Finance
Stock Market Reactions and Firm Performance Surrounding CEO Succession: Antecedents of Succession and Successor Origin Full Text
Vol. 21, No. 1, p. 21
Jong C. Rhim, University of Southern Indiana
Joy V. Peluchette, University of Southern Indiana
Inam Song, Daejeon University
This study investigates the effects of CEO succession on the stock and financial performance of large publicly held corporations over the years 1977-1994. Using a market signaling framework, this study examines how the stock market responds to the expected financial performance of the firm at the announcement of CEO succession. The impact of successor origin of the CEO on the financial performance of the firm is also investigated. Findings indicate that the stock market responded more favorably to the announcement of succession caused by unanticipated events than to announcements of anticipated succession. Although successions resulted in significant improvement in some aspects of financial performance, the findings could not be generalized across all financial performance measures. However, those firms with inside CEO succession performed generally better than those firms utilizing outside succession with respect to operations and profitability.
Dual-Class Companies: Do Inferior-Voting Shares Make Inferior Investments? Full Text
Vol. 21, No. 1, p. 41
Judith Swisher, Western Michigan University
A dual-class share structure allows managers or original owners to retain control of a firm, while providing public equity financing. In the U.S., a firm generally issues superior-voting shares to managers or original owners, and inferior-voting shares to the public. As a result of the separation of control and risk bearing, the potential for agency problems exists. Theory predicts and some evidence shows that the use of a dual-class share structure leads to a lower firm valuation than would otherwise exist. However, theory also suggests that separation of control and risk bearing might be desirable in some situations, since it allows managers to make long-term investments without fear of a hostile takeover. Thus, a dual-class share structure could result in superior performance. This study addresses the question that confronts investors with respect to dual-class firms: “Are inferior-voting shares inferior investments?” Specifically, this research investigates the stock performance of companies that have dual-class shares. Overall, results show that investors in inferior-voting shares do not earn abnormally low risk-adjusted returns. Investors in non-IPO inferior-voting shares earn positive abnormal risk-adjusted returns.
An Analysis of Working Capital Management Results Across Industries Full Text
Vol. 20, No. 2, p. 11
Greg Filbeck, Schweser Program
Thomas M. Kruger, University of Wisconsin-La Crosse
Firms are able to reduce financing costs and/or increase the funds available for expansion by minimizing the amount of funds tied up in current assets. We provide insights into the performance of surveyed firms across key components of working capital management by using the CFO magazine’s annual Working Capital Management Survey. We discover that significant differences exist between industries in working capital measures across time. In addition, we discover that these measures for working capital change significantly within industries across time.
IBBEA Implementation and the Relative Profitability of Small Banks Full Text
Vol. 20, No. 2, p. 19
Srinivas Nippani, Texas A&M University-Commerce
Kenneth M. Washer, Texas A&M University-Commerce
The enactment of Riegle-Neal IBBEA in 1994 encour-aged bank mergers and acquisitions. Empirical evidence indicates that large banks benefited from IBBEA enactment. However, there is little, if any, evidence of the impact of the act on small banks' profitability relative to large banks. This study examines the impact of IBBEA on the performance of small banks in the period preceding and following IBBEA implementation. Evidence is presented that indicates the return on assets of small banks was significantly less than that of larger banks in the post-IBBEA period. This is contrary to the results of the pre-IBBEA period when small banks' profitability was competitive with and in some cases even better than large banks' profitability. It is concluded that the enactment of IBBEA has placed small banks at a competitive disadvantage which could eventually lead to their demise.
Modeling Internet Operations Using Initial Public Offerings Full Text
Vol. 20, No. 2, p. 24
Sameer Prasad, University of Wisconsin-Whitewater
David C. Porter, University of Wisconsin-Whitewater
Linda Yu, University of Wisconsin-Whitewater
In this research we test the generalizability of an existing model for classifying information-intensive services that can be globally disaggregated to Internet services. This catego-rization allows us to judge which types of Internet Initial Public Offerings (IPOs) are likely to have superior perfor-mance. Specifically, we hypothesize that Internet firms with higher information intensity, lower physical presence and lower customer contact needs will have a greater probabil-ity of generating larger risk-adjusted returns. We test these hypotheses on 340 Internet IPOs and find partial support for the model. In particular, Internet firms with high informa-tion intensity and low customer contact need yield superior performance. However, firms with low physical presence underperform in our sample.
