Nominal contracting in a world of uncertainty

This paper evaluates corporate sensitivity to relative price risk and inflation risk and suggests how the existence of various nominal contracts, particularly debt and forward contracts, may modify firm behavior under uncertainty. By differentiating between the two types of price risk, this paper demonstrates the distinct risk reduction functions served by forward contracts and debt. Debt primarily protects against inflation risk whereas forward contracts can be used to protect against relative price risk. Complications arise, however, because forward contracts, which are denominated in nominal terms, also have an impact on the firm's degree of inflation risk.     

Humpty Dumpty's guide to tax law: Rules,principles and certainty in taxation

Tax systems are, most commonly, rules-based. This gives the impression of techno-rationality in the interpretation of the numbers from which tax bills are derived. In fact, uncertainty and complexity in tax rules are seen as promoting tax avoidance behaviour, as avoiders exploit this complexity. Some authors have advocated that this can be combated by replacing rules-based tax legislation with principles-based legislation, giving tax authorities and the courts the power to interpret legislation purposively.This paper demonstrates by reference to a number of UK tax cases that rules-based legislation already embodies the hidden operation of state power as judges have considerable discretion in the interpretation of rules. The paper goes on to argue that principles-based legislation would further empower the state vis-à-vis the citizen. While this might be intuitively appealing to the vast majority of taxpayers not engaged in tax avoidance, it brings with it the hidden danger of a fundamental alteration of the balance of power between the state and all citizens, and should therefore be treated with caution.     

Beyond Panglossian theory: strategic capital investing in a complex adaptive world

Traditional capital budgeting theory (as an extension of financial economics) is characterized as Panglossian because of its suggestion that rational market outcomes produce the best of all possible worlds. During the last two decades, practice-oriented theorists have increasingly been moving from algorithmic capital budgeting techniques to a focus on capital investment strategy. Also, during the last twelve years, economics researchers at the Santa Fe Institute (SFI) have scrapped the dubious assumptions of neoclassical economics and have turned to complex adaptive systems theory for a more realistic portrayal of the economy. This paper explores various SFI studies and their implications for capital investment theory and capital investment strategy. Brian Arthur's theory of increasing returns undermines the notion that capital budgeting techniques can be counted on to generate economic efficiency. His theory further suggests that the high tech, knowledge-based sectors of the economy inherently produce outcomes that are too unpredictable for the meaningful application of traditional capital budgeting techniques. Studies by David Lane and his colleagues suggest that the identity of agents, the attributes of artifacts and the possibilities for action tend to be emergent phenomena that are generated by the interactions of agents. These considerations suggest a form of strategic action that focuses on process. Finally, it is argued that the artificial life and other SFI types of computer simulation models are potentially useful tools for the study of strategic capital investment decisions.     

From risk to the government of uncertainty: the case of mobile telephony

Confronted with complex and wicked issues, public authorities turn to science and expertise to provide answers that will help reduce the level of uncertainty that characterizes these issues. Yet, the paper argues that more often than not, it is the application of a risk framework to a given issue that fosters uncertainty, not the other way round. Hence, the more authorities and experts attempt to apply a risk approach to an issue, the more they encourage the production of uncertainty. Taking mobile telephony as a case in point, the paper then goes on to show that to reduce uncertainties, authorities in some countries have recently experimented with new forms of knowledge in the process of expertise; paradoxically, this may raise in a first moment the general level of uncertainty, but it may also provide in the longer term more robust knowledge. The larger aim of the paper is to expand conceptions of uncertainty commonly used in risk governance.     

From ruin theory to solvency in non-life insurance

We start from ruin theory considerations in the classical Cramér–Lundberg model. We modify these considerations step by step so that finally we arrive at today’s solvency assessments for non-life insurance companies. These modifications include discussions about time horizons, risk measures, financial returns, and valuation of insurance liabilities.     

