COST-VOLUME-PROFIT ANALYSIS UNDER UNCERTAINTY WHEN THE FIRM HAS PRODUCTION FLEXIBILITY

This study examines the behavior of the firm which faces uncertainty in demand but can adjust its output once the uncertainty is resolved, using contingentclaims analysis. The paper finds that (i) the optimal output of the firm with ex post adjustment capability is less than that of the firm without production flexibility; (ii) the optimal ex ante output increases with the higher interest rate; (iii) the greater the marginal cost associated with the expost adjustment and/or salvage value, the greater the optimal ex ante output; and (iv) the effect of demand volatility and production lead time on the optimal ex ante output could be either positive or negative. Based upon the study's findings, some important managerial decision implications are discussed.     

A SIMPLIFIED APPROACH TO SHORT-TERM INTERNATIONAL DIVERSIFICATION

Using Eurocurrency deposit interest rates, currency exchange rates, and inflation rates in a mean-variance portfolio analysis, the authors develop portfolios of interest-bearing deposits in London banks denominated in various currencies. These easily constructed multicurrency portfolios are shown to provide better risk-return positions than comparable single currency holdings.     

BENCHMARK ERROR AND THE SMALL FIRM EFFECT: A REVISIT

In this study benchmark error is tested for as a source of the small firm effect by comparing the results from ordinary least squares and instrumental variable methods. Although the instrument is not perfect, results show that benchmark error could be a cause of the overall (all months) small firm effect. Results from the instrumental variable method indicate that large January abnormal returns are still present, but that they are offset by negative non-January abnormal returns. As a result, the instrumental variable results show that there is no longer a significant overall “effect,” merely a seasonal effect. It is also found that the results are not sensitive to the choice of the market index.