Credit Default Swaps: Risk Hedge or Financial Weapon of Mass Destruction?

Credit default swaps (CDSs) are contracts between buyers and sellers of protection against default. They are a form of debt insurance, or more precisely derivatives contracts that investors buy to either insure against or profit from a default. In this way CDS contracts act as a form of debt insurance in that they provide a means of protection against credit risk. In the aftermath of the global financial crisis, the CDS earned the reputation of a ‘financial weapon of mass destruction’. Why? Is this charge justified? This paper shows that the reality is more complex: CDSs carry benefit as well as costs, and the risks associated with them can be mitigated through prudent supervision.     

When loyalties clash purchase behavior when a preferred brand is stocked out: The tradeoff between brand and store loyalty

The interplay between brand and store loyalty is investigated in the situation of stockout of a preferred brand at a preferred store through three studies. A four-item scale for measuring store loyalty is developed and tested. While brand loyalty influences between-store substitution and within-store substitution in a stockout, store loyalty does not have any influence, suggesting the dominance of brand loyalty over store loyalty in a stockout. Relevance and implications of the results are discussed.     

Costly external finance and labor market dynamics

We study the role of agency frictions and costly external finance in cyclical labor market dynamics, with a focus on how credit-market frictions may amplify aggregate TFP shocks. The main result is that aggregate TFP shocks lead to large fluctuations of labor market quantities if the model is calibrated to the empirically observed countercyclicality of the finance premium. A financial accelerator mechanism thus amplifies labor market fluctuations by rendering rigidity in real wage dynamics. In contrast, if the finance premium is procyclical, which the model can be parameterized to accommodate, amplification is absent, and labor-market fluctuations display the Shimer (2005) puzzle.     

Toward a theory of managing context in Six Sigma process-improvement projects: An action research investigation

In this paper, field studies, extant literature, and domain knowledge are used to develop a theory of managing context in Six Sigma process-improvement projects. By means of a participatory action research investigation involving ten projects in manufacturing and service firms, this paper examines the interrelationship among project context, elements, and success. Rich text-based information for each project was analyzed for the underlying patterns and relationships using the NVIVO 8 qualitative data analysis software package. The insights gained from this in-depth field investigation are presented in the form of 12 inductively derived research propositions that, when taken together, uniquely contribute to context-based theory-building in this area.     

Fiscal deficits,banking crises and policy reversal in a semi-open economy

We study the effect of domestic policies and external shocks in a semi-open economy characterized by incomplete liberalization of the financial sector. We argue that in such transition economies stabilization programs can have a negative impact on the fiscal imbalances, offsetting to some extent the very achievement of the stabilization program. We develop a simple general equilibrium model which allows propagation of shocks in the presence of government guarantees and imperfect capital mobility. We also empirically test the impact of positive foreign interest shock on the Indian economy using a reduced form VAR approach. The econometric evidence, though broadly consistent with the main predictions of the model, suggests no significant impact of foreign interest rate shock on output and credit. We conclude that incomplete liberalization of the financial sector in transition economies has two effects. It reduces i) exposure to external financial shocks (like the current credit crisis) and ii) ability to deal with real sector shocks (which may arise from global recession in the medium term) due to endogenous policy reversals and presence of government guarantees.     

The economic profitability of pre-IPO earnings management and IPO underperformance

The purpose of this paper is to test the market performance of a zero-investment trading strategy based on the knowledge of IPO underperformance and estimates of pre-IPO earnings management. This trading strategy is implemented by forming two-firm portfolios that take short positions in the IPOs and long positions in control firms matched by industry and market capitalization. The first test shows that significant positive abnormal returns can be earned trading on the knowledge of IPO underperformance. However, the relationship between the level of abnormal returns and the level of pre-IPO earnings management is not found to be significant. Overall, our results suggest that existent pre-IPO earnings management plays important roles although investors may not sophisticated enough to measure the level of earnings management.