Showing papers on "Financial risk published in 1990"

On the Efficiency of Internal and External Corporate Control Mechanisms

Abstract: Managers of contemporary publicly held organisations typically are not the owners. Rather, a specialisation of responsibilities has evolved whereby managers coordinate activities within the firm and position it appropriately in its competitive environment; the owners of the firm bear financial risk in the hope of retaining the difference between the firm’s productive cash-flows and the outflows of its promised payments (Fama and Jensen 1983a, 1983b). As the firm’s owners would suffer tremendous financial losses if the firm failed, they tend to diversify their holdings across a variety of firms as a hedge against such a possibility. As a result, the individual owner has little interest in conducting, or even closely monitoring, the day-to-day activities in all of the firms in which he or she has a financial interest (Fama 1980). The owners hire boards of directors who, in turn, hire managers to perform these duties.

An Examination of the Impact of the Garn-St. Germain Depository Institutions Act of 1982 on Commercial Banks and Savings and Loans

Abstract: This paper evaluates the effects of events leading to the passage of the Garn-St. Germain Depository Institutions Act of 1982. The evidence suggests that the call for reform by President Reagan's Housing Commission and the Senate passage of the bill produced positive abnormal returns to stockholders of large savings and loans and commercial banks. Stockholders of small S&Ls and banks, on the other hand, generally experienced negative abnormal returns. Furthermore, when hopes of passage of the Act faded, significant negative (positive) abnormal returns were experienced by stockholders of large (small) S&Ls and banks. THIS STUDY EXAMINES THE impact of the passage of the Garn-St. Germain Depository Institutions (GSGDI) Act of 1982 on commercial bank and savings and loan stockholder returns. The GSGDI Act represents one of two major revisions of the financial system over the last twenty years (the other being the Depository Institutions Deregulation and Monetary Control Act of 19801). The proposal for such a change reflected the growing inadequacy of the regulatory structure of financial institutions to adapt to rapid changes in technology, shifting consumer demands for financial services and extremely volatile interest rates. Efforts to reform the financial system resulted in passage of the GSGDI Act of 1982 which included provisions seeking to improve both the implementation of monetary policy and the degree of equity in the regulation of financial institutions. Such improvements were intended to reduce the operational and financial risk of financial institutions. A central issue in the economics of regulation is whether regulatory actions benefit the economic agents they are intended to benefit. A large body of literature exists which examines the economic effects of regulation. Much of this literature has utilized the concepts and methods of welfare economics to assess the extent

The financial system and economic performance

Abstract: The core function of the financial system is to facilitate the allocation and deployment of economic resources, both spatially and across time, in an uncertain environment. This system includes the basic payment system through which virtually all transactions clear and the capital markets which include the money, fixed-income, equity, futures, and options markets and financial intermediaries. The capital markets are the medium that makes possible the basic cash-flow cycle of household savings flowing to capital investments by firms, followed by a return to households (via profits and interest payments) for consumption and recycling as new savings. Through often-elaborate financial securities and intermediaries, the capital markets provide risk-pooling and risk-sharing opportunities for both households and business firms. Well-developed capital markets allow for separation of the responsibility for the capital-flow requirements of investments from the risk-bearing responsibility for those investments. In both an international and domestic context, this facility permits efficient specialization in production activities, according to the principle of comparative advantage. In addition to these manifest functions, the capital market serves an important, perhaps more latent, function as a key source of information that helps coordinate decentralized decision-making in various sectors of the international economy. Interest rates and security prices are used by households or their agents in making their consumption-saving decisions and in choosing the portfolio allocations of their wealth. These same prices provide critical signals to managers of firms in their selection of investment projects and financings.

Understanding and Assessing Financial Risk Tolerance: A Biological Perspective

Abstract: (1990). Understanding and Assessing Financial Risk Tolerance: A Biological Perspective. Financial Analysts Journal: Vol. 46, No. 6, pp. 50-62, 80.

Utilization management of mental health services by private third parties.

Abstract: The author describes approaches to utilization management and the growth of this segment of the health care industry. Issues posed for the mental health field by introducing a third party as the arbiter of care include professional uncertainty and the discretionary behavior of practitioners and third parties, the availability of clinically appropriate alternative services, shifting of costs between the public and private sectors, safeguarding privacy, accountability and the integrity of the review process, financial risk versus professional responsibility, and the impact of utilization management on the outcome of care.

