Front Matter Source: Financial Management, Vol. 11, No. 3 (Autumn, 1982), pp. 1-4 Published by: Wiley on behalf of the Financial Management Association International Stable URL: http://www.jstor.org/stable/3664991 . Accessed: 12/06/2014 21:03 Your use of the JSTOR archive indicates your acceptance of the Terms & Conditions of Use, available at . http://www.jstor.org/page/info/about/policies/terms.jsp . JSTOR is a not-for-profit service that helps scholars, researchers, and students discover, use, and build upon a wide range of content in a trusted digital archive. We use information technology and tools to increase productivity and facilitate new forms of scholarship. For more information about JSTOR, please contact [email protected]. . Wiley and Financial Management Association International are collaborating with JSTOR to digitize, preserve and extend access to Financial Management. http://www.jstor.org This content downloaded from 62.122.76.45 on Thu, 12 Jun 2014 21:03:29 PM All use subject to JSTOR Terms and Conditions
Transcript
Front MatterSource: Financial Management, Vol. 11, No. 3 (Autumn, 1982), pp. 1-4Published by: Wiley on behalf of the Financial Management Association InternationalStable URL: http://www.jstor.org/stable/3664991 .
Accessed: 12/06/2014 21:03
Your use of the JSTOR archive indicates your acceptance of the Terms & Conditions of Use, available at .http://www.jstor.org/page/info/about/policies/terms.jsp
.JSTOR is a not-for-profit service that helps scholars, researchers, and students discover, use, and build upon a wide range ofcontent in a trusted digital archive. We use information technology and tools to increase productivity and facilitate new formsof scholarship. For more information about JSTOR, please contact [email protected].
.
Wiley and Financial Management Association International are collaborating with JSTOR to digitize, preserveand extend access to Financial Management.
http://www.jstor.org
This content downloaded from 62.122.76.45 on Thu, 12 Jun 2014 21:03:29 PMAll use subject to JSTOR Terms and Conditions
* Financial Management (ISSN 0046-3892) is the journal of the Financial Management Association, an affiliate of the Finman Corporation. It is published quarterly. See publishing schedule and deadlines below. The Editor and the Association assume no responsibility for views expressed by the authors.
* Membership dues of the Association include a one-year subscription to the journal. Subscription rates are: Regular $25; Sustaining $30; Student $12. Corporate, governmental, or institutional membership is $100 (all rights and privileges); 3 individuals may receive mailings. Library subscriptions are $35 per year. Members outside the U.S. add $2 per year to cover overseas postage. All fees must be in U.S. dollars. Application forms follow the last article in this issue.
* Memberships, subscriptions, and address changes: Write Financial Management Association, College of Business Administration, University of South Florida, 4202 Fowler Avenue, Tampa, Florida 33620.
* Manuscripts: Send to Willard T. Carleton, Editor, Financial Management, School of Business Administration, University of North Carolina, Chapel Hill, North Carolina 27514. A submission fee is required for evaluation of each manuscript considered, $30 for non-FMA members and $15 for FMA members (U.S. dollars). Style information for manuscripts is at the back of this journal. * Permission to Quote or Republish: Write Financial Management Association, College of Business Administration, University of South Florida, 4202 Fowler Avenue, Tampa, Florida 33620.
* Advertising Rates and Requirements: Write Patricia Hodgson, Managing Editor, Financial Management, School of Business Administration, University of North Carolina, Chapel Hill, North Carolina 27514.
* Publishing Schedule and Deadlines: Financial Management is published on March 30 (Spring), June 30 (Summer), September 30 (Autumn), and December 30 (Winter). Deadlines for receipt of meeting announcements, calls for papers, or positions available are: January 30 (Spring), April 30 (Summer), July 30 (Autumn), and October 30 (Winter). Announcements received after these deadlines will be printed in the current issue if at all possible or will be printed in the next following issue if appropriate. (These deadlines do not apply to camera-ready copy for advertisements. Advertisers please direct queries to the Managing Editor.)
* Copyright ? 1982 by the Financial Management Association, an affiliate of the Finman Corporation. Composed and printed by Dartmouth Printing Company, Hanover, N.H. Second class postage paid at Tampa, Florida, and additional mailing offices.
POSTMASTER: Send Form 3579 to FMA, College of Business Administration, University of South Florida, 4202 Fowler Avenue, Tampa, FL 33620.
