So much attention is devoted to the cost of industrial disasters in financial terms and to the technologies that fail at times, that it is possible to lose sight of the fact that…
Abstract
So much attention is devoted to the cost of industrial disasters in financial terms and to the technologies that fail at times, that it is possible to lose sight of the fact that disasters involve people, individually and in societal groups. Although awareness and concern about the human factor in industrial disaster has grown considerably over the last 15‐20 years, many continue to see human error in a very narrow perspective. People, however, play a key role in causing disasters, must cope with them when they occur, and bear the consequences in their aftermath. Consideration of the human factor in industrial disaster has focused primarily on input in causing disasters. Two additional phases of human involvement in industrial disaster, their coping and their reaction to the outcome, must be included. At every stage of its occurrence, industrial disaster is truly about people and their behaviour.
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This chapter presents a structural model à la Leland (1994) that is, at the same time, novel, simple, and able to explain the quotes of credit default swaps (CDS), equity, and…
Abstract
This chapter presents a structural model à la Leland (1994) that is, at the same time, novel, simple, and able to explain the quotes of credit default swaps (CDS), equity, and equity options. The model gives a closed-form formula for the term structure of default probabilities and can be calibrated to fit the CDS spreads. It also offers closed-form formulas for equity, equity volatility, and equity options. Differently from other structural models, debt has been modeled as a perpetual fixed-rate bond, instead of a zero-coupon bond with finite maturity. Therefore, default can happen at any time, and not only at the bond's maturity. The model (which belongs to the class of first-passage models) specifies default as the first time the firm's asset value hits a lower barrier. The barrier is endogenously determined as a solution of an optimal stopping problem (stockholders’ equity maximization). Equity is seen as a portfolio that contains a perpetual American option to default and can be valuated by using the results of Rubinstein-Reiner (1991) for barrier options. Equity options are valued by a closed-form formula that requires only an extra parameter (leverage) with respect to the standard input list of Black–Scholes–Merton equation. The formula is consistent with the volatility skew that is generally observed in the equity options markets and can be used to estimate the firms’ implied leverage, as it is perceived by traders. The chapter concludes with an application of the model to the case of Goldman Sachs.
This paper examines the critical effect of learning from past changes on employees' evaluations regarding the extent that a crisis can be controlled and prevented. It is suggested…
Abstract
Purpose
This paper examines the critical effect of learning from past changes on employees' evaluations regarding the extent that a crisis can be controlled and prevented. It is suggested that previous changes incorporate elements of a double‐loop learning process that shape managerial perceptions of crisis controllability and crisis prevention.
Design/methodology/approach
The present study is based on a field study of 225 NPOs. Using closed‐end questionnaires the issues pertaining to crisis and learning are examined.
Findings
The results show that the mere experience of previous changes enhances managers' estimations of crisis control, but lowers their estimations of crisis prevention. These results indicate that using the double‐loop learning process contributes to a better understanding of organizational competence in non‐profit organizations.
Research limitations/implications
The present study provides a starting‐point for further research, in which crisis is seen as the antecedent of possible learning experiences that could further enhance capabilities of preventing future crises. The sample is restricted to nonprofit settings, using a relatively small sample. Further studies should address this link using for‐profit and public organizations, or even conduct comparative studies.
Originality/value
No empirical studies are available that assess the line between crisis learning and probable crisis prevention evaluations. The notable and promising side‐effect of the study shows how much remains unexplored in regard to both crisis and learning, forming important lessons for managers.
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Examines the disastrous industrial accidents globally since the Second World War. Change and innovation development have accelerated dramatically through this century. The war…
Abstract
Examines the disastrous industrial accidents globally since the Second World War. Change and innovation development have accelerated dramatically through this century. The war itself influenced various developments. Argues that environmental problems are problems of development. Bhopal, Chernobyl, Exxon Valdez, Kuwait’s oil wells and Siberian pipelines are all used as examples. Industrial activity and social change have increased vulnerability to man‐made hazards. Hazardous industries tend to be sited nearer the poorest and most vulnerable people, making the effects of any disaster even greater. Discusses the changing attitudes to man‐made disasters ‐ from fatalistic resignation to a desire to gain greater control. Assessment, legislation and mitigation have meant improvements and are indicators of willingness and ability to handle the threats.
