Proceedings of the "Scientific Management" and Management Science Today International Scientific Conference

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1 SZEGEDI TUDOMÁNYEGYETEM GAZDASÁGTUDOMÁNYI KAR UNIVERSITY OF SZEGED FACULTY OF ECONOMICS AND BUSINESS ADMINISTRATION Proceedings of the "Scientific Management" and Management Science Today International Scientific Conference Edited by Éva Málovics Beáta Kincsesné Vajda UNIVERSITY OF SZEGED FACULTY OF ECONOMICS AND BUSINESS ADMINISTRATION 6722 Szeged, Kálvária sgt. 1.

2 Reviewed by Zoltán Bajmócy Károly Barakonyi Katalin Botos László Dinya József Gál Balázs Hámori Erzsébet Hetesi Szabolcs Imreh Gabriella Keczer Judit Kovács Zsófia Kürtösi László Lippai Miklós Lukovics Zoltán Majó Éva Málovics György Málovics János Málovics József Poór Szabolcs Prónay Balázs Révész Miklós Sallai Katalin Szabó Márton Vilmányi Selected papers proofread by Dalma Dudás Copy-editing by Melinda Molnárné Rómer Proceedings of the "Scientific Management" and Management Science Today International Scientific Conference ISBN Published by University of Szeged Faculty of Economics and Business Administration 2

3 Authors Ács, Attila PhD student. University of Szeged, Faculty of Economics and Business Administration, Hungary. Balogh, Gábor assistant research fellow. University of Pécs, Faculty of Business and Economics, Hungary. Benčiková, Dana Head of the English Section. Matej Bel University, Department of Foreign Business Language Communication, Slovakia. Bogdanović, Mario PhD, assistant professor. University of Split, Faculty of Economics, Croatia. Braxmair, Zsófia PhD student. University of Szeged, Faculty of Economics and Business Administration, Hungary. Brzozowski, Andrzej m.a. Barometr Zaangażowania, BENTEN, Poland. Cole, David assistant. Matej Bel University, Department of Foreign Business Language Communication, Slovakia. Dragičevič, Marija PhD, assistant professor University of Dubrovnik, Department of Economics and Business Economics, Croatia. Dumitrescu, Georgia title. West University of Timisoara, Faculty of Economics, Romania. Farkas, Gergely lecturer. University of Szeged, Faculty of Economics and Business Administration, Institute of Business Studies, Hungary. Farkas Tibor PhD, associate professor. Szent István University, Faculty of Economics and Social Sciences, Hungary. García, María Purificación PhD, professor. University of León, Faculty of Labor Sciences, Spain. Gulyás, Éva lecturer. Corvinus Univerity of Budapest, Faculty of Business Administration, Hungary. Hámori, Balázs, CsC, professor. Corvinus Univerity of Budapest, Faculty of Economics, Hungary. Harmath, Péter PhD, lecturer, University of Subotica, Faculty of Economics, Serbia. Hegedűs, Henrik PhD, invited lecturer. National University of Public Service, Faculty of Military Sciences and Officer Training, Hungary. Hetesi, Erzsébet PhD, associate professor. University of Szeged, Faculty of Economics and Business Administration, Institute of Business Studies, Hungary. Hurta, Hilda PhD student. Szent István University, Faculty of Economics and Social Sciences, Institute of Economics and Methodology, Hungary. 3

4 Imreh, Szabolcs PhD, associate professor. University of Szeged, Faculty of Economics and Business Administration, Hungary. Kazár, Klára lecturer. University of Szeged, Faculty of Economics and Business Administration, Institute of Business Studies, Hungary. Keczer, Gabriella PhD, associate professor. University of Szeged, Faculty of Pedagogy, Hungary. Kincsesné Vajda, Beáta lecturer. University of Szeged, Faculty of Economics and Business Administration, Hungary. Kiss, Gábor Dávid assistant professor. University of Szeged, Faculty of Economics and Business Administration, Institute of Finance and International Economic Relations, Hungary. Komlósi, Edit lecturer. University of Pannonia, Faculty of Business and Economics, Hungary; PhD student, University of Derby, Business School, UK. Kosztopulosz, Andreász PhD, associate professor. University of Szeged, Faculty of Economics and Business Administration, Institute of Finance and International Economic Relations, Hungary. Kovács, Kristóf consultant. Accenture, Hungary. Kovács, Péter PhD, associate professor. University of Szeged, Faculty of Economics and Business Administration, Institute of Business Studies, Hungary. Kovács, Viktor PhD student. Faculty of Electrical Engineering and Informatics, Budapest University of Technology and Economics, Hungary. Kovács, Zoltán CsC, assistant professor. University of Pannonia, Faculty of Business and Economics, Hungary. Kürtösi, Zsófia PhD, associate professor. University of Szeged, Faculty of Economics and Business Administration, Hungary. Lakatos, Péter PhD, associate college professor, College of Szolnok, Faculty of Business Administration, Hungary. Lanero, Ana PhD, assistant professor. University of León, Faculty of Economics and Business Sciences, Spain. Lelovics Zsuzsanna PhD, associate professor. Kaposvár University, Kaposvár, Hungary. Lenkovics, Beatrix lecturer. Budapest Business School, Faculty of Commerce, Catering and Tourism, Hungary. Lobnikar, Branko PhD, associate professor. University of Maribor, Faculty of Criminal Justice and Security, Slovenija. 4

