Price Setting Practices in Australian Local Government

Revenues generated on a ‘fee‐for‐service’ or ‘user‐pays’ basis are a significant source of income for Australian local governments. However, how local governments set prices and charges remains under‐explicated. This article reports empirical evidence obtained on the pricing policies and practices of Australian local governments. The responses to a national survey reveal considerable diversity – and often an apparent lack of ‘rationality’– in setting specific prices. Instead, general ‘across the board’ adjustments to historical prices are typically made to assist in balancing budgets. The cost of service delivery is neither a prominent nor standardised input to pricing decisions.     

Corporate Finance and Sustainability: the Case of the Electric Utility Industry

The electric utility industry is in transition but needs to move even faster if the country is to meet its emissions goals. The industry has historically moved cautiously, but policies and regulatory approaches must avoid unintentionally reinforcing the status quo. Incentive‐oriented policies and redesigned regulations must balance environmental sustainability with economic sustainability. The authors draw on well‐established corporate finance principles to guide more effective policies. Shareholder‐focused utility executives must make investments conditioned by three elements: (1) the return on equity the utility can expect to make on each project; (2) the investors' required return on equity capital for each project; and (3) the size of the investment. The well‐established economic value added (EVA) model can assist policy analysis: V=(r‐k)I; where V is the shareholder value created, r is the return on equity, k is the return investors require if they are to invest in the stock, and I is the scale of the project. Any new incremental V translates into higher stock prices. All three elements of their model (i.e., risk, return, and scale) require attention by regulators and policymakers to create value for shareholders. The authors show how the right state policies could create powerful incentives for shareholder focused utility executives to support such transitions.     

Regimes of risk management in corporate annual reports: a case‐study of one globalizing Australian company

An approach to the study of the ‘risks’ of ‘globalization’ that are increasingly the focus of global protest is outlined. By enrolling a blend of Mary Douglas' cultural approach to ‘risk’ and Ulrich Beck's theory of the ‘risk society,’ it is argued that three distinct ‘regimes of risk management’ are evident in corporate activity. After showing that corporate annual reports are useful for analysis of those effects, the argument is tested/illustrated through a case‐study of the reports of Amcor, a typically internationalizing Australian company. It is concluded that disputes over the ‘risks’ of ‘globalization’ are likely to become even more intense.     

The Economic Significance of Long‐Term Plans

The authors summarize the findings of their event study of the capital market reactions to an inaugural set of 17 CEO presentations of their ‘long‐term plans’ to institutional investors. The findings show that, although sell‐side analysts appear unresponsive to such plans, both trading volumes and stock prices exhibit significant abnormal reactions to the presentations, providing suggestive evidence that the communication of such plans conveys ‘value‐relevant’ information to investors with longer time horizons. Although based on an admittedly small sample, these findings shed light on the promise of long‐term plans and have been corroborated by analysis of the market response to the presentations of 10 more companies since the study was conducted. The authors also provide the outlines of a ‘content framework’ designed to help companies put together effective corporate plans and other long‐term disclosures. The framework is organized around nine main ‘themes,’ including policies governing capital allocation, corporate governance, and human capital development, as well as the statement of corporate purpose. After applying this framework to the 17 CEO presentations, the authors find that the more specific and forward‐looking the information disclosed in these long‐term plans, the more positive the capital market reaction.     

Individualization revisited: global family developments,uncertainty and risk

Abstract

As part of our special issue appreciating the work of Ulrich Beck, this article introduces and rearticulates his concept of individualization for an audience beyond those engaged with sociological theory. It is argued to be the ‘forgotten half’ of Beck’s approach that is in particular need of both restatement and reaffirmation of its contemporary relevance. It does so by firstly contextualizing and explaining its comparatively limited impact before elaborating the stages of the individualizing process and how his key notion of ‘disembedding without re-embedding’ is distinct from traditional sociological understanding of the individualizing dynamic within modernity. Its relevance and utility is then indicated through surveying developments in family and affective relations in China and America, two of Beck’s ideal types of individualization pattern. Both demonstrate a pattern of radical ‘disembedding’, and a conscious and partial ‘re-embedding’ in the case of the ‘neo-traditional’ American middle-class family. Following this, the article suggests a stronger potential connection between the risk and individualization dimensions of his approach than was drawn out by Beck himself, through focusing upon the uncertainty created by disembedding. The uncertainty that follows from individualization suggests precautionary retreat into security and the construction of risk as a means of embodying and managing uncertainty. Recognition of this social dynamic is potentially more useful in understanding risk than the better-known but very general theory of reflexive modernization that is the other half of Beck’s contribution to risk research.     

Test of recent advances in extracting information from option prices

A large literature exists on techniques for extracting probability distributions for future asset prices from option prices. No definitive method has been developed however. The parametric ‘mixture of normals’, and non-parametric ‘smoothed implied volatility’ methods remain the most widespread approaches. These though are subject to estimation errors due to discretization, truncation, and noise. Recently, several authors have derived ‘model free’ formulae for computing the moments of the risk neutral density (RND) directly from option prices, without first estimating the full density. The accuracy of these formulae is studied here for the first time. The Black-Scholes formula is used to generate option prices, and error curves for the first 4 moments of the RND are computed using the ‘model-free’ formulae. It is found that, in practice, the formulae are prone to large and economically significant errors, because they contain definite integrals that can only be solved numerically. We show that without mathematically equivalent expressions with analytical solutions the formulae are difficult to deploy effectively in practice.     

