Using 947 acquisitions during 1970–1989, this article finds a relationship between the postacquisition returns and the mode of acquisition and form of payment. During a five‐year period following the acquisition, on average, firms that complete stock mergers earn significantly negative excess returns of −25.0 percent whereas firms that complete cash tender offers earn significantly positive excess returns of 61.7 percent. Over the combined preacquisition and postacquisition period, target shareholders who hold on to the acquirer stock received as payment in stock mergers do not earn significantly positive excess returns. In the top quartile of target to acquirer size ratio, they earn negative excess returns.

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Commonly used Jones-type discretionary accrual models applied in quarterly settings do not adequately control for nondiscretionary accruals that naturally occur due to firm growth. We show that the relation between quarterly accruals and backward-looking sales growth (measured over a rolling four-quarter window) and forward-looking firm growth (market-to-book ratio) is non-linear. Failure to control for the effects of firm growth and performance on innate accruals leads to excessive Type I error rates in tests of earnings management. We propose simple refinements to Jones-type models that deal with non-linear growth and performance effects and show that the expanded models are well-specified and exhibit high power in quarterly settings where one is testing for earnings management. The expanded models are able to identify the presence of earnings management in a sample of restatement firms. Our findings have important implications for the use of discretionary accrual models in earnings management research. JEL Classifications: C15; M40; M41.

We examine the CBOE option market depth and bid-ask spreads. Absence of price effects surrounding large option trades suggests excellent market depth. However, bidask spreads for the CBOE options and the NYSE stocks are nearly equal, even though an average option is equivalent to less than half a stock plus borrowing. We explain this tradeoff between market depth and bid-ask spreads on the CBOE and the NYSE by differences in market mechanisms. We also show that the adverse-selection component of the option spread, which measures the extent of information-related trading on the CBOE, is very small. THIS STUDY EXAMINES EMPIRICALLY the liquidity of the options market. In particular, we examine the tradeoff between market depth and market spread arising from differences in market mechanisms of the Chicago Board Options Exchange (CBOE) and the New York Stock Exchange (NYSE). Market depth is the ability of a market to absorb sudden increases in trading volume and is measured by the extent of a large trade's impact on the security's price. Market spread is the difference between the lowest ask and the highest bid prices at which dealers stand ready to trade a minimum-size order.The basic theory motivating our analysis has been developed by a number of researchers, but perhaps most effectively by Ho and Macris (1985). They argue that increasing the number of dealers in a given security leads to greater market depth at the cost of wider bid-ask spreads. Their basic reasoning is as follows. Consider first the situation facing a specialist who is the only designated dealer in a particular security. The specialist uses the bid-ask spread to recover the cost of market-making and uses the position of the spread (i.e., the location of the spread midpoint) to control his or her costs arising from carrying an inventory of securities. For example, if the specialist has a large negative inventory, he or she raises both the bid and the ask prices, which encourages potential sellers and discourages potential buyers. Now compare a multiple dealer market, such as the CBOE, to the NYSE, where a single dealer (the specialist) makes the market in each stock. In a multiple dealer market, the collective ability of dealers to carry inventory to absorb imbalances in buying and selling activity is much higher. Also, the ability of any one dealer to move bid-ask prices is limited because he or she faces competition from other dealers who may have small inventories. (dissertation advisor) for helpful comments. I am especially obliged to the referee and the editor for many helpful suggestions which improved this paper considerably. 1158The Journal of Finance Thus, increasing the number of dealers results in higher market depth; that is, the market can absorb large orders with little change in the price. However, this improvement in market depth occurs at a cost. All of the dealers together pay higher inventory costs for carrying more inventory; furthermore, fixed costs, such as the opportunity cost of dealers' time, increase in direct proportion ...