Do size and unobservable company factors explain stock price reversals?

We use daily price data from the Egyptian stock market and a Loser portfolio of 20 IPOs from the late 1990s that experienced dramatic 1-day price falls in the period 2004 to 2007 to estimate a 2-way fixed effects model of CARs. Observable covariates are company size and turnover growth and unobservables company and period fixed effects. Our results provide evidence of significant price reversal over the first 40 post-event days. Firm size is negatively correlated with post-event CARs, consistently with the argument that small firms have a stronger tendency to price-reverse due to greater informational opacity. But permanent, unobservable company-specific factors, account for a much larger percentage of post-event variation in stock prices and indicate an underlying heterogeneity in investor responses to initial price falls not uncovered before in the literature. Strong negative company effects following a price fall are found to presage reinforcing ‘long term’ price falls and strong positive company effects to presage countervailing ‘long term’ price reversals. At the extremes these company effects are sufficiently large to suggest that a trading strategy based on them would be profitable.     

Hedging gas bills with weather derivatives

Natural gas company managers concerned with customer satisfaction attempt to minimize the occurrence of extreme bills. Previously, only price fluctuations were addressed with derivative instruments; exchange-traded weather derivatives present a means of hedging exposure to increases in quantity of gas demanded during colder than expected winter months. We model a natural gas company’s ability to adjust for consumer sensitivity and exposure to extreme bills with the use of an optimal mix of weather derivatives and gas pricing derivatives. We find consumer exposure to extreme bills is minimized when the utility uses pricing and weather derivatives.(JEL G11, L51)     

Organizations undertaking complex projects in uncertain environments

Recent evidence suggests that firms’ environments are becoming more complex and uncertain. This paper investigates the relationship between the complexity of a firm’s activities, environmental uncertainty and organizational structure. We assume agents are arranged hierarchically, but decisions can be made at different levels. We model a firm’s activity set as a modified NK landscape. Via simulations, we find that centralized decision making generates a higher payoff in more complex and uncertain environments, and that a flatter structure is better for the organization with centralized decision making, provided the cost of information processing is low enough. Financial Support from Zengin Foundation for Studies on Economics and Finance is gratefully acknowledged.     

Portfolio Selection under Maximum Minimum Criterion

In this paper, we studied the problem of risky portfolio selection under uncertainty. Different from risk-return analytical methodology, we formulated a model under maximum minimal criterion of uncertain decision-making theory. If the investor had no any distribution information of the returns and (s)he knew the variation scopes of the returns by his/her knowledge of the market information or experts’ evaluations of the alternative risky assets, then we showed that the optimal portfolio strategy of the model under maximal minimal criterion could be obtained by solving linear programming. If the returns were known to be normal distributed, the investor’s optimal portfolio strategy could be obtained by solving a nonlinear programming. The paper also provided an algorithm to solve this programming. At last, the paper compared this model with Markowitz’s mean-varience (M-V) model and Young’s minmax model, and pointed out the distinctions and similarities between our model and the other two. Supported in part by Program for NCET, in part by the Key Project of Chinese Ministry of Education 104053.     

Indirect taxation with shadow cost of public funds in mixed oligopoly

We adopt a mixed oligopoly model, where a state-owned welfare-maximizing public firm competes with a profit-maximizing private firm, to compare the welfare effects of the specific and ad valorem tax in the presence of the shadow cost of public funds. Following the assumption of most previous literature that total output is constant under specific and ad valorem taxation, we find that, when the shadow cost of public funds exists, the tax policy must be adjusted according to the privatization level of the public firm; if the privatization level is low (medium, high), the government needs to adopt ad valorem (specific, ad valorem) tax. Moreover, the private firm will earn a higher (lower) profit under ad valorem tax than under specific tax, if the public firm is not fully privatized and the shadow cost of public funds is high (low).     

On the informed seller problem: optimal information disclosure

We consider a revenue-maximizing seller who, before proposing a mechanism to sell her object(s), observes a vector of signals correlated with buyers’ valuations. Each buyer knows only the signal that the seller observes about him, but not the signals she observes about other buyers. The seller first chooses how to disclose her information and then chooses a revenue-maximizing mechanism. We allow for very general disclosure policies, that can be random, public, private, or any mixture of these possibilities. Through the disclosure of information privately, the seller can create correlation in buyers’ private information, which then consist of valuations plus beliefs. For the standard independent private values model, we show that information revelation is irrelevant: irrespective of the disclosure policy an optimal mechanism for this informed seller generates expected revenue that is equal to her maximal revenue under full information disclosure. For more general allocation environments that allow also for interdependent, for common values, and for multiple items, disclosure policies may matter, and the best the seller can do is to disclose no information at all.     

