One-time cash flow announcements and free cash-flow theory: share repurchases and special dividends

Article Abstract:

The leading explanation for the positive price response surrounding tender offer share repurchase and specially designated dividend (SDD) announcements is the information signaling hypothesis. This paper reexamines these announcements to determine if Jensen's free cash-flow theory also has explanatory power. Lang and Litzenberger's (1989) findings suggest an important role for free cash-flow theory in explaining the market's reaction to dividend changes. In contrast, we find the market's reaction to share repurchases and SDDs is approximately the same for both high-Q and low-Q firms. We thus have an empirical puzzle: If Jensen's free cash-flow theory applies to dividend changes, it is difficult to see why it does not also apply to the analogous events examined here. (Reprinted by permission of the publisher.)

Dividends, Cash flow, Tender offers (Securities), Tender offers

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Tests of the relations among marketwide factors, firm-specific variables, and stock returns using a conditional asset pricing model

Article Abstract:

In this article we generalize Harvey's (1989) empirical specification of conditional asset pricing models to allow for both time-varying covariances between stock returns and marketwide factors and time-varying reward-to-covariabilities. The model is then applied to examine the effects of firm size and book-to-market equity ratios. We find that the traditional asset pricing model with commonly used factors can only explain a small portion of the stock returns predicted by firm size and book-to-market equity ratios. The results indicate that allowing time-varying covariances and time-varying reward-to-covariabilities does little to salvage the traditional asset pricing models. (Reprinted by permission of the publisher.)

Return on investment, Rate of return

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Two-pass tests of asset pricing models with useless factors

Article Abstract:

Research into the properties of the two-pass cross-sectional regression when the asset pricing model is misspecified indicates that there is no justification for the view that, when a useless factor is used in testing an asset pricing model, the assumption that its risk premium is zero would only be rejected with a low probability as shown by the size of the test. It was established that in a finite sample, the beta risk linked with a useless factor is priced more often than the size of the test. It appears that the t-test rejects the zero risk premium for a useless factor with a probability of more than twice the size of the test for a typical length of time series.

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