Volume 29 Number 2 December 2004
Robert E. Marks
Learning, Risk, and Diversity
T his is the largest issue we have published for some years. There is a diversity of disciplines represented among the eight papers, from computer simulations of auctions with repeating bidders who learn, to the use of financial derivatives in managing corporate risk, to accounting measures of firm performance, to flexible work options and diversity in the workforce. There are four finance papers (Papers 2, 5, 6, and 8), two OB papers (3 and 7), an economics paper (Paper 1) and an accounting paper (Paper 4). The Journal has a reputation for publishing excellent papers in finance, and has also published excellent papers in marketing, OB, accounting, operations, and economics. Indeed, the winner of the E.J. Yetton Award for best paper published in 2003 is a marketing paper (see below for the announcement). So I welcome the diversity of this issue's offerings. As Mao exhorted: Let a thousand flowers bloom.
Auctions are being used not just to sell antiques or objects d'art or spectrum rights or prospective oil leases or (via procurement auctions) to buy service contracts. The push for market-based instruments to protect the environment has led to auctions being considered as a mechanism for allocating land conservation contracts to private bidders, under the belief that competitive bidding minimizes information rents. Hailu & Schilizzi construct an agent-based model (Judd & Tesfatsion 2005) to evaluate the long-term performance of such auctions when agents can learn from the outcomes of previous auctions. They find that, although one-shot auctions are more efficient, with learning in repeated auctions these benefits are soon eroded. Moreover, they find that a fixed-price scheme with reserve prices set at 90% of average opportunity costs outperforms the auction in terms of both participation and efficiency. These results were derived with individual, arm's-length learning only: with the possibility of communication among bidders, the results would be even starker, the authors suggest.
The value of a call option, according to the Black-Scholes pricing model, increases with underlying volatility. If equity is seen as a call option on a firm's assets, then the riskier the projects undertaken, the higher the value of the equity. This has been used to explain why managers undertake risky projects (the so-called asset substitution proposition of Jensen & Meckling 1976). But Gong notes that the Black-Scholes option-pricing model ignores bankruptcy risk, and asks whether shareholders will still be risk-seeking when they bear explicit bankruptcy risk. He shows that, when bankruptcy costs are borne by shareholders, for low levels of debt, shareholders prefer to minimize cash-flow volatility, although for high levels of debt shareholders might be risk-seeking, as Jensen & Meckling argue.
Härtel describes a research program motivated by the increasingly diverse Australian workforce. She wants to explain the impacts of such diversity on business interactions, specifically by testing whether human-resource management policies and practices that foster openness (briefly, embracing diversity) can be shown to shape employee attitudes and behaviours. By reducing levels of prejudice, such policies and practices could improve outcomes for the organization. After describing and analysing a series of interviews with people representative of different stakeholders, she concludes with four recommendations for organizations with diverse workforces.
As an economist, I have often belittled the accountant's view of costs as inappropriate in making forward-looking decisions. But with the emergence of a repackaged, trade-marked model of residual income known as Economic Value- Added (EVAr) I have to admit that the two views of the appropriate way to model costs are converging-or, rather, the accountants have seen the light. Of course, the acid test must be market performance (absent externalities). Worthington & West ask whether EVA is more highly correlated with stock returns than are other commonly used accounting measures. The answer is yes: residual income, earnings, and net cash flow are dominated by EVA's correlation with stock returns. Opportunity cost rules!
In the thirty years since Black, Scholes, and Merton first solved the option- pricing conundrum, the use of options and other so-called derivatives has become pervasive in managing corporate assets and liabilities. An interesting study might be to track the adoption of these new financial instruments. An exhibit at the Baker Library, Harvard, describes it thus:
News of an elegant and practical solution to the pricing of options and other derivatives spread quickly among receptive audiences. The Black and Scholes working papers, along with Merton's own handwritten notes and derivations of the formula, were required reading for students in Merton's finance classes long before they were published. An equally eager audience of financial advisors, portfolio managers and securities traders awaited the option pricing model.
