by Jean DERMINE. * Associate Professor of Finance, INSEAD ...

"DEPOSIT INSURANCE, CREDIT RISK
AND CAPITAL ADEQUACY: A NOTE"
by
Jean DERMINE.
N° 92/I9/FIN
* Associate Professor of Finance, INSEAD, Boulevard de Constance,
Fontainebleau 77305 Cedex, France.
Printed at INSEAD,
Fontainebleau, France

DEPOSIT INSURANCE, CREDIT RISK AND CAPITAL ADEQUACY, a Note
by Jean Dermine*
INSEAD,Fontainebleau
March 1992
*Research undertaken while the author was Visiting Fellow at New York University
Salomon Center. The author acknowledges the insightful comments of Mark Flannery,
Itzhak Swary and participants of the University of Florida (Gainsville) Finance Seminar and
of the Seminario de Economia Financiera of the Fundacion Banco Bilbao Vizcaya,
Barcelona.

Abstract
DEPOSIT INSURANCE, CREDIT RISK AND CAPITAL ADEQUACY, a Note
Previous research on deposit insurance and capital adequacy has modeled the bank
as a corporate firm with risky assets and insured liabilities. No attempt was made to analyze
explicitly the risk characteristics of bank assets. The purpose of this paper is to model bank
lending and calculate credit-risk sensitive insurance premia. The lending function of banks
creates the need to model equity as a 'capped' call option. Previous estimates of insurance
premia which are based on a 'naked' call assumption could be biased. Moreover, it is shown
that the Modigliani-Miller capital structure irrelevance theorem implies the ineffectiveness
of bank capital regulations.

1
The seminal work by Black and Scholes (1973) on the valuation of options has led
to four applications in the banking literature : Pricing of deposit insurance (Merton
(1977,1978), Pennacchi (1987), Allen and Saunders (1990)), design of capital requirement
(Pyle (1986), Ronn and Verma (1989)), risk premium evaluation on bank subordinated debt
(Gorton and Santomero,1990), and determination of examination schedules (Kuester and
O'Brien, 1991). Applied papers by Marcus and Shaked (1984), Ronn and Verma
(1986,1987), and Giammarino, Schwartz and Zechner (1990) elicit from observable market
data the necessary parameters to evaluate deposit insurance premia. A constant in these
papers is that the role of banks as financial intermediaries is not modeled explicitly. The
bank is considered as a corporate firm with insured liabilities and risky assets that follow
a Wiener process. Equity, subordinated debt, deposits or deposit insurance liability are
priced as contingent claims on the assets of the bank. Equity is equivalent to a call option,
while the deposit insurance liability is modeled as a put option. Two exceptions in this
literature are McCulloch (1984) and Crouhy and Galai (1986, 1991) who model explicitly
the maturity transformation role of banks and who calculate interest-sensitive risk premia.
The purpose of this paper is to provide an analysis of credit-risk sensitive insurance premia.
The motivation is twofold. First, lending is an essential function of banks. A FDIC study
(1983) reports that the prime cause of bank failure is credit risk in 75 % of the cases. An
explicit formulation of credit risk should provide more information on the underlying
exposure of deposit insurers. Secondly, the empirical studies by Marcus-Shaked (1984),
Ronn-Verma (1986) and King-O'Brien (1991) yield a positive correlation between the
market capitalisation-to-deposit ratio of banks and the variance of asset returns. Strongly
capitalized banks would hold riskier assets. One does wonder whether this result can be
caused by a misspecification of the valuation functions.
The results are as follows. Firstly, the lending function of banks creates specific risk
characteristics and the necessity to model the equity of a bank as a call option which is

2
being capped. Previous empirical estimates of insurance premia that are based on a 'naked'
call assumption could be biased. Highly leveraged banks in the Ronn-Verma sample appear
to hold riskier assets, increasing substantially the liability of the deposit insurer. Secondly,
the depositors are protected by two equity cushions : Those of the bank and of the
borrowers. It is shown that the Modigliani-Miller capital structure irrelevance theorem
implies the ineffectiveness of bank capital regulations.
The paper is organized as follows. The theoretical valuation model is developed in
Section One. The ineffectiveness of bank capital regulations in a Modigliani-Miller world
is proven in Section Two. A numerical analysis of the effect of misspecification on the
market-based estimation of insurance premia follows in Section Three.
SECTION ONE : THE VALUATION MODEL
The standard contingent claim approach is applied to a bank-borrower situation. A
firm is funding an asset (market value =A E) with a bank loan (Lf) and equity (E r). The bank
funds the loan with insured deposits (D b) and equity (Eb). The promised payments on the
zero coupon loan and deposits, L and D respectively, are set in a perfectly competitive
market. Loans and deposits have a maturity T. The balance sheets of the firm and of the
bank are as follows :
Af
Lf (L) Db (D)
Ef
Eb
The Firm The Bank'
The market value of the asset of the firm varies continuously over the time interval
(0,T) according to the stochastic process
'The balance sheet of the bank does not include the fixed insurance premium which has
been paid upon receipt of the deposits.

3
dAt = pAtd, + oAtdWt,
where p is the instantaneous expected rate of return on the asset, a is the instantaneous
standard deviation of the return and W t is a Wiener process. The stochastic process implies
that the value of the asset A, will follow a lognormal distribution.
As is well known from option theory (Black and Scholes,1973), the market value of
the equity of the bank (MVE) is a call option on the asset of the bank, that is
MVE = Call (Value of loan, D)
= Call (L-Put(A, L), D),
i.e., the ability to buy the asset of the bank at an exercise price D. The value of the asset
of the bank is the promised payment on the loan (L) reduced by a put option given to the
borrower who can sell his end-of-period asset A at a price L. Applying the Put-Call-Parity
theorem to the value of the asset of the bank, one obtains :
e'rTL-Put (A,L) = Call(L-Put(A, L), D) + D.e -rT -Put(L-Put( A, L), D) (1).
The asset of the bank is equal to the equity (the call), plus the discounted value of
the exercise price (D) minus the liability of the insurer (the put). This allows to write the
market value of the equity of the bank (MVE) as follows :
MVE = Call = - Put(A, L)) - D.er + Put(L-Put(A, L), D)
= + Put(A, D) (2).
The simplification of the insurance liability occurs because the put on the asset of the bank
will only be exercised when the bank defaults, that is when the borrower defaults and hands
his assets A to the bank2.
2The assumption of equal maturity for deposits and loans permits this simplification.
Otherwise, the value of bank assets, at the deposit maturity date, would be equal to L-
Put(A,L).

4
Graphically, the value of the equity of the bank can be represented as follows :
MVE
L—D
D b D L f
L A f
A
Lb
Ef
Figure One : The Market Value of the Bank's Equity
The value of the equity of the bank is bounded upward by a cap, the promised loan
payment (L) net of the deposit (D). It is bounded downward by the put received from the
deposit insurer. The upward sloping segment represents the borrower's default case with the
bank holding the end-of-period asset A. At the beginning of the period, the asset Af is equal
to the sum of deposits and equities of the bank and of the borrower. An alternative way to
interpret the risk characteristics is to observe that the deposits and equity of the bank are
equivalent to a senior claim and subordinated debt on the assets of the borrower. The
depositors are protected by a double cushion coming from the equity of the borrower and
of the bank. The bank shareholders received a fixed payment when the borrower is solvent,
and hold the borrower's asset when he defaults.
In this model, the liability of the deposit insurer is modeled as a put on the asset of
the borrower,
Deposit Insurance Liability = Putins = Put(A, D) (3).
Applying the Risk Neutral Valuation methodology 3 and denoting by N(.) the
3A detailed application of the Risk Neutral Valuation method to subordinated debt is
available in Black and Cox (1976), and Smith (1980).

cumulative normal distribution and by r the risk free interest rate, one obtains :
5
MVE=AI N(
in(
, 02
f
D )+(e+ 2 —)T
ovy,
02
In(-9+(r--)T
e -"D N( D 2
aft
A, 02 A, n2
ln()+(r+-)T In(--2)+(r--=)T
L 2 L 2
- Al N(
)+e -"L N( ) (4).
=. g--
°IT oft
Equation (4) can be interpreted as the value of a call on the asset A of the borrower
at an exercise price D, net of a call given to the borrower on the same asset at an exercise
price L The last two terms represent the loss of value resulting from the cap. It is a
decreasing value of the loan repayment, going to zero as L goes to infinity. The case
analyzed in the literature (the 'naked' call) is a limit case of the 'capped' valuation.
The liability of the deposit insurer is valued as follows :
A, n2 A, n2
+(r+=-)T
2
PUTIns = e-"D(1-N( )-441(1-N( D2 )) (5).
a vt
The valuation of the insurance liability is similar to the put option discussed in the
literature, except that the underlying asset is the one of the borrower.

