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Managerial Finance in the Corporate Economy Managerial finance in the corporate economy In most countries the economic structure and financial landscape are dominated by corporations. A critical examination of the various facets of the corporate economy is thus vitally important. In Managerial Finance in the Corporate Economy the authors use new theoretical apparatus and empirical evaluations to present such a study. The book, divided into five sections, brings together new research on the major issues. These include mutual and pension funds and portfolio diversification; market volatility, credit availability, tax structure and the dividend reinvestment plan; financial institutions; corporate behavior in the context of the international economy. Managerial Finance in the Corporate Economy presents a comprehensive analysis of corporate culture within the international economy. Dilip Ghosh is Professor of Finance at Suffolk University, Massachusetts. He is also editor of The International Journal of Finance. Shahriar Khaksari is Professor of Finance at Suffolk University, Massachusetts, and Director of the Master of Science Program. Managerial finance in the corporate economy Edited by Dilip K.Ghosh and Shahriar Khaksari London and New York First published 1995 by Routledge 11 New Fetter Lane, London EC4P 4EE This edition published in the Taylor & Francis e-Library, 2005. “To purchase your own copy of this or any of Taylor & Francis or Routledge’s collection of thousands of eBooks please go to www.eBookstore.tandf.co.uk.” Simultaneously published in the USA and Canada by Routledge 29 West 35th Street, New York, NY 10001 © 1995 Selection & editorial material Dilip K.Ghosh and Shahriar Khaksari. Individual chapters to their authors. All rights reserved. No part of this book may be reprinted or reproduced or utilized in any form or by any electronic, mechanical, or other means, now known or hereafter invented, including photocopying and recording, or in any information storage or retrieval system, without permission in writing from the publishers. British Library Cataloguing in Publication Data A catalogue record for this book is available from the British Library Library of Congress Cataloging in Publication Data Managerial finance in the corporate economy/edited by Dilip K.Ghosh and Shahriar Khaksari. p. cm. Includes biliographical references and index. 1. Corporations—Finance. 2. Investments, Foreign. 3. Financial institutions. 4. Securities. 5. Pension trusts. 6. Mutual funds. I. Ghosh, Dilip K. (Dilip Kumar), 1942–. II. Khaksari, Shahriar, 1949–. HG4026.M346 1994 94–13590 658.15–dc20 CIP ISBN 0-203-98425-0 Master e-book ISBN ISBN 0-415-11111-0 (Print Edition) Contents List of figures vii List of tables viii List of contributors xi Preface xiv Part I Introduction Managerial finance in the corporate economy 2 Dilip K.Ghosh and Shahriar Khaksari Part II Mutual funds, pension funds and portfolio management 1 The long-run gains from international equity 10 diversification: Australian evidence from cointegration tests D.E.Allen and G.MacDonald 2 Shareholder portfolio decisions in spinoffs 27 Russell B.Gregory-Allen and Wallace N.Davidson III 3 A one-period model for the asset liability matching problem 59 of pension funds Paul C.van Aalst and C.Guus E.Boender 4 An empirical study of the correlation between mutual 75 funds’ selectivity and timing performance Zakri Y.Bello Part III Credit, security volatility and cyclicality 5 Finding the factors associated with stock price volatility 104 Mohamed Ariff, K.Kuhan, A.M.Nassir and Shamsher, M. 6 The short-term return structure of rationally (?) priced 119 cyclical securities John C.Woods 7 Black Monday: What burst the bubble? 126 v A.M.Parhizgari, Krishnan Dandapani and A.J.Prakash 8 Australian imputation tax system and dividend 143 reinvestment plans Keith K.W.Chan, Damien W.McColough and Michael T. Skully 9 The credit availability theory: A non-monetarist test 162 Paul Kutaslovic and Conway L.Lackman Part IV Financial institutions 10 Establishing an efficient private-federal partnership in 179 deposit insurance Edward J.Kane 11 Bank risk-taking, risk-hedging and the effects of the risk- 199 based bank capital regulation Hua Yu 12 Financial Institutions Reform, Recovery and Enforcement 211 Act 1989 (FIRREA) and the management of thrifts in the 1990s Ramakrishnan S.Koundinya 13 Bank failure and capital adequacy regulation in commercial 220 banks Jiachu Song and William Rayburn 14 Capital regulation and bank portfolio adjustment 232 Tseng-Chuan Tseng and Soushan WuMei-Ying Liu Part V International investments and corporate finance 15 A general equilibrium model of international asset pricing 248 Tribhuvan N.Puri and George C.Philippatos 16 The relative valuation of Japanese and US stock markets 