AJM - Editorial

Volume 23 Number 1 June 1998

Editor - Robert Marks

Prices and Values

T he seven papers in this issue of the Australian Journal of Management have at least two common threads, despite their diversity: six of the seven are explicitly concerned with prices - only the Worthington paper does not consider prices explicitly, although its financial ratios include some market-determined values. The remaining six papers consider prices - of stocks or of indices or of electricity - either as indicators of value or of risk or as outcomes of the design and interaction of markets - the more policy-oriented orientation of Gans, Price and Woods.

Measures of firm or industry performance is the second common thread - even the Gans, Price and Woods paper addresses the performance of the electricity industry via the spot market for electricity. The other six papers are concerned with measures of firm (or industry) performance, mostly using market-determined measures (prices) or, in Worthington's case, comparing technical measures against accounting measures. Of the seven papers, six are empirical studies of actual performance of firms or industries. Brooks, Faff and McKenzie are also engaged in testing econometric methods as well as searching for patterns in the data. Only the Gans, Price and Woods paper is entirely devoted to theory, although data from spot markets for electricity may provide a fertile field for future empirical studies of oligopolistic behaviour.

Worthington suggests that his technical measures may provide guidance for management in improving the firm's efficiency, and Gans, Price and Woods discuss strategic moves by the management of electrical generators in their efforts to increase their profits in an oligopoly.

There is little need to remind readers of the Journal of the great store placed by modern finance on systematic risk of firms or industries, as revealed by stock market valuations. To what extent, if at all, do these systematic risks (the firms' or industries' betas) change over time? Use of betas usually assumes that they are unchanging or change only very slowly, which raises the issue of how different management might affect a firm's beta (prospective doctoral students, please note). But before asking why a firm's (or an industry's) beta might change, the question of whether betas change, and how quickly, should be asked. Brooks, Faff and McKenzie examine three techniques for estimating the form of beta instability, one of the first attempts to derive estimates of the time series of an industry's (or firm's) beta. They conclude that Australian industry betas are not constant over time (the period 1974 to 1996) and that the Kalman filter is the best estimation approach of the three they consider.

One firm acquires another. On average, how does the merger affect the acquirer's long-run performance? Attempts to answer this using empirical estimation must control for firms' survival (disappearance of a firm may bias the results up), firm size, and measure bias. Brown and da Silva Rosa find that, with suitable controls, the relative performance of the acquirers is consistent with the outcome expected from informationally efficient capital markets: their usual good performance before the bid amount improves, on average, in the months following.

Computerisation of long-established stock markets and the establishment of new markets (such as those for electricity examined by Gans, Price and Woods) have resulted in increasing research effort focused on the microstructure of markets. and the impact of trading roles and customs on the formation of prices and the quantities traded. This research program is most advanced in the empirical analysis of stock markets, as exemplified by Walsh's paper. He examines the impacts of the size of the order, the number of orders, and the proportions of orders conditional on order size on the volatility and the mean of subsequent price charges. He concludes that informed traders are perceived by the other market participants to use larger orders, and not to use smaller orders. Moreover, an increase in the number of orders taken (of any size) is seen to increase the existing information asymmetry (between informed and uninformed traders) and hence the price volatility.

Arbitrage should result in a congruence between futures prices and adjusted spot prices. When examining share prices, the researcher must make adjustments not only for dividends but also for taxes and transaction costs. These notions have been tested for share price indices (SPIs) in the US, and now in Australia, with a different tax regime and different transaction costs. Twite finds that transaction costs in Australia, as in the US, are a plausible explanation for the divergence between observed futures prices and predicted prices of the SPI.

Injection of competition into the provision of utilities has resulted in the trading of electricity in a spot or pool market in at least three countries in the past few years, where privatised or corporatised generators sell to large and small users, or perhaps to electricity retailers. At the same time, advances in auction theory and in the application of game theory to issues in industrial organisation have come together in a series of recent papers, summarised in the paper by Gans, Price and Woods, which examines the risk-sharing in these markets, specifically the interaction between formed contracts for electricity and electricity spot markets. The authors argue that the generators have a purely strategic incentive to sign forward contracts in order to raise their market shares by lowering their prices, at least over the elastic region of their demand curves. This implies that electricity prices are lower than they would be in the absence of markets for forward contracts. Moreover, they argue that contracting leads to greater use of lower-cost generating plants, an efficient outcome. But the news is not all good: they also find that it is possible that the existence of a contract market deters otherwise efficient generators from entering, thus keeping prices higher than had entry occurred. This paper is a useful summary and exposition of these ideas.

The data about firms that are most easily available are the accounting data published in annual reports and other public documents. The question of how well the financial performance, revealed by such financial ratios, accords with production performance is of great interest. An approach which might help to answer this question is Data Envelope Analysis (DEA), which applies the concepts of the production function and the efficient frontier to performance assessment. In principle, DEA can overcome many of the limitations of traditional ratio analysis, but questions of the validity of the DEA approach, especially with respect to financial performance, remain. Worthington uses data from thirty listed gold-producing firms to compare the two approaches. His results reveal different rankings of the firms using financial ratios and using the DEA approach. He argues that the DEA approach may be used by management to complement the accounting-ratios approach, for instance, by revealing slacks in inputs and outputs which could be addressed by better management.

