Volume 25 Number 3 December 2000

Editor - Robert Marks

T he world is in a precarious state. Almost ten years of economic growth have meant that severe hardship in the industrial democracies is uncommon, although the process of adjustment to increased competition in many industries means that a small number of households have suffered loss of jobs and have had to uproot to find work. This is been especially severe in some country towns, although, in Australia, the fall of the Australian dollar has cushioned many of the exporting industries.

At the same time there is now a rising chorus of voices against 'globalisation', as seen recently in Seattle, Washington and Melbourne. In Melbourne, this was evident in the misguided violence of the protestors besetting the Crown Casino, perhaps a more politically acceptable target than, say, a university college. I say 'violence' since, in besetting the building, the protestors were blockading the Casino in order to prevent delegates to the World Economic Forum from entering or leaving. Unfortunately, the Forum not being a decision-making body, but rather an occasion for discussing, ventilating, debating, and exploring the economic, social, and political consequences of globalisation, the protest and blockades had the dour effect of reducing debate, not increasing it. (I characterise the protest as violent in the same way that the playground bully is violent when he pins my arms to my sides to stop me retaliating - when I struggle to free myself, his violence is reflected in my response to him.)

A possible cause for the dissatisfaction, or at least lack of joy, at the unprecedented high levels of living standards in the industrialised world, after eight years of growth, is given by Robert Frank (2000), who argues that the relative level of consumption, not the absolute, is what strongly influences people's level of satisfaction. As Fred Hirsch pointed out twenty-five years ago, in any race only few win, or come close. The increased level of competition seen recently might not be a consequence of globalisation, but a contributing factor, as individuals vie for the best positional good. Whatever the reason, I believe that the levels of dissatisfaction are becoming dangerously high.

To counter some of the anti-globalisation rhetoric and even hysteria, I can strongly recommend a book by two journalists from The Economist magazine that dares to celebrate the potential of our world. They make a clear and compelling case for the liberal and economic values that both create and result from globalisation, which they translate into human and understandable terms. The book is A Future Perfect: The Challenge and Promise of Globalisation, by John Micklethwait and Adrian Wooldridge. Amongst other things they point out that globalisation is not an inevitable, irresistible force shoved down the throat of a resistant world that can do little more than learn how to live with it. On the contrary, they point out that a strong enough political reaction to the perceived problems of globalisation may well stop it dead, to the great detriment of those many millions of people around the world who stand to gain from increased trade and increased economic growth.

Indeed, in a recent speech, Alan Greenspan, Chairman of the US Federal Reserve, warned that neither continued economic liberalisation nor high economic growth was inevitable. Economic liberalisation has been popular in recent decades, he said, but opponents of trade, competition, and economic dynamism have not gone away. There is still deep-seated antipathy towards free-market competition and its partner, creative destruction, in Joseph Schumpeter's now famous insight. Writing in the 1930s, Schumpeter noted that a successful capitalist economy will nurture freedom of speech, debate, and criticism, which are themselves required for entrepreneurship to flourish. But that freedom will, in turn, encourage intellectuals who will aim their criticism at creative destruction itself. So a market economy will create its own critics. In a recent article in the New York Times, Virginia Postrel argues that anti-globalisation comes less from a fear of poverty or lost jobs than it does from a visceral, aesthetic revulsion to technological dynamism and economic growth. An argument that the goods - and the creative processes that produce them - aren't worth having.

Lest my concerns be thought unduly alarmist, I point back to an earlier period of globalisation, in the decades before the First World War, ninety years ago. A popular book in Britain was Norman Angell's The Great Illusion, in which the future Nobel laureate (1933, Peace) argued that the trade linkages between the European powers, specifically between Great Britain and Germany, meant that there was too much to lose from war for it to happen. Meanwhile, the Germans were reading von Bernhardi's Germany and the Next War. After the war, and the collapse of trade, it took a depression, another world war, the untimely deaths of millions, the collapse of communism, and many, many years for the level of economic interdependency of the Edwardian world to be surpassed.

