Risk-adjusted performance measures at bank holding companies with section 20 subsidiaries

This paper examines risk-adjusted performance measures in banking, which are used as a guide for efficient asset allocation, performance evaluation, and capital structure decisions in complex, multidivisional financial institutions. Traditional measures of performance are contrasted with the portfolio-based risk-adjusted measures using a unique detailed micro data set for a sample of domestic bank holding companies (BHCs) that engaged in both commercial banking and investment banking activities between 1990 and 1999. This paper finds evidence that traditional stand-alone performance measures can lead to results substantially different from those of the portfolio models. This study also examines BHCs’ optimal portfolios consisting of traditional and nontraditional banking activities derived from the efficient frontiers. These results show that there are gains from diversification as indicated by the composition of optimal portfolios.Bank holding companies ; Risk management

PORTFOLIO MANAGEMENT FEES: ASSETS OR PROFITS BASED COMPENSATION?

This paper compares assets-based portfolio management fees to profits-based fees. Whilst both forms of compensation can provide appropriate risk incentives, fund managers´ limited liability induces more excess risk-taking under a profits-based fee contract. On the other hand, an assets-based fee is more costly to investors. In Spain, where the law explicitly permits both forms of retribution, assets-based fees are observed far more frequently. Under this type of compensation, the paper provides some insights into how management fees should be determined in order to solve the principal´s trade-off between providing better risk incentives and incurring a lower cost of compensation.

Project selection, income smoothing, and Bayesian learning

Capital rationing is an empirically well-documented phenomenon. This constraint requires managers to make investment decisions between mutually exclusive investment opportunities. In a multiperiod agency setting, this paper analyses accounting rules that provide managerial incentives for efficient project selection. In order to motivate a shortsighted manager to expend unobservable effort and to make efficient investment decisions, the principal sets up an incentive scheme based on residual income (e.g. EVATM). The paper shows that income smoothing generates a trade-off between agency costs resulting from differences in discount rates and the costs associated with the "congruity" of residual earnings

Estimating the expected cost of equity capital using consensus forecasts

In this study, we develop a technique for estimating a firm’s expected cost of equity capital derived from analyst consensus forecasts and stock prices. Building on the work of Gebhardt/Lee/-Swaminathan (2001) and Easton/Taylor/Shroff/Sougiannis (2002), our approach allows daily estimation, using only publicly available information at that date. We then estimate the expected cost of equity capital at the market, industry and individual firm level using historical German data from 1989-2002 and examine firm characteristics which are systematically related to these estimates. Finally, we demonstrate the applicability of the concept in a contemporary case study for DaimlerChrysler and the European automobile industry

IT GOVERNANCE AND BUSINESS CORPORATE STRATEGY – BASED ON EMBEDDING THE PROGRAM AND PROJECT MANAGEMENT WITH THE IT&C VALUE CHAIN

This paper presents the key concepts related to the current process of IT Governance in modern corporations. The first part addresses the definitions of IT Governance and its life-cycle model, the covered strategic areas and the effective governance management ways, the IT value management for ensuring value delivery, and the IT value chain based on projects and programs together with the organizational value of the IT&C programs and projects. The second part deals with the IT value chain based on operations, the strategic-factors of success and the services delivery chain, the value chain management and the contribution measurement to the organizational business, with a final presentation of practical applicability of the mobile value chain to the 3G mobile communication services. Recent IT&C and corporate strategic management field references bring an additional support to the paper value.IT Governance

Valuing entrepreneurial investments: the venture capitalists' approach.

