Market e#ciency survives the challenge from the literature on long-term return anomalies. Consistent with the market e#ciency hypothesis that the anomalies are chance results, apparent overreaction to information is about as common as underreaction, and post-event continuation of pre-event abnormal returns is about as frequent as post-event reversal. Most important, consistent with the market e#ciency prediction that apparent anomalies can be due to methodology, most long-term return anomalies tend to disappear with reasonable changes in technique. # 1998 Elsevier Science S.A. All rights reserved.

As in previous decades, merger activity clusters by industry during the 1990s. One particular kind of industry shock, deregulation, becomes a dominant factor, accounting for nearly half of the merger activity since the late 1980s. In contrast to the 1980s, mergers in the 1990s are mostly stock swaps, and hostile takeovers virtually disappear. Over our 1973 to 1998 sample period, the announcement-period stock market response to mergers is positive for the combined merging parties, suggesting that mergers create value on behalf of shareholders. Consistent with that, we find evidence of improved operating performance following mergers, relative to industry peers.

The share of equity issues in total new equity and debt issues is a strong predictor of U.S. stock market returns between 1928 and 1997. In particular, firms issue relatively more equity than debt just before periods of low market returns. The equity share in new issues has stable predictive power in both halves of the sample period and after controlling for other known predictors. We do not find support for efficient market explanations of the results. Instead, the fact that the equity share sometimes predicts significantly negative market returns suggests inefficiency and that firms time the market component of their returns when issuing securities.

We present a model of mergers and acquisitions based on stock market misvaluations of the combining firms. The model explains who acquirers whom, whether the medium of payment is cash or stock, what the valuation consequences of mergers are, and why there are merger waves. Some of the key predictions of the model are: 1) acquisitions are disproportionately for stock when market valuations are high, and for cash when they are low; 2) targets in cash acquisitions earn low returns prior to the acquisitions, whereas bidders in stock acquisitions earn high returns; 3) long run returns to bidders in stock acquisitions are likely to be negative, those to bidders in cash acquisitions are likely to be positive; 4) despite negative long run returns, acquisitions for stock serve the interest of long run shareholders of the bidder; 5) diversification strategies serve the interest of bidding shareholders even when they earn negative announcement returns; 6) such diversifying acquisitions are likely to be for stock; 7) management resistance to cash tender offers is often in the interest of shareholders; 8) acquisition targets are likely to have managers and shareholders with relatively shorter horizons than the bidders. 1 We are grateful to Robin Greenwood and Rafael La Porta for helpful comments, to Mark

Shareholder rights vary across �rms. Using the incidence of 24 governance rules, we construct a “Governance Index ” to proxy for the level of shareholder rights at about 1500 large �rms during the 1990s. An investment strategy that bought �rms in the lowest decile of the index (strongest rights) and sold �rms in the highest decile of the index (weakest rights) would have earned abnormal returns of 8.5 percent per year during the sample period. We �nd that �rms with stronger shareholder rights had higher �rm value, higher pro�ts, higher sales growth, lower capital expenditures, and made fewer corporate acquisitions. I.

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I review empirical research on the relation between capital markets and financial statements.The principal sources of demand for capital markets research in accounting are fundamental analysis and valuation, tests of market efficiency, and the role of accounting numbers in contracts and the political process.The capital markets research topics of current interest to researchers include tests of market efficiency with respect to accounting information, fundamental analysis, and value relevance of financial reporting.Evidence from research on these topics is likely to be helpful in capital market investment decisions, accounting standard setting, and corporate financial

We review extensive evidence about how psychological biases affect investor behavior and prices. Systematic mispricing probably causes substantial resource misallocation. We argue that limited attention and overconfidence cause investor credulity about the strategic incentives of informed market participants. However, individuals as political participants remain subject to the biases and self-interest they exhibit in private settings. Indeed, correcting contemporaneous market pricing errors is probably not government’s relative advantage. Government and private planners should establish rules ex ante to improve choices and efficiency, including disclosure, reporting, advertising, and default-option-setting regulations. Especially

Statistical inference in long-horizon event studies has been hampered by the fact that abnormal returns are neither normally distributed nor independent. This study presents a new approach to inference that overcomes these difficulties and dominates other popular testing methods. I illustrate the use of the methodology by examining the long-horizon returns of initial public offerings ~IPOs!. I find that the Fama and French ~1993! three-factor model is inconsistent with the observed long-horizon price performance of these IPOs, whereas a characteristic-based model cannot be rejected. RECENT EMPIRICAL STUDIES IN FINANCE document systematic long-run abnormal price reactions subsequent to numerous corporate activities. 1 Since these results imply that stock prices react with a long delay to publicly available information, they appear to be at odds with the Efficient Markets Hypothesis ~EMH!. Long-run event studies, however, are subject to serious statistical difficulties

We build a model that helps explain why increases in liquidity⎯such as lower bid-ask spreads, a lower price impact of trade, or higher turnover⎯predict lower subsequent returns in both firm-level and aggregate data. The model features a class of irrational investors, who underreact to the information contained in order flow, thereby boosting liquidity. In the presence of short-sales constraints, high liquidity is a symptom of the fact that the market is dominated by these irrational investors, and hence is overvalued. This theory can also explain how managers might successfully time the market for seasoned equity offerings, by simply following a rule of thumb that involves issuing when the SEO market is particularly liquid. Empirically, we find that: i) aggregate measures of equity issuance and share turnover are highly correlated; yet ii) in a multiple regression, both have incremental predictive power for future equal-weighted market returns.