M. Andrew Fields

The Emergence of Corporate Governance from Wall St. to Main St.: Outside Directors, Board Diversity, Earnings Management, and Managerial Incentives to Bear Risk

Recent corporate events have brought a heightened public awareness to corporate governance issues. Much work has been accomplished to date, but it is clear that much more remains to be done. This paper provides a review of empirical research in four relevant areas of corporate governance. Specifically, the paper provides an overview of (a) the role that outside directors play in monitoring managers, (b) the emerging literature on the impact of board diversity, (c) the existence of and incentives for corporate executives to manage firm earnings, and (d) managerial incentives to bear risk.

The effect of Chernobyl on electric-utility stock prices

Abstract U.S. public electric-utility stock price reactions to the Chernobyl nuclear-power accident are investigated. Results indicate that utility shareholders earned, on average, significant negative abnormal returns during the 20-day period immediately following the accident. Firms using nuclear power experienced greater losses than did nonnuclear firms. These findings are consistent with those of previous studies on Three Mile Island. However, our results indicate no significant changes in systematic risk, total risk, or market risk as a result of the Chernobyl accident.

The wealth effects of corporate lawsuits: Pennzoil v. Texaco

Abstract The Pennzoil-Texaco lawsuit is a unique case that provides an excellent opportunity to study the impact of litigation on both the plaintiff and defendant. Market reaction to the lawsuit produces an asymmetrical effect on shareholder wealth. There is a large combined loss in market value resulting from the initial court decision, as much of Texacos decline in wealth is not transferred to Pennzoil. However, anticipation of settlement causes a reversal of the effect. And, when measured over the entire lawsuit period, there is no evidence of a final loss in combined value. The asymmetric patterns indicate the presence of large transaction costs imposed upon Texaco as a result of the lawsuit and financial distress. There is a similar effect on bondholder wealth. In addition, it is hypothesized that the equity beta coefficient of both companies will be affected substantially during the lawsuit period. Pennzoils beta declines significantly, and Texacos beta rises significantly relative to the oil industry.

Should dividend discount models be yield-tilted?: Comment

I n a 1983 article in this Journal, William Bethke and Susan Boyd, hereafter B-B, present evidence supporting the existence of a tilted yield plane. They conclude that the most likely explanation is a tax effect. High-yield stocks must compensate investors for the higher taxes paid on dividends relative to capital gains. IEven with the new tax law, this difference may persist because capital gains can be deferred. A yield tilt is an appealing relationship, but the issue of its existence is far from resolved. It is not my purpose to dispute the empirical conclusions, as Michaud did in an earlier comment (1984). Rather, I would like to examine the authors’ choice of model, arguing that it introduces a bias into the estimation of the dope of the plane. The issue is of importance, given 1 hat yield-tilt models are widely used. Much of the work that tests for a yield tilt has been based upon a model first developed by Brennan (1970). Litzenberger and Ramaswamy (1979), hereafter L-R, provide one such extension. B-B take issue with the L-R model in a footnote and derive a different model that uses the market yield as a “bogey for comparing’’ security yields. The authors imply that the comparison of security yields should be made against the market yield instead of the risk-free rate as L-R did in their model. This makes sense at first glance, yet it is necessary that a model adjust returns consistently for all yields. The L-R model uses the risk-free rate to do just that provide yield consistency between the risk-free rate, the market yield, and security yields. The K-B model ignores the yield status of the riskfree rate, thus providing biased results. It is my intent to present the implication of this alteration. Z 2 ;i m

On allocating the variance of output growth to trend and cycle components

Abstract Given any decomposition of real GNP into trend and cycle components, we describe a simple statistical procedure by which the proportions of the variance of GNP growth attributable to each of these components can be calculated.