Showing papers in "Australian Journal of Management in 2006"

Alignment: Using the Balanced Scorecard to Create Corporate Synergies

Abstract: ov R The Bal M ie sequels are rarely as good as the original. So it is with Alignment by obert Kaplan and David Norton, the fourth book in a series that started with anced Scorecard a decade ago. The authors position the series as ‘the foundation for a new science of strategy management.’ This claim has to be based on the enormous success and popularity of their The Balanced Scorecard and Strategy Maps among businessmen and women. I have great difficulty seeing the contributions as ‘a new science of strategy management.’ Alignment is a great title for a book. The reason is that alignment of strategy with organization and management processes is important but hard to do. Alignment isn’t a new issue. The McKinsey 7S model in 1982 argued the need for alignment of strategy with structure, systems, staff, style (culture), skills, and shared values (Peters & Waterman 1982). When one sees an organization that is dysfunctional and underperforming, the lack of alignment is readily apparent. For example, when the computer industry changed in the early 1980s, IBM had an enormous challenge of alignment, away from the mainframe business model to software and services. This was a challenge taken on by a new outside CEO with a remit to change virtually every aspect of how the company operated. Observing a lack of alignment is only the first step in the process. How one obtains alignment is another matter. The alignment strategy and process outlined in the book is comprehensive. It involves ‘wiring up’ the multi-business company by developing strategy maps and balanced scorecards for each and everything—from corporate office to corporate support, corporate office to business units, business units to support, customers, and suppliers. The book provides a rich set of examples of organizations with the visual display of themes and initiatives. Readers of The Balanced Scorecard and Strategy Maps will be familiar with the displays. The case studies are interesting and varied. They range from the US Army and the Royal Canadian Mounted Police to IBM Learning, Ingersoll Rand, and DuPont. As a communication device the alignment process will find its way into management meetings and strategy reviews

Ownership, competition, and financial disclosure

Abstract: A firm's incentive to disclose has been linked empirically to a range of variables, including information asymmetry, agency costs, political costs, and proprietary costs. While the intuition underlying each of the variables seems plausible, Verrecchia (2001) argues that disclosure models can be characterized as an eclectic mingling of highly idiosyncratic economic-based models, and challenges researchers to take the first steps to unification. First, we investigate the role of ownership and competition variables in explaining voluntary segment disclosures in Australian firms and find support for both these variables. Second, drawing on theory supported by the corporate governance, strategic management and industrial organization literatures, we introduce a new economic variable that unifies both ownership and competition variables. We find that the unifying variable performs better than our model focusing on ownership and competition variables alone. We conduct a series of robustness tests on the model and find that its significance is not affected by the inclusion of disclosure control variables identified in prior literature, the change in standard, and acquisitions and disposals of physical assets.

The determinants of credit ratings: Australian evidence

Abstract: We examine the impact that various financial and industry variables have on credit ratings issued for Australian firms by Standard and Poor's. Our ordered probit model indicates that interest coverage and leverage ratios have the most pronounced effect on credit ratings. Profitability variables and industry concentration measures are also important. Financial variables are helpful in discriminating between A- and BBB-rated firms, but are less precise in separating AA- and A-rated firms. We also document a consistent trend towards lower ratings—the standard required to achieve a particular rating is increasing over time.

Investigating the Performance of Alternative Default-Risk Models: Option-Based Versus Accounting-Based Approaches:

Abstract: In this paper we evaluate the performance of three alternate default-risk models, seeking to find that measure which performs best, using a comprehensive sample drawn from the Australian equities market. The first two models are option-based models and are derived from Merton's (1974) insight that equity can be viewed as a call option on a firm's assets. In the first model, equity is modelled as a standard call option. In the second model, equity is modelled as a path-dependent barrier option. The third model is created using accounting ratios and is similar to Altman's (1968) Z-Score. To assess which of the models is superior, we consider variations of each model and then rely on prediction-oriented tests that focus on whether a firm subsequently defaults. Our results show that the option-based models clearly outperform their accounting ratio counterparts. Furthermore, our analysis suggests that the option-based models are very successful at ranking firms by default probability. It is noteworthy that the performances of the option-based models are difficult to distinguish from each other.

Momentum in Australia—A Note

Abstract: Our note examines the momentum effect in Australia using the J-month/K-month methodology of Jegadeesh and Titman (1993, 2001). Our sample consists of stocks listed on the Australian stock exchange from January 1980 to December 2001. We do not find evidence for a momentum effect in Australia during this period. Rather, we find evidence of significantly positive returns for ‘loser’ portfolios in July-the first month of the Australian financial year.

