Showing papers in "Managerial Finance in 2005"

Forward curve dynamics in the Nordic electricity market

Abstract: The forward curve dynamics in the Nordic electricity market is examined. Six years of price data on futures and forward contracts traded in the Nordic electricity market are analysed. For the forward price function of electricity, we specify a multi‐factor term structure models in a Heath‐Jarrow‐Morton framework. Principal component analysis is used to reveal the volatility structure in the market. A two‐factor model explains 75 per cent of the price variation in our data, compared to approximately 95 per cent in most other markets. Further investigations show that correlation between short‐ and long‐term forward prices is lower than in other markets. We briefly discuss possible reasons why these special properties occur, and some consequences for hedging exposures in this market.

Competition, liberalization and efficiency: evidence from a two‐stage banking model on banks in Hong Kong and Singapore

Abstract: Hong Kong and Singapore are economically similar and rival international financial centers. Banks in both Hong Kong and Singapore operate in very similar environments: internationally oriented with protected domestic banking market and firm regulators. With liberalization under the Financial Services Accord of the World Trade Organization (WTO), comes more competition and the growing importance for banks to ensure that they are X‐efficient so as to compete successfully or risk being marginalized. This paper uses data envelopment analysis (DEA) to assess X‐efficiency of banks in Hong Kong and Singapore via a two‐stage (combining both the intermediation and production stages) banking model. Changes in X‐efficiency over time are computed to determine if policy initiatives have facilitated improvements in efficiency. Our results on X‐efficiency of banks demarcated by size and ownership provide valuable insights into the issues of scale economies and the impact of family ownership on X‐efficiency.

“Doing well while doing good” revisited: A study of socially responsible firms’ short-term versus long-term performance.

Abstract: This article reexamines the “doing well while doing good” debate within the financial management literature, using comparisons among socially responsible mutual funds (SRMF(, the NYSE Composite Index, and a portfolio made up of firms most valued by SRMF managers )MostSRF(. The performance of MostSRF did no better or no worse than the over all market or SRMF in three to five year comparisons. However, results from the ten‐year performance comparison refute earlier studies and indicate that the market prices social responsibility characteristics in the long run. Given MostSRF out performed the other two indices in this time line, a new paradigm for understanding the impact of SRI is revealed.

Performance of Mutual Funds

Abstract: The current paper evaluates the performance of Greek equity funds during the period 1997-2000. The evaluation is based on the analysis of risk and return. The risk is measured through the coefficient of variation and the systematic risk. The results indicate that there is a positive relation between risk and return for the whole period, while the betas for all funds are smaller than one.

Alternative approaches to weather derivatives pricing

Abstract: The goal of the paper is to analyse the various issues attached to the valuation of weather derivatives. We focus our study on temperature‐related contracts since they are the most widely traded at this point and try to address the following questions: (i) should the quantity underlying the swaps or options contracts be defined as the temperature, degree‐days or cumulative degree‐days? This discussion is conducted both in terms of the robustness of the statistical modelling of the state variable and the mathematical valuation of the option (European versus Asian). (ii) What pricing approaches can tackle the market incompleteness generated by a non‐tradable underlying when furthermore the market price of risk is hard to identify in other traded instruments and unlikely to be zero? We illustrate our study on a database of temperatures registered at Paris Le Bourget and compare the calls and puts prices obtained using the different methods most widely used in weather markets.

Supporting the paradigm shift in vendor selection: multicriteria methods for sole‐sourcing

Abstract: Procurement is an increasingly important activity within most firms, and severe financial and operational consequences can result from the failure to optimize the procurement function. The multiple criteria, including the financial significance, involved in the selection of a sole‐source vendor are addressed here. Two multicriteria approaches to decision support for vendor selection are presented and are demonstrated through an example. One approach, the simple multiattribute rating technique, is relatively widely used in selection problems. The other approach, data envelopment analysis, is rarely used in such problems but serves as a very acceptable alternative for supporting the vendor selection decision. The results from these two approaches are compared to those based upon a pure aggregation and averaging procedure. For the example being considered, both multicriteria approaches provide similar results, which differ considerably from those for pure aggregation. In addition, the short‐term financial implications are examined so as to underscore the commitment needed by management if non‐cost criteria are to be incorporated into vendor selection.

