bluuebunny/crossref_metadata_2025 huggingface dataset:
Introduction of extended LEC14‐type branching into core‐fucosylated biantennary N‐glycan
Authors: André Sabine , Kojima Shuji , Prahl Ingo , Lensch Martin , Unverzagt Carlo , Gabius Hans‐Joachim
Published: April 2005

A series of enzymatic substitutions modifies the basic structure of complex‐type biantennary N‐glycans. Among them, a β1,2‐linked N‐acetylglucosamine residue is introduced to the central mannose moiety of the core‐fucosylated oligosaccharide by N‐acetylglucosaminyltransferase VII. This so‐called LEC14 epitope can undergo galactosylation at the β1,2‐linked N‐acetylglucosamine residue. Guided by the hypothesis that structural modifications in the N‐glycan alter its capacity to serve as ligand for lectins, we prepared a neoglycoprotein with the extended LEC14 N‐glycan and tested its properties in three different assays. In order to allow comparison to previous results on other types of biantennary N‐glycans the functionalization of the glycans for coupling and assay conditions were deliberately kept constant. Compared to the core‐fucosylated N‐glycan no significant change in affinity was seen when testing three galactoside‐specific proteins. However, cell positivity in flow cytofluorimetry was enhanced in six of eight human tumor lines. Analysis of biodistribution in tumor‐bearing mice revealed an increase of blood clearance by about 40%, yielding a favorable tumor/blood ratio. Thus, the extended LEC14 motif affects binding properties to cellular lectins on cell surfaces and organs when compared to the core‐fucosylated biantennary N‐glycan. The results argue in favor of the concept of viewing substitutions as molecular switches for lectin‐binding affinity. Moreover, they have potential relevance for glycoengineering of reagents in tumor imaging.
THE QUIET RESTRUCTURING
Authors: Kensinger John W. , Martin John D.
Published: April 2005

Every individual, therefore, endeavors as much as he can both to employ his capital in the support of domestic industry, and so to direct that industry that its produce may be of the greatest value … and he is in this, as in many other cases, led by an invisible hand to promote an end which was no part of his intention.

— Adam Smith, 17761—
LEVERAGED ESOPS AND CORPORATE RESTRUCTURING
Authors: Bruner Robert F.
Published: April 2005

The ESOP is treated as simply an employee benefit, but it is really a device to save the human race.

—Louis T. Kelso, founder of ESOP1

The American public is not too well‐informed….these plans have been heralded as the basic solution for many of our economic ills. Specifically, one of our chief proponents… has said that widespread adoption of ESOPs will accomplish the following objectives: The restoration and acceleration of economic growth to unprecedented levels; create legitimate full employment for two or three decades; and lay the foundation for arresting inflation. I must confess that these are some claims. Certainly no one since I have been chairing this committee has come before us with program that promises that much.

—Sen. Hubert Humphrey, Joint Economic Committee Hearings, 1975

(Kelsonomics is) an amateurish and crankish fad.

—Paul Samuelson, San Juan Star, April 27, 1972

The ESOP is first and foremost an employee benefit plan.

—Rosen, Klein, Young, 1986
FINANCIAL STYLE AND CORPORATE CONTROL
Authors: Murray Michael J. , Reid Frank C.
Published: April 2005

who will control the process of realizing values inherent in a particular business? If the answer is to be “Management,” then a more assertive financial style and an accelerated financial restructuring timetable may be required to accompany any necessary business restructuring activities. In the new financial environment, failure to take the initiative to implement prudent, well‐reasoned financial restructuring may allow outside interests to re‐define the game. Management would thus lose control of the value creation process.
THE BRITISH PETROLEUM STOCK OFFERING: AN APPLICATION OF OPTION PRICING
Authors: Muscarella Chris , Vetsuypens Michael
Published: April 2005

With the world's economic health said to be banging in the balance, Britain announced that it would proceed with its offering of British Petroleum Co. shares…. Never has a single stock offering so galvanized the attention of Wall Street, world capital markets and investors.

‐Wall Street Journal, October 30, 1987
IDENTIFYING, MEASURING, AND HEDGING CURRENCY RISK AT MERCK
Authors: Lewent Judy C. , Kearney A. John
Published: April 2005

The authors would like to thank Francis H. Spiegel, Jr., Senior Vice President and CFO of Merck & Co., Inc., and Professors Donald Lessard of M.I.T. and Darrell Duaffie of Stanford for their guidance throughout.
THE MOTIVES AND CONSEQUENCES OF DEBT‐EQUITY SWAPS AND DEFEASANCES: MORE EVIDENCE THAT IT DOES NOT PAY TO MANIPULATE EARNINGS
Authors: Hand John R. M. , Hughes Patricia J.
Published: April 2005

On February 9,1982, Hammermill Paper registered with the Securities and Exchange Commission to swap as many as 400,000 common shares for $13.4 million of the company's 8.07% promissory notes due February 1, 1997. The resulting swap increased Hammermill's 1st quarter earnings by $3.7 million, accounting for more than a third of its earnings for that period. Between February 9 and 10, the market value of Hammermill's equity fell by 4.5%.