Moreover, the variance of the bank equity return is given by`
6
2
A, °
In—t-+(r+z—)T --z In--L+(r+=—)T
A
2.rw 2 2
)-N(
I 4
f xo2A (6).
)(Vs v
mv E
The variance of equity returns differs significantly from the one of a naked call. It
can be seen that it is an increasing function of L, equal to the variance of a 'naked' call as
L goes to infinity.
The explicit analysis of bank lending and credit risk has two implications. Firstly, the
equity of the bank is equivalent to a 'capped' call. In 'good' economic states, the value of
equity cannot exceed the promised payment on the loan net of the deposit repayment. This
observation is independent of the maturity of the loan. Secondly, the liability of the deposit
insurer is directly related to the risk on the borrower's asset, the maturity of the deposit and
a leverage defined as the deposits to borrower's asset ratio. In the next section, it is shown
that the Modigliani-Miller capital structure irrelevance theorem implies the ineffectiveness
of bank capital regulations.
*This follows from equation (2) and the expression for the random return on a put
option (P) on an asset (A) :
A xr r .6x—
put p A
where 6 is the standard delta on a put option and r A is the random return on the underlying
asset (Galai and Masulis,1976).

7
SECTION TWO : THE INEFFECTIVENESS OF BANK CAPITAL REGULATIONS
Let us first assume that an increase in bank equity (AEI) is compensated by a deposit
reduction of an equivalent amount. The market value of the bank equity becomes :
MVE=Lr(De -'T- AEb)+Put(A,D- AEbel) (7).
The change in the market value is the difference between equations (7) and (2) :
AMY E. A E b-(Put(A,D)-Put(A,D- AEber7)).
The increase in market value is equal to the increase in equity less the reduction in the
deposit insurance liability5. Since the increase in market value is less than the issue of
equity, the stock price would go down. A possible way to retain the deposit insurance
subsidy is to keep constant the volume of deposits and increase the amount lent to finance
the asset Af by AEb. The promised reimbursement on the loan, L., is calculated to increase
the value of the loan by AE b. In this case, the market value of the bank equity becomes :
MVE = (Lt + AEb) - Db Put(A,D)
= (re-'r - Put(A,L.)) - Db Put(A,D) (8).
The bank keeps the insurance subsidy and, with respect to equation (2), the change in the
market value of the bank equity becomes AE b, leaving the price per share constant. It
remains to be shown under which circumstances the borrower would accept such lending
terms. In a 'Modigliani-Miller capital structure irrelevance' world, an increase in the bank
5For expository convenience,we have assumed that the insurance premium is
independent of the volume of deposits.If this was not the case,part of the proportional
insurance premium paid to the insurer would be returned to the bank.

8
loan (ALI = AEb) would be fully compensated by a decrease in equity ( A -Ef)and the value of
the borrower's assets (and price per share) would remain constant. The capital structure
irrelevance theorem implies the ineffectiveness of bank capital regulations.
This straightforward proposition that an increase in bank capital can be offset by an
increase in the leverage of the borrower has not received much attention in the theoretical
literature, although it is well recognized that bank capital regulations can be defeated by an
increase in the variance of return on assets (Kareken,1987)6. The sources of wealth transfers
from deposit insurance to banks are similar to those found in the literature (Li. Furlong and
Kealey, 1989), except that attention is paid explicitly to the risk characteristics of the
borrower. An increase in the variance of asset return, or an increase in the bank leverage
increases the value of the bank equity. Indeed from equation (2) and keeping constant the
current value of the loan, L1 , one has :
a AIVE a Put
amvE
0Put
> 0 = - 1 + — > - 1 .
a 02
a a' ap, ap b
ADeiti-Ebi
Similarly, increasing the borrower leverage (A -A 1
= A.E1, ADb = AEb = AL1 = 0), or increasing
simultaneously the leverage of the borrower and of the bank
( 1A-E1 AilDb, AAf = AEb = 0) transfer wealth to the bank shareholders :
amvE ()Put amv 8Put
< 0 ; > O.
8D b no
a41 ilDetaf Efi b
In the next section, we assess the impact of misspecification on the market-based
estimates of deposit insurance premia .
6One will observe that the international regulations on bank capital implemented by the
Bank for International Settlements or the European Community make no reference to the
leverage of borrowers.
'Full information is assumed, so that the terms of the loan, C, are adjusted to keep
constant the current value of the loan.

9
SECTION THREE : MISSPECIFICATION AND INSURANCE PREMIUM
ESTIMATES
It has been shown that the lending function of banks creates a specific risk structure
and the necessity to model the equity of banks as 'capped' call options. Ronn-Verma (1986)
have used market-based data and the assumption of a 'naked' call option to estimate fair
insurance premia. One can wonder whether a cap would alter their estimates significantly.
An additional motivation is that their empirical results yield an (unreported) positive
correlation of 0.43 between the estimated variance of bank assets and the market
capitalization-to-deposit ratio. In an earlier study by Marcus and Shaked (1984), the
correlation is even higher, 0.73. Strongly capitalized banks appear to hold riskier assetss.
An exlanation consistent with the option-based model is that a high variance of asset return
increases the subsidy derived from deposit insurance and the capitalised market value of
banks. However, this line of reasoning is not validated empirically. Indeed, the correlation
between the estimated variance of asset return and an 'adjusted' capitalised value (observed
capitalised value net of a fair deposit insurance premium) remains positive. An alternative
explanation is that a mispecification in the valuation model could bias the estimate of the
variance of asset return.
Two tests of the robustness of deposit insurance premium estimates are reported. In
the first one, we provide numerical examples to test the sensitivity of insurance premium
estimates to the existence of caps and to assess the direction of the biases. In the second
one, we test the robustness of the Ronn-Verma estimates.
The sensitivity of insurance premia. a numerical exercise
The numerical exercise is designed as follows. Starting from a set of assumptions on
alCuester and O'Brien (1991) report a positive Spearman rank correlation coefficient
between asset return standard deviation and market capitalisation-to-asset ratio.

10
the value of the asset of a borrower, the variance of its return, the size of the loan and the
bank equity-to-asset ratio, we calculate the market value of the bank equity, the standard
deviation of its return and the insurance premium which are consistent with equations (4)
to (6). In a second step, we apply the Ronn-Verma methodology 9 to the 'observable'
computed values obtained for the bank equity and the variance of its return. A 'naked 'call
methodology is applied in a 'capped' world to assess the extent of the bias.
In the first example, we consider an asset of 100 with variance of 0.1 financed with
a loan of 70. We let the bank equity-to-asset ratio fluctuate between 1 % and 10 %. It is
assumed that a competitive risk free interest rate of 7 % is paid on bank deposits and that
the loan is priced in a perfectly competitive market, that is the terms of the loan are such
that its market value is equal to its book value L 1°. In line with the literature, we assume
a short maturity of one year for deposits".
Insert Table One.
As expected, the (q) ratio of the market value of the equity of the bank to its book
value increases sharply with leverage as the bank extracts a rent from the deposit insurance
agency. The 'q' ratio jumps from 1.11 to 3.27 as the equity-to-asset ratio decreases from
9Ronn and Verma (1986) solve for the value of bank asset (V) and its variance a
system of two non-linear equations
MVE=Call(V,D)=VN(C-De'N(c12)
a mv, - ExN(d )xo v
MV
1
02
where di=((inVID)+ (r )7)/0 [T
2
d2=di-og
The value and variance of the assets are used to calculate the risk insurance premium.
1°A discussion on the sharing of the insurance rent is available in Ronn and Verma
(1986). The cumulative normal approximation discussed in Figlewski, Silber and
Subrahmanyam (1990) is used for the calculations.
"From the point of view of a deposit insurer,the effective maturity of deposits could be
longer,if a poor marketability of bank loans forces the insurer to refinance the portfolio for
a longer period.

11
10 % to 1 %. The last three columns report the 'Ronn-Verma' estimates for the market
value of asset, the variance and the insurance premium. Three observation stand out. The
first is an undervaluation of the asset of the borrower by an order of 30 % and an
undervaluation of the variance of the asset return by a factor of 10. Secondly, these biases
affect the estimate of the insurance premium in opposite ways. The undervaluation of the
assets backing deposits raises the premium, while the undervaluation of variance lowers it.
In this numerical example, the net effect is an undervaluation of the insurance premium as
long as the bank equity-to-asset ratio exceeds 2 %. Finally, the bias in the estimates of the
variance and the asset are the largest, the lowest the bank equity to asset ratio12.
In Table Two, we consider a higher degree of leverage for the borrower (90 %) and
various degrees of bank leverage. As in Table One, the biases in the estimates of assets and
variance are the largest for the highly leveraged bank cases, but the variance is
overestimated so that the bias in the insurance premium is always positive. Finally, in Table
Three, we consider a constant leverage for the bank (8%), but the leverage of the borrower
is increased from 30 to 90 %. The bank 'q' ratio increases from 1 to 1.68, while the bias in
the insurance premium goes from an undervaluation for a low level of indebtness to an
overvaluation of in the highly leveraged situation.
Insert Table Two and Three
The main results of the numerical exercises are to show that the biases resulting from
the application of the Ronn-Verma methodology in a 'capped' world can be significant and
that the direction of the bias cannot be signed. It depends on the financial structures of the
bank and of the borrower.
In the final part of the paper, we investigate to what extent the Ronn-Verma
estimates are robust with respect to alternative specifications.
12With reference to the ineffectiveness of bank capital regulation discussed in Section
Two,it can easily be shown that an increase in bank equity from 8 to 10 % (a 25 % relative
increase) necessitates an increase in the loan from 70 to 71.55 ( a relative increase of 5 %
in the borrower equity-to-asset ratio) to keep the insurance-based subsidy constant.

