Research Lab

This paper compares the properties of dividend announcements and management earnings forecasts as predictors of earnings and firm value. First, the two predictors are compared on the basis of their ability to predict earnings. Then the information they convey about firm value is assessed by comparison of the performance of investment strategies based on values of the two predictors. Finally, the effects of dividend announcements on stock prices are considered.

Evidence is given in this paper which indicates that corporate insiders time their trades in their firms' stock relative to the date of the disclosure of their forecasts of annual earnings. Further, insiders earn abnormal returns to their joint trading and information dissemination activities, and the paper provides measures of these returns.

Over the years, there has developed a fairly substantial body of research on the time series of earnings. As a whole, this literature concludes that changes in (annual) accounting earnings are unpredictable, that is, earnings follow a "random walk." Based on this result, some inferences of economic substance (policy) have been claimed. In this paper we reconsider empirical issues which, at least to some extent, have been obscured by this conclusion.

The Arrow-Debreu intertemporal general equilibrium paradigm is typically interpreted as suggesting that contingent claims markets need not reopen as time passes and uncertainty resolves. We show that this property, if satisfied, has strong implications for the structure of agents' preferences and for the updating of probabilistic beliefs.

This article focuses on the formulation of a method to solve the joint consumption-portfolio problem. The formulation presented allows the author to distinguish between risk preferences and time preferences when determining optimal consumption and asset demand. Classic Fisherian two-period diagrammatics are generalized. Period-two risk preferences are assumed to be independent of first-period consumption. The set of consumption-portfolio optima is expanded consistently with utility maximization.

This paper assesses the ability of markets to convey information about firms to investors. The present system of disclosure rules has been restricted to historical data. Recently there have been proposals to bring predictive data—in particular, earnings forecasts—under the scope of a disclosure rule. Forecasts of future earnings are, at present, being provided by many corporate managements.

This paper develops optimal portfolio choice and market equilibrium when investors behave according to a generalized lexicographic safety-first rule. We show that the mutual fund separation property holds for the optimal portfolio choice of a risk-averse safety-first investor. We also derive an explicit valuation formula for the equilibrium value of assets.

Reprinted in Fred Lane, (ed.), <em>Current Issues in Public Administration</em> (New York: St. Martin's Press, 1978), pp. 288- 301.