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Articles 1 - 10 of 10
Full-Text Articles in Corporate Finance
Maintaining A Flexible Payout Policy In A Mature Industry: The Case Of Crown Cork And Seal In The Connelly Era, James Ang, Tom Arnold, C. Mitchell Conover, Carol Lancaster
Maintaining A Flexible Payout Policy In A Mature Industry: The Case Of Crown Cork And Seal In The Connelly Era, James Ang, Tom Arnold, C. Mitchell Conover, Carol Lancaster
Finance Faculty Publications
As related in these pages, the history of Crown Cork and Seal (hereafter known as “Crown”) provides us with a case of a company that stopped paying dividends but establish a disciplined share repurchase policy and did so for all the right reasons. Under family ownership in the 1950s, Crown lost market share and was on the brink of bankruptcy when its largest shareholder, John Connelly, was elected chairman of the board in 1957. Under John Connelly’s leadership, the firm restructured its operations and began a payout policy based solely on stock repurchases. During the Connelly era, the firm did …
Real Options Analysis And The Assumptions Of Corporate Finance: A Non-Technical Review, Tom Arnold, Richard L. Shockley Jr.
Real Options Analysis And The Assumptions Of Corporate Finance: A Non-Technical Review, Tom Arnold, Richard L. Shockley Jr.
Finance Faculty Publications
This paper provides a non-technical presentation of the theoretical foundations of corporate financial decision making and the net present value (NPV) rule. Our objective is to show that the concepts of value and value creation arise from a single, unified framework that is firmly rooted in neoclassical microeconomic theory. This, in turn, allow us to demonstrate that the corporate valuation approach generically known as real options analysis is perfectly justifiable - without further qualification - in any situation when investors want managers to maximize NPV.
An Examination Of Value Line’S Long-Term Projection, Andrew Szakmary, C. Mitchell Conover, Carol Lancaster
An Examination Of Value Line’S Long-Term Projection, Andrew Szakmary, C. Mitchell Conover, Carol Lancaster
Finance Faculty Publications
Unlike previous papers, which have focused on the timeliness ranks, we examine Value Line’s 3–5 year projections for stock returns, earnings, sales and related measures. We find that Value Line’s stock return and earnings forecasts exhibit large positive bias, although their sales predictions do not. For stock returns, Value Line’s projections lack predictive power; for other variables predictive power may exist to some degree. Our findings suggest the spectacular past performance of the timeliness indicator reflects either close alignment with other known anomalies or data mining, and that investors and researchers should use Value Line’s long-term projections with caution.
Duration Measures For Corporate Project Valuation, Tom Arnold, David S. North
Duration Measures For Corporate Project Valuation, Tom Arnold, David S. North
Finance Faculty Publications
Sensitivity analysis is a very common exercise performed with the forecasting of project cash flows. In this paper, a duration-type measure is generated that provides a single number for the assessment of project cash flows relative to changes in the discount rate (or adjusted for changes in a particular cash flow model parameter). The calculation is no more difficult than the duration measures that already exist for bonds. Yet, the calculation provides valuable insight that many times is lost when performing sensitivity analysis. Further, at a minimum, the measure provides a gauge for the consequences of mis-specifiying the discount rate …
A Simplified Approach To Understanding The Kalman Filter Technique, Tom Arnold, Mark J. Bertus, Jonathan Godbey
A Simplified Approach To Understanding The Kalman Filter Technique, Tom Arnold, Mark J. Bertus, Jonathan Godbey
Finance Faculty Publications
The Kalman filter is a time series estimation algorithm that is applied extensively in the field of engineering and recently (relative to engineering) in the field of finance and economics. However, presentations of the technique are somewhat intimidating despite the relative ease of generating the algorithm. This article presents the Kalman filter in a simplified manner and produces an example of an application of the algorithm in Excel. This scaled-down version of the Kalman filter can be introduced in the (advanced) undergraduate classroom as well as the graduate classroom.
Using Gmm To Flatten The Option Volatility Smile, Tom Arnold
Using Gmm To Flatten The Option Volatility Smile, Tom Arnold
Finance Faculty Publications
By using an over-identified Generalized Method of Moments (GMM) estimation procedure with careful consideration for data biases existing in the previous literature, parameters are estimated for a stochastic volatility jump diffusion option pricing (SVJ) model. The estimated parameters indicate a statistically significant highly negative infrequent jump process in the underlying security return distribution consistent with market crashes. When comparing to a stochastic volatility (SV) option pricing model, the SVJ is more robust but not always the superior model. The robustness of the models is further gauged by evaluating performance up to a year beyond the estimation data.
Do Option Markets Substitute For Stock Markets?, Tom Arnold, Gayle Erwin, Lance Nail, Terry D. Nixon
Do Option Markets Substitute For Stock Markets?, Tom Arnold, Gayle Erwin, Lance Nail, Terry D. Nixon
Finance Faculty Publications
Using a sample of cash tender offers occurring between 1993 and 2002, we find evidence that the options market has become the preferred venue for traders attempting to profit on anticipated announcements. Options offer advantages relative to stocks. Traders gain leverage by trading in options and multiple options contracts on an individual stock. The results of our study indicate that a substitution effect does exist. Abnormal volume in the option market replaces abnormal volume in the stock market prior to cash tender offer announcements, and this abnormal option volume precedes abnormal stock volume for targets with or without traded options.
Using The Wacc To Value Real Options, Tom Arnold, Timothy Falcon Crack
Using The Wacc To Value Real Options, Tom Arnold, Timothy Falcon Crack
Finance Faculty Publications
We present a real option valuation using the weighted average cost of capital (WACC). This is an alternative to risk-neutral real option valuation. Using the WACC involves a marginal increase in mathematical complexity, but it is easy to implement in a spreadsheet, and it is easy to present to management. Our analysis reveals, however, that because the real option valuation is immune to choices of admissible discount rates (as per Arnold and Crack 2003a), the critical issue is correct estimation of volatility, not choice of discount rate. We also point out that the natural and conservative tendency to overestimate risk …
Beware Of The Ides Of March: The Demise Of Hih Insurance, Bonnie Buchanan, Tom Arnold, Lance Nail
Beware Of The Ides Of March: The Demise Of Hih Insurance, Bonnie Buchanan, Tom Arnold, Lance Nail
Finance Faculty Publications
Despite differences in corporate governance systems in the United States and Australia, the corporate governance failures that led to each country’s largest bankruptcy are strikingly similar. WorldCom in the United States and HIH Insurance in Australia were both created by a rapid series of major acquisitions, failed after their last major acquisitions, and attempted to hide their declining performance with aggressive and/or fraudulent accounting practices. In this paper we present a clinical examination of the corporate governance failures that led to the demise of HIH Insurance and show that corporate governance failures are not endemic to the existing corporate governance …
Adr Risk Characteristics And Measurement, Tom Arnold, Lance Nail, Terry D. Nixon
Adr Risk Characteristics And Measurement, Tom Arnold, Lance Nail, Terry D. Nixon
Finance Faculty Publications
While a healthy empirical literature exists on international diversification and its benefits, surprisingly few studies have examined the risk characteristics and efficacy of asset pricing models for one avenue of international diversification – investments in American Depository Receipts (ADRs). Originating in approximately 1927, ADRs provide an opportunity for investors to indirectly purchase shares of foreign firms. ADRs represent a claim to a given number of shares of a foreign firm held by a U.S. financial institution (e.g., Bank of New York). With the increasingly significant presence of ADR trading in the American stock markets – increasing six-fold between 1990 and …