Journal of Financial and Strategic Decisions Volume 11, Number 1   Spring 1998 CONDITIONAL INTERACTION BETWEEN DOMESTIC AND FOREIGN BUSINESS IN THE MNC Samuel B. Bulmash University of South Florida Abstract This study reexamines the Multinational Corporations' (MNC) motives for going abroad. A model is presented examining the conditions under which business abroad supplements or substitutes domestic business for the MNC. By doing so, this study contributes to the theoretical understanding of the Multinational Corporations' business.

Journal of Financial and Strategic Decisions Volume 11, Number 1   Spring 1998 AN EMPIRICAL EVALUATION OF THE INFORMATION SIGNALLING AND FINANCIAL DISTRESS HYPOTHESES Gerald W. Buetow, Jr. PDI Strategies Stephen G. Buell Lehigh University Abstract     This study empirically tests two theories put forth to explain the existence of convertible debt which exhibit a significant premium between conversion value and call price.     We reject the Information Signalling hypothesis of Harris and Raviv. Our results suggest that management does not use the premium as a mechanism for signalling investors.     We validate the Financial Distress hypothesis of Jaffee and Shleifer. Our results suggest that management allows the premium to develop in order to decrease the likelihood of a failed conversion. This is important since the concept of cost avoidance pervades the literature on convertible debt calls.

Journal of Financial and Strategic Decisions Volume 11, Number 1   Spring 1998 A MODEL FOR OPTIMAL UTILIZATION OF A FIRM'S LINE OF CREDIT William A. Ogden, Jr. University of Wisconsin - Eau Claire Srinivasan Sundaram Ball State University INTRODUCTION Constant pressure to increase return on assets has firms seeking ways to reduce their working capital costs. In the cash management area, firms are employing more sophisticated collection and disbursement systems. Cash management systems today efficiently speed up collections and, at the end of the day, sweep excess balances into money market accounts. Cash managers focus on finding the optimal cash-short-term investment mix. We can view cash as a raw material. Accordingly, the cash manager and the production manager face similar challenges. The production manager is responsible for maintaining appropriate levels of raw materials, work-in-progress, and inventories. Similarly, the cash manager is responsible for maintaining optimal cash balances. Maintaining appropriate cash balances or inventory levels involves managing flows. As long as the cash manager has sources of credit (access to cash), the firm can cover operating costs while maintaining minimal cash balances. Likewise, the production manager who is able to purchase materials on an as needed basis can minimize the firm's inventory levels. Inefficient use of cash and materials ultimately reduces the firm's profitability. Inadequate levels of cash can preclude a firm from meeting its financial obligations as they become due, while material shortages can prevent meeting production schedules. Excess levels of cash and inventories tie up capital and reduce the firm's return on assets.

Journal of Financial and Strategic Decisions Volume 11, Number 1   Spring 1998 TRANSACTIONS DATA EXAMINATION OF THE EFFECTIVENESS OF THE BLACK MODEL FOR PRICING OPTIONS ON NIKKEI archive_index FUTURES Mahendra Raj The Robert Gordon University David C. Thurston University of Texas-Pan American Abstract Several recent studies have found that the Black (1976) model prices American options on futures quite accurately. These studies have used daily prices which are subject to non-synchronous trading. The present study uses transactions data on the Nikkei archive_index futures and options on Nikkei archive_index futures traded at Singapore International Monetary Exchange to examine the effectiveness of the Black model on an intra-day basis. The study finds that the model underprices both calls and puts. This is consistent with the fact that the model does not account for the early exercise feature of American options.

Journal of Financial and Strategic Decisions Volume 11, Number 1   Spring 1998 NYSE & AMEX LISTED FIRMS THAT PAY NO DIVIDEND: A RECENT HISTORY Shawn M. Forbes Georgia Southern University John Hatem Georgia Southern University Abstract Using CRSP data, we retrieve, organize, and present in various contexts, for the years 1974 to 1993, data on NYSE and AMEX listed firms that paid no dividend. The findings show that across industries, equity capitalization, and to a lesser extent share price, the variety of firms that are choosing not to pay dividends has grown substantially.

Journal of Financial and Strategic Decisions Volume 11, Number 1   Spring 1998 AN EMPIRICAL STUDY OF THE IMPACT OF FOREIGN OWNERSHIP ON THE VALUES OF U.S. COMMERCIAL PROPERTIES Arnold L. Redman The University of Tennessee-Martin N.S. Gullett The University of Tennessee-Martin The funding for the research was provided by a grant from The University of Tennessee-Martin Research Grant Fund. Abstract Foreign investment in U.S. real estate increased substantially in the decade of the 1980s. Prior research has focused on the domestic U.S. factors influencing real estate prices and rents. This study empirically investigates the impact on prices of U.S. commercial properties of buying and selling by foreign investors. It was found that foreign investors buying properties was a statistically significant determinant of property values, in addition to property type, building size, capitalization rate, expense growth rate, and occupancy rate. The sale of property by foreign investors was not found to be statistically significant.

