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This paper evaluates an editorial and seven invaluable and interesting review papers for the Journal of Risk and Financial Management (JRFM). The topics covered include the rising complexity of bank regulatory capital requirements from global guidelines to their United States (US) implementation, connections among big data, computational science, economics, finance, marketing, management and psychology, factors, outcome, and the solutions of supply chain finance, with a review and future directions, time-varying price-volume relationship, adaptive market efficiency, and a survey of the empirical literature, improved covariance matrix estimation for portfolio risk measurement, stock investment and excess returns, with a critical review in the light of the efficient market hypothesis, and a cross section analysis of country equity returns, and a review of the empirical literature. [ABSTRACT FROM AUTHOR]

We present a dynamic capabilities framework to explain the effective strategic management of the political environment. We argue that the effectiveness of political strategies will be a function of firms' dynamic political management capabilities and propose four firm-level strategies--proactive, defensive, anticipatory, and reactive--for managing the political environment effectively. We develop propositions to explain how particular dynamic capabilities are associated with the effectiveness of alternative political strategies and conclude with suggestions for future research into effective strategic political management. [ABSTRACT FROM AUTHOR]

The paper argues that the market significantly overvalues firms with severely underfunded pension plans. These companies earn lower stock returns than firms with healthier pension plans for at least 5 years after the first emergence of the underfunding. The low returns are not explained by risk, price momentum, earnings momentum, or accruals. Further, the evidence suggests that investors do not anticipate the impact of the pension liability on future earnings, and they are surprised when the negative implications of underfunding ultimately materialize. Finally, underfunded firms have poor operating performance, and they earn low returns, although they are value companies. [ABSTRACT FROM AUTHOR]

I examine the concern that unconstrained real options can lead to escalation of commitment and identify contexts in which escalation of commitment is likely. I argue that these situations fall primarily outside the realm of unregulated for-profit organizations and also that the predictions of agency and attribution theories counter the predictions of the escalation of commitment framework. Finally, I assert that optimality requires flexibility in the timing of the exercise of real options when returns on investment are volatile. [ABSTRACT FROM AUTHOR]

We develop an analytical model to address the question of optimal deposit insurance policy and to examine the impact of deregulation on depositors' welfare and the soundness of the insurance system. We find that the optimal level of regulation depends critically on the functional relationship between risk and return. We show that in general deregulation of bank activities and/or of deposit rate ceilings will involve tradeoff between depositors' welfare and the soundness of the insurance system. Our analysis also indicates that risk-sensitive premium and capital requirement schedules may not be efficient in managing the risk of banks. [ABSTRACT FROM AUTHOR]

Sell-off activities arise when a firm sells part of its assets (e.g., a segment, a division, etc.) but continues to exist in essentially the same form. This study investigates the effect of voluntary sell-offs on stock returns. From a sample of over 1000 sell-off events (first public announcements), the evidence shows that both sellers and buyers earn significant positive excess returns from these transactions. The excess returns earned by buyers are smaller than those earned by sellers. There is also evidence that sell-off announcements are preceded by a period of significant negative returns for the sellers which suggests that the sellers, on average, performed poorly prior to their sell-off activities. [ABSTRACT FROM AUTHOR]

This study provides further evidence on the rates of return realized by the shareholders of multinational firms relative to those of purely domestic firms. The results indicate that the risk-adjusted returns realized by the shareholders are identical across the two groups except where the MNC operates in competitive foreign markets. In that case, MNC shareholders experience negative abnormal returns. The study also provides further evidence on the risk-reduction effect of international diversification. The results fail to support the hypothesis that the beta is a convex function of the degree of international involvement. Finally, the paper provides some preliminary evidence on the effect of corporate international diversification on shareholders' returns. It is found that abnormal returns rise by some 18 percent during the 14 months preceding the initial foreign diversification. [ABSTRACT FROM AUTHOR]

It has long been suggested that the financial structure of a firm communicates information about its returns, and in Ross [1977] some models were developed in which, at an equilibrium, managers would use finance to transmit and validate information about their firms. While these models have the virtue of describing a positive role for finance they are missing some important elements. Perhaps their principal limitation is that they assign no significant function to the manager beyond that of choosing the financial structure. This is in contrast to the neoclassical view of the manager as being concerned solely with activity choice, rather than with irrelevant financial matters. One of the purposes of this paper is to explore the relationship between these two functions. It is not unlikely that in some situations no incentive schedule can be found that simultaneously motivates that manager to make correct activity choices—efficient ones—and to signal the firm's type through the financial structure. Such a structure must reward the manager on the basis of competence while signalling, through finance, the framework of choice faced by the manager. The problem of assessing performance is further complicated by the inability to identify states. In the absence of a complete contingent description of the economy it will always be difficult to separate out the extent to which a particular firm's returns were the consequence of the manager's choices or nature's, i.e., skill or luck. The problems of moral hazard in such a situation are evident; if the manager's productive performance is positively rewarded it is in his interest to bias downward the market's perception of the activity set open to him. This evaluation problem is the second theme of this paper. The first section of the paper introduces the general incentive-signalling-financial (ISF) equilibrium model, and the following section specializes the model to a traditional state-space framework. Here... [ABSTRACT FROM AUTHOR]