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One of the most disturbing features of man‐made disasters is thatoften the cause has been known beforehand but little or nothing has beendone to prevent the occurrence or often…
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One of the most disturbing features of man‐made disasters is that often the cause has been known beforehand but little or nothing has been done to prevent the occurrence or often re‐occurrence. Examines the failure to implement the lessons from previous experience.
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The depth and breadth of the market for contingent claims, including exotic options, has expanded dramatically. Regulators have expressed concern regarding the risks of exotics to…
Abstract
The depth and breadth of the market for contingent claims, including exotic options, has expanded dramatically. Regulators have expressed concern regarding the risks of exotics to the financial system, due to the difficulty of hedging these instruments. Recent literature focuses on the difficulties in hedging exotic options, e.g., liquidity risk and other violations of the standard Black‐Scholes model. This article provides insight into hedging problems associated with exotic options: 1) hedging in discrete versus continuous time, 2) transaction costs, 3) stochastic volatility, and 4) non‐constant correlation. The author applies simulation analysis of these problems to a variety of exotics, including Asian options, barrier options, look‐back options, and quanto options.
Based on the belief that it is behaviour which constitutes risk rather than procedures, the paper focuses on the awareness of behavioural aspects in risk management techniques and…
Abstract
Based on the belief that it is behaviour which constitutes risk rather than procedures, the paper focuses on the awareness of behavioural aspects in risk management techniques and the consequences that arise out of this awareness. It questions the traditional thinking that risk management is predominantly a set of procedures in the control of risk. The paper also considers the part played by public policy in managing risk and changing behaviour. The paper concludes that it is behaviour, and not the set of procedures, which is the risky factor; therefore in risk management there is need to focus on developing human behaviour that is capable of being flexible in an event.
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Hong Kim Duong, Anh Duc Ngo and Carl B. McGowan
– The purpose of this paper is to examine the role of industry peers in shaping firm debt maturity decisions.
Abstract
Purpose
The purpose of this paper is to examine the role of industry peers in shaping firm debt maturity decisions.
Design/methodology/approach
The authors use idiosyncratic equity shocks as instruments to disentangle industry fixed and peer effects. The authors also employ a three-stage least squares regression (3SLS) model to capture the correlation among thee (short, medium, and long) debt maturity decisions.
Findings
The authors find that a one standard deviation change in peer short (medium, long) maturity debt leads to a 50 percent (37 percent, 23 percent) change in firm corresponding maturity debt and that these mimetic behaviors are statistically significant within, but not between, firm size groups. The findings also reveal that firms that mimic the short and medium (long) debt maturity structure of their peers tend to increase (decrease) firm performance as measured by profitability, return-on-assets, and stock returns.
Research limitations/implications
First, given the research design, the authors are constraint from pinpointing the exact date of the mimicking behaviors. This limitation prevents the authors from establishing the causality of the mimicking behavior and firm performance. Future research can extend the findings by solving this problem. Second, it should be interesting to address the question of whether mimicking behavior is good or bad for firm performance. The authors only compare the performance of Close Followers and Loose Followers; however, it would be more precise to compare the performance of mimicking firms with the performance of non-mimicking firms.
Originality/value
First, the findings extend the debt maturity structure literature by providing empirical evidence that an important determinant of firm debt maturity is industry peer debt maturity. Since debt maturity directly influences firm risk and performance, it is important for debt and equity holders to know how firms choose their debt maturity so that they can estimate their investment risk precisely. Second, the paper provides new empirical evidence supporting the information acquisition and principal-agent theories in demonstrating that firm performance increases when managers herd over short and medium debt maturity decisions and decreases when managers herd over long debt maturity decisions.
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This study develops a novel method for mitigating credit risk through the use of structured derivatives, focusing in particular on the use of European put options as a strategic…
Abstract
This study develops a novel method for mitigating credit risk through the use of structured derivatives, focusing in particular on the use of European put options as a strategic hedging tool. Inspired by the work of Merton (1974), our approach introduces the concept of default triggered by the stock price ST breaching a predefined barrier B. By establishing a distributional equivalence between an existing default model and