Social Work Roles And Criminal Justice Settings Social Work Essay

Social Work Roles And Criminal Justice Settings Social Work Essay There are many competing pressures to direct the service in ways that may not be consistent with Social Work principles towards greater penal and correctional models. It is therefore essential to have a clear understanding of the policy and legal framework that creates the remit and legitimacy for the operation of Social Work in the Criminal Justice process (Whyte, 2001, p.7). Statute law is created by Acts of the UK and Scottish Parliaments and relies upon rulings made in Court Hearings to set precedents that define and interpret key terms i.e. Case Law. Understanding the law is fundamental to practice in Criminal Justice settings. Criminal Law is a powerful instrument of social control and sanctions and the Criminal Courts have the potential to impose restrictions of liberty of individuals. Social Workers have a responsibility towards the general public and the courts to protect the public and ensure their wellbeing however, there is also obligation towards those who are in the Criminal Justice process who may be vulnerable and in need of services provided by Social Work. It is therefore essential that all workers have an understanding of the legal frameworks that govern Criminal Justice Social Work and are aware of the scope and limitations of their mandate (Whyte, 2001). However, law is subject to change and criminal justice policy is more liable to su dden, politically motivated changes of direction than is social policy in other fields (Smith, 2002, p.309) The law defines what a crime is, rules of evidence and criminal procedure. However, discretion is given to those involved and therefore, the criminal justice process is not systematic. The judiciary, police and social work have differing roles, agendas, values and beliefs which are shaped by training and cultures which can make working within the system difficult due to lack of shared understanding of common aims and individual roles. Social Work involves working with the marginalised and disadvantaged and can be both vulnerable to crime and susceptible to criminalisation and practice involves work with victims or offenders. Local Authorities have statutory responsibility to provide Criminal Justice Social Work Services to support the Criminal Justice Process through assessment of individuals, information to the Courts and supervision of offenders. Scotland differs from the rest of the UK in that there is a unique cultural and political heritage and a separate legal system. Social Work therefore, has a central role within the Criminal Justice process in Scotland which is in contrast to England and Wales where probation work is commissioned by the National Offender Management Service (NOMS) which is separate from Local Authority control and Social Work functions and shows a difference in their approaches in responding to crime. As McAra (2005) suggests a more welfare orientated approach has been adopted due to its legal culture and political history. The legal framework outlining powers and duties of Criminal Justice Social Work is the Social Work Scotland Act 1968 (as amended). Section 27 of this Act outlines the duty by Local Authorities to provide specific Criminal Justice services (e.g. social background reports, supervision of offenders on an Order or Licence) in respect of central government funding however, it does not explain the objectives of these services or provide guidance on their exercise. Section 12 gives Local Authorities (LAs) discretion to provide additional services (e.g. victims) as part of the general responsibility to promote social welfare. Probation or offender services became the responsibility of the Local Authority Social Work Departments in 1968 and had a general duty to promote social welfare in their locality (S12, Social Work (Scotland) Act 1968). This was due to the Kilbrandon Committee (Kilbrandon, 1964) being appointed to investigate increasing juvenile crime. The Kilbrandon Report recommended a new approach to childrens services based on the needs of children and families and those who offend should be treated the same as those children requiring care and protection. Kilbrandon also suggested diversion and early voluntary intervention as crime prevention and one department for children and adults. This merge of work with adult offenders was pivotal in recognising work with offenders as having a welfare component admittedly with a level of control. Although the Kilbrandon philosophy followed trends of the time which advocated rehabilitation and treatment of offenders and an awareness of the social causes of c rime, this is still highly relevant to todays practice. From the 1980s onwards Criminal Justice in Scotland has undergone major legislative and policy change due to successive governments. As there was concern for public protection and community disposal effectiveness in 1991, 100 per cent central government funding was introduced and the National Objectives and Standards were published which set out core objectives, service provision and guidance on their delivery (Social Work Group, 1991). This resulted in the government committing to Social Work delivering this role. This policy arrangement outlined by Rifkind in 1989 has survived changes in political administration although, it has been suggested that devolution has caused a sudden and dramatic politicisation of Criminal Justice issues and could undermine the welfare tradition (McNeill and Batchelor, 2004: Croal, 2005). Social Work with offenders should aim to address and reduce offending behaviour. Whilst the law provides a framework for practice, effective work with offenders requires Social Work skills such as communication, therapeutic relationships in supervision, assessment and risk management. The task is therefore, varied and complex as Social Workers have the power to control the individuals who are referred via the Courts and enforce any Court Orders but must also work with an offender in a holistic, inclusive way to have a positive impact on their offending behaviour and this can be through support and assistance in relation to personal and social problems but also the individual taking responsibility for their actions. Effective and ethical practice is therefore, about considering and managing the needs and rights of the Courts, the general public, victims and offenders. Although Social Workers have statutory duties and powers to interfere in peoples lives this is not always welcome but is necessary in promoting public safety. Under the Scottish Social Work Services Council (SSSC) Code of Practice Social Workers have an obligation to uphold public trust and confidence and the Criminal Justice Authorities (CJAs) are required by Scottish Executive guidance to develop a strategy to address this (Scottish Executive, 2006b). This strategy includes both offenders and their families and Social Workers should engage these individuals and recognise their views in the development of services. Both Criminal Law and Social Work recognise the autonomy of individuals choices on how they lead their lives and with this capacity is criminal responsibility. Those of which who lack capacity (e.g. children and the mentally disordered) are not culpable in the eyes of the law and may be treated differently. It is therefore recognised that criminal behaviour is not just a choice but may be about social circumstances to which they have minimal control. Social Workers should assist in allowing individuals to improve their capacity for making choices together with consequences to their actions (ADSW, 1996a). Although Social Workers are obliged to protect the rights and interests of service users there is a belief amongst the general public that they have forfeited these rights when they have offended. All Criminal Justice agencies must comply with the Human Rights Act 1988 which incorporates into domestic law the fundamental rights set out in the European Convention of Human Rights (ECHR). Public Authorities are required to respect all of the provisions however, the two articles with particular relevance to Criminal Law and Social Work are the right to liberty and security (Article 5. ECHR) and the right to a fair trial (Article 6, ECHR). However, the state can impose restrictions on those who breach criminal law or are a threat to public safety as long as the detention is authorised by law and there is a balance between the individual, their victims and the general public. The Social Worker must assess this balance through rigorous assessment and analysis of risk. The Social Work role r equires respect to offenders as individuals and ensure that the offenders ability and right to function as a member of society is not impaired to a greater extent than is necessary in the interests of justice (ADSW, 1996a). Criminal Justice Social Work services are delivered in partnership with various statutory and non-statutory agencies and this can present challenges due to conflicting professional values and aims. The Management of Offenders etc. (Scotland) Act 2005 was introduced to improve joint working and co-ordinate the management of offenders especially in the transition from custody to community supervision and places a duty on Criminal Justice Authorities (CJAs) to have an information sharing process in order that relevant information is shared between agencies (s.3 (5)(g)) for improving offender and risk management. However, sensitive personal information must be handled carefully and be under the principles of the Data Protection Act 1988 and local agency protocols. Practitioners within Social Work must ensure that any information sharing decisions are fully explained and understood by the offender even when their consent to disclosure is not required. Organisations who deliver public services have general duties to eliminate unlawful discrimination and promote equality of opportunity on the grounds of race (Race Relations (Amendment) Act 2000), sex (Equality Act 2006), and disability (Disability Discrimination Act 2005). Individuals who are involved with Criminal Justice organisations are entitled to the protection of discrimination laws which relate to sex, race, disability, religious beliefs and sexual orientation, with exception to exercising judicial functions or carrying out Court orders. In these circumstances it may be within Article 14 of the ECHR which prevents to the right to liberty and security of the individual or the right to a fair trial being interfered with on a wide range of discriminatory grounds. Criminal Justice is still influenced by prejudicial and discriminatory views. Research has been carried out by both the Social Work and Prisons Inspectorate for Scotland (1998) which highlighted concerns about the treatment of female offenders in the Criminal Justice process. In addition to this, several inquiries in England and Wales in relation to racial discrimination by the police and prison services has subsequently raised public awareness (Macpherson, 1999; Keith, 2006). The Scottish Government has a duty to publish information of discrimination of any unlawful grounds (s.306 (1)(b) Criminal Procedure (Scotland) Act 1995) and therefore, all workers need to