By employing the vector error correction model (VECM) in a system of seven equations, we find that the Japanese stock market is cointegrated with a group of six macroeconomic variables. The signs of the long-term elasticity coefficients of the macroeconomic variables on stock prices generally support the hypothesized equilibrium relations. Our findings are robust to different combinations of macroeconomic variables in six-dimension systems and two subperiods. Also, the VECM consistently outperforms the vector autoregressive model in forecasting ability.

Consistent with theoretical predictions, we find that both a higher level of financial leverage and a faster speed of adjustment of leverage toward the shareholders' desired level are associated with better corporate governance quality as defined by a more independent board featuring CEO-chairman separation and greater presence of outside directors, coupled with larger institutional shareholding. In contrast, managerial incentive compensation on average discourages use of debt or adjustments toward the shareholders' desired level, consistent with its entrenchment effect. The effect of corporate governance on leverage adjustments is most pronounced when initial leverage is between the manager's desired level and the shareholders' desired level where the interests of managers and shareholders conflict.

We report the results of a 2004 survey from managers of dividend-paying Norwegian firms listed on the Oslo Stock Exchange about their views on dividend policy. Specifically, we identify the most important factors in making dividend policy decisions and managers' views about various dividend-related issues. The most important determinants of a firm's dividend policy are the level of current and expected future earnings, stability of earnings, current degree of financial leverage, and liquidity constraints. No significant correlation exists between the overall rankings of factors influencing dividend policy between Norwegian and U.S. managers.Norwegian managers express mixed views about whether a firm's dividend policy affects firm value. Respondents point to the possible role of dividend policy as a signaling mechanism. No support exists for the tax-preference explanation for paying dividends.-3 -

We posit that country diversification via cross-border mergers creates wealth by providing benefits for firms that are not available to their shareholders. We hypothesize that these benefits are inversely related to the extent of co-movement in the economies of the bidder's and target's countries. We examine the wealth effects of U.S. targets and bidders involved in cross-border mergers with firms in other countries during 1982-1991. We show that wealth effects vary, depending on country affiliations of two merging firms, and are inversely related to the degree of economic co-movement between the two countries.

As a firm deviates from its target leverage from above (below), the bankruptcy costs (foregone tax savings) rise at an increasing rate while the tax savings (reduced bankruptcy costs) rise at a decreasing rate, generating a stronger incentive for rebalancing capital structure. This phenomenon renders the speed of adjustment (SOA) an increasing function of the deviation. Employing a bootstrapping‐based estimation strategy that averts well‐known estimation biases, we find U.S. firms exhibit a positive SOA sensitivity to leverage deviation. Also, the SOA sensitivity is greater for overlevered than underlevered firms.