AN ECONOMETRIC ANALYSIS OF EQUITY COSTS AND RISK PREMIUMS IN THE ELECTRIC UTILITY INDUSTRY: 1971–1985

This paper develops a varying parameter econometric model that estimates the cost of equity of individual utility firms from 1971 to 1985. The equity costs estimated in this framework can be analyzed in terms of their statistical precision. The paper also examines, theoretically and empirically, the relationship between the econometric estimates of the equity risk premiums and the risk-free interest rates. The data do not support the hypothesis that risk premiums are independent of interest rates. Also, the relationship appears to vary over time. These results invalidate the risk premium approach in which equity costs are estimated by adding a constant, historical average risk premium to the prevailing interest rates.     

我国银行业市场结构变迁的路径选择

产业组织理论认为,市场结构是决定企业行为,进而决定市场绩效的基本因素。本文运用市场份额指标和市场集中度指标来衡量中国商业银行的市场结构及垄断程度,对中国商业银行的市场结构做一实证研究。本文认为我国商业银行市场集中度高,具有鲜明的寡头垄断市场的特点;动态的看,四大国有商业银行各项指标近年来缓慢下降,而新兴股份制商业银行各项指标上升势头明显。这表明竞争趋势正在逐步提高,中国商业银行业的市场结构正逐步由高度集中的寡头垄断型向垄断竞争型转变。同时,本文从金融产权制度变迁的角度探讨了中国商业银行市场结构形成的深层次原因,并提出了相应的政策建议。     

TIME-SERIES PROPERTIES OF THE EQUITY RISK PREMIUM

In this paper we use time-series models to investigate the presence of autoregression, random variation, and random walk movements of historic equity risk premiums. An autoregressive risk premium is found for 1926–58, but random variation around a much lower risk premium mean is found for 1959–90. This finding is not sensitive to holding-period length, the choice of the risk-free rate proxy, or January/July seasonal effects.     

中国金融业的市场化趋势与结构性变革

金融市场化趋势是指资本市场相对于商业银行体系而言 ,规模越来越大 ,活跃程度越来越高 ,对于促进实体经济的发展发挥着越来越重要的金融功能 ,并以其架构精巧的杠杆体系推动着实体经济的发展。金融的市场化趋势推动着中国以商业银行为主体的传统金融体系向以资本市场为中心的现代金融体系演进。本文对构建未来的中国金融体系提出必须把握的三个方面 :一是大力发展资本市场 ,使其成为中国金融体系中最有活力的核心 ,发挥其对现代经济体系的杠杆推动作用 ;二是商业银行的发展要注重和资本市场对接 ,其业务创新应围绕资本市场这一平台展开 ;三是注重协调资本市场和商业银行的功能互补     

THE RISK BEHAVIOR OF EQUITY OF FIRMS APPROACHING BANKRUPTCY

The risk behavior of financially distressed companies is studied using the shifting regimes regression model originally suggested by Brown, Durbin, and Evans. In addition, the presence of nonsynchronous trading is detected and the regression model is adjusted accordingly using Dimson's technique. The results reveal that the behavior of systematic risk as firms approach bankruptcy depends to some degree on appropriate identification of periods over which beta is constant and adjusting for nonsynchronous trading. The results also lend support to the importance of skewness and to some extent beta but not unsystematic risk in explaining the security returns of firms approaching bankruptcy. Finally, the behavior of equity risk is examined according to the outcome of the bankruptcy filing.     

GLOBAL EVIDENCE ON THE EQUITY RISK PREMIUM

The size of the equity risk premium—the incremental return that shareholders require to hold risky equities rather than risk-free securities—is a key issue in corporate finance. Financial economists generally measure the equity premium over long periods of time in order to obtain reliable estimates. These estimates are widely used by investors, finance professionals, corporate executives, regulators, lawyers, and consultants. But because the 20th century proved to be a period of such remarkable growth in the U.S. economy, estimates of the risk premium that rely on past market performance may be too high to serve as a reliable guide to the future.
The authors analyze a 103-year history of risk premiums in 16 countries and conclude that the U.S. risk premium relative to Treasury bills was 5.3% for that period—lower than previous studies suggest—as compared to 4.2% for the U.K. and 4.5% for a world index. But the article goes on to observe that the historical record may still overstate expectations of the future risk premium, partly because market volatility in the future may be lower than in the past, and partly because of a general decline in risk resulting from new technological advances and increased diversification opportunities for investors. After adjusting for the expected impact of these factors, the authors calculate forward-looking equity risk premiums of 4.3% for the U.S., 3.9% for the U.K., and 3.5% for the world index. At the same time, however, they caution that the risk premium can fluctuate over time and that managers should make appropriate adjustments when there are compelling economic reasons to think that expected premiums are unusually high or low.     

