Past Finance Publications

 

A supersized Microsoft dividend is not good news
MiBiz West, Vol. 16, No. 23, p. 27, August 23, 2004
By Gregg Dimkoff

Microsoft Corp. stunned the investment community in July by announcing a special one-time cash dividend of $3 per share - a dividend 75 times larger than its pre-announcement 4 cents per share quarterly dividend.

Because it has nearly 11 billion shares of stock outstanding and is the most widely held corporation in the world, it is likely thousands of West Michigan investors will receive Mr. Softie's special dividend.

The dividend might be a source of glee for many investors.  After all, it amounts to $300 for every 100 shares of stock held.  And it comes at a good time for many -Dec. 2 - when wallets will be sucked dry by Christmas shopping.

A Survey of the Monday Effect Literature
Quarterly Journal of Business and Economics, Summer/Autumn 2003, Vol. 42, Nos. 3 & 4, pp. 3-28
By Glenn N. Pettengill

An extensive and long-standing literature documents calendar patterns in asset returns.  In the inaugural edition of the Review of Economic Statistics, Persons (1919) makes reference to a January effect tin equity securities, as one of several "seasonals" in stock returns.  Another seasonal, the Monday effect, the tendency for Monday stock returns to be low relative to other weekdays on the average negative, provides the focus of this survey paper and other papers in this issue.  Maberly (1995) shows that financial practitioners were aware of the Monday effect as early as the late 1920s.  (See Kelly, 1930)  Then, as now, the existence of negative returns on Mondays was a puzzling phenomenon.  Why should investors on Friday or Saturday buy securities that, based on historical data, should be expected to exhibit negative returns the following trading day?

Academic researchers have spent considerable effect attempting to document and, with limited success, to explain the tendency for asset returns to be negative on Monday.  In recent years a new dimension has arisen that presents both obstacles and opportunities for explaining the Monday effect.  Monday returns for large-firm equities have become positive, and in some years these returns are significantly higher than returns for other weekdays.

This survey serves as an introduction to a series of papers that examine the Monday effect including the shift from negative Monday returns to positive Monday returns.

Annuities and life lessons
MiBiz West, Vol. 16, No. 25, p. 29, September 20, 2004
By Gregg Dimkoff

One of my friends, a financial advisor, recently told me about a client who had been advised to roll several hundred thousand dollars into an indexed annuity.  The client's family was seeking a second opinion from my friend.

Indexed annuities are a fairly recent investment product that exploded in popularity in the late 1990s.  They are a special form of annuity whose value is linked to a stock market index, usually the S&P 500.  By their very nature they are long-term investment products, not appropriate unless the investor has a years-long time horizon

Auto insurance evils
MiBiz West, Vol. 16, No. 16, p. 13, May 3, 2004
By Gregg Dimkoff

I've just finished reading first-hand descriptions of about 75 insurance claims.  My students turned them in - an assignment requiring them to describe a real life insurance claim.  Not surprisingly, a majority of them chose to describe the facts surrounding an auto accident.  After several years of reading student experiences with auto claims, not much surprises me anymore, but only because I'm hardened off by now.  You, however, would be appalled by their experiences.  What follows are a few of my observations.

Beware of Knoll's IPO
MiBiz West, Vol. 17, No. 2, p. 37, October 18, 2004
By Gregg Dimkoff

You may have heard about Knoll Inc.'s plans for an initial public offering.  Knoll, a large manufacturer of high-end office furniture, has plants in Muskegon and Kentwood.  Its annual sales are nearly $700 million.  If Knoll executives go ahead with their IPO, it would be the company's second foray into public markets.  It went public with an IPO in 1997, but that lasted only two years.  Warburg, Pincus Ventures (WPV), an investment banking and private investment counseling company that has invested more than $17 billion in approximately 480 companies in 30 countries around the world, took the company private in 1999.

Credit ratings, insurance premiums & politics
MiBiz West, Vol. 16, No. 25, p. 29, September 20, 2004
By Gregg Dimkoff

Have you noticed the recent furor over using consumer credit scores to set auto and homeowners' insurance premiums?  Several stories have appeared in the media quoting Linda waters, commissioner of Michigan's Office of Financial and Insurance Services, who wants the practice abolished.  She says credit scores are unrelated to claims, unreliable, and not under the control of insureds.  There's nothing new here - the same complaints have come from citizens, public interest groups, and legislators in many other states.

What is new, however, is except for some grumbling here and there, the issue already has been decided in most states.  We thought it also was decided in Michigan, a result of a 1996 law allowing insurers to use credit scores as one of several rating factors for setting auto and homeowners' premiums.  The law stipulates that insurance cannot be denied based just on an applicant's credit score, and the use of scores must be applied evenly.

Do Productivity Gains Translate into Abnormal Stock Returns?
Federation of Business Disciplines 2004 Conference, Orlando, FL, March, 2004.
By Jose Mercado-Mendez & Thomas Wiley

Each year, since 2000, USA Today releases the productivity gains/losses of the largest 100 U.S. companies.  According to one of the releases, productivity turns companies into winners in today's markets.  This study attempts to determine whether or not financial markets recognize these productivity gains or losses.  By examining the returns of the largest U.S. firms, we try to determine if firms achieving gains dominate those with productivity losses.  The evidence seems to suggest that a portfolio of firms with productivity gains outperforms a portfolio of firms with productivity loses and the market portfolio.  However, the release of a list of companies with productivity gains and losses by the newspaper seems to have only a patrol impact on financial markets.