On January 28, 1985, United Airlines announced that its preceding 4th quarter earnings included a $3 million extraordinary gain from the defeasance of $38 million of outstanding notes, and that earnings for all of 1984 included a defeasance gain of $21.5 million, representing 7.6% of UAL's 1984 net income. Between January 28 and 29, the market value of UAL's equity declined by 4.6%.
CAN A SUCCESSFUL COMPANY EXPECT TO INCREASE ITS SHARE PRICE? A CLARIFICATION OF A COMMON MISCONCEPTION
Authors: Keane Simon M.
Published: April 2005

It is probably fair to say that several corporate problems can be attributed to the widespread misconception that companies can expect to increase their share price in real terms.
AVOIDING NEW EVILS BY APPLYING NEW REMEDIES: TAXES AND THE CROSS‐BORDER TRANSACTION
Authors: Briffett Richard
Published: April 2005

He that will not apply new remedies must expect new evils; for time is the greatest innovator; and if time of course alter things to the worse, and wisdom and counsel shall not alter them to the better, what shall be the end?

—Francis Bacon (1625)1
USING PROJECT FINANCE TO FUND INFRASTRUCTURE INVESTMENTS
Authors: Brealey Richard A. , Cooper Ian A. , Habib Michel A.
Published: April 2005

For much of the past century, there has been an increased tendency for large infrastructure projects to be funded and operated by governments. Since the early 1980s, however, private‐sector financing and management of such projects have experienced a dramatic revival. In some cases, this revival has taken the form of the “privatization” of an entire industry. But another, increasingly common, form has been the use of project finance to fund instrastructure investments. Besides being widely used in infrastructure investments like telecommunications and power generation in developing countries, the use of project finance has recently been extended by the U.K.'s Private Finance Initiative to fund public enterprises as diverse as the construction and operation of prisons, hospitals, subway cars, and the National Insurance computer system.

In a project financing, the project is managed by a separate company that is owned by a project sponsor (or sponsors) who usually takes an active role in the management of the project. The project company enters into a complex series of contracts with multiple parties, including the host government, the project's customers and suppliers, and the banks that typically provide most of the debt financing.

This paper argues that the equity investment by the project's operators works together with high debt ratios and the web of contractual arrangements to reduce “agency” problems in the management of large projects. It also shows how the contracts shift the various project risks to those parties best able to appraise and control them. Finally, it discusses why most project financing takes the form of limited recourse bank loans to the project company rather than, say, public bonds with full recourse to the sponsors.
BEHIND THE CORPORATE HEDGE: INFORMATION AND THE LIMITS OF “SHAREHOLDER WEALTH MAXIMIZATION”
Authors: Hu Henry T. C.
Published: April 2005

The article begins by setting out three alternative conceptions of the corporate objective function. Relying on this framework, it shows that legal analyses tend to neglect conflicts between the interests of the corporate entity and the interests of shareholders over the amount of corporate risk‐taking. Financial analyses tend to ignore both constraints on managerial discretion imposed by law and a fundamental ambiguity the author identifies in the “shareholder wealth maximization” assumption that underlies such analyses.

This ambiguity arises in part from market “frictions”–particularly, the investor uncertainty and heightened price volatility that stem from informational “asymmetry.” Such an information gap between management and outside investors (along with market “irrationality”) can cause material disparities between the actual trading price and the intrinsic value (or what the author calls the “blissful price”) of a company's shares. As a consequence, corporate hedging that maximizes actual share values may not maximize intrinsic values (and vice versa), thus giving rise to a managerial dilemma.

Previous analyses have also failed to give adequate consideration to the expectations of shareholders. If, for example, the shareholders of a natural resource company are seeking a relatively “pure play” on that resource–in part because they believe the company's management has no comparative advantage in managing price risks–corporate hedging that increases shareholder wealth may re‐duceshareholder welfare. In this sense, the usual “shareholder wealth maximization” directive is not only ambiguous, but also incomplete.

These problems stem not only from informational asymmetry, but from other institutional realities (such as the “political” taint associated with reported derivative losses of any kind) that raise the information costs of using derivatives. The article concludes with some suggestions for improving disclosure of corporate risk management “philosophy.” Better disclosure may not only help reduce such information costs, but could also encourage corporations to find–and stick to–their derivatives niche.
INCORPORATING COUNTRY RISK IN THE VALUATION OF OFFSHORE PROJECTS
Authors: Lessard Donald R.
Published: April 2005

Offshore projects, especially those in emerging economies, are generally viewed as more risky, and thus as contributing less to shareholder value, than otherwise comparable domestic investments. Emerging economies are typically more volatile than the economies of industrialized countries. They also present a greater array of risks that are (perceived as being) primarily of a downside nature, such as currency inconvertibility, expropriation, civil unrest, and general institutional instability. Further, because such risks are relatively unfamiliar to the investing companies, the companies are likely to make costly errors in early years and to require more time to bring cash flows and rates of return to acceptable steady‐state levels.

