The file PortfolioManagementAssignment1.xlsx placed on the Learning Management System subject page provides daily share price data and dividend data from 31 December 2014 to 31

 8

Major Project

Part A

The file PortfolioManagementAssignment1.xlsx placed on the Learning Management System

subject page provides daily share price data and dividend data from 31 December 2014 to 31

December 2019 for 30 of the largest, by market capitalization, companies listed on the ASX.

Daily values of the All-Ordinaries Accumulation Index are also provided in that file. Note that for

this exercise the yield on Australian Government 10-year bonds is set at approximately 5 per

cent per annum (which may be used as a proxy for the risk-free rate of interest) and the equity

risk premium is 4 per cent per annum.

Each student will be allocated a portfolio comprising seven of these companies. Students whose

student number ends in 1 or 2 will be allocated companies 1, 3, 5, 7, 9, 11 and 14. Students

whose student number ends in 3 or 4 will be allocated companies 2, 4, 6, 8, 10, 12 and 15.

Students whose student number ends in 5 or 6 will be allocated companies 15, 17, 19, 21, 23, 1

and 4. Students whose student number ends in 7 or 8 will be allocated companies 16, 18, 20, 22,

2, 4 and 7. Students whose student number ends in 9 or 0 will be allocated companies 1, 3, 5,

10, 12, 17, and 19.

For your portfolio of companies and using the file PortfolioManagement3_8.xlsx as a template,

show the efficient frontier of all efficient portfolios (with and without short selling), and the capital

allocation line. For this analysis, expected returns are calculated using the Capital Asset Pricing

Model. Also, document the security market line for your portfolio of companies.

(5 marks)

9

Part B

This question uses monthly returns observed on US shares from 1926 to 2020 and specifically

uses data from Professor Ken French’s website -

http://mba.tuck.dartmouth.edu/pages/faculty/ken.french/data_library.html

You have been asked to assess the performance of a fund that invests in companies with very

small market capitalizations and very high book-to-market ratios. The file

PortfolioManagementAssignment2.xlsx placed on the Learning Management System subject

page provides the monthly returns to this portfolio for the period July 1926 to December 2020

inclusive. It also provides monthly excess returns (return on a market portfolio less the return on

a risk-free asset), monthly returns on a portfolio of small market capitalization companies less

returns on a portfolio of big market capitalization companies (the so-called SMB portfolio),

monthly returns on a portfolio of companies with high book-to-market ratios less returns on a

portfolio of companies with low book-to-market ratios (the so-called HML portfolio), and monthly

returns on a risk-free asset.

The period for you to examine is the sixty-year period beginning in 1937 plus the truncated value

of the number provided by the last two digits of your student number divided by four. So, if the

last two digits of your student number are 00, then TRUNC (0/4) = 0 and your sixty-year period is

from 1937 to 1996 inclusive. If the last two digits of your student number are 15, then TRUNC

(15/4) = 3 and your sixty-year period is from 1940 to 1999 inclusive. If the last two digits of your

student number are 99, then TRUNC (99/4) = 24 and your sixty-year period is from 1961 to 2020

inclusive. [This method is just a way of dividing the class into 25 groups].

For your period of sixty years, use regression analysis to determine and examine whether or not

the portfolio of companies with very small market capitalizations and very high book-to-market

ratios has outperformed when benchmarked against the Capital Asset Pricing Model, and also

whether it has outperformed when benchmarked against the Fama-French three factors.

(5 marks)

Part C

PortfolioManagementAssignment3.xlsx placed on the Learning Management System subject

page provides end-of-month prices (adjusted for dividends) for eighty-one Australian listed

companies from December 2001 to December 2015 and monthly returns from January 2002 to

December 2015. It also provides the market capitalisation, the book-to-market ratio, and the 52-

week high share price of each of these companies at the end of each year from 2002 to 2015.

10

Form three equally weighted portfolios. The first portfolio (HML) to be formed is long the N

companies with the highest book-to-market ratios and short the N companies with the lowest

book-to-market ratios. The second portfolio (SMB) to be formed is long the N companies with the

smallest market capitalisation and short the N companies with the largest market capitalisation.

The third portfolio (WML) to be formed is long the N companies that have share prices that are

closest to their 52-week high share price and short the N companies that have share prices that

are farthest away from their 52-week high share price. Each portfolio is rebalanced at the end of

each year.

N is equal to 5 plus the truncated value of the number provided by the last two digits of your

student number divided by five. So, if the last two digits of your student number are 00, then

TRUNC (0/5) = 0 and the portfolios have 5 long positions and 5 short positions. If the last two

digits of your student number are 19, then TRUNC (19/5) = 3 and the portfolios have 8 long

positions and 8 short positions. If the last two digits of your student number are 99, then TRUNC

(99/5) = 24 and the portfolios have 24 long positions and 24 short positions.

