Mark A. Wolfson

The intraday speed of adjustment of stock prices to earnings and dividend announcements

Abstract This paper examines the effects of Broad Tape news releases of earnings and dividend announcements on three aspects of intraday stock price behavior: mean returns, return variance, and serial correlation in consecutive price changes. The initial price reaction is evident in the first pair of price changes following the release (i.e., within a few minutes, at most). The returns earned by simple trading rules dissipate within five to ten minutes, although significant returns are detected in the overnight period and at the opening of trading on the next day. Disturbances in the variance and serial correlation persist for several hours and extend into the following trading day. As a class, dividend announcements induce much less activity than do earnings, although the response to dividend changes is comparable to the earnings announcement effect.

Financial-Reporting, Supplemental Disclosures, And Bank Share Prices

A prominent feature of financial reporting regulation over the past 15 years has been the explosion in the volume of required financial disclosures. A plausible explanation for this development is the shift in regulatory emphasis from viewing the role of the primary financial statements as being to provide complete measures of net income and market value of common equity to viewing financial disclosures (both primary financial statements as well as supplemental disclosures) as providing a rich set

Anticipated information releases reflected in call option prices

Abstract This study captures the ex ante information content of a financial reporting event (the annual earnings announcement) by examining the behavior of call option prices on dates leading up to and passing through the disclosure date. This approach differs from most previous empirical security price research which has been ex post in nature. The hypothesis that investors anticipate that the future release of annual earnings numbers will affect security prices is empirically confirmed. In particular, systematic changes in variance rates implied by the Black-Scholes option pricing model are demonstrated.

GEOGRAPHIC INCOME SHIFTING BY MULTINATIONAL-CORPORATIONS IN RESPONSE TO TAX RATE CHANGES

We investigate geographic income shifting by 191 U.S. multinational corporations in response to worldwide changes in tax rates during 1984-90. Between 1984 and 1986, the United Kingdom reduced corporate tax rates from a maximum of 45% to 35%, and in 1985 France reduced rates from 50% to 45%. Following these reductions in European rates, the United States reduced top corporate tax rates from 46% to 34% between 1986 and 1988. Canadian rates increased between 1984 and 1986 and then decreased through 1989. Beginning in 1988, numerous countries enacted tax cuts, apparently in response to those that occurred earlier in other countries. As discussed in section 3, differential changes in tax rates provide incentives for geographic income shifting by multinational firms. We identify two subperiods during 1984-90 in which relative tax rate changes

Firms Responses To Anticipated Reductions In Tax Rates - The Tax-Reform Act Of 1986

The 1986 Tax Act in the U.S. gradually reduced corporate tax rates from 46 percent prior to the Act to 34 percent by the middle of 1988. This reduction gave firms an incentive, in 1986 and 1987, to shift taxable income to future years when tax rates would be lower. There are substantial impediments, however, to shifting taxable income across periods (notably, offsetting tax consequences to other contracting parties and a host of nontax costs), and it becomes an empirical question as to whether the benefits of shifting taxable income are sufficient to overcome the impediments. This paper examines whether firms deferred income recognition and/or accelerated expense recognition in anticipation of these declining tax rates. We find statistically significant evidence that firms shifted gross margin from the quarter immediately preceding and anticipated decrease in tax rates to the next quarter. We estimate that, on average, the 812 firms in our sample saved approximately five hundred thousand dollars in taxes by deferring sales. At a gross margin rate of one-third, this amounts to nearly twenty billion dollars of shifted sales for our sample firms.

Decentralized Investment Banking: the Case of Discount Dividend-Reinve Stment and Stock-Purchase Plans

Discount dividend-reinvestment and stock-purchase plans allow shareholders to capture part of the underwriting fees incurred in new stock offerings and save sponsoring firms some of the usual underwriting costs. We tested the degree to which individual investors can profitably serve this investment banking function by implementing simple investment/trading strategies designed to capture the discounts and distribute the shares in the market. The large profits earned by our strategies raise serious questions about why it takes firms so long to raise the target level of capital and why many eligible shareholders do not participate in these discount plans.

Tax, Incentive, and Risk-sharing Issues in the Allocation of Property Rights: The Generalized Lease-or-Buy Problem

The lease-versus-buy question has captured the attention of accountants and financial economists for many years.1 The analyses to date have adopted a traditional neoclassical perspective: markets are complete, information is symmetric among agents, and contracts are costlessly enforceable. Alternatives are compared on the basis of their future cash flows. When taxes are factored into the analysis, they are typically shown to have a first-order effect on the decision. Miller and Upton (1976) represent the best work in the area to date, although they discuss some ways in which their analysis is restrictive. I wish to focus on their assumption that future maintenance costs and asset values are the same whether the asset is leased or owned:

Accumulating Damages in Litigation: The Roles of Uncertainty and Interest Rates

THE analysis presented here concentrates on one aspect of the problem of computing damage compensation: the accumulation of the dollar amount of the damages from the date of harm to the payment date. In attempting to compensate the plaintiff for the passage of time between damage and settlement, we must consider both the deferral of consumption and the resolution of uncertainty which occur during that interval. The bearing of risk and the market values of various risky claims figure prominently in the calculation of the proper interest rate. Uncertainty plays a key role in the analysis. In particular, three critical questions can be raised: (1) Will the defendant have sufficient funds to pay the accumulated amages when the suit is finally settled? (2) If the damage consisted of deprivation of a business opportunity, what was the ex ante probability distribution of outcomes, and which particular outcome oc-

The Role of Tax Rules in the Recent Restructuring of U.S. Corporations

U.S. tax reforms in the 1980s have changed substantially the relative attractiveness of operating in partnership form relative to corporate form. They have also changed the desirability of debt financing relative to equity financing, both of domestic operations and of foreign subsidiaries. And whereas the 1981 Tax Act encouraged mergers and acquisitions among U.S. corporations, the 1986 Act discouraged such transactions. Moreover, these Acts had the opposite effect on incentives of foreign companies to acquire U.S. businesses. In this paper, we attempt to show that these apparently disparate claims are all implied from a common (and simple) framework. Moreover, we present empirical evidence to support the claims.

Repackaging Ownership Rights and Multinational Taxation: The Case of Withholding Taxes

Tax systems are designed to achieve a variety of social goals. As a result, tax rates vary across different economic activities, across individual taxpaying units, and for given taxpaying units over time. These differential tax rates, in turn, provide strong incentives for taxpayers to engage in tax planning. These incentives are the key ingredients that allow the tax system to be used to implement desired social policy.’ A problem with this approach, however, is that tax rules adopted for the purpose of achieving certain social goals are generally overinclusive; that is, the rules encourage some taxpayers to exploit ambiguity in the rules and, as a result, lead to some socially undesirable economic activity. The response to overinclusiveness is to fine-tune the tax system. In particular, when taxpayers have gone ‘‘too far” in their efforts to avoid taxes, the Congress or the Treasury (or both) fight back by establishing legislative restrictions, judicial restrictions, or administrative guidelines on what taxpayers can do.’ To combat socially undesirable tax planning, Congress imposes both very broad restrictions that apply to a great variety of transactions, and very specific restrictions that respond to particular abuses of the tax system. Congress must be careful not to impose too many restrictions or to make enforcement of the rules too uncertain. Tax rule and enforcement uncertainty may discourage precisely the transactions that Congress wishes to encourage. In other words, restrictions can be overinclusive as well.