Finance and Financial Management Commons^™

The Abcs Of Modified Bond Duration And Wxyzs Of Bond Convexity, Tom Arnold, Andrew C. Szakmary

Finance Faculty Publications

By breaking the mathematical derivation of Macaulay Duration, Modified Duration, and Bond Convexity into smaller easily calculated component parts, a more manageable means of calculation for these bond measures emerges for the student. Further, an Excel spreadsheet or an algorithm within a programming language can also be implemented using these smaller component calculations. The Excel template provided can be made into an assignment or used as a resource for the student.

Required Minimum Distribution (Rmd) Spreadsheet Calculators Based On The Secure Act Of 2022, Tom Arnold, John H. Earl, Jr., Cassandra D. Marshall

Finance Faculty Publications

Required Minimum Distribution (RMD) Spreadsheet Calculators

Based on the SECURE Act of 2022

The Setting Every Community Up for Retirement Enhancement Act (SECURE Act) of 2022 made a second round of changes (relative to the SECURE Act of 2019) to the required minimum distribution (RMD) schedule for individual retirement accounts (IRAs) and defined contribution retirement plans. Excel spreadsheet calculators are developed to calculate the new annual RMD cash flows throughout retirement for those who are retired and for those who are planning to retire. The spreadsheet calculators also allow savings to accrue with interest if the RMD is in excess …

Volatility Transmission: Evidence From U.K. Reit & Stock Market Implied Volatility, Mutale Katyoka, Simon Stevenson

Finance Faculty Publications

This paper investigates volatility transmission in the U.K. REIT market. It considers how REIT volatility is related to implied volatility in both the overall stock market as well as that derived from traded options on REIT stocks. The multivariate analysis utilizes both Constant Conditional Correlation (CCC) and Dynamic Conditional Correlation (DCC) GARCH specifications to analyse the interdependence of the data. The findings confirm the presence of volatility transmission across the implied volatility of U.K. REITs, the U.K. implied volatility index, and the U.K. REIT index. The study also applies the variance decomposition approach proposed by Diebold and Yilmaz to examine …

When Does Csr Payoff?, John A. Doukas, Rongyao Zhang

Finance Faculty Publications

We investigate whether firms engaging in corporate social responsibility (CSR) can preserve firm value during normal and unprecedented exogenous adverse events. Our evidence shows, in regular times, a negative relation between CSR engagement and firm value, but under adverse economic conditions, CSR protects firm value by decreasing firm risks. We also find that firms with high managerial attributes engage in greater CSR activities that benefit shareholders in both normal and aberrant financial times. Despite the controversy surrounding CSR, our evidence points out that CSR can be viewed as a set of intangible assets that can improve firm value across good …

Simplified Portfolio Optimization Using Cramer’S Rule In Excel, Tom Arnold, Joseph Farizo, Terry D. Nixon

Finance Faculty Publications

The matrix algebra associated with finding minimum variance portfolio weights, mapping the efficient frontier, and determining the tangency portfolio weights is greatly simplified in Excel by applying Cramer’s Rule. Only a scant knowledge of linear algebra is necessary for producing a very intuitive presentation for a multi-asset portfolio. The technique is very easily replicated for an assignment or for providing a classroom resource.

The Relationship Between Enterprise Risk Management And Cost Of Capital, Muhammad Kashif Shad, Fong-Woon Lai, Amjad Shamim, Michael Mcshane, Sheikh Muhammad Zahid

Finance Faculty Publications

This paper investigates the effect of enterprise risk management (ERM) implementation on the cost of capital (cost of debt, cost of equity, and weighted average cost of capital) for the oil and gas industry. The research is conducted using panel data analysis from 2008-2017 for 41 oil and gas companies publicly listed on the Bursa Malaysia. ERM implementation data is collected from company annual reports, while the cost of capital data is obtained from Thomson Reuters DataStream. The results indicate that an increase in the level of ERM implementation reduces the cost of capital, which we argue is one mechanism …

Monte Carlo And Bootstrapping Carry Trade Simulations In Excel, Tom Arnold, C. Mitchell Conover, Joseph Farizo

Finance Faculty Publications

In a currency carry trade, an investor borrows money in a low interest rate currency and invests in a high interest rate currency. The trade is profitable if the future exchange rate does not adjust to the interest rate differential. After downloading exchange rate data, a Monte Carlo simulation of a carry trade is performed in Excel based on a normal distribution and the data’s mean and standard deviation. A bootstrapping carry trade simulation exercise is also generated by randomly selecting observations from the historical data. In contrast to the Monte Carlo simulation, the bootstrapping exercise preserves the skewness within …

Are Ceos To Blame For Corporate Failure? Evidence From Chapter 11 Filings, Rajib Chowdhury, John A. Doukas

Finance Faculty Publications

This study examines whether chief executive officers (CEOs) are to blame for corporate failures. Using alternative CEO managerial ability measures, we document that high-ability (low-ability) CEOs are less (more) likely to be associated with bankruptcy. We also find that reorganized firms run by high-ability incumbent CEOs experience improved financial performance after filing for Chapter 11. Firms that hire high-ability CEOs with bankruptcy experience also realize improved financial performance. Our evidence indicates that the likelihood of corporate bankruptcy is unrelated to the presence of high-ability managers and that bankruptcy does not adversely affect the post-bankruptcy careers of high-ability CEOs.

