Akron business and economic review

To the extent that business cycles tend to behave independently across different countries and that there exist imperfections in international markets for products, capital, and other factors, foreign operations by firms should provide their stockholders risk-return opportunities superior to those available to the stockholders of purely domestic firms. In this paper, we examine the empirical evidence with regard to these advantages of investing in multinational firms as a method of diversifying internationally, investigating the issue of investor recognition of the advantages enjoyed by a multinational firm. This issue is important not only for investors but also for corporate management, for example, when formulating corporate strategy (see, for example, Hisey and Caves [13]). It is hypothesized that, consistent with the capital asset pricing model, international diversification of real assets by firms is rewarded in their domestic capital markets by a reduction in their systematic risk (beta) and by an increase in their price/earnings ratios. Further, it is hypothesized that the strength of these relationships is related to the degree of international involvement. PRIOR RESEARCH An early application of portfolio theory in an international context was by Grubel [11]. He demonstrated that for the individual portfolio investor, risk reduction is facilitated by holding a diversified portfolio of international securities. These results have been subsequently confirmed and extended by Levy and Sarnat [17], Grubel and Fadner [12], Solnik [25], Agmon and Lessard [4], and Solnik and Noetzlin [26]. These empirical studies have confirmed benefits from international diversification at the shareholder level in the form of risk-adjusted returns that are superior to those achievable in a single national market. However, there are many restrictions that may prevent investors from achieving an efficient, internationally diversified portfolio. Among the barriers to investments in individual foreign markets are higher information processiong and transactions costs in the form, for example, of a general lack of information about foreign securities, the peculiar nature of trading and brokerage arrangements in the foreign capital market, lack of liquidyt, foreign exchange and other controls on the movement of capital, and the fear of expropriation and other political risks. To avoid these limitations of international portfolio diversification, it has been suggested that investors could achieve the advantages of international diversification by investing in domestically traded multinational firms. A large number of researchers (Severn [23], Hughes, Logue, and Sweeney [14], Rugman [22], Agmon and Lessard [4], Miller and Pras [21], Aggarwal [1,2], Mikhail and Shawky [20], Barone [5], Kumar [16], Yoshihara [28], Grant [10], Aggarwal and Soenen [3], Daniels and Bracher [8], and Brewer [6] have provided empirical evidence of a positive relationship between international involvement and firm performance. These studies reported that multinational firms tend to be more profitable) measured as return on assets, return on sales, return on equity, and the price-earnings ratio) and/or showed lower risk (in terms of diversification of the unsystematic component of risk, beta coefficients, probability of insolvency, and equity variability) than domestically-based firms. However, some authors )Severn [23], Rugman [22], Barone [5], and Aggarwal and Soenen [3]) have indicated that benefits of international diversification via the multinational firm seem to be deteriorating over time and will eventually fade away as the integration of economies proceeds. A smaller number of researchers (Jacquillat and Solnik [15], Brewer [6, 7], Mathur and Hanagan [18], Fatemi [9], Shaked [24], and Michel and Shaked [19]) have provided empirical evidence that when both risk and return were considered, the risk-adjusted returns of multinational firms do not (always) outperform those provided by purely domestic firms. …

The Influence Of Major Lawsuits On Common Stock Returns(*) The purpose of this paper is to measure the impact on the price of a firm's common stock of the announcement or of a major lawsuit against the firm. There are several reasons why such a study is important. First, the announcement or the of a lawsuit against a firm is a common occurrence that is reported in the public press, and thus it constitutes readily available public information. Sometimes the dollar amount of the lawsuit represents a significant proportion of a firm's total assets. Given these facts, there is reason to believe that the announcement of such suits will represent relevant information for the pricing of common stock, and yet, to our knowledge, with the exception of the work by Jarrell[9], the impact of this type of information on stock market returns has not been studied.(1) Little is known about whether the market is efficient with respect to this type of information and thus reacts quickly and in an unbiased way. Second, unlike the case with many studies of the impact on the stock market of the announcement of various types of information, announcements concerning lawsuits carry with them publicly stated dollar costs that should be related to the economic relevance of the information announcement. This permits one to study the relationship between the magnitude of the market's reaction and the size of the suit and to detect any bias in the size of the market's reaction. Third, this form of information also permits one to determine the extent to which the market can accurately anticipate the announcement of a lawsuit or the direction of the verdict in a suit. In many cases, information concerning the impending announcement of a suit or about the progress of an ongoing suit may be leaked to the market. It is an interesting question to determine how far in advance the market can anticipate information concerning