In the same year that Merton published his article on option-pricing theory (1973), the Chicago Board Options Exchange opened and provided the perfect testing ground for the practical implementation of the Black-Scholes model. Within six months of the original publication of the Black-Scholes formula, it had become so widely used by traders at the CBOE that Texas Instruments produced a handheld calculator pre-programmed to produce Black- Scholes option prices and hedge ratios. (Baker Library 2004)
As Benson & Oliver point out, testing positive theories to explain the extent and means of corporate financial risk management (including the use of derivatives) requires many assumptions. Grasping the nettle, the authors find that across Australian publicly listed firms, there is a range of purposes for the use of derivatives, over a range of risks and a range of exposures, the diversity of which helps to explain the lack of consistency in previous studies. Against the Jensen- Meckling asset substitution proposition, but perhaps consistent with Gong's findings in Paper 2 of this issue Benson & Oliver find that managers are focused on the broad reduction of risk and volatility of cash flows and earnings. The main hedged risks are foreign-currency and interest-rate risks, generally using derivatives. Hedging financial risks occurs, generally using forward options and swaps. But much financial risk exposure is unhedged. Loudon looks at airlines' risks in Paper 8 of this issue.
Government regulation has resulted in a large growth in managed funds in Australia, especially superannuation funds. These funds have to be managed. And the fund's investment performance can be used to measure the effectiveness of the manager, as scrutinised by investors, asset consultants, ratings agencies, and the financial press. Gallagher & Nadarajah examine the relationship between the funds' executive turnover and investment performance. They find that the departure of managers from lower-(higher-)performing funds is generally followed by higher (lower) fund performances, although whether the managers' decisions are directly responsible for the funds' performance is not always clear. What is the impact of firms' use of such flexible work options as flexible hours and part-time work on employees' attitudes? Of course, the other demands on the employee's time should affect these attitudes, and whether the push for such options has come from employees or from management. But flexible work options have been seen as a low- or no-cost option, which will reduce turnover and absenteeism, and increase productivity. Albion examines such attitudes in two organizations, and argues that increased flexibility in the workplace, properly introduced and managed, can have positive outcomes for both employers and employees.
Since the terrorist attacks of 9/11, most non-government airlines around the world have been in precarious financial positions, in which they are highly vulnerable to adverse outcomes in the cost of capital, currency fluctuations, and the cost of fuel. Loudon examines the exposures of the two carriers, QANTAS and Air New Zealand, to key financial risks. He finds that both airlines are negatively exposed to short-term fuel-price risks. There was, he finds, an impact of 9/11 on their returns, but little effect on either airline's exposure to interest-rate or currency risk. He notes that, hedging having taken place, he can only observe exposure after hedging, so that lack of measured exposure might reflect effective risk management rather than low underlying risk levels, which ties in with Paper 2 of Gong'
Each year the Journal's area editors vote on the best two papers of the previous year. The winners are awarded the E.J. Yetton Award for best paper and runner-up, a prize donated by Philip Yetton, on his retirement from the chair of the General Editor. The first awards were made for Volume 20, 1995. This time, Volume 28, 2003, included three issues, two regular issues sandwiching a Special Issue on Stock Markets-Risk, Return and Pricing. In total there were seventeen papers, of which seven received votes. The best paper was voted to be Geoffrey N. Soutar and Jillian C. Sweeney's paper, 'Are There Cognitive Dissonance Segments?' followed up by Emma Welch's paper, 'The Relationship Between Ownership Structure and Performance in Listed Australian Companies,' both in the December, 2003, issue. The earlier winning papers (all eighteen of them) can be seen at the Journal's web site (at the E.J. Yetton Awards pages).
Recently, the beta version of Google Scholar has emerged as a new on-line search tool for academic research. I searched for the phrase 'Australian Journal of Management;' there were 846 hits (on 25/11/04). What about Plain Old Google (POG)? About 9,860 hits. The Google Scholar includes original papers as well as citing papers, and apparently attempts to avoid duplication, whereas POG lists any web page that includes the searched-for phrase. Factiva is the on-line database of publications (both mass media and academic journals) worldwide, of Dow Jones & Reuters. A Factiva search for 'Australian Journal of Management' across all of Factiva's publications and across all available years for each publication resulted in 144 hits (on 25/11/04). Removing the 38 self-references (recent issues of the Journal are included in the Factiva database) results in 106 references to the Journal from all other publications.
