Journal of
Financial Education

We examine U.S. and Canadian finance faculty members’ perceptions of the fairness, efficiency, and effectiveness of the finance journal peer review process. We find that most finance faculty are reasonably satisfied with the process, but several areas of concern are apparent, including the blindness of reviews at top journals, the length of review times at lower ranked journals, and apparent editor bias. We examine variations in responses and summarize the respondents’ open-ended comments, some of which relate to possible improvements to the review process. We hope to stimulate dialogue on the nature of the review process in finance journals.

This study examines the citation records of economics and finance journals during the period 2001-2003. We investigate whether citation frequency is linked to the quality of internet access provided by the journals. First, we construct turnover factors that not only measure the number of citations but also take into account the speed of citation. Second, we use a logit model to study the relationship between internet access and journal rankings. Finally, we develop a regression model that tests whether citation performance is affected by past ranking, self-citation, journal size and access to publications. Our findings suggest that free access to current articles is used by lower ranked journals in response to low citation frequency. Additionally, the OLS estimation results show that free online access to articles played a significant role in improving the citation performance of these journals. More specifically, internet access mitigated the impact of journal size and increased the impact of self-citations.

Pages 28-39

Understanding Portfolio Risk Analysis Using Monte Carlo Simulation

Simulation software offers users the opportunity to "experience" hundreds or thousands of outcomes associated with uncertain events. Dealing with uncertainty and hence risk is an important component of many finance courses. This paper describes how the same "experiential" approach used by risk professionals can be utilized to provide an experiential learning opportunity for students. This approach helps to bring about an understanding of statistical and financial concepts associated with risk management, beyond what students might achieve through conventional teaching methods.

Pages 40-58

The Binomial Pricing of Options on Futures Contracts

Rubinstein (1979) and Rendleman and Bartter (1979) are considered important pedagogical contributions to the financial literature. Unlike the Black-Scholes (B-S) model, whose derivation requires stochastic calculus and a heat exchange equation, the binomial model is simpler to derive and yet still yields the same solution as the B-S model (when the number of subperiods to expiration is large). As a result, most derivative textbooks provide a formal derivation of the BOPM. Today, the derivative market for non-stock options (indices, currencies, debt securities, and commodities) is dominated more by options on futures contracts than options on spot securities. Unlike the detailed presentation of the binomial model for spot options, though, most of the popular derivative texts only define the binomial model for pricing futures options. Like the derivation of the BOPM for spot options, the derivation of the binomial model for futures options has similar pedagogical values. In addition, the derivation of the BOPM for futures options also shows how different arbitrage relations governing the prices of futures and options converge to determine the equilibrium price of a futures option contract and how the early exercise advantage for futures options depends on whether the futures market is normal or inverted. This paper presents a derivation of the BOPM for futures options.

Pages 59-87

Capital Structure Decision-Making: A Pedagogical Application

We offer a pedagogical application of the capital structure decision-making process for a firm issuing debt to retire equity. The application has proven successful in helping advanced business students understand the impact of the debt choice on firm value. The application introduces a tool that students can use as future financial managers. The tool is a recent gain to leverage (G_L) equation given by Hull’s Capital Structure Model (CSM). This CSM equation contains cost of capital variables for which managers can reasonably estimate values compared to the difficulty of directly measuring the dollar value of bankruptcy and agency costs. Surprisingly, the cost of capital variables found in the CSM equations are missing from textbook equations and, until the development of the CSM, even missing from the perpetuity G_L research. Given estimates for the costs of capital and tax rates, this paper’s pedagogical application shows how managers can use the CSM equation to choose an optimal debt level.

Pages 88-111

Integrating Market Statistics, Institutional Features, and Theory: An Experiential Approach to Teaching Investments

A challenging, multi-dimensional goal for an effective investments class is to satisfy the students’ expectation to acquire investing advice while demonstrating the relevance of the course material with topical real-world issues and market features. A well-known experiential learning exercise for teaching investments principles and market efficiency was the Dartboard Contest in the Wall Street Journal. A customized, in-class extension of that contest in which student teams pick competing portfolios to include mutual funds has produced results over the last five years which support a major tenet of the efficient markets hypothesis. The contest is integrated into an investments class with market performance statistics in a way that delivers a comprehensive and intuitive investment strategy and provides a foundation on which to build key Investments exercises such as beta calculations, optimal portfolio determination, risk-adjusted performance measures, and discussion of different degrees of efficiency.

Pages 112-136

Automated Online Homework Managers: Filling the Gaps with Flash^TM

This paper explores the use of online homework managers, which are typically provided by the major business textbook publishers, supplemented with Flash™ solutions, which were developed by the author. The homework managers that are currently available tend to focus on the correct answer and not on the process for finding the correct answer. The Flash™ solutions allow students to see the process or processes used to arrive at correct solutions even for unique algorithmically generated problems. Although the Flash™ homework solutions discussed in this paper were not made available to students until after an assignment’s deadline had passed, other pedagogical uses for Flash™ movies both in and out of the classroom are explored. Evidence that supports the usefulness of these movies is provided in the form of improved test performance.

Financial Restructuring at Jazztel: What’s Next?

It was mid November 2002 and the Jazztel Management Team composed of Antonio Carro (CEO), Miguel Salís (CFO) and Christoph Schmid (Director of Corporate Finance and Board Secretary) were preparing their recommendations for the next board meeting regarding the potential steps to be taken to ensure the financial health of the company. A few months earlier the team had reached an agreement with an ad hoc committee of bond holders to restructure the close to €700 million in high yield debt. The team was keen to minimize a potentially negative impact that a balance sheet restructuring would have on the rest of the stakeholders of the company such as shareholders, customers, suppliers, creditors and employees.

Pages 157-173

Ted’s Trailer: When to Sell? Business Valuation

In early 2005, Ted Bunge, founder and CEO of Ted’s Trailer, a manufacturer of side-loading trailers, was again thinking about selling his company and decided to rehire Darin Good, Executive Vice President of IBG Business Services, Inc., the largest sell-side merger and acquisitions (M&A) firm in the Rocky Mountain region. Ted had previously fired Darin in mid 2004 when he disagreed with Darin’s recommendation to continue developing the company and not sell it for $8 million at that time. During this new meeting with Darin, Ted was in an agitated state and blurted out: "Everything I own is for sale! Sell my company right now, I can’t sleep at night. I dream about one of my trailers dropping a HazMat (hazard materials) load on I-25 and I never have had any of that expensive product liability insurance. I now want $10 million for my company." Darin replied, "You may have to fire me again because you’d be an idiot to sell right now before we again consider the alternative decision of continuing to develop your company to increase its sales value."

Pages 158-188