Showing papers on "Financial risk published in 1984"

The Impact of the Degrees of Operating and Financial Leverage on Systematic Risk of Common Stock

Abstract: The capital asset pricing model postulates that the equilibrium return on any risky security is equal to the sum of the risk-free rate of return and a risk premium measured by the product of the market price of risk and the security's systematic risk. In the capital asset pricing model, beta as an index of systematic risk is the only security-specific parameter that affects the equilibrium return on a risky security.

A Perspective on Health and Safety Risk Analysis

Abstract: Health and safety risks are compared with financial risks, and the differences pertinent for risk evaluation and management are described. Such differences arise from the equities of risk distribution, the multiple stakeholders in the decision process, the opportunities for risk diversification, the interpretation of social values relating to risk choices, and in the political objectives in the decision process. Health and safety regulators are faced with the problem of making decisions involving large scientific uncertainties, public perceptions at odds with professional perceptions, uncertain and conflicting public values expressed through the political process, and difficult judgments of equity when risk and benefit are borne by different groups. The effect of highly publicized risk controversies on such regulatory decisions is described.

On the Assessment of Default Risk in Commercial Mortgage Lending

Abstract: This paper takes an initial step toward the development of an empirically-based model of default risk assessment in the commercial mortgage market A review of existing empirical studies of residential mortgage and commercial loan default provides evidence for appropriate model specification and estimation A simple default risk model for commercial mortgages is then developed based upon the generalized default risk models of Jackson and Kaserman [1980] and Vandell [1981] The model is then examined for its ability to successfully handle a variety of situations and used to test the validity of traditional ratio analysis “rules-of-thumb” employed in commercial lending Ratio tests are found generally to be inconsistent with an objective of constraining default risk below some maximum Finally, a modified ratio analysis consistent with the model and with a constrained default risk strategy is introduced

Hospital diversification and financial management.

Abstract: Hospital diversification and its impact on the operating ratio are studied for 62 New York hospitals during the period 1974-1979. Diversification and operating ratio are modeled in a two-stage least squares (TSLS) framework as being jointly dependent. Institutional diversification is found to yield better financial position, and the better operating ratio allows the institution the wherewithal to diversify. The impact of external government planning and hospital competition are also measured. An institution life cycle hypothesis is advanced to explain hospital behavior: boom and bust, diversification and divestiture, occasionally leading to closure or merger. These results should not be generalized beyond the New York State context. Restructuring of the organization, unrelated business ventures, and transactions with related organizations were not a problem in this sample. However, in 1983, many a new corporation is set up whose revenues do not become part of the hospital's and whose complex transactions conceal unallowable costs and maximize reimbursement. A number of hypotheses are advanced concerning hospital administrator's attitude toward risk.

Self-Insurance and the Probability of Financial Regret

Abstract: The financial decision of whether a business firm should self insure a group of exposure units is a complicated but very important one. Many exposures to loss are financially inconsequential so they can be safely retained and paid out of cash flow. However, other exposures to loss which have large financial consequences cannot be retained by the firm without a detailed analysis of the financial implications of such a decision. I Due to the complexity and financial importance of this decision, risk managers have started to utilize some advanced financial and statistical tools to assess the risks involved with the retention of various loss exposures, such as workers' compensation, products liability and other liability exposures.2 Risk managers have started to rely on the loss retention method more frequently because of cash flow considerations and the high interest rates available in recent years. If there are a sufficient number of exposure units to estimate the expected losses and associated financial risks and a reserve fund

Capacity of the Property-Casualty Insurance Industry

Abstract: This paper examines the interrelationships among the capacity variables of level of surplus, investment risk, underwriting risk, and expenses. The primary objective is the development of a capacity measure that recognizes all these variables and interrelationships. The study addresses the capacity issue from the perspective of insurer management rather than from the regulatory perspective that has appeared in other recent research. This theory begins with the realistic view that surplus is relatively fixed and determines the aggregrate premium volume and rate of growth that can be sustained by an insurer while maintaining a ruin probability below some specified ?. Traditional risk theory, as well as earlier research dealing with by-line loss ratios, loss reserve estimation accuracy, and investment portfolio risks, is used to develop a unified theory of capacity. Capacity of the Property-Casualty Insurance Industry1

Prediction of common stock investment risk

Abstract: C $? predictive model of common stock investment risk since December 1975. The model predicts systematic risks, common factor risks, and specific risks of individual common stocks.' The predictions are updated at the beginning of each month. The first step is to calculate descriptors of the variability of the stock price, stock trading activity, and the company's industry classification, variability of earnings, past success, size, maturity, growth, yield, and financial leverage. We then use risk prediction rules to convert these descriptors into the necessary risk predictions. We estimated the risk prediction rules over the time span from April 1966 through August 1974. The prediction rules have continued unchanged from December 1975 until the present, although we have made some improvements in the formulas for descriptors and the timeliness of the data. The model was superceded by a new risk model estimated in 1980 and released in 1982. The model reviewed here was then renamed the "El Model" to distinguish it from the revised E2 Model. Although the E l Model is now obsolete, we continue to use it, and it continues to perform well. This article will evaluate its predictive performance from the third quarter of 1974 until the present. Until December 1975, the model was being estimated and readied for commercial implementation. From December 1975 until June 1977, risk predictions were periodically updated but no ongoing evaluation occurred. Hence, we performed the evaluation of predictive performance through June 1977 retrospectively. From July 1977 until the present, we routinely evaluated predictive performance each month during

Financial risk, rate of return of Canadian firms, and implications for government intervention

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The World Bank and Petroleum Development in the Third World

Abstract: The issues that arise between state sovereignty over natural resources and the desire of the State to finance the development of its petroleum resources from external sources are briefly examined The problem is particularly acute for the least developed countries It is suggested that financing obtained from international agencies such as the World Bank, may provide a means for such countries to maintain full sovereignty over their petroleum resources and at the same time obtain needed financing To this end the petroleum lending activities of the World Bank are examined both in terms of policy and in terms of the financial resources available A special lending facility to help underwrite financial risk of petroleum exploration in the least developed countries is proposed

Competition in health care: strategies from other industries.

