The Business Review

Is Time-Varying Conditional Beta A Significant Risk Measurement?

Dr. David Morelli, Kent Business School, University of Kent, Canterbury, Kent, UK

ABSTRACT

This paper finds evidence of a significant risk-return relationship on the Hong Kong stock market when beta is used as the measurement of risk. Beta is estimated from time-varying variances and covariances estimated using variants of GARCH models. Beta is then examined conditionally on the sign of the excess market returns. The results show beta to be a significant risk measurement when recognition is given to the sign of the excess market return. A strong positive risk-return relationship is found during up markets and a strong negative relationship during down markets. When the sign of the excess market return is ignored beta is shown to be an insignificant risk measurement on the Hong Kong stock market. Explaining what causes movements in stock prices has always been of great interest in the finance world. Over the years many pricing models have been developed both single and multifactor in an attempt to answer this. The most well known pricing model, which is still discussed and empirically tested today, is the Capital Asset Pricing Model (CAPM) of Sharpe (1964) and Lintner (1965). This single factor asset pricing model attempts to explain security returns through its relationship with its systematic risk. The CAPM assumes a positive, linear risk-return relationship. The only risk measure of any significance is systematic risk as the model assumes that idiosyncratic risk is diversified away through the holding of the market portfolio. Despite early empirical studies supporting this positive risk-return relationship, such as those by; Lintner (1965), Black et al. (1972) and Fama and MacBeth (1973), a number of subsequent studies failed to find any such relationship. Such studies include those of Fama and French (1992) on the US markets, Chan and Chui (1996), Fletcher (1997), Hung et al. (2004) on the UK market, Ho et al. (2006) on the Hong Kong market, Faff (2001) on Australian market, and Elsas et al. (2003) on the German stock market. As a result of many of these studies many doubts were raised regarding the validity of the CAPM.. One of the issues with the CAPM is the problems associated with its testing. To test the CAPM one requires the true market portfolio and also expected returns data. With respect to the true market portfolio a proxy is used. There are many proxies available and on the whole can be looked upon as good representations of the market portfolio, even though they do not represent the true market portfolio. However, one issue that cannot be overcome relates to the unavailability of expected data. The CAPM is an expectation based model, namely in that it tries to explain the expected return, however all test of the CAPM are based on realized returns.

Full text

Earnings and Corporate Investment

Dr. Chih-Chieh (Jason) Chiu, Rider University, Lawrenceville, NJ

Dr. Mitchell Ratner, Rider University, Lawrenceville, NJ

ABSTRACT

In this paper I examine the association of corporate investment with earnings. My findings suggest that earnings are more informative about corporate investment than are cash flows and normal accruals are more informative about corporate investment than are discretionary accruals. Further, my analysis shows that cash flows subsume discretionary accruals in explaining corporate investment. In a world without financing frictions, corporate earnings and cash flows should explain corporate investment decisions equally well. This is because in a frictionless financial market, the information contents of the earnings and cash flows are the same. However, in a world with financing frictions, created by the separation of ownership and control, the relationship between earnings and cash flows in explaining corporate investment decisions is not so obvious. One may argue that earnings are a lesser measure of firm performance and cannot explain corporate investments as well as can cash flows. This is because earnings are susceptible to earnings management. Earnings consist of two components: cash flows and accruals. Managers could manage earnings via cash flows or accrual manipulation. In the case of accrual manipulation, managers manage earnings upwards or downwards by changing the accrual assumptions without changing the underlying economics of the firm. The manipulated earnings hide a firm’s underlying economic conditions from its stakeholders and hence are less informative about the managerial decision making processes. Yet one may also argue that earnings are a superior performance measure and therefore explain corporate investments better than do cash flows. According to accounting research, earnings are the premier measure of firm performances. Dechow (1994) documents that earnings are a better performance measure than cash flows because the accrual component of earnings helps mitigate the timing and matching problems with revenues and expenses. I investigate the information content of earnings and cash flows by comparing the firm-specific investment-earnings sensitivities and investment-cash flow sensitivities. I hypothesize that earnings are more informative about corporate investments because the accrual component of earnings facilitates the matching of revenues and expenses. I also hypothesize that accrual components of earnings are more informative than cash flows about corporate investments. I further investigate whether earnings quality plays a role in relaying information to investors about corporate investments decisions. I define earnings quality by using the unsigned abnormal accruals. I hypothesize that there are varying degrees of earnings informativeness about corporate investment among the different earnings quality groups. Specifically, I expect the earnings of the high earnings quality firms to be more informative about corporate investments.

