The contention that in efficient markets, successive price changes are random. This implies that shares move regardless of historic patterns, and therefore that chartism is nonsense.
1. Independent assessment of the quality of a company’s debt.
2. Credit rating.
It measures the explanatory power of a linear
statistical model. Technically, defined as the square of the correlation coefficient; it gives the proportion of the variability explained by the linear model.
Approximately, the nominal rate of return, less the rate of inflation.
Someone who takes charge of a liquidation (the process of winding up a company).
Accounting term meaning an account giving shareholders a claim over some assets of a firm. Examples of reserves are ‘retained profit’ and ‘revaluation reserve’.
Profit after tax in any year which is retained by the business rather than distributed amongst shareholders as dividends.
Increases and decreases in returns are governed by two factors or laws:
1. variations in the proportions in which the factors of production are combined;
2. a change in the scale of production.
Operating profit divided by some measure of capital employed.
An issue of shares to existing shareholders in proportion to their holdings in exchange for payment (and therefore unlike a scrip issue of free shares).
In investment, risk is referred to as the uncertainity of return from any asset.
An asset providing a certain return over some holding period.
S
US institution which takes local deposits and
lends primarily for residential mortgages. S&Ls now operate under a tight regulatory environment created by the Financial Institutions Reform, Recovery and Enforcement Act (FIRREA) of 1989.
A security which, under US Securities and Exchange Commission rules, is non-exempt, but may be sold to US residents, because it has been outstanding for a period of time.
A professional association or body which has responsibilities for overseeing the conduct of its members.
A form of pricing efficiency in which the price of a security fully reflects all public information including but not limited to, historical price and trading patterns.
This is the risk of the transaction failing at the time of settlement (when documents are exchanged). Settlement is normally carried out via a bank and clearing house mechanism. The main types of settlement risk are: evidence of ownership, cash settling and periodic evaluations of the instruments.
Companies divide their capital into equal units called shares. Buying the shares brings* rights - a share in the business - and risks - the possibility of losing your investment. Shareholders are last in the queue when the assets are shared out if a company goes out of business.
A measure of a portfolio’s excess return divided by the total variability of the portfolio.
A special kind of risk attached to a security, deposit or a loan because of borrower’s country of residence being different from that of the investor. Also referred to as country risk.
An exchange member who makes a market in a particular listed security and to whom orders in that security are directed.
Risk attaching to a particular company’s security rather than to any relationship with a market movement.
1. To take a subsidiary and make a separate company, usually a publicly quoted one, out of it. This is a frequent practice in the USA, where the original owner usually retains a stake but sells a majority of the equity to a third party. Management often obtains a small stake in the business. If ownership does not change at all, a spin-off is more correctly called a demerger.
2. Used rather more loosely to indicate a splinter group that leaves one firm and sets up its own business, usually without the original firm having a stake in the new one, and in competition with the first firm. Most often used in professional services, especially in consulting and investment banking.
3. Also describes incidental benefits from a project, development or technology, as in ‘the project achieved its goals, but also had unforeseen spin-off benefits’.
The difference between buy (bid) and sell (offer) prices for a financial security. Spreads can be quite large on shares with low liquidity, such as penny shares or emerging market shares, making it expensive to deal.
The here-and-now market for immediate delivery, as opposed to the futures market.
A statistical measure of the degree to which observations within a group vary. Measured by formula: square root of the mean of the squared deviations of members of a group from their mean. In a group of numbers, it is the square root or the average of the squared deviations of the numbers from their average. To take a simple example, the standard deviation of 1,2,3 is the square root of (1-2) squared, (2-2) squared and (3-2) squared, that is, the square root of (1 x 1) plus (0 x 0) plus (lxl) = 1 .
An active portfolio management technique that focuses on advantageous selection of particular
Glossary
stocks rather than on broad asset allocation choices.
Raw material, work-in-progress and finished goods, ready for sale. American word for shares.
1. An interest in all elements of a security’s financial structure, hence a strip including some risk equity, some mezzanine, some senior debt and some subordinated debt, or whatever the relevant entities are.
2. Almost the opposite meaning, when a bond is split into its capital element (the zero coupon bond) and an interest-only instrument. The process of detaching the interest coupons from a fixed-rate security so that they may be traded as a set of zero-coupon securities.
A low ranking long-term loan; in liquidation, all other creditors take priority over holders of subordinated debt.
A cost that has already occurred in the past and cannot be recovered. It cannot be changed by the decision to accept or reject the project, hence irrelevant for capital budgeting and other decisions.
1. To barter.
2. An exchange of debt. Some swaps are highly complex pieces of financial engineering.
Not to be confused with systemic risk, it is the risk of the stock market as whole, as opposed to the risk of attaching to a particular company (‘unsystematic’, or ‘a specific’, or ‘diversifiable risk’).
The risk that the failure of any financial institution, especially a large bank, may cause severe strains in the financial system as a whole.
The amount paid for acquiring a company over and above its market capitalization to secure acceptance.
US term where a company offers to buy the shares of another at a fixed price, usually above the previously prevailing price.
The ratio of a quoted company’s market value to the replacement cost of its assets.
Mainly affects multinational corporations which have trading operations in different jurisdictions, and need to report consolidated earnings in one currency.
U
1. When a firm (especially a takeover) decides to sell off non-core businesses and focus on just one or two core businesses. Sometimes less politely called asset stripping.
2. Process of segmentation whereby customers are offered the chance to buy individual parts or modules of a product, rather than having to buy everything together.
A single number that identifies a statistically probable minimum return or maximum loss within a given time interval and a stated confidence interval.
W
Issued as an add-on to bonds or ordinary shares, warrants are a type of call option which give the right, without obligation, to buy new shares in a company at a fixed price and on a fixed date.
The weighted average of the cost of equity and the cost of debt.
Glossary
Trading in securities which have been announced, but not yet issued. Such securities are said to trade on an ‘if, as and when-issued’ basis. Also called the gray market in the Euromarkets.
Making use of laxity in accounting rules to make the P&L and balance sheet look better than they really are, without actually breaking the law.
Decrease the value of an asset on the balance sheet.
¥
Yield measures the annual income from an investment against its current market price. Yields fall
when prices rise, reflecting the fact that investors have to pay more for the same level of income.
