Index
accounting practices 259
cultural debate on volatility 335–6
targeting users 334
tyranny of net income and ratios 334–5
acquisitions learning curve 108
ad hoc extension of portfolio 7
adding value
through risk management 229–326
agency costs 154
airline industry 85
Allied Irish Bank 246, 249, 255–6
allocation of risk 435
Amazon 81
America Online 415
American Home-American Cyanamid 102
AMEX 146–8, 150, 152, 158, 191
Amgen 140
amortization 376
anchor 45
Annual Real Options Conference 76
annuitants 6
AOL see America Online
APCIMS index 19
applying BSC to nonprofits and government organizations 384–8
modifying architecture of BSC 385–8
arbitrage assumptions 42
arbitrageurs 43
ARCH model see autoregressive conditional heteroskedasticity
“Are you about to get Googled?” 218–20
Armageddon 37
Ashford Group 339
asset utilization 257
assets in place 135
autoregressive conditional heteroskedasticity 282
back books 300
applying BSC to nonprofits and government organizations 384–8
beyond measurement to management 388–9
emergence of balanced scorecard 373–4, 416–17
stakeholder and key performance indicator scorecards 382–4
supplementation of conventional financial reporting 375–6
vs. conventional financial reporting 375–6
see also what gets measured gets done
Bank for International Settlements 307
impact on net interest margin 291–2
Basle Committee on Banking Supervision 310
Beeton's Guide to Investing Money with Safety and Profit 8, 12
Bermudan options 296
best practice in managing real options 93–4
extending field of vision 93–4
Best Practices LLC 419
Big Bang 201
Big Five 111
“Big Mac” 241
see also McDonald's
black box 82
Blue Circle industries 352
blue sky laws 191
Boeing 241
BP-Amoco 98
breakeven 295
Bridges Community Ventures 438
Bristol&Myers-Squibb 102
British Airports Authority 399
British Bankers' Association 306
see also state capitalism; state of denial
British Government bonds 5–6, 20
BSA see Building Societies Association
BSC see balanced score card
BTP see below-target probability
BTR see below-target risk
Building Societies Act 1986 186–7
Building Societies Act 1997 187
Building Societies Association 285
buyback schemes 165–71, 176–85
capital structure puzzle 125–45
toward a unified theory of corporate
Cargill 436
carve-outs and mispricing 54–6
case studies
corporate governance failures 447–65
failing to fill the funding gap 464–6
fundamentals and stock market drive 52–8
interview with Microsoft's CEO 439–46
Sciona and venture capital 186–9
cash flow return on investment 348
cash flow risk 273
causes of unethical behaviors 413–15
business climate 413
competitive global environment 414
human nature 414
nature of competitive organizations 414–15
societal climate 414
Center for Research in Security Prices 147–8
Central Office of Information 395
Central Statistical Office 397
Chadwicks Investment Circular 8–11, 18
changing firm characteristics 146–64
characteristics of dividend players 150–54
size 153
charisma 69
cheerleading squads 72
Chicago Mercantile Exchange 248
churn rate 300
Cisco 104
CME see Chicago Mercantile Exchange
Coca-Cola 347
appointment of directors and nomination committee 458
composition of board of directors 455–6
confidential information 458
independent directors 456
internal control and role and composition of internal control committee 459–60
relations with institutional investors and other shareholders 460
role of board of directors 455
separation of chairperson and CEO positions 457–8
transactions with related parties 460
codes of ethical conduct 430
cognitive biases in behavioral finance 43–5, 86
conservatism 45
disposition effect 45
framing 44
heuristics 43
mental accounting 44
representativeness 44
cognitive psychology 42
coherent packages of financial policies 140
Cold War 36
collateral 135
emergence of belief 69
Colonial bonds 8
commercialization of contentious activities 435
commodity 304
common platforms 107
common time horizon 265
communication 400
Compustat 133, 138, 147, 150–55, 160–62, 360
conditional variance models 282
confidence 265
Conservation International 437
conservatism 45
entering developing markets 434
exploiting new technologies 432–3
exploring legally contestable markets 434–5