To reflect these higher risks and greater unfamiliarity, many companies include an extra premium in the discount rate they apply to offshore and, particularly, emerging‐market projects. However, the basis for these discount rate adjustments is often arbitrary. Such adjustments do not properly reflect objective information available about either the nature of these risks, or about the ability of management to manage them. Nor do they take into account the reality that the risks stemming from unfamiliarity fall over time as the firm progresses along the learning curve.

As a result, companies often “over discount” project cash flows in compensating for these risks, and thus unduly penalize offshore projects. More important, adjusting for country risk using arbitrary adjustments to the discount rate fails to focus management's attention on strategic and financial actions can be taken to reduce risk—notably, actions capable of transferring some of the company's exposures to specific risks to different parties with comparative advantages in bearing those risks.

This paper outlines a four‐step procedure for assessing overseas risks that integrates these various aspects:

Classify risks in terms of various stakeholders' comparative advantage in risk‐taking based on their: (a) existing portfolio of assets; (b) access to information; and (c) capabilities for reducing risk.

Allocate risk through project structuring and financial engineering to exploitthese comparative advantages.

Adjust resulting cash flows (relative to their most‐likely levels) for (a) the impact of “asymmetric” risks; (b) learning effects; and (c) potential competitive options and/or barriers to entry resulting from comparative advantage in dealing with risks.

Discount resulting expected cash flows at a risk‐adjusted discount rate that reflects the covariance of the cash flows with the benchmark portfolio.
AN ARGUMENT AGAINST HEDGING BY MATCHING THE CURRENCIES OF COSTS AND REVENUES
Authors: Harris Trevor S. , Melumad Nahum D. , Shibano Toshi
Published: April 2005

One way for multinationals to manage their exposures to foreign currency fluctuations is by matching the currencies of costs and revenues, a practice sometimes referred to as “natural hedging.” Proponents of this risk‐management technique argue that matching currencies decreases profit variability.

Using the example of a U.S. firm competing with a French firm for sales in France, the authors analyze the desirability of the U.S. firm's matching currencies of costs and revenues by sourcing in France rather than in the U.S. They find that in such settings with limited competition, while matching reduces profit variability, it also causes a reduction in expected profitability–a potential drawback that appears to have been overlooked in previous discussions.

The authors demonstrate that the U.S. firm, by choosing not to match currencies, retains the strategic flexibility to adjust its prices and quantities in order to exploit the competitive cost differentials caused by exchange rate shifts. The expected profit effects of matching depend on the tradeoff between expected cost savings, if any, of sourcing abroad versus the reductions in expected profits due to the loss of strategic flexibility. They argue that the benefits of strategic flexibility associated with sourcing in the U.S. can yield an increase in expected profits that may outweigh the cost savings and hedging benefits of currency matching.
TO OWN OR TO FRANCHISE?: THE INTERNATIONAL CONTROL DECISION FOR SERVICE COMPANIES
Authors: Fladmoe‐Lindquist Karin , Jacque Laurent L.
Published: April 2005

Franchising, which accounts for a significant share of the U.S. domestic service industry, has also become a major strategic alternative in the international expansion of U.S. service firms. This article attempts to explain the international franchising and control decision by U.S.‐based service firms in terms of a theoretical framework that borrows from agency theory and transaction‐cost analysis. Specifically, it attempts to answer the following question: Why would a well‐established service firm choose to operate in certain countries through a franchising agreement whereas in others it would set up a wholly‐owned subsidiary?

In their empirical test of a sample of over 10,000 international service units that were either owned or franchised by 12 U.S. multinational service companies, the authors find that the most important determinants of the decision to franchise rather than own are the following four: (1) geographical distance from headquarters; (2) extent of cultural differences; (3) years of international experience; and (4) degree of concern about reputation or brand name. Greater geographic and cultural distance make service companies more likely to franchise, as do greater experience and familiarity with international business settings. Greater concern about brand name, by contrast, makes companies more likely to own than franchise. Measures of political and exchange risk have no detectable effect.
EXPLAINING PREMIUMS AND DISCOUNTS ON CLOSED‐END EQUALITY COUNTRY FUNDS
Authors: Arshanapalli Bala , Choi Jongmo Jay , Clagget E. Tyler , Doukas John , Lee Insup
Published: April 2005

Over the past decade or so, the surge of interest among U.S. investors in international investing has led to the creation of numerous foreign equity country funds. Like U.S. closed‐end mutual funds, the prices of such closed‐end country funds fluctuate widely in relation to their underlying net asset values (NAVs).