12
The robustness the Ronn-Verma estimates
The application of the 'capped' methodology to real world data raises an interesting
issue. Indeed, one could argue that the assumption of a normal distribution for the return
on bank assets is justified by a Central Limit Theorem applying to a sum of independent
assets or by the fact that factors other than credit risk affect the value of bank assets, such
as interest rate fluctuations. The Central Limit Theorem argument is doubtful for the
following reason. Recent research on credit risk (Chirinko-Gui11,1991) reports a large
correlation between the activity levels of industries so that one can not rely on a sum of
independent variables to describe credit risk. Presumably, in good states of the economy,
loan losses are small and the assets of the bank are capped by the sum of promised
payments, while in bad states, there are many defaults and banks end up owning the assets
of borrowers. The effect of interest rate fluctuations on the value of bank assets is a more
powerful criticism, but it has been reported that interest rate risk is small relative to credit
risk (FDIC,1983). Moreover, interest rates are bounded downward at zero, so that the value
of bank assets is limited upward by the sum of promised cash flows.
In the analysis that follows, we assume that the value of the bank assets, which
follows a lognormal distribution, is capped at some level. This assumption hides complex
issues of aggregation of loans of different maturities granted to various industries. It
attempts to reflect the fact that the assets of banks are capped by the promised repayments
in good states of the economy, while their value fluctuate much more in bad states. The
unbounded distribution assumed by Ronn-Verma is a limit case and the sensitivity of
insurance premia estimates with respect to the caps becomes an empirical issue. Following
Ronn-Verma, we take the observed market value of the equity and the variance of equity
return to estimate the value of bank assets, the variance and the deposit insurance premium.
We use the 1983 (quarter IV) data provided in Ronn-Verma (1986) to test the sensitivity
of their estimates to various cap assumptions. A major difficulty arises in this exercise.
Whereas Ronn and Verma have a two-equation systems to evaluate two unknowns, the asset
and the variance, we have two equations to evaluate three parameters : The asset, the
variance and the cap. In other words, the existence of a cap does not allow to evaluate the

13
insurance premia using market based data 13. What can be done is a test the sensitivity of
the insurance premium estimates to various cap assumptions.
Insert Table Four
The robustness of the Ronn-Verma estimates is evaluated for two sets of four heavily
leveraged and strongly capitalized banks. As reported in Table Four, the Ronn-Verma
estimates of the standard deviation of asset return are the highest for the strongly
capitalized banks, such as Wachovia or JP Morgan. To test the robustness of their estimates,
the 'capped' valuation model is applied. The cap on the asset of the leveraged banks has
been set to allow the capitalisation value of the bank to increase by 200 %. As the market
value of leveraged banks is very low, this assumption could penalize those banks. So in a
second case, we allow the capitalisation value of leveraged banks to reach the book value
of equity, while the return on well capitalized banks is limited to 25 %. As is shown in Table
Four, the caps raise the insurance premium of the highly leveraged banks considerably. For
instance, the insurance premium of First Pennsylvania is raised from 0.5 % to 8.5 %. The
increase results from a substantially higher estimate of the variance of asset return. As
concerns the strongly capitalized banks, the Ronn-Verma estimates for the insurance
premium are shown to be robust with respect to various caps, 200 % increase in
capitalisation value or a restrictive 25 . Whatever the caps, the insurance premium
remains close to zero.
The main conclusion of the test of robustness of the Ronn-Verma estimates is that
the low insurance premium reported for the highly leveraged banks is highly dependent on
the assumption of an unbounded distribution. Caps raise the insurance premium estimates
quite substantially. However, the 'zero premium' estimates obtained for the strongly
capitalized institutions are quite robust with respect to alternative specifications. The
observation that highly leveraged banks hold riskier assets seems reasonable. These banks
130ne has to be reminded that the variance of assets cannot be evaluated directly.The
value of assets is unobservable since it depends on the insurance premium.

14
hold a large portfolio of doubtful loans the value of which is closely dependent on the assets
of the borrowers. In the case of strongly capitalized banks, the portfolio of doubtful loans
is smaller so that the value of bank assets is less dependent on the assets of the borrowers
because of the cap on the promised payments.
As the two-equation system does not allow the simultaneous estimation of the cap,
one will have to rely on judgment or additional information to evaluate the relevance of the
cap assumption for the highly leveraged banks.
The objective of the paper is to show that bank lending and credit risk create a
specific stochastic process for the asset of a bank. Equity is isomorphic to a 'capped' call and
the leverage relevant for the insurer is the deposits to borrower's asset ratio. It has been
shown that 'call' evaluations of insurance premia could be biased when credit risk is the
significant risk factor. A bias is likely to arise for highly leveraged banks, but appear to be
small for strongly capitalized ones. Furthermore, a straightforward policy conclusion is that
capital regulation can be offset by a relatively small increase in the leverage of the
borrowers. To be efficient, capital adequacy regulations must take into account the leverage
of borrowers.

15
REFERENCES
Allen,Linda and Anthony Saunders : "Forbearance and Valuation of Deposit Insurance as
a Callable Put", mimeo, New York University, 1990.
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Journal of Political Economy, 81, May-June 1973,637-659.
Black, Fischer and John C. Cox : "Valuing Corporate Securities, Some Effects from Bond
Indentures", Journal of Finance, 31, May 1976,351-367.
Chirinko Robert S. and Gene D. Guill : "A Framework for Assessing Credit Risk in
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Crouhy,Michel and Dan Galai :"An Economic Assessment of Capital Requirement ", Journal
of Banking and Finance 10, June 1986,231-242.
Crouhy,Michel and Dan Galai :"A Contingent Claim Analysis of a Regulated Depository
Institution", Journal of Banking and Finance 15, 1991, 73-90.
Federal Deposit Insurance Corporation : Deposit Insurance in a Changing Environment
(Washington : Federal Deposit Insurance Corporation,april 15,1983).
Galai, Dan and Ronald Masulis : 'The Option Pricing Model and the Risk Factor of Stock",
Journal of Financial Economics , 33, January/March 1976, 53-81.
Figlewski, Stephen, William L. Silber and Marti G. Subrahmanyam (eds): Financial
Options.from Theory to Practice.1990 (Business One Irwin : Homewood).
Furlong Frederick T. and Michael C. Keeley : "Capital Regulation and Bank-Risk Taking,
a Note", Journal of Banking and Finance 13, November 1989,883-891.
Giammarino, R., Eduardo Schwartz and Joseph Zechner : "Market Valuation of Bank
Assets and Deposit Insurance in Canada", Canadian Journal of Economics, 22, 1989,109-127.
Gorton, Gary and Anthony M. Santomero :" Market Discipline and Bank Subordinated
Debt", Journal of Money.Credit and Banking, February 1990, 22,119-128.
Kareken, John : "The Emergence and Regulation of Contingent Commitment Banking",
Journal of Banking and Finance 11, June 1987,359.

16
Kuester, Kathleen A. and James M. O'Brien : "Market-Based Risk-Adjusted Examination
Schedules for Depository Institutions", Journal of Banking and Finance,15, September
1991,955-974.
Kuester, Kathleen A. and James O'Brien : "Market-Based Deposit Insurance Premiums, an
Evaluation", Federal Reserve Board, January 1991.
Marcus, Allan and Israel Shaked: 'The Valuation of Deposit Insurance Using Option Pricing
Estimates", Journal of Money. Credit and Banking, 16, November 1984,446-460.
Merton, Robert C. :"On the Cost of Deposit Insurance When There Are Surveillance Costs",
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Journal of Monetary Economics July 1980, 333-358.

17
BANK
EQUITY
(% of Loan)
q RATIO' INSURANCE'
(MV/iEb) (% of DEPOSITS)
RONN-VERMAb
ASSET VARIANCE PREMIUM
(% OF DEPOSITS)
10 1.11 1.26 70.49 .00815 0.49
8 1.17 1.46 70.47 .00780 0.74
6 1.26 1.67 70.40 .0075 1.10
4 1.46 1.91 70.20 .0069 1.60
2 2.06 2.16 69.90 .0062 2.30
1 3.27 2.29 69.62 .0059 2.85
Table One : Robustness with respect to Bank Leverage
Asset =100,Loan =70, Variance =0.1,Interest Rate = 0.07,Maturity= 1 year
a.The market value and insurance premium have been computed with equations (4) and (5).
b.The Ronn-Verma methodology discussed in footnote 8 is applied to the market value and variance computed with
equations (4) and (6).

18
RONN-VERMAb
BANK q RATIO' INSURANCE' ASSET VARIANCE PREMIUM
EQUITY (MVpiEb) (% of DEPOSITS) (% of DEPOSITS)
(% of Loan)
10 1.48 5.28 82.6 .147 14.39
8 1.68 5.85 81.4 .154 16.28
6 2.27 6.46 80.0 .159 18.24
4 2.70 7.09 78.6 .166 20.34
2 4.80 7.75 76.9 .172 22.60
1 9.02 8.08 76.2 .173 23.60
Table Two : Robustness with respect to Bank Leverage
Asset =100,Loan =90, Variance =0.1,1nterest Rate =0.07,Maturity=1 year
a.The market value and insurance premium have been computed with equations (4) and (5).
b.The Ronn-Verma methodology discussed in footnote 8 is applied to the market value and variance computed with
equations (4) and (6).

