bluuebunny/crossref_metadata_2025 huggingface dataset:
Investment Returns of Life Insurers: Tests of Agency Theory and its Alternatives
Authors: Boose Mary Ann
Published: January 2008

Agency theory leads to proposals that managers of asset portfolios would not necessarily maximize net return on invested assets for any level of risk. Because investment income accounts for approximately one third of the total income of life insurers, the rate of return on invested assets can substantially affect an insurer's products and profitability. Prior research has shown systematic differences in general insurance expenses between classes of insurers, but continued viability of all classes of insurers through time. This study tests the predictions of agency theory and its alternatives concerning the investment yields of life insurers and finds offsetting differences in the investment results of these insurers. The study also finds significant economies of scale in the investment function that help explain what might otherwise appear to be an unjustified emphasis on firm growth. This study has important implications for participants in the industry, regulators, consumers and investors.
Three Agency‐Cost Reasons for Hedging Foreign Exchange Risk
Authors: Dobson John , Soenen Luc
Published: January 2008

Given that it is costly, the widespread use of foreign exchange hedging is puzzling for several reasons. In an efficient market exchange rate fluctuations should even out over time. Also, exchange rate risk is generally regarded as unsystematic, and even if it is systematic investors can themselves hedge the risk. This paper answers the question of why firms hedge foreign exchange risk by invoking three agency problems. Given the existence of any of these agency problems, foreign exchange hedging does not merely impact firm risk. By smoothing cash‐flow streams, it also impacts directly firm value.
Africa's Development Financing Dilemma: Illusions of the Past and Challenges of the Future
Authors: Rehman Zeinelabdin Abder
Published: January 2008

Despite the various modalities recommended to alleviate the debt burden, and the IMF‐World Bank led structural adjustment programmes, the African countries South of the Sahara (ACSS) are faced everyday with more and more complex problems. Their standards of living deteriorate systematically and they seem to be in an eternal state of debt overhang. The survey of the existing vast literature and empirical studies indicate clearly that most of the African countries cannot cope with the existing debt burden, unless a drastic breakthrough is brought about in their development process. At the same time, neither the volume of their national savings nor the mechanisms of mobilising internal resources, within the prevailing economic environment and the existing structural and institutional setups, are adequate enough to satisfy their ever‐increasing financing needs. Hence, a twin dilemma: mounting difficulties of repayment of existing stock of debts and a noticeable slowdown in external financial flows on the one hand, and insufficiency of the domestically generated funds, on the other bedevil the African development scenario.
Testing the Relationship Between Government Expenditure and National Income in Canada, Employing Granger Causality and Cointegration Analysis
Authors: Ansari Mohammed I.
Published: January 2008

The relationship between government expenditure and economic growth has been extensively studied both in public finance literature and in the literature dealing with macroeconomic modelling.In public finance the issue dates back to Adolph Wagner (1890) or even before. But Wagner is known to have presented the idea in its modern form. Wagner essentially presented a behavioral statement about the growth of public expenditure which, after some refinements by others, has come to be known as the Wagner's hypothesis (WH). According to this, the growing importance of the state activity and therefore public expenditure is an inevitable feature of a progressive society. In modern literature, the proposition is formulated as follows: as per capita income rises, the share of the public sector increases because:(1) protective and administrative functions of the state expand,(2)state activities pertaining to culture and education expand, and (3) increasing tendency towards monopoly due to technological advancement and increasing returns to scale need to be offset by state actions.The WH is often considered to represent a long‐term relationship which is expected to apply to countries during their early stages of growth and development. The implication of WH is that the causation runs from economic growth to growth in government expenditure. A more important implication of this hypothesis, however, is that government expenditure does not qualify as development finance because it plays no role in economic growth.
A Generalised Theory of Islamic Development Financing
Authors: Alam Choudhury Masudul
Published: January 2008

The objective in this paper is to show that a generalised theory of development financing in Islamic context assumes a detailed general equilibrium approach to the solution of the following interrelated problems: The objective criterion of Islamic development co‐operation is recognised as the optimisation of an underlying ‘ummatic’‘shura’‐based social welfare function in the sense of social consensus formation. This social welfare model is implicitly invoked here, not explicitly formalised. The reader is referred to the glossary of Arabic terms used in this paper.
Equity Capital for Small and Medium‐Sized Enterprises in Malaysia: Venture Capital or Islamic Finance
Authors: Grahame Boocock J. , Presley John R.
Published: January 2008

This article seeks to explore whether there is a role for venture capital in the funding of small and medium‐sized enterprises (SMEs) within a developing economy, where there has not been an established culture of equity‐linked funding. In addition, the links between venture capital and the concepts of Islamic banking are examined. The Malaysian economy is taken as a case study as it allows a discussion of venture capital issues alongside the potential for Islamic finance.
A MANAGEMENT AUDIT OF SMALL BUSINESS LONG‐TERM FINANCIAL AFFAIRS
Authors: Flesher Dale L.
Published: January 2008