practice in an anti-discriminatory way. The law outlines the limits of Social Work intervention and knowledge of the law is essential to anti-oppressive practice. The only legitimacy for intervening in the life of the individual within the criminal justice process is the individuals offending behaviour†¦if individuals have social needs which require to be met but are not crime related or crime producing, or if the offence is not sufficiently serious to fall within the criteria of the twin-track approach, services should be offered, as far as possible, through voluntary provision†¦No-one should be drawn into the criminal justice processes in order to receive social work help (Moore and Whyte, 1998, p.24). Rehabilitative intervention is not just about helping; it imposes limitations on the rights of the individual who is subject to the intervention. Risk assessment and offence based practice is an ethical approach. It aims to ensure that the most intensive and potentially most intrusive services are focused on those service users who pose the greatest risk of causing harm to others (ADSW, 2003) and to prevent socially disadvantaged individuals being taken further into criminal justice control which can result in further social exclusion. Criminal Justice Social Workers must take note that the role involves work with disadvantaged social groups. Certain types of crimes and offenders often criminalise the young, deprived, unemployed and undereducated male with an experience of the care system and this is clear from Social Work and prison statistics (Croall, 2005; McAra and McVie, 2005). There is often a complex relationship between social exclusion and offending behaviour and often the Criminal Justice process displays existing injustices within society. It is important that issues in relation to class, age and social context should be recognised together with vulnerability to discrimination. The Social Workers role should be to address issues of social exclusion and empower individuals to lead law abiding lives by addressing their offending behaviour. Social Work can help offenders develop capacity to make informed choices by actively encouraging their participation in the supervision/change process and their engagement with improving their current social situation (McCulloch, 2005; McNeill, 2004). Assisting offenders to focus on their strengths as opposed to their risk and needs can have a positive impact as they learn to recognise the value in their own lives and respecting the value of others. The sentencing stage in the criminal justice process generates the majority of Criminal Justice Social Work through provision of information to the Court in the form of Social Enquiry Reports (SERs) and the administration of community disposals, with the exception of liberty orders (tagging). SERs have no legal basis but there is a statutory duty on criminal justice social work to provide reports to the Court for disposal of a case (s.27(1)(a) SWSA 1968. Reports provide the court with the information and advice they need in deciding on the most appropriate way to deal with offenders. They include information and advice about the feasibility of community based disposals, particularly those involving local authority supervision. In the case of every offender under 21 and any offender facing custody for the first time, the court must obtain information and advice about whether a community based disposal is available and appropriate. In the event of custody, the court requires advice abo ut the possible need for a Supervised Release order or Extended Sentence Supervision on release. (Scottish Executive, 2004d, para. 1.5) The Criminal Procedure (Scotland) Act 1995 sets out when the court can or must obtain an SER. Failure to request a report, where required by law, can result in a sentence being quashed on appeal. The Court is not obliged to follow recommendations or opinions in the SER however, Social workers can have a direct influence on the sentence passed. Preparing SERs demands a high standard of professional practice. It requires skilled interviewing, the ability to collect and assess information from different sources, and the art of writing a report which is dependable, constructive, impartial and brief (Social Work Services Inspectorate (SWSI), 1996, Foreword). The law imposes time limits in compiling reports. The Courts require a report within three weeks (s.201(3) (a) if an offender is remanded in custody and within four weeks if the offender is on bail (s.21(3)(b) of the 1995 Act). This means in practice that there are increased demands on a workers time that places increased pressure in the preparation of SERs especially if there are high numbers of worker absence due to leave or whether the worker knows the offender and their individual circumstances. Whilst conducting interviews the worker must ensure that the offender understands the purpose of the report, the relevance of questions (health, addiction issues, and personal relationships) and the limits to confidentiality of this information. Social workers must balance between an informed recommendation and an awareness of the severity of the offence. The report author should be impartial and not minimise the seriousness of the offence and its impact (NOS, Scottish Executive, 2004d, p ara 5.5) and phrases that imply moral judgements, label or stereotype offenders should not be used (para. 5.1). When compiling an SER workers are required to consider the suitability of disposals in relation to the risk posed by an offender and to target appropriate resources which are most appropriate and successful in addressing offending behaviour. Guidelines for the assessment and management of risk are outlined in the Management and Assessment of Risk in Social Work Services (SWSI, 2000) and there are also additional risk assessment frameworks which specifically relate to serious violent and sex offenders. In Criminal Justice the focus has moved from risk of custody to risk of reoffending and risk of harm. Risk assessment is complex and there has been a shift from concern for the offender and their needs to concern about public safety and the offender being a potential source of risk to others. Although the legislation is not explicit about offending behaviour, National Standards state that SERs should provide information and advice which will help the Court decide the available sentencin g options†¦by assessing the risk of reoffending, and†¦the possible harm to others. This requires an investigation of offending behaviour and of the offenders circumstances, attitudes and motivation to change (Scottish Executive, 2004d, 1.6). Risk is defined by Kemshall (1996) as the probability of a future negative or harmful event and assessment of risk includes: the likliehood of an event occurring, who is likely to be at risk, the nature of the harm which they might be exposed and the impact and consequences of the harmful event. Risk assessment has changed over the years and prior to the introduction of risk assessment tools workers relied on clinical methods or professional judgement which was based on an offenders history. These methods were criticised for being too subjective, inaccurate, open to worker bias and dependent on information given by the offender. In the 1990s workers moved towards objective and empirically based risk assessment tools (actuarial) to support their assessment. Actuarial risk assessment tools rely on static (historical) risk factors together with dynamic (criminogenic) risk factors and to assess the risk of reoffending. The static factors (which cannot change) take into account gender, age at first conviction, number of previous offences and custodial experiences, school progress, previous employment and personal history. The criminogenic factors (focus on current areas) include current employment, personal relationships, peer associates, use of time, substance use, mental health and attitudes and behaviour. All of these factors impact on the risk of reoffending (Bonta, 1996). The most widely used assessment tool, The Level of Service Inventory Revised (LSI-R) devised by Andrews and Bonta (1995) incorporates both static and dynamic factors. However, it does not assess risk of harm and this shows that both actuarial and clinical risk assessments are crucial for an effective and comprehensive risk assessment. Clinical methods combine knowledge of the offenders personality, habits lifestyle and an analysis of the circumstances of the offending behaviour and are therefore, the most appropriate assessme nt tool at identifying those who are likely to cause serious harm. Although more time consuming and require more in-depth analysis of both the offender and the offence risk is assessed on predispositions, motivation towards certain behaviours and triggers that may contribute to harmful behaviour. Actuarial tools are not totally accurate (Kemshall, 1996) and although this is improved upon through use of clinical methods in decision making, professional judgement is also crucial. Social workers must be aware that social disadvantage plays a part and this can contribute to a higher assessment of risk and need and to be cautious about the total reliability of these factors when making recommendations that may affect an offenders liberty. Risk assessment and intervention or supervision should be informed by valid, reliable and ongoing assessment and Social Workers should familiarise themselves with research emerging in this area and the many assessment tools and change programmes available (Levy et.al., 2002). To support change Social Workers have to not just think about what work is done with the offender but how that work is done. Offenders under supervision have very high levels of need. Moreover, although most offenders have many needs in common, there are also significant variations that necessitate the thoughtful tailoring of individual interventions if the effectiveness of practice is to be maximised. In delivering effective practice, the accumulated weight of evidence†¦drives us towards recognition that practice skills in general and relationship skills in particular are at least as critical in reducing re-offending as programme content (McNeill et al., 2005, p.5). This recent review of core skills required for effective Criminal Justice Social Work practice raises challenges in practising ethically and effectively but when applied critically and reflectively this could achieve positive outcomes that are in the interest of the public, victims and offenders. Although the law is crucial in framing Social Work practice in the Criminal Justice process it is equally important that Social Work skills and values are central to effective interventions as the role is both demanding and rewarding. Crime has become increasingly prominent both in the public and political agenda and therefore, Social Work has become more prominent and complex. Social Workers have a professional responsibility towards victims, the Court, community and offenders. To fulfil this role effectively, Social Workers must have a clear, confident understanding of their role, the legislative and policy context and a commitment to increasing and developing knowledge, skills and values required for effective and ethical practice.

