Journal of Financial and Strategic Decisions Volume 8, Number 3   Fall 1995 VARIABLE REINVESTMENT RATES, CONTROL TIMINGS, AND THE PROJECT EVALUATION PROCESS FOR MULTINATIONAL CORPORATIONS Kashi Nath Tiwari Kennesaw State College Abstract This paper investigates the effect of currency controls on the profitability of multinational corporations and on the evaluation of international investment opportunities. Existence of an international tax differential and tax deferral privileges may not increase the value of the project. The net terminal value of a project will be significantly affected by the timings of the imposition and removal of the currency control. Controls may be removed prior to the terminal time period, during the terminal time period, after the terminal time period, or they may never be lifted at all. In the project evaluation process, where the exchange restrictions are not permanent, three segments of the time-period have been emphasized: the time segment prior to the imposition of currency control, the time segment during the currency control, and the time segment after the removal of the currency control. The major emphasis has been placed on the locations and timings of the reinvestments of the net cash flows. Exchange restrictions will generally lower the terminal value of the project. The net cash flows of the pre-currency control period may also get entrapped under the "currency control regime" during the reinvestment phase, which will further lower the terminal value of the project. The negative impact of currency control can be so pronounced that the project may yield a negative rate of return. However, there are two instances where currency control will NOT adversely affect the net terminal value of the project: (i) if the adjusted index for the collective value of the reinvestment rate of return in the host country is higher than that in the home country and when the controls are not permanent and (ii) if the host government provides full compensation to the firm for the revenue loss arising due to the imposition of control measures. There are numerous parameters involved in the project evaluation process, and whether a management team will produce a realized rate of return that will be at least as great as the expected rate of return will depend upon how accurately it can predict the future values of these parameters. Aside from the future net cash flow projection, the management's primary task during the project selection stage should be to estimate an index for the collective value of the investment and reinvestment rate of return.

Journal of Financial and Strategic Decisions Volume 8, Number 3   Fall 1995 AN ALTERNATIVE CALL POLICY FOR CONVERTIBLE DEBT Gerald W. Buetow, Jr. James Madison University Stephen G. Buell Lehigh University Abstract The results of this study suggest that current convertible bond call policies do not maximize shareholder wealth. We offer an alternative call policy based on intuitive, firm specific characteristics. In addition, a cost effective trading strategy which results in a profit should a failed conversion occur is also formulated. If management is trying to maximize current shareholder wealth, then both the premiums established in executing current call policies and the 20 percent rule-of-thumb premium are too large. Failed conversion costs are roughly four times the cost of the trading strategy developed to avoid them. This is true for all premium levels. Therefore, the optimal call policy as defined in this study is consistent with management's goal of maximizing shareholder wealth.

Journal of Financial and Strategic Decisions Volume 8, Number 3   Fall 1995 A MULTIPLE-METRIC STUDY OF THE RETURNS TO SHAREHOLDERS: THE CASE OF BANK HOLDING COMPANY MERGERS J.C. Thompson Eastern Kentucky University Donald J. Mullineaux University of Kentucky Abstract This research is an event study that deals with shareholder reaction to the announcement of the merger of two bank holding companies (BHC). The work spans the time period 1980-1987. The period was chosen because of its correspondence with significant deregulation of the industry and significant swings in economic activity. The changing economic activity during the period allowed the study of the deregulation effects in different economic climates. The study employs three single-index and two double-index econometric models. An index of bank stocks was also developed to facilitate the analysis. The results of this study provide additional evidence on 1) the significance of bank merger announcements, 2) the comparative announcement effects across exchanges, 3) a comparison of acquiring versus acquired effects, and 4) evidence on the consequences of model choice. It is found that positive abnormal returns accrue to the shareholders of the acquired firm. The abnormal returns to the shareholders of the acquiring firm are either significantly negative or zero and are stock exchange dependent.