In this paper, the authors summarize the major findings of their recent study of the performance of 28 country funds relative to their NAVs over the period 1978–1995. While 20 of the 28 funds traded at average discounts to their net asset values, the discounts for the country funds were smaller than those of the average U.S. fund, and over a quarter of the funds sold at premiums.

In an attempt to explain such premiums or discounts, the authors examined primarily three factors: (1) the sensitivity of country‐fund returns (relative to that of local market indices) to U.S. returns; (2) the possible effects of local government investment restrictions; and (3) the impact of exchange rate changes. Although most of the eight funds that traded at average premiums represented countries with significant restrictions on capital flows and foreign ownership, there were also a number of funds with similar restrictions trading at significant discounts. In exploring the reasons for such discounts, the authors noted that the returns to the country funds were “surprisingly sensitive” to U.S. market conditions, thus reducing the extent of their diversification benefits for U.S. investors. The article also raises the possibility that if such country funds are not “priced at the margin” by globally diversified investors, U.S investors' “country‐risk sentiments” could cause such funds to trade at discounts.
GAMBLING, SPECULATION, AND INSURANCE: WHY THEY CONTINUE TO BE CONFUSED AND CONDEMNED
Authors: Brenner Reuven
Published: April 2005

Governments and the media have often attacked financiers for “speculating” in their countries' currencies, thereby forcing them to make drastic and sometimes painful changes in monetary and fiscal policies. This article argues that such accusations have no basis in economic theory, and that “such rhetoric should be seen for what it is: an attempt by politicians and policy‐makers to divert attention and blame from their own mismanagement.”

More generally, the author argues that the failure of the general public to understand the social benefits of financial activies such as trading in government bonds, commodity futures, and, more recently, financial derivatives has led throughout history to “prejudice, bad laws, and bad regulations.” Much as the charging of interest and certain forms of insurance were proscribed by the medieval Church, agricultural commodity futures were attacked in the 19th century (and in much of the 20th as well) in the U.S. and elsewhere as thinly disguised forms of gambling.

Moreover, the same restrictions that were imposed on gambling and futures markets during the 19th and early 20th centuries are now imposed in many Third‐World countries. Instead of encouraging the use of forward markets by small producers and traders, and promoting the development of organized commodity markets and banks in local centers, most less‐developed countries today support national and international “stabilization” measures such as buffer stocks and regulations like price floors, price ceilings, and crop quotas. Meanwhile, in Western nations, governments continue to accuse financial markets of “destabilizing speculation” and of a myopic obsession with short‐term profitability—even as the U.S. IPO market continues to assign record values to companies that have yet to show profits. Viewed in this light, the media and regulatory assaults on the junk bond markets in the late 1980s and on derivatives in the early 1990s are only the latest in a long line of misguided attacks on financial innovation.
PERFORMANCE LEVERAGE, AND OWNERSHIP STRUCTURE IN REVERSE LBOs
Authors: Holtbausen Robert W. , Larcker David F.
Published: April 2005

Previous studies have provided convincing evidence of improvements in the performance of companies that undergo leveraged buyouts (LBOs). This article presents evidence from the authors' recent study of the performance of 90 “reverse LBOs–LBO firms that go public again in an IPO—after they return to public ownership. The aim of the study was to track the performance of reverse LBOs and to reveal any association between operating performance and changes in leverage and equity ownership.

Among the principal findings of the study were the following: Despite a substantial decline in leverage ratios and equity ownership by insiders at the time of the IPOs, equity ownership of reverse LBOs remained more concentrated and leverage higher than that of public companies in the same industries.

The operating performance of reverse LBOs was significantly better than that of the median firm in their industries in the year prior to and in the year of the IPO. Although there is some evidence of a deterioration in the performance of the reverse‐LBO firms, they continue to outperform their industry competitors for at least four full fiscal years after the IPO.

Greater reductions in the percentage equity owned by managers and other insiders at the time of the reverse LBO are associated with larger declines in operating performance.

The stock price performance of reverse LBOs after going public appears more “rational” than that of other IPOs—that is, there is less initial under pricing and no sign of the negative, longer‐term abnormal returns reported by recent studies of IPOs.
DESIGNING CAPITAL STRUCTURE TO CREATE SHAREHOLDER VALUE
Authors: Opler Tim C. , Saron Michael , Titman Sheridan
Published: April 2005

In the past decade, many U.S. companies have launched aggressive share repurchase programs with the expectation that value can be created by returning excess capital to shareholders and moving the firm closer to its optimal capital structure. But how much capital does a company really need to support its business activities?