Bankruptcy Prediction: Application of Logit Analysis in Export Credit Risks

Abstract: To date, relatively little empirical research has been conducted on the efficacy of the trade credit risk prediction model in the context of international trade applications. Using a sample of list...

A Time-Series Analysis of the Demand for Life Insurance Companies in Australia: An Unobserved Components Approach:

Abstract: We systematically explore the time-series properties of life insurance demand using a novel statistical procedure that allows multiple unobservable (but interpretable) components to be extracted. This methodology allows the data to be modelled in new and innovative ways. We find univariate series decomposition allows us to more easily explain the behaviour of life insurance demand over the sample period (1981-2003), than would otherwise be possible. A multivariate model (including a number of variables thought to influence demand) produces quite pleasing results overall. A SUTSE model involving demand and each of the explanatory variables in turn shows evidence of common components in all cases but one. Finally, an out-of-sample forecast comparison shows the univariate model to outperform the multivariate model for accuracy.

Capital Structure Decisions Under Classical and Imputation Tax Systems: A Natural Test for Tax Effects in Australia:

Abstract: The paper investigates determinants of capital structure, focusing on tax incentives for debt. The paper makes use of a panel of Australian firms in two tax regimes: a classical regime, and a dividend imputation regime. An important feature is the identification of the economic model using Bayesian selection methods. This methodology offers a new way of examining and assessing interactions between variables where there are competing explanations, noisy data and no unifying theory. As hypothesized, the results demonstrate a significant tax coefficient during the classical era and an insignificant tax coefficient in the imputation era. Risk and signalling variables, represented by firm size, Z-score, operating risk and asset base are also found to help explain capital structure choice.

Is the Ex Ante Risk Premium Always Positive? Further Evidence:

Abstract: An implicit assumption of the conditional CAPM is that the ex ante equity risk premium is positive in all states of the world. Studies on US portfolios by Boudoukh, Richardson and Smith (1993) and ...

Top Management Turnover: An Examination of Portfolio Holdings and Fund Performance*

Abstract: We examine the performance and portfolio characteristics of actively managed equity funds impacted by top management turnover. Utilizing a unique database of monthly portfolio holdings, our study finds that, post-replacement, previously poor performing funds experience improved returns. However, this improved performance is not attributable to superior stock selection skill. We also find these new managers decrease the fund's reliance on momentum strategies and decrease the portfolio's concentration, which then leads to a reduced tracking-error volatility. Prior to the replacement event, underperforming investment managers exhibit preferences for larger, growth-oriented stocks, as well as riding momentum strategies and increasing portfolio turnover.

Bayesian Prediction, Entropy, and Option Pricingx

Abstract: This paper studies the performance of the Foster-Whiteman (1999) procedure for using a Bayesian predictive distribution for the future price of an asset to compute the price of a European option on that asset. A technical contribution of the paper is the description of a sequential importance sampling procedure for implementing an informative prior that reflects and rewards past option-pricing success. The risk-neutralization of the predictive distribution is accomplished by Stutzer's (1996) constrained KLIC-minimizing change of measure. The procedure is used in weekly pricing of July and November options on soybeans on the Chicago Board of Trade from 1993–1997, and produces option prices that mimic market prices much more closely than those of the Black model or those produced by risk-neutralizing a nonparametric predictive.

Micro-Strategizing and the Three Logics of Action:

Abstract: This study explores the three logics of action used by middle managers when undertaking projects. While this study was an exploratory one, it demonstrated that three logics clearly exist in the decision-making process, and that decision-making is discursively heterogeneous. Each of these logics, authoritarian, emotional, and conciliatory, implies a particular kind of rationality. Such logics depend mainly on the managers' perceptions of their endeavours. Each of these three logics implies a particular kind of rationality that goes much beyond the bounded rationality.

Administrative Heritage: An Exploratory Study of Large Australian Firms:

Abstract: In this study we address the existing gap in the literature on the strategic evolution of Australian MNCs and the effect their administrative heritage, developed in the domestic market, had on thei...

