Business Commons^™

Corporate Financial Strategy, Arindam Bandopadhyaya, Kristen Callahan, Yong-Chul Shin

Financial Services Forum Publications

No abstract provided.

Dice Or No Dice: The Casino Debate In Massachusetts, College Of Management, University Of Massachusetts Boston

Financial Services Forum Publications

The debate on casinos has intensified over the last few years. Governor Deval Patrick tried to get approval for three casinos back in September 2008, which was rejected by the then Speaker Salvatore Dimasi. However, two years ago, the Governor stood in the way of casinos by vetoing the bill passed by the House and the Senate.

With the economy still recovering from the aftermath of the “Great Recession”, there are talks about job creation and consumer spending all over Massachusetts. Currently, the three most critical players in the government of Massachusetts - Governor Deval Patrick, House Speaker Robert DeLeo, …

Who Knew: Financial Crises And Investor Sentiment, Arindam Bandopadhyaya, Derek Truong

Financial Services Forum Publications

It has been argued and empirically documented that with a looming financial crisis, the risk-reward trade-off of market participant changes, resulting in a decrease in market sentiment. Traders flock towards less risky securities which drives the returns of such securities higher. In this paper, based on a methodology developed by Persaud [1996], by correlating the riskiness and returns of securities in various international equity markets, an index to measure the sentiment of market participants is constructed. We use the breaking point of the Lehman Brothers bankruptcy as the onset of the financial crisis in 2008.

We track the market sentiment …

Misi At A Glimpse: January 1 To December 31, 2010, College Of Management, University Of Massachusetts Boston

Financial Services Forum Publications

According to the Index, investors were generally cautious in 2010 (approximately half the trading days); however, investor sentiment ranged from highly risk-averse to highly risk seeking, with scores distributed almost evenly across all the categories. Investor sentiment had peaked in February, reached a low in the end of May. It was on an upward trajectory towards the end of the year, and was almost near its February high.

Mass Business Report, College Of Management, University Of Massachusetts Boston

Financial Services Forum Publications

Welcome to the College of Management, UMass Boston, Financial Services Forum’s Spring 2010 report on the Massachusetts economy. The spotlight of this report is the Finance, Insurance and Real Estate (FIRE) sector in Massachusetts.

Managing Exchange Rates, Arindam Bandopadhyaya, Giorgio Gotti, Qian Lu

Financial Services Forum Publications

The collapse of the fixed exchange rate system established under the Bretton Woods Agreement ushered in fluctuating exchange rate regimes. Although extreme volatility is managed by monetary authorities, fluctuations in exchange rates present unique challenges to the manager of a multinational corporation (MNC). This chapter reviews various types of exchange rate regimes and discusses the types of risk an MNC faces due to exchange rate fluctuations. Special attention is paid to how these risks are measured and ways in which they are hedged using available financial market instruments. The chapter also discusses exchange rate forecasting models that are frequently used.

Mass Business Report, College Of Management, University Of Massachusetts Boston

Financial Services Forum Publications

Welcome to the College of Management, UMASS – Boston, Financial Services Forum’s Fall 2009 report on the Massachusetts economy. The Forum is a source of current information and commentary about critical issues facing the industries in Boston and at the national level, as well as the health of financial services in general.

Discontinued Sec Required Disclosures: The Value Of Repairs And Maintenance Expenditures Using A Variance Decomposition Approach, Bruce K. Behn, Richard Riley, Giorgio Gotti, Richard C. Brooks

Financial Services Forum Publications

On December 13, 1994, the Securities and Exchange Commission (SEC) eliminated certain schedules that included repairs and maintenance (R&M) disclosures previously required in annual reports and registration statements filed with the SEC. The purpose of this research is to determine if market participants utilized R&M information when making investment decisions. Resulting from a variance decomposition approach, the findings indicate that market participants did use R&M disclosures in their investment decisions. Thus, as a possible policy implication of this research, the SEC may want to reconsider the decision to eliminate the required R&M expenditure disclosures.

Conditional Conservatism In Accounting: New Measure And Tests Of Determinants, Giorgio Gotti

Financial Services Forum Publications

Following Basu’s (1995, 1997) seminal work, accounting literature adopted the Basu coefficient to measure conditional conservatism (among others, Ball et al. 2003; Ball et al. 2000; Ball et al. 2005; Ball and Shivakumar 2005; Lobo and Zhou 2006; Chandra et al. 2004). However, Basu’s choice of proxy for measuring the arrival of good/bad news, stock returns, introduces inaccuracy in the measure of conditional conservatism (Dietrich et al. 2007; Roychowdhury and Watts 2007; Givoly et al. 2007).

