Myron S. Scholes

The Pricing of Options and Corporate Liabilities

If options are correctly priced in the market, it should not be possible to make sure profits by creating portfolios of long and short positions in options and their underlying stocks. Using this principle, a theoretical valuation formula for options is derived. Since almost all corporate liabilities can be viewed as combinations of options, the formula and the analysis that led to it are also applicable to corporate liabilities such as common stock, corporate bonds, and warrants. In particular, the formula can be used to derive the discount that should be applied to a corporate bond because of the possibility of default.

Estimating betas from nonsynchronous data

Abstract Nonsynchronous trading of securities introduces into the market model a potentially serious econometric problem of errors in variables. In this paper properties of the observed market model and associated ordinary least squares estimators are developed in detail. In addition, computationally convenient, consistent estimators for parameters of the market model are calculated and then applied to daily returns of securities listed in the NYSE and ASE.

The effects of dividend yield and dividend policy on common stock prices and returns

Abstract This paper suggests that it is not possible to demonstrate, using the best available empirical methods, that the expected returns on high yield common stocks differ from the expected returns on low yield common stocks either before or after taxes. A taxable investor who concentrates his portfolio in low yield securities cannot tell from the data whether he is increasing or decreasing his expected after-tax return by so doing. A tax exempt investor who concentrates his portfolio in high yield securities cannot tell from the data whether he is increasing or decreasing his expected return. We argue that the best method for testing the effects of dividend policy on stock prices is to test the effects of dividend yield on stock returns. Thus the fact that we cannot tell, using the best available methods, what effects dividend yield has on stock returns implies that we cannot tell what effect, if any, a change in dividend policy will have on a corporations stock price.

Dividends and taxes

Abstract We present sufficient conditions for taxable investors to be indifferent to dividends despite tax differentials in favor of capital gains (Strong Invariance Proposition). The conditions include two ‘seemingly unrelated’ provisions of the Internal Revenue Code: (1) the limitation of interest deductions to investment income received and (2) the tax-free accumulation of wealth at the before-tax interest rate on investments in life insurance. Although we use insurance for simplicity in the proof, many tax-equivalent investment vehicles now exist, notably pension funds. Our analysis suggests that the personal income tax is approaching a consumption tax with further drift likely.

Dividends and Taxes: Some Empirical Evidence

This paper reexamines some recent tests of whether holders of shares with higher dividend yields receive higher risk-adjusted rates of return to compensate for the heavier taxes on dividend payments than on long-term capital gains. Our particular concern is with tests using short-run measures of dividend yield--that is, measures that seek to deduce the differential tax burden on dividends over long-term capital gains from differences in rates of return on shares that do not pay a cash dividend during the return interval. We show that such measures are inappropriate for that purpose. Any yield-related effects associated with such measures must arise from sources other than the long-term tax differential. For the short-run measures considered here, the yield-related effects found in some tests are traced to biases, one of a fairly subtle kind, introduced by dividend announcement effects.

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.

Taxes and Business Strategy

This book is written for anyone with an interest in learning about tax strategy. We initially wrote the book for MBA students, but it is also appropriate for undergraduate students, mas ters of accounting or finance students, and doctoral students. More specifically, this book is appropriate for those embarking on (or already in) careers in investment banking, corporate finance, strategy consulting, money management, or venture capital. The book is valuable to accountants and attorneys who want a rigorous framework for thinking about tax strategy and how tax strategy interacts with other aspects of the firm. In addition, those starting their own businesses and even just managing their own finances will find many aspects of this book valuable. URI http://lib.hpu.edu.vn/handle/123456789/22567 Collections Sociology [2834] DSpace software copyright

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.

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.

Forecast Evaluation Based on a Multiplicative Decomposition of Mean Square Errors

The evaluation of forecasts is frequently hampered by the heterogeneity of the underlying data. Suppose, for example, that three forecasters, X, Y, and Z, all predict the same variable one year ahead in a number of consecutive years. Suppose further that it is agreed to use the mean square error as the criterion of the forecasts. Then an ordinary estimated mean square is frequently an imperfect instrument for the evaluation because different years may correspond to different populations, some years being easy to predict and some very difficult. What is needed is a separation of effects (a “forecaster effect” and a “year effect” in this example), which is not unlike the separation procedure of classical variance analysis.