Electricity load pattern hedging with static forward strategies

Abstract: We consider the partial hedging of stochastic electricity load pattern with static forward strategies. We assume that the company under consideration maximizes the risk adjusted expected value of its electricity cash flows. First, we calculate an optimal hedge ratio and after that we use this hedge ratio to solve the optimal hedging time. Our results indicate, for instance that agents with high load volatility hedge later than agents that have low load volatility. Moreover, negative correlation between forwards and electricity load pattern postpones the hedging timing.

Efficiency of the New York independent system operator market for transmission congestion contracts

Abstract: The physical nature of electricity generation and delivery creates special problems for the design of efficient markets, notably the need to manage delivery in real time and the volatile congestion and associated costs that result. Proposals for the operation of the deregulated electricity industry tend towards one of two paradigms: centralized and decentralized. Transmission congestion management can be implemented in the more centralized point‐to‐point approach, as in New York state, where derivative transmission congestion contracts (TCCs) are traded, or in the more decentralized flowgate‐based approach. While it is widely accepted that theoretically TCCs have attractive properties as hedging instruments against congestion cost uncertainty, whether efficient markets for them can be established in practice has been questioned. Based on an empirical analysis of publicly available data from years 2000 and 2001, it appears that New York TCCs provided market participants with a potentially effective hedge against volatile congestion rents. However, the prices paid for TCCs systematically diverged from the resulting congestion rents for distant locations and at high prices. The price paid for the hedge not being in line with the congestion rents, i.e., unreasonably high risk premiums are being paid, suggests an inefficient market. The low liquidity of TCC markets and the deviation of TCC feasibility requirements from actual energy flows are possible explanations.

Valuation of investment and opportunity‐to‐invest in power generation assets with spikes in electricity price

Abstract: We address the problem of valuing electricity generation capacity and the opportunities to invest in power generation assets in the deregulated electric power industry The spark spread option‐based valuation framework is extended to take into consideration the electricity price spikes This framework provides a valuable tool for merchant power plant owners to perform hedging and risk management With jumps in the value process of power generation capacity, we demonstrate how to determine the value of an opportunity to invest in acquiring the generation capacity and the threshold value above which a firm should invest We illustrate the implications of price spikes on the value of electricity generating capacity and the investment timing decisions on when to invest in such capacity

The Cross‐Section of Expected Stock Returns: An Empirical Study in the Athens Stock Exchange

Abstract: This paper explores the ability of the capital asset pricing model, as well as the firm specific factors, to explain the cross‐sectional relationship between average stock returns and risk in Athens Stock Exchange (ASE). The objective of this study is to investigate the cross‐section of stock returns in the Greek stock market for the period from July 1993 to June 2001. A methodology similar to that of Fama and French (1992) is employed, by taking into account the constraints imposed by a smaller sample both in time and in terms of number of stocks. Our findings indicate that in the Greek stock market there is not a positive relation between risk, measured by β, and average returns. On the other hand, there is a “size effect” on the cross‐sectional variation in average stock returns.

The Productivity of European Co‐operative Banks

Abstract: This paper examines the cost and profit productivity of European co‐operative banks between 1996 and 2003 using the parametric productivity decomposition suggested by Berger and Mester (2003). We find that over the period co‐operative banks benefited from substantial gains in both profit and cost productivity. Annual profit improvements range between 4% and 8% for the majority of co‐operative banks, with even larger cost productivity gains. These productivity improvements have predominantly been generated by the enhanced performance of best practice banks relative to other banks. This means that the best practice co‐operative banks have moved further away from other banks in terms of increasing profits and reducing costs.

Loss aversion: a qualitative study in behavioural finance

Abstract: The Behavioural Finance contests the modern financial theory statements, specially the rationality conception of the market as well as the agent behaviour. For the Behavioural Finance, the human being is susceptible to make mistakes and often acts under “irrational” and passional impulses. This article describes, comparatively, the Behavioural Finance and the modern finance theory investigating precisely the aversion feeling to loss under the investor view. The comprehension of the aversion feeling of loss is deepened from psychoanalytical theory contribution. As the aversion feeling to loss constitutes an aspect of the human subjectivity and cannot be explained just through quantification, the qualitative methodology was used. It was investigated about the influence meanings, experienced by the investors.

