Journal of Financial and Strategic Decisions Volume 10, Number 2   Summer 1997 AN ANALYSIS OF VALUE LINE'S ABILITY TO FORECAST LONG-RUN RETURNS Gary A. Benesh Florida State University Steven B. Perfect Florida State University Abstract Value Line's success in predicting short-term stock price movements via its timeliness rankings is widely publicized. Evidence pertaining to the accuracy of Value Line's long-run (3- to 5-year) stock return forecasts is scarce. Here, we assess the accuracy of these long-run forecasts over two non-overlapping five year periods. The findings indicate that for these periods the forecasts were of little use in discriminating how stocks actually perform over the subsequent five years.

Journal of Financial and Strategic Decisions Volume 10, Number 2   Summer 1997 MUTUAL FUND OBJECTIVES: DO THEY PROVIDE A USEFUL GUIDE FOR INVESTORS? L.E. Sweeney Ball State University R.S. Rathinasamy Ball State University K.J. Tan University of Alabama in Huntsville INTRODUCTION Mutual funds, like most firms, are required to state their objectives in their prospectuses upon registration. We examined whether these objectives convey information about the performance of the funds that uniquely distinguishes them from funds with other objectives. This issue appears to be particularly critical for mutual funds, because they are able to alter their asset portfolios more readily and with less timely public knowledge than most other firms. In addition, most of the funds use their objective as part of their names so that investors are made aware of the objective. There are some plausible reasons for performance to deviate from the objectives. It is conceivable, or even likely, that the fund managers cannot consistently identify securities of firms whose performance is congruent with their objectives. Furthermore, they may not be able to find a sufficient number of firms whose attributes fit the objective of the fund. In this case, they may find their selection to be further limited by the regulatory restrictions on the proportion of ownership they are allowed to hold in any single firm. The larger funds are more likely than smaller funds to have exhausted their selection pool, so they are more likely to deviate from their objectives as they continue to grow. This issue is also examined. The possibility that fund managers purposefully alter their portfolios to pursue a different objective than stated cannot be denied, but this is not testable. This study differs from a few past studies in several ways. It uses a much larger and more recent data base with a greater number of objective categories. The data were subjected to more rigorous statistical tests than were used before. Two time periods were examined to see if fund performance for objective categories changed in comparison to other categories over time. We used the objectives stated in the prospectuses of the funds; whereas, the prior studies used objectives based in part on judgement.

Journal of Financial and Strategic Decisions Volume 10, Number 2   Summer 1997 CHANGES IN CORPORATE PERFORMANCE ASSOCIATED WITH LAYOFFS Zahid Iqbal Texas Southern University Aigbe Akhigbe Florida Atlantic University Abstract This paper examines changes in the industry-adjusted financial performance of 48 sample firms that laid off five percent or more employees between 1985 and 1990. Our findings indicate that the firms show significant improvements in operating cash flows and cost efficiency despite poor sales performance following layoffs. There is also evidence that the firms' asset size increases after the layoffs. Further, we find that firms disclosing favorable news with the layoff announcements experience improvements while firms without favorable news experience deteriorations in performance. Also, the stock price reactions to layoffs are negative for firms without favorable news.

Journal of Financial and Strategic Decisions Volume 10, Number 2   Summer 1997 EXCHANGE RATE PROBABILITY DISTRIBUTIONS AND FUNDAMENTAL VARIABLES Ken Johnston Georgia Southern University Elton Scott Florida State University Abstract This study attempts to increase fundamental variables ability to explain exchange rate price changes. To do this fundamental variables from the various theoretical models are linked with the distributional characteristics of exchange rate changes. Models are developed that relate fundamental economic variables to the specific forms of the distributions of exchange rate changes. Data sets are developed to isolate the effects of alternative distributional models. Regression models are applied to explain observed results for jump processes, for jumps based on the GARCH(1,1) model and to examine shifts between normals for the mixture of 2 normals process. The regression results indicate that explanatory power is increased by isolating the jumps. Implications of results and improvements in methodology are discussed.

