bluuebunny/crossref_metadata_2025 huggingface dataset:
Protection in a Changing and Volatile World A Study of Political Risk Insurance Providers
Authors: Anaam Hashmi M.
Published: January 2008

A widely used strategy to cope with the dangers of foreign investment by hedging against potential losses is political risk insurance. All multinational corporations are subject to political risk perils. Political risk is defined as the adverse effect on the value of a business arising out of direct or indirect actions by a foreign government. Broadly speaking, there are six different types of political risk: confiscation, expropriation and nationalization; contract repudiation and frustration; unfair regulatory environment; currency inconvertibility; contingency; and war risk. Similarly, policies available can be defined according to these six categories. In summary, political risk insurance addresses losses which occur because of politically motivated decisions.
The Business Judgement Rule vs. the Efficient Market Hypothesis
Authors: Margotta Donald G.
Published: January 2008

Contests for corporate control often create a conflict between a legal principle, the business judgment rule (BJR), and an economics principle, the efficient market hypothesis (EMH). The BJR focuses on the process of decision making and requires managers to be guided by their integrity and diligence. The EMH focuses on outcomes and expects decisions to be guided by stock prices. Ideally the principles do not conflict, but when they do, when the market disagrees with managers' decisions, it is important to understand why. This article discusses the principles, why they sometimes conflict, and circumstances when one should outweigh the other.
Wealth Effects from Acquiring Bankrupt Firms
Authors: Bartunek Kenneth , Madura Jeff , Tucker Alan L.
Published: January 2008

Acquisitions of bankrupt firms can be beneficial because the bankrupt targets may be more receptive to acquisition offers for the purpose of survival, courts can override any resistance that may occur, information on the target is disclosed within the formal reorganization plan, acquirers can accrue tax benefits, and acquirers may assume favorable debt contracts. However, two disadvantages of acquiring a bankrupt firm are higher costs of completing the conversion and the high degree of uncertainty about the target's future cash flows. Results of our analysis suggest that firms announcing acquisitions of bankrupt targets experience favorable wealth effects. Thus, the market appears to anticipate that the present value of future cash flows derived from the target will exceed the cost of the acquisition. Our analysis also found that acquisitions of bankrupt firms yield more favorable wealth effects than acquisitions of healthy firms. The acquisitions of bankrupt firms were especially well received by the market when the acquirer was the sole bidder and when the target's business was closely related to that of the acquirer.
Corporate Acquisitions of Fine Art: Measuring the Underlying Motivations
Authors: LeClair Mark S. , Doornbosch Kathy
Published: January 2008

Corporate involvement in the acquisition and display of fine art has expanded from a relatively unknown practice undertaken by a few businesses, to a common activity involving hundreds of firms. This study presents the results of a survey of 450 corporations (with 130 respondents) aimed at measuring the motivations behind the creation of corporate collections. Such collections may be held to improve employee morale and retention, to enhance the public image of the corporation, or to bolster the bottom‐line. In addition, a number of non‐monetary reasons are frequently cited. Corporations may be hesitant to reveal their true motives for holding art, since such a revelation may undo the very reasons for acquiring such a collection (enlightenment becomes simple self‐interest). Unlike previous studies of this kind, the questions are designed to determine the motivating factors behind these collections, without relying solely on the firms to reveal those motives. The results indicate that although a variety of motives, both pecuniary and non‐pecuniary, underlie these acquisitions, the former tend to dominate.
The Informational Efficiency of the Art Market
Authors: Goetzmann William N.
Published: January 2008

Two measures of informational efficiency are applied to the market for paintings. The first is a measure of market efficiency as captured by serial dependency in returns. The serial correlation in an index of art returns suggests the possibility of persistent trends in the art market, however there is no empirical evidence that these trends can be easily exploited. The second is a measure of “price risk,” or instantaneous uncertainty about the immediate resale value of a work of art. The magnitude of the price risk suggests that there is a major role for dealers in the art market. Using historical data, I find that the price risk has been declining since the beginning of the painting market, indicating increasing informational efficiency. Paintings are like stocks and a dealer is like a broker. Someone makes money, then there is someone else who's really good at investing in stocks, and he tells the investor what to buy. If someone tells you to go to a good gallery rather than one that's not so good, you'll get a painting that might turn out to be worth something, a painting you like that's also a good investment. Its like having a broker tell you what stocks to buy. Andy Warhol
The Cointegration of Auction Price Series
Authors: Taylor William M.
Published: January 2008

It is found that one unit root, common trend is shared by the quarterly auction price series of five frequently auctioned types of stamps. The common trends analysis provides specific, stationary linear combinations, or cointegrating portfolios, of the auction price levels. The quarterly returns for the system of cointegrated auction prices can be represented by an error correction model using past returns and cointegrating vectors. There is evidence of a positive relationship between changes in the common trend and leading changes in industrial production
An Introduction to the Collectible Sportscard Market
Authors: O'Brien Thomas J. , Gramling Lawrence J. , Rodriguez Mauricio
Published: January 2008

