Search,product market competition and CEO pay

We develop a market equilibrium model to show how search frictions in the CEO market, agency conflicts and product market characteristics interact to affect CEO market tightness, firm size and CEO incentive pay. The theory generates novel implications that link firms' product markets with CEO markets. Different determinants of competition—the entry cost, product substitutability, and market size—have contrasting effects on CEO market tightness, CEO pay and firm size. We also derive new predictions for the impact of product market risk on firm size and CEO incentive compensation. We show empirical support for several cross-sectional hypotheses derived from the theory for how CEO pay, CEO incentives, firm size and market tightness vary with product market characteristics.     

The stages of financial services product elimination

This paper examines product elimination in the UK's financial services industry. The literature review establishes that physical goods elimination theory has only limited application to the financial services sector. Specifically, it fails to take account of constraints that prevent the removal of a product to a state of nonexistence. To overcome this, the sector uses two forms of removal — full and partial elimination. A three-stage methodology is used to find out how products are eliminated in retail banks, building societies and insurance organisations. A model is developed which explains that companies within the sector proceed through four stages during the elimination process — identification, decision, implementation and post elimination evaluation. At the end of this process, a product will have been either partially or fully eliminated. The preference of the industry is to use partial elimination. It can be concluded that the customer relationship is a key determinate factor in the choice of elimination process.     

The economic implications of the VLSI revolution

In 1970 a silicon-wafer fabrication plant cost $2 million: in 1979 it was $50 million. The production of integrated circuits is not only capital intensive. It is also a high-risk business—rapid innovation brings the dangers of product and process obsolescence. Vast investments in complex equipment to produce ever tinier integrated circuits can be recouped only through high-volume sales. Consumers pay less per unit of performance and large firms are favoured. VLSI (very large scale integration) may shortly bring a generation of devices more flexible even than the microprocessor. But the diffusion of the new technology depends heavily on ‘gatekeepers’ who evaluate potential applications. The greatest obstacle, as in the case of automation, will be the design and choice of appropriate software.     

Zillmerung, Stille Reserven, Intransparenz der Vertragsabwicklung — die Todsünden der Lebensversicherung?

Life Assurance is a very complex, but highly efficient product for individual risk management and old-age insurance. Yet some of its features, mainly connected with profit participation, are sometimes difficult to understand or explain — this is particularly true for the role of Zillmerisation and the use of hidden reserves in the smoothing process which typically is part of profit participation of german life assurance products. Also, Life Assurance is often considered to be an intransparent product. The author expresses his view that Zillmerisation, Hidden Reserves and Intransparency are not ?deadly sins“ of Life Assurance but guarantors of a verifiable product efficiency which finally is of benefit to policy holders. He explains the function of the said product features and substantiates his view by a number of qualitative arguments and quantitative examples.     

Why do accruals predict earnings?

Higher accruals are associated with lower subsequent earnings. We show this phenomenon can be explained by the way sales, profits, and working capital respond to changes in a firm's product markets. Empirically, high accruals predict high subsequent sales growth but a long-lasting drop in both profits and profitability. Accruals also predict an increase in future competition, suggesting that accruals are correlated with abnormally high—and, in equilibrium, transitory—true profitability that attracts new entrants to the industry. Overall, the predictive power of accruals is better explained by product-market effects than by measurement error in accruals or diminishing returns from investment.     

Stakeholder involvement in the new service design process

The role of innovation/new product/service development as a source of organisational growth and profitability is well recognised. Similarly, the need to build ‘quality’ into the design of new products and services is understood. Research focusing on the development of new financial services usually includes new product development models, emphasising the ‘technical quality’ of the service, while service design models emphasise process or ‘functional quality’. Additionally, while the impact of staff on service delivery at the implementation stage and the need for inter-departmental cooperation is widely discussed, many studies do not focus on the range of stakeholder interests that affect the new product development/design process. The case study presented highlights both the focus of service design and the multiple stakeholders involved in the process. In-depth interviews with managers of the new product development department of a UK bank reveal potential and actual sources of conflict.     

FinTech,BigTech, and the Future of Banks

Banks are unique financial institutions in that they combine the production of liquid claims—that is, demand deposits—with loans. Though banks can replicate most of what FinTech firms can do, FinTech firms benefit from an uneven playing field in that they are less regulated than banks. The uneven playing field enables nonbank FinTech firms to challenge banks in specific product areas where success is not tied to what makes banks unique—namely, their deposit‐gathering abilities and the potential for synergies with borrowers provided by deposits. And although banks’ responses to FinTech have also been hampered by their legacy IT systems and by internal frictions inherent in large diversified firms, FinTech's narrow product offerings and lack of established “franchises” appear to put clear limits on Fintech's ability to displace banks. Unlike Fintech, however, BigTech firms have some advantages that banks will find it harder to replicate, and so they present a much stronger challenge to established banks in two main areas: consumer finance and loans to small firms. And FinTech as well as BigTech are contributing to a trend in which banks are losing a comparative advantage that has derived from having more immediate access to information about parties seeking credit. The extent to which banks succeed in warding off such threats will depend on (1) their ability to make effective—and possibly even better—use of the same information technology now being used by its new competitors, and (2) their success in realizing economies of scale and scope that their nonbank competitors will find hard to match.     

