Unobserved Heterogeneity: Evidence and Implications for SMEs' Hedging Behavior

Financial research indicates that several firm characteristics are related to the use of derivatives. Less attention has been paid to the role of the characteristics of managers, which are particularly important when studying derivative usage of small and medium sized enterprises (SMEs). In this paper we focus on the influence of manager's level of education, the manager's decision-making unit, and the fundamental determinants of risk management - managerial risk attitude and managerial risk perception - on SMEs' commodity derivative usage. In empirical studies to date, the heterogeneity of derivative users has been neglected. We propose a generalized mixture regression model that estimates the relationship between commodity derivative usage and a set of explanatory variables across segments of an industry. Accounting for unobserved heterogeneity reveals that segments of the industry have different determinants of derivative use. Moreover, the heterogeneity at the segment level appears to mask significant effects at the aggregate level, most notably the effects of risk attitude and risk perception.Marketing,

STRATEGIC RISK MANAGEMENT BEHAVIOR: WHAT CAN UTILITY FUNCTIONS TELL US?

The validity of the utility concept, particularly in an expected utility framework, has been questioned because of its inability to predict revealed behavior. In this paper we focus on the global shape of the utility function instead of the local shape of the utility function. We examine the extent of heterogeneity in the global shape of the utility function of decision makers and test whether its shape predicts strategic risk management behavior. We assess the utility functions and relate them to strategic decisions for portfolio managers (N = 104) and hog farmers (N = 239). The research design allows us to examine the robustness of our results and the extent to which the results can be generalized. Furthermore, we assess the shape of the utility functions for these decision makers applying two different methods. This allows us to further test the robustness of our empirical results. If there exists a relationship between the shape of the utility function and strategic decisions, both methods should yield the same result. The empirical results indicate that the global shape of the utility function differs across decision makers (fully concave or convex versus S-shaped), and that the global shape predicts strategic decisions (e.g., asset allocation strategy in the case of portfolio managers; type of production process employed in the case of hog farmers). These findings support the notion that the often criticized concept of utility is a useful concept when studying actual behavior, and highlight the importance of considering decision-maker behavior over a wide outcome range when examining strategic behavior.Risk and Uncertainty,

The Financial Industry's Challenge of Developing Commodity Derivatives

With a constant new stream of financial services coming to the market, each often more exotic and complicated than the last, the financial services industry, which includes commodity derivatives exchanges, brokerage houses and banks providing price risk reduction services (the so-called hedging services), is one of the fastest growing industries. In order to assure survival, these companies show a rapid product innovation. However, for commodity derivatives the risk of failure is considerable. This paper presents a new and integrative approach towards commodity derivatives management, which makes it easier to gain insight into the viability of new commodity derivatives before introduction, to assess and improve the viability of existing commodity derivatives

Changing Agricultural Marketing Channel Structures: Interdependences & Risk Preferences

We propose a conceptual model that integrates transaction cost and risk behavior theories in an interdependence framework. Hypotheses are offered that relate the concepts that are central to the proposed model to the three dimensions of channel structures: the allocations of uncertainty, decision rights, and gains. An empirical research design is proposed to test the validity of the conceptual model within the context of the broiler and grain industries. The conceptual model will be validated in a structural equation modeling framework.Marketing,

Commodity Futures Contract Viability: A Multidisciplinary Approach

We propose a development process of commodity futures contracts in which the decisions and wishes of potential customers are investigated simultaneously with the necessary technical properties that need to be met for trading to take place. Within this framework the relationship between trading volume and hedging effectiveness is examined taking both basis risk and market depth risk into account, and the relationship between owner-manager's characteristics and the probability of using futures is examined, taking latent variables and the heterogeneity of owner-managers into account. The relationships are tested on a set of data gathered in a stratified sample of 440 owner-managers by means of computer-assisted personal interviews and on transaction-specific futures data. Structural equation models and multiple regression models are used to validate the relationships. The hedging effectiveness and the variables that play a role in the owner-manager's use of futures are related to the tools of the exchange.Futures Contracts Design; Multidisciplinarity; Hedging Effectiveness; Choice Behavior; Measurement Error; Segments; Futures Exchange Toolbox

Shareholder Activism and the Role of Marketing: A Framework for Analyzing and Managing Investor Relations

This paper proposes a conceptual framework that shows the role of (the) marketing (function) in managing investor relations. The framework complements existing literature on the marketing-finance interface and explicitly includes investor relationships as market-based assets. The framework provides (the) marketing (function) with tools to analyze and manage investor relations in order to improve companies’ market performance and increase shareholder value by lowering the costs of shareholder activism. Three real-life scenarios of shareholder activism demonstrate the implications of the framework for marketing practice.Strategy;

Futures Exchange Innovations: Reinforcement versus Cannibalism

Futures exchanges are in constant search of futures contracts that will generate a profitable level of trading volume. In this context, it would be interesting to determine what effect the introduction of new futures contracts have on the trading volume of the contracts already listed. The introduction of new futures contracts may lead to a volume increase for those contracts already listed and hence, contribute to the success of a futures exchange. On the other hand, the introduction of new futures contracts could lead to a volume decrease for the contracts already listed, thereby undermining the success of the futures exchange accordingly. Using a multi-product hedging model in which the perspective has been shifted from portfolio to exchange management, we study these effects. Using data from two exchanges that are different regarding market liquidity (Amsterdam Exchanges versus Chicago Board of Trade) we show the usefulness of the proposed tool. Our findings have several important implications for a futures exchange's innovation policy.