Knowledge that Transforms

Alan S. McCall, Neil B. Murphy, A Note on Evaluating Liquidity Under Conditions of Uncertainty in Mutual Savings Banks, The Journal of Financial and Quantitative Analysis, Vol. 6, No. 4 (Sep., 1971), pp. 1165-1169

This paper has explored a problem presented by introducing formal measures of risk into firm decision making. Risk measured in the firm's asset collection may not equal risk in the claims against the assets, with a resulting inequality of valuations in an a priori balance sheet. This nonadditivity problem does not occur if covariance with some external portfolio is used as the risk measure. Computer testing has suggested that the nonadditivity problem could occur in considerable magnitude if variance were used as a risk measure, and to a substantially lesser extent if standard deviation (or the coefficient of variation) were used. Nonadditivity problems in the measures were worse in rather high (but not ultra-high) debt-use ranges and did not exist at all as long as debt was used so moderately that no chance of default was foreseen. While no findings were stated on this point, intuition and some unreported work done by one of the authors both suggest that nonadditivity would also be a problem in mixed risk measures, in which both covariance with an external portfolio and a measure of dispersion in the firm's own portfolio are employed.

Each business firm has a large body of fundamental data that can be organized so that it can aid in graphically determining the firm's optimum profit. In this paper an attempt has been made to bring forth a method by which some choice of policy may be followed in order to select a particular profit curve. More precisely, a policy will be determined that leads to a given optimal profit curve. In this paper “optimal profit curve” will mean the profit curve that has been selected from a fixed set of possible profit curves. The purpose of the paper is to describe a method to determine the policy that will reduce the optimal curve. The method is based on a general form of the Riesz- Kakutani Representation Theorem, which states that a bounded linear operator from the space of continuous functions of one variable t where 0 ≤ t ≤ 1 to the space of continuous functions can be represented as an integral to a Gowurin measure.

The problem of cash management, in its simplest form, is to formulate decision rules which control the level of a firm's cash balance to meet its demands for cash at minimum total discounted cost. Control is achieved by transacting securities for cash. The cost of control is the commission expense [13]. Optimality depends on balancing excess opportunity costs of holding balances which are too large and having excess buying and selling costs (to meet cash obligations) of balances which are too small.

Careful examination of the behavior of financial variables over time uncovers an important distinction: variables expressed in dollars, such as earnings per share, behave very differently from percentage changes in those same variables. Similarly, financial ratios, such as the price/earnings ratio, behave quite differently from percentage changes in financial ratios. Variables expressed in dollars and financial ratios appear comparatively stable and predictable over time. Successive values are fair approximations of one another. Percentage changes in dollar and financial ratio variables-i.e., growth variables on the other hand, tend to be erratic, volatile, and unpredictable over time. Successive values bear little relation to one another. This distinction between dollar and ratio variables, on the one hand, and percentage changes in these variables-i.e., growth variables-on the other, serves as a useful basis for a financial model.

Considerable attention has been focused in the past two decades on the substitutability of the liabilities of private nonmonetary financial intermediaries for money, narrowly defined as the sum of currency and demand deposits adjusted. Discussion concerning this topic related to the United States, and most of the empirical work has been confined to that country. The essential folklore of that discussion crossed the border into Canada and is now even reflected in its textbooks on Canadian money and banking. However, very little empirical work has been done in Canada to examine this lore.

In my article, I have discussed the relationship between the internal rate of return, K, and Kp which denotes the reciprocal of the payoff period under several alternative assumptions.

The purpose of this study is to analyze the behavior of the cost of equity capital in the commercial banks by looking at whether there exists an optimal composition of the bank “fund structure” that would maximize bank earnings through the minimization of its cost of funds. The analysis should give an approximate cut-off point for testing such projects as “checking plus, ” checkless payment systems, etc.

Investment literature, particularly materials made available to investors by financial magazines, brokerage houses, and investment services, places a great deal of stress upon analysis of investment opportunities by industry groups. Examples are industry analyses, such as those of Forbes and Financial Analysts Journal, as well as the industry segregations of popular services such as Value Line, Standard & Poor's and Moody's.

R. H. Litzenberger, O. M. Joy, Target Rates of Return and Corporate Asset and Liability Structure Under Uncertainty, The Journal of Financial and Quantitative Analysis, Vol. 6, No. 2 (Mar., 1971), pp. 675-686