A. Alasdair Lonie

Managerial attitudes to risk: a comparison of Scottish chartered accountants and U.K. managers

Abstract This paper examines attitudes to risk by Scottish chartered accountants and considers whether their risk-taking attitudes are similar to or different from those of other business managers in the U.K. The papers also investigates whether the respondents focus on simple heuristics rather than on statistical outcomes in their decision-making process. The findings reported here are based on a large survey of accountants and managers in different functional areas. The results suggest that accountants and managers exhibit many of the biases that have been documented for executives in other countries. A focus on the framing of a decision, an emphasis on the magnitude of negative outcomes and an insensitivity to probability estimates are all characteristics of the responses to the scenario cases provided. In addition respondents display clear views about the factors that influence the riskiness of a decision. A number of strategies are likely to be adopted by the respondents to control risk, including the gathering of information and consultation with colleagues. Finally, the respondents suggest that several groups, such as customers, competitors and large shareholders, influence risk decisions taken.

Attitudes of UK managers to risk and uncertainty

The authors provide an overview of their research into the attitudes of UK managers to risk and uncertainty. They find that, when it comes to decision making, managers in UK enterprises tend to focus on loss aversion rather than risk aversion. They found that managers’ personal attitudes to risk were often more important than risk management systems and their appropriateness.

Does the issue method influence the market reaction to seasoned equity offer announcements

The evidence in this note indicates that the average stock market reaction to news of ordinary equity issues by quoted companies may depend on the share issue method employed. Using a sample of announcements made in the UK between 1989 and 1991 we find that the market response is significantly negative when the disclosure relates to a rights issue, but that there are no significant share price changes when announcements about equity placings and open offers take place. This result appears to be inconsistent with the theoretical analysis contained in Myers and Majluf (Journal of Financial Economics, 13, 1984).

Corporate growth and the equity-debt choice

In this paper we extend the analysis of earlier investigations into the relationship between patterns of corporate growth and the announcement of new financing (see for example, Pilotte 1992; Burton et al., 1993) by examining the growth in turnover and earnings achieved by equity and debt-issuing firms. We study the performance of UK firms which made new financing announcements between 1989 and 1991 and find (i) that corporate growth generally declined in the years which followed the announcement date and (ii) that equity-issuing firms exhibited higher pre-announcement growth in sales turnover and in earnings than their debt-issuing counterparts - significantly higher growth in the case of the expansion in the value of sales.

An investigation of the stability of returns in Western European equity markets

This paper investigates the temporal stability of various dimensions of the returns of 16 European stock markets that are relevant to an analysis of international portfolio diversification. The basic data consist of daily stock market price indices for these markets. This group of indices comprehends a wide range of stock markets differentiated by size, age and technological sophistication, but in each case located in Western Europe. Two main tests were conducted: (a) ANOVA to identify inter-temporal variability and inter-market variability over 24 three-month sub-periods from January 1989 to December 1994, and (b) cluster analysis to identify groups of markets that exhibit similar behaviour patterns. The findings suggest that, while the potential gains from an internationally diversified portfolio restricted to the equities of Western European markets appear to be substantial, the lack of inter-temporal stability in the composition of the optimal portfolio from one period to another makes these gains difficult to achieve in practice.

Insider trading, growth opportunities and the market reaction to new financing announcements

The paper examines three hypotheses about the effect of insider trading on the market response to new financing announcements (NFAs) using a sample of disclosures made by UK firms between 1989 and 1991. The study demonstrates first that no systematic relationships exist between the market response to NFAs and pre-announcement insider trading. Second, contrary to the predictions of John and Mishra (1990), the values of growth indicators do not differ significantly between firms that are subject to insider buying and selling prior to NFAs. Third, while there is some evidence to suggest that insider trading and growth prospects influence the market reaction to debt issue announcements, the evidence is not pervasive across growth measures and does not extend to equity issues. This final result helps to resolve an apparent contradiction between the signalling models of John and Mishra (1990), and John and Lang (1991), and suggests that prior studies of the market reaction to NFAs are not significantly flawed by their failure to consider the signalling role of pre-announcement insider trading. The findings are also shown to be relevant to the current debate about whether, and how, insider trading regulations should be tightened. *It is greatly regretted that Mr. Alasdair Lonie, sometime Senior Lecturer in the Department, died while this paper was in review.

Volatility Assessment for Stocks or Portfolios: A Risk Triangle Approach

Publisher Summary This chapter presents volatility assessment for stocks or portfolios. It presents an analysis, which may be of interest to fund managers as well as academics in three ways: (1) it examines a number of risk measures that are relevant to the portfolio appraisal of fund managers as well as a number of non parametric equivalents, and applies them to an internationally diversified share portfolio; (2) it analyzes relevant risk-return combinations at three levels o f disaggregation, as country index, industrial sector index, and company share; and (3) it constructs risk triangles, which are a method of presenting risk-return information that is designed to facilitate share appraisal and selection procedures in a way that reflects the individual attitude to risk o f the user.