Journal Of Financial And Strategic Decisions

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 Volume 8, Number 2   (Summer 1995) 
Contagion Effects In The Chemical
Industry Following The Bhopal Disaster
Rajiv Kalra
Glenn V. Henderson, Jr.
Gary A. Raines
Expansion Into Insurance Product-Lines
And Bank Shareholder Returns
Lawrence C. Rose
Dean G. Smith
Growing Competition In Consumer Loan
And Deposit Markets: A Case Of Market
Inter-Dependence Between Credit Unions
And Commercial Banks
Matiur Rahman
Douglas W. McNiel
Roy P. Patin, Jr.
Explanation Of Industry Returns Using
The Variable Beta Model And Lagged
Variable Beta Model
Thomas M. Krueger
Mohammad H. Rahbar
The Impact Of Firm's Characteristics
On Junk-Bond Default
Sam Ramsey Hakim
David Shimko
The 1986 Tax Reform Act And
Strategic Leverage Decisions
Chenchuramaiah T. Bathala
Steven J. Carlson
An Empirical Examination Of The Information
Content Of Balance Sheet And Dividend
Announcements: A Signaling Approach
Said Elfakhani
Overfunded Pension Plans, Early Termination,
And Asset Allocation Strategies:
An Option Theoretic Approach
Joseph K.W. Fung
Kam C. Chan

 

Journal of Financial and Strategic Decisions
Volume 8, Number 2   Summer 1995

CONTAGION EFFECTS IN THE CHEMICAL INDUSTRY
FOLLOWING THE BHOPAL DISASTER

Rajiv Kalra
Moorhead State University

Glenn V. Henderson, Jr.
University of Cincinnati

Gary A. Raines
University of Cincinnati

Abstract

This study examines the returns of Union Carbide and other chemical producers around the time of the Bhopal disaster. As might be anticipated, there were significant contagion effects. These effects were, however, economically small. There is also some evidence of over-reaction effect–larger initial losses moderated by later offsetting gains. For the firms other than Union Carbide, the later gains completely offset the initial losses.
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Journal of Financial and Strategic Decisions
Volume 8, Number 2   Summer 1995

EXPANSION INTO INSURANCE PRODUCT-LINES
AND BANK SHAREHOLDER RETURNS

Lawrence C. Rose
San Jose State University
Visitor, Massey University, NZ

Dean G. Smith
The University of Michigan

The authors are grateful for suggestions from Andrew Thompson
and session participants at the Midwest Finance Association Meetings
where an earlier version of this paper was presented. We also wish to thank
Michael Garner for his excellent research assistance.

Abstract

The prospects of Congress permitting bank expansion into insurance continues to concern bankers, insurers and investors. Based upon event study methods, abnormal returns to investors of banks engaging in currently permitted insurance activities are found to be significant over the 1974-1990 period. Further, disaggregated results suggest that there were significantly higher returns to more recent engagements, as compared to engagements prior to 1982.
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Journal of Financial and Strategic Decisions
Volume 8, Number 2   Summer 1995

GROWING COMPETITION IN CONSUMER LOAN
AND DEPOSIT MARKETS: A CASE OF MARKET
INTER-DEPENDENCE BETWEEN CREDIT
UNIONS AND COMMERCIAL BANKS

Matiur Rahman
McNeese State University

Douglas W. McNiel
McNeese State University

Roy P. Patin, Jr.
Midwestern State University

Abstract

The paper seeks to examine the case of a plausible interdependence between large credit unions and commercial banks in an environment of growing competition in consumer loan and deposit markets. The theoretical results suggest the existence of market interdependence between these two financial intermediaries both under cost minimization and profit maximization by credit unions.
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Journal of Financial and Strategic Decisions
Volume 8, Number 2   Summer 1995

EXPLANATION OF INDUSTRY RETURNS USING THE VARIABLE BETA MODEL AND LAGGED VARIABLE BETA MODEL

Thomas M. Krueger
University of Wisconsin-La Crosse

Mohammad H. Rahbar
University of Wisconsin-La Crosse

Abstract

Beta is found to be a function of several leading economic indicators and government policy variables within the context of the Variable Beta Model which incorporates economic characteristics in the single index model in a multiplicative manner. When contemporaneous macroeconomic descriptors are replaced with reporting-period-lagged macroeconomic descriptors, in the Lagged Variable Beta Model, model explanatory power increases. Findings suggest that the lagged beta model is more likely to satisfy the ordinary least squares assumptions of serially independent error terms.
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Journal of Financial and Strategic Decisions
Volume 8, Number 2   Summer 1995

THE IMPACT OF FIRM'S CHARACTERISTICS
ON JUNK-BOND DEFAULT

Sam Ramsey Hakim
University of Nebraska, Omaha

David Shimko
University of Southern California

We would like to thank Joseph Bencivenga of Salomon Brothers
and Melvin Vukcevich of Kemper Securities Group for helpful comments.

