Showing papers on "Financial risk published in 1989"

Financial management and policy

Abstract: I. FOUNDATIONS OF FINANCE. Vignette: Problems at Gillette. 1. Goals and Functions of Finance. 2. Concepts in Valuation. 3. Market Risk and Returns. 4. Multivariable and Factor Valuation. 5. Option Valuation. II. INVESTMENT IN ASSETS AND REQUIRED RETURNS. Case: Fazio Pump Corporation. 6. Principles of Capital Investment. 7. Risk and Real Options in Capital Budgeting. 8. Creating Value through Required Returns. Case: National Foods Corporation. III. FINANCING AND DIVIDEND POLICIES. Case: Restructuring the Capital Structure at Marriott. 9. Theory of Capital Structure. 10. Making Capital Structure Decisions. 11. Dividends and Share Repurchase: Theory and Practice. IV. TOOLS OF FINANCIAL ANALYSIS AND CONTROL. Case: Morley Industries, Inc. 12. Financial Ratio Analysis. 13. Financial Planning. V. LIQUIDITY AND WORKING CAPITAL MANAGEMENT. Case: Caceres Semilla S.A. de C.V. 14. Liquidity, Cash, and Marketable Securities. 15. Management of Accounts Receivable and Inventories. 16. Liability Management and Short/Medium Term Financing. VI. CAPITAL MARKET FINANCING AND RISK MANAGEMENT. Case: Dougall & Gilligan Global Agency. 17. Foundations for Longer-Term Financing. 18. Lease Financing. 19. Issuing Securities. 20. Fixed-Income Financing and Pension Liability. 21. Hybrid Financing through Equity-Linked Securities. 22. Managing Financial Risk. VII. EXPANSION AND CONTRACTION. Case: Rayovac Corporation. 23. Mergers and the Market for Corporate Control. 24. Corporate and Distress Restructuring. 25. International Financial Management. Appendix: Present-Value Tables and Normal Probability Distribution Table.

How do financial incentives affect physicians' clinical decisions and the financial performance of health maintenance organizations?

Abstract: It has been suggested that the use of financial incentives by health maintenance organizations (HMOs) may change physicians' behavior toward individual patients. To test this hypothesis, we used a regression analysis of data from a survey of HMOs to examine the relation between the presence of financial incentives and two measures of the use of resources (the rate of hospitalization and the rate of visits for outpatient services) and one measure of the HMOs' financial viability (the achievement of break-even status). When we controlled for the effect of market-area variables, we found that some forms of compensation were significantly associated with these indicators of decision making by physicians. Among methods of paying physicians, the use of capitation or salaries was associated with a lower rate of hospitalization than the use of fee-for-service payment; physicians in for-profit HMOs and group-model HMOs also used the hospital less often. Placing physicians at financial risk as individuals and imposing penalties for deficits in the HMO's hospital fund beyond the loss of withheld funds were associated with fewer outpatient visits per enrollee, but a higher percentage of HMO patients in a physician's caseload was associated with more frequent visits. HMOs were more likely to break even if they were larger, older, had physicians who treated more HMO patients, and placed physicians at personal financial risk for the cost of outpatient tests; break-even status was also related to the type of HMO. We conclude that the use of some, but not all, financial incentives, as well as the type of HMO, does influence the behavior of physicians toward patients. It remains to be determined how these factors affect the quality of care.

Managing Financial Risk

Abstract: Note: Bibliogr. : p. 642-653. Index Reference Record created on 2004-09-07, modified on 2016-08-08

