Obsessive love in Great Gatsby by F. Scott Fitzgerald Essay

In The Great Gatsby, Jay Gatsby is portrayed as a naive and heartbroken man who will do anything to revive his relationship with the love of his life; even if it means reliving the past. Gatsby is a victim to temptation, manipulation, society and obsessive love. However it is because of this obsessive and incessant love that the rest of his problems unfold. He is so blinded and determined to gain the approval of his former lover, he allows himself to be made a mockery by society. It is made clear that Gatsby moved to West Egg for the sole reason that the love of his life, Daisy Buchanan, lives with her husband Tom in a house within sight of Gatsbys mansion. I think he half expected her to wander into one of his parties, some nightbut she never did (Fitzgerald.4.84). As Daisys friend Jordan explains the situation to the narrator and Daisys cousin, Nick Carraway, she notes that although Gatsby threw countless parties that were no interest of him in hopes that Daisy would one day stumble in, she was clueless to how very close Jay Gatsby was to her. Gatsby lacked the courage to approach Daisy, even though he worked his life around his dream of seeing her again. Gatsby was referred to by the socialites as new money. Living in West Egg was less respectable then living in East Egg. The social structure was not of much concern to Gatsby and he paid little attention to etiquette or class. His obsession with Daisy took top priority, and while his intentions were sincere, Gatsby put himself in positions to be made a fool. My God, I believe the mans comingDoesnt he know she doesnt want him?(Fitzgerald.6.109). When invited by the Sloanes, a wealthy couple from East Egg, to eat dinner with them, Gatsby innocently accepts, not realizing it was merely a formality. His pure love for Daisy shows through in all aspects of his life, affecting his judgment and ability to see through those with less than genuine intentions. One of the main themes throughout The Great Gatsby is Gatsbys attempt to turn back time and relive what he had in the past with Daisy. Cant repeat the pastwhy of course you can!(Fitzgerald.6.116). It is clear that the relationship between Gatsby and Daisy remains only in the past, and it is  apparent to all but the two that their relationship ended many years ago. Since the five years they last saw each other, Daisy moved on with her life; although neither she nor Gatsby are willing to admit to it. Gatsbys love for Daisy affects every aspect of his life, and when he is finally able to reunite with her, it is hard to believe that nothing has changed in their relationship. Almost five years! There must have been momentswhen Daisy tumbled short of his dreamsbecause of the colossal vitality of his illusionNo amount of freshness can challenge what a man will store up in his ghostly heart(Fitzgerald.5.101). Nick cannot imagine that Daisy could possibly live up to the goddess-like vision Gatsby has stored up and embellished on for five years. However, once again blinded by love, he ignores Daisys flaws, and attempts to rekindle their former life. Gatsby is aware that Daisy is a very superficial woman and he knows the only way he could possibly have her love is through wealth and status. Gatsby turns to shady and possibly illegal means to attain the money that he knows will win Daisy over. His obsessive love is his chief vice that causes all his others. Her voice is full of money (Fitzgerald.7.127). Gatsby doesnt see Daisy as shallow or consider her a gold digger, he thinks it is he who must progress and become wealthy in order to satisfy her lavish lifestyle. After a confrontation with Daisys husband, Tom, Gatsby expects nothing less of Daisy than for her to tell Tom that she never loved him. He couldnt possibly leave Daisy until he knew what she was going to do. He was clutching at some last hope and I couldnt bear to shake him free (Fitzgerald.8.155). Gatsby refuses to give up his dream that Daisy will leave everything behind to live with him and start their life together. Until he hears it from Daisys mouth, and maybe even after that, Gatsby will always have faith that she will come back to him. Much of this false hope can be attributed to Daisy and her manipulation, which leads Gatsby to think that he may get his wish. Nick was forced to watch every encounter between Daisy and Gatsby, and witness Daisy lead Gatsby into thinking she would leave her husband for him.  Nick knows that nothing anyone can say could change how Gatsby feels about Daisy and stop him from trying to win her over. And he stood on those steps, concealing his incorruptible dream (Fitzgerald.8.162). Gatsbys intentions with Daisy were nothing but pure and his dream in life was for her to return his love that he liked to believe existed. Gatsby was aware that his friends used him and until Nick came along, there may not have been a soul who truly cared for him. He made a fool of himself in society, but he is not concerned in the least. Gatsby had a dream and nothing could deter him from achieving it. His obsessive love for Daisy caused many problems in his life, and eventually lead to his death. However, Gatsby would most likely take this punishment in return for the time he was finally able to spend with his one true love. Works Cited: Fitzgerald, F. Scott. The Great Gatsby. Macmillan Publishing Company. New York. 1992.

