Les Coleman

Frequency of Man-Made Disasters in the 20th Century

This paper analyses two disaster databases maintained by the Center for Research on the Epidemiology of Disasters and by Emergency Management Australia. The objective is to quantify the frequency, nature and changes in man-made disasters in industrialised countries during the past century. The analysis shows an exponential growth in disaster frequency, largely due to an increase in traditional hazards such as fires and explosions, rather than from new technologies. Although the number of incidents has grown, this has been offset by a decline in fatalities per incident. An important implication of these results is that regulatory oversight and internal corporate governance processes are inadequate to ensure effective management of modern industrial risks.

New light on the longshot bias

The longshot bias is the tendency for bettors to put more money on horses with long odds than is justified by their objective probability of winning: thus favourites win more often than projected by their odds. This challenges normative assumptions as it means the return increases with the probability of winning. Even though the longshot bias is well-known, it has defied authoritative explanation. This article draws on studies of the longshot bias over 50 years across four continents to show that its nature is consistent with two bettor populations. One is risk-averse, knowledgeable about winners, backs favourites, believes in the gamblers fallacy, and has a positive expected return. The other, a larger group is risk loving, backs longshots, believes in hot hands, and has a significant, negative expected return. The crossover between the two groups occurs where the probability of a positive result is about 0.2. This matches the transition from risk aversion to risk embrace which has been found in a variety of behavioural studies.

What were they thinking? Reports from interviews with senior finance executives in the lead-up to the GFC

The impact of the Global Financial Crisis (GFC) on capital markets has demonstrated that corporate stakeholders (including shareholders, lenders and independent board members) need to be far more aware of the decision-making processes followed by corporate executives. Gaining insight into these processes is difficult at any time, yet attempting to uncover (in any meaningful sense) how executives reached critical decisions in the lead-up to the GFC is almost impossible in hindsight. This article overcomes this problem in that it reports the results of interviews conducted with senior Australian finance executives in the lead-up to the GFC. These interviews were designed to elicit granular explanations for the rationale underpinning major corporate finance decisions, and their timing and subjects provide a unique ex ante profile of the perceptions of senior executives in large firms as the GFC developed. The most significant finding is that the corporate executives shared a decision framework with core features similar to those of financiers that are thought to have contributed to the GFC, particularly permanently increasing asset prices, easy liquidity and safety in powerful risk management techniques. Our findings have strong implications for independent board members who – at least in hindsight – failed to identify and mitigate risks from systemic reliance on appreciating markets and the inevitability of mean reversion.

An Exploratory Analysis of Factors Influencing Initial Market Response and Media Reports Following Shock Corporate Events

This article examines market efficiency in a natural environment using minute-by-minute share prices following fatal industrial disasters and sudden CEO deaths, and their subsequent media reports. Prices of affected firms start to react within an hour of shock events and fall by 3%; half this fall is reversed prior to the first media reports with the balance reversed by the next trading day. Spreads behave in similar fashion. This is interpreted as market overreaction as risk-averse investors respond to uncertainty created by the shock; prices return to pre-shock levels once it is clear that the event is to be expected and already built into valuations.

Narratives in Managers’ Corporate Finance Decisions

This article uses the extended case method to explore senior executives’ corporate finance decisions. We quantified firm’s finance practices using a mail survey, and then – to resolve puzzles in managers’ decision processes – conducted face-to-face interviews with chief finance officers of large listed firms. The interviews identified six themes as consistent influences on finance decisions: pressures imposed by clienteles; constraints on resources; risk management; heuristics; real options; and sustainability. We conclude that managers are logical and rational in their decisions, but employ a wider range of criteria than assumed in conventional finance theories.

Testing equity market efficiency around terrorist attacks

This article uses the nine major bombings since 1998 that have been attributed to Al Qaida to examine market efficiency, including a test of rumours that investors traded with advance knowledge of attacks. Analysis of these related, but individually unexpected, events confirms markets are semi-strong efficient: it now takes well under a trading day to fully price in a completely unexpected attack. On balance, markets also proved strongly efficient with no conclusive evidence of insider trading.