5 Málovics, Éva PhD, associate professor. University of Szeged, Faculty of Economics and Business Administration, Hungary. Marosán, György CSc, professor. Budapest Business School, College of International Management and Business, Hungary. Megyeri, Eszter PhD, assistant professor. University of Szeged, Faculty of Economics and Business Administration, Institute of Finance and International Economic Relations, Hungary. Milicz, Ákos PhD student. Corvinus University of Budapest, Faculty of Business Administration, Hungary. Monastyrnaya, Elena title. Tomsk Polytechnic University, Institute of Social and Humanitarian Technologies, Russia. Németh, Gyöngyi BA student. College of Szolnok, Faculty of Business Administration, Hungary. Noszkay, Erzsébet CSc, professor, head of Knowledge Centre, head of MSc Programme in Leadership and Organization. Budapest College of Communication and Business, Heller Farkas Tourism and Business Faculty, Hungary. Óhegyi, Katalin PhD student. Szent István University, Faculty of Economics and Social Sciences, Hungary. Papp-Váry, Árpád PhD, dean, head of department. Budapest College of Communication and Business, Heller Farkas Tourism and Business Faculty, Marketing Department, Hungary. Pierog, Anita PhD student. University of Debrecen Centre for Agricultural and Applied Economic Sciences, Faculty of Applied Economics and Rural Development, Hungary. Plotnieks, Davis researcher. Latvian Academy of Sciences, Latvia. Poór, József PhD, professor. Szent István University, Faculty of Economics and Social Sciences, Hungary. Révész, Balázs PhD, associate professor. University of Szeged, Faculty of Economics and Business Administration, Institute of Business Studies, Hungary. Sipos, Norbert PhD student. University of Pécs, Faculty of Business and Economics; assistant professor, Eötvös József College, Technological and Economics Faculty Hungary. Svržnjak, Kristina PhD, college professor. College of Agriculture in Križevci, Croatia. Szabados, György Norbert PhD, assistant professor. University of Debrecen Centre for Agricultural and Applied Economic Sciences, Faculty of Applied Economics and Rural Development, Hungary. Szabó, Katalin DsC, professor. Corvinus Univerity of Budapest, Faculty of Economics Hungary. 5

6 Szabowska Walaszczyk, Anna m.a. University of Gdańsk, Barometr Zaangażowania, Poland. Tasner, Dóra assistant professor. University of Pannonia, Faculty of Business and Economics, Hungary. Tessényi, Judit PhD student. University of Szeged, Faculty of Economics and Business Administration, Hungary. Törőcsik, Mária CSc, professor. University of Pécs, Faculty of Business and Economics, Hungary. Töttösi, Adrienn Vaszkun, Balázs György PhD, research assistant. Corvinus University of Budapest, Faculty of Business Administration, Hungary. Vázquez, José Luis PhD, professor. University of León, Faculty of Economics and Business Sciences, Spain. Vilmányi, Márton PhD, associate professor. University of Szeged, Faculty of Economics and Business Administration, Hungary. Žarkovič, Ksenija M.A. Secondary school, Split, Croatia. Zawadzka, Anna Maria professor. University of Gdańsk, Poland. Zsigmond, Száva lecturer. Budapest Busniess School, College of Finance and Accountancy, Hungary. 6

7 Contents Foreword Motivation of financial institutions management to a crisis (ATTILA ÁCS) Introduction The financial landscape Regulation Beliefs and ignorance: this time is different Compensation practice Conclusions References Features of talent-branding at the University of Pécs (GÁBOR BALOGH) Introduction Higher Education and students in Europe Talent-branding Trends affecting talent-branding The student side The corporate side The connection of perspectives the source of empirics Research methodology The characteristics of the sample and the basic information Results Conclusion References Graduate Follow-Up System at the University of Pécs (GÁBOR BALOGH NORBERT SIPOS) Introduction Professional practice The success of the students in the labour market The practice of talent development at the UP FBE Methodology The experiences of the optional professional practice (related to the undivided education) The results of the Graduate Follow-Up System References Institutional isomorphism vs. the free market (DANA BENCIKOVA DAVID COLE) Introduction Embeddedness and post-transitional states The weak links between citizenship and country The importance of status The isomorphic institutionalization of the desk job The imposition of the public sector The Research Test 1. Questionnaire about emigration to another country Test 2. Questionnaire about living and spending choices

