Bruce D. Grundy

Changing Risk, Changing Risk Premiums, and Dividend Yield Effects

The authors investigate the cross-sectional relation between dividend yield and expected return and attempt to include various effects of changing risk measures and changing risk premiums. A stocks risk is measured by its sensitivities to two factors, a market factor and a changing-risk-premium factor. After analyzing dividend-related changes in risk measures, the authors investigate the presence of dividend effects in expected returns using four methods, each imposing a different structure on the temporal behavior of risk measures and risk premiums. For each method, they find no reliable cross-sectional relation between dividend yield and risk-adjusted expected return. Copyright 1990 by the University of Chicago.

Stock returns and the Miller Modigliani valuation formula: Revisiting the Fama French analysis.

Fama and French (2006) use the dividend-discount model to develop the role of expected profitability, expected investment, and the book-to-market ratio as predictors of stock returns. One reported empirical result is anomalous. The valuation model establishes that the comparative static relation between expected returns and expected investment is negative, yet it appears to be positive and insignificant. We show that the posited valuation relations apply at the firm level, and not at the per share level at which they were tested. Once the variables are measured at the firm level, all the Fama French predictions are validated.

Merton H. Miller: His Contribution to Financial Economics

Merton Millers status as a father of finance reflects the academic depth, breadth, and rigor of his writings and two important facets of his character. Merton was a man of great warmth and humor. He communicated his often challenging views via memorable phrases and anecdotes that have become part of the everyday language of the profession. Merton was also a man of great dedication. The whole profession has benefited from his devotion to his doctoral students, to his colleagues, and to his coauthors. This essay demonstrates how Mertons admiration for markets provided the foundation for all his research. Copyright The American Finance Association 2001.

The External Financing of Investment

Investment characteristics and the form of external financing are linked. Factor analysis indicates that the principal determinant of the financing choice is whether an investment’s payoffs can be described as a hit or miss. Hit-or-miss investments are more likely to be equity financed. Equity also becomes more common the longer the time until an investment produces positive payoffs. Debt financing is more likely for investments that are both tangible and non-unique. For R&D-like investments, equity and bank debt financing are more likely than non-bank debt financing. Convertible securities link to uncertain investment lives and are therefore useful for sequential financing.

Informed Trading in Options or Price Pressure in Stocks? Connecting the DOTS in Option-Based Return Predictability

Stock and options markets can disagree about a stocks value because of informed trading in options and/or price pressure in the stock. The predictability of stock returns based on this cross- market discrepancy in values is especially strong when accompanied by stock price pressure, and it does not depend on trading in options. We argue that option-implied prices provide an anchor for fundamental stock values that helps to distinguish stock price movements due to pressure versus news. Overall, our results are consistent with stock price pressure being the primary driver of the option price-based stock return predictability.

Valuation of Crude Oil and Gas Reserves

The valuation of crude oil and gas reserves is a critical step in pricing crude oil and gas producing firms. This is of interest both to academics and practitioners who are called upon to value these firms. It is also of interest to regulators, particularly in their oversight of mergers and acquisitions and the issue of securities to the public. Our results reject the notion that the market value of crude oil and gas per unit of reserves varies one-to-one with the current price, net of extraction costs (Hotelling model). Crude oil and gas reserve pricing is more complex in practise with both production rate and the proportion of developed proven reserves playing a role in valuation. We use fixed effects panel methods in analysis of data provided by IHS Herold Inc, which comprises 409 crude oil and gas producers (3303 firm-years) over an 18-year period from 1992 to 2008. We find no evidence to support the Hotelling model prediction of a one-to-one relation between the market value of crude oil per unit of reserves and the price of these reserves, net of extraction costs. There is evidence of time variation in this pricing relationship, with the relation being correlated with extraction rate. Further, there is evidence that the proportion of proven reserves that are developed is positively correlated with the market value of reserves. The main implication to be drawn from this study is that the valuation of crude oil and gas reserves requires more information than just reserve volume and spot price.

Variation in OPEC and Non-OPEC Crude Oil Production: 1973 to 2010

The impact of the OPEC cartel on crude oil prices is the subject of considerable discussion in the literature but there is little analysis of what crude oil producing nations actually do. Regime shift tests, using U. S. Energy Information Administration monthly crude oil production data from 1973 to 2010, show evidence of structural change in the time series nature of world production. In particular, there is evidence of increased volatility in monthly production over the periods from 1973 to 1990 and from 1997 to 2003. OPEC production volatility differs considerably from non-OPEC production volatility over the period of this study. Indeed, cluster analysis of individual country production identifies variation in clusters over the study period. While there are a number of country production clusters in the period from 1973 to 1990, which appears to drive results for full period analysis as well, the post 1990 period sees a movement toward one large production cluster including both OPEC and non-OPEC nations. It appears the marked dichotomy between OPEC and non-OPEC producers is no longer relevant to modelling world oil and gas production.

Can Socially Responsible Firms Survive Competition? An Analysis of Corporate Employee Matching Grant Schemes

Employee matching grant schemes are coordination mechanisms that reduce free-riding by socially-conscious employee-donors. Matching schemes coupled with lower take-home pay than offered by non-matching firms will survive capital and labor market competition if employee type is not observable and socially-conscious employees are more productive or value working together. Matching can enhance employee welfare and raise more for charity without reducing profits. We document that matching firms have higher labor productivity and are more likely to be ranked as one of the “100 Best�? employers. The result is robust to managerial entrenchment concerns and is not confined to the high-tech sector.

Wall Street Journal Stories and Oil Prices

Commodity markets are often assumed efficient yet commodities are not the same as shares and the structure of commodity markets can differ considerably from the structure of share markets. As a result we choose to explore the efficiency of the crude oil market using Wall Street Journal (WSJ) announcements and crude oil prices (West Texas intermediate crude prices, New York Mercantile Exchange light sweet crude oil futures contract prices of various maturities and a value-weighted oil industry share price index) drawn from the period 1983 to 2006. The WSJ articles chosen for analysis focus on changes in crude oil production, pricing and/or OPEC membership. We find that commodity prices decrease (increase) with announcement of production increase (decreases). OPEC accounts for most of the production based articles with production decrease announcements having most price impact during periods of backwardation. There are few OPEC membership change announcements and so these are analysed within a multivariate framework though we find that commodity prices tend to increase where an increase in OPEC membership is mooted.

Multiplicative Risk Prudence, Inflation Uncertainty and the Real Risk-Free Rate Puzzle

We examine the optimal saving decision of individuals who face a multiplicative risk. An individual is defined to be multiplicative risk prudent if multiplying a pure risk to her future wealth raises her optimal savings. We show that convex marginal utility is not sufficient to induce multiplicative risk prudent. Instead, an individual is multiplicative risk prudent if and only if her relative prudence of future consumption uniformly exceeds two. Our results provide an explanation to the real risk-free rate puzzle. Intuitively, the presence of (or an increase in) inflation uncertainty in an economy should stengthen the aggregate precautionary motive to save, leading to a reduction in the equilibrium real risk-free rate. Thus neglecting inflation uncertainty may result in an overestimation of real risk-free rate. We also study jointly the impact of correlated additive and multiplicative risks on the optimal savings decision and demonstrate that the concept of multiplicative risk prudence is stronger than that of additive-multiplicative risk prudence. Our findings suggest one should take the condition of multiplicative risk prudence as a natural restriction on preference.