Financial markets at the crossroads: Fears of a great crash

Not so long ago the international financial markets were being acclaimed as the cure-all for debt crises and interest rate and exchange rate risks, but new developments are giving increasing cause for concern, as the Deutsche Bundesbank¹ noted recently. Pessimists are spreading a mood of disaster and are already predicting the collapse of the world financial system.² What is the basis for such fears? How serious is the danger of a crash?     

Expected EPS and EPS Growth as Determinantsof Value

This paper develops a parsimonious model relating a firm’s price per share to, (i), next year expected earnings per share (or 12 months forward eps), (ii), short-term growth (FY-2 versus FY- l) in eps, (iii), long-term (asymptotic) growth in eps, and, (iv), cost-of-equity capital. The model assumes that the present value of dividends per share (dps) determines price, but it does not restrict how the dps-sequence is expected to evolve. All of these aspects of the model contrast sharply with the standard (Gordon/Williams) text-book approach, which equates the growth rates of expected eps and dps and fixes the growth rate and the payout rate. Though the constant growth model arises as a peculiar special case, the analysis in this paper rests on more general principles, including dividend policy irrelevancy. A second key result inverts the valuation formula to show how one expresses cost-of-capital as a function of the forward eps to price ratio and the two measures of growth in expected eps. This expression generalizes the text-book equation in which cost-of-capital equals the dps-yield plus the growth in expected eps.This revised version was published online in August 2005 with a corrected cover date.     

A change‐recipient perspective on training during organizational change

In this paper, we examine skill‐related uncertainties among middle managers during organizational change. The question emerged from a qualitative study of two planned organizational change initiatives in the public sector where a group of middle managers were required to learn new skills because of changes in their work tasks and managerial roles. In both cases, we found that change recipients experienced two types of job‐related uncertainty in the post‐training phase: role ambiguity and operationalization uncertainty. Role ambiguity refers to challenges in understanding diverse expectations tied to the future work situation and necessary skills, whereas operationalization uncertainty refers to the challenges of putting new skills into practice. Although necessary and important, formal training was not sufficient to resolve these challenges. Rather, the change recipients engaged in informal and horizontal communication to resolve uncertainties related to new skill and role requirements.     

Sources of increasing systemic risk in international financial markets

In its annual report, published in June, the Bank for International Settlements (BIS) warned of increasing systemic risk in international financial markets. Competitive pressures will intensify in the years to come and financial institutions and regulators around the world appear ill-prepared to cope with the resulting challenges. The pressures are expected to grow for three reasons above all: the prospective “Big Bang” of the Japanese financial system, a further erosion of the Glass-Steagall restrictions in the United States and the preparations of financial institutions in Europe to position themselves for the introduction of the euro.¹     

Currency trading and international financial instability

During the past year, global capital markets have experienced an unprecedented series of financial turmoils. Asian contagion, Russia's default and the collapse of the US hedge fund Long Term Capital Management (LTCM) are the low points of this development. As recent events in Latin America and elsewhere indicate, there is no prospect that markets worldwide will lastingly calm down soon. There is an abundance of proposals and suggestions on how the system should be stabilised. The most popular among them include the control of capital flows and hedge-fund activities. The following article draws attention to another element of financial instability which at times triggers, at times fuels, a crisis: expectation-driven foreign exchange transactions.     

Structural aspects of social capital: tests for cross-national equivalence in Europe

In this contribution we start from the emerging consensus on the widely disputed phenomenon of social capital. We propose to focus on structural aspects of social capital: formal (contacts within formal organizations) and informal (contacts outside of formal organizations). First, we address methodological questions on the cross-national equivalence of these social capital measurements. Second, we re-visit substantive questions on the patterns of relationships in different European countries. In particular, we inquire to which degree formal and informal social capital can substitute each other, as well as being complementary. We take advantage of recent Eurobaromer data (2004) containing a wide range of valid measurements on both structural aspects of social capital. We find strong evidence for cross-national equivalent measurements regarding formal social capital, employing probabilistic scalogram analyses. For informal social capital, we find strong evidence for configural and metric invariance as well as evidence for partial scalar invariance, employing multi group confirmatory factor analyses. We have to reject the substantive hypothesis on substitution of formal and informal social capital for all countries under consideration, except for Romania. We corroborate the hypothesis on complementarity of formal and informal social capital.