International Diversification and Retirement
Withdrawals Full
Text
Vol. 20, No. 1, p. 55
Danny M. Ervin, Salisbury University
Larry H. Filer, Old Dominion University
Joseph C. Smolira, Belmont University
This study evaluates the success of the monthly withdrawal of funds from hypothetical retirement portfolios for the period January 1930 to December 2001. The objective of this research is to provide an empirical examination of the historical effect of global diversification on the withdrawal of funds from a retirement portfolio. We compare portfolios consisting of U.S. stocks and U.S. corporate bonds, and portfolios consisting of global stocks and U.S. corporate bonds. We examine both portfolio compositions using a variety of portfolio weights, fund withdrawal rates, and fund withdrawal periods. The results of the study indicate that, in general, portfolios with a higher equity portion had a greater likelihood of sustaining a given number of withdrawals over this time. Additionally, for much of the 1930 to 2001 period, including international stocks in a withdrawal portfolio decreased the likelihood the withdrawals lasted for a given period. However, the inclusion of international stocks does increase the terminal value of retirement portfolios after withdrawals during the latter part of the period under study. The results of this study can be used for retirement planning since it provides a historical perspective on the success of various withdrawal rates. The results can also be used to determine the value of the portfolio an individual needs at retirement to fund a given level of withdrawals. This can assist in the retirement timing decision.
A Simulation of the Future Economic Impact
of Pension Rate Reductions Full
Text
Vol. 19, No. 2, p. 31
Alan I. Blankley, University of North Carolina, Charlotte
Philip G. Cottell, Miami University
Richard H. McClure, Miami University
Pension rate estimates are important because they provide information to the market, and because they are useful in estimating future cash flows or for other analytical purposes. This is especially true now, because the economic environment has deteriorated to a point that many investors perceive increased uncertainty with respect to pension plans and the effect they have on future income. In fact, several authors in the popular financial press have speculated on the impact of such fundamental changes in pension assets, liabilities, and estimates. Often, however, these articles are sensational, and do not appear to appreciate fully the complexities of pension accounting.
In order to model the economic impact of pension rate declines, we develop a two-period analytical model of pension cost, which allows us to simulate future pension expense and its associated earnings impact using a triangular distribution of rate estimates. In addition, we model the incremental cash contributions required under these estimates in order to maintain the ratio of pension assets to liabilities at 100%.
Our results indicate that while the pension expense effect is large in both periods across firms with small, mid-sized and large pension plans, firms with large plans show the greatest increase in pension expense. Interestingly, however, the earnings impact is the smallest for firms with large plans in both periods. In addition, all firms face significantly increased cash funding requirements in order to prevent funding ratios (plan assets scaled by pension liabilities) from deteriorating. These results suggest not only future earnings reductions from pension rate declines, but also a potentially significant cash flow impact as well.
The Informational Content of Consumer Expectations
on the Direction of Exchange Rate Movements Full
Text
Vol. 19, No. 1, p. 31
Marc W. Simpson, University of Texas
Sanjay Ramchander, Colorado State University
This paper shows that the University of Michigan's “Survey of Consumers” can be useful in predicting the direction of change in five U.S. dollar exchange rates. The explanatory power, however, is contingent on the particular survey question employed and the forecast horizon under consideration. The study finds that the survey question regarding car purchases does especially well in predicting the future direction of exchange rate movements. Furthermore, the results generally indicate that the survey is more useful when making distant (i.e., 12-month ahead) currency forecast than for making near term (i.e., 3-month and 6-month ahead) predictions.
Management Motive, Shareholder Returns,
and the Choice of Payment: Evidence from the U.K. Full
Text
Vol. 19, No. 1, p. 23
Mahendra Raj, Robert Gordon University
Michael Forsyth, Robert Gordon University
Prior studies have reported mixed findings regarding bidder shareholder returns. There are many theories regarding the motivation towards the initiation of a takeover. This study intends to analyse four major merger motivations separately and examine the impact each one has on bidder returns. We find the market reacts according to the nature of the takeover and the underlying motive behind the bid.
