Alan C. Shapiro

SYSTEMATIC RISK, TOTAL RISK AND SIZE AS DETERMINANTS OF STOCK MARKET RETURNS*

Abstract This paper studies the historical relationship for the period 1962–1981 between stock market returns and the following variables: beta, residual standard deviation (or total variance), and size. We conclude that neither the traditional measure of risk (beta) nor the alternative risk measures (variance or residual standard deviation) can explain the cross-sectional variation in returns; only size seems to matter. When January returns are eliminated, even the size variable loses its statistical significance.

The reaction of bank stock prices to the international debt crisis

Abstract In this paper we develop a cross-sectional regression approach to estimate the impact of foreign loan exposure on the pricing of U.S. bank stocks. A new approach is required because news about foreign loan problems may arrive incremently over time, rather than reaching the market on a few specific dates the way earnings and dividend announcements do. Consistent with this interpretation, we find that foreign loan exposure had a significant impact on the pricing of U.S. bank stocks during the years 1982 and 1983, but that the stock prices adjusted continually over the two-year period rather than jumping on a few particular days.

Taxes and Stock Return Seasonality: Evidence from the London Stock Exchange

Prior to the introduction of capital-gains taxes, seasonality is not detected in the returns of firms that traded on the London Stock Exchange. However, after the imposition of a capital-gains tax, the British stock return data exhibit apparent monthly effects in both Jan uary and April. Additional analysis reveals that, while the April effect is consistent with the tax-loss-selling hypothesis, the January effect cannot be attributed solely to the introduction of capital-gains taxation. Furthermore, the authors efforts indicate that much caution should be exercised when interpreting studies that compare results from non-U.S. data sources with those from U.S. data. Copyright 1987 by the University of Chicago.

Financial Structure and Cost of Capital in the Multinational Corporation

As the multinational corporation (MNC) becomes the norm rather than the exception, the need to internationalize the tools of domestic financial analysis is apparent. A key question is: What cost-of-capital figure should be used in appraising the profitability of foreign investments? This paper seeks to provide a comprehensive approach to analyze the cost-of-capital question. It begins by extending the weighted cost-of-capital concept to the multinational firm. It then builds on previous research to address the following related topics: national or multinational financial structure norms; the role of parent company guarantees; the costing of various fund sources particularly when exchange risk is present; the impact of tax and regulatory factors; risk and diversification; and joint ventures.

Financial Goals and Debt Ratio Determinants: A Survey of Practice in Five Countries

Dr. Stonehill is Professor, Oregon State University and Courtesy Visiting Professor, North European Management Institute (NEMI), Oslo, Norway. Dr. Beekhuisen is Visiting Professor, INSEAD, and formerly Professor, The Netherlands School of Business, Breukelen. Dr. Wright is Associate Professor at McGill University and Visiting Professor, Institute for International Studies and Training, Japan. Dr. Remmers is Professor, INSEAD. Dr. Toy is Assistant Professor, Columbia University and Visiting Professor, NEMI. Dr. Pares is Assistant Professor, INSEAD-CEDEP. Dr. Egan is Professor of Marketing, Georgia State University. Dr. Bates is Professor and Director of the Center for World Business, California State University at San Francisco.

Capital Budgeting for the Multinational Corporation

Publisher Summary This chapter focuses on the capital budgeting for the multinational corporation. Substantial differences can exist between project cash flows and cash flows back to the parent firm because of tax regulations and exchange controls. Many project expenses such as management fees and royalties are returns to the parent company. In addition, the incremental revenue contributed to the parent MNC by a project can differ from total project revenues if the project involves substituting local production for parent company exports. In general, incremental cash flows to the parent can be found by subtracting worldwide parent company cash flows from post-investment parent company cash flows. Given such differences, the question arises as to the relevant cash flows to use in project evaluation. The actual tax on remitted funds also depends on the transfer mechanism used, including adjustments in transfer prices, dividend flows, fee and royalty charges, and intracompany loan and credit arrangements.

Managing Exchange Risks in a Floating World

Dr. Shapiro is an Assistant Professor at The Wharton School of the University of Pennsylvania. He has published a number of articles related to international financial management and is a consultant for several banks and multinational corporations in this area. Dr. Rutenberg is an Associate Professor of Industrial Administration at Carnegie-Mellon University. He is completing a book Multinational Tactics which brings together his research in multinational finance, production, and marketing. Rutenberg has been a consultant to numerous corporations on questions of strategy and competition.

What does purchasing power parity mean

This paper examines the theoretical and empirical content of purchasing power parity (PPP) in efficient markets. It analyzes the sources of deviations from the strictest version of PPP (that exchange-adjusted price levels are everywhere identical), focusing on the role played by uncertainty, relative price changes, inappropriate price data, transaction costs, and government intervention in creating these deviations. It then identifies and addresses the key issue involving purchasing power parity: are the deviations from PPP that occur sufficiently large, persistent, and predictable as to enable individuals or governments to successfully exploit them? An answer of ‘no’ is shown to be consistent with both economic theory and the empirical evidence.

Currency Risk and Relative Price Risk

This paper demonstrates the strong linkages that exist between currency risk, represented by inflation risk and exchange rate changes, and relative price risk. These linkages affect the optional quantities of forward exchange contracts, nominal debt, and fixed price sales (purchase) contracts to use in hedging against these risks. It is shown that the existence of as many hedging mechanisms as there are forms of price risk allows for the precise targeting of specific price risks with specific hedging instruments. Moreover, even though each hedging mechanism specializes in protecting against a particular form of price risk, the optimal quantitiy of each influences and is influenced by the optimal quantities of the others.

Optimal Inventory and Credit-Granting Strategies under Inflation and Devaluation

The recent wave of revaluations has again brought to the fore the foreign exchange risks with which most multinational corporations have to live constantly. While these latest parity changes have tended to increase the value of foreign currencies relative to the dollar, most exchange risks arise from pending devaluations.