Knowledge that Transforms

The recent wave of revaluations has again brought to the fore the foreign exchange risks with which most multinational corporations have to live constantly. While these latest parity changes have tended to increase the value of foreign currencies relative to the dollar, most exchange risks arise from pending devaluations.

The purpose of this comment is to make a comparison between the sufficient conditions of Soper [3] and of Norstrøm [2] for a unique internal rate of return (IRR). Such a condition is crucial for the implementation of a computer program, as for instance the one presented by Mao and Knoll [1] which makes use of Soper's condition. Therefore, it seems appropriate to investigate if one of the mentioned conditions is superior to the other, so that we could rely only on the more efficient one.

George C. Philippatos, David N. Nawrocki, The Information Inaccuracy of Stock Market Forecasts: Some New Evidence of Dependence on the New York Stock Exchange, The Journal of Financial and Quantitative Analysis, Vol. 8, No. 3 (Jun., 1973), pp. 445-458

Do changes in stock market indicators, such as the short interest ratio, signal changes in stock prices? Popular stock market lore and numerous books and articles support the worth of “technical” analysis. On the other hand, to the extent that stock prices follow a random walk, technical indicators would seem to be of no value. The two positions can be reconciled to a degree by realizing that a variable can follow a random walk with respect to its own sequence and still be successfully predicated by some other variable(s). Furthermore, successful predications of stock prices can be made on the basis of available information, if that information is used in some unique manner that has not been fully developed by other market participants.

Ronald J. Jordan, An Empirical Investigation of the Adjustment of Stock Prices to New Quarterly Earnings Information, The Journal of Financial and Quantitative Analysis, Vol. 8, No. 4 (Sep., 1973), pp. 609-620

The objective of this paper is to carry out tests of the general hypothesis, most recently urged by Scherer [14, pp. 100–102] and Weston and Brigham [17, p. 689], that the cost-of-equity capital of small industrial corporations is greater than that of large industrial corporations. The paper denotes this cost as ke and defines it as the expected rate of return on the stock of a company when the current price of the stock is in equilibrium. A common designation of ke of course is the equity capitalization rate. It will be noted that this definition of the cost-of-equity capital abstracts from the flotation costs that are usually incurred when companies sell new stock. Archer and Faerber [2] have already shown that these costs are inversely related to the size of companies.

Intelligent corporate financial planning has been necessary for as long as the corporate form of business enterprise has existed. Only in recent years, however, have computer technology and academic theorizing been harnessed to meet this practical need. Without wishing to minimize the impact and value of these efforts on the practice of corporate finance, we do think there are grounds for believing that the new finance “tools” have been less than maximally effective. In this article we contrast typical financial modeling theory in order to interpret the gap between the two. Then we describe a financial policy model whose characteristics might be expected to be more acceptable in practice. Finally, we discuss the implications of the theory/practice gap and our experience with this model for future scholarly activities in the modeling of financial policies.

Considerable literature in the investment, growth, and financing of the corporation has developed in recent years. While theoretical studies in this area have contributed importantly to the understanding of the firm's time-optimal decision program, they have generally been limited in scope to the all-internally-funded firm and steady-state dynamics. The well-known analyses of Gordon ]7[ and Lintner ]13[ are typical of this restricted focus. Herein we relax these specializing conditions, both by permitting external equity as a financing alternative and by not a priori requiring the firm to make identical (earnings proportional) investment and financing decisions at every time instant such that it progresses only along a constant, exponentially growing earnings path.

In this paper the traditional capital asset pricing model is reformulated as a system of simultaneous equations in which returns on similar securities are treated as endogenous variables and in which pertinent financial data for particular firms and a market factor are treated as exogenous variables. Such a system is estimated, and serious questions are raised concerning the tenability of the simple linear model so often used to explain capital asset prices under uncertainty.