Timing the Start of Material Substitution Projects: Creating Switching Options under Volatile Material Prices

Firms developing new products often face the challenge of making investment decisions under uncertain input–cost conditions due to the price volatilities of the materials they use. These decisions need to be made long before the final products are launched on the market. Therefore, firms that invest in the opportunity to switch materials in a timely manner will have the flexibility to react to material price changes and realize competitive advantages. However, volatile material prices may also cause a firm to delay investment. Using real‐options reasoning, this paper studies the influence of input‐cost fluctuations on the timing decision to start new product development (NPD) and thus create the follow‐on opportunity to later replace an existing product. A model that combines waiting and switching options to derive influencing factors of the flexibility value that triggers the investment is developed and tested on a sample of material substitution projects from manufacturing firms. The results show how price uncertainty of the new and the old material, their joint price development, the expected project duration, and competitive preemption are related to the propensity to delay the start of NPD. The findings provide new insights on how timing in adopting materials can be used to hedge exposure to volatile material prices. The insights are relevant for adopters and producers of new materials, as well as for policy makers who strive for supporting the diffusion of new materials.     

Einzelbesprechungen

Ohne ZusammenfassungAus dem Italienischen übersetzt von M. St. Braun, WienAus dem Italienischen übersetzt von E. Allina, WienAus dem Russischen übersetzt von A. GerschenkronÜbersetzt von Paul Brüll, Wien.     

Katastrophenanleihen als Risikotransfer-Instrument für Industrieunternehmen

All over the world an increase in natural catastrophes and resulting damages can be observed for entire economies as well as for individual industrial enterprises. This trend leads to extraordinary expensive traditional natural catastrophe insurance or even a lack of insurance capacities. Due to the increased threat resulting from natural catastrophes and the inefficiencies of traditional insurance solutions, it will be analyzed in the following whether catastrophe bonds (cat bonds), as an alternative risk transfer instrument, should play a role in the risk management portfolio of industrial companies. It will be discussed whether catastrophe bonds are possible risk transfer instruments for industrial companies and whether certain basic prerequisites for a confirmation of the suitability are recognizable. In a further step, the design possibilities for cat bonds will be presented and the most suitable design alternatives for industrial companies as issuers of cat bonds will be elaborated. In addition, a critical comparison between the usage of traditional insurance solutions and cat bonds by industrial companies in order to protect themselves against natural catastrophes will be conducted. The result is a first orientation and a general guideline for dealing with catastrophe bonds as part of the operational risk management for industrial companies.     

Integration of financial and management accounting systems: The mediating influence of a consistent financial language on controllership effectiveness

Two fundamental options exist for management accounting system (MAS) design: Either financial records can be used as a database for management accounting (integrated accounting system design), or the MAS can be based upon a separate system, i.e., a third set of books beside financial and tax accounting records. Since the 1990s, many German-speaking firms have changed from the second to the first option, which has instigated a highly controversial debate.Our paper contributes to this debate by empirically analyzing (1) whether the integration of financial and management accounting has a positive impact on controllership effectiveness, and (2) what causal inferences relate both variables. We use structural equation modelling for a sample of 149 dyads surveyed from German top 1500 firms. We identify no significant effect of the technical aspects of MAS integration, but a fully mediating influence of a consistent financial language on controllership effectiveness. Our results thus imply that consistency with financial reporting is an important property of MAS design from management's point of view.     

Fair ranking of teachers

Economic theory suggests that it is optimal to reward teachers depending on the relative performance of their students. We develop an econometric approach, based on stochastic frontier analysis, to construct a fair ranking that accounts for the socio-economic background of students and schools and the imprecision inherent in achievement data. Using German PIRLS (IGLU) data, we exploit the hierarchical structure of the data to estimate the efficiency of each teacher. A parsimonious set of control variables suffices to get a “fair” estimate of unobserved teacher quality. A Hausman–Taylor type estimator is the preferred estimator because teacher efficiency and some exogenous variables may be correlated.     

Transactional activities and total factor productivity growth in Taiwan

Total factor productivity (TFP) growth shows how rapidly an economy is enhancing technology and the efficiency with which it allocates resources. It has been argued that “miraculous” growth in East Asian economies may not be sustainable, due to relatively low rates of TFP growth. Among these economies, it appears that Taiwan has indeed exhibited substantial technological progress. Failure to control for transactional activities, however, can distort the impression of TFP growth. This study recalculates Taiwan's TFP growth for the 1957–1993 sample period, adjusting for transaction costs in the government and private sectors. For the early years of the sample, 1957–1973, the economy's technological progress is better than GDP-based calculations suggest. In recent years, 1983–1993, productivity improvement has been overstated, but the economy has still exhibited relatively fast TFP growth.