Many firms face bidding situations in which follow-on contracts are likely, and the firm winning the initial contract is favored to win the follow-on awards. Managers are tempted to bid the initial contract low in anticipation of receiving the lucrative follow-on contract, but quantitative analysis of these situations can be difficult. A technique is presented herein where the expected present value of the margin of the follow-on contract is added to the present value of the margin of the initial contract to achieve an overall expected margin sufficient to meet the management's minimum target ROI levels. [ABSTRACT FROM AUTHOR]

Recent empirical studies have presented evidence that contradicts the presumed trade-off between changes in market share and profitability. This research attempted to resolve these inconsistent findings and to examine the conditions under which simultaneous increases in market share and profitability are found Contextual and strategic differences were identified among businesses in four dynamic performance situations. [ABSTRACT FROM AUTHOR]

Do mergers provide real benefits to acquiring firms? If not, as empirical studies completed mostly in the field of finance conclude, then why do firms continue to merge? If mergers do provide real benefits, as the literature of industrial organizations and strategic management suggest, then why haven't the empirical studies found any evidence of real benefits? By integrating the conclusions on mergers from the above three disciplines, these questions are addressed. [ABSTRACT FROM AUTHOR]

The divesting of corporate assets has become quite popular. Previous studies of divestitures have found conflicting impacts upon shareholders' wealth of the buying firm. This study measures the impacts of product-line relatedness between the acquiring firm and the divested unit and financial weakness of the selling firm upon the abnormal returns to the acquiring firm. Although the study finds that the impact of financial strength of the seller is ambiguous, the purchase of related assets produces more wealth than does the purchase of unrelated divested units. Further, firms that purchase related divested units have larger proportions of insider ownership. [ABSTRACT FROM AUTHOR]

A framework is indispensable in pursuing share price maximization. By making explicit many of the interdependent effects of management decisions concerning the investment and financing activities of the firm, the framework presented in this article is an ideal tool to evaluate the impact of management decisions upon the firm's stock price. [ABSTRACT FROM AUTHOR]

An accurate price forecast is crucial when deciding on a new investment proposal for capital intensive commodities. In such industries as metals, plastics, and fertilizers, the sale price is the key profitability factor. New investments are too often based on specious forecasts which use historical price trends to predict the future. Another way to forecast prices which can provide more meaningful results is presented in the article. [ABSTRACT FROM AUTHOR]

We examine the returns from owning cows and buffaloes in rural India. With labor valued at market wages, households earn large, negative median annual returns from holding cows and buffaloes, at −293% and −65%, respectively. Making the stark assumption of labor valued at zero, median returns are then −7% for cows and +17% for buffaloes (with 51% and 45% of households earning negative returns for cows and buffaloes, respectively). Why do households continue to invest in livestock if economic returns are negative, or are these estimates wrong? We discuss reasons why we may be underestimating returns and also, if the estimates are accurate, reasons why labor and milk market failures and social norms may still lead to persistent livestock investments. [ABSTRACT FROM AUTHOR]

Target rate of return pricing is the predominant pricing strategy in use today. Target ROI pricing is popular because it is relatively easy and because, in general, it works. A target ROI model that simplifies this strategy even further has been suggested here. The benefits from such a model include speed, simplicity, and the fact that it is easily understood by lower-level managers. The few simplifying assumptions that are made regarding the nature of "fixed' costs are perhaps unrealistic, but in "real world" pricing problems their significance may not be important. In fact, there is reason to believe that such simplification may lead to even better pricing decisions by managers. In addition, the model outlined here provides the basis for rather easy solutions to fairly complex contract situations involving delays in payment, early buildup of material supplies, and risk analysis involving follow-on contract awards. As in any strategy formulation, it is not suggested that this approach leads to THE appropriate price. NO formalized strategy can legitimately claim to do that. But it CAN lead to a very good benchmark for what the price should be, based on a few easily understood assumptions. It is left to the managers to make whatever adjustments in specific programs they deem necessary and appropriate. [ABSTRACT FROM AUTHOR]

Devinney, Stewart, and Shocker identify six dimensions on which financial portfolio theory differs from our modification of that paradigm for use in the product market management context. We believe that these differences require modification-not rejection-of the financial portfolio paradigm for application in marketing. We discuss each of these differences in turn. [ABSTRACT FROM AUTHOR]