19
LOAN
(% of Asset)
q RATIO' INSURANCE'
(MVp/Eb) (% of DEPOSITS)
RONN-VERMAb
ASSET VARIANCE PREMIUM
(% of DEPOSITS)
30 1.00 0.00 30.0 0.0000 0.00
40 1.00 0.00 40.0 0.0001 0.00
50 1.02 0.10 50.1 0.0015 0.00
60 1.06 0.50 60.2 0.0015 0.01
70 1.17 1.46 70.47 0.0078 0.74
80 138 3.23 78.5 0.0390 5.23
90 1.68 5.85 81.4 0.1540 16.28
Table Three : Robustness with respect to Borrower Leverage
Asset =100,Equity =8 %, Variance =0.1,1nterest Rate =0.07,Maturity =1 year
a.The market value and insurance premium have been computed with equations (4) and (5).
b.The Ronn-Verma methodology discussed in footnote 8 is applied to the market value and variance computed with
equations (4) and (6).

20
Ronn-Verma Estimate? Cap on MVE =
200 % increase"
MVE/D A
a A Premium
(%)
Ab a A Premium
(%)
Cap on MVE =
Book Value"
A a A Premium
(%)
First Pennylvania 0.28 3857 0.99 0.51 4100 44 15 3550 7.07 8.5
Crocker National 0.9 15247 1.43 0.56 15700 44 16 14600 8.4 5.6
Continental Illinois 1.14 22829 0.98 0.16 22300 1.41 0.19 22180 2.4 0.75
Wells Fargo 1.4 22200 1.08 .087 22200 1.7 0.21 22160 2.2 0.44
Ronn-Verma Estimates' Cap on MVE =
200 % increase"
MVE/D A
on Premium
(%)
A aA Premium
(cX)
Cap on MVE =
25 % increase"
A a A Premium
(%)
Republic NY Corp. 9.7 4225 2.21 0 4225 2.21 0 4360 5.92 .04
Irving bank 6.5 10326 1.25 0 10326 1.25 0.01 10350 2 0
Wachovia 8.0 6807 1.70 0 6807 1.7 0 6819 2 .01
Morgan J•P. 7.1 28913 1.71 0 28913 1.71 0 28900 4 0
Table Four : Robustness of Ronn-Verma Estimates
a.Estimates reproduced from Ronn and Verma (1986).
b.Values of A and aA by solving equations (4) and (6). Premium computed with equation (5) and estimates of A and 0A.

1NSEAD WORKING PAPERS SERIES
88/12 Spyros MAKRIDAKIS "Business firms and managers in the 21st
century", February 1988
1988
88/01 Michael LAWRENCE and "Factors affecting judgemental forecasts and
Spyros MAKRIDAKIS confidence intervals", January 1988.
88/13 Manfred KETS DE VRIES "Alexilhymia in organizational life: the
organization man revisited", February 1988.
88/14 Alain NOEL "The interpretation of strategies: a study of
the impact of CEOs on the
corporation", March 1988.
88/02 Spyros MAKRIDAKIS "Predicting recessions and other turning
points", January 1988.
88/03 James TEBOUL "De-industrialize service for quality", January
1988.
88/04 Susan SCHNEIDER "National vs. corporate culture: implications
for human resource management", January
1988.
88/05 Charles WYPLOSZ "The swinging dollar: is Europe out of
step?", January 1988.
88/15 Anil DEOLALIKAR and "The production of and returns from
Lars-Hendrik ROLLER
industrial innovation: an econometric
analysis for a developing country", December
1987.
88/16 Gabriel HAWAWINI "Market efficiency and equity pricing:
international evidence and implications for
global investing", March 1988.
88/17 Michael BURDA "Monopolistic competition, costs of
adjustment and the behavior of European
employment", September 1987.
88/06 Reinhard ANGELMAR "Les conflits dans les canaux de
distribution", January 1988.
88/07 Ingemar DIERICKX "Competitive advantage: a resource based
and Karel COOL perspective", January 1988.
88/08 Reinhard ANGELMAR "Issues in the study of organizational
and Susan SCHNEIDER cognition", February 1988.
88/09 Bernard SINCLAIR- "Price formation and product design through
DESGAGNE bidding", February 1988.
88/10 Bernard SINCLAIR- "The robustness of some standard auction
DESGAGNE game forms", February 1988.
88/11 Bernard SINCLAIR- "When stationary strategies are equilibrium
DESGAGNE
bidding strategy: The single-crossing
property". February 1988.
88/18 Michael BURDA "Reflections on "Wait Unemployment" in
Europe", November 1987, revised February
1988.
88/19 M.J. LAWRENCE and "Individual bias in judgements of
Spyros MAKRIDAKIS confidence", March 1988.
88/20 Jean DERMINE,
Damien NEVEN and
"Portfolio selection by mutual funds, an
equilibrium model", March 1988.
J.F. THISSE
88/21 James TEBOUL "De-industrialize service for quality", March
1988 (88/03 Revised).
88/22 Lars-Hendrik ROLLER "Proper Quadratic Functions with an
Application to AT&T", May 1987 (Revised
March 1988).

88/23 Sjur Didrik FLAM "F.quilibres de Nash-Cournot dans le march4
and Georges ZACCOUR europden du gaz: un cas oh les solutions en
boucle ouverte et en feedback coincident",
Mars 1988.
88/34 Mihkel M. TOMBAK "Flexibility: an important dimension in
manufacturing", June 1988.
88/35 Mihkel M. TOMBAK "A strategic analysis of investment in flexible
manufacturing systems", July 1988.
88/24 B. Espen ECKBO and "Information disclosure, means of payment,
Herwig LANGOHR and takeover premia. Public and Private
tender offers in France", July 1985, Sixth
revision. April 1988.
88/25 Everette S. GARDNER "The future of forecasting", April 1988.
and Spyros MAKRIDAKIS
88/26 Sjur Didrik FLAM "Semi-competitive Cournot equilibrium in
and Georges ZACCOUR multistage oligopolies", April 1988.
88/27 Murugappa KRISHNAN "Entry game with resalable capacity",
Lars-Hendrik ROLLER April 1988.
88/28 Sumantra GHOSHAL and
C. A. BARTLETT
"The multinational corporation as a network:
perspectives from interorganizational
theory", May 1988.
88/36 Vikas TIBREWALA and "A Predictive Test of the NBD Model that
Bruce BUCHANAN Controls for Non-stationarity", June 1988.
88/37 Murugappa KRISHNAN "Regulating Price-Liability Competition To
Lars-Hendrik ROLLER Improve Welfare", July 1988.
88/38 Manfred KETS DE VRIES "The Motivating Role of Envy : A Forgotten
Factor in Management", April 88.
88/39 Manfred KETS DE VRIES "The Leader as Mirror : Clinical
Reflections", July 1988.
88/40 Josef LAKONISHOK and "Anomalous price behavior around
Theo VERMAELEN repurchase tender offers", August 1988.
88/41 Charles WYPLOSZ "Assymetry in the EMS: intentional or
systemic?", August 1988.
88/29 Naresh K. MALHOTRA,
Christian PINSON and
Arun K. JAIN
"Consumer cognitive complexity and the
dimensionality of multidimensional scaling
configurations", May 1988.
88/30 Catherine C. ECKEL "The financial fallout from Chernobyl: risk
and Theo VERMAELEN
perceptions and regulatory response", May
1988.
31 Sumantra GHOSHAL and "Creation, adoption, and diffusion of
Christopher BARTLETT
innovations by subsidiaries of multinational
corporations", June 1988.
88/32 Kesre FERDOWS and "International manufacturing: positioning
David SACKRIDER plants for success", June 1988.
88/33 Mihkel M. TOMBAK "The importance of flexibility in
manufacturing". June 1988.
88/42 Paul EVANS "Organizational development in the
transnational enterprise", June 1988.
88/43 B. SINCLAIR-DESGAGNE "Group decision support systems implement
Bayesian rationality", September 1988.
88/44 Essam MAHMOUD and "The state of the art and future directions
Spyros MAKFUDAKIS in combining forecasts", September 1988.
88/45 Robert KORAJCZYK "An empirical investigation of international
and Claude VIALLET
asset pricing", November 1986, revised
August 1988.
88/46 Yves DOZ and "From intent to outcome: a process
Amy SHUEN framework for partnerships", August 1988.
88/47 Alain BULTEZ,
Els GUSBRECHTS,
"Asymmetric cannibalism between substitute
items listed by retailers", September 1988.