Downsizing Strategy, Stakeholder-Agency Theory, and the Value of the Firm
The Journal of Accounting and Finance Research, Vol. 12, No. 1, Spring, 2004, pp. 14-23

This research examines the extent to which a firm's downsizing strategy impacts its long-term financial performance within the framework of the stakeholder-agency theory of the firm.  Previous empirical research exhibits mixed results in defining the impact of a downsizing strategy on long-term performance.  I find that downsizing negatively impacts the long-term financial performance of the firm.  In addition, the presence of excess cash prior to the reduction in the workforce and the use of multiple downsizings result in lower financial performance over both the two-year and five-year sample periods after the downsizing.  In contrast, the permanence of the downsizing action is found to positively impact long-term financial performance.

Guaranteed mortgage packages: a consumer friendly change
MiBiz West, Vol. 16, No. 19, p. 23, June 28, 2004
By Gregg Dimkoff

A quiet but important change is taking place in the home mortgage industry - guaranteed mortgage packages, or GMPs.

A package acts as a contract between a lender and a borrower specifying both the interest cost of a mortgage and total settlement charges.  Without guaranteed packages, borrowers don't know their exact closing costs until or near closing.  By then most borrowers are too deeply into the loan process to shop around for better deals if the difference between estimated and actual costs are significant.

Identifying The Gap Between Student and Faculty Expectations: Report from a BusinessSchool
2004 International Applied Research Conference, San Juan, Puerto Rico
By Marie McKendall, Yatin Bhagwat, Daniel C. Geideman, Helen A. Klein, & Nancy M. Levenburg

This paper discusses differences between faculty members' standards and expectations and undergraduate students' attitudes and behavior related to business school education.  The results show students' primary motivation for attending college is to obtain a credential.  They spend significantly less time on coursework and they devote more time to socializing.  While students consider themselves as quite skilled and motivated, there are substantial differences between perceptions of tenured/tenure-track and non-tenure track faculty.

Job losses & unhealthy workers
MiBiz West, Vol. 16, No. 14, p. 14, April 5, 2004
By Gregg Dimkoff

We've identified a new scapegoat for the loss of manufacturing jobs in Michigan: unhealthy workers.  As the argument goes, Michigan workers are exceptionally unhealthy, leading to unusually high health care costs.  In turn, high health care costs are making our businesses uncompetitive.  I like the argument.  Finally there seems to be a reason to forgo all those cases of beer, pizzas, and packs of smokes.  The trouble is, even though the argument makes sense, I don't believe it.

Money may not buy happiness, but . . .
MiBiz West, Vol. 17, No. 4, p. 11B, November, 15 2004
By Gregg Dimkoff

Does money buy happiness?  It's easy to say no because that's what we've been told.  It's also what we often want to believe.

If the answer is no, it helps us feel less envious of accidental millionaires and billionaire celebrities who seem as dense as sacks of rocks.  We rationalize that, while they are rich, they aren't as happy as we are.

And we know money doesn't always buy happiness: we've all endured a long list of agonies - illnesses, stress, heartbreak - for which no amount of money would have brought relief.

On the Value of Tracking Stocks: An Investigation Into Shareholder Returns From Tracking Stocks
2004 Proceedings of the Midwest Decision Sciences Institute, April, 2004, Cleveland, OH
By Peter Basciano & Susan Edwards

We investigate the pre- and post abnormal returns associated with the issuance of tracking stock.  We calculate the abnormal returns for the parent firm, the tracking stock, and an "original investor" portfolio using the market index and three alternative matching firm strategies.  For the parent firm, we find that although the announcement of the tracking stock is viewed positively by the market, the actual issuance of the tracking stock does not result in significantly positive abnormal returns for the parent firm.  The same post-issuance result is present for both tracking stock and the "original investor" portfolio.

Online vs. In-Class: Comparisons Based on Grades
Midwest Finance Association 53rd Annual Meeting, Chicago, IL, March, 2004
By Vijay Gondhalekar, Robert Barnett, & Susan Edwards

Now that Internet-based distance education has taken hold in colleges and universities, research has begun to emerge that examines the effects of online vs. in-class (traditional) instruction on student learning (See Parker and Gemino 2001; Joy and Garcia 2000; Wegner, Holloway, and Gorton, 1999).  Much of the extant research, however, relies on findings based  on surveys or case studies (e.g., Kearsley2000; Hiltz 1997) or a single class (e.g., Cheung and Kan, 2001; Harnar, Brown, and Mayall, 2000) and so is discipline specific.  While it is important to understand issues about online education that are specific to a discipline or an area, it is unlikely that students are not affected by their online education in other areas.  Gondhalekar, Barnett, and Barthelemes (2002) point out that because online education is a relatively recent phenomenon in the finance area (and in many other areas), the depth and breadth of online classes in the finance area are limited at most institutions.  Therefore, findings based on finance classes may draw the criticism of being course and/or instructor specific (i.e., being influenced by idiosyncratic factors).

