Karpoff's earlier research groups into several areas. Scroll down for an
outline of these areas and descriptions of published papers.
A. Corporate finance – Capital and dividends
B. Corporate governance
C. Trading volume in financial markets
D. Corporate crime and punishment
E. Fishery economics and regulation
A. Corporate finance -- Capital and dividends
1. "Short Term Trading Around Ex-Dividend
Days: Additional Evidence" (with Ralph A. Walkling). Journal
of Financial Economics 21:2 (September 1988): 291-298.
A dividend tax penalty (i.e., a higher tax
rate on dividend than capital gains income) creates profitable
trading opportunities for short-term traders with sufficiently
low transaction costs. In stocks with ex-dividend day returns
affected by short-term trading, ex-day returns are positively
correlated with transaction costs. Data from 1964-1985 indicate
that short-term traders are the marginal investors in high-yield
stocks, primarily since the introduction of negotiated commissions
on the NYSE. Short-term trading is not evident in low-yield stocks,
nor does it appear prevalent before negotiated commissions.
2. "Dividend Capture in NASDAQ Stocks"
(with Ralph A. Walkling). Journal of Financial Economics
28:1-2 (November/December 1990): 39-65.
This paper shows analytically that, when
dividend capture occurs, ex-day returns will be positively related
to transaction costs. The theory provides a concise and comprehensive
characterization of dividend capture tradinge. Empirical tests
then demonstrate that ex-day returns are positively related to
transaction costs among high-yield stocks -- precisely those stocks
most likely to attract dividend capture trading.
3. "Insider Trading Before New Issue
(with Daniel Lee). Financial Management 20:1 (Spring 1991):
Unable to find support for other explanations
of the stock price reactions to new issue announcements, finance
researchers frequently conclude that such announcements convey
information to investors. There is little direct evidence of
such information effects, however, so information hypotheses are
theories of last resort. This paper provides direct evidence
that is consistent with information signaling by new issue announcements.
We find that an unusual number of insiders sell stock before
common stock and convertible debt issues. There is no abnormal
insider trading before new issues of straight debt. These findings
are consistent with prior evidence that the stock price reaction
to announcements of common stock and convertible debt is negative
and significant, but is small and statistically insignificant
for issues of straight debt. The evidence suggests that managers
have and act on privileged information before announcing it through
new issue announcements.
B. Corporate governance
1. "Organizational Form, Share, Transferability,
and Firm Performance: Evidence from the ANCSA Corporations"
(with Edward M. Rice). Journal of Financial Economics
24:1 (September 1989): 69-105.
Theories of firm organization are difficult
to test because, for most firms, organizational characteristics
and performance are determined endogenously. This paper provides
a rare test of theory of the firm predictions. It does so by
exploiting data from an unusual set of thirteen firms established
by the Alaska Native Claims Settlement Act of 1971 (ANCSA). The
ANCSA firms are saddled with unusual organizational restrictions,
the most important of which is that stock cannot be traded. Drawing
from theory of the firm literature, we derive predictions that
the ANCSA firms have poor financial performance, a high incidence
of costly disputes over firm policy, and high turnover among directors
and managers. All predictions are supported by the data. The
data provide weaker evidence that is also consistent with predictions
derived in the paper: the ANCSA firms use unusual monitoring
and incentive mechanisms, incur high general and administrative
expenses, diversify a great deal, invest heavily in financial
assets, and pay their managers low monetary wages.
2. "The Wealth Effects of Second Generation
State Takeover Legislation" (with Paul H. Malatesta). Journal
of Financial Economics 25:2 (December 1989): 291-322.