Adjusting for cultural differences,a new DEA model applied to a merged bank

The usefulness and application of Data Envelopment Analysis (DEA) efficiency measurements is usually limited by the requirement of consistent operating circumstances. However, in many real world situations this is not the case, so to overcome this problem, this paper reports on a new strategy by inventing a Culturally Adjusted DEA model to benchmark business units that operate under different cultural (business) environments. This is especially useful when these environmental factors are partial causes of inefficiency and can not be simply incorporated into a DEA model as inputs or outputs. A simulation analysis is conducted to examine the effectiveness of the CA-DEA model for controlling these environmental effects. This model is applied to a real life efficiency study of two major financial firms in Canada in 2000, when the two entities started to consolidate and merge their branch networks. Two cultural indices are identified to represent a firm’s unique operating environment, one to capture the nature of a firm’s corporate strategies (Corporate Index), and the other to estimate the effectiveness of a firm’s operational systems (Service Index). The results show that a firm’s corporate culture has a significant influence on its branches’ efficiency and this, we found, is often neglected in such studies. This paper also makes a contribution to the bank merger literature by providing an internal view of the potential benefits that may result from sharing cultural advantages while identifying the true managerial inefficiencies.     

Optimal speculative trade among large traders

A collection of large traders holds heterogeneous prior beliefs regarding market fundamentals. This gives them a motive to engage in speculative trade with respect to market prices. Rather than assuming a particular institution or market for speculative trade, we take a mechanism-design approach by attempting to characterize the mechanism that maximizes the traders’ gains from speculative trade, subject to the incentive constraints that result from the traders’ ability to manipulate market prices. Within a stylized market model, we show that this mechanism affects price volatility without destroying ex-post efficient allocations. We also characterize the implementability of optimal speculative trade when the traders’ prior beliefs are private information. Financial support from the US-Israel Binational Science Foundation, Grant No. 2002298 is gratefully acknowledged.     

Experiments with mixtures: Optimal allocations for becker’s models

Extending Scheffé’s simplex-centroid design for experiments with mixtures, we introduce aweighted simplex-centroid design for a class of mixture models. Becker’s homogeneous functions of degree one belong to this class. By applying optimal design theory, we obtainA-, D- andI-optimal allocations of observations for Becker’s models.     

Delegation in a mixed oligopoly: the case of multiple private firms

Previous research examining mixed duopolies shows that the use of an optimal incentive contract for the public firm increases welfare and that privatization reduces welfare. We demonstrate that these results do not generalize to a mixed oligopoly with multiple private firms. We derive the optimal incentive contract for a public firm that weighs both profit and welfare and show that its use may either increase or decrease welfare depending on the number of private firms and the exact nature of costs. We also identify the conditions that determine whether or not privatizing the public firm facing an optimal incentive contract reduces welfare. Copyright © 2008 John Wiley & Sons, Ltd.     

Location decisions and welfare under spatial price discrimination

The welfare effects of regulation are of crucial importance to policy makers. To this end, we present a model of n firms with differentiated costs competing in a linear market within the framework of spatial price discrimination. We prove that the Nash equilibrium locations of firms are always socially optimal irrespective of the number of competitors, the distribution of consumers, firms' cost heterogeneity, the level of privatization, and the number and/or the varieties of the produced goods. We also provide an algorithm on how to find the unique Nash equilibrium in the case of uniformly distributed consumers.     

Estimates of relative risk

Summary For the two-sample problem with proportional hazard functions, we consider estimation of the constant of proportionality, known as relative risk, using complete uncensored data. For this very special case of Cox’s (1972) regression model for survival data, we find a two-step estimate which is asymptotically equivalent to Cox’s partial likelihood estimate, and we show that both estimates are asymptotically optimal (in the sense of minimum asymptotic variance) among all regular rank estimates of relative risk. Supported by NSF grant 81-00748.     

Selezione degli investimenti e costo del denaro

Alcuni Autori ritengono che non abbia senso il costo del denaro, in uno schema lineare in cui si può ripartire il proprio denaro in tutte e sole le operazioni che determinano il tasso di sconto. La conclusione di tali Autori appare azzardata: infatti il loro risultato discende da una ipotesi estranea al modello lineare. In questo lavoro io interpreto lo stesso modello, mostro che in esso ha senso il costo del denaro e propongo delle impostazioni alternative.

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An interesting economic problem consist in the search of the optimal allocation of one’s monetary resources in different financial transactions. We often consider as “optimal” the allocation which makes the sum of the actual values of investiments the highest possible, within the limits of all feasible operations. These values are reckoned according to the discount rates established by the financial market. This type of abstraction can be acceptable when we can split our capital into a number of operations that are on the whole negligible, if compared with the movement of the market. In case of a considerable turn over that may therefore affect the cost of money, it follows that we can’t determine an appropriate discount rate before establishing the distribution policy; on the other hand we cannot determine the distribution policy before defining the discount rate. As a border-line case we have that of an “enclosed” economy, where funds can be rationed into all and only those operations which determine the cost of capital. That is the case of “pure capital rationing”. To solve the problem of reckoning the cost of capital under pure capital rationing, some Authors have formulated the two dual linear programs (1) and (2) and have deduced that f is the vector of market prices if and only if the optimal dual solution is equal to f. As that happens if and only if f=0, Burton and Damon [2] consider their “main result a rigorous proof that there does not exist a meaningful solution for the pure capital rationing problem” and conclude “that if there exist a solution to the problem it is not to be found by the traditional linear programming formulations”. On the contrary I demonstrate that f=0 is the only possible capital cost because of the hypotesis =f, which is not related to the linear pattern and is not acceptable from an economic-financial point of view. Then I demonstrate that the market prices are all and only those based on which the actual values of the operations considered are 0. Nor was it right to expect more sophisticated conclusions of such an elementary scheme. Finally I express an alternative linear formulation, where the dual optimal solutions are exactly the market prices.

