Some recent works dealing with the subject of investment in common stocks have made cautious reference to the potential of some published, leading economic time series as inputs to stock price forecasting models. However, no prominent reports of systematic empirical research of the predictive usefulness of such series have appeared in the literature. Our study was designed to partially correct this seeming oversight.

The large amount of foreign direct investment by U. S. firms in recent years suggests that such firms had a high internal rate of return on investment abroad. In this paper we attempt to explain this high rate of return. We conclude that direct investors tend to be in research-intensive industries and that their profitability is associated with research and development, rather than with direct investment itself. By investing abroad, or exporting, they increase the expected return to research activity. Thus, the internal rate of return on foreign direct investment exceeds average rates of return observed in foreign economies. Since direct investors in manufacturing are typically research-intensive, this result suggests why capital may flow from countries with high rates of return to those with lower observed rates of return.

The financial management area has come a long way since Fred Weston in 1954 (Journal of Finance) called for more research in and application of financial theory. Now, Neuberger and Hammond advance investment theory by empirical studies in an area which has received little direct attention. Their researching of new issues' price behavior provides application of observed facts to substantiate policy recommendations framed within a certain investment psychology structure.

The Apilado, Warner, Dauten paper is notable in several respects. The problem of credit worthiness in consumer credit is certainly critical in our credit-oriented society. The research design is innovative and shows considerable thought. The paper's conclusions are modest, yet they do represent some progress in attempting to quantify the consumer credit-granting activities of financial institutions. This review of the paper will concentrate on two areas—research design and a broad discussion of the paper's practical applicability.

For purposes of discussing Professor Emery's work, we may adopt the following symbolism: (1) let SEEj denote the standard error about the regression-established trend of the reported earnings stream of firm j; (2) let VAR(ΔEPSj) denote the variance of the annual changes in the reported earnings stream of firm j; (3) let denote the variance of the annual changes in the cthsimulated (unsmoothed) earnings stream for firm j; (4) let CORRj be the coefficient of correlation between the reported earnings stream and the price series for firm j; (5) let be the coefficient of correlation between the cthsimulated earnings stream and the price series for firm j; (6) let Nj be the number of the C unsmoothed earnings streams generated for firm j for which ; and (7) let Nj* be the number of these Nj earnings streams for which .

Research in the area of portfolio management and capital markets has led to the development of a fundamental concept of market risk. Through work with the capital asset pricing model, “risk” has been decomposed into systematic or market risk and specific or diversifiable risk. Recent interest has focused on integrating these portfolio theory and capital market concepts with corporate finance. Hamada [5], and others, provide theoretically-based analyses which suggest that differences in degree of market risk should be related to differences in financial management activities and practices.

The paper represents a remarkable effort to push outward the limits of static ratio analysis for the purpose of judging commercial loan applications. I found the task of reviewing this paper by Professor Altman and his colleagues from CESA (Center for Management Education) a very useful experience because it gave me an opportunity to reacquaint myself with an area of finance to which I had paid very little attention for some time. Hopefully, these comments are still useful despite my lack of recent experience.

Professors Fraser, Phillips, and Rose's paper on canonical analysis of bank performances is another welcome addition to the growing body of literature in the area of measurement of bank performances. Since the purpose of the paper is to report the results of the application of canonical correlations in measuring the performance of commercial banks in Texas (a unit banking state), my observations are restricted to the statistical aspects of the paper.

One of the phenomena on Wall Street during the sixties was the new issues market. During the decade new issues became a popular investment alternative, particularly in the bull markets of 1962, 1966, and 1968. The height of enthusiasm occurred in the hot new issues market of the fiscal year 1968–1969 when 2,171 issues were offered to the public. This interest in new issues was followed by studies such as Reilly and Hatfield [12], McDonald and Fisher [9], the SEC [13], and others, all of which show that there is a downward bias in the issue price of new issues. Why this downward bias is present was treated later by Logue [5]. Although these studies also suggest that there is a difference in the pricing behavior by individual underwriters, none of the previous studies has addressed itself specifically to this point.

A relationship between money supply and stock prices is fairly well recognized in the literature. More recently the studies of Hamburger and Kochin [7], Modigliani [12], Keran [9], and Homa and Jaffee [8] have attempted to specify the short- and long-run nature and the direct and indirect nature of these relationships. Also, these studies have focused on determining the transition variables through which the money-supply effect is transmitted to stock prices. A more pragmatic approach is that of Sprinkel [17 and 18] and Palmer [14] who have attempted to analyze the money-supply and stock-market relationships to see if the former can be a predictor of the latter. More reliable forecasts of future market movements, if available, could be extremely useful for individual and institutional investors. At one extreme, information could be used to time the investment in and out of the market portfolio. Alternatively, the investor could more profitably use the B information on market volatility of stocks available from the capital-asset pricing model, relating expected rate of return on a security, E(Ri), with that on the market portfolio, E(Rm). Accordingly, the prediction of the market would indicate when to shift the composition of the portfolio from relatively low to high or from relatively high to low β stocks and cash.