This study uses two well-diversified portfolios, online and in-class, each consisting of ninety matched undergraduate classes (31 different courses from most major disciplines; forty percent instructor match up).  It compares the grade performance of students in the two portfolios by slicing the portfolios based on various student and instructor characteristics.  Furthermore, it also tracks each student for a period of two subsequent years and examines the enrollment frequency and performance in the next higher level class (relative to the one they were enrolled in while in the portfolio).  The purpose is to enhance the current understanding of student learning in online classes.

Protect yourself from future Fed rate hikes
MiBiz West, Vol. 16, No. 21, p. 27, July 26, 2004
By Gregg Dimkoff

After months of fretting over the possibility of rising interest rates, economic experts are finally able to tell us, "I told you so!"

The Federal Reserve raised rates one-quarter of a percent June 30.  The increase was the Fed's first in four years.

What was the reaction to the increase?  Yawns.  The Fed had telegraphed its intentions weeks prior to the actual increase.  Further, with short-term interest rates at 46-year lows, an increase of only a quarter percent means they are still extraordinarily low.

And although the Fed announced there will be further increases, it also said they will come "at a pace that is likely to be measured."  What's with that?

Riding Momentum with Dow Jones Contrarian versus Technician
Southwest Business Symposium 2004 Proceedings, Edmond, OK, April, 2004.
By Glenn Pettengill, Yasser Al-Henawi, & Elvis Kusi

This study examines the profitability of implementation of two competing momentum-investing strategies.  The strategies will be applied to a sample of 33 securities that were a part of the Dow Jones Industrial Average at one time during our sample period.  We acquire data from Research Insight over the period August 1983 through July 2003.  The first strategy implements a classical momentum strategy that uses technician standards to rebalance the portfolio.  We began the portfolio by purchasing those six securities that have experienced the largest price momentum in the last six-months.  This portfolio will be subject to potential rebalancing at the end of each month using the technical rule.  At this point we will drop a security from the portfolio if its price falls below its six-month moving average.  Each security dropped will be replaced with a security with the highest return for the last six-months.  The second strategy implements a contrarian strategy.  This strategy attempts to benefit from momentum, but by purchasing securities that may be expected to achieve momentum in the future rather than from securities that are presently experiencing momentum.  We begin this portfolio with the six securities with the lowest P/E ratio.  As with the pure momentum portfolio, the contrarian portfolio is subject to rebalance at the end of each month.  At this point we drop any securities whose P/E ratio exceeds the average P/E ratio for the total sample securities.  Any security dropped from the portfolio will be replaced by the security with the lowest P/E ratio at that time.

Short-Sellers, Put Options and the Monday Effect: Another Look
Midwest Finance Association 53rd Annual Meeting, Chicago, IL, March, 2004
By Glenn N. Pettengill, Vijay Gondhalekar, & John W. Wingender, Jr.

This study examines the hypothesis that the weekend effect was created by risk adverse bearish investors using short-sells.  According to Chen and Singal, these investors terminated their risky position over the weekend increasing returns on Friday and decreasing returns on Monday.  However, according to this argument, with the advent of listed put options bearish investors no longer needed to close their positions over the weekend as the put options strategy provided a les risky alternative.  Thus, for large-firms securities that have listed options, the weekend effect disappears.

We argue against the hypothesis that put options are less risky than short-selling.  We support our theoretical arguments with a simulation study that indicates that a put option strategy is much riskier than a short-selling strategy.  Consistent with the risk-return tradeoff, the simulation indicates that a put option strategy produces a much higher average return than does a short-selling strategy.  Thus, we argue against the implication that bearish investors using a put option strategy would be less inclined to close their position over the weekend.  Our empirical analysis investigating the impact of the put option listing on a security level leads us to concede that some other factor must be responsible for the elimination of the weekend effect for large-firm securities. 

The Blue-Monday Hypothesis: Evidence Based on Nasdaq Stock, 1971-2000
Quarterly Journal of Business and Economics, Summer/Autumn 2003, Vol. 42, Nos. 3 & 4.
By Vijay Gondhalekar & Seyed Mehdian

As part of this special issue on the Monday effect , we examine the blue-Monday hypothesis that the inherent gloom among investors on Mondays (relative to other days), because of there being a pervasive risk factor, contributes to the famous Monday pattern is widespread across industries tracked by the Nasdaq sub-indices.  Furthermore, the Monday seasonal in most industries is positively correlated over time.  In regressions of industry returns against market (composite) returns, the r-squared values for a bulk of the industries are higher for Mondays than non-Mondays even through the composite itself exhibits a Monday seasonal.  Across industries, the higher these Monday r-squared values are, the more pronounced is the Monday effect.  Finally, for many of the industries, the Monday seasonal is related to proxies for pessimism among investors.  We take these findings to be consistent with the blue-Monday hypothesis.

The Clever Cigarette Tax
MiBiz West, Vol. 16, No. 13, p. 16, March 8, 2004
By Gregg Dimkoff

Gov. Jennifer Granholm has proposed increasing the state's cigarette tax by 75 cents per pack to help reduce next year's projected $447 million Medicare deficit.  Without new taxes or some sort of miracle, the state faces a $1.3 billion budget deficit for the fiscal year beginning July 1.

The cigarette tax increase will raise an estimated $295 million, a huge proportion of both the projected Medicare deficit and the stat's deficit.  Clearly, something has to be done, and at this point, the only alternatives involve drastic actions.