President
Ombudsman
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Willard T. Carleton School of Business Administration
University of North Carolina Chapel Hill, North Carolina 27514
MANAGING EDITOR
Patricia K. Hodgson 919/962-4206
ASSOCIATE EDITORS
Christopher B. Barry Southern Methodist University
Philip L. Cooley University of South Carolina
Kerry Cooper Texas A&M University
David H. Downes University of California, Berkeley
David Durand Lexington, Massachusetts
Jack Clark Francis Bernard Baruch College
Robert R. Glauber Harvard University
Myron J. Gordon University of Toronto
Christine R. Hekman Duke University
Roger G. Ibbotson University of Chicago
Andrew J. Kalotay Salomon Brothers
Richard Kolodny University of Maryland
William J. Marshall Washington University
John J. McConnell Purdue University
Richard W. McEnally University of North Carolina
James L. Pappas University of Wisconsin, Madison
John J. Pringle University of North Carolina
Richard J. Rendleman, Jr. Duke University
Lemma W. Senbet University of Wisconsin, Madison
Seymour Smidt Cornell University
Joel M. Ster Chase Financial Policy
Hans R. Stoll Vanderbilt University
Robert A. Taggart, Jr. Northwestern University
Howard Thompson University of Wisconsin, Madison
George E. Pinches University of Kansas
INSTITUTIONAL MEMBERS
Kansas State University University of North Carolina
at Chapel Hill University of South Florida
Babson College Banco Portugues do Atlantico Beatrice Foods Co. Bell of Pennsylvania Canadian Bankers' Association Credit Research Foundation First National Bank of Chicago Gulf States Utility
Imperial Bank Inst. de Est. Fin. AC Mexico John Hancock Mutual Life Insurance Co. Marathon Oil Co. Morgan Guaranty Trust Co. Reading & Bates Corp. Transco Companies, Inc. U. S. Army Air Defense Center
SPONSORS
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6 Myopia, Capital Budgeting and Decision Making George E. Pinches
Both executives and academicians have tended to take a myopic view of capital budgeting. This has been caused by not viewing the process in its entirety; by ignoring findings from other disciplines, including the question of how capital budgeting actually interfaces with the firm's strategic positioning decision; by our inability to deal with risk effectively; and by skimping on the control phase, including the question of what effects managerial reward/evaluation systems, which are not congruent with shareholder wealth maximization, have on the process. A broader examination of the capital budgeting process, along with many effective business/academic interchanges, can go a long way toward improving the capital budgeting process.
20 Shareholder Goals, Firm Goals and Firm Financing Decisions Neil Seitz
Shareholder wealth maximization models of firm behavior have not been successful in explaining or predicting firm financing decisions. Management oriented theory - agency and signaling - has also been unsuccessful with regard to explaining financing decisions of large, complex firms whose managers own a small percentage of total equity. Thus, we lack models that explain the financing choices of major corporations. In this paper, it is argued that managers make decisions and that they make the decisions in light of their own welfare, which is determined by the form in which they received compensation. Support is presented for the argument that managers receive their reward based on results, not the ex-ante quality of their decisions. Based on this ex-post reward method and the fact that the typical manager has a long-term nondiversified interest in the firm's equity performance, predictions with regard to leverage and capital budgeting decisions are developed. Specifically, it is suggested that the leverage position that maximizes geometric mean return to equity provides an upper limit on the amount of debt that will be incurred.
27 The Use of Warrants in the Bail Out of First Pennsylvania Bank: Joseph F. Sinkey, Jr. An Application of Option Pricing James A. Miles
Using a concept-model-example framework, this paper analyzes the use of warrants in the bail out of First
Pennsylvania Bank. A class-action suit on behalf of First Pennsylvania's stockholders was filed against the FDIC's use of the warrants. The shareholders claim the warrants represent "unreasonable" compensation for the bail out. Since a warrant is similar to a call option, the investigation is presented in terms of the Black- Scholes option-pricing model. Our estimates of the value of the warrants and the subsequent analysis suggest that the FDIC and the assisting banks did not receive "unreasonable" compensation for the bail out. By comparing the estimated value of the warrants with the estimated value of the loan subsidy, the FDIC has a
technique to determine the "fairness" of future warrant transactions.