Most small businesses today could probably benefit from a management audit of the firm's long‐term financial affairs. In large corporations, internal auditors generally have free rein to audit all operations—including the activities of the corporate treasurer and the controller's department. Such audits involve not only the financial aspects of operations, but the day‐to‐day operating aspects as well. Internal audits of operations are typically called operational audits in the United States and value‐for‐money audits in the countries of the British empire. “Value‐for‐money audits” is probably the best name because the objective of the auditors is to point out ways that a department can save money or enhance revenues. Now it would be nice if small businesses had internal auditors to conduct value‐for‐money audits, but such is not the case. Most small companies do not have internal auditors. However, there is another alternative. The owner or manager of a small business can conduct the audit on sort of a do‐it‐yourself basis. Although every department could possibly benefit from such an audit, it is the long‐term financial management of the organization that might profit the most from a value‐for‐money audit.
CASH CONVERSION CYCLE AND FIRM SIZE: A STUDY OF RETAIL FIRMS
Authors: Moss Jimmy D. , Stine Bert
Published: January 2008

Many businesses are faced with liquidity problems for various reasons. This is especially true for small businesses, since most must operate with fewer sources of both short and long term financing than larger firms. Where less financing is available, more assets must be held in liquid form to meet daily transactions and emergency requirements. Larger firms, that have better access to both the money and capital markets, can afford to hold fewer current assets and meet cash requirements just as quickly and efficiently through borrowing.
Dividend Policy: The Issues
Authors: Allen D.E. , Izan H.Y.
Published: January 2008

The determinants of dividend policy are a continuing puzzle, as noted by Black (1976). In this paper we review the major issues in dividend policy and relate them to some of the themes explored in companion papers in this volume. The paper is divided into five sections. Section 2 surveys the literature on the information signalling properties of dividends. Section 3 discusses some tax issues related to dividend policy and section 4 draws on some agency costs explanations for dividend payments. The conclusion draws together the arguments and highlights some of the unresolved issues.
The Ex‐Dividend Day Behaviour of Australian Share Prices Pre and Post Imputation
Authors: Clarke Alex W.
Published: January 2008

The corporate dividend decision has been of interest to researchers in finance for many years. Early theoretical and empirical work such as Graham and Dodd [1951], Lintner [1956], Miller and Modigliani [1961] and in part Ball and Brown [1968] concentrated upon the signalling properties of dividend announcements. As a result of this early work, a nexus between dividends and current or foreseeable corporate earnings was proposed.
Capitalizing on Eastern Europe
Authors: Lyroudi Katerina , Taylor Don A.
Published: January 2008

The 1990s may be viewed as the decade of economic globalization. The projected EEC integration in 1992 has already lead to an increase in direct foreign investment (DFI) and acquisition activity in Europe. Many firms would like to participate in the new market that will emerge in 1992. In addition, the collapse of the Berlin Wall and the subsequent reunification of the two Germanies have signalled a new era for Eastern Europe. These events will forge a new Europe of approximately 520 million people with nearly $5 trillion in combined gross national product, versus the $4 trillion economy of the United States and the $2 trillion economy of Japan.
International Mutual Fund Performance U.S. vs. U.K.
Authors: Cheney John M. , Atkinson Stanley , Bailey Barrie A.
Published: January 2008

An increasing number of investors are becoming aware of the benefits of international diversification. Generally, an internationally diversified portfolio of securities will be less volatile than a purely domestic portfolio. The reduction in volatility occurs because the returns on foreign securities are not perfectly correlated with domestic securities. As a result of the perceived benefits, U.S. based international mutual funds and U.K. international investment trusts are becoming more popular with investors.
Foreign Exchange Risk Management — A Balanced Portfolio
Authors: Holland J.B.
Published: January 2008

Changes in the financial and competitive environment have been a recurring stimulus to corporate reappraisal of foreign exchange risk management (FERM) policy. In 14 UK company cases studied by the author, treasurers identified the following competitive and financial environmental influences on FERM policy.
The State of the Art in Assessing Foreign Currency Operations
Authors: Demirag I.S.
Published: January 2008

