Volume 30 Number 1 June 2005
Robert E. Marks
Organisational Behaviour, Finance, and Economics
The living of the eighteenth- or nineteenth-century Church of England vicar must have, first, attracted some interesting men, and, second, afforded him much leisure time. How else to explain the accomplishments of the reverends Malthus, Boole, and Bayes? Malthus explored the theoretical relationships between food production and population, and his writings inspired both Wallace and Darwin to realise independently how natural selection could shape the evolution of life on earth. Boole developed an algebra for logic, which has been invaluable in the design of logic circuits for digital computing. And Bayes developed a way of thinking about likelihood--probability--that incorporated subjectivity into estimates of probability, which were thus sensitive to information, in contrast to the frequentist, or classical, approach to probability, which states that unique events can have no prior estimates of the probability of outcomes. All three were C. of E. clergymen.
In this issue's first paper, Gray uses techniques (first imagined by Bayes) in examining the estimation of continuous-time processes, which are popular in theoretical work. In empirical estimation, however, there are three hurdles to using such models: first, the transition density, and hence the exact likelihood function, of a stochastic process is unknown for all but a few simple models. Employing an approximate likelihood function in such cases can induce bias in parameter estimates. Second, even with an exact likelihood function, the finite-sample performance of such classical methods as maximum-likelihood estimation is largely unknown. Third, observations occur daily, weekly, or even monthly, rather than continuously; this can also introduce bias.
Remember, Bayes taught us that, given a prior and a likelihood function, the posterior distribution can be calculated simply as proportional to the prior distribution times the likelihood. Gray explores a method of estimating the parameters of continuous-time short-rate models when the exact likelihood function is unknown. He also uses a technique to augment the discrete data observations by simulating values of the process between each pair of observations. He concludes that his findings are encouraging: he obtains a close approximation to the true posterior density, and the maximum-likelihood estimates are close to the true Bayesian point estimates. Although not apparently increasing the accuracy of point estimates, his data augmentation is useful in recovering accurate approximations of the true posterior densities of parameters, at a cost, however, of significantly increased computing time.
You come into an inheritance. After paying down your mortgage, what should you do? The average punter might look to invest in new property, or might consider the stock market. Mutual funds provide a means of obtaining a diversified portfolio without paying close attention to the vagaries of the stock market. Its pure form, where the fund tracks a given stock-market index as closely as possible, is known as passive index investment, and in the second paper Frino, Gallagher, and Oetomo present evidence that passive index investment management has outperformed actively managed mutual funds (on average) after costs.
There is a third way. When the fund manager engages in limited (risk- controlled) active investment strategies, in what is known as an enhanced index fund. Such funds execute investment strategies that are essentially index-oriented, but may engage in participation in initial placement offers (IPOs), trading in stocks associated with index revisions before the revision date, the use of futures contracts, participating in dividend reinvestment plans, "pairs" trading, etc. (See their footnote 3.) Is there a benefit to an index fund of employing less rigid investment strategies?
Examining index funds' rebalancing strategies during periods of index revision, Frino et al. find that such enhanced index investment strategies earn significantly higher returns than do vanilla index funds. Moreover, enhanced index funds' investment behaviour significantly lowers the trading costs, because such strategies are less impatient in competing trading packages. Is there any downside? Well, with greater discretion, enhanced index fund management can make more mistakes, but Frino et al. find no evidence of this in aggregate.
In this paper, a finance paper, the managers are price takers, facing going market prices for stocks. The third paper, in contrast, considers bilateral negotiation, from an organization behaviour perspective. Negotiation is pervasive in business and management, indeed, for some industries, bilateral negotiation might be as significant an allocation mechanism for firms as the market. Olekans and Smith recognise that how negotiators think about their task influences their planning, and so influences the outcomes of negotiation, and consider whether differences in the negotiators' mental maps (the representations of their notions of objects, events, behaviours, or tasks) can explain the outcomes of the negotiation, by asking, first, how negotiators' goals (for instance, to improve their own position--competitive--or to meet the needs of both parties--cooperative) influence their mental maps of the negotiation, and, second, how negotiators' goals and maps affect the outcome. When one or both negotiators held non-competitive goals, Olekans and Smith found that negotiators' flexibility was beneficial to their joint gain, but when both held competitive goals their flexibility resulted in a low joint gain.
The fourth paper, by Tharenou, (and the second of four O.B. papers in this, the largest issue for some years) examines the impact of mentoring on career advancement, specifically women's compared to men's. She found that mentoring was no more effective at affecting women's career advancement than it was for men's. On the other hand, "psychosocial" support is relatively more effective with women's careers. Woman mentors have stronger effects than do man mentors. These results have implications for people who want to improve their chances of career advancement, and for firms that plan to institute employee support programs.
Merger arbitrageurs try to exploit pricing discrepancies in the market for corporate control. The target's bid price will typically be greater than the market price at announcement of the takeover. Arbitrageurs buy at the market price and hope to sell at a higher price on successful completion of the merger. But failure may result in selling at a loss. Just how risky has merger arbitrage been in Australia?