Philippe NAERT and
Piet VANDEN ABEELE
88/59 Martin KILDUFF
"The interpersonal structure of decision
making: a social comparison approach to
organizational choice", November 1988.
88/48
Michael BURDA
"Reflections on 'Wait unemployment' in
Europe, 11", April 1988 revised September
1988.
88/60 Michael BURDA
"Is mismatch really the problem? Some
estimates of the Chelwood Gate II model
with US data", September 1988.
88/49
Nathalie DIERKENS
"Information asymmetry and equity issues",
September 1988.
88/61 Lars-Hendrik ROLLER
"Modelling cost structure: the Bell System
revisited", November 1988.
88/50
Rob WEITZ and
"Managing expert systems: from inception
Arnoud DE MEYER
through updating", October 1987.
88/62 Cynthia VAN HULLE,
"Regulation, taxes and the market for
88/51
Rob WEITZ
"Technology, work, and the organization:
Theo VERMAELEN and
Paul DE WOUTERS
corporate control in Belgium", September
1988.
the impact of expert systems", July 1988.
88/63 Fernando NASCIMENTO
"Strategic pricing of differentiated consumer
88/52
Susan SCHNEIDER and
Reinhard ANGELMAR
"Cognition and organizational analysis:
who's minding the store?", September 1988.
and Wilfried R.
VANHONACKER
durables in a dynamic duopoly: a numerical
analysis", October 1988.
88/53
Manfred KETS DE VRIES
"Whatever happened to the philosopherking:
the leader's addiction to power,
88/64 Kasra FERDOWS
"Charting strategic roles for international
factories", December 1988.
September 1988.
88/65 Arnoud DE MEYER
"Quality up, technology down", October 1988
88/54
Lars-Hendrik ROLLER
"Strategic choice of flexible production
and Kasra FERDOWS
and Mihkel M. TOMBAK
technologies and welfare implications",
October 1988
88/66 Nathalie DIERKENS
"A discussion of exact measures of
88/55
Peter BOSSAERTS
"Method of moments tests of contingent
information assymetry: the example of Myers
and Mailuf model or the importance of the
and Pierre HILLION
claims asset pricing models", October 1988.
asset structure of the firm", December 1988.
/67 88/56 Pierre HILLION
"Size-sorted portfolios and the violation of
Paul S. ADLER and
the random walk hypothesis: Additional
Kasra FERDOWS
88/57
Wilfried VANHONACKER
and Lydia PRICE
empirical evidence and implication for tests
of asset pricing models", June 1988.
"Data transferability: estimating the response
effect of future events based on historical
analogy", October 1988.
1989
89/01 Joyce K. BYRER and
Tawfik JELASSI
"The chief technology officer", December
1988.
"The impact of language theories on DSS
dialog", January 1989.
88/58
B. SINCLAIR-DESGAGNE
and Mihkel M. TOMBAK
"Assessing economic inequality", November
1988.
89/02 Louis A. LE BLANC
and Tawfik JELASSI
"DSS software selection: a multiple criteria
decision methodology", January 1989.

89/03 Beth H. JONES and
"Negotiation support: the effects of computer
89/13 Manfred KETS DE VRIES
"The impostor syndrome: a disquieting
Tawfik JELASSI
intervention and conflict level on bargaining
phenomenon in organizational life", February
outcome", January 1989.
1989.
89/04 Kasra FERDOWS and
"Lasting improvement in manufacturing
89/14 Reinhard ANGELMAR
"Product innovation: a tool for competitive
Amoud DE MEYER
performance: In search of a new theory",
advantage", March 1989.
January 1989.
89/15 Reinhard ANGELMAR
"Evaluating a firm's product innovation
89/05 Martin KILDUFF and
"Shared history or shared culture? The
performance", March 1989.
Reinhard ANGELMAR
effects of time, culture, and performance on
institutionalization in simulated
89/16 Wilfried VANHONACKER,
"Combining related and sparse data in linear
organizations", January 1989.
Donald LEHMANN and
regression models", February 1989.
Fareena SULTAN
89/06 Mihkel M. TOMBAK and
"Coordinating manufacturing and business
B. SINCLAIR-DESGAGNE
strategies: I", February 1989.
89/17 Gilles AMADO,
Claude FAUCHEUX and
"Changement organisationnel et Oath&
culturelles: contrastes franco-ainericains",
89/07 Damien J. NEVEN
"Structural adjustment in European retail
Andrd LAURENT
March 1989.
banking. Some view from industrial
organisation", January 1989.
89/18 Srinivasan BALAJC
"Information asymmetry, market failure and
RISHNAN and
joint-ventures: theory and evidence",
89/0B Arnoud DE MEYER and
Hellmut SCHOTTE
"Trends in the development of technology
and their effects on the production structure
in the European Community", January 1989.
Mitchell KOZA
89/19 Wilfried VANHONACKER,
March 1989.
"Combining related and sparse data in linear
Donald LEHMANN and
regression models", Revised March 1989.
89/09 Damien NEVEN,
"Brand proliferation and entry deterrence",
Fareena SULTAN
Carmen MATUTES and
February 1989.
Marcel CORSTJENS
89/20 Wilfried VANHONACKER
"A rational random behavior model of
and Russell WINER
choice", Revised March 1989.
89/10 Nathalie DIERKENS,
"A market based approach to the valuation
Bruno GERARD and
of the assets in place and the growth
89/21 Arnoud de MEYER and
"Influence of manufacturing improvement
Pierre HILLION
opportunities of the firm", December 1988.
Kasra FERDOWS
programmes on performance", April 1989.
89/11 Manfred KETS DE VRIES
"Understanding the leader-strategy interface:
89/22 Manfred KETS DE VRIES
"What is the role of character in
and Alain NOEL
application of the strategic relationship
and Sydney PERZOW
psychoanalysis?" April 1989.
interview method", February 1989.
89/23 Robert KORAJCZYK and
"Equity risk premia and the pricing of
89/12 Wilfried VANHONACKER
"Estimating dynamic response models when
Claude VIALLET
foreign exchange risk" April 1989.
the data are subject to different temporal
aggregation", January 1989.
89/24 Martin KILDUFF and
Mitchel ABOLAFIA
"The social destruction of reality:
Organisational conflict as social drama"
zApril 1989.

89/25 Roger BETANCOURT and
"Two essential characteristics of retail
David GAUTSCHI
markets and their economic consequences"
89/36 Martin KILDUFF
"A dispositional approach to social networks:
March 1989.
the case of organizational choke", May 1989.
89/26 Charles BEAN,
"Macroeconomic policies for 1992: the
89/37 Manfred KETS DE VRIES
"The organisational fool: balancing a
Edmond MAL1NVAUD,
transition and after", April 1989.
leader's hubris", May 19119.
Peter BERNHOLZ,
Francesco GIAVAllI
89/38 Manfred KETS DE VRIES
"The CEO blues", June 1989.
and Charles WYPLOSZ
89/39 Robert KORAICZYK and
"An empirical investigation of international
89/27 David KRACKHARDT and
"Friendship patterns and cultural
Claude VIALLET
asset pricing", (Revised June 1989).
Martin KILDUFF
attributions: the control of organizational
diversity", April 1989.
89/40 Balaji CHAKRAVARTHY
"Management systems for innovation and
productivity", June 1989.
89/28 Martin KILDUFF
"The interpersonal structure of decision
making: a social comparison approach to
89/41 B. SINCLAIR-DESGAGNE
"The strategic supply of precisions", June
organizational choice", Revised April 1989.
and Nathalie D1ERKENS
1989.
89/29 Robert GOGEL and
"The battlefield for 1992: product strength
89/42 Robert ANSON and
"A development framework for computer-
Jean-Claude LARRECHE
and geographic coverage", May 1989.
Tawfik JELASSI
supported conflict resolution", July 1989.
89/30 Lars-Hendrik ROLLER
"Competition and Investment in Flexible
89/43 Michael BURDA
"A note on firing costs sad severance benefits
and Mihkel M. TOMBAK
Technologies", May 1989.
in equilibrium unemployment", June 1989.
89/31 Michael C. BURDA and
"Intertemporal prices and the US trade
89/44 Balaji CHAKRAVARTHY
"Strategic adaptation in multi-business
Stefan GERLACH
balance in durable goods", July 1989.
and Peter LORANGE
firms", June 1989.
89/32 Peter HAUG and
"Application and evaluation of a multi-
89/45 Rob WEITZ and
"Managing expert systems: a framework and
Tawfik JELASSI
criteria decision support system for the
Amoud DE MEYER
case study", June 1989.
dynamic selection of U.S. manufacturing
locations", May 1989.
89/46 Marcel CORSTJENS,
"Entry Encouragement", July 1989.
Carmen MATUTES and
89/33 Bernard SINCLAIR-
"Design flexibility in monopsonistic
Damien NEVEN
DESGAGNE
industries", May 1989.
89/47 Manfred KETS DE VRIES
"The global dimension in leadership and
89/34 Sumantra GHOSHAL and
"Requisite variety versus shared values:
and Christine MEAD
organization: issues and controversies", April
Nittin NOHRIA
managing corporate-division relationships in
1989.
the M-Form organisation", May 1989.
89/48 Damien NEVEN and
"European integration and trade flows",
89/35 Jean DERMINE and
"Deposit rate ceilings and the market value
Lars-Hendrik ROLLER
August 1989.
Pierre BILLION
of banks: The case of France 1971-1981",
May MCI

