Franklin R. Edwards

Managerial Objectives in Regulated Industries: Expense-Preference Behavior in Banking

Recent work on the theory of the firm under regulation suggests that managers of regulated firms may be utility maximizers rather than profit maximizers. There is, however, very little empirical evidence on managerial behavior in regulated industries. This article examines one kind of utility-maximizing behavior that seems particularly applicable to regulated firms: expense-preference behavior. Specifically, I develop a test capable of discriminating between expense-preference and profit-maximizing behavior and apply it to the banking industry, a highly regulated industry. My findings indicate that an expense-preference theoretical framework better explains the behavior of regulated firms than does a profit-maximization framework.

Uncertainty, Market Structure, and Performance: The Galbraith-Caves Hypothesis and Managerial Motives in Banking

I. The market structure-uncertainty avoidance relationship, 455. — II. Rationale behind the Galbraith-Caves hypothesis, 456. — III. A measure of uncertainty avoidance and the theory of the firm under uncertainty, 458. — IV. The Galbraith-Caves thesis in the context of the firm under uncertainty, 460. — V. Testing the relationship between market power and uncertainty-avoidance behavior, 463. — VI. Empirical results, 469. — VII. Conclusion, 472.

Hedge Funds versus Managed Futures as Asset Classes

Portfolio theory focuses on constructing optimal portfolios of assets to maximize expected return and minimize risk. In informationally efficient markets, the prescription is generally to buy and hold a broadly diversified portfolio. In theory, fairly priced derivative instruments do not add anything of importance to the mix, since their payoffs can be replicated using the underlying assets. And there is no role for speculation, against the efficient prices in the market. Among real-world investors, however, there is considerable interest in funds that specialize in trading futures, as well as in hedge funds that may engage in all sorts of speculation. Historically, some funds based on these non-standard assets appear to have done extremely well, but others have not. This article takes a thorough and comprehensive look at the historical performance of managed futures and hedge funds alone and as components of a broadly diversified asset portfolio. The overall result is that they have historically tended to earn positive returns with low correlation to other asset classes, so that adding either hedge funds or managed futures to a diversified portfolio of ordinary assets would have increased its Sharpe ratio.

Taxing transactions in futures markets: Objectives and effects

In the last few years various legislative proposals have been made to impose a transaction or excise tax on securities and derivative market transactions. Although there have been considerable discussion and analysis of the wisdom of imposing such a tax on securities markets, there has been no analysis of the pros and cons of extending the tax to futures markets. This article attempts to fill this gap, first, by examining the various rationales advanced to support a tax on securities markets to determine their applicability to futures markets and, second, by analyzing the likely effects of the tax on the competitiveness and efficiency of futures markets. In addition, the revenue-raising potential of a tax on futures transactions is evaluated. I conclude that a tax on futures markets will not achieve any important social objective and will not generate much revenue.

Off-Exchange Derivatives Markets and Financial Fragility

Huge losses suffered by users of off-exchange (or OTC) derivatives have created widespread concern that derivatives may be undermining the stability of financial markets. During the last 12 months alone companies have reported losing more than

Studies of the 1987 stock market crash: Review and appraisal

10 billion on derivatives investments. A prime example is Metallgesellschaft A.G. (MG), Germany’s 14th largest industrial firm corporation, which reported losses of almost

Regulating international financial markets : issues and policies

1.5 billion as a result of a hedging strategy gone sour.1 Only a massive

Financial Markets and Managerial Myopia: Making America More Competitive

1.9 billion rescue operation by 150 German and international banks kept MG from going into bankruptcy. While MG did not default on its futures or swap obligations, had it done so the ramifications for some major international banks and for OTC derivatives markets in general may have been far-reaching. Substantial losses also have been reported by other large firms and investment funds: Orange County California (

New proposals to regulate hedge funds: SEC Rule 203(b)(3)-2

1.5 billion), Showa Shell Sekiyu (

Do Hedge Funds Have a Future

1.5 billion), Kash-ima Oil (