Fred R. Kaen

R/S analysis of foreign exchange rates under two international monetary regimes

Abstract The purpose of this study is to examine empirically the behavior of foreign exchange markets during the most recent experiences with fixed and flexible rates. Specifically, this study explores the possibility that long-term dependence is present in the exchange rate series for the British pound, French franc, and German mark in terms of the U.S. dollar. Using R/S analysis, positive long-term dependence is uncovered for each exchange rate during the flexible regime but negative dependence is found in the fixed period.

Firm Size, Employees and Profitability in U.S. Manufacturing Industries

We examine the relation between profitability and size for sixty-four manufacturing industries between 1990 and 2001. We use three measures of profitability: Earnings before interest, taxes, depreciation and amortization as a percent of sales (EBITDA margin); earnings before interest and taxes as a percent of sales (EBIT margin) and EBIT as a percent of total assets (EBIT/TA). Our measure of firm size is the natural log of the number of employees. We find the following: (1) In about half of the sixty-four industries firm profitability increases at a decreasing rate and eventually declines as firms become larger. (2) For the remaining half of our manufacturing industries, no relationship exists between size and profitability. (3) For a given level of total assets, firms with fewer employees exhibit greater profitability. (4) For a given level of sales, firms with fewer employees exhibit greater profitability. Our results are consistent with theories of firm size that specify trade-offs between economies of scale and organizational costs and with theories that ascribe certain competencies to firms that allow them to offset the advantages often ascribed to large firms such as economies of scale.

Risk Management, Corporate Governance and the Public Corporation

The finance literature describes risk management as being concerned with identifying and managing a firm’s exposure to financial risk. Corporate governance is often described as the set of rules, structures and procedures by which investors assure themselves of getting a return on their investment and ensure that managers do not misuse the investor’s funds. This essay addresses the connection between risk management and corporate governance and the public corporation. We argue that risk management and risk management products help ensure the survival of the firm and thereby support broad public policy objectives — objectives beyond the immediate interests of the owners of the company and a narrow financial objective of shareholder wealth maximization.

The Effects of Bundesbank Discount and Lombard Rate Changes on German Bank Stocks

We investigate whether Bundesbank interest rate changes convey information to investors about future financial market and economic conditions, especially as they affect banking and bank equities. We find that increases in Bundesbank discount and Lombard rates are associated with negative abnormal returns on German equities and negative market adjusted abnormal returns on bank stocks. Decreases in official rates are associated with positive market wide returns and positive market adjusted abnormal returns on bank stocks. We conclude that Bundesbank discount and Lombard interest rate changes are systemic events which lead investors to revalue the expected cash flows and/or required rates of return on both bank and non-bank German equities.

American political values and agency theory: A perspective

This paper explores the historical American political values which have shaped modern financial theory and agency theory. Financial agency theorys intellectual roots are shown to be located in the liberal tradition which espouses the instrumental nature of property and property rights. The paper also argues that financial theorists should recognize that, historically, economic efficiency was not a value or end in itself but merely a means by which more fundamental social goals might be achieved.

New Hampshire Bank Mergers: The Returns to Acquiring Bank Shareholders

A major revision of laws governing bank branching and bank mergers was passed by the New Hampshire Legislature and signed by the state’s governor in June 1979. This banking legislation, HB 777, opened the way for statewide branching and statewide merger by New Hampshire banks. Since its passage, there have been numerous bank mergers and acquisitions resulting in the emergence of a number of relatively large banking organizations throughout the state.

Information effects in financial distress : The case of Seabrook Station

Abstract In 1972 a group of electric utilities announced plans to construct Seabrook Station, a nuclear generating facility. In 1988, the lead partner in the venture, Public Service Company of New Hampshire (PSNH), filed for bankruptcy. Examination of the stock price effects of a variety of financial events preceding the bankruptcy filing shows that information about cash flows paid to PSNH security holders affected the common stock prices of PSNH and its Seabrook partners. whereas information about investment and operating cash flows had little or no effect.

The effects of the Norwegian banking crisis on Norwegian equities

Abstract We examine the information effects of Norwegian savings and commercial bank financial distress announcements on Norwegian bank and non-bank stock prices. We find that Norwegian commercial bank failures during the Norwegian banking crisis were associated with negative common stock abnormal returns for both Norwegian banks and large Norwegian corporations listed on the Oslo Bors. We interpret this finding as supporting the conclusion of Norges Bank that the banking crisis was an economy-wide systemic crisis and required intervention by Norges Bank and the Norwegian government. Although we find no systemic market-wide information effects associated with the failure of Norwegian savings banks, we are reluctant to conclude that these bank failures had no effect on the households, businesses and local economies served by these banks. The absence of negative abnormal returns on large commercial banks or publicly listed Norwegian corporations for the savings-bank events may reflect the fact that large commercial banks were serving a different banking clientele than the savings banks and that large Norwegian corporations did not rely on savings banks for financing.

