Inayat Ullah Mangla

Agency costs and the discount rate for public sector enterprises

In this paper, we examine the implications of agency costs on the discount rate for public sector enterprises (PSEs); we do this in the framework of the Capital Asset Pricing Model. With the addition of agency costs, the discount rate for Public Sector Enterprises (PSEs) under uncertainty becomes the risk-adjusted discount rate plus a premium for agency costs; under certainty, the discount rate for PSEs is shown to be the risk-free rate plus a premium for agency costs. Use of a discount rate by PSEs without adjusting for agency costs both under certainty and uncertainty, will lead to sub-optimal capital investment decisions by PSEs.

Extreme loss risk in financial turbulence – evidence from the global financial crisis

Purpose - This study aims to examine the stock returns distributions in ten countries in the periods before and after the global financial crisis (GFC) to evaluate how well the empirical distributions conformed to the extreme value theory (EVT) which underlies a family of risk management models. Design/methodology/approach - The authors’ sample consists of the G5 countries and the five leading emerging economies. Parameters of the General Pareto Distribution (GPD) for each country are estimated for the pre- and the crisis period. The authors follow a two-step procedure: a GARCH(1,1) model is fitted to the historical return data by pseudo maximum likelihood method; Hills GPD tail estimation procedure is employed on the residuals from the first step. Goodness-of-fit is evaluated for the empirical distributions. Findings - The authors find that the EVT explains the observed distributions well in both the pre-GFC and the GFC periods, with the important exceptions of the US and the UK markets in the crisis period. Moreover, the estimated distribution parameters are quite different for the two periods. The results underscore the inadequacy of the quantitative risk models in times of financial turbulence, and the need for prudential exercise of judgment in risk management. Originality/value - The global financial crisis (GFC) provides a unique and historical experiment to evaluate the models of tail distributions. Although the EVT provides a sound basis for modeling extreme risks, the study highlights the fundamental problem of dealing with uncertainty.

Foreign Trade Zones: The Mid‐American Experience

Foreign trade zone (FTZ) usage in the United States has increased substantially in this decade. This paper discusses the major reasons for that increase, which include a favourable regulatory climate, growing awareness of the competitive benefits of operating within a zone, and community interest in promoting zones as an incentive to attract investment. Examined here are developments in the Mid‐American region, which reflect national trends. In Indiana, illinois, Ohio and Michigan there is considerable interest in general purpose zones, but so far business use has been limited. The major activity is occuring in subzones in individual manufacturing plants, and this is likely to continue in the region as well as nationally.