The price of corporate acquisition: determinants of cash takeover premia
Applied Economics Letters, 2004, 11, 735-739.
By Vijay B. Gondhalekar, R. Raymond Sant, & Stephen P. Ferris

A sample of cash-only acquisitions of Nasdaq targets during 1973-1999 is examined.  It is found that the mean (median) percentage premia declines from 74% (65%) during the 1970s to 47% (42%) in the 1990s.  Consistent with recent research on the value reduction associated with diversification, it is observed that acquirers generally will not pay higher prices to acquire firms operating in different industries.  It is found that over-invested firms pursue acquisitions more aggressively by paying higher premia while under-invested firms pay less, on average.  Finally, the evidence suggests that agency rather than synergistic or hubris effects influence the level of merger premia

The Role of the Discussant
2004 Financial Management Association International Annual Meeting, October 2004, New Orleans, LA.
By Larry Blose

Academic conferences in the Business Disciplines (Finance, Economics, Marketing, Management, Accounting, and Decision Sciences) typically assign discussants to read and comment on papers presented at the conference workshops.  This practice uses precious workshop time while the value added to the session is questionable.  This presentation examines the role of the discussant.  It presents the origins and evolution of the use of discussants at academic conferences.  The presentation analyses instructions to discussants given in different academic disciplines.  Alternative models (both successes and failures) for promoting thoughtful discussion of the workshops papers are examined.  The benefits and costs associated with allocating time to discussants are examined.  Finally, a brief tutorial is presented on how to prepare a meaningful and useful discussion.

There's no such thing as a "jobless recovery"
MiBiz West, Vol. 16, No. 9, p. 10, January 12, 2004
By Gregg Dimkoff

When I was taking courses as part of my MBA degree more than 30 years ago, I was intrigued and heartened by what I was finding and hearing about the economy.  Many economists and others were saying we had finally learned how to control the economy, and business cycles were a thing of the past.  The most important result of this rosy outlook was the implication that we had learned how to eliminate recessions.  You can understand my excitement about this revelation.

Obviously, they not only were wrong, they were really wrong.  The early 1982 recession was the worst on since the Great Depression, and recessions continue to occur.

This year's financial scapegoat: the low-carb diet
MiBiz West, Vol. 17, No. 6, p. 29, December 13, 2004
By Gregg Dimkoff

A handful of food companies have recently reported disappointing sales and earnings.  The culprit?  The low-carb diet, according to company spokespeople.  Yet, because not many of us need a smaller wardrobe, two thoughts come to mind: either the low-carb diet isn't working, or the companies are using the low-carb fad as a scapegoat

Weekend Seasonality In Gold Returns
Thirty-Fifth Annual Meeting of the Midwest Decision Sciences Institute, April 2004, Cleveland, OH.
By Laurence E. Blose

This paper examines the return on gold over the 25 year period from January 1978 through December 2002.  It finds that the disappointing returns over that period are due to negative weekend returns.  The paper finds that the average return (annualized) over the period from close on Friday through close on Monday was -6.54% while the annualized average return during the other four days of the week was 11.09%.  If it were not for the weekend effect in the price of gold, the return on gold would have been substantially greater than would have been anticipated for a zero beta asset.

West Michigan Stock Returns
Seidman Business Review, Vol. X, p. 8-9, Winter 2004
By Gregg Dimkoff

At this time last year I mentioned that local stock returns weren't good, but compared with the national market indexes, we had no reason to complain: local stock had fallen about 6% compared with double digit decreases for the three most widely followed national market indexes.  It's even better this year - the average West Michigan stock rose over 35%, far better than either the Dow Jones Industrials or the S&P 500 Index, but not quite as good as the NASDAQ's 50% rise.  The table on page 9 shows the performance of each West Michigan stock.

"Are wars good for the economy?"
MiBizWest, May 2003, pp. 15.
By Gregg Dimkoff

Now that the war in Iraq is winding down, more of the country's attention will be focused on the economy.  Though we aren't officially in a recession (it ended a year-and-a-half ago according to economists), that's small solace because, with the unemployment rate higher than at anytime in a decade, it sure seems like a recession.  A question raised by many people is whether the war will stimulate the economy enough to get us out of the economic doldrums.

One measure of how the U.S. economy has performed is the gross domestic product, or GDP.  It measures economic activity occurring inside the U.S.  When GDP is growing slowly (the current situation), unemployment is higher than it could be, tax revenues are lower and both businesses and individuals are hesitant to invest and spend.

"Degree of Advertising Leverage:  A Measure To Evaluate the Impact of Advertising on Earnings of Corporations."
European Applied Business Research Conference, Venice, Italy, June 2003, pp. 1-4.
By Yatin Bhagwat and Marinus DeBruine

The objective of this project is to introduce a new measure - Degree of Advertising Leverage.  This will measure the impact of advertising on earnings of firms.  We plan to develop and test the impact of advertising on earnings of firms belonging to key industries with relatively high advertising to sales (advertising intensity) ratio by estimating degree of advertising leverage.  The aim of the study is to measure overall returns to scale of advertising effort in the contemporary era where increasing pecuniary economies and decreasing technological economies of scale in advertising are contemporaneous.  The degree of advertising leverage may be a useful measure for managers, lawmakers, Madison Avenue experts, financial analysts and consumer advocates alike.  For example, if investors are optimistic about the prospects for a highly competitive industry, they might favor a firm with a high degree of advertising leverage a it faces increasing returns to scale from advertising possibility by capturing a larger market share.