The rapid development of multinational companies (MNCs) has resulted in the need for accounting systems which function to report, evaluate and control international operations and their managers' effectiveness. While the problems surrounding the evaluation and control of domestic firms remain the same for MNCs' parent company managers, the question of which country's currency should be used in the evaluation process represents additional complexities for them. The choice is essentially either that of the parent company currency or the currency of the foreign subsidiary. Parent company managers may also use both of these currencies, but it is likely that this choice will result in different decisions regarding the performance of foreign operations (see Demirag, 1987,1987a, 1987b). The aim of this paper is to critically review the theoretical and empirical literature on the use of parent and/or foreign subsidiary accounting information used by multinational companies in the evaluation of their foreign subsidiary operations and managers. In doing so, the paper addresses the following two questions. First, to what extent is translated information, untranslated information or both types of information significant in the evaluation of foreign subsidiary operations and their managers' performance in MNCs? Second, what are the major contextual variables which influence MNC foreign currency accounting practices in performance evaluations?
Policies Employed in the Management of Currency Risk: A Case Study Analysis of US and UK
Authors: Collier P.A. , Davis E.W. , Coates J.B. , Longden S.G.
Published: January 2008

The objective of this paper is to extend research findings obtained in a preliminary survey of currency risk management in UK multinational companies (Collier and Davis, 1985) by presenting a case study analysis of currency risk management practice in large UK and US multinational companies. The research is specifically concerned with aspects of the management of foreign currency transaction and translation risk by multinational companies and the extent of risk aversion in the policies adopted.
Financial Innovations: Some Empirical Evidence from the United Kingdom
Authors: Glaum M. , Belk P.A.
Published: January 2008

This paper reports the results of an empirical study undertaken during 1988 into firstly the opinions of corporate treasurers in UK multinational corporations on the process of financial innovation and the relationship between the corporates and their banks in the context of this process, and secondly the use of financial innovations in the MNCs' management of foreign exchange risk. It concludes that in general treasurers were sceptical about financial innovations, and that the relationship between the corporates and their banks appeared to be going through a difficult phase reflecting the breaking up of traditional links between banks and their corporate customers. The findings on the use of financial innovations varied; while currency futures were not used at all by the MNCs, the treasurers tried out the use of currency options and swaps. A general conclusion was that the corporates' exchange risk management practices were short term orientated and innovations were incorporated into the day‐to‐day management of positions rather than into longer term strategic decisions.
The Level and Nature of Venture Capitalist Involvement in Their Portfolio Companies: A Study of Three European Countries
Authors: Sapienza Harry J. , Amason Allen C. , Manigart Sophie
Published: January 2008

This research was funded in part by the Center for International Business Research, University of South Carolina.
The Relationship Between Venture Capitalists and Managers in New Firms: Determinants of Contractual Covenants
Authors: Barney J.B. , Busenitz Lowell , Fiet Jim , Moesel Doug
Published: January 2008

Two types of opportunism, managerial and competitive, are described. Contractual covenants that control these types of opportunism are used when they are likely to occur, i.e., when there are obstacles to monitoring management behavior and when returns to starting new firms are large. These ideas are subjected to empirical test. The relationship between managers in new firms and venture capitalists is receiving increased attention in the literature (Norton and Tenenbaum 1990; Sahlman, 1988). The determinants and implications of several attributes of these relationships have been examined, including the percentage of a new firm's equity held by venture capitalists, the number of seats on the board controlled by venture capitalists, and the post‐funding activities of venture capitalists (e.g., helping the new firm raise additional capital, contacting customers, replacing management) (Barney, Busenitz, Fiet, and Moesel, 1989). While our understanding of the relationship between managers in new firms and venture capitalists is growing, one particularly important component of that relationship has yet to receive significant attention in the literature: the details of the formal contractual arrangement between managers in a new firm and venture capitalists. Often called the “terms and conditions” of the relationship between managers and venture capitalists, these contractual details specify the rights and obligations of both managers and venture capitalists throughout their entire relationship in a series of covenants (Fiet, 1991). Among other items, contractual covenants can specify limits on capital expenditures, limits on managerial salaries, limitations on raising additional outside capital, technology non‐disclosure agreements, and conditions for forcing a change in managing and liquidating the deal. The purpose of this paper is to understand the determinants of the formal contractual arrangements between managers in new firms and venture capitalists.
Evaluating the Venture Capital Fund Agreement
Authors: Brophy David J. , Haessler Michael R.
Published: January 2008

The purpose of this paper is to demonstrate how probabilistic simulation can be used to assist prospective general partners (GP) and limited partners (LP) of a venture capital limited partnership fund to evaluate alternative investment strategies for the proposed fund. The model presented in the paper is based upon observed characteristics of the venture capital market reported in the finance, economics, and management science literature. The body of the paper is organized as follows. In Section II we review the structural characteristics of the model. In Section III we present the results, in terms of ending wealth, obtained from simulating the fund's operations over its life under selected alternative investment strategies. In Section IV we show evaluations of the fund's simulated results under expected return, mean/variance and four moment approaches. In Section V, we present conclusions and implications of the results for financial management.
Small Growth Firms, Venture Capital and Financial System Trends
Authors: Kolari James W.
Published: January 2008

