James S. Schallheim

Seasonal and Size Anomalies in the Japanese Stock Market

Little attention has been paid by the academic community in the United States to the Japanese stock market and its structure. Japan has the second largest economy in the Western world, and the Tokyo Stock Exchange (TSE) is second only to the New York Stock Exchange (NYSE) in terms of aggregate market values and sales volume. Analysis of the Japanese stock market is useful given its relative importance, but, in addition, examination of the Japanese market may offer insights into controversies surrounding U.S. markets. This study focuses on two such current controversies: the January and size anomalies.

Valuation of asset leasing contracts

Abstract This paper describes the relation among a variety of asset leasing contracts, including: (1) cancellable operating leases; (2) leases which grant the lesse an option to extend the life of the lease; (3) leases that grant the lessee an option to purchase the leased asset at a fixed price at the maturity date of the lease; (4) leases that grant the lessee the right to purchase the leased asset at its ‘fair market value’ at the maturity date of the lease; (5) leases that grant an option to the lessee to purchase the leased asset at a prespecified price anytime during the life of the lease; (6) leases that require the lessee to purchase the leased asset at a fixed price at the maturity date of the lease; and (7) leases that contain non-cancellation provisions. The paper uses a compound option pricing framework to develop a general model for valuing (or evaluating) each of the types of leasing contracts. Numerical examples are presented to illustrate the effect of the various elements of a leasing contract — including cancellation risk and residual value risk — on equilibrium rental payments.

Lifting the Lid on Closed-End Investment Companies: A Case of Abnormal Returns

This study documents substantial gains accuring to shareholders of discounted closed-end investment companies when these funds are reorganized to allow shareholders to obtain the market value of the funds assets. The findings indicate that the discounts on closedend funds are real, i.e., they are not the sole result of inaccurate reporting of the funds net asset value. The study also documents significant abnormal returns after the announcement of management-sponsored proposals to reorganize. This finding is inconsistent with the joint hypothesis of market efficiency and that the market model (as estimated) is the correct return bench mark for funds undertaking reorganization.

Are Debt and Leases Substitutes

Lease valuation models often begin with the assumption that leases and debt are substi? tutes. This paper demonstrates that, because leasing is a mechanism for selling excess tax deductions, it can motivate the lessee firm to increase the proportion of debt in its capital structure relative to an otherwise identical firm that does not use leasing. Thus, debt and leases can be complements. We also show that a competitive lessor will use diversification to reduce risk and increase the probability that tax deductions are fully utilized so that it can lower lease payments.

Private equity financings in Japan and corporate grouping (keiretsu)

Abstract This study offers evidence concerning the private issues of seasoned equity by examining the stock market reaction to the announcement of these issues in Japan. Similar to results in the U.S., the announcement of the private placement of equity by Japanese firms is significantly positive, nearly five percent on average. We examine a sample of firms that purchase the private equity issues and find that the average market reaction of their stock is negative at the announcement of the purchase. Finally, we examine two subsets of the sample: those firms that belong to a keiretsu, an industrial grouping, and those that do not belong to an identifiable group. Our evidence is consistent with the notion that the keiretsu form of industrial organization is beneficial to the shareholders of member firms.

The determinants of yields on financial leasing contracts

Abstract This study tests hypotheses about the valuation of leasing contracts. We examine the determinants of the yields of a relatively large, reasonably heterogeneous, and nationally representative sample of financial leases. We find lease yields to be significantly related to treasury bond yields and our proxies for the systematic risk of the leased assets residual value and the transaction and information costs associated with the lease. There is also some evidence of a relationship between lease yields and the default-risk of the lessee.

Do Incentives Matter? Managerial Contracts for Dual-Purpose Funds

We examine the contracts used to compensate the managers of the seven dual‐purpose investment companies that existed between 1967 and 1985 to determine whether financial incentives in fluence real behavior in the predicted way. The compensation contracts for these funds provided explicit incentives for the production of both capital gains and current income. We model the behavior that an expected compensation‐maximizing agent would exhibit when faced with such contracts and derive several testable implications. Our empirical results are consistent with the theoretical predictions, and so we are able to use this relatively clean setting to contribute to the growing literature concerned with determining the impact of incentive contracts on behavior. A unique and interesting aspect of this study is that the nature of these organizations allows us to provide evidence that the market understood and priced the behavior induced by these contracts.