Linking Financial Ratios and Stock Returns

Chapter I INTRODUCTION Financial ratio analysis is a technique for trying to help interpret financial accounts and to determine the intrinsic value of a security by careful examination of key value drivers such as risk, growth, and competitive position. Various ratios can be calculated from the financial accounts. These ratios will then help us to examine the company’s performance over a number of periods by comparing the same ratios in previous years’ accounts and also the accounts of other businesses operating in a similar environment (Most common benchmarks are industry leaders and industry averages). Financial ratio analysis provides essential information and serve (Investors, Stockholders, lenders, corporation management, Fundamental analysts†¦. ) with a lot of different contexts for different kinds of decisions. 1. 1 Statement of the Problem The enormous number of financial ratios used by financial managers and financial analysts and their relationship with stock return is the main problem in interpreting the financial statements. Based on, the ultimate goal of financial managers is to maximize the wealth of their stockholders; financial managers must understand the impact of their managerial decisions on their company’s financial statements and financial ratios concluded which will consequently affect the stock price of their company. Interpreting such a huge number of ratios distracts attention from the most relevant factors that affect stock prices. 1. 2 Purpose of the study A number of studies such as Timo Salmi (1990) were conducted to reduce the information load resulting from computing a large number of ratios and categorize those ratios that were believed valuable. This study aims to identify those variables that are most relevant to the stock returns of pharmaceutical sector in Egyptian stock market. 1. 3 Statement of objectives This study attempt to achieve the following objective: -The most relevant independent variables (financial ratios) with stock returns as a dependent variable. Chapter II FINANCIAL RATIOS AND STOCK MARKET 2. 1 Literature Review The main goal of our research is to evaluate the relationship between common financial ratios as independent variables and stock returns of the pharmaceutical firms as dependent variable. The relation between financial statement information and stock return was examined by Ou and Penman (1989) who observed returns to investment strategies that are based on a measure that summarizes the information in financial statements to identify the relevant financial ratios. Their study indicate that the predicted returns can not be explained by return based risk measures and that financial statements capture fundamentals that are not reflected in stock prices. The results of the study suggest that it is possible for investors to make excess profits using publicly available information. More recently, the relation between financial statement information and stock return was extended by Holtausen and larcker (1992) who identify value-relevant fundamentals in the context of a return-fundamentals relation. Holtausen (1992) examined the ability of accounting information to generate profitable trading strategies (using 60 accounting ratios). The excess returns were observed in the fourth month following the company’s fiscal year end. The results of the study suggest that the trading strategy was able to earn significantly abnormal returns during the period of 1978-1988. The same issue was examined later by Lev and Thiagarajan (1993) who used fundamental ratios as the basis of analysts’ description of different ratios to identify the value relevance of the financial ratios and their usefulness in security valuation. Afterward, Belkoui (1997) employed the popular financial ratios to show the value relevance, where the popularity of these financial ratios is matched by their usefulness in security valuation. He shows that value relevance of popular financial ratios in both a non contextual setting and a setting conditioned by levels of inflation and growth. 2. 2 Classification of financial ratios The classification of financial ratios was studied by Timo Salmi (1990) who split these financial ratios into five somewhat arbitrary groups: †¢Profitability – how good is the business as an investment. Liquidity – the amount of working capital available. †¢Capital Adequacy – measure the leverage percentage. †¢Debt service coverage – how near is the business to bankruptcy. †¢Efficiency – how good is the management of the business. Each financial ratio has its own signal and its own relation to the stock return. Based on these previous studies, the stu dy selected the most popular financial ratios guided in major financial analysis books such as Mishkin (2001) 2. 3 An overview of Egyptian stock exchange EgyptWatch (2002) studied the history of the egyptian stock exchange and mentioned that the Egyptian Stock Exchange is comprised of two exchanges: the Cairo & Alexandria Stock Exchanges (CASE), and is governed by the same board of directors that share the same trading, clearing & settlement systems. The Alexandria Stock Exchange was officially established in 1888 followed by that of Cairo in 1903. The two Exchanges were very active until the 1940s, when the Egyptian Stock Exchange ranked fifth in the world. Nevertheless, the political turmoil of the mid-1950s led to the demise of activity on the Exchange, which remained dormant throughout the period between 1961 and 1992 (MohieEldin and Sourial, 2000). In 1990, the Egyptian government started on economic reform & restructuring program. The move towards a free-market economy has been remarkably swift and the process of deregulation and privatization has simulated stock market activity. The Capital Market Authority (2002) played an instrumental role in initiating and leading the effort for the revival of the Egyptian stock market in the period between 1992 and 1996. The Capital Market Authority (CMA) is the regulatory body in charge of enforcing, regulating & ensuring compliance as well as monitoring market performance. Relevant policy actions undertaken by the CMA include introducing all types of investment vehicles, allowing open competition in the pricing of market services; and providing full investor protection. The main features of the operational framework are fair trading procedures and practices as well as an immediate transfer of ownership of traded securities; optional listing on the stock exchange; quarterly disclosure requirements for companies; adequate protection of minority shareholder rights; and improved data collection schemes. Capital Law 95/1992 has put in place the regulatory framework in which financial intermediaries such as brokers, venture-capital firms, underwriters and fund managers are to operate. With respect to the managerial framework of CASE, a coherent organizational structure with a clear division of authority & responsibilities was established, creating new divisions & departments such as Publications & Public Relations, Research, Surveillance & Market Control, and Information Technology. Additionally, in May 1998, CASE signed a contract with EFA Software Ltd. , to deliver the new electronic trading, clearing & settlement system that will replace the existing one. The Board of Directors also set up several committees with specific responsibilities. At the senior level, an international advisory committee made up of internationally prominent economists, investment bankers, financiers & investors has been developed in order to ensure that CASE stays closely linked to the int’l arena. This group also provides continuous feedback on its policies. Both the CMA & the CASE monitor market activity to detect possible market manipulation or insider trading. Accordingly, they may suspend offers & bids for institutions suspected of price manipulation. In the case of an emergency, the CASE and/or the CMA may halt trading and/or place ceilings on floors trading prices (maximum 5% up or down), based on the closing prices of the preceding day. In the case of individuals, mutual funds & international funds, no taxes are levied on dividends, capital gain & interest on bonds. Profits of Egyptian corporations from securities investments are subject to a capital gains tax. 2. 3. 1 Recent developments On 21 July 2002, CASE commenced its new price ceiling system with regard to the most actively traded stocks. According to the new practice, the five-percent ceiling on daily prices was removed for a set of selected active stocks (currently twelve). This set of stocks comprises 12 out of the most actively traded stocks on CASE. The chosen of this set of stocks was based on meeting some stated criteria decided by CASE (2002): †¢Stocks must be dematerialized. †¢Minimum trading days per company per year is 220. †¢Average number of transactions per stock must be 20. †¢Minimum market capitalization per company amounts to LE 200 million. Minimum free float amounts to 15 percent of the total listed shares. †¢Minimum turnover ratio per company is 10 percent. †¢The company must prepare financial statements for three consecutive years. †¢Transactions conducted on the shares of the company must be executed by at least 20 brokerage firms. The new practice will stipulate the halt of trading on any of the twelve stocks for a period of thirty minutes, forty-five minutes o r till the end of the trading session, if the stock prevailing weighted average price exceeds 10 percent, 15 percent or 20 percent respectively over opening price. When trading is halted, brokers should inform their clients about the temporary suspension, its reasons, duration and should take the necessary actions in order to fulfill their clients requests. Brokers are allowed to cancel, any of their clients’ orders, when trading is halted. 2. 3. 