Predicting divestiture of unrelated acquisitions: an integrative model of ex ante conditions

The majority of unrelated acquisitions are divested shortly after their purchase. Often, those acquisitions-turned-divestitures result in strategic, organizational, and financial losses for both the acquiring and the acquired companies. To consider how such divestitures can be avoided, this study examined some of the differences between divested and retained unrelated acquisitions. The study integrated four explanations for why unrelated acquisitions occur and related them to the fates of such acquisitions. Unrelated acquisitions were hypothesized to be divested when they fail to realize some motives and expectations that prevailed at the time of acquisition. Two samples of unrelated acquisitions (135 from 1977 and 140 from 1987) were tracked over 5-year periods. The results indicate that motives and conditions at the time of acquisition, and changes in those motives and conditions, were related to the fates of the acquisitions. In addition, the relative importance of those factors varied across the periods studied. Discriminant analyses further demonstrate that most divestitures could be predicted correctly on the basis of those motivations and conditions. The implications of the findings are discussed. © 1997 John Wiley & Sons, Ltd.     

Measures used to evaluate industrial marketing activities

Given the importance of controlling marketing efforts, a study was conducted of industrial manufacturers to determine the extent of their use of various measures to evaluate different marketing activities. The predominate measures used for evaluation were sales volume with much less utilization of profitability, productivity, and expense measures.     

Synthetic Floating‐Rate Debt: An Example of an Asset‐Driven Liability Structure

An asset‐driven liability (ADL) structure is analogous to a liability‐driven investment (LDI) strategy. In both cases, the intent is to reduce the risk arising from a mismatch of assets and liabilities by aligning the interest rate sensitivity of cash flows on both sides of the balance sheet. Increasingly, defined‐benefit pension plans have adopted LDI strategies that reduce their equity assets and increase the average duration of their debt assets to better match the typical long duration of their retirement obligations to its employees. To illustrate the concept of ADL, the authors use the example of a corporate issue of traditional fixed‐rate debt that is transformed into synthetic floating‐rate debt using an interest rate swap (in which the corporation receives the fixed rate on the swap and pays at money market reference rate like three‐month LIBOR). The use of such long‐term, floating‐rate debt reduces interest rate risk when the firm has operating revenues that are positively correlated to the business cycle. However, a problem arises in that there is limited demand for such debt securities from institutional investors, many of which, because of LDI guidelines, prefer long‐term, fixed‐rate securities. Derivatives provide a way of resolving this mismatch between issuer and investor interests. In the article, the authors present a detailed example of the cash flows on the “receive‐fixed” interest rate swap (and its valuation for financial reporting) to show how the synthetic ADL debt structure obtains the desired outcome.     

EMPLOYMENT-RELATED LEGAL OBLIGATIONS: A RISK MANAGEMENT PERSPECTIVE OF FEDERAL ANTI-DISCRIMINATION LAWS

Abstract: The authors examine the statutes, protected classes and damages under federal antidiscrimination laws. Because of the limitations of insurance as a loss financing tool, the authors contend that loss control is a more prudent course of action for employers than loss financing.     

Asymmetric effect of basis on dynamic futures hedging: Empirical evidence from commodity markets

The dynamic minimum variance hedge ratios (MVHRs) have been commonly estimated using the Bivariate GARCH model that overlooks the basis effect on the time-varying variance–covariance of spot and futures returns. This paper proposes an alternative specification of the BGARCH model in which the effect is incorporated for estimating MVHRs. Empirical investigation in commodity markets suggests that the basis effect is asymmetric, i.e., the positive basis has greater impact than the negative basis on the variance and covariance structure. Both in-sample and out-of-sample comparisons of the MVHR performance reveal that the model with the asymmetric effect provides greater risk reduction than the conventional models, illustrating importance of the asymmetric effect when modeling the joint dynamics of spot and futures returns and hence estimating hedging strategies.     

The usefulness of inaccurate models: Towards an understanding of the emergence of financial risk management

Is the growth of modern financial risk management a result of the accuracy and reliability of risk models? This paper argues that the remarkable success of today’s financial risk management methods should be attributed primarily to their communicative and organizational usefulness and less to the accuracy of the results they produced. This paper traces the intertwined historical paths of financial risk management and financial derivatives markets. Spanning from the late 1960s to the early 1990s, the paper analyses the social, political and organizational factors that underpinned the exponential success of one of today’s leading risk management methodologies, the applications based on the Black–Scholes–Merton options pricing model. Using primary documents and interviews, the paper shows how financial risk management became part of central market practices and gained reputation among the different organisational market participants (trading firms, the options clearinghouse and the securities regulator). Ultimately, the events in the aftermath of the market crash of October 1987 showed that the practical usefulness of financial risk management methods overshadowed the fact that when financial risk management was critically needed the risk model was inaccurate.