New development: Scarcity,policy gambles,and ‘one-shot bias’—training civil servants to speak truth to power

ABSTRACT

Allocating scarce resources to meet policy objectives incurs opportunity costs. A vital element of ‘speaking truth to power’ thus involves officials advising ministers on the opportunity costs of high-risk ‘pet projects’. In democracies, the brevity of ministerial office can produce ‘one-shot bias’—radical policy-making that deploys ministers’ time-limited powers to the full, yet risks producing significant opportunity costs for public service organizations. Examples include the UK’s recent social security, healthcare and European policies. Training in the economics of organization, development of new techniques for coping with uncertainty in opportunity-cost estimates, and stronger incentives for decision-makers to consider ‘benefits foregone’ by their actions could all provide greater protection against the downsides of one-shot bias.     

The ‘ladder of success’ in healthcare: the UK national reference costing index

Relative performance evaluation (RPE) is a form of benchmarking that operates through ranking institutions in comparative league tables. This paper explores issues raised by the introduction of RPE to benchmark UK hospital costs (termed ‘reference’ costs for this purpose). These reference costs are aggregated into a comparative cost index—thereby creating a ‘ladder of success’.The ‘ladder of success’ has the potentiality both to enhance the purchasing role and to provide a comparative database for hospitals to improve their performances. Yet this research found that several problems confound its use for benchmarking: the absence of a referent (or standard) against which ‘reference’ costs can be compared; the non-comparability of many hospitals featuring in the index; and the lack of standardisation in costing practices.In terms of refining and developing the index to enhance its usefulness, there are several possibilities: distinguishing between direct and indirect costs; introducing benchmarking ‘cluster groups’; pinpointing an acceptable range of target costs; and reducing the scope of clinical activities included. However, if any of these alternatives were adopted, the power of a single comprehensive measure that attaches one—and only one—number to each trust would be lost. The issue is that in making the index more meaningful, political leverage over the UK trusts would be reduced. Hence, despite all its associated problems, this research concludes that the ‘ladder of success’ looks likely to continue in its present form.     

Corporate Commitment to Sustainability – Is it All Hot Air? An Australian Review of the Linkage between Executive Pay and Sustainable Performance

Across time, companies have increasingly made public commitments to sustainable development and to reducing their impacts on climate change. Management remuneration plans (MRPs) are a key mechanism to motivate managers to achieve corporate goals. We review the MRPs negotiated with key management personnel in a sample of large Australian carbon‐intensive companies. Our results show that, as in past decades, the companies in our sample have MRPs in place that continue to fixate on financial performance. We argue that this provides evidence of a disconnection, or ‘decoupling’, between the sustainability‐related rhetoric of the sample companies, and their ‘real’ organisational practices and priorities.     

Impact of risk aversion and countervailing tax in oligopoly

The literature recognizes the qualitative effects of risk aversion on oligopolistic market performance, but less is known about their magnitudes. We quantitatively evaluate these effects in Cournot and Bertrand oligopolies where firms maximize mean-variance utilities under linear demand and costs. The impacts are very similar for the two types of oligopoly, but have opposite signs. The impacts of a firm’s risk aversion on outputs, prices, consumer surplus and social welfare can be expressed via potentially observable variables. Since these impacts resemble the effects of firms’ cost changes, a regulator can reduce or eliminate undesirable effects of risk aversion by changing firms’ costs with appropriate countervailing taxes.     

Size Effects in the Pricing of Corporate Bonds

Large orders for corporate bonds get preferential treatment unlike large orders for stocks on the NYSE. A structural explanation, namely, that the corporate bond market is dealer‐dominated, has been offered for the favorable pricing. In this paper, we offer an additional explanation, namely, that the improved pricing for large orders is due to the net impact such orders have on a market maker's costs. Using a data sample that is substantially free of timing mismatch, we support our assertion by sorting the sample into ‘brokered’ trades, which are trades where the dealer merely crosses buy and sell orders and ‘inventoried’ trades, where the dealer trades out of his inventory. We find that large orders raise information costs, but lower inventory costs for ‘inventoried’ trades. The net result is a smaller price advantage than received by large orders on ‘brokered’ trades which are not subject to these costs.     

The tax treatment of UK defined contribution pension schemes

The paper aims to clarify the tax status of pension schemes in the UK and, by using economic and other arguments, to establish a theoretical benchmark that could be considered the ‘appropriate’ tax regime for pension saving. We consider existing tax regimes for saving (such as the ‘ISA’ regime) and theoretical regimes (such as a pure expenditure tax and a comprehensive income tax) and we compare the costs different tax regimes impose on defined contribution pension schemes. We conclude that an expenditure tax is an appropriate benchmark tax regime for pension saving, and that other tax regimes impose additional financial as well as administrative costs.     

