Willard T. Carleton

The Influence of Institutions on Corporate Governance through Private Negotiations: Evidence from TIAA-CREF

This paper analyzes the process of private negotiations between financial institutions and the companies they attempt to influence. It relies on a private database consisting of the correspondence between TIAA-CREF and 45 firms it contacted about governance issues between 1992 and 1996. This correspondence indicates that TIAA-CREF is able to reach agreements with targeted companies more than 95 percent of the time. In more than 70 percent of the cases, this agreement is reached without shareholders voting on the proposal. We verify independently that at least 87 percent of the targets subsequently took actions to comply with these agreements. Copyright The American Finance Association 1998.

A New Approach to Estimation of the Term Structure of Interest Rates

The purpose of this study is to extend the analysis of estimation of the term structure. The ability of the exponential/polynomial present-value function of equation (5) to approximate the theoretical present-value function is analyzed empirically. This study confirms previous results that indicate that the function does not provide an acceptable fit using least squares regression. In most samples, the near end of the estimated term structure appears substantially in error. Lengthening the polynomial tends to improve the fit only at the far end. Since the data appear to be subject to maturity-related heteroschedasticity, we have generalized the disturbance variance specification to allow for this possibility.Our correction permits determination of sample-specific degrees of heteroschedasticity. The reason is that the intensity of the heteroschedasticity appears to change from period to period. Although previous studies have attempted heteroschedasticity corrections (see [4]), the same specification was imposed on each sample in such studies. Maximum likelihood estimation was proposed and implemented in this paper. The results indicate that the difficulties of providing a good fit using the exponential/polynomial function are substantially eliminated.Recent literature regarding term structure estimation emphasizes the selection of more sophisticated estimating functions to provide a reasonable fit throughout the entire maturity range. This study emphasizes more careful modeling of the pricing disturbances. The prior approach involves somewhat complicated estimating functions and a potential loss of efficiency due to the lack of influence that each portion of the term structure is able to exert on other portions (with spline functions, for example.) Our maximum likelihood approach is somewhat difficult to implement and computationally burdensome. Nevertheless, it appears to provide a useful term structure estimation procedure.

Immunizing Default-Free Bond Portfolios with a Duration Vector

Dissatisfaction occasionally has been expressed with traditional measures of duration for immunization on conceptual grounds. However, more elegant duration measures have not been found to be superior to the traditional ones in empirical tests of immunization efficacy. Under the assumption that the term structure of continuously compounded interest rates can be expressed as a polynomial, Chambers and Carleton (1981) demonstrate that the finite and noninstantaneous return of a default-free bond can be expressed as a vector product of a duration vector and a shift vector. This study derives immunization strategies from the model and tests them. The results of the portfolio tests indicate that the traditional duration approach of Macaulay provides enhanced immunization relative to maturity approaches or naive approaches. However, the duration vector approach produces further improvements.

A Highly Personal Comment on on the Use of the CAPM in Public Utility Rate Cases

* Professors Brigham and Crum (hereafter BC) have performed a valuable service in their article [3]. They have brought to the attention of academicians a controversy that since the Breen/Lerner [1] and Myers [10] interchange had been argued over primarily in the trenches utility rate hearings. The focus of BCs criticism is quite narrow, calling attention to the effects of risk non-stationarity on measured betas, hence on estimated costs of equity. BC appear to accept as valid the underlying theory, a subject of increasing dispute in itself. The purpose of my note is not to find fault with the BC analysis and examples; surely much fault-finding ink will be spilled in Financial Management without my help.1 Rather I should like to add to the menu of CAPM problems, in the

The methodology of finance: A round table discussion

Abstract This round table discussion on “The Methodology of Finance” took place in St. Louis, during the annual meeting of the Financial Management Association. The moderator was George M. Frankfurter [GF] and the panel participants, in alphabetical order, were: Willard Carleton [BC], University of Arizona; Myron Gordon [MG], The University of Toronto; James Horrigan [JH], The University of New Hampshire; Elton McGoun [EM], Bucknell University; George Philippatos [GP], The University of Tennessee; and Chris Robinson [CR], York University.

The WPPSS mess, or “What's in a bond rating?”: A case study

Abstract This paper traces the history of the Washington Public Power Supply System (WPPSS) Projects 4 and 5 bond default, and evaluates Moodys ratings of the bonds in light of the facts available at the time, utilizing among other things a database and a ratings model developed for 1977 based on Moodys own statements as to what variables are important in its ratings determinations. The model is reasonably successful in replicating Moodys 1977 ratings generally, although many of the variables described as important by Moodys turn out to be insignificant statistically. When the model is applied to WPPSS 4 and 5 participant utilities, it becomes evident that the Systems 1977 bonds should have been given a below-investment grade rating consistent with Moodys model-revealed standards. The paper concludes with a 1981 model update and some conjectures as to why the misratings occurred, as well as why the bonds could ever have been sold to the public.