The contribution of scenario analysis to the front-end of new product development

The front-end of new product development involves the identification and analysis of product or service opportunities, idea generation, and the selection of new product and service concepts. It is often referred to as non-routine, dynamic, and highly uncertain. Authors have made attempts to improve the manageability of this phase by proposing several methods and techniques. This paper explores the possible contribution of scenario analysis to increase the quality and effectiveness of the front-end of new product development process by linking a set of functions of scenario analysis as is recognized in the literature as possible solutions to various front-end problems. Two case studies are used to explore if and how the scenario analysis functions contribute to the front-end of new product development process in an empirical setting.     

New solvable stochastic volatility models for pricing volatility derivatives

In this paper we discuss a new approach to extend a class of solvable stochastic volatility models (SVM). Usually, classical SVM adopt a CEV process for instantaneous variance where the CEV parameter γ takes just few values: 0—the Ornstein–Uhlenbeck process, 1/2—the Heston (or square root) process, 1—GARCH, and 3/2—the 3/2 model. Some other models, e.g. with γ = 2 were discovered in Henry-Labordére (Analysis, geometry, and modeling in finance: advanced methods in option pricing. Chapman & Hall/CRC Financial Mathematics Series, London, 2009) by making connection between stochastic volatility and solvable diffusion processes in quantum mechanics. In particular, he used to build a bridge between solvable superpotentials (the Natanzon superpotentials, which allow reduction of a Schrödinger equation to a Gauss confluent hypergeometric equation) and existing SVM. Here we propose some new models with ${\gamma \in \mathbb{R}}$ and demonstrate that using Lie’s symmetries they could be priced in closed form in terms of hypergeometric functions. Thus obtained new models could be useful for pricing volatility derivatives (variance and volatility swaps, moment swaps).     

Financial intermediation and the funding of biomedical innovation: A review

We review the literature on financial intermediation in the process by which new medical therapeutics are financed, developed, and delivered. We discuss the contributing factors that lead to a key finding in the literature—underinvestment in biomedical R&D—and focus on the role that banks and other intermediaries can play in financing biomedical R&D and potentially closing this funding gap. We conclude with a discussion of the role of financial intermediation in the delivery of healthcare to patients.     

A liquidity-based model for asset price bubbles

We provide a new liquidity-based model for financial asset price bubbles that explains bubble formation and bubble bursting. The martingale approach to modeling price bubbles assumes that the asset's market price process is exogenous and the fundamental price, the expected future cash flows under a martingale measure, is endogenous. In contrast, we define the asset's fundamental price process exogenously and asset price bubbles are endogenously determined by market trading activity. This enables us to generate a model that explains both bubble formation and bubble bursting. In our model, the quantity impact of trading activity on the fundamental price process—liquidity risk—is what generates price bubbles. We study the conditions under which asset price bubbles are consistent with no arbitrage opportunities and we relate our definition of the fundamental price process to the classical definition.     

Buyer seller relationships in the UK insurance market: Is this the key competitive advantage?

In services marketing much of the recent literature recommends the use of relationship marketing frameworks rather than the extended marketing mix which adds people, process and physical evidence to the traditional four Ps of product, price, promotion and place. In the UK permanent health insurance sector some suppliers sell through intermediaries, making this an ideal environment for testing the value of relationship marketing. Using the Industrial Marketing and Purchasing (IMP) group framework, interviews were conducted with 100 intermediaries. Respondents were asked to rate their top two suppliers against five relationship marketing variables: commercial skills, technical skills, commitment, adaptability and conflict management.The data showed the top supplier was rated more highly than the second supplier in three of the criteria:— commercial skills— technical skills— adaptability.Two of the criteria, commercial skills and technical skills, showed significant differences. The results of this research provide support for the importance of relationship marketing within this sector of the insurance market. For suppliers in the insurance industry, developing competencies in adaptability and conflict management may be the best method both to differentiate the firm and to develop competitive advantage.     

Innovation in Euromarket hybrid funding instruments

This paper considers case studies of the use of innovative hybrid funding instruments—which have features of debt and equity issued by UK companies in the Euromarket. It considers why these instruments were developed and how they utilise the ‘grey areas' in accounting and tax regulations to achieve what managers perceive to be the main benefits of each. One of the major influences on the choice of funding instruments for a number of companies involved in acquisitions in the late 1980s was their accounting and tax treatment. the search was for cost effective finance which at the same time contributed a premium to blunt the purchased goodwill write-off. Group reserves have no legal significance but goodwill write-offs can have consequences for a group constrained by borrowing restrictions (based on its balance sheet figures). the concern with the shape of the balance sheet and the ratios calculated using these figures, combined with perceived beliefs about the tax advantages of borrowing led to the development of the Euroconvertible Preference Share issues by subsidiary companies in 1989. the tax authorities removed the attraction of this instrument to issuers. However, the innovative process continued and similar accounting and tax explanations influenced the design of another major category of hybrid—the Convertible Capital Bond. Accounting regulators have reacted to this hybrid by producing new guidelines which have removed its benefits and therefore its attraction to companies. Nonetheless, the process of innovation continues and a new instrument—the Irredeemable Convertible Bond—has been developed.     