Managerial “irrationality” in financial decision making

Abstract: This paper examines managerial attitudes to risk in the UK to see whether managers are apparently “irrational” and focus on simple heuristics rather than concentrating on statistical outcomes in their decision‐making processes. The findings reported here are based on a large postal questionnaire survey of UK managers in different functional areas. The results suggest that managers exhibit many of the biases that have been documented for executives in other countries. A focus on the framing of a decision, an emphasis on the magnitude of negative outcomes and an insensitivity to the probability estimates are all characteristics of the responses to the scenario cases provided.

Active international mutual fund management; can managers neat the index?

Abstract: We examine the benefits of active international mutual fund management. Is there an advantage to active fund management over investing in index funds? Previous research has found that for domestic funds, active fund management can not outperform index funds. But there has been no clear conclusion as to active international mutual fund management. We utilize Morningstar Mutual Fund data to analyze five international mutual fund categories, and overall, for a sample of 831 funds with 4,835 annual return data points. We find the difference in mean return (index minus fund return) is negative for all fund categories, except for Europe funds. The difference is significant overall and for four of the five fund categories. The results from the multivariate regression show no relationship between total return and expense ratio, but there is a significant positive relationship between total return and turnover, and a significant positive relationship between total return and fund size (LN net assets). As opposed to domestic mutual funds, it appears to be beneficial to select actively managed international mutual funds over index funds.

Credit unions and demutualisation

Abstract: This paper reviews experience with credit union demutualisation to date in the light of increasing discussion about whether demutualisation is a likely (or inevitable) future stage in the evolutionary process. It is argued that the credit union industry faces an inherent demutualisation bias which emerges as the sector develops maturity. Contributing factors include the emergence of professional management pursuing personal objectives, together with the economic realities of technological change, financial liberalisation, increased competition, and prudential regulation based on minimum capital requirements. Demutualisation incentives may partially reflect the unsuitability of the mutual form of governance in larger, more sophisticated financial institutions, but there is also a significant risk of demutualisation based on wealth expropriation motives. Alternative policies and strategies which might avoid this demutualisation bias are examined.

Linking firm performance to the Malcolm Baldrige National Quality Award implementation effort using multiattribute utility theory

Abstract: Executives are searching for ways to deliver consistent improvements in productivity and profitability while addressing economic realities. One initiative that has been discovered by many organizations is the integration a quality process into their or ganization that is based on the Malcolm Baldrige National Quality Award (MBNQA). Many studies have been done showing that award winning companies tend to out perform peers and competitors, yet many managers are reluctant to under take the large initiative required to work toward the award. This reluctance may stem from the belief that the reported benefits are not those that are important for managers to justify the effort. The purpose of this research is to begin an exploratory study that examines the expectations of company managers, executives, and other professionals regarding the types of firm performance and returns that would be needed to justify undertaking the MBNQA process. The results showed that while financial performance of the firm is the strongest justification managers consider, and that while their expectations for improved financial performance are some what high, the financial returns are certainly not out of the realm of normal expectations for returns from other projects.

Use dividends to signal or not: an examination of the UK dividend pay out patterns

Abstract: We examine the dividend pay out patterns for all UK listed industrial companies featured in the FTSE All Share Index for the period 1992‐1998 Then we match the pay out patterns to different dividend policies From our empirical observations, we argue that dividend signalling does not universally apply to all firms We also report our evidence that there is no industry norm for dividend policy, particularly when firms have decided whether to use dividends to signal or not In addition, we found that the percentage of insiders’ share holdings, market capitalisation and as set book values are statistically significant for determining whether firms use dividends to signal or not

Pricing of equities in China: evidence from the Shanghai Stock Exchange

Abstract: In this article we compare the performance of the traditional CAPM with the multi factor model of Fama and French (1996) for equities listed in the Shanghai Stock Exchange. We also investigate the explanatory power of idiosyncratic volatility and respond to the claim that multi factor model findings can be explained by the turn of the year effect. Our results show that firm size, book to market equity and idiosyncratic volatility are priced risk factors in addition to the theoretically well specified market factor. As far as the turn of the year effect is concerned we reject the claim that the findings are driven by seasonal factors.