lawsuits. Finally, for some types of suits it is unlikely that the market or the defendant in the suit will be aware of the suit before it is publicly announced. For these types of suits, any dramatic movements in the price of the stock may be associated with trading by insiders in advance of the announcement of the suit. (For evidence of insider trading in advance of a merger announcement, see Keown and Pinkerton[10]). LAWSUIT DATA The set was originally collected by hand from articles that appeared in The Wall Street Journal over a period of years by one of the authors. At the time, lawsuits were selected from different types of cases based on their interesting legal characteristics for use as case material in a business law course. Only later was it realized that this could be used to study the previously unstudied question of the impact of lawsuits on stock returns. In preparing the sample for use in this stock return study, twelve firms were eliminated because of the unavailability of a full complement of stock return in the Center for Research in Security Prices (CRSP) Daily Stock Return File. Thirty-seven of these companies were eliminated because either the dollar magnitude of the suit was less than .1% of the total assets of the firm or the suit was withdrawn very shortly after it was filed. Thus, the working set consists of 78 companies.(2) The earliest suit in the sample occurred in April, 1969, and the most recent suit occurred in August, 1984. Over 70% of the suits in the sample occurred since 1978. Two types of announcement dates are determined by screening The Wall Street Journal Index. The filing data will refer to the that the first announcement appeared in The Wall Street Journal that a suit involving a particular firm had been filed. At that date, a firm is designated as either the defendant or plaintiff in the suit. The settlement date will refer to the that the first announcement appeared in The Wall Street Journal that a particular existing suit had been settled or a verdict had been rendered. …

The Fine Art of Performance Appraisal: The Case of Overkill Performance appraisal can be conceptualized as a memory-based task in which raters acquire, encode, store, and later retrieve performance information to make a judgment[2]. A close review of recent studies addressing the issue of employee performance appraisal reveals varied foci. A number of the studies are concerned with the effect of various forms of rater predisposition or bias on performance ratings (e.g., Binning, Zaba, and Whattam[4]; Hogan[12]; Huber, Neale, and Northcraft[14]; Kingstrom and Mainstone[16]; Williams et al.[23]). Other studies have investigated the effect of the timing of the appraisal process[11] and contrast effect[14] on the manager's ratings of subordinates. While the rater and various characteristics that are associated with the administration of the appraisal have been extensively researched, the context of the appraisal instrument itself relative to the task of appraising employee performance has been neglected. The situation is paradoxical because the format and content of the appraisal instrument are more controllable by management than the characteristics and disposition of the rater. Several areas of concern manifest themselves relative to the context of the performance appraisal instrument. Among the areas of concern are: format (e.g., forced choice or behavioral format); type of appraisal items (e.g., subjective areas of rating as opposed to objective indices); and instrument length. The relationship between appraisal items and instrument length is the area of primary concern in the present investigation. The research concentrates on the issue of whether an appraisal instrument may actually over-represent a (selling) job. Idiomatically speaking, the study investigates appraisal instrument overkill. Although the researchers lacked multi-company descriptive data necessary to substantiate the claim, experience suggests that management sometimes overkills in its attempts to evaluate the performance of skilled employees such as salespeople. Although the financial effects of overkill are indeterminate, the utility of appraisal reduction in terms of cost savings, increased ability to reward performance, providing feedback to employees, and making effective promotion decisions is very real. As well, inaccurate or overstated performance appraisal instruments can frustrate the efforts of operational management to use the instrument as a device for employee coaching and reward administration. Using multiple item performance appraisal data, the researchers examine the dimensionality and sensitivity of a company performance appraisal instrument. In line with the research objectives for the study of performance appraisal outlined by Feldman[8], the objective of the investigation is to assess the relevance of information provided by a salesperson performance appraisal in terms of: (a) underlying structures of rating items (such an objective has been suggested by Guion[9]; and (b) the contribution of individual appraisal items to the instrument. METHOD Sample Performance appraisal data were obtained for 115 of the 136 sales representatives (85%) employed by a national manufacturer of branded consumer products. Performance appraisals were completed during the first three months of the year by the salesperson's immediate manager. Data from two consecutive years would have been helpful from the standpoint of item stability. However, processes of attrition and promotion of salespeople and raters substantially altered the composition of the salesforce between annual rating periods. Following Moncrief's[18] taxonomy, the salesperson for the subject company can best be described as a trade servicer. For each store in a geographic territory, the salesperson is responsible for: encouraging store managers and wholesale distributors who service retail outlets (rack jobbers) to stock larger quantities of certain product items; securing store participation in product promotions; familiarizing store managers and rack jobbers with new product items; and setting up promotional displays. …