An Investor Perspective on the Black Box of Corporate Social Responsibility

In summarizing the findings of their recent study, the authors report findings that suggest that not all socially responsible corporate policies are likely to have the same effect on a company's ownership and value. Using environmental policy as their proxy for CSR activities, the authors classify corporate environmental practices into two categories: (1) actions that reduce the likelihood of harmful outcomes by reducing the corporate exposure to environmental risk; and (2) actions that enhance companies' perceived ‘greenness’ through investments that go beyond both legal requirements and any conceivable risk management rationale. Although both groups of environmental practices are likely to be viewed as socially beneficial, corporate expenditures that reduce a firm's environmental risk exposure are more likely to benefit shareholders by limiting the risk of losses arising from environmental accidents, lawsuits, and fines—and possibly thereby reducing the firm's cost of capital. By contrast, corporate expenditures that enhance the firm's perceived greenness by going beyond legal requirements and risk management rationales could actually reduce shareholder value. Consistent with this hypothesis, the authors find that institutional investors tend to own smaller than average percentages of both companies the authors identify as ‘toxic’ and make limited efforts to manage their environmental risk, and companies they label ‘green’ with low environmental risk exposure but relatively high CSR spending on the environment. At the same time, such investors hold larger‐than‐average positions in ‘neutral’ companies with relatively low, or effectively managed, environmental risk exposures and limited investment in ‘greenness’ programs. The authors also find that both toxic and green companies have lower (Tobin's Q) valuations than neutral companies, and that otherwise toxic companies that effectively manage their environmental risk exposures have higher valuations.     

Option-Implied Risk Aversion Estimates

Using a utility function to adjust the risk‐neutral PDF embedded in cross sections of options, we obtain measures of the risk aversion implied in option prices. Using FTSE 100 and S&P 500 options, and both power and exponential‐utility functions, we estimate the representative agent's relative risk aversion (RRA) at different horizons. The estimated coefficients of RRA are all reasonable. The RRA estimates are remarkably consistent across utility functions and across markets for given horizons. The degree of RRA declines broadly with the forecast horizon and is lower during periods of high market volatility.     

Taxes,tenders and the design of Australian off‐market share repurchases

In designing off‐market (self‐tender offer) share repurchases, Australian companies must consider the resulting potential tax benefits for different investor groups with consequent effects upon the supply of stock tendered by holders and the ultimate tender outcome. We develop and estimate a model of the stock supply curve that demonstrates less than perfect elasticity and incomplete tax arbitrage arising from ‘participation risk’ for potential arbitrageurs. We are able to estimate the extent of disequilibrium in prices involved in fixed‐price repurchases and show that it is substantial. We show that Australian Tax Office restrictions on the tender price range for Dutch auctions have meant that non‐participating shareholders have foregone some potential benefits through the transfer of tax benefits to (primarily institutional, low tax rate) successful tender participants. The results provide support for legislative changes proposed in 2009 (but not implemented as of mid 2011), which removed constraints on the allowable range of repurchase prices.     

Risks for the Long Run: A Potential Resolution of Asset Pricing Puzzles

We model consumption and dividend growth rates as containing (1) a small long‐run predictable component, and (2) fluctuating economic uncertainty (consumption volatility). These dynamics, for which we provide empirical support, in conjunction with Epstein and Zin's (1989) preferences, can explain key asset markets phenomena. In our economy, financial markets dislike economic uncertainty and better long‐run growth prospects raise equity prices. The model can justify the equity premium, the risk‐free rate, and the volatility of the market return, risk‐free rate, and the price–dividend ratio. As in the data, dividend yields predict returns and the volatility of returns is time‐varying.     

Pricing jump risk with utility indifference

This paper is concerned with option pricing in an incomplete market driven by a jump-diffusion process. We price options according to the principle of utility indifference. Our main contribution is an efficient multi-nomial tree method for computing the utility indifference prices for both European and American options. Moreover, we conduct an extensive numerical study to examine how the indifference prices vary in response to changes in the major model parameters. It is shown that the model reproduces ‘crash-o-phobia’ and other features of market prices of options. In addition, we find that the volatility smile generated by the model corresponds to a zero mean jump size, while the volatility skew corresponds to a negative mean jump size.     

Capital gains tax,supply‐driven trading and ownership structure: direct evidence of the lock‐in effect

This study investigates the effect of differential capital gains tax rates on investor trading and share prices in a unique market setting that facilitates the resolution of conflicting prior evidence of holding period tax incentives. In particular, we examine whether the concessionary tax treatment of long‐term capital gains increases the supply of shares that qualify for long‐term status, thereby causing downward price pressure. We find evidence of abnormal seller‐initiated trading following the 12‐month anniversary of listing for IPO firms that appreciate in price (‘winners’) and report no such evidence for firms that decline in price (‘losers’). Consistent with the tax concessions being greater for individual than institutional investors, we report that abnormal seller‐initiated trading is mitigated by higher levels of ownership by institutional investors. We also report limited evidence, for winners, of declining share prices upon qualifying for long‐term tax status.     