International Cash Management Practices in a Russian Multinational

Abstract: management practices in a Russian Multinational Company (RMC). The paper is motivated by the lack of empirical evidence on financial management practices outside the Western World (especially from Russia and from other Commonwealth of Independent States). Data for the analysis are gathered from documents and in‐depth interviews with finance managers in the company. The findings of the paper suggest that the company implemented an international cash management system reminiscent of international cash management discussed in the Western literature. For example, techniques such as netting, leading and lagging, re‐invoicing center and cash flow planning are used in the company. Thus, our conclusion is that financial management techniques are likely to be the same in Russia as in the Western world. However, differences are likely to be found in the ways in which these techniques are implemented and used in practice due to differences in environmental conditions. For example, the company did not use any of the sophisticated cash management models discussed in the literature. Our research has implications for understanding financial management practices outside the Western World, especially in Russia.

Should investments professors join the “crowd”

Abstract: Just like the market which has its bulls and its bears, investments has its fundamentalists crowd and its technicians crowd. The academic finance profession must wake up and realize that investing is no longer driven solely by fundamental and statistical analysis. While as a profession we believe in and teach the fundamental investment subjects such as CAPM or EMH, we also realize the need to examine ways to explain the 80 per cent of the variability of stock returns not explained by the fundamentals. In addition to the fundamental investment subjects an increased exposure to both behavioral finance and the psychology of financial markets is absolutely necessary to increase the understanding of how and why stocks move. Just as the bulls need the bears, fundamentalists need technicians. Behavioral finance, crowd psychology, and the psychology of financial markets are the underpinnings of technical analysis. Western technical analysis predates CAPM and EMH by decades, if not more, tracing its roots back to ...

Cost Efficiency, Environmental Influences and UK Credit Unions, 1991 to 2001

Abstract: This study uses a stochastic frontier analysis to evaluate the relative performance of UK credit unions over the period 1991 to 2001. The analysis found that UK credit unions are subject to high levels of (gross) in efficiency. The analysis also revealed that the environment within which individual credit unions operate plays a critical role in the relative efficiency of credit unions. In terms of direction of influence, the analysis of environmental effects highlighted (main in sights) that larger credit unions are more cost efficient as are credit unions which do not draw their membership exclusively from areas of high deprivation. These directional influences were viewed as offering some encouragement to the thrust of the Financial Services Authority’s new policy regime for credit unions which may well result in a smaller number of larger credit unions each with a more varied membership mix.

Moving average technical trading strategies for currencies of emerging economies

Abstract: This paper studies the efficacy of using moving average technical trading rules with currencies of emerging economies. If technical trading rules are successful, they can become a risk management tool for multinational firms and investors in emerging markets. Typical risk management tools such as forwards, futures, and options are not sufficiently active in emerging currency markets. In this paper we use four Variable Length Moving Average (VMA) trading models and compare them to a simple buy and hold strategy. Results support the effectiveness of our trading models, which imply the presence of strong serial correlation among currency returns for emerging markets. As a result, the predictability of future currency prices will allow investors to create effective hedges in the often volatile emerging markets.

Asset Management Companies, State‐Owned Commercial Bank Debt Transfers and Contingent Claims: Issues in the Valuation of China’s Non‐Performing Loans