2 Background of Privatization Program The Ministry of Public Enterprise (MPE) is dedicated to achieve the long-term goal of complete implementation of Egypt’s overall privatization plan. In 1991 Public Enterprise Law No. 203 was introduced as a transitional measure. Dr. Khatab M. (Minister of Public Enterprise) (2002) has explained his Ministry’s plans and objectives to facilitate privatization in Egypt and the methods that have been followed in this regard. Also Dr. Mokhtar Khatab has mentioned to the Government of Egypt (GOE) his efforts in undertaking an extensive privatization program whereby state-owned companies are transferred to the private sector through several methods McKinney (1996). †¢The transfer of ownership & control of state-owned enterprise to the private sector through a partial or a full public share flotation on both the domestic or foreign stock exchanges. †¢Direct sale of a controlling interest to domestic or foreign investors. Direct sale of a controlling interest to employees. †¢The law also allows the sale or lease of company assets, unlimited sale of government-owned shares, or liquidation. Primary objectives of the plan are to generate higher productivity and faster (but sustainable) growth, and as a consequence an increase in returns on assets and equity while at t he same time raising internal efficiency, improving capital structure and increasing capital expenditure. Since the early 1990s a number of key programs have been put into place to greatly liberalize commerce and trade; and to re-frame the country’s legal, regulatory, judicial, and tax structures. An equally important focus of the plan is the creation of new jobs that an expanding economy will provide for the workforce. Over the past five years, the GOE has achieved very gratifying results in macroeconomic terms. This is due to the creation of policies to remove trade barriers, the reform of trade and financial markets, and the reform of the legal taxation and regulatory frameworks, Field (1995) 2. 3. 3 Updates on the Situation of the Privatized Companies The Government of Egypt (GOE) has designed a balanced privatization program, which includes the following share sales strategies. The Egyptian Ministry of Public Enterprise Sector (2001) revealed that: †¢Public Offerings on the Cairo and Alexandria Stock Exchange 37 companies have so far been approved by the GOE for privatization and have been sold through Initial Public Offering (IPO) or second offerings. The sales of these companies netted 5. 6 billion pounds which represents 36% of privatization proceeds to date. 16 companies have achieved partial privatization netting the government nearly 1. 76 billion LE. †¢Sale to Anchor and Strategic Investors 3 companies have been privatized by this method, accounting for 6. 4 billion pounds LE in proceeds to the government. Sales to anchor investors have amounted to 42% of the total privatization proceeds thus far. †¢Employee Stock Ownership Programs (ESOPs) The GOE has approved the allocation through the sale of 10 percent of the public enterprises’ share offerings to the employees as part of the â€Å"Employee Stock Ownership Program†. I n other cases, and according to the particular circumstances of each company, the majority of shares have been sold to its management and employees. To date, mainly medium-sized companies in the public works sector have implemented this scheme. So far, 30 Employee Shareholder Association (ESA) sales transactions have taken place bringing in 870 million pounds LE. †¢Lease Management Contracts In this method, Companies were offered for management by the government to the private sector with an option to buy at a future date. This alternative is not very different to the anchor investor approach if and when the managing company exercises its option to buy. Five contracts of this type are currently active. Chapter III PHARMACEUTICAL SECTOR OVERVIEW The government has set a 40% ceiling (maximum that could be privatized), 10% of which is reserved for Employee Shareholder Associations (ESA), on the privatization of any public pharmaceutical company. The restriction relates to the government’s desire to maintain control of the industry for its significant role in society, The Egyptian Ministry of Public Enterprise Sector (2001). The first five companies that have been privatized: Alexandria, Cairo, Memphis, Arab and Nile pharmaceuticals. These companies have already been 40% privatized. The privatization plan then expanded to cover 11 companies at the end of June 2002. . 1 Pharmaceutical Industry Highlights Drug policy and planning center (2002) has published the following statistics: 199920002001 Market Size (LE bn)4. 655. 42 No. of Products (thousand)3. 63. 84 Per capita spending (LE)72. 6677. 1882. 14 3. 2 Pharmaceutical Products Total exports made by Egypt to the whole world includes a lot of commodities which are classi fied to (Fuels Products, Cotton, Raw Materials, Semi finished commodities and finished commodities). Central Bank of Egypt (2002) revealed that Pharmaceutical products are considered as part of finished commodities, they represent 3% of finished commodities and 1. % of the total export. Also, Pharmaceutical products play a significant role in Egypt’s import. They represent 4% of the total import and 21% of their classification division (consumer goods). Figure (1) shows Pharmaceutical Export and Import situation. Figure (1) Local production of medicine satisfies 92% of the market demand, whereas the remainder is balanced by imports. Kompass Egypt (2002-2003) classified the local market players as: 1) Public-sector companies. 2) Private-sector companies. 3) Multinationals Figure (2) Note: The term Private sector encompasses Multinationals and other Private companies. The government has set a relatively low tariff on imported drugs, which averages around 5%. The main reason for this comparatively low duty is the state’s policy of making medicine available to the bulk of the population at the cheapest possible price. 3. 3 Pricing Policy Prior to the reform program in 1991, the government’s major consideration when setting prices for drugs was to make medicine affordable to the bulk of the population regardless of a company’s cost structure. The focus on the social role of medicine, rather than the profitability of pharmaceutical companies, is the main reason behind this policy. The Drug Policy & Planning Center (DPPC) is the main regulatory authority controlling the pharmaceutical industry. The center is in charge of drug registration and pricing. The DPPC (2002) uses a â€Å"Cost Plus Formula† to price drugs. The formula stipulates a price equivalent to the products cost plus a certain profit margin. The profit margin is 25% for nonessential products, and 15% for essential products. It is noteworthy that once a product has been priced, it is seldom eligible for re-pricing to account for increasing costs. The heavy drop in the value of the Egyptian pound was mirrored in an increasing raw material costs burdening the Egyptian Pharmaceutical companies, which import around 80% of their raw material requirements. In order to save the profit margins from the aftermath of the devaluation, the Ministry of Health finally agreed to raise the prices of five products for each pharmaceutical company starting February 2002. 3. 4 GATT and TRIPS Egypt is a signatory to the General Agreement on Tariffs and Trade (GATT) which will come into effect for the pharmaceutical sector in Egypt in 2005. The agreement is likely to have serious repercussions for the pharmaceutical industries of developing countries including Egypt. The agreement calls for the abolition of both quantitative and qualitative barriers to entry for pharmaceutical products, thus eliminating any governmental protection of the industry. Under GATT, Egyptian companies have to abide by the restrictions imposed by patents and property rights for a period of 20 years. Based on the Egyptian commitment with the agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS), which is part of the GATT, President of Egypt published The Law No. 2 for year (2002), calling for the Protection of any invention whether industrial or intellectual. The agreement will result in the extension of a patent to 20 years and will grant protection to the product and the production process. Chapter IV METHODOLOGY AND EMPERICAL MODELS 4. 1 Data Set In our study, we select all the pharmaceutical companies quoted in the Egypt ian stock exchange which consists of 11 pharmaceutical companies representing the pharmaceutical sector. We covered the period from 1996 to 2001. Analyzing six continuous years of data, strengthen and support results and give our conclusion stability and reasonability. Kompass Egypt Financial Year Book and the Egyptian Capital Market Authority were the prime sources for our data set. Additionally, for the purpose of this analysis, we calculate the returns using annually prices of securities for years starting from 1996 to 2001. 4. 2 Selection of Financial Ratios (Independent variables) According to the literature, we determine the most useful financial ratios that could be functional in security valuation by analyzing and comparing several papers and texts were analyzed and compared. The reasons behind the selection of these financial ratios: †¢Their talent in theoretical explanation of fundamental relationships and signals experienced by the firms. [Foster 1986] †¢The importance of their existence in published annual reports. [Gibson 1982] †¢Surveys proved that chief executive officers and other senior executives are concerning popular financial ratios for various types of decision making. [Walsh 1984] The following table provides the most common financial ratios that might affect stock returns. For each financial ratio, we provide the way of calculation, the hypothesized positive or negative relationship with stock returns. Table (1) The common financial ratios and their prediction with stock returns GroupFinancial ratiosVariablesEquationsPrediction of relationship ProfitabilityEarning per ShareEPSNet income / Number of shares outstandingPositive Return on EquityROENet income / owners’ equity Return on AssetsROANet income / total assets Profit MarginPMNet income / total sales LiquidityCurrent RatioCTRCurrent assets / Current liabilitiesNegative Quick RatioQR(Current assets – Inventory) / Current liabilities Operating Cash flow RatioOCFCash flow from operations / Current liabilitiesPositive LeverageDebt to Equity RatioDERLong term liabilities / owners’ equityNegative CoverageInterest CoverageICEBIT / interest expensePositive EfficiencyAssets TurnoverATOSales revenue / Total assetsPositive Receivables TurnoverRTOSales / Account Receivables EBIT: Earnings before Interest and Taxes We refer to the explanantion of these financial ratios (independent variables) in the Appendix section. . 3 Buy-and-Hold Returns (BHR) As far as the dependent variable is concerned, stock returns, there is no consensus on the appropriate methodology for calculating the long-run stock returns (see among other, Barber and Lyon, 1997; Kothari and Warner, 1997; Brav and Gompers, 1997; and Barber, Lyon and Tsai, 1999). Researchers use several methods to calculate long run returns, in particular Buy-and-Hold returns (BHRs) method. The first s tep in calculating Buy-and Hold return method is to calculate rate of return on stocks. We consider that the appropriate rate of return on a given stock is the difference between the stock prices in time t plus dividends in time t-1 and the stock prices in time t-1 , as follows: (1) Where is the return for security I for period t, refers to the closing price of security I at time t , and is the price of security I at time t-1 , is the dividend received for period t-1 for the firm I As far as we consider time t as a year, rate of return on stocks ( ) that we calculated from the previous equation is the Buy-and-Hold return method for a financial year. (2) Where is Buy-and-Hold Return for security i in period t. we consider it a year. 4. 