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Previous research and logic indicate that capital markets generally value spending for advertising and promotion; however, empirical results from these studies are far from consistent. While most studies find a positive relationship between a firm's advertising spending and its market value (Hirschey, 1985; Jose, Nichols and Stevens, 1986; Lustgarten and Thomadakis, 1987;Morck, Shleifer and Vishny, 1988; and Morck and Yeung, 1991), others find a negative relationship when control variables are added to the empirical model (Erickson and Jacobson, 1992). Differences in model specification may explain these conflicting results. Previous studies have included a variety of control variables such as return on investment, market share, research and development (R&D) spending, and book value (Erickson and Jacobson, 1992; Chauvin and Hirschey, 1993; Hirschey, 1982) when testing the relationship between promotional expenses and market value. Different firm characteristics (e.g. sales, total assets, book value of equity and price) have been selected as scalers for empirical measures of both the dependent and independent variables. Although these studies investigated an essentially identical theoretical relationship, variation in model specifications renders interpretations different.

Economists usually try to avoid making moral judgements, at least in their professional capacity. Positive economics is seen as a way of analysing economic problems, in as scientific a manner as is possible in human sciences. Economists are often reluctant to be prescriptive, most seeing their task as presenting information on the various options, but leaving the final choice, to the political decision taker. The view of many economists is that politicians can be held responsible for the morality of their actions when making decisions on economic matters, unlike unelected economic advisors, and therefore the latter should limit their role.

During recent years, financial economists have made a significant contribution to the rapid development of a vibrant and growing literature on organization structure and corporate governance. In reviewing the development of this literature, it becomes easy to see how the seminal contributions of Ronald Coase (awarded the Nobel Prize in Economics in 1991) have become the cornerstone of a new institutional economics. In particular, researchers following in Coase’s footsteps have clarified the conditions under which voluntary contracts between private agents can resolve a wide variety of so-called “agency problems.” More than just representing an important discovery of the significance of transaction costs and property rights for the institutional structure and functioning of the economy, Coase’s work has become an important foundation for the theory of contracts and for the whole field of “organization economics.”

This paper examines the risk-shifting and delayed equity hypotheses concerning the use of convertible securities by Japanese firms. The popularity of equity-linked debt instruments in Japan where institutional arrangements can mitigate the transfer wealth from bondholders to stockholders appears inconsistent with the risk-shifting hypothesis. Further, we find that the probability of selecting convertible securities over common equity is not positively related to the potential for a wealth transfer from bondholders to stockholders. We obtain similar results when we examine convertible debt ratios. However, we find evidence consistent with the delayed equity hypothesis that firms use convertibles to delay equity when they have favorable information about the firm. The stock price increases preceding and following convertible issuance are positively related to offering size and growth opportunities as predicted by the delayed equity hypothesis. Overall, our findings endorse the delayed-equity hypothesis as an explanation for the use of convertible securities by Japanese firms.

Using a sample of telecommunications mergers during the 1990–1993 period, we find that acquiring firms underperform relative to their size and industry-matched control firms. The annual cumulative abnormal returns (CARs) to these firms are significantly negative for five years following the merger. Shareholders of the acquiring firm suffer a wealth loss of nearly 20% over the five-year post-merger period. We obtain similar results from three- and five-year holding period returns (HPRs). Our findings are consistent with those of earlier studies and indicate that regulated industries also experience post-merger underperformance. We do find upon disaggregation of the sample that larger mergers exhibit positive long-run performance while the mid-size and smaller mergers underperform relative to their control firms. We further observe that conglomerate mergers demonstrate superior long-run performance while that for non-conglomerate mergers is consistent with the aggregate sample findings and suggests significant underperformance.