Journal Of Financial And Strategic Decisions

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 Volume 10, Number 3   (Fall 1997) 
A Test Of The Temporal Stability Of Proportional
Hazards Models For Predicting Bank Failure
Kathleen L. Henebry
The Relationship Between Corporate Debit
Issuance And Changes In Systematic Risk
Ajai K. Kapoor
Ralph A. Pope
Strategic Assets, Capital Structure,
And Firm Performance
Rahul Kochhar
Event Risk Bond Covenants And Shareholder Wealth:
Evidence From Convertible Bonds
Terrill R. Keasler
Delbert C. Goff
Steven B. Perfect
The Impact Of Options Delisting
On The Underlying Stocks
Mohammed Chaudhury
Said Elfakhani
The Effect Of Announcement Of Bribery,
Scandal, White Collar Crime, And Illegal
Payment On Returns To Shareholders
Spuma M. Rao
Corporate Managers' Risky Behavior:
Risk Taking Or Avoiding?
Kathryn Sullivan
A Consistent Yield-Based Capital Budgeting Method David A. Volkman

 

Journal of Financial and Strategic Decisions
Volume 10, Number 3   Fall 1997

A TEST OF THE TEMPORAL STABILITY OF PROPORTIONAL
HAZARDS MODELS FOR PREDICTING BANK FAILURE

Kathleen L. Henebry
University of Nebraska at Omaha

This paper is based on my dissertation. I would like to acknowledge the helpful
comments of my chair and members of my committee as well as participants
at the Eastern Finance Association Annual Meeting of 1996.

Abstract

This research uses both cash flow and non-cash flow proportional hazards models to test for stability of the models over time. Several different time horizons and start dates were used to test stability over the 1985-1989 time period. The results indicate that none of the specific formulations were stable across different starting dates nor across different horizons for the same starting date. Forecast models further tested stability and only three variables were found to be consistently useful in predicting bank failure: Primary Capital to Total Assets (PCTA), Nonperforming Loans to Total Loans (NPLTL) and Total Loans to Total Assets (TLTA).
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Journal of Financial and Strategic Decisions
Volume 10, Number 3   Fall 1997

THE RELATIONSHIP BETWEEN CORPORATE DEBIT
ISSUANCE AND CHANGES IN SYSTEMATIC RISK

Ajai K. Kapoor
California State University, Sacramento

Ralph A. Pope
California State University, Sacramento

The authors would like to thank the valuable contributions of Dr. Thomas S. Howe,
Illinois State University, and Dr. David A. Whidbee, California State University.

INTRODUCTION

The objective of this article is to determine whether debit issued by a corporation has a significant effect on the systematic risk, of beta, or that corporation's stock. The results of this study suggest that the issuance of debt does not have an effect on beta.
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Journal of Financial and Strategic Decisions
Volume 10, Number 3   Fall 1997

STRATEGIC ASSETS, CAPITAL STRUCTURE,
AND FIRM PERFORMANCE

Rahul Kochhar
Purdue University

This paper has benefitted from the suggestions of Jay Barney, Albert Cannella,
Parthiban David, Javier Gimeno, Wayne Grossman, Connie Helfat, Michael Hitt,
Robert Hoskisson, and Hicheon Kim. A previous version of this paper titled
"Financial Policies and Sustained Economic Rents: A Resource-Based Perspective"
was presented at the annual Academy of Management meetings, Dallas, 1994.

Abstract

Possession of strategic assets is a necessary condition for sustained competitive advantage. This condition is, however, not sufficient. Firms require financial management capability to realize the rents present in their strategic assets. The firm-specific nature of strategic assets implies that they be financed primarily through equity; other less specific assets should be financed through debt. Firms are likely to suffer increased costs and decreased performance if they do not adopt suitable governance structures in their transactions with potential suppliers of funds.
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Journal of Financial and Strategic Decisions
Volume 10, Number 3   Fall 1997

EVENT RISK BOND COVENANTS AND SHAREHOLDER WEALTH:
EVIDENCE FROM CONVERTIBLE BONDS

Terrill R. Keasler
Appalachian State University

Delbert C. Goff
Appalachian State University

Steven B. Perfect
Florida State University

Abstract

Previous studies examining the impact of event risk bond covenants on shareholder wealth have conflicting results. Bae, Klein and Padmaraj (1994) find a significant positive stock price reaction related to the issuance of event risk protected bonds. While Cook and Easterwood (1994) find an opposite effect. We examine a sample of convertible bonds and determine that event risk covenants have a significant negative impact on shareholder wealth. This finding supports the hypothesis that event risk bond covenants serve the role of an anti-takeover device and can serve as a tool for management entrenchment.
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Journal of Financial and Strategic Decisions
Volume 10, Number 3   Fall 1997

THE IMPACT OF OPTIONS DELISTING
ON THE UNDERLYING STOCKS

Mohammed Chaudhury
University of Saskatchewan

Said Elfakhani
University of Saskatchewan

The authors thank Erika Gilbert and participants at the 1994 Academy of
Business Administration conference, London, UK, for helpful comments.
The authors are responsible for any errors or omissions.