The Papers: Taxes, Collars, Exports and Losses Three of the papers in this issue focus on international issues. Styles & Ambler seek influences on firms' export performance in Australia and the UK; Allen looks at differences in firms' spare debt capacity among British, Australian, and Japanese companies; and Mian & Adam Mian & Adam demonstrate that prices on the Australian Stock Exchange are increasingly influenced by events that occur in North America, while Australians sleep. The paper by Faff, Hillier & Wood examines the impact of an Australian tax innovation - the dividend imputation scheme - on financial decision making. The paper by Easton & Pinder uses option theory to analyse a decision faced by members in a demutualisation. Sin & Watts ask whether the influence of the announcements of losses on share returns is less than the influence of announcements of profits.

As Australian firms of all types have struggled to complete the first return under the new taxation system - the Business Activity Statement - it might be readily agreed that taxes can affect financial decision making. Although a recent paper (D. Jamkov et al. 2000) ranks Australian as the second lowest (behind Canada) by inconvenience of establishing a new business, this was before the imposition of the new tax system. The BAS may have no impact on asset pricing, but an earlier innovation in tax policy, the dividend imputation scheme, may well have had, after its introduction in July in 1987. Faff, Hillier & Wood find consistent evidence, after appropriate adjustments, that in the post-imputation tax environment the relationship between risk (as measured by the beta coefficient of the Capital Asset Pricing Model) and return is more steeply sloped, that is, the relationship between risk and return is found to be more positive post-imputation than previously. The authors do not explore the implications of this for future tax policy.

Edith Penrose (1996) distinguished two types of knowledge: objective, which can be formally taught, recorded and learnt from the written word and transmitted to others; and experiential, which arises from subjective personal experience. The issues that Styles & Ambler term relational fall into the experiential knowledge category, and so are part of social learning. To what extent do relational variables, such as trust and relationship commitment, have an impact on export performance at the small- and medium-enterprise level? Styles & Ambler examine data from the UK and Australia and find that two kinds of commitment - to the market and to the relationship with the distributor - are key. Both of these begin with experiential data gathering, or social learning. The Australian data do not provide as strong a link as do the UK data, perhaps owing to less experience of exporting among Australia firms, or to the fact that Australian exporters' customers in Asia have less in common culturally with Australians on average then do the European customers with their UK suppliers. The study is more subtle than this precis suggests, as the reader will see below.

Around the English-speaking world, the past ten years have seen significant numbers of mutual organisations, owned by their members, converting ('demutualising') to public companies owned by their shareholders. In some cases, such as the NRMA (a combined insurance/road service organisation), the process has been troubled as courts have ruled that the membership of the mutual may not have been given full information or offered clear alternatives or may even have been given misleading information on which to base their decision to vote for demutualisation to proceed. Although the rate of demutualisation may be slackening, with few mutual organisations remaining to convert, the process has nonetheless some lessons in the financial aspects of corporate governance. The largest Australian insurance organisation is AMP, which first listed as a public company in June 1998, following an overwhelming vote to proceed held in November 1997. Under the prospectus, shareholders were offered the opportunity to buy shares or to sell their allocation of shares in the new company through a facility at a price related to the price on the market after listing. Easton & Pinder examined the circumstances under which the AMP member-turned-shareholder would rationally commit to sell via the facility or on-market, before knowing the facility price. They argue that the facility comprised a 'collar with Asian options'. Not exotic S & M devices, but originally from interest-rate options markets, collars are contracts which include combinations of caps (maxima) and floors (minima) in order to achieve less costly and perhaps more specific risk control. An Asian option is an option that is settled on the basis in the difference between the striking price (the current market price at the time of sale of the option) and the average market value of the underlying security; as such, the authors use simulation technique to determine to floor and cap AMP share prices of the collar, and remark that the disclosure of information during the demutualisation may affect the fraction of shareholders who commit to buying and selling through such facilities.

Most households have spare debt capacity: these days this may be nothing more than a credit card balance below the limit. Those who have experienced it know the annoyance and inconvenience of having one's card rejected because the credit limit has been reached when the purchase was about to occur. Firms too may have spare debt capacity, through design or by chance at any date. What policy may result in spare debt capacity as a deliberate outcome? Insurance against unforseen adverse events? Ability to seize new opportunities for investments or acquisitions? A means of signalling firm and project quality, given the informational asymmetry between the firm and its potential creditor? Since spare debt capacity is not directly observable or comprehensively reported, the signalling role may be less important, but Allen examines the extent to which an sample of listed Australian, British, and Japanese companies maintain spare debt capacity via questionnaire. He finds the Australian and British companies are more likely to maintain such capacity than are Japanese companies, perhaps because of the closer relationships with group banks in Japan. Spare debt capacity was reported as assisting firms to seize opportunities rather than as insurance. The signalling hypothesis was less strongly supported, especially in Japan. Firms believed they could substantially increase their borrowing without paying high interest rates (more in Japan then in Britain or Australia). Allen concludes by explaining spare debt capacity as a consistent response to difficulties associated with the existence of agency costs (the transactions costs associated with asymmetries of information).