The First Step of the Capital Flow from Institutions to Entrepreneurs: the Criteria for Sorting Venture Capital Funds

We contribute to the knowledge of the capital flow from institutional investors via venture capital (VC) funds as intermediaries to their final destination, entrepreneurial ventures. To this end, we conduct a world‐wide survey among limited partners to determine the importance of several criteria when they select VC funds. We find the top criteria to be the expected deal flow and access to transactions, a VC fund's historic track record, his local market experience, the match of the experience of team members with the proposed investment strategy, the team's reputation, and the mechanisms proposed to align interest between the investors and the VC funds. A principal component analysis reveals three latent drivers in the selection process: ‘Local Expertise and Incentive Structure’, ‘Investment Strategy and Expected Implementation’, and ‘Prestige/Standing vs. Cost’. It becomes evident that limited partners search for teams which are able to implement a certain strategy at a given cost. Thereby, they focus on an incentive structure that limits agency costs.     

Predicting Corporate Failure Using a Neural Network Approach

This paper investigates the performance of Artificial Neural Networks for the classification and subsequent prediction of business entities into failed and non-failed classes. Two techniques, back-propagation and Optimal Estimation Theory (OET), are used to train the neural networks to predict bankruptcy filings. The data are drawn from Compustat data tapes representing a cross-section of industries. The results obtained with the neural networks are compared with other well-known bankruptcy prediction techniques such as discriminant analysis, probit and logit, as well as against benchmarks provided by directly applying the bankruptcy prediction models developed by Altman (1968) and Ohlson (1980) to our data set. We control the degree of ‘disproportionate sampling’ by creating ‘training’ and ‘testing’ populations with proportions of bankrupt firms ranging from 1% to 50%. For each population, we apply each technique 50 times to determine stable accuracy rates in terms of Type I, Type II and Total Error. We show that the performance of various classification techniques, in terms of their classification errors, depends on the proportions of bankrupt firms in the training and testing data sets, the variables used in the models, and assumptions about the relative costs of Type I and Type II errors. The neural network solutions do not achieve the ‘magical’ results that literature in this field often promises, although there are notable 'pockets' of superior performance by the neural networks, depending on particular combinations of proportions of bankrupt firms in training and testing data sets and assumptions about the relative costs of Type I and Type II errors. However, since we tested only one architecture for the neural network, it will be necessary to investigate potential improvements in neural network performance through systematic changes in neural network architecture.     

The Loser's Curse: Accounting for the Transaction Costs of Takeover and the Distortion of Takeover Motives

Studies for major stock markets of share price movements in the period around a takeover show that target company shareholders typically experience large gains in wealth but that acquiring company shareholders do not. The reasons for this asymmetry–and, in particular, for the absence of gains for the shareholders of the companies which initiate the deal–are imperfectly understood. This note suggests one factor contributing to those results. It argues that accounting practice prescribed by the main standard setters is non‐neutral towards ‘successful’ and ‘unsuccessful’ bidders with respect to reporting the transaction costs of bidding. It shows how the prescribed accounting treatment of these costs affects performance measures used in salary contracts as well as in the markets for executives and for corporate control. The result is that the managers of bidding companies will have an ‘arti ?cial’ incentive to in ?ate their bid price or to go ahead with a bid which offers no bene ?t to their shareholders. Ironically, the main standard setters seem minded soon to prohibit the only accounting technique which does not distort these incentives.     

Valuation of risky assets in arbitrage-free economies with transactions costs

This paper analyzes the equilibrium valuation of risky assets in the case where transactions costs are present. The methodology involves applying ‘theorems of the alternative’ (Farkas' Lemma) as a consequence of arbitrage-free markets. Under relevant assumptions, it is found that the price of an asset having transactions costs is the corresponding price that would obtain in a perfect market, plus a ‘fudge factor’. This latter factor is provided explicit bounds.     

