BENEFITS / Stock Options Swell Executives’ Coffers

He said that every time shareholders’ wealth (defined as dividends paid plus any increase in the company’s stock price) rises by $1,000, the average chief executive at a large corporation earns an additional 45 cents in salary and bonus. But every time shareholders’ wealth goes up $1,000, the CEO’s wealth as measured by his stock holdings goes up by $1.40. “”I think it’s occurring out of fear the company will disappear and the executives will lose their jobs,” said David Swinford, vice president at compensation consultant TPF&C. “”If the company is acquired, the options will go up in value.” — Seagate Technology paid $1.2 million last year to a company owned by its chairman, Alan Shugart, for chartered aviation services. Seagate also paid $45,336 to Personal Computer Repair, a company owned by Shugart and his wife, for maintenance services performed on Seagate’s office equipment.
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JOHN ECKHOUSE, Chronicle Staff Writer

Full text: [San Francisco Chronicle (pre-1997 Fulltext)] May 1, 1989

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INVESTMENT ADVICE

Jefferson is strongly capitalized and conservatively run with an attractive deposit base in its central and western Virginia markets. Jefferson is currently negotiating to acquire Chesapeake Bank Corp. in Eastern Virginia. Fast-growing Chesapeake is a loan-rich, deposit-poor and capital-constrained bank that should complement Jefferson’s stable slower-growth base. The deal is scheduled to close in midsummer. Dilution of 5 percent in per-share earnings from the proposed merger is reflected in our estimates. Before the acquisition announcement in January, Jefferson was a cheap stock in an out-of-favor group. With the announcement, the bank’s shares have declined another 9 percent to 10 percent. However, in the 32 months since our last report, Jefferson’s earnings have advanced 43 percent while its shares have fallen 25 percent. Our bottom line: high asset quality, low stock price, 10 percent growth, 5 percent yield with the possibility of an annual return between 25 percent and 30 percent.
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Full text: [Richmond Times - Dispatch] May 1, 1989

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Conditions for Efficiency on the Government Securities Secondary Market: Initial Research Results

Aspects of problems in the secondary market in government securities in Italy were examined, and the results of research conducted by Prometeia for the Italian Bankers’ Association were presented. Market efficiency before and after the reform of May 1988 was assessed. Dealer participation and the conditions of price formation were given special attention. The research revealed that dealer participation was highly irregular. Trading was aimed at exploiting special opportunities to profit from current financial conditions. The same conclusion was made from the analysis of the securities being traded. In the area of price formation on the secondary market, a high market segmentation was indicated, which lessened somewhat after May 16, 1988. The research shows that the setting up of the screen-based market in government securities has created an institutional basis for guaranteeing efficiency on the secondary market, which is up to the levels of the primary market.
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Onado, Marco

Full text: [Review of Economic Conditions in Italy] May-Aug 1989

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Real liquidity signaling decrease in stock prices

Since taking over the investment portfolio of Fireman’s Fund in 1986, Robert Bruce has made 19 percent annually on his money, vs. 7.7 percent for the Standard & Poor’s 500. Bruce is a confirmed value hunter who uses total-return analysis to uncover bargains, then takes enormous positions in them. Forty-three percent of Fireman’s $1.8-billion equity portfolio is in just five stocks: Alexander & Alexander Services, Freeport McMoran, Raychem, San Juan Basin Royalty Trust, and US Shoe.
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Brendan Boyd:Special to the Register

Full text: [Orange County Register] May 1, 1989

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To Keep Profits On A Roll, Stay Tuned To The Business Cycle

To comprehend economic statistics, it is necessary to understand the framework that forms them: the US business cycle. This cycle normally takes 3-4 years and is directly related to the performance of investments and interest rates. The business cycle begins when interest rates and inflation are low or falling. As demand for credit increases, interest rates rise because more borrowers are competing to get loans. The cycle ends when inflation and interest rates climb high enough to send stock prices down. Watching interest rates helps an investor develop an idea of what it will cost to borrow money and what rates can be earned on cash investments. Three key government economic figures that should be tracked are the US gross national product, the balance of payments, and the index of leading economic indicators. The consumer price index is a measure of the costs of goods and service. The stock market’s behavior sometimes gives advance warnings of economic fluctuations.
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Updegrave, Walter L.

