Volume 35 CONTENTS Spring 2009
Implications of the Financial Crisis for Financial Education
A continually recurring debate in finance education involves the role of theory versus practice, or in a similar vein mathematical modeling versus explanation of actual practice. The complaint voiced by many students is that they are forced to learn esoteric theories that are not applicable in the fabled "real world." That debate is likely to become more intense as we go forward from what has been the biggest financial crisis since the great depression.
Is the Cost of Success Constant Across Business Disciplines: A Survey of Successful Authors
Andrew H. Holmes and J. Michael Pinegar
We survey authors in major business disciplines who published in their respective top journals between 2000 and 2002 to investigate whether publishing in top journals is equally difficult across disciplines. We inquire about time, data, and analytical requirements for publication. We also inquire about the research environment and resource availability at the respondents’ respective schools. Finally, we ask about publication requirements for tenure and about the authors’ perceptions of the difficulty of publishing in disciplines other than their own. Finance is perceived to be the most difficult discipline in which to publish, other than the respondents’ own disciplines, and publication requirements for tenure are also more daunting for finance faculty than for faculty in other disciplines, on average.
Success Rates, Optimism Bias, and the Predictive Power of Alternative Performance Measures:
A Post-Audit of One Company's Real Investment Decisions
Peter Brous, Bridget Hiedemann and Tsunya Schultz
Using a detailed database of the forecasted and actual performance of each investment made by one firm over the period 1996 to 2001, we determine the firm’s investment success rate, the level of optimism bias associated with the analysts’ forecasts, and the implications of using expected ROI rather than the theoretically preferred expected NPV to make investment decisions. In our sample, the success rate is approximately 64%, optimism bias leads to huge discrepancies between expected and actual NPVs, and the implications of using expected ROI rather than expected NPV are limited. A couple of caveats apply. The firm in question makes relatively homogeneous investments. And these investments involve minimal changes in working capital and depreciation expense.
Finance Faculty Perception of Teaching, Research, and Service Performance Evaluations
Connie Chum, Kam C. Chan and Samanta Thapa
We conducted a survey on Finance faculty teaching, research, and services performance evaluations. Based on a usable 305 responses, we conducted various statistical tests of means and multiple regression analyses. We find that Finance academics perceive the order of importance in performance evaluations as research, teaching, and services, a result consistent with earlier studies. Nonetheless, the responses among assistant, associate, and full professors are different. Specifically, the research emphasis is more pronounced with respect to assistant professors. In addition, we find that the most important element in determining performance is formal teaching evaluations for teaching, publications in refereed periodicals for research, and school-wide committee services for services. Given the wide-spread advocacy of using multi-dimensional evaluation criteria among AACSB and various stakeholders over the years, the findings of having one single most important attribute each in teaching, research, and services performance evaluation is surprising.
A Gender Analysis of Productivity and Quality in Finance Research
Phyllis Y. Keys, Wanda L. Owens and Pamela A. Turner
A gender cohort analysis of academic finance research reveals that although males produce more journal articles than females, gender is not a factor in average quality of output after controlling for degree-granting institution and year of PhD. A productivity model reveals benefits in mentoring with the results that males tend to publish more frequently with their advisor and that advisor type is related to greater productivity for female authors. A quality model suggests benefits arise from attending a higher ranked PhD institution, and this model reveals that research quality declines over time.
Good to Great, or Great Data Mining?
Kristine Beck and Bruce Niendorf
The primary objective of this paper is to discuss the dangers of data mining using the book Good to Great as an example. This study considers the validity and generalizability of author Jim Collins’ conclusions concerning the greatness of the eleven companies identified in the book. The second objective is to examine the impact of financial risk on the returns of the eleven Good to Great firms. Although Collins and his research staff undertook a rigorous screening process to identify the best firms, their selection criteria omitted a critical variable: risk. The third objective is to offer a homework or classroom exercise in which students can test whether risk-adjusted stock returns outperform a market benchmark. This exercise also can be used to test the performance of the Good to Great firms in other time periods.
Adaptation of Online Material for Teaching Financial Economics Courses
Akbar Zamin Ali, Ratna Derina and Ralf Zurbruegg
This paper examines the impact on student perceptions and motivation to study finance from the introduction of a portfolio game as part of the graded assessment of a course. By incorporating a commercial portfolio game with prize money associated with it, results from student questionnaries reveal that a significant proportion of students had an increased positive perception of the field of finance and motivation to study it. It was also found that this positive outcome was not related to the prize money but rather the increased perception students had of the applied and practical nature of the assignment. These results support arguments that students are motivated better when they can directly perceive a link between studying financial theory and its practical application.
A Pedagogical Tool for Arbitrage Using DJIA-linked Market Instruments
John J. Neumann
This article exploits the growing importance of exchange-traded funds to illustrate financial markets concepts and relationships. The relationship between the Dow Jones Industrial Average and DIAMONDS exchange-traded security is employed as the core of a case with which finance classes can study the concept of arbitrage, the mechanics of trading strategies designed to exploit mispricings, and how implementation of those strategies unleashes market forces to restore a no-arbitrage condition. The impact of commissions and differences in the ability of individual vs. professional market players to enact these strategies are illustrated with examples. The weighting schemes and calculations of indices, along with their roles in investment management, can also be integrated into the classroom discussion using this contextual example.
An Easy Way to Extract Actual Statistical Measures from Derivative Pricing Models
Claudi Henrique da Silveira Barbedo and Eduardo Faco Lemgruber
This paper is helpful to explain students that although synthetic probabilities are different from true probabilities, derivative prices are the same in real and risk-neutral worlds. We explore the resources of an Excel spreadsheet to discuss the main theoretical principles related to options. For example, we show that risk-neutral and true volatilities are equal, even though securities expected returns are different in both worlds. We present a routine to convert derivatives models synthetic probabilities of exercise into actual probabilities, which is a very useful tool to analyze real option problems as, for instance, the task of estimating company’s default probabilities.
Raymond M. Kinnunen and Susan F. Sieloff
Executive Air is a small, private air charter firm, located about 20 miles outside of Boston, MA. It was started in 2003 by Eric Anderson as CEO and Al Barrington as President to provide private charter air transport utilizing a fleet of one turboprop and three jets. Barrington handled day to day operations based on his contacts and knowledge from over 20 years of experience in the air charter industry. Revenues should reach $5 million this year and the company expects to break even. Revenues were driven by three elements: private charter clients, an on-call agreement with the New England Organ Bank to transport human transplant organs, and an agreement with Boston Medflight to provide a fixed wing aircraft and crews for emergency and other medical flights.
County Line Markets: Store Remodel and New Store Investment
Ron Rizzuto and Lou D'Antonio
A pressing issue facing County Line Markets (CLM) is the decision to upgrade, expand or replace 10 stores. These 10 CLM stores are located in areas where the demographics, population, and competitive landscape have changed dramatic-ally since the stores were last remodeled. The key capital investment trade-off decision facing CLM is whether to: 1) remodel or expand its existing stores now; 2) replace its existing stores now with new, larger superstores; or, 3) take no action.
Reader's Digest Association: Debt or Equity?
The Reader’s Digest Association (RDA) case is about a decision that the firm must make concerning the financing of its new acquisition. The firm has traditionally been conservative, financing with little or no debt. The company must choose between straight debt, new common equity, or preferred stock. The case explores the tax impacts of each decision, along with the implications for control, risk and shareholders’ income