The primary and secondary market activity in collectible sportscards has evolved into that of a primitive, but organised financial market. This report reviews some aspects of the collectible sportscard market. The objective of the report is to introduce the sportscard investment medium to finance professionals, including those interested in the research potential of the market. The report includes an empirical analysis of the performance of some selected sportscard portfolio strategies for the period between March 1988 and December 1993. Sportscard collecting has evolved from an adolescent hobby of the 1950s into an active national market, estimated to involve approximately $5 billion and 3 million persons and served by a network of dealers and price information suppliers. The evolution of the sportscard market into its current state is described in this presentation. The description includes an empirical analysis of the performance of some selected sportscard portfolio strategies for the period between March 1988 and December 1993. The objective of the report is to provide information to those considering collectible sportscards as an investment medium and to those who might be interested in conducting financial research with collectible sportscard pricing data.
Mean Reversion in Stock Prices: An Error‐Correction Approach
Authors: Cochran Steven J. , DeFina Robert H.
Published: January 2008

Several recent studies have indicated the existence of a predictable component in stock prices. This study examines the sources of this serial correlation using error‐correction models. The results show that autocorrelated economic variables can generate serial correlation in stock returns. After these effects are accounted for, however, significant serial correlation in stock prices remains. The activities of noise traders and inefficiencies in the pricing of securities, within the context of limitations to the arbitrage process, are suggested as additional sources of serial correlation in stock prices.
Sensitivity of Bank Equity Returns to the Level and Volatility of Interest Rates
Authors: Mansur Iqbal , Elyasiani Elyas
Published: January 2008

This study attempts to determine whether the level and volatility of interest rates affect the equity returns of commercial banks. Short‐term, intermediate‐term, and long‐term interest rates are used. Volatility is defined as the conditional variance of respective interest rates and is generated by using the ARCH estimation procedure. Two sets of models are estimated. The basic models attempt to determine the effect of contemporaneous and lagged interest rate volatility on bank equity returns, while the extended models incorporate additional contemporaneous macroeconomic variables. Contemporaneous interest rate volatility has little explanatory power, while lagged volatilities do possess some explanatory power, with the lag length varying depending on the interest rate series used and the time period examined. The results from the extended model suggest that the long‐term interest rate affects bank equity returns more adversely than the short‐term or the intermediate‐term interest rates. The findings establish the relevance of incorporating macroeconomic variables and their volatilities in models determining bank equity returns.
The Volatility of the Pe Ratio and its Components: A Contrast of Japanese and U.S. Markets
Authors: Agnes Cheng C.S. , Kathy Hsu H.Y. , Noland Thomas R.
Published: January 2008

This paper extends previous research by reexamining the difference in cross‐sectional variability of Japanese and U.S. price‐to‐earnings (PE) ratios. A simple model is developed to decompose the variance of the PE ratio into three components: the variance of the price‐to‐book (PB) ratio, the variance of the book‐to‐earnings (BE) ratio and the covariance of the PB and BE ratios. We analyze the behavior of the cross‐sectional variability of the PE ratio and its components and compare the behavior of these ratios across the U.S. and Japanese markets. We find that the cross‐sectional variability of the PE ratio in the Japanese market is consistently lower than that of the PB ratio and the converse is true for the U.S. market. The cross‐sectional variability of PE ratios in Japan is lower than that in the U.S. and the converse is true for the PB ratio. Our results are inconsistent with those reported by Bildersee et al. and indicate that the main factor causing the differences between the cross‐sectional variability of PE ratios and PB ratios is the high negative covariance of the PB and BE ratios.
Consequences of Financial Reporting Requirements on Managerial Decisions: The Case of U.S. Multinational Corporations and Foreign Currency Translation
Authors: Spiceland J. David , Trapnell Jerry E. , Behrens Michael L. , Kablan Abdel
Published: January 2008

This article reports the results of tests used to detect shifts in the systematic risk of multinational corporations concurrent with regulations mandating new financial reporting requirements for foreign currency translations. Results indicate significant beta shifts, suggesting that management undertook specific suboptimal actions to counteract the effects of the regulations and that those actions were responded to by the marketplace in the form of a reassessment of systematic risk. It is further indicated that the market reaction varies according to both the location and magnitude of firms' foreign investments.
Valuation of Executive Stock Options
Authors: Bey Roger P. , Johnson Larry J.
Published: January 2008

