Honors Projects for Finance
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ItemFinancial Ratio and Multiple Regression Analysis of Corporate Mergers(University of Hawaii at Manoa, 2014-09-26)The general concern of this paper is the utility of financial ratios in the assessment of corporate mergers. Recent literature has been highly critical of traditional ratio analysis as an analytical technique in assessing the performance of the business enterprise. Does this mean financial ratios are of such limited utility that they have virtually no place in the decision making process? The answer rests on whether or not financial ratios can be successfully transformed and subjected to the more rigorous statistical techniques such as multiple regression. The usual types of transformations are trends, in the case of time-series analysis, and financial ratios, in the case of cross-sectional analysis. The specific concern of this paper is financial ratios, for the utility of financial accounting in general, and decision making in particular, rests on the usefulness of these ratios. Thus, the question here is: Can financial ratios be used to predict the success or failure of a corporate merger? The utility of ratios can only be measured with regard to some particular purpose. Past studies have found ratios to be useful in predicting a business failure and corporate bond ratings. If ratios have been useful in these unrelated areas, it would be reasonable to assume they may have some use in assessing the outcome of a merger.
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ItemThe Role of the Failing Company Defense in Modern Era Mergers and Acquisitions(University of Hawaii at Manoa, 2014-09-26)The 1980's was a revolutionary period. This was characterized by and unprecedented changes in the U.S., including the acceleration of global economic interdependence and the waning of U.S. economic might. Deregulation was in style, catalyzed by the Airlines Deregulations Act of 1978. The year 1981 ushered in Ronald Reagan as President, who intensified the government "hands off" approach. His administration not only drastically diminished the role of government but also unabashedly fostered big-business. Furthermore, the 1980's were fueled by a laissez-faire attitude that is rarely exhibited in this country, and created a wave of mergers and acquisitions unparalleled in history. During this span of time, 31,000 deals with a total value of $1.3 trillion were struck. (See Exhibit 1 for year-by-year figures.) The 1980's represented a striking departure from prior years of strict supervision. Since the late 1800's, the United States government had endeavored to limit the power of big business. Its primary concern was the maintenance of healthy competition and the prevention of monopolies or monopolistic tendencies, especially those resulting from mergers and acquisitions. In 1914, Congress enacted the Clayton Act (15 USC @ 18) to combat a variety of anticompetitive practices. Section 7 of the Clayton Act, which deals with mergers and acquisition, states that "no persons engaged in commerce or any activity affecting commerce shall acquire, directly or indirectly, the whole or any part of the stock or other share capital...[where] the effect of such acquisition may be substantially to lessen competition, or tend to create a monopoly."
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ItemThe Effects of Being "Socially Responsible" on Investors' Risk Perceptions(University of Hawaii at Manoa, 2014-09-26)The general purpose of this study is to determine whether the social responsibility issue is of great enough concern to the investment community to affect a corporation's common stock value. More specifically, the objective is to provide evidence to support or reject the hypothesis that companies deemed being more "socially responsible" are perceived of as less risky and are therefore, according to the Capital Assets Pricing Model, required to yield a lower rate of return. But before this objective can be achieved, a working definition of being "socially responsible" must be established. The social responsibility issue has been at the center of controversy for decades. Some claim the argument for corporate social responsibility is insightful and valid, while others call it pure rhetoric. Part of the reason for these divergent opinions is the lack of consensus as to what " social responsibility" means and entails. But while a universally acceptable definition has yet to be found, "social responsibility" does incorporate certain characteristics that most people agree upon. These attributes are well expressed by A. A. Sommer, Jr., an attorney actively involved in the area of corporate law and social involvement. He states, "[s]ocial responsibility means that a corporation voluntarily expends its resources to do something not required by law and without immediate economic benefits.” A set of guidelines known as the Sullivan Principles seems to be consistent with Mr. Sommer's definition of social responsibility. A sample of 39 companies subscribing to the Sullivan Principles was therefore selected to deter mine if any discernible changes in risk could be found after the firms agreed to abide by the principles.