8 7.3. Test 3. Response to visual stimuli about issues relating to questions about where to live, family choices, and job preferences Conclusion from the survey results References Management social responsibilty of croatian agricultural enterprises (MARIO BOGDANOVIĆ KRISTINA SVRŽNJAK) Introduction Research of social responsibility of the management of agricultural enterprises in Croatia Research method Research process and subjects (samples of enterprises) Results and discussion of the emperical research The responsibility of the management of the agricultural enterprises towards their own staff Environmental responsibility of the management of agricultural enterprises The responsibility of the agricultural enterprises management towards clients, suppliers and competitors on the market (market responsibility) Responsibility of the management of the agricultural enterprises towards the local community Organizational culture of agricultural enterprises Overall managerial social responsibilities in agricultural enterprises Conclusion References University impact and impress on student growth (ZSÓFIA BRAXMAIR ERZSÉBET HETESI) Introduction Who are the stakeholders? Difficulties in the definition and main interpretation of quality in higher education Value added student growth: a quality measure? The conceptual model of the value added at a higher education institution Research plan References The science behind Taylor s principles of scientific management (CECILIA M. DEAN) Introduction Defining science Radcliffe-Brown s single science for the study of human society Natural sciences 1911 to Taylor s principles of scientific management Introduction to Taylor's principles Taylor s mechanisms of management Mechanisms of management: concerns Mechanisms of management: Taylor s essence of management Essence of management: concerns Essence of management: Conclusion References

9 Influence of quality management system ISO 9001 at hotel business practice in Croatia (MARIJA DRAGIČEVIĆ KSENIJA ŽARKOVIĆ) Introduction Advantages of companies that have implemented qualitiy managing system ISO Results of research carried out in croatian hotel industry and discussion Level of ISO 9001 implementation in Croatian hotel industry Influence of Standard ISO 9001 on business success of Croatian hotel industry Research methodology Managers characteristics Influence of ISO 9001 implementation on marketing performance of Croatian hotels Influence of ISO 9001 implementation on operational performance of Croatian hotel industry Influence of ISO 9001 implementation on human resources management in Croatian hotel industry Conclusion References Risk management a strategic advisor for a sound management of a leasing business (ELENA ANDREI DRAGOMIR ION DOBRE) Introduction Modern risk management perspective Conceptual taxonomy of erm types Type I. Risk silo management Type II. Integrated risk management Type III. Risk-based management Type IV. Holistic risk management ERM framework and risk universe ERM framework Risk universe Risk management process Alternative approaches of risk assessment Active management of the largest risks The two-dimensional risk map: High/Medium/Low classification of risks Risk assessment using refined classifications Statistical Analysis Aggregating probabilities and impacts Conclusions References Risk factors in the elaboration and implementation of projects within the Hungary Romania Cross Border Cooperation Programme (GEORGIA DUMITRESCU) Introduction Project management within the Hungary Romania cross border cooperation programme Evolution of the Cross border Cooperation Programme Actual Programming Period of HU-RO CBC Project management Project risk management mithin cross border cooperation projects

10 3.1. Definition and risk classification Risk Factors and Risk Management Plan Risk factors and Risks Assessment in cross border project stages Conclusions References Management of family businesses (GERGELY FARKAS) Introduction The concept of the family business The proportion of the family businesses in the economy The function of familiness Discussion References Not all that glitters is gold not all foreign currency is what it seems? a perspective of financial institutions (ÉVA GULYÁS) Introduction The importance of foreign currency loans in the light of statistical data Definition of items in foreign currency Foreign currency or foreign currency - based? Annual report and impairment Amendments for helping the households indebted in foreign currency and their impacts on the FX-position Conclusions References Organizational innovations and their behavioral background (BALÁZS HÁMORI KATALIN SZABÓ) Introduction The undeservingly neglected version of innovation The theoretical approaches and the types of organizational innovations Theoretical considerations: The theoretical background of organizational innovations Synergy between the various types of organizational innovations and the postmodern economic environment Empirical research results on organizational innovation Conclusions References Sound theoretical knowledge as a remedy for practical organizational problems (PÉTER HARMATH) Introduction Materials and methods The problem finding stage the strategic assessment The strategy of the organization The business environment The size of the organization Organizational structure Question of organizational complexity Organizational climate The management style