Abstract: Health care managers can learn to adjust to competition by observing companies in other deregulated industries. Six basic strategies will separate the winners from the losers: Increase market share. This strategy requires not only increasing the share of current markets but also introducing new products and services into new markets. Scrutinize operations. Managers must be knowledgeable about strategic planning, adept at product line analysis, and skillful in using management information systems. Prune where necessary. Operations must be periodically reviewed to assess whether programs, products, and services continue to be profitable. Increase productivity. Productivity in this labor-intensive industry is essential. Wages may have to be reduced and staffing levels changed in the future to permit better control of labor costs. Increasing the volume of service, investing in nonclinical technology, and encouraging employee ideas also should be considered in seeking higher productivity. Strengthen the balance sheet. Hospitals should avoid incurring both long- and short-term debt, and they should attempt to accelerate repayment of long-term debt. Not-for-profit hospitals should investigate joint ventures, which spread the financial risk among investors, as means to raise capital to expand their operations. Increase cash. Prudent organizations will establish reserve funds, adopt fund-raising programs, and initiate improved cash collection systems. Health care executives also should reflect on how deregulation may affect their employees, the poor, and access to sophisticated medical procedures. The successful health care organization eventually will position itself in line not only with its markets but also with its mission and values.

Operational Approaches to Risk Management in Financial Institutions: A Technique for Commercial Banks

Abstract: This article provides an overview of operational approaches to risk in financial institutions along with a more specific look at risk in banking The coverage includes traditional approaches to the subject and more recent developments such as the use of computer simulation models

A basic strategy for financing long term care.

Abstract: As pressure mounts to contain Medicaid long term care spending, short-range "quick fixes" must be avoided. Three such false solutions in particular have shortcomings that may actually exacerbate long term care's financial dilemma because they are based on inadequate definitions of the problem. Two of these proposals--legislation to broaden family responsibility toward institutionalized elders on Medicaid and expanded state power to put liens on such elders' real property--err by trying to mandate "caring" and are predicated on a misunderstanding of the "spend-down" problem. The other proposal--to provide tax incentives to family members who care for elders--requires a large administrative apparatus, assumes an elasticity of supply that may not exist, and could disrupt the "gift relationship" on which family exchanges are often based. What is needed is a strategy with short term, intermediate, and long term objectives that move toward an insurance approach. The short term plan should lay the groundwork for intermediate strategy and control costs by changing rate-setting methods and putting limits on facility construction. The intermediate plan should change the problem's definition from one of merely controlling Medicaid long term care expenditures to one of efficiently managing state resources for the elderly through the development of state financing and local delivery systems that target older persons in greatest need. An effective means of doing this is through the creation of social/HMOs, which have five key features: integration of service responsibility and authority; flexibility in organizational design; balanced clientele; pooled prepaid funding; and financial risk for the provider organization. Finally, the long term strategy should transfer much of the long term care financial burden from individuals and state Medicaid agencies to insurance mechanisms. Many individuals would thus avoid impoverishment caused by health care spending and Medicaid would greatly reduce its caseload. Insurance coverage is an appropriate funding mechanism, moreover, in that relatively few persons will ever incur high costs.

Managing to reduce nuclear financial risks

Abstract: Nuclear power plant projects have weathered volatile economic conditions and uncertain regulatory climates with varying degrees of success. Some electric utilities can point to excellent construction and operating records, while others have suffered continuous difficulties. Are the success stories the result of good luck or effective management. This article identifies the potential sources of financial risk in a nuclear project and describes several methods available to management for controlling financial liability. A commitment to the highest level of technical and managerial skills is cited as a necessary component of all successful nuclear undertakings. 4 references, 3 figures, 2 tables.

Application of Value-lmpact Methodology in the Design Analysis of a Nuclear Safety System

Abstract: The application of a value-impact methodology to a nuclear safety system design analysis has been investigated. The theoretical framework of multi-attribute decision theory and cost-benefit analysis is combined with reliability, availability, and probabilistic risk assessment techniques to analyze three design alternatives for the auxiliary feedwater system of a pressurized water reactor. Selected attributes pertaining to financial impact, investment risk, health risk, and licensability are used to rank the alternatives. External factors--such as the effect on the schedule of other plants, impact on property value, and emotional effects on population--that are potentially large were not considered. Standard reference tables were developed as a user's guide for value-impact calculations.

Financial Risk and Capital Structure: Theory and Practice in an International Context

Abstract: Much work has been done on corporate financing in recent years and the theory of capital structure has become one of the better developed areas of finance At the same time, the gulf between theory and practice in this area seems particularly pronounced and may even be widening Conceptual developments as they have evolved in the academic literature, such as a formalisation of tradeoffs as posed in perfect or at least efficient financial markets, are foreign to most practicing financial executives, while the issues that concern practitioners, such as developing a specific financing strategy in a particular business and institutional environment which is often viewed as having significant imperfections, have been of little interest to academics Faced with this dichotomy, it seems fruitful to explorethe differences between theory and practice, and what may give rise to them For if the purpose of theory is to improve practice which I believe it should be, we will have to narrow this gap to be successful For each side, it is tempting to blame the other as the culprit: academics view practitioners as ignorant and backward, while practitioners counter by blaming academics with irrelevance and naivety As usual in life, the truth is probably somewhere in the middle, with each side having to learn from the other