AJM - Editorial

Volume 24 Number 1 June 1999

Editor - Robert Marks

Globalisation, Competition, and Financial Instruments

T he five papers in this issue can broadly be described by the title of this editorial: the papers by Gray and Whaley, and Jarnecic are concerned with financial markets and instruments traded on them, a trade which is growing with globalisation, although on some measures the financial markets are still not as globalised now as they were almost a hundred years ago, before the First World War (see Williams and O'Rourke 1999). King's paper considers policy implications of privatisation policy and competition. Murphy, and Devinney and Kabanoff are concerned with multinational companies, their practices and avowals and behaviours.

The growth of financial derivatives has seen the emergence of new instruments, such as Macquarie Bank's Geared Equity Investment. Gray and Whaley demonstrate that this is essentially a collateralised loan plus a reset put. What is a 'reset put'? These securities, now traded in a number of markets worldwide, are like standard put options except that the exercise price is automatically reset at a higher level if the underlying stock price is above the original exercise price on the reset date. Sometimes they are traded as separate securities, at other times they are embedded in structured over-the-counter products, such as the Macquarie Bank's instrument.

Gray and Whaley derive a valuation formula for a reset put as a European-style instrument and use this to compare the risk characteristics of a reset put with those of a (European-style) standard put. With American-style reset puts, such as the Macquarie Bank's instrument, analytical solutions are not in general possible, and the authors describe and use a numerical method for valuing the interest rate premium of this instrument, with a single reset date. They find that the premiums are on average almost 250 basis points higher than those of comparable Australian Stock Exchange puts, even after adjusting for the tax benefits available.

Over the past twenty years there has been a global move to privatise government-owned enterprises, and more recently to lower or remove competitive barriers for utilities, many of which have also been privatised or broken up into smaller firms. In Australia, the partially privatised telephone company, Telstra, owns the 'local loops' from the exchange to the house. As one of several companies to provide long-distance and international telephone services, as well as dial-up Internet services, Telstra is thus competing as a vertically integrated company against some of its customers, other phone companies and Internet service providers.

In the face of the widespread belief that such a vertically integrated utility might cross-subsidise its competing, downstream operations from its monopolistic, upstream service, and in the face of the inability of a regulator always to be effective at preventing such cross subsidies, a general consensus seems to be that the vertically integrated firm should be broken up, so that the competitive, downstream part competes without any subsidy, and the monopolistic, upstream part may be more effectively regulated, or even kept in government ownership.

King, however, argues that, under reasonable assumptions embodying these beliefs, the conclusions are at best ambiguous and may be false. He argues that the integrated utility's price discrimination may hurt competitors but benefit consumers, by lowering prices below levels that would hold with vertically separated companies and no price discrimination. Whether regulation to prevent cross-subsidisation on the part of the vertically integrated utility will result in muted competition, raising final product prices, and so lowering levels of social welfare will depend on the implementation of the regulation, as well as on any barriers to entry. Given the policy issues raised by King's paper, and the revenues and profits associated with utilities, especially in the telecommunications industry, these conclusions will becontentious, not only in government, but also in the boardrooms of new entrants to these industries.

Globalisation, the knitting together of the world, with economic forces as the main agent, is now proceeding with a rapidity and a completeness that was previously unimaginable. Some believe that the political impetus to resist globalisation is fully the match of the economic impetus to embrace it (Williamson and O'Rourke 1999), but others argue that the possibility of an outbreak of protectionism is less likely (Friedman 1999), because the flow of money and information around the world due to Internet and other modern communications make it difficult.

Globalisation should make life and business easier for multinational corporations (MNCs): a more closely knit world should imply less diversity and so greater uniformity in products and in sales practices. The paper by Murphy uses data from a single MNC operating in both Australia and New Zealand to test the hypothesis that cultural closeness is sufficient for uniformity in sales practices. Despite the closeness of the two countries' cultures, as revealed in their scores on national cultural dimensions, Murphy's research suggests that customising its sales practices is better practice for this MNC - and, by implication, other MNCs operating across more diverse countries - than using uniform sales practice. Whether globalisation will eventually erode the cultural differences underlying these results is questionable, in my view - I do not agree with Friedman that globalisation, driven by the economic imperative, will triumph.

When my predecessor, John Roberts, started the practice of writing these introductions, some queried its value. Surely it was sufficient to let the papers stand on their own? There are two responses to this: first, as reported below, the Anbar rankings for the Journal and the Link2Go rankings for the Electronic AJM web page attest to the degree to which John's innovation has made the Journal much more reader friendly. Second, as discussed in the paper by Kabanoff and Devinney, this issue is very similar to that faced by companies in their annual reports: to what extent should they 'let the numbers [the financial data] speak for themselves' and to what extent can investors gain a greater insight into the firms' managers' thinking by reading a further commentary on the financial data? Of course, one could argue that the difference is that company accounting data reflects past performance and the commentary will foreshadow future actions, and that the purpose of this introduction is not to look forward, but to attempt to present the papers' wider context.

At any rate, Kabanoff and Devinney examine Australian firms' annual reports in order to investigate three issues: is the level of attention that firm gives to a geographic region (as evidenced by the frequency of reference to the region in the report) related to its level of investment and profitability in the region? Second, is the level of attention related to future investment and profitability of the region? Third, what are some environmental determinants of a firm's level of references? The authors use content analysis, a recently developed technique for text analysis, which is still somewhat controversial, but their paper will help to gain its acceptance. The authors found, first, that a greater proportion of assets in a region is correlated with a greater frequency of references to that region in the firm's annual reports, confirmation of the validity of verbal references. Second, they found indications that companies refer more frequently to regions in which their profits are about to improve. Third, there is a correlation among the frequency of references to a region made by one's competitors, but not to the reference frequencies of companies in general.

