MANAGERIAL INCENTIVES AND CORPORATE DIVERSIFICATION STRATEGIES

Because the break-up of conglomerates typically produces substantial increases in shareholder wealth, many commentators have argued that the conglomerate form of organization is inefficient. This article reports the findings of a number of recent academic studies, including the authors' own, that examine the causes and consequences of corporate diversification. Although theoretical arguments suggest that corporate diversification can have benefits as well as costs, several studies have documented that diversified firms trade at a significant discount from their single-segment peers. Estimates of this discount range from 10–15% of firm value, and are larger for “unrelated” diversification than for “related” diversification. If corporate diversification has generally been a value-reducing managerial strategy, why do firms remain diversified? One possibility, which the authors label the “agency cost” hypothesis, is that top executives without substantial equity stakes may have incentives to maintain a diversification strategy even if doing so reduces shareholder wealth. But, as top managers' ownership stakes increase, they bear a greater fraction of the costs associated with value-reducing policies and are therefore less likely to take actions that reduce shareholder wealth. Also, to the extent that outside blockholders monitor managerial behavior, the agency cost hypothesis predicts that diversification will be less prevalent in firms with large outside blockholders. Consistent with this argument, the authors find that companies in which managers own a significant fraction of the firm's shares, and in which blockholders own a large fraction of shares, are significantly less likely to be diversified. If agency problems lead managers to maintain value-reducing diversification strategies, what is it that leads some of these same firms to refocus? The agency cost hypothesis predicts that managers will reduce diversification only if pressured to do so by internal or external mechanisms that reduce agency problems. Consistent with this argument, the authors find that decreases in diversification appear to be precipitated by market disciplinary forces such as block purchases, acquisition attempts, and management turnover.     

Search and Liquidity in Single-Family Housing

A two-stage least squares model of housing prices is estimated with data collected from 3358 single-family home transactions. The results provide evidence for an optimal marketing period and indicate that a liquidity premium is priced in single-family home sales. Consistent with the hypothesis derived from economic search models, the model shows higher selling prices for houses having longer expected marketing periods. The model also shows a price premium for houses that sell faster than expectations. This effect supports the concept that liquidity is a value-enhancing characteristic.     

Backtesting Value-at-Risk: A Duration-Based Approach

Financial risk model evaluation or backtesting is a key partof the internal model's approach to market risk management aslaid out by the Basle Committee on Banking Supervision. However,existing backtesting methods have relatively low power in realisticsmall sample settings. Our contribution is the exploration ofnew tools for backtesting based on the duration of days betweenthe violations of the Value-at-Risk. Our Monte Carlo resultsshow that in realistic situations, the new duration-based testshave considerably better power properties than the previouslysuggested tests.     

Wirkungen einer EU–weiten Verlustverrechnung auf das Steueraufkommen

Seit einigen Jahren stellt der Europäische Gerichtshof vermehrt Regelungen der nationalen Steuersysteme in Hinblick darauf in Frage, ob sie mit dem EG-Recht konform gehen. Im aktuellen Fall Marks & Spencer entscheidet der Gerichtshof, ob Konzerne Verluste ausländischer Töchter mit inländischen Gewinnen verrechnen dürfen. Welche Wirkung hätte eine EU-weite Verlustverrechnung auf das deutsche Steueraufkommen?Prof. Dr. Clemens Fuest, 36, ist Direktor des Finanzwissenschaftlichen Forschungsinstituts an der Universität zu Köln und Mitglied des Wissenschaftlichen Beirats beim Bundesministerium der Finanzen; Thomas Hemmelgarn, 30, Dipl.-Volkswirt, ist Mitarbeiter an demselben Institut; Fred Ramb, 39, Dipl.-Volkswirt, ist Mitarbeiter der Deutschen Bundesbank, Economic Research Centre, in Frankfurt. Dieser Artikel repräsentiert die persönliche Auffassung der Autoren und entspricht nicht notwendigerweise der Position der Deutschen Bundesbank oder ihrer Mitarbeiter.     

Beyond Self-Regulation: Towards A Critique of Self-Regulation As A Control Strategy For Hazardous Activities*

After highlighting some of the key issues and positions in the debate around appropriate preventive regulation, the paper presents a number of observations directed at the proponents of greater self-regulation. These observations confront directly a number of familiar, but often unchallenged, arguments for self-regulation. More centrally we address claims concerning, the extent to which the chemicals industries have a good and improving ‘safety’ record; and whether the sector consists of companies both motivated and capable in the context of effective crisis and disaster management. Lastly, the paper sets out some ‘new directions’ for the nature and role of regulation in the effective prevention of crises. Thus the paper indicates a number of regulatory developments which are distinct from any shift towards greater self-regulation, but which would result in more effective crisis and disaster prevention in the UK chemicals industries and, indeed, beyond that specific sector.     

Informal group influence among situationally/dispositionally-oriented consumers

Consumer susceptibility to reference group influence has been demonstrated for certain products and buying situations. This article reports a study designed to determine if reference group influence varies between consumers classified as situationally-oriented and dispositionally-oriented. Results indicate a considerable difference between the two groups. Independence Health Plan