The Integration of Eurodollar and U. S· Money Market Interest Rates in the Futures Market

ZusammenfassungDie Integration der Eurodollar-und US-GeldmarktsÄtze auf dem Terminmarkt. —In diesem Aufsatz wird die Beziehung zwischen den TerminsÄtzen für Eurodollars, amerikanische Schatzwechsel und amerikanische verbriefte Termineinlagen untersucht. Dabei wird die Granger-KausalitÄt unter Verwendung der tÄglichen PreisÄnderungen für Kontrakte zum Juni, September und Dezember {dy1982} getestet. Im Ergebnis zeigt sich, da\ sich die Preise auf den TerminmÄrkten für Eurodollars und für amerikanische Geldmarktinstrumente gleichzeitig anpassen, ganz im Gegensatz zum Kassamarkt. Dieses unterschiedliche Verhalten beider MÄrkte kann durch institutionelle Hindernisse (z. B. Restriktionen bei der Zulassung von Banken und hinsichtlich der Kapitalströme), strukturelle Besonderheiten der MÄrkte (MindestbetrÄge für Transaktionen und die Marktmacht einiger Banken) und/oder Transaktionskosten erklÄrt werden. Die Bildung von TerminmÄrkten in den Vereinigten Staaten und in Gro\britannien könnte dazu beitragen, die Zahl der Marktteilnehmer auf den internationalen GeldmÄrkten zu vergrö\ern und bisher bestehende Marktunvollkommenheiten zu verringern.RésuméL’intégration des taux d’intérÊt du marché monétaire des E.U. et d’Eurodollar sur les marchés à terme. —Cet article analyse la relation entre les opérations à terme d’Eurodollar, des bons du Trésor des E.U. et des certificats de dépÔt sur des contrats à terme des banques locales des E.U. Les auteurs appliquent les procédures de causalité de Granger et utilisent les données sur les changements des prix quotidiens pour les opérations en Juin, Septembre et Décembre 1982. Ils conclurent que les prix des opérations à terme d’Eurodollar et d’instrument financier du marché monétaire des E.U. changent simultanément. Sur le marché au comptant, cependant, il y a une évidence répétée que des ajustements de prix ne sont pas simultanés. La conduite dissimilaire sur les deux marchés peut Être expliquée par la présence des barrières institutionelles (par exemple des restrictions sur l’entrée des banques et sur les flux des capitaux), par des caractéristiques de la structure de marché (le volume minimum des transactions et le pouvoir de marché de quelques banques), et/ou des frais de transaction. L’établissement des marchés à terme dans les E.U. aussi bien que dans le R.U. peut contribuer à augmenter le nombre des participants sur les marchés monétaires internationaux et peut reduire des imperfections quelconques qui peut-Être avaient existé dans le passé.ResumenIntegración de las tasas de interés de los mercados eurodólar y monetario de los EEUU a los mercados de futuro. —En este artículo se analiza la relación entre los contratos a futuro del eurodólar, valores del Tesoro de los EEUU y los C.D. de la banca doméstica norteamericana. Se utilizan los procedimientos de causalidad de Granger y los datos son los cambios diarios de precios para los contratos de junio, septiembre y diciembre de 1982. Este articulo concluye que la relación de los cambios de precios de los instrumentos financieros de contratos a futuro entre el eurodólar y el mercado monetario de los EEUU es contemporánea. En los mercados en efectivo, sin embargo, hay evidencia repetida que se producen ajustes de precios no-contemporáneos. El comportamiento disímil de ambos mercados se puede explicar por la presencia de barreras institucionales (p.ej. restricciones en la entrada de bancos y flujos de capitales), caracteres estructurales de mercado (tamaño mínimo de las transacciones y poder de mercado de algunos bancos), y/o costos de transacción. El establecimiento de mercados de futuro tanto en EEUU como en el Reino Unido podría servir para incrementar el nÚmero de participantes en los mercados monetarios internacionales y puede conducir a una reducción de cualquier imperfección de mercado que pueda haber existido en el pasado.

Bundesbank intervention effects through interest rate policy

Abstract This paper investigates the effects of the changes in the Bundesbanks discount and Lombard interest rates on the volatility of European Union country exchange rates relative to the German mark during 1987–93. The first year of the sample period contains the last major realignment in the ERM before its ‘breakdown’ in 1993. Using a parsimonious EGARCH model, we find that the conditional volatility of these exchange rates increased in response to interest rate changes, regardless of the rate change direction. This finding is in direct conflict with Bundesbanks public statements that indicate that its interest rate policy was designed to calm its foreign exchange markets.