What is the return performance of the each of these portfolios over the period January 2003 to

December 2015? If your brief was to establish a long-only value fund of N shares (within the

investible universe of the 81 companies), what shares would be held in January 2016? If your

brief was to establish a long-only fund of smaller companies (within the investible universe of the

81 companies), what shares would be held in January 2016? If your brief was to establish a

long-only fund of companies based on a 52-week high strategy (within the investible universe of

the 81 companies), what shares would be held in January 2016?

11

(5 marks)

Part D

The daily closing prices of GameStop (NYSE: GME) shares from 11 June 2020 to 10 June 2021

are provided below.

One definition of an efficient market is one where prices are an unbiased estimate of value and

where information is incorporated into prices instantaneously and without bias. Using this

definition it is difficult to argue that estimated values could have changed to such an extent, as to

be able to argue that at each point in time over this period that prices were unbiased estimates of

values at that time. Indeed, the person synonymous with research providing evidence supportive

of markets being highly efficient, Eugene Fama, when interviewed in March 2021, stated that

“GameStop (was) a clear case where, for a couple of days, the market was inefficient” (Gold

(2021)). In this interview it is the definition of market efficiency referred to above that is being

discussed.

However, in order for abnormal returns to be able to be earned, prices must be biased estimates

of value and there must be not limits to arbitrage. In the case of Gamestop, what limits to

arbitrage may have existed to prevent abnormal returns from being earned?

Your answer should compare the case of Gamestop shares in 2021 with the case of the relative

pricing of Royal Dutch shares and Shell shares from 1990 to 2002, and the case of the relative

pricing of Palm shares and 3Com shares in 1999. These cases are discussed in Bodie, Kane

and Marcus (2021, pp. 378 – 379), Froot and Dabora (1999), Lamont and Thaler (2003), and in

12

the Lecture Recording for this subject titled “Behavioural Finance and Market Efficiency - Limits

to Arbitrage”.

References

Froot, K. A. and E. M. Dabora, (1999), ‘How Are Stock Prices Affected by the Location of the

Trade?’, Journal of Financial Economics, Vol. 53, pp. 189 – 216.

Gold, H, (2021), ‘Nobel Winner Eugene Fama on GameStop, Market Bubbles and

Why Indexing is King’, MarketWatch, March 3, 2021. Retrieved 11 June 2021.

https://www.marketwatch.com/story/nobel-winner-eugene-fama-on-bubbles-why-indexing-is-stillking-

and-gamestop-11614776294

Lamont, O. A. and R. H. Thaler, (2003), ‘Can the Market Add and Subtract? Mispricing in Tech

Carve-outs’, Journal of Political Economy, Vol. 111, pp. 227 – 268.

(15 marks)

The word limit for the major project is 3000 words. It is recommended that the majority of the

words be allocated to Part D.

Solution

Major Project

Part A

In this part of the project I was required to find the efficient frontier of all the efficient portfolios, the capital allocation line while calculating the expected returns using the Capital Asset Pricing Model (CAPM), and to document the security market line of all these companies assigned to me for part A.

I, therefore, used the PortfolioManagementAssignment1.xlsx to find the seven companies (together with their data) allocated to me. I then used that financial data to answer part A. My workings are found in the attached file PortfolioManagement3_8.xlsx.

The seven companies assigned to me are:

• Alumina AWC

• ANZ Bank Limited ANZ

• Caltex CTX

• Incitec Pivot IPL

• Mirvac Group MGR

• Sonic Healthcare SHL

• Telstra Corp TLS

I then took price data of the above companies, calculated daily returns which is equal to price today-price yesterday – 1. Then, I got the averages daily returns for each company. After that, I calculated the variance Covariance matrix/ bordered Covariance matrix. I found the portfolio weights for the seven companies (companies = 1/7) so each got weights of 0.142857142857143 which when added together equals 1 or (100%) meaning that all the capital has been allocated equally.

|Once I had the portfolio weights, I then calculated the first portfolio mean and variance.

Portfolio Return = w^Tµ = SUMPRODUCT (w,µ)

Portfolio Variance = w^TΕw = MMULT(TRANSPOSE (w), MMULT (E,w))

Then, used the excel solver function was to calculate the portfolio weights. After that, the portfolio variances are calculated before calculating the series of portfolio standard deviation and portfolio mean.

The series of portfolio standard deviation and portfolio mean are used to create the chart which is the portfolio frontier.

The portfolio frontier is then formatted to include the title, the x-axis is the portfolio standard deviation (which is a measure of risk), while the y-axis is labeled the portfolio means (which is a measure of return).

Generally, the stocks above the minimum variance are the efficient portfolio frontier and those below the minimum variance are the inefficient portfolio frontier.