ESTIMATING THE EQUITY RISK PREMIUM AND EQUITY COSTS: NEW WAYS OF LOOKING AT OLD DATA

This article examines three alternative ways of estimating the expected return on the equity market in using the CAPM or some other risk premium model. The three techniques are (1) direct estimation of the average nominal equity return for use as a forecast nominal equity return; (2) estimation of the average real equity return, which can then be added to a forecast inflation rate; and (3) estimation of an average equity risk premium, which is then added to a current risk-free rate. Ibbotson and Sinquefeld's data on annual holding period returns are used to test the validity of their assumption that the equity risk premium follows a random walk and that the third of these approaches is thus the best method.
The paper reaches three major conclusions. First, each of these three techniques involves a bias of some kind. The use of average equity returns as a forecast is subject to risk-free rate and inflation rate biases, while the use of an average equity risk premium is subject to a term premium bias. As a result, only the data can tell us which approach is best. Second, from analyzing equity and bond return data and the trend in interest rates, the author concludes that the term premium bias when using average historic equity risk premium is by far the largest of the three sources of bias. Indeed, the popular practice of adding an historic average equity risk premium to the 30-year Treasury bond rate significantly overstates equity costs. Third, after examining equity rates of return back to 1871, the author concludes that the real equity return seems to follow a process that is close to a random walk and is thus the best of the three techniques to use as a naive forecast.     

THE ROLES OF INSTITUTIONAL INVESTORS IN THE FAILURE OF NEWLY PUBLIC STOCKS

In this article, we study two negative events that can happen to newly public stocks: (1) the price drops at least 50% from the closing price on the first trading date within one year after the initial public offering (IPO) (initial failure) and (2) the firm is delisted for negative reasons within three years after the IPO (final failure). We find that high investor sentiment at the time of IPO can lead to both initial failure and final failure of IPO firms, whereas monitoring by external professionals plays a more important role in averting final failure than initial failure. Exploring the roles of different types of institutional investors, we find that transient (i.e., short‐term trading) institutions sell before initial failure. In contrast, dedicated (i.e., monitoring) institutions focus on long‐term performance and may stay with stocks suffering temporary initial failure, but their selling typically signals the imminent final failure of newly public firms.     

THE ROLE OF ACCOUNTING IN ORGANISATIONAL CHANGE: PROMOTING PERFORMANCE IMPROVEMENTS IN THE PRIVATISED UK WATER INDUSTRY

Privatisation has been one of the most important and controversial policy initiatives to emerge in the U.K. over the last decade. Yet despite its prominence, little so far is known about its impact on those centrally involved in its implementations: senior management. This paper will investigate the ways in which senior management within one of the major privatised industries, the Water Industry, have sought to give effect to the strategic change involved in the transformation of a public sector Water Authority into a private sector Water plc. Although the monopoly character of the supply of Water services has remained intact, managers in the new Water plcs have had to respond to new expectations and assessments of corporate performance from shareholders, investors and financial analysts; from customers; and from a new economic regulatory regime operated by the Director General of the Office of Water Services. The Director General, in addition to operating price controls, is committed to developing “yardstick” competition which will provide the opportunity to make comparative judgements about performance levels achieved by each of the new Water plcs. In pursuit of improvements in efficiency and profitability, senior managers have engineered a variety of restructurings of corporate organisation to give more focus to achieving new business objectives, and to move away from a public sector bureaucratic management style with its traditional tall-pyramid structure to flatter and less hierarchical management structures. Although many of the changes have been justified in terms of empowerment and providing more autonomy for local managers, the paper argues that the experience of change for these managers has largely consisted of being subjected to much greater accountability for their performance through greater emphasis on the achievement of financial targets, more systematic monitoring of performance, the introduction of individual performance appraisal, and performance-related pay. Central to this intensification of the scrutiny of performance have been changes in accounting information systems and how they are used. In examining how these changes have functioned in their organisational context, the paper seeks to contribute to an understanding of the role of accounting in processes of organisational change     

FOREIGN-CURRENCY ACCOUNTING METHODS: REPORTING THE EXCHANGE RATE RISK EXPOSURE OF EQUITY

This study tests whether Australian firms' unregulated foreign-currency accounting policies indicated the extent to which equity claims against the firm were exposed to exchange rate risk. Evidence supports the hypothesis that the methods of accounting for foreign-currency gains and losses on long-term monetary-items were associated with the exposure. Methods of disposing of the gains and losses arising from translation of the accounts of overseas subsidiaries were also associated with the exposure, but not in the manner predicted. The results indicate that foreign-currency accounting policies were established in an interactive (portfolio) decision-making process, and that managers reported equity claim exposures relative to the returns to equity claims against other firms. Overall, the study provides evidence that at least some unregulated choices of foreign-currency accounting methods were made to minimise the agency costs associated with contracts between shareholders and management.     

MARKET POWER IN THE PROPERTY/CASUALTY INSURANCE INDUSTRY

Abstract: Pro-consumer groups have charged that insurance firms are able to exercise market power to reduce coverage and/or increase rates. The ability of firms to earn economic rents (abnormal profits) is a factor in banks' interest in entering insurance markets. In classical economics such collusion is usually only possible with cartels. Recent work, examining the relationship between industry structure indicates that the power that can be exercised by cartels may be more limited than under the classical paradigms. We examine the ability of insurers to exercise market power in light of these modern theories.