11 3.8. Delegation and decentralization Integration and coordination Technology The question of formalization The results strategic design recommendations Conclusion References Knowledge management with talent management (HENRIK HEGEDŰS) Introduction Our quickly changing world HR profession looking for the way Being talented in the world of labor Developing during the whole career Conclusion: Knowledge as element of success References Corporate opinion about competition and cooperation in the examined enterprises (HILDA HURTA) Introduction Material and methods Results Conclusions References Family business development (SZABOLCS IMREH ÉVA MÁLOVICS GERGELY FARKAS) Introduction Definition of the term family business Family and business as distinct social systems The role of family businesses in Hungary Empirical research Presentation of the sample Differences between family and non-family businesses Features of the demands of trainings Summary References Consumer awareness in public services environment quantitative examination of water consumption habits in the city of Szeged (KLÁRA KAZÁR) Introduction Theoretical overview The specific marketing aspects of water consumption The public service nature Marketing communication of the public utilities Consumer theory of water Water consumption theories Sustainable consumption consumer awareness of water The importance of segmentation in water consumption Primary research Objectives of the research

12 3.2. Description of methodology The influence factors of water consumption The dimensions of awareness Description of conscious and less conscious consumer groups The limitations on applicability of the results Conclusion References Assessing faculty s performance: war of the worlds? (GABRIELLA KECZER) Introduction: individual performance assessment and its significance Performance assessment in higher education Characteristics of higher education related to performance assessment Aspects of performance assessment in higher education Foreign practices Conclusions References Financial literacy of hungarian teenagers (GÁBOR DÁVID KISS ANDREÁSZ KOSZTOPULOSZ PÉTER KOVÁCS BALÁZS RÉVÉSZ) Introduction The importance of financial literacy Financial literacy and economic rationality Phases of THE Elaboration of the questionnaire evaluation and improvement The structure and items of the 2012 SZTE GTK Econventio questionnaire Conclusions References Trait emotional intelligence (TEIQue) as an individual performance influancing factor (EDIT KOMLÓSI) Taylor in the digital age (ZOLTÁN KOVÁCS DÓRA TASNER VIKTOR KOVÁCS KRISTÓF KOVÁCS) Introduction Own improvement Process Processing Application experience PreCon Application possibilities Development opportunities Conclusions References Students in the labour market (ZSÓFIA KÜRTÖSI) Introduction and theoretical backround Specialities of higher education The empirical studies The surveys Studenst preparedness for the labour market, foreign language skills, expectations Foreign language skills, studying and working abroad Professional experience

13 2.3. Anticipation and expectations related to labour market Graduates situation in the labour market The use of university services that help in finding jobs Finding employment after graduation The current situation of graduates in the labour market Finding employment in the region Summary References Logistics performance assessment (PÉTER LAKATOS GYÖNGYI NÉMETH) Introduction Importance and problems of logistics Good supply chain manager Performance measuring, optimization and developing Controlling and logistics controlling Logistics controlling Project management Warehouse and route optimizers Establishment of a new warehouse is it needed? Conclusions References Nógrád county: rural tourism? (BEATRIX LENKOVICS ADRIENN TÖTTÖSI ZSUZSANNA LELOVICS TIBOR FARKAS) Introduction Nógrád county Palóc people Crisis and recovery Festivals Festivals of Nógrád The market features of the rural gastronomic tourism The future of rural gastronomy Negatives and positives of local, rural festivals Discussion Conclusion References How to get employee engagement? (BRANKO LOBNIKAR) Introduction Description of the used method, instruments and sample Analysis and interpretation of research results Discussion How to increase the personal engagement of employees? Conclusion References Paradigm shift in organizational health management (ÉVA MÁLOVICS BEÁTA KINCSESNÉ VAJDA) Introduction Management and health Worksite stress

14 4. Conclusions References Corporate management and the revolution of the Machiavelli-method (GYÖRGY MAROSÁN) Introduction The evolution of the institution (-system) of corporate management The leader individual: High Mach Why will the High Mach (HM) be selected? Is High Mach a curse or a gift? Root case of crisis Conclusion References The role of fairness in modelling business relationships (ESZTER MEGYERI) Introduction Models treating fairness as a relationship dimension Interorganizational exchange behavior in marketing channels Evaluation of relationship quality in business relationships Culturally different inequity perception in interorganizational relationships Antecedents and consequences of consumer trust in the context of service recovery Fairness trust loyalty relationship under varying conditions of supplier buyer interdependence Summary and conclusion References Civil project management (ÁKOS MILICZ) Introduction Explanations About the civil sphere in brief About the research in short The research subjects The subject of the research Research methods The most important result of the research The way of thinking of the tender announcers Different types of applicant organizations Lack of innovations Non-governmental co-operations Hidden profit orientation The hardness of quantifying Weak human resource planning Lack of experts Two-sided publicity Problematic sustainability Stable asset and equity Weak financial reports The good financial manager Solutions, researcher s suggestions for the future References