This article presents an economic framework or “model” that can be used to simulate the effect of various capital structure choices on shareholder value. The fundamental insight underlying the model is that judicious use of debt can add value by reducing corporate taxes and strengthening management incentives to increase efficiency, but that too much debt can result in a loss of business and perhaps a costly reorganization. Indeed, one of the key findings of the authors' recent research is that companies with highly leveraged balance sheets suffer disproportionately large losses in market share and value during industry downturns. As illustrated in a case study of a hypothetical general merchandiser, the model makes it possible to identify an optimal debt‐equity ratio (and percentage of fixed‐ versus floating‐rate debt)—one that balances the value of the tax shield from debt against the increased risk of financial distress.
A PRACTICAL APPROACH TO CAPITAL STRUCTURE FOR BANKS
Authors: Davis Donald , Lee Kevin
Published: April 2005

Like U.S. companies in many industries. American's bank's attention to capital structure is reflected in their high level of stock repurchases in recent years. But, if banks are responding to some of the same economic forces that are driving industrial firms to shed excess capital, there are some important differences between banks and industrials that complicate the process of establishing appropriate capital levels for banks. The most important difference comes from regulation. Since the implementation by FDICIA of risk based capital guidelines in the early 1990s, the capital ratios of U.S. banks have increased substantially. In fact, most U.S. banks today carry considerably more capital than is required by the regulators. This tendency to exceed regulatory capital levels is especially pronounced for smaller institutions, which can in turn be explained by the riskier profile of smaller banks: While such banks have the highest proportion of the lowest‐risk assets (such as cash, mortgages, and marketable securities), they also have a much greater degree of concentration (and co‐variance) among their riskier assets.

This article recommends using a quantitative economic approach (such as a RAROC model) to generate a lower bound on the amount of necessary capital. This estimate can then be translated into a target capital structure by taking account of a variety of practical, qualitative considerations, including banks' preference to maintain capital levels that provide a comfortable margin above bank regulators' “well capitalized” levels. Although such considerations will vary in importance from one bank to another, they will generally include management's risk tolerance, regulatory constraints, market pressures (as reflected in peer group capital levels), the bank's prospects and investment plans, and, for larger banks, rating agency requirements.
ASSET BACKED COMMERCIAL PAPER: GET WITH THE PROGRAM
Authors: Stone Charles A. , Zissu Anne
Published: April 2005

Asset backed commercial paper, or ABCP for short, is commercial paper that is issued by a special purpose corporation against undivided interests in corporate receivables, including retail, trade, or export receivables. Since the inception of the market in 1983, the volume of ABCP has grown to represent about 16% of the total commercial paper market.

ABCP is a valuable source of liquidity for companies that generate a steady flow of quality receivables. Many ABCP programs restrict purchases to companies with investment grade ratings. For such companies, ABCP may help diversify funding sources and allow the firms to lower their funding costs by arbitraging different markets. But ABCP programs can also prove a low‐cost source of funding for companies that either do not have access to the CP market through their own balance sheets or have used up their prime CP and bank borrowing capacity. ABCP is also an important source of funds for smaller companies requiring liquidity to support rapid growth.

ABCP programs can be viewed as “synthetic” revolving bank credit facilities in the sense that they can provide the same flow of funds as revolving credits by using a vehicle constructed specifically to refinance pools of receivables. The benefits of ABCP relative to bank lines of credit may take the form of either lower interest rates, less restrictive financial covenants, or both. Although ABCP is at best a partial substitute for bank credit, the liquidity provided by an asset backed commercial paper program can be used to hold down the costs of bank borrowing.
PRIVATE EQUITY: SOURCES AND USES
Authors: Bradford Travis , Smith Roy C.
Published: April 2005

Private equity capital is playing a large and growing role in the funding of small to medium‐sized, high‐growth businesses. Today's private equity investment typically takes the form of purchase of a minority interest in a post‐start‐up, high‐technology company followed by an IPO a few years later. A large number of such investors are scouring the markets for new investment possibilities and the competitive pressures are growing.

Although private equity investors can and often do add significant value to a company, private equity is potentially expensive, in terms of both loss of ownership and loss of control over long‐term strategic decisions of the company. Owner‐managers who want to retain as much of both as possible are advised to install more formalized business procedures, expand the company's outside relationships, and become more familiar with the company's financial needs and options. These changes should reduce capital needs, reduce the costs of private equity funding, and increase negotiating leverage when dealing with large, sophisticated private capital investors.
USING EXCHANGE‐TRADED EQUITY FLEX PUT OPTIONS IN CORPORATE STOCK REPURCHASE PROGRAMS
Authors: Angel James J. , Gastineau Gary L. , Weber Clifford J.
Published: April 2005

Casual evidence suggests that as many as 10% of the companies repurchasing their stock over the past decade have used the sale of puts on the company's stock as part of the repurchase program. This article describes a new instrument for such corporate stock buybacks recently introduced by the American Stock Exchange: Equity Flex puts on the issuer's stock. When and if the puts are exercised, the company's shares are retired—often on better terms and with better cash flow timing than the company could achieve with a conventional stock repurchase program.

