Journal of Financial and Strategic Decisions Volume 11, Number 2   Fall 1998 EVENT RISK COVENANT RATING ANNOUNCEMENTS AND STOCK RETURNS Edgar Norton Illinois State University Glenn N. Pettengill Emporia State University Prior versions of this paper were presented at Midwest Finance Association and Southern Finance Association meetings. Abstract We study the effect on equity prices of the announcements by Standard and Poor's concerning the strength of super poison put provisions. We find that these announcements have a significant impact on equity prices. We interpret this result to suggest some degree of equity market inefficiency as investors revised their expectations based on expert interpretation of previously available information. We find that the strength of the impact diminishes over time which is consistent with the market becoming more efficient with added experience in interpreting super poison put provisions. Finally, unlike previous studies, our results suggest that equity investors viewed the put provisions as a loss of expected restructuring premiums because of management entrenchment.

Journal of Financial and Strategic Decisions Volume 11, Number 2   Fall 1998 INDUSTRY PRACTICE RELATING TO AGGRESSIVE CONSERVATIVE WORKING CAPITAL POLICIES Herbert J. Weinraub The University of Toledo Sue Visscher The University of Toledo Abstract This study looked at ten diverse industry groups over an extended time period to examine the relative relationship between aggressive and conservative working capital practices. Results strongly show that the industries had significantly different current asset management policies. Additionally, the relative industry ranking of the aggressive/conservative asset policies exhibited remarkable stability over time. Industry policies concerning relative aggressive/conservative liability management were also significantly different. Interestingly, it is evident there is a high and significant negative correlation between industry asset and liability policies. Relatively aggressive working capital asset management seems balanced by relatively conservative working capital financial management.

Journal of Financial and Strategic Decisions Volume 11, Number 2   Fall 1998 A COMPREHENSIVE QUANTITATIVE MODEL FOR ANALYZING BOND REFUNDING DECISIONS Lawrence S. Tai Loyola Marymount University Zbigniew H. Przasnyski Loyola Marymount University Abstract When a corporation refunds a bond issue, choices have to be made between fixed-rate and floating-rate bonds based on expectations of future interest rates. Whether it is financially viable to refund a bond issue depends on many factors, including the magnitude of the decline in interest rates, the call premium, flotation costs, overlapping interest and the corporate tax rate, and all of these factors should be considered in the decision making process. This paper presents a comprehensive quantitative model that will assist the corporation to decide whether to refund and to select the best refunding option. Unlike prior studies, the model developed in this paper is capable of handling a variable overlap period, floating-rate bonds, and old and new bonds with different terms to maturity.

Journal of Financial and Strategic Decisions Volume 11, Number 2   Fall 1998 DIFFERENTIAL INFORMATION HYPOTHESIS, FIRM NEGLECT AND THE SMALL FIRM SIZE EFFECT Said Elfakhani University of Saskatchewan Tarek Zaher Indiana State University The first author acknowledges partial financial support from the Board of Governors and the Dean of the College of Commerce, University of Saskatchewan. The second author recognizes the financial support of Indiana State University in getting research data. The authors gratefully acknowledge the contribution of I/B/E/S Inc. for providing forecast data as a broad academic program to encourage earnings expectations research. The authors also thank the participants of the seventh annual meeting of the Academy of Financial Services for helpful comments. All remaining errors are the authors'. Abstract The finance literature presents the size effect as an anomaly. The same literature also suggests that small stocks are generally neglected by financial analysts. This paper extends the previous literature by investigating three issues: (1) whether size effect (January and non-January) persists during the sampling period (1986-1990), (2) whether there is a relationship between the documented size effect and analysts' neglect of smaller firms (as a proxy of differential information among small and large stocks), and (3) whether individual investors can still benefit from financial analysts neglect of small stocks. Regression analysis on a monthly basis supports the existence of size effect in January, but only for portfolios of large stocks. Interestingly, the size-January effect is often dominated by neglect effect; i.e., large firms that are less popular among financial analysts are found to earn higher return premiums than other more popular large firms. The results also show that individual investors could still earn higher returns on stocks that are less pursued by financial analysts during the 1986-1990 period.

Journal of Financial and Strategic Decisions Volume 11, Number 2   Fall 1998 DETERMINING THE CASH DISCOUNT IN THE FIRM'S CREDIT POLICY: AN EVALUATION Stephen F. Borde University of Central Florida Daniel E. McCarty Florida Atlantic University Abstract The purpose of this study is to test the most general form of the maximum cash discount model developed by Hill and Riener [1979]. This study is an extension of their work. The model is dynamically tested using computer simulations. Under these dynamic tests, the model provides a stable output (maximum cash discount) which peaks in the 2 percent to 3 percent range. This model appears to have the potential to be a very useful management tool is the process of setting value-maximizing company policy on how much discount should be offered for early payment.