15 Driving forces of development of society in a market economy (ELENA MONASTYRNAYA) Introduction The concept of needs Needs of socio-economic system Production needs Conclusion References Who will (or should) inherit the earth? The new challenge of Hungarian change and crisis management: issues of responsible succession of family businesses (ERZSÉBET NOSZKAY) Introduction What is family business and what makes a difference from classical businesses problems of the management of continuity What is family business what makes it a family? On the succession of family firms The dilemmas of inheritance (responsible transmission) including the issues of solution The basic question of inheritance, responsible transmission Criteria of inheritance and responsible transmission Summary The most important steps of transfer Endnotes References Lessons from fish market sellers, cheese-seeking mice and moving penguins building business short stories into management education (ÁRPÁD PAPP-VÁRY) Introduction The formula of success Management in 1 minute Lessons from fish market sellers The change management of penguins Cheese-seeking mice How seriously can they be taken? Summary: incorporating business short stories into management education References The examination of managerial processes of civic organizations (ANITA PIEROG GYÖRGY NORBERT SZABADOS) Introduction Functionalism in management Subject and method of the research Results Managerial tasks Planning Decision making Organization Control Summary References

16 Conception of an innovative school and its development opportunities in Latvia (DAVIS PLOTNIEKS) Introduction Secondary school education Conception of innovative school Skills and competencies for 21 st century Education development framework and school models Models of innovative schools Innovative school analyses and criteria for measurement Innovative school development opportunities in Latvia Conclusions References The cafeteria system in Hungary: past, present and future (JÓZSEF POÓR KATALIN ÓHEGYI) Introduction Cafeteria benefits Origin of flexible benefit plans The evolution of benefit plans in Hungary The research Background Key findings Cafeteria and taxation The future of cafeteria benefits in Hungary Conclusions References Leveraging marketing performance through information technology use (BALÁZS RÉVÉSZ MÁRIA TÖRŐCSIK) Information technology use in marketing Contemporary marketing practices, the CMP model Empirical research Hypotheses Introducing the sample and the respondents The evaluation of information technology use on the basis of the research results Summary References Faculty of Business and Economics, University of Pécs graduates on the labor market (NORBERT SIPOS) Introduction Methodology The results of the analysis Conclusion References Employee engagement: how business goals can be achieved through employee well-being (ANNA SZABOWSKA-WALASZCZYK ANNA MARIA ZAWADZKA ANDRZEJ BRZOZOWSKI) Introduction Well-being through employee engagement

17 2.1. What is well-being? Well-being at work: employee engagement link How to increase employee engagement? Capturing employee engagement Drivers of engagement Employee engagement and business results Conclusions References Responsible corporate behaviour at Szerencsejáték Zrt. (JUDIT TESSÉNYI) Introduction CSR definitions Previous investigations The indicators of responsible game standards Summary and conclusions Appendix References Taylor and after: paradigms in the history of management (BALÁZS VASZKUN) Introduction Scientific management: the engineered production Human relations: the awakening employee Structural revolution and open systems Strategies for the global competition Conclusions References Students today, workers tomorrow. An analysis of undergraduates attitudes towards corporate social responsibility (JOSÉ LUIS VÁZQUEZ ANA LANERO MARÍA PURIFICACIÓN GARCÍA) Introduction Dimensions of sustainability and responsibility in organizations Method and result Sample and procedure Results Conclusions References The impact of cooperation closeness on cooperation effectiveness in university-industry R&D collaborations (MÁRTON VILMÁNYI) Introduction Economic effectiveness of university-industry R&D partnerships in the light of relationship closeness Operationalization of the economic effectiveness and closeness of university-industry partnerships The closeness of university-industry R&D collaborations Presentation of the subjects and methodology of the study Test results The correlation between relationship closeness and relationship effectiveness Research limitations Summary

18 References Cross-fertilization between sport psychology and business coaching (SZÁVA ZSIGMOND) Introduction Why is the topic actual? Similarities and differences between sport psychology and business coaching The similarities The wheel of excellence Differences Experiences Cross-fertilization in practice according to professionals My own experiences of cross-fertilization Conclusion References