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ItemReform: Would the Expansion of Private Banking Sector Improve the Efficiency, Safety and Profitability of China's Banking Industry?(University of Hawaii at Manoa, 2014-09-26)In 1995, the People's Republic of China (hereafter, China) has emerged from a mono-banking system (1949-1978) to a multi-banks' system. Its multi-banks' system consists of a central bank (the People's Bank of China) governing and regulating the four state specialized banks (the Agricultural Bank of China, the Bank of China, the Industrial and Commercial Bank, and the People's Construction Bank), comprehensive banks and foreign banks. Since 1978, China has reformed its banking system in respond to an increasing need of its developing economy. After Deng Xiaoping, Chinese de facto and paramount leader, gained power in 1976, China has started to move towards more market-oriented. The goal for China is to adapt capitalist ideas into its socialist society and economy. As a result, more private owned companies, with ownership shares offering to the public, have been established in China since then. For example, in 1994, there were over one million Chinese companies owned shares of private companies traded in the Shanghai Stock Exchange. In fact, there has been a record of 11 new private companies being listed in the Shanghai Stock Exchange on one day in January 1994. In addition, foreign companies have also increased their investment in China. The foreign investment in China has jumped from U.S. $19.58 billion in 1991 to $68.5 billion in 1992. This increase of foreign investment has promoted the development of market economy in China.
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ItemIdentifying the Characteristics of Target Firms: A Regression Analysis(University of Hawaii at Manoa, 2014-09-26)The purpose of this study is to identify a set of variables that best differentiate acquired companies from the nonacquired ones, by using both financial ratios and quantitative variables. The basic difference between previous studies and this is that none of the previous one uses qualitative variables to explain the effects that cannot be captured using financial ratios. Since the multivariate method has proven to be better predictor for events like bankruptcies, credit ratings, bond ratings, and acquisitions than univariate tests, a multivariate regression technique is employed in this study. Any technique that can predict acquisitions is both advantageous to management and investors. In identifying potential acquisitions, management can either use it for investment purposes or for defending against potential acquisition threats. In addition, such a technique may provide information to antitrust regulators concerning the capital structure, and profit margin. This paper is divided into six sections. The first involves a general illustration of the mergers and acquisitions trends in terms of the number of transactions and the values paid. In the following section, the basic literature reviews of the theories of mergers and acquisition, the formulation of hypotheses, and an illustrative case example on Phillips Petroleum will be discussed. The third section deals with the methodology of the empirical study. In this section, the basic study assumptions are made. In addition, the experimental design and approach of regression technique are discussed. The next section explains the empirical model and the classification ability of the model. The fifth section reviews and compare the results obtained from previous studies. The final section summarizes the contents. It also includes an evaluation of the model by stating the limitations and problems.
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ItemA Critical Analysis of the Debt Service Capacity of Developing Countries(University of Hawaii at Manoa, 2014-09-26)During the past several years the external indebtedness of developing countries, specially those which must import oil, has been the focus of much attention and concern. The basic issue is whether or not the amount of debt has become so large, relative to the developing countries' ability to service it, that there will be a series of defaults leading eventually to a collapse of the world's banking system. There is no consensus of opinion. In studies based on the debt level of developing countries it is as likely to be argued that the level is manageable as it is to argue that the world's financial system is facing a real and imminent crisis. The objective of this paper is to identify and evaluate the arguments raised on both sides of the issue. There are a number of international and domestic developments which have contributed to this concern including oil price increases, inflation, a reliance on debt to fund development plans, declining growth in industrialized countries, deteriorating balance of payments and the increased proportion of commercial bank lending to these developing countries. We begin with a look at the oil price increases.