Since the groundbreaking efforts of Treynor [11], Sharpe [10], and Jensen [4], portfolios have been evaluated on the basis of how favorable they compare with an expected (or required) rate of return. In Sharpe's scheme, that return is an increasing function of the portfolio's total risk. [k.sub.s] = [R.sub.f] + [SD.sub.p] ([R.sub.m] - [R.sub.f])/[SD.sub.m] (1) where: [k.sub.s] = Sharpe's expected portfolio return [R.sub.f] = riskfree return [SD.sub.p] = portfolio's standard deviation [R.sub.m] = expected market return [SD.sub.m] = market's standard deviation By contrast, Treynor [11] and Jensen [4] limit the portfolio's expected return to systematic risk. [K.sub.TJ] = [R.sub.f] + [COV.sub.i,m] ([R.sub.m] - [R.sub.f])/[VAR.sub.m] (2) where: [K.sub.TJ} = Treynor's and Jensen's expected portfolio return [COV.sub.i,m] = covariance of returns from stock i and market [VAR.sub.m] = variance of returns from market For portfolios that are completely diversified, the two methods lead to the same expected returns. Further divergence of opinion emerged a decade later when Hogan and Warren [3] and Bawa and Lindenberg [1] agreed with Treynor and Jensen that only market risk is important but defined that risk as [CLPM.sub.i,m]/[LPM.sub.m] where: [CLPM.sub.i,m] = co-lower partial moment of returns from stock i and market [LPM.sub.m] = lower partial moment of returns from market The (intuitive) argument that risk is best measured by the lower partial moment (or semivariance) was empirically tested by Nantell and Price [8]. They found that systematic risk in the equation (3) sense led to required returns not unlike those based on the more conventional definition of market risk: [COV.sub.i,m]/[VAR.sub.m]. Price, Nantell, and Price [9] also compared the two approaches to systematic risk within the framework of the capital asset pricing model (CAPM). They reported that how market risk is defined is an unimportant detail only when the investment possesses average risk. For assets with either above or below average risk, the CAPM-VAR model generated a return greater than that produced by the newer CAPM-LPM. In the absence of more recent research, previous studies of expected portfolio returns can be partitioned as follows: [TABULAR DATA OMITTED] It is tempting to develop a downside-deviations-by-total-risk measure if only to complete Figure I. However, there are at least four more meaningful incentives. One, the intuitive appeal of the semivariance requires continuing investigation. The one common thread in the post-1960s' studies cited in this paper is the gut feeling on the part of the authors that risk has less to do with total deviations than with the negative ones. Two, there is growing evidence that the semivariance more closely conforms to the rule that risk and return are highly positively correlated than does the more common standard deviation. Most recently, Kochman [5] found that the 1-2-3-4 order of four popular proxies for the market portfolio based on the average annual return for the 1965-84 period was duplicated by the semivariance -- i.e., the index with the highest return had the highest semivariance, the index with the second-highest return had the second-highest semivariance, and so on -- but not by the standard deviation where the index with the lowest average return was rated the second-riskiest. A third reason to fill cell 2,2 in Figure I is the reality that the co-lower partial moment of returns (CLPM) in equation (3) is neither obvious nor easily calculated. There is even some disagreement among its proponents over whether the measure should be restricted to returns below the asset's risky mean or below the riskfree rate. Finally, the kind of diversification that makes only systematic risk relevant may be more theoretical than actual. …

Establishing Formal Specialties Within the Accounting Profession In its 1985-86 Annual Report, the American Institute of Certified Public Accountants (AICPA) [1, p. 213] stated, the existence of de factor specialization among members and the desire of some to have a particular expertise recognized, Council authorized a program to accredit specialties. The Special Committee on Specialization ... will study areas of practice in which members, by meeting experience, examination, and educational requirements, can seek accreditation. This formal creation of a special AICPA committee to pursue the accreditation of specialties is significant because this action recognizes the reality that specialization is very prevalent in the accounting profession. The special committee's report will not be available for some time; however, the primary question for resolution should be How will the formal accreditation (certification) system for specialization of practitioners operate? Specialization is a logical reaction to the reality within the accounting profession as changes occur in the environment. This paper summarizes the specialization issues, describes certain conditions that now especially favor recognition of specialists, presents certain advantages and disadvantages associated with accrediting specialties, and offers recommendations for implementing a specialization framework. The accounting profession's traditional position has been that all CPAs are qualified and competent to provide comprehensive services commonly offered by public accounting firms. Consequently, it has not been considered necessary to formally create specialization classifications with supporting practice standards. However, during the 1970s, the AICPA did attempt several times to resolve the issue of formal recognition of specialization within the accounting profession. These unsuccessful efforts were undertaken by separate special committees established in 1970, 1973 and 1975. The rationale for creating these