The executive stock option (ESO) valuation model developed in this research amends the popular exchange traded option pricing models such as Black and Scholes (1973), Whaley (1981), and Cox, Ross, and Rubinstein (1979) to include economic features of the ESO contract that previously have been ignored. One of these features is the non‐transferability of the ESO, which creates a situation where the ESO might be exercised when an otherwise identical exchange traded option would not. Another feature is the hybrid nature of the ESO; it is not solely either an American option or a European option. The results of the comparative statics indicate that the impact of the non‐transferability of the ESO value is significant, whereas the hybrid feature of the ESO results in values that are very similar to American option values. The economic implication is that if an American or European option model is used to value ESO's, the probability is very high that a wealth transfer between management and shareholders will occur.
Making Capital Budgeting Decisions in Multinational Corporations
Authors: Booth Laurence
Published: January 2008

Academic research has made remarkable contributions to our knowledge as to how capital markets behave. This research has in turn stimulated changes in the practise of finance. From the seminal contributions of Markowitz (1952) and subsequently Sharpe (1964) we have learnt how diversification affects the risk of holding securities. This has stimulated practical innovations in index funds, risk and style based bench‐marking of portfolio performance as well as more precise methods for estimating capital costs. From the contributions of Black and Scholes (1973) we have also learnt how financial and real options can be valued. This in turn provided the necessary condition for the development of the huge market in derivative securities. Who could have issued LYONS, Nikkei puts, bull floaters and caps and collars if Black and Scholes had not first made the key insight that you could value these securities indirectly by creating a risk free portfolio? Finally, from Jensen and Meckling (1976) we have rediscovered the problems of incentive structures, and the importance of “agency” problems. This in turn has stimulated significant changes in the design of financial securities, such as event risk clauses in bonds, to protect against corporate opportunism, as well as providing the intellectual motivation behind the dramatic developments in management and leveraged buyouts. The above developments have been recognised in two Nobel prizes with most probably more to come.
Risk Analysis and Capital Budgeting Techniques of U.S. Multinational Enterprises
Authors: Shao Lawrence Peter , Shao Alan T.
Published: January 2008

The purpose of this study is to examine the capital budgeting strategies that are used by foreign subsidiaries of U.S.‐based multinational enterprises. While the results indicated a preference for sophisticated capital budgeting techniques as the primary method of analysis, the actual use of sophisticated capital budgeting techniques by foreign managers may not be as widespread as expected by financial theorists. Although it was found that certain environmental and company‐specific factors influenced the level of sophistication of capital budgeting practices used by U.S. foreign subsidiaries, the associations were small and had only minor explanatory significance. The results showed that foreign subsidiaries exposed to high levels of political and financial risk tended to use sophisticated capital budgeting strategies. Subsidiaries characterized by high levels of financial leverage and high cost of capital requirements also employed advanced capital budgeting strategies. Multinational enterprises (MNEs) have many options available to them in terms of how they manage their foreign subsidiaries. Traditionally, most major policy decisions were made at the parent firm's headquarter office while foreign subsidiaries had few opportunities to influence major corporate decisions. Today, more companies are using a flexible approach which involves setting strategic goals at the home office and allowing local managers to implement their own specific policies. An important question in this study involved determining how effective local foreign managers were in implementing their capital budgeting processes. As U.S.‐based MNEs continue to expand their operations abroad, there is an increased need to examine which financial decision models are actually used by subsidiary managers to deal with the increased complexity of investing in foreign countries. Unlike traditional capital budgeting analysis, international analysis is a considerably more complex process. These complexities occur for a number of reasons including complicated cash flows estimates, changes in foreign exchange rates, different accounting systems, potential for blocked funds, and political risk considerations. These factors are rarely experienced by traditionally domestic U.S. firms. To maintain a competitive edge, MNEs must continue to use the most efficient approaches available to them. This study provides a detailed analysis of the capital budgeting practices that are actually being used by foreign subsidiaries of U.S.‐based MNEs. The paper is organized in the following manner. Section I provides a brief overview of the theoretical and practical issues of international capital budgeting analysis. Section II focuses on the areas of data collection, questionnaire design, and environment‐specific and company‐specific factors. Section III discusses usage of capital budgeting techniques, adjustment and assessment of project risk, and factors influencing capital budgeting policies. The final section presents some findings from this study.
Stock Price Reaction Around Changes in Product Prices
Authors: Iqbal Zahid , Shetty Shekar
Published: January 2008

The main purpose of this study is to investigate product price changes from the stockholders' perspective. Our evidence indicates that stockholders react positively to a price increase at the time of the Wall Street Journal announcement. In the event of a price cut, stockholders show little reaction. In a longer interval, however, both price increases and price cuts are associated with negative stock returns. Our analysis also suggests that firms that initiate price changes experience declining sales prior to the price change decisions.
An Examination of the Differential Information Hypothesis
Authors: Huang Gow‐Cheng , Madaris Michael B.
Published: January 2008