It is taken that any point at the lower part of the curve gives a lower return for the risk you take (inefficient) as compared to any of the points at the upper point of the curve. this means those at the top are more efficient.

This is important for rational investors because when they look at the chat, they would not choose any point at the lower part of the curve, this is because they can get a higher return for the same level of risk if they choose the points at the upper parts of the curve. , the upper part of the curve is known as the efficient frontier, and the lower inefficient frontier

Part B

In part B of the project, I was required to access the performance of funds invested in the following companies.

• Small market capitalization and very high book-to-market ratio using data provided in the file PortfolioManagementAssignment2.xlsx.

• In my case, the period I was tasked to examine was calculated as follow:

60 year period from 1937 + TRUNC no. which is equal to 10/4 =2

1937+2 = 1939+59 = 1998

therefore, the period to be examined is between 1939 to 1998. This period was highlighted with the color yellow in the file PortfolioManagementAssignment2.xlsx to identify easily.

Using the data provided in PortfolioManagementAssignment2.xlsx and the period to be examined of 1939 to 1998, I used together with regression analysis to determine and examine whether the portfolio of companies with small market capitalization and the very high-to-market ratio has outperformed when bench-marked against the Capital Asset Pricing Model, and small market capitalization and the very high-to-market ratio has outperformed when bench-marked against the Fama-French three factors.

The results were as follow:

The performance of small/ value portfolio bench-marked against the market return (or the capital asset pricing model (CAPM) were as follow:

I used the file PortfolioManagementAssignment2.xlsx (the results attached) and applied the regression analysis using excel on the highlighted period of 1939 to 1998 and the output should be the value (or alpha) under intercept of 0.50431. (see attached file). It shows results over the American company history, the positive alpha is shown under the intercept of that regression.

That positive alpha is the monthly abnormal return of 0.50431 % on the portfolio which is also taken as the annual abnormal return and annual alpha of the order of 5 %.

The downside of this result from regression analysis is that the return is unexplained. In addition, this means that when the performance of small/ value portfolios are benchmarked against the market return (or the capital asset pricing model (CAPM) the earned excess return of more than 5 % per year cannot be explained by the figures provided.

The figures also show that the stock is riskier than average because of the beta of 1.26779 which means any person invested in these small value stocks would have made great returns. But the bottom line is a more realistic model should be used that takes into account market return, size, and value factors. And, this will involve benchmarking the performance of the same small/ value portfolio against 3 factors that pick up sensitivity to size, sensitivity to the market, and sensitivity to value.

Assessing the performance of the small/ value portfolio benchmarked against the Fama French 3 factor model

I did another regression of the same period 1939 to 1998 but this time taking into account the market return, size, and value factors and the results were as follows: A positive alpha of 0.0591 (see attached file) was given as at the intercept. this figure is the 0.0591% of monthly abnormal return which translates into over 1% of abnormal year returns.

In addition, the figures below are the 3 factors x1, x2, and x3 of market return, size, and value, which measure the sensitivity of the portfolio and explain returns of a portfolio far more fully than just the value given when using the Capital Asset Pricing Model (CAPM)

Thus, the most appropriate model is the Fama-French 3 factor model, not the simplistic Capital Assets Pricing model

In conclusion, the best results for the performance of small market capitalization and very high book-to-market ratio are obtained when the Fama-french model is used because it takes into account 3 factors of market return, size and value.

Part C

For this part of the project, N is equal to 5 plus the truncated value of the number provided by the last two digits of the student number divided by five.

Therefore for this case N = 5 + 10/5

N = 5+2

N = 7

In addition, what is required is to formulate 3 equally weighted portfolios and this was done using the provided PortfolioManagementAssignment3xlxx. The ranking is as follow:

First portfolio (HML) = 7 companies with the highest book-to-market ratio and the shot 7 companies with the lowest book-to-market ratios. These portfolios will be made up of companies that have less value because they have a high book-to-value ranking, meaning that if an investor was to buy from this portfolio they would pay more funds. They are also referred to as growth stock companies. Each year the portfolio will be evaluated and new rankings of companies will determine if the companies with high book to market ratios are remaining in the portfolios.

For instance, in PortfolioManagementAssignment3xlxx the 7 companies that are in this portfolio for the year ending December 31 2002 are Sirtex Medical (Ranking Of 81), Cochlear (80), REA Group (79), IREE (78), Woolworths (77), ASX (74). The portfolio is then rebuilt at the end of the year according to the performances of those companies. Therefore, at end of the year December 31, 2003, the 7 companies that are in the portfolio are Sirtex Medical (81), Cochlear (79) Woolworths (76), Rea Group (73), IREE (78), Rio Tinto (77) Oz Minerals (75). In the new year, a new portfolio is rebuilt, and the process continues.