This paper examines a conceptual framework for normative models of financial management in commercial banks. Since the bank is viewed as a financial intermediary, it is argued that the appropriate conceptual framework for bank financial management models is one that focuses on imperfections in the markets in which the bank operates.

This paper has examined the investment performance of the common stock portfolios of 20 property-liability insurance companies over the period 1958–1967. The performance of these portfolios was compared with the performance of both equal-weighted and value-weighted random portfolios of common stocks. The evidence indicated that the returns earned by the insurance companies were significantly lower than the returns earned by random portfolios of equivalent risk.

While this study is not precisely comparable to the previously published studies of mutual funds in terms of either the methodology employed or the time period considered, the results are quite similar. An additional group of institutional investors can be seen not to have outperformed the “market.” The presumption of inferior performance is even stronger in the case of the property-liability companies because all the comparisons in this study were made on a gross basis. Most of the studies of mutual fund performance have compared fund returns net of investment expenses to the gross returns from random investments. In those instances where comparisons were made on a gross basis, the performance of fund portfolios was found to be very similar to the performance of random investments.

Traditional planning for working capital needs is typically conducted with a relatively short time horizon. In this process, management attempts to optimize the return on existing fixed assets. The period for capital investment planning is much longer, reflecting the irreversibility of these decisions. Current research in the two areas tends to dichotomize these decision processes. The implications seem to be that working capital policies only have impact in the short run. However, it is clear that cash flows for potential capital expenditures are based on assumptions relative to expected future demand and production to meet this demand—assumptions that are necessarily tied to working capital commitments in the long run. The overall planning for credit, inventory, and liquidity should, therefore, be carried out before, or simultaneously with, the capital investment decision. It is a planning requirement that becomes an integral part of the total asset planning system. The vast majority of existing working capital models or long-term capital planning models do not allow for the explicit existence of and the simultaneous interrelationships between these two important subsystems.

On February 1, 1971, the National Association of Security Dealers instituted an automatic quoting system for over-the-counter stocks. Heralded as a major advance in the elimination of market imperfections, the National Association of Security Dealers Automatic Quote System (NASDAQ) allowed bidand- ask prices of different firms in this geographically dispersed market to be centralized. Essentially its operation allowed individual “houses” to obtain the various bid-and-ask prices of market makers for a given unlisted security.

A fundamental function of any portfolio selection model is the identification of inefficient portfolios and the consequent reduction of the set of alternative investments that the decision maker must evaluate. In the absence of a specific utility function, the establishment of criteria for the identification of inefficient portfolios must strike a compromise in terms of convenience and effectiveness. Of the myriad possibilities, models employing a criterion based on two parameters have been found most convenient for reasons of simplicity of interpretation and computational feasibility. Certainly, the most popular of the two parameter models has been the expected value-variance (E-V) formulation first proposed by Markowitz [7]. The basic E-V model developed for individual decision making has been extended by Sharpe, Lintner, and others [1, 4, 3, 9] to set forth an extensive theory which seeks to explain the equilibrium price of risky assets. The purpose of the present paper is to review and extend some of the implications of an alternative two-parameter portfolio selection model, called the expected value-semivariance model (E-S). In particular, the discussion focuses on certain contrasts and similarities between the E-V and the E-S models.

A convertible bond is a hybrid financial instrument that incorporates features of a bond (fixed income security) and an equity claim (usually common stock). In most instances the convertible can be exchanged, at the holder's option, for the common shares of the corporation issuing the convertible. The conversion value, or stock value, is the market value of the common shares for which the convertible can be exchanged. The bond value or floor price is the market value of an equivalent bond that does not include a conversion feature. The market price of a convertible will be the conversion value or the bond value, whichever is higher, plus a premium. The purpose of this paper is to develop and test a model which estimates the premium. The premium estimated is defined as the difference between the market price of the convertible and the bond value or conversion value, whichever is larger. No consideration will be given to convertible preferreds.

It is widely assumed in portfolio theory that investors are risk-averse expected-utility maximizers. There is a good theoretical reason for assuming expected-utility maximization. Such behavior is well known to be consistent with several quite plausible postulates of rationality [5]. On the other hand, the main empirical foundation for such behavior in portfolio selection appears to be the observation of diversification. Risk-averse, expected-utility maximization implies diversification in portfolio selection, and investors are observed to diversify.