This study examines the differential market reaction to unexpected dividends between large firms and small firms by employing the Cumulative Sum Technique of Hillmer and Yu (1979). The technique allows the incorporation of both the magnitude of the security price adjustment and the speed of the price adjustment into the analysis. We provide additional information by adjusting for the firm size effect. Contrary to the results from previous studies, the empirical evidence presented here suggests an insignificant difference in market reaction between different firm‐size portfolios.
Covariance Analysis as an Alternative Event‐Study Methodology
Authors: Hogan Stephen
Published: January 2008

Today the most common way of testing for the presence of abnormal stock market returns is by following the pioneering work of Fama, Fisher, Jensen, and Roll (1969). Their benchmark approach examines whether or not the stochastic behavior of firms' market‐conditional returns is significantly affected by some specific event like an earnings announcement, CEO's death, or brokerage house recommendation.
Ethics, Institutions, and Business Relations: A Study of Collusive Incentives for Institutional Shareholders to Monitor Firm Managers
Authors: Eakins Stan , Mishra Chandrasekhar
Published: January 2008

Our theory asserts that at low levels of ownership institutions may support management to preserve other business relations. At higher levels of ownership, institutions more actively monitor management because the gains from equity ownership exceed the cost of management review and of possible lost business. Corporate performance first decreases and then increases with the institution's ownership. Furthermore, the institutional ownership‐performance relation, especially the critical ownership level that separates management aligned institutions from efficiently monitoring ones, varies with management specific parameters (managerial effort disutility), firm specific parameters (firm size) and whether or not the institutional owner is pressure sensitive.
On the Shareholder Wealth Maximization Objective of Corporate Governance: The Case of Leveraged Recapitalizations
Authors: Walker M. Mark
Published: January 2008

Increases in stockholder wealth around leveraged recapitalization (recap) announcements are related more to reductions in the firm's financial slack than improvements in operating efficiency. Moreover, while recaps significantly reduce the firm's workforce and asset base, they do not improve operating profitability. These results support the argument (often espoused by non‐finance writers) that the market for corporate control is inefficient and, in many cases, outright destructive. Alternative systems of corporate governance should be explored.
On Globalization and Capitalization
Authors: Mehmet Ozay
Published: January 2008

The last two centuries, roughly from the publication of Adam Smith's The Wealth of Nations, have witnessed a remarkable process of globalization of Western capitalism. The principal institutions facilitating this process were originally the chartered companies and, in the more recent times, the multinational corporations headquartered in the West. Search for global profits has always been the driving force behind this globalization. But the deeper inner logic of this process is capitalization on a world‐scale.
Effects of Bailout Legislation: Implications from the Stock Market for Thrift Shareholders
Authors: Hudgins Sylvia C. , Gregory Richard
Published: January 2008

The examination of the differential effects of bailout legislation on well‐capitalized versus under‐capitalized thrifts is the focus of this study. The study examines return responses for portfolios of thrift stocks, formed on the basis of capitalization, to news events concerning bailout funding leading up to and concluding with the President's signing of the Competitive Equality Banking Act of 1987 (CEBA). The results indicate thrifts react differently to legislative news events based on their capitalization levels. This is evidenced by 1) the presence of abnormal returns for portfolios of relatively well‐capitalized and relatively under‐capitalized thrifts, 2) the trends in the size of abnormal returns across well‐capitalized (under‐capitalized) portfolios as the average level of capitalization decreases (increases), and 3) the opposite signs of abnormal returns for relatively well‐capitalized versus relatively under‐capitalized portfolios.
The Impact of Interstate Banking Legislation on Target and Buyer Bank Stock Returns
Authors: Black Harold A. , Fields M. Andrew , Schweitzer Robert L.
Published: January 2008

There has been a loosening of the regulation governing the market for corporate control in the banking industry. Nearly every state in the U.S. has passed some form of interstate banking legislation that allows out‐of‐state banks to acquire local banks. Previous research has shown that the market reaction to this state legislation is both positive and significant for affected bank stocks. What is not clear from prior research is whether all banks are positively affected by the legislation or just banks that are likely acquisition targets. This study measures the impact on both subsequent buyer and target banks. Results indicate that the reaction is a general effect reflecting positive expectations for the industry. The buyer group sustains a significant five percent increase during the event window and the target group increase is over seven percent. The higher return for the target group may reflect an additional acquisition premium. However, the difference between the two groups is not significant. Tests utilizing market value as a proxy for acquisition attractiveness demonstrate that size does not impact the results.
Changes in Corporate Capital Structures: Evidence from the 1986 Tax Reform Act
Authors: Kim Chang‐Soo
Published: January 2008