The second portfolio (SMB) = 7 companies with the smallest market capitalization and short the 7 companies with the largest market capitalization. What can be noted here is companies with the smallest market capitalization are good to invest in, because they are ranked according to their value (the one with a ranking of 1 being with the most value to invest in) and those with the largest market capitalization are growth companies ( with higher ranking and are short sold off by investors)

The portfolios of these companies are made using the excel worksheet - of the file PortfolioManagementAssignment3xlxx - labeled market cap and I used the rankings to form the portfolios. For instance, on the year 31 December 2002, the 7 companies with the smallest market capitalization were Cash Converters INTL. (1) WEBJET (2), Tox Free Solutions (3), Western Areas (4), Reckon (5) Rea Group (6) Hansen Technologies (7) Hansen Technologies. A new portfolio is then rebuilt each year according to the performances of companies in the previous year.

The third portfolio (WML) = 7 companies that have share prices that are closest to their 52-week high share price and short the 7 companies that have share prices that are farthest away from their 52-week high share price.

Using the 52-week excel worksheet of the file PortfolioManagementAssignment3xlxx on 31 Dec 2002, companies that fall in a portfolio where they can be bought and held or close to their 52 weeks high are found using the low ranking of (starting from 1) and they are Adelaide Brighton, Sky Network TV.(ASX), Skycity ENTM.Group (ASX), Sims Metal Management, REA GROUP, OZ Minerals, Fletcher Building (ASX). And again, the portfolio is rebuilt each year and the companies that remain in the portfolio depending on the new rankings. Likewise, those companies furthest from their 52 week high are considered to be growth companies and are ranked higher. The portfolio of these companies also changes each year with new ranked firms.

One might conclude that when using size and value strategy, the portfolio of small companies outperformed the portfolio of big companies as shown by the returns (the return worksheet of file PortfolioManagementAssignment3xlxx). The average return of small companies in small stock is 1.73% compared to that of portfolios of big companies which is 0.57%

Using the book strategy (where companies are ranked from smallest to largest based on a market-to-book ratio. These companies to be invested in are the small ones because they have better pricing and can be sold in the future. Therefore, they will outperform larger ones.

When it comes to how much shares are to be held in January 2016 = (M/B performance) the average monthly return from a portfolio of value stocks was 1.35%, the average monthly return of growth stock was 1.17% and the average monthly return of the HML portfolio was 0.18 % per year.

long-only fund of companies based on a 52-week high strategy shares to be held in January 2016 can be found using the momentum strategy and the 52-week high worksheet showing share prices of stock at their 52 weeks high in PortfolioManagementAssignment3. companies bought are those which are close or at their 52 weeks high and those that are far away from their 52 week high are short sold. All this is done using the ranking found on the same 52 weeks high excel worksheet.

Therefore, in the return excel worksheet the 52 week high winners were 1.06% and loser stocks earned returns per month of 0.96 % and winner stocks outperformed loser stocks by 0.10 % per year which shows the use of the momentum strategy.

Part D

The GameStop saga of January 2021 has taught important lessons about efficiency, diversification, investing, and trading. These lessons were stressed more clearly by Statman (2021) in his article titled: Trading Isn’t the Same Thing as Investing.

GameStop, a brick and Mortar based gaming business has been struggling for some years now – since most gaming retailers moved their businesses online. Therefore, most investment professionals and finance practitioner community expected it to continue struggling and the saga started when amateur investors bought shares in Gamestop to cause a short squeeze in the market. They did this using a no-commission mobile app known as Robinhood. Indeed they caused a viral short trading frenzy in January 2021 from less than $20 % per share to a high $483. Moreover, in early February the share price quickly went back to around $50.

Within that period, those who bought shares quickly and sold within that short period benefited, but the majority of irrational investors lost money because they bought shares and kept them until they were too low to sell.

Statman (2021) explained how the rational investors described in standard finance know that markets are hard to beat, but many of the normal investors described in behavioral finance, such as GameStop’s amateur investors who believe that markets are easy to beat.

In reality, they found out that the market beats most investors who attempt to beat it and most of the time cognitive and emotional errors mislead many investors into thinking that they can easily beat the market. Many people believed that the market price of GameStop would fall any time through shot selling (or short Squeeze strategy)

Limits to Arbitrage

There are two sources of Limits to Arbitrage and one of them is Fundamental risk where errors may not be corrected for an (unknown) long time, the other is implementation costs which are cases where implementation costs can be high- especially if shares are overvalued.

To see in if reality the two forms of limits to arbitrage takes place, the relative pricing of the Siamese twin companies has been used. For instance, in the Royal Dutch Petroleum and Shell Transportation case, the limit to arbitrage prevented any mispricing from being corrected.

