Irwin Friend

The Changing Role of the Individual Investor

Uses information obtained from federal income tax returns and mail and telephone surveys of stock-owning families to evaluate the effect on American equity markets of the shift of stock ownership from individuals to institutions. Presents new information on individual investors, their future plans, and the possible consequences of changes in government policy or economic environment. Suggests the most efficient ways to encourage individual stock ownership. Examines the pros and cons of numerous proposals and mechanisms for improving the securities markets, including new material on disclosure requirements, options, short sales, and index funds. Provides charts and tables to illustrate information on the individual as an investor.

Recent developments in finance

Abstract This paper selects examples from a number of major areas of finance, e.g. monetary policy, capital asset pricing, financial institutions and markets and corporate finance, to illustrate the absence of or questionable nature of much of the ‘knowledge’ in these areas, the problems involved in present methodology, and the need for a changed emphasis in methodology. It pays particular attention to the present status of the Sharpe-Lintner capital asset pricing model, including the past and more recent attempts to reconcile that theory with the empirical facts.

The Predictive Ability of Consumer Attitudes, Stock Prices, and Non-Attitudinal Variables

Abstract This article reports on tests of the comparative usefulness of consumer attitudes, stock prices, and some non-attitudinal variables for short-term forecasting of the value and number of motor vehicle sales. Both levels and changes of the variables are analyzed for a variety of time spans between 1952 and 1962. The work suggests that stock prices and some non-attitudinal variables, like the length of the work week, share the predictive ability of consumer attitudes, except perhaps for the early part of the 1952–62 period.

The cost of capital to corporations in Japan and the U.S.A

Abstract The average 1962–1984 cost of capital was probably lower in Japan than in the U.S.A., but this was not necessarily true of the marginal cost, and in any case the difference was not large enough to explain the higher rate of investment in Japan. The combined tax impact on the average cost of capital does not seem to have been markedly different in the two countries and even the direction of the effect on the marginal cost is not clear. The apparently lower average cost of capital in Japan reflected lower real interest rates and greater reliance on corporate debt.

An empirical examination of the implications of arbitrage pricing theory

Abstract This paper presents a comprehensive set of tests of the implications of the Arbitrage Pricing Theory. We find, unlike previously reported results, a very limited relationship between the expected returns and the covariance (factor loadings) measures of risk. Furthermore, unique variance measures of risk, while generally making only small contributions to the explanation of asset returns, turn out to be significant about as frequently as the coveriance measures of risk — which is inconsistent with the Arbitrage Pricing Theory model. The intercept tests are more mixed but provide only limited support to the model.

Dividend Policy in Perspective: Can Theory Explain Behavior?

The contribution of recent research to the explanation of a variety of behavioral findings is examined, with particular attention to tax clientele effects, cross-section studies dependent on capital asset pricing model assumptions, and dividend signaling models. Further relaxation of standard capital market assumptions appears necessary to reconcile behavior with investor and firm rationality: for example, investors in capital-constrained firms may regard capital gains resulting from earnings retention as more risky than current dividends or stockholders may see dividend payment as imposing constraints on management that reduce agency costs. Copyright 1988 by MIT Press.

Economic Foundations of Stock Market Regulation

Before considering the economic impact of stock regulation in the United States, which has pioneered in this area, it is desirable to review briefly the general purposes of such regulation. The two basic aims of the original legislation — the Securities Act of 1933 and the Securities and Exchange Act of 1934 — were protection of investors and promotion of the broader public interest as this interest is affected by trading in securities. The first aim has a fairness orientation and the second an economic orientation, since the public interest in the area of securities regulation relates largely to the impact of regulation on the economic performance of securities markets.

Risk and capital asset prices

Abstract This paper is an empirical examination of the statistical significance of the residual variance of individual assets as compared with the covariance of returns with various market portfolio proxies in predicting expected return. The data and analysis we present suggest that measures of covariance are no more significant than residual variance in predicting expected return. In this sense our paper is not supportive of the Sharpe-Lintner or Black versions of the capital asset pricing model.

THE DEMAND FOR RISKY ASSETS: Some Extensions

Publisher Summary This chapter discusses some extensions on the demand for risky assets. The research on capital asset pricing has until very recently been devoted almost exclusively to the interrelationships of the risk premiums among different risky assets rather than to the determinants of the market price of risk. Such research has also generally relied on theoretical preconceptions to determine the appropriate utility functions of individual investors upon which both the market price of risk and the pricing of individual risky assets depend. The chapter discusses the highlights of the theoretical and empirical analysis and their conclusions. Then, the same analytical framework is used to obtain new results on the effect of inflation on the market price of risk. It turns out that by using nominal values for returns, the market price of risk under inflation is increased by positive covariance between the rate of inflation and the market rate of return, and decreased by negative covariance. However, statistically as the actual covariance has been very small since the latter part of the 19th century, at least in the USA, the measured market price of risk is not affected appreciably by the adjustment for inflation.

A Reevaluation of the Predictive Ability of Plant and Equipment Anticipations

Abstract This article suggests that anticipations alone do a better job of forecasting business plant and equipment expenditures than fitted functions which include only non-anticipatory data. Anticipations can also make a significant contribution in the presence of such data. Since previously published studies have come to different conclusions, the focus of this article is an evaluation of the methodology and results of those studies.