Small Firm Financing: Implications from a Strategic Management Perspective

Abstract: The main thesis of this article is that a corporate strategy perspective (which includes managerial choice) may be superior to a traditional finance perspective in explaining small firm financing decisions. The traditional finance perspective tries to explain a complex financial decision process (e.g., optimal debt level) without fully considering the impact of managerial choice. It is likely, however, that managerial choice exerts considerable influence on small firm financing decisions. Thus, a new paradigm is needed which includes the many factors that are a part of the small firm financing decision process, among them: goals, risk aversion, and internal constraints. Such a paradigm would: (1) allow for a more complete understanding of the small firm financing process; (2) address more fully the needs and concerns of the small firm practitioner; and (3) provide a sound basis for future empirical research. Recent literature has attempted to explain small firm financing decisions using modern financial theory. For example, McConnell and Pettit' suggest that small businesses generally have proportionally less debt than large firms. They propose this is so because: (1) small firms generally have lower marginal tax rates than larger firms (suggesting less tax deduction benefit of debt); (2) small firms may have higher bankruptcy costs than large firms (which increases the financial risk of debt); and (3) small firms may find it more difficult to "signal" their business health to creditors (therefore raising the "cost" of debt to small firms). Another attempt to explain small firm financing behavior relies on agency theory.2 Agency theory holds that people who have equity or debt in a firm require costs to monitor the investment of their funds by management or the small business owner (i.e., agency costs). This view suggests that financing is based on the owner/ manager being able to assess these agency costs" for each type of financing, and then selecting the lowest-cost method of financing the firm's activities. One weakness of this explanation is that no one has yet been able to measure agency costs, even in large firms. Nor has agency cost theory (or any other modern financial theory) been able to explain capital structure in large, public firms, let alone in small, private ones.3 In contrast, recent theoretical and empirical work suggests that a strategic perspective (which includes multiple firm objectives and managerial choice) may have promise in explaining the financing decision in large, public firms. The objective of this article is to use a strategic perspective as a basis for developing propositions-and a new research paradigm-to explain the financing decisions of small, private firm management. First, the Barton and Gordon argument for the applicability of a strategic management perspective in understanding large firm financing decisions is reviewed.5 Second, the argument's validity and relevance as applied to small firm financing decisions is assessed. Third, propositions regarding the small firm financing decision are developed. Finally, follow-up empirical work is proposed. THE CASE FOR A STRATEGY PERSPECTIVE Barton and Gordon point out that while financing decisions are an important aspect of firm strategy, neither finance theory nor empirical research has provided useful guidance for practitioners or academics regarding this decision.6 They suggest that the finance paradigm may not permit adequate representation of complex behavior at the individual firm level. They point out that unrealistic assumptions are made in developing theoretical financial models, and note that the representation of the firm as a rational economic entity with the singular goal of shareholder wealth maximization is an oversimplification. Barton and Gordon suggest that the following characteristics must be accounted for in any explanation of firm financing decisions: (1) behavior at the firm level; (2) the fact that the capital structure decision is made in an open systems context by top management; (3) the capital structure decision must be consistent with an overall corporate plan; and (4) the decision reflects multiple objectives and environmental factors, not all of which are financial in nature. …

Portfolio Optimization with Shortfall Constraints: A Confidence-Limit Approach to Managing Downside Risk

Abstract: The portfolio optimization process determines the set of portfolios that achieve the highest expected returns at given risk levels. In this context, risk is usually measured by the standard deviation of the portfolio's returns. But many problems associated with return dispersion can be expressed in terms of a shortfall constraint-the minimnum return that must be exceeded with a given probability. This "confidence limit/" approach may provide a more meaningful description of risk for many investment situations. Consider investors who are judged relative to a benchmark portfolio, such as an index or basket of indexes. The return and risk characteristics of potential investment portfolios and the benchmark portfolio can be used to determine a distribution of deviations from the benchmark. The portfolio optimization process can then be limited to portfolios that have a given probability (e.g., 95 per cent) of not underperforming the benchmark by more than a specified amount (e.g., 5 per cent). Constrained optimization may be especially helpful for investors who are subject to multiple, and potentially conflicting, objectives.

Asset Allocation: Balancing Financial Risk

Abstract: This work provides a review of the capital market theory behind asset allocation, as well as step-by-step guidelines for designing and implementing appropriate investment strategies. The critical dimensions of asset allocation are covered, and a framework is provided for making decisions.

Country Risk and the Structure of International Financial Intermediation

Abstract: Country risk stands out in today’s global financial system for several reasons. It is perceived to be a major threat to the system’s stability, more so than virtually any other single category of risk. It also is perceived to follow different rules than most other types of risks, and hence to require different institutional approaches. This is reflected in the specialization of particular institutions in bearing country risk, the important risk mitigating role of multilateral institutions or arrangements, including the International Monetary Fund, the World Bank, and the Paris Club, and the lack of specialized markets for laying off this risk.

The measurement of investment risk

Abstract: 1.1 In the paper ‘Improving the Performance of Equity Portfolios’ by Clarkson and Plymen the authors concluded that Modern Portfolio Theory methods made no contribution whatever to improving the performance of equity portfolios and suggested that attention should be paid instead to the application of fundamental analysis, which—if carried out by skilled and experienced analysts—should lead to higher expected returns. The only practical application of techniques related to Modern Portfolio Theory appeared to be in the area of Index Funds, where it is desired to track the performance of a chosen index as closely as possible.

Accounting Information and Investment Risk Perception in Japan

Abstract: This paper investigates the issue of whether financial reports appear to convey information on risk on a consistent basis across international capital markets. Data collected from a sample of Japanese financial analysts are compared to previously reported data from U.S. analysts. The results indicate that traditional accounting measures of risk explain substantial variation in the average risk perceptions of financial analysts in both the U.S. and Japan; however, while accounting risk measures were found to explain significant variation in ex post beta for the U.S. sample, this was not found to be the case for the Japanese sample. The implications of these cross-national differences and similarities are discussed.

