Ben S. Branch

Perceptions of Firm Quality: A Cause or Result of Firm Performance

This article examines two issues regarding the formation and effects of qualitative perceptions offirm performance: First, do firm quantitative measures of performance influence perceptions offirm management quality? Second, do perceived firm qualities affect measures of firm financial performance? We examined data from Fortune magazines survey of corporate reputations as a source for measures of perceivedfirm quality. The results suggest thatfinancial measures of both risk and return influenced perceptions offirm quality. Moreover, perceptions offirm quality, though correlated with the subsequent performance of specific financial performance measures, were generally more closely related to priorfinancial performance than to subsequent financial performance.

Research and Development Activity and Profitability: A Distributed Lag Analysis

There are at least three ways in which profits and R & D may be related. First, profits may influence subsequent R & D. Second, R & D may influence subsequent profits. And third, it is possible that R & D and profits are influenced simultaneously by some third factor. For example, government support or exogenous surges in demand could increase both at the same time. Although the first two of these relations involve influences of one variable on another over time, the problem of distinguishing between a simultaneous and a recursive relation has not been tackled in previous work. The current study employs distributed lag techniques with pooled time-series and cross-section data to discriminate among the alternative types of time relations. A sample of seven industries containing 111 firms covering the 1950-65 period was used to test these relations. The results indicate a tendency for R & D to influence future profitability and to be influenced by past profitability.

The costs of bankruptcy: A review

Abstract Bankruptcy-related costs may be categorized into four areas: (1) Real costs borne by the distressed firm; (2) Real costs borne directly by the claimants; (3) Losses to the distressed firm that are offset by gains to other entities; (4) Real costs borne by parties other than the distressed firm or its claimants. Cost categories 1, 2, and 3 are relevant for claimants, while Categories 1, 2, and 4 are relevant for society. Focusing on the first three categories, the present study reaches the following conclusions: First, after allowing for their costs of collections, claimsholders recover approximately 56% of the bankrupt firms predistress value (PDV). Second, dealing with financial distress generally consumes between 12% and 20% of the distressed firms PDV. Taking the midpoint of this range (16%) implies that the losses that lead to the firms distress average approximately 28% of its PDV. These estimated values demonstrate the importance of bankruptcy costs in determining an optimal capital structure and explaining the level of risk premiums. Because of its impact on risk premiums, the cost of capital and needed tax rates, the cost of dealing with financial distress has an adverse impact on resource allocations throughout the economy.

Streamlining the Bankruptcy Process

High costs and a tendency to allow nonviable firms to reorganize represent two major problems with the present Chapter 11 bankruptcy resolution process. I propose a new system that differs from the old in two important respects. First, an automatic mechanism would award each claimant class consideration in line with priority. Second, effective control of the bankrupt firm would be quickly transferred to its rightful owners (i.e., the creditors), who would elect a new board of directors in the third or fourth month of the bankruptcy proceeding.

The Laws of the Marketplace and ROI Dynamics

A clear understanding of the factors that have a significant impact on profitability would be of considerable interest to a variety of people. There are, however, long-run steady-state factors that cause some businesses to be more profitable than others and shorter-run transitory factors that may, over a brief period, lead to substantial departures from normal profit levels. While long-run considerations are of paramount importance, there are times when shortrun factors dominate decision-making. Even when they do not, the potential impact of these transitory forces should not be ignored. Moreover, it may at the outset be difficult to distinguish short-run aberrations from shifts in the forces that determine the steadystate relations. Accordingly, a detailed examination of the dynamics of profitability should be quite useful to those who seek to have some control over its level and/or whose fortunes are in some way tied to its performance. Dynamic analysis may be viewed either from the perspective of period-to-period changes or in a disequilibrium context. Prior work of mine [5] followed

The Predictive Power of Stock Market Indicators

Empirical research has cast so much doubt on chart readers that most capital theorists have about as much faith in charts as astronomers have in astrology. Certainly there is overwhelming evidence that attempting to predict future price changes on the basis of past price behavior is unproductive. There is, however, another aspect of technical analysis which has received much less attention from academicians. In its narrow form technical analysis seeks to forecast the direction of price movements of individual securities from past price and volume data. A second and somewhat broader type of technical analysis concentrates on the prediction of general market movements and trends relying on a broader set of information. Various market indicators are said to offer signals useful in forecasting future prices. One type seeks to measure investor sentiment through what might be called mood variables. A second type of indicator is more closely related to fundamental factors affecting future supply and demand for securities. Both types of indicators, however, are designed to be used in predicting future market movements rather than the movements of individual stock prices. This is to be contrasted with fundamental analysis which is concerned with predicting future prices of individual securities by analyzing the underlying factors related to the firms future profitability. Most of the prior work with market indicators takes one or another proposed market indicator and examines the historical relation, between the indicator and some market index such as the Dow Jones Industrial Average.

The Monday merger effect

Abstract We explored relationships between daily market returns, Mondays, and the level of merger activity during 1982–1998 in a multivariate model. Once other factors (interest rates and future market directions) are accounted for, we found no statistically significant relationship between daily market returns and either Mondays or the level of merger activity. On the other hand, we did find an impact for both Mondays and the level of merger activity on market volatility, which is measured either by the absolute value of daily returns of the implied volatility or the OEX index.

The Bid-Ask Bias and The Size Effect: A Test of the Blume-Stambaugh Bid-Ask Bias Effect Hypothesis

Much CAPM-related research has explored the causes of the size effect anomaly. Blume and Stambaugh (1983) suggest that a ibid-ask biasi accounts for approximately one half of the size effect. The bid-ask bias results from the tendency of stocks to bounce between the bid and the ask price quotes. This bounce causes a difference between observed returns and a more realistic assessment of equilibrium market returns. Examination of a significantly larger data set suggests that the difference is caused by comparing value-weighted outcomes with equal-weighted outcomes.

Merger Arbitrage: Evidence of Profitability

While merger arbitrage has proven itself to provide valuable return to risk properties, academics have supported various theories as to the basis for merger activity and the returns derived from various forms of merger arbitrage. In this article, a wide range of academic articles which have explored the basis for as well as the performance of merger arbitrage are reviewed.

Do Socially Responsible Index Investors Incur an Opportunity Cost

We construct index‐tracking portfolios using integer programming and then compare the tracking errors and performances of portfolios formed from an unrestricted and socially screened stock universe. We find that one can construct a portfolio of socially responsible stocks that deliver market performance. Thus, the exclusion of a set of stocks from consideration does not exhaust the existence of efficient index‐tracking portfolios, especially when the exclusionary screen is for nonfinancial reasons. Our results are robust to various specifications in constructing the portfolio, for example, number of stocks included in the portfolio and weighting schemes, and robust to alternative tracking error measurement; we show that the difference induced from conducting socially responsible screen is never statistically significant.