Nominal uncertainty,real uncertainty and macroeconomic performance in a time-varying asymmetric framework: Implications for monetary policy

This study examines the dynamic causal links and volatility spillovers of inflation, output growth and their uncertainties in four South Asian countries, namely, Pakistan, India, Bangladesh and Sri Lanka by utilizing asymmetric GARCH family models. Our empirical evidence supports a number of important conclusions. There is an overwhelming support for Friedman-Ball hypothesis of positive inflation-uncertainty trade-off for all countries excluding India and Sri Lanka. The Cukierman-Meltzer’s idea that inflation uncertainty generates inflation, hold for Bangladesh and Sri Lanka only and the Holland’s hypothesis of negative influence of inflation uncertainty on level inflation is supported by India only. The positive influence of output uncertainty on inflation (Devereux (1989) hypothesis) is supported by all countries excluding Bangladesh while nominal uncertainty (real uncertainty) has negative (positive) effect on output growth in Pakistan (Bangladesh). Output growth is reducing real uncertainty in all countries excluding Sri Lanka and nominal uncertainty in Pakistan only. There is significant negative relationship between inflation and output growth for Pakistan only while real uncertainty is positively (negatively) related with nominal uncertainty in India (Bangladesh). The estimated results are almost robust with the simultaneous estimation procedure for testing the main hypotheses. In general, there is asymmetric effect and persistence of the GARCH parameters for all countries. The study suggests that the concerned central banks should pay more attention to the effects of macroeconomic uncertainty and should focus their monetary policy strategy on stabilizing both output growth and inflation.     

Investment timing in presence of downside risk: a certainty equivalent characterization

We demonstrate that the value of a single threshold investment strategy under stochastic dynamics allowing both continuous fluctuations and instantaneous downward jumps has a certainty equivalent representation in terms of the value of this strategy under risk-adjusted deterministic dynamics, and that this risk adjustment can be made either to the discount rate or to the expected infinitesimal growth rate of the underlying. In this way our analysis characterizes a class of optimal timing problems of irreversible investments for which the solution of the stochastic problem coincides with the solutions of certain risk-adjusted deterministic optimal timing problems.     

A pragmatist approach to transdisciplinarity in sustainability research: From complex systems theory to reflexive science

The importance of questioning the values, background assumptions, and normative orientations shaping sustainability research has been increasingly acknowledged, particularly in the context of transdisciplinary research, which aims to integrate knowledge from various scientific and societal bodies of knowledge. Nonetheless, the concept of reflexivity underlying transdisciplinary research is not sufficiently clarified and, as a result, is hardly able to support the development of social learning and social experimentation processes needed to support sustainability transitions. In particular, the concept of reflexivity is often restricted to building social legitimacy for the results of a new kind of ‘complex systems science’, with little consideration of the role of non-scientific expertise and social innovators in the design of the research practice itself.The key hypothesis of the paper is that transdisciplinary research would benefit from adopting a pragmatist approach to reflexivity. Such an approach relates reflexivity to collective processes of problem framing and problem solving through joint experimentation and social learning that directly involve the scientific and extra-scientific expertise. To test this hypothesis, the paper proposes a framework for analysing the different types of reflexive processes that play role in transdisciplinary research. The main conclusion of the analysis is the need to combine conventional consensus-oriented deliberative approaches to reflexivity with more open-ended, action-oriented transformative approaches.     

Anglo-Saxon governance: Similarities,difference and outcomes in a financialised world

The increasing pervasiveness of financial markets across the global economy has been identified in the literature with the spread of ‘Anglo-Saxon capitalism’, reflecting the notion that a common US–UK model of governance and managerial attitudes is becoming increasingly common worldwide. This paper questions the existence of a common US–UK model by exploring how the concept of ‘Anglo-Saxon capitalism’ emerged and by highlighting the institutional differences in governance and managerial routines between the two countries. As the collapses of Lehman Brothers and Royal Bank of Scotland show, common outcomes, driven by international, financialised markets and actors, may mask important differences in managerial routines and attitudes towards risk.     