Financial risk : theory, evidence and implications : proceedings of the Eleventh Annual Economic Policy Conference of the Federal Reserve Bank of St. Louis

Abstract: I Risk: A General Overview.- 1 Differences of Opinion in Financial Markets.- Commentary by V. V. Chari.- 2 Risk, Exchange Market Intervention, and Private Speculative Behavior in a Small Open Economy.- Commentary by Charles I. Plosser.- II Risk: A Domestic Overview.- 3 Risk and the Economy: A Finance Perspective.- Commentary by A mold Zellner.- 4 Management versus Economic Conditions as Contributors to the Recent Increase in Bank Failures.- Commentary by George G. Kaufman.- III Risk: An International Overview.- 5 Empirical Assessment of Foreign Currency Risk Premiums.- Commentary by Maurice Obstfeld.- 6 Country Risk and the Structure of International Financial Intermediation.- Commentary by Thomas D. Willett.

The persistence of investment risk

Abstract: While undoubtedly correct mathematically, the 24% probability estimate of stocks underperforming bonds over a twenty-year investment period struck me as intuitively implausible when I first heard it. Given the importance of the Salomon Brothers finding to setting long-term investment policy for pension and endowment funds, I decided to conduct my own investigation. Does the Salomon Brothers finding truly challenge the generally held belief that stock returns will dominate bond returns for investment periods of twenty years or longer? I have concluded that my initial reaction was indeed on the mark. The Salomon Brothers findings are implausible because one of the assumptions behind the mathematical procedures underlying the findings is implausible. As they speculated themselves, the Salomon researchers have indeed \"spawned a mathematical curiosity by pushing a short term [investment] model too far into the future\" (Leibowitz and Krasker [1988]).

Long-run financial and demographic differences between failed and successful local and regional railroads

Abstract: This paper examines a series of long-run financial and demographic attributes of local and regional (L&R) railroads to determine whether certain factors have been historically associated with railroad service failure and whether those factors could indicate which firms are predisposed to greater risk. Additionally, this investigation attempts to determine whether deleterious financial and demographic positions occur just prior to service failure or exist for extended periods of time. Such determinations could be beneficial to those assessing investment risk in the L&R railroad industry. While this paper does not attempt to define the risk of any specific railroad, it provides a historical overview of those factors associated with L&R railroad success and failure.

Policy and risk implications for an individual grain farm

Abstract: Farmers should include risk in their marketing, management, and financial plan. This article describes a conceptual model of risk and a microcomputer model, presents output for a hypothetical farm and examines the effects of agricultural policy and futures price, basis and crop yield risk on the financial probability distribution. The model should be solved for specific farms; conclusions should not be based on averages. Although participation in agricultural programs improves the financial position for a farm, price signals among grain are distorted causing a misallocation of resources. Financial survival distributions vary with size of risk coefficients.

Estimating financial loss from fire and explosion accidents on process plants

Abstract: In this research a method has been developed for rating process plants with regard to financial risk from fire and explosion. The main contribution of the research lies in the modelling of the internal structure of the method in a logical way. [Continues.]

Managing labour under extreme risk: collective bargaining in the North Sea Oil industry.

Abstract: The thesis is concerned with the means by which labour is managed in the young, turbulent and high risk industry of North Sea oil extraction. To explain this, the study had to extend beyond the more usual focus of research attention, the inmediate relationship between employer and employee, to examine the wider commercial relationship between the major oil companies and their contractors from the perspective of both parties. The response of the trade unions is assessed in this broader context. In a relatively short period of time an industrial relations system of considerable complexity has developed. The spreading of financial risk by the operating companies (oil majors) is paralleled in industrial relations by the delegation of responsibility to contractors. As a result, a two tier workforce has developed. The study analyses the processes at work, drawing on a range of interview, observation and archival techniques. Collective bargaining has been widely used to cope with the labour problems posed by these extreme financial and environmental circumstances. It is demonstrated that this has sometimes been imposed upon the contractors and that it operates at both the mUlti-employer, industry level, and at that of the individual company. However, the thesis concludes that this collective bargaining rests more on loose, informal agreements, and trade union lobbying, rather than formal agreements and procedures.