Should executive stock options be abandoned

Abstract: Recent corporate scandals around the world have led many to single out executive stock options as one of the main culprits. More corporations are abandoning stock options and reverting to restricted stock. This paper argues that such a change is not entirely justifiable. We first provide a critical review of the pros and cons of executive stock options. We then compare option-based contracts with stock-based contracts using a simple principal-agent model with moral hazard. In a general environment without restrictions on preferences or technologies, option-based contracts are shown to weakly dominate stock-based contracts. The weak dominance relation becomes strict if the manager is risk neutral. Numerical examples are provided to show that, even if the manager is risk averse, strict dominance is more likely the case.

Thirty Years of Published Research in the Australian Journal of Management

Abstract: This study reviews 30 years of scholarly research published in the Australian Journal of Management (AJM) over the period 1976–2005. The study examines the productivity, influence, and contribution of management research in Australia. In the past three decades, AJM has published 406 research articles from 458 different authors and co-authors. Over the past 30 years, the four most prolific publishers were Philip Brown (11 papers), Philip Yetton (9), Ray Ball (8) and Terry Walter (8). In the last decade alone, Robert Faff and Raymond da Silva Rosa have published the greatest number of AJM articles (6). The Journal has been most supported over the past three decades by authors from AGSM, UNSW, UWA, UQ, Monash, Melbourne, ANU and Sydney. The top six institutions contributed more than half of all AJM publications. The AJM has also experienced increasing contributions from finance articles in recent years, accounting for 51% of total published articles in AJM. Opportunities and challenges remain ahead for the AJM, particularly when one considers the decision by The University of Chicago's Journal of Business to cease future publications beyond 2006, citing the establishment of specialist journals.

Applying Evolutionary Search to a Parametric Family of Auction Mechanisms

Abstract: In this paper we describe an evolution-based method for evaluating auction mechanisms, and apply it to a space of mechanisms including the standard first- and second-price sealed bid auctions. We replicate results known already in the Auction Theory literature regarding the suitability of different mechanisms for different bidder environments, and extend the literature by establishing the superiority of novel mechanisms over standard mechanisms, for commonly occurring scenarios. Thus this paper simultaneously extends Auction Theory, and provides a systematic method for further such extensions.

Hurdle Rate: Executive Stock Options:

Abstract: Executive stock options with a rising strike price are a recent innovation in executive compensation in Australia and New Zealand. These options combine a dividend protection feature and a strike price that increases at a hurdle rate set with reference to a cost of capital estimate. With a constant dividend yield, the strike price becomes a path-dependent function of the stock price and exact analytic valuation becomes intractable. However, path-dependent American options can be valued using a Monte Carlo approach proposed in Longstaff and Schwartz (2001). We examine procedures for valuing these options and compare them with Black and Scholes (1973) and Merton (1973) formula valuations.

For Business Ethics

Abstract: th pu disp E ics has always had a somewhat uneasy place in business education. Is its rpose to inform and enlighten; to impart a moral turn to technical skills; to el vice and inculcate virtue? The history of business ethics provides few answers to these questions. Early opponents claimed that ethics was not teachable or should have been learned elsewhere and earlier. Since the 1980s, the subject has gained an increasing, if sometimes grudging, acceptance but its rationale has remained hazy. One hope was that ethics courses would lessen the incidence of corporate failure and reduce public pressures for stronger regulation and tougher policing of business. Unfortunately, the corporate crashes and ethical failures of the past two decades—Enron, HIH, WorldCom, Tyco, OneTel—have disappointed such hopes and confirmed the suspicions of those who opposed ceding valuable curriculum space to ethics. For Business Ethics by Jones, Parker and ten Bos, is one kind of response to these disappointments. While conventional business ethics continues to try to rein in aberrant business practices, this book argues that such efforts are based on mistaken beliefs about business and ethics. The authors declare their hand on the first page:

Regulatory Revenues and the Choice of the CAPM: Australia Versus New Zealand:

Abstract: This paper compares the revenues resulting from the Officer model, which is generally used by Australian regulatory bodies, the simplified Brennan-Lally model, which is used by the New Zealand regulatory body, the Sharpe-Lintner-Mossin model, which is widely used in other regulatory regimes, and a comprehensive model that is free of simplifying assumptions concerning the tax environment and the extent to which firms attach imputation credits to dividends. The question of which of the three simplified models is best depends upon the proportion of a firm's company tax that is passed through as imputation credits, the utilisation rate on imputation credits, the extent to which ordinary income is taxed more heavily than capital gains, and the issue of whether revenue underestimates are considered to be more important than revenue overestimates. If the utilisation rate is considered to be close to 1, ordinary income is considered to be more heavily taxed than capital gains, and revenue underestimates are consi...