Full text: [Money] May 1989

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Nine Timely, Worry-Free Investments

According to Allen Sinai of the Boston Co., the combination of slower growth, lower profits, and rising interest rates may create problems in the stock market. Currently, the safest investments are money-market funds or short-term US Treasury securities whose yields are tracking rising interest rates. Nine investments should be considered when planning a portfolio. Because of tax breaks, high dividends that help support stock prices, or other special advantages, each offers protection from long-term inflation and economic slowdowns. The investments are presented in the approximate order of their degree of risk: 1. certificates of deposit, 2. zero-coupon bonds, 3. government bond funds, 4. municipal bonds, 5. corporate thrift plans, 6. mutual funds at a discount, 7. low-risk funds, 8. oil stocks, and 9. utility stocks.
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Full text: [Money] May 1989

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Taxes And The Futures-Forward Price Difference In The 91-Da

It has been hypothesized that the reason futures prices in the 91-day Treasury bill market consistently diverge from the forward prices implicit in T-bill spot prices is because of the difference in the taxation of returns from spot T-bills as opposed to futures contracts. An analysis of this hypothesis produces inconclusive results. The results show, depending on the tax hypothesis, that the marginal tax rate in the matched forward market is high, which supports the theory of optimal capital structure. For the post-Economic Recovery Tax Act (1981) era, however, the results are much weaker, but those results must be evaluated in light of the more complex tax regime that prevailed after 1981. The analysis derives the relation between the futures-forward price difference and the marginal tax rate as implied by the tax hypothesis. This relation is then used to estimate the marginal tax rate. The analysis also tests the implications of the tax hypothesis for the number of deliveries in the futures market.
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Viswanath, P. V.

Full text: [Journal of Money, Credit, and Banking] May 1989

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Taxes and the Futures-Forward Price Difference in the 91-Day T-Bill Market

It has been hypothesized that the reason futures prices in the 91-day Treasury bill market consistently diverge from the forward prices implicit in T-bill spot prices is because of the difference in the taxation of returns from spot T-bills as opposed to futures contracts. An analysis of this hypothesis produces inconclusive results. The results show, depending on the tax hypothesis, that the marginal tax rate in the matched forward market is high, which supports the theory of optimal capital structure. For the post-Economic Recovery Tax Act (1981) era, however, the results are much weaker, but those results must be evaluated in light of the more complex tax regime that prevailed after 1981. The analysis derives the relation between the futures-forward price difference and the marginal tax rate as implied by the tax hypothesis. This relation is then used to estimate the marginal tax rate. The analysis also tests the implications of the tax hypothesis for the number of deliveries in the futures market.
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Viswanath, P. V.

Full text: [Journal of Money, Credit, and Banking] May 1989

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Is There a Monthly Effect in Stock Market Returns? Evidence from Foreign Countries

The daily stock market returns are examined for the UK, Japan, Canada, and Australia to determine if a monthly pattern in the sample distribution of the daily returns exists. Ariel (1987) has documented a monthly pattern for US stock market returns. He has found that the mean return for US stocks is positive only on the last day of the month and during the first half of the month. The monthly effect for US stocks seems to be of the same order of magnitude as 2 other well-known seasonals – the weekend effect and the January effect. The results of this study indicate only weak evidence supporting a US-type monthly seasonal in the foreign markets. Only Australia exhibits a significant or near-significant seasonal consistent with Ariel’s findings. However, stronger evidence is found of a “last-day-of-the-month” effect.
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Jaffe, Jeffrey
Westerfield, Randolph

Full text: [Journal of Banking & Finance] May 1989

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Bid-Ask Spreads and Volatility Estimates: The Implications for Option Pricing