An Investigation of Poison Pill Securities,
Long-Term Debt and the Wealth of Shareholders
Full
Text
Vol. 18, No. 2, p. 17
James Forjan, York College of Pennsylvania
Bonnie Van Ness, University of Mississippi
Poison pill securities can be used to deter takeover activity by making the acquisition cost prohibitive or to increase bargaining power of target firms. Poison pills, which are also known as shareholder rights plans, are typically used in conjunction with other takeover defense mechanisms, such as anti-takeover charter amendments or dual classes of stock. This study examines the role that debt plays as an anti-takeover strategy in the presence of poison pills. The results show that, on average, capital markets have little reaction to poison pill announcements. A regression equation, however, shows that announcement period abnormal returns are positively related to leverage ratios. This paper provides empirical evidence that the capital structure of firms plays an important role in the perceived strength of poison pills.
Sourcing Strategies of Manufacturing Firms:
Transaction Cost Implications Full
Text
Vol. 16 No. 2, p. 11
Hong Y. Park, Saginaw Valley State
University
C. Surender Reddy, Saginaw Valley
State University
Iksu Jurn, Saginaw Valley State University
Developing the right sourcing strategy in managing the firm’s supplies is critical for today’s managers. They realize the long-term impact of their sourcing strategies (make or buy, supply-base structure, and nature of customer-supplier relationship) on the profits and the efficient functioning of the organization. The study examines and evaluates changes in these strategic choices. The study revealed the following: small and lower labor productivity firms rate their internal suppliers better than external suppliers; obtaining supplies nationwide from a limited number of suppliers is the prevalent supply-base structure; and customer-supplier relationship is deepening.
The Dow Jones Industrial Average:
Issues of Downward Bias and Increased Volatility Full
Text
Vol. 14 No. 1, p. 41
Paul A. Mueller, Bowling Green State University
Raj A. Padmaraj, Bowling Green State University
Ralph C. St. John, Bowling Green State University
Does the method of divisor adjustment used for stock splits in the Dow Jones Industrial Average (DJIA) cause a downward bias in the average's level and does this method of adjustment cause increased volatility in the average? To investigate these issues, two averages are created using DJIA stocks. One average is adjusted for stock splits through adjustment in the divisor. This method is identical to the DJIA method of adjustments. The other average makes adjustment for stock splits by adjusting the stock value in the numerator. Relative to these two methods of adjustment for stock splits, the results of the study demonstrate that there is no downward bias of the DJIA. Additionally, it is found that the method of divisor adjustment for stock splits does not increase the volatility of the average. When compared to the Standard and Poor's Industrial Index, the DJIA does show downward bias.
Can Technology Even Things Up for
Community Banks? Full
Text
Vol. 12 No. 2, p. 13
Rose M. Prasad, Central Michigan University
Community banks are the smallest of the commercial banks in the United States. They have been bracing to cope with the impact of interstate banking, with the distinct possibility of large banks encroaching on their hitherto protected market territories. The challenge for these banks has been one of survival in an environment dominated by "mega" banks and non-bank financial firms able to provide the customers with an array of service at lower cost. In this environment, information technology plays a prominent role. The main purpose of our research was to find out how community banks perceive competitive threats from larger banks, how they have attained a threshold level of technology, and what they consider to be their strengths in competing with the larger rivals.
Corporate Earnings and the Stock Market Full
Text
Vol. 11 No. 1, p. 31
Keith V. Smith, Purdue University
Common stock prices and returns are alleged to depend on how corporate earnings progress over time. This paper investigates at the aggregate level how certain components of corporate earnings impacted stock market prices during the 1977-93 period. The impact of the market multipliers on stock market prices also is investigated. One major finding is that financial decisions, much more so than operating performance, caused the growth of stock prices during the period, while increased market multipliers had an even greater impact on the aggregate level of the stock market during that period.
Changes in Working Capital of Small
Firms in Relation to Changes in Economic Activity Full
Text
Vol.10, No. 2, p. 45
Morris Lamberson, University of Central Arkansas
This paper studies how the working capital position of small firms responds to changes in the level of economic activity. Fifty small firms were studied for the time period 1980-1991. The findings from this study showed that liquidity increased slightly for these firms during economic expansion with no noticeable change in liquidity during economic slowdowns. Their investment in working capital, as measured by the inventory to total assets and current assets to total assets ratios, were relatively stable over the time period of this study. Findings suggest that working capital management practices of small firms in response to changes in economic activity do not follow commonly held expectations.