The turbulent decade of the 1980s completely restructured the financial system of the 1990s. Deregulation and rising competition led to record numbers of failures among depository institutions in the U.S., especially savings and loan associations. These failures have caused tremendous taxpayer losses, which are estimated at around $200 billion in present value terms. Financial markets became increasingly volatile, with increased price movements in bond, stock, and currency markets. These events triggered both public and private sector responses, including increased regulatory standards for safety and soundness and financial innovation. Additionally, the fall of communism in Eastern Europe and the former Soviet Union, now known as the New Independent States (NIS), as well as the trend toward trading blocks, including the continuing process of European unification and the North American Free Trade Agreement (NAFTA) between the U.S., Canada, and Mexico, have greatly increased the demand for growth capital in a global sense.
Long‐memory and Nonlinearity: A Time Series Analysis of Stock Returns and Volatilities
Authors: Crato Nuno , de Lima Pedro J.F.
Published: January 2008

This paper is focused on two particular issues related to the stochastic structure of stock prices: linear long‐memory and nonlinearity.
Predicting the Volatility of Stock Prices Using ARCH Models, with UK Examples
Authors: Taylor Stephen J.
Published: January 2008

ARCH models can be used to predict volatility and to enhance option pricing methodologies. A guide to these models is provided and illustrative results are presented for the prices of Shell stock traded in London.
Money Growth and Supply Shock Effects on Consumer Leverage, Consumption and Financial Wealth
Authors: Taube Paul Michael
Published: January 2008

In an intertemporal decision framework, borrowing and wealth holding decisions will incorporate information relevant to future income realizations. One channel for monetary and real disturbances to influence real activity is through revised anticipations of future income. In this study, evidence was uncovered for contemporaneous nominal shock effects on changes in household leverage with nominal and real shock effects uncovered for the growth of nondurables and services consumption and real financial wealth holdings. Evidence was found for potential opportunities to use short‐run monetary policy to offset the impact of sectoral production shocks on the growth rate or the volatility of the growth rate in consumption. The monetary shock would have to be opposite in sign to the sectoral production shock. A similar feature was found for the financial asset holdings. Evidence was uncovered for volatility and growth rate trade‐offs.
Linkages in US and World Sugar Futures Contracts
Authors: Arguea Nestor , Harper Richard K.
Published: January 2008

In this paper we examine the relationship over time of the No. 11 (World) and the No. 14 (US) sugar futures contracts, traded on the New York Coffee, Sugar and Cocoa Exchange. Using daily price data for a 14 year period, we examine statistical linkages between domestic and world futures contracts. Our results suggest that the US and world markets exhibit strong linkages during periods when US imports are under tariff (1977–1982), but the US market is effectively insulated from world price changes by the operation of the quota program (1982–1990). The pattern of causality runs from the world to the US market during the tariff period. The US market does not appear to influence world market prices during either the tariff or the quota period.
Models for Predicting Prices and Volatility Patterns in Major International Stock Markets
Authors: Theodossiou Panayiotis
Published: January 2008

This study presents various GARCH models for predicting movements (returns) and volatility patterns in major national stock market indices. These models depict that future returns in the national stock markets of Australia, Belgium, Canada, France, Italy and Switzerland are predictable from past realized returns; therefore, the stock indices for these markets violate the Martingale model. The stock market indices for Germany, Japan, the United Kingdom and the United States, however, behave as Martingale processes. Volatility patterns in these indices are predictable using past realized volatility measures.
Instabilities and Chaotic Behavior of Stock Prices in International Capital Markets
Authors: Philippatos George C.
Published: January 2008

In this paper chaos is viewed as an alternative approach to modeling complex and random appearing behavior. The spatial (static) characteristics of weekly returns and price levels for eleven International Indices are quantified. We find evidence that all countries exhibit similar static characteristics. Evidence presented supports the examination of price series instead of returns.
AN APPLICATION OF CONJOINT ANALYSIS TO CAPITAL BUDGETING: THE CASE OF INNOVATIVE LAND MANAGEMENT SYSTEMS
Authors: Zinkhan F.C. , Zinkhan G.M.
Published: January 2008

Multiattribute utility models link the relative attractiveness of a given project to the utility functions of the decision makers. Conjoint analysis is industry's most commonly used marketing research method for measuringconsumers'multiattribute utility functions (Green 1984). In this article, conjoint analysis is proposed as a methodology for measuringmanagers'utility functions regarding innovative capital budgeting proposals.
Using Fuzzy Logic in Corporate Finance: An Example of a Multinational Cash Flow Netting Problem
Authors: Turtle Harry , Bector C.R. , Gill A.
Published: January 2008