Since 1982, 35 states have passed nearly 100
laws regulating corporate takeovers. Advocates of the laws claim
that they protect shareholders, local communities, and employees
from abusive takeover tactics. Opponents argue that the laws
help entrench inefficient managers and harm the long-term economic
health of many firms. This paper provides a large-scale examination
of the state antitakeover laws, by examining the stock-price effects
of all such laws introduced from 1982 through 1987. On
average, the announcements are associated with a small but statistically
significant decrease in the stock prices of firms incorporated
in the state and of large firms headquartered in the state. The
stock-price effects are concentrated in firms without preexisting
firm-level takeover defenses. Firms with prior defenses have
no significant stock-price reactions. The results indicate that
state antitakeover laws introduced between 1982 and 1987 resulted
in a $6 billion loss to shareholders of the affected companies.
3. "Share Values and Antitakeover Legislation:
The Case of Pennsylvania's Act 36" (with Paul Malatesta).
Journal of Corporate Finance 1:3/4 (1995): 367-382.
This paper resolves a dispute over the valuation
effects of the country's most notorious state takeover law. Opponents
claimed the law lowered firm values. Proponents argued that the
opponents' numbers were unreliable because they ignored firm size
and other effects. We show that the law's proponents were correct
in this narrow dispute. However, both sides had mis-identified
the dates information about the law entered the market. Taking
into account the correct information dates and various other influences,
the law lowered firm values.
4. "Corporate Governance and Shareholder
Initiatives: Empirical Evidence" (with Paul Malatesta and
Ralph Walkling), Journal of Financial
Shareholder-initiated proxy proposals on corporate
governance issues became popular in the late 1980s as corporate
takeover activity declined. We find firms attracting governance
proposals have poor prior performance, as measured by the market-to-book
ratio, operating return, and sales growth. There is little evidence
that operating returns improve after proposals. The proposals
also have negligible effects on company share values and top management
turnover. Even proposals that receive a majority of shareholder
votes typically do not engender share price increases or discernible
changes in firm policies.
C. Trading volume in financial markets
1. "A Theory of Trading Volume."
Journal of Finance 41:5 (December 1986): 1069-1088.
Most finance students learn that exchange
occurs when market agents assign different values to an asset.
But things quickly get complicated when one looks at the number
of assets exchanged in a market with diverse traders. Many models
of financial markets implicitly assume away trading volume by
assuming away heterogeneity. Yet there is active trading in most
financial markets, indicating that agents are heterogeneous and
operate in a changing environment.
This paper develops a theory of trading volume
based on heterogeneous investors who periodically and idiosyncratically
revise their demand prices. A better understanding of trading
volume is important for at least three reasons. First is the
inconsistency between the widespread use of the homogeneous investor
assumption and observations of positive trading volume. This
model presumes that investors have a demand to trade even in the
absence of new information because of unique liquidity or speculative
desires. Second, volume data are regularly reported in the financial
media along with price data. Yet it is not clear what, if any,
information is reflected by volume data. Some empirical researchers
attempt to draw inferences from volume data, but others argue
that the link between information and volume is ambiguous. This
paper establishes two distinct ways information affects trading
volume, and thus it provides a rationale for deriving the inference
that an event contains information from empirical volume data.
However, the ambiguity is not eliminated, as a volume increase
can indicate that investors interpret the information differently
or that they interpret the information identically but begin with
diverse prior expectations. And third, the effects of the institutional
design of the market on trading volume are not well understood.
These effects are explored through simulations of a continuous
market with significant frictions (information and transaction
costs) and a costless Walrasian call market. Trading volume is
lower in the imperfect market, and information has a persistence
effect on volume in the imperfect market. This is consistent
with empirical evidence, and suggests that markets do not immediately
clear all demands motivated by the information or that investors
make trading mistakes and have demands to recontract in subsequent
2. "The Relation Between Price Changes
and Trading Volume: A Survey." Journal of Financial and
Quantitative Analysis 22:1 (March 1987): 109-126.
There are at least four reasons the price-volume
relation is important. First, it provides insight into the information
structure of financial markets. Second, it is important for event
studies that use a combination of price and volume data from which
to draw inferences. Third, it is critical to the debate over
the empirical distribution of speculative prices. And fourth,
it has several significant implications for research into futures
This paper reviews previous and current research
on the relation between price changes and trading volume in financial
markets, and makes four contributions. First, two empirical relations
are established: volume is positively related to the magnitude
of the price change and, in equity markets, to the price change
per se. Second, previous theoretical research on the price-volume
relation is summarized and critiqued, and major insights are emphasized.
