Disclosure and the cost of equity in international cross-listing

In this paper, we examine the relationship between disclosure level and the cost of equity capital for a sample of international firms cross-listing on the New York Stock Exchange. Increased disclosure has the potential to reduce information asymmetry, reduce the cost of financing and increase analyst following. Using an international asset pricing model, we find that listing firms experience a decrease in both disclosure risk and systematic risk while matching firms do not. Further, we find that the magnitude of the decrease is related to three types of disclosure: accounting standards; analyst following; and exchange/regulatory investor protection. Our results suggest that increased disclosure through accounting standards is beneficial to investors and that disclosure can be accomplished through information intermediaries, e.g., analyst following. For firms with the lowest levels of disclosure prior to cross-listing, all three types of disclosure appear to be valuable.

Asymmetric wealth gains in joint ventures: Theory and evidence

I examine the causes of asymmetric wealth gains (instances where one partner gains and the other partner loses) and the extent of these gains in joint ventures. I argue that asymmetric gains arise as the common benefits created by the venture are offset by the negative wealth effects of resource appropriation for one parent. Using a sample of 412 joint ventures I find that in 42% of the ventures one parent gained and the other lost. In addition, I find that when the abnormal returns of parents within a venture were compared, firms that gained more from forming the venture experienced [−1,0] returns of +3.22% and firms that gained less experienced [−1,0] returns of −1.37%. Additional analyses showed that asymmetric wealth gains tended to occur in ventures where one parent had relatively high valued resources and the other parent had relatively lower valued resources thus suggesting that resource appropriation may be an important cause of this pattern of gains.     

Of Tournaments and Temptations: An Analysis of Managerial Incentives in the Mutual Fund Industry

We test the hypothesis that when their compensation is linked to relative performance, managers of investment portfolios likely to end up as “losers” will manipulate fund risk differently than those managing portfolios likely to be “winners.” An empirical investigation of the performance of 334 growth-oriented mutual funds during 1976 to 1991 demonstrates that mid-year losers tend to increase fund volatility in the latter part of an annual assessment period to a greater extent than mid-year winners. Furthermore, we show that this effect became stronger as industry growth and investor awareness of fund performance increased over time.     

Institutional evolution as an emerging focus in scenario planning

In this paper, we argue that institutional evolution should occupy a center stage in scenario development. During the last two decades, strategy models have neglected the institutional milieu, partly because analytical approaches to link institutional milieus and business contexts were underdeveloped. However, theoretical developments in institutional economics accomplished during this time period make it possible to connect the consequences of institutional evolution to strategy development. Further, with the increasing globalization of commerce, and the attendant complexity and turbulence in institutional evolution, particularly in emerging economies, significant opportunities for strategy related action may reside not in product markets but in institutional arenas. Institution-focused scenarios are therefore increasingly needed. We outline the key linkages between the institutional milieu and business contexts and illustrate how scenarios incorporating institutional parameters can shed light on the strategy context in the case of emerging economies.     

Moment explosions in stochastic volatility models

In this paper, we demonstrate that many stochastic volatility models have the undesirable property that moments of order higher than 1 can become infinite in finite time. As arbitrage-free price computation for a number of important fixed income products involves forming expectations of functions with super-linear growth, such lack of moment stability is of significant practical importance. For instance, we demonstrate that reasonably parametrized models can produce infinite prices for Eurodollar futures and for swaps with floating legs paying either Libor-in-arrears or a constant maturity swap rate. We systematically examine the moment explosion property across a spectrum of stochastic volatility models. We show that lognormal and displaced-diffusion type models are easily prone to moment explosions, whereas CEV-type models (including the so-called SABR model) are not. Related properties such as the failure of the martingale property are also considered.

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A Case Study and Field Evaluation of EDP-XPERT

This paper reports on the continued evaluation of EDP-XPERT, and expert system for assisting Computer Audit Specialists (CASs) in evaluating the reliability of EDP controls in advanced computer environments. The current evaluation of the system involved four phases. First, Senior CASs used the system on two case studies. Second, it was then used by the Senior CASs to evaluate recently completed audits. Third, a sensitivity analysis of the system's output was conducted. Fourth, the knowledge base was reprogrammed into another expert system shell and the Senior CASs' responses on the two cases and the audits were re-run. The results indicated that EDP-XPERT performed well on the case studies but that performance declined on the audits. The sensitivity analysis showed that EDP-XPERT's conclusions were affected by moderate perturbations of the CASs' input judgments. Finally, reprogramming the knowledge base into a more flexible expert system shell substantially improved the performance of the system's judgements.     

Is Fairly Priced Deposit Insurance Possible?

We analyze risk-sensitive, incentive-compatible deposit insurance in the presence of private information and moral hazard. Without deposit-linked subsidies it is impossible to implement risk-sensitive, incentive-compatible deposit insurance pricing in a competitive, deregulated environment, except when the deposit insurer is the least risk averse agent in the economy. We establish this formally in the context of an insurance scheme in which privately informed depository institutions are offered deposit insurance premia contingent on reported capital; the result holds for alternative sorting instruments as well. This suggests a contradiction between deregulation and fairly priced, risk-sensitive deposit insurance.     

When your contract manufacturer becomes your competitor

PC maker Lenovo started out as a distributor of equipment made by IBM and other companies; now it has formed a joint venture with IBM and will eventually affix its own logo to its computers. Shanghai Automotive Industry Corporation (SAIC) started out manufacturing vehicles for Volkswagen and GM; now it's preparing to sell its own cars in China, Europe, and North America. Lenovo and SAIC represent a host of formerly anonymous makers of brand-name products that are breaking out of their defined roles and pushing the brands themselves aside. In this article, the authors explore the double-edged relationships original equipment manufacturers (OEMs) forge with their contract manufacturers (CMs). On the one hand, an OEM can reduce its labor costs, free up capital, and improve worker productivity by outsourcing all the manufacturing of a product. The company can then concentrate on value-adding activities--research and development, product design, and marketing, for instance. On the other hand, an OEM that retains a contract manufacturer may find itself immersed in a melodrama replete with promiscuity (the ambitious CM pursues liaisons with other OEMs), infidelity (the OEM's retailers and distributors shift their business to the upstart CM), and betrayal (the brazen CM transmits the OEM's intellectual property to the OEM's rivals or keeps it for itself when the contract is up). OEMs cannot simply terminate their outsourcing arrangements--they need contract manufacturers in order to keep specializing, adding value, and staying competitive. But OEMs can manage these relationships so that they don't become weak or the CMs too strong. Doing so requires modesty about revealing trade secrets; caution about whom one consorts with; and a judicious degree of intimacy, loyalty, and generosity toward partners and customers.