This paper by Hughes, Logue, and Sweeney offers an excellent summary of recent theoretical work on the advantages of multinational firms in providing opportunities for international diversification. In addition, some interesting empirical tests of an international version of the capital asset pricing model (IAPM) are reported. Neither of these topics is original as several writers have explored the theoretical advantages of the multinational firm providing international diversification, including this discussant [1]. The IAPM has been tested by Solnik [2] and others who find that systematic risk is lower in international financial markets than in domestic ones.

Previous research suggests that earnings growth rates are random in nature such that reliable earnings projections cannot be made based solely on the earnings time series. The purpose of this study was to determine whether earnings forecasts made by security analysts remain a random variable when the information set is expanded to include publicly available information about firms whose earnings are being projected. This was accomplished by relating firm financial variables to the forecast errors resulting from corporate earnings forecasts.

Market return and risk should be jointly considered in any investment decision. In an effort to examine some of the underlying components of market excess return and risk, the relationship between these two measures and firm financial characteristics is analyzed. Since both market return and risk are considered simultaneously in an investment decision, they are also simultaneously related to firm financial characteristics using canonical correlation analysis.

Reports of firms with working capital problems have been widespread in recent years, particularly since the Penn Central debacle, whose failure caused a genuine confidence crisis which spread rapidly throughout all segments of the financial markets. A survey of the literature produced little evidence which had sought to determine the impact of a company's liquidity position on the market price of its common stock. This study first laid a theoretical framework for explaining possible effects of various levels of liquidity on equity values. Then, four hypotheses were investigated:

1. A corporation's liquidity position has an identifiable impact upon investors' evaluation of a common stock.

It is not uncommon on occasions such as this to talk about the shortcomings in the theory of Finance, and to emphasize how little progress has been made in answering the basic questions in Finance, despite enormous research efforts. Indeed, it is not uncommon on such occasions to attack our basic “mythodology,” particularly the “Ivory Tower” nature of our assumptions, as the major reasons for our lack of progress. Like a Sunday morning sermon, such talks serve many useful functions. For one, they serve to deflate our professional egos. For another, they serve to remind us that the importance of a contribution as judged by our professional peers (the gold we really work for) is often not closely aligned with its operational importance in the outside world. Also, such talks serve to comfort those just entering the field, by letting them know that there is much left to do because so little has been done. While such talks are not uncommon, this is not what my talk is about. Rather, my discussion centers on the positive progress made in the development of a theory of Finance using the continuous-time mode of analysis.

The purpose of this paper is to present a more meaningful interpretation of the empirical finding of a distributed lag relationship between the nominal (market) rate of interest and the rate of inflation than that offered by Irving Fisher [8] and subsequent writers (see e.g., [2], [9], [10], [11], [15], [17]). In Part II we identify a paradox between Fisher's theory and his empirical results and examine previous explanations for the paradox. In III and IV, we offer what appears to be a more satisfactory resolution of the paradox and subject it to empirical test.

A well-known model of asset returns is the index equation

in which Rj, t is the observed rate of return on asset j during time period t; Rm, t is the return on a market index; βj, t is a parameter which measures the risk of asset j; αj, tis another parameter which has been given several interpretations by different authors; and εj, t is a stochastic disturbance term with zero mean. We discuss techniques for avoiding some of the pitfalls caused by nonstationarity. We explain a technique of robust regression; when the disturbances do not have all the standard spherical Gaussian properties so familiar from econometrics texts. We then describe a methodology for regression with a nonstationary model. It utilizes orthogonal polynomials of time to track the paths taken by the risk coefficient. This is a very robust specification and it has the potential to side-step many of the troubling theoretical and econometric problems of the model. By using the simple model we are not obliged to take sides on the question of which particular theory is “true” because this specification will be an approximation to all of the currently suggested theories (for a particular data sample). It is also reasonable to assert that the specification will approximate currently unknown models that may be developed in the future.

This paper derives a generalized Capital Asset Pricing Model (CAPM) to allow the investment horizon to be explicitly introduced into the risk-return relationship of capital asset pricing. It is shown that the systematic risk estimated from this generalized CAPM includes finite systematic risk, Jensen systematic risk, and Cheng–Deets (CD) systematic risk as a special case. From the relationship among the finite horizon type CAPM, the Jensen instantaneous type CAPM, and the generalized CAPM, it is found that the investment horizon problem can be treated as a functional form problem which is similar to determining whether a Cobb-Douglas type or a CES type production function is appropriate in estimating a production relationship. As the rates of return on security and market rates of return are log normally distributed, it is shown that Jensen instantaneous systematic risk is identical to CD instantaneous systematic risk. Under this circumstance, it also is shown that the finite systematic risk is approximately equal to the instantaneous systematic risk times an adjustment factor.

Over the past fifteen years we have seen an enormous increase in the theoretical and empirical literature in the field of finance. This outpouring of academic research has had a substantial impact on the content of finance courses including the introductory course. However, the changes in content at the introductory level appear to me to have been evolutionary rather than revolutionary. Textbooks contain more analytical and theoretical material, but this material is provided within traditional structures. The contents of the chapters have changed but not the titles of chapters nor the sequencing. With minor changes in wording I would guess that course outlines of today appear little different from those of ten years ago. I am not particularly disturbed by these observations, but I believe it is time to take a close look at what we are doing to our students, and I would like to explore the possibilities of a more coherent approach to the introductory course.

At the beginning perhaps it would be appropriate to say that three assumptions have been made throughout the entire discussion. They include:

1. An assumption that there are approximately 45 classroom hours available to the instructor,

2. An assumption that for many students it is the only finance course they will take,

3. An assumption that the course is oriented toward business finance, and not, for instance, capital markets, or money and banking.

The content of the basic course in finance is analyzed in terms of a number of dimensions. My presentation will focus on six areas: (1) our clients and their needs, (2) the managerial orientation, (3) coverage, (4) role of specialized techniques, (5) application to other purposive organizations, and (6) social responsibility issues.