Dennis E. Logue

On the Pricing of Unseasoned Equity Issues: 1965–1969

Recent research focused on the market for first public offerings of common stock has indicated that investors who purchase new issues at the offering price will quickly achieve relatively large systematic profits. This is attributable to either the inability or the reluctance of investment bankers to reoffer the shares in which they deal at market-clearing prices. This paper examines factors that influence investment bankers in their pricing decisions and subsequently determine the short-run performance of new issues.

Corporate International Diversification and Market Assigned Measures of Risk and Diversification

Recent evidence supports the notion that capital markets are substantially integrated in a return/systematic risk sense [1, 12]. Other studies show that investors can reduce the total level of risk borne without reducing expected returns by holding an internationally diversified portfolio [8, 9, 17]. Together these studies imply that the various economies mirrored by financial markets are not perfectly integrated. Some assert, however, that because of controls on capital flows, differential trading costs, different tax structures, and a number of other factors, markets are imperfectly (albeit substantially) integrated. Hence investors may not actually be diversifying internationally and thus forego advantages which would accrue to them if they were willing to hold foreign security issues.

Financial Policy and Market Expectations

If financial managers do indeed seek to maximize shareholder wealth, it is incumbent on them to know something of the effects of financial decisions on investor expectations. This article seeks to provide insight into how financial policy affects shareholder expectations, and presents some evidence regarding the relative importance of decisions concerning liquidity, investment, and financing. The first section of this article contains a brief discussion of previous research and introduces the capital asset pricing model-the model that facilitates explicit study of expectations. An intuitive explanation of why the financial, marketing, and production decisions of the firm affect investor expectations follows. Then a market expectation/financial decision model is formulated and tested using multiple regression analysis. A summary of results and implications concludes the article.

Inflation and Real Growth: Some Empirical Results: A Note

What is the relationship between the average rate of inflation and the variability of real economic growth? Recent studies by Gordon [3], Okun [7], Logue and Willett [6], Klein [5], and Jaffee and Kleiman [4] have attempted to f1ll some of the gaps in our knowledge of inflations effect on the economy; these studies have generally demonstrated the positive empirical relationship between the rate of inflation and its variability or unpredictability. Such heightened uncertainty may produce greater variability of real growth which, in turn, undoubtedly increases welfare costs. Using annual data for twenty-four countries, we Elnd a positive relationship between the mean inflation rate and the variability of real economic growth. This finding strengthens the commonly held belief that inflation is undesirable on welfare grounds.

Speculative behavior of foreign exchange rates during the current float

Abstract The current regime of floating exchange rates has been characterized by a number of informed observers as economically unsatisfactory. Use of terms such as “overshooting”, “bandwagon effects”, “destabilizing”, and “insufficient speculation” reflects serious misgivings on the part of many toward the long-run viability of a floating, rather than a fixed or semi-fixed, rate regime. Using fairly standard procedures, the authors have attempted to determine the extent to which the foreign exchange market exhibits the adverse features noted above. The authors conclude that by and large foreign exchange markets have not performed particularly poorly. The foreign exchange markets seem to be efficient at least in the weak form sense. Past exchange rate changes are not useful in predicting future exchange rate changes. This empirical finding contrasts sharply with the view that the markets “overshoot”, or that there are “bandwagon effects”, or that the amount of price stabilizing speculation is inadequate.

Rearranging Residual Claims: A Case for Targeted Stock

This paper describes and analyzes a relatively new method of equity-based restructuring, Targeted Stock. We examine announcement period share price reactions for completed, pending, and canceled offerings. Although the total number of completed transactions to date is small, we document a positive share price reaction on average for this form of equity reorganization. We then compare and contrast Targeted Stock with alternative equity reorganization forms, including spin-offs, equity carve-outs, and dual class common stock. We argue that Targeted Stock is most useful for firms in which the benefits of integration and control over corporate operating and financing activities outweigh the benefits of a complete or partial separation of the targeted business unit(s).

The Interdependent Structure of Security Returns

In this paper the traditional capital asset pricing model is reformulated as a system of simultaneous equations in which returns on similar securities are treated as endogenous variables and in which pertinent financial data for particular firms and a market factor are treated as exogenous variables. Such a system is estimated, and serious questions are raised concerning the tenability of the simple linear model so often used to explain capital asset prices under uncertainty.

Offshore alphas: Should diversification begin at home?

A s Roger Murray is apt to point out at the beginning of one of his talks on financial markets, the first principle of finance (domestic and international) can be symbolized as TINSTAAFLIF. Although the letters themselves may not be easy to remember, they stand for a hard (to accept) fact: ”There is no such thing as a free lunch in finance.” This is our basic theme in this paper: there may be no free lunch in international investment. In portfolio advisory circles, international portfolio diversification strategies have recently become quite fashionable.’ The argument made on behalf of international portfolio diversification is, as might be expected, superior performance. Some go so far as to suggest that countries can be “picked” even if one can’t pick stocks within countries. In any event, by ”properly” investing abroad, an investor is presumably able to earn ”excess” returns while possibly taking on even less ”risk.” Another way of saying this is that positive offshore alphas exist returns in excess of those returns that investors might reasonably expect on average for given levels of risk. Sounds contrary to the first principle of finance, doesn’t it? In what follows we argue that, while much merit may exist in international portfolio diversification, at least two generally ignored pitfalls also exist to hinder measurement of ”real” offshore alphas. The first of these is comparatively easy to cope with. It is strictly a technical problem but nevertheless a very important one that has largely been circumvented by professionals in the area. It has to do with the choice of

Performance Monitoring and the Timing of Cash Flows

* Theoretically, it is net present value, and not the pattern of cash flows over time, that is important to investors. This is true not only for capital expenditure decisions, but also for financing and dividend decisions. However, for the net present value rule to work as theory says it should, the present value of all costs and benefits must be incorporated in the analysis. This includes the costs and benefits of information-gathering and performance-monitoring activities. This paper discusses some possible reasons why firms often appear to disregard the net present value criterion. For instance, management often seems to weigh heavily the pattern and timing of a potential projects cash flows, and to make investment decisions based on the early arrival of these cash flows. A related issue is the firms dividend decision: it is unclear why management agonizes over, and investors express a

Optimal choice of contracting methods: negotiated versus competitive underwritings revisited

Abstract We use a previously unexploited data base, specifically debt offerings by AT&T and its subsidiaries in the period 1970–1974, to examine the relative costliness of competitive and negotiated offerings. A sample based on the experience of a single issuer allows us to minimize the influence of agency considerations and differential riskiness of the issuers. We find no systematic ex post cost difference, and we also find that negotiation was chosen during comparatively unsettled times.