The Balance between Specific and Ad Valorem Taxation

A recurring issue in indirect tax design — most obviously, but not only, for goods traditionally subject to heavy excises — is the appropriate balance between specific and ad valorem taxation. Recent work has developed new perspectives on the issue, which is also one of the oldest in the formal study of public finance. This paper provides a broadly non-technical account of the central considerations that arise in choosing the balance between specific and ad valorem taxation, reviewing and somewhat extending the lessons of theory and experience. There emerge clear presumptions as to the relative effects of the two kinds of tax on such attributes as price, profits, product quality and variety. But the socially optimal balance between them is likely to be quite sensitive to the characteristics of the market at issue. JEL classification: h21, H22.     

Customer value exchange

This paper discusses the state of the US banking industry — its challenges and some of the common shortcomings of their current strategies — and presents compelling reasons why banks must re-formulate new strategies for growth and profitability focused on the customer. It proposes a framework, called the customer value exchange (CVE), as a potential solution that would enable banks to develop effective strategies tailored to their customers’ specific needs and perceptions of value, which are the drivers for profitability. This framework is organised into capabilities, which are explained in this paper. A sample process for how these capabilities are applied is provided with an emphasis on an iterative, dynamic refinement process. The iterative approach includes strategy, people, process, analyses and information that companies can integrate to yield higher value and exchange with the banks’ customers. The paper also presents a real company case study. This framework can be utilised by academics and industry practitioners of customer relationship programmes alike.     

Methods of consolidation in current accounting textbooks

This paper describes my attempts to deal with a problem that is perhaps a common one—the problem of teaching consolidations as something other than a matter of choice. To suggest that the problem is common follows from two observations. First, very few neophytes enter the professorate with the intention to teach consolidations. Second, department heads often have to persuade someone to teach the course. Those so persuaded, like myself, face a rather bewildering and complex curriculum. In this paper, I offer some heuristic guidance perhaps useful to others, guidance that is the product of 6 years of trying to overcome the difficulties of teaching out of one's primary area of interest.Apart from the technical complexity of the course, consolidations pose a quite practical, pedagogical problem. While the end sought in the consolidation process is clear—the production of consolidated financial statements—there are a variety of means available to achieve that end. To varying degrees, the means to the end is recording method dependent; i.e., the consolidation process will vary with the way the parent company accounts for its long-term majority-owned investment during the accounting cycle. For expediency, teachers are likely to promote one of these recording methods. Yet the student is likely to encounter other recording methods either in practice or on professional examinations. While this paper does not purport to have the definitive answer to this dilemma, this paper does provide some thoughts which may be helpful in coping with the existence of alternative recording methods.     

Product Mix and Earnings Volatility at Commercial Banks: Evidence from a Degree of Total Leverage Model

We construct a degree-of-total-leverage framework to test whether and how shifts in product mix affect earnings volatility at 472 U.S. commercial banks between 1988 and 1995. Our framework, which accounts for cost and revenue synergies not captured in most previous studies, conceptually links earnings volatility to revenue volatility, expense fixity, and product mix. We find that replacing traditional lending activities with fee-based activities—an ongoing trend that may be strengthened by recent financial modernization—is associated with both higher revenue volatility and higher total leverage, which in this framework implies higher earnings volatility. Journal of Economic Literature Classification Numbers: G21, G32, D24.     

The complexity of management accounting change: Bifurcation and oscillation in schizophrenic inter-organisational systems

This paper discusses and reconceptualises the role and practice of accounting in dynamic and complex business networks. The paper conceptualises change in complex inter-organisational systems as a process where various perturbations from the environment or installation of management accounting affect the system. This initiates two types of development. Firstly, the system searches the inter-organisational space, and branches out into new inter-organisational configurations—the system bifurcates. Secondly, the systems studied in this paper did not stabilise to the new order and inter-organisational configuration—rather they oscillated between institutional orders. The inter-organisational system is therefore schizophrenic in a sense, since it can shift between fundamentally different behaviours and orders within a short span of time. Management accounting in this complex evolving inter-organisational system is a source of instability rather than stability, a source of emergent, unintended order rather than planned or institutionalised change.     

期货新品种上市机制研究

期货新品种开发机制的扭曲与不到位目前已成为制约期货业发展的"瓶颈",理顺期货新品种上市程序,建立合理、高效的市场导向上市制度,必将大大推进我国期货市场的改革,迎来期货业的大发展.在市场价值取向已经确定的情况下,将核准制和注册制作为期货新品种上市机制改革的长远目标是适宜的.但鉴于我国期货市场的发展阶段以及经济体制转型现状,改良审批制应是目前的最佳选择.