moving from public to private sector 433–4
contestable market exploration 434–5
contracting costs 128–30, 132–6
benefits of debt in controlling overinvestment 129–30
costs of financial distress 129
debt maturity and priority 134–6
evidence for capital structure 132–6
control structure of Italian listed companies 445–50
control variables 135
controlling overinvestment 129–30
controversy incorporated 430–38
earning right to operate profitably 435–8
conventional financial reporting vs. balanced scorecard 375–6
Corning 65
corporate citizen 380
corporate failures 113
corporate finance industry 110–111
corporate financial policy 139–42
corporate governance failures 447–65
compliance with Italy's code of best practice 454–60
ownership and control structures 448–50
corporate growth spectrum 140
costs of financial distress 129
counters to short-term focus 396–7
covenant restrictions 134
creative accounting 411
credit-linked notes 304
how credit derivatives are used 306–311
market size and major participants 304–6
types of credit derivative 302–4
Credit Suisse First Boston 27, 350
credit-line management 306
credit-linked notes 304
credit-spread put option contracts 303–4
creditworthiness 307
cross-pollination 437
cross-sectional regression techniques 133
Crossmar Matching System 259
CRSP see Center for Research in Security Prices
CSO see Central Statistical Office
currency exchange trading 246–62
accounting practices 259
currency futures and swap transactions 248
exchange contracts 247
falsified documents 252
introduction 246
options 248
prime brokerage accounts 252–3
spot exchange 247
trading strategy of John Rusnak 249–51
value at risk calculations 253–4
currency futures 248
customer value 380
“dash for gas” 96
day traders 80
de facto insiders 167
deal-making industry 114
debt financing 125
debt maturity and priority 134–6
deCODE Genetics 433
default swaps 302
Deloitte Touche Tohmatsu 411, 453
design philosophies 106
determinants of corporate borrowing 129
developing markets 434
direct public offerings 212
disposition effect 45
distortion 42
divergence of opinion hypothesis 204
diversification in practice 19–20
diversion of innovative energy 107
dividend payer versus non-payer behavior 155–7
dividend payment propensity 154–60
dividend player characteristics 150–54
dividend signaling power 177–9
dividends
aims, objectives and theoretical setting 176
behavior of payers versus non-payers 155–7
cash dividend time trends 147–50
caveats 185
characteristics of dividend players 150–54
diminishing dividend signaling power 177–9
greater pressure from shareholders to conduct buybacks 184–5
greater reliance on buyback schemes 179–83
methodology 177
time trends in cash dividends 147–50
Doerr, John 433
dollar loss metric 264
doomsday 274
DPOs see direct public offerings
drugs 401
dual-listed companies and mispricing 54–6
early diversification strategies 9–12
early lessons from managerial use of performance indicators 392–406
early warning system 73
“early-bird” specials 44
earning right to operate profitably 435–8
learn to work with stakeholders 436
rethink leadership and governance 437–8
take long-term view of market design 435–6
understand social assets 436–7
Eastman Kodak 125
eBay 63
economic imperative 98
economic reality 81
efficient investment portfolios 19
efficient markets hypothesis 42
EFQM award see European Foundation for Quality Management award
Electrolux 108
elements integral to performance indicators 393–4
EMH see efficient markets hypothesis
empire building 109
Empire stocks 8
employee stock ownership plans 160
energy and rail privatization 435–6
equilibrium in value 19
equity arbitrage 46
equity financing 358
expected equity risk premiums 37–8
prior estimates of risk premium 27–8
variation of risk premiums over time 32–4
ESOPs see employee stock ownership plans
establishment of realistic attainment levels 398–9
see also governance and ethics
European Foundation for Quality Management award 383
European Investment Bank 172
euthanasia 433
research methodology 363
excess cash 167
“excessive” profits 436
exchange contracts 247
exchange rate environment 234
exploitation of new technologies 432–3
exploring legally contestable markets 434–5
extending field of vision 93–4