Realized Returns and the Default and Prepayment Experience of Financial Leasing Contracts

0 The decision to lease or buy equipment continues to be important for financial managers. Nevitt and Fabozzi [15] estimate that 80% of U.S. corporations lease assets each year and that, in aggregate, these firms lease over

Do Leases Expand Debt Capacity

100 billion in capital equipment. Because of systematic economic differences between lessees and lessors, financial managers will continue to view leasing as a viable alternative for acquiring the use of an asset. For the most part, existing research on leasing focuses on the theoretical and analytical aspects of leasing contracts.1 The few existing empirical studies concentrate on the ex-ante contractual yields of leasing contracts.2 Contractual yield calculations assume that all lease payments are made as scheduled and that the estimated residual value of the leased asset is realized at the maturity date of the contract. In essence, these ex-ante yield computations assume leasing contracts are default-free. However, as noted in Schallheim, Johnson, Lease, and McConnell [17] (SJLM), ex-ante yields reflect a

An Empirical Examination of the Costs and Benefits of Executive Stock Options: Evidence from Japan

Theoretically and empirically, debt and leases have been shown to be both substitutes and complements. To explore the relation, we divide our sample into two subsets: those that exhibit a complementary relation (43% increase debt after increasing leases), and those that exhibit a substitutionary relation (57% decrease debt after increasing leases). For complement firms, we find a significant negative relation between leasing and the firms size, marginal tax rate, and z-score, consistent with “complementary” theories. For substitute firms, we find a positive and significant relation between leasing, the marginal tax rate and changes in cash. We also find a significant positive stock market reaction to the announcement of the SLB, which is stronger for the complement subset of firms.Most theoretical models predict that debt and leases should act as substitutes. While the preponderance of evidence supports this claim, there remain significant cases where debt and leases appear to be complements. One of the problems with prior research is that it is difficult to properly control for the changing asset base associated with leasing in cross-sectional tests. To overcome this problem, we examine a sample of sale-and-leaseback (SLB) transactions where the assets of the firm do not change due to the lease. We find evidence of a substitution effect between leases and long-term debt in our overall sample. We also find, however, that 40 percent of the firms exhibit evidence of a complementary relation by increasing their debt after the SLB transaction. To further explore this relation we divide the sample into two groups, those that show an increase in debt and those that show a decrease in debt after the SLB transaction. Within the substitute subgroup, leasing is associated with more capital expenditures and financial constraints. Within the complement subgroup, we find a significant relation between leasing and the firm’s marginal tax rate. The “leasing puzzle” first defined by Ang and Peterson (1984) remains unsolved. This puzzle involves the theoretical conjecture that debt and leases should act as substitutes (in the sense that more leases should lead to less debt), but Ang and Peterson found that firms that used more leases tended to have, in fact, more debt. A body of literature has developed since Ang and Peterson posed this puzzle, but no definitive answer has resulted. While the preponderance of evidence in the literature supports debt and leases as substitutes, there remain significant cases in which debt and leases simultaneously increase. One of the problems with the previous literature that examines this issue is the familiar ceteris paribus condition. But here the condition is more problematic because a typical lease involves the acquisition of the use of a new asset for the firm. In order to overcome this problem, we have chosen a sample of sale-and-leaseback (SLB) transactions in which the assets of the firm do not change due to the leasing transaction. Therefore, we can examine in detail the substitution or complement issue without the potential contamination of a change in the asset base or investments of the firm. The theoretical models in the leasing area have usually assumed that leases substitute for debt. The question posed in the model by Myers, Dill, and Bautista (1976) was how much debt is displaced by leasing. However, the leasing models presented by Lewis and Schallheim (1992) and Eisfeldt and Rampini (2007) do predict the possibility that debt and leases can be complements with theories based on taxes or bankruptcy costs, respectively. Therefore, the true nature of the relation between debt and leases remains an empirical issue. Bayliss and Diltz (1986), Marston and Harris (1988), Beattie, Goodacre, and Thomson (2000), and Yan (2006) all find that debt and leases are substitutes, with varying degree of substitutability. However, all of these studies suffer from the impact that new leases have on the 1 Other literature addressing the leasing puzzle includes Bayliss and Diltz (1986), Marston and Harris (1988), Beattie, Goodacre, and Thomson (2000), and Yan (2006). asset and investment opportunities of the firm. Our study will control for this problem with our sample of SLB transactions. Our results shed the following light on the leasing puzzle. First, in the overall sample of SLBs, we do not find any significant relation between the increase in leases and the change in total debt. However, when we examine just the changes in long-term debt and SLBs, we do find support of a substitution effect between the leases and debt. We then divide the sample of SLBs into two groups, those who show an increase in total debt, a little over 40 percent of the sample, and those that show a decrease in total debt. The first subgroup is labeled the complement sub-sample and the second group is the substitute subsample. For the substitute sub-sample, a dollar of SLBs appears to substitute for approximately