Austin Murphy

An empirical comparison of alternative models of capital asset pricing in Germany

Abstract In an empirical investigation, this research finds that the CAPM is a better explanatory model of risk-return relationships in the German stock market than the CCAPM.

An empirical analysis of the structure of credit risk premiums in the Eurobond market

Abstract This research finds some empirical evidence of a rising term structure of credit risk premiums for high-grade Eurobonds and a declining term structure for low-grade Eurobonds. However, the results are discovered to vary somewhat across individual issuers. Perhaps most importantly, evidence is found that credit risk premiums on bonds with the same credit rating vary significantly across currencies. The latter finding holds true even for Eurobonds from the same issuer.

A comparative analysis of the price-process model of mortgage valuation

Abstract This paper compares the performance of the price-process model, which efficiently sets prepayments as a function of call option values, with a traditional interest-rate-process model, which sets prepayments as a function of interest rate spreads. The empirical results indicate that the price-process model is more consistent with GNMA market prices. Tests on more recent data indicate that the price-process modeling framework has continued to be more accurate in explaining GNMA prices than other mortgage-pricing models reported in the literature.

Empirical evidence of a positive inflation premium being incorporated into stock prices

This study demonstrates that in contrast to prior research findings on short-term stock returns, long-term stock returns are positively correlated with inflation. In addition, within the context of a more complete explanatory model, long-term stock returns are found to be negatively related to changes in long-term interest rates and negatively related to beginning price to earnings ratios. The significance of these variables in explaining almost all the time series variation in long-term stock returns demonstrates that changes in stock values are well explained by theory.

The Value of convertible preferred stock in transactions with “relationship investors” like Warren Buffett

Abstract This research finds no evidence that private placement transactions of convertible preferred stock with relationship investors are designed in order to disguise special compensation offerred to such investors to provide management advice or to defend against an unwanted raider. In particular, the value of a sample of such securities was found to exceed the price by an amount (an average of 17%) that approximated the sum of the offering costs (about 5%) avoided by private placement and the illiquidity premium (about 10%) that would normally be required because trading in the special securities was restricted. In addition, empirical evidence is found that the transactions have positive effects on the combined economic welfare of the issuer and the relationship investor.

Shorting Down Value: The Toxic Effect of Insufficient Internal Liquidity

This paper demonstrates analytically how short sellers can put non-transitory downward pressure on the stock market prices and intrinsic values of companies that need to raise external capital because of insufficient internal liquidity. The model helps explain anomalous empirical findings in the extant literature on negative returns to stocks subjected to heavy shorting activity. The implications of the model also supply normative justification for the sizable cash reserves held by corporations and their reluctance to raise external capital. The equity pricing effects implied by the model are illustrated for a large empirical sample of companies negatively impacted by heavy short sales. Empirical tests are also conducted in this research that provide evidence consistent with the theory.

A possible adverse effect of needing to issue new equity in the future

Abstract This research develops a model of how a need to issue new equity in the future can have an adverse affect on a stocks current price, value, and beta. In particular, if the market error in pricing a stock is positively correlated with the return on the market portfolio of all assets, losses from having to issue equity in the future at a distressed price will result in the stock having a higher beta and a lower current market value. To avoid this situation, corporations are motivated to hold greater financial slack.

An empirical investigation of business financial structures in a regulated economy

THE PROBLEM OF DETERMINING the optimal financial structure is not confined to privately owned, value-maximising businesses in market economies but also exists for state-owned firms in regulated economies.1 Although extensive studies have been conducted on the general economic conditions in regulated economies (Kornai, 1980), the financial structure issues have largely been ignored. Research on the financial structure of value-maximising enterprises in market economies might be useful for state-owned firms (Myers, 1984), but the optimal financial structure for a company in a regulated economy may be different from that for an enterprise in an existing market-oriented economy owing to the different operating and financial environments (Granick, 1974). The transition from a centrally planned to a market economy might therefore entail significant innovative financial policy changes. In order to provide further insight into these issues, the financial structure of state-owned businesses in a regulated economy can be compared with those of privately owned businesses in a market-oriented economy. For this purpose, Hungary and West Germany are chosen. Hungary represents one of the first centrally planned communist countries to begin the path towards a market economy, while West Germany represents an example of a market-oriented economy that many reforming East European countries now wish to imitate (Der Tagesspiegel, 1990; and Nepszabadsag, 1990). In this article some testable characteristics of a regulated economy are briefly reviewed, the data and empirical findings are described, and the analysis is summarised.

Empirical analysis of pricing efficiency in the Hungarian capital markets

An investigation of the efficiency of the Hungarian capital markets in reflecting technical and fundamental information is carried out. Consistent with a hypothesis that developing markets are inefficient, very few statistical relationships are found between market prices and important fundamental factors. However, with the exception of a strategy of buying securities whose prices are reported to be supported by market manipulators, no evidence of exploitable trading systems is found net of transaction costs. The latter results are consistent with the hypothesis that the market is not becoming more efficient over time.

A Financial Analysis of the Economic Effects of Having to Reverse Current Account Deficits

This research develops a theoretical model of current account deficits that explains the effects of having to reverse such imbalances. The theory defines precise mathematical relationships which should exist between the balance of payments, exchange rates, interest rates, inflation, income, and investor expectations. The model is consistent with both currency crises and less volatile situations.