Pradipkumar Ramanlal

Six myths of information and markets: information technology networks, electronic commerce, and the battle for consumer surplus

The infusion of powerful information networks into business environments is beginning to have a profound impact on the nature of governance between buyers and sellers in the marketplace. Most articles in this area emphasize the benefits to the consumer side of the equation due to reduced coordination, search, and transactional costs. This article presents a broader view of information and markets by elucidating innovative ways that sellers can survive in intensely competitive markets. The article is framed in terms of six myths and counter myths of information technology and effective markets. The myths provide a conventional view of how increased customization and outsourcing, open architectures, a larger customer base, and low price guarantees will benefit the buyer. The counter myths illustrate that it is altogether feasible for IT to enable supplier strategies that extract consumer surplus. For instance, suppliers could use IT to price discriminate by tailoring product offerings and charging buyers as much as they are willing to pay. They could also segment markets making comparative shopping difficult, thus avoiding the competitive equilibrium. Also, suppliers could focus on the creation of networks that lock in customers or follow aggressive pricing strategies that deter price competition. Both the myths and counter myths are presented and examined in a polemical format using simple, fundamental economic arguments. We hope to provide provocative new avenues for discourse in this area by recognizing the complexity of interactions between buyers and suppliers in a highly networked environment

Timing of Convertible Debt Issues

Abstract The popularity of convertible debt as a financing vehicle waxes and wanes. In this article, we investigate whether the timing of convertible debt issues can be explained by three reported reasons for its use as a financing vehicle. Specifically, we reexamine the long-standing beliefs that convertibles are used as “debt sweeteners” and there are “hot issue” markets for these securities. In addition, we examine whether convertibles help diminish the agency conflict between bondholders and stockholders as suggested by Brennan and Schwartz (1988) . Our empirical results suggest that: (1) corporate managers issue convertible debt as debt sweeteners and (2) more convertible debt is issued in hot markets.

Digital economics and the e-business dilemma

he past few years have seen a number of debatesover whether e-business requires new or differ-ent thinking about business and strategy. Regard-less of the various views, the reality is that contemporaryinformation technologies (ITs) are facilitating rapid digi-talization, storage, and transfer of product and service ex-periences. This will not abate. So a productive exercise isto examine business strategy by looking at the economicimpacts of digitalization. Here we try to take a step backand reexamine the dynamics of e-business and its poten-tial impact on the economy from fundamental andenduring economic principles.Our aim is to provide managers of enterprises in this digi-tal age with guidance on key factors that will have a con-trolling effect on the likely evolutionary path of e-busi-ness. Moreover, these controlling factors will affect thebalance of power between market participants, specifi-cally, suppliers and entrepreneurs on the one hand andconsumers on the other. We conjecture that the evolution-ary path and the balance of power are intimately linkedand will result in a precarious economic balancing act—precarious in the sense of generating huge benefits for theeconomy as a whole, but with the potential to initiatelarge swings in the division of those benefits betweenbuyers and suppliers. As such, managers of companiesthat digitalize their offerings or use today’s Internet andother networks for business have a compelling interest tocomprehend the new economic reality and leverage it totheir respective advantage. The failure to do so can havedramatic negative consequences for the complacent party.

The Relative Performance of Yield Curve Strategies

Columbia (SC 29208). uration is a useful metric for assessing a bond portfolio’s sensitivity to a parallel shift in the yield curve. When the yield curve shift is not parallel, however, two bond portfolios with the same duration may not experienlce the same return performance. To evaluate differences in expected performance across portfolios, it is therefore necessary to quanti

Riding the Bill Curve

the price impact due to changes in shape, as opposed to merely shift, of the yield cume. Litterman and Scheinkman [1991] suggest that changes in shape are due mostly to parallel shf t s , changes in slope (i.e., twist), and changes in curvature (i.e., humpedness or butterfly changes). Jones [1991] and Willner [1996] inhcate that these three types of changes in the yield curve’s shape (level, slope, and curvature) are not independent, so correlations among them must be considered when estimating the bond portfolio’s expected performance. Bond portfolio managers pursuing active strategies must therefore consider all three yield curve parameters as well as correlations among changes in these parameters. Consider, for example, yield curve strategies that involve structuring a portfolio to exploit expected changes in the yield curve’s shape. Three basic yield curve strategies are: 1) bullet strategies; 2) ladder strategies; and 3) barbell strateg~es (see Fabozzi [1996]). A bullet strategy calls for investing in a bullet portfolio, which is constructed so that maturities of the bonds are concentrated at one particdar point on the yield curve. A ladder portfolio is con-

Convertible Preferred Stock Valuation: Tests of Alternative Models

The authors examine the effectiveness of “riding the bill curve” using a comprehensive sample of U.S. Treasury bills over a recent ten-year period. The results suggest that riding the bill curve consistently enhances returns over a buy-and-hold strategy on average. Although the additional return is associated with higher risk, the reward is sufficient for all but the most risk-averse investors. The riding strategys performance deteriorated substantially during the Federal Reserve tightening cycle of 1994–1995. Riding the bill curve, however, is generally preferable to buying and holding relatively expensive “quarter-end” or “tax” bills.

Simple Approximation of the Value of Callable Convertible Preferred Stock

We undertake a comprehensive test of several contingent claim valuation models adapted to callable, convertible preferred stocks employing a sample of 24 issues and over 27,000 daily price observations. To our knowledge, no large-scale tests of these models have been published. The most complete model tested is an extension of the 1970s developments of Ingersoll and of Brennan and Schwartz, allowing for realistic contract features including delayed callability and nonconstant call prices. The mean and the mean absolute pricing errors are approximately −0.18 percent and 5.4 percent, respectively, and this model fits the data substantially better than the simpler alternatives that ignore such features. Thus, the added computational complexity required for the most complete model examined is evidently merited. Moreover, to the extent that the most complete model accurately mirrors reality, the evidence suggests that investors rationally account for many of the complex features imbedded in typical contracts.

Distribution of growth probabilities in fluid flow and diffusion-limited aggregation

We develop an analytic approximation of a model of callable convertible preferred stock that allows for deferred callability and cash dividends on the issuing firms common stock. Predictions of the analytic approximation and the numerical solution are close, hence we show that the benefit of the method (ease of computation) outweighs the cost (negligible computational error). We also show that model prices predict market price with reasonable accuracy. The model is developed so that it may be solved on a handheld calculator or on a personal computer, making accurate price predictions readily available.

Utility Maximizing Portfolio Insurance Strategies When Hedgers Consider the Impact of Their Trading on Security Prices

The authors examine the role of extrinsic noise in diffusion-limited aggregation (DLA) and a deterministic continuum theory derived from the work of Paterson (1984) on fluid flow in a Hele-Shaw cell. They show the distribution of growth probabilities for the deterministic model to be essentially the same as DLA and predict that the asymptotic value of the fractal dimension for off-lattice DLA may be closer to D approximately 1.65+or-0.03, as opposed to D=1.71. The results confirm that extrinsic noise is not essential to create the characteristic properties of DLA in models that are variations of DLA.

Liquidity Trading in Market Microstructure Theory

Portfolio insurance strategies can destabilize markets to such an extent that they may be counterproductive. Destabilization results when hedgers take share prices as given and follow exogenously specified price-based trading rules. We recognize that such trading rules may not be utility maximizing and that hedging affects share prices. Accordingly, we develop a portfolio insurance strategy where hedgers consider the impact of their trading on prices and endogenize their trading rule which is obtained by maximizing expected utility. Moreover, our strategy does not require the dissemination of information about the extent of portfolio-insurance based hedging activity in the economy.