Uri Loewenstein

On Equilibrium Pricing under Parameter Uncertainty

Prior theoretical work on estimation risk generally has been restricted to single-period, returns-based models in which the investor must estimate the vector of expected returns but the covariance matrix is known. This paper extends the literature on parameter uncertainty in several ways. First, we analyze asymmetric parameter uncertainty in a model based on payoffs. Second, we explore the effects of both symmetric and asymmetric estimation risk on equilibrium asset prices when the covariance matrix for payoffs must also be estimated. Finally, we investigate the effects on equilibrium of asymmetric parameter uncertainty in a simple multiperiod model.

Equilibrium pricing and portfolio composition in the presence of uncertain parameters

Abstract We analyze the effect of parameter uncertainty on equilibrium asset prices. For the symmetric case, when the amount of estimation risk is the same for all securities, the existing literature argues that parameter uncertainty is largely irrelevant for equilibrium. Our results differ. We find that symmetric estimation risk affects equilibrium values of relative asset prices, expected returns, market weights, and betas.

THE INFORMATIONAL CONTENT OF THE TIMING OF DIVIDEND ANNOUNCEMENTS

Abstract This paper contains a test of a new aspect of the informational content of dividend; namely, is there information in the timing of the announcements? The empirical evidence indicates that the market expects ‘bad news’ to be delivered late and that these expectations are confirmed. Mean excess returns of stock prices around late announcements are, depending on the assumed returns generating process, either significantly negative or insignificant while significantly positive around the entire population of announcements. Moreover, the proportion and magnitude of dividend reductions associated with late announcements are significantly larger than in the complete universe of announcements.

Dividend policy, cash flow, and investment in Japan

This study provides evidence in support of the cash flow information (CFI) hypothesis focusing on the Japanese firms. Dividend changes indeed convey information about the firm’s cash flows. Although the free cash flow hypothesis is to some degree supported by the evidence in firms’ investment behavior, dividend policy is not used by Japanese firms to control the overinvestment problem. In addition, the dividend clientele effect does not appear significant around dividend announcements in Japan. Given the specific institutional features of the Japanese market, we find that investment spending is very sensitive to liquidity constraints for nonkeiretsu firms, but not so for keiretsu firms. D 2002 Elsevier Science B.V. All rights reserved.

Voluntary dividend announcements in Japan

Abstract Japan offers us a valuable opportunity to examine issues related to dividend announcements under an institutional setup quite different from that in the U.S., such as the voluntary nature of dividend announcements, and mutual-shareholding among corporations. We provide evidence on two dimensions of the voluntary dividend announcements: (1) What are the major determinants of voluntary dividend announcements? and (2) How does the stock market react to these announcements? Our results show that larger firms and keiretsu firms make announcements more frequently than smaller firms and non-keiretsu firms. However, firms with greater information asymmetry, proxied by higher insider shareholding and greater return variance, are less likely to disclose dividend information. In voluntary disclosure, managers exhibit a bias toward releasing good news. Due to such discretionary bias, the market reaction to announcements of no dividend change is significantly negative, which is in contrast to the results in the U.S.

Resolution of Uncertainty and Asset Prices: Why the Timing of Information Release Might be Relevant After All

The objective of this paper is to reexamine the effects of the timing of information releases on security prices. We extend Ross (1989) by allowing the timing of information releases to affect the martingale probabilities. We show that if the early release of information is expected to resolve part of the uncertainty about the economy wide shock, it will positively affect asset prices in general and, under some conditions, the price of the information generating firm will rise more than the price of other firms. Our results are consistent with puzzling empirical observations documented in both the accounting and financial economics literatures.

A note on market expectations of risk-free rates and volatilities before and after October 1987

Abstract This paper examines the role of interest rates expectations in contributing to the stock market crash of October 1987. Given prices of a pair of options of equal maturity on the S&P100, a dividend-modified Black-Scholes option pricing model is solved for the combination of volatility and interest rate which prices both options. Using data for the three year period spanning the crash of October 1987, there appears to be no discernible difference between implied interest rates before and after October 1987. There is no indication in the implied rates that the market anticipated the crash. The volatility of implied interest rates in our experiment is considerable. We also find a marked increase in market volatility only after the crash, whereas the implied volatility for the period preceding the crash is remarkably stable. There appears to be a negative correlation between implied interest rates and implied market volatilities but this correlation is driven by prices observed on dates immediately following October 19, 1987.