Probabilistic Seismic Risk to Non-Nuclear Facilities

Abstract: This paper presents the overall methodology and results of a seismic risk assessment performed on two facilities in California. The purpose of this study was to assess the financial risks associated with earthquakes at non-nuclear facilities. Analytical tools, assumptions and models applicable to the assessment of seismic risk to nuclear power plants were utilized in this study. Structural failures that could potentially result in loss of the buildings were evaluated and the ground acceleration levels that could induce failures of critical structures were calculated. A frequency distribution of earthquakes was next constructed based upon exceeding ground acceleration levels as a function of distance from identified seismic events and the estimated intensity of each seismic event. The ground accelerations associated with the structural failure data were then combined with the constructed frequency distribution to determine the frequency of seismic events that equaled or exceeded the ground acceleration levels that would induce structural failures on the two sites. The resulting distribution estimates the potential risk of earthquakes inducing structural failures as data input for the consequential financial risk associated with these failures. The methodology application discussed in this paper can be a valuable tool used by insurance companies and by commercial and industrial firms to identify areas of high seismic risk that can then be used to evaluate financial risk, adequacy and value of insurance coverage, and the need to perform a seismic upgrade program.

The gearing adjustment in inflation accounting: The financing sequence assumption

Abstract: The application of a gearing adjustment in inflation accounting has always resulted in the problem of determining a financing sequence. A decision has to be taken whether certain categories of assets are financed with equity and/or loan capital. Financial theory of the last few decades quite convincingly revealed that there are no logical grounds for relating certain assets to certain liabilities and/or equity. This proportional financing assumption is discussed and illustrated in the article for the so-called Van der Schroeff-system of income demermination in order to point out the sensitivity and financial consequences of this assumption for financial decision making. The assumption about the financing sequence does have a definite influence on the gearing adjustment. Further influences are on the income statement and the message given to shareholders and the investment public; the composition of the asset structure and consequently the risk composition of the assets; the composition of the financing structure and consequently the financial risk as portrayed by the balance sheet; and the marginal financing ratios needed to maintain the original gearing ratio.

An Examination of the Effect of Financial Risk on the Manager's Choice of Accounting Methods.

Abstract: This study examines the effect of the firm's level of financial risk on m a n a g ement's prefer e n c e for full-cost or s u c c e s s f u 1 -e f 1orts accounting in the oil and gas industry. Agency theory predicts that firms with Increasing levels of Iinancial risk have an incentive to switch to an accounting method which tends to increase net tangible assets and which c r eates more stable earnings in order to avoid technical default on loan covenants. Therefore, it is expected that s u c c e s s f u l -efforts firms with increasing levels of financial risk will tend to switch to use the lu l l c o s t accoun t i n g method. Past studies have used leverage as a s u r r o g a t e lor financial risk, but it is argued in this study that leverage is not n e c e s s a r i l y a good su r r o g a t e in the oil and gas industry. Instead, a variable, debt beta, is d e v eloped which r e p r e s e n t s a market assessment of financial risk. An i n f o r m a t i o n a l l y eff i c i e n t market con s i d e i s othei factors besides leverage in assessing financial risk, and these factors are reflected in the debt beta. The empirical results indicate that firms swi t c h i n g to the ful l-cost accounting method e x p e r i e n c e an increase in

The Economic Risks of Deliberately Released Genetically Engineered Microorganisms

Abstract: Because of biotechnology's ability to foster the next technological revolution in agriculture, economists are anxious to be able to perform ex ante analysis of its effects on farm sector structure and performance. Historical experience with the externalities generated by the chemical revolution in agriculture have made economists concerned with determining the socially optimal level of risk and mix of institutions for regulating any adverse effects of the new technologies. Uncertainty exists in the scientific community about the possibility of migration, mutation, and possible environmental and crop damage from genetically engineered microbial vectors (hereafter referred to as GEMs). However, a consensus is emerging that the risks presented by GEMs can be characterized as low probability/high consequence (Colwell, Harlow, Regal). The effect of this risk profile on the adoption of GEMS in agriculture will be determined in two stages. The first is the standard of acceptable risk set by regulators before allowing the product's release into the marketplace. Second, because this is unlikely to be a zero-risk-based criterion, farmers will be faced with assessing the financial risk (through liability for the externalities created) and health risk created by use of the product. Fundamental scientific, legal, and institutional uncertainties prevent economists from using standard models and methods for predicting adoption of the technology and its subsequent effects on the sector or determining either the socially optimal level of risk or the appropriate institutional division of labor between regulatory agencies and the courts for promulgating the desired level of safety. The extent of economic analysis that can be conducted and the effect of regulatory and court decisions on producer adoption will be explored.

Some Aspects of Life Assurance Solvency

Abstract: This paper uses a stochastic investment model developed by Professor A.D. Wilkie to study in probabilistic terms the investment risk to the solvency of a life assurance company. Two probabilities are considered for a cohort of policies: i) the probability that the premiums paid together with investment income and any initial reserve will be insufficient to pay for the claims, ii) the probability that at any time during the term of the policies the investment experience will have been sufficiently bad for a valuation to produce a deficit.