extension of securities 10
extreme sport 82
Exxon 170
fair rates of return 25
fairness 131
fallen angels 316
Fannie Mae 422
FDA see U.S. Food and Drug Administration
Federal Reserve Bank of New York 247, 253
feedback 403
financial clearinghouses 267
financial distress 129
financial performance measures 347–54
cash is fact, money is opinion 350
Financial Review of Reviews 13, 15, 18–20
financial strategy map 379
capital structure puzzle 125–45
initial public offerings 190–217
value of share buybacks 165–71
financing startups 205
firewalls 322
background 285
emergence of fixed mortgages 286–9
the future 301
mortgage world before fixed rates 285–6
risk management issues 289–300
flow of funds 267
Foreign and Colonial Investment Trust 12
Fortune 1000 77
franchise building 380
Freddie Mac 422
French Ministry of Industry 65
Friedman, Milton 430
frozen assets 389
FTSE 46
GAAP earnings 358
game-playing 402
Gates, Bill 354
Gaussian distributions 280
genetically modified seeds 436
gilts 290
glamour firms 102
Glaxo-Wellcome 102
global diversification 13, 15, 19
global environment 414
globalization 333
Globana 338
GM see General Motors
going forward 90
going public process 190, 207–212
direct public offerings 212
overallotment options and stabilization 209–210
going public as stage in firm's external
financing startups 205
investor relations after going public 207
mechanisms to distinguish among firms 206–7
gold mining 8
Goldman Sachs 172–5, 192, 350, 375
“Are you about to get Googled?” 218–20
“Google's earnings more than double 1st quarterly results as public firm strong” 222–3
“Google's rising share price is cold comfort for investors” 227–8
“How high can Google fly?” 223–4
“Ignore Wall St's whining – Google's IPO worked” 220–22
“Google's earnings more than double 1st quarterly results as public firm strong” 222–3
“Google's rising share price is cold comfort for investors” 227–8
controversy incorporated 430–38
rebalancing the scorecard 411–20
Green Shoe option 209
Greenpeace 437
growth options 129
Hamel, Gary 354
hedge accounting 300
hedging to variable rate 289–91
historical equity risk premium see equity risk premium
Hoechst Roussel-Marion Merrel Dow 102
Hoechst-Rhone Poulenc 98
household budget 44
“How high can Google fly?” 223–4
HRRO see historical rate rollover
human nature 414
human rights 433
human trafficking 434
IFRSs see international financial reporting standards
“Ignore Wall St's whining – Google's IPO worked” 220–22
impresario hypothesis 204
incurred costs 387
inflation 49
information asymmetries 191, 267
information costs 130–32, 136–8
debt maturity and priority 138
evidence for capital structure 136–8
inherited causes of common diseases 433
initial public offerings 190–217
contractual forms and going public process 207–212
going public as a life cycle stage in firm's external financing 205–7
new issues underpricing 193–200
innovation and mergers and MNEs 98–117
integrated design 104
integrating technologies 104–7
integration 49
integration of stocks and flows 141–2
internal process strategy map 380
Internal Revenue Service 55
International Accounting Standard 39, 299–300
international diversification pre-WWI 5–24
diversification in practice 19–20
early diversification strategies 9–12
managing risk 7
“scientific” approach to diversification 12–19
international financial reporting standards 285, 299–300
International Swaps and Derivatives Association 306
interview with Microsoft's CEO 439–46
mergers, MNEs and innovation 98–117
realizing the potential of real options 76–92
why bad projects are hard to kill 63–75
investment canons 7
Investment as Exact Science 13
Investment Registry 20
IPOs see initial public offerings
irrational behavior 53
ISDA see International Swaps and Derivatives Association
Jaguar 242
Kaplan, Robert 354, 373–91, 416
key performance indicator scorecards 382–4
killing off bad projects 63–75
Kodak 242
Komatsu 241
KPI scorecards see key performance indicator scorecards
law of small numbers 44
lawsuit avoidance hypothesis on new issues underpricing 198
leadership and governance 437–8
learning and growth strategy map 380–82
learning to live with fixed rate mortgages 285–301
learning to work with stakeholders 436
