The concern of this paper is with the effects of insider trading on ex ante managerial behavior. Specifically, the paper focuses on how insider trading affects insiders' choice among investment projects. Other things equal, insider trading leads insiders to choose riskier investment projects, because increased volatility of results enables insiders to make greater trading profits if they learn these results in advance of the market. Thiseffect might be beneficial, however, because insiders' risk aversion pulls them toward aconservative investment policy. Insiders' choices of projects are identified and compared with insider trading and those without such trading. Using these results, the conditions under which insider trading increases or decreases corporate value by affecting the choice of projects with uncertain returns are identified.

This paper tests conditional capital asset pricing models in a multivariate GARCH framework employing both constant and time-varying prices of market and bond risk. Depending on the interpretation of the market portfolio, the ICAPM with one hedge portfolio or the two-factor myopic CAPM are supported using weekly data from July 1983 to December 1989. In contrast, we reject the myopic single-factor CAPM under a constant price of market risk. We find that interest rate risk is highly significant, which suggests that previous rejections of the conditional CAPM using only stock market data may be due to omitted hedge terms or an incomplete market factor.

From various empirical work, it is well known that the volatility of asset returns changes over time. This might be one of the reasons that implied volatilities differ for options that only differ in time to maturity. We construct models for the relation between short- and long-term implied volatilities based on three different assumptions of stock return volatility behavior, i.e., mean-reverting, GARCH, and EGARCH models. We test these relations on option price data and conclude that EGARCH gives the best description of asset prices and the term structure of options' implied volatilities.

This paper illustrates regression and Kalman filtering methods for estimating the time-varying term structure of volatility expectations revealed by options prices. Short- and long-term expectations are estimated for four currencies using daily PHLX options prices from 1985 to 1989. Throughout this period, there were important differences between shortand long-term expectations. The slope of the term structure changed frequently and there were significant variations in long-term volatility expectations. The expectation estimates can be used to value OTC options, to improve hedging strategies, and to test the hypothesis that the options market overreacts.

Small sample t-test results are reported in the literature that indicate the difference between futures and forward exchange rates are statistically insignificant. Much research draws on this finding, which is in contrast with theory. The evidence presented here suggests this difference does not follow a normal distribution, so the small sample inferences based on the t-tests may be suspect. As appropriate alternatives, nonparametric distribution-free tests are used to reexamine the difference for two sample periods, one covering the 1970s and the other the 1970s and 1980s. A significant divergence is observed for several currencies as well as for a sample of pooled currencies. The results are stronger for samples covering the 1980s. The economic significance of the forward-futures differentials is examined and theoretical justifications are discussed.

This study applies an option pricing model to empirically derive pension put values for a sample of 176 individual pension plan sponsors insured by the Pension Benefit Guaranty Corporation (PBGC). This study finds that the pension put values for a group of 22 underfunded sponsors were significantly greater than the insurance premiums paid to the PBGC. On the other hand, for a group of 154 overfunded sponsors, the put values were also greater than the pension premiums paid to the PBGC, although the difference was not statistically significant. These findings suggest that underfunded plan sponsors are significantly undercharged by the PBGC, while overfunded plan sponsors are approximately fairly charged.

This paper proposes and conducts direct tests of the mixture of distributions model for stock prices. By exploiting the model's bivariate conditional normality of price changes and trading volume, these restrictions can be tested under very weak assumptions regarding the daily flow of information to the market. As a technical byproduct, important parameters governing the distribution of this unobservable information flow are estimated.

This paper models the strategic pre-tender offer share acquisition problem faced by potential bidders in takeovers. The model provides a rational explanation for the seemingly anomalous empirical evidence that the information about the impending tender offers is not fully conveyed through the potential bidders' pre-tender offer trades and for the evidence that a large fraction of bidders do not hold any target shares prior to launching the tender offers. Additional testable implications are also provided.

This paper empirically examines the underinvestment problem and the use of dividends to expropriate lenders' wealth. Rather than analyzing the market's reaction to potential wealthexpropriating events, a different aspect of potential conflicts of interest is addressed: do managers who control dividends act in a manner consistent with wealth expropriation? If so, then debt issues should be followed by increases in dividends. Two samples of firms are used: those issuing straight debt and those issuing convertible debt. The study finds no evidence that firms manipulate dividend policy to transfer wealth from the bondholders to stockholders. Two possible explanations are suggested. First, wealth expropriation may be a potential problem, but existing bond covenants restricting a firm's ability to pay dividends are effective. Second, firms may believe that reputation has greater value than what can be transferred from creditors in a one-time expropriation of wealth. Since the paper fails to find support for the covenant argument, it concludes that reputation is the most plausible explanation.

This paper provides further evidence of the holiday effect in stock returns and additional insight into the effect. This paper reports abnormally high returns on the trading day before holidays in all three of the major stock markets in the U.S.: the NYSE, AMEX, and NASDAQ. The holiday effect is also present in the U.K. and Japanese stock markets, even though each country has different holidays and institutional arrangements. This study finds that the holiday effects in the U.K. and Japanese stock markets are independent of the holiday effect in the U.S. stock market. Unlike the other seasonal patterns in stock returns, such as January and weekend effects, this investigation of size decile portfolios shows that the size effect is not present in mean returns on preholidays.