Return Risk and Cash Flow Risk with Long-term Riskless Leases in Commercial Real Estate

Abstract: This paper presents a conceptual analysis of some of the key fundamentals that underlie the risk characteristics of commercial real estate returns. In particular, the relationship between the property's return risk and its cash flow risk is explored. This relationship is important because it is the return risk that should matter most to investors, yet it is the cash flow risk or market risk about which we may have the most objective information and the most intuition. This is because real estate assets are generally unsecuritized and trade too infrequently to observe time series of returns (including appreciation) that could be used to directly study the risk characteristics of the returns. By explicitly incorporating the possibility of cash flows governed by riskless long-term leases, this paper also explores the relationship between lease term and both cash flow risk and return risk.

Inductive learning for risk classification

Abstract: The authors discuss the application of inductive learning to credit risk analysis. Three risk classification problems are addressed: business loan evaluation, bond rating, and bankruptcy prediction. The use of a system called Marble, a knowledge-based decision-support system that uses approximately 80 decision rules to evaluate commercial loans, is discussed. In particular, an aspect of Marble that uses inductive learning to classify financial risks is described, and the effectiveness of the technique is discussed. >

Customer Motivations: Use and Non‐use of Automated Banking

Abstract: The results are presented of an exploratory study on customer motivations towards the use and non‐use of an automated teller machine with data collected from a total of 208 customers of a financial institution. An analysis of results based on demographic variables reveals significant differences between users and non‐users in terms of education only. Results also show that convenient accessibility of a financial institution and avoidance of waiting lines are the principal reasons for using the automated teller. Furthermore, in comparison with non‐users, the user group is more likely to believe the automated teller improves service quality, reduces the financial institution′s operating costs, presents no personal or financial risks, and is simple to use. The non‐user group for its part prefers dealing with human tellers, finds the machine complex to use, and associates personal and financial risks with the use of the automated teller.

Corporate Financial Policy and the Theory of Financial Intermediation

Abstract: This paper examines the optimal structure of financial contracts in an economy subject to two forms of moral hazard. Multiple information problems are shown to generate a role for multiple classes of financial claimants. We then show that economic efficiency is enhanced if the financial structure of the economy consists of both direct and intermediated financial contract markets. Consequlently, our results demonstrate a motivation for the complementarity between capital markets and depository financial institutions. THE PURPOSE OF THIS paper is to provide an analysis of the complementary roles of direct financial contract markets and intermediated financial contract markets in the modern theory of corporate finance. The need to formulate such a model has been emphasized elsewhere by Stiglitz (1985) and Fama (1985), among others. However, an adequate explanation of this phenomenon has yet to be formulated. The model described in this paper focuses on the role of multiple information problems in a theory of complex financial structure. Specifically, in an environment with private action (i.e., unobservable investment allocations) and private information (i.e., partially unobservable project cash flows), multiple claimant classes arise to resolve the separate inefficiencies induced by moral hazard. In our model, the interaction of project risk and observability creates investment distortions which can be mitigated by increasing the number of outside claimant classes. Our results demonstrate explicitly the way in which a firm's optimal financial structure depends on the assumed configuration of an investment project's risk and observability characteristics. Under certain conditions, we show that the optimal contractuai allocation in an economy with only direct financial contract markets consists of a debt contract and an outside equity claim. This contractual configuration restores the efficient investment allocation decision. We then consider the feasibility of an intermediated financial contract market in this setting. We show that the existence of an intermediated financial contract market improves economic efficiency due to the reduced aggregate costs of

A classification of structured bond portfolio modeling techniques

Abstract: 0 ver the past decade, managing interest rate risk has become-a pivotal component of the portfolio management procedures of financial institutions. The volatility of interest rates in the early 1980s emphasized the importance of insulating portfolio values from unanticipated swings in interest rates. A flurry of activity contributed considerable refinements to existing assethability management techniques, including immunization techniques such as dedication and duration matching. This article examines the various approaches to modeling the assethability management problem. Our goal is to help practitioners decide which methodology is appropriate for their specific problem, given the unique structure of their liabilities and the types of assets in their portfolio. We consider a hypothetical financial institution with liabilities that must be met over time. To minimize financial risk, the institution intends to invest cash in assets that "match" the liabilities. The asset/ liability management problem is to identify a portfolio of assets (or to identify a feasible asset portfolio rebalancing strategy) that achieves this "match" so as to eliminate the interest rate risk from the combined assetniability portfolio. We classify assetniability problems as either deterministic or stochastic. Deterministic assethability problems are those for which 1) the liability cash flow stream is known with certainty in advance, and 2) the cash flows for all assets that may potentially be included in the portfolio are known with certainty, and do not depend in any way on factors such as the level ofinterest rates, exchange rates, or the general level of the economy. These two criteria are quite restrictive, excluding most realistic assethability management problems. All other problems are classified as stochastic problems; either the liability cash flows are uncertain, the asset cash flows are uncertain, or, in most instances, both. Much of the research in this area during the past decade has focused on analyzing the stochastic assetniability management problem. We also classify asset/liability management techniques according to the hedging criteria applied dedication techniques and duration-matching techniques. Dedication or cash-matching techniques focus on matching the liability cash flows over time. Duration-matching techniques focus on hedging the interest rate exposure in the liabilities by constructing an asset portfolio that matches the interest rate sensitivity of the liabilities. Table 1 categorizes assetniability management problems by problem type (deterministic or stochastic) and by hedging methodology (dedication or duration matching). Within each category, some references are provided to the literature. We discuss