To address the problem, I introduce a new measure of conditional conservatism, which results from a Least Absolute Deviation (LAD) piecewise regression and adopts …

An Analysis Of The Levels And Patterns Of Shareholder Rights: 1990 - 2006, Lal Chugh, Joseph W. Meador

Financial Services Forum Publications

Greater attention is being paid to the issue of shareholder rights and corporate governance, particularly since the scandals of 1990s and 2000s and the stock market decline of the new millennium. This study advances the concept of an optimum level of shareholder rights in corporate governance and analyzes the long-run trends in shareholder rights versus management entrenchment, using the G-Index. This study finds that the level of shareholder rights generally has not increased, despite the legislative and regulatory reforms of the 2000s and contrary to the general perception. Rather, shareholder rights have declined amongst the large, S&P 500 companies. The …

The Effect Of Corporate Governance Regulatory Intervention On Firm Decisions And Market Reactions, The Italian Case, Giorgio Gotti, Stacy R. Wade

Financial Services Forum Publications

This paper investigates whether Italian companies that cross-list in the United States between 1993 and 2005 show (i) a change in their internal policies as anticipated by the bonding hypothesis, (ii) an increase in market value, or (iii) an increase in the access to capital funds. We use the unique environment created by the 1998 Draghi reform which significantly improved the protection of Italian listed companies’ minority shareholders and we further examine the impact of legislated changes in corporate governance in Italy on the decision of Italian companies to cross-list in the United States.

Our results indicate that following the …

The State Of New England: Economic Slowdown And Recovery After The Dotcom Bust, Arindam Bandopadhyaya, College Of Management, University Of Massachusetts Boston

Financial Services Forum Publications

What follows is an analysis of the key macroeconomic trends in the six New England states. Using data publicly available in 2007, we examine trends in GDP growth, population, personal income and unemployment rate in each state. We provide a breakdown of each state by GDP category and provide an overall weighting by super sectors.

Adr Characteristics And Performance In International And Global Indexes, Arindam Bandopadhyaya, Lal Chugh, James L. Grant

Financial Services Forum Publications

This study looks at the characteristics and performance of ADRs in international and global indexes. We find that ADRs in EAFE are tilted toward three common factors: giant cap, high dividend yield, and U.K. stocks. In terms of risk-adjusted performance, we find that ADRs provide inefficient diversification for US investors, as tradeoffs of return and risk are better with portfolio combinations of the S&P500 and the S&P Global 700, as compared with portfolio combinations of the S&P500 and an ADR breakout of the Global 700. Our findings on ADR characteristics are consistent with prior research, while our performance findings are …

Evidence Of The Lack Of Effectiveness Of Low-Income Savings Incentives, Julia M. Camp, Teresa Stephenson, Stacy R. Wade

Financial Services Forum Publications

In view of the government’s propensity to develop programs to encourage savings, we examine a group of individuals to whom these programs are targeted: low- to moderate-income taxpayers. We show that saving for retirement is not a priority in the lives of these taxpayers. The low priority given to saving is often due to immediate necessary costs such as housing, food, and transportation. However, our study shows that even nonessential items and activities such as cable and internet services or travel are often considered more important than saving. We also show that most of the participants were not even aware …

Active Investing In Strategic Acquirers Using An Eva Style Analysis, James L. Grant, Emery A. Trahan

Financial Services Forum Publications

Employing an EVA style classification, we examine whether active investors (such as hedge funds and other long-short investors) can develop an alpha-generating strategy by classifying acquisitions based on the pre-acquisition EVA style quadrant of the acquirers. Over a recent ten-year period, the announcement evidence suggests that acquisitions across all style quadrants generate negative risk-adjusted returns: wherein the magnitude of economic gains from shorting acquirers is determined by EVA style characteristics; namely wealth creators or wealth destroyers. Moreover, we find that the potential for longing gains on targets of acquiring firms is also captured by EVA style.

