Structural reforms of a fundamental nature now under way in Wall Street have been proclaimed so often of late as to become commonplace. The fact that many of these changes are not welcomed by established and influential persons who make their living in or around Wall Street is not news. What may be news, however, is that neither of these facts is particularly new.

The goal of American stock market reform is the establishment of a central market in which public orders are executed at the best price obtainable in an environment of competitive market makers. Among the measures needed to achieve this are: a consolidated tape, a consolidated quotation system, and competitive commission rates.

The central theme of the paper by Professor Phillips is the effects of technological change on the way financial institutions operate and the implications for regulation. His analysis is an excellent combination of both sound economics and political economy. Increasingly, shifts are made between noninterest-bearing demand deposits and interestbearing savings deposits. The increased use of negotiable order of withdrawal (NOW) accounts represents a step toward permitting interest on demand deposits. The implications of the increased use of “electronic funds transfer system” (EFTS) are even greater. Professor Phillips indicates the EFTS could make all marketable and negotiable assets “money,” and that the turnover of deposits could approach “infinity.”

William Gibson has presented a useful analysis of the Administration's proposals for financial reform, and I have no difficulty concluding with him that they should be passed. But, I find myself in some disagreement with him on a number of matters of interpretation.

My remarks are divided into two sections. The first section briefly summarizes the major points of the two papers. I should acknowledge that I agree with almost all of the conclusions by Farrar and Mendelson regarding the reforms which have taken place and the beneficial effects of these reforms. The second section briefly discusses one adverse effect of the institutional market not remedied by the reforms. This adverse consequence is only briefly mentioned by Farrar, while it is discussed by Mendelson, but the full implications are not considered.

Professor Mendelson's interesting paper reaches one conclusion with which I have no quarrel. Under his “most likely” future scenario, he argues for the need for the individual investor in the stock market to enhance the external equity capital-raising abilities of corporations. However, on the way to that conclusion, he dispenses a number of inconsistencies and confusing points.

While a substantial body of evidence exists indicating that the distribution of price changes in speculative markets is not normally distributed, there is some question about which theoretical distribution best describes price changes. This paper derives and tests an alternative distribution based on the incorporation of vectors of information bits into prices. The resultant distribution uses two parameters, u and β, to measure the response of price lags to given information vectors and can be interpreted as measures of risk.

The thoughts presented in this paper were developed during the first stage of an ongoing research project. This project is designed to shed light on the management of the size and exchange composition of financial assets and liabilities in the U.S. multinational companies (MNCs). The study also intends to analyze the impact of these policies on the international and national financial markets.

The purpose behind this review of recent research on financial decisions in the multinational corporation (MNC) has been, first, to further the discussion as to the appropriate normative framework applicable to financial decisions in the MNC, and second, to suggest directions for further research by pointing to open questions.

The analysis focuses on the major financial decision areas of the firm as well as on important new factors introduced by the international environment. Specific issues disussed are: capital-market segmentation, financing decision, financial structure and cost of capital, investment decision and exchange risk.

The principal conclusion presented as a basis for discussion is that the financial decision framework developed for the one-country firm can essentially be extended to the case of the MNC. This should hold true even if partial restrictions to capital flows exist. The only limiting requirement is that all subsidiaries be wholly owned, i.e., equity securities be issued by the parent firm only. A specific case in which the analogy to, the one-country firm breaks down arises when joint ventures are introduced.

A number of areas for further research are identified. Most prominent, perhaps, are (1) an operational concept of economic exchange risk exposure, i.e., measuring the impact of exchange rate changes on the value of foreign operations; (2) criteria for evaluating foreign investment projects consistent with the firm's cost of capital; and (3) empirical evidence on the extent to which MNCs are affected by capital-market segmentation.

The purpose of this paper is to test the hypothesis that three financial performance variables, namely, growth, profitability, and risk, are determinants of corporate debt ratios in the manufacturing sector in industrialized countries. In particular, a linear model is hypothesized and Ordinary Least Squares is used to estimate the coefficients for the relationship. The sample used contains 816 firms in four selected industries in five industrialized countries during the period 1966–72.