As Siamese twin companies, Royal Dutch and Shell had a structure where the two companies agreed to merge their interests on a 60: 40 basis while remaining separate and distinct entities {Froot & Dabora, 1999). but interestingly they were two separate companies at some point, where each company had its shares. the shares in one company were independent of the shares of another. Royal Dutch company was from the Netherlands, while Shell Transportation was listed in the United States. What is amazing about these two companies is, that they both hard the same dividends (mainly because the dividends were always paid in US dollars), taking advantage of having no foreign exchange difference and they would pay out the same payouts if the companies were to be liquidated. In addition, shareholders in the two companies also had identical voting rights on management decisions and they were a common board for the two companies (Froot & Dabora 1999).

So what took place?

- from 1998 to 2002 their prices deviated from one another (Deviation of parity)

- And for 10 years when an investor tried to use the Arbitrage strategy to earn arbitrage profits by short-selling shares in Royal Dutch and at the same time buy shares in a relatively undervalued shell company. They took this decision because Royal Dutch looked overpriced compared to shell most of the time during that period. but the problem is with the Arbitrage strategy the investor would be making a bigger loss on shares sold of Royal Dutch compared to the gain from buying the shares in Shell.

Therefore, Froot & Dabora (1999) explained how arbitrage disciplines the price gap. It an unrealistic world benefits or gains from the arbitrage strategy would be realized but not in reality.

The reason why most investors who used the arbitrage strategy on Royal Dutch and Sell during that period is because they were fundamental risks, where the mispricing may not be corrected for an (unknown) long time.-And in terms of implementation cost the management cannot maintain a short-selling position on a company forever.

Another realistic cause of limits to arbitrage and the law of one price is the case of 3com and Palm.

In that case, the limits to arbitrage were preventing mispricing from disappearing, even though the market was not fully efficient, and on top of that individuals in these companies were not processing information correctly. in their paper, Can the Market Add and Subtract? Mispricing in Tech Stock Carve‐outs, Lamont & Thaler (2003) wrote a paper to investigate the violations of the law of one price. They used cases with detailed evidence of prices that were wrong or fictitious.

The conclusion was that the main driver of the law of one price in financial markets is arbitrage, In this case, the buying and selling of the same security for two different prices with the hope of gaining incentives to eliminate any violations of the law of one price.

And indeed one of the investigations done by Lamont & Thaler (2003) was on 3Com and palm. Palm, which makes hand-held computers, was owned by 3Com, a profitable company selling computer network systems and services. So when 3com spun off Palm, it sold 5% of its subsidiary Palm through an official public offering and its shareholders retained 95 %.

Interestingly, 3com was expected to perform better than Palm, and the price of 3 com shares was also expected to be greater than one and a half Palm shares mainly because each Shareholder of 3com was to receive a free one and half shares because they had retained 95% shares of Palm

But to everyone's surprise, 3Com shares traded at a lower price than that of its subsidiary Palm. This strange situation happened because, for the year from 2nd March 2000 to the 18th of September 2000, a graph of dollars per share is usually used to explain:

- On the day of listing Palm the price difference was $82-1.5 x $95 meaning 1 3Com share could be purchased for $82 but on the first day of listing investors were buying Palm shares and paying $95 per share. So 1.5 Palm shares would cost 1.5 lots of $95 and you could buy 1 3com share that entitles you to 1.5 Palm shares for only $82.

- The mispricing appeared to be at least $82 less 1.5 lots of $95 or $62.50.

-when most investors observed that, they used the arbitrage strategy of buying 3Com shares and short sell Palm shares, the problem with the arbitrage strategy, in reality, is it was not possible to sell overpriced assets and buy the under-priced shares, simply because all the Palm shares that were being held were already shot sold so, in reality, it was not possible to sell the Palm shares which they did not even own.

Thus this mispricing occurred because of overconfidence, irrational behavior by investors who were buying too much of Palm shares at the height of the .dotcom bubble and they didn't benefit from the mispricing at all.

The lesson learned here was that when you don't own shares in a company, sometimes it is not possible to arrange a short sale. to do this properly, you might have to find an institutional investor who will allow you to borrow the shares off them and sell them temporarily.

Lamont & Thaler (2003) also documented how shorting costs are the precise market friction that allows prices to be wrong, and irrational investors, woefully uninformed, endowed with strange preferences, or willing to hold overpriced assets, usually get it wrong and lose out.

References

• Lecture Recording for this subject titled “Behavioural Finance and Market Efficiency - Limits to Arbitrage”.

• STATMAN, M. (2021), 'Trading Isn’t the Same Thing as Investing: The Lessons of GameStop', Journal of Avantis Investors Retrieved 24 July 2021. https://www.avantisinvestors.com/content/dam/ac/pdfs/ipro/viewpoint/avantis-lessons-of-gamestop.pdf

• Froot, K. A. and E. M. Dabora, (1999), ‘How Are Stock Prices Affected by the Location of the Trade?’, Journal of Financial Economics, Vol. 53, pp. 189 – 216.