leaving money on the table 199–200
legally contestable markets 434–5
taxes shield value 167
licence fees 337
limits to arbitrage 42, 45–7, 53
lobbyists 431
London Business School 112
London Stock Exchange 8, 11, 425, 555
Long Term Capital Management 46
divergence of opinion hypothesis 204
impresario hypothesis 204
windows of opportunity hypothesis 204–5
long-term view of market design 435–6
loss reduction 286
low frequency misvaluations 50
low-hanging fruit theory 355–72
lower propensity to pay 146–64
LTCM see Long Term Capital Management Ludwig report 250, 252, 256–8
“M&A learning curve” 99
McDonnell Douglas 241
major participants in credit derivatives market 304–6
Malcolm Baldrige award 383
refining models of perfection 82–4
valuing and managing the firm 89–90
managing risk 7
irrational behavior 53
limits to arbitrage in financial markets 53
systematic patterns of behavior 53
market implosion 104
research methodology 363
market saturation 360
market share and mergers 102–3
market-to-book ratios 133–6, 146, 152–3, 202
markets
Markowitz diversification 6
Markowitz optimization 6, 13, 19
maxi-hedge 299
maximum reasonable loss 263
measures of financial performance 347–54
measuring operating exposure 242–4
bottom-up estimates 243
top-down estimates 244
measuring performance 327–406
EVA implementation and market over-reaction 355–72
performance indicators 392–406
transforming the balanced scorecard 373–91
mechanics of going public 191–2
mechanisms to distinguish among firms 206–7
megabid mania 110
men and overconfidence 44
mental accounting 44
merchant bank archives 20
merger enigma 99
merger insiders 110
merger performance research 100–104
mergers and acquisitions
explanation of poor performance building on game theory 109–110
increasing importance of corporate finance industry 110–111
positive merger learning curve 108–9
difficult trade-off between cost-cutting and revenue-enhancement 103–4
disappointing results of stock market and accounting studies 101–2
mergers and market share – adding to the bleak picture 102–3
need for expanded research agenda 111–14
performance so poor, deals so many 108–111
research on merger performance 100–104
underestimated problem of integrating technologies 104–7
Merrill Lynch 192, 255, 318, 412
meso-oriented approach 113
Metropolitan Life 10
micro-merger problems 115
opportunity costs and diversion of innovative energy 107
protracted technical integration problems as ABB 105–6
Milken, Michael 433
mini-hedge 299
misaligned incentives 86
Mississippi Bridge 8
mitigation of risk 291–2, 306, 310, 364
Mobil 170
model dredging 45
see also state capitalism; state of denial
modeling managerial behavior 85–7
modification of BSC architecture 385–8
Modigliani-Cohn hypothesis 49
modularity 78
money left on the table 199–200
monitoring structure of Italian listed companies 450–54
role of board of statutory auditors 451–2
role of external auditing board 452–4
Monte Carlo simulation 84, 253, 283
mortality rates 44
mortgages
world before fixed rates 285–6
moving average volatility 281
moving from public to private sector 433–4
naïve diversification 6, 19, 22
NASD see National Association of Securities Dealers
Nasdaq 46, 146–8, 150, 152, 158, 191
National Association of Securities Dealers 212
National Securities Markets Improvements Act 1966 191
Nationwide Building Society 297
natural oligopoly 326
nature of competitive organizations 414–15
new economy bubble 336
New Groschen Consols 8
new issues underpricing 193–200
issuers leaving money on the table 199–200
market feedback hypothesis 197
reasons for new issues underpricing 196–9
summary of explanations 199
new technology exploitation 432–3
nominal exchange rate 234
non-debt tax shields 139
non-Gaussian distributions 274
Norton, David 354, 373–91, 416
NYSE 146–8, 150, 152, 158, 191
OCIP see Orange County
1/N rule 43
OPEC see Organization of Petroleum Exporting Countries
bottom-up measurement 243
exchange rate environment 234
measuring operating exposure 2420 244
understanding operating exposure 234–42
operational excellence 380
opportunity costs 107
optimal capital structure 125
optimal deviation 137
options 248
organic growers 102
Organization of Petroleum Exporting Countries 169