committees, together with their activities, recommendations, and reasons for their ultimate demise, has been described by Olson [3]. Two of these committees apparently had their efforts concerning specialization somewhat influenced and also diluted by the concurrent issue of whether associate memberships for non-CPAs should be allowed by the AICPA. The rationale for this issue was whether individuals working within CPA firms and having specialized knowledge should be permitted to gain membership in the AICPA even though they were not CPAs. Moreover, during the 1970s, the AICPA's bylaws were being examined for a number of important issues regarding the scope of services provided, such as management advisory engagements and the legal implications of other provisions of the Code of Ethics. These special committees also functioned at a time when ethics interpretation 502.4 (Self Designation as Expert or Specialist) was in effect. This interpretation [2] stated, Claiming to be an expert or specialist is prohibited because an AICPA program with methods for recognizing competence in specialized fields has not been developed and self designations would be likely to cause misunderstanding or deception. A member or a member's firm may indicate the services offered but may not state that the practice is limited to one or more types of service. Traditionally, the AICPA Code of Ethics prohibited CPAs from promoting themselves as specialists, but the Code could not prohibit the actual trend toward emerging specialization. Ethics interpretation 502.4 was initially established to prevent self designation of a specialized proficiency since no certification structure was available to recognize specialists. The professional ethics committee in 1981 withdrew its restriction against members claiming specialist or expert status. This revocation of interpretation 502.4 represented a logical extension of the reversal in 1978 of the ethics prohibition against advertising. …

Risk Reduction and Informal Interpersonal Influence: Industrial Marketing Management Perspectives Perceived risk has been an integral part of the buying behavior literature for several decades. The seminal work by Bauer [4] set the stage for definitively including the component of risk in the buying decision. Managing, controlling, and monitoring levels of risk have been of paramount concern to practitioners in general and industrial marketing managers in particular. Given that many of the purchases in the industrial sector are big-ticket items with considerable technical complexities and inherently more risk, industrial marketers have a vested interest in gaining additional insight into the phenomenon of risk. Of particular concern in the current study is the role of informal interpersonal influence on the level of risk experienced by the organizational buyer in a new-task situation. Given that the organizational buyer plays the vital role of influencer in the buying process, it is essential to concentrate on methods of managing risk. This position of influence has been highlighted from both the perspective of the macro-model [e.g., 28, 31, 38] and the micro-model point of view [e.g., 5, 24, 36, 39]. Inherent to both the macro-models and the micro-models of organizational buyer behavior is the significance of informal interpersonal influences on the level of risk by buyers [10, 21, 28, 31, 32]. Specifically, the macro-models have provided the market planner with a generalized perspective of organizational buying; however, they fail to provide adequate empirical evidence to substantiate the posited relationships [29]. The present investigation seeks to provide such commission costs. The one percent commission costs incorporated in the second investment test eliminate the before-commission cost excess returns found in the first investment test. These results on the underlying common stocks of takeover target firms are consistent with previous studies [1,2,5,7,11], which find that the majority of the excess returns generated by a takeover announcement accrue to the target firms on or before the first public announcement. Finally, the results of this study are similar to the previous study by Reilly and Gustavson [8], which focused on investigating in the options of firms announcing stock splits. They found that abnormal returns net of commission costs are available on the options of firms announcing splits; however, these returns were not available on the underlying common stocks of these firms. an empirical test by examining the impact of informal interorganizational and intraorganizational influences on the buyer's level of risk. THE ROLE OF INFORMAL INFLUENCE The reliance upon external sources of information to aid the organizational buyer in the decision process concerning a new-task purchase is well recognized [3, 15, 21, 27, 32, 38, 44]. The use of these sources of information may be viewed as a way of decreasing the level of risk associated with the new-task purchase. Additionally, it should be pointed out that these information sources may originate either inside or outside the organizational buyer's firm. The two are not to be considered mutually exclusive as many times it is a combination of both internal and external information that is sought [6, 13, 14, 17, 18, 21, 22, 44]. The degree of influence attributed to these informal sources has been shown to vary along a continuum anchored by certainty and uncertainty (or perceived risk) [7, 9, 40]. Generally, it may be concluded that the greater the perception of risk associated with the new-task buying situation, the greater reliance is placed on the informal communication source [28, 38]. PERCEIVED RISK AND MODIFICATION Perceived Risk Many views have been forwarded concerning the various components that make up risk; however, it is possible to combine these views into three diverse and unique categories: (a) performance risk, (b) social risk, and (c) financial risk [23, 25, 30, 33, 38, 41]. …