Abstract: This article outlines contingent claims created as a result of the arrangements underlying the transfer of state‐owned commercial banks’ non‐performing loans to asset management companies. An understanding of these factors is central in analysing the potential for China’s as set management companies to realise value from their acquisition of these nonperforming state‐owned enterprise loans. After establishing the scale of the non‐performing loan problem, the article identifies and describes a number of real and financial options that may assist in the consideration of the value of assets associated with the transfer of non‐performing loans from the state‐owned commercial banks to the asset management companies. Real and financial options appear in the form of implied guarantees over asset management corporation debt, implied guarantees associated with the non‐performing assets remaining with the stateowned commercial banks, and within the equity positions held by the asset management companies as a result of equity‐for‐debt swaps initiated under the current reform process. The article concludes that any gains made to the credit standing of the state‐owned commercial banks reflect the value of implied guarantees over both the asset management corporation debt and the remaining stock of non‐performing loans held by the banks. Furthermore, institutional arrangements associated with the equity positions held by the asset management corporations significantly reduce the value of options associated with operation and control of firms in which the equity positions are held. Additionally, the structure of equity positions taken under the equity‐debt swaps suggest that the value of equity positions held in state‐owned enterprises by the asset management companies will be considerably lower than hoped for and implied in the asset management companies’ mandates.

International Cash Management in the 21st century: Theory and Practice

Abstract: This paper outlines the theoretical models of international cash management and assesses their implications for corporate practice. Corporate practice is then reviewed through the analysis of survey research and case studies. It emerges that whilst the implications of theoretical models are captured in essence by corporate practice, there is scant evidence of companies using sophisticated models in international cash management. The practice of international cash management is largely driven by developments in communications and computer technology, relaxation of regulatory and tax impediments, the internationalisation of banking and the development of new banking prod ucts. International treasurers may therefore be able to find appropriate cash management solutions to meet their business needs with the co‐operation of banks and technology providers. Further academic research should evaluate the extent to which corporate practice is consistent with extant multi‐currency balance and net work optimisation models and also explain why particular approaches to interna tional cash management persist in companies.

Trustworthiness of investment manager

Abstract: The relationship between trustees of pension funds and investment managers has been well recognised in invest mentmanagement practice but studies of trust relationship between them are few. This study explores trustworthiness of investment managers as an important factor for trustees in building and developing trust relationship with the investment managers. Case study research method is used togather and analyse data collected from indepth interviews with the trustees. The major research findings of this study shows that (1) trust is an important factor in the relationship between trustees of pension funds and investment managers; and (2) the key factors of trust worthiness of investment managers are determined by their ability, benevolence, integrity, and openness in communication.

Analyzing the product‐mix decision by using a fuzzy hierarchical model

Abstract: The product‐mix decision has received considerable attention in management accounting and economics literatures. However, many studies in these literatures are contradicting, inconclusive and lack rigorous analysis of this complex decision. They seek to develop weights for the products in the product mix based on one objective, to maximize the firm’s profit ability. But before developing these weights, the studies must first rank these products, Ranking is a complex endeavor since it is often driven by a multitude of hierarchical financial and non‐financial goals and objectives. Ranking is also difficult due to the use of complex concepts such as time, uncertainty, cost and interdependencies between accounting systems and manufacturing systems and among the products of the product mix. These concepts are inherently fuzzy and coextensively applied often with a confluence of variables operating simultaneously. This paper applies an advanced mathematical model to account for the product mix decision. The mod...

The importance of country versus sector characteristics

Abstract: Does a company’s country of incorporation or the sector of its activity have a greater influence on the equity returns its shareholders earn? This question has been examined extensively using dummy variable regressions or factor models on pre‐determined characteristics; nevertheless, the results are inconclusive and vary with the range of companies and the time period studied. This study employs an alternative method that finds “naturally occurring” groups of companies based on the quantifiable relationship between the company returns themselves. The resulting groups are then examined in terms of their country and sector composition. The groups indicate that companies clearly cluster by country rather than by sector and that this effect has become more pronounced over time. This has important implications for financial analysts and portfolio managers.

A Puzzle of Emerging Markets: A Systemic ‘Surprisingability’

Abstract: Since the early 1980s when the term ‘emerging markets’ was first coined by the IMF and World Bank to describe the performance in countries with changing institutional framework, the theory has failed to produce a coherent and systemic theory. Overtime the term became generic, initially including developing countries (mainly in Asia and Latin America), but later covering the former socialist countries/economies (labelled as transitional countries), and some ‘developed’ countries that did not have extensive experience of capital market development (mainly due to having a bank‐based financial system).