Chapter 7 Versus Chapter 13 Bankruptcy:
It Pays To Ask Why Creditors know from experience that bankruptcy
is typically bad news. Creditors usually recover little or nothing out of
a Chapter 7 bankruptcy, the most common type of bankruptcy case. On the other
hand many creditors feel that Chapter 13 is preferable to Chapter 7 because
the debtor is usually required to pay a portion of the outstanding debts from
the debtor's future income. Creditors may not realize that in many cases the
debtor has filed a Chapter 13 bankruptcy for the purpose of gaining some advantage
over one or more creditors which could not be realized in Chapter 7. This
article examines the difference between Chapter 7 and Chapter 13 and illustrates
the little known debtor advantages of Chapter 13 bankruptcy. Finally, this
article makes recommendations for changes in bankruptcy law to prevent abusive
Chapter 13 filings.
Vol. 10, No. 2, p. 65
Edward W. Brankey, Eastern Illinois University
Determinants of Bank Profitability Full
Text This study investigates the determinants
of profitability of U.S. commercial banks in the 1970s and 1980s. It is established
that banks, depending on their size, may need to exercise greater control
over a defined set of variables in order to maximize profits and/or minimize
costs. Further, the study provides some indirect evidence of economies of
scale/scope in certain aspects of the banks' loan and investment portfolios.
Vol. 10, No. 1, p. 41
Mukesh Chaudhry, Elizabeth City State University
Arjun Chatrath, Lake Erie College
Ravindra Kamath, Cleveland State University
Do the Foxes Guard the Hen House?
A Note on Agency Costs Full
Text It is a fairly common practice for the CEOs
of one corporation to serve on the Board of Directors of another corporation.
The question addressed here is the effect that the presence of outside CEOs
on the Board of Directors has on the compensation of the firm's CEO. There
are two alternative views that emerge from the literature. One view is that
CEOs are selected to serve as directors because they will back management,
including proposals for increased compensations. The other possibility is
that a CEO knows the techniques that another CEO may use to obtain increased
compensation and will thus serve as a better watch dog than a non-CEO. Using
a sample of the Fortune 1000, we find that for non regulated
firms there is a negative relationship between the proportion of outside CEOs
serving on the board and three different measures of CEO compensation after
controlling for firm performance in four different ways.
Vol. 10, No. 1, p. 21
Richard J. Dowen, Northern Illinois University
Thomas L. Mann, Northern Illinois University
The Association Between U.S. and Canadian
Prime Rate Changes Full
Text A change in the value of one variable often
provides information about related variables. This study examines the degree
to which changes in the prime interest rates in the United States and Canada
are associated. Utilizing a sample of 321 prime rate changes in the two countries
through the 197 months ending in May 1991, our analysis shows that nominal
rates are generally higher in Canada, changes are more frequent in the U.S.,
and the average number of days between changes is longer in Canada. These
observations suggest that Canadian prime rate changes are stickier than U.S.
changes. Evidence of a long-run equilibrium relation is found indicating that
U.S. and Canadian rates do not drift too far apart. However, the U.S. rate
was found to adjust faster than the rate in Canada. Finally, prime rate decreases
in Canada follow U.S. decreases within fifteen days. Canadian borrowers with
rates tied to the prime could, therefore, consider short-term funds during
the days immediately following a U.S. cut and then lock-in a lower longer-term
rate once the Canadian prime rate falls.
Vol. 10, No. 1, p. 31
Reinhold P. Lamb, University of North Carolina at Charlotte
A. Qayyum Khan, University of North Carolina at Charlotte
Naive Versus Minimum-Risk Direct Hedging
of Cash Metal Prices Using U.S. Metal Futures Markets Full
Text This research examines the ability of firms
to utilize the existing primary U.S. metal futures markets in decreasing variability
of spot metal positions. The focus of the analysis is on those twenty-one
U.S. cash metals listed in the Wall Street Journal which have
an intrinsic relation with (at least) one of the six primary metal futures
markets. Hedging is deemed effective if variance of
hedged returns is significantly lower than the cash-position return variance.