R around the world: New theory and new tests

Morck, Yeung and Yu show that R² is higher in countries with less developed financial systems and poorer corporate governance. We show how control rights and information affect the division of risk bearing between managers and investors. Lack of transparency increases R² by shifting firm-specific risk to managers. Opaque stocks with high R²s are also more likely to crash, that is, to deliver large negative returns. Using stock returns from 40 stock markets from 1990 to 2001, we find strong positive relations between R² and several measures of opaqueness. These measures also explain the frequency of crashes.     

Managerial discourse and the link between theory and practice: From ROI to value-based management

Building on Thrift's (2005) concept of the cultural circuit of capitalism using critical discourse analysis, the paper investigates the influence of management accounting concepts on practice. The paper proposes that the way that academic theories in management accounting affect practice depends on the origin of the early texts, the extent to which the texts become discourses and the relative institutional support for the discourse. The approach is illustrated by focusing on three particular management accounting concepts: return on investment (ROI), value-based management (VBM) and strategic management accounting (SMA) and empirically contextualised through the case history of GEC/Marconi. The paper explains that, whilst ROI and VBM have, to varying degrees, become part of managerial discourse, SMA has remained a loose collection of academic texts and has had a negligible impact on managerial discourse and practice.     

From vision to action: Framing the Leitbild concept in the context of landscape planning

Reviewing landscape developments in the last decades evidently shows that in the future most pressing changes can be expected for the land surface. This indispensably calls for strategic approaches based on visions and transdisciplinary creativity. Hence, this paper critically reviews the Leitbild concept, an idea on spatial planning which has been widely discussed in the German-speaking planning literature but which has received scant attention elsewhere. Although the term has been translated as a ‘vision’, this paper shows that the concept is far richer in its content than these casual translations suggest. The paper shows that it defines a particular paradigm for landscape planning that embodies a transdisciplinary approach in which lay-people and experts develop both goals and strategies for realising their joint visions. A systematic overview of the key characteristics that make up the Leitbild approach is provided and set in relation to already available approaches for decision makers. Although there are similarities between the Leitbild approach and other planning and decision-support tools, such as Environmental Impact Assessment (EIA), Strategic Impact Assessment (SEA) and Sustainability Impact Assessment (SIA-sust), the paper shows that the particular combination of issues considered when developing a Leitbild makes it distinctive. Through an iterative process, the development of a Leitbild allows new approaches to spatial planning in which space and place can be considered as a social construct, and in which the values and understandings of local actors can be better represented.     

Naturoids: From a dream to a paradox

The human ambition to reproduce natural objects and processes has a long history, and ranges from pure dreams to actual design: from Icarus's wings to modern-day robotics and bioengineering. The concept of naturoid has been introduced in the last decade or so, for referring to man's attempts to reproduce natural phenomena. The development of naturoids may be viewed as a special class of technological activity, distinct from the general class of technology. The concept of naturoid should be useful for methodological research aimed at finding possible common rules, potentialities and constraints characterizing the human effort to reproduce natural objects.Tacitly, many designers think that the continuing improvement of a naturoid consists in its ever-growing overlap with the natural instance, and that the holy grail, as it were, is the complete reconstruction of a natural object of process, from its external appearance to its inner workings. This paper tries to show that a naturoid is always the result of a reduction of the complexity of natural objects, due to an unavoidable multiple selection strategy. Nevertheless, the reproduction process implies that naturoids take on their own new complexity, resulting in a transfiguration of the natural exemplars and their performances, leading to a true innovation explosion. As a matter of fact, the core performances of contemporary naturoids improve, but, paradoxically, the more a naturoid develops, the further away it moves from its natural counterpart. Therefore, naturoids will more and more affect our relationships with advanced technologies and with nature, but in ways quite beyond our predictive capabilities.     