The increasing use of stock options markets has raised the issue of their efficiency vis-a-vis stock markets. Since stocks and their options are regarded as perfect substitutes, if their trading in the two markets is not in phase, this suggests the possibility of inefficiencies, specifically in the market which lags. Or the instruments may not be perfect substitutes in the eyes of investors, or there may be informational asymmetries between the markets. In a paper which considers stocks and their options traded on the Australian Stock Exchange, Elvis Jarnecic finds, first, that stocks lead their options, as reflected in trading volumes; second, that there is no evidence of informational asymmetries; third, that when periods of infrequent trading in the options market are eliminated, the lead disappears. He also finds that different opening procedures of the two markets partly explains the discrepancy. These results are consistent with recent US studies of the trading of stocks and their options.

Notes
This issue of the Journal is noteworthy in several ways. First, it is the first issue to be produced under the auspices of the merged Australian Graduate School of Management, a school jointly under the Universities of Sydney and New South Wales. Second, as noted in my comments prefacing the delayed issue of December 1998, our long-time production manager, Fiona Barratt, became a mother last September. Fiona has now decided to reduce her involvement with the Journal, the better to spend time with her family. Although not entirely disengaged - she will continue to help with the web pages of the Electronic AJM - she will be greatly missed, after her involvement of over ten years with the Journal. Fiona's role wil partly be taken by Sonal Bhalla.

On the editorial side, Professor Rob Widing has been the Marketing Editor for two years, but recently indicated that his heavier administrative load at the University of Melbourne meant he had to step down. In his place, I am very pleased to announce that Professor Mark Uncles of the University of New South Wales has agreed to become the new Marketing Editor. Welcome, Mark and Sonal. The Journal has recently garnered two indications of its success. With the proliferation of journal titles (from 10,000 in 1951 to over 140,000 now) an increasing problem is to sift the worthwhile reading from the time-wasting. One solution is the emergence of companies that classify and rank journals, so that librarians and readers can cut time and money in their search for value.

One such company is Anbar Electronic Intelligence, with its Anbar International Management Database. This database classifies the top management journals into the following categories: Accounting and finance, Business context, General management, Human resources, Information management, Marketing and distribution, Operations and production, Quality management, Strategy, Special interest, and Training and development. The Journal is classified as General management; in 1996 there were 30 General management journals and in 1997 32. (1997 is the most recent ranking.) Anbar uses four attributes in ranking the journals: Research, Practical Implications, Originality, and Readability. From 1996 to 1997 the Journal improved its ranking in all attributes: Research from 18/30 to 13/32; Practical Implications from 8/30 to 7/32; Originality from 11/30 to 10/32; and Readability from 29/30 to 25/32. This last must be because of the introduction of these prefaces by John Roberts in 1997, since the format of the Journal is otherwise unchanged, and of course makes little concession to readability, as an academic and technical journal.

A second gong was announced for the Electronic AJM's home web page, entitled 'AJM - about AJM', at http://www.agsm.edu.au/~eajm/. It was selected as a Links2Go 'Key Resource' in the Social Science Journals topic, at http://www.links2go.com/topic/Social_Science_Journal. In fact, this page is ranked third of fifty (after APA Monitor and Current Research in Social Psychology). Links2Go explained that:

Each quarter, Links2Go samples millions of web pages to determine which pages are most heavily cited by web pages authors, such as yourself. The most popular pages are downloaded and automatically categorized by topic. At most 50 of the pages related to a topic are selected as 'Key Resources'. Out of 50 pages selected as Key Resources for the Social Science Journals topic, your page ranked Third... The Links2Go Key Resource award differs from other awards in two important ways.

First, it is objective. Most awards rely on hand selection by one or more 'experts', many of whom have only looked at tens or hundreds of thousands of pages in bestowing their awards. Selection for these awards means no more than that one person, somewhere, noticed your page and liked it enough to select it. The Key Resource award, on the one hand, is based on an analysis of millions of web pages. Any group or organisation who conducts a similar analysis will arrive at similar conclusions. When Links2Go says your page is a Key Resource, we mean that your page is one of the most relevant pages related to a particular topic on the web today, using an objective statistical measure applied to an extremely large data set.

Second, the Key Resource award is exclusive. We get literally hundreds of people requesting that their page be added to one or more topics per week. All of these requests are denied. The only way to get listed as a Key Resource is to achieve enough popularity for our analysis to select your pages automatically. We do no accept fees, offers of link exchanges, free advertising, or bartered livestock as inducements to add new sites to our lists. Fewer than one page in one thousand will ever be selected as a Key Resource.

Both of these events reflect on the team that help to produce the Journal: the authors, the editors, the reviewers, the production staff, both past and present. To all, thank you!

References

Anbar Electronic Intelligence, http://www.anbar.co.uk

Friedman, T.L. 1999, The Lexus and the Olive Tree, Farrar Straus & Giroux, New York.

Links2Go, http://www.links2go.com/topic/Social_Science_Journal

Williamson, J.G. & O'Rourke, K. 1999, Globalization and History: The Evolution of a Nineteenth Century Atlantic Economy, MIT Press, Cambridge, Massachusetts.