Risk Sharing versus Low-Cost Credit Systems for International Development

Abstract: Low-cost credit programs in developing countries have failed to achieve agricultural technology adoption goals. This research attributes the failure to the inabiiity of poor farmers to, bear the combined business and financial risks p:'sed ly adopting new technologies and develops proposals for the design of credit programs that reduce these risks. Agronomic and socioeconomic data are combined through simulation and mathematical programming to analyze problems of decision making under risk for developing countries. The results will assist iii the design of new rural financial institutions conducive to the adoption of new production technologies by subsistence

The Financial Effects of Fuel Adjustment Clauses on Electric Utilities

Abstract: During the 1970s, fuel adjustment clauses (FACs) were adopted by many electric utilities as a means of adjusting electricity prices when per-unit fuel costs changed. Recently, many state regulators have questioned the need for FACs since fuel costs have become more stable. Some have been reluctant to abolish FACs because of fear that an electric utility's financial risk will increase and with it the cost of capital for the utility. This article shows empirically that the risk effects of FACs may be quite small, and that risk could actually decline if an FAC is removed. However, a wealth effect may exist that should be considered before an FAC is abolished. Copyright 1990 by the University of Chicago.

An application of target-MOTAD programming to the analysis of downside business and financial risk on farms.

Abstract: In this paper a description is provided of the development and use of a target-MOTAD model for use in consultative work with farmers who are under financial pressure The analysis of downside risk and introduction of a trade-off between financial and business risks are key features of this model that make it especially applicable to such situations

Systemic Financial Risk in Payment Systems

Abstract: Efficient and stable payments systems are of fundamental importance in maintaining an orderly international monetary system. Major disruptions of national and international payments systems would have highly adverse effects on international trade, capital flows, and real activity. A key issue--now being addressed by authorities in a number of major countries--is whether existing institutional arrangements need to be modified in order to reduce the liquidity and credit risks that have arisen as a result of the expansion of international capital flows and the growing integration of major financial markets. This paper examines the nature of these risks and the policies that are being implemented to manage or curb them.

The use of accounting ratios as measures of risk in the determination of the bid-ask spread

Abstract: The effect of financial reports on stock market behavior is a central issue of research in accounting and finance. A number of studies investigate how financial information becomes impounded in security prices and affects investment decisions. Prior studies on the determinants of the bid-ask spread investigate the effect of market risk measures, and provide evidence that the bid-ask spread is a positive function of risk. Other studies report on an association between market risk measures and accounting risk measures. The present study extends this line of research by examining the effect of risk, proxied by accounting risk measures, on the bid-ask spread. The results of ordinary least squares (OLS) regressions provide evidence of a statistically significant association between certain accounting ratios and the bid-ask spread, and indicate that accounting risk measures account for more variability in the bid-ask spread than market risk measures. Most notably, the results indicate that a model which includes both accounting risk measures and market risk measures is a better fitted model that one which includes either accounting risk measures or market risk measures alone.

The myth of aggregate planning

Abstract: Abstract. An empirical study explores the business environment, the nature of manufacturing, and the planning cycle, using a sample of enterprises with seasonally-biased sales profiles for their products. This enables both the principles and the practicalities of aggregate planning to stand comparison with the observed rubric of manufacturing management. The conclusion is that neither is germane to industry, and that, in general, practitioners develop an effective (broad) manufacturing strategy with an appropriate resources-acquisition programme. The master production schedule then strikes an acceptable balance between productivity, flexibility, and financial risk.