The Portfolio Advantages Of Sukuk: Dynamic Correlations Between Bonds And Sukuk, Abdullah Alfalah, Simon Stevenson, Eamonn D'Arcy

Finance Faculty Publications

The growth of the Islamic finance sector has been well-documented. One of the most booming sectors has been Sukuk. According to several past studies, non-Islamic investors' interest in Sukuk is due, at least in part, to the diversification benefits that Sukuk provides in the context of a fixed-income portfolio. This paper compares a pair between Sukuk and Bonds in the Malaysian market issued by the same issuer to have an unbiased comparison. Using unconditional correlation methodology provides an initial examination of the relationship between the matched pairs. In addition, this paper adopts the standard GARCH-DCC approach of Engle (2002). This …

The Way Digitalization Is Impacting International Financial Markets: Stock Price Synchronicity, Chen Chen, M. Mahdi Moeini Gharagozloo, Layla Darougar, Lei Shi

Finance Faculty Publications

This paper investigates whether and how the development level of a country's digital economy affects stock price synchronicity. The results indicate that countries with high levels of digital economy development exhibit low stock price synchronicity. Additionally, by decomposing stock price synchronicity into systematic and firm‐specific stock return variations, we find that systematic (firm‐specific) variations of stock returns decrease (increase) with the level of a country's digitalization. These findings shed light on the future trend of stock price synchronicity in financial markets around the world and support the information‐based interpretation of stock price synchronicity.

Using Excel To Simulate A Financial Calculator And Excel Tvm Formulas, Maura Alexander, Tom Arnold, Joseph Farizo

Finance Faculty Publications

Excel is used to build a simulation of the TI BAII-Plus financial calculator to illustrate the N, I/Y, PV, PMT, and FV inputs. Unlike other financial calculator simulators, this template also displays the corresponding Excel functions to aid in transitioning the student to using Excel for financial analysis.

Visual Timelines In Excel To Illustrate Tvm Calculations, Maura Alexander, Tom Arnold, Joseph Farizo

Finance Faculty Publications

Time value of money calculations are illustrated through developing a timeline with cash flow graphics in Excel. The cash flow graphics can be used in the live or virtual classroom and as a resource for students outside of the classroom. Further, the graphic is readily adjustable to different scenarios making it useful for multiple time value of money topics.

Visual Presentation Of Mirr And Mnpv Calculations, Tom Arnold, Joseph Farizo

Finance Faculty Publications

Project cash flows and modified cash flows are presented in an illustrative graphic within Excel for the live or virtual classroom. Further, the graphic computes and displays the relevant modified internal rate of return (MIRR) and modified net present value (MNPV), with associated formulas. The presentation allows for a discussion of the reinvestment assumption attributed to the internal rate of return (IRR) and the net present value (NPV) calculations.

Sentiment-Scaled Capm And Market Mispricing, John A. Doukas, Xiao Han

Finance Faculty Publications

This study explores the conditional version of the capital asset pricing model on sentiment to provide a behavioural intuition behind the value premium and market mispricing. We find betas (β) and the market risk premium to vary over time across different sentiment indices and portfolios. More importantly, the state β derived from this sentiment-scaled model provides a behavioural explanation of the value premium and a set of anomalies driven by mispricing. Different from the static β-return relation that gives a flat security market line, we document upward security market lines when plotting portfolio returns against their state βs and portfolios …

Chronic Disease Management: How It And Analytics Create Healthcare Value Through The Temporal Displacement Of Care, Steve M. Thompson, Johnathan Whitaker, Rajiv Kohli, Craig Jones

Finance Faculty Publications

The treatment of chronic diseases consumes 86% of U.S. healthcare costs. While healthcare organizations have traditionally focused on treating the complications of chronic diseases, advances in information technology (IT) and analytics can help clinicians and patients manage and slow the progression of chronic diseases to result in higher quality of life for patients and lower healthcare costs.

We build on prior research to introduce the notion of temporal displacement of care (TDC), in which IT and analytics create healthcare value by displacing the time at which providers and patients make interventions to improve healthcare outcomes and reduce costs. We propose …

How Ceo Wealth Affects The Riskiness Of A Firm, Sonik Mandal, Charlie Swartz, Sanjib Guha, Carl B. Mcgowan Jr.

