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Finance

The IUP Journal of Applied Finance

October' 08

Focus Areas
Business Environment Regulatory Environment Equity Markets Debt Market Corporate Finance	Financial Services Portfolio Management International Finance Risk Management

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Center Rules the Markets

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Competitive Strategy or Signal Jamming: A Test of Rivals' Response to M&A

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Economic Profit, NPV and CAPM: Biases and Violations of Modigliani and Miller's Proposition

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Center Rules the Markets

--Paulo Alves and Miguel Ferreira

The paper evaluates the impact of the European Economic and Monetary Union (EMU) based on the Fama and French three-factor model. The study reveals that the models based on EMU factors do not have a better explanatory power than the models based on local and international factors, although international factors do not have a significant role. The study also finds that the biggest European stock markets have a tendency to be explained by international factors, when compared to the smallest. Such behavior is being seen as a signal of integration of the largest capital markets. Finally, the study recommends portfolio managers to use the local Fama and French model in the case of small and value stocks and use the local Capital Asset Pricing Model (CAPM) in the case of big and growth stocks.

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Competitive Strategy or Signal Jamming: A Test of Rivals' Response to M&A

--Kenneth J Hunsader

The decision by any management to release information about firm's value depends not only on the firm's own financial position but may also depend on their desire to disrupt other firms' actions within their own industry. Previous research in finance has theorized that management sends signals of firm value to the capital markets, i.e., investors; however, in an industry with a few relevant competitors, managers of strategic firms may also send signals in order to signal jam competitor's actions.

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Economic Profit, NPV and CAPM: Biases and Violations of Modigliani and Miller's Proposition

--Carlo Alberto Magni

For one-period projects under certainty, the notion of Net Present Value (NPV) formally translates the notion of economic profit, where the discount rate is the cost of capital. Under uncertainty, the cost of capital is the expected rate of return of an equivalent-risk alternative that the investor might undertake and is often found by taking recourse to the Capital Asset Pricing Model (CAPM). This paper shows that the notions of disequilibrium NPV and economic profit for risky one-period projects are not equivalent: NPV-minded agents are open to framing effects and arbitrage losses, which imply violations of Modigliani and Miller's Proposition I. The notion of disequilibrium (present) value, deductively derived from the CAPM by several researchers and widely used in applied corporate finance, should therefore be dismissed.

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Automated Teller Machines (ATMs): The Changing Face of Banking in India

Bank Management

Information and communication technology has changed the way in which banks provide services to its customers. These days the customers are able to perform their routine banking transactions without even entering the bank premises. ATM is one such development in recent years, which provides remote banking services all over the world, including India. This paper analyzes the development of this self-service banking in India based on the secondary data.

The Information and Communication Technology (ICT) is playing a very important role in the progress and advancement in almost all walks of life. The deregulated environment has provided an opportunity to restructure the means and methods of delivery of services in many areas, including the banking sector. The ICT has been a focused issue in the past two decades in Indian banking. In fact, ICTs are enabling the banks to change the way in which they are functioning. Improved customer service has become very important for the very survival and growth of banking sector in the reforms era. The technological advancements, deregulations, and intense competition due to the entry of private sector and foreign banks have altered the face of banking from one of mere intermediation to one of provider of quick, efficient and customer-friendly services. With the introduction and adoption of ICT in the banking sector, the customers are fast moving away from the traditional branch banking system to the convenient and comfort of virtual banking. The most important virtual banking services are phone banking, mobile banking, Internet banking and ATM banking. These electronic channels have enhanced the delivery of banking services accurately and efficiently to the customers. The ATMs are an important part of a bank’s alternative channel to reach the customers, to showcase products and services and to create brand awareness. This is reflected in the increase in the number of ATMs all over the world. ATM is one of the most widely used remote banking services all over the world, including India. This paper analyzes the growth of ATMs of different bank groups in India.

International Scenario

If ATMs are largely available over geographically dispersed areas, the benefit from using an ATM will increase as customers will be able to access their bank accounts from any geographic location. This would imply that the value of an ATM network increases with the number of available ATM locations, and the value of a bank network to a customer will be determined in part by the final network size of the banking system. The statistical information on the growth of branches and ATM network in select countries.

Indian Scenario

The financial services industry in India has witnessed a phenomenal growth, diversification and specialization since the initiation of financial sector reforms in 1991. Greater customer orientation is the only way to retain customer loyalty and withstand competition in the liberalized world. In a market-driven strategy of development, customer preference is of paramount importance in any economy. Gone are the days when customers used to come to the doorsteps of banks. Now the banks are required to chase the customers; only those banks which are customercentric and extremely focused on the needs of their clients can succeed in their business today.

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