4 Regression Model To determine the relationship between the independent variables (financial ratios) and the dependent variable (stock return), we follow a similar methodology to that of Belkaoui (1997) and estimate the following regression: (3) Where is the annual stock return of firm I at time t, is the earning per share for firm I at t ime t, is the return on equity for firm I at time t, is the return on assets for firm I at time t, is the profit margin for firm I at time t, is the current ratio for firm I at time t, is the quick ratio for firm I at time t, s the operating cash flow for firm I at time t, is the debt to equity ratio for firm I at time t, is the interest coverage ratio for firm I at time t, is the asset turnover for firm I at time t, is the receivable turnover for firm I at time t. Since the return of a given stock is based on a period extending from 9 months prior to the fiscal year-end and 3 months after the fiscal year-end, corresponding roughly with the period between announcing the financial statement, the starting month would be December for firms whose fiscal years end at Jun, the 30th and June for firms whose fiscal years end at December the 31st. CHAPTER V RESEARCH FINDINGS 5. 1 Results We present results of a regression model where independent variables in the regression equation are chosen in two ways (both general and step wise regression). Multicollinearity tests the correlation among two or more of the independent variables (financial ratios) used in the regression equation. Multicollinearity is a problem because it increases the likelihood of rounding errors in the calculation of the beta estimates and standard error, and also it may produces confusing and misleading (signs of beta parameters are different from those signs expected) results (Mendenhall, 1996). Table (2) shows that the existing problem in this Multicollinearity is especially evident for the correlation between the Current Ratio and the Quick Ratio reaching 0. 92 and significant at 99% level. Current Ratio and Quick Ratio are two faces for the same coin. They are categorized under liquidity ratios group, they have the same explanation about the result and there is a little bit difference in their equations (In Quick Ratio, Inventory is excluded from the Current Assets). So we eliminate Quick ratio from the independent variables (financial ratios) and retain on Current Ratio because it is more popular. Table (2) Correlation Matrix to explain the relationships among the financial ratios as independent variables VariablesQRATODERCTRICEPSOCFPMRTOROAROE QR1. 000 ATO-0. 4204*1. 000 DER0. 03920. 3860*1. 000 CTR0. 9239*-03478*0. 08801. 000 IC0. 3752*-0. 3246**-0. 15040. 3610*1. 000 EPS0. 1884-0. 2604**-0. 12480. 0724-0. 03061. 000 OCF0. 0641-0. 3243-0. 29300. 15720. 19970. 32021. 000 PM0. 1659-0. 4338*-0. 2835**0. 23450. 04750. 6245*0. 34311. 000 RTO-0. 2999**0. 1663-0. 0413-0. 0230-0. 0298-0. 19220. 6846*0. 16561. 000 ROA0. 0535-0. 1600-0. 4080*0. 16850. 17500. 6342*0. 6703*0. 6392*0. 3761*1. 000 ROE0. 1264-0. 1178-0. 01580. 21150. 10610. 11030. 8970. 2610**0. 18200. 3693*1. 000 * Significant at the 1% level ** Significant at the 5% level Table (3) & (4) show the multiple and step-wise regressions of the relationship between explanatory variables (financial ratios) and stock returns utilizing buy-and-hold return (BHR) method. The relationship between stock returns and common financial ratios is es timated using the following equation: Where is the annual stock return of firm i at time t. BHR is calculated as follows: Where is buy- and- hold return for security i, in period T, T is the trading month number 12, and indicates the first event month of calculating the return. s the dependent variable in the regression equation. Table (3) Multiple Regressions of the Relationship between Financial Ratios and Stock Returns Independent variables BetaT testSig. T 1- Current ratio (CTR)0. 7821993. 0940. 0055* 2- Interest coverage ratio (IC)0. 6895873. 0850. 0056* 3 Profit margin ratio (PM)0. 6434102. 5740. 0177** 4- Earnings per share (EPS)0. 3790681. 1190. 2757 5- Operating cash flow ratio (OCF)0. 2002970. 5430. 5931 6- Assets turnover (ATO)0. 1150700. 4550. 6537 7- Return on Equity (ROE)0. 0966730. 5010. 6215 8- Debt to equity ratio (DER)0. 0622020. 3040. 7640 – Receivables turnover (RTO)-0. 165573-0. 4660. 6457 10- Return on Assets (ROA)-0. 121268-0. 3320. 7433 Multiple R = 0. 68529F = 6. 76472 R square = 0. 46962Significant F = 0. 0031 * Significant at the 1% level ** Significant at the 5% level The results from table (3) show that the F test used to test the overall utility of the model indicates that the model is significant at the 99% level. However, the R square is 46. 96% indicating that the ten independent variables together explained approximately half of the variance in the yearly return of pharmaceutical sector as a dependent variable. Also, T test of the individual Betas (financial ratios) indicates that the most active ratios in determining stock returns are Current Ratio (CTR), Interest Coverage Ratio (IC) and Profit Margin Ratio (PM) with a significant level of 99%, 99% and 95% respectively. To check on the signs of the beta coefficient, the dependent variable (stock return) was regressed on each of the independent variables (financial ratios) and the signs of the resulting betas were checked against that of the original equation. There are three ratios which are Current Ratio, Receivable Turnover and Return on Assets that had different signs from the original regression equation The positive coefficient estimated for Current Ratio with stock returns is not expected because conservative policies that tend to keep current asset higher than current liability have lower risk and also have lower expected return than the aggressive policies. So we conclude that rational investors put more confidence in low risky stocks and look forward for stable stocks more than the temporary profitable stocks. On the other hand, Receivable Turnover ratio and Return on Assets ratio are completely insignificant as show in table (3), so there is nothing important to explain their different signs from the original prediction. Table (4) Step-wise Regression of the Relationship between Financial Ratios and Stock Returns Independent variables R? BetaT testSig. T ChangeAccumulation 1- Current ratio 0. 194050. 194050. 7302745. 2990. 0000* 2- Interest coverage ratio 0. 121330. 315380. 7161115. 2420. 0000* 3 Profit margin ratio 0. 072850. 388230. 4597934. 1170. 0001* Multiple R = 0. 62308F= 12. 69213 R square = 0. 38823 * Significant at the 1% level ** Significant at the 5% level In the next step, we utilize the step-wise regression to reach the final model that contains the significant explanatory variables and give better explanation for the relationship. Consistent with the general regression models, the step-wise results confirm the above mentioned findings as Current Ratio (CRT) is the most significant variable at the 99% and explained about 19% of the variance in the yearly return of pharmaceutical sector with R square about 19%, while R square for the model is about 39%. Interest coverage ratio has also explained about 12% of the variance in the yearly return of pharmaceutical sector. Interest coverage ratio is regarded as a measure of a company’s creditworthiness because it shows how much income there is to cover interest payments on outstanding debt. Profit margin ratio explained about 7% of the variance in the yearly return of pharmaceutical sector with R square 7%. From results we conclude that rational investors and stockholders are looking for strength and stability first then profitability when evaluating a pharmaceutical stock company. Table (5) Stepwise Multiple regression analysis for the good predictors Company R? BetaT testSig. T ChangeAccumulation 1- Memphis0. 466240. 466240. 73001412. 4530. 0000* 2- Cairo0. 213940. 680180. 6092937. 6880. 0000* 3- Alexandria0. 094360. 77454-0. 521862-4. 6470. 0001* Multiple R = 0. 88006F= 23. 73573 R square = 0. 77454 * Significant at the 1% level ** Significant at the 5% level Stepwise multiple regression model yielded a reduced equation containing only three companies (independent variables) explaining about 77% of the variance in the yearly return of pharmaceutical sector as a dependent variable: the analysis yielded three good predictors as demonstrated at table (5), the results proved that Beta value of Memphis Pharmaceutical and Chemical Industries was 0. 73 and it is significant at 99% level. Additionally, Memphis Company alone explained about 47% of the variance in the yearly return of the pharmaceutical sector. The second good predictor is Cairo Pharmaceutical and Chemical Industries while its Beta value was 0. 60 and it is significant at 99% level. Cairo Company alone explained about 21% and together with Memphis Company explained about 68% of the variance in the yearly return of the pharmaceutical sector. The third and last predictor is Alexandria Pharmaceutical and Chemical Industries with a Beta value of -0. 52 and significant at 99% level. Alexandria Company explained alone about 9% of the variance in the yearly return. 5. 2 Summary and Conclusion The relationship between financial ratios and stock returns has been a popular issue in the area of accounting and finance for a long time, so we found that it is a good issue to discuss on the Egyptian stock market. Here, an analysis is undertaken to show the value relevance of the financial ratios and their usefulness in security valuation in the Egyptian pharmaceutical sector. In our research, we use step-wise multiple regressions between financial ratios and stock returns, also between pharmaceutical companies’ returns and pharmaceutical sector returns. The results from using step-wise and multi regression indicate that Current Ratio (CTR), Interest Coverage Ratio (IC) and Profit Margin Ratio (PM) respectively, are the most relevant ratios in determining stock returns. Additionally, Memphis Pharmaceutical and Chemical Industries is the most relevant company in explaining the variance of the pharmaceutical sector return as a whole. Finally, it seems that Current Ratio (CTR), Interest Coverage Ratio (IC) and Profit Margin Ratio (PM) play a significant role in formulating investment decisions in the Egyptian stock market (specifically, Pharmaceutical sector). Egyptian rational investors put more confidence in low risky stocks and look forward for stable stocks more than the temporary profitable stocks. 