Why finance theory fails to survive contact with the real world: A fund manager perspective

This paper examines why financial decision theory finds so little application in the real world. A review of the literature identifies shortcomings in research methodologies, and summarises evidence that core finance paradigms prove of limited empirical value. The practitioner perspective is reported based on interviews with 34 fund managers on four continents. These conclude that finance theory is of limited relevance to practitioners because its quantitative approach requires data about the future that are unavailable, and because it ignores practitioner objectives and skill, and the wealth of qualitative data available to them. The paper concludes that future research should better translate practitioner knowledge and practices into improved investment theory.     

From intention to action on sustainability reporting: The role of individual,organisational and institutional factors during war and post-war periods

This study examines the role of individual, organisational, and institutional factors in influencing the decision to engage in sustainability reporting (SR) and, how these factors change from war to post-war periods. Drawing on semi-structured interviews of Sri Lankan top and middle-level managers, the study finds that while individual and institutional factors play a role in SR, organisational factors predominate as both facilitators and inhibitors of SR in both war and post-war periods. This finding suggests the organisational level ultimately is the conduit of SR, although shaped by individuals and by institutional forces that come into confluence therein. The end of the civil war enabled the country to focus on economic and social development, a phase that witnessed the amplification of the role of organisational factors in SR. The social and economic impacts of the civil war manifested themselves contemporaneously and well after hostilities ceased; organisations experienced inflated expectations from government and communities, for example, through soldiers’ rehabilitation and infrastructure development. By employing a multi-level analysis, the study offers insights into the dynamic between individual, organisational, and institutional factors influencing SR, highlighting the merit of this research approach.     

Linking environmental uncertainty to non-financial performance measures and performance: a research note

Several previous research studies have reported mixed results concerning the direct association between non-financial performance measures and performance. The presence of environmental uncertainty on this relationship has not been established. This paper makes a contribution to this area by proposing that it is in conditions of environmental uncertainty that non-financial measures are most useful in improving organizational performance. It analyses empirical data from a sample of New Zealand manufacturing organizations to test the hypothesis that non-financial measures of performance would lead to improved organizational performance under conditions of increased environmental uncertainty. Multiple regression analysis of the data suggests that performance should be a declining function of the size of the ‘mismatch’ between an organization's environment and use of the different combinations of non-financial performance measures. Further, the paper concludes that prior mixed results may be attributed to the omission of environmental uncertainty.     

Capital markets research and real world complexity: The emerging challenge of chaos theory

The theories of chaos and complexity are presented as a wide-ranging new vision of the relationship between order and disorder, a new vision that is challenging many of the fundamental presuppositions of the older Newtonian world view of science. The implications of the new vision are explored in terms of their challenges to the methodological views widely espoused by capital market researchers in accounting, most notably with respect to the assumptions of linearity and predictability. Mandelbrot's early studies of economics and financial time series data, which provided many of the insights for his conception of fractals, are reviewed in terms of their challenges to the conceptual framework of the traditonal capital markets research paradigm and its extension to financial reporting issues. Contemporary studies which are reviving Mandelbrot's challenges are also reviewed, with the conclusion that they are weakening the intellectual hold of the tradtional capital markets paradigm and making it more susceptible to overthrow by a competing paradigm. Finally, an emerging new research program associated with the Santa Fe Institute (SFI) is reviewed. SFI researchers are studying financial markets as complex adaptive systems. Their preliminary findings are incompatible with the widely presumed theoretical linkage between financial reporting systems and economic efficiency, and they tend to undermine the traditonal rationale relating earnings to stock prices.     

Public education spending in a globalized world:

This paper studies the effect of globalization on public expenditures allocated to different stages of education. First, we derive theoretically that globalization’s influence on education expenditures depends on the type of government. For benevolent governments, the model suggests that expenditures for higher education will increase and expenditures for basic education will decline with deepening economic integration. For Leviathan governments, on the other hand, the effects of globalization on public education spending cannot be unambiguously predicted. In the second part of the paper, we empirically analyze globalization’s influence on primary, secondary, and tertiary education expenditures with panel data covering 104 countries over the 1992–2006 period. The results indicate that globalization has led in both industrialized and developing countries to more spending for secondary and tertiary and to less spending for primary education.