Graph showing the return on fixed-interest securities according to the length of their maturity; normally slopes gently up to reflect a risk premium required on long-term funds. If it slopes down at some point, this indicates the expectation that medium- or short-term interest rates will fall.
Z
A model developed by Fischer Black similar to the conventional Capital Asset Pricing Model when there are restrictions on risk-free investments and the market is no longer a common optimal portfolio.
Figures and tables are shown in bold
A
academic
finance literature 284 research 231, 238-9 theory 285
accepted accounting principles (GAAP) 313, 315 accounting 97-115
countries 101-4, 102, 104 language 111-15 standards 104-6, 108-9 aggregation risks 297 AIDS vaccine 190 analysts, forecasts 182-3, 183 Angels 76
Anglo-American accounting 56 anti-takeover legislation 407 APT
alternative to assessing risk 31-6 factors 34-5
measuring fund performances 34 using 35-6, 35-6
APV method (adjusted present value) 25-8
arbitrage 33, 336-7
arbitrageurs 221, 226, 336-7
Asian countries, financial systems 168
asset allocations 271-5
asset-backed securities (ABS) 254-7
asymmetric information 323
auction markets 65-7, 203-4, 209
automated systems 214
automobile companies 327
average returns, long-term bonds 230, 231-3
banking
global systems 335 industry, rating agencies 234 systems 252 bankruptcy codes 411-14
costs 53-4, 246, 322, 415-17, 416 banks 159, 161, 341, 344, 366-8, 369 charter 383-4 credit availability 429 deposits 336, 368 deregulation 373 disasters 385-93, 386 financial advisory business 378 future 377-8 loans 254, 257, 424
portfolios 252 securitization 256 oriented economies 55, 58-9 panics 383, 385 recent developments 384-5 regulation 378, 383-4, 426-7 regulators 311, 390 retail side 376-7 wholesale side 375 behavioral researchers 194 benchmarks indices 266 portfolios 268 Bermuda 399 Beta 194, 265 measures 165
prior return performance 40 risk premiums 40-2 size and price/book 36-43 size effect 37-40 UK companies 20 bid-ask spreads 206-7, 269 Black-Scholes option pricing model 70, 341-4 block houses 207-8 bond-rating agencies controversies 236-7 evaluating 233-40 processes 236 recent developments 237 bonds
investing in 227-32 investors, investment strategy 230-1 mutual funds 232 ratings providers 233-4 yields and returns 223-4, 223 238-9, 239 bookbuilding 69-70 borrowers 372, 424, 372, 424 credit worthiness 247 borrowing, ability to 53 Bretton Woods system 221 British, stock market 274 broker-dealers 211
G
call markets 204 Canada dollars 325, 330 bonds 328 debt 328, 330 capital
adequacy standards 311
Asset Pricing Model (CAPM) 8, 19-23, 148, 194, 197, 263, 265 budgeting 127
beta way 17-23 will the project pay? 12-17 cost of 23
estimating cost using CAPM 21, 22 expenditures 143 flows 286 gains 195
short-term 173
markets 56, 146-7, 380, 382, 407 imperfections 300 newly formed 107 ratio requirements 257 structures 59-62 changing 53 in the G7; 56, 57
CAPM see Capital Asset Pricing Model (CAPM) car and aircraft loans 257 card technology 368 cash
flow-based valuation analysis 136 flows 123, 123, 126-32 caveats 131 earnings 129-32 predictions 127-9
return on investment (CFROI) 125 offers, general v rights issues 73 raising 65-74 Cayman Islands 399 central banks 423-4, 428 CEOs, debt 59-64 certification demand 236, 238 changes, analyzing 62-3 China 284
Three Gorges Dam 433-4 Chinese Walls 184, 402-3 clearing houses 383, 401
collateralized mortgage obligations (CMOs) 255 commercial
banks 350, 370-9, 371
capital requirements 311 changing world 380-5 traditional functions 372 bills 252-3 paper market 374 paper (CP) rates 198-9 commissions 181, 212 communications costs 225 technology 376 companies
comparisons 56 exchange rate exposure 314 managers 313 market values 314-15 risk management 298-304 undervalued 246 young 132
company index futures 200
Comparability Improvements Project 112 compensation schemes 323 competition 127, 212-3 competitive
advantage 400 environments 150, 315-17 markets 158 computer programs 297 computing power 191 concentration risk 297 consulting firms 407 consumer durable loans 254 consumption choices 157-8 Continental Europe economic growth 173 financial systems 168 control 43-8
private benefits 44-7
country differences 46-7 estimates of value 45-6 examples 44-5 legality 45
and reporting procedures 350-1 value of 43-4 convergence 173-4 conversions 246 convertible bonds 241-7
reasons for issuing 244-5, 244 corporate control 159 finance 49-96 risk management 324 value creation 122-4 correlations 276 cost savings 366
counterparty (credit) risks 208-9, 296, 350, 350 credit
derivatives 384 enhancement 254 monitoring 254 ratings 254, 401 status assessments 253 creditors
control rights 413-14 rights 57, 57
cross-ownership of stocks 105 cross border money 221 crude oil prices 353 currency
exchange rate risks 296 fluctuations 344 forward contracts 338, 338 customer contracts 353-4
D
data
mining 166 processing 373
dealer markets 203-4, 206, 209 deals, pure and mixed 182-3 debtors, control rights 413-14 debts 53-9, 64
advantage of 53-4 financing 80-1, 322 in practice 55-6 issuers 233 markets 217-87, 383-4 ratings 234, 238 sweetening 247 decimals 207 delayed equity 245-7 Denver summit 403 depository institutions 389 deposits 372
deregulation 370, 372-3, 377 derivatives 331-59
disasters 319-20, 348, 353 markets 335-6 product company (DPC) 401 risk reduction 345-52 size and industry 345-6, 346 developing countries 253 equities 7
private capital flows 280 development economics 436 disaster myopia hypothesis 387-8 discount