Journal of Financial and Strategic Decisions Volume 11, Number 2   Fall 1998 THE INFORMATION CONTENT OF THE ADOPTION OF CLASSIFIED BOARD PROVISIONS Philip H. Siegel Long Island University Khondkar E. Karim Long Island University Abstract The purpose of this study is to analyze the information content of a frequently used anti-takeover amendment, the classified board provision. If information regarding the intrinsic value of the firm is imbedded in this decision, the information should be reflected by the existence of abnormal returns. If managers are signaling private information, the change in available information should be reflected by changes in the relationship between bid and ask prices. Managers who combine classified boards and insider trading provide a unique opportunity to study signaling, financial decisions, and anti-takeover defenses. Prior studies have found that managers propose anti-takeover strategies because they have private information that the firm is undervalued, and thus is a potential takeover target. Researchers indicated that these actions benefit the shareholder, while others assert that anti-takeover provisions lead to entrenched management and lower shareholder wealth. We document empirically that the announcement of board classification significantly depresses share prices following the event day during the event interval (days +2, +45) and is a signal of potential takeover activity. We also find that dealer spread reacts to the adoption of classified boards dependent upon insider trading activity. The difference in reaction is due to changes in the level of adverse information cost.

Journal of Financial and Strategic Decisions Volume 11, Number 2   Fall 1998 THE MANAGERIAL IMPERATIVE OF EVALUATING NON-CAPITAL EXPENDITURES WITHIN A CAPITAL BUDGETING CONTEXT John B. White Georgia Southern University Morgan P. Miles Georgia Southern University Abstract It has long been an accepted precept that the purpose of management is the maximization of shareholder wealth. Few would dispute the notion that projects requiring long-term capital investments should be subjected to capital budgeting. Numerous authors have, however, questioned the appropriateness of subjecting non-capital expenditures, such as advertising, research or product development, to capital budgeting analysis. These studies have suggested that it is inappropriate to evaluate expenditures with uncertain outcomes, such as advertising, research and product development, with a technique as rigorous as net present value. The present study contends that it is not only appropriate to evaluate non-capital expenditures using capital budgeting techniques but it is essential for firm survival. Furthermore, despite difficulty in applying capital budgeting to advertising or R&D expenditures, no other analytical technique is superior to capital budgeting in determining the effect of expenditures on the financial performance of the firm.

Journal of Financial and Strategic Decisions Volume 11, Number 2   Fall 1998 DIVERSIFICATION AND FIRM PERFORMANCE: AN EMPIRICAL EVALUATION Anil M. Pandya Northeastern Illinois University Narendar V. Rao Northeastern Illinois University Abstract Diversification is a strategic option that many managers use to improve their firms' performance. This interdisciplinary research attempts to verify whether firm level diversification has any impact on performance. The study finds that on average, diversified firms show better performance compared to undiversified firms on both risk and return dimensions. It also tests the robustness of these results by classifying firms by performance class. The results show that among the best performing class of firms, undiversified firms have higher returns, but these returns are accompanied by high variance. Whereas, highly diversified firms show lower returns, and much lower variance. Results further show that diversified firms perform better than undiversified firms on risk and return dimensions, in the low and average performance classes. The paper concludes that a dominant undiversified firm may perform better than a highly diversified firm in terms of return but its riskiness will be much greater. If managers of such firms opt for diversification, their returns will decrease, but their riskiness will reduce proportionately more than the reduction in their returns. In such firms, there will be a tradeoff between risk and return.

Journal of Financial and Strategic Decisions Volume 11, Number 2   Fall 1998 THE EFFECT OF POSITIVE CORPORATE SOCIAL ACTIONS ON SHAREHOLDER WEALTH Pamela L. Hall Western Washington University Robin Rieck Abstract This study examines the impact of voluntary positive corporate social actions on shareholder wealth. After performing an event analysis, the announcement of corporate donations is found to have a significant positive effect on stock prices. Firms producing environmentally-friendly products exhibit a large significant positive reaction on Day 0, however no significant returns accrue over the cumulative time period from -5 to +5. No other announcement of a voluntary corporate social action is found to have a significant impact on shareholder wealth, specifically those firms engaged in recycling or social policy issues.

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