MEASURING HEDGE EFFECTIVENESS FOR FAS 133 COMPLIANCE

Financial Accounting Standard (FAS) 133 requires business entities to document their anticipation of hedge effectiveness in order to qualify for hedge accounting treatment of gains and losses from financial derivatives. In the absence of specific guidelines, the accounting industry has espoused the "80–125" rule for determining hedge effectiveness. But the authors observe that meaningful assessment of anticipated hedge effectiveness must consider two distinct aspects of a firm's hedging strategy: (1) the strength of the hedging relationship, which is determined by the choice of the hedging instrument; and (2) the position taken in the hedging instrument relative to the holdings of the hedged item. They take both aspects of hedging into consideration in developing alternative measures of hedge effectiveness and distinguishing between the potential and attained effectiveness of a particular hedge. This approach enables the user to evaluate the relative merits of alternative hedging strategies to support risk management decisions, and also to document a selected hedging strategy's anticipated effectiveness for purposes of compliance with FAS 133. While the authors endorse a fairly broad interpretation of hedge effectiveness, their approach can also be used in the narrower context of an "80–125" rule.     

Review Article

Linda Clarke, Peter de Gijsel & Jörn Janssen (eds) (2000) The Dynamics of Wage Relations in the New Europe (Dordrecht, Kluwer Academic)ISBN 0-7923-7742-7 £83 368 pp.     

A Statement of Accounting Concepts for Level 1 of the Conceptual Framework?

The type of reporting found in corporate governance includes financial reporting, but over time various arguments have developed regarding a tension found between conventional and financial type reporting, especially as to the role of financial statements. Further tensions follow from the introduction of economic and social issues within both conventional accounting and financial reports.
This article argues that distinct, though related, frameworks at particular levels are required. The mingling of conventional accounting with financial and economic ideas and issues is evident in the conceptual framework (CF) project where there is reference to economic benefits and costs in making economic decisions for the allocation of resources. This results in a misconception of the function of these distinct types of information. An unravelling of particular issues will require a Statement of Accounting Concepts (SAC) for Level 1 of the CF.     

Discontinuous innovation and supply relationships: strategic dalliances

The authors address the need for supply relationships to generate, support, and respond to discontinuous innovation (DI), noting that established ways of working appear insufficient. The peculiarities of DI are explained and contrasted with well-known concepts within innovation. The need for customer firms to be both closely collaborative with suppliers while also exploring potential, unpredictable DI elsewhere is proposed, by means of strategic dalliances . A model is presented for understanding and exploring this emerging management challenge.     

Discussion of “Earnings Surprises,Growth Expectations,and Stock Returns,or, Don't Let an Earnings Torpedo Sink Your Portfolio”

Review of Accounting Studies -     

A comparison of Ad valorem and per unit taxes in regulated monopolies

This paper compares the output and revenue effects in the rate-of-return regulated monopoly model. Both the ad valorem and the unit tax generally decrease the use of capital, and as such, reduce the output and raise the price. In addition, it is shown that Suits and Musgrave's conclusion of higher revenue of an ad valorem tax at a given output can apply to a regulated monopolist if the marginal product of labor under the ad valorem tax is greater than or equal to that under the unit tax. Similarly, their second conclusion, that for a given tax revenue an ad valorem tax has a larger output than a unit tax rate before the revenue-maximizing tax rate, can also apply to the regulated monopolist.     

Capital Investment under Alternative Marketing Scenarios in the Hog Industry: A Real Option Approach

This paper uses a real option approach to analyze the impact of alternative marketing contracts on the decision to invest in a cooperatively owned hog facility. For the numerical analysis of the impact, this paper uses a simulation method that incorporates early exercise, multiple‐state variables, multi‐choice decisions and temporal optimality. The results show that the option values that stem from the value of waiting to invest and choosing between alternative marketing methods amounts to 20–36% of the initial investment. Further, having an option to choose an alternative marketing method with different risk structure does add to the value of waiting to invest. Having an option to enter a 15‐year marketing contract increases the value of waiting by as much as $117,097 for the pork production example in this paper. Finally, the value of the option to wait is unilaterally lower under a risk‐reducing contract scenario than under a spot market alternative. This could explain the explosion in hog production facility investment during the 1990s when prevalence of contract production increased. Les auteurs ont recouru à l'approche du choix véritable pour analyser l'impact d'autres solutions de mise en marché sur la capacité d'investir ou pas dans un élevage de porcs exploitéà la manière d'une coopérative. Aux fins de l'analyse, on s'est servi d'une méthode de simulation intégrant une brève campagne, de multiples variables d'État, des décisions à choix multiple et des conditions optimales dans le temps. Les résultats indiquent que l'existence d'un choix réel permettant à l'exploitant d'attendre avant d'investir et de sélectionner entre plusieurs méthodes de mise en marché représente 20 à 36 pour cent de l'investissement initial. Par ailleurs, le fait d'avoir accès à une autre méthode de mise en marché, à structure de risque différente, ne donne pas plus de valeur à la capacité d'attendre avant de procéder aux investissements. La possibilité de signer une entente de commercialisation de quinze ans accroît la valeur de l'attente de jusqu'à 117,097 $ pour le type d'élevage porcin retenu comme exemple. Enfin, l'existence d'une entente de commercialisation atténuant les risques réduit unilatéralement la valeur de l'option « attente », comparativement à ce qui se produit quand l'éleveur n'a d'autre choix qu'écouler ses bêtes sur le marché au comptant. Ces résultats pourraient expliquer l'explosion des investissements observée dans le secteur du porc au cours des années 90, où la production sous contrat avait sensiblement augmenté.     

AN EMPIRICAL EXAMINATION OF RELATIONSHIP MAGNITUDE

Based upon a review of the extant literature, it is proposed that the structure of an interorganizational relationship is composed of relationship type and the under‐researched construct of relationship magnitude. Specifically, it is hypothesized that relationship magnitude, a second order construct composed of trust, commitment, and dependence, affects relationship type, which affects the perception of value of the relationship. The results of a survey analyzed through structural equation modeling support these hypotheses.     

Spatial determinants of Japanese FDI in China

Research on foreign direct investment in China has spawned an increasingly large literature. Whilst regional cleavages with respect to the distribution of foreign direct investment (FDI) are acknowledged, empirical research on the spatial determinants of FDI in China has been limited. Furthermore, research on the spatial determinants of home country FDI in China has thus far been neglected due to difficulties in accessing the appropriate data. The objective of this paper is to examine the spatial determinants of Japanese direct investment in China by using an econometric model. To that purpose, a dataset is created from the Toyo Keizai directory on the overseas activities of Japanese companies. The results show that tertiary education, inland waterways, as well as coastal location are positive and significant determinants of Japanese investment in China.     

Managerial Opportunism? Evidence from Directors' and Officers' Insurance Purchases

We analyze a sample of 72 IPO firms that went public between 1992 and 1996 for which we have detailed proprietary information about the amount and cost of D&O liability insurance. If managers of IPO firms are exploiting superior inside information, we hypothesize that the amount of insurance coverage chosen will be related to the post-offering performance of the issuing firm's shares. Consistent with the hypothesis, we find a significant negative relation between the three-year post-IPO stock price performance and the insurance coverage purchased in conjunction with the IPO. One plausible interpretation is that, like insider securities transactions, D&O insurance decisions reveal opportunistic behavior by managers. This provides some motivation to argue that disclosure of the details of D&O insurance decisions, as is required in some other countries, is valuable.