To date, such stock repurchase programs have been conducted primarily using over‐the‐counter put options. The new Equity Flex puts promise to eliminate the relative advantages of OTC transactions and offer stock repurchasers better pricing and increased liquidity. Use of exchange markets can also help overcome any reluctance a financial officer might have to rely on prices offered by a single dealer.
TWO DCF APPROACHES FOR VALUING COMPANIES UNDER ALTERNATIVE FINANCING STRATEGIES (AND HOW TO CHOOSE BETWEEN THEM)
Authors: Inselbag Isik , Kaufold Howard
Published: April 2005

This is the sequel to the authors' 1989 article discussing the two basic discounted cash flow approaches for valuing debt‐financed transactions and corporations: weighted average cost of capital (WACC) and adjusted present value (APV). The WACC method discounts all after‐tax (but pre‐interest) cash flows at the company's weighted average cost of capital. The APV method treats the value of a levered firm as the value of the same firm if financed entirely with equity plus the discounted value of the interest tax shields from the debt its assets will support. The authors argue that the WACC approach is more practical if the firm intends to hold its (market) leverage ratio relatively constant over time, but that the APV technique is the preferred method if the firm plans to reduce its leverage ratio according to a pre‐determined schedule (as tends to be the case in highly leveraged transactions).
MANAGEMENT FADS AND ORGANIZATIONAL ARCHITECTURE
Authors: Brickley James A. , Smith Clifford W. , Zimmerman Jerold L.
Published: April 2005

This article applies and extends the three‐part organizational framework used in the preceding article to a broad range of management innovations. After furnishing some interesting evidence of the rise and fall of management techniques such as TQM, Reengineering, Just‐in‐Time Production, and Activity‐Based Costing, the authors raise and then attempt to answer a number of questions:

What explains the popularity of these management innovations? Why do they often fail to produce the expected benefits? How can managers tell if a particular technique is right for them? What can managers do to increase the likelihood that an adopted technique will be successful?

The persistent, and at times seemingly insatiable, corporate demand for management innovations is viewed by the authors as a “rational” economic response by senior managers to major changes in the external business environment—changes that in turn dictate changes in business strategy. For example, when confronted with external changes such as deregulation or heightened global competition, companies often find it necessary to refocus their efforts on improving product quality and operating efficiency. And such changes in business strategy tend to require a revamping of the three critical components of organizational architecture: (1) assignment of decision rights, (2) performance evaluation systems, and (3) compensation systems.

As the authors argue, innovations such as TQM, outsourcing, Re‐engineering, and JIT typically involve major changes in just one or two of these critical elements of the organization, but not all three. The failure to coordinate organizational changes in such a way that these three elements are mutually consistent and reinforcing is one important reason why management innovations can fail to meet expectations. The framework described in this article is designed to help managers considering one potentially valuable set of organizational changes to identify other facets of the organization that also require attention and perhaps complementary adjustments.
MANAGING FOR SHAREHOLDER VALUE AT BANK OF AMERICA
Authors: Coulter David
Published: April 2005

In this brief and informal speech to senior executives representing a group of the bank's largest corporate clients, Bank of America's CEO and Chairman describes the bank's mission and the “necessary conditions” for achieving it. Besides mentioning a number of recent initiatives aimed at improving quality of service—including an extensive employee stock option plan—he also comments on the role of the bank's stock repurchase program in its overall attempt to maximize “economic profit” and shareholder value.
EVA, ACCOUNTING PROFITS, AND CEO TURNOVER: AN EMPIRICAL EXAMINATION, 1985–1994
Authors: Lehn Kenneth , Makhija Anil K.
Published: April 2005

A growing number of companies use EVA or related measures of economic profits as metrics for corporate planning and executive compensation. Unlike traditional accounting measures of performance, EVA attempts to measure the value that firms create or destroy by subtracting a capital charge from the cash returns they generate on invested capital. For this reason, EVA is seen by its proponents as providing the most reliable year‐to‐year indicator of a market based performance measure known as market value added, or MVA.

Although EVA and MVA have received considerable attention in recent years, there has been little empirical study of these performance measures—and what studies have been produced have provided mixed results. This study joins the debate over EVA vs. conventional accounting measures by asking a different question: Which performance measures do the best job of explaining not only stock returns, but the probability that a CEO will be dismissed for poor performance?

Using a sample of 452 firms during the period 1985–1994, the authors report that EVA has a somewhat stronger correlation with stock price performance than conventional accounting measures such as ROE and ROA. But, of greater import, EVA appears to be a considerably more reliable indicator of CEO turnover than conventional accounting measures.
Risks and Rewards in Emerging Market Investments
Authors: Smith Roy C. , Walter Ingo
Published: April 2005

In light of the recent currency crises in East Asia, this article questions the accepted wisdom that emerging market securities deserve to be included in global portfolios primarily because of their low correlations with more conventional asset classes. The authors suggest that the basic cycle of emerging market loans and securities appears to have been compressed, and its swings accentuated, by the herd‐like behavior of global institutional investors. This is not the irrational behavior of crowds infected by investment euphoria, but the rational behavior (however volatile) of a large number of institutional investors with huge stakes in the market, each trying to outperform or at least keep up with the others.