Facing up to fund managers: An exploratory field study of how institutional investors make decisions

Purpose - – The paper aims to describe the behind-the-scenes strategy and processes that fund managers use to make investment decisions. Design/methodology/approach - – The research involved semi-structured, face-to-face interviews with 34 fund managers in Istanbul, London, Melbourne and New York during 2012. Results describe their approach, and tie it back to theoretical explanations. Findings - – Large investors make limited use of neoclassical finance theory. They believe that securities markets trend over the short term, mean revert over the long term, and have upward sloping demand curves. They rely on qualitative techniques, think of security prices rather than returns, acknowledge constraints by their employer and clients, are heavily socialised and see no limitation from using similar approaches to competitors. Originality/value - – This is the first interview-based evaluation of global manager techniques since the market crash after 2008, and provides an innovative depiction of actual processes followed by institutional investors.

On the Need for Quantifying Corporate Crises and Other Man-Made Disasters

On 23 March 2005 an explosion and the resulting fire in a BP oil refinery in Texas took the lives of 15 people, injured 170 others and caused damage worth billions of dollars. The already classic evaluation of this man-made disaster by an independent review panel, the so called Baker Report, starts by stating in the first line that ‘process safety accidents can be prevented’ (Baker Report, 2007). Looking at our industrial history, which is lined with corporate crises of all sizes, the question springs to mind ‘how can we be so sure that corporate crisis can be prevented?’; and should that not be ‘how can we be best prepared to control the effects of such crisis?’ The history of this journal is an illustration of the considerable progress in scholarly understanding of the causes of crises and disasters during the last 40 years or so, and of techniques for their avoidance and management. An important difference between the studies of natural disasters and man-made diasters should be noted. Studies of natural disasters generally consider them amenable to statistical analyses, and an important body of work has been developed that quantifies their frequency and consequences. By contrast studies involving man-made disasters have tended to treat them as isolated, if not unique, events. Most analyses have been case studies drawing out the root causes of the event, or outlines of best practice in crisis avoidance and management. It should therefore be acknowledged that our scientific base is currently weak. Grand master of the trade, Quarantelli, does exactly that in his epilogue of the book ‘What is a Disaster: New Answers to Old Questions’ (Perry and Quarantelli, 2005). He turns away from the academic question at hand, which he himself raised, and instead comes up with a 10 point list of future research topics. Second on that list is ‘in depth studies where the database is very weak’. The Need for a Quantitative Base

Optimizing decisions using knowledge risk strategy

Purpose The paper aims to focus on a strategic approach for making trade-offs between knowledge and risk. Design/methodology/approach Knowledge and risk are viewed as organizational resources that have an inherent trade-off between them, so that optimal firm performance does not necessarily arise through greater accumulation of knowledge nor from reduced risk. This trade-off is represented as an efficient knowledge-risk frontier. The paper examines the dynamics of this frontier on organizational performance. Findings The concept of knowledge-risk strategy is presented which contends that non-probabilistic risk or uncertainty originates from gaps in knowledge. Research limitations implications The paper proposes a new line of research to understand decision-making in organizations, particularly those which focus on knowledge intensive products and services. Practical implications The paper proposes managerial approaches to improve organizational positioning relative to the efficient knowledge-risk frontier through greater awareness of contributors to knowledge gaps and risk in decision situations, as well as traditional strategic tools such as outsourcing. Originality/value The postulated link between risk and knowledge gaps establishes a knowledge-based view of firm risk and recognizes trade-offs for decisions regarding knowledge accumulation.

Why Explore for Oil When it is Cheaper to Buy

This article uses results of independent US oil companies to examine their decisions in a high-risk environment. When these companies seek to replace oil production, the available choices fall into two broad classifications, each with its own distribution of expected costs and returns: explore for oil; or buy proven oil reserves. Firms prove risk-sensitive in their decisions as the balance struck between building reserves by acquisition and by exploration responds to firm characteristics. The crossover from risk embrace (exploration) to risk aversion (acquisition) occurs when the probability of success from the more risky strategy drops below about 15%. This matches the behaviour of decision makers when facing risks as diverse as acquisitions and racetrack betting. Shareholders, however, do not support risk-taking for its own sake, although they bid up the price of successful risk-takers. This reveals a divergence in goals between principals and agents; and an inverse relationship between risk-taking and return as measured by shareholder value.