Recent globalization of markets has led to corporate activities that span numerous national boundaries within a single multinational corporation. We address the particular problem of cash flow management in a multinational setting. Uncertainty regarding changes in exchange rates, differences between currency bid and ask prices, possibly unknown changes in both lending and borrowing rates, and uncertain cash flows from subsidiaries make this problem difficult to specify in a traditional crisp environment. In this paper, we show how fuzzy programming techniques can be employed to handle the general problem of multinational cash flow netting. We also provide a specific numerical example comparing the results of the crisp and fuzzy contexts with the aid of sensitivity analysis.
Real Exposure to Foreign Currency Risk
Authors: Schnabel Jacques A.
Published: January 2008

The Adler‐Dumas regression approach to foreign currency exposure measurement and hedging is examined in the presence of an uncertain domestic inflation rate. The assumption made here is that the investor is primarily concerned with the real, and not the nominal, value of the domestic currency value of his foreign currency cash flow. A revised measure of exposure, real exposure, is developed and shown to exhibit a numerical value less than that of the Adler‐Dumas measure. A revised optimal hedging amount which minimizes the variance of the investor's real terminal cash flow is calculated. It is shown to exhibit a numerical value less than that of the Adler‐Dumas optimal hedging amount. Thus a financial manager who ignores the positive correlation between the domestic inflation rate and the exchange rate would tend to overstate his company's exposure and engage in excessive foreign currency hedging. The correct exposure measure and the appropriate amount of foreign currency hedging can be obtained by employing inflation‐adjusted, rather than nominal, cash flows.
The Effects of Ownership Structure on Value Added‐Based Performance
Authors: Pavlik Ellen , Riahi‐Belkaoui Ahmed
Published: January 2008

Following the recognition of the separation of ownership and control in the large firm espoused by Berle and Means (1932), a debate ensued on the possible effect of such separation on the value/or performance of the large firm. This controversy was evidenced in both theoretical and empirical studies on the relation between the allocation of shares among managers and non‐managers, and corporate value/or performance (Jensen and Meckling, 1976; Stulz, 1988; Morck, Schleifer and Vishny, 1988; Demsetz and Lehn, 1985; Holderness and Sheehan, 1985; Hermalin and Weisbad, 1987; and Riahi‐Belkaoui and Pavlik, 1992). Empirical studies focused specifically on the relationship between Tobin Q or accounting‐based profit measures of performance, and equity ownership, yielding mixed results.
Investment Risk Concepts and Measurement of Risk in Asset Returns
Authors: Alles Lakshman A.
Published: January 2008

The theory of finance is built around return and risk concepts and a basic tenet of finance is that there is a trade off between the risk and returns of assets. As such the measurement of risk goes to the very core and foundation of the theory of finance. Given that the main theories of finance have been maturing over several decades of discussion and debate, one would imagine that a concept as fundamental as the measurement of risk would be a well settled issue by now. On the contrary, the recent finance literature shows ample evidence that risk measurement and risk concepts are drawing continued scrutiny from academic researchers. This is because there are several alternative, and competing ways in which risk can be conceived of and it is not clear which of the alternative concepts is most appropriate. Each concept of risk can be measured or estimated in several ways as well. Estimation methods can be diverse in their precision. Risk measurement can be further complicated by the fact that risk is not a static feature. Risk changes over time. Whether risk changes can be modelled satisfactorily is a major challenge taken up by researchers.
Electric Utility Performance and CEO Compensation
Authors: Hogan Stephen , Robinson Steve
Published: January 2008

Empirical analysis does not yet converge on a unique set of factors which determine CEO compensation within the electric utility industry. There is some evidence, for example, that compensation and firm size are positively related, and that compensation and accounting profitability are either unrelated or negatively related (Carroll & Ciscel, 1982; Hirschey & Pappas, 1981). On the surface, these findings argue against the need for incentive programs within the utility industry since regulation itself assures adequate firm profitability.
Pay for Performance: Does Disclosure Matter?
Authors: Byrd John , Hickman Kent
Published: January 2008

Responding to a public outcry about the level of executive compensation in many corporations as well as the apparent weak linkage between performance and pay, on October 15, 1992, the SEC (US Securities and Exchange Commission) adopted new rules affecting corporate disclosure of compensation. These rules require that executive compensation and company performance be clearly presented, and that the compensation committee of the board of directors explain how they arrived at their compensation decisions. The new rule affects the 1993 proxy statements of all but the smallest publicly‐traded US corporations, and applies to results from the 1992 fiscal‐year.
CEO Pay and Company Performance
Authors: Sigler Kevin J. , Haley Joseph P.
Published: January 2008

