Volume 32 CONTENTS Spring 2006
#1 - Factors Explaining the Results of Job Search by 2002 FMA Job Applicants: A Survey
Tarun K. Mukherjee, Joseph Farhat and Carmen Cotei
We perform an online survey of candidates who applied for assistant professor in finance positions by posting their resumes on the 2002 FMA website. Consistent with Bertin, Prather, and Zivney (1999), we find that the new hire market for finance professors continues to shrink and salary range continues to widen. The factors significantly affecting the success rate in the job market are: having Ph.D./DBA in Finance/Financial Economics, having dissertation defended, having worked as a GA, being a female, being a US citizen/permanent resident, and graduating from two top tier schools. A candidate who is a female, or gets an appointment at an AACSB-accredited school, or graduates from a school in the top two tiers, or is a US citizen (or green cardholder) is likely to receive higher salary. Also, the number of FMA interviews and the number of campus visits are positively related to salaries. It appears that the market condition has changed since the Bertin, Prather, and Zivney (1999) study, as we find that U.S. citizens/permanent residents and female candidates have more success in obtaining jobs with higher salary than their non-US citizens or male counterparts.
#2 - A Relative Efficiency Approach to Modern Performance Measurement Using Data Envelopment Analysis
Christopher M. Brockman, Robert W. McLeod and Randy I. Anderson
In this paper, we demonstrate the use of the operations management research technique Data Envelopment Analysis (DEA) as a measure of portfolio performance. DEA is a relative performance measure that can convert multiple inputs and multiple outputs into a single measure of efficiency, or performance. We illustrate the DEA technique by measuring the relative performance of real estate mutual funds from 1997 and 1998. A primary result of DEA is that it provides a measure of relative performance for any set of investments, indicating the efficient and inefficient units, which is useful to an investor in ranking investments and making investment decisions. A fund manager will find the DEA results useful in that the magnitude and source of the inefficiencies are identified and possible ways to make the fund efficient can be found. We further show that DEA gives comparable results as the traditional performance measures, while providing useful results and advantages not obtained with these measures.
#3 - Assessing Learning Levels Among Students in the Finance Core
Peter Eisemann, Alfred Mettler and Milind M. Shrikhande
Most business programs offer just one core corporate finance course for all business majors. Consequently, the importance of assessing learning levels among students taking the Finance core cannot be underestimated. We use Bloom’s Taxonomy as a framework of reference to study instruments used to assess students in the Finance core and identify levels in the taxonomy at which learning gets assessed among these students. We then study the link between assessment instruments and student performance. Our findings are useful as a case-study to develop learning outcomes and pedagogy for business courses. Assessing learning levels is a first step in complying with AACSB standards and in fulfilling faculty need for refinement of the teaching and learning process.
#4 - A Simple Application of Real-Options to the Valuation of Pre-IPO High-Growth Firms
Anthony F. Herbst, J. Barry Lin and Bing S. Yi
Valuation has always been difficult for IPO and Pre-IPO businesses, particularly in how to capture the growth value that is highly important for such firms. This paper derives a simple pre-IPO valuation model where the values of growth real options are explicitly accounted for. Firm value is shown to depend critically on a growth multiplier relative to a benchmark index. It is also similar to a path-dependent knock-in option where the IPO target value is the knock-in threshold. Our simple model illustrates how growth prospects are priced into Pre-IPO startups. In a simulation, we also demonstrate that when a significant portion of value of the pre-IPO startup firms is due to valuable growth real options, an industry downturn can rationally lead to substantial loss of market capitalization for such firms.
#5 - Coupon Bond Valuation Using Yield to Maturity: How Wrong is It?
Bruce D. Bagamery
Traditionally, we teach bond valuation using a yield to maturity (YTM) approach, which discounts all bond flows at the YTM. The correct approach uses the zero coupon bond (ZCB) rate to discount each bond flow at the ZCB rate for that flow’s maturity. How large are the pricing errors when we use YTM instead of ZCB? Giannetti  discussed this problem and gave one example where the error was 16 cents per $1,000 of par value. This paper generalizes Giannetti’s study by using the yield curve model of Diebold and Li  to generate yield curves of different levels, slopes, and degrees of curvature. For reasonable parameter values, the pricing errors can be as large as $20 per $1,000 of par value. Sensitivity analyses show that pricing errors are larger for yield curves that are 1) lower, 2)steeper (positive or negative sloped), and 3)"straighter" (less curvature), and for bonds with 4) longer maturities and 5)coupon rates farther from the rate on the reference bond used to determine the YTM.
#6 - An Effective Method for Teaching and Understanding Interest Rate Conversions
David A. Stangeland and Charles E. Mossman
Practitioners in finance, accounting and legal professions use interest-rate quotes to determine interest charges, present values and future amounts. Unfortunately, rate quotations usually cannot be used directly in basic time-value calculations. Many practitioners are unaware of the true meaning of the interest-rate quotes they are using – resulting in incorrect calculations and exposure to legal disputes. We provide precise explanations of interest-rate quotes and explain their correct use. We present a fail-safe method for converting any quoted interest rate into the correct rate to be used for time-value calculations. We also include discussion of Annual Percentage Rates (APRs) and real (inflation adjusted) versus nominal returns. Our presentation is intended for finance, accounting, and legal professionals who require full understanding and correct methodology. This presentation is also useful for students and professors of finance who are usually only exposed to a cursory discussion of interest-rate conversion presented in typical corporate finance textbooks.
#7 - Northwest Airlines Corporation DC-10 Replacement Decision
Marcus Allan Ingram and James G. Tompkins, IV
In late September 2000 the fleet planning team at Northwest Airlines thought they had just about finished their task. After over a year of planning, and about 9 months of intensive analysis, they had come to a conclusion about the critical decision to replace the aging, three-engine wide-body DC10 aircraft Northwest used on their trans-Atlantic routes. The DC10-30s were outdated and inefficient, both in terms of fuel consumption and maintenance costs, and Northwest had known for years that they needed to be replaced in order to remain competitive with other international carriers. The aircraft still had many years of useful life, however, so the plan was to use the DC10-30s on domestic, U.S. routes and to retire the even older and more inefficient DC10-40s currently in use on those U.S. routes.