Risk Reduction and Informal Interpersonal Influence: Industrial Marketing Magagement Perspectives

Abstract: Risk Reduction and Informal Interpersonal Influence: Industrial Marketing Management Perspectives Perceived risk has been an integral part of the buying behavior literature for several decades. The seminal work by Bauer [4] set the stage for definitively including the component of risk in the buying decision. Managing, controlling, and monitoring perceived levels of risk have been of paramount concern to practitioners in general and industrial marketing managers in particular. Given that many of the purchases in the industrial sector are big-ticket items with considerable technical complexities and inherently more risk, industrial marketers have a vested interest in gaining additional insight into the phenomenon of perceived risk. Of particular concern in the current study is the role of informal interpersonal influence on the level of perceived risk experienced by the organizational buyer in a new-task situation. Given that the organizational buyer plays the vital role of influencer in the buying process, it is essential to concentrate on methods of managing risk. This position of influence has been highlighted from both the perspective of the macro-model [e.g., 28, 31, 38] and the micro-model point of view [e.g., 5, 24, 36, 39]. Inherent to both the macro-models and the micro-models of organizational buyer behavior is the significance of informal interpersonal influences on the level of risk perceived by buyers [10, 21, 28, 31, 32]. Specifically, the macro-models have provided the market planner with a generalized perspective of organizational buying; however, they fail to provide adequate empirical evidence to substantiate the posited relationships [29]. The present investigation seeks to provide such commission costs. The one percent commission costs incorporated in the second investment test eliminate the before-commission cost excess returns found in the first investment test. These results on the underlying common stocks of takeover target firms are consistent with previous studies [1,2,5,7,11], which find that the majority of the excess returns generated by a takeover announcement accrue to the target firms on or before the first public announcement. Finally, the results of this study are similar to the previous study by Reilly and Gustavson [8], which focused on investigating in the options of firms announcing stock splits. They found that abnormal returns net of commission costs are available on the options of firms announcing splits; however, these returns were not available on the underlying common stocks of these firms. an empirical test by examining the impact of informal interorganizational and intraorganizational influences on the buyer's level of perceived risk. THE ROLE OF INFORMAL INFLUENCE The reliance upon external sources of information to aid the organizational buyer in the decision process concerning a new-task purchase is well recognized [3, 15, 21, 27, 32, 38, 44]. The use of these sources of information may be viewed as a way of decreasing the level of perceived risk associated with the new-task purchase. Additionally, it should be pointed out that these information sources may originate either inside or outside the organizational buyer's firm. The two are not to be considered mutually exclusive as many times it is a combination of both internal and external information that is sought [6, 13, 14, 17, 18, 21, 22, 44]. The degree of influence attributed to these informal sources has been shown to vary along a continuum anchored by "certainty" and "uncertainty" (or "perceived risk") [7, 9, 40]. Generally, it may be concluded that the greater the perception of risk associated with the new-task buying situation, the greater reliance is placed on the informal communication source [28, 38]. PERCEIVED RISK AND MODIFICATION Perceived Risk Many views have been forwarded concerning the various components that make up perceived risk; however, it is possible to combine these views into three diverse and unique categories: (a) performance risk, (b) social risk, and (c) financial risk [23, 25, 30, 33, 38, 41]. …

A knowledge-based seismic risk evaluation system for the insurance and investment industries (IRAS)

Abstract: This paper summarizes the development of the Insurance and Investment Risk Analysis System (IRAS) which provides consultation on earthquake risk for insurance and investment banking industries. Major features of IRAS, including interactive input/output facilities, graphic data retrieval, hierarchical knowledge-based management, integration of independent program modules, combinations of backward-chaining and forward-chaining inference mechanisms, and approximate reasoning schemes based on fuzzy set theory to deal with linguistic and/or incomplete information are described

Property and asset allocation – 2 The broker′s view

Abstract: Considers the role of pension funds′ real portfolio structure and the role of property within that portfolio, discussing the need for establishing parameters. Compares business risk and investment risk, and discusses the problems faced by investment managers in reconciling their conflicting requirements. Highlights the potential conflict of interest between quoted securities managers and property advisors. Suggests, by reference to a historical summary, that, given sufficient information, property should be treated as all other assets.

Risk facing U.S. commercial banks

Abstract: The study examines the financial state of the U.S. commercial banks and of the main private borrowing sectors: corporate non-financial business and households. The study finds that the condition of the banks' loan portfolios exposes them to high losses. This risk together with the forthcoming increase of the required ratio of capital to assets suggests that banks will respond by slowing the growth of credit. One consequence would be weaker U.S. investment and consumption. Moreover, credit would probably be directed away from higher risk borrowers such as the highly indebted countries.