Yoon K. Choi

Efficiency of mutual funds and portfolio performance measurement: A non-parametric approach

Abstract In finance, portfolio performance assessment is an important area of research. The two popular indices of performance are the Jensens alpha and the Sharpe index. However there are a number of shortcomings of the above measures that have been highlighted in the literature. We propose a new measure of performance that seeks to address the limitations of the earlier indices. The new index is calculated by employing a well known method in operations research called data envelopment analysis. We show the benefits of the proposed approach and assess the performance of mutual funds. We compare the results with traditional indices of performance. An interesting result we obtain is that the mutual funds are all approximately mean-variance efficient.

Determinants of American Depositary Receipts and their underlying stock returns: Implications for international diversification

Abstract We empirically examine several major determinants of American Depositary Receipts (ADRs) and their underlying stock returns for the period of 1990–1996 and discuss implications for international diversification and market segmentation. In general, the local factors (market or industry) explain ADRs and their underlying stock returns across both countries and industries better than the world factor for our sample period. This is especially true for emerging markets in comparison with developed markets. One notable exception is Japan. The importance of the world industry factor relative to the local industry factor is shown to depend on the industrial globalization. The explanatory power of the exchange rates for ADRs was not as strong as expected. Finally, we conclude that ADRs, especially those of the emerging markets, provide US investors with an effective way to internationally diversify.

Determinants of insurance pervasiveness: a cross-national analysis

Macroeconomic variables have previously been studied to better understand the varying degree of insurance pervasiveness across countries, but the impact of sociocultural variables on the degree of insurance pervasiveness has not been extensively researched. Using data from a representative sample of 37 countries across the globe, we find that certain cultural and sociopolitical variables can significantly influence the level of insurance pervasiveness. Specifically, we find that the masculine-feminine dimension of national culture, aggregate income, sociopolitical stability, and government regulation have statistically significant effects. Besides being additions to this body of knowledge, these results provide important revelations that represent valuable information to various constituents of the insurance industry.

Managerial incentive contracts with a production externality

Abstract A multi-agent model is extended to examine the optimal incentive contract when a production externality is significant in team production. A situation is described where relative performance evaluation is ineffective.

Transfer Pricing, Incentive Compensation and Tax Avoidance in a Multi-division Firm

This article examines the relation between transfer pricing and production incentives using a model of a vertically integrated firm with divisions located in different tax jurisdictions. We show that if divisional profits are taxed at the same marginal rate, the transfer price should be set to minimize the compensation risk faced by the manager of the buying division. For the case where divisional profits are taxed at different marginal rates, we are able to characterize the trade-off between the tax savings from setting transfer prices to reduce profitability in the high tax jurisdication and the loss of effort attributable to the impact of tax avoidance on the incentive compensation system. Further, we show that if it is feasible to compensate the division managers using multiple performance measures, the transfer price should be used to minimize the firms overall tax liability. Finally, we show that when authority to determine the transfer price must be delegated to one of the division managers, it is optimal to assign responsibility for setting the transfer price to the manager of the division with the most production uncertainty.

A note on “Monte Carlo analysis of convertible bonds with reset clause” ☆

Kimura and Shinohara [T. Kimura, T. Shinohara, Monte Carlo analysis of convertible bonds with reset clauses, European Journal of Operational Research 168 (2006) 301-310] analyze the value of a non-callable convertible bond with a reset clause. For a reset convertible bond, the conversion ratio is not fixed but depends on the underlying stock price. However, their model does not consider a dilution effect which can result due to changes in the number of shares into which the bond is converted. In this paper, we have developed a new pricing formula for reset convertible bonds that adjusts for dilution.

Management turnover and executive compensation in synergistic takeovers

Abstract The purpose of this paper is to provide a model of management turnover and executive compensation for a synergistic takeover. I extend a principal-agent model to include a synergy factor. I argue that the choice of management structure—turnover or no-turnover—provides an opportunity for the shareholder to efficiently utilize three elements of the incentive contracts: effort, insurance (risk-reduction) and synergy. I explain high turnover rates after takeovers, especially in conglomerate mergers as compared to horizontal mergers. Also, my model is consistent with empirical evidence that there is a high rate of management turnover in friendly as well as hostile takeovers and thus complements the model of the disciplinary role of takeovers. I also discuss an optimal compensation structure in synergistic takeovers compatible with their corresponding organizational forms.

Real options: a commercial bank lending application

We extend existing real‐option theories by incorporating the stochastic interaction between unit price and cost, applied in commercial bank lending. We further empirically examine an implication derived from the model as to the relationship between lending practices in the banking industry and future uncertainties. We focus on lending institutions to analyze the effect of uncertainties on lending (investment) decisions for several reasons. First, it is easy to identify the main sources of uncertainties for the assets and liabilities of the financial institutions – default risk and interest rate changes. Second, the commercial lending institution provides a unique environment in which the correlation between investment costs (liabilities) and output (loans) price is quite high and positive since both depend heavily on interest rates. Finally, bank loans may be subject to a high degree of irreversibility (e.g., substantial loss in defaults). The real option model explains the relationship between levels of lending, loan‐toassets, and the uncertainties regarding interest income and expenses. The correlation between interest income and loan expenses, in particular, explains cross‐sectional loan activities, which confirms the importance of risk management. These results also show that as banks increase one type of risk, e.g., interest rate risk, they decrease another type of risk, e.g., lending risk as measured by loans/assets.

Corporate Governance, Diversification, and Firm Value: Evidence from 'Spin-Ins'

We analyze the impact of corporate restructuring on firm value using a unique internal corporate restructuring created between the years of 2001 and 2003 in Japan. We show that excess value significantly increases after the internal restructuring even when the degree of diversification has not changed. This result supports the argument that diversification itself may not drive “discounts” or “premiums.” We also explore these events to examine the effect of bank governance and keiretsu affiliation. Our results are consistent with the argument that recent Japanese restructuring reduces information asymmetries and agency problems, thus improving the efficiency of internal capital markets and firm value.

Monitoring, diversification and managerial incentive contracts

Abstract A principal-agent model is extended to examine the optimal incentive contract when the manager is motivated by both diversification in product lines and monitoring over subordinates.