19 Foreword This is a collection of papers based on the lectures of the international conference organized by the University of Szeged, Faculty of Economics and Business Administration on November Our faculty organizes a scientific conference every year, and this one was held to honour the 100th anniversary of Frederick Winslow Taylor s publication of Principles of Scientific Management Taylor is regarded as the father of scientific management. He thought that by analysing work, the "One Best Way" to do it would be found. Since its introduction a hundred years ago Taylorism has generated heated debates and controversies with numerous supporters and criticizers. Taylor intended to use his scientific model for the benefit of all concerned parties. However, his famous line, that even an intelligent gorilla could be trained to do Schmidt s job, actually refers to the dehumanization of human work. A range of questions hence arises, such as: Why are Taylor s ideas coming up on the management agenda even today? What arguments are brought up by neo-taylorism? Which of Taylor s contributions still stand scientifically, and which ones should be unlearned by today s researchers and practitioners? What are the new approaches that we need to focus on? We believe that the questions raised by Taylorism would be worth reconsidering and answering from the perspective of management sciences today. So the aim of our conference was to rethink the ideas of scientific management from the point of view today s management sciences. As a result of the above mentioned aim our conference provided a wide range of topics to the participants, which were divided into the following three groups: organizations, cultural and behavioural issues and management practices. During the conference these topics were discussed in lively debates by the participants in several sections. It was a great pleasure for us to review and edit the conference proceedings and make them available for interested readers via the internet. We would like to kindly thank all the authors, the members of the Scientific and Reviewer Committee, the organizing team and our faculty for their valuable contribution to the conference. Szeged, 30 September 2013 Éva Málovics Chairperson of Scientific and Reviewer Committee

20 Motivation of financial institutions management to a crisis ATTILA ÁCS The recent financial and economic crisis highlighted the importance to better understand managers motivation and decision making process at financial institutions. There is direct relation between liquidity developments and asset price movements and these market developments influence the decision makers attitude and reaction. This interconnection can result in a vicious circle with devastating consequences for the financial system and real economy. Nowadays market-based institutions overtook the dominant role in the supply of credit from commercial banks. These market-based financial institutions were deeply involved in securitisation and actively used capital and financial markets to satisfy their funding needs. This changing nature of finance is well reflected by the aggregate balance sheet of marketbased financial intermediaries which in 2007 reached trillion of dollars compared to commercial banks trillion. This overwhelming role of broker-dealers, investment banks together with their risk and investment practices explains why the managerial decisions in this type of financial institutions have reaching consequences to the whole financial system and real economy. Main goal is to shed light on this management behavioural phenomenon on which today s researchers and practitioners need to focus on to prevent the proliferation of overly risk taking. Keywords: crisis, risk, compensation scheme, leverage 1. Introduction The primary goal of this paper is not to put the blame on financial managers for the financial crisis but to shed light on their motivating factors. There is plenty of literature dealing with the causes of the current situation but little attention has been paid to psychological aspects. Király et al (2008) provides an overview of the antecedents of the crisis emanating from the US sub-prime credit market. They conclude that the main drivers of the turmoil were a persistently low international interest rate environment and financial imbalances brought about by globalisation. The continuously rising house prices, the rapid increase of financial asset prices due to sub-prime mortgage credit securitisations (the originate-and-distribute model) and the crash of asset prices in the United States collectively were liable for the enormity of the economical distress. But to a very important feature of the events little attention was paid to: the financial institution managers and portfolio dealers motivation. The recent financial and economic crisis highlighted the direct relation between liquidity developments and asset price movements. These market developments are important inputs in decision making process and contribute to the general attitude and influence reactions. This interconnection between market developments and investors feelings can result in a vicious circle with devastating consequences for the financial system and real economy. First the financial landscape will be introduced as to understand the setting in which decision makers manoeuvre. Only the very necessary technical aspects will be treated which are indispensable to our topic. After the regulatory issues the this time is different belief is treated as beliefs and ignorance are key to understand dynamics. Before ending this paper with conclusions the compensation practice at financial institutions is going to be discussed and its effect. 20