This paper examines the link between CEO cash compensation and company performance. We test for the influence of CEO pay on firm performance over a cross section of companies applying the same approach that is used by Lewellen, Loderer, Martin and Blum [1992]. In our study we account for the degree of common stock ownership by the CEO of each company as well. We find a positive and significant connection between the pay of CEOs and the performance of their respective firms. From our results it appears that CEO pay is used to align the interests of shareholders with company CEOs, reducing agency costs within the firm.
Adaptive Decision Support Systems for Evaluating Risk and Uncertainty in Capital Investment Decisions: Opportunities for Future Research
Authors: Accola Wilton L. , Agrawal Surendra P. , Holsapple Clyde W.
Published: January 2008

The extensive normative literature on capital budgeting decision models tends to ignore many factors that influence choice processes. This paper identifies task factors, context factors, and decision maker factors which influence perceived risk in capital budgeting decisions. Central issues explored in the paper are (a) whether some context and decision maker factors can be included in a capital budgeting decision support system's knowledge system, and (b) whether a decision support system can adapt its choice models and interface to different decision situations based on knowledge about task factors, context factors, and decision maker factors.
Effect of Risk on the Use of Performance‐Contingent Compensation
Authors: Kimmel Paul , Kren Leslie , Schadewald Michael
Published: January 2008

The separation of ownership from control in large public corporations and the resulting conflict of interest between shareholders and managers is a fundamental problem in corporate governance. From the shareholders' perspective, an effective compensation contract is one that aligns the manager's incentives with shareholder interests. Numerous studies have investigated the use of performance‐contingent compensation to achieve this linkage, as well as the use of alternative control mechanisms. This study extends this research by examining the effect of risk on the use of performance‐contingent compensation. The effect of risk on compensation contracts is of interest to accountants because of accounting's stewardship role in the organization. In particular, because significant accounting resources are directed toward corporate control, it is of interest to accountants to know when firms are likely to place more or less emphasis on performance‐contingent compensation.
A Comparative Study of Alternative Indicators of Budgetary Slack
Authors: Leavins John R. , Omer Khursheed , Vilutis Arv
Published: January 2008

The objective of this study was to empirically test Wolf's [1971] proposed objective indicator against a subjective indicator of budgetary slack. This was accomplished by correlating two indicators of budgetary slack with each other and with each of the slack contributing factors identified in the literature. A moderately positive relationship was found to exist between the subjective and objective indicators of budgetary slack. A strong relationship between the linkage of the budgetary system to the system of rewards and the two indicators of budget slack was indicated. Budget pressure revealed a moderately positive relationship with budgetary slack. The test for the relationship for budgetary participation and the firm's economic environment with the indicators of budgetary slack produced mixed results. The correlation coefficient for the degree of decentralization was weak but positive with the objective indicator and slightly negative with the subjective indicator of slack. Since budget slack is a commonly observed phenomenon in business organizations, it is important to discover practical ways to obtain an indication of the creation of slack in an organization. Such monitoring of slack would lead to better utilization of company resources and the achievement of operational efficiency. The use of an objective indicator holds promise for internal monitoring of slack by companies because an in‐house questionnaire may not be dependable. In spite of its limitations, this study takes an important first step in this development.
Shareholders' Perceptions on The Usefulness Of MD&AS
Authors: Epstein Marc J. , Pava Moses L.
Published: January 2008

This paper reports the results of an extensive study of the effectiveness of MD&As. Our primary research question can be stated as follows: To what extent do MD&As, as currently issued, meet the self‐perceived needs of individual investors? To answer this question, we examine the responses to a survey questionnaire. The content of the questionnaire was based on an earlier survey conducted in 1973 by Epstein (1975). Our results are based on a random sample of shareholders owning at least 100 shares of one stock on either the New York Stock Exchange or the American Stock Exchange. We conclude that the MD&A section of annual reports is a potentially useful investment tool. In its current state, however, investors read it less, and rank it as less useful than the financial statements. Our survey indicates that it is not difficult to understand. We attribute its poor performance, in part, to a lack of credibility, and, to a larger extent, to a lack of prospective information. Evidence on the relationship between demographic characteristics and usefulness shows that wealthy, inexperienced investors are the only group of investors who are currently using the MD&A in any substantial way.
Risk Management in Global Finance
Authors: Baker James C.
Published: January 2008

This special issue is devoted to a discussion of some major risks facing multinational companies (MNCs) in the operation of their global business. Multinational business is carried out in many ways including international trade and investment activities. Such enterprise may be confronted by a number of risks. Among these, the most important are foreign exchange risk, credit risk, interest rate risk, and political risk.
Global Foreign Investment Insurance The Case of MIGA with Comparisons to OPIC and Private Insurance
Authors: Baker James C.
Published: January 2008