Third, a simple model of the price-volume relation is proposed
that is consistent with several seemingly unrelated or contradictory
observations. And fourth, several directions for future research
3. "Costly Short Sales and the Correlation
of Returns with Volume." Journal of Financial Research
11:3 (Fall 1988): 173-188.
One of the stylized facts established in item #2 above is that contemporaneous returns and volume are positively correlated in some markets. Previous explanations rely on unusual assumptions about investors' behavior, sometimes requiring irrational behavior. This paper proposes an alternate explanation based on the notion that short positions are more costly than long positions in these markets. This costly short sales hypothesis is consistent with previous findings and with futures markets data, in which the costs of assuming short and long positions are symmetric and in which the correlation between returns and volume is not significant.
D. Corporate crime and punishment
1. "The Reputational Penalty Firms Bear
for Committing Criminal Fraud" (with John R. Lott, Jr.).
Journal of Law and Economics, 36:2 (October 1993): 757-802.
This paper shows theoretically that the optimal
criminal penalty for frauds of private parties is small because
the external effects of such frauds is small. It then reports
empirical tests that show that, in practice, criminal penalties
for private frauds are very small compared to market-imposed penalties.
2. "Why the Sentencing Commission's Rules
May Create Greater Disparity" (with John R. Lott, Jr.).
Federal Sentencing Reporter 3:3 (November/December 1990):
This paper observes that one of the United
States Sentencing Commission's primary purposes is to eliminate
disparities in sentencing practice for similar crimes. In establishing
sentencing guidelines for corporate crimes, however, the Commission
has ignored the role market forces play in disciplining corporate
criminal behavior. The guidelines overturn decades of common
law and court decisions, which frequently do take into account
such market forces. As a result, the Commission's guidelines
increase sentencing disparity for some classes of crime.
E. Fishery economics and regulation
1. "Low Interest Loans and the Markets
for Limited Entry Permits in the Alaska Salmon Fisheries."
Land Economics 60:1 (February 1984): 69-80.
This paper evaluates the impact of loans at
subsidized rates on the markets for the affected assets. The
model's predictions are supported by data from the Alaska salmon
fisheries. Under the entry limitation program, transferable permits
convey fishing rights. A loan subsidy available to Alaska residents
increased permit prices by 23% and trading volume during an adjustment
period by 22%. Observed changes in prices and trading volumes
are decomposed into permanent and temporary effects, where temporary
effects reflect two-way trades by Alaska residents engineered
to take advantage of the loan subsidy. Overall, the loan subsidy
is estimated to have caused a $0.3 million deadweight loss and
a $48.9 million transfer to existing permit holders.
2. "Insights from the Markets for Limited
Entry Permits in Alaska." Canadian Journal of Fisheries
and Aquatic Sciences 41:8 (August 1984): 1160-1166.
Information from the permit markets is used
to examine several key issues regarding the behavior of fishermen
and the effects of fishery management policy. The results indicate
that (1) expectations of future fishing incomes are the primary
determinants of permit prices, (2) Alaska Department of Fish and
Game forecasts of fish recruitment (the number of fish returning
to spawn) are capitalized in permit values, and (3) such forecasts
are discounted when recent error rates are high. Using an adaptive
expectations model of fishing profits, it is further concluded
that the "average memory" of fishermen in projecting
future fishing incomes is 2.56 years (which is nearly identical
to Friedman's estimates of consumers' "average memory"
in consumption decisions), and that the average risk premium on
fishing income is 5.05%.
3. "Alaska's Limited Entry Permit Markets:
A Summary of Empirical Results." 1984 Western Proceedings
(Proceedings of the 64th Annual Conference of the Western Association
of Fish and Wildlife Agencies and Western Division of the American
Fisheries Society): 326-335.