Journal of Financial and Strategic Decisions Volume 10, Number 2   Summer 1997 EARNINGS AND STOCK SPLITS IN THE EIGHTIES Eugene Pilotte Rutgers University The author gratefully acknowledges useful comments received from participants in the 1994 Financial Management Association Meeting and from the finance faculties of the University of Colorado-Boulder, University of Colorado-Denver, Colorado State University, University of Denver, and University of Wyoming at the Fall 1993 Front Range Finance Workshop hosted by the University of Colorado-Boulder. Helpful comments also were received from Steve Cahan. Abstract Prior literature presents evidence on the nature of the earnings information conveyed by stock splits during 1970-1980. During 1970-1980 the information conveyed is that large pre-split earnings increases, usually viewed by the market as transitory and likely to be followed by earnings decreases, are in fact permanent. This paper presents evidence on the nature of the earnings information conveyed by splits during 1982-1989, a period of lower inflation and higher real economic growth. Results for 1982-1989 indicate that the market interprets stock splits as signals of subsequent earnings increases. Thus, the information conveyed by stock splits is time-period specific, with the market interpreting splits more optimistically during the period when economic conditions are stronger.

Journal of Financial and Strategic Decisions Volume 10, Number 2   Summer 1997 A HISTORICAL ANALYSIS OF MARKET EFFICIENCY: DO HISTORICAL RETURNS FOLLOW A RANDOM WALK? Michael J. Seiler Hawaii Pacific University Walter Rom Cleveland State University Abstract This study examines the degree of random walk in daily stock prices for all stocks listed on the NYSE from February 1885 through July 1962. Modern day anomalies are examined in conjunction with historical data in an attempt to explain the return series. While many regularly observed patterns occurred before 1962, they were unable to aid in the prediction of future stock price movements. The results are consistent with the preponderance of modern efficient market studies in that historical stock returns are found to follow a random walk.

Journal of Financial and Strategic Decisions Volume 10, Number 2   Summer 1997 EXECUTIVE STOCK OPTIONS: RISK AND INCENTIVES Socorro M. Quintero Oklahoma City University Leslie Young Chinese University of Hong Kong Michael Baur Ball State University Abstract We perform comparative analysis on an optimal compensation contract comprised of stock options and a fixed salary for two types of managers. In a principal-agent framework, we obtain the pareto optimal solution for the level of stock options in a manager's compensation contract. We then analyze the sensitivity of this optimal contract to changes in the firm's performance, the volatility of the firm's payoffs, and the manager's risk attitudes. In an uncertain environment, we find that shareholders can reduce the volatility of their ownership claim by including stock options in a manager's contract. We also find that a compensation contract with options remains near pareto optimality in the face of changing business conditions. Shareholders are spared the costs of continuously re-contracting with managers to keep their incentives properly aligned with shareholders.

Journal of Financial and Strategic Decisions Volume 10, Number 2   Summer 1997 AN EMPIRICAL INVESTIGATION OF PUT OPTION PRICING: A SPECIFICATION TEST OF AT-THE-MONEY OPTION IMPLIED VOLATILITY Hongshik Kim Daewoo Research Institute Jong Chul Rhim University of Southern Indiana Mohammed F. Khayum University of Southern Indiana Abstract We statistically test the robustness of implied volatility estimates across option pricing models for at-the-money put options. The results of the specification tests show that the implied volatility estimate recovered from the Black-Scholes European option pricing model is nearly indistinguishable from the implied volatility estimate obtained from the MacMillan/Barone-Adesi and Whaley's American put pricing model. We also investigate whether the use of Black-Scholes implied volatility estimates in American put pricing model significantly affect the prediction of American put option prices. It is shown that as long as the possibility of early exercise is carefully controlled for in the calculation of implied volatilities, predictions of American put prices are not significantly affected when the Black-Scholes implied volatility estimates are used in a specific American put option pricing model.

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