Knowledge that Transforms

Although the effects of pure diversification and synergistic mergers on market valuation have been widely discussed and there have been a number of studies estimating. merger performance using the two-parameter model of Sharpe-Lintner, the investigation of the corporate determinants of beta is of recent vintage. A variation on this theme, namely whether merger activity is impounded into beta and its speed of being impounded, is the focus of the Joehnk-Nielsen (J-N) study.

Almarin Phillips, Regulatory Reform for the Deposit Financial Institutions--Retrospect and Prospects, The Journal of Financial and Quantitative Analysis, Vol. 9, No. 5, 1974 Proceedings (Nov., 1974), pp. 795-802

The FINSIM model provides a fundamental and analytical basis for security evaluation. The methodology presented includes the relevant economic and firm variables in an efficient computational scheme and is useful for:1. reducing the analysts' judgments about the future to a specific stock price (the model described does not replace the analyst, rather it provides the analyst with a vehicle to determine the implications of his critical assumptions);2. testing the probable impact of changed expectations concerning the firm and/or the level of the market on stock value;3. getting at what “the markets” expectations must be to justify the current price;4. determining the value of additional information (are results changed significantly to pay for the expense of refined estimates?);5. determining the impact of alternative growth horizons on value; and6. determining what the actual growth rate of total earnings must be to overcome the dilution effects of financing with external equity.While the security analyst still faces the problems associated with decision making under uncertainty, the methodology presented facilitates the use of sensitivity analysis to study the implications of uncertain knowledge of parameters.

Traditional planning for working capital needs is typically conducted with a relatively short time horizon. In this process, management attempts to optimize the return on existing fixed assets. The period for capital investment planning is much longer, reflecting the irreversibility of these decisions. Current research in the two areas tends to dichotomize these decision processes. The implications seem to be that working capital policies only have impact in the short run. However, it is clear that cash flows for potential capital expenditures are based on assumptions relative to expected future demand and production to meet this demand—assumptions that are necessarily tied to working capital commitments in the long run. The overall planning for credit, inventory, and liquidity should, therefore, be carried out before, or simultaneously with, the capital investment decision. It is a planning requirement that becomes an integral part of the total asset planning system. The vast majority of existing working capital models or long-term capital planning models do not allow for the explicit existence of and the simultaneous interrelationships between these two important subsystems.

Prior to 1952 there was no analytical theory available that would satisfactorily explain the well-known phenomenon of asset diversification by investors. Although the portfolio selection criteria of Markowitz [3] and that of Roy [5] both explain diversification, they are based on very different objectives. The objective of Markowitz's approach is to select the portfolio of securities that maximizes the expected utility of the investor, i.e., the EV criterion. The objective of Roy's approach is economic survival through selection of the portfolio that minimizes the probability of disaster, i.e., the safety-first (SF) criterion.

Many of the typical problems encountered in forecasting a time series are alleviated when the series follows a seasonal pattern. The seasonal effect is independent of a long-term trend and cyclic effect. Furthermore, since the seasonal effect is recurrent and periodic, it is predictable. Thus, when the time series follows a seasonal pattern, the general shape of the series is known. Questions regarding the growth trend of the series, the expansion and contraction of the seasonal pattern, and random variation affecting the series are, however, left unanswered.

On February 1, 1971, the National Association of Security Dealers instituted an automatic quoting system for over-the-counter stocks. Heralded as a major advance in the elimination of market imperfections, the National Association of Security Dealers Automatic Quote System (NASDAQ) allowed bidand- ask prices of different firms in this geographically dispersed market to be centralized. Essentially its operation allowed individual “houses” to obtain the various bid-and-ask prices of market makers for a given unlisted security.

Industry analysis has long been a cornerstone in both the academic and professional segments of the investment community. Concepts such as “an industry providing downside protection” or “another is certain to outperform the market” have been prevalent throughout the profession. The importance of industry analysis in terms of stock price changes has been suggested by King, while the influence of the industry factor on corporate earnings changes has been documented by Brown and Ball. These studies and others have indicated that industry analysis has been an important part of security valuation.

Since the Second World War the corporate pension trust has become a prominent method of provision for employees' retirement income. The continuing liberalization of pension provisions and pressures to match pension trust liabilities with assets has established pension contributions as a significant component of corporate cash outlays. Asset accumulation in pension trusts has rendered such institutions a major source of capital funds.

Burton Zwick, Comment: The Effect of Interest-Rate Risk on Liquidity Premiums: An Empirical Investigation, The Journal of Financial and Quantitative Analysis, Vol. 9, No. 5, 1974 Proceedings (Nov., 1974), pp. 911-913