"Directors' Duties Legislation and Shareholder Wealth"
Regional Business Review, Vol. 18, May 1999, pp. 28-34.
by Mick Swartz

This paper analyzes the impact of directors' duties legislation on security returns. Currently more states have this law than any other state antitakeover law. To date, there has been no comprehensive study of these laws. To disentangle the effects of this legislation from other antitakeover laws, only directors' duties laws passed without other antitakeover laws are included in the study. All states, except New York, had negative CARs for firms without previous antitakeover amendments. Firms with antitakeover amendments outperformed firms without these amendments in every state in the study, except for New York. The vague wording of the directors' duties laws leaves open the possibility of different interpretations of the law from each state court system. Investors may view the New York court system, and the New York market for corporate control differently than other court systems and other corporate control markets.

"Dividends: Reap or sow?"
MiBizWest, February 2003, pp. 14.
By Gregg Dimkoff

Two interesting and unusual developments with corporate dividends are making news right now:  President Bush's plan to remove the double taxation on dividends, and Microsoft Corp.'s announcement of its first dividend ever.  Both of these announcements came out of the blue, and to a finance guy like me, the thinking behind these decisions is intriguing.

Corporate dividends are subject to double taxation.  The first tax occurs when companies pay taxes on their profits.  Some of those profits are then sent out to shareholders as dividends.  At tax time, shareholders pay a second tax on the same dollars.  It hasn't always been that way.  For many years, the first $200 of dividends received was tax-free, and for married taxpayers filing jointly, $400 was exempt.

"Financial myths revealed"
MiBizWest, October 2003, pp. 18A.
By Gregg Dimkoff

Life is full of myths.  Most of them are harmless, some are humorous, and some add to our culture.  Especially fascinating are urban myths - those seemingly true stories we burn into our brains to make sure we will never, never be that stupid.  You've all heard about the guy who met a girl at a bar, went to her apartment and woke up several hours later in a bathtub filled with ice with a note on his chest instructing him to call 911 because one of his kidneys had been removed.  Or the one about the woman who accidentally exploded her cat trying to dry it off in microwave oven after its bath.  Fascinating, false, harmless.

But not all myths are harmless.  Many widely known and widely followed myths are rules for managing your money.  Blindly following these rules will often lead to trouble.  For example, there's a widely recognized rule of saying the percentage of wealth invested in stocks should be 100 percent less your age.  According to the rule, a 30-year-old person should have 70 percent in the stock market, while someone 90 years old should have only 10 percent.  But what's the logic?

"Flying High: Choosing the Right Tax-Deferred Defined Contribution Plan Allows Employers To Rise Above The Pack"
Absolute Advantage, 2003, Vol. 3, pp. 40-43.
By Gregg Dimkoff

Tax-deferred defined contribution plans, such as 401(k) and 403(b) plans, date back to 1982.  In that year, the IRS issued proposed regulations sanctioning their use as a type of employee retirement plan.  The first company to implement a 401(k) plan was the Johnson Companies, and by 1984, over 17,000 companies had 401(k) plans covering 7.5 million workers.  Today, over 432,000 plans cover more than 47 million workers.  Plan assets are just shy of $2 trillion dollars.  Clearly, defined contribution plans have been one of the most significant and far reaching financial developments in at least a generation.

Small and mid-sized businesses often lack the expertise to stay abreast of solid ideas to keep their defined contribution programs a valued benefit for employees.  Further, employees are often confused about the long-term benefits of participation in 401(k) or 403(b) plans.  A well-designed plan presented properly will enhance the financial wellness of your employees.  Yet, the majority of small business owners can't accurately answer basic questions about their plan responsibilities according to a 2003 survey by Nationwide Financial.  But you can help your plan participants achieve financial wellness by making sure both you and they understand how they work, and by understanding a few financial principles.

"Forfaiting and Innovation of Convertible Forbaited Bills:  A technique to Raise Venture Capital in Emerging Markets"
French Finance Association, Hammamet Yasmine, Tunisia, March 2003.
By Yatin Bhagwat

Forfaiting is a technique of financing foreign trade.  Receivables on the sale of capital goods may be paid by importers in installments.  The exporter may need the cash instantaneously and may be unwilling to provide credit.  In this situation, the receivables maybe forfeited or discounted with a financial service center known as forfaitor.  The forfaitor may or may not require a sovereign guarantee.

Forfaiting originated in Europe in cross border transactions involving importers in developing countries and in East Europe.  The technique has not been popular globally.  The passage of NAFTA has led to increase export of capital goods to Mexico from Canada and the United States.  The relaxation of tariffs and promotion of industrial growth in the emerging markets has created new opportunities for venture capitalists.  The financial services industry may be able to finance the increased flow of capital goods by forfeiting the receivables.

This paper examines forfeiting from a markets perspective.  Forfaiting creates zero coupon bonds, which are actively traded in the secondary markets.  The stripping of forfaiting bills forms a portfolio of tax options.  The paper derives value of the exchange option in the absence of sovereign guarantee.  The cost of sovereign guarantee is also estimated using the option pricing model.