Full text

A Comparison of the Service Quality of Operate-Transfer Swimming Pools

Dr. Cheng-Ping Li, Minghsin University of Science and Technology, Taiwan R.O.C.

ABSTRACT

The main purpose of this study is to compare the different types of service quality regarding the outsourcing of swimming pools in Taipei City. With the questionnaire methodology, 451 users of two swimming pools are recruited as participants. The data is analyzed by descriptive statistics, t-testing, and one-way ANOVA to test the assumptions. The main findings are as follows: Most of the subjects of this study are males; distribution of all ages is average; most education backgrounds are college and above. Subjects share the highest agreement in “assurance” and “tangibility” of outsourced swimming pools in this study. Significant differences exist in age, education background, and monthly income of subjects. People aged over 41 have higher agreement in the five dimensions of service quality than subjects aged between 31 and 40 and under 30. Regarding education background, the factors of subjects holding master’s degrees or above are obviously higher than those holding bachelor’s degrees or vocational school diplomas. Regarding “tangibility”, “reliability”, and “empathy”, subjects holding master’s degrees or above are higher than those holding high school diplomas. Finally, subjects with monthly income of over 50,001 NTD have higher agreement in “reliability”, “responsiveness”, “assurance”, and “empathy”. Regarding the differences of service quality of outsourced swimming pools of different modes, government-outsourced swimming pools have higher service quality than school-outsourced swimming pools in “tangibility” and “empathy”. In recent years, the government has built swimming pools, swimming facilities, and sports center in schools of all levels, and privately operated swimming pools have gradually increased (Hsu, 2002). However, due to a lack of human resources and funding, as well as increased external competition, school-built swimming pools face difficulties in operation. Therefore, government-built swimming pools are mostly outsourced to relieve economic burden (Wang, 2001). Under the circumstances of poor government finance and a lack of school funds, the government encourages individuals to participate in outsourcing the businesses of BOT (Building-Operate-Transfer) and OT (Operate and Transfer) swimming pools, thus, outsourced swimming pools will be the trend in the future (Liu, 2005). At present, the business mode of OT (operate transfer) is the most common form, meaning that after being invested and constructed by the government, swimming pools are outsourced to non-government institutions. When the operation is terminated, the right of management is given back to the government, as the operatorso btain the right of management through bidding.

Full text

The Difference between Consumer Needs and Wants: Based on the Store Proximity between Haagen-Dazs and Starbucks