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Lavoro effettuato nell’ambito del G.N.A.F.A. del C.N.R.     

Incorporating morale into a classical agency model: implications for incentives, effort, and organization

This paper incorporates morale into a standard principal-agent model. When morale is observable, the worker’s effort level, the optimal piece rate, and the firm’s expected profits are all generally increasing in the worker’s level of morale. Furthermore, under reasonable conditions, higher-morale individuals are more responsive to incentives. Finally, when considering morale interdependence, conditions are derived which determine optimal organization strategies in terms of pooling or separating workers, and corresponding staffing policies are discussed.      

On the Sub-optimality of Entry Fees in Auctions With Entry

We study a variation of Myerson’s (1981) model in which we allow for uncertainty about the number of bidders. In our set-up, an appropriate reserve price in a standard auction maximizes the auctioneer’s expected revenue. However, entry fees can be optimal only under some special conditions. Basically, there must be some homogeneity in bidders’ beliefs about the number of bidders and the auctioneer must know, to some extent, these beliefs.     

Privatization, Competition, and Budget Constraints: Disciplining Enterprises in Russia

We investigate whether privatization, competitive forces, and the hardening of budget constraints played efficiency-enhancing roles in Russia in the immediate post-privatization period. We find evidence of a positive impact of privatization on labor productivity: a 10% point increase in private share ownership raises real sales per employee by 3–5%. The evidence on product market competition is weaker, depending on model specification. Soft budget constraints are usually found to reduce restructuring but the effect is small and insignificant. We find that in terms of their impacts on productivity, privatization and subsidy reduction are substitutes; privatization and competition (measured as the geographic scope of markets) are complements; and that competition and subsidy reduction are independent. This revised version was published online in August 2006 with corrections to the Cover Date.     

Equity private placements, liquid assets, and firm value

This paper finds wealth enhancement from equity private placement issuances where liquid assets are provided to slack-poor companies. This result runs counter to the expected Jensen's (1986) excess free-cash-flow problem, where the predominant findings of numerous studies include negative wealth effects from externally financed liquidity enhancements. We also find greater announcement-period returns for smaller firms and firms with better recent performance. Investors appear to view either of these factors, together with the private investor’s willingness to provide additional liquidity, as an asymmetric information release on the firm’s viability and likelihood of improved performance.     

Keeping Work in Perspective: Work–Nonwork Considerations and Applicant Decision Making

The work–nonwork supportiveness of an organization may influence applicant decision making among young applicants. This possibility was tested using a phased narrowing decision making task and three organizational attributes (salary, number of work–nonwork supportive policies/benefits and their related culture supportiveness). Data gathered from a sample of 110 graduating college business majors partially supported the hypotheses (p < 0.05), revealing a dynamic influence of the organizational attributes across decision making stages and a differential impact of the attributes depending on their framing as family-friendly or life-friendly. Salary was especially important in initial screening of organizational options, and the organizational culture support of work–nonwork challenges was increasingly influential as the final choice was formed. Implications for young applicant attraction are discussed. The research presented here (a portion of the author’s master’s thesis at Bowling Green State University) was presented at the 2006 Annual Conference of the Society for Industrial and Organizational Psychology in Dallas, TX. Thanks go to Dr. Steve M. Jex, Dr. Scott Highhouse, and Dr. Cathy Stein for their assistance in the development of this study. Thanks are also owed to Dr. Michael Doherty for his thoughtful comments on an earlier draft.     

Mapping the successful succession process in family firms: evidence from Greece

The succession process in family firms has by far been determined to be the most critical phase in the family business life-cycle (e.g. Morris et al. Journal of Business Venturing 18:513–531, 1997; Wang et al. 2000) and characterized as the period in which most family firm fatalities occur (Handler and Kram Family Business Review 1:361–381, 1988). This paper is an empirical study on Greek family firms and seeks to identify the critical success factors that have a major impact on the outcome of a generational transition in the leadership of the family firm. Based on an integrated conceptual framework proposed by Pyromalis et al. (2006), we test the impact of five factors, namely the incumbent’s propensity to step aside, the successor’s willingness to take over, the positive family relations and communication, succession planning, and the successor’s appropriateness and preparation on both the satisfaction of the stakeholders with the succession process and the effectiveness of the succession process per se. The results provide a useful insight and confirm the importance of the aforementioned factors in the succession process by mapping a safe passage through the family business succession process, and by contributing not only to the overall family business literature but also generating strong arguments in favor of the family firm as an integral entrepreneurial element for a region’s sustainable economic development.