brokerages 376 rates, selecting 434-5 discrete auctions 67, 203-4 distortion, remedy 286-7 diversification 287 dividends 171, 195 domestic stocks 276 Dupont System 147, 150-1
earnings announcements 161 earthquake insurance 267 economic
book value 136-7 growth 173, 430
Economic Value Added (EVA) 133-8, 407 defining and calculating 134-6 limitations and future 136 users 133
efficient markets 190
hypothesis (EMH) 160-3, 167-8 electric companies 326 electronic
communications 212-13 technology 202-3 trading 204-5, 209, 376 umbrellas 212-14 emerging markets 221, 278, 284 end-of-the year show 198-201
equities
issues 65-74 markets 175-215 premiums 8-9, 197 returns 6-7, 6-7, 224-5, 224 solving puzzle 179-84 European central bank 367
Monetary Union (Emu) 423, 427 Union
accounting standards 107 banks 427
Capital Adequacy Directive 311 events, extreme 277-9 exchange rates 313-19 exposure 313-19 index 317-18 instability 173 movements 313 options 344 risks 257-8 executives, top 409 export sectors 314 external accounting reports 104
F
Faustian bargains 372
Federal Deposit Insurance Improvement Act (FDICIA) 390, 392 Federal Reserve statistics 201 finances data 5
external sources 58, 58 and government 419-38 professors 192 theory 271-75 financial
Accounting Standards 112 analysts 313
asset returns, forecasting 185-91 centers 221
companies, risk management 302-3 distress
companies 415, 415 cost of 299-300 drivers 123 economists 166, 197 engineering innovations 237 institutions 341, 361-94, 371, 371 regulators 311 intermediaries 358 intermediation 365-7 investors, stay at home 276-82 markets 153-74, 302, 340 efficiency 160-2 information 159-60 prices 163-8 roles 157-60 short-termism 168-74
newswires 236 risks 296-7
services groups, globalization 225-6 statements 313 structure 53-9, 64 systems 59, 168, 213, 367 terminology 101 financing, costs 322-3 Fisher effect 250-1 fixed incomes markets 285 returns 7-8
fixed-price offers for sale 65-7 floor trading 205
flows to debt and equity investors 27-8 folklore 55-6, 64 forecasts 231-2
future interest rates 232 short-term interest rates 247-51 statistical methods 186, 191 foreign
currency derivative markets 348-9 exchange
exposure 348-50 fluctuations 340 hedging 327-30 managing 325-30 measuring exposure 326-7 investments 277 projects 13-15 rating agencies 237
securities institutional investors’ holdings 281 forwards 335-9, 347 contracts 337-8 purchasing 286-7, 286 rates 228-32 France
9
demergers 85 financial markets 157 monetary authorities 428 Frankfurt, financial center 221 fraud 400 free-riding 432
fund managers 170-1, 174, 269 funding risks 296 futures 78-9, 336-9
complications and opportunities 338-9 forwards and swaps 335-9 strategies 336, 336
G
G7 capital structures 56, 57 countries 284 Denver summit 403 Germany
accounting 56, 103 standards 109 automobile companies 327
bankruptcy code 413-18 banks 382 capital markets 409 companies 53, 56 investments 172-3 currency 325
D-Marks 224, 326, 341-2, 344 put options 343 debt issues 284 economic growth 173 economy 55 financial
markets 157 systems 168, 367 monetary authorities 428 securities markets 402 spin-offs 85 stockholders 104 top executives 409 universal banks 380, 402 Glass-Steagal Act (1933) 380, 402 global
banking systems 335
capital markets 101, 106-7, 146, 240
competition 215
corporate governance systems 409
debts 285-6
equity booms 287
financial markets 319
indices 266
market portfolios 286
stock market 214
globalization, financial services groups 225-6 go-for-broke behavior 390, 392 good news stocks 165 government debt 433-4 finances 430-8 Great Depression 5, 11, 385 Groucho Marx theorem 193, 197 growth stocks 166, 168 guaranteed investment products 340 guarantees of fundings 372-3, 372-3 Gulf War 200, 307, 353, 357, 200, 307, 353, 357
H
hedging 305-13, 318-24 contracts 354 instruments 311 Metallgesellschaft (MG) 353-9 risks 296 strategies 354 historical estimates 5
returns 227-8, 227, 232 holding periods 224, 226 home currencies 314-16, 315 Flong Kong
conglomerates 93 financial center 221
I
implementation 357-8 index
funds 283 futures 335-6 Indonesia gold deposit 399 industrial
nations of Europe 430
portfolios, exchange rate exposures 316
yield spreads
interest coverage 238 over treasury bonds 239 industries
exchange rate exposures 316-17, 316 new 132
inflation 10, 272, 367 forecasts 250-1 information 163, 167 costs 238 technology 372-3 types 161
infrastructures 435 project financing 82 initial
public offers see IPOs (initial public offerings)
returns, average for 25 countries 72 inputs, production costs 431, 434 insolvencies 390 codes 411-18
Insolvency Act (1986) 411 institution-based credit markets 58 institutional
investors 121, 189, 209, 213 links 221, 226 shareholders 174 insurance companies 350 rating agencies 234 regulatory bodies 236 interest rates 221, 227, 247-51 changes 340, 344 exposure 349-50 parity theorem 327-8 risks 296 statements 161
intermediation, changes 367-70 internal
control and reporting 350-1, 351 departments 402 rates of return (IRR) 125 international
accounting standards (IAFs) 101-15 bond markets 227, 227 capital markets 435 competitiveness 174
diversifications 266-7, 277, 280-1 efficient frontiers 279-80 financial markets 400, 404 financial transactions 399 justice 399 Monetary Fund 316
organizations, accounting language 111-12 priced input markets 315 regulator, market 399-404 stock return correlations 276 trade in goods and services 256 internet 179 investment
analysts 170, 174, 180-4, 272 banks 181, 221, 350 grade labels 234