Should Massachusetts Regionalize Public Health?, Eric W. Hayden

Financial Services Forum Publications

Amidst rising global concerns about bioterrorism and pandemic flu preparedness, the delivery capacity and effectiveness of public health service assumes increased importance and relevance. In the United States, the lack of a centralized, national public health system has meant that “public health” is the primary responsibility of state and local governments. Many states have established various types of intrastate regional structures to deliver the range of on-going, occasional, and/or episodic services that characterize the world of public health. However, Massachusetts is not among them. Despite its global reputation as a pre-eminent medical center, the state of Massachusetts has a highly …

In Search Of Certain Earnings: Applying The Ace Portfolio Concept To Sectors, James L. Grant, Chris Rowberry

Financial Services Forum Publications

Sector composites that have highly stable earnings streams allow the portfolio manager or analyst to derive “earnings certain” sector risk premiums. ACE (Approximately Certain Earnings) Sectors represent such baskets. Since sector pricing is influenced by earnings variability, obtaining risk premiums from standard sectors is contaminated. With knowledge of an EPS Stability measure, a composite engine, and the proprietary G-Model (or like DCF framework), we can discover companies within each sector that exhibit highly certain earnings. In practice, ACE Sectors can be used to derive current/historical “earnings certain” sector risk premiums, enhance sector rotation strategies, obtain sector implied growth rates, make …

Long-Run Risk-Adjusted Performance Of Ipos In The Life Insurance Industry, Lal Chugh, Joseph W. Meador

Financial Services Forum Publications

The pace of demutualization among major U.S. life insurance companies increased sharply after the mid-1990s. Five of the fifteen largest U.S. life insurers demutualized between 1997 and 2001, and the largest, Metropolitan Life Insurance Company, demutualized in 2000. Ten other major life insurance companies, with total assets in 2003 of $775 billion, demutualized over the same time period. The regulatory and competitive environment in the life insurance industry has changed dramatically in recent years. These changes include: (1) the fact that consumers have shown declining interest in the traditional life insurance products of risk bearing and transfer, while revenues from …

Demutualization In The Life Insurance Industry: A Study Of Effectiveness, Lal Chugh, Joseph W. Meador

Financial Services Forum Publications

The regulatory and competitive environment in the life insurance industry has changed dramatically in recent years. We investigate the effectiveness of demutualization as a strategic response to the challenges posed by these sweeping changes. The study finds that the demutualized firms generally have implemented a successful strategy based on higher growth, greater profitability, cost effectiveness and shifts in product mix. Also, we find that management takes greater risk in the investment portfolio. In addition, demutualization unlocks value lying dormant in the mutuals’ surplus. The paper concludes that the demutualized firms have generated substantial excess returns over the several market indexes, …

A Primer On Eva For Healthcare Providers, James L. Grant

Financial Services Forum Publications

The concept of economic profit (EVA) has proved successful in the field of corporate finance since its adoption by several U.S. and International companies over the past 25 years. Unlike accounting earnings, EVA is a measure of a company’s true earnings because it fully “accounts” for the costs of all forms of financing, including debt and equity. In the EVA view, a company is not truly profitable unless it earns a return on capital that bests the opportunity cost of capital. That being said, the question that we address here is how to measure the economic profit of providers in …

Measures Of Investor Sentiment: Who Wins The Horse Race?, Arindam Bandopadhyaya

Financial Services Forum Publications

Traditional research on asset pricing has focused on firm-specific and economywide factors that affect asset prices. Recently, the finance literature has turned to noneconomic factors such as investor sentiment as possible determinants of asset prices. Some researchers (e.g., Eichengreen and Mody, 1998) suggest that a change in one set of asset prices may change investor sentiment, thus triggering changes in a seemingly unrelated set of asset prices, especially in the short run, giving rise to pure contagion. Fisher and Statman (2000) and Baker and Wurgler (2006) have also recognized that investor sentiment may be an important component of the market …

A Survey Of Demographics And Performance In The Hedge Fund Industry, Arindam Bandopadhyaya, James L. Grant

Financial Services Forum Publications

We investigate hedge fund demographics using data from the Alternative Asset Center (AAC) and then hedge fund performance over the twelve years since inception of the Credit Suisse/Tremont Hedge Fund Indices (HFI, 1994-2005). We find that hedge funds are largely domiciled “offshore” while hedge-fund managers are located primarily in the United States, particularly New York, California, Illinois, Connecticut and Florida. We find that the annualized performance of hedge funds as an “asset class” is about the same as that of U.S. equities (S&P 500). That being said, the real benefit of hedge funds lies in risk management as the volatility …

Estimating The Required Return In A World Of Heightened Uncertainty: Emphasizing The Equity Risk Premium, James L. Grant, James A. Albate, Chris Rowberry

Financial Services Forum Publications

Heightened uncertainty over the past five years--due to the bursting of the NASDAQ bubble, the recession of 2001, the September 11th attacks, accounting scandals, and the oil shocks of 2005--has brought new challenges for securities analysts and portfolio managers. This observation is particularly relevant for fundamental equity managers using price relative and/or discounted cash flow (DCF) models. While correctly worrying about values of cash flow input (dividends, free cash flow, economic earnings) to DCF models, portfolio managers must be especially aware of risk factors that impact the required return or discount rate, and relatedly, market valuation multiples. This discount rate …

