Cheol S. Eun

In this paper, we examine the behavior of stock prices of individual firms with different bond ratings surrounding the October market crash of 1987 and therefrom make inferences about the significance of bankruptcy costs borne by stockholders. The key findings are as follows: Immediately following the crash, stock prices of firms with different bond ratings display dramatically divergent behavior. Specifically, stocks with speculative bond ratings exhibit significantly negative cumulative abnormal returns (CAR) in the wake of crash; the more speculative a firm's bond is, the more negative is the CAR of the firm's stock. Regression analysis confirms that there indeed exists a significantly negative relationship between the post-crash CARs and individual firms' bankruptcy risk proxied by their bond ratings, a variable that measures the likelihood of financial distress ex ante. These results indicate that the bankruptcy costs borne by stockholders are significant and investors recognize it as such, especially during a period of market turbulence.

In this paper, we investigate the pattern of dynamic interactions among the prices of those stocks that are cross‐listed on the three major stock markets of the world, i.e. New York, London and Tokyo. Major findings are: first, regardless of the nationality of stocks, innovations in the ‘home’ market returns are always fed into the returns in the ‘overseas’ markets, with the former causing the latter in the Granger sense. However, innovations in the New York market returns of foreign stocks are fed back into their respective home markets, contributing to the price discovery there. Second, the ‘succeeding’ overseas market, which operates immediately after the home market, plays a dual‐role: it conducts the home market innovations to the next‐opening overseas market, as well as adds its own innovations. Third, the exchange rate changes substantially influence the overseas market returns, but not the home market returns. The exchange rates appear to play a role in the transmission mechanism mainly via the inter‐market price parity.