Abstract

This paper examines the effect of options delisting on the variance and the beta of the underlying stock using Canadian data. The contention is that whatever effects options listing have, such effects should reverse when options are delisted, our study provides independent and additional evidence that options listing (and delisting) are volatility-neutral. In particular, this paper investigates if there is a differential response to complete delisting, and limited market listing to some (but not all) exchanges, as part of a reallocation of options trading by the Trans-Canada Options Inc. It also researches the effect of listing limited to smaller versus a larger exchange market. Our results show that, on average, complete delisting of Canadian options reduces trading volume after the delisting event; however, it does not alter the variance or the beta of the underlying stocks. Nevertheless, when options are delisted from some exchanges, the market-adjusted variance increases. This effect can be driven by the reallocations that lead to options trading on a larger exchange. Also, the evidence on listings limited to a smaller exchange is consistent with the "liquidity explanation" of the volatility effect.
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Journal of Financial and Strategic Decisions
Volume 10, Number 3   Fall 1997

THE EFFECT OF ANNOUNCEMENT OF BRIBERY,
SCANDAL, WHITE COLLAR CRIME, AND ILLEGAL
PAYMENT ON RETURNS TO SHAREHOLDERS

Spuma M. Rao
University of Southwestern Louisiana

Abstract

This study adds to the empirical evidence supporting a significant connection between ethics and profitability by examining the connection between published reports of unethical behavior–in terms of bribery, scandal, white collar crime, and illegal payment–by publicly traded U.S. and multinational firms and the performance of their stock. Using reports of this unethical behavior–published in the Wall Street Journal from 1989 to 1993, and the standard event-study methodology, the analysis shows that the actual stock performance for those companies was lower than the expected market adjusted returns. Unethical conduct by firms which is discovered and publicized does impact on the shareholders by lowering the value of their stock for an appreciable period of time. Whatever their views on whether ethical behavior is profitable, managers should be able to see a definite connection between unethical behavior and the worth of their firm's stock. Stockholders, the press and regulators should find this information important in pressing for greater corporate and managerial accountability.
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Journal of Financial and Strategic Decisions
Volume 10, Number 3   Fall 1997

CORPORATE MANAGERS' RISKY BEHAVIOR:
RISK TAKING OR AVOIDING?

Kathryn Sullivan
Westfield State College

I would like to thank Thomas Kida, Nelson Lacey, Jim Smith,
Arnie Well, Bill Diamond, Sue Machuga, Pam Trafford, Chris Agoglia,
and Sudip Bhattacharjee for their helpful comments.

Abstract

This study reports on five experiments that investigate professional corporate managers' risky behavior across decision settings in which various forms of financial data are evaluated. Specifically, managers decisions to take or avoid risk are investigated when evaluating data in the form of profits, losses, revenues, costs, and expenditures. The results indicate that, with one exception (i.e., clear financial losses), a greater tendency towards risk avoidance exists when managers evaluate many forms of financial data. These results provide evidence on managerial risky behavior across decision contexts and suggest that managers use inclusive "mental accounts" in their decision processes.
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Journal of Financial and Strategic Decisions
Volume 10, Number 3   Fall 1997

A CONSISTENT YIELD-BASED CAPITAL BUDGETING METHOD

David A. Volkman
University of Nebraska at Omaha

Abstract

This study develops a yield-based capital budgeting method that is consistent in maximizing shareholder wealth in six out of seven preconditioned environments. Academic studies surveying corporate management consistently conclude that corporate management prefers a yield-based capital budgeting method, such as the IRR, to a discount cash flow model, such as the NPV. This preference is strong with the NPV and EAA methods typically ranked as least favorable among corporate managment and yield-based methods ranked most favorable. However, previous yield-based methods are not consistent in maximizing shareholder wealth in many economic environments. The capital budgeting method developed in this study appeases corporate management's preference for a yield-based measure while maintaining the Fisherian assumption of wealth maximization. To maintain wealth maximization, this study demonstrates that the yield-based measure must distinguish between financing and investment cash flows, adjust to investments with differing economic lives, recognize the time disparity in the cash flow stream between mutually exclusive investments, and maintain the value additive principle.
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