Finance Faculty Publications

The objective of this paper is to analyze the relationship between the ownership level of managers and the risk averse behavior of the firm. We measure the ownership level of the managers by the ratio of their ownership of the company relative to their total wealth for a sample of 69 individuals from the Forbes 400 list of the wealthiest individuals in the world for the period from 2001-11 using an unbalanced panel data analysis. The dependent variable is the Altman Z-score of each firm and we further test these relationships using financial leverage. The independent variables are delta and …

When Fund Management Skill Is More Valuable?, Feng Dong, John A. Doukas

Finance Faculty Publications

Does fund management skill allow managers to identify mispriced securities more accurately and thereby make better portfolio choices resulting in superior fund performance when noise trading- a natural setting to detect skill - is more prevalent? We find skilled-fund managers with superior past performance to generate persistent excess risk-adjusted returns and experience significant capital inflows, especially in high sentiment times, high stock dispersion and economic expansion states when price signals are noisier. This pattern persists after we control for lucky bias, using the "false discovery rate" approach, which permits to disentangle manager "skill" from "luck".

The Impact Of Taxes On Foreign Direct Investments, James Mohs, Robert Wnek, Arthur Galloway

Finance Faculty Publications

The role of taxation in the area of foreign direct investment and economic growth has been the topic of many studies. With the effect of newly enacted corporate tax reform in the United States the impact will become the topic of many future studies. This paper will review the common factors used to correlate the impact of corporate taxation on Foreign Direct Investment decision making. The purpose of this research is to review and outline the sensitivity to taxation based on a multiplicity of economic factors that will include taxation on the return on investment and global profits. For the …

The Evolving Enforcement Of E.U. Competition Laws, Martin A. Goldberg, James Mohs

Finance Faculty Publications

Entrepreneurship and new business development has been increasingly moving to the forefront of media, public and governmental attention. Many countries have enacted competition laws to curb abuses and specifically prevent unfair competition. Unlike the Unites States, enforcement of competition law in Europe has historically been the domain of the government, generally under the of the European Commissioners for Competition, and does not rely on private actions of entrepreneurs and new business developers. By combining existing worldwide case law, legislation and governmental policies as a lens, this paper is intended to fill a gap in the existing literature relating to the …

Random Walks And Market Efficiency: Evidence From Real Estate Investment Trusts (Reit) Subsectors, Fahad Almudhaf, Andrew J. Hansz

Finance Faculty Publications

This paper investigates the random walk behavior of real estate investment trust (REIT) subsectors using monthly return data from January 1994 to July 2015. Using variance ratio tests, we examine subsectors of lodging/ resorts and self-storage and find that they do not follow a random walk, contradicting the weak-form efficient market hypothesis. Nonparametric runs tests help us find that office, industrial, mixed, free standing, shopping centers, apartments, manufactured homes, and timberland subsectors are weak-form efficient. The evidence in this study supports the idea that some subsectors are more informationally efficient than other subsectors. Copyright © 2018 The Author(s).

Does The Market Believe White Knights And Hostile Bidders Are Acting In Their Shareholders' Interest?, John M. Griffith, Mohammad Najand, Jiancheng Shen

Finance Faculty Publications

This study examines why white knights suffer significant losses while their rival hostile bidders experience significant abnormal gains. We address two research questions: 1) Does the market believe that white knights and hostile bidders are acting in their shareholders' interest? 2) Does Tobin's q explain why white knights suffer significant losses and hostile bidders experience significant gains upon the announcement of their bids? The results show that hostile bidders are value-maximizing investors and white knights are not acting in their shareholders' interest. Instead, white knights suffered significant reductions in value and historically have not maximized the wealth of investors

Financial Reporting And The Accounting Expectations Gap, James Mohs

Finance Faculty Publications

The overall goal of financial reporting is to provide high quality financial information regarding reporting entities that is useful for informed decision making. Considering most organizations have multiple groups of stakeholders which often have differing and competing informational needs, as well as expectations and desired outcomes, the accounting expectations gap has become a topic of current debate in many business circles. Historically, the accounting expectations gap has centered around the role of the auditor and audit responsibility. The financial accounting expectations gap encompasses what the preparers of the statements and auditors believe they should contain and includes what stakeholders believe …

Base Erosion And Profit Shifting: Options, Opportunities And Alternatives, James Mohs, Martin Goldberg, David Palacio Buitrago