An innovation in the form of convertible forfaiting is also presented whereby the venture capitalist may be able to participate in the long-term growth of the project, which may be characterized by an initial phase of higher earnings variability and higher business risk.

"Friendly fires, homeowners' insurance and the Internet"
MiBizWest, July 2003, pp. 15.
By Gregg Dimkoff

A story floating around in cyberspace describes the plight of a North Carolina man who is sitting in prison, a victim of his own greed.  Supposedly, he is one of the winners of the 1999 Darwin Natural Selection Awards, even though to qualify for this prestigious award, a person must die doing something horribly stupid, thereby removing defective genes from the human gene pool.

As the cyberspace story has it, the man purchased a $15,000 box of very fine Cuban cigars - A cost of about $600 apiece.  (At this point, the story starts to make sense - anyone paying that much for cigars needs to have his genes removed.)  Over time, he leisurely smoked the cigars, enjoying each one to the fullest.  When the box was finished he filed a claim with his homeowners' insurance company, claiming his cigars were lost in a series of small fires.  The insurer was incensed by the claim, but saw no legal way to deny reimbursement.  Begrudgingly, it paid $15,000 for the incinerated cigars.  In a twist if poetic justice, the insurers then had the man jailed on 24 counts of arson.  There he sits with his genes effectively removed from the gene pool.

"Lucky Gold Speculators"
MiBizWest, August 2003, pp. 18.
By Gregg Dimkoff

You've likely heard the expression, "Even a blind hog turns up an acorn now and then."  It's true.  One needs look no further than all the innocent individual investors who were conned into buying gold as part of their investment portfolios.  Usually, such behavior is subject to a fairly stiff stupidity tax.  As luck would have it, though, gold has done well over the past several months.  But rather than signal the soundness of investment decisions, it once again demonstrates the adage about the blind pig. 

For the past several years, the price of gold has fluctuated around $275 per troy ounce, and that's about where it was as late as last November.  This summer, however, it reached $373 and currently stands at $255/ounce.  Those summer prices represent a 33 percent and 27 percent return, respectively, far outpacing both stock and bond investments over the same time period.

"Measuring Interest-Rate Risk in Retail Deposit Markets"
Bank Accounting & Finance, Vol. 12, No. 2, pp. 13-19.
by Dave Hutchison, Mick Swartz, and Greg Dimkoff

In the commercial banking system as a whole, retail deposits, defined as transactions accounts, small time deposits, and savings deposits, constitute between 60% and 70% of total liabilities. Unfortunately, the application of traditional interest-rate-risk models to these retail deposit markets has proven to be problematic, particularly in markets for demand deposits. This article will reconsider traditional methods of measuring interest-rate risk or duration as they are often applied in retail or consumer deposit markets.

"Motives in the Acquisitions of NASDAQ Targets During the Aftermath of the 1987 Crash"
The Financial Review, November 2003, pp. 553-569.
By Yatin Bhagwat and Vijay Gondhalekar

After the crash of 1987, the Nasdaq composite index stayed below the precrash level for nearly two years.  Takeover activity surged in this after-crash period.  We compare the motives in the acquisitions of Nasdaq targets during the after-crash period with those in the ten-year period before the crash.  We find that the announcement period return to acquirers and the proportion of acquirers with positive gains declines in the after-crash period.  For both the periods, agency is the motive for takeovers that have negative total gains (acquirer + target), but synergy and hubris are comotives for takeovers that have positive total gains.  The proportion of takeovers in which the managers of acquirers act against the interest of the shareholders increases after the crash.

"Pirates return to the High Seas"
MiBizWest, September 2003, pp. 16.
By Gregg Dimkoff

One of the most successful movies this past summer was Disney's Pirates of the Caribbean: Curse of the Black Pearl. Starring Johnny Depp, the movie included unshaven pirates dressed in dirty, tattered rags, peg legs, eye patches, swash-buckling, treasure chests full of gold coins and other plunder, and many battles waged with pirates' favorite weapons: cannons and swords.  The movie is loosely based on Disney's Pirates of the Caribbean theme park attractions, and drums up stereotypes of what pirate life might have been like in the Caribbean and Gulf of Mexico centuries ago.  Ironically, pirates are still a major concern to ocean-going vessels, and pirate attacks occur in greater numbers now then centuries ago.  In contrast to the Disney movie, however, virtually none of the stereotypes fit modern pirates or their methods.

For starters, the Caribbean isn't a hotbed of pirate activity.  Instead, the heaviest volume of violence occurs in the waters off Indonesia and Bangladesh.  Other dangerous waters include those off India, The Gulf of Guinea off Nigeria's coast, the Straits of Malacca, Singapore, and the Gulf of Aden-Red Sea region.  The International Maritime Bureau, a division of the International Chamber of Commerce, reports that 234 acts of piracy occurred in the first half of 2003, a projected pace of 400-500 attacks for all of 2003.  Dozens of crewmembers are killed each year, and hundreds are taken hostage by pirates expecting to collect ransoms.  Further, several ships are hijacked annually. 

