Knowledge that Transforms

Ceteris paribus, investors prefer to purchase municipal bonds selling close to their par value. That is, investors are willing to purchase at the lowest yield a municipal bond alike in all respects to other municipal bonds, but with a coupon that permits it to be sold at or near its par value. Conversely, investors are willing to purchase municipal bonds with coupons that cause them to be sold at prices either greatly above or greatly below par only at penalty or premium yields relative to similar par bonds.

The purpose behind this review of recent research on financial decisions in the multinational corporation (MNC) has been, first, to further the discussion as to the appropriate normative framework applicable to financial decisions in the MNC, and second, to suggest directions for further research by pointing to open questions.The analysis focuses on the major financial decision areas of the firm as well as on important new factors introduced by the international environment. Specific issues disussed are: capital-market segmentation, financing decision, financial structure and cost of capital, investment decision and exchange risk.The principal conclusion presented as a basis for discussion is that the financial decision framework developed for the one-country firm can essentially be extended to the case of the MNC. This should hold true even if partial restrictions to capital flows exist. The only limiting requirement is that all subsidiaries be wholly owned, i.e., equity securities be issued by the parent firm only. A specific case in which the analogy to, the one-country firm breaks down arises when joint ventures are introduced.A number of areas for further research are identified. Most prominent, perhaps, are (1) an operational concept of economic exchange risk exposure, i.e., measuring the impact of exchange rate changes on the value of foreign operations; (2) criteria for evaluating foreign investment projects consistent with the firm's cost of capital; and (3) empirical evidence on the extent to which MNCs are affected by capital-market segmentation.

This paper examines a conceptual framework for normative models of financial management in commercial banks. Since the bank is viewed as a financial intermediary, it is argued that the appropriate conceptual framework for bank financial management models is one that focuses on imperfections in the markets in which the bank operates.

The mathematical difficulties encountered when attempting to express the internal rate of return (IRR) of a combination of two or more investments as a weighted algebraic sum of the individual investments' IRRs has been recognized in the financial literature for some time. However, in a recent issue of this journal, Professors Reilly and Wecker (hereafter R-W) [3] apply the well-known mathematical impossibility of expressing the root(s) of a polynomial as an algebraic combination of the roots of related polynomials to question the validity of the weighted cost of capital (kw) concept.

The theory of efficient capital markets suggests that if the capital markets are efficient, security prices can be assumed at any time to “fully reflect” all available information. Various forms of the model have been subjected to extensive empirical testing. The results of these tests have been such that in reviewing the literature on the theory Fama [3] states, “ … the evidence in support of the efficient markets model is extensive, and (somewhat uniquely in economics) contradictory evidence is sparse.” Most of the research, however, has been addressed to the question of whether prices “fully reflect” particular subsets of available information. The validity of these results depends on the extent to which the information in the subset used for testing captures the information actually impounded in prices.

Vincent P. Apilado, Don C. Warner, Joel J. Dauten, Evaluative Techniques in Consumer Finance--Experimental Results and Policy Implications for Financial Institutions, The Journal of Financial and Quantitative Analysis, Vol. 9, No. 2 (Mar., 1974), pp. 275-283

Several titles reflecting different approaches to our subject matter were considered for the paper. An historical but somewhat pedantic approach to the teaching of investments might have been titled “Pedagogical Developments in Investments: Past, Present, and Future.” Another possibility was “Sex and the Single Investor, ” a title which probably would have attracted a larger audience. “Beat the Dealer Versus Beat the Market” might well have been an appropriate title in view of our presence here in Las Vegas and also because of recent experience in the securities markets. We finally decided on simply “A Portfolio Analysis of the Teaching of Investments, ” because this seems to better capture the essence of our viewpoint.

The purpose of this paper is to indicate that the opportunity to obtain information regarding the probability distribution of the return on a risky asset, such as a portfolio or a mutual fund, may cause a risk-averse decision maker to accept a single-period actuarially unfair gamble. This behavior is the same as that implied by utility functions that have convex segments, as originally considered by Friedman and Savage [2] and by Markowitz [12], but the utility function derived is not convex on any interval, since it is the envelope of a finite set of strictly increasing, strictly concave functions. Similar utility functions have been obtained, by Fleming [1] because of transactions costs, by Hakansson [4] by imposing a borrowing restriction on an investment-consumption model, and by Masson [14] in the context of an imperfect capital market. In this paper acceptance of single-period actuarially unfair gambles by an individual risk averse with respect to future wealth levels results from the opportunity to acquire information. The acquisition of information creates a set of conditional decisions each of which the individual may treat in an optimal manner, and that set of conditional decisions may induce risk-taking behavior.

The purpose of this article is to produce a conservative estimate of how often traditionally conceived seasonal components are present in prices of individual Dow Jones industrial stocks. A careful estimate is needed to resolve some of the current confusion on the question and to provide basic information along lines suggested by Smidt [27, p. 238]: “… investigations of the random walk hypothesis would be most fruitful if they were conducted in the spirit of attempting to determine the size and extent of systematic tendencies that may exist in price series” (italics added).

The study initially examined the immediate effects that conglomerate acquisitions have on the beta level of conglomerate and nonconglomerate acquiring firms. An analysis was then made of the long-run beta trends of firms that actively engage in conglomerate mergers. The results of the short-term comparative analysis have indicated that systematic risk behavior tends to be responsive in varying degrees to major conglomerate merger activity—with betas changing as a function of the combined premerger values and ρ2 measures showing improvement upon acquisition. At the same time, the regression results clearly revealed that the responsiveness of β to premerger marketrelated variables was considerably greater for the nonconglomerate firms. In contrast, the results of the comparative long-term analysis suggested that the differential effects of conglomerate merger activity on systematic risk are more of a marginal or limited nature. That is, unless the firm conducted extensive merger activity, the long-run performance of β and ρ2 indicated that conglomerate mergers have only contributed to increased absolute and relative systematic risk levels—the same pattern exhibited by the nonconglomerate, nonmerging sample.