21 2. The financial landscape To be aware of the financial landscape preceding the events is very helpful to understand financial managers motivation and decision making process. Classical financial institutions (commercial banks, saving houses, thrifts) make money by maturity transformation, that is they finance long term investments (house purchase) from short term sources (deposits). But from the 80 s so called market-based financial institutions (broker-dealers, investment banks, hedge funds) overtook the dominant role in the supply of credit from commercial banks. These market-based financial institutions were deeply involved in securitisation and actively used capital and financial markets to satisfy their funding needs. This changing nature of finance is well reflected by the aggregate balance sheet of market-based financial intermediaries which in 2007 reached trillion of dollars compared to commercial banks trillion (Adrian Shin 2008). This overwhelming role of broker-dealers, investment banks together with their risk and investment practices explains why the managerial decisions in this type of financial institutions have far reaching consequences to the whole financial system and real economy too. Market-based financial institutions engage in very intense maturity transformation by buying long term assets on the capital markets (stocks, bonds, asset backed securities, credit default swaps, etc) and refinancing these assets from short term credits from the money markets. Money markets offer short term financing possibilities that is they lend money for one day or a couple of day. From this follows that investors have to refinance assets from time to time. Not surprisingly, refinancing conditions are vital to investors. On money markets the primary form on lending is the repurchase agreement (repo). In a repo contract the borrower sells a security today for a price below the current market price and will buy it back in the future at a pre-agreed price. The difference between the current market price of the security and the price at which it is sold is called the haircut. The variations of haircut largely determine the available funding to market participants, since the haircut determines the maximum potential leverage possible to borrowers. In case of 2% haircut, investors can borrow 98 dollars for 100 dollars worth of assets pledged, investing this way only 2 dollars of equity to hold 100 dollars worth of securities. Thus, in case of 2% repo haircut the greatest possible leverage (ratio of assets to equity) is 50 (Adrian Shin 2009). The evolution of factors influencing liquidity conditions shows pro-cyclicality which means that liquidity is plenty when markets are calm and prices of assets are rising. In these conditions lenders feel safe from losses as they keep the collateral. The value of collateral in favourable conditions, when optimism is reigning, usually is rising. Volatility is low as investors are calm. Several other factors have influence on short term liquidity conditions and implicitly on balance sheets of financial institutions. As portfolio managers react to every change in asset and money market conditions balance sheets reflect all this adjustment. As a consequence investment banks aggregated balance sheets is a good proxy for general liquidity conditions (Adrian Shin 2008). It is important to write about financial developments. Financial engineering created new highest qualified investment graded (AAA) assets which became eligible for repo. As the real value of these securities got questioned they lost their high level status and a haircut of 100% was applied to them. These papers became ineligible for refinancing in practice which put additional pressure on their prices. 3. Regulation Investment companies, broker-dealers have to follow mark-to-market accounting rules to reflect the true and updated value of the balance sheets of financial institutions. It means that 21

22 these companies day-by-day have to update their balance sheet items. This methodology should allow investors and policy makers to better assess risk profiles and make corrective actions in financial regulations. Opponents of this accounting practice argue that mark-tomarket accounting leads to excessive and artificial volatility of market prices and balance sheets. As a consequence, short-term fluctuations have serious effects on the value of the balance sheets of financial institutions. This way an accounting rule drives markets instead of the fundamentals and the value at maturity of assets and liabilities (Allen Carletti 2007). This mark-to-market accounting rule is exacerbated by value-at-risk (VaR) risk management. VaR is defined as a threshold value that the losses should not exceed in a given time period with a given confidence level. The main input in VaR values is the volatility of time series of daily equity returns. To put it simple, VaR is high when the market prices change with big amplitudes. In compliance with VaR risk management practice exposures are adjusted continuously to be matched with available capital, so to leave the probability of default constant. But market prices change in the same time for every financial investor which means that they have to de-leverage (sell assets) at the same time to contract their balance sheets. In other words, balance sheet must shrink or expand simultaneously to keep probability of solvency fixed over time. Thus, when after a shock the overall risks in the financial system increase, the intermediary must decrease its exposure in order to maintain the probability of default unchanged to additional arriving shocks. On the contrary, when the economic situation is more benevolent and anticipated risk declines, the financial companies will expand balance sheets by buying risky assets to keep the probability of default constant (Adrian Shin 2008). From the above mentioned follows that the assets to capital ratio moves hand-in-hand with VaR. Intermediaries are buying risky assets when the risk measured by VaR is low and selling assets when measured risk is elevated. To put it in different way leverage is procyclical in the sense that leverage grows when balance sheets are expanding, and then contracts when balance sheets are shrinking (Adrian Shin 2008). Figure 1 and figure 2 help to explain this relationship, between VaR, leverage and volatility, where the latter is represented by the VIX 1 index. On Figure 1 the relationship between the equity of the 4 largest US investment bank, value of VaR (the 06 May value set to unity) and S&P500 stock prices can be seen. Equity is responding not only to stock prices but VaR too and that is the reason that the value of banks equity can diverge from the course of stock prices. Obviously the change of equity can overreact the change of stock prices in benign conditions when VIX declining. On Figure 2 the countercyclical nature of connection of price volatility (VIX) and banks leverage ratio (lev) is visible. The effect of suddenly falling prices to leverage is dramatic in The explanation is that crashing prices wiping out bank equity (Figure 1) faster than banks can adjust leverage to new conditions. Liquidity 2 conditions were stressed from two main directions. First asset liquidity deteriorated on markets 3. It means that when financial companies sell stock they want to exit the same door at the same time but simply enough buyers can be found only at markedly lower prices. The final consequence is devastating and demonstrated by leverage value. It has reached nearly 100 which imply that against equity of 1 The CBOE Volatility Index (VIX ) is a key measure of market expectations of near-term volatility conveyed by S&P 500 stock index option prices. Since its introduction in 1993, VIX has been considered by many to be the world's premier barometer of investor sentiment and market volatility. 2 About likuidity effect see Ács A market is liquid if transactions can take place rapidly and with little impact on price. So defined, market liquidity has several dimensions.20 Tightness refers to the difference between buy and sell prices, for example the bid-ask spread in a quote-driven market. Depth relates to the size of the transactions that can be absorbed without affecting prices. Immediacy denotes the speed with which orders can be executed, and resiliency the ease with which prices return to normal after temporary order imbalances (Borio 2000). 22