"Relaxing Glass-Steagall Provisions:  Wealth and Risk Effects on Foreign Banks and Their Domestic Corporate Customers"
Journal of Multinational Financial Management, December 2003, pp. 465-482.
By Rajesh P. Narayanan, Nanda K. Rangan, and Sridhar Sundaram

We provide evidence that expanding the permissible scale of Bank Holding Company (BHC) securities activities in the US redistributes wealth from foreign banks and their domestic customers to domestic BHCs.  However, removing prudential interaffiliate firewalls to permit BHCs to freely pursue synergies from the joint performance of banking and securities activities result in wealth losses for all interest groups.  Securities activity deregulation increases the systematic risk for the foreign bank sector.  Our evidence highlights that the application of the US regulatory policy of national treatment, which seeks to provide equality of competitive opportunity to foreign banking institutions operating in domestic markets, results in competitive inequalities.

"Say no to credit card company life insurance offers"
MiBizWest, June 2003, pp. 15.
By Gregg Dimkoff

In a recent, high profile murder trial in Kent County Circuit Court, Gordon Lyons was found guilty of murdering William Drummond II.  Lyons had been having an extra-marital affair with Drummond's wife, Valerie.  Adding to the intrigue during the trial was the revelation that, prior to the murder, the Drummonds had been sucked into their credit card company's offer of a $1 million life insurance policy.  The offer was especially attractive because the first three months of coverage was free.  During the trial, the implication was that Lyons might have anticipated sharing the insurance windfall with Valerie once her husband was out of the way. 

In a plot twist worthy of an Alfred Hitchcock television episode, the insurance paid off only in the event of death while a passenger in an airplane crash - an event with an infinitesimal probability of only about one in 4.6 million.  The probability of a payout is so ridiculously low I'm surprised the credit card companies don't offer coverage for free.  Were the Drummonds scammed by their credit card company?  Duh!  While no law was broken, the Drummonds, like many other people, were fooled into buying something much different than what they thought.

"Stockbrokers' dirty tricks"
MiBizWest, June 2003, pp. 12.
By Gregg Dimkoff

Before I get attacked by all the stock brokers within driving distance of my home, let me state that I believe the majority of brokers are honest, competent people who have no intention of causing harm to their clients.  But there are lots of brokers.  And it should come as no surprise to anyone that the brokerage industry has more than its share of shady characters.  Most people familiar with the industry will tell you that brokers give their incomes highest priority, and their clients' interests become second.  That's not unlike many business relationships.  But it also isn't any reason to be unethical or outright dishonest.  Yet, over the years I've seen firsthand some really questionable practices, and people working in the brokerage industry have described to me several terrible war stories.  Here are three of the more common unethical practices to watch for [...]

"The real reasons why banks charge you fees"
MiBizWest, March 2003, pp. 13.
By Gregg Dimkoff

If you are old enough, you can remember when doing business with banks was relatively simple and stress free.  A typical customer had a passbook savings account and a checking account, maybe even a Christmas Club account, a mortgage loan, and perhaps an auto loan.  That was it.  No ATM cards, no credit cards, no minimum balances, and modest fees when you overdrew your checking account. 

When I was a kid, banks closed at 3 p.m. most days of the week.  They weren't open on Saturdays either.  And perish the thought of evening hours.  I never understood the reason for these short hours, but felt it had something to do with counting all the money and locking it up safely.  After all, I reasoned, it would take quite some time to carefully count out millions of dollars (I had mental images of Scrooge McDuck in his vault surrounded by his enormous wealth).  In many ways, those were the good old days for bank customers, and the stodgy days for bank owners. 

"The sorry state of personal finances"
MiBizWest, November 2003, pp. 15.
By Gregg Dimkoff

The Christmas shopping season is quickly approaching a peak.  Retailers are hoping for wild and unconstrained spending by the hordes of shoppers elbowing their ways through their isles.  If shoppers' basic instincts are allowed to run free, it will be a great shopping season, and all sorts of people will overextend themselves, ruining their long-term financial plans for a long time to come.  In fact, several statistics paint a grim picture of the average person's lack of financial discipline and poor financial shape. 

"The truth about the evil of credit cards"
MiBizWest, December 2003, pp. 11.
By Gregg Dimkoff

There's a joke going around about the time Larry King interviewed Satan on his radio/TV program.  At one point during the interview, King asked Satan to describe the foulest deed he'd ever done.  Satan refused to name one, pointing out that there had been so much destruction over the years, so many lives cut short, and so many wars and calamities that none stood out.  But Larry King kept pestering.  "Surely, if you think hard enough, there must be one dastardly deed you are most proud of."  Satan thought for a moment, his eyes brightened, and he replied, "Well, yes.  I guess if I have to pick just one particular evil thing I'm proudest of, it would be this: several years ago I invented credit cards."

"Trying to qualify for Medicaid"
MiBizWest, April 2003, pp. 14.
By Gregg Dimkoff

I'll bet you've run into people who have asked how they can spend, hide or transfer wealth so they or their parents can be destitute enough to qualify for Medicaid - the state administered welfare program.  Often the purpose in doing so is to make the state pay for nursing home care of some other type of subsidized living.  Of course these people already have come to grips with the moral issues involved - they don't have any when it comes to Medicaid.  They've already decided they aren't going to spend their hard-earned money on nursing home care when the government will foot the bill. 

Perhaps more often than not, children of elderly parents are behind the push to qualify for Medicare by shedding wealth.  That demonstrates even a worse thinning of moral fiber.  By hiding, spending or transferring assets, their parents will get into a nursing home on the public dole while the children usually are the beneficiaries of the chicanery. 