5. 3 Further Research The study was conducted on Egyptian pharmaceutical sector and taken all pharmaceutical companies (11 companies) that have been quoted in Egyptian stock exchange, covered the period from 1996 to 2001. Replicating the study on other sectors in Egypt such as (Agriculture, Food & Beverages, Construction, Banks†¦) at different times could be very useful. The study could be also replicated on the valuable Egyptian market indices such as (Case 30, IFCG, MSCI, EFG Hermes). These studies could help in determining more clearly the relationship between financial ratios as independent variables and stock returns as dependent variable. CHAPTER VI REFRENCES Barber, B. , Lyon, J. , and Tsai, C. , (1999), â€Å"Improved Methods for Tests of Long-Run Abnormal Stock Returnsâ€Å", Journal of Finance, 54 (1), 165-201. Baraber, B. , and Lyon, J. , (1997), â€Å"Detecting Long-Run Abnormal Stock Returns: The Empirical Power and Specification of Test Statisticsâ€Å", Journal of Financial Economics, 43 (3), 41-72. Brav, A. , and Gompers, P. , (1997), â€Å"Myth or Reality? The Long-Run Underperformance of Initial Public Offerings: Evidence from Venture Capital and non-Venture Capital-Backed Companiesâ€Å", Journal of Finance, 52 (5). Capital Law 95/1992, â€Å"Intermediation Companies†, (CMA. gov. eg), Available: http//www. cma. gov. eg /En-nf/index4. html, (Accessed: 2003, January 20). CASE, (2002), â€Å"What’s New†, (Egyptse. com), Available: http://www. egyptse. com, (Accessed: 2003, February 7). Central Bank of Egypt (2002), â€Å"Proceeds of commodity Exports and Imports by degree of processing†, (CBE. org. eg), Available: http//www. cbe. org. g, (Accessed: 2003, February 9). Charles, P. J. , (2002), â€Å"Investments Analysis and Management†, Seventh edition, John Wiley & Sons Inc. , NY: Third Avenue. David, I. , and Pitman, (2001) â€Å"Foundation for SME Development: Key Financial Ratios† Available: www. google. com , (Financial Ratios). EgyptWatch, (2002), â€Å"Egypt Stock Market†, (Egyptwat ch. com), Available: http://www. egyptwatch. com/en/Finance/Indicators/stock. doc (Accessed: 2003, February 16). Eugene F. B. , and Joel H. H. , (1998), â€Å"Fundamentals of financial management†, eightth edition, The Dryden Press. Field, M. (1995), â€Å"The Slow Road to Privatization†, Euromoney, Middle East Markets Supplement, November 12-13. Foster, G. (1974). â€Å"Financial statements Analysis: A New Approach†, Englewood Cliffs, NJ: Prentice Hall. Gibson, C. H. (1982a), â€Å"How Industry Perceives Financial Ratios†, Management Accounting. April, p. 13-19 Gibson, C. H. (1982b), â€Å"Financial Ratios in Annual Reports†, The CPA Journal, September, p. 18-29 Holthausen, R. W. , and Larcker, D. F. , (1992), â€Å"The prediction of stock return using financial statement information,† Journal of Accounting and Economics, Vol. 15, p. 373-412. John M. R. and Jeanne Y. H. (1998), â€Å"The power of cash flow ratio†, Journal of Accounta ncy, October, p. 53-55, 56-58, 60-61. Khatab, M. , (2002), â€Å"Minister’s Message†, Available: www. mpe-Egypt. gov. eg Kompass Egypt Financial Yearbook (2002 – 2003), Pharmaceutical & Health Care, Published by Fiani & Partners, Cairo, Egypt. Kothari, S. , and Warner, J. , (1997), â€Å"Measuring Long-Run Horizon Security Price Performance†, Journal of Financial Economics, 43 (3), 30-40. Lev, B. , and Thiagarajan, S. , (1993), â€Å"Fundamental Information Analysis,† Journal of Accounting Research. Autumn, p. 190-250. McKinney, B. M. (1996), â€Å"Recent Development in Egyptian Investment Policies and Programs, and Pending Reform Legislation† Middle East Executive Reports, 19 (7), 9-12. Mendenhall, W. , and Sincich, T. , (1996), â€Å"A Second Course in Statistics Regression Analysis†, Fifth edition, Prentice Hall. Mishkin, F. S. (2001), â€Å"The Economics of money, banking, and financial markets†, Sixth Edition, Adison Wisel y, Boston. MohieEldin, M. and Sourial, M. S. , Institutional Aspects, Distributional Characteristics and Efficiency of Egyptian Securities Market, in Arab Stock Markets: Recent Trends and Performance, edited by Riad Dahel, (Cairo: AUC Press, 2000), 1-44. Ou, J. , Penman, S. 1989. â€Å"Financial statement analysis and the prediction of stock returns,† Journal of Accounting and Economics, Vol. 11, p. 295-330. Peter S. R. , (1999), â€Å"Commercial bank management†, fourth edition, McGraw-Hill Companies, NY: Avenue of the Americas. Riahi-Belkaoui, A. (1997). â€Å"Value relevance of popular financial ratios,† Advances in Quantitative Analysis of Finance and Accounting, Vol. 5, pp. 193-201. Ross, Westerfield, and Jaffe, (2002) â€Å"Corporate Finance†, Sixth edition, McGraw-Hill Companies, NY: Avenue of the Americas. The Capital Market Authority, (2002), â€Å"CMA Public Information Center†, (CMA. ov. eg), Available: http://www. cma. gov. eg/En-nf/index5. html (Accessed: 2003, January 20). The Drug Policy and Planning Center, (2002), Pharmaceutical Industry Statistics, (DPPC. gov. eg), (Accessed: 2003, February 10) The Egyptian Ministry of Public Enterprise Sector, (2001), Privatization Program perform ance from the start to February 2001, (Cairo: MPES), http://www. mpe-egypt. gov. eg/privatize. asp#methods. (Accessed: 2003, February 16) The Law No. 82 for year (2002), â€Å"Trade-Related Aspects of Intellectual Property Rights (TRIPS)†, Pharmacy and Medicine, March 2003, Vol. 24, p. 44-55 Timo S. , Ilkka V. , Paavo Y. O. (1990), â€Å"On the Classification of Financial Ratios†, published on the Word Wide Web as http://www. uwasa. fi/~ts/sera/sera. html Walsh, F. J. (1986), â€Å"The Relative Information Content of Accruals and Cash Flows: Combined Evidence at the Earnings Announcement and Annual Report Release Date† Journal of Accounting Research, p. 165-200 CHAPTER VII APPENDIX (A) Financial Ratios Financial ratios are very important for new investors who would like to invest in the firm and also for stockholders who are the investors of the firm because financial ratios give them several indicators which they can evaluate the firm with. 1) Profitability Ratios The main goal of these ratios is to help us to judge how good the firm's profit performance. Profitability ratios refer to the ability of a firm to generate revenues in excess of expenses. 1. 1 Earnings per Share The portion of a company’s profit allocated to each outstanding share of a company’s common stock. E arnings per share is simply a fundamental measure of profitability that shows how much profit was generated on a per-share-of-stock basis. EPS doesn’t reveal a great deal. Its true value lies in comparing EPS figures across several quarters, or years, to judge the growth of a company’s earnings on a per-share basis. David Irwin (2001) Therefore, studying refers to a positive relationship between EPS and stock market return. To calculate EPS, start with net income (earnings) for the period in question, subtract the total value of any preferred stock dividends and then divide the resulting figure by the number of shares outstanding during that period. Or: Net income / Number of shares outstanding 1. 2 Return on Equity ROE is a fundamental indication of a company’s ability to increase its earnings per share and thus the quality of its stock, because it reveals how well a company is using its money to generate additional earnings. ROE allows investors to compare a company’s use of their equity with other investments, and to compare the performance of companies in the same industry. ROE can also help to evaluate trends in a business. Businesses that generate high returns on equity are businesses that pay off their shareholders handsomely and create substantial assets for each dollar invested as mentioned by Peter S. 1999). To calculate ROE, divide the net income shown on the income statement by shareholders’ equity, which appears on the balance sheet: Net income / owners’ equity 1. 3 Return on Assets A Company’s profitability expressed as a percentage of its total assets. Return on assets measures how effectively a company has used the total assets at its disposal t o generate earnings. Because the ROA formula reflects total revenue, total cost, and assets deployed, the ratio itself reflects a management’s ability to generate income during the course of a given period, usually a year. Ross (2002) Naturally, the higher the return the better the profit performance. ROA is a convenient way of comparing a company’s performance with that of its competitors. ROA should have a positive relationship with the stock market return. To calculate ROA, divide a company’s net income by its total assets, then multiply by 100 to express the figure as a percentage: Net income / total assets 1. 4 Profit Margin Profit Margin is a company’s net profit or loss as a percentage of total sales for a given period, typically a year. This ratio shows how efficiently management uses the sales revenue, thus reflecting its ability to manage costs and overhead and operate efficiently. It also indicates a firm’s ability to withstand adverse conditions such as falling prices, rising costs, or declining sales. Ross (2002) The higher the figure, the better a company is able to endure price wars and falling prices. Investors tend to prefer a higher percentage of profit margins, which considered being an indication of a positive relationship between profit margin and stock market return. The calculation is very basic: Net profit / total sales (2) Liquidity Ratios These are ratios that measure the liquidity of the firm. Firms have to ensure that they have the liquidity required to meet all their commitments. To the extent a firm has sufficient cash flow; it will be able to avoid defaulting on its financial obligations and, thus avoid experiencing financial distress. 2. 1 Current Ratio Current ratio is the company’s liquidity and its ability to meet its short-term debt obligations. By comparing a company’s current assets with its current liabilities, the current ratio reflects its ability to pay its upcoming bills in the unlikely event of all creditors demanding payment at once. Current liabilities are debts that are due within one year from the date of the balance sheet as mentioned by Charles P. (2002). The basic source from which to pay these debts is a current asset. As long as firms are searching for no risks by increasing current assets, profitability will be getting shrunk. So that current ratio should have a negative relationship with stock market return. Working capital is also called net current assets or current capital, and is expressed as: Current assets / Current liabilities 2. 