The relationship between bid-ask spreads and estimates of volatility based on observed sequences of transaction prices is examined. The implications of this relationship for the use of the Black-Scholes model in the pricing of options are derived. It is shown that volatility estimates based on observed sequences of transaction prices overestimate the true variance of returns on a security, with the magnitude of the overestimation an increasing function of the level of the volatility. Empirical tests are provided of the proposition that the variance-related bias exhibited by the Black-Scholes model is a result of this misestimation of volatility. The results indicated that, although the misestimation is systematically related to the variance, it is of insufficient magnitude to explain the volatility bias exhibited by the Black-Scholes model.
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Choi, J. Y.
Shastri, Kuldeep

Full text: [Journal of Banking & Finance] May 1989

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A Simple Linear Weighting Scheme for Black-Scholes Implied Volatilities: A Note

The performance is examined of an easily applied piecewise linear weighting function for implied volatilities calculated from the Black-Scholes option pricing model. A sensitivity analysis is conducted to compare Black-Scholes prices computed using the weighted implied volatilities to US model prices. The results indicate that the relatively simple European model can provide close approximations to US prices. The model provides prices that are consistently close to the US prices for both puts and calls, but it may prove to be most useful for the pricing of puts. While relatively simple US models are available for calls, all available US put models require a great deal of computational effort. The weighted implied volatility allows reasonable approximations to be calculated quite easily.
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Finucane, Thomas J.

Full text: [Journal of Banking & Finance] May 1989

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The INC. 100

In Inc. Magazine’s 11th annual ranking of the US’ fastest growing small public companies, 27 of the 100 are in the red. Growth-company chief executive officers (CEO) need to promote their undervalued companies in order to pump the stock price, yet they fear that publicity will attract takeover attention. The number one firm is Teradata Corp., a high-technology manufacturer that booked approximately $90 million in revenues in 1988 by selling database computers, add-ons that hook up to a host computer to hold and process huge databases for banks, airlines, and telephone companies. Between its 1979 founding and 1987, when it went public, Teradata raised $67 million in venture capital through 6 rounds of financing. Initial customer acceptance was difficult to gain because of the firm’s tiny size. While few of 1989′s CEOs seem concerned about the marketplace, they are uneasy about growth itself. A complete listing of the 100 companies is included.
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Anonymous

Full text: [Inc] May 1989

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Perrier Your Bubbles Are Too Big

Although there has been an increase in the amount of sparkling water consumed in France, Perrier’s market share has dipped slightly while Badoit’s – BSN’s water with smaller bubbles than Perrier – has nearly doubled in the last few years. A careful look at Source Perrier SA’s published accounts shows that the company’s sales have been stagnant since fiscal 1986 and so have its real earnings. This fact was hidden by a change in the date of the ending of fiscal year 1986 that added 3 extra months of activity and by $15 million in nonrecurring items. The drop in the US dollar against the franc also hurt Perrier. In addition, the acquisition of the Arrowhead bottled water division of Beatrice Foods for $453 million by Perrier is questionable. Yet, Perrier stock is still one of the most popular on the Paris Bourse because Perrier’s real value may be its assets.
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Pouschine, Tatiana

Full text: [Forbes] May 1, 1989

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Technical Notes: Program Trading and Systematic Stock Price

It is examined whether exogenous events whose only direct effect is to change stock prices can indirectly affect corporate investment through the stock price mechanism. A modified version of the flexible capital stock adjustment model and some modified flexible accelerator investment equations are used. The actual structural effect of share price changes on investment will depend on managerial autonomy, which depends on the use of the takeover mechanism, the size of the quoted sector, gearing ratios, and the role of employees in corporate decision making. Once other influences on investment have been allowed for, share prices provide no additional explanatory power for investment behavior in Japan or Germany, but they do affect investment in the UK and US. Fischer supports this view and confirms the empirical superiority of the flexible accelerator model of investment over the more elegant Q-theory. Hamada argues that cross-section analyses may give better results than time series estimation and that the Japanese and German economies may have an advantage in overall economic performance concerning investment activities.
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Full text: [Financial Analysts Journal] May/Jun 1989

