Diversification Benefits of iShares and Closed-End Country Funds

We study the performance and diversification of iShares and their rival closed‐end country funds from April 1996 to December 1999. International iShares are country‐specific series of securities that track the price and yield of a specific Morgan Stanley Capital Internation (MSCI) country index and, presumably, should provide diversification benefits. Our single‐index model demonstrates that iShares replicate the home index, showing some potential for diversification. However, our two‐factor model, which isolates the “true” diversification virtues, documents that both iShares and closed‐end country fund market prices maintain considerable exposure to the U.S. market. Furthermore, the net asset value returns of the closed‐end funds demonstrate a strong home country exposure, suggesting there is no substitute for direct foreign investment.     

FREE CASH FLOW AND PUBLIC GOVERNANCE: THE CASE OF ALASKA

In a widely cited 1986 article in the American Economic Review, Michael Jensen gave the concept of free cash flow (FCF) a new twist by redefining it as cash flow in excess of that required to fund all projects with positive net present values. Put another way, FCF represents funds available in the firm that managers may choose to hold as idle cash, return to shareholders, or invest in projects with returns below the firm's cost of capital. In redefining FCF in this way, Jensen converted FCF from a measure of economic income and value into a measure of corporate assets available for discretionary, and potentially value‐destroying, use by firm managers. And, as he argued in his important article, managers in mature businesses with substantial free cash flow have a tendency to destroy value by plowing too much capital back into those businesses or, often worse, making ill‐advised acquisitions in unrelated businesses. Several methods have been developed in financial markets and internal corporate governance systems to discourage managers from wasting FCF. Better monitoring by boards of directors, large ownership blocks, and properly aligned management compensation contracts are all parts of the solution. And the extraordinary increase in stock repurchases in recent years, invariably applauded by investors, is another illustration of the market's success in encouraging companies to address their free cash flow problems. But if the “FCF problem” of the private sector has attracted considerable attention from finance scholars, the problem is even more acute in the public sector, where FCF can be thought of as tax revenue in excess of what is required to finance well‐defined and generally accepted levels of public services. Unlike the private sector, in the public sector there are neither measures nor mechanisms by which to monitor and constrain wasteful spending by elected officials. In this article, the authors attempt to measure the costs to taxpayers of government FCF using the case of Alaska, which since 1969 has received a huge windfall of tax revenue from North Slope oil leases. After examining the state's public finances from 1968 through 1993, the authors offer $25 billion as a conservative estimate of the social losses from Alaska's waste of free cash flow during that 25‐year period.     

Forecast Encompassing as the Necessary Condition to Reject Futures Market Efficiency: Fluid Milk Futures

The traditional necessary condition for futures market inefficiency is the existence of alternative forecasting methods that produce mean squared forecast errors smaller than the futures market. Here, a more exacting requirement for futures market efficiency is proposed—forecast encompassing. Using the procedure of Harvey and Newbold , multiple forecast encompassing is tested using Chicago Mercantile Exchange fluid milk futures. Time series models and USDA experts provide competing forecasts. Results suggest milk futures do not encompass the information contained in the USDA forecasts at a two-quarter horizon. While the competing forecasts generate positive revenues, it is unlikely that returns exceed transaction costs in this relatively new market.     

Bank mergers: Integration and profitability

The Treasury Department's 1991 recommendations for financial service reform would have allowed interstate branching by banks, eliminating the requirement that banking companies form a separate subsidiary for each state in which they do business. Supporters of the proposal argue that allowing bank holding companies to merge their subsidiary banks would improve performance. We tested this proposition by studying the before- and-after performance of all bank mergers in the New England states between 1982 and 1987. In the aggregate, merging banks did not achieve significant improvements in operating profits relative to other banks during the first two years after a merger. It is important to distinguish, however, between mergers of newly acquired banks and mergers of banks acquired earlier by the holding company. Mergers of previously acquired banks performed significantly better than mergers of newly acquired banks and, measured by operating return on assets, achieved significant performance improvements relative to the industry.This article may not be reproduced in any form without permission of the authors, who hold the copyright.     

The Structure of Banking Systems in Developed and Transition Economies

The paper empirically analyses the determinants of banking system structure (as measured by bank assets, number, branches and employees) for 26 developed OECD countries. The estimated regressions are then applied to 23 transition economies, to obtain benchmarks for the efficient structure of their banking systems. The actual and benchmark measures of banking structure are compared to evaluate the state of banking system development, including the computation of a measure of 'banking system convergence'. The results are objective and replicable multidimensional measures of banking system development for the transition economies.     

The Changing Liability Structure of Savings and Loan Associations

The paper surveys the key factors, past and future, affecting Savings and Loan Association liability structure. The economic principles underlying Savings and Loan liability management are illustrated with emphasis on the dynamic aspects of decision-making and on the lack of perfect competition within the industry. Specific topics include the matching of asset and liability maturities, liquidity management, discrimination among classes of liabilities, and Regulation Q ceilings. The major shifts in the liability structure of Savings and Loan Associations during the 1970s is then reviewed. Key points include the steadily declining share of passbook accounts, the increasing average maturity of liabilities until 1978, and the ramifications of newly introduced deposit categories such as Money Market Certificates. Finally, the likely liability structure of Savings and Loans during the 1980s is discussed in the context of the removal of Regulation Q ceilings. The necessity for Savings and Loans to offer competitive interest rates on all maturity categories, and to offer deposit liabilities with liquidity features comparable to those available from other sources is emphasized.     

Oil and gas stock price reactions to federal tax legislation

The purpose of this research is to assess the effects of major tax legislation on the stock prices of firms in the oil and gas industry. Event study methodology is used to examine the behavior of security prices of oil and gas firms in response to the Joint Conference Committee vote in August 1986.