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ItemThe Initial Public Offerings of Foreign Companies in U.S.(University of Hawaii at Manoa, 2014-09-26)In this paper, I examine the initial public offerings (IPOs) of foreign companies in U.S.. The paper is divided into two parts. In part I, I discuss why foreign companies seek listings in the United States (U.S.) stock markets, the regulations and requirements for their listings, and the costs involved. I also take a close look at the listings of Canadian companies in the U.S. markets. In part II, a sample of 108 foreign companies' IPOs in the U.S. during the 1977- 1988 period is analyzed. The underpricing of these IPOs is examined and compared to that of U.S. companies' IPOs. In addition, I set up a multiple regression model to test the relationship between the initial returns on these foreign new issues and different variables which proxy for ex ante uncertainty. The results of this study can provide investors some insights on the performance of foreign companies' IPOs.
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ItemPortfolio Insurance: First Impressions(University of Hawaii at Manoa, 2014-09-26)Insurance in general serves as a means of pooling and transferring risk among the economic agents within a society. The more participants there are available, the greater becomes the possibilities of dissipating individual risk. By virtue of both individual and aggregate wealth, the insurance industry especially in developed countries like the United States and United Kingdom, is extremely large. The concept of portfolio insurance has only become more well known in the last decade (Luskin, [1988]). Despite its name, portfolio insurance is not the creation of the insurance industry so commonly known to us. The parallels between the two are limited. Portfolios in need of portfolio insurance are highly correlated to be insured through risk pooling like automobile and life insurance. Also, until recently, there existed no financial instruments with adequate liquidity and volume necessary for successful implementation of portfolio insurance. Chapter two will give us a better understanding of what portfolio insurance is. The portfolio insurance strategy has been a very fast growing investment strategy in recent years. After the decline of the stock market in 1973-74 due to a world recession, many pension funds retreated from the stock market. Stock market activity at that point was down. Portfolio Insurance would definitely appeal to these fund managers and lure them back into the stock market, increasing market activity. Portfolio insurance should not only appeal to pension or endowment funds which must at all cost maintain a minimum value but thereafter can afford to accept reasonable risks. Institutional investors whose funds they control are expected to return above average returns (through superior stock selection) but at the same time want to keep risk within a manageable level, should be interested in portfolio insurance too.
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ItemA Critical Analysis of the Correlation Between Interest Rates and Selected Securities(University of Hawaii at Manoa, 2014-09-26)With the federal deficit and the threat of fluctuating interest rates, it is important for investors to know the effects that interest rates have on securities. The causes of high interest rates and the significance of these causes are difficult to document, but it is possible to record the levels and incremental changes of interest rates along with the subsequent impact on securities. Currently, the stock market is plagued with the worries of rising interest rates which has resulted in a serious downtrend in stock prices. Since stocks are the most "visible" of securities, they will be the major focus of this report. However, both bonds (government issues) and gold prices will be covered. A few theories of interest-sensitive as well as some advice from money managers regarding strategies of investing, given an interest rate forecast, will be discussed. However, the processes behind economic forecasting are beyond the scope of this report. In addition to the theories of interest rate sensitivity, results from a recent correlation study will be presented; the correlational analysis was done on the College of Business' QSTAT program.
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ItemReturn Characteristics of Fundamentally Screened Stock Portfolios(University of Hawaii at Manoa, 2014-09-26)This is advice Benjamin Graham gave "Intelligent Investors" sixteen years ago. In today's world of efficient markets, Graham's thoughts would be criticized on the grounds that stock prices reflect fully all relevant known information, and, in retrospect, only appeared unusually depressed because new information entered the market place, resulting in an upward revision of common stock valuation in general, or in particular individual issues. Evidence in this report suggests Graham's advice, at least regarding relative under- evaluation of individual issues, may have been sound and thus as it casts doubt on the Efficient Market Hypothesis (EriUi). Specifically, the EMH does not explain the return performance of portfolio subgroups developed using known information. Price-earnings ratios and quarterly earnings reports, used individually and together as fundamental screens, demonstrate ability to discriminate between portfolios offering positive and negative returns.
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