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The Effect of the Stock Market on Investment: A Comparative Study; Comments

It is examined whether exogenous events whose only direct effect is to change stock prices can indirectly affect corporate investment through the stock price mechanism. A modified version of the flexible capital stock adjustment model and some modified flexible accelerator investment equations are used. The actual structural effect of share price changes on investment will depend on managerial autonomy, which depends on the use of the takeover mechanism, the size of the quoted sector, gearing ratios, and the role of employees in corporate decision making. Once other influences on investment have been allowed for, share prices provide no additional explanatory power for investment behavior in Japan or Germany, but they do affect investment in the UK and US. Fischer supports this view and confirms the empirical superiority of the flexible accelerator model of investment over the more elegant Q-theory. Hamada argues that cross-section analyses may give better results than time series estimation and that the Japanese and German economies may have an advantage in overall economic performance concerning investment activities.
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Mullins, Mark
Wadhwani, Sushil B.
Fischer, Stanley
Hamada, Koichi

Full text: [European Economic Review] May 1989

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The effect of the stock market on investment: A comparative study

A study examined whether exogenous events whose only direct effect is to change stock prices can indirectly affect corporate investment through the stock price mechanism. The actual effect of share price changes depends on institutional considerations that affect the degree of managerial autonomy.
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Mullins, Mark
Wadhwani, Sushil B

Full text: [European Economic Review] May 1989

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Comments: ‘The effect of the stock market on investment: A comparative study’ by M. Mullins and S. B. Wadhwani

The article by Mullins and Wadhwani, “The effect of the stock market on investment: A comparative study,” is discussed. Mullins and Wadhwani describe the question as whether an exogenous change in stock prices has any effect on investments, but the question should be defined more narrowly.
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Fischer, Stanley

Full text: [European Economic Review] May 1989

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Comments: ‘The effect of the stock market on investment: A comparative study’ by M. Mullins and S. B. Wadhwani

The article by Mullins and Wadhwani, “The effect of the stock market on investment: A comparative study,” is discussed. Justifications for their conjecture that the Japanese and the German economy may have an advantage in overall economic performance are rather indirect and need clarification.
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Hamada, Koichi

Full text: [European Economic Review] May 1989

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Forecasting Stock-Market Volatility Using Options On Index

Stock market volatility is constantly changing, and investors and market observers must continually update their volatility forecasts, which is not an easy task because of the many factors involved. A study was conducted to demonstrate the usefulness of implied volatilities in forecasting stock-market vicissitudes. The results indicated that, when forecasting 57 and 38 days into the future, implied volatilities were more efficient than the history-based sample of standard deviation of past returns. Among 19-day forecasts, the Naive forecast seemed to do better than the implied volatilities prior to the stock market crash of 1987. However, the implied volatilities outperformed the Naive forecast after the crash. The Naive predictor seems to function best over short horizons when the market is calm. Implied volatility can be used as a leading indicator of stock market volatility changes.
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Feinstein, Steven P.

Full text: [Economic Review - Federal Reserve Bank of Atlanta] May/Jun 1989

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Forecasting stock-market volatility using options on index futures

Stock market volatility is constantly changing, and investors and market observers must continually update their volatility forecasts, which is not an easy task because of the many factors involved. A study was conducted to demonstrate the usefulness of implied volatilities in forecasting stock-market vicissitudes. The results indicated that, when forecasting 57 and 38 days into the future, implied volatilities were more efficient than the history-based sample of standard deviation of past returns. Among 19-day forecasts, the Naive forecast seemed to do better than the implied volatilities prior to the stock market crash of 1987. However, the implied volatilities outperformed the Naive forecast after the crash. The Naive predictor seems to function best over short horizons when the market is calm. Implied volatility can be used as a leading indicator of stock market volatility changes.
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Feinstein, S.

Full text: [Economic Review - Federal Reserve Bank of Atlanta] May/Jun 1989

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