Journal of Financial and Strategic Decisions Volume 11, Number 1   Spring 1998 GRAPHICAL ANALYSIS FOR EVENT STUDY DESIGN Kenneth H. Johnson Georgia Southern University Abstract This paper describes a graphical procedure that was used to select the length and placement of the announcement period, the number of securities in the comparison portfolio, and the length of the comparison period for an event study involving over 16,000 earnings announcements. The literature does not suggest a single "best" methodological approach for an event study. Plotting information content as the dependent variable and placement of the announcement period as the independent variable, the procedure produced families of nested curves, one set for each combination of parameters being tested. Interpretation of the plots is based on the general notion that the optimal combination of parameters will produce a plot with high amplitude and sharp increases and decreases as the announcement period placement approaches, passes through, and moves away from the optimal placement. The analysis led to the selection of an announcement period of ten days (announcement date plus seven days prior and two days following), a comparison period of 30 days, and a comparison portfolio of ten securities.

Journal of Financial and Strategic Decisions Volume 11, Number 1   Spring 1998 UTILITY MERGERS AND THE COST OF CAPITAL S. Keith Berry Hendrix College INTRODUCTION Much work has been done on the impact of mergers and acquisitions on the shareholders of both acquiring and target firms (see Asquith et al. [1983], Bradley et al.[1988], Jarrell and Poulsen [1989], Jensen and Ruback [1983], and Travlos [1987]). Those studies generally indicate favorable stock price responses for target firms, and slight, to no, stock price response for acquiring firms. Recent interest has been focussed on utility mergers and impacts on share prices, with similar conclusions obtained (see Bartunek et al.[1993], Ray and Thompson [1990]). Bartunek et al found that acquirers experience wealth losses, while targets experience gains, and that the results are not as favorable as for either as compared with non-utility acquisitions.1 Ray and Thompson examined four electric utility mergers and found that three of them exhibited positive wealth gains for both acquirer and target shareholders. There are two significant differences in mergers between non-utility firms and mergers between utility firms. First, utility mergers are subjected to a much a higher level of regulatory scrutiny, at both the state and federal levels. Second, merger-induced efficiency gains and/or cost savings are generally passed on to customers rather than retained by shareholders (see Bartunek et al. [1993], Ray and Thompson [1990], Norris [1990], Studness [1989], and Studness [1996] for discussion of these two points).2 Because of this second point it is not surprising that utility shareholders do not gain as much as non-utility shareholders. Additionally, utility shareholders lose flexibility in terms of their portfolio allocations between the two pre-merger utility stocks, and have, in essence, forced portfolio allocations, based on the relative sizes of the two utility companies. This can result in an increase in the cost of equity, and cost of capital, of the merged utility, which in a regulated environment is ultimately flowed through to the customers (see Bonbright et al. [1988] and Morin [1994] for a discussion of cost of capital methods employed by regulators). Thus, in utility mergers, although there may be significant gains in operating efficiencies and cost savings inuring to the benefit of customers, consideration should be made of the offsetting increase in the cost of capital, which ratepayers ultimately pay for. This paper considers two different models for examining the theoretical increase in the merged utility's cost of capital because of the loss in portfolio allocation flexibility. This is done from the perspective of a hypothetical investor with appropriate portfolio efficiency frontiers and risk-return indifference curves. In Section II, we consider a model (Model 1) where the portfolio consists of just two utility stocks. Section III examines a model (Model 2) where one of the utility stocks is not included in the pre-merger portfolio. In both models it is demonstrated that the utility merger will increase the merged utility's cost of equity.

Journal of Financial and Strategic Decisions Volume 11, Number 1   Spring 1998 THE TREBUCHET AND MAGNIFIED LEVERAGE EFFECTS IN THE BUSINESS FIRM Brian Belt University of Missouri at Kansas City Abstract The medieval catapult weapon known as the trebuchet provides a useful physical analog for the impact of the many leverage effects that exist in a business firm and its performance. The trebuchet is explained, as are an extensive number of leverage effects for the business firm. The algebraic framework for determining the leverage effects in a business is presented and explained. The implications for management, as well as examples, are provided.

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