Showing papers on "Financial risk published in 1982"

Warranty and Other Extrinsic Cue Effects on Consumers' Risk Perceptions

Abstract: Warranty quality, warrantor reputation, and price were manipulated in five separate experiments that were designed to examine the effects of these extrinsic cues on consumer perceptions of the financial and performance risk involved with innovative product concepts. The important role of the warranty as a mechanism for allaying consumers' financial risk perceptions was consistently demonstrated in all five experiments.

On the Relationship between Systematic Risk and the Degrees of Operating and Financial Leverage

Abstract: In order to use the capital asset pricing model (CAPM) to make operating and financial decisions, financial managers must confront the problem of estimating a security's systematic risk, or what commonly is termed beta (3) One approach to this problem is to estimate / by regressing the time series of a security's realized financial return (dividend plus capital gain or loss) on the contemporaneous realized financial return on a market portfolio Such a procedure is suspect for three reasons First, there is evidence that ,Ss of individual securities are not stationary [3, 4, 7, 9] Second, this procedure cannot be undertaken when historical information is not readily available, as might be the case in evaluating new product decisions Third, it masks the important fact that firms make decisions about how to operate in the factor and product markets of the real economic sector As Myers [20] points out, the actions taken as a result of these decisions generate a real return composed of an immediate cash flow plus any change in the present value of future investment opportunities The regression procedure, though, uses the realized financial returns generated in the financial sector of the economy to calculate / It therefore provides no knowledge of the real determinants of/ from the underlying characteristics of the real assets Moreover, financial managers cannot look to the CAPM to find clues for estimating ,B on the basis of real variables As a theory of financial market behavior, the CAPM states only a necessary equilibrium relationship between the prices of securities given their stochastic characteristics over a period of time It says little about how stock prices are determined by the real variables that financial managers must consider in evaluating strategic, operating, and financial alternatives The studies that seek to provide financial managers with knowledge of the real determinants of systematic risk are numerous There are those that empirically test intuitive specifications between real variables and / [2,

Why Do Farmers Fail? Farm Bankruptcies 1910–78

Abstract: Econometric analysis of aggregate time-series farm-sector data suggests that prior to World War II the farm bankruptcy rate appears to be associated with financial risk variables, while postwar data show a strong association with business risk variables. There does not appear to be any evidence that agricultural support payments since World War II have induced, deferred, or reduced farm failures.

Investment in Developed and Less Developed Countries

Abstract: A number of studies have compared the investment risk of various industries and of various individual corporations in developed countries (DCs). The purpose of this paper is to compare investment risk in DCs with less developed countries (LDCs). The variance of returns to investment in common stocks provides a natural measure of investment risk and will be used in this study. Studies in LDCs include work of Levy and Sarnat [12], [13]. Errunza [3], [4], and Lessard [11]. Levy and Sarnat and Errunza found low economy-wide investment risk on an average for LDCs (relative to DCs), with stock indices being used as surrogates for economy-wide risk. These results are not unambiguous, however, because there are probable difficulties due to infrequent trading and averaging in the broad market indices used in the above studies. Hence, we use a sample of the largest corporations that suffer little, if at all, from thin trading and/or averaging.

Investment Risk, Bankruptcy Risk, and Pension Reform in Canada

Abstract: The wealth redistributive effects of retroactive termination insurance together with the difficulty of determining insurance premiums suggest that an alternative response, such as improved disclosure of worker benefits in the event of plan wind-up, may be preferred if the government remains concerned about the security of benefits in underfunded plans. Members of money purchase plans may well be less subject to investment risk than members of defined benefit plans, contrary to the claim of many. In Canada, defined benefit plans appear to have been transformed into defined benefit/money purchase hybrids, and this has several important implications. IN DECEMBER OF 1980, the Province of Ontario introduced plan termination insurance in order to guarantee benefits in underfunded pension plans. The legislation, which was a response to actual or threatened plant shutdowns, makes the insurance retroactive and establishes premiums solely on the basis of each plan's unfunded liabilities.' In early 1981, the Royal Commission on the Status of Pensions in Ontario [10] recommended that the Province adopt a universal money purchase pension plan. Each employer and employee would make fixed contributions to a fund, to be managed by the employee, and the accumulated proceeds of the fund would be used to purchase a pension for the employee upon his retirement. The Royal Commission did not, however, address the fact that plan members bear all of the investment risk in money purchase plans, and many critics summarily dismissed the Commission's main recommendation on this ground. The premise of this paper is that the analysis of competitive labor markets provides important-and probably neglected-insights into these two policy initiatives. Since plan termination insurance is under active consideration by other governments, and since the question of whether or not to encourage money

Worker response to a menu of implicit contracts.

Abstract: The literature on implicit contracts between workers and firms suggests that workers face a variety of such contracts, allowing each to choose the optimal trade-off between earnings level and earnings stability. This study tests some implications of that theory through an examination of the risk behavior of individual heads of households. The data source is the University of Michigan Panel Study of Income Dynamics, which includes a measure of the worker's taste for risk avoidance. Additionally, several predictions derived from Arrow's postulate of increasing relative risk aversion are examined. The results confirm a tendency of risk-averse individuals to choose jobs offering lower wages and lower financial risk. The results also provide indirect support for Arrow's postulate. The paper's findings suggest that studies of the earnings effects of discrimination may possibly understate those effects, just as studies of the value of a human life may understate that value.

The Structure of Social Risk

Abstract: It is increasingly recognized that the structure of financial risks interacts with economic or fundamental risks in a way that influence real economic outcomes. Recent work documents, on the one hand, the apparent excessive sensitivity of financial markets to economic shocks (see especially Shiller (1979)); and on the other hand the close dependence of investment and economic variables on financial variables. One of the central developments to analyze such interactions has been portfolio theory, particularly the capital asset pricing model (CAPM). This field has been extremely fertile, and has seen an outpouring of both theoretical and empirical work. Unfortunately, virtually all the work has been directed at a very narrow set of concerns -n stock market performance. Thus virtually every major firm has been extensively studied and has its own "beta" estimates from numerous beta vendors. To our knowledge, however, there has been no attempt to apply these tools to the economy as a whole. The present paper is a preliminary attempt to make such estimates. The first section develops the theory; the second outlines the data; the third presents the estimates; while the last turns to the implications.

Using Financial Structure Planning to Improve Small Business Performance

Abstract: Since return on equity usually represents a primary source of income for the small business owner, achieving a satisfactory ROE should be a major goal for any small business. One way to improve ROE is through proper use of leverage and financial structure planning.The purpose of this paper is to provide the small business manager with a simple method for evaluating alternative capital structures to improve potential returns and analyze the comparative financial risks.

Risk in a "Fee for Service" Health Care System.

Abstract: This paper describes an approach for assessing the financial risk inherent in a bid for the development and operation of a Management Information System (MIS) that includes processing of claims associated with a “Fee for Service” Health Care System. The discussion establishes the motivation for a risk assessment, defines the context of the problem, and proposes a risk-analysis procedure. Results attainable with the proposed approach are compared with those of a conventional analysis. The advantages of the proposed approach are addressed in terms of the added effort required.