performance evaluation, conceptual complications 265-6 policy 54-5
strategy, bonds investors 230-1 theory 276 investors
over-reactions 163-4, 167 reactions 165-6 under-reactions 164-5 IPOs (initial public offerings) 66, 71, 140-5, 179-82
Iraqi invasion of Kuwait 222, 353
issue costs 70
Italy
monetary authorities 428 top executives 409
Japan
accounting standards 109 automobile companies 325, 327 banking systems 367 bondholders 274 capital markets 409 companies 53, 56, 172-3 currency 325 economic growth 173 economy 55, 105 electronics companies 325 financial
markets 157 systems 168 interest rates 285 investors 228, 286 passive investing 285 raising equity 58 regulators 403 stock market 273-4 stocks 267, 285 top executives 409 yen 224, 325
Jensen’s Alpha 263-70, 264
Keynes General Theory 195-6
lag structures 318-19 LBOs (leveraged buyouts) 24-30, 75 applying insights 407-8 benefits 405-10
capital expenditures 142-3, 142 insights 405-7 partnerships 76-9 performance 139-45 results, interpreting 144-5 reverse, performance 139-42 valuation approaches 24-30 legal, judication, litigation and documentation risks 296
lemons problem 245
lending and monetary transmission 425-6 leverage 56, 60-4
leveraged buy-outs (LBOs) see LBOs (leveraged buyouts)
leveraged companies (VL) 26 limit orders 205 limited disclosure 199 liquidations 416 liquidators 411 liquidity 207-8, 296 loan book sales 252-3 London, investment banks 221 long-horizon stock returns 188-9 long-term
bond investors 227, 228 bonds 228, 232 returns 230, 230 fixed-price oil contracts 355 interest rates 227 investments 168-72, 174 investors 271-2 loser portfolios 165 losses, provision for 387 low-beta securities 266
macroeconomics events 249-50 managements 173 management
accounting systems 387 entrenchment 59, 63-4 incentives 80 motivation 121 motives for hedging 323-4 ownership 143 risk aversion 323 rote 158 security 63-4
short-termism 170 teams 406
managers, objectives 270 market value added (MVA) 134-5 market-clearing prices 209 market-makers 212 market-oriented countries 55 market-timing 280-2 market-to-book effects 265-6 markets 202-3
collapses, risk of 273-4 efficiency 162-3
international regulator 399-404
microstructure 202
rates 428
risks 296, 351
saturation 127
sensitivity (beta) 263-4
value 313-19
Martian, predictions 193-5 mathematical tools 192 maturity loans 286-7, 286 mean-reversion 273 mean-variance analysis 274 measurements benefits 432-3 costs 433-4 of risk 297 risks 340
Metallgesellschaft (MG) 353-9 Mexico
crisis (1994 and 1995) 55, 280, 282 debt moratorium (1982) 253 government auctions 69 investment 279 stock market 278 middlemen 209, 365-71 Miller and Modigliani theorem 195, 244-5 minimal default risks 247 mistaken beliefs 183-4 modern
finance 193 portfolio theory 287 monetary
authorities 428 economics 423-4 policy 423-9 theories 367 transmission 424-6 money
managers 267 markets 200, 225, 225 monitoring 62 costs 255-6, 366 risks 293-7
Monte Carlo analysis 306 mortgage pools 256 multinational corporations 115
mutual fund reporting services 265
Nasdaq (the National Association of Securities Dealers Automated Quotation system) 211 national
companies 326 financial markets 221 market system 213
Net Present Values (NPVs) 133-5, 148-9, 170, 172- 4, 432, 435 implementing rule 431, 436-7 Netherlands, currency 325 New York, investment banks 221 New York City, financial crisis (1970s) 236, 240 Nobel Prize research 435 non-cliversifiable risks 194
non-financial companies, risk management 301-2 non-interest bearing current liabilities (NIBCLs) 136
non-interest income 375, 375 nonsynchronous trading 187-8 NOPAT 135-7
OCF/assets 140-1, 143 oil
market, backwardation 356-7, 356 prices 221, 354 swaps 354
operational risks 296 OPIN/assets 140-1 optimistic forecasts 180-1 option pricing 342 organizational details 202 over-the-counter (OTC) derivatives 401 markets 203, 354 options 346-7
P
passive
indexing 283 investing 283-7 past data 231
payments technology 369-70 P/E ratios 170 pension funds 274-5, 281 perceptions of greater risks 278 performance
common benchmarks 190 dimensions 267-70 evaluation 268
measurement maps 124, 124, 141 measures 263-5 returns 270 summaries 267
Philippine mining company 111 political and country risks 296
popular benchmarks 6 portfolios
insurance 339 investments 259-87 losses 275 managers 196, 265
risk management 305-8, 305 returns
autocorrelation 186-8 practical complications 266-7 theory 283, 287 winners 163, 165-6 precise measurement 209 predictability, maximizing 189 present value of the price (TVN) 27 prices 194
changes 161, 193 effects
new issues 71 seasoned issues 71-3, 73 pricing
and arbitrage, futures 336-7 convertible bonds 242-4, 243-4 models 341 warrants 241-2 private
capital flows, developing countries 280 equity 75-9
partnerships (PEPs) 75-9 potential 75-9, 75 Finance Initiatives (PFI) 83 information 162 placements 65 rating agencies 403 regulation 400-1 strategic responses 401-3 private-sector investment 435 organizations 83 proactivity 210-12 product markets 146 professional
economists 232 investors 208, 408 money managers 267 profitability 146 potential 356 profits, after-tax 407 projects
finance 285-6 financing 80-5 advantages 80-2 conditions for success 82 public sector projects 82-4 risks 22
psychology 166-8, 197 public
announcements 161
debt markets 237
equitization of income streams 284 finance
practitioners 432 principles 430-2, 431 information 162 issues 65
auctions 65-7
fixed-price offers for sale 65-7 methods 66 regulators 403 strategic responses 403-4 PVTS 26