The authors describe how management might approach the problem of systematically measuring the effects of certain long-range promotional activities. Little published research exists on this widely discussed topic. A mini-case study is presented describing the approach taken by Anheuser-Busch management regarding specific aspects of the promotional measurement problem. [ABSTRACT FROM AUTHOR]

The factor model is an important construct for both portfolio managers and researchers in modern finance. For practitioners, factor model coefficients are used to guide the construction of optimal portfolios. For academicians, factor model parameters play a fundamental role in explaining equilibrium asset prices and other market phenomena. This paper presents a hierarchical modeling procedure that can substantially improve the accuracy of factor model parameter estimates through incorporation of cross-sectional information. It is shown that this improvement in parameter estimation accuracy translates into substantial improvement in port-folio performance. Expressions are derived that characterize the sensitivity of portfolio performance to parameter estimation error. Evidence with NYSE data suggests that the hierarchical estimation technique leads to superior out-of-sample portfolio performance when compared to alternative estimation approaches. [ABSTRACT FROM AUTHOR]

Contracts are examined when outcomes depend on managers' choices as well as efforts. As the cost of effort shrinks relative to payoffs, the optimal contract converges to a linear payoff if the control space of the agent has full dimensionality, but not otherwise. Thus, when the agent can trade expected return for greater correlation with other returns, it is better to ignore relative performance when the cost of effort is small. When the choices include all fair gambles and hedges, the linear schedule is no more expensive than any other schedule that induces effort. Unfair gambles are examined as well. [ABSTRACT FROM AUTHOR]

This paper considers choice between individual projects and shows that when the choice set includes arbitrary distributions, then any assumed relationship between expected utility theory and general moment preferences for individual decision makers is theoretically unsound. In particular, a risk averse investor with any common utility function may, when choosing between two positive return opportunities, prefer the project simultaneously having a lower mean, higher variance, and lower positive skewness. Moreover, the decision maker can prefer opportunities with higher variance even when the opportunities are continuous, unimodal, and arbitrarily visually and statistically close to the normal distribution in shape. Our conclusions hold for any decision maker with a utility function whose derivatives alternate in sign being strictly positive or negative (i.e., we exclude the uninteresting cases of quadratic and cubic utilities). The method of analysis is based upon the theory of Tchebychev systems of functions which deals with the expected value of [utility] functions of stochastic variables with known moments. Although we focus on the first three moments, the results, as presented here, apply to all higher moments as well. It is also shown that there can be extremely large deviations between the certainty equivalents of distributions having the same moments, so this result is also pertinent to practical decision analysts as well. The paper demonstrates that the properties of utility functions have implications which are much more subtle than previously recognized for evaluating distributions in terms of their moments. [ABSTRACT FROM AUTHOR]

The purpose of this article is to formulate and test a decision model to increase the return on a pool of liquid assets through the use of Treasury bill futures contracts. Recent literature has documented inefficiencies in the pricing of T-bill futures. These inefficiencies can be exploited to increase the return on a portfolio of T-bills without affecting the maturity of the portfolio. The solution technique used is dynamic programming. The results of applying a dynamic programming algorithm parameterized on available data to trade in real time are presented. The rules lead to increased returns. [ABSTRACT FROM AUTHOR]

This paper presents a model to assist property-liability insurance companies in making product and investment mix decisions. A quadratic programming approach is used to generate mean-variance efficient frontiers that reflect the covariability of returns on insurance lines and assets. The solution indicates the overall premium-to-surplus ratio, the distribution of premiums among insurance lines, and the proportion of assets in each major investment class that are consistent with the minimum level of risk for a given expected rate of return on net worth. Recognition is given to the tendency for some insurance lines to generate more investable funds than others due to longer lags between claim occurrence and settlement. The importance of federal income taxes in insurance company decision making is recognized, and a method is suggested for including taxes in the model. The traditional model for selecting insurance company operating strategies is safety-first decision making (ruin theory). More recently, utility theory has been suggested as an alternative approach. This paper discusses the linkages between ruin theory and utility theory and indicates how these decision rules can be used to select operating points along the efficient frontier. A numerical example is given based on the published financial data of a major insurance company to illustrate the development of an efficient frontier and the use of ruin and utility-based decision rules. The results indicate that these decision rules generally lead to different operating strategies and that efficiency can be improved using the quadratic programming approach. [ABSTRACT FROM AUTHOR]

