Spin‐offs: Tackling the Conglomerate Discount

Spin‐offs and other restructuring actions have risen sharply in 2011, driven by the need to streamline business models and increase corporate values. These transactions can be an effective tool for addressing the conglomerate valuation discount that has been a pervasive phenomenon over the past decade, affecting conglomerates in most regions across the world. In particular, North American and Western European conglomerates trade at valuation multiples that are roughly 10% lower than those of their pure‐play peers. A conglomerate discount also prevails in some of the emerging markets, including CEEMEA and Asia. Nevertheless, in some regions, notably Japan and Latin America, conglomerates typically trade at a premium. Although the average conglomerate discount narrowed during the financial crisis due to the perceived benefits of diversification during downturns, almost half of the conglomerates globally trade at a discount, and almost a third of all conglomerates have persistently traded at a discount during the past five years. For such companies, fixing the discount requires a simplification of the business model. The authors show that recent announcements of spin‐offs have led to significant share price outperformance by the parent company in both the short and the longterm, highlighting their effectiveness as a tool to enhance valuation. Spin‐offs can be particularly attractive for those conglomerates that operate unrelated business segments since these firms trade at a sharper discount than diversified firms operating in related businesses. The authors discuss how management should think about the financial implications of spin‐offs, including capital structure considerations, dividend policy, and turnover in the shareholder base.     

Using Job Rotation to Extract Employee Information

This article provides an incentive-based explanation for thepractice of job rotation. When agents privately learn aboutthe productivity of tasks on which they work, job rotation canbe an efficient means of eliciting their information. Each agentfreely communicates his information since the switch in tasksguarantees his report will not subsequently be used againsthim; the report is used primarily in evaluating the new agentwho moves into the task. Another benefit is that an agent rotatedinto a job holds less task-specific information and is thuseasier to motivate. Job rotation also comes with a cost—agentsmust be compensated for the disutility of working on new tasks.We study this trade-off and identify conditions under whichjob rotation and specialization are each optimal.     

CONDITIONAL HETEROSCEDASTICITY IN THE MARKET MODEL AND EFFICIENT ESTIMATES OF BETAS

Previous studies have investigated only unconditional heteroscedasticity in the market model. This paper tests for both conditional and unconditional heteroscedasticities as well as normality. Using the monthly stock rate of return data secured from the Center for Research in Security Prices (CRSP) tape for 1976 through 1983, this paper shows that conditional heteroscedasticity is more widespread than unconditional heteroscedasticity, suggesting the necessity of model refinements that take conditional heteroscedasticity into account. This paper provides an alternative estimation of betas of individual securities and portfolios based on the autoregressive conditional heteroscedastic (ARCH) model introduced by Engle. The efficiency of the market model coefficients is markedly improved across all firms in the sample through the ARCH technique.     

Traffic law enforcement in Hyderabad, India

The aim of the study was to understand traffic law enforcement (TLE) carried out by the police to reduce non-compliance with traffic laws on the roads of Hyderabad city in India for 2001-2003. The Traffic Police database of citations issued to drivers who violated traffic laws in Hyderabad was analysed for the years 2001-2003 to describe the TLE activities of the police, to describe and compare the TLE activities for the different types of vehicles and to compare the TLE activities for the 3 years. The violations were classified in five categories - those related to driving, parking, vehicle, document and others; and TLE into safety and other TLE. A total of 646 161 traffic-law violations were registered in 2001, 904 447 in 2002 and 964 275 in 2003 for Hyderabad. Driving and parking violations were the most common violations registered in all 3 years, with parking violations slightly higher in 2001 (43.5%) and driving violations slightly higher in 2002 (35%) and 2003 (36.4%). Auto-rickshaws (three-wheel commercial passenger vehicles) accounted for the highest violations registered in 2001 (41.4%) whereas motorized two-wheelers had the highest registered violations in 2002 (35.5%) and 2003 (33.2%). Safety TLE activity (detecting and registering driving violations) was only one-third of all the TLE activity performed by the police in the 3 years, and disobeying traffic signals was the most common violation registered under safety TLE. Indian rupees 50 (US$1.1) were collected by way of a fine in 87% of the cases registered. Age and gender of the violators were not recorded in the database. These data can be used for planning, monitoring and evaluating TLE in Hyderabad. These can help identify traffic control and human factors that could lead to traffic noncompliance, and help identify priorities for improving road safety. These data indicate a need to enhance the safety TLE activity of the police, to make TLE more visible in Hyderabad, and to assess the effectiveness of the current legal action as deterrence to improve road safety. Recommendations to enhance TLE within the given resources of the police are made. More effort is needed towards systematic collection and analysis of data on TLE in India to facilitate long-term improvements in TLE for safer roads.     

Heteroskedasticity-consistent covariance matrix estimators for spatial autoregressive models

In the presence of heteroskedasticity, conventional test statistics based on the ordinary least squares (OLS) estimator lead to incorrect inference results for the linear regression model. Given that heteroskedasticity is common in cross-sectional data, the test statistics based on various forms of heteroskedasticity-consistent covariance matrices (HCCMs) have been developed in the literature. In contrast to the standard linear regression model, heteroskedasticity is a more serious problem for spatial econometric models, generally causing inconsistent extremum estimators of model coefficients. This paper investigates the finite sample properties of the heteroskedasticity-robust generalized method of moments estimator (RGMME) for a spatial econometric model with an unknown form of heteroskedasticity. In particular, it develops various HCCM-type corrections to improve the finite sample properties of the RGMME and the conventional Wald test. The Monte Carlo results indicate that the HCCM-type corrections can produce more accurate results for inference on model parameters and the impact effects estimates in small samples.     

Pricing Internal Trade to Get a Leg up on External Rivals

The pricing of transfers from parent to subsidiary is an oft-explored issue. Linking the cost of internal transfers with external market prices is one common approach, typically justified when the market for the good is perfectly competitive. This paper shows that imperfect competition may also justify market-based transfer prices. Concern that transfer price will deviate from marginal cost and thereby distort subsidiary choices can lead a parent to undertake actions to influence the market price of the upstream good. Such efforts can provide a desirable strategic posture in the upstream market.     

Corporation Diversification and Firm Performance: Evidence from Vietnamese Listed Firms

We examine the effect of corporate diversification on the performance of firms listed on the Vietnamese stock exchanges, using 2744 firm year observations over the period from 2007 to 2012. We find that corporate diversification has a negative impact on firm performance. Our results are robust to various econometric estimation techniques including fixed effect, instrumental fixed effect, Heckman selection model and system generalised method of moments. In the Vietnamese context, the lack of an efficient corporate governance system may encourage firms to follow corporate diversification strategies, thus impairing their performance.