"West Michigan investors:  A scammer's paradise"
MiBizWest, January 2003, pp. 13.
By Gregg Dimkoff

I sometimes ask students in my finance classes where they would go if they were in the mood to wage a financial scam on the unsuspecting public.  Right off the bat, most of them mention Florida, and I agree.  Florida is populated with old people.  Many of them are loaded with money.  And students believe that it's relatively easy to pull the wool over the eyes of the elderly.  Again, I agree with them.

But I press them further.  After Florida, where else would they go?  If Florida makes sense because of its large population of retirees, then try to figure out other states where retirees gravitate.  Logically, they pick Arizona and Texas.  So far so good, I tell them, but keep going.  Where else?

"West Michigan Stock Returns"
Seidman Business Review, Winter 2003, pp. 9.
By Gregg Dimkoff

Last year's performance of West Michigan-based stocks can be compared to an injured person who is the only survivor in a train wreck: no complaints, it could have been much worse, as it was for everyone else.  Local stocks reversed a two-year string of gains by ending the year down 5.7 percent.  Such a loss, however, pales when compared with the performance of several widely-followed national market indexes: [table]

Proceedings

"Day of the Week Effect and January Effect in Gold Prices"
Southeast Decision Sciences Institute, February 24-26, 1999.
by Laurence Blose

This study examines daily gold prices over the period January 1, 1981 through December 31, 1997 for evidence of a January effect and a day of the week effect. The results indicate that gold prices exhibit a weak but statistically significant weekend effect similar to what has been observed in the equity markets. With regard to the January effect, the results indicate that the January effect is not present in gold prices and returns.

"Differential Trading Patterns of Institutional Investors Surrounding the Release of Management Forecasts of Annual Earnings"
Western Decision Sciences Institute, April 6-10, 1999.
by Mick Swartz and Timothy Cairney

This paper examines differences in the trading patterns of institutions. Investee firms with different levels and types of institutions are also examined. A method is developed to categorize institutions as active or inactive. Changes in the level of information, changes in the CAR response, changes in the type of earnings surprise and changes in trading volume are examined to detect differences across institutional types. Significant differences in CAR responses are observed between active and inactive traders, even after controlling for information surprises. In addition, the type of earnings surprise, good news versus bad news, results in differences in trading patterns across different types of institutional investors. Differences in trading volume and the timing of trading volumes are documented, as well. Active institutions tend to hold prior to good news disclosure, but no such evidence is reported for bad news disclosures. Inactive institutions do not exchange shares at the same time or in the same manner as active institutions. This suggests the acquisition of private information by active institutions, but not by inactive institutions.

"Employment Discrimination Litigation and the Value of the Firm"
Academy for Studies in Business Law Journal, Vol. 4, No. 2, 2001, pp. 85-100.
by Laurence E. Blose and Gerald E. Calvasina

This paper examines the stock market reactions to announcements regarding employment discrimination. The study finds that there are no statistically significant excess returns associated with settlement announcements and decision announcements. Announcements of new lawsuits, however, are accompanied by a weak and barely significant negative excess return. These findings are contrary to earlier reported findings of strongly negative excess returns for all three types of announcements. The paper suggests that the different results arise from changes in the discriminatory behavior of the firms over the study period. Additionally, the paper finds that despite provisions for punitive damages in The Civil Rights Act of 1991, excess returns associated with announcements regarding employment discrimination lawsuits subsequent to the change in the law are not significantly lower than those prior to the law.

"Evaluation of the Impact of R&D on EPS in the Oil and Gas Industry"
Proceedings of the Academy of Accounting and Financial Studies, Vol. 6, No. 2,
Oct. 2001, pp. 25-28.
by Vijay Gondhalekar, Yatin Bhagwat and Marinus DeBruine

Investment in Research and Development (R&D) creates intangible assets with a high earning potential. Several industries have a continuous R&D program due to the competitive nature of business. Thus R&D outlays may be viewed as fixed costs necessary for firms to achieve growth in size and earnings. The impact of R&D on earnings is measured by degree of R&D leverage, a term analogous to degrees of operating and financial leverage. This paper specifically tests the relationship between changes in R&D outlays and their impact on earnings for a sample of firms within petroleum drilling, refining, and oil and gas field services industry.

The results indicate that non-U.S. firms have higher R&D intensity compared to U.S. firms. Also R&D intensity is higher for firms within the petroleum-related service firms than for petroleum refining companies. Also the firm with lower R&D intensity have demonstrate higher degree of R&D leverage implying diminishing returns at the higher end of the R&D intensity spectrum. On average, every one-percent increase in R&D outlay results in a one-fourth of one-percent increase in earnings per share. 

Sabbatical Reports

Frank T. Griggs

How does the stock market behave? How important is it for an individual investor to know the statistical characteristics of the market? If investors knew something about the statistical underpinnings of the market, could they beat the market? Could they avoid losing money in stock market crashes, such as the one that occurred recently? In this paper, we want to investigate some o the properties of stock market behavior, with the hope of developing some understanding of the underlying process. If we can gain some insight into how the market behaves, we can better organize our resources to achieve our goals. Nonparametric techniques are particularly well suited to help us do this. With an absolute minimum of constraining assumptions, we can not only describe events and outcomes associate with the stock market, but we can perhaps make some inferences about the facts, and make better decisions based on them.

 

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