‘Bankruptcy tourism’ under the EC regulation on insolvency proceedings: A view from England and Wales

This article provides an account of the emergent phenomenon of ‘bankruptcy tourism’—forum shopping by debtors for favourable personal insolvency law—within the EU and with particular reference to England and Wales. After outlining the structural features of the European legal framework that make forum shopping for personal insolvency law possible, including the EC Regulation on Insolvency Proceedings and explaining why England and Wales in particular has proved to be an attractive ‘tourist’ destination, the article charts how the official receivers and the courts in England and Wales have sought to manage the influx of foreign bankruptcies in terms of legal principle and process drawing on two reported cases, Eichler and Mitterfellner. It will be seen that the institutional response in England and Wales has been twofold. First, the ‘problem’ of forum shopping debtors has been framed as a problem of policing the line between genuine and fictional relocations. Secondly, there are signs that the procedural onus on debtors to evidence their claim to English jurisdiction before a bankruptcy order is made has been increased, a move that can be interpreted as a form of institutional resistance designed to raise the barrier to entry. Having sought to illuminate the problems, costs and inconvenience associated with forum shopping from a practitioner standpoint, we explore the ‘good’ versus ‘bad’ forum shopping question and consider the scope for reform of the EC Regulation. Adopting a creditor perspective, we conclude provisionally that the Regulation could usefully be reformed to limit the scope for insolvent debtors to switch their COMI in anticipation of filing for bankruptcy. Copyright © 2010 John Wiley & Sons, Ltd.     

Identifying lobbying strategies: An analysis of public responses to the Productivity Commission Inquiry into executive remuneration in Australia

This study investigates lobbying behaviour over the two phases of the 2009 Productivity Commission Inquiry into executive remuneration within Australia. Consistent with expectations, behaviours appeared related to preference for change, the costs of regulatory change relative to those of lobbying, and the need for reputational capital. Industry participants, and those from the Representative and Professional bodies emerge as key opponents. Industry presented in a conciliatory manner during the first phase, revealing a preference for the status quo, but then directly targeted specific recommendations of concern, notably the ‘two strike’ and ‘no vacancy’ rules in the second phase. Respondents from the Representative and Professional Bodies were broadly and consistently supportive of change and the Inquiry’s final recommendations. We also find that these recommendations largely align with the views of the Representative Bodies, but conflict with those expressed by Industry in their second phase submissions. Finally, we find no evidence to suggest the motivation behind Industry lobbying related to poor remuneration practices.     

Money on the move: Opportunities for financial service providers in the ‘third space’

Delivering financial services to customers on the move is an emerging imperative for the industry, as at present the services available do not meet the needs of customers. Such services could empower customers to control their own finances, at the same time as reducing costs for companies. Those in most need of such services require top line account updates at present, but also welcome the possibility of more advanced account management services. These services have the capacity greatly to improve relationships with customers; ‘guardian-services’ which monitor financial performance and respond accordingly will foster ‘good will’ and increase loyalty. While complex services requiring expert advice should remain branch based, new data-enabled mobile phones will establish new opportunities for service provision in the future.     

Huntington's disease,critical illness insurance and life insurance

We describe briefly a model of Huntington's disease (HD), a highly penetrant, dominantly inherited, fatal neurological disorder. Although it is a single-gene disorder, mutations are variable in their effects, depending on the number of times that the CAG trinucleotide is repeated in a certain region of the HD gene. The model covers: (a) rates of onset, depending on CAG repeat length as well as age; (b) post-onset rates of mortality; and (c) the distribution of CAG repeat lengths in the population. Using these, we study the critical illness and life insurance markets. We calculate premiums based on genetic test results that disclose the CAG repeat length, or more simply on a family history of HD. These vary widely with age and policy term; some are exceptionally high, but in a large number of cases cover could be offered within normal underwriting limits. We then consider the possible costs of adverse selection, in terms of increased premiums, under various possible moratoria on the use of genetic information, including family history. These are uniformly very small, because of the rarity of HD, but do show that the costs would be much larger in relative terms if family history could not be used in underwriting. We point out some difficulties involved in applying a moratorium that recognises simply a dichotomy between ‘carriers’ and ‘non-carriers’ of any mutation in a gene when these mutations are, in fact, very variable in their effects. These complexities suggest that restrictions on the disclosure, rather than on the use, of genetic information, if it became established as a principle, could deprive insurers of information needed for risk management even if not used in underwriting.     

Investment timing and optimal capital structure under liquidity risk

Deterioration in debt market liquidity reduces debt values and affects firms' decisions. Considering such risk, we develop an investment timing model and obtain analytic solutions. We carry out a comprehensive analysis in optimal financing, default, and investment strategies, and stockholder–bondholder conflicts. Our model explains stylized facts and replicates empirical findings in credit spreads. We obtain six new insights for decision makers. We propose a ‘new trade-off theory’ for optimal capital structure, a new tax effect, and new explanations of ‘debt conservatism puzzle’ and ‘zero-leverage puzzle’. Failure in recognizing liquidity risk results in substantially over-leveraging, early bankruptcy or investment, overpriced options, and undervalued coupons and credit spreads. In addition, agency costs are surprisingly small for a high liquidity risk or a low project risk. Interestingly, the risk shifting incentive and debt overhang problem decrease with liquidity risk under moderate tax rates while they increase under high tax rates.     