Journal of Financial and Strategic Decisions Volume 8, Number 3   Fall 1995 GOING PRIVATE: A FINANCIAL PROFILE Spuma M. Rao University of Southwestern Louisiana Melissa S. Waters University of Southwestern Louisiana Bruce Payne University of Southwestern Louisiana Abstract The number of public firms going private has increased sharply in recent years, as part of widespread corporate restructuring. There have been numerous studies concerned with the motive for mergers/acquisitions, but very few have addressed the motives for going private. The purpose of this study is to establish the financial characteristics of firms that have gone private. More specifically, the study is concerned with those variables that are indicators of the firms' risk-return tradeoff character and changes in cash flows. It is the real, or perceived changes in those groups of variables, by investors at the margin that result in changes in the market value of the firm. In addition, there is a proxy for size since it has never been established whether large or small firms are more likely to go private. A probit model was used to distinguish the difference between firms that went private and firms that did not. Major findings were: (1)the higher the price-earning multiple, the greater the market value to book value ratio and the higher the growth rate the less likely a firm will go private; (2)the greater the cash flow to total assets, and the higher the dividend yield, the greater the likelihood the firm will go private. Stated differently, if returns to owners are measured in potential cash such as market value, or growth the firm is more likely to stay public but if the greater returns are measured in cash or cash for dividend payouts, the more likely the firm will go private.

Journal of Financial and Strategic Decisions Volume 8, Number 3   Fall 1995 INSIDER TRADING AND DUAL-CLASS RECAPITALIZATION Charmen Loh Rider College R.S. Rathinasamy Ball State University Abstract Existing empirical evidence on the impact of dual-class recapitalization on shareholder wealth has produced results that range from insignificant to negative abnormal returns. One possible reason for the different results is the existence of two sets of motives for the issuance of limited-voting stock with opposite effects on shareholder wealth. This paper uses insider trading to segregate the dual-class recapitalizations that increase shareholder wealth from those that reduce firm value. Our results show that, consistent with our hypothesis, firms with net insider purchases over a period of six months prior to the issuance of dual-class stock experience significant positive abnormal returns while firms with net insider sales suffer significant losses in firm value.

Journal of Financial and Strategic Decisions Volume 8, Number 3   Fall 1995 EXPECTATIONS OF WEEKEND AND TURN-OF-THE-MONTH MEAN RETURN SHIFTS IMPLICIT IN INDEX CALL OPTION PRICES Amy Dickinson Florida Atlantic University David R. Peterson Florida State University This study was partially supported by a summer research grant to David R. Peterson from Florida State University. Abstract This study extends the call option pricing model developed by O'Brien (1986), which has as one of the parameters the expected return on the underlying asset, to index options. Market prices of call options on the Standard and Poor's 100 stock index are used to implicitly derive the expected rate of return on the index. Two previously documented seasonal mean shifts, at the weekend and the turn-of-the-month, are examined. Empirical evidence indicates these shifts are at least partially anticipated by investors.

Journal of Financial and Strategic Decisions Volume 8, Number 3   Fall 1995 PITFALLS IN USING THE S&P BOGEY FOR FINANCIAL ANALYSIS AND PORTFOLIO MANAGEMENT Somnath Basu University of Denver Ron Rizzuto University of Denver We thank two anonymous referees for their very helpful comments. Abstract The S&P 500 Index is a benchmark that is widely accepted and used though much maligned. In this study we add a chapter to the index's detractors by investigating and revealing an industry bias built-in to the index. By the nature of the construction of the S&P there exists sectoral imbalances. By constructing 'S&P Comparable' indexes we establish first that such an industry bias does exist and then we probe deeper to find the sectors that are favored or disfavored. We find that the problem is not insevere and neither does it go away with time.

Journal of Financial and Strategic Decisions Volume 8, Number 3   Fall 1995 INFORMATIVENESS OF THE EQUITY FINANCING DECISION: DIVIDEND REINVESTMENT VERSUS THE PUBLIC OFFER Grace C. Allen Western Carolina University LeRoy D. Brooks University of South Carolina William T. Moore University of South Carolina The authors express gratitude to Ellen Roueche for expert technical assistance. Abstract Stock price reactions to announcements of new equity issues via dividend reinvestment plans (DRPs) have been shown to be statistically insignificant. The insignificant reaction documented in studies using conventional event study methods may be because (1) equity issuance through DRPs arises from economic motives that are different from those underlying general cash offers, (2) new-issue DRPs are generally much smaller than general cash offers, hence their effects are more difficult to detect, or (3) identification of the precise event date for new-issue DRPs is problematic. We compare stock price reactions to DRPs and general cash offers taking care to control for relative issue size and employing stringent sampling techniques to assure reliable identification of the event date. Our results show that stock price reactions to DRPs and general cash offers are statistically indistinguishable once the appropriate controls are employed.

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