Q
qualified institutional buyers (QIB) 65 quotes 205
random walk hypothesis 185-91 rates of return, required 21 real-time settlement systems 378 receivership 411 codes 414-15 recession 200
regulation and governance 395-418 regulators 311, 341, 387, 401, 403 regulatory oversights 302 remuneration 121, 294 reserve requirements 428 residential mortgages 256 resources
allocation 158 reallocation 314 retail
gasoline suppliers 353 investors 211 sector 340
return on net assets (RONA) 134-5
return-beta trade-off (Jensen’s Alpha) 264
returns, superior 263-70
risk-adjusted performance 263, 270
risk-adjustments 270
risk-averse investors 264
risk-free securities 158
riskless securities 226
risks
businesses 293-7 categories 234, 235
management 289-330, 293-5, 340, 346-8, 347 portfolio managers 305-8, 305 reasons for 298-300 revolution 298-304 sub-fields of research 300-3 systems 303-4 techniques 306 VAR 307
reduction, derivatives 345-52
return trade-off 265 returns 5-12, 9, 166 revolution 298-304 reward 272 techniques 303 two types 20-1, 31-3 valuations 8-9 risky
assets 283-4 investments 18-19 Russian stock market 273
savings and loan associations (S&Ls) 255-6 388-91 Scotland 401
seasoned equity offerings (SEOs) 180, 182 Second World War 5, 273, 385-6, 388 securities,
markets 283-4 returns 222-3 trading 202-9 securitization growth 255-6 loans, outstanding 256 unbundling for value 252-8 self-regulation 378
self-regulatory organizations (SROs) 210 selling power 181 share prices 161
shareholder value 121-6, 133, 146-7, 321 shareholders 62, 158 Sharpe Ratio 263-70, 264, 264 short-term, bonds 228, 232-3, 228, 232-3 short-termism problems 172-3 remedies 173-4 SIC codes 141
Singapore, financial center 221 small-firm effects 200-1 social security funds 275 South America 253 Soviet bloc, financial markets 157 Spain, top executives 409 speculation, futures 337, 337 spin-offs 87, 90
conglomerate discounts 92-3 decisions 93-4 divestitures 86, 88-9 information 91-5 panacea 94 taxation 85-91 trade-offs 90-1 stability and integrity 400 standard deviation 272-3 statistical tests 273 stock exchanges 65, 106-7, 202, 272-3 clearing and settlement rules 208
, 385-6,
Subject index
forces of change 210-15 stock-based compensation 114 stockholder-directors 63 stockholders, interests 159 stocks
forecasts 266 good news 271-2 holding 271 how much held 274-5 index futures 335 long-run risks 273 markets 380-2 crash (1929) 12 crash (1987) 249 globalization 221-6 human dimensions 192-7 short-termism 169 options 61, 340-5 grants 64
price reactions 159 random walk 185-6 returns 231, 249, 272 stop-go policies 173 strategies
contrarian 181-2 and finance 146-51 change 149-50 financial implications 147-9 financing 357
integrating marketing, operations and finance 149 objective 146-7 organizational choices 404 planning budgeting 125 responses 401-4
Suffolk System, New England 401 supervisory authorities 391 Survey of Derivative Usage, US Non-Financial Firms 318
swaps 311, 338, 347, 349 Sweden, automobile companies 327 sweetening debts 245 Switzerland currency 325 tax-free spin-offs 85 symmetry and asymmetry 15-16 systemic risks 297
takeovers
imminent 161
and restructuring activities 405, 405, 407 short-termism 171-2 taxation 53-4, 195, 321-2 codes 57 structures 299
technology 202, 215, 370, 372, 377 costs 213
links 221, 226 tequila effect 279 Tesco-bonos 55 Tokyo, investment banks 221 total
business return (TBR) 122, 125 company value 136
shareholder return (TSR) 121-2, 125-6 trade-off, risk and return 276-7, 277 trading 193
economic costs 205-6 screens 236 technical aspects 209 volume 203 transactions costs 54 prices 207
transport and communication costs 256 Treasury Bills 199, 201
UK
banks and financial institutions 234 commercial bills 253 companies, investments 172-3 demergers 85 economic growth 173 economy 173 equity risk premia 19 financial system 257 insolvency code 411 market-orientation 55 monetary policy 428-9 pension funds 281 receivership code 414-16 stock markets 162 top executives 409 transport projects 83 unbundling, gains 253-4, 254 uncertainty, reducing 68-9 underlying markets 335-6 underwriters 70, 400 uniform price auctions 67 US
accounting standards 101 asset-backed bonds (ABBs) 254-5 Bankruptcy code 412-14, 417 banks 253
employees 377 capital markets 101 companies 56
investments 172-3 corporate governance system 409 credit-rating agencies 401 depository institutions 389 disaster myopia 388-9 discount brokerage firms 193 dollars 325, 327-30
Subject index
economic growth 173 equities, histogram of returns 18 equity mutual funds 270 expense ratios 269 Federal and State legislation 253 financial
assets 198, 201 institutions 234 services industry 115 Generally Accepted Accounting Principles (GAAP) 107-8, 111, 113-15 government agencies 434 bonds 228
Internal Revenue Code 85
investment banks 179-81, 184, 179-81, 184
legal and tax system 410
market-orientation 55
monetary policy 428
mortgage market 255
mutual funds 281
Non-Financial Firms, Survey of Derivative Usage 318 oil futures 353 pension funds 271 public capital market 107 regulations 234, 236 regulators 403 Savings and Loan losses 425 securitization 254-5 spin-offs 85 stock
exchanges 186 indices 191
markets 162, 185, 210 top executives 409 Treasury bills 185, 248-9, 248
V
vaccinations 432 valuations current 11
management buy-out plans 28-30 risk measurement 345 yardsticks 10-11 value 1-48
