Social capital,strategic relatedness and the formation of intraorganizational linkages

This paper investigates the evolutionary dynamics of network formation by analyzing how organizational units create new interunit linkages for resource exchange. Using sociometric techniques and event history analysis, this study predicts the rate at which new interunit linkages are created between a newly formed unit and all the existing units in a large multinational organization. Two important constructs: social capital, derived from the literature on social structure and network formation, and strategic relatedness, derived from research on diversification and the resource‐based view of the firm, are used to explain the rate of new linkage creation. Results show that the interaction between social capital and strategic relatedness significantly affects the formation of intraorganizational linkages. Copyright © 2000 John Wiley & Sons, Ltd.     

Optimal hedging of contingent exposure: the importance of a risk premium

The focus of this article is how a non‐zero risk premium affects an economic agent's optimal hedging decision when exposed to a nonmarketed event. The analysis is not confined to the optimal use of one particular hedging instrument, rather, the optimal payoff based on the agent's preferences is derived. We show, for various preferences, how the size of a risk premium affects the degree of nonlinearity in the optimal hedging instrument. This result is in contrast to known results for contingent exposure in the case of a zero risk premium. We demonstrate an inefficacy of the approach of confining the analysis to one particular hedging instrument in the case of standard exposure. © 2000 John Wiley & Sons, Inc. Jrl Fut Mark 20:823–841, 2000     

The New Game in Town: Competitive Effects of IPOs

We analyze the effect of initial public offerings (IPOs) on industry competitors and provide evidence that companies experience negative stock price reactions to completed IPOs in their industry and positive stock price reactions to their withdrawal. Following a successful IPO in their industry, they show significant deterioration in their operating performance. These results are consistent with the existence of IPO‐related competitive advantages through the loosening of financial constraints, financial intermediary certification, and the presence of knowledge capital. These aspects of competitiveness are significant in explaining the cross‐section of underperformance as well as survival probabilities for competing firms.     

Reconsidering the Relationship between Inflation and Relative Price Variability

It has long been popularly believed that the relationship between inflation and relative price variability (RPV) is positive and stable. Using disaggregated CPI data for the United States and Japan, however, this study finds that the relationship is neither linear nor stable over time. The overall relationship is approximately U‐shaped around a nonzero threshold inflation rate. RPV therefore changes not with the inflation rate per se, but with the deviation of inflation from the threshold inflation rate. More importantly, the relationship is by no means stable over time but instead varies significantly in a way that coincides with regime changes of inflation or monetary policy. The relationship was positive during the period of high inflation of the 1970s and the early 1980s, as has been documented by a number of previous studies, whereas it takes a U‐shape profile during the Great Moderation. The results are robust to the use of core inflation, which excludes the traditionally volatile prices of food and energy. This paper then presents a modified version of the Calvo‐type sticky price model to describe the observed empirical regularities. Simulation experiments show that the modified Calvo model fits the data well, and that the underlying relationship hinges upon the degree of price rigidity, which is systematically related to inflation regime. For countries and periods with low inflation rates, the relationship takes a U‐shape as price adjustment is more sticky. In a high‐inflation environment, when price setting becomes more flexible, the U‐shaped profile vanishes.     

An Optimal Product Mix for Hedging Longevity Risk in Life Insurance Companies: The Immunization Theory Approach

This article investigates the natural hedging strategy to deal with longevity risks for life insurance companies. We propose an immunization model that incorporates a stochastic mortality dynamic to calculate the optimal life insurance–annuity product mix ratio to hedge against longevity risks. We model the dynamic of the changes in future mortality using the well‐known Lee–Carter model and discuss the model risk issue by comparing the results between the Lee–Carter and Cairns–Blake–Dowd models. On the basis of the mortality experience and insurance products in the United States, we demonstrate that the proposed model can lead to an optimal product mix and effectively reduce longevity risks for life insurance companies.     

Come Rain or Shine: Evidence on Flood Insurance Purchases in Florida

This article provides a detailed analysis of the operation of the National Flood Insurance Program (NFIP) in Florida, which accounts for 40 percent of the NFIP portfolio. We study the demand for flood insurance with a data set of more than 7.5 million NFIP policies‐in‐force (the largest ever studied) for the years 2000–2005, as well as all NFIP claims filed in Florida. We answer four questions: What are the characteristics of the buyers of flood insurance? What types of contracts (deductibles and coverage levels) are purchased? What are the determinants of claims payments? How are prices determined and how much does NFIP insurance cost?     

Optimal Multiperiod Asset Allocation: Matching Assets to Liabilities in a Discrete Model

Investment and risk control are becoming increasingly important for financial institutions. Asset allocation provides a fundamental investing principle to manage the risk and return trade‐off in financial markets. This article proposes a general formulation of a first approximation of multiperiod asset allocation modeling for institutions that invest to meet the target payment structures of a long‐term liability. By addressing the shortcomings of both single‐period models and the single‐point forecast of the mean variance approach, this article derives explicit formulae for optimal asset allocations, taking into account possible future realizations in a multiperiod discrete time model.     

Liquidity and market efficiency: A large sample study

Chordia et al. (2008, hereafter CRS) examine short horizon return predictability from past order flows of large, actively traded NYSE firms across three tick size regimes and conclude that higher liquidity facilitates arbitrage trading which enhances market efficiency. We extend CRS to a comprehensive sample of all NYSE firms and examine the dynamics between liquidity and market efficiency during informational periods. Our results indicate that although all NYSE firms experience an overall improvement in market efficiency across periods of different tick size regimes, this improvement varies significantly across the portfolios of sample companies formed on the basis of trading frequency, market capitalization, and trading volume. After controlling for these factors, we further document a positive association between a continuous measure of liquidity and market efficiency, and show that this effect is amplified during periods that contain new information, as reflected in high adverse selection component of the bid-ask spread.     

Asset allocation and age effects in retirement savings choices

We examine the asset allocation decisions of members of three large Australian retirement savings funds. Superannuation Guarantee legislation in 1992 made Australian employees compulsory investors by requiring employers to contribute a fixed proportion of earnings to a superannuation fund on behalf of employees. A majority of these employees can choose an investment strategy for these contributions. We examine how actual investment strategy and asset allocation choices of members change with age in view of the conventional wisdom that individuals allocate less to risky assets as they age and investments theory which provides conflicting advice on the issue.     

Underwriter reputation,earnings management and the long‐run performance of initial public offerings

This study contributes to the extant literature on the nature of earnings management surrounding initial public offerings (IPOs) by investigating the role of underwriter reputation. We argue that prestigious underwriters will protect their reputation by carefully monitoring and certifying financial information on IPO firms, thereby limiting any potential earnings manipulation. As a result, those IPO firms that are associated with more prestigious underwriters are likely to exhibit substantially less‐aggressive earnings management. Conversely, we find the existence of a negative relationship between earnings management and the post‐offer performance of an IPO firm’s stocks only for those firms associated with less‐prestigious underwriters.