Are the changes in the earnings of publicly listed firms (as accruing to their owners) a random walk, as researchers have believed for nearly forty years, or are they related to firms' earnings-to-price ratios? Recent research using US data has suggested that stocks' earnings changes are inversely related to the stocks' E/P ratios. Allen, Lisnawati and Clissold, using Australian data, replicate this result.

E. Yetton Award for 1997 and Other Matters
The E. Yetton Award for best paper published in the previous volume of the Journal is judged by the Associate Editors. Volume Twenty-Two included nine papers. There was a clear winner - Hans R. Stoll and Robert E. Whaley (1997). Given the affiliations of the two authors (The Owen Graduate School of Management at Vanderbilt University, and the Fuqua School of Business at Duke University), the award will be presented in absentia, since although the Journal is available in cyberspace (see below) we cannot yet send the plaque over the Internet. The decision for runner-up was Stephen E. Satchell, Richard C. Stapleton and Marti G. Subrahmanyam (1997). Congratulations to all five authors for two excellent papers, which admirably demonstrate the outstanding standards to which all associated with the Journal - editors and authors - aspire. The E. Yetton Award commemorates the father of Philip Yetton, previous General Editor but one of the Journal.*

* For the record, the two previous winners of the E. Yetton Award were: Paul Gatward and Ian Sharpe (1996), and Michael Aitken, Philip Brown, H.Y. Izan, Amaryllis Kua and Terry Walter (1995).

After serving for several years as the Area Editor for Finance, Tom Smith has retired and goes with sincere thanks from me, from Garry Twite, the Deputy General Editor, and from the rest of the team. Give the Journal's profile, the number of submissions in Finance is always much heavier than all other areas combined, and Tom has done an excellent job of maintaining and improving standards in the area. Thank you, Tom. His replacement is Stephen Gray, at the University of Queensland. Welcome, Stephen.

A second departure from the team is Sandra Hoey, who was the Journal's manager for twelve years, under three editors, since 1986. Under Sandra's management the Journal successfully self-published and converted to Microsoft Word for its production software, the Electronic AJM was developed and launched, and the number of submissions, of associate editors and reviewers, and of subscribers grew substantially. Moreover, the timeliness of publication improved dramatically. For over half its lifetime the Journal reliably depended on Sandra for its smooth production and distribution. Now that Sandra has been promoted, Fiona Barratt takes over the role of manager, although Fiona too has been associated with the Journal since 1986. A seamless transition from one expert to another. Thank you, Sandra.

For two years the Journal has been available over the Internet, at www.agsm.edu.au/eajm/. There is an HTML front end, including abstracts, and the papers are available in the Adobe Acrobat Portable Document Format (PDF), easily read with the freely available Acrobat Reader browser or plug-in. PDF files replicate on the screen the exact appearance of the printed pages of the Journal, including tables, figures and equations - a boon for technical papers.

In the past six months the Journal has become even more widely available. We have signed non-exclusive distribution agreements with both IAC and UMI for distribution of the contents of the Journal via their channels, which include CD-ROM, on-line services, microform, electronic media, magnetic media, and optical media. More recently, we have signed a similar agreement with UnCover, one of the first on-line archives of journal articles.* At the moment, the Journal is self-published, but increasingly, given the evolution of electronic technology, this is no handicap to the wide dissemination of the Journal's contents. We are exploring methods for putting more of our back issues on-line at our web site, but are currently being stymied by unlabelled back-up tapes, written using obsolete tape-drive hardware, despite the source files being in ASCII for the powerful, Unix-based troff mark-up text-processing language (see Marks 1987). I hope to have more news of this effort in a future issue. In the meantime, the Journal has been invited to participate in the National Library of Australia's PANDORA project (Preserving and Accessing Networked DOcumentary Resources of Australia), and we have accepted. This will allay fears about the availability of on-line journals in the future. Until then, we present seven excellent papers.

* IAC is at international.iacnet.com; UMI is at www.umi.com; and UnCover is at uncweb.carl.org

References

Aitken, M., Brown, P., Izan, H.Y., Kua, A. & Walter, T. 1995, 'An intraday analysis of the probability of trading on the ASX at the asking price', Australian Journal of Management, vol. 20, no. 2, Dec., pp. 115-54.

Gatward, P. & Sharpe, I.G. 1996, 'Capital structure dynamics with interrelated adjustment: Australian evidence', Australian Journal of Management, vol. 21, no. 2, Dec., pp. 89-112.

Marks, R. 1987, 'On redesigning an academic journal', Australian Journal of Management, vol. 12, no. 2, Dec., pp. 149-58.

Satchell, S.E., Stapleton, R.C. & Subrahmanyam, M.G. 1997, 'The pricing of marked-to-market contingent claims in a no-arbitrage economy', Australian Journal of Management, vol. 22, no. 1, June, pp. 1-20.

Stoll, H.R. & Whaley, R.E. 1997, 'Expiration-day effects of the all ordinaries share price index futures: Empirical evidence and alternative settlement procedures', Australian Journal of Management, vol. 22, no. 2, Dec., pp. 139-174.