Rita Rodriguez's paper examines the factors involved in the decisions of foreign exchange management. It consists of four major parts: a) the concept and definition of foreign exchange risk, b) the finance function and foreign exchange management, c) management's attitudes towards foreign exchange risk, and d) the effect of differences in management's attitudes towards foreign exchange risk on the monetary system. The conclusions and results of the paper are drawn from surveys and interviews with over 50 multinational corporations in the United States.

The paper reports three findings regarding equity investors' common stock perceptions which are an important part of their security decision process. These results are based on demographic and perceptual data collected from investment professors, portfolio managers, and individual round-lot investors.

Various studies reported in the literature overwhelmingly reach the conclusion that the mutual funds in general have not outperformed the market. This result seems at variance with the tremendous growth the mutual fund industry has experienced over the past two decades. If the market efficiency hypothesis is valid, and there is considerable evidence in its support, then a mutual fund may not be able to consistently outperform the market. However, while an average mutual fund does not outperform the market, the mutual fund industry as a whole may be able to do so.

In this paper a model is presented to explain the structure of systematic risk. The starting point is the expression for the total dollar return to investors who hold the securities from period t - 1 to t assuming no new securities have been issued in the interim:

where Xt is earnings before interest, preferred dividends, and taxes; T is the corporate tax rate; Dd,t is the interest paid on debt in year t; Dp,t is the dividend paid to preferred shareholders in year t; Dc,t is the dividend (total) paid to equity shares-holders in year t; ΔPt · Nt-1 is the aggregate capital gains for the Nt-1 shares of common stock outstanding as of t-1 and ΔGt is the change in the capitalized value of future growth opportunities. The hypothesis is that the risk associated with the left-hand side variables, the market determined systematic risk, is derived from the corporate variables on the right-hand side of the equation. The market determined level of systematic risk is a linear function of the sensitivity of percent changes in revenues of the firm to percent changes in GNF (asset betas), financial leverage, and changes in growth potential.

In recent capital-market equilibrium theories it has been customary to entertain the assumption that corporate bonds are riskless. Attention has therefore been directed to the valuation of shares, since it is trivial to deal with the valuation of bonds under the assumption of riskless bond yield. In order to study the effect of leverage on equity and bond yields at the equilibrium while removing the assumption of riskless bonds, one must first deal with a valuation model for risky bonds. Consequently, one must face the necessity of making explicit the stochastic relationships between the risky bond returns and the risky share returns. To do this, each firm decides a dollar amount to be paid to the bondholders at the end of a period during which it generates random gross yields. The total return to bondholders is a random variable since it is possible that a firm's gross yield may be less than the dollar amount promised, a case of default. The total return to shareholders as a random variable is therefore conditional upon the choice of the promised amount to the bondholders. In other words, the explicit stochastic relationships between the bond returns and share returns will be conditional upon the choice of promised returns to bondholders by all firms. Employing the usual assumptions found in the capital-market equilibrium theories and the negative exponential utility function of final wealth, the model then generates conditional equilibrium prices of bonds and shares, and the resulting conditional equilibrium leverage and expected yields.

Municipal bond credit ratings are currently being created and distributed by two main rating agencies. Controversy has urrounded these ratings and their effects on interest costs to municipalities. This paper summarizes these controversies and presents a methodology which would enable a more objective appraisal of municipal credit quality.

Much work on the term structure of interest rates has focused on comparing and testing opposing theories–expectations versus liquidity-preference versus hedging-pressure–using aggregated econometric models. This emphasis has resulted in a restricted view of the microeconomic behavior behind term-structure theory.

This paper investigates the relationship between interest-rate risk and liquidity premiums on U.S. Treasury bills. Interest-rate risk stems from uncertainty about the future general level of market interest rates.

The classic article about liquidity premiums is Kessel [3]. Kessel regresses the liquidity premium, measured as the difference between the forward rate and the actual future spot rate, against the current spot rate and observes a positive relation between the level of the current spot rate and the size of the liquidity premium. Olsen alters Kessel's model in two respects. First, he introduces a proxy for risk or uncertainty about interest rates as an additional determinant of the liquidity premium. Second, instead of using the actual future spot rate as a measure of the expected future spot rate, he specifies the expected future spot rate as a linear combination of the current and past spot rates.