This paper employs choice‐theoretic models to study the impact of the 1986 Tax Reform Act on firms' issue behavior and the determinants of corporate capital structures. Choice‐theoretic models allow researchers to examine firms' leverage decisions at the margin. Both parametric and semi‐parametric estimations are employed to perform a more precise statistical inference. The results show that firms tend to issue more debt after the 1986 Tax Reform Act. The results also support the theories based on the trade‐off between tax shields and financial distress costs, corporate non‐debt tax shields, and agency costs inclusive of those from free cash flows.
Third World Debt Default Announcements and Market Learning: Effects of Sequential Debt Defaults on U.S. Banks
Authors: Philippatos George C. , Viswanathan K.G.
Published: January 2008

From 1982 to 1987, several Third World borrowers defaulted on their loans to U.S. creditor banks. The defaults resulted in the deterioration of the quality of loan assets held by the banks. The purpose of this study is to analyze the market reaction to a series of sovereign debt defaults. Specifically, we analyze eight events during the six year period to find out how the market reaction changed from one event to the next. Standard residual analysis and volatility tests are applied to a sample of 75 banks common to all eight events. The speed of adjustment to the sequential events indicates that with each event, the market becomes better informed and there is evidence of market learning. New SEC regulations requiring banks to disclose significant exposures to foreign borrowers and increasing awareness about the quality of the loan portfolio of banks helped in the market correctly evaluating the effects of defaults on the lenders.
Signalling and Mimicry: The Evidence from Firm Goal Definition
Authors: Moyer R. Charles , Rao Ramesh P. , Francois Regnard Jean
Published: January 2008

This paper tests the mimicking propositions from signalling theory as they relate to stated firm objectives and firm performance. We classify the corporate objectives of a large sample of firms and evaluate firm performance relative to these objectives. We find that poorly performing firms more frequently cite shareholder wealth maximization as their primary objective than do better performing firms. There is no evidence that firms citing a shareholder wealth maximization objective perform any better than firms with alternative objectives. Similar evidence is found for other common corporate objectives. Overall, our results are consistent with signalling theory in that non‐enforceable signals, such as proclamations of corporate objectives, are not credible signals for investors.
The Incentive Effects of Accounting Based Long‐Term Performance Plans
Authors: Brockie Leonard Barbara , Mishra Chandrasekhar
Published: January 2008

Long‐term performance contracts are awarded to top management in order to provide incentives to maximize shareholder value. We test the incentive hypothesis using 350 firms, one half of which has adopted long‐term performance plans over the period 1971–80. The analysis uses performance indicators such as earnings per share (EPS), rate of return on assets (ROA), rate of return on equity (ROE), rate of return on investment (ROI), and stock returns (ASR). In addition to using a control group of firms that did not adopt plans, the test period consists of a control period (six years prior to plan adoption) and a test period (six years following plan adoption). The results support the incentive hypothesis in that all performance indicators for the test firms improved compared to prior performance, but the performance of test firms in the period subsequent to plan adoption when compared to the control firms was not significantly different.
Nonbanking Performance of Bank Holding Companies: An Update from 1986–1990
Authors: Saxena Atul K.
Published: January 2008

There is an ongoing controversy over whether or not to extend commercial banks' nonbanking powers. Although the Glass‐Steagall Act of 1933 and the McFadden‐Pepper Act of 1927 restrict commercial banks' activities, the technological and financial innovations of the last several years have raised new questions. Whether banks should be allowed to undertake nonbanking activities? How profitable are these businesses? Whether banks will gain monopolistic powers? Will they increase FDIC's liabilities? And several other related questions. This study looks at the nonbanking activities of bank holding companies using a relatively new data source, i.e. FR‐Y11AS reports for the years 1989 and 1990. The performance of nonbanking subsidiaries is then compared with that of commercial banks and bank holding companies. Some meaningful inferences are drawn on issues such as market concentration, profitability, capitalization, and level of problem‐loans of nonbanking and banking subsidiaries, as well as, consolidated bank holding companies. Results from two prior studies are further utilized to look for possible trends. Since these studies have used the same data source (FR‐Y11Q and FR‐ Yl1AS) for the years 1986 through 1988, this facilitates a trend analysis over a five year period 1986–90. The main conclusions are that the BHC's nonbanking activities are heavily concentrated among the top five or ten firms within each activity. However, both the number of firms as well as total assets held in most nonbanking subsidiaries have declined over the five year period. Activities considered traditional, e.g. commercial and consumer finance and mortgage banking have suffered significant losses in terms of total assets and number of firms. Some interesting conclusions can be drawn from these results. First, due to the growing liberalization in interstate banking laws, BHCs can now carry on these activities in their bank subsidiaries and do not have to acquire a nonbanking subsidiary in order to capture business across state lines. Second, the glass walls separating banking from commerce may be cracking. Several states have started allowing banks to carry out some of the nonbanking activities, hence, considerably neutralizing the Glass‐Steagall Act. Insurance agencies and underwriting business of BHCs show the most significant growth over the five years, 1986–1990. Securities brokerage has held constant. Another finding is that the return on equity (ROE) for nonbanking firms has been lower than both the banking firms as well as the BHCs. However, this is mainly due to the relatively low equity capital levels for banks and BHCs. The nonbanking subsidiaries show fairly stable and relatively high capital ratios. Finally, for most part, nonbanking subsidiaries have a higher rate of problem‐loans.
Auditing Risk, Materiality & Judgement Standards: An International Comparison
Authors: Pratt Michael J. , Van Peursem Karen
Published: January 2008