Finance Faculty Publications

Base erosion and profit shifting is generally defined as tax strategies that serve to exploit gaps or inconsistencies in global tax systems that allow an enterprise to shift profits to lower tax jurisdictions. This can be accomplished by either shifting income to lower tax jurisdiction or shifting deductible expenses to higher tax jurisdictions. Historically, these shifting strategies have been handled on a country by country basis with no centralized framework. In 2015 the Organization of Economic Cooperation and Development proposed modifications through its Base Erosion and Profit Shifting project that if adopted by the member countries, would reverse the adverse …

News And Social Media Emotions In The Commodity Market, Jiancheng Shen, Mohammad Najand, Feng Dong, Wu He

Finance Faculty Publications

Purpose--Emotion plays a significant role in both institutional and individual investors' decision-making process. Emotions affect the perception of risk and the assessment of monetary value. However, there is a lack of empirical evidence available that addresses how investors' emotions affect commodity market returns. The purpose of this paper is to investigate whether media-based emotions can be used to predict future commodity returns.

Design/methodology/approach--The authors examine the short-term predictive power of media-based emotion indices on the following five days' commodity returns. The research adopts a proprietary data set of commodity-specific market emotions, which is computed based on a comprehensive …

Risk Management And Capital Adequacy In Turkish Participation And Conventional Banks: A Comparative Stress Testing Analysis, M.Kabir Hassan, Omer Unsal, Hikmet Emre Tamer

Finance Faculty Publications

In this study, we investigate changes in banks' capital adequacy ratio (CAR) under different stress scenarios and examine the results by comparing conventional banks to participation banks in Turkey. Our results report that the capital adequacy ratio of the banks declines substantially given the stress scenarios. We find that participation banks in Turkey suffer more in declined capital adequacy ratio compared to conventional banks. Our findings reveal that participation banks in Turkey are more sensitive to sudden changes in exchange rates and increased non-performing loans. However, this sensitivity is in regards to capital adequacy, not profit. Overall, our study shows …

Idiosyncratic Risk And Earnings Noncommonality, Kenneth Yung, Qian Sun, Hamid Rahman

Finance Faculty Publications

The seminal Campbell et al. (2001) paper showing that idiosyncratic risk has increased considerably in recent years has spawned a large number of articles to explain the phenomenon. In this paper, we propose growing earnings noncommonality as a possible source of the increasing idiosyncratic volatility. The empirical results of this research validate this proposition. Our conclusions stand the test of several robustness checks which show that market power and innovativeness previously considered in literature as sources of increased idiosyncratic volatility are not significant in the presence of earnings noncommonality. The findings of this research will be useful for analysts and …

One-Step Bond Pricing, Tom Arnold

Finance Faculty Publications

This paper re-works the traditional formula for pricing a bond with a present value annuity and a single discounted cash flow into a "one-step' bond pricing formula. The new derivation allows for a clear presentation of the relationship between a bond's coupon yield and its yield to maturity and a quick means for pricing a bond.

Global Financial Model For The Value Chain, Robert Rainish, Pawel Mensz, James Mohs

Finance Faculty Publications

The objective of this paper is to describe how a valuation decision model for a firm in a multi-country environment can be used to determine the optimal value chain. The paper extends the initial work of Rainish and Mensz (2012). The paper examines how a global firm can optimize its value chain and how that chain will be affected when the value of various key variables change. Variables were selected (e.g. labor costs, transportation costs and transfer price tax rates) from recent studies by consulting firms Deloitte (2013) and the Boston Consulting Group (2014). The data used in the model …

Can Strategic Risk Management Contribute To Enterprise Risk Management? A Strategic Management Perspective, Phil Bromiley, Devaki Rau, Michael K. Mcshane

Finance Faculty Publications

Within the discipline of enterprise risk management (ERM), strategic risk management (SRM) has become a subject of increasing interest to practitioners and academics. To our knowledge, the term “strategic risk management” first appeared in the management literature in 1985 and 1986 (Jammine, 1985; Figenbaum & Thomas, 1986) and in the academic finance literature in 1990 (Rawls and Smithson, 1990), although early usage of the term did not clearly relate to later conceptions. The phrase has been in use even longer than ERM (Bromiley, McShane, Nair, and Rustambekov, 2014). Even with this longevity, the meaning of the term remains unclear, with …

How Large Are The Benefits Of Emerging Market Equities?, C. Mitchell Conover, Gerald R. Jensen, Robert R. Johnson

Finance Faculty Publications

We perform a comprehensive evaluation of the benefits of emerging market equities by extending previous research in four fundamental ways. The contribution of this study is that it 1) evaluates a more complete sample; 2) examines performance measures that account for asymmetric return distributions; 3) separates emerging markets by region; and 4) considers the influence that the market environment has on the benefits of emerging market investments. Our results suggest that previous research has understated the benefits associated with investing in emerging markets. We find that broad emerging market indices have relatively low downside risk, which results in Sortino ratios …