• Lamont, O. A., and R. H. Thaler, (2003), ‘Can the Market Add and Subtract? Mispricing in Tech Carve-outs’, Journal of Political Economy, Vol. 111, pp. 227 – 268.

Royal dutch shell is a British multinational oil and gas company founded in 1907 that is headquartered in the Netherlands and

Closing case

Royal dutch shell is a British multinational oil and gas company founded in 1907 that is headquartered in the Netherlands and incorporated in the united kingdom the company is one of the world largest oil producers with revenues of about $388 billion profit of $24 billion and operation in more than 70 countries the company has some 82.000 employees of which about 7000 employees are at any one time on expatriate assignments outside their home country a crucial task for the shell is to manage this extensive population of expatriate workers to meet its commercial goals and transfer valuable technical and managerial knowledge across operations located in different nations its no easy task

Shells long-term goal is to develop local talent wherever possible thereby leveraging local employees networks, market knowledge, and language skills while also minimizing cost however there are many cases where deploying foreign nationals makes the most commercial sense first there is often a shortage of skills in certain locations, the shell has found this to be a vital issue in the middle east and North Africa where the company often works with local joint -venture partners or third parties. moving shell employees from other countries to work with partners. and transfer expertise is often a key part of the company strategy. the second shell recognize that the skills of staff and senior leadership are improved by significant exposure to overseas markets in other words in a multinational shell high potential employees need to understand what it is like to live and work in other countries – to get a sense of the conditions on the ground third in many instances, senior shell employees need to be on the management boards of local subsidiaries to effectively monitor and control those operations and keep the head office informed of developments.

A shell has found however moving employees to other countries raise several important challenges it's not always easy to recruit skilled personnel to work in different locations a survey of expatriate personnel at shell found that five issues had the greatest impact on the willingness of employees to accept an international assignment in order of importance these were (1) separation from children during their secondary education (2) harm done to a spouse career and employment (3) failure to recognize and involve a spouse in the relocation decision (4) failure to provide adequate information and assistance regarding relocation and (5) health issue the underlying

The message was that the family is the basic unit of expatriation, not the individual, and the shell need to be more to recognize this.

To deal with these issues shell implement several programs designed to address some of these problems to help with the education of children, shell built an elementary school for shell employees where there was a heavy concentration of expatriates as for secondary school education shell worked with a local school (e.g.. often providing grants) to help them upgrade their educational offering it also offered an education supplement to help expatriates send their children to a private school in the host country.

Helping spouse with their career is a more vexing problem according to survey data half the spouse accompanying shell staff on assignment were employed until the transfer when expatriated only 12 percent were able to secure employment while a further 33 percent wished to be employed shell set up a spouse employment center to address the problem the center provides career counseling and assistance in locating employment opportunities both during the company also agreed to reimburse up to 80 percent of the cost of vocational training further education or reaccreditation

Shell set up global information and advise network known as the outpost to provide support for the families facing the challenges of global mobility the outpost has its headquarters in the Hague with about 50 local offices around the world the center recommends school and medical facilities and provides housing advice and up-to-date information on employment study self-employment and volunteer work

Finally there is also issues with expatriate pay. an expatriate basic salary and bonus are linked to what they would receive in their home country additional pay is given to expatriates moving to more locations so they can maintain their standard of living shell also recognize that employees often need additional financial incentives to persuade them to leave family and friends and location premiums to persuade to move less popular expatriate destinations such as Kuwait, the shell also use tax equalization as part of its expatriate pay approach specifically home country taxes are deducted from expatriate pay white host country taxes are paid by the company of course all of these added factors make expatriates and expensive resource that can cost up to three-time as much as a local employee

Questions

1. Royal dutch Shell is one of the largest companies in the world and has been for years with sales approaching $ 400 billion and 82 000 employees worldwide, including some 7000 employees on the expatriate assignment the company is large, complex, and powerful compared with retail or consumer companies shell is more narrowly focused and much more technical in orientation. How do you think this narrower focus and technical orientation affects the global human resource management shell?

2. Shell's long-term goal is to develop local talent wherever possible, thereby leveraging local employees' networks, markets knowledge, and language skills while also minimizing cost moving shell employees from other countries to work with partners and transfer expertise to the potential local employees who do not have the educational background in many cases. How would you solve the education skill and knowledge gap if you were a shell c suite leader?

3. Spending significant time (e.g. three years) on an expatriate assignment has significant family and professional implications as can be seen in the shell survey that was mentioned in the case how would you feel if you were given an expatriate assignment today? how would you feel about it if you were 25 years old 35? 50?