out-of-pocket transaction costs 142
over-lay manager 268
see also stabilization
ownership dispersion hypothesis on new issues underpricing 199
ownership of Italian listed companies 445–50
ownership of performance indicators 396
paper losses and paper gains 45
parsimony 394
partial adjustment phenomenon 199
patent regulation 85
path of least resistance 126
peak-period surcharges 44
pecking order theory 126, 131–2, 136–8, 140–41
Penny Stock Reform Act 1990 193
performance indicators 392–406
accountability and politics 395–6
appropriate number of 394
communication 400
development time 399
inclusion of all integral elements 393–4
interpretation of 402
introduction period 401
link to existing systems 399–400
provision of adequate safeguards 394–5
performance metrics 347
Pernod Ricard 118
picking the low-hanging fruit 357, 367–8, 370
Porritt, Jonathon 437
portfolio approach to declining incidence of dividends 157–60
positive merger learning curve 108–9
PPP see purchasing power parity
press cuttings about Google 218–28
price of risk 37
Pride and Prejudice 6
prime brokerage accounts 252–3
acquisition of Ashford Group 339
acquisition of Globana 338
bonuses recapitalized 340
deferred revenue expenditure 339
depreciation and repairs and maintenance expenditure 338
exchange rates 340
hotel sale and leaseback transactions 337–8
licence fees 337
loan finance costs 339
office properties held under finance leases 338
other changes 340
profit on disposal of fixed assets 339–40
rationalization costs 339
sale and repurchase of land 340
Prison Service 393
privatization of education 433
probability level 275
problem of underinvestment 129
process of going public process 207–212
productivity 379
avoiding dangers of blind faith 72–4
faith that wouldn't be shattered 64–6
propensity to pay dividends 154–60
behavior of dividend payers versus non-payers 155–7
portfolio approach to explain declining incidence of dividends 157–60
proper division of risk 11
prospect theory 49
prospective equity risk premium 32
protection buyer 302
protection seller 302
psychological biases 42
public education in the USA 433
purchasing power parity 234
“pure-play” investments 84, 193
put buyer 304
put seller 304
prior year adjustments and reclassifications 337–42
questionable accounting 411–20
Railtrack 436
a natural oligopoly 326
we're not watchdogs 324
real estate 43
real estate investment trusts 191
best practice in managing real options 93–4
bridging gap between theory and practice 82–90
going forward 90
how BP maximizes oilfield value 94–6
new insights and new vocabulary 77–9
power master-stroke by Powergen 96–7
real options in the crosshairs 80–82
realism 126
reasons for new issues underpricing 196–9
investment banker's monopsony power hypothesis 198
lawsuit avoidance hypothesis 198
market feedback hypothesis 197
ownership dispersion hypothesis 199
summary of explanations of new issues underpricing 199
winner's curse hypothesis 196–7
reassessing internal and external relationships 401
additional possible perspectives 418
from strategy and responsibility to the bottom line 418
rebalancing the scorecard 411–20
corrective actions taken so far 412–13
rebalancing the scorecard 416–17
social responsibility issues 419
some causes of such behaviors 413–15
what gets measured gets done 416
deferred tax write back 341
finance lease creditors 341
non-hotel properties 341
stocks 340
telephone revenue 341
recognition of trade-offs 403–4
reference asset 302
refining models of perfection 82–4
reflection of managers' efforts 397
Reform Act 9
REITs see real estate investment trusts
reliance on buyback schemes 179–83
relocation 335
rentiers 6
return
revenue growth 379
reverse LBOs 202
revision of performance indicators 399
risk
risk allocation 435
currency exchange trading 246–62
risk-based capital allocation 273–4
road show 192
robustness 135
Roche-Syntex 102
Rock Life 10
Saab 107
sales and hedging mismatches 292–4
salience effect 45
“scientific” approach to diversification 12–19
about Sciona 189
observations of venture capital experience 187–9
venture capital companies 187
Sears 383
seasoned equity offerings 160, 193
SEC see Securities and Exchange Commission
Securities and Exchange Commission 191
