A flexible approach to determining financial terms of sale

With high inflation and interest rates the financial or credit terms of a sale are an increasingly important source of foods for buyers and an expensive cost for sellers. This article proposes some guidelines for setting terms of sale policies which may benefit both buyers and sellers. A method for determining the best terms alternative from the buyers perspective is also described.     

Why does capital structure choice vary with macroeconomic conditions?

We develop a computable general equilibrium model explaining financing over the business cycle. To avert agency conflicts, managers must hold a high percentage of their firm's equity. During contractions, firms substitute debt for equity in order to maintain managerial equity shares. During expansions, risk-sharing improves, with increases in managerial wealth facilitating substitution of equity for debt. In calibrated simulations, (counter) cyclical variation in leverage is only exhibited by less constrained firms. All firms exhibit financial accelerator effects. However, the effect is decreasing in financial flexibility. The model's predictions regarding financing and investment are consistent with empirical evidence.     

The Nut Island effect. When good teams go wrong

The team that operated the Nut Island sewage treatment plant in Quincy, Massachusetts, was every manager's dream. Members of the group performed difficult, dangerous work without complaint. They needed little supervision. They improvised their way around operational difficulties and budgetary constraints. They were dedicated to the organization's mission. But their hard work led to catastrophic failure. How could such a good team go so wrong? In this article, the author tells the story of the Nut Island plant and identifies a common, yet destructive organizational dynamic that can strike any business. The Nut Island effect begins with a deeply committed team that is isolated from a company's mainstream activities. Pitted against this team is its senior management. Preoccupied with high-visibility problems, management assigns the team a vital but behind-the-scenes task. Allowed considerable autonomy, team members become adept at managing themselves. Management takes the team's self-sufficiency for granted and ignores team members when they ask for help. When trouble strikes and management is unresponsive, team members feel betrayed and develop an us-against-the-world mentality. They stay out of management's line of sight, hiding problems. The team begins to make up its own rules, which mask grave problems in its operations. Management, disinclined in the first place to focus on the team's work, is easily misled by team members' skillful disguising of its performance deficiencies. The resulting stalemate typically can be broken only by an external event. The Nut Island story serves as a warning to managers who concentrate their efforts on their organization's most visible shortcomings: sometimes the most debilitating problems are the ones we can't see.     

The Behavior of Option Implied Standard Deviations Around Merger and Acquisition Announcements

This paper examines the behavior of option implied standard deviations around merger and acquisition announcements. The implied standard deviations of target firms increase significantly three days prior to the announcement. The bidding firm implied standard deviations are not affected. The analysis is extended to the equity market to determine which market reacts first to the merger or acquisition announcement. Target firm equity abnormal returns and residual variances increase significantly one and two days, respectively, prior to the announcement.     

Developing a deeper understanding of post-purchase perceived risk and behavioral intentions in a service setting

Researchers and service providers have realized that a disproportionate share of a firm’s sales and profits come from a relatively small number of loyal customers that repeatedly purchase the firm’s services. In many service settings, such as health care, repeated interactions between the service provider and the client are necessary for service delivery. While service quality is certainly important, it is also important that customers’ perceptions of perceived risk are taken into account and that customers perceive a degree of control over the services provided. We develop a conceptual model of linkages between the physical environment of the service, perceived control over the service and service quality and, demonstrate through two empirical studies, how these factors affect perceived risk and post-purchase behavioral intentions. Both studies were conducted in health care settings. In the first study, we collected data using a mail survey of 192 patients after their treatment from a regional hospital. In the second study, survey data were collected from 101 patients of a specialized clinic providing alternative therapies within a major hospital. Our results provide confirmation that the favorable physical environment of the service setting enhances perceived control and perceptions of service quality. Moreover, perceived control and perceived quality of the service provider reduces post-purchase perceived risk. Finally, post-purchase perceived risk reduces behavioral intentions, while perceived quality of the service provider enhances behavioral intentions. Authors contributed equally to the research.     

Sovereign debt: Reputation, seizure and reputation

The interaction between a creditor and a sovereign debtor is described as a ‘one-shot’ game with discrete actions—total or no debt-repudiation and seizure of asset holding abroad. Possible Nash equilibria where each player chooses an action as to maximize his expected payoff given his beliefs about the other player’s action and the implications of those actions on the players’ trustworthy reputation are identified. However, if reputation losses rise convexly with the players’ relative hostility, partial repudiation and seizure can be the preferred strategies. The preferred repudiation and seizure rates are analyzed under asymmetric and symmetric information about the state of the world. (JEL classification F34)