at risk (VAR), pitfalls 305-13 creation 125-6 drivers 123-4, 123, 126 management 117-51 stocks 164, 166, 168 value-based management 124-5 value-creating companies 121 valuing deals 26-7 variables 231 venture capital 30, 76 volatility 300, 342
security returns 265, 270 VU 26
vulnerability 388, 391
W
WACC (weighted average cost of capital) 25, 27-9, 148
waves, riding 146-51 Wharton School 271, 284, 318, 345 whipsaw effect, prepayments 255, 255 window dressing 199, 201, 231 winner’s curse 67, 68 winners portfolios 163, 165-6 working capital 143 world
capital markets 101, 106-7, 146, 240 stock markets 109 wide recession 221
World Bank, Annual Conference on Development Economics 436
¥
yield curves 329-30
Z
Zurich, financial center 221
A
Abarbanell (1991) 180 Alesina, Alberto (1997) 437
Aliber, Robert Z. 2, 12-17, 16, 218, 221-6, 290, 325- 30
Allen, Franklin 118, 146-51
Altman (1984) 417
An Ideal Husband, Wilde, Oscar 162
Andrade, Gregor 406
Animal Farm, Orwell, George 44
Arrow, Kenneth (1966) 436
Asquith and Mullins 71
B
Bachelier, Louis 161 Barbarians at the Gate 44 Barber, Brad 176, 202-9, 260, 263-70 Barberis, Nicholas 154, 163-8, 260, 271-5 Barclay, M.J. and Holderness, C.G. 45-6, 48 Barnes, Ronnie 290, 319-24 Barro, Robert 430, 437 Benartzi, Shlomo 195, 197 Benson, Arthur 353-4 Berger, Philip G. 50, 59-64 Bernard, Victor and Jacob Thomas 164 Beta, size and price/book: three risk measures or one ?231
Black, Fischer 340
Blume, Marshall E. 176, 210-15
Bodnar, Gordon M. 290, 313-19, 332, 345-52
Brealey, Richard 50, 65-74
Brigham, E. 244
Brown, Foster and Noreen (1985) 180
C
Carley, Alvin 98, 111-15
Christie, William 211
Clark, John Maurice 197
Coase, Ronald (1960) 436
Common Stocks as Long-term Investments 11
Cooper, Ian 332, 335-9
The cost of capital, corporation finance and the theory of investment 321 Cowles, Alfred 6
D
Daley, I. 94
Darby and Kami (1973) 400 De Bondt, Werner 163, 165, 194 Dechow, Patricia M. 176, 179-84 Dechow and Sloan (1997) 182 Dimson, Elroy 2, 17-23 Dodd, David 38
Donaldson, Gordon 407 Dugar and Nathan (1995) 181
The economics of the private equity market (1995) 79
Eisner, Michael 408
Fama, Eugene 166
and Kenneth French 194 Fenn, George, Nellie Liang and Stephen Prowse (1995) 79
Financial Executive 115 Financial Management 417 Financial Reporting - An International Survey 114
Financial Times 195 Fisher, Irving 11-12, 158, 250 Fitts, Michael (1990) 437 Forstmann, Theodore 78 Franks, Julian R. 396, 411-18 French, Kenneth 166
and Poterba, J.M. (1991) 277 Friedman, Milton 192-3
George, Eddie 249
Germain, Laurent 154, 160-2
Gibbons, Michael R. 218, 227-32
Gorman, L.R. and Jorgensen, B.N. (1996) 279
Gorton, Gary B. 362, 380-5
Graham, Benjamin 38
Grossman, Sanford J. 93, 260, 283-7
Gurley, John and Edward Shaw 365
Guttentag, Jack 386
Habib, Michel 50, 91-4 Hall and Liebman 408 Hanson, Lord 302 Harris, Professor Trevor 114 Hawawini, Gabriel 2, 36-43, 231 Hayt, Gregory S. 332, 345-52 Herring, Richard J. 362, 385-93 Holliwell, John 290, 293-7 Holthausen, Robert W. 118, 139-45 Hutton, Amy 176, 179-84
1
Inman, Robert P. 420, 430-8 Inselbag, Isik 2, 24-30 Insight 113
Institutional Investor 181
Name index
International Accounting Standards vs US GAAP reporting 114
Jensen, Michael 163, 167, 263 Journal of Finance 196, 211 Journal of Political Economy 197
Kahneman, Daniel 192 Kaplan, Steven N. 50, 75-9, 290, 305-13, 396, 405-10
Kashyap, Anil K. 420, 423-9 Kaufold, Howard 2, 24-30 Keim, Donald B. 2, 36-43, 231 Keynes, John Maynard 195-6, 387 Klein (1997) 400 Kravis, Henry 405 Kroszner, Randall S. 396, 399-404 and Strahan (1996) 403
La Porta, R. and others 46, 48 Lakonishok, Joseph 193 Larcker, David F. 118, 139-45 Lawrence Smith, Edgar 11 Lee, Charles 196
Leftwich, Richard 98, 101-10, 176, 202-9, 233-40 260, 263-70, 290, 305-13 Lewis, Karen K. 260, 276-82 Lin and McNichols (1993) 181 (1997) 180
Little, Professor I.M.D. 436 Lo, Andrew W. 176, 185-91 Loughran, T. and Ritter, J. 71, 182 Lowenstein, R. 181
MacKinlay, Craig (Joseph P. Wargrove) 176,
185-91
Markowitz, Harry 20, 192, 274
Marsh, Paul 70, 74, 154, 168-74
Marston, Richard 332, 345-52
Mastering Finance 157, 168, 191-2, 231, 252
Masulis and Korwar 71
Maxwell, Robert 54
Michaely, Roni 195
and Womack (1996) 181 Michelins 44 Mikkelson and Partch 71 Milbourn, Todd T. 118, 133-8 Milken, Michael 374-5, 405 Miller, Merton 53-4, 58, 148, 192, 202 Mirrlees, James (1991) 436 Modigliani, Franco 53-4, 58, 148, 192 and Miller, Merton 321 Money in a Theory of Finance (1960) 365
Monnery, Neil 118, 121-6 Moody, John 233-4 Mussavian, Massoud 2, 31-6 Musto, David K. 176, 198-201, 231 Myers and Majluf 72-3
Naik, Dr Narayan 154, 157-60 Neuberger, Anthony 332, 340-5, 353-9 Nyborg, Kjell 50, 65-74, 218, 241-7, 396, 411-18
and Sundaresan, S. (1996) 69
O’Brien, Patrica 118, 127-32
Ofek, Eli 50, 59-64
Orwell, George, Animal Farm 44
P
Peeble Beach golf course 15 Percival, John R. 118, 146-51 Porter, Michael 53
R
Rajan, Raghuram 50, 53-9, 58, 362, 371-9, 402 Riding on the benefits of the LBO wave 77, 145 Rockefeller Center 15
Rose, Harold 50, 80-5, 218, 252-8, 362, 365-71, 420, 428-9
Rosen, S. and Weinberg, B. (1997) 430
S
Samuelson, Paul 5, 192 Santomero, Anthony M. 290, 298-304 and Babbel, D.F. (1997) 303 Sauter, George 268 Schimmelbusch, Hans 354-5 Schipper, Katherine 50, 85-91 Scholes, Myron 340 Schultz, Paul 211 Schwert, William 6 Sharpe, Bill 20, 31, 192 Shiratori, Ejicchi 113 Shleifer, Andrei 193, 196 Siegel, Jeremy J. 2, 5-12, 271 Sloan, Richard G. 176, 179-84 Slovin, M. 94 Smithburg, William D. 88 Smithson, Charles 352 Spiess and Affleck-Graves (1995) 182 Stein, Jeremy C. 420, 423-9
T
Thaler, Richard 163, 165, 176, 192-8
