Jeffrey F. Jaffe

Patterns in Japanese Common Stock Returns: Day of the Week and Turn of the Year Effects

Stock markets in the United States and foreign countries exhibit a strong weekly seasonal, an empirical regularity for which no theoretical explanation has been found. Ones belief in this phenomenon would be strengthened if it is known to also occur in capital markets separated from those in the United States by distance, institutional arrangements, and culture.

Do Takeover Targets Underperform? Evidence from Operating and Stock Returns

Financial economists seem to believe that takeovers are partly motivated by the desire to improve poorly performing firms. However, prior empirical evidence in support of this inefficient management hypothesis is rather weak. We provide a detailed re-examination of this hypothesis in a large scale empirical study. We find little evidence that target firms were performing poorly before acquisition, using either operating or stock returns. This result holds both for the sample as a whole and for subsamples of takeovers that are more likely to be disciplinary. We conclude that the conventional view that targets perform poorly is not supported by the data.

A twist on the Monday effect in stock prices: Evidence from the U.S. and foreign stock markets

Abstract One of the most unusual empirical results in finance is the significantly negative average return on the stock market on Mondays. The present paper documents a twist on this effect. We find that abnormally low returns on Monday seem to follow stock market declines. In fact, the Monday effect virtually disappears when the market has previously risen. Cross, Keim-Stambaugh, and Jaffe-Westerfield point out that Mondays return is positively correlated with the previous Fridays return. Surprisingly our findings hold even after one accounts for this Friday–Monday correlation.

Is there a monthly effect in stock market returns?: Evidence from foreign countries

Abstract In a recent paper, Ariel documents a monthly pattern for U.S. stock market returns. Our paper examines this pattern of returns in four other countries. We find only weak evidence supporting this phenomenom in these foreign markets; just one country exhibits a significant seasonal consistent with Ariels work. However, we do find stronger evidence of a ‘last day of the month’ effect. In addition there is evidence of a country unique monthly pattern (i.e. one that is not consistent with the U.S. pattern).

The performance of investment newsletters

This paper analyzes the recommendations of common stocks made by the investment newsletters followed by the Hulbert Financial Digest. We conclude that, taken as a whole, the securities that newsletters recommend do not outperform appropriate benchmarks. Our data provide modest evidence that the future performance of a newsletter is related to its past performance, when performance is measured by raw returns. However, evidence of persistence vanishes when performance is measured by abnormal returns. We find little, if any, evidence of herding, i.e., cross-sectional dependence of recommendations, across newsletters. Newsletters tend to recommend securities that have performed well in the recent past. Finally, newsletters with poor past performance are more likely to go out of business.

Does Section 16b deter insider trading by target managers

Authors description of his article: This paper empirically examines whether the short swing trading rule (Section 16(b) of the Securities Exchange Act) deters managers from trading before merger announcements. This rule bars insiders from profiting on round-trip trades completed within a six month period. Insiders can generally escape the short-swing rule by selling six months and a day after purchase. However, a merger forces the sale of all the outstanding common stock of the target firm, preventing insider purchases within six months before the merger from escaping this rule. We analyze the trading behavior of top managers of takeover targets around the announcement of a bid. In order to disentangle the effect of this rule from the deterrent effect of the more punitive Rule 10(b)(5), we examine the time period from 1941 to 1961, an era when the latter rule was not enforced. We find that managers of target firms reduce their purchases before the merger announcement below their normal level of purchases and relative to a control sample of non-target firms. This evidence is consistent with a deterrent effect of Section 16(b). We find that managers reduce their purchases before the merger completion only in the 1941-55 period. Surprisingly, managers do not reduce their sales before the announcement, even though Section 16(b) cannot punish deferral of planned sales.

Inflation and the Holding Period Returns on Bonds

The relationship between the rate of inflation and the interest rate has been a topic of research for quite some time. A breakthrough in the analysis occurred years ago with Irving Fishers hypothesis that the nominal interest rate fully reflects the available information concerning the possible future values of the rate of inflation. Others have extended Fishers original insight to explain further the interaction between the rate of interest and inflation. For example, Mundell [26] uses the Pigou real-balance effect to hypothesize that the real rate of interest is inversely related to the rate of inflation.

Inflation, the Interest Rate, and the Required Return on Equity

Miller has analyzed capital structure in the presence of both corporate and personal taxes. The present work investigates the effect of inflation on both interest rates and equity returns when the Miller equilibrium condition is employed in a loanable funds model. Both an interest rate effect and a redistribution effect are derived. The interest rate effect forces the responsiveness of the interest rate to the inflation rate to be below that hypothesized by Darby. However, the redistribution effect may change this responsiveness in either direction.

Leverage and the value of a firm under a progressive income tax: A correction and extension

Gordon develops a model where he concludes that “the equilibrium value of a firm is a convex function of its leverage rate and … the optimal (value maximizing) policy for all firms is the maximum possible leverage rate’. Using Gordons model, we show below that Gordons conclusions are incorrect. We develop a correct version of the Gordon model where the firms value is invariant to the debt-equity ratio.