89/49 Jean DERMINE "Home country control and mutual
recognition", July 1989. 89/62 Arnoud DE MEYER
(TM)
89/50 Jean DERMINE "The specialization of financial institutions,
the EEC model", August 1989. 89/63 Enver YUCESAN and
(TM) Lee SCHRUBEN
89/51 Spyros MAKRIDAKIS "Sliding simulation: a new approach to time
series forecasting", July 1989. 89/64 Enver YUCESAN and
(TM) Lee SCHRUBEN
89/52 Arnoud DE MEYER "Shortening development cycle times: a
manufacturer's perspective", August 1989. 89/65 Soumitra DUTTA and
(TM, Piero BONISSONE
89/53 Spyros MAKRIDAKIS "Why combining works?", July 1989.
AC, FIN)
"Technology strategy and international R&D
operations", October 1989.
"Equivalence of simulations: A graph
approach", November 1989.
"Complexity of simulation models: A graph
theoretic approach", November 1989.
"MARS: A mergers and acquisitions
reasoning system", November 1989.
89/54 S. BALAKRISHNAN "Organisation costs and a theory of joint 89/66 B. SINCLAIR-DESGAGNE
and Mitchell KOZA ventures", September 1989. (TM.EP)
"On the regulation of procurement bids",
November 1989.
89/55 H. SCHUTTE "Euro-Japanese cooperation in information 89/67 Peter BOSSAERTS and
technology", September 1989. (FIN) Pierre HILLION
89/56 Wilfried VANHONACKER
and Lydia PRICE
89/57 Taekwon KIM,
Lars-Hendrik ROLLER
and Mihkel TOMBAK
"On the practical usefulness of meta-analysis
results", September 1989.
"Market growth and the diffusion of
1990
multiproduct technologies", September 1989. 90/01
TM/EP/AC
B. SINCLAIR-DESGAGNE
"Market microstructure effects of
government intervention in the foreign
exchange market", December 1989.
"Unavoidable Mechanisms", January 1990.
89/58 Lars-Hendrik ROLLER "Strategic aspects of flexible production 90/02 Michael BURDA
(EP,TM) and Mihkel TOMBAK technologies", October 1989. EP
89/59
(OH)
Manfred KETS DE VRIES,
Daphne ZEVADI,
Alain NOEL and
Mihkel TOMBAK
"Locus of control and entrepreneurship: a
three-country comparative study", October
1989.
90/03
TM
Arnoud DE MEYER
"Monopolistic Competition, Costs of
Adjustment, and the Behaviour of European
Manufacturing Employment", January 1990.
"Management of Communication in
International Research and Development",
January 1990.
89/60 Enver YUCESAN and "Simulation graphs for design and analysis of 90/04 Gabriel HAWAWINI and
(TM) Lee SCHRUBEN discrete event simulation models", October FIN/EP Eric RAJENDRA
1989.
"The Transformation of the European
Financial Services Industry: From
Fragmentation to Integration", January 1990.
89/61 Susan SCHNEIDER and "Interpreting and responding to strategic 90/05 Gabriel HAWAWINI and
(AB) Arnoud DE MEYER issues: The impact of national culture",
FIN/EP Bertrand JACQUILLAT
October 1989.
"European Equity Markets: Toward 1992
and Beyond", January 1990.

90/06 Gabriel HAWAWINI and "Integration of European Equity Markets:
FIN/EP Eric RAJENDRA Implications of Structural Change for Key
Market Participants to and Beyond 1992",
January 1990.
90/17
N
Nathalie DIERKENS
"Information Asymmetry and Equity Issues",
Revised January 1990.
90/18 Wilfried VANHONACKER "Managerial Decision Rules and the
90/07 Gabriel HAWAWINI "Stock Market Anomalies and the Pricing of MKT Estimation of Dynamic Sales Response
FIN/EP
Equity on the Tokyo Stock Exchange",
Models", Revised January 1990.
90/08
TM/EP
Tawfik JELASSI and
B. SINCLAIR-DESGAGNE
January 1990.
"Modelling with MCDSS: What about
Ethics?", January 1990.
90/19 Beth JONES and "The Effect of Computer Intervention and
TM Tawfik JELASSI Task Structure on Bargaining Outcome",
February 1990.
90/09 Alberto GIOVANNINI "Capital Controls and International Trade 90/29 Tawfik JELASSI, "An Introduction to Group Decision and
EP/FIN and Jae WON PARK Finance", January 1990. TM Gregory KERSTEN and Negotiation Support", February 1990.
90/10 Joyce BRYER and "The Impact of Language Theories on DSS
Stanley ZIONTS
TM Tawfik JELASSI Dialog", January 1990. 90/21 Roy SMITH and "Reconfiguration of the Global Securities
FIN Ingo WALTER Industry in the 1990's", February 1990.
90/11 Enver YUCESAN "An Overview of Frequency Domain
TM Methodology for Simulation Sensitivity 90/22 Ingo WALTER "European Financial Integration and Its
90/12 Michael BURDA "Structural Change, Unemployment Benefits
Analysis", January 1990. FIN Implications for the United States", February
1990.
EP and High Unemployment: A U.S.-European 90/23 Damien NEVEN "EEC Integration towards 1992: Some
90/13 Soumitra DUTTA and "Approximate Reasoning about Temporal
Comparison", January 1990. EP/SM Distributional Aspects", Revised December
TM Shashi SHEKHAR Constraints in Real Time Planning and 90/24 Lars Tyge NIELSEN "Positive Prices in CAPM", January 1990.
Search", January 1990.
FIN/EP
1989
90/14
TM
90/15
TM
Albert ANGEHRN and
Hans-Jakob LUTHI
Amoud DE MEYER,
Dirk DESCHOOLMEESTER,
Rudy MOENAERT and
"Visual Interactive Modelling and Intelligent
DSS: Putting Theory Into Practice", January
1990.
"The Internal Technological Renewal of a
Business Unit with a Mature Technology",
January 1990.
90/25
FIN/EP
Lam Tyge NIELSEN
"Existence of Equilibrium in CAPM",
January 1990.
90/26 Charles KADUSHIN and "Why networking Fails: Double Binds and
OB/I1P Michael BRIMM the Limitations of Shadow Networks",
February 1990.
Jan BARBE 90/27 Abbas FOROUGHI and "NSS Solutions to Major Negotiation
90/16 Richard LEVICH and "Tax-Driven Regulatory Drag: European
TM Tawfik JELASSI Stumbling Blocks", February 1990.
FIN Ingo WALTER Financial Centers in the 1990's", January 90/28 Arnoud DE MEYER "The Manufacturing Contribution to
1990. TM Innovation", February 1990.

90/40 Manfred KETS DE VRIES "Leaders on the Couch: The case of Roberto
90/29 Nathalie DIERKENS "A Discussion of Correct Measures of OB Calvi", April 1990.
FIN/AC Information Asymmetry", January 1990.
90/30 Lars Tyge NIELSEN "The Expected Utility of Portfolios of
90/41
FIN/EP
Gabriel HAWAWINI,
Itzhak SWARY and
"Capital Market Reaction to the
Announcement of Interstate Banking
FIN/EP Assets", March 1990. Ik HWAN JANG Legislation", March 1990.
90/31 David GAUTSCHI and "What Determines U.S. Retail Margins?", 90/42 Joel STECKEL and "Cross-Validating Regression Models in
MKT/EP Roger BETANCOURT February 1990. MKT Wilfried VANHONACKER Marketing Research", (Revised April 1990).
90/32 Srinivasan BALAK- "Information Asymmetry, Adverse Selection 90/43 Robert KORAJCZYK and "Equity Risk Premix and the Pricing of
SM
RISHNAN and
Mitchell KOZA
and Joint-Ventures: Theory and Evidence",
Revised, January 1990.
FIN Claude VIALLET Foreign Exchange Risk", May 1990.
90/33 Caren SIEHL, "The Role of Rites of Integration in Service 90/44 Gilles AMADO, "Organisational Change and Cultural
OB David BOWEN and Delivery", March 1990. OB Claude FAUCHEUX and Realities: Franco-American Contrasts", April
Christine PEARSON Andre LAURENT 1990.
90/45 Soumitra DUTTA and "Integrating Case Based and Rule Based
90/34
FIN/EP
Jean DERMINE
"The Gains from European Banking
Integration, a Call for a Pro-Active
TM Piero BONISSONE Reasoning: The Possibilistic Connection",
May 1990.
Competition Policy", April 1990.
90/46 Spyros MAJCRIDAKIS "Exponential Smoothing: The Effect of
90/35 Jae Won PARK "Changing Uncertainty and the Time- TM and Michele HIBON Initial Values and Loss Functions on Post-
El'
Varying Risk Premia in the Tenn Structure
Sample Forecasting Accuracy".
of Nominal Interest Rates", December 1988,
Revised March 1990. 90/47 Lydia PRICE and
"Improper Sampling in Natural
MKT Wilfried VANHONACKER Experiments: Limitations on the Use of
90/36 Amoud DE MEYER "An Empirical Investigation of Meta-Analysis Results itt Bayesian
TM Manufacturing Strategies in European Updating", Revised May 1990.
Industry", April 1990.
90/48 Jae WON PARK "The Information in the Term Structure of
90/37 William CATS-BARIL
"Executive Information Systems: Developing
EP
Interest Rates: Out-of-Sample Forecasting
TM/OB/SM
an Approach to Open the Possibles", April
Performance", June 1990.
1990.
90/49 Soumitra DUTTA "Approximate Reasoning by Analogy to
90/38 Wilfried VANHONACKER "Managerial Decision Behaviour and the TM Answer Null Queries", June 1990.
MKT
90/39
TM
Louis LE BLANC and
Tawfik JELASSI
Estimation of Dynamic Sales Response
Models", (Revised February 1990). 90/50 Daniel COHEN and "Price and Trade Effects of Exchange Rates
Charles WYPLOSZ
Fluctuations and the Design of Policy
"An Evaluation and Selection Methodology
Coordination", April 1990.
for Expert System Shells", May 1990.

