Rodney L. Roenfeldt

Abnormal Returns from Merger Profiles

Several studies indicate the presence of large abnormal returns accruing to shareholders of merged firms in the period immediately before the merger. For example, Mandelker [18] reports that stockholders of acquired firms earn abnormal returns of approximately 14 percent in the seven months preceding merger. Franks, Broyles, and Hecht [15] find abnormal returns of 26 percent for British firms during the four months prior to merger; Elgers and Clark [11] report 43 percent abnormal returns accruing over two years before merger to shareholders of acquired firms.

Equity valuation effects of forming master limited partnerships

Abstract Equity valuation effects of decisions by corporations to shift assets to master limited partnerships (MLPs) are examined for the period 1982–1987. Positive average abnormal returns are found for (1) total conversions of corporations to MLPs (5.89%), (2) rollouts of subsets of assets by distribution of MLP equity claims to parent-firm shareholders (6.41%), and (3) rollouts of subsets of assets by public sale of MLP equity claims (2.41%). The positive effects are consistent with tax advantages, reduction in free cash flow, and information signaling. The positive effects for rollouts of subsets of assets are also consistent with reductions in information asymmetry and improvements in asset management.

CAPITAL BUDGETING PROCEDURES UNDER INFLATION

S ignificant increases in the general price level for goods and services necessitate modification of traditional capital budgeting procedures to avoid inefficient allocation of capital. During the 1960s, price levels as measured by the Consumer Price Index increased 2.8% per annum on average and thus far in the 1970s have increased an average of 6.2% per annum. A chronic inflationary environment diminishes the purchasing power of the monetary unit, causing large divergences between nominal and real future cash flows. Thus, since rational decision makers presumably are interested in real returns, they should explicitly include the impact of inflation on investment projects when making capital budgeting decisions. The purpose of this paper is to present a normative framework, building on the traditional net present value model, that explicitly incorporates anticipated inflation and allows for uncertainties in real cash flows. Failure to consider the impact of inflation tends to produce suboptimal decisions for several reasons. For example, cash-flow estimates must embody anticipated inflation if the discount rate contains an element attri-

Warrant Pricing: Jump-Diffusion vs. Black-Scholes

This paper investigates the warrant pricing abilities of dilution-adjusted versions of the Black-Scholes and Jump-Diffusion option pricing models. Because of the typically long lives of warrants, their pricing is hypothesized to benefit from use of the Jump-Diffusion model, which relaxes the Black-Scholes restriction against stock price jumps. Empirical results indicate that while the Black-Scholes model almost uniformly provides more efficient estimates, the Jump-Diffusion model generally provides less biased estimates of market value. Particularly for the valuation of out-of-the-money warrants and warrants on stocks with a history of large and/or frequent jumps, the Jump-Diffusion model may be preferred.

The Value of Open Market Repurchases of Closed-End Fund Shares

The authors illustrate the value to shareholders when closed-end funds repurchase shares at a discount from net asset value. Repurchases increase share price even when there is no asymmetric information concerning the value of the underlying assets and the percentage discount remains unchanged following the repurchase. Expected gains to shareholders are derived from capturing the discount on the assets associated with the shares repurchased. In an analysis of twenty-seven open market repurchase announcements by closed-end funds, the regression coefficient estimate that measures the association between the actual excess return and the expected increase in share price is essentially 1.0. Copyright 1999 by University of Chicago Press.

Analysis of Financial Leases

In recent years, leasing as a means of financing, has grown at an annual rate of 15% [5]. Parallel to this expanding impact of leasing, has been a similar increase in the techniques for lease analysis [See, for example, 1, 2, 4, 7, 8, 9]. The rapid proliferation of these techniques, however, has produced methods of analyzing financial leases which overlook critical elements in the evaluation of alternatives.

Lease-Cost Measurement of Hospital Equipment Under Cost-Based Reimbursement

* Several approaches to lease-cost measurement have been presented and discussed in the literature [1, 3, 5, 12, 13], while some recent literature attempts to examine the cost of leasing in the efficient capital markets framework [6, 8, 9]. Further, Sorensen and Johnson [14] and Roberts and Gudikunst [10] have empirically measured the actual or direct cost for a sample of lease contracts. Although these two empirical studies provide valuable insight into the leaseversus-borrow-and-purchase decision for profitseeking firms, they provide very little information about the relative cost of leasing versus borrowing for the not-for-profit hospital. In a recent study [4] that parallels the studies in the for-profit sector, we found that the effective interest cost on a sample of not-for-profit hospital leases is generally high in absolute terms, ranging between 13% and 25%. We also found that many hospital officials

Market performance of options on the Chicago board options exchange

Abstract Unproven assertions about potential option returns have accompanied increased interest in option trading since formation of the CBOE. This paper presents an analysis of return distributions from buying and selling CBOE options. Generally, buying options resulted in returns that were negative and lower than returns from buying the underlying stocks. Average returns from writing covered options exceeded returns from buying both options and stocks. Commissions and taxes shifted location of return distributions for all three investments, particularly reducing returns from buying options.

Uncertainty during tender offers and the measurement of shareholder wealth effects

Uncertainty concerning the ultimate outcome of tender offers may affect the measurement of changes in shareholder wealth. The uncertainty regarding the outcome of tender offers is measured by estimating the probability of acceptance of tender offers during the period when the tender offers are outstanding. The estimated probability of acceptance of tender offers implies that the amount of uncertainty prior to knowledge of the ultimate outcome is substantial and affects the measurement of expected equity gains. The uncertainty-adjusted measure of the change in shareholder wealth indicates that previous studies may have underestimated the gains expected to result from tender offers.

Commentary on the 1982 FMA Program

* More than 1,000 people registered for the twelfth annual meeting of the Financial Management Association held at the St. Francis Hotel in San Francisco, October 14-16, 1982. Several individuals have asked a variety of questions about the 1982 program. The purpose of this commentary is to answer these questions and to provide the membership with (1) a brief description of the program, (2) comparative data and a perspective on previous programs, and (3) a geographical distribution of participants. Program Development and Perspective The program was composed of 84 sessions this year, of which 12 were panels and the remaining 72 were paper presentations. Each of the 72 paper sessions contained three papers for a total of 216 papers. These papers were selected from 490 abstracts submitted, an acceptance ratio of 44 percent. Exhibit 1 indicates the