Tobin, James 11-12, 20
Torous, Walter N. 218, 247-51, 396, 411-18
Tufano, P. and Serbin, J. 312
Tversky, Amos 192
Name index
Umlauf 69
Vincent, Linda 50, 85-91 Vishny, Robert 193
W
Wall Street Journal 181 Warner (1977) 417
White, Lord 302
Wilde, Oscar, An Ideal Husband 162 Winton, Andrew 384
Wright brothers (Wilbur and Orville) 227
Yermack, David 50, 59-64
Zingales, Luigi 2, 43-8, 50, 53-9
/
Agence d’Evaluation Financiere (ADEF) 234 A1 Dunlap 408 AM Best Company 234 American Barrick Resources 312 American Stock Exchange (AMEX) 37, 39, 41, 212, 236
Amgen 190
Apple Macintoch computers 147, 309 Arizona Stock Exchange 205 Association of British Insurers 121 AT&T 85-6, 207 Australian Ratings 234
Bank of England 428
Bank of International Settlements (BIS), Basle Committee 311, 391 Barings 308, 335, 353, 400 Bausch and Lomb 149-50 BCCI 399-400 Bloomberg 236 Bre-X 399
British Aerospace 257 British Gas 85 British Petroleum 207-8
Cambridge Associated 78 Campeau 406
Canadian Bond Rating Service 234 Central District of the California Banruptcy Court 413
Channel Tunnel 83-4, 415
Chargeur, media and textile groups 85
Charles Schwab 376-7
Chase Manhattan 92
Chemical Bank 92
Chicago
Graduate School of Business 192, 197 markets 212 Merc’s S&P 500; 200 University of 53, 163, 166 Chicago Board of Trade (CBOT) 202, 204, 401 Chicago Mercantile Exchange (CME) 202, 204, 401 Ciba Specialty Chemicals 85 CIBC Wood Gundy 345, 352 City of London 168 Coca-Cola 133 Columbia
Business School 114 Pictures 410 University 114, 164
Continental Illinois Bank 373 Courtaulds 85
Daimler Benz 56, 103, 103 , 107, 410 Daiwa 308
Darden Restaurants 86, 88 Dean Witter 92 Decline Inc 129-30, 130 Derivatives Product Group 311 Deutsche Bank 354 Deutschland AG 55, 55 Disney 408
Dominion Bond Rating Service (Canada) 234 Dresdner Bank 354 Drexel Burham Lambert 374-5 Duff and Phelps’ Credit Rating Company (Duff and Phelps) 233, 240 Dun and Bradstreet 233
Economist 94 Emerson Electric 150-1 European
Central Bank 429 Monetary Union 257-8, 429 Eurotunnel 415
F
Federal Reserve Bank 198, 198 , 389, 392, 426 Federated Department Stores 406 Fidelity Magellian Index funds 268-9, 268 Financial
Accounting Standards Board (FASB) 109 Executives Institute 112, 115 Financial Times 17-18, 93-4, 196 Fisher-Price toys 88
Fitch Investors service (Fitch) 233-4, 240 Forstmann Little 76, 78 Frankfurter Allgemeine Zeitung 353-4 FT All Share Index 33 FTSE 100 index 122, 335-6
G7 countries 56, 57 , 58, 276-7, 284, 316 Gateway 406
General Electric (GE) 94, 103-4, 207, 254
General Mills 86, 88
General Motors 85, 254
Germany, stock exchange 273
Gibson Greetings 302
Glaxo-Wellcome 410
Goldman Sachs 179, 208
Government National Mortgage Association 256
Organization index
Greylock 76 Group of Thirty 311 Growth Ltd 127, 128
H
Hanson 85, 91, 94
Harvard Business School 163, 408
High Tech Inc. 25, 27-30, 28-9
Hilton Hotels 88
Hong Kong Stock Exchange 107
Hydro Quebec 326, 328-30
I
IBM 147, 149 ICI 160-1 Instinet 206 Intel 205, 210, 309 International
Accounting Standards Committee (IASC) 106-15
Association of Financial Executives Institutes 112
Bank Credit Analysis (IBCA) 234 Finance Corporation 83 Organization of Securities Commissioners (IOSCO) 106-7, 112, 115 Swaps and Derivatives Association 311 ITT 85, 88, 91-92
J
Japan
Bond Research Institute (JBRI) 234 Credit Rating Agency (JCR) 234 Johnson & Johnson 150 J.P. Morgan 88, 307 Justice Department 211, 237
Kansas City, Value Line 200 Kleiner Perkins 76 Klockner-Werke 415 Kodak 147
Kohlberg Kravis & Roberts (KKR) 76, 405 Kuwaiti government 208
Levis 71
London Stock Exchange (LSE) 40, 107, 203, 40, 107, 203
counterparty risk 208 electronic trading 205 Louis Dreyfus Energy 353 LSE (London School of Economics) 214 Lucas-Varity 133 Lucent Technologies 85-6
McKinsey & Co 407
Macy’s 406
Massachusetts Institute of Technology (MIT) 53 Matsushita 410 Mattel 88
Maturity pic 127, 128, 129 Merrill Lynch 208 Metallgesellschaft (MG) 302, 353-9
Refining & Marketing (MGRM) 353-9, 358 Microsoft 210, 309
Moody’s Investors Service (Moody’s) 198, 233-4, 236-7, 240, 401, 403, 198, 233-4, 236-7, 240,
401, 403
Morgan Stanley 203 Morningstar 265, 268-9 Multinational Inc. 25, 30
N
Nasdaq (the National Association of Securities Dealers Automated Quotation system) 202-4, 211, 214-5
National Associations Corporate Directors 408 Insurance Commissioners 236, 311 Pension Funds 121
Securities Dealers Automated Quotation system 210, see also Nasdaq National Bureau of Economic Research 385, 385 Nationally Recognized Statistical Rating Organization (NRSRO) 234, 237, 240 NatWest Bank 257 Markets 249 Netscape 71, 74 New World Development 93 New York
Federal Reserve Bank 198, 198 Mercantile Exchange (Nymex) 354-5 Stock Exchange (NYSE) 37, 39, 41, 56, 106, 108, 186, 202, 204, 207, 210, 212-5, 236 counterparty risk 208 1989 All-American Research Team 181 Nippon Investors Services (NIS) 234 Norwest of Minneapolis 377 Novartis 85
NRSRO see Nationally Recognized Statistical Rating Organization (NRSRO)
NYSE see New York, Stock Exchange (NYSE)
Orange County 353
P
Paris Stock Exchange 205 Penn Central 199, 237 Pennsylvania, University of 271 Philip Morris Kraft 86 Pony Express delivery system 205 Porsche 326
Organization index
Posit 205 PR Newswire 236 Price Waterhouse 114 Procter and Gamble 302, 353
Quaker Oats 88 Quantum 92
Rating Agency Malaysia (RAM) 234 Reuters 205 Instinet 205-6 newswires 236 RJR Nabisco 86
S&P 500 index 11, 185, 190, 193, 268-9, 268,
276
Salomon Brothers 378 SCM 92
Scott Paper 408 Seagram 208 Sears Roebuck 91-2