Dongxiao Wang, East China Normal University, Shanghai, China

Dr. Hung-hsin Chen, East China Normal University, Shanghai, China

ABSTRACT

The purpose of this paper is to investigate the differences between customer needs and wants of Starbucks and Haagen-Dazs to take the real needs of consumers as a starting point, and discuss the feasibility of the methods and ways to short the gaps between the actual needs or wants of the customers and the stores’ behavior in the end. After the survey from 4 stores of Starbucks and 4 stores of Haagen-Dazs in Shanghai, we found the differences between customer needs and wants of Starbucks and Haagen-Dazs. This paper suggests that it can make most customers enjoy more with the needs of their own services, and improve the competitiveness of these brands. This study draws on the consumed perspective to investigate consumer real needs and wants with the differences in contrasting stores. Since Starbucks entered China in 1998, in less than two decades, it has so far received higher profits in China than in Europe. Comfortable seats, beautiful music, quiet space, with a cup of Starbucks coffee, all this things captured hearts and minds of many white-collar workers. While early in 1996, Haagen-Dazs had come to mainland China firstly. With its high quality and the perfect Declaration of love, it gradually occupied the high-end market, and achieved high performance. The dominant flavor of Haagen-Dazs is sweet and memorable, "Love her, take her to eat Haagen-Dazs," is a lot of customers ' first impression of Haagen-Dazs. However, insiders of Haagen-Dazs has talked about such a phenomenon that, where there is a Starbucks, the income of Haagen-Dazs is not so satisfactory. Not to mention the benefit of a shop is determined by many factors. The main products of Haagen-Dazs are ice cream, while Starbucks' main products are coffee. So both of them seems to be associated difficultly. However, consumer needs sometimes is not an ice cream or a cup of coffee. So, what are the real consumer needs of Starbucks and Haagen-Dazs? What are consumer wants of them? The inquiry of the difference between customer needs and wants in these two stores, is a continuous process of exploring real customer needs and wants of them. In some cases, the consumer needs are an ice cream or a cup of coffee; but in other cases, probably most cases, consumer needs or wants may not look so simple apparently.

Full text

The Effect of Taxes on Corporate Financing Decisions: Evidence from Brazilian and American Firms

Peter V. Fonseca, Mackenzie Presbyterian University, Brazil

Dr. Michele N. Juca, Mackenzie Presbyterian University, Brazil

ABSTRACT

According to trade-off theory, encouraged by debt tax benefit, the company uses third-party capital to the level at which the costs, associated with bankruptcy risks, outweigh this advantage. The United States represents the largest economy in the world and Brazil is a developing country, with one of the highest tax burdens in the world. This paper analyzes whether the tax benefit has a positive effect on the capital structure of American and Brazilian companies. The sample comprises 407 American¹and 217 Brazilian² non-financial or utility companies, whose data are obtained between the period of 2008 and 2015. By means of three tax variables - kink, standardized kink and tax payment - dynamic adjustment models of capital structure are estimated. The results confirm that tax benefit influences the capital structure decisions of Brazilian and American companies. In addition, Brazilian and American companies are identified as having a conservative position in terms of indebtedness. After their seminal paper of 1958, Modigliani and Miller (1963) recognize the existence of the effect of tax benefit on debts. According to them, this tax shield on debt increases the company´s value, since it reduces its cost of capital. It means that there is an optimal capital structure allowing the maximization of shareholders´ wealth, which confirms the traditional theory by Durand (1952). Empirically, companies tend to behave as if there is an optimal capital structure. According to Weston and Brigham (2000), the target structure of capital involves the exchange between risk and return. High risk, associated with high debt, tends to reduce the stock price. However, higher expected rate of return raises that price. Thus, the company's goal is to find the optimal capital structure, in which the marginal tax benefits of debt are equal to its marginal costs. Furthermore, considering the high tax rates that companies face, the influence of tax shield on the capital structure of firms is potentially significant. Moreover, since there are considerable differences between Brazilian and American tax policies, this paper aims at comparing the effect of debt tax benefits on the capital structure of public firms in both countries. Based on trade-off theory (TOT), the main hypothesis of this study is whether there is a positive relationship between the level of indebtedness and the tax benefit (H1). To test this, two samples of non-financial or utility companies - 407 American¹ and 217 Brazilian² – are analyzed by means of a regression with dynamic panel data - Equation 4. The annual data are obtained from Standard and Poor´s (S&P) IQ Capital database between 2008 and 2015. Another differential of this study is that, the analysis of the influence of taxes on corporate capital structure is made through more appropriate proxies, such as kink and standardized kink. As a result, the hypothesis is in fact confirmed. This means that the tax benefit arising from debt affects the companies´ capital structure. Additionally, on the one hand, Brazilian companies are verified as adopting a conservative use of their debts, to capture the benefits of tax deduction.

Full text

Member: Association of American Publishers (AAP), Professional / Scholarly Publishing, New York