Valuing high-growth, high-uncertainty firms, characterised by a unique business concept, significant growth opportunities, and/or no real positive cash flows to show the profit potential of the venture, is a major challenge faced by most venture capitalists (Gompers (1995)). Unlike for an investment in publicly traded securities for which there exists a well-defined pricing mechanism, it is difficult to find an objective valuation for the investment holdings of a venture capital fund. The valuation of individual unquoted investments is, thus, a very complicated process. subject to the discretion and judgment from the part of the venture capitalist. Recently, growing criticism and increasing interest are observed regarding the valuation of the private equity and venture capital portfolios of high-tech, high risk, high growth venture investments (EVCA (2001), Millner (2002), Blaydon & Horvath (2002)). Consequently, the underlying goal of the empirical analyses included in this paper corresponds exactly with revealing the valuation methodology operated by venture capitalists when determining or reconsidering the valuation for each venture investment held in portfolio.Cash flow; Firms; Investment; Investment portfolio; Investments; Opportunities; Portfolio; Pricing; Processes; Risk; Studies; Valuation; Valuation method; Venture capital;

Hedging the exchange rate risk in international portfolio diversification : currency forwards versus currency options

As past research suggest, currency exposure risk is a main source of overall risk of international diversified portfolios. Thus, controlling the currency risk is an important instrument for controlling and improving investment performance of international investments. This study examines the effectiveness of controlling the currency risk for international diversified mixed asset portfolios via different hedge tools. Several hedging strategies, using currency forwards and currency options, were evaluated and compared with each other. Therefore, the stock and bond markets of the, United Kingdom, Germany, Japan, Switzerland, and the U.S, in the time period of January 1985 till December 2002, are considered. This is done form the point of view of a German investor. Due to highly skewed return distributions of options, the application of the traditional mean-variance framework for portfolio optimization is doubtful when options are considered. To account for this problem, a mean-LPM model is employed. Currency trends are also taken into account to check for the general dependence of time trends of currency movements and the relative potential gains of risk controlling strategies

Portfolio choice and estimation risk : a comparison of Bayesian approaches to resampled efficiency

Estimation risk is known to have a huge impact on mean/variance (MV) optimized portfolios, which is one of the primary reasons to make standard Markowitz optimization unfeasible in practice. Several approaches to incorporate estimation risk into portfolio selection are suggested in the earlier literature. These papers regularly discuss heuristic approaches (e.g., placing restrictions on portfolio weights) and Bayesian estimators. Among the Bayesian class of estimators, we will focus in this paper on the Bayes/Stein estimator developed by Jorion (1985, 1986), which is probably the most popular estimator. We will show that optimal portfolios based on the Bayes/Stein estimator correspond to portfolios on the original mean-variance efficient frontier with a higher risk aversion. We quantify this increase in risk aversion. Furthermore, we review a relatively new approach introduced by Michaud (1998), resampling efficiency. Michaud argues that the limitations of MV efficiency in practice generally derive from a lack of statistical understanding of MV optimization. He advocates a statistical view of MV optimization that leads to new procedures that can reduce estimation risk. Resampling efficiency has been contrasted to standard Markowitz portfolios until now, but not to other approaches which explicitly incorporate estimation risk. This paper attempts to fill this gap. Optimal portfolios based on the Bayes/Stein estimator and resampling efficiency are compared in an empirical out-of-sample study in terms of their Sharpe ratio and in terms of stochastic dominance

Avoiding the rating bounce : why rating agencies are slow to react to new information

Rating agencies state that they take a rating action only when it is unlikely to be reversed shortly afterwards. Based on a formal representation of the rating process, I show that such a policy provides a good explanation for the empirical evidence: Rating changes occur relatively seldom, exhibit serial dependence, and lag changes in the issuers’ default risk. In terms of informational losses, avoiding rating reversals can be more harmful than monitoring credit quality only twice per year

Risk and return of open-end real estate funds : the German case

Open-end real estate funds (so called “Offene Immobilienfonds”) play a major role in the German market for securitised real estate investments. Such funds are pools of money from many investors, which are invested in real estate by special investment management companies. This study seeks to identify the risk and return profile of this investment vehicle (before and after income taxes), to compare them with those of other major asset classes, and to provide implications for their appropriate role in a mixed-asset portfolio. Addition-ally, an overview of the institutional architecture and role of German open-end real estate funds is given. Empirical evidence suggests that the financial characteristics of open-end real estate funds are in many respects similar to those reported for direct real estate invest-ments. Accordingly, German open-end real estate funds qualify for medium and long-term investment horizons, rather than for shorter holding periods