seductive appeal of collective belief 68–72
segregation 49
SelectaVision see RCA's SelectaVision
selective risk management 267–8
senior debt 138
September 11, 2001 37
SERPS scheme 426
shareholder pressure to conduct buybacks 184–5
Shell see Royal Dutch/Shell
short-termism 333
signaling 130–31, 136–7, 140, 177
effects 126
Silicon Valley 44
small-cap stock 202
SmithKline-Beecham 102
social responsibility issues 419, 430
societal climate 414
Sony 379
speculating 272
spot exchange 247
see also overallotment options
stakeholder capitalism 347, 421–6
startup financing 205
“sticky” nature of dividends 364
stock of assets 267
stock and flow integration 141–2
stock market and accounting study results 101–2
stop-loss limit 254
financial perspective 379
internal process perspective 380
learning and growth perspective 380–82
strength of information signals 45
stress 190
sunflower seeds 436
support legitimation 388
survival probabilities 44
swap transactions 248
synergy 101, 103, 107–9, 118–19
systematic patterns of behavior 53
evidence for capital structure 138–9
taxes shield value from leverage 167
technological relentlessness 70
theories on capital structure 127–32
taxes 128
theory of low-hanging fruit 355–72
Three per cent Consols 8, 11–12
time trends in cash dividends 147–50
top-down approach to portfolio construction 13
top-down estimates of operating exposure 244
total-rate-of-return swaps 302–3
total-return seller 302
toward unified theory of corporate financial policy 139–42
integration of stocks and flows 141–2
trade currents 15
trade-off between cost-cutting and revenue-enhancement 103–4
trading strategy of John Rusnak 249–51
transforming balanced scorecard 373–91
tree-based game theory 85
international diversification pre-WWI 5–24
TRORSs see total-rate-of-return swaps
trustworthy data for performance indicators 401–2
types of credit derivative 302–4
tyranny of indexing 42
tyranny of net income and ratios 334–5
UK benchmark APCIMS index 19
underestimated problem of integrating technologies 104–7
underinvestment 129
underpricing, dollar amount of 199–200
underpricing new issues193–200
understanding operating exposure 234–42
understanding social assets 436–7
underwriter compensation 212
unified corporate financial policy 139–42
Unilever 55
unlikely alliances 431
unseasoned security offerings 193
U.S. Food and Drug Administration 65–6
use of credit derivatives 306–311
potential risks associated with credit derivatives 309–311
use of performance indicators 401–5
aggregation and response time 404–5
importance of feedback 403
interpretation 402
trade-offs and complex interactions 403–4
uses and abuses of value at risk 263–84
uses of VAR 266
using experience of other organizations 398
valuation vs. value creation 374–5
abnormal returns and risk-based capital allocation 273–4
cash flow risk 273
computing volatility inputs 281–3
corporate risk management objectives 266–8
non-dealer uses of 266
non-variance calculation methods 283
VAR and corporate risk management
VAR and the great derivatives disasters 268–73
uses of VAR 266
variance-based approaches 280–81
value destroyer 348
value risk managers and VAR-based risk controls 267
value of share buybacks 165–71
taxes shield value from leverage 167
value-based management 351
mechanics of going public 191–2
VAR see value at risk
VAR and corporate risk management objectives 266–8
total vs. selective risk management 267–8
value risk managers and VAR-based risk controls 267
VAR-based risk controls 267
variance-based VAR calculation methods 280–81
variation in risk premiums over time 31–3
imprecise estimates 33
issues arising during funding 188
search for venture capital 188–9
what are VC companies looking for? 188
viability 74
Vodafone-Mannesmann 98
conditionals variance models 282
moving average volatility 281
Volkswagen 402
Von-Neumann-Morgenstern expected utility theory 42
warning flags 72
watchdogs 324
weight of information signals 45
why bad projects are hard to kill off 63–75
windows of opportunity hypothesis 204–5
winner's curse hypothesis on new issues underpricing 196–7
“Women as Investors” 13
women and overconfidence 44
working with stakeholders 436
World Bank 433
World Investment Report 109
World War II 36
Yahoo! 42