4. why do the accounting systems of different countries differ? why do these differences matter

5. why might an accounting-based control system provide headquarters management with biased information about the performance of a foreign subsidiary? how can these biases best be corrected?

Solution

 Executive summary

This paper will look into the issues that a multinational corporation has when it expands its operations across many countries. Royal Dutch Shell is the corporation in question. It will examine the issues related to human capital management. The examination is broken into five sections, which are as follows:

1. The first segment will look at how Shell's narrower focus strategy and technical orientation affect its worldwide human resource management.

2. The second portion looks into how I would address the education skill and knowledge gaps. The final segment will discuss how I might feel if granted an expatriate assignment at different age groups.

3. The third section will discuss how I might feel if granted an expatriate assignment at different ages.

4. The fourth segment discusses why various countries' accounting systems differ and why it matters.

5. The fifth section explores why a headquarters may obtain skewed performance data from an accounting-based control system given by a foreign subsidiary.

The findings were: Human resource management at the global level is influenced by the company's strategy and technological direction, and it reacts by focusing on encouraging individual workers to meet the company's specified objectives, according to the results. As a member of the C suite, I would collaborate with other stakeholders to narrow skills and knowledge gaps, particularly in areas where youth unemployment is prevalent. I would have different feelings and interests if offered an overseas assignment, however, Shell provides wonderful programs that can assist me to adapt to working abroad. Other nations' accounting systems differ according to their cultures, level of development, economic and political relations, and sovereignties, and these differences matter because they influence the capacity to compare financial accounts from different countries. Exchange rates, transfer prices, and the country's economic realities are all reasons why the headquarters may get biased information from an accounting-based control system.

Introduction

The case under examination is for The Royal Dutch Shell, which was formed in 1912 and is one of the most successful international oil and gas businesses with subsidies all over the globe (Priest, 2005). When the investigation is finished, remedies and suggestions for human capital management and financial reporting issues will be presented (Roszkowska, 2020). As a result, the goal of this paper is to discover answers to the obstacles that the Royal Dutch shell corporation faces in dealing with human resource and financial management concerns.

The investigation : Divided Into Five Sections

The first section discusses how Shell's narrower emphasis and technical orientation affect worldwide human resource management. Shell has a restricted approach that focuses on a limited number of operations while passing up other attractive alternatives. Shell's technical orientation refers to the interest in gratification produced by actual understanding of a business's technical aspects. As a result, as a worldwide corporation, Shell is focusing on motivating its workers so that they may effectively boost profitability, which has an impact on Shell's human resource management on a global scale (Durugbo & Amankwah‐Amoah, 2019). Its compensation, training and development, appraisal management, and talent management responsibilities must be tailored to each subsidiary's needs in a specific nation. This is because employee needs vary in each country.

The second section discusses how I would close the education skill and knowledge gap if I were a member of Shell's C suite. If I were in charge, I would devise ways to close skill and knowledge gaps, such as a) offering enough training options for youth, such as going to other countries and obtaining a taste of life abroad (Namaste, 2017). b) Collaborate with other stakeholders such as educational institutions, governments, and businesses to provide the skills required to enter the oil and gas sector (Heim et al., 2019). c) Seeking applicants from under-served populations, such as those with disabilities and older employees, who may have relevant expertise and can help the company's customer outreach.

The third section is about how I would feel if I were given an expatriate assignment when I am 25, 35, or 50 years old: In summary, I expect that my company achieves my goals so that I may successfully assist the company in transferring valuable technical and management skills to other countries. For example, as a 25-year-old, I would encounter problems such as whether it was worthwhile to leave my social and professional network back home, worry of not fitting into a new culture of another nation, loneliness, lack of budgeting experience, and cultural opposition and pressure. At 35, I would encounter fresh obstacles and adjustments in the new banking, investing, and taxes systems, as well as my partner and children adjusting to new places, language issues, and costs involved. As a 50-year-old, I would be concerned about the amount of international health insurance provided, if I would have access to great private treatment, and whether I will be safe and secure. Shell would suit me since it provides additional compensation, financial incentives, and global adaption assistance to entice expatriate employees and their families to stay. Shell offers tax breaks and location bonuses, which will boost my drive to succeed and adapt to foreign conditions.

The fourth section discusses why countries' accounting systems differ and if those variations are relevant. The reasons why accounting systems differ amongst countries are as follows: a) culture of a country - countries have their own accounting standards that they do not want to modify because they believe that any changes will weaken, complicate, and influence people's tolerance for ambiguity (Yanto et al., 2017). b) level of development - each country's accounting system has grown to fulfill distinct accounting demands and information. As a result, the more developed countries have more complex accounting systems than the less developed countries. b) Economic and political links — nations with diverse economic and political interests typically have diverse accounting systems (Dillard & Vinnari, 2019). d) Country sovereignty - Some countries are opposed to a single set of accounting rules that would jeopardize their sovereignty or ability to govern themselves. Accounting standards disparities are significant because a) they impact how financial reports are generated and evaluated, and those variances make cross-country comparisons of financial statements difficult. When financial statements are generated using multiple accounting standards, it is difficult to compare the performance of different firms or their subsidiaries. As a result, a firm like Shell will have a tough time comparing the performance of its subsidiaries. Finally, variations in financial reporting quality among nations have an impact on the quality of financial reporting.