The ability to preserve some of the value
of an open-access resource such as a fishery by limiting entry
is examined using data from the Alaska salmon fisheries. The
capitalized value of all permits in early 1981 was $432.0 million,
which is a rough estimate of the fishery rent preserved by entry
limitations. In the absence of limitations, theory and previous
evidence indicate that most (under some circumstances, all) of
this value would be dissipated in the form of higher harvesting
costs and/or a smaller gross harvest. Entry limitations do not
maximize the value of the fishery, however, because they do not
address the fundamental problem of the common pool, which is that
property rights are unassigned until fish are caught.
4. "Non-Pecuniary Benefits in Commercial
Fishing: Empirical Findings from the Alaska Salmon Fisheries,"
Economic Inquiry 23:1 (January 1985): 159-174.
It is widely argued that non-pecuniary benefits
are unusually high for producers in fisheries, and that such benefits
distort the intended effects of fishery regulations. This paper
measures the importance of non-pecuniary benefits in commercial
fishing using data from the Alaska salmon fisheries, which are
subject to entry limitations. Although limited entry permit prices
reflect primarily pecuniary factors, the continued presence of
many low-revenue fishermen in the fisheries suggests that they,
at least, derive non-money benefits. The existence of non-pecuniary
benefits, however, does not appear to depend substantially on
the gear type or geography of the fishery.
5. "Time, Capital Intensity, and the Cost
of Fishing Effort." Western Journal of Agricultural Economics
10:2 (December 1985): 254-258.
The notion that a fishing vessel's costs are
a function of its effort is a useful paradigm in fishery
analysis. This paper elaborates on this micro-theoretic approach,
and proposes a way to view the cost of effort as the interaction
of capital intensity and the length of the fishing season. The
model indicates that capital intensity decisions are affected
by season closures, and that season closures can be used to redistribute
wealth among different classes of fishermen.
6. "Suboptimal Controls in Common Resource
Management: The Case of the Fishery." Journal of Political
Economy 95:1 (February 1987): 179-194.
This paper represents a departure from traditional
fishery analysis, which has ignored the economic theory of regulation
and evidence that producers are heterogeneous. Actual fishery
regulations are not "irrational," as is commonly argued,
but instead are the outcomes of a political process used to redistribute
wealth among fishery producers.
The self-interest hypothesis of regulation
and fisherman heterogeneity can explain two historically popular
types of fishery regulations, season closures and capital constraints.
These regulations affect fishermen differently, and typically
redistribute the fishery's harvest from more efficient toward
less efficient producers. In many fisheries, less efficient fishermen
tend to be indigenous to the regulators' jurisdiction. In these
fisheries, I predict that current regulations will persist, despite
economists' hue and cry about them.
7. "Characteristics of Limited Entry Fisheries
and the Option Component of Entry Licenses." Land Economics
65:4 (November 1989): 386-393.
Entry limitations are frequently proposed
as a partial solution to the common pool problem that characterizes
most fisheries. Entry limitations have actually been imposed,
however, in relatively few fisheries. At first glance, this contradicts
the self-interest hypothesis of regulation, because most proposals
to limit entry would convey licenses to many existing fishermen
at a nominal price. Item #6 above argues that traditional regulations
such as capital constraints and season closures are popular because
they redistribute the catch toward the politically dominant groups.
This paper directly examines conditions under which political
support for entry restrictions is likely to be sufficient among
fishermen, i.e., when the expected net benefits are positive for
a sufficient number of fishermen. Such support is likely when
minority groups are targeted for exclusion, expected fishing incomes
are low, and the variance of fishing returns is high.
Limited entry licenses limit competition when
the fishery is profitable but do not force participation when
the fishery is unprofitable. They are therefore similar to option
contracts. I use the option analogy to derive an exact license
8. Regulatory Techniques in the Fishery:
A Model for Pacific Salmon. Juneau: Alaska Commercial Fisheries
Entry Commission, 1982, 50 p.
