Journal of Financial and Strategic Decisions Volume 10, Number 1   Spring 1997 MODELING BANK MERGERS IN THE 1990S: THE POTENTIAL DILUTION EFFECT Stanley Block Texas Christian University Abstract As mergers become increasingly important in the financial services industry, the need for proper sensitivity analysis to assess the financial impact of the merger is essential. Unlike industrial mergers, there is almost always initial dilution in a bank merger. This is because of the homogenous nature of bank P/E ratios and the high premium over book value that is typically paid. The problem of dilution was further compounded by an SEC ruling in March of 1996 that restricted the repurchase of outstanding shares for two years after merger under a pooling of interests financial recording. Given these factors, the initial dilution can only be overcome by more rapid post-merger earnings growth by the holding company. The author models the factors that affect the growth rate after merger and indicates the relative importance of the premium paid, the size of the merging institutions, the absence or presence of synergy and a number of other variables.

Journal of Financial and Strategic Decisions Volume 10, Number 1   Spring 1997 CONTROLLING THE AGENCY COST OF INSIDER TRADING James S. Ang Florida State University Don R. Cox Appalachian State University Abstract This study provides a unique use of abnormal profits from insider trading to measure a specific form of agency cost between outside shareholder and insiders—the agency cost of insider trading. Cross-sectional differences in the utilization of various bonding and monitoring mechanisms are examined to determine the relative effectiveness of alternative strategies in controlling such agency cost. Institutional shareholders and separation of the CEO and board chairman positions are shown to be effective in minimizing the agency cost of insider trading.

Journal of Financial and Strategic Decisions Volume 10, Number 1   Spring 1997 DOES THE MARKET REACT TO SURPRISE ISSUES OF CALLABLE AND NONCALLABLE DEBT? Richard J. Kish Lehigh University Special thanks go to an anonymous Journal of Financial and Strategic Decisions referee for providing valuable comments and suggestions. This paper has also benefitted from the comments of Miles Livingston, David Brown, Mark Flannery, and Chris James. Abstract Insignificant stock market reactions to debt issues have been well documented in the finance literature. This paper segments debt issues into callable/noncallable and long-term/short-term categories, as well as anticipated and unanticipated issues (8 different categories of debt). A logit model was used to classify the debt issues into anticipated and unanticipated categories. Stock market reactions were insignificant for 7 of the 8 debt categories. Market reactions were sizably negative and highly significant for unanticipated long-term noncallable debt issues. These results support the efficiency of the market and Flannery (1986) conjecture that the issuance of long-term noncallable debt is a signal for identifying bad firms.

Journal of Financial and Strategic Decisions Volume 10, Number 1   Spring 1997 LIMITATIONS ON THE BUSINESS OF BANKING William A. Christiansen Florida State University R. Daniel Pace University of West Florida Abstract Using a simulation model, the study examines the impact to states and national BHCs if allowed greater participation in securities (segmented into securities brokerage and investment banking), insurance (brokerage, life insurance underwriting, and property-casualty underwriting), or real estate (segmented into five industries ranging from brokerage to development). Utilizing accounting earnings and market return data from 1971 to 1989, this paper determines the upper-bound of diversification benefits if greater participation were allowed. This study complements previous studies which, by their random-merger design, determine the lower-bound of diversification benefits. The results support controlled expansion into insurance and securities activities. Regarding insurance and securities, the evidence indicates more caution for expansion into greater securities than insurance activities because of investment-level sensitivity. The results do not support increased real estate powers.

Journal of Financial and Strategic Decisions Volume 10, Number 1   Spring 1997 LONG-RUN STRATEGIC CAPITAL STRUCTURE Dev Prasad Texas A&M University–Corpus Christi Garry D. Bruton University of Tulsa Andreas G. Merikas University of Piraeus Thanks to Mark Collins, Ken Carow, Michael Lubatkin, and Gene Swanson for their helpful comments on an earlier version of this paper. Abstract In the increasingly turbulent environment facing business the strategic management of the firm has become more predominate. However to date, the linkage between strategic management and financial management of the firm has largely not been explored. This research utilizes two different methods of analysis to confirm the linkage between capital structure and strategic posture of the firm. Specifically, managers were found to structure the selection of debt and capital intensity in a means consistent with the strategic goal of long-run control of systematic risk.

Journal of Financial and Strategic Decisions Volume 10, Number 1   Spring 1997 CEO DUALITY IN THE PAPER AND FOREST PRODUCTS INDUSTRY Uma. V. Sridharan Clemson University Allan Marsinko Clemson University We are grateful to Ms. Renee Partin and Mr. Bill Zawacki for research assistance. Abstract Every firm makes an important organization structural decision about whether or not to have a CEO that also oversees the board of directors. CEO duality refers to the situation when the CEO of a firm is also chairman of the board of directors. Powerful arguments have been made by academic researchers and practitioners on the advantages and disadvantages of CEO duality. This study investigates the impact of CEO duality on the market value of the firm by examining the evidence from the Paper and Forest Products industry, over the period 1988-1992. The results suggest that firms with a dual CEO have superior performance in terms of margins and productive utilization of assets which is reflected in a higher market value of the firm.

Journal of Financial and Strategic Decisions Volume 10, Number 1   Spring 1997 EMPLOYEE MANAGEMENT STRATEGY, STAKEHOLDER-AGENCY THEORY, AND THE VALUE OF THE FIRM Jeffery Heinfeldt Hilbert College Richard Curcio Kent State University Abstract The purpose of this research was to determine the extent to which a company's employee management strategy impacts firm financial performance. In essence, does the extent of a firm's compensation package, its human relations strategy, and/or its ability to challenge and motivate employees affect the enhancement of firm value? The theoretical foundation for this research derives from the stakeholder-agency concept of the firm. The results of previous empirical studies, while mixed, tend to suggest that, in some cases, ESOPs, profit sharing plans, and progressive people management strategies have a positive effect on limited measures of financial performance. This study improved upon previous work by using excess value, a superior market-based measure of firm financial performance, and extensive combinations of personnel management variables as well as control variables. Within the limitations of the study, the general conclusion of this research is that employee management strategy does impact firm financial performance. The appropriate strategies, however, for the most part, seem to be industry specific. Opportunities for future research are definitely available.

Journal of Financial and Strategic Decisions Volume 10, Number 1   Spring 1997 INFLATION, CAPITAL STRUCTURE, AND IMMUNIZATION OF THE FIRM'S GROWTH POTENTIAL Devendra Gulati Rider University Zaher Zantout Rider University Abstract In this present study we develop a general case model of corporate growth potential. This model enables us to determine the conditions which must prevail in order for neither inflation in input and/or output prices nor changes in interest rates to have an impact on the firm's growth potential and hence its investment decision. We find that immunizing the firm's real growth potential against the effects of inflation and interest rate fluctuations generally requires frequent changes in its capital structure, which may be a costly strategy to implement.

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