267 Jongmoo Jay Choi 17 Cointegration and the relationship between inflation and 282 stock prices in the emerging markets of Latin America: Argentina, Brazil, Chile, Mexico Mitchell Ratner and Belmont F.Haydel 18 From banca to bolsa: corporate governance and equity 291 financing in Latin America Klaus P.Fischer, Edgar Ortiz and A.P.Palasvirta 19 Patterns of corporate leverage in selected industrialized 327 countries vi Rama Seth 20 External financial pressures on UK companies, 1978–91: an 341 examination of the impact of interest rates in two recessions A.A.Lonie, C.D.Sinclair, D.M.Power and M. Michaelson 21 Financial accounting statements and foreign exchange risk 372 management Krishna Moorti Kasibhatla, John Malindretos and Luis E. Rivera- Solis Index 389 Figures 3.1 Average liabilities of original participants (in millions) 67 3.2 Coefficient of variation of original participants 68 4.1 Alternative security characteristic lines 77 4.2 TM and modified TM models 77 6.1 Security prices and cyclical dividends 120 6.2 Security prices under differing valuation scenarios 123 6.3 Realized short-term trading returns for various horizons with F&F 124 valuation 7.1 Demand and supply for stocks 130 7.2 Kinked demand and supply for stocks 140 10.1 Insured amounts 191 14.1 Global (unconstrained) versus constrained efficient frontier 236 14.2 Bankruptcy probability, bank portfolio and capital regulation 237 18.1 Corporate governance, competitive goods markets 301 18.2 Corporate governance, controlled goods markets 305 18.3 Value of equity 310 19.1 Relationship between firms’ leverage and the earnings sensitivity to 332 output in selected industrialized countries 19.2 Relationship between firms’ interest burden and the earnings 332 sensitivity to output in selected industrialized countries 20.1 London clearing banks base rate 342 20.2 Interest to operating profit ratio, industry data 351 20.3 Index of company liquidations 353 20.4 Interest to operating profit ratio, company data 354 20.5 Percentage change in dividend, company data 355 20.6 Percentage cutting dividend, company data 356 20.7 Capital expenditure, company data 357 Tables 1.1 ADF tests based on equations (1.2) and (1.3) 14 1.2 Φ2 and Φ3 tests based on equation (1.3) 16 1.3 Johansen estimation results for pairwise portfolios 19 1.4 Unit root tests on residuals from “cointegrating regressions” 22 1.5 Johansen cointegration test results for three sample portfolios 23 2.1 Number of significant beta shifts at the 5 percent level and the z 32 score of the proportions 2.2 z scores for differences between proportions of beta shifts for 33 sample control 2.3 Weights and returns for portfolio group during the post-spinoff 35 period, with alternative weights found holding variance constant 3.1 Interest rate, wage growth and inflation over the period 1960–91 66 4.1 Average portfolio compositions, 1986–90 79 4.2 Average F statistics and R2 for regression quality 80 4.3 Average selection and timing performance measures 81 4.4 Pearson correlation coefficients between timing performance and 83 selectivity 5.1 Share price volatility and fundamental variables in Japan: 1959–89 110 (general model) 5.2 Share price volatility and fundamental variables in Japan: 1959–89 110 (simpler model) 5.3 Descriptive statistics of fundamental variables in Singapore: 1975– 111 90 (variable×100) 5.4 Share price volatility and fundamental variables in Singapore: 1975– 111 89 (general model) 5.5 Share price volatility and fundamental variables in Singapore: 1975– 112 90 (simpler model) 5.6 Descriptive statistics of fundamental variables in Kuala Lumpur: 113 1975–90 (variable×100) 5.7 Share price volatility and fundamental variables in Kuala Lumpur: 113 1975–89 (general model) 5.8 Share price volatility and fundamental variables in Kuala Lumpur: 114 1975–90 (simpler model) 6.1 Values over the 20-period cycle for dividends, required returns and 121 aggregate present value 7.1 Preliminary proxies for market mechanism factors 132 ix 7.2 OLS estimates of stock prices 134 7.3 Estimates of stock prices under alternative specification 135 7.4 A subset of measures of the OV variables 139 8.1 Market model results of DRP announcements: pre-imputation 152 8.2 Market-adjusted returns model results of DRP announcements: pre- 152 imputation 8.3 Z statistic for excess returns over time interval 153 8.4 Market model results of DRP announcements: post-imputation 154 8.5 Market-adjusted returns model results of DRP announcements: post- 155 imputation 10.1 Market-mimicking “prompt corrective action” injunctions for 184 regulators in the Federal Deposit Insurance Corporation Improvement Act of 1991 13.1 Summary of the new risk-based capital standards 221 13.2 Proposed definition of capital 222 13.3 Ratio description 225 13.4 Characteristics
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