On the Magnet Effect of Price Limits

The ‘magnet’ or ‘gravitational’ effect hypothesis asserts that, when trading halts are rule‐based, investors concerned with a likely impediment to trade advance trades in time. This behaviour actually pushes prices further towards the limit. Empirical studies about the magnet effect are scarce, most likely because of the unavailability of data on rule‐based halts. In this paper, we use a large database from the Spanish Stock Exchange (SSE), which combines intraday stock specific price limits and short‐lived rule‐based call auctions to stabilise prices, to test this hypothesis. The SSE is particularly well suited to test the magnet effect hypothesis since trading halts are price‐triggered and, therefore, predictable to some extent. Still, the SSE microstructure presents two particularities: (i) a limit‐hit triggers an automatic switch to an alternative trading mechanism, a call auction, rather than a pure halt; (ii) the trading halt only lasts 5 minutes. We find that, even when prices are within a very short distance to the price limits, the probability of observing a limit‐hit is unexpectedly low. Additionally, prices either initiate reversion (non limit‐hit days) or slow down gradually (limit‐hit days) as they come near the intraday limits. Finally, the most aggressive traders progressively become more patient as prices approach the limits. Therefore, both the price patterns and the trading behaviour reported near the limits do not agree with the price limits acting as magnetic fields. Consequently, we conclude that the switching mechanism implemented in the SSE does not induce traders to advance their trading programs in time.     

Bankruptcy,absolute priority,and the pricing of risky debt claims

In practice, there are substantial deviations from the doctrine of ‘absolute priority’, which governs the rights of the firm's claimholders in the event of bankruptcy. To determine whether or not the possibility of such deviations is reflected in the prices of the firm's securities, this study examines the risk and return characteristics of financial claims against firms in court-supervised bankruptcy proceedings. Debt claims against bankrupt firms are indeed ‘risky’, exhibiting levels of systematic risk similar to that of common stocks in general. While some of the findings are anomalous, the data are generally consistent with the view that the capital market ‘properly’ prices risky debt claims to reflect both their risk characteristics and the possibility of departures from the doctrine of absolute priority.     

Voluntary Disclosures as a Mechanism for Defining Entity Status in Australian Not‐for‐Profit Organisations

This study examines managerial efforts to portray an entity's not‐for‐profit (NFP) status based on voluntary disclosure practices. The annual report text of 61 NFPs are analysed in accordance with Salamon and Anheier's (1997) NFP definitional framework. Results indicate a predominant application of the structural‐operational definition. Furthermore, the ‘organised’ attribute of this definition prevails over the ‘non‐profit‐distributing’ criterion that has been advocated by various parties. Standard‐setting bodies may want to consider: (1) NFP management perspectives in any revised NFP definition; and (2) greater clarity in conceptual framework and standard‐setting arrangements to improve overall transparency in NFP reporting practices.     

Are Options on Index Futures Profitable for Risk‐Averse Investors? Empirical Evidence

American options on the S&P 500 index futures that violate the stochastic dominance bounds of Constantinides and Perrakis (2009) from 1983 to 2006 are identified as potentially profitable trades. Call bid prices more frequently violate their upper bound than put bid prices do, while violations of the lower bounds by ask prices are infrequent. In out‐of‐sample tests of stochastic dominance, the writing of options that violate the upper bound increases the expected utility of any risk‐averse investor holding the market and cash, net of transaction costs and bid‐ask spreads. The results are economically significant and robust.     

The Price Impact and Survival of Irrational Traders

Milton Friedman argued that irrational traders will consistently lose money, will not survive, and, therefore, cannot influence long‐run asset prices. Since his work, survival and price impact have been assumed to be the same. In this paper, we demonstrate that survival and price impact are two independent concepts. The price impact of irrational traders does not rely on their long‐run survival, and they can have a significant impact on asset prices even when their wealth becomes negligible. We also show that irrational traders' portfolio policies can deviate from their limits long after the price process approaches its long‐run limit.     

Mobile phone masts,social rationalities and risk: negotiating lay perspectives on technological hazards

This paper examines the responses of 37 participants in six focus groups to media representations of the health risks associated with mobile phone masts (‘base stations’) in the light of theoretical debates concerning non‐expert understandings of risks (variously characterised as ‘lay rationality’, lay epidemiology’, popular epidemiology’, ‘public knowledges’, ‘social rationality’ and ‘intuitive risk judgements’). In particular, the study discusses the extent to which two particular manifestations of such understandings – non‐mediated contextual and personal knowledges (‘multiple information sources’), and risk comparisons made between mobile phone masts and a variety of other perceived health risks – are prominent in respondents’ discursive constructions of risk. The paper suggests that analyses of risk responses such as these should differentiate clearly between classes of risks, and avoid suggestions that any particular type of risk response can be unproblematically mapped onto other risk scenarios.