RISK MANAGEMENT FOR MIDDLE MARKET COMPANIES

This article reinforces the message of the one immediately preceding by showing that small to medium‐sized firms have even stronger (non‐tax) motives for hedging risks than their large corporate counterparts. Although middle market companies have traditionally been viewed as less sophisticated than their larger corporate counterparts in the risk management arena, the authors suggest that such companies have become increasingly receptive to new hedging strategies using derivative products. When used appropriately, such products allow companies to stabilize their periodic operating cash flow by eliminating specific sources of volatility such as fluctuations in interest rates, exchange rates, and commodity prices. Smaller companies recognize that a single swing in a budgeted cost can have a catastrophic effect on an entire budget, whereas a larger company can more easily absorb such a cost. Moreover, because the principal owners of mid‐sized firms often have a substantial part of their net worth tied up in the business, they are likely to have a far stronger interest than typical outside shareholders in using risk management to reduce the volatility of corporate profits and firm value. Perhaps most important to owners whose firms rely on debt financing, the greater cash flow stability resulting from active risk management significantly reduces the possibility of financial distress or bankruptcy. In this article, three representatives of Bank of America's risk management practice discuss three different exposures faced by middle market companies—those arising from changes in interest rates, foreign exchange rates, and commodity prices—and show how these risks can be managed with derivatives. Besides shielding companies from financial trouble, risk management is also likely to improve their access to the money and capital markets. By protecting the firm's access to capital, risk management increases the odds that the firm will not be forced to pass up good investment opportunities because of capital constraints or fear of getting into financial difficulty.     

Does the one man show pay? Theory and evidence on the dual CEO revisited

Contrary to the view expressed in several countries and the corresponding pressure exerted by shareholder activists and regulators to separate the titles of CEO and Board Chairman, this study proposes that there is an optimal board composition for each firm, which varies across firms and over time. A review of the extant empirical evidence reveals that most prior studies bypass this notion which raises serious implications for related empirical studies. In addition, this study documents striking differences in leadership structures between the US and the UK and calls for further research in an international context.     

Self-managing selling teams and team performance: The complementary roles of empowerment and control

This work is the first to examine systematically the influence of empowerment and control on the degree to which selling teams engage in desired self-managing behaviors. Further, this work is the first to propose the construct of desired self-managing behaviors in a selling team context, and empirically examine its influence on selling team performance. Our investigation indicates that control of team self-management provides a complementary positive influence to that of empowerment on the degree to which selling teams exhibit desired self-managing behaviors. In addition, we find a positive relationship between the degree to which teams exhibit desired self-managing behaviors and selling team performance; moreover, this relationship explains, to a large degree, selling team performance. These findings are consistent with our thesis that control of teamwork facilitates performance on the selling team level, just as control of selling skills facilitates performance on the individual sales rep level.     

Cost-comparison of two trabecular micro-bypass stents versus selective laser trabeculoplasty or medications only for intraocular pressure control for patients with open-angle glaucoma

Aim: Patients with open-angle glaucoma (OAG) whose intraocular pressure is not adequately controlled by one medication have several treatment options in the US. This analysis evaluated direct costs of unilateral eye treatment with two trabecular micro-bypass stents (two iStents) compared to selective laser trabeculoplasty (SLT) or medications only.

Materials and methods: A population-based, annual state-transition, probabilistic, cost-of-care model was used to assess OAG-related costs over 5 years. Patients were modeled to initiate treatment in year zero with two iStents, SLT, or medications only. In years 1–5, patients could remain on initial treatment or move to another treatment option(s), or filtration surgery. Treatment strategy change probabilities were identified by a clinician panel. Direct costs were included for drugs, procedures, and complications.

Results: The projected average cumulative cost at 5 years was lower in the two-stent treatment arm ($4,420) compared to the SLT arm ($4,730) or medications-only arm ($6,217). Initial year-zero costs were higher with two iStents ($2,810) than with SLT ($842) or medications only ($996). Average marginal annual costs in years 1–5 were $322 for two iStents, $777 for SLT, and $1,044 for medications only. The cumulative cost differences between two iStents vs SLT or medications only decreased over time, with breakeven by 5 or 3 years post-initiation, respectively. By year 5, cumulative savings with two iStents over SLT or medications only was $309 or $1,797, respectively.

Limitations: This analysis relies on clinical expert panel opinion and would benefit from real-world evidence on use of multiple procedures and treatment switching after two-stent treatment, SLT, or polypharmaceutical initial approaches.

Conclusions: Despite higher costs in year zero, annual costs thereafter were lowest in the two-stent treatment arm. Two-stent treatment may reduce OAG-related health resource use, leading to direct savings, especially over medications only or at longer time horizons.     

The optimal degree of cooperation in the repeated Prisoners' Dilemma with side payments

In the infinitely repeated Prisoners' Dilemma with side payments, we characterize the Pareto frontier of the set of subgame perfect equilibrium payoffs for all possible combinations of discount factors. Play paths implementing Pareto dominant equilibrium payoffs are uniquely determined in all but the first period. Full cooperation does not necessarily implement these payoffs even when it maximizes total stage game payoffs. Rather, when the difference in players' discount factors is sufficiently large, Pareto dominant equilibrium payoffs are implemented by partial cooperation supported by repeated payments from the impatient to the patient player. When both players are sufficiently patient, such payoffs, while implemented via full cooperation, are supported by repeated payments from the impatient to the patient player. We characterize conditions under which public randomization has no impact on the Pareto dominant equilibrium payoffs and conditions under which such payoffs are robust to renegotiation.     

The long or short of it: Determinants of foreign currency exposure in external balance sheets

A major focus of the recent literature on the determination of optimal portfolios in open-economy macroeconomic models has been on the role of currency movements in determining portfolio returns that may hedge various macroeconomic shocks. However, there is little empirical evidence on the foreign currency exposures that are embedded in international balance sheets. Using a new database, we provide stylized facts concerning the cross-country and time-series variation in aggregate foreign currency exposure and its various subcomponents. In panel estimation, we find that richer, more open economies take longer foreign-currency positions. In addition, we find that an increase in the propensity for a currency to depreciate during bad times is associated with a longer position in foreign currencies, providing a hedge against domestic output fluctuations. We view these new stylized facts as informative in their own right and also potentially useful to the burgeoning theoretical literature on the macroeconomics of international portfolios.     

The dynamics of exchange rate regimes: Fixes, floats, and flips

The impermanence of fixed exchange rates has become a stylized fact in international finance. The combination of the “mirage” view that pegs do not really peg with the “fear of floating” view that floats do not really float generates the conclusion that exchange rate regimes are, in practice, unimportant for the behavior of the exchange rate. This is consistent with evidence on the irrelevance of exchange rate regimes for general macroeconomic performance. Recent studies, however, show that the exchange rate regime matters. This can be understood by considering the dynamics of exchange rate regimes. We demonstrate that the “mirage” view is somewhat misleading and incomplete. Pegs frequently break, but many do last. Also, there is a high degree of flipping, that is, the re-formation of pegs that have broken. Thus, a fixed exchange rate today is a good predictor that one will exist in the future. We also investigate the quantitative effect of fixed exchange rates. While the “fear of floating” view suggests little actual difference in fixed and floating rates with respect to exchange rate volatility, we show that fixed exchange rates exhibit considerably greater bilateral exchange rate stability than flexible rates, both today and in the future.