LIQUIDATION IN LIMIT ORDER BOOKS WITH CONTROLLED INTENSITY

We consider a framework for solving optimal liquidation problems in limit order books. In particular, order arrivals are modeled as a point process whose intensity depends on the liquidation price. We set up a stochastic control problem in which the goal is to maximize the expected revenue from liquidating the entire position held. We solve this optimal liquidation problem for power‐law and exponential‐decay order book models explicitly and discuss several extensions. We also consider the continuous selling (or fluid) limit when the trading units are ever smaller and the intensity is ever larger. This limit provides an analytical approximation to the value function and the optimal solution. Using techniques from viscosity solutions we show that the discrete state problem and its optimal solution converge to the corresponding quantities in the continuous selling limit uniformly on compacts.     

The case for strategic management accounting: The role of accounting information for strategy in competitive markets

A review of two economic theories is utilized to provide theoretical support for the greater possible involvement by accountants in what has been called strategic management accounting. One of these theories is concerned with the underlying characteristics of enterprise products. It suggests that there is a need for accountants to consider the cost structure of not only their own firm but of all enterprises in the relevant market and of potential entrants. It also suggests that costs can not be considered in isolation from demand factors. The second theory to be reviewed is concerned with whether a firm's cost structure permits its market strategy to be sustainable in the face of potential entry. This theory again emphasizes the intertwining of demand and cost factors and the need to consider these factors simultaneously. The use of this theory allows a new perspective to be taken to cost behaviour which is especially suited to high technology manufacturing.     

Fourier-analytic measures for heavy-tailed insurance losses

We propose a family of three ‘Fourier-analytic’ measures to extend the conventional concepts of standard deviation, variance, and coefficient of variation to insurance losses with arbitrarily heavy tails. After motivating and computing their mathematical forms, we apply the proposed measures to the case of Lévy-stable loss portfolios. Finally, the new measures are used to study the diversification properties of heavy-tailed losses.     

Capital Allocation: Evidence,Analytical Methods,and Assessment Guidance

Capital allocation is one of top management's primary responsibilities. Although always important, it is critical today because corporate operating returns on invested capital are at an all‐time high, while recent growth and investment have been modest, and corporate balance sheets in the U.S. have substantial cash. Yet few senior executives are sufficiently well‐versed in finance theory and methods to allocate capital as effectively as possible. Further, incentive programs that focus on meeting earnings per share often encourage behavior that is not in the best interests of long‐term shareholders. In this report, the authors begin with the premise that the goal of corporate capital allocation is to build long‐term value per share; and with that view in mind, they examine the main sources and uses of capital by the largest 1,500 U.S. companies during the last 30 years. More specifically, the authors identify the amounts of capital allocated to each of seven important alternatives, including major uses of capital such as M&Amp;A, capital expenditures, R&D, and distributions of capital to investors such as dividends and stock repurchases. And after reviewing the past allocations of capital to each of these alternatives, the authors summarize the academic research on the effects on corporate values of each of these uses of capital. The authors report that U.S. corporations fund most of their investments internally, and that M&Amp;A and capital expenditures have long been, and continue to be, the largest operating uses of capital, though both capital expenditures and growth in assets have fallen in recent years. At the same time, both corporate cash holdings and distributions to shareholders in the form of dividends and stock buybacks are at record levels. But even with such high payouts, R&D spending as a percentage of revenue by U.S. companies has remained high, and actually increased during the past decade. Finally, the authors provide a framework that can be used either internally or by outsiders to evaluate the capital allocation practices and effectiveness of a management team. This framework asks management to assess its past performance, provide realistic projections of future returns on invested capital, and evaluate their own incentive programs—all while renewing their commitment to the five principles of thoughtful capital allocation: (1) zero‐based capital allocation; (2) funding of strategies, not projects; (3) no capital rationing; (4) zero tolerance for bad growth; and (5) continuous monitoring of the value of all assets and business, and willingness to take action if and when such values are larger outside than inside the firm.     

Prognose des Abwicklungsergebnisses mittels Chain-Ladder-Verfahren für abhängige Run-Off-Portfolios

In the present paper we analyse how the estimators from Merz u. Wüthrich (2007) could be generalised to the case of N correlated run-off triangles. The simultaneous view on N correlated subportfolios is motivated by the fact, that in practice a run-off portfolio often has to be divided in subportfolios, so that the homogeneity assumption of the claims reserving method on each subportfolio is satisfied. We derive an explicit formula for the process-variance, the estimation-error and the prediction error made by the forecast for the claims development result with the Chain-Ladder method. We illustrate the results by an example.     

The effect of uncertainty and asset co‐specialization on governance in biotechnology alliances

We explore transaction cost economics (TCE) and real option (RO) rationales for alliance governance and find the predictive power of each depends upon the type of uncertainty confronted. Our review of alliance activity from 1995 through 2000 for 642 alliances confirms that governance is influenced directly by partner, task, and technological uncertainty and by interactions among asset co‐specialization, partner uncertainty, and task uncertainty. Consistent with TCE, co‐specialized assets increased the likelihood of hierarchical governance. Partner and task uncertainty increased this effect. Consistent with RO, we find technological uncertainty decreased the likelihood of hierarchical governance. Copyright © 2005 John Wiley & Sons, Ltd.     

Knowledge spillover from other assurance services

We argue that services which are complimentary and closer aligned to the annual report audit provide greater insight about risk and are more likely to exhibit the existence of economies of scope (knowledge spillover) through a positive association with audit fees. Specifically, we consider the potential for knowledge spillover from the auditing of triennial Long-Term Plans (LTP) to the annual report audit for a large sample of New Zealand municipals over the period 2005–2013. We find the LTP audit fees are positively related to municipal annual report audit fees and other fees (audit of for-profit subsidiaries, non-audit services) are not. This suggests that knowledge spillovers are dependent on the nature of the additional services. We also find evidence of higher fees for private sector auditors for both the annual report and the LTP audit. The LTP (forecast) audit fee is associated with municipal size, complexity, and political competition.     

Debt, Leases, Taxes, and the Endogeneity of Corporate Tax Status

We provide evidence that corporate tax status is endogenous to financing decisions, which induces a spurious relation between measures of financial policy and many commonly used tax proxies. Using a forward-looking estimate of before-financing corporate marginal tax rates, we document a negative relation between operating leases and tax rates, and a positive relation between debt levels and tax rates. This is the first unambiguous evidence supporting the hypothesis that low tax rate firms lease more, and have lower debt levels, than high tax rate firms.     

Seven surprises for new CEOs

As a newly minted CEO, you may think you finally have the power to set strategy, the authority to make things happen, and full access to the finer points of your business. But if you expect the job to be as simple as that, you're in for an awakening. Even though you bear full responsibility for your company's well-being, you are a few steps removed from many of the factors that drive results. You have more power than anybody else in the corporation, but you need to use it with extreme caution. In their workshops for new CEOs, held at Harvard Business School in Boston, the authors have discovered that nothing--not even running a large business within the company--fully prepares a person to be the chief executive. The seven most common surprises are: You can't run the company. Giving orders is very costly. It is hard to know what is really going on. You are always sending a message. You are not the boss. Pleasing shareholders is not the goal. You are still only human. These surprises carry some important and subtle lessons. First, you must learn to manage organizational context rather than focus on daily operations. Second, you must recognize that your position does not confer the right to lead, nor does it guarantee the loyalty of the organization. Finally, you must remember that you are subject to a host of limitations, even though others might treat you as omnipotent. How well and how quickly you understand, accept, and confront the seven surprises will have a lot to do with your success or failure as a CEO.