Section five discusses the reasons why accounting-based control systems provide biased information from other countries. These include a) changes in the exchange rate – currencies can depreciate or appreciate, causing the original figures on performance to change (Liu & Lee, 2020). b) transfer prices – subsidiaries can trade under common ownership – for example, Royal Dutch Shell may have subsidiaries selling to each other – and the profitability of these subsidiaries can be distorted by lower transfer prices to minimize expenses and taxes. C) The current state of microeconomic factors and trends in a nation — variables such as inflation, unemployment rate, economic growth, and a country's monetary policy might contribute to inaccurate information being received from subsidiaries in such countries. These biases can be effectively avoided by a global corporation using a single currency rate to examine financial reporting. b) establishing standards and policies that must be adhered to across subsidies to minimize poor profits caused by transfer pricing inefficiencies. b) When it comes to microeconomic factors, a multinational corporation is at the mercy of government interventions and a country's market supply and demand adjustments (Fenna, 2019).

Conclusion

Global human resource management is impacted by the company's strategy and technical direction, and it responds by focusing on encouraging individual employees to reach the company's set objectives, based on the outcomes. As a member of the C-suite, I would work with other stakeholders to close skill and knowledge gaps. If I were offered a foreign assignment, I would have different sentiments and interests; nevertheless, Shell has fantastic programs that can help me adjust to working abroad. Accounting systems in other countries differ based on their cultures, degree of development, economic and political relationships, and sovereignties, and these variations are important because they affect the ability to compare financial statements. Exchange rates, transfer prices, and the country's economic reality are all reasons why an accounting-based control system may provide bias information to headquarters.

References

Dillard, J., & Vinnari, E. (2019). Critical dialogical accountability: From accounting-based accountability to accountability-based accounting. Critical Perspectives on Accounting, 62, 16-38.

https://www.sciencedirect.com/science/article/pii/S104523541830323X

Durugbo, C., & Amankwah‐Amoah, J. (2019). Global sustainability under uncertainty: How do multinationals craft regulatory policies?. Corporate Social Responsibility and Environmental Management, 26(6), 1500-1516. https://onlinelibrary.wiley.com/doi/abs/10.1002/csr.1764

Fenna, A. (2019). In a ‘market’,‘free enterprise’or ‘capitalist’system, dominated by private owner-ship and free exchange such as Australia's, the government can only influence how well the economy functions. Moreover, a small national economy such as Australia’s is often at the mercy of events in the world economy. The main tools government has at its disposal to influence the economy are. Australian Politics and Policy, 541. https://eprints.whiterose.ac.uk/163928/13/Australian%20Politics%20and%20Policy.pdf#page=551

Heim, I., Kalyuzhnova, Y., Li, W., & Liu, K. (2019). Value co‐creation between foreign firms and indigenous small‐and medium‐sized enterprises (SMEs) in Kazakhstan's oil and gas industry: The role of information technology spillovers. Thunderbird International Business Review, 61(6), 911-927.

Priest, T. (2005). The ‘Americanization’of Shell Oil. InForeign Multinationals in the United States (pp. 204-222). Routledge. https://www.taylorfrancis.com/chapters/edit/10.4324/9780203996669-17/americanization-shell-oil-tyler-priest

Roszkowska, P. (2020). Fintech in financial reporting and audit for fraud prevention and safeguarding equity investments. Journal of Accounting & Organizational Change.

https://www.emerald.com/insight/content/doi/10.1108/JAOC-09-2019-0098/full/html

Liu, T. Y., & Lee, C. C. (2020). Exchange rate fluctuations and interest rate policy. International Journal of Finance & Economics. https://onlinelibrary.wiley.com/doi/abs/10.1002/ijfe.2336

Namaste, N. B. (2017). Designing and Evaluating Students' Transformative Learning. Canadian Journal for the Scholarship of Teaching and Learning, 8(3), n3. https://eric.ed.gov/?id=EJ1162945

Yanto, H., Yulianto, A., Sebayang, L. K. B., & Mulyaga, F. (2017). Improving the compliance with accounting standards without public accountability (SAK ETAP) by developing organizational culture: A case of Indonesian SMEs. Journal of Applied Business Research (JABR), 33(5), 929-940.

https://www.clutejournals.com/index.php/JABR/article/view/10016