Both risk-minimizing and "naive" futures hedge positions are analyzed.
On a realized return basis the direct offsetting hedges prove to be effective
in almost 93 percent of the forty-two comparisons examined.
Vol. 9, No. 2, p. 39
Thomas O. Meyer, The University of Toledo
Goal Programming: An Effective Tool
in Commercial Bank Management Full
Text Organization theorists tell us that all of
the constituents of organizations have individual goals which they expect
to be satisfied by organizational activity. They also tell us that the supporting
environment has goals for the organization which must be satisfied if the
organization is going to continue to receive environmental support in the
form of scarce resources and utilization of its output. Also, taken all together,
organizational goals, member goals, and environmental goals may be conflicting. In an attempt to control at least a portion
of the melange, Goal Programming (GP) has been designed to attempt to deal
with organizational goals. The assumption is that organizational decision
makers can at least rank order their preferences of goal attainment and, where
goals may sometimes conflict, those conflicting goals may not be in direct
opposition to each other and may vary in strength. This paper addresses the
crucial problem which any bank faces in managing its portfolio. Further, the
paper shows how GP can be an efficient tool in measuring the level of achievement
of predetermined goals in commercial banks according to prioritized policies
and regulations.
Vol. 9, No. 1, p. 31
Victoria Jedicke, Northern Illinois University
William L. Wilbur, Northern Illinois University
Ahmed K. Rifai, Northern Illinois University
Housing Finance Agency Allocations Full
Text At the height of the recession in the early
1980's, a multitude of state and locally sponsored housing finance agency
programs were legislatively introduced in response to populist pressure. Many
of these controversial programs utilized lower cost municipal bonds to subsidize
private sector housing programs and had remarkable diversity in their stated
objectives. This study focuses on one of these programs, the Ohio Housing
Finance Program, which purported to address the needs of mainly first-time
home buyers. Housing program evaluations, while rarely done, are very important
where public borrowing is used to support them. Using county-level demographic
data for 1983, the empirical results suggest that the Ohio program's target
clientele, first time home buyers, were the major beneficiaries of the program.
Vol. 8, No. 1, p. 39
Gerald E. Smolen, The University of Toledo
Michael T. Bond, Cleveland State University
James R. Webb, Cleveland State University
Stock Returns, Inflation, and the
Business Cycle Full
Text This study examines the effect of inflation
on stock returns in the context of the policy reaction function theory. This
theory contends that the nature and extent of the government's policy reaction
to inflation will depend upon the current level of economic activity. A contractionary
policy, which will depress stock returns, is more likely when the economy
is at a business cycle peak than at a trough. Therefore, the effect of inflation
on stock returns varies with the stage of the business cycle.
Vol. 8, No. 1, p. 45
Gary S. Moore, The University of Toledo
Sue L. Visscher, The University of Toledo
In order to test this theory, monthly consumer price indices, capacity utilization
indices, and stock returns were examined. The results of using the returns
of both a market index and a sample of individual companies between 1962 and
1988 support the theory.
The Stock Market Reaction to Plant
Closings Full
Text This paper is an event time study of the
valuation effects of a sample of eighty-two permanent closings. The traditional
approach to project termination decisions suggests that common stock prices
should increase around the date on which firms publicly announce the termination
of a projects. However, the empirical results of this study indicate that,
on average, no significant changes in shareholder wealth are associated with
the closing down of capital assets.
Vol. 8, No. 1, p. 57
Raymond A. K. Cox, Central Michigan University
John B. Mitchell, Oakland University
Robert T. Kleigman, Central Michigan University
Selection of Commercial Bank CEOs
in the Deregulated Environment: Influencing Factors Full
Text Deregulation is having a major impact on
all aspects of firm behavior in the banking industry. Bankers now find themselves
in a more competitive environment which may require different operating rules
for firm growth and profitability. To understand the types of adjustments
that are taking place in this market, a national survey of 410 commercial
bank chief executive offers (CEOs) was conducted and results analyzed. The
primary objective of this analysis was to estimate the impact that deregulation
had on the CEO selection criteria within the banking industry. Bank CEOs were
divided into groups based on tenure in office to measure the influence of
deregulation on the selection process. A key result of this analysis suggests
that the most recently selected CEOs view the ability to manage and motivate
and communication skills as relatively more important in their selection in
comparison to the most tenured bankers. While change has occurred in the selection
criteria, experience in the loan officer position is still considered a major
asset for anyone seeking to become a bank CEO.