Maheswaran and Yeoh examine the risk-adjusted returns over ten years from 1991 to 2001. They find that, before transaction costs are included, merger arbitrage generated statistically and economically significant excess risk-adjusted returns, but when transaction costs are included returns in most cases fall to statistically normal levels. No doubt, the arbitrageurs' efforts to outperform the market, in aggregate, has resulted in abnormal returns being competed away.
The third organisation behaviour paper in this issue concerns organisations. use of employee opinion polls and benchmarking. Specifically, in the sixth paper Mason, Chang, and Griffin look beyond such identification of organisational strengths and weaknesses in organisational performance (by which they do not mean its stock market performance) to ask how organizations can improve their performance, as indicated in such surveys by using "quasi-linkage research," which, unlike "linkage research," uses a single source of data: the organisation's employees.
Exchange rates are significant prices. (On a personal note, I type this sitting in France, wondering how my credit-card charges will appear on my on-line statements.) And exchange-rate markets have been subject to intense analysis. Nonetheless, unexplained, anomalous behaviour persists: exchange rate volatility with respect to fundamentals, and persistent departures from so-called .fair values.. The seventh paper, by Crosby, asks whether price-to-market models for exchange- rate behaviour are better at explaining these two anomalies than are conventional theories. He concludes that such models do a better job of explaining exchange-rate behaviour, but do not fully explain observed high-to-medium-frequency fluctuations in exchange rates.
The final paper in this issue, the fourth O.B. paper, by Sarros, Gray, Debsten, and Cooper examines one measure of "organisational culture". What is organisational culture, exactly? Well, I suppose that it is open to the researcher to define it however she wishes, and analyse the construct so defined, but there is an understanding in the field that organisational culture is, to quote Denison (1996), "the deep structure of organisations, which is rooted in the values, beliefs, and assumptions held by organisational members." Sarros et al. consider that organisational culture is a top-down phenomenon: only employees in the top strata of management can significantly influence cultural identity and change.
The authors examine of the most popular measures of organisational culture in use today. They find that innovation in the organization appeared to play a pivotal role of Australian executives' perceptions of organisational culture, as well as identifying two new factors associated with environmental aspects of organisational culture: stability and social responsibility.
HousekeepingThe E. Yetton Award is given to the paper voted by the Journal's Associate Editors as the best paper published in the Journal in the previous year. The winning paper for Volume 29, 2004, is Ning Gong's "Do Shareholders Really Prefer Risky Projects?". The runner-up is David R. Gallagher and Prashanthi Nadarajah's "Top Management Turnover: An Analysis of Active Australian Investment Managers", both from Volume 29, Number 2, December 2004. The competition was close, with several papers receiving at least one mention in the voting. Congratulations, Ning Gong, David Gallagher, and Prashanthi Nadarajah.
Tim Devinney has been the Associate Editor in Strategy for almost ten years. At the end of 2004 he intimated that he was ready to stand down, and suggested Anne-Wil Harzing of Melbourne University as his successor. I agreed, as did Anne- Wil, when I approached her. Welcome, Anne-Wil. More recently, Doug Foster intimated that he would stand down as co-Associate Editor in Finance. Finance is without doubt the busiest of the discipline areas at the Journal, and co-editors Doug and Garry Twite have carried a heavy load of reading, corresponding, inviting people to act as reviewers, and deciding. Doug and Garry suggested David Gallagher of UNSW as a successor to Doug, and David agreed. David has been a frequent contributor to the Journal, most recently being co-author of the runner-up to last year's E. Yetton Award. Welcome, David.
A final note: congratulations to Kristie Clemow, our long-time word- processing production assistant, at the birth of her baby girl, Ellee Jade.
Bayes, T. 1736, An Introduction to the Doctrine of Fluxions; and, Defense of the Mathematicians Aganst the Objections of the Author of the Analyst, So Far as They are Designed to Affect Their General Methods of Reasoning, Printed for J. Noon, London.
Boole, G. 1854, An Investigation of the Laws of Thought: On Which are Founded the Mathematical Theories of Logic and Probabilities, Walton and Maberley, London.
Dennison, D.R., 1996, "What is the difference between organizational culture and organizational climate? A native's point of view on a decade of paradigm wars," Academy of Management Review, vol. 21, pp. 619-55.
Gallagher, D.R. & Nadarajah, P. 2004, "Top management turnover: An analysis of active Australian investment managers," Australian Journal of Management, vol. 29, no. 2, pp. 243-74.
Gong, N. 2004, "Do shareholders really prefer risky projects?" Australian Journal of Management, vol. 29, no. 2, pp. 169-87.
Malthus, T.R. 1798, An Essay on the Principle of Population as it Affects the Future Improvement of Society: With Remarks on the Speculations of Mr. Godwin, M. Condorcet and Other Writers, J. Johnson, London.
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