Does Corporate Diversification Destroy Value?

We analyze several hundred firms that expand via acquisition and/or increase their number of business segments. The combined market reaction to acquisition announcements is positive but acquiring firm excess values decline after the diversifying event. Much of the excess value reduction occurs because our sample firms acquire already discounted business units, and not because diversifying destroys value. This implies that the standard assumption that conglomerate divisions can be benchmarked to typical stand-alone firms should be carefully reconsidered. We also show that excess value does not decline when firms increase their number of business segments because of pure reporting changes.     

Range-Based Estimation of Stochastic Volatility Models

We propose using the price range in the estimation of stochastic volatility models. We show theoretically, numerically, and empirically that range-based volatility proxies are not only highly efficient, but also approximately Gaussian and robust to microstructure noise. Hence range-based Gaussian quasi-maximum likelihood estimation produces highly efficient estimates of stochastic volatility models and extractions of latent volatility. We use our method to examine the dynamics of daily exchange rate volatility and find the evidence points strongly toward two-factor models with one highly persistent factor and one quickly mean-reverting factor.     

The Importance of Social Capital to the Management of Multinational Enterprises: Relational Networks Among Asian and Western Firms

Social capital is an important concept for multinational firms. Firms operating in global markets rarely have adequate resources to compete effectively in global markets; they access the needed resources through formal and informal relationships with other firms. The cultures in Asian countries have emphasized relationships much more strongly than Western firms. Thus, relational capital, based on guanxi (China), kankei (Japan) and inmak (Korea), provides the framework for business dealings in many Asian countries. As a result, the social capital of many Asian firms gives them a potential competitive advantage in global markets. Western firms must develop social capital and learn to manage relational networks to gain and sustain a competitive advantage in global markets. Western firms can learn how to develop and manage social capital from Asian firms. Alternatively, social capital has some disadvantages. Firms are limited by their networks and thus experience opportunity costs and path dependence. Additionally, while Asian firms often have strong network ties in their domestic markets, they have to develop many more ties globally to operate effectively in global markets. As a result, the development and management of social capital has become of critical importance for competitive advantage in global markets.     

Asymmetric Information,Asset Allocation,and Debt Financing

We analyze a signaling game where firms' financing announcements convey private information about their prospects but a moral hazard problem exists in that managers may suboptimally invest. Consequently, the attempt to address an asymmetric information problem exacerbates moral hazard. The equilibrium recognizes both imperfect information problems. Additionally, the firm must determine how to allocate funds between two technologies differing in cash flow timing and managerial accessibility. We define an above-average firm's comparative advantage as that technology which is most dominant relative to a firm with lesser prospects and show that the resultant equilibria follow the lines of the firm's comparative advantage. Finally, we show that separation may be achieved costlessly, i.e., with no explicit signaling cost.     

Macroeconomic effects of IMF-sponsored programs in Latin America: output costs, program recidivism and the vicious cycle of failed stabilizations

We investigate the effects of IMF stabilization programs, and the reasons behind the unusually high IMF activity and relatively low program completion rates in Latin America. We base our tests on a panel, and distinguish between IMF program approvals and completion. We find that Latin America has higher output costs of IMF programs (especially when completed), no improvement in the current account, and a much higher likelihood of program failure and recidivism than other regions. The common finding that entering into an IMF-supported program incurs real short-run costs on the economy is entirely driven by the experiences in Latin America.     

Confirming Management Earnings Forecasts, Earnings Uncertainty, and Stock Returns

In this study we examine the association among confirming management forecasts, stock prices, and analyst expectations. Confirming management forecasts are voluntary disclosures by management that corroborate existing market expectations about future earnings. This study provides evidence that these voluntary disclosures affect stock prices and the dispersion of analyst expectations. Specifically, we find that the market's reaction to confirming forecasts is significantly positive, indicating that benefits accrue to firms that disclose such forecasts. In addition, although we find no significant change in the mean consensus forecasts (a proxy for earnings expectations) around the confirming forecast date, evidence indicates a significant reduction in the mean and median consensus analyst dispersion (a proxy for earnings uncertainty). Finally, we document a positive association between the reduction of dispersion of analysts' forecasts and the magnitude of the stock market response. Overall, the evidence suggests that confirming forecasts reduce uncertainty about future earnings and that investors price this reduction of uncertainty.     

Strategic Internet application trends in supply chain management

The Internet is evolving as a powerful force in the new marketplace where the nexus of competition has changed from individual firms to efficient supply chain networks both between firms and within industries. This study explores Internet adoption patterns and operational applications in US supply chain networks. The data reveal that the integration of the Internet into supply chain management applications has increased and has moved away from indiscriminate application of novel Internet technologies towards becoming a focused endeavor with precise expectations and measurable goals. Specifically, the study finds that Internet usage within supply chains is maturing as evidenced by enhanced and increased productivity, reduced costs and increased profit for participating firms.     

Decentralisation and Management Accounting in Central Government: Recycling Old Ideas?

This paper examines the Next Steps development from both contemporaneous and historical perspectives. Specifically, it traces the reliance on a distinct model of management and accounting in Next Steps (1988) and its predecessors (FMI, 1982; and Fulton, 1968). This shows not only that there are a series of commonalities within the details of these various reforms of central government, over the past three decades, but also that these various reforms share foundations which are embedded in 'management thought' on best practice in the 1950s and 1960s. We identify contemporaneous studies in both management and management accounting which could have informed these reforms, and make suggestions for situationally specific means of improving management and accounting in central government.     

Insurance Derivatives: A New Asset Class for the Capital Markets and a New Hedging Tool for the Insurance Industry

The number and severity of natural catastrophes has increased dramatically over the last decade. As a result, there is now a shortage of capacity in the property catastrophe insurance industry in the U.S. This article discusses how insurance derivatives, particularly the Chicago Board of Trade's catastrophe options contracts, represent a possible solution to this problem. These new financial instruments enable the capital markets to provide the insurance industry with the reinsurance capacity it needs. The capital markets are willing to perform this role because of the new asset class characteristics of securitized insurance risk: positive excess returns and diversification benefits.
The article also demonstrates how insurance companies can use insurance derivatives such as catastrophe options and catastrophe-linked bonds as effective, low-cost risk management tools. In reviewing the performance of the catastrophe contracts to date, the authors report promising signs of growth and liquidity in these markets.     

Real estate return correlations: Real-world limitations on relationships inferred from NCREIF data

Correlation estimates for returns between individual properties are subject to large inherent uncertainties due to limits on the amount of data that is likely to be available for the foreseeable future. After allowance for correlation sampling error, it is impossible to distinguish on an ex ante basis between the risk-reduction capabilities of mean-variance portfolio selection models and naive diversification without regard to property type or geographical location. The naive portfolio diversification strategies of typical institutional real estate portfolio managers are rational responses to limitations on the informational content of statistical analyses of historical real estate data.