Vol. 7, No. 2, p. 25
Donald R. Andrews, Nicholls State University
Jerry M. Hood, Loyola University
Uday Tate, Southeastern Louisiana University
Estimating Systematic Risk With Long-Term
Growth Forecasts and Analyst Following Full
Text According to the capital asset pricing model,
a stock's required rate of return is determined by systematic risk, otherwise
known as beta. Usually betas are estimated using historic data. It is shown
here that future betas have a stronger relationship to analysts' long-term
growth forecast than to historic betas.
Vol. 7, No. 2, p. 33
Richard J. Dowen, Northern Illinois University
Managing Retention in Big Eight Public
Accounting: Why Employees Stay Full
Text Previous studies analyze turnover in public
accounting by focusing on why employees leave. None has discussed the critical
question of why employees stay. The present article reports results from a
survey of Big Eight public accounting employees who discussed their reasons
for staying, and suggests approaches for improving retention.
Vol. 6, No. 1, p. 35
Matthew H. Sauber, Eastern Michigan University
Andrew G. Snyir, Eastern Michigan University
Mohsen Sharifi, Eastern Michigan University
The States' Regulatory Climate: Distortion in Public Utility Underwriting Costs Full Text
Vol. 6, No. 1, p. 45
Raymond F. Gorman, Miami University
Gautam Vora, University of New Mexico
This study examines the distortive effects of the states' regulatory climate on the underwriting costs of new equity issues of public utilities. Each state has its own public utility commission (or public service commission) to regulate the natural monopolies of public utilities. The wealth-maximizing behavior of utilities is constrained by the rate-making process monitored by the commissions. The policies of a state's commission collectively establish the regulatory climate' in that state. Using a sample of new equity securities issued, during the period from January 1973 through September 1980, by utilities listed on the New York Stock Exchange, we investigate the effect of the regulatory climate on underwriting costs. Our findings are that, in general, the direct costs of flotation, namely, underwriting commission and out-of-pocket expenses, are positively related to regulatory climate whereas the indirect cost of flotation, namely, underpricing of the new issue, is negatively related to regulatory climate. These results are counter-intuitive since they imply that as the regulatory climate becomes more favorable the direct cost of flotation increase and the indirect cost of flotation decreases. This is clearly a distortive effect of the regulation and we offer some explanation for it.
What Should You Know About the Theory of Corporate Finance?
Full TextVol. 5, No. 2, p. 15
Stephen E. Skomp, Bowling Green State University
This paper outlines the thinking of financial theorists on issues most relevant to those influencing financial decision-making within a firm. While the review is not comprehensive, it does provide a foundation for understanding what is included in the modern theory of corporate finance. Perhaps more importantly, the reader should gain an appreciation for what is financial "trust." The paper concludes with a section on managerial implications.
Financial Reform: Assessing Risk, Structure and Regulation Full Text
Vol. 5, No. 1, p. 3
W. Lee Hoskins, Federal Reserve Bank - Cleveland
Reforms are proposed which are necessary to achieve a more responsive market-oriented regulatory system.
A Financial Profile of Firms Favored by Institutional Investors Full Text
Vol. 4, No. 2, p. 49
Bruce C. Payne, University of Southwestern Louisiana
For years institutional investors have concentrated their holdings of common stock in a relatively small group, the "institutional favorites." While the market performance and changes in the composition of institutional favorites were reported in financial literature from the 1950s, no recent studies concerning the characteristics of firms classified as institutional favorites have been presented.
The purpose of this study is to establish a financial profile for firms currently favored by financial institutions, and to determine whether these firms differ significantly from firms selected at random. It is concerned with those variables that are indicators of the firm's risk-return tradeoff character. As in previous studies of this nature, Multiple Discriminant Analysis was used. The results were somewhat surprising in that the institutions did not seem to be drawn to what are perceived to be growth firms. As was expected, however, institutional favorites were larger in size than firms selected at random.