23 1 there were assets of 100; only an additional 1% decrees in value wiped out totally the remaining equity of banks resulting in bankruptcy. Figure 1. Relationship between S&P500 stock prices (lhs), equity of banks (lhs), and VaR (rhs) Note: Index comprised of Bear Stearns, Goldman Sacs, Lehman Brothers, and d Morgan Stanley. Source: Shin et al (2008) Figure 2. Relationship betweenn S&P500 stock prices (lhs) and leverage ratio (rhs) Source: Yahoo Finance 4. Beliefs and ignorance: thiss time is different The roots of the problems stretch back to the preceding years of low interest rates and high world growth. The main driver of developments was the search for yield further down the credit quality curve. Stock prices were kept on rising and volatility was subdued simultaneously leading to overoptimistic assessments about thee risks ahead. At the same time financial system developed new investment graded (AAA, that is i the highest quality) financial f instruments that seemed to offer higherr risk-adjusted yields, but in reality their risk r was understated due to lack of knowledge and negligence. In this environment prevailed by optimismm market discipline failed f (IMFF 2009a). Not surprisingly thiss time is different attitude reigned across the financial system. The belief in financial innovations was unlimited blurring even the supervisors vision tooo in many cases. The decisive d moment in the period before crisis was when the newly created investment graded securities appeared on the 23

24 markets and got refinanced in repo transactions at a much lower haircut than otherwise would have been reasonable. The US Office for the Comptroller of the Currency from 2004 through 2007 provided timely warning. Tried draw attention to a) imprudent credit decision practices fostered by ambitious growth goals, b) the need of better credit risk management practices, c) the liability of managers for both the quality and the quantity of their deals, d) the worst of loans are made in the best of times, e) changing risk selection practices and underwriting standards, and emerging concentrations of risks, f) unsustainable appreciation of house prices and overvalued markets, g) increasing credit risk due to weakening of underwriting standards (IMF 2009b). Rajan (2009) is pointing to cyclical euphoria. It is not completely surprising that bad investments are done in good times. But what was astonishing was that the originators of securities with questionable values held in their own portfolios so many of them. At least the financial institutions should have understood the deterioration of the underlying quality of assets (mortgage backed securities, MBS). The justification has to be that somebody in these financial institutions considered these securities worth of investment. Buying mortgage backed securities seemed to be became part of an investment culture characterised by excessive risk-taking. To timely recognise this abnormality, it is extremely difficult, especially in the case of new products (Rajan 2009). As these assets were widely accepted in repo at a relatively low haircut indeed they were attractive. Another issue is related to performance evaluation. To judge whether a financial manager is generating real risk adjusted excess returns or whether the current returns are simply compensation for an uncovered risk that can later materialize is a tough task. In addition head of financial companies are evaluated in part on the basis of the earnings they generate relative to their peers. This is a very competitive business and the pressure is always high to generate high returns. To managers of follower banks have no option but to engage in risky investments to improve various observable measures of performance. Even if they recognize the doubtfulness of this type of strategy, the temptation to increase their bank s stock prices and their own reputation is a strong appeal. There is anecdotal evidence of this type of managerial attitude. The most frequently cited is the chief executive officer of Citigroup, Chuck Prince. In his infamous sentence gave explanation why Citigroup continued the same investment practice to buy assets from credit despite rising risks: When the music stops, in terms of liquidity, things will be complicated. But, as long as the music is playing, you ve got to get up and dance. We re still dancing (Rajan 2009). This dance is highlighted on Figure 3, where the simultaneous development of S&P500 stock index and market volatility (VIX) is observable. Nicely discernible is a change in the relationship between S&P500 and VIX from 2002 onwards. Volatility was diminishing and stock prices were kept on rising. VIX reached its bottom in 2006q4 but stock prices were rising for an addition half year. Liquidity conditions changed in response to varying volatility and asset prices. When both were deteriorating liquidity conditions answered in accordance by rising haircuts and shrinking number of eligible assets. Then the stock index bottomed and volatility topped at the same time in 2009q1. 24

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