33 The Case for Using Options to Evaluate Salvage Wayne Y. Lee Values in Financial Leases John D. Martin
Andrew J. Senchack
One of the more troublesome issues encountered by lessors in setting lease terms involves the necessity for
evaluating the residual or salvage value of a leased asset. However, recent changes in the tax treatment of financial lease contracts (contained in the Economic Recovery Act of 1981) enhance the potential for using an
option approach to the valuation of residual values. Using the put-call option parity theorem, we demonstrate that the lessor's ownership position in the residual value of a leased asset can be constructed as a combination of a put and a call. This combination, in turn, provides a basis for valuing the leased asset's residual value. Furthermore, we present economic arguments for the existence of put and call option (financial claims) markets for leased asset residual values.
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42 The American Put: Computational Issues and Value Comparisons Walter L. Eckhardt, Jr.
The four principal methods used to value American put options in a Black-Scholes framework are characterized in some detail. Three different sets of assumptions are treated. As presented in the literature, the Parkinson and binomial methods stipulate dividends that are a constant multiple of the prevailing stock price, while the Brennan-Schwartz technique assumes a constant dollar dividend. The Black-Scholes analytical procedure specifies a constant dividend yield and does not take the possibility of early exercise into consideration.
Comparisons between model and market put prices are made under all three sets of assumptions, where the binomial method is selected to represent the multiplicative dividend case. The data cover the period September 1977 through June 1981. The entire sample (1977 observations) indicates that the constant dollar dividend structure conforms most closely with market prices. All three models display a tendency to undervalue puts, but considerable dispersion of model/market value differences is observed. In addition, the correspondence be- tween the models and the market vary substantially between subsamples when the data are stratified by date, underlying stock, distance from striking price, time to maturity, stock volatility, and stock dividend yield.
53 Evidence on a Simplified Model of Systematic Risk Don M. Chance
This paper presents a simplified approach to determining the effects of business and financial risk on systematic risk. Using a well-known theoretical equation as a guideline, it develops an econometric test whereby business risk is captured by constructing classes of homogeneous unlevered betas, and the effect of financial leverage on systematic risk is then examined. Results reveal that the model performs as well as other more complex models in explaining sample variance in betas and is much more manageable. Additional evidence addresses the impact of risk class homogeneity on capturing leverage effects on systematic risk.
64 Time-Series Analysis of Beta Stationarity and Its Determinants: Carl R. Chen A Case of Public Utilities
This paper demonstrates the estimation of actual response betas and shows how a time-series analysis of beta determinants can be done using such an estimator. The empirical analysis based upon this method is more consistent with the arguments of random betas. In addition, economic variables, which have been traditionally ignored in empirical studies, can be analyzed in accordance with the model developed in this paper. The evidence provided in this study could be useful for policy decision making in firms and for determining rate structures in public utilities.
71 The Bargaining Positions of the Parties to a Lease Agreement John C. Hull
When potential lessees and lessors are in different tax positions it is sometimes possible to devise financial lease agreements that are attractive to both parties. This paper develops sufficient conditions for such mutually attractive agreements to exist and explores the bargaining positions of the two parties.
80 Bank Discount, Coupon Equivalent, and Compound Yields Philip W. Glasgo William J. Landes
A. Frank Thompson
Reported yields on short term debt instruments are calculated in a variety of ways, making comparison of yields on different instruments difficult. This article reviews the different methods, demonstrates that the biases that result from their use vary as the maturity of the instrument varies and increase as market rates increase, and suggests a method for standardization of yield comparisons.
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Dates: October 14-16, 1982 Place: St. Francis Hotel
San Francisco, California The Financial Management Association brings together practicing financial managers from industry,
financial institutions, and nonprofit and governmental organizations, and members of the academic commu-
nity with interests in financial and investment decision-making. The twelfth annual program, scheduled for October 14-16, 1982, at The St. Francis Hotel in San Francisco, California, will stress the interrelationship between theory and practice in financial and investment management.
Information on local arrangements such as lodging and travel can be obtained from: James K. Malernee, Vice President, Management Analysis Center, Inc., 550 California Avenue, Suite 300, Palo Alto, California 94306 (415) 857-1600.
Information about the placement clearinghouse services can be obtained from: Verlyn D. Richards and
Randolph A. Pohlman, Co-Directors, Placement Clearinghouse, Department of Finance, Calvin Hall, Kansas State University, Manhattan, Kansas 66506 (913) 532-6892 or (913) 532-6868.
Note: Registration desks will be set up at the meeting (corridor by the California Room) for those who are not pre-registered. Pre-registration packets will be available at the registration desks. Hotel reservations may be made by calling the St. Francis Hotel at (415) 956-5390 (please identify yourself as being with the FMA convention).
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