Patterns of Error and Neglect in Security Analyst Forecasts Full Text
Vol. 4, No. 2, p. 55
Richard J. Dowen, Northern Illinois University
It is well documented that firms that are neglected by analysts and large institutions provide superior investment performance. This paper studies whether that effect is caused by an upward bias in analyst earning forecasts. The idea is that the more popular firms are the ones with the greatest earnings estimation bias. It was found that after controlling for earnings estimation bias the neglect effect was considerably weakened. However, It was also found that there was no relation between analysts following and earning estimation bias.
An Ethical Evolution of Interest Full Text
Vol. 4, No. 1, p. 17
Thomas J. Stuhldreher, Clarion University of Pennsylvania
Thomas A. Ulrich, Loyola College in Maryland
Charging interest on loans is considered normal business practice. However, today consumers and regulators are taking a close look at interest rates and fees which at times seem unreasonably high. But charging even a reasonable rate of interest has not always been considered morally acceptable. This paper examines the ethical evolution which has taken place concerning the morality of charging interest. In doing so it provides an understanding of the historical and philosophical foundations with respect to the charging of interest.
The Role of Medium of Exchange in Acquisitions Full Text
Vol. 4, No. 1, p. 39
Asrat Tessema, Eastern Michigan University
This paper investigates the role method of payment in explaining the differences in returns to a bidding firm during the announcement period. The results indicate that the bidding firms' returns are negative for equity payment bids and positive and significantly larger for cash bids. This is consistent with the view that cash-offer announcements constitute a revelation by management of favorable new information about a firm's future cash flows and vice versa for equity offerings. The results from this study provide an explanation of why business executives have been reluctant to issue equity even when they are raising the money to finance profitable projects like acquisitions. Executives relied on internal funds that allowed them to avoid the flotation costs of issuing new shares and the scrutiny by the financial market while limiting growth to that sustainable with internally generated funds.
Scanning the Future Environment for Banking Full Text
Vol.3, No. 2, p. 23
John F. Preble, University of Delaware
Arie Reichel, Ben Gurion University
Environmental scanning is that part of the strategic planning process which monitors emerging changes and issues and determines their likely impact on business decisions. While sophisticated scanning systems are not yet widely used in the banking industry, much has been learned about such systems in other industries. The paper illustrates how that knowledge might be applied to banks, S&Ls, and MBHCs, which are facing increasing levels of environmental change.
Commercial Lending Officer and Small Business Client Relationships Full Text
Vol. 3, No. 2, p. 59
Jack H. Rubens, Cleveland State University
Sally C. Barton, Bank One, Cleveland
This article presents the results of an April 1986 mail survey of small business firms in Cuyahoga County, Ohio, concerning the relationship with their commercial bank lending officer. The survey examined loan types and rates, types of collateral, and bank and officer characteristics. Results indicate that 1) secured lines of credit were the most common loan type, 2) the reputation of the bank was the most important characteristic, 3) personal guarantees were the most common collateral type, and forty small businesses rely heavily upon the expertise and support of their commercial lending officers-the businesses would seldom change banks for a half percent rate advantage.
Education of the Financial Planner Full Text
Vol. 3, No. 2, p. 54
M. Athar Murtuza, Northern Arizona University
William Brunsen, Eastern New Mexico University
This paper discusses the importance of close collaboration between practitioners and academics to address common concerns of the profession. Although there are a few institutions which offer a curriculum for the education of financial planners, most AAACSB schools do not offer such a program.
A survey was conducted of AACSB member institutions to ask whether they offer personal financial planning (PFP) courses, if so, how many-and whether they offer a major or degree in the field. The schools were also asked whether their advisory group(s) contained active business representatives and whether the advisory groups contained professional financial planners.
Most of the respondents offer only one or two courses and these seem to include many personal budgeting or self-improvement courses rather than part of a curriculum for a personal financial planning professional. Very few respondents offer a degree or major in financial planning. Although all the advisory groups seem to include active business people, there are very few members who were reported as professional personal financial planners.