Tactical Asset Allocation And Presidential Elections, James L. Grant, Emery A. Trahan

Financial Services Forum Publications

We analyze tactical asset allocation decisions around presidential elections using traditional methodology and then in the context of an efficient frontier analysis rather than the traditional stock-only or bond-only allocations in prior literature. To our knowledge, this is the first paper in the literature that addresses asset returns around presidential elections in a mean-variance efficient frontier framework. We find that the efficient frontier is sensitive to presidential time periods, with Democrats providing the best risk-reward opportunities over the long term, while Republicans provide better opportunities over the past quarter century.

The Sarbanes-Oxley Act Of 2002 And Its Effects On American Business, Lara Bergen

Financial Services Forum Publications

In the wake of the 2001-2002 Arthur Andersen accounting scandal and collapse of Enron and WorldCom, the government, the investors and the American public demanded corporate reforms to prevent similar future occurrences. Viewed to be largely a result of failed or poor governance, insufficient disclosure practices, and a lack of satisfactory internal controls, in 2002 Congress passed the Sarbanes-Oxley Act seeking to set standards and guarantee the accuracy of financial reports.

The Sarbanes-Oxley Act (known as SARBOX or SOX) sought to address these concerns through making executives responsible for company accounting statements, redefining the relationships between corporations and their auditors, …

The Effect Of The Form Of Tax Incentives On Individuals’ Savings Decisions, Julia Brennan, David S. Hulse, Cynthia Vines

Financial Services Forum Publications

Congress and the media have both expressed concerns about Americans’ low savings rates. We address these concerns by investigating the extent to which the form of an investment’s tax preference affects individuals’ willingness to choose a tax-preferred vehicle over a less restrictive, but non-tax-preferred, investment. Specifically, we tested the extent to which subjects chose a traditional savings plan versus an investment resembling either a traditional IRA, Roth IRA, or government matching program. We find that subjects are not as sensitive to the form of the tax preference as they are to restrictions on their ability to withdraw funds. This suggests …

Non-Profit Hospitals Face Structural As Well As Financial Challenges: Lessons From Massachusetts, Eric W. Hayden

Financial Services Forum Publications

Like most non-profit hospitals, those of Massachusetts are facing serious financial challenges. While the immediate issue is the shortfall between revenues and expenses, the paper finds that their real problems are structural, evidenced by at least three systemic impediments -uncompensated care, over-utilization of teaching hospitals, and an increasingly unattractive environment for the practice of medicine. Other states whose non-profit hospitals face persistent financial difficulties may find it useful to consider whether structural impediments of the type facing Massachusetts undermine the operating performance of their own institutions.

Measuring Investor Sentiment In Equity Markets, Arindam Bandopadhyaya, Anne Leah Jones

Financial Services Forum Publications

Recently, investor sentiment has become the focus of many studies on asset pricing. Research has demonstrated that changes in investor sentiment may trigger changes in asset prices, and that investor sentiment may be an important component of the market pricing process. Some authors suggest that shifts in investor sentiment may in some instances better explain short-term movement in asset prices than any other set of fundamental factors. In this paper we develop an Equity Market Sentiment Index from publicly available data, and we then demonstrate how this measure can be used in a stock market setting by studying the price …

Bond And Stock Market Linkages: The Case Of Mexico And Brazil, Arindam Bandopadhyaya

Financial Services Forum Publications

This paper examines the Brady bond market of two largest Latin American economies, Mexico and Brazil. Results indicate that stripped yield of each market in the very near future is determined primarily by the past yields in the respective markets. However, over a longer-term horizon the interrelationships between the bond markets and the stock markets of the two countries become important. Future yields in the Mexican bond market are affected by the current returns in the Mexican stock market, and to a certain extent the yields in the Brazilian bond market. A significant portion of the future variation in the …

U. S. Competitiveness In The Global Financial Services Industry, Lawrence G. Franko

Financial Services Forum Publications

The World Trade Center Towers: they were the headquarters of Morgan Stanley, one of the world’s leading investment banks, and of Cantor Fitzgerald, the world’s leading trader of U.S. government bonds. They were also the work location of 9,000 Merrill Lynch employees. The Citicorp Building. The Prudential Tower. The New York Stock Exchange. These actual and recently uncovered potential terrorist targets in the United States are financial services companies and organizations. Add to them the threats to the World Bank and the International Monetary Fund, and one could conclude that seven out of ten terrorists prefer financial services.

This focus …