In light of the ongoing debate over the value of the equity risk premium, its increasing use in the regulatory setting, and the impact of dividend imputation on the premium, this paper presents a timely new look at the historical equity risk premium in Australia, and provides an improved understanding of the historical record. We document concerns about data quality that become increasingly important the further back in time one looks. In particular, there are sufficient question marks over the quality of data prior to 1958 to warrant any estimates based thereon to be treated with caution. Accordingly, we present a new set of estimates of the historical equity risk premium corresponding to periods of increasing data quality but of decreasing sample size. Relative to bonds (bills), the equity premium has averaged 6.3 per cent (6.8 per cent) per annum over 1958-2005, which is a period of relatively good data quality. Together with other results in the paper, the findings reveal a historical estimate that is substantially less than widely cited historical studies would otherwise indicate. We reconcile prior evidence through documenting a dividend adjustment that has typically been overlooked. We also provide estimates that incorporate an adjustment for imputation credits. Copyright (c) The Authors.
This paper examines various models of the short‐term interest rate in Australia. The analysis centres on three classes of models. First, the generalised diffusion model of Chan et al. (1992) is examined which allows the variance to be a function of interest rate levels. This model nests a number of the traditional term structure models. We find initial support for the generalised model. Second, we examine models which incorporate time‐varying volatility dynamics. Third, a class of models that incorporates both time‐varying volatility and the levels model is analysed. We extend these models by allowing an asymmetric reaction to news resulting in a threshold‐type model. The paper examines each of the models and then proposes and perfor Ms prediction tests that allow different classes of models to be benchmarked. The second and third class of models appear to produce the most accurate estimates. The results indicate a number of important differences between the Australian market and overseas markets.
This article uses the extended case method to explore senior executives' corporate finance decisions. We quantified firm's finance practices using a mail survey, and then -to resolve puzzles in managers' decision processes -conducted faceto-face interviews with chief finance officers of large listed firms. The interviews identified six themes as consistent influences on finance decisions: pressures imposed by clienteles; constraints on resources; risk management; heuristics; real options; and sustainability. We conclude that managers are logical and rational in their decisions, but employ a wider range of criteria than assumed in conventional finance theories.
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