While stressing the benefits of foreign capital for emerging nations, Smith and Walter also point to the adverse consequences of abrupt shifts in investor sentiment and capital flows. Citing a recent World Bank study, the authors suggest that the effect of portfolio equity inflows on many developing economies has been a “glut” of foreign exchange and liquidity, which tends to cause inflationary pressure and appreciation of real exchange rates. Such currency appreciation can in turn have unwanted “real” effects, such as increases in trade deficits.

Going somewhat “against the grain of the Washington Consensus,” the authors suggest that emerging nations undertake a gradual, though steady movement toward adoption of freemarket policies. In particular, they cite with approval attempts by more successful emerging nations such as Chile and South Africa to limit portfolio capital inflows to avoid this problem of excess liquidity. As the authors conclude, “At no point in their development did now‐established countries like Japan, Germany, South Korea, Taiwan, Singapore, Spain, and Chile adopt a totally free‐market approach. They moved purposefully over decades in that direction, but only at a pace that could be accommodated by the accompanying political thinking and infrastructure‐building.”
Are Open Markets Good for Foreign Investors and Emerging Nations?
Authors: Kim E. Han , Singal Vijay
Published: April 2005

Although policymakers of emerging nations routinely brand foreign capital as “hot money” and hold it responsible for the ills of their economies, this article suggests that the experience of opening up their markets to overseas investors has been largely beneficial for the host countries. Based on their own recent study, the authors report that when emerging economies open their markets, the level of stock prices tends to rise without an associated increase in volatility, and more capital becomes available for domestic investment at a lower cost. The stock markets also appear to become more efficient, thus resulting in a better allocation of resources. Furthermore, the inflow of foreign capital does not lead to higher inflation or stronger currencies, nor does the volatility of inflation or exchange rates increase. If some countries experience large capital outflows with damaging consequences, the culprit is not foreign investors, but rather policymakers' futile attempt to defy market forces and the failure of their economies to put the capital to productive uses.

The authors' analysis also suggests that, when the recent turmoil in emerging markets is set in the context of a longer‐run historical perspective, nothing appears to have changed that would materially alter the prospects for investing in emerging markets. The recent market volatility and currency crises in emerging nations are by no means extraordinary—indeed, the currencies of many developing countries fall routinely. What distinguishes the Mexican and Thai currency crises from such run‐of‐the‐mill devaluations is that both governments resisted the inevitable until market forces brought about a crash. The recent emerging market currency crises should accordingly be viewed as more or less predictable “road bumps” that can be expected when the policymakers of emerging economies gradually—and grudgingly—relinquish their power to the markets.
Yankee Bonds and Cross‐Border Private Placements
Authors: Johnson Greg , Funkhouser Thomas
Published: April 2005

With credit spreads and U.S. Treasury yields near historical lows and the recent relaxation of U.S. regulatory reporting requirements, the U.S. bond markets are more and more frequently the markets of choice for international issuers. Total cross‐border U.S. bond issuance is expected to top $200 billion in 1997, easily surpassing previous issuance levels.

Overseas issuers have three primary forms through which they can participate in the U.S. long‐term debt markets: publicly traded, SEC registered bonds (commonly known as “Yankee” bonds); traditional private placements; and underwritten Rule 144A private placements. Each of these three financing methods has distinct benefits and limitations that should be thoroughly evaluated in light of the specific objectives of the issuer. Yankee bonds are typically the most cost‐efficient vehicle for large, investment‐grade issuers. The fastest growing segment is the rule 144A market, which accounted for 38% (by number, not dollar volume) of all U.S. cross‐border debt transactions in 1996. The Rule 144A structure is often used for complex structures requiring heavy rating‐agency involvement, such as future financial flow transactions and project financings. The 144A market has also become a particular favorite with international issuers because of its less formal disclosure requirements and streamlined execution process. The private placement market, which accounted for 24% of cross‐border transactions in 1996, continues to be the dominant choice of smaller issuers, companies with complicated “stories,” and firms that do not wish to submit to regular scrutiny by rating agencies. This article provides a detailed analysis of each type of bond issuance and the related issues facing a financial officer in trying to determine the most appropriate source of long‐term debt.
ACCOUNTING FOR DERIVATES: BACK TO BASICS
Authors: Benston George J.
Published: April 2005

Public accountants have had a hard time deciding how to account for derivatives that are used to hedge risks, which in turn has given derivatives users and others a hard time. For about six years, the Financial Accounting Standards Board (FASB) has struggled with several, often diametrically opposed procedures, ranging from showing all derivatives at “fair” values to deferring realized losses or gains on derivatives until related gains or losses on the hedged transactions have been realized (a practice known as “hedge accounting”).