One of the most valuable fisheries in the
world, the Alaska salmon fisheries have attracted attention from
policy makers because they were among the first subjected to entry
limitations. The agencies responsible for entry limitations have
tried unsuccessfully to fulfill a legislated mandate to determine
the optimum number of entry licenses. This paper addresses the
optimum numbers issue by constructing a model of renewable resource
exploitation in a common pool, using assumptions that approximate
the biological and regulatory characteristics of the Alaska salmon
fisheries. The optimum number of licenses, i.e., that which maximizes
the fishery's value, is at the point of unitary elasticity of
the demand curve for licenses. Hence, the optimum numbers dilemma
can be solved using data from the markets for entry licenses.
The model is combined with evidence from the
Bristol Bay fisheries to yield the following additional implications:
(1) The open access fishery involves redundant effort in the
form of too many optimally sized vessels, not in the form of
vessels. (2) Gear or vessel restrictions limit effective effort,
but any resulting preserved rent is dissipated in the higher costs
that are necessarily implied by the restrictions. (3) Very weak
evidence suggests that these higher costs take the form of a greater
number of participants, not higher costs per vessel, which (4)
implies that gear and vessel restrictions permit higher-cost producers
to compete by limiting the efficiency of lower-cost producers.
(5) Further evidence indicates that fishermen respond to time
restrictions by employing smaller amounts of capital and not operating
marginal vessels, which implies that (6) time restrictions decrease
vessels' revenues more than their money costs. (7) Restrictions
on the number of competing vessels encourages competition along
other input dimensions, and the amount of preserved rent from
the fishery is inversely related to the ease with which effort-per-vessel
can be substituted for numbers of vessels. (8) Because of the
propensity to dissipate rent along other input dimensions, the
optimum number of vessels in a fishery regulated by entry limitation
is most probably less than what a sole owner of the fishery would
employ, because the sole owner could control effort-per-vessel.
1. "In Search of a Signaling Effect:
The Case of Corporate Name Changes" (with Graeme W. Rankine).
Journal of Banking and Finance 18:6 (1994).
Researchers who cannot explain a positive
stock price reaction to an event frequently claim the event
some type of information. This sometimes seems to me to be a
flaky argument. It is at least an argument of last resort. In
this paper we put the argument to test using one type of event
-- name changes -- that is widely regarded as signalling information
to investors. We show that the signalling story does not hold
up to empirical scrutiny.
2. "Barter Trading as a Microeconomics
Teaching Device." Journal of Economic Education 15:3
(Summer 1984): 226-236.
This paper describes how a barter trading
game can be used as a supplementary teaching device in microeconomics
classes. The actual results of this game in four sections of
an introductory course are described and critiqued. The game
can be used to allow students to participate actively in a market
process, in addition to studying one. Students experience the
effects on markets of price controls, taxes, wealth redistributions,
and government grants of monopoly power.
3. "The ANCSA Corporations: Still Troubled
After All These Years" (with Edward M. Rice),
Contemporary Policy Issues, July 1992.
The Alaska Native Claims Settlement Act of
1971 (ANCSA) resolved disputes over aboriginal lands by giving
Alaska Natives 44 million acres of land and $962.5 million largely
through Native-owned corporations. While the corporations initially
performed poorly, their performance appeared to improved in later
years. This paper documents that the apparent improvement in
ANCSA firm performance is illusory. The causes of the poor performance
are inherent in restrictions ANCSA placed on the corporate form,
which have not changed substantially since the Act's passage.
Some suggestions for alleviating the costs of the restrictions
are provided, but the most important lesson derived for future
Native settlements is to avoid creation of entities with ANCSA-type
Once considered a hallmark of aboriginal land
claims settlements, the ANCSA corporate structure has fallen out
of favor among Native land claims experts who now generally favor
the creation of semi-autonomous aboriginal political units (such
as the recently announced Inuit homeland in northern Canada).
This paper argues that the fundamental problem with the ANCSA
settlement has not been understood by policy-makers, and may be
repeated in future Native settlements.