Abstract

This study examines firm-specific value and risk factors as early predictors of junk bond default. Reduction in equity value, increased variation in long-term debt levels, and reductions in cash flow are found to be statistically significant indicators of higher default probabilities in a logit model. Variations in investment levels have insignificant explanatory power. The model provides individual investors with the ability to assess the default risk of high-yield securities based on the levels of observable financial variables.
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Journal of Financial and Strategic Decisions
Volume 8, Number 2   Summer 1995

THE 1986 TAX REFORM ACT AND
STRATEGIC LEVERAGE DECISIONS

Chenchuramaiah T. Bathala
North Dakota State University

Steven J. Carlson
University of North Dakota

Abstract

The 1986 Tax Reform Act (TRA) repealed the investment tax credit, lowered corporate tax rates and lengthened depreciation schedules. These tax law changes have important implications for firms' strategic decisions regarding leverage and for testing DeAngelo and Masulis' tax shield substitution hypotheses. First, the effect of the TRA on firms' leverage, effective tax rates, and non-debt tax shields are examined. Second, the substitutability between debt and non-debt related tax shields is investigated within the DeAngelo and Masulis framework. The results of the paired t-tests, analysis of covariance, and regression analysis provide empirical support that, on average, firms have increased their leverage ratios during the post-TRA period. This increase is primarily in response to an increase in effective tax rates and a reduction in non-debt tax shields. This finding supports the view that firms tend to make strategic changes in leverage in response to tax law changes. Additionally, the evidence is consistent with two of DeAngelo and Masulis' hypotheses,
H:3 and H:5.

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Journal of Financial and Strategic Decisions
Volume 8, Number 2   Summer 1995

AN EMPIRICAL EXAMINATION OF THE INFORMATION
CONTENT OF BALANCE SHEET AND DIVIDEND
ANNOUNCEMENTS: A SIGNALING APPROACH

Said Elfakhani
University of Saskatchewan

I acknowledge invaluable comments by Larry J. Merville.
Also, I thank the participants of the Northern Finance Association
meeting for helpful comments on an earlier version of this paper.
All errors are my own responsibility.

Abstract

This paper examines whether changes in financial statements and dividends can together provide a better information transmittal system to deliver missing private information on the firm. The dividend signal draws its value from three sources: its expected content favorableness, sign of dividend change, and type of signaling role. The signaling system can involve three corporate attributes: capital investment, financing, and agency decisions, all of which contribute to the firm's future cash flows. The findings show that the strength of market reaction to dividend announcement depends on the role of the dividend signal (confirmatory, clarificatory or unclear). The results also reveal that the market is more concerned with the news favorableness than with the sign of dividend change.
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Journal of Financial and Strategic Decisions
Volume 8, Number 2   Summer 1995

OVERFUNDED PENSION PLANS, EARLY TERMINATION,
AND ASSET ALLOCATION STRATEGIES:
AN OPTION THEORETIC APPROACH

Joseph K.W. Fung
Hong Kong Baptist College

Kam C. Chan
Moorhead State University

Helpful comments from Larry Lawson are gratefully acknowledged.
We are responsible for any remaining errors.

INTRODUCTION

The objective of this paper is to explain the reluctance of pension fund sponsors to terminate overfunded defined benefit pension plans (hereafter, pension plans). The paper extends the "pension put" option-theoretic approach of Sharpe [1976] and Bicksler and Chen [1985] to a "pension call" model to describe a general phenomenon of the unwillingness to terminate overfunded plans by their sponsors.

Recently, Turner and Beller [1989] estimate that by 1987 aggregate pension assets were 125.7% of aggregate pension liabilities. This indicates that pension funds are overfunded. In addition, Alderson and Chen [1986], Haw, Ruland, and Hamdallah [1987], VanDerhei [1987], and Mitchell and Mulherin [1989] provide evidence that the terminations of overfunded pension plans can, indeed, produce positive statistically significant abnormal returns. Nonetheless, only 0.7% of all plans had been terminated as of 1987-accounting for a mere 9% of the excess plan assets (Mitchell and Mulherin [1989 p.43]). A question that naturally arises, then, is, "Why haven't more sponsors terminated their overfunded plans?" Some research has been done in this area with the focus on factors such as implicit labor agreements (Ippolito and Turner [1987]), tax abuse (Ippolito [1986]), financial distress (Mittelstaedt [1989] and Thomas [1989]), and efficient market (Ippolito and James [1992]).This paper offers an alternative explanation that does not base on neither external factors nor on termination costs. Instead, our "pension call" option-theoretic approach shows that it is economically sub-optimal to divest overfunded portfolios of risky assets. Besides, our model also provides implications on the allocation strategies of pension plans.

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