Karen Craft Denning

A simple multiple variance ratio test

Abstract Empirical applications of the variance ratio (VR) test frequently employ multiple VR estimates to examine the random walk hypothesis against stationary alternatives. Failing to control the joint test size for these estimates results in very large Type I errors. This manuscript extends the Lo and MacKinlay (1988) methodology and provides a simple modification for testing multiple variance ratios. Monte Carlo results indicate that the size of our test is close to its nominal size and that it is as reliable as the Dickey-Fuller (D-F) and the Phillips-Perron (P-P) unit root tests. For a stationary AR(1) alternative, our test is comparable to both the D-F and the P-P tests and seems to be more powerful than these tests against two unit root alternatives, an ARIMA(1,1,1) and an ARIMA(1,1,0).

Long-term and short-term price memory in the stock market

Abstract In this study we examine the issue of memory in common stock returns through an analysis of short- and long-term dependencies in various equity return series. We conclude that there is no compelling evidence that would support a finding of systematic dependencies in the behavior of equity returns.

Spin-offs and Sales of Assets: An Examination of Security Returns and Divestment Motivations

Abstract Event study research to date has generally used the cumulative average residuals technique and focused on stockholder announcement impacts while testing one or two hypotheses concerning divestment. There are two important reasons for departing from this tradition. First, recent evidence suggests that an examination of cross-sectional cumulative average residuals may result in detecting abnormal performance when none is present. Second, most of the hypotheses concerning divestment are consistent with positive returns to stockholders. This research isolates the impact of divestment on security holders by examining firms that have a single major divestment and no other seemingly important news events. The impacts at the announcement period and the divestment period are examined for subsamples of firms according to managerial motivations for divestment. Results indicate that when the sample is categorised this way, divestiture impacts vary between categories.

Changes in Organizational Structure and Shareholder Wealth: The Case of Limited Partnerships

This paper analyzes the consequence for shareholders of a change in organizational form, the conversion of a corporation, or the spin-off of a unit into a limited partnership. Theory suggests that, prior to the Tax Reform Act of 1986, the tax benefits of conversion to a limited partnership and the creation of a new entity separate from the parent corporation should have a positive effect on shareholder wealth. On the other hand, the increase in agency costs of such an organizational change should decrease the wealth of shareholders. Empirical results lend support to hypotheses that predict an increase in stock price at the announcement of the conversion, but cannot identify the source of the gain.

Evidence on Stock Reaction to Market-Wide Information

The main purpose of this paper is to show that the lack of misreaction to common information in previous research may be due to methodological weakness. As of now, there is no evidence which suggests that stocks under-react to common information at short horizons and over-react at longer horizons. Even if stocks under- and/or over-react to common information at the security level, the reaction pattern may not be evident at the market level if only some stocks have such a pattern and their capitalization is small. We show in this manuscript that the lack of misreaction to common information in previous research may be due to methodological weakness. By focusing on the stock level reaction, we find a statistically and economically significant reaction pattern to common information as the behavioral models suggest. This finding thus complements the findings of stock misreaction to firm-specific information, and may benefit researchers attempting to understand investor behavior.

Baltic freight futures: Random walk or seasonally predictable?

Abstract Ocean freight futures, the only futures contract on a service, began trading on the BIFFEX Exchange in 1985. The Chow and Denning (1993) refinement to the Lo and MacKinlay (1989) variance ratio methodology is used to examine daily BIFFEX price, volume, and index quotes for randomness. Results suggest the possibility of seasonality in the index values between 1985 and 1989. Evidence of seasonality in the index suggests the possibility of the potential for exploitation by some market participants. However, evidence of randomness in the futures contract prices, suggests that index seasonality has not here-to fore been exploited.

Serial bankruptcy: plan infeasibility or just bad luck?

Through a comparison of serial and once bankrupt firms over the period 1970–1996, those factors that lead to a successful reorganization are examined. It is found that serial bankrupt firms generally fail to restructure their top management around the time of their initial reorganization while over 70% of the sample of once bankrupt firms replace their senior executives. Serial bankrupt firms increase their level of fixed payments, are less able to lower their debt coupon rate and issue more equity than their once-bankrupt matches. It is further found that firm growth, performance, liquidity and size are associated with a greater likelihood of a successful reorganization. Firm risk as measured by financial leverage increases the probability of a subsequent bankruptcy. These results are useful to both bankruptcy courts and corporate managers seeking to discriminate between feasible and unrealistic reorganization plans following bankruptcy.

Divergent Market Responses to Human Capital Reorganizations

The stock market response to human capital downsizing events is on average negative. Firms maximize value by signalling to investors the types and nature of their capital budgeting decisions. Human capital restructuring is one such capital budgeting signal. This paper expands on previous research by examining market reactions to firm characteristics, specific firm decisions and certain external macroeconomic conditions. We find that the market response to the human capital downsizing events is firm specific and depends on macroeconomic conditions. We confirm our results using robustness testing. For firms responding positively to the downsizing event, size or analyst following, the firm’s technological intensity and simultaneous asset reorganization are significant contributors to the market response. For the positive subsample, a positive movement in the business cycle and the commercialization of the internet are associated with positive market returns for downsizing events. Significant factors for firms responding negatively include potential financial distress and offshoring. Technological intensity is also a significant influence, but is different for the two subsamples. For positive responding firms, the market may perceive that the firm is pro-actively managing its costs. For the negative responding firms, the market may perceive that knowledge workers may not be available when and if the firm recovers. For the negative subsample, commercialization of the internet and white-collar outsourcing intensify the negative market response.