SEC see Securities and Exchange Commission (SEC)
Securities and Exchange Commission (SEC) 47, 101, 107-10, 203, 211-12, 214, 234, 236, 311 SECUs 212 Sharper Image 206-7 Showa Oil 353
Society of Practitioners in Insolvency 411 Sony 410 Sotherbys 203
Standard and Poor (S&P) 233-4, 236, 240, 401, 403 500 Index 11, 185, 190, 193, 268-9, 268, 276 Credit Watch 237, 239
Stern Stewart Management Services 133, 407 Sumitomo 308
Sydney Stock Exchange 202, 205
Telerate 236 Terrance Odean 193
Thai Rating and Information Service (TRIS) 234
Thaler fund 193
Thomson Bankwatch 234
Thorn-EMI 85
Time Warner 208
Tokyo Stock Exchange 40, 107, 204, 208, 214 Toronto Stock Exchange 205 Treynor Index 264
Universal Studios 410 US
Consumer Price Index 251 Controller of the Currency, Office of 236 Federal Home Loan Bank 79 Federal Reserve
Bank, New York 198, 198 Board 79, 236, 251 government 213 Labor Department 236 National Association of Insurance Commissioners 236, 311 Securities and Exchange Commission (SEC) 409
USA Inc. 55, 55
V
Vanguard Index 500; 268-9, 268 Venture Economics 78 Viacom 89
Wall Street 61, 168 The Wall Street Journal 17 Walmart 147
Weiss Center for International Financial Research 345,352
Wharton School 271, 284, 318 Wisconsin, University of 163 World Bank 83, 436 WT Grant 237
Yahoo! 179
Have you Mastered Finance?
We hope that you have found this book useful. If so, why let your pursuit of management excellence end here?
We have recently developed a series of opportunities for executives to stay in touch with the latest management thinking (see overleaf). These will enable you constantly to upgrade your management skills as part of an international community of those who are Mastering Management. Membership of this select community will give you privileged access to a range of learning opportunities, tailored to meet your needs as the world of management evolves.
To find out more about the Masters of Management Club, fill in the application form below and return it to:
Masters of Management Club,
FT Mastering,
28 Long Acre,
London WC2E 9AN.
Fax: +44 (0) 171 240 8018
Mr/Mrs/Miss/Ms Initial _ Last name _
Department_ _
Job title _ _ __
Company_
Address
Telephone no._Fax no_
Areas of special interest:_ _
1 .__
2 ._
3. _
4.
5. _
Preferred newspaper Preferred business magazine
Any comments on Mastering Finance or proposals for future projects:
Edited by Tim Dickson, George Bickerstaffe and James Pickford
Business School Partners include:
IMD Switzerland • Wharton School at the University of Pennsylvania • London Business School •
INSEAD • Chicago Graduate School of Business • Manchester Federal School of Business Management
Improve your strategic management skills
The new Financial Times Mastering Management Service introduces the three Rs of management: The Reader, The Review and The Resource. Ideas you can use, issues that matter, practices that are already working for others.
Every month, The Reader and The Review
combine to bring you the thoughts, opinions and advice of the very best management minds from across the spectrum. Leading business schools, top managers and management experts bring you in-depth insight and information on the issues confronting today’s corporate manager.
The Resource gives you unlimited access to a unique on-line information center for managers. Here, you can find further reading, hold discussions in our newsgroups, or browse through our case studies, conference and book summaries.
How much?
12 issues each of The Reader and The Review plus unlimited on-line access for one year for £190.00 plus postage and packing: £20 Continental Europe; £48 North America/Africa; £60 Asia Pacific
How to subscribe?
To subscribe and/or request a trial copy call on +44 (0) 1483 733 899 or e-mail subscribe@ftmastering.com
Please quote ref code: 7911MF Payment can be made by credit card, cheque or proforma invoice.
I.'INANCI AL T.t MBS
»eqre
John Btwne,
c+iftf execute of
ptychoU&n r,* m-xh
Ylfcatdo yom bw »bo«t gvntsf
(continued from front flap)
Debt Markets Portfolio Investment Risk Management Derivatives Financial Institutions Regulation & Governance Finance & Government
The University of Chicago Graduate School of Business has more Nobel Prize winners than all the other business schools combined. In addition to its legendary strength in finance, Chicago offers six programs leading to an MBA degree and a Ph.D. in business. Approximately 350 Chicago graduates hold key faculty posts at business and universities and more than 50 serve as deans.
The Wharton School of the University of Pennsylvania, founded in 1881 as the first collegiate school of management in the United States, is recognized around the world for its innovative leadership and broad academic strengths across every major discipline and at every level of business education. Currently, Wharton has 4,695 students and nearly 10,000 participants in its executive education programs each year and a network of 70,000 alumni in more than 100 countries.
Founded in 1965, London Business School
has firmly established itself as a leading international business school, offering a 21- month MBA program as well as a one-year Masters in Finance course. London Business School’s Institute of Finance & Accounting was established in 1973, and has since established itself as an international center of excellence with the largest concentration of finance faculty outside North America.
Jacket design by Andrew M. Newman
Pitman Publishing
4720 Boston Way Lanham, MD 20706 301-731-9516
128 Long Acre
London, WC2E 9AN, UK
0171447-2000