In A Conceptual Framework for Auditing (Pratt & Van Peursem, 1993) it was argued that audit risk, materiality and judgement are fundamental auditing concepts which should form a part of any conceptual framework. However, it was identified that the New Zealand Society of Accountants treats these issues as guidelines only; they are not treated as fundamental issues. This paper compares the different positions in respect of audit risk, materiality and judgement that have been adopted by the various professional bodies responsible for auditing standards in English speaking Pacific Rim countries and the United Kingdom. Countries included in the study are: New Zealand, Australia, United States of America, Canada, United Kingdom, Singapore, Hong Kong and Malaysia. It is concluded that the tendency in all the standards has been to under‐emphasise these three conceptual issues, despite auditing standards and guideline frameworks that profess interest in broad theoretical issues. As a result, the auditing standards have tended to focus upon procedural ‘how to’ questions rather than more complex questions of ‘why’, or ‘how much’. It is recommended mat the auditing standard setters in all the countries included in this analysis should consider the adoption of a conceptual framework of auditing to better inform the process of standard setting, and to assist the achievement of internal consistency within the standards and guidelines.
The Warsaw Stock Market: Bear Or Bull? Lessons for New Stock Exchanges
Authors: Cutler Mary M. , Paszkowska Gabriela
Published: January 2008

Investors around the world are eager to buy shares of newly‐privatized state firms. This behavior is understandable in light of the evidence that many governments underprice initial public offerings. This paper looks at Eastern Europe's first public offerings of privatized state firms (in Poland) and finds evidence of significant underpricing. We also find that the level of underpricing was masked by special discounts and the redemption, at par, of discounted government bonds. Using conservative assumptions we conclude that underpricing was almost 30%, three times the level reflected by recorded stock prices. Our study of the new Polish stock market indicates the need for caution when using data from developing capital markets. Prices, returns, trends and market capitalization rates in Poland were affected by unique, local financial practices.
DEVELOPING DECISION RULES TO AID TAX PROFESSIONALS IN AMBIGUOUS PLANNING SITUATIONS
Authors: Hagan Joseph M. , de Korvin Andre , Siegel Philip H.
Published: January 2008

In order to allow flexibility in the enforcement of the tax law, the language used is often intentionally vague and ambiguous. This enables the government to implement the intent of the lawmakers in administering that law. However, interpreting these vague and ambiguous laws requires tax professionals to face planning situations that are complex and uncertain. Due to an increase in civil litigation, the importance of tax professionals making defensible decisions has been magnified in recent years. Carnes, et al. (1994) report that tax partners with Big‐Six accounting firms spend about 30 to 45 percent of their time resolving ambiguous tax questions. Therefore, tax professionals could benefit from models or systems (i.e., decision support systems, expert systems, artificial intelligence) that provide decision direction when facing ambiguous tax situations. One such area in which tax professionals must assist their clients is the determination of what levels of compensation are reasonable for owner‐employees of closely‐held corporations (Hagan, et al. 1995).
PROMOTION DECISIONS:A ROUGH SET APPROACH
Authors: Scandura Terri A. , Munter Paul , de Korvin Andre
Published: January 2008

Promotions are an important aspect of the careers in managerial accounting. Review of the literature on promotions reveals that the decision‐making process is open to bias due to characteristics of ratees and raters, as well as possible political influences. Such flawed decision making may be due in part to the inherent ambiguity in rating performance of managers. Rough set rules are developed from an decision‐making example in which performance data is used in the decision to promote managers. Implications of incorporating these rules into expert systems used for promotions decisions are presented.
Investing in Emerging Markets: Emerging Issues and Trends
Authors: Herbert Wilson E.
Published: January 2008