90/51 Michael BURDA and "Gross Labour Market Flows in Europe: 90/63 Sumantra GHOSHAL and "Organising Competitor Analysis Systems",
EP Charles WYPLOSZ Some Stylized Facts", June 1990. SM Eleanor WESTNEY August 1990
90/52 Lars Tyge NIELSEN "The Utility of Infinite Menus", June 1990. 90/64 Sumantra GHOSHAL "Internal Differentiation and Corporate
FIN SM Performance: Case of the Multinational
90/53 Michael Burda "The Consequences of German Economic
Corporation", August 1990
El' and Monetary U ", June 1990. 90/65 Charles WYPLOSZ "A Note on the Real Exchange Rate Effect of
90/54 Damien NEVEN and "European Financial Regulation: A
El' German Unification", August 1990
El' Colin MEYER Framework for Policy Analysis", (Revised 90/66 Soumitra DUTTA and "Computer Support for Strategic and Tactical
90/55 Michael BURDA and "Intertemporal Prices and the US Trade
90/56
Stefan GERLACH
Damien NEVEN and
Lars-Hendrik ROLLER
May 1990). 111/SE/FIN Piero BONISSONE Planning in Mergers and Acquisitions",
Balance", (Revised July 1990).
90/67
TM/SE/FIN
Soumitra DUTTA and
Piero BONISSONE
September 1990
"Integrating Prior Cases and Expert Knowledge In
a Mergers and Acquisitions Reasoning System",
"The Structure and Determinants of East-West
September 1990
Trade: A Preliminary Analysis of the
Manufacturing Sector", July 1990 90/68 Soumitra DUTTA "A Framework and Methodology for Enhancing the
TM/SE
Business Impact of Artificial Intelligence
90/57 Lars Type NIELSEN Common Knowledge of a Multivariate Aggregate Applications", September 1990
FIN/EP/ Statistic", July 1990
TM 90/69 Soumitra DUTTA "A Model for Temporal Reasoning in Medical
90/58 Lars Tyge NIELSEN "Common Knowledge of Price and Expected Cost
FIN/EP/TM in an Oligopolistic Market", August 1990 90/70
90/59 Jean DERMINE and "Economies of Scale and
TM Expert Systems", September 1990
TM
Albert ANGEHRN
"'Triple C': A Visual Interactive MCDSS",
September 1990
FIN Lars-Hendrik ROLLER Scope in the French Mutual Funds (SICAV) 90/71 Philip PARKER and "Competitive Effects in Diffusion Models: An
Industry", August 1990 MKT Hubert GATIGNON Empirical Analysis", September 1990
90/60 Pen IZ and "An Interactive Group Decision Aid for 90/72 Enver YUCESAN "Analysis of Markov Chains Using Simulation
TM Tawfik JELASSI Multiobjective Problems: An Empirical TM Graph Models", October 1990
Assessment", September 1990
90/61 Pankaj CHANDRA and "Models for the Evlauation of Manufacturing
90/73
114
Amoud DE MEYER and
Kasra FERDOWS
"Removing the Barriers in Manufacturing",
October 1990
TM Mihkel TOMBAK Flexibility", August 1990
90/62 Damien NEVEN and "Public Policy Towards TV Broadcasting in the 90/74 Sumantra GHOSHAL and "Requisite Com plexity: Organising Headquarters-
EP Menno VAN DLIK Netherlands", August 1990 SM Nitin NOHRIA Subsidiary Relations in MNCs", October 1990

90/75
MKT
Roger BETANCOURT and
David GAUTSCH1
'The Outputs of Retail Activities: Concepts,
Measurement and Evidence", October 1990
9087
FIN/EP
Lars Tyge NIELSEN
"Existence of Equilihriuut in CAPIN: Further
Results', December 1990
90/76 Wilfried VANHONACKER "Managerial Decision Behaviour and the Estimation 90/88 Susan C. SCHNEIDER and "Cognition in Organisational Analysis: Who's
MKT
of Dyaarsic Sales Response Models",
OIUMKT Reinhard ANGEL/AR Wading the Store?" Revised, December 1990
Revised October 1990
90/89 Manfred F.R. KETS DE VRIES *The CEO Who Couldn't Talk Straight and Other
90/77 Wilfried VANHONACKER "Testing the Koyck Scheme of Sales Response to OH Tales from the Board Room; December 1990
MKT
Advertising: An Aggregation-ludepeodeut
Aulacerreiahon Test", October 1990 90/90 Philip PARKER 'Price Elasticity Dynamics over the Adoption
MKT Lifecycle: An Empirical Study,' December 1990
tons Michael BURDA and "EscImage Rate Dynamics and Currency
EP Stefan GERLACH Unification The Ostmark - DM Rate•
October 1990
90,19 Anil GABA 'Inferences ni gh no Unknown Noise Level is
TM Berman/1i Process", October 1990
90/110 Anil GABA and "Wog Survey Data in Inferences about Purchase
TM Robert WINKLER Behaviour•, October 1990 1991
TM
Tawfik JELASSI
'Du Pretreat as Fedor: Wan et Orientations des
Systtoses toteractifs d'Aide h la DOOM,'
October 1990
91/01
TM/S14
904.2 Charles WYPLOSZ "Monetary Union and Fiscal Policy Discipline,'
EP November 1990 91/02
TM/gt4
Luk VAN WASSENHOVE, •Operetimal Research Can Do More for Managers
Leonard FORTUIN and
Than They MOM;
Paul VAN BEER January 1991
Luk VAN WASSENHOVE,
Leonard FORTUIN and
°Operational Research and &ointment;
January 1991
90/113 Natalie DIERKENS and "beformatios Asymmetry and Corporate Paul VAN BEEK
FIN/TM Bernard SINCLAIR-DESGAGNE Communication: Results of • Pilot Study',
November 1990 9100 Pekka HIETALA and •AA Implicit Dividend Increase in Rights Issues:
FIN Time LOYITYNIEMI Theory and Evidence," January 1991
90/114 Philip M. PARKER nu Effect of Advertising on Price and Quality:
MKT nee Optometric Industry Revisited." 91/04 Lars Tyge NIELSEN "Two-Fred Separation, Factor Structure and
December 1990 FIN Robastm; January 1991
90/115 Avijit GHOSH and 'Optimal Tuning and Location in Competitive 91/05 Susan SCHNEIDER "Managing Itmadasies in Organisations;
MKT Vika. TIBREWALA Markets," November 1990 OR January 1991
90/$6
EP/TAM
Olivier CADOT and
Bernard SINCLAIR-DESGAGNE
'Prudence and Success he Politics,' November 1990 91/06
OR
Manfred KEFS DE VRIES, •Lloderstaodiog the Leader-Strategy !Medico
Danny MILLER and
Application of the Strategic Relationship Interview
Akin NOEL Method,' January 1990 ($9/11, revised April 1990)

91/07 Olivier CADOT "Lending to Insolvent Countries: A Paradoxical
EP Story," January 1991 91/19
MKT
Vikas TIBREWALA and "An Aggregate Test of Purchase Regularity",
Bruce BUCHANAN March 1991
91/08 Charles WYPLOSZ "Post-Reform East and West: Capital
EP Accumulation and the Labour Mobility 91/20 Darius SABAVALA and "Monitoring Short-Run Changes in Purchasing
Constraint," January 1991 MKT Vikas TIBREWALA Behaviour", March 1991
91/09 Spyros MAKRIDAKIS "What can we Learn from Failure?", February 1991 91/21 Sumantra GHOSHAL, "Intermit Communication within MNCs: The
TM SM Harry KORINE and Influence of Formal Structure Versus Integrative
91/10 Luc Van WASSENHOVE and "Integrating Scheduling with Hatching and
Gabriel SZULANSKI Processes", April 1991
TM C. N. POTTS Lot-Sizing: A Review of Algorithms and 91/22 David GOOD, *EC Integration and the Structure of the Franco-
91/11 Luc VAN WASSENHOVE et al. "Multi-Item Lotsizing in Capacitated Multi-Stage
Complexity", February 1991 EP Lars-Hendrik ROLLER and American Airline Industries: Implications for
Robin SICKLES Efficiency and Welfare", April 1991
TM Serial Systems", February 1991 91/23 Spyros MAKRIDAKIS and "Exponential Smoothing: The Effect of Initial
TM
Michele HIBON Values and Loss Functions or Post-Sample
91/12 Albert ANGEHRN "Interpretative Computer Intelligence: A Link Forecasting Accuracy", April 1991 (Revision of
TM
91/13
EP
Michael BURDA
between Users, Models and Methods in DSS",
February 1991
"Labor and Product Markets in Czechoslovakia and
the Ex-GDR: A Twin Study", February 1991
91/14 Roger BETANCOURT and "The Output of Retail Activities: French SM/TM Charles J. CORBETT
MKT David GAUTSCHI Evidence", February 1991
91/15
OB
Manfred F.R. KETS DE VRIES
"Exploding the Myth about Rational Organisations
and Executives", March 1991
90/46)
91/24 Louis LE BLANC and "An Empirical Assessment of Choice Models for
TM Tawfik JELASSI Software Evaluation and Sdaction", May 1991
91/25 Luk N. VAN WASSENHOVE and "Trade-Offs? What Trade-Offs?" April 1991
91/26 Luk N. VAN WASSENHOVE and "Single Machine Scheduling to Minimize Total Late
TM C.N. POTTS Work", April 1991
91/27 Nathalie DIERKENS "A Discussion of Correct Measures of Information
91/16 Arnoud DE MEYER and "Factories of the Future: Executive Summary of FIN Asymmetry: The Example of Myers and Wiles
TM Kasra FERDOWS et.al. the 1990 International Manufacturing Futures
Survey", March 1991
Model or the Importance of the Asset Structure of
the Finn", May 1991
91/17 Dirk CATTRYSSE, "Heuristics for the Discrete Lotsizing and 91/28 Philip M. PARKER "A Note on: 'Advertising and the Price and Quality
TM
Roelof KUIK,
Scheduling Problem with Setup Times", March 1991 MKT of Optometric Services', June 1991
Marc SALOMON and
Luk VAN WASSENHOVE 91/29 Tawfik JELASSI and "An Empirical Study of an Interactive, Session-
TM
Abbas FOROUGHI Oriented Computerised Negotiation Support System
91/18 C.N. POTTS and "Approximation Algorithms for Scheduling a Single (NSS)", June 1991
TM Luk VAN WASSENHOVE Machine to Minimize Total Late Work",
March 1991