What is behind the FASB's inability to come up with a decisive and authoritative ruling? Although the politics of self‐interest has fueled much of the debate, there is more to the problem than politics. The author argues that the underlying cause of the FASB's inability to reach a satisfactory and acceptable solution is not politics, but rather a flawed basic concept of how financial accounting should be done.

In this article, the author recommends a procedure for derivatives accounting that was endorsed by the Financial Economists Roundtable in its 1995 “Statement on Accounting Disclosure about Financial Derivative Instruments.” The proposal, in brief, is this: Provided a company can satisfy its auditors that it is using derivatives primarily to hedge an offsetting price exposure, the firm should be given the option to use hedge accounting for that part of its derivatives position that is functioning as a hedge. All other investment or speculative uses of derivatives should be treated like other financial instruments and marked to market or fair value.

Such a procedure, the author argues, is far more consistent than the FASB's recent proposals with fundamental principles of accounting that have been developed by accounting practitioners and scholars over several centuries.
Financial Innovation in the Management of Catastrophe Risk
Authors: Doherty Neil A.
Published: April 2005

Like the preceding article, this article argues that the high costs of reinsurance present the opportunity for hedging instruments to be offered to primary insurers that are both competitive with current reinsurance and that offer investors high rates of return. But the combination of high reinsurance premiums and the vast capacity of the capital market for diversification is not sufficient to ensure the success of these new instruments. If new instruments such as catastrophe options and catastrophelinked bonds are to compete successfully with reinsurance, they must provide a cost‐effective means of resolving incentive conflicts between the primary insurer and the ultimate risk bearer that are known as “moral hazard.” Without an effective solution of this moral hazard problem, the use of past insurance loss data to estimate the potential returns for purchasers of catastrophe bonds and other such instruments will be misleading and unreliable.

As the author demonstrates, both traditional reinsurance and each of the new catastrophe hedging instruments presents insurance companies and other hedgers with the challenge of managing a different combination of moral hazard, credit risk, and basis risk. For example, traditional catastrophe reinsurance is subject to significant credit risk and moral hazard, but little if any basis risk. By contrast, both catastrophe options and bonds can be designed in ways that reduce moral hazard and credit risk, but at the cost of taking on some basis risk. The risk manager's task in such circumstances is to design an instrument that embodies the optimal, or cost‐minimizing, trade‐off among these three sources of risk.
Risk Management by Securities Settlement Agents
Authors: Culp Christopher L. , Neves Andrea M. P.
Published: April 2005

As developing countries search for ways to promote capital formation through the establishment of organized exchanges, they will need to pay more attention to the role of risk management in the securities settlement process. The delivery‐versus‐payment (DVP) agents that facilitate the process of exchanging securities for funds in most world markets have both the incentive and comparative informational advantage to monitor, measure, and manage risks inherent in the securities settlement system.

Unfortunately, most DVP agents have accomplished this task to date through the cumbersome use of position and net debit limits, capital requirements, and collateral requirements. Such limits and requirements are almost everywhere based on relatively arbitrary criteria that may have no relation to the actual replacement cost, principal, or liquidity risk of the transaction, portfolio, or participant on which they are imposed.

To remedy this shortcoming in the current state of risk management at DVP agents, this article holds out the possibility of integrated, comprehensive risk management processes that emphasize and rely on forward‐looking measures of risk for individual brokers and across brokers. Many risk measures could serve the settlement agent's purposes, including “value at risk” (or “VaR”), “below target risk,”“below‐target probability,” and “downside semi‐variance.” The actual summary risk measure used for risk monitoring and control is not as important as the methodology used to generate that risk measure. “The goal of such a process,” as the authors put it, “is to ensure that the risks to which a settlement agent and its residual claimants are exposed are those risks to which the agent's shareholders think they are and want to be exposed.”
Market Based Management™*—A Key to Nucor's Success
Authors: Nobles William , Redpath Judy
Published: April 2005

Ken Iverson, CEO of Nucor Corporation, transformed Nucor from the virtually worthless corporate shell that it was when he took over as president in 1966 into a Fortune 500 giant with current shareholder value in excess of $5 billion. How did Iverson do it? What are the secrets to his outstanding success?

This article argues that an important part of the answer is Market Based Management, a relatively new set of management values and practices that aims to bring the power of a free‐market society inside companies. Stated in brief, Market Based Management attempts to replace the traditional “command‐and‐control” management approach with decentralized decision‐making that is designed to make full use of employees' “specific knowledge.” Employees' expanded decision‐making authority is reinforced by a powerful incentive compensation system that rewards them handsomely for achieving corporate goals. The result, according to the authors, is highly motivated employees who “take ownership” for their role in contributing to the success of the enterprise.