This paper reports on the risk preferences for below target returns of 224 managers from the U.S., Canada, and Europe. When only non-ruinous losses were involved, 71% of the managers were risk seeking for below target returns. The distribution of risk preferences tended to be stable over a wide range of experimental conditions: diversity of background of the managers, the size of outcomes below target, and the context of the decision process (personal versus managerial). When ruinous losses were introduced for 75 of the managers, 64% switched to risk averse behavior. Empirical findings concerning the relationship between risk preferences for below target returns and several demographic characteristics of managers are also reported. [ABSTRACT FROM AUTHOR]

A common formulation of the portfolio selection problem leads to the prescription of a strategy which maximizes the geometric mean return on investments. In this paper we examine conditions under which solutions exist for the case where the returns distribution is discrete. We establish necessary and sufficient conditions for a solution to exist and give a computationally convenient and exact method for finding a solution in circumstances where (i) a solution exists and (ii) the number of securities equals or exceeds the number of values in the returns distribution. [ABSTRACT FROM AUTHOR]

The problem faced here by a firm whose input quantities are fluctuating is to choose the optimal combination of average input quantifies so as to maximize expected revenue under a cost constraint. We show that for the prevailing production functions, the firm might find it optimal to increase the average use of the stochastic factor (even when such an increase will further increase uncertainty) at the expense of other, possibly certain factors. This holds even when increased uncertainty in input reduces total expected revenue. The solution is shown to depend on characteristics of the production function which are generally ignored in the classical theory of the firm. The model may be used in general maximization problems with underlying stochastic variables. [ABSTRACT FROM AUTHOR]

A difference equation model of a university budget system is proposed and analyzed. The conditions for first and second-order dynamic equilibrium are determined, and it is shown that first-order equilibrium provides a useful criterion for financial health. Two sets of first-order solutions are examined: (1) those involving total expenditures, operating income, and the endowment payout rate; and (2) those involving tradeoffs between the net budget increase factor and tuition. The endowment payout rate emerges as a key policy variable that should be set on the basis of budget variables and total return on the endowment, rather than as the result of endowment yield. A region of instability in the solution space is defined; this region should be avoided. Stationary equilibrium, in which the fraction of the budget supported by endowment remains constant over time, simplifies the model and has other desirable properties. [ABSTRACT FROM AUTHOR]

The rapid growth of consumer credit has created a need for improved credit control policies which result in lower total credit costs. This paper investigates one approach for achieving that objective. The credit control problem is formulated as one of developing optimal policies for an infinite horizon Markov decision model. The model utilizes standard financial data; it also requires the measurement of the costs and returns from alternative credit control policies. The Markov model is transformed into an equivalent linear program. A sample problem is solved and the resulting policies analyzed. [ABSTRACT FROM AUTHOR]

This section presents abstracts of research papers on economics which were published as of June 1967. Measuring the Productivity of Investment in Persuasion recommends an approach labeled Profitometrics for determining how much to invest in advertising. Profitometrics is essentially economic and financial analysis of futurities. It focuses on future after-tax cash flows and the profit-productivity of capital and relies upon quantitative estimates. Managerial Discretion and Profit Maximizing Behavior: Some Further Comments considers the relationships among corporate organization, managerial discretion, diffusion of ownership, monopoly power, and the prevalence of profit maximizing behavior. Based on The Maintenance of Rates of Return on Capital, the conclusion is drawn that companies are reasonably successful in maintaining their rates of return on capital relative to others in their industry over periods of 2 to 3 years, but not particularly successful over longer periods. Changes in rates of return between years are thought to be comparatively small, random fluctuations. The author of The Depreciation Multiplier derives an exact formula for M in the more general case that the life times are different and possess a stationary distribution with mean and standard deviation.

The article discusses research pertaining to employee satisfaction and firm performance. Researchers studied eight years' worth of employee attitude data, return on assets, and earnings per share from several large corporations. The study revealed a link between employee satisfaction and firm satisfaction in both directions over multiple periods. The researchers contend that the results imply the existence of a circular loop with respect to causality. The research indicated that as a firm's reputation improved so did its ability to offer superior benefits and higher pay to employees. Experts say the study proves that management should monitor employee attitudes and satisfaction.

The author presents a view of the market which indicates that it will take longer for products to make their way to the market, creating a dilemma for executives looking for more immediate return on product investment. The author outlines the issues, including a slow-growing population and reduced growth in some market segments due to increased competition. The solution sought by many companies is to gamble on new products or promotion, gaining short-term profits, but risking long-term growth. The author suggests more research in the effects of searching for the immediate return on new products, arguing that investing in the improvement of older, more established products, will have a better pay out.

This note considers a problem of simultaneous selection of a subset of N projects and determination of an optimal sequence to implement these projects so as to maximize the net present value of the total return. We first establish an optimal sequence of all projects which does not depend on the particular subset of selected projects and then propose an efficient polynomial dynamic programming method for solving the problem. [ABSTRACT FROM AUTHOR]