2 Quick Ratio How quickly a company’s assets can be turned into cash, which is why assessment of a company’s liquidity also is known as the quick ratio, or simply the acid ratio. Regardless of how this ratio is labeled, it is considered a highly reliable indicator of a company’s financial strength and its ability to meet its short-term obligations. Because inventory can sometimes be difficult to liquidate, the quick-test ratio deducts inventory from current assets before they are compared with current liabilities-which is what distinguishes it from the current ratio. Potential creditors like to use the quick-test ratio because it reveals how a company would fare if it had to pay off its bills under the worst possible conditions. Indeed, the assumption behind the quick-test ratio is that creditors are howling at the door demanding immediate payment, and that an enterprise has no time to sell off its inventory, or any of its stock. This ratio should have also negative relationship like the current ratio with stock market return. The quick-test is computed by subtracting inventories from current assets and dividing the difference by current liabilities: (Current assets – Inventory) / Current liabilities . 3 Operating Cash Flow Ratio Traditional working capital ratios indicate how much cash the company had available on a single date in the past. Cash flow ratio, on the other hand, tests how much cash was generated over a period of time and compare that to near-term obligations as published by John R. and Jeanne H. (1998). This ratio should str engthen the investors’ confidence toward the firm, therefore it should be positively related with stock market return. The numerator of the OCF ratio consists of net cash provided by operating activities. This is the net figure provided by the cash flow statement after taking into consideration adjustments for non-cash items and changes in working capital. The denominator is all current liabilities, taken from the balance sheet: Cash flow from operations / Current liabilities (3) Leverage Ratios 3. 1 Debt-to-Equity Ratio How much money a company owes compared with how much money it has invested in it by principal owners and shareholders. The debt-to-equity ratio reveals the proportion of debt and equity a company using to finance its business. It also measures a company’s borrowing capacity. The higher the ratio, the greater the proportion of debt but also the greater the risk. Mishkin (2001) describes the debt-to-equity ratio as â€Å"a great financial test† of long-term corporate health, because debt establishes a commitment to repay money throughout a period of time, even though there is no assurance that sufficient cash will be generated to meet that commitment. Creditors and lenders, understandably, rely heavily on the ratio to evaluate borrowers. As long as this ratio is considered to be low, investors’ confidence will be increased which negatively related with the stock performance. The debt-to-equity ratio is calculated by dividing debt by owners’ equity, where equity is, typically, the figure stated for the preceding calendar or fiscal year. Debt, however, can be defined either as long-term debt only, or as total liabilities, which includes both long- and short-term debt. The most common formula for the ratio is: Long term liabilities / owners’ equity (4) Coverage Ratios 4. 1 Interest Coverage The amount of earnings available to make interest payments after all operating and non-operating income and expenses—except interest and income taxes—have been accounted for. Interest coverage is regarded as a measure of a company’s creditworthiness because it shows how much income there is to cover interest payments on outstanding debt. Banks and financial analysts also rely on this ratio as a rule of thumb to gauge the fundamental strength of a business as argued Eugene F. & Joel H. (1998). Investors also rely on this ratio to examine the strength of a firm’s financial statement while this ratio should have a positive relationship with stock market return. Interest coverage is expressed as a ratio, and reflects a company’s ability to pay the interest obligations on its debt. It compares the funds available to pay interest—earnings before interest and taxes, or EBIT—with the interest expense. The basic formula is: EBIT / interest expense (5) Efficiency Ratios Ratios of turnover are constructed to measure how effectively the firm’s assets are being managed. 5. 1 Asset Turnover The amount of sales generated for every pound’s worth of assets over a given period. Asset turnover measures how well a company is leveraging its assets to produce revenue. A well-managed manufacturer, for example, will make its plant and equipment work hard for the business by minimizing idle time for machines. The higher the number the better-within reason. As a rule of thumb, companies with low profit margins tend to have high asset turnover; those with high profit margins have low asset turnover. This ratio can also show how capital intensive a business is. Some businesses-software developers, for example-can generate tremendous sales per dollar of assets because their assets are modest. At the other end of the scale, heavy industry manufacturers need a huge asset base to generate sales as refered by Eugene F. & Joel H. (1998). As long as the plant and equipment work hard and sales are increasing that would be an indication of a good sign. Consequently, this ratio should be a positively related with stock market return. Asset turnover’s basic formula is simply sales divided by assets: Sales revenue / Total assets 5. 2 Accounts Receivable Turnover This ratio explains the number of times in each accounting period, typically a year that a firm converts credit sales into cash. A high turnover figure is desirable, because it indicates that a company collects revenues effectively, and that its customers pay bills promptly. A high figure also suggests that a firm’s credit and collection policies are sound. In addition, the measurement is a reasonably good indicator of cash flow, and of overall operating efficiency as hence by Mishkin (2001). This ratio should have a positive relationship with stock return. The formula for accounts receivable turnover is straightforward. Simply divide the average amount of receivables into annual credit sales: Sales / Account Receivables (B) Statistical Results

Globalization Between Rich and Poor Countries

Globalisation may be the concept of the 1990s, a key by which we understand the transition of human society in to the third millennium. My essay will be focusing on the economic side of it. I will be explaining the MNCs effect on the poor countries in respect to the rich countries ( of course intending developed countries and less developed countries), in order to do so I will first need to introduce the concept of economic development. We will find that the impact of MNCs on LDCs can be under many aspects crucial to the development of the latter, even though it is important to bare in mind the positive contribution MNCs can bring in to LDCs. However in order to cover all the points of this wide topic, it would have been necessary to look at not only the economic side that there is to it , but as well political, social and cultural sides, which are here only briefly referred to. The main concern of theorists of imperialism has been to explain why rich ( or capitalist ) states behave the way they do toward poor states. With the birth of dozens of new states in the years after the Second World War, interest was sparked on the other side of the imperialistic coin, so to speak. From the point of view of this new states, understanding why states behave imperialistically is only part of the problem. The other part focuses on the question of how best to deal with richer, larger states to achieve economic well-being and political independence. Answers to this questions, so far at least, have been much more numerous than examples of success in attaining these goals. The experience of Third World countries in the four decades since the Second World War has demolished one theory after the other concerning the most effective ways to speed development. In the 1950's, the United States dominated the world economically, and Americans likewise tended to dominate the discussion about economic development in academic circles as well as in international forums. Even Americans, of course, had a variety of ideas about how the emerging new countries could best achieve economic growth, but a few basic themes and assumptions were widely shared. One implicit assumption was that England, the United States and other industrialised Western countries served as historical model that the new countries should try to emulate in their efforts to develop politically and economically. This emulation meant, in the orthodox view, that the new countries should adopt free enterprise systems based individual initiative and democratic political systems. In general, development theories in the 1950s stressed the importance of internal changes in the new states as the crucial steps toward economic development. On the other point of view, the dependency theorists, do not deny that internal changes are necessary, but from their point of view, orthodox analysts seriously underestimate the extent to which the problems of Third World countries are caused by factors external to those countries and the impact of the international economic and political environment on them. â€Å"It fiddles its accounts. It avoids or evades its taxes. It rings its intra-company transfer prices. It is run by foreigners from decision centres thousands of miles away. It imports foreign labour practices. It doesn't import foreign labour practices. It overpays. It underpays. It competes unfairly with local firms. It is in cahoots with local firms. It exports jobs from rich countries. It is an instrument of rich countries' imperialism. The technologies it brings to the third world are old-fashioned. No, they are to modern. It meddles. It bribes. Nobody can control it. It wrecks balances of payments. It overturns economic policies. It plays off governments against each other to get the biggest investment incentives. Won't it come and invest? Let it bloody come home. (The Economist, January 21, 1976, p. 68) It of course refers to Multinational Corporations. One reason why developing countries turned to bank loans in the late 1970's involved their suspicion about foreign investments by multinational corporations (MNCs). MNCs provoke some of this suspicion because they so large. In fact, many of them, by some measures , are larger economic units then developing countries. As can be seen in Appendix 1, if we compare the GNPs of countries with the gross annual sale of MNC's, several of the largest economic units in the world are not states, but corporations. In these terms, General Motors is bigger than Argentina, and Exxon is larger than Algeria or Turkey. Another reason that MNCs in developing countries provoke suspicion is that comparisons of inflows and outflows of capital associated with their activities shows, years after year and place after place, that MNCs take more money out of developing countries then they put in to them. In addition, critics of MNCs point out that these companies do not bring much money in to developing countries in the first place. Instead, they borrow from local sources or reinvest profits that they have earned in foreign countries. â€Å"Over the 1966-1976 period, 4 percent of all net new invested funds of U. S. transnational corporations in the less developed countries where reinvested earnings, 50 percent were funds acquired locally, and only 1 percent funds newly transfered from the United States† (emphasis added). Defenders of MNCs concede that inflows from investments by corporations in developing countries are typically smaller than outflows of repatriated profits. But such comparisons are irrelevant or misleading. The fact that corporations took more money out of Country X in 1998 that they put into that country in that same year does not prove that Country X is being â€Å"decapitalised†, because what comes out from Country X in the form of repatriated profits in that year is not a function of funds going into the country during that time. Rather the profits of 1998 are the result of corporate investments in several preceding years. Such comparison also ignore the facts that once capital is invested in a country (even if it is borrowed from banks within that country), it forms the basis of a stock of capital, which can grow and produce more with each passing year. In other words, once a factory is set up, some of the profits every year will be sent to the MNC's home country, and it is quite possible that no money will be brought in. But part of the rest of the profits, year after year, will be paid in taxes, and the remainder will be used to expand production, hire new people, and pay more each year in salaries and wages. This argument certainly does not end the controversies surrounding MNCs. They also are blamed for balance-of-trade problems, for using inappropriate capital-intensive technology (in countries where labour is in surplus supply), and for encouraging the rich to indulge in conspicuous consumption of luxury products instead of investing in the productive capacity of their countries, while at the same time persuading the poor to drink Coca-Cola instead of milk. Perhaps the strongest argument that can be made in defence of MNCs point out that in the long run, they are destined to get caught in dilemmas from which there is no obvious escape. Take, for example, the focus by critics on the enormous profits that they repatriate. If MNCs respond to this criticism by bkeeping that money in the host countries and reinvesting it there, they are unlikely to boost their own popularity. Continuous reinvestment will eventually become very threatening in the host country as MNCs expand and take over larger shares of domestic markets. If MNCs avoid capital-intensive technology and turn to more labour intensive production techniques, critics complain that they are using poor countries as dumping ground for obsolete technology. In general, the longer a MNC stays in a developing country, the more reasons there will be for it to become unpopular. When they first arrive, they create jobs and face the risk of failure. But after they have become established, the risks are minimal, and they seem to be sitting there raking in enormous profits. If the MNC hires many local people for important positions of responsibility, this is likely to speed the day when the nationals feel they can run the subsidiary on their own, without the help of the MNC. If the MNC keeps citizens of the host country out of management positions, that may lead even more quickly to antagonism on the part of the host country, whose citizens will argue that MNC's employment policies are designed to keep them in a position of permanent subordination and dependence. That subsidiaries of MNCs in developing countries will become unpopular seems all but inevitable, but that unpopularity is not necessarily deserved. They may serve for engines of development even if they provoke antagonism and opposition. Many researchers have tried to determine the overall impact of MNCs in developing economies by statistically analysing the relationship between foreign investments and economic performance . Some have found that foreign investments in Third World countries retards economic growth; additional analyses reveal correlations between foreign investments and inequalities in the distribution of wealth. But the weight of contrary evidence is such that conclusions regarding these controversies must be even more than normally tentative . Albert Szymansky concludes that much of the empirical work reporting deleterious effects of foreign investment â€Å"in reality†¦ demonstrates nothing more than how easy it is to produce just about any conceivable results with multivariate computer analysis- if one is willing to throw in enough control variables and utilise enough different sets of countries† . Although this comment may be insensitive to many complex problems that can make simple, seemingly more straightforward analyses even more misleading, it does voice what seems to be an increasingly common opinion about the impact of MNC investment in developing countries: the nature of the impact depends on how the government of a given country deals with it. (And how is dealt with is not inevitably determined by the presence of the investment. ) In other words, MNC investments can have bad effects, but dealt with effectively, they also can bring substantial benefits. As Robert Gilpin concludes, MNCs are â€Å"neither as positive nor as negative in their impact on development as liberals or their critics suggests. Foreign direct investment can help or hinder, but the major determinants of economic development lie within LDCs (less-developed countries) themselves† . However, dependency theorists would disagree. Their basic argument is that foreign investment, or any other economic contact that poor countries have with the world's economic system, particularly with the rich, capitalist, industrialised countries, has almost uniformly disastrous effects on the economic and political fortunes of those countries.

A Summer Life Rhetoric Analysis - Free Essay Example

Sample details Pages: 2 Words: 634 Downloads: 4 Date added: 2017/09/12 Category Advertising Essay Did you like this example? Jennie Le AP English 29 August 2010 A Summer Life rhetoric analysis In his autobiographical narrative A Summer Life, Gary Soto vividly recreates the guilt felt by a six- year-old boy who steals an apple pie. Through Soto’s reminiscent he has taken us on a journey of his guilt, paranoia, and redemption through the usage of tone, allusions, and imagery. Since Soto knows stealing the pie is a sin his guilt is amplified when he ignores his knowledge. Soto’s guilt is emphasized through the tone of the story, â€Å"my sweet tooth gleaming and the juice of my guilt wetting my underarms†¦ I nearly wept trying to decide which to steal. † By Soto’s tone towards the pies over exaggerating on which one to steal shows that he is nervous and anxious. This reveals that Soto knew what he was doing however he was feeling bored so he disregarded his prior knowledge. Another example of how Soto feels guilty is when he was trying to rationalize what he has just done. After stealing the apple pie Soto says to himself, â€Å"No one saw†. Don’t waste time! Our writers will create an original "A Summer Life Rhetoric Analysis" essay for you Create order By saying, â€Å"No one saw† Soto reveals the guilt that he is feeling but tries to defend what he just did by rationalizing his actions. It also shows that he is denying and that he is really feeling panic and anxiousness. Soto feeling guilty eventually made him feel paranoia. His paranoia is apparent with the religious allusion, â€Å"A squirrel nailed itself high on the trunk†. By using this religious allusion illustrates that his guilt has developed into paranoia when the squirrel is being nailed somewhat exactly how Jesus got nailed onto the cross. This reveals that his anxiousness and panic have turned into fear. Another example that shows Soto’s guilt is the allusion of Adam and Eve. By referring to Adam and Eve, Soto reminisces on what Sister Marie showed him in the video when Adam and Eve were casted into the desert, â€Å"I knew an apple got Eve in trouble with the snakes because Sister Marie had shown us a film about Adam and Eve being cast into the desert, and what scared me more than falling from grace was being thirsty for the rest of my life. This reveals that Soto is afraid and nervous since he committed a sin. When Soto refers back to Adam and Eve tells the reader that Soto is aware of his wrong doing but ends up disregarding his prior knowledge and feels paranoid. After stealing the apple pie and feeling guilty and paranoid Soto seeks redemption and shows that through imagery. Soto tries to redeem himself by helping his sister but later has to crawl underneath the house because the image of the kitchen swir ling was too much, â€Å"the kitchen swirling with heat and flies† this image resembles Hell. This image reveals that the guilt was too much for Soto and that the crawling underneath the house resembles asking for forgiveness. During the time Soto goes underneath the house and stays there he gives the image that Soto is coming back alive and free of sin, â€Å"I lay until I was cold and then crawled back to the light, rising from one knew, then another†. This image religiously represents that Soto is coming back from the dead and rising into the light. This image shows that Soto is forgiven and that his sin for stealing the apple pie is gone. Throughout the story Soto feels guilty and seeks redemption because Soto steals the apple pie. His guilt is magnified when he thinks everyone knows of his sin, and starts to develop paranoia. The author’s attitude towards guilt affects how he is behaving. By using imagery and allusions Soto recreates the guilt felt by a young boy who has stolen an apple pie.