Emerging markets present differences in structural characteristics, yet exhibit commonalities of melancholy evidence of varying degrees of economic and political under‐development. There is a greater consensus in the finance literature on what the characteristics of emerging markets are than there is on their meaning. Some perceive the financial markets in terms of the mix of financial institutions and the level of development of the national economy. In this respect, popular reference relates to the dichotomy between developed and developing countries. This view of the emerging markets is flawed on the grounds that some countries within the developed countries' group are regarded as emerging markets (e.g. Portugal, Greece and former USSR) (see for example, Todaro, 1989, p.16). Narrow conceptions then focus on the level of development (and efficiency) of the national stock market and financial system, hence the appellation ‘emerging stock markets of developing countries’. These markets are thought to suffer from the small numbers market condition (Williamson, 1975), allocative efficiency distortion, and a range of market imperfections and externalities, including transaction costs. Yet others cast these markets in terms of their high levels of political risk, involving essentially military interregnums or what the international investor regards as unwarranted government intervention in exchange transactions.
The Efficiency of French Banking Industry
Authors: Dietsch Michel
Published: January 2008

Major structural changes have affected the French banking industry during the second half of the 1980s, what suggests that the French banks were operating with a significant level of inefficiencies before this period. The purpose of this study is to present estimates of X‐Efficiencies and Scale‐Efficiencies in French banks for the 1988–1992 period which followed this wave of changes. The data are annual accounting data for corporate, mutual and savings banks. The sample contains 375 depository banks. By using the “distribution free” method of efficiency estimation, our estimations show that average X‐efficiencies of the French banks are in the range of 70% to 90%. Our results confirm also the existence of scale economies in French banking industry. Scale efficiency estimates show clearly that French banks could reduce average costs by about 15% on average by increasing size in order to reach the efficient size. Note that this result is also in conformity with the hypothesis that some excess capacity could exist in French banking industry.
Internal Organization and Economic Performance: The Case of Large US Commercial Banks
Authors: Hunter William C. , Timme Stephen G.
Published: January 2008

This paper provides novel empirical evidence on the impact of bank internal organization structure characteristics on costs and productive efficiency. The specific internal organization characteristics examined include centralized versus decentralized 1) decision‐making, 2) service delivery systems, and 3) back‐office operations, e.g. accounting, computing, and advertising, among others. The analysis is conducted using average data drawn from a sample of 118 large US commercial banks for the years 1989 and 1990. The analysis reveals that centralized decision‐making tends to increase costs. Likewise, centralized service delivery systems either increase or have an insignificant impact on costs. In no case was it found that centralized service delivery systems reduce costs as is often envisioned by proponents of centralization. Centralized back‐office operations were found to reduce costs significantly and is consistent with the existence of scale economies in bank back‐office operations.
Employee Stock Ownership Plans and Corporate Control
Authors: Clark Roger W. , Philippatos George C. , Shrieves Ronald E.
Published: January 2008

The conventional wisdom regarding the rationale for employee stock ownership plans (ESOPS) holds that such plans provide incentives for improved worker productivity. This view minimizes the employees' portfolio problem inherent in ESOP participation — employment risk for ESOP participants is increased by tying their investment/retirement program to the fortunes of the company in which they are employed. We examine the extent of empirical support for the incentive alignment theory of ESOPs, along with two alternative explanations. One alternative holds that firms initiating ESOP plans signal high investment quality, thus reducing the cost of raising equity capital. Another theory is that ESOPs are a form of coalition, or “devil's pact” between managers and workers in which they agree to prolong and share in perquisite consumption. A large sample of ESOP plans is divided into three categories: anti‐takeover plans, wage concession plans, and “pure” ESOPs. Analysis of pre‐ and post ESOP conditions and stock returns is performed. Among the findings is that pure ESOPs appear to have effects consistent with improvements in worker productivity and/or signaling high investment quality. Strong support for the devil's pact theory is found in the anti‐takeover subcategories of ESOPs.
Employee Stock Ownership Plans, Common Stock Wealth Effects and Stock Price Variability
Authors: Muhtaseb Majed R.
Published: January 2008

The objective of this paper is to document the impact of several types of ESOP announcements on shareholder wealth. The market welcomes the news of initiation ESOPs, nonleveraged ESOPs and ESOPs implemented by firms with B‐BAA Moody's bond rating. However, the market indifferently responds to announcements of expansion ESOPs, leveraged ESOPs and ESOPs adopted by firms with A‐AAA Moody's bond rating. Announcements of nonleveraged ESOPs, expansion ESOPs and B‐BAA rating ESOPs are found to be associated with some resolution of asymmetric information.
Prediction of Business Failure: A Funds Flow Approach
Authors: Kahya Emel
Published: January 2008