Accruals and ‘accounting numbers management’ in UK executive agencies

Public sector reforms have implemented business techniques, including management by results, cost management and accrual accounting, to make public entities more efficient and accountable. As a consequence, ‘accounting numbers management’ has become a way for managers in the public sector to adapt accounting figures to their interests. This study focuses on ‘earnings management’ (manipulation of earnings) in government agencies. The authors provide evidence of earnings management in which agencies try to keep net operating costs to around zero. The authors' findings question the effectiveness of financial targets associated with accrual-based measures.     

Small fish in big ponds: Connections of green finance assets to commodity and sectoral stock markets

We analyze return and volatility connectedness of the rising green asset and the well-established US industry stock and commodity markets from September 2010 to July 2021. We find that the time-varying return and volatility connectedness have exhibited serious crisis jumps. Some individual assets of both the green and commodity markets are in connection to the US sectoral stock market returns, and the volatility connections are even more common than the return connections. Furthermore, some financial and economic uncertainty indicators manifest positive impacts from the volatility of some ‘big pond’ markets for e.g. commodities, whereas some others affect the connectedness negatively. Additional analysis of financial and economic uncertainty indicators manifests positive impacts from the volatility of some ‘big pond’ markets, e.g., commodities, while others negatively affect the connectedness.     

What is a fair amount of executive compensation? Outrage potential of two key stakeholder groups

The public discussion of executive compensation often centres on ‘fair’ and ‘unfair’ amounts and the public outrage over compensation that is deemed too high. The academic literature states that such outrage can lead to outrage costs, pressuring firms to adjust compensation levels. However, it is unclear what a ‘fair’ compensation is for various stakeholders and how their fairness concerns relate to outrage constraints. Based on surveys among two key stakeholder groups (representative eligible voters and investment professionals), we provide evidence that fairness is an important criterion for both groups but that opinions on how large a fair compensation amount should be are widely dispersed. Moreover, personality traits systematically influence fairness opinions through self‐serving interpretations of distributive justice and personal risk attitudes, indicating that a ‘fair’ amount of executive compensation may strongly depend on the involved stakeholders. Investigating thresholds for outrage, i.e., amounts above which compensation is judged ‘unfairly’ high, we show that even though investment professionals care for fairness as well, ‘capital market outrage’ might not equate to ‘public outrage’. Our paper contributes to the literature on outrage constraints by linking individual fairness concerns to outrage potential and has implications for transparency of executive compensation and research on shareholder activism.     

Stock option use by Australian IPOs

This paper examines the use of stock options by Australian IPOs. Stock options in this setting exhibit heterogeneity of ‘in the moneyness’ attributes. We can therefore identify incentive ‘out of the money’ options and reward ‘at or in the money’ options and study their usage. The setting also features options granted to employees (CEO, executives, non-executive directors, and managers) and external parties (e.g., underwriters, lenders, seed capitalists, and promoters). We examine the motives for granting stock options with different ‘in the moneyness’ attributes to employees and external parties, as well as the performance outcomes. Our results suggest ‘in the moneyness’ attributes of options vary according to uncertainties about growth options, general operating risks, and/or agency risks relating to the use of IPO proceeds; however, these relations do not translate into robust links from the option grants to future performance.     

Transparent Costing: Has the emperor got clothes?

Transparent Costing (TC) is a framework for determining the full indirect costs and thereby the full costs (FC) of Australian Competitive Grant (ACG) research projects; with the objective of ensuring the full funding of these projects by the government, so that they could be sustained in the long-run, and preventing their cross-subsidisation from other revenue sources. If a university wishes to be fully funded for its AGC research projects, it is mandatory to undertake a TC exercise and allocate the indirect costs of research activities. It was found in this study that whilst the objectives of FC appear worthwhile, FC may not prevent the practice of cross subsidisation. Also whilst it was found that Time-Driven Activity-Based Costing (TDABC) is preferable to ABC in the TC modelling of ‘research only’ departments and institutes; both approaches do not provide accurate information in ‘teaching and research’ departments. In these departments more accurate estimations could be obtained from studying the workload allocation methods and conducting direct interviews of the staff undertaking research on ACG and other externally funded grants.