Eugene A. Pilotte

Growth Opportunities and the Stock Price Response to New Financing

The author documents the effect of growth opportunities on the stock price response to security offerings. For equity offerings, the stock price decline for mature firms exceeds the decline for growth firms. For straight and convertible debt offerings, mature firms experience a significant price decline while growth firms experience no significant price change. Regression analysis indicates that the stock price response to new financing is significantly, positively related to a variety of growth opportunity measures. Holding growth opportunities fixed, the stock price response depends on the type of security offered (equity vs. debt) and, for straight debt offerings, Moodys bond ratings. Copyright 1992 by University of Chicago Press.

The market's response to recurring events the case of stock splits

Abstract A substantial body of literature suggests that stock splits convey information. In this paper we extend this literature by examining firms that split their stock at least twice during 1970–1988. We focus on firms with multiple splits to provide evidence on the markets use of previous split experience in interpreting a recurring event. Our major findings are that stock price responses to both stock splits and post-split earnings changes depend on earnings realizations observed after previous splits. These findings support the conclusion that the market uses previous split experience to interpret a recurring event.

Sharpe and Treynor Ratios on Treasury Bonds

We challenge asset pricing theory with numerous stylized facts regarding risk and return on U.S. Treasury securities. Most striking is our finding that reward/risk ratios vary inversely with maturity and are incredibly high for short-term bills. Apparently investors would do much better engaging in highly leveraged investments in bills instead of purchasing long-maturity bonds or common stocks. Simulations of estimated three-factor affine term structure models do not replicate the high ratios of reward to risk for bills. Other results include business cycle patterns in risk premiums, volatility, and the reward to volatility that vary with maturity.

Capital Gains, Dividend Yields, and Expected Inflation

One explanation for the negative relationship between short-horizon stock returns and inflation is that inflation proxies (inversely) for expected future real output. In this paper, I examine the possibility that inflation also proxies for variation in real price/dividend ratios (excess returns). I show that when the covariance between real price/dividend ratios and inflation is nonzero, the relationship between returns and expected inflation differs for the two components of returns: dividend yields and capital gains returns. My empirical evidence demonstrates that dividend yields and capital gains are related differently to expected inflation in U.S. and foreign markets. Copyright 2003 by the American Finance Association.

Time-varying term premia on U.S. Treasury bills and bonds

Abstract We use instrumental variables estimation to document variation in ex ante term premia on U.S. Treasury bills and bonds of maturities ranging from two months to twenty years. For the April 1959 to December 1989 sample period, ex ante term premia are found to be positively related to the ex ante variability in the nominal one-month risk-free rate of interest. Significant shifts in the stochastic process generating term premia are documented subsequent to the October 1979 and October 1982 shifts in monetary policy. Subperiod results document variation in ex ante tenn premia in each of the three monetary regimes.

Macroeconomic Announcements and the Distribution of Price‐Endings in the U.S. Treasury Market

We investigate how new information impacts quote clustering in the bond market. We find that clustering, along with quote activity, price volatility and bid‐ask spreads, increases sharply in the minutes following releases of macroeconomic news. Each returns to near‐normal levels within the hour. Effects are strongest for more liquid on‐the‐run notes and for the announcements typically associated with substantial information flow. The strong positive comovement of clustering, quote activity, price volatility, and bid‐ask spreads supports the conclusion that innovations of these variables are endogenous to the arrival and incorporation of information into prices.

Agency Costs and the Short-Run Stock Price Response to Capital Expenditures

We estimate the short‐run stock price response to unanticipated capital expenditures. We use association study methodology to avoid the self‐selection bias in event studies and to facilitate construction of a large sample of firm‐years likely to exhibit agency problems. We find that the average price response to routine capital expenditures is negative, and that commonly used agency cost measures explain fully the negative response. Subsample results support the conclusion that the market is skeptical of cash flow financed spending by low‐q firms and even capital spending by high‐q firms when the firm is large and q is only marginally high.

Security design, market risk and round quotes in the treasury bond market

ABSTRACT Prior literature finds that the tendency of price-endings to cluster on rounder fractions increases with price volatility. We estimate the separate influences and relative importance of the determinants of price volatility, security design and market risks. Our data is from a market setting that is ideal for isolating and studying the relations of interest. Results for both quote and trade prices indicate that the tendency to use round price-endings increases with both a security’s inherent risk, attributable to security design, and variation over time in market risks. Security design influences clustering more than market risks, but market risks are influential in determining clustering once security design is fixed. The estimated effects are strongest in the on-the-run market segment where liquidity facilitates the aggregation of information into price.

Quote activity and round quotes in a voice-brokered bond market

ABSTRACT We investigate the relation between quote activity and the precision with which prices are quoted. Where prior literature finds that the tendency of price-endings to cluster on rounder fractions declines monotonically with quote activity, we show that the decline is limited to an initial range of quote activity. Once a very high level of quote activity is reached, the use of rounder quotes increases with quote activity. Also contrary to the conventional view is our finding that round quotes are used more frequently in the more active of two market segments where equivalent assets are traded. We attribute our results to two opposing influences of activity on price clustering, the price resolution and negotiation effects, that reflect the cognitive limitations of humans when dealing with uncertain values.