91/30 Wiltried R. VANHONACKER and "Using Meta-Analysis Results in Bayesian Updating:
MKT Lydia J. PRICE The Empty Cell Problem", June 1991 91/43 Sumantra GHOSHAL and "Building Transnational Capabilities: The
SM Christopher BARTLETT Management Challenge", September 1991
91/31 Rezaul KABIR and "Insider Trading Restrictions and the Stock
FIN Theo VERMAELEN Market", June 1991 91/44 Sumantra GHOSHAL and "Distributed Innovation in the 'Differentiated
SM Nitin NOHRIA Network' Multinational", September 1991
91/32 Susan C. SCHNEIDER "Organisational Sensemaking: 1992", June 1991
011 91/45 Philip M. PARKER "The Effect of Advertising on Price and Quality:
MKT
An Empirical Study of Eye Examinations, Sweet
91/33 Michael C. BURDA and "German Trade Unions after Unification - Third Lemons and Self-Deceirers", September 1991
EP Michael FUNKE Degree Wage Discriminating Monopolists?",
91/34 Jean DERMINE "The BIS Proposal for the Measurement of Interest
lune 1991 91/46 Philip M. PARKER "Pricing Strategies in Markets with Dynamic
MKT Elasticities", October 1991
FIN Rate Risk, Some Pitfalls", June 1991 91/47 Philip M. PARKER "A Study of Price Elasticity Dynamics Using
MKT
Parsimonious Replacement/Multiple Purchase
91/35
FIN
Jean DERMINE
"The Regulation of Financial Services in the EC,
Centralization or National Autonomy?" June 1991
Diffusion Models", October 1991
91/48 H. Landis GABEL and "Managerial Incentives and Environmental
91/36 Albert ANGEHRN "Supporting Multicriteria Decision Making: New EP/TM Bernard SINCLAILDESGAGNE Compliance", October 1991
TM Perspectives and New Systems", August 1991
91/49 Bernard SINCLAIR-DESGAGNE "The First-Order Approach to Multi-Task
91/37 Ingo WALTER and "The Introduction of Universal Banking in Canada: TM Principal-Agent Problems", October 1991
EP Hugh THOMAS An Event Study", August 1991
91/50 Luk VAN WASSENHOVE and "How Green is Your Manufacturing Strategy?"
91/38 Ingo WALTER and "National and Global Competitiveness of New York SM/TM Chides CORBETT October 1991
EP Anthony SAUNDERS City as • Financial Center", August 1991
91/39
EP
91/40
TM
91/41
TM
Ingo WALTER and
Anthony SAUNDERS
"Reconfiguration of Banking and Capital Markets
in Eastern Europe", August 1991
91/51 Philip M. PARKER "Choosing Among Diffusion Models: Some
MKT Empirical Guidelines", October 1991
91/52 Michael BURDA and *unman Capital, Investment and Migration in an
Luk VAN WASSENHOVE, "A Set Partitioning Heuristic for the Generalized
El' Charles WYPLOSZ Integrated Europe", October 1991
Dirk CATTRYSSE and
Assignment Problem", August 1991
Marc SALOMON 91/53 Michael BURDA and "Labour Mobility and German Integration: Some
El' Charles WYPLOSZ Vignettes", October 1991
Luk VAN WASSENHOVE, "A Fully Polynomial Approximation Scheme for
M.Y. KOVALYOU and
Scheduling a %ogle Machine to Minimize Total 91/54 Albert ANGEHRN "Stimulus Agents: An Alternative Framework for
C.N. POTTS Weighted Late Work", August 1991 TM Computer-Aided Decision Making", October 1991
91/42 Rob R. WEITZ and "Solving A Multi-Criteria Allocation Problem:
TM Tawfik JELASSI A Decision Support System Approach",
August 1 99 1

91/55 Robin HOGARTH,
EP/SM Claude MICHAUD,
Yves DOZ and
"Longevity of Business Firms: A Four-Stage
Framework for Analysis", November 1991
92/03
OB
Manfred F.R. KETS DE VRIES
"The Family Firm: An Owner's Manual",
January 1992
Ludo VAN DER HEYDEN 92/04 Philippe HASPESLAGH and "Making Acquisitions Work", January 1992
91/56 Bernard SINCLAIR-DESGAGNE
TM/EP
"Aspirations and Economic Development",
SM
David JEMISON
November 1991 92/05 Xavier DE GROOTE "Flexibility and Product Diversity in Lot-Sizing
TM
Models", January 1992 (revised)
91/57 Lydia 1. PRICE "The Indirect Effects of Negative Information on
MKT Attitude Change", November 1991 92/06 Theo VERMAELEN and "Financial Innovation: Self Tender Offers in the
FIN Kees COOLS U.K.", January 1992
91/58 Manfred F. R. KETS DE VRIES "Leaders Who Go Crazy", November 1991
OB 92/07 Xavier DE GROOTE "The Fledbility of Production Processes: A
TM
General Framework", January 1992 (revised)
91/59 Paul A. L. EVANS
OB
"Management Development as Glue Technology",
November 1991
92/08
TM
Luk VAN WASSENHOVE,
Leo KROON and
91/60 Xavier DE GROOTE
"Flexibility and Marketing/Manufacturing
Marc SALOMON
TM
Coordination", November 1991 (revised)
92/09 Luk VAN WASSENHOVE,
91/61 Arnoud DE MEYER "Product Development in the Textile Machinery
TM
Roelof KUM and
TM Industry", November 1991 Mare SALOMON
"Exact and Approximation Algorithms for the
Operational Fixed Interval Scheduling Problem",
January 1992
"Statistical Search Methods for Lotsizing
Problems", January 1992
91/62 Philip PARKER and "Specifying Competitive Effects in Diffusion 92/10 Yves DOZ and "Regaining Competitiveness: A Process of
MKT Hubert GATIGNON Models: An Empirical Analysis", November 1991 SM Heinz THANHEISER Organisational Renewal", January 1992
91/63 Michael BURDA "Some New Insights on the Interindustry Wage 92/11 Enver YUCESAN and "On the Intractability of Verifying Structural
EP
Stricture from the German Socioeconomic Panel",
December 1991
TM Sheldon JACOBSON Properties of Discrete Event Simulation Models",
February 1992
91/64 Jean DERMINE
FIN
"Internationalisation of Financial Markets,
Efficiency and Stability", December 1991
92/12
FIN
Gabriel HAWAWINI
"Valuation of Cross-Border Mergers and
Acquisitions", February 1992
1992 92/13 Spyros MAKRIDAKIS and "The M2-Competition: A Budget Related
92/01 Wilfried VANHONACKER "CONPRO•DOGIT: A New Brand Choice Model
TM Michele HIBON et.al. Empirical Forecasting Study", February 1992
MKT/EP/TM Incorporating a Consideration Set Formation 92/14 Lydia PRICE "Identifying Cluster Overlap with NORMIX
Process". January 1992 MKT Population Membership Probabilities",
92/02 Wilfried VANHONACKER "The Dynamics of the Consideration Set Formation
MKT/EP/TM
Process: A Rational Modelling Perspective and
Some Numerical Results", January 1992
February 1992

92/15 Vikaa TIBREWALA,
MKT Peter LENK and
Ambar RAO
"Nonstationary Conditional Trend Analysis: An
Application to Scanner Panel Data", February 1992
92/16 Xavier DE GROOTE and
TM Yu-Sheng ZHENG
"A Sensitivity Analysis of Stochastic Inventory
Systems", March 1992
92/17 Xavier DE GROOTE and
TM Evan L. PORTEUS
"An Approach to Single Parameter Process
Design", March 1992
92/18 Xavier DE GROOTE
TM
"Information Disclosure and Technology Choice",
March 1992