The Use of Debt to Prevent Short-Term Managerial Exploitation

This paper emphasizes the versatility of debt by presenting a setting in which debt is used to assuage a manager. Our result is driven by the option-like feature of shareholder ownership in the presence of debt and the detrimental effect of diversification (reduced volatility) on option value. The diversification effect is introduced in our model when the shareholders use a “portfolio of managers” over the firm’s life. In contrast, retaining the existing manager is a riskier strategy. Debt makes this risky strategy desirable for the shareholders and, thus, serves to commit them to be more patient in firing decisions. Viewed broadly, the paper stresses the interaction between capital structure, information system design, and control systemsWe thank C.D. Aliprantis (Editor), Tim Baldenius, Joel Demski, Ron Dye, John Fellingham, Hans Frimor, Ronen Israel, Chandra Kanodia, Brian Mittendorf, James Peck, Doug Schroeder, Lixin Ye, workshop participants at Carnegie Mellon, Columbia University, Ohio State University, and the European Summer Symposium in Financial Markets, and two anonymous referees for helpful comments. Anil Arya gratefully acknowledges assistance from the John J. Gerlach Chair     

The Internationalization of a Production Network and the Replication Dilemma: Building Supplier Networks in Mainland China

Replication can be a powerful strategy for firms, but the replication of organizational practices is not easy, and there exists a real tension between replication and adaptation. This paper looks at the sourcing strategies and supplier networks of three Taiwanese machine tool companies in mainland China to understand the conditions under which replication may be more or less likely to occur. In addition, by viewing the cases as examples of the production network internationalization and by considering the issue of convoy migration in such a context, this paper presents a new way of thinking about the internationalization of industrial networks.     

immigration and the collapse of communism

Will Western Europe have to deal with a flood of emigrants from the East? Jonathan Eyal, of the Royal United Services Institution, argues that the West should not be unduly affected.     

The Use and Deployment of Soft Process Technologies within UK Manufacturing SMEs: An Empirical Assessment Using Logit Models

This study assesses the adoption of different soft process technologies from a survey of 218 British engineering and electronics small and medium-sized firms (SMEs). The new process (soft) technologies that were modeled included total quality management, Kaizan, and statistical process control. Logit models demonstrate that the determinants of soft process technology adoption vary significantly from technology to technology. The study questions a blanket approach to technology adoption. Firm-specific factors make a larger difference to the adoption of process technologies than competitive factors. While on the whole small firms are slow to adopt new techniques, this does not hold for all technologies, and future research might investigate what technologies SMEs adopt and why. Benchmarking, suggestions schemes, problem-solving techniques and ISO 9000 adoption was unrelated to firm size, which holds out the prospect of soft process technologies as an alternative technological path for small firm productivity growth.     

Forecasting Credit Spread Volatility: Evidence from the Japanese Eurobond Market

Different approaches to forecasting the volatility associated with the credit spreads on Yen Eurobonds are investigated. The actual volatility, historical volatility and estimated conditional volatility on spreads derived from a regression-based model with a GARCH and ARMA specification are compared within an adaptation of Black’s (J. Finance, 31, 1976, 361–367) option-pricing model. Surprisingly, the regression forecast over a medium forecasting horizon suggests that historic volatility provides the better forecast. The implications of these results for volatility forecasting and credit spread modelling are also discussed.JEL Classification: C32; G15     

Momentum and Autocorrelation in Stock Returns

This article studies momentum in stock returns, focusing onthe role of industry, size, and book-to-market (B/M) factors.Size and B/M portfolios exhibit momentum as strong as that inindividual stocks and industries. The size and B/M portfoliosare well diversified, so momentum cannot be attributed to firm-or industry-specific returns. Further, industry, size, and B/Mportfolios are negatively autocorrelated and cross-seriallycorrelated over intermediate horizons. The evidence suggeststhat stocks covary "too strongly" with each other. I argue thatexcess covariance, not underreaction, explains momentum in theportfolios.     

Optimal consumption and portfolio rules with intertemporally dependent utility of consumption

In the usual consumption portfolio problem, lifetime utility is assumed to be time-additive. This assumption has been criticized for failing to capture important intertemporal dependencies in utility such as intertemporal risk aversion and habit formation. This paper studies the consumption portfolio problem for a class of intertemporally dependent utility functions.     

Financial globalization and real regionalization

Over the period 1972-1986, the US business cycle was strongly correlated with the business cycle in the rest of the industrialized world. Over the period 1986-2000, international co-movement was much weaker (real regionalization). At the same time, US international asset trade has increased significantly ( financial globalization). We first document these phenomena in detail and then argue that they are related. In particular, we present a model in which financial globalization occurs endogenously in response to less correlated real shocks. Financial globalization, by enhancing cross-border capital flows, further reduces the international correlations in GDP and factor supplies. We find that both less correlated shocks and the endogenous change in international financial markets are needed to quantitatively account for the observed changes in the international business cycle.