The World Bank established the Multilateral Investment Guarantee Agency (MIGA) in 1985 as the first truly global agency which insures foreign investments against political risks. MIGA is now in its fifth full year of operations and has been more successful than originally forecast. This paper will discuss the formation of MIGA and includes an analysis of its operations to date. When appropriate, comparisons will be made between MIGA operations and those of the U.S. investment insurance agency, OPIC, the Overseas Private Investment Company, as well as private market insurers. Selected cases of MIGA guarantees are discussed in the paper.
Corporate Finance and the Legal Environment — An Introduction
Authors: Fields M. Andrew
Published: January 2008

An appreciation of the legal environment becomes more important with each passing year for anyone involved in corporate finance. A casual glance at the morning newspaper will usually provide a quick reminder of just how much the two areas are interrelated. The current debate in the United States concerning health care legislation may well result in a package that has a tremendous impact on many companies and industries. Tax issues have been in the news recently as well. There have been a number of significant changes in tax regulations during the past decade, including the legislation just passed by the U. S. Congress in 1993. Smoking continues to generate considerable controversy, and one result has been courtroom battles between tobacco companies and local governments over antismoking ordinances. During the last year, the DuPont Corporation has been defending itself in court over charges that one of its products caused substantial damage to farm crops. Guilty or not, the risk and expense from product liability is an enormous problem confronting almost all companies today. Texaco settled a lawsuit with Pennzoil in 1988 for $3 billion in damages stemming from a battle for the control of Getty Oil. Texaco won that battle, but suffered a very serious setback in the courtroom.
Art as an Investment: A Portfolio Allocation Analysis
Authors: Tucker Michael , Hlawischka Walter , Pierne Jeff
Published: January 2008

The role of art in a portfolio of investments is examined using Sotheby's art index as & proxy for returns on art investments. Historical data for portfolios of artwork and other financial securities over the period 1981 to 1990 are used to construct the optimal mean‐variance portfolio. The art investment receives over 36% of this portfolio. This large percentage can be traced in part to the low correlation of art returns to the returns of other financial securities. Clearly investments in art deserve the serious consideration of mean‐variance investors
Macroeconomic Risk and the Determination of Expected Returns on Stocks
Authors: Sill Keith
Published: January 2008

This paper empirically investigates the link between expected returns on stocks and a set of variables that describe the general state of economic activity. The model relates the first and second conditional moments on stock excess returns to the conditional variances and covariances of a set of prespecified macroeconomic factors. The estimation results suggest that industrial production growth, inflation, and short‐term interest rates help explain the behavior over time of expected excess returns on stocks.
R/S Analysis and Long Term Dependence in Stock Market Indices
Authors: Nawrocki David
Published: January 2008

Recent studies indicating long term dependence in stock market indices have found a mean reversion process. However, studies using rescaled range (R/S) analysis have not found evidence of a mean reversion or ergodic process. Instead, evidence from these studies indicate either long term persistence in a nonperiodic cycle or short run Markovian dependence with no long term persistence. The purpose of this paper is to study the issue of long term dependence using rescaled range analysis. The empirical results obtained in this study support the persistent dependence/nonperiodic cycle results and suggest that the dependence arises from the general economic cycle.
Measuring Long‐term Performance for Advanced Manufacturing Technology: An International Perspective
Authors: Bayou Mohamed E. , Reinstein Alan
Published: January 2008

New developments in the manufacturing industries require reexamining both the performance evaluation techniques and the concept of performance itself. As to evaluation, the return on investment model (ROI), popular during the 1950s throughout the 1970s, has faced much criticism that in the 1980s and the 1990s new financial and nonfinancial performance evaluation methods gained popularity. On a world‐wide basis, the increasing adoption of automation and the trend toward more centralization have changed the concept of performance. No longer based on motivating and directing the labor force, performance now aims to obtain the best results out of robotic assets and flexible manufacturing systems (FMS), which require new managerial attention and attitude. These factors have made the concept of performance more vague and difficult to define and measure. After comparing and contrasting how multinational and domestic companies evalu‐ate corporate performance, the study reconstructs the concept of performance, bringing forth fundamental propositions (axioms) of the long‐run dimension of measurement and utilization as the core of performance. Developing utilization as a dynamic concept with constantly changing components, a long‐term discounted‐cash‐flow return on investment (DCF‐ROI) model is developed and exhibited as a comprehensive measure of utilization. The DCF‐ROI model fits harmoniously into the mechanisms of the new cost reduction techniques of target and kaizen costing.Kaizen, a Japanese term, is translated into English as “improvement,” i.e., a continuous accumulation of betterment activities over the long run. Target and Kaizen costing are conditioned by top management's target profit which can take the form of a DCF‐ROI objective. This kaizen‐oriented DCF‐ROI is demonstrated as a moving average ratio that captures the dynamic utilization through its progression over ten years. Limitations of the model and recommendations for further research are also presented.
Black Scholes, As Compared to Observed Prices: An Empirical Study
Authors: Sarkar Salil K.
Published: January 2008