The purpose of this paper is to assess the usefulness of financial ratios derived from working capital‐based funds flow information to predict the failure of US industrial firms. Unlike cash‐based funds flow ratios, used in the previous papers, capital‐based funds ratios are less volatile, therefore they are expected to be better predictors of business failure. Moreover, the paper utilizes a more general definition of business failure than the legal definition. The analysis is carried out using a stepwise logit procedure. The results indicate that working capital‐based funds flow measures are superior to cash‐based funds flow measures in business failure prediction models.
USING EXPORT‐CREDIT INSURANCE TO ENHANCE THE WORKING CAPITAL REQUIREMENTS OF THE OVERSEAS CUSTOMER: ACCOMMODATING MEXICAN IMPORTERS AMIDST THE 1994–95 PESO CRISIS
Authors: Holden Alfred C. , Monter Patricia A.
Published: January 2008

While export‐credit insurance is traditionally utilized by exporters to protect foreign receivables, to facilitate domestic financing, or to match credit terms of competitors, there is an interesting fourth function. The exporter targeting a creditworthy foreign customer within a country undergoing a temporary economic disruption can use export‐credit insurance to provide a key addition to the foreign customer's working capital needs. This paper quantifies the working capital gains for a Mexican importer when a U.S. exporter liberalizes payment terms by using export‐credit insurance and so alleviates the importer otherwise confronting sharply higher short‐term domestic borrowing costs and a depreciating peso.
TRADE CREDIT AS QUALITY SIGNAL: AN INTERNATIONAL COMPARISON
Authors: Wei Peihwang , Zee Susan M.L.
Published: January 2008

This paper tests the product quality theory of trade credit with 1993 year‐end data for Germany, Japan, United Kingdom, and United States. The results are inconsistent with the transaction and financing theories of trade credit, since the evidence indicates that firms with high sales relative to their assets and firms with larger sizes extend less credit. However, the quality theory of trade credit is not uniformly supported by the data. Moreover, the evidence suggests wide variations of trade credit policies across countries and industries.
Performance Plan Adoption and Corporate Performance
Authors: Bannister James W. , Mihalek Paul H. , Smith Carl S.
Published: January 2008

Performance plans, a form of executive compensation plan, are designed to reward management for improved performance over the long run. Various accounting measures can be used to evaluate this performance: return on assets (ROA), return on equity (ROE), and earnings per share (EPS) are examples. This study employs these, as well as cash flow measures, on a sample of matched performance plan adopting and control firms to examine whether there is a difference in performance associated with the adoption of a plan. The results indicate that adopting firms display significantly greater growth in ROA, ROE, and working capital from operations to total assets (WCFO) than do control firms. This result continues to hold for ROE, but not ROA or WCFO, after controlling for economy‐wide growth.
Accounting Earnings and Effort Allocation
Authors: Banker Rajiv D. , Thevaranjan Alex
Published: January 2008

The impact of accounting earnings based compensation contracts an effort allocation is analyzed using an agency‐theoretic model. In this model, the CEO of a publicly traded firm expends effort on operational short‐run activities and strategic long‐run activities. The shareholders desire the CEO to expend more effort in the strategic long‐run activities because the return to shareholders depends more on long‐run than short‐run activities. More specifically, they desire the effort to be allocated between these two activities on the proportion of the sensitivity of stock returns to these two activities. Compensating the CEO based on the stock returns performance measure is shown to induce the CEO to exert the desired proportion of effort in the long‐run activities. Unlike stock returns, accounting earnings are believed to focus more on the short‐run performance of the firm and not reflect the full impact of a CEO's long‐run effort. Compensating the CEO based on accounting earnings, in addition to stock returns, is shown to induce the CEO to expend less than the desired proportion of effort in long‐run activities. As the emphasis placed on accounting earnings relative to stock returns increases, the CEO decreases the proportion of effort expended in long‐run activities. On the positive side, including accounting earnings in the contract increases the total effort that the CEO exerts in short‐run and long‐run activities. The benefit accruing from the increase in total effort more than offsets the dysfunctionality caused by the short‐run focus. More specifically, adding accounting earnings to the incentive contract is shown to increase the expected return to the shareholders. In summary, while accounting earnings cause the CEO to be short‐run focused, their use in the incentive contract improves the firm's performance by motivating the CEO to work harder overall.
Disaggregation of General Price Level Gains and Losses
Authors: Zebda Awni M. , Cargile Barney R.
Published: January 2008

This paper provides a new approach for the preparation and interpretation of GPLA statements. Unlike the conventional approach to GPLA statements, the proposed approach is based on disaggregating the effect of inflation overall into the effect on the beginning balance, of either the monetary or the nonmonetary items, and the effect on operations during the year. The proposed approach explains the relationship between historical cost statements and GPLA statements and the relationship between the nonmonetary items approach (Ijiri, 1976) and the monetary items approach to the same statements. More importantly, the proposed approach provides for a better evaluation of management performance for, as explained in the paper, the effect of inflation on operations may provide a partial measure of how well management planned for the impact of inflation during the year.