When a company reports losses to the market, investors may exercise their option of selling their shares to avoid further losses and to realise the liquidated value of their assets. But if the company is financially sound, investors may wait to see whether management can stem losses and return the company to profitability. Because investors' losses are not expected to persist (whether because of selling shares or because of expected recovery of financial health by the firm), this behaviour will result in a weaker association between share returns and losses than between share returns and profits: losses are less permanent. Using Australian data, Sin & Watts find that there is a lower earning-response coefficient for losses than for profits, as expected. Their results also hold when losses are reported by financially healthy firms because of shareholders' expectations of a return to profitability. The results are robust for individual firms over a number of years and after controlling for the effects of firm size.

As American viewers of the Sydney Olympics became aware, the East Coast of Australia is between eight and ten hours behind the East Coast of the USA (and a day ahead, just to confuse). During the Olympics, this meant that viewers to NBC's service saw the contests in primetime some hours after they had been decided, at the cost of immediacy of the results. Usually, however, it is Australia which is the disadvantaged: events of moment occur overseas in Europe and North America while we sleep. Mian & Adam present evidence that reveals that more information that effects the Australian Stock Exchange is publicly revealed when the ASX is closed and that the US is the primary source of this non-trading-period information. I conjecture that the importance of US-generated information for Australian stock prices will only increase, despite the continuing growth of the Australian economy.

Housekeeping There are two new names on this issue's masthead. As I wrote in June, Boris Kabanoff stood down as Organisational Behaviour area editor. Sharon Parker has agreed to replace Boris, and has been editing away for almost six months, during which time she has been promoted. After four years as Accounting area editor, with several accounting papers per number over that time, Greg Clinch has stood down. Thank you for your efforts, Greg. John Lyon has agreed to be the new area editor Accounting. Welcome, Sharon and John. Joshua Gans, area editor Economics, has also been promoted recently.

Readers will have noticed that this, the December issue, is number 3 of volume 25. Number 2 was the Special Issue on Market Orientation edited by Mark Uncles, which was published in September. At some time in the future, there may be two additional Special Issues, one on National Competencies, to be edited by Ian Marsh, and another on Organisational Behaviour to be edited by our new O.B. area editor, Sharon Parker.

On the production side, Sonal Bhalla has returned to India with baby Ayesha. In her stead, Kristie Clemow has been doing yeoman service as Production Manager for over six months, to the extent that we have been approached to help produce a second academic journal.

References Angell, N. 1910, The Great Illusion; A Study of the Relation of Military Power in Nations to their Economic and Social Advantage, Heinemann, London. Bannock, G. & Manser, W. 1989, International Dictionary of Finance, The Economist in Association with Profile Books, London. Frank, R.H. 2000, 'Why living in a rich society makes us feel poor', New York Times Magazine, October 15. Greenspan, A. 2000, http://www.federalreserve.gov/BoardDocs/Speeches/2000/20000825.htm Hirsch, F. 1976, The Social Limits to Growth, Harvard U.P., Cambridge. Jamkov, D., La Porta, R., Lopez-de-Silanes, F. & Shleifer, A. 2000 'The regulation of entry', National Bureau of Economic Research Working Paper No. W7892. Micklethwait, J.A. & Wooldridge, A. 2000, A Future Perfect: The Challenge and Promise of Globalisation, Heinemann, London. Penrose, E. 1966, The Theory of Growth of Firms, Basil Blackwell, Oxford. Postrel, V. 2000, 'Good times, not bad, nurture enemies of free market', New York Times, Sept. 7. Schumpeter, J.A. 1934, A Theory of Economic Development, Harvard V.P., Cambridge. von Bernhardi, F. 1911, Germany and the Next War [Deutschland und der Nachste Krieg], Ogilvie, New York.

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