Contents

Autoregressive Conditional Skewness
Campbell R. Harvey and Akhtar Siddique

IPO Underpricing Explanations: Implications from Investor Application and Allocation Schedules
Philip J. Lee, Stephen L. Taylor, and Terry S. Walter

The Role of Personal Taxes in Corporate Decisions: An Empirical Analysis of Share Repurchases and Dividends
Erik Lie and Heidi J. Lie

Dynamic Asset Allocation and Fixed Income Management
Carsten Sørensen

Informational Asymmetry and Market Imperfections: Another Solution to the Equity Premium Puzzle
Chunsheng Zhou

Abstracts

Foreign Ownership Restrictions and Equity Price Premiums: What Drives the Demand for Cross-Border Investments?
Warren Bailey, Y. Peter Chung, and Jun-koo Kang

We study the impact of barriers to international capital flows with stock price data from 11 countries whose stock markets feature shares restricted to locals and otherwise identical shares available to foreigners. Large price premiums for unrestricted shares relative to matching restricted shares are typically observed. Although basic notions of international asset pricing offer a straightforward explanation for the price premiums, we find little evidence that the price premiums are explained by lower foreign required returns. Alternative concepts and theories centering on foreign investor demand and the supply of shares explain some of the time-series and cross-sectional variation of price premiums. More specifically, premiums for unrestricted shares are positively correlated with foreign investor demand in the form of international mutual fund flows, sentiment implicit in matching closed-end country fund premiums, market liquidity, and information reflected in press coverage, country credit rating, and firm size.

Autoregressive Conditional Skewness
Campbell R. Harvey and Akhtar Siddique

We present a new methodology for estimating time-varying conditional skewness. Our model allows for changing means and variances, uses a maximum likelihood framework with instruments, and assumes a non-central t distribution. We apply this method to daily, weekly, and monthly stock returns, and find that conditional skewness is important. In particular, we show that the evidence of asymmetric variance is consistent with conditional skewness. Inclusion of conditional skewness also impacts the persistence in conditional variance.

IPO Underpricing Explanations: Implications from Investor Application and Allocation Schedules
Philip J. Lee, Stephen L. Taylor, and Terry S. Walter

Initial Public Offers (IPOs) made on the Stock Exchange of Singapore routinely provide sufficiently detailed data to allow reconstruction of both the application and allocation schedules. We show that large investors tend to preferentially request participation in IPOs with higher initial returns, consistent with these investors being better informed. We also show that inferences based exclusively on application strategies are quite different from those drawn on investor allocations. Our results suggest that caution is necessary in assessing the relative merit of competing explanations for IPO underpricing where the underlying demand is not identified.

The Role of Personal Taxes in Corporate Decisions: An Empirical Analysis of Share Repurchases and Dividends
Erik Lie and Heidi J. Lie

This study investigates the impact of personal taxation on corporate managers' choices between share repurchases and dividends as a means of disbursing cash. Consistent with the notion that personal taxation influences the choice of disbursement method, we find that managers are more likely to choose a share repurchase if the firm has a low dividend yield, if the firm's stock has experienced losses or small recent capital gains, and if the payout occured before the Tax Reform Act of 1986. Further, managers are more sensitive to the shareholders' tax situations if institutional investors hold a large fraction of the shares.

Dynamic Asset Allocation and Fixed Income Management
Carsten Sørensen

This paper provides the solution to an intertemporal investment problem. The investor has power utility and can invest in stocks and bonds in a complete market setting where the Vasicek term structure model applies. The paper demonstrates that the zero-coupon bond with maturity at the investment horizon is the appropriate instrument for hedging changes in the opportunity set. Implementation issues are discussed and it is shown how the intertemporal investment problem can be recast as a series of mean-variance problems in terms of drift and volatility of the wealth forward price. An application based on a quasi-dynamic programming approach is considered.

Informational Asymmetry and Market Imperfections: Another Solution to the Equity Premium Puzzle
Chunsheng Zhou

This paper develops an equilibrium asset pricing model to explain the equity premium puzzle and the risk-free rate puzzle by allowing for both market frictions and informational asymmetry. The paper argues that much of the high equity premium in the Mehra and Prescott (1985) sample period can be explained by informational asymmetry among investors and the inability of many investors to diversify their portfolios. With admissible relative risk aversion coefficient γ, the model matches various key statistics quite well. The paper implies that with the development of mutual funds, the equity premium should decline as has been the case since the 1950s.