Mark I. Weinstein

An empirical investigation of IPO returns and subsequent equity offerings

Abstract Several recent papers present signaling models in which firms underprice their initial public offerings of equity (IPOs) so that they can subsequently issue seasoned equity at more favorable prices. We test the implications of these models. We find a positive relation between IPO underpricing and the probability and size of subsequent seasoned offerings. Although these results are consistent with the implications of the signaling hypotheses, the economic significance appears weak. We conduct additional tests to evaluate other explanations for these findings and find the alternatives more compelling.

The effect of a rating change announcement on bond price

Abstract This paper examines the behavior of corporate bond prices during the period surrounding the announcement of a rating change. We find some evidence of price change during the period from 18 to 7 months before the rating change is announced. We find no evidence of any reaction during the 6 months prior to the rating change. We also find little reaction, if any, during the month of the change or for 6 months after the change. This evidence contradicts the recent findings of Katz and Grier and Katz.

Profit‐Sharing Contracts in Hollywood: Evolution and Analysis

This article examines the development of profit‐ or revenue‐sharing contracts in the motion picture industry. Contrary to much popular belief, such contracts have been in use since the start of the studio era. However, early contracts differed from those seen today. The evolution of the current contract is traced, and evidence regarding the increased use of sharing contracts after 1948 is examined. I examine competing theories of the economic function served by these contracts. I suggest that it is unlikely that these contracts are the result of a standard principal‐agent problem.

Derived factors in event studies

Abstract We examine the utility of the statistical factor model of the process generating stock returns in the context of event studies. For a variety of estimation procedures and experimental designs we find limited value added relative to the use of a simple market model. We would attribute this finding to misspecification of the statistical factor analysis model, and suspect that there exist more robust procedures for estimating the factor structure of stock returns.

Conglomerate mergers, managerial motives and stockholder wealth

Managerial theories of conglomerate mergers suggest that such mergers are motivated by the managers desire to reduce his firms—and thus his income—risk. Yet, the application of optimal contracting models [e.g., Diamond and Verrecchia (1982)] to this issue suggests that the stockholders, who bear the cost of uncertainty, may also benefit from reducing the firms risk. Examining the market reaction to congomerate mergers announcements, we cannot support the hypothesis that managers initiate conglomerate mergers solely for their own benefit to the detriment of stockholders.

The Systematic Risk of Corporate Bonds

This statement presents the usual perception of bond risk. It is striking in that it does not discuss what is, from a portfolio theoretic view, the risk of a bond––the covariance of its return with the returns of other assets. This is in contrast to the typical discussion of the riskiness of common stocks, where we find some discussion of systematic risk and the role it plays in determining equilibrium expected security returns.

A curmudgeon's view of junk bonds

T he past few years have seen the development of a market for original issue high-yield (lowgrade) bonds, the so-called Junk Bond Market, which has developed as an alternative to private placements. The demand side of the Junk Bond Market is the subject of this paper. The demand side is interesting because it represents, for the first time in recent memory, significant purchases of publicly traded investment in fixed-income securities of less than investment grade. The lure for this is obviously the extraordinarily high yields obtainable on these securities. This paper examines the behavior of low-grade corporate bonds over an earlier period (1962-1974) to ask three related questions: 1. Do low-grade bonds actually deliver realized returns in excess of those on high-grade bonds? Note the emphasis on realized returns. Yield to maturity is a promised number, but portfolio managers are compensated on the basis of results, not promises. 2. If these differences exist, do they represent abnormal returns, or simply compensation for risk bearing? 3. How is inference about low-grade bonds affected by sample default experience? The answers to these questions will help the portfolio manager judge whether a strategy of investing in junk bonds is appropriate. A STUDY OF JUNK BlOND RETURNS FliOM 1962 THROUGIH 1974

Share Price Changes and the Arrival of Limited Liability in California

What effect does limited liability have on share values? This question is difficult to answer because active stock markets did not develop until the rise of corporate limited liability in the nineteenth century. Previous research has shown that one company with pro rata limited liability, American Express, was actively traded until the 1960s. However, no one has examined the price effect of a change from unlimited to limited liability. The history of corporate law in California provides a natural experiment that can be used to examine the effect of limited liability. Until 1929, all California corporations had pro rata unlimited liability. By a process that lasted until 1931, California adopted limited liability for corporations. In the paper I provide the first empirical examination of the effect that this move had on share prices. I find no evidence of share price changes associated with the change in the liability regime.

Don't Buy Shares without It: Limited Liability Comes to American Express

What is the value of limited liability to the corporation? Financial economists take the value of limited liability for granted, and there has been little empirical study of its value. Few natural experiments allow us to estimate the value of limited liability. One of these, however, is the case of the American Express Company. It appears that American Express was the last publicly traded unlimited liability firm in the United States, becoming a corporation with limited liability only in 1965. In this article, I examine the effects of adopting limited liability on the value of American Express shares and on their risk. Consistent with economic theory and previous empirical research, I find little effect on the firms value and a reduction in both systematic and unsystematic risk. This article also contributes to the empirical methodology of event studies.

Don't Leave Home Without It: Limited Liability and American Express

What is the value of limited liability to the corporation? Financial economists take the value of limited liability for granted and there has been little empirical study of its value. Few natural experiments allow us to estimate the value of limited liability. One of these, however, is the case of American Express Company. It appears that American Express was the last publicly traded unlimited liability firm in the United States, becoming a corporation with limited liability only in 1965. In this paper, I examine the effects of adopting limited liability on the value of American Express shares, and on their risk. Consistent with economic theory and previous empirical research [Weinstein (2003)], I find little effect on firm value, and a reduction in both systematic and unsystematic risk. This paper also contributes to the empirical methodology of event studies.