October 2006

Sourcing Practices and Boundaries of the Firm
in the Financial Services Industry
Summarized by Professor M. Hossein Safizadeh

Outsourcing for financial services firms has its pros and cons. The authors examine the sourcing decision for 108 processes of financial services companies. In particular, the authors focus on the sourcing decision for a firm’s back-office operations. The results of the study show that changes in the degree of service customization and demand volume influence sourcing practices for financial services processes. Specifically, a higher degree of customization and larger volume appear to limit outsourcing. However, when financial services firms outsource their back-office activities, they gain in process flexibility without negatively affecting cost.
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Portfolio Choice and Trading in a Large 401(k) Plan
Summarized by Associate Professor Pierluigi Balduzzi

This study extends the previous literature in the arena of investor trading behavior beyond that of discount brokerage accounts and into a broader category of investors, participants in 401(k) plans. This study also encompasses a time dimension, which allows the authors to observe trading behavior and asset allocation shifts as the investor ages, earns more income, and gains job seniority. The authors follow a panel of nearly 7,000 individual accounts in a single 401(k) plan for the period from April 1994 through August 1998. The plan data include detailed information on participants’ trading activity and asset allocations, as well as demographic and employment information such as gender, age, marital status, salary, and tenure on the job.
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Credit Ratings and Capital Structure
Summarized by Assistant Professor Darren J. Kisgen

The author examines the factors that corporate financial managers consider important when making capital structure decisions for their firms. Although the extant academic literature and standard finance textbooks do not include credit ratings as a factor in capital structure theory, the reality is that they play a central role. This study shows that firms attempt to influence rating change decisions by reducing leverage at the critical junctures of both a likely rating downgrade and rating upgrade. A firm�s credit rating is crucial to its effective cost of capital because if the rating drops below investment grade, the firm�s access to the commercial paper market is restricted and the market for its bonds is limited.
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Transparency and Liquidity:
A Controlled Experiment on Corporate Bonds
Summarized by Associate Professor Edith S. Hotchkiss

On July 1, 2002, the National Association of Securities Dealers (NASD) began a program of increased post-trade transparency for corporate bonds, known as the Trade Reporting and Compliance Engine (TRACE) system. The corporate bond market, primarily traded over-the-counter, has historically been one of the least transparent securities markets in the United States. Prior to TRACE, no centralized mechanism existed to collect and disseminate post-transaction information. Because there were concerns that public dissemination of this data for smaller and lower-grade bonds might have an adverse impact on liquidity, TRACE was initially launched only for investment-grade issues (bonds rated BBB and above) with issue sizes greater than $1 billion. This study, conducted by the authors on behalf of the NASD, was a crucial piece of the puzzle in the decision to expand TRACE in January 2006 to cover the entire public corporate bond market.
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Q&A:
Michael Travaglini, Executive Director of Massachusetts Pension Reserves Investment Management Board

In 2004, Michael Travaglini became executive director of the Massachusetts Pension Reserves Investment Management Board (PRIM), which invests $43 billion in assets for the state workers' and state teachers' pension systems and many local government pension systems in the Commonwealth. With an annualized rate of return on investment of 10.5 percent in the last ten years, PRIM ranks among the top 5 percent of public pension managers, allowing the state's retirement system to improve its funding status from 39 percent in 1990 to approximately 75 percent today. In this lively Q&A interview, he holds forth on topics like PRIM’s investment strategies, its relations with outside money managers, and the political debate over pension plans.
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Treasury of Knowledge

The Carroll School of Management is engaged in a wide variety of research. In the spirit of providing insight into the Carroll School of Management’s “Treasury of Knowledge” we have highlighted some of our faculty and their research topics. The treasury will showcase “nonfinancial” articles to illustrate the breadth of research related to firms in the asset management field.
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On a periodic basis we will update this list and range of topics. If you are interested in more information on any of the topics, please email
asset.management@bc.edu.

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Carroll School Faculty
To review the Carroll School’s research related to the interests of asset management, we invite you to peruse the scholarly interests of our outstanding faculty. Click here to view faculty page.