The Black Scholes option pricing model has been put to extensive application both in research and in actual market place. However, the inputs for the model are generally obtained from the stock market which is considered less efficient than the options market. This leads to a difference in calculated price and observed price. This paper studies the bias empirically.
A Case Study of a Failed Call Options Market
Authors: Ariff M. , Chan P.K. , Johnson L.W.
Published: January 2008

Three years after the introduction of exchange‐traded options on the American scene, a call options market was made with ten popular common stocks in Singapore in early 1977. Only calls were traded and no puts were introduced. After six months of trading actively, volume dwindled, and the market was withdrawn in early 1980. Three currency options markets introduced in 1987 continues to thrive at the time of this study. The reason for the demise of the call options market is mainly the significant mispricing of the contracts as most contracts were systematically above the theoretical fair prices. Low volatility in the spot market after the calls were introduced, availability of alternative speculative instrument for traders, high transaction costs and the lack of knowledge about the complexity of options trades are suggested as reasons for the failure of the market. As a new options market has been introduced again in March, 1993, it is worthwhile to learn from the past.
Implied Volatility vs. GARCH: A Comparison of Forecasts
Authors: Bartunek Kenneth S. , Chowdhury Mustafa
Published: January 2008

In this paper we compare three types of forecasts of the volatility of equity returns series. The first is an historical estimate based on a simple sample standard deviation. A second is an estimate found by implying the volatility using the Black‐ Scholes formula. Finally, the third is an estimate obtained by forecasting with an estimated generalized autoregressive conditional heteroscedasticity (GARCH) model.
Changes in Corporate Debt Policy: Information Asymmetry and Agency Factors
Authors: Crutchley Claire E. , Jensen Marlin R.H.
Published: January 2008

This paper tests how changes in information asymmetry and agency variables affect changes in debt policy. Unlike previous studies that examine levels of variables to explain what may determine debt policy, we calculate yearly changes in variables to provide a stronger test of causal relations. By examining changes in agency and information variables, we are able to identify factors that cause firms to change their optimal capital structure. We find institutional ownership has become a substitute for debt financing due to increased shareholder activism. In addition, we find support for Jensen's free cash flow theory, mixed support for informational asymmetry, and no support for Jensen and Meckling's agency model.
Determinants of Capital Structure: An Empirical Analysis of Firms In Industrialized Countries
Authors: Sivarama Krishnan V. , Moyer R. Charles
Published: January 2008

This paper examines the determinants of capital structure of large corporations of industrialized countries (excluding financial institutions and regulated utilities), using five years of data ending in 1992. The study employs variables reflecting differing theoretical arguments on capital structure. We find evidence similar to previous empirical research using data for American companies. In particular, the pecking order theory of capital structure, with past profitability being the major determinant of leverage, is supported. For U.S. firms, but not for Japanese firms, tax factors also appear to be important determinants of capital structure. In general, variables proxying for firm size and growth also appear to be significant variables in explaining capital structure variations. Corporations from Germany and Italy appear to be most different from the American companies, with the former having lower and the latter higher leverage ratios relative to the U.S. corporations. Japanese companies appear to use less long‐term leverage, a result that is consistent with the close ties between Japanese firms and their banks — a relationship that permits a greater use of short‐term financing than is true in the U.S.
Further Evidence on the Relation Between Corporate Ownership Structure and Debt Policy
Authors: Wansley James W. , Cary Collins M. , Dutta Amitabh S.
Published: January 2008

Recent studies have shown that the level of insider holdings and firm value are related in a nonlinear manner. Other studies find that the level of debt in a firm's capital structure declines with increases in its growth options. The principal‐agent relationship maintains that an increase in the equity stake of insiders reduces the agency costs of issuing debt. Extension of this premise suggests, however, that the agency costs of debt rise with extremely high levels of insider holdings as insiders consume perquisites to the detriment of outside stakeholders, revealing a nonlinear relation attributable to agency costs. We examine the relation between debt financing and insider holdings for 1894 firms at the end of 1989. In keeping with the hypothesized relation, the cross‐sectional regressions of leverage on insider holdings reveal significant nonlinearities. Leverage first rises with insider holdings and then declines. The positive relation between leverage and insider holdings returns as inside ownership approaches 100 percent. These results hold for two different measures of leverage and after controlling for industry differences in leverage, tax shields, firm size, growth options, and earnings or return volatility. The results also hold when regulated firms are excluded from the analysis.