These numbers should not surprise us. A 2003 paper on citations in the work of a large number of PhD students in Australian universities (Clements & Wang, 2003), found that in terms of citations the Journal ranked fourth amongst Australian economics journals (behind Economic Record, Australian Economics Papers, and the Australian Journal of Agricultural Economics-as it then was, and equal with or ahead of such journals as the Brookings Papers, Economic Inquiry, the Journal of Industrial Economics, and Management Science.
The Journal receives copyright payments from copiers around the world through the Copyright Agency Ltd. Six weeks ago I was surprised to learn that the CAL cheque for the July 2004 quarter copyright payments would be over $30,000, about 40 times as large as any cheque received in the past. This is owing to the sudden popularity of a single paper, 'What Do Managers Like To Do? Comparing Women and Men in Australia and the US', by Alison M. Konrad, Robert Waryszak, and Linley Hartmann, which appeared in Volume 22, June 1997. The paper does not have many citations. (Google Scholar gives it two.) The authors and others undertook a larger cross-country study published four years later; perhaps that study has become popular; or perhaps the title is too suggestive. Will its popularity continue? (The cheque is no longer in the mail: it arrived last Friday.)
There have been some changes amongst the Area Editors. A year ago Sharon Parker told me of her intention to resign her area editorship of Organisational Behaviour; she suggested that Claire Mason be invited to succeed her. Claire, at the Queensland University of Technology (where previous OB editor Boris Kabanoff is a professor), agreed, and started receiving manuscript submissions in January. Unfortunately, after several months of dealing with the flow of submissions stimulated, I think, by the OB Special Issue of 2002 edited by Sharon Parker and Robert Wood, Claire regretfully resigned the editorship, which is now being performed by a group of people from the AGSM's OB Cluster: welcome, Steve Frenkel, James Carlopio, Lex Donaldson, Peter Lok, and Markus Groth. Tim Devinney has been the Area Editor in Corporate Strategy for ten years, since June 1995. This is a long time for an Area Editor to survive, going back to John Roberts' General Editorship. Tim has decided to retire as the Strategy Area Editor at the end of 2004. Farewell and thanks, Tim, Sharon, and Claire. Congratulations to Ian Marsh, Area Editor, Government Policy and Regulation, for his recent appointment as ANZSOG Professor of Government at the University of Sydney, one of the AGSM's two parent institutions.
Baker Library, Harvard 2004, Option Pricing in Theory & Practice: The Nobel Prize Research of Robert C. Merton
http://www.library.hbs.edu/hc/exhibits/merton/about.htm Accessed on 22 November 2004.
Clements, K.W. & Wang, P. 2003, 'Who cites what?' Economic Record, vol. 79, no. 245, pp. 229-44.
Google Scholar, at http://scholar.google.com
Jensen, M. & Meckling, W. 1976, 'Theory of the firm: managerial behavior, agency costs, and ownership structure', Journal of Financial Economics, vol. 4, pp. 305-60.
Judd, K. & Tesfatsion, L. (eds.) 2005, Handbook of Computational Economics: Volume II: Agent- Based Computational Economics, North-Holland, forthcoming.
Konrad, A.M. Waryszak, R. & Hartmann, L. 1997, 'What Do Managers Like To Do? Comparing Women and Men in Australia and the US', Australian Journal of Management, vol. 22, no. 1, pp. 71-97.
Soutar, G.N. & Sweeney, J.C. 2003, 'Are there cognitive dissonance segments?' Australian Journal of Management, vol. 28, no. 3, pp. 227-50.
Welch, E. 2003, 'The relationship between ownership structure and performance in listed Australian companies', Australian Journal of Management, vol. 28, no. 3, pp. 287-306.
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