Insiders Can Disclose and Trade–Or Can They? Full Text
Vol. 3, No. 1, p. 27
Monojit Ghosal, Valdosta State College
Kenneth L. Stanley, Valdosta State College
The article addresses the rather ambiguous doctrine of "disclose or abstain" with respect to insider trading. A brief review of The Securities Exchange Act of 1934 and court cases and judicial opinions suggests that the only real option available for someone possessing insider information is to abstain from trading on that information. The alternative of disclosing this information and trading does not appear to be a viable alternative. The authors offer a specific recommendation for new regulatory guidelines for disclosure which could, indeed, make this a realistic alternative.
Bank Holding Company Dividend Policies and Share Prices Full Text
Vol. 3, No. 1, p. 32
Adi S. Karna, Indiana University-Purdue University
Duane B. Graddy, Middle Tennessee State University
This paper analyzes the relationship between dividend policy and the rate of return on bank holding company (BHC) stocks. We hypothesize that the representative investor in BHC shares has a preference for dividend income over prospective capital gains return. Regulatory policy is hypothesized as playing a role in the determination of the substitutability between dividends and capital gains.
To test our hypothesis, two different specifications of the SML were established for the years 1971-80. Our cross-sectional sample included forty-four large BHC's. In general, the statistical evidence provides support for the supposition that investors in BHC stock do not consider expected dividend return and capital gain return as perfect substitutes.
Portfolio Constraints Versus Special-Effect Stock Returns Full Text
Vol. 2, No. 2, p. 18
W. Scott Bauman, Northern Illinois University
Richard J. Dowen, Northern Illinois University
Investors with less than $200 million may receive higher than expected returns generated by the common stocks of small firms, by stocks with low price-earnings ratios, and by stocks neglected by large institutional investors. It is suggested that large investors do not receive these returns because of two constraints: a portfolio diversification constraint and a liquidity constraint, referred to as a percentage ownership constraint. An implication of the empirical findings of this study is that it may be easier for relatively smaller funds to produce superior portfolio performance than it is for larger funds.
Compensating Balance Practices by Midwestern Banks Full Text
Vol. 2, No. 2, p. 23
Thomas A. Ulrich, Loyola College
Thomas J. Stuhldreher, Clarion University
A compensating balance requirement is an arrangement between commercial banks and business customers whereby a customer must hold a deposit balance to compensate the bank for granting a loan, establishing a line of credit or performing certain services. This study presents the results of a survey of midwestern commercial banks regarding their practices with respect to compensating balances requirements. Despite predictions of a decline in the use of compensating balances, the results of this survey clearly indicate that compensating balances are holding their own among midwestern banks.
Information Needs of the Bank Loan Officer in Evaluating Loan Requests from Small Businesses Full Text
Vol. 2, No. 1, p. 41
Kenneth M. Hiltebeitel, Villanova University
Commercial loans are a major source of financing for small businesses. To enhance the likelihood of obtaining a commercial loan with the most favorable terms, sufficient information must be made available to the bank loan officer (BLO). Based on a review of the banking literature and a study of 138 BLOs, the author identifies the primary information needs of the BLO, sources of this information, and procedures in processing this information. Findings of the study identify two information sources that are within the control of the loan applicant. The data from these two important sources could have a significant influence in determining the outcome of a commercial loan decision.
Biases in Investor Decision Making: The Case of John DeLorean
Full TextVol. 1, No. 2, p. 5
Thomas S. Bateman, University of North CarolinaChapel
Hill
Charles R. Schwenk, Indiana University
Why do people so often make bad investment decisions–when it should have been clear from the beginning the decisions would turn sour? Using the John DeLorean Case as an example, this article explores some of the natural human tendencies that adversely affect the quality of decision making. Investors, once they are aware of these biases, can take steps to counteract their influence and make more well-informed decisions.
Investment Decisions with Labor Bottlenecks
Full TextVol. 1, No. 2, p. 55
Ron M. Adelsman, Indiana UniversitySouth Bend
Paul S. Kockanowski, Indiana University–South Bend
This paper analyzes the keep-versus-replace decision where labor shortages act as production bottlenecks, which can be lessened to some degree by employing new labor saving equipment. Additional realism is brought to the analysis by explicit consideration of production demand, learning, and multiple product situations.