Common law Essay

A Tort is the French word for a â€Å"wrong.† A tort is a civil wrong. A civil wrong involves a breach of a duty owed to someone else, as opposed to criminal wrongdoing which involves a breach of a duty owed to society. Torts are civil wrongs other than breaches of contract and certain equitable wrongs. The law of torts law is a remainder category of civil wrongs once other wrongs are excluded. It covers a grab bag of legal cases comprising such disparate topics as auto accidents, false imprisonment, slander and libel, product liability (such as defectively designed consumer products), and environmental pollution (toxic torts). A person who suffers legal damage may be able to use tort law to receive damages (usually monetary compensation) from someone who is responsible or liable for those injuries. Generally speaking, tort law defines what is a legal injury and what is not. A person may be held liable (responsible to pay) for another’s injury caused by them. Torts can be classified in a number of different ways, one is to distinguish according to degree of fault, so that there are intentional torts, negligent torts, and strict liability torts. In much of the Western world, the measure of tort liability is negligence. If the injured party cannot prove that the person believed to have caused the injury acted with negligence (lack of reasonable care), at the very least, tort law will not compensate (pay) the victim. However, tort law also recognizes intentional (purposeful) torts and strict liability torts, which apply when the person accused of committing the tort satisfied certain standards of intent (meaning) and/or performed certain types of conduct. In tort law, injury is defined broadly. Injury does not just mean a physical injury, such as where Brenda was struck by a ball. Injuries in tort law reflect any invasion of any number of individual interests. This includes interests recognized in other areas of law, such as property rights. Actions for nuisance (annoying or hurting) and trespass (unlawful entering) of land can arise from interfering with rights in real property. Conversion law and trespass to chattels (personal property) can protect interference with movable property. Interests in prospective (possible future) economic advantages from signed agreements can also be injured and become the subject of tort actions. A number of situations caused by parties in a contractual (written agreement) relationship may still be tort rather than contract claims, such as breach of duties. Tort law may also be used to compensate (pay) for injuries to a number of other individual interests that are not recognized in property or contract law. This includes an interest in freedom from emotional distress, privacy interests, and reputation. These are protected by a number of torts such as Intentional infliction of emotional distress, privacy torts, and defamation/slander (destruction of a reputation). Defamation and privacy torts may, for example, allow a celebrity to sue a newspaper for publishing an untrue and harmful statement about him. Other protected interests include freedom of movement, protected by the intentional tort of false imprisonment which is when you are arrested without cause. The equivalent of tort in civil law jurisdictions is delict. The law of torts can be categorised as part of the law of obligations (duties), but unlike voluntarily assumed obligations (such as those of contract, or trust), the duties imposed by the law of torts apply to all those subject to the relevant jurisdiction. To behave in tortious manner is to harm another’s rights, body, property or other rights. One who commits a tortious act is called a tortfeasor. Law of torts consists of some general defense, which can be pleaded in the court of law to get justice. Types of general defenses 1) INEVITABLE ACCIDENTS[1]: The plea of inevitable accident is usually spoken of as a defense but is, strictly speaking, not a defense but only a denial of liability. For instance, in an action for bodily harm, the plaintiff has ordinarily to prove intent or negligence of the defendant; and if he fails to do so, his injury may be said to be an inevitable accident. The burden to prove plea of inevitable accident lies on the defendant and to establish the defense, the respondent will have to establish that accident could not have been avoided by exercise of ordinary care and caution. Ex: Ryland’s v Fletcher 2) MISTAKE[2]: Mistake of law is generally no defense to civil or criminal liability. Mistake of fact is a general defense under the IPC, but not to an action in tort. For instance, an officer who executes a warrant of arrest against the wrong man by mistake is not guilty of a crime, but he will be liable in an action for false imprisonment. Mistake would be an excuse only in those exceptional cases where an unlawful intent or motive is an essential ingredient in liability. Ex: Hollins v Fowler 3) EXERCISE OF COMMON RIGHTS[3]: This, like inevitable accident, is really nota defense but a denial of a breach of duty or violation of rights, as where the defendant builds on his land and shuts f the light of a new house of his neighbour or opens a new shop and ruins an older rival. The defense is necessary on the assumption that their is a general rule of liability for intentional harm. 4) VOLENTI NON FIT INJURIA[4]: It is also known as the defense of consent. Volenti non fit injuria[5] It is a Latin word which means â€Å"to a willing person, no injury is done† or â€Å"no injury is done to a person who consents†) is a common law doctrine which means that if someone willingly places themselves in a position where harm might result, knowing that some degree of harm might result, they cannot then sue if harm actually results. Volenti only applies to the risk which a reasonable person would consider them as having assumed by their actions; thus a boxer consents to being hit, and to the injuries that might be expected from being hit, but does not consent to (for example) his opponent striking him with an iron bar, or punching him outside the usual terms of boxing. Volenti is also known as a â€Å"voluntary assumption of risk.† In Law of Torts, Volenti non-fit injuria is an exception to liability in torts. It means: Where the sufferer is willing and has the knowledge , no injury is done. the precept that denotes that a person who knows and comprehends the peril and voluntarily exposes himself or herself to it, although not negligent in doing so, is regarded as engaging in an assumption of the risk and is precluded from a recovery for an injury ensuing there from. Volenti non fit iniuria (or injuria) (Latin: â€Å"to a willing person, injury is not done†) is a common law doctrine which states that if someone willingly places with proper knowledge themselves in a position where harm might result, they are not able to bring a claim against any damages from the other party in tort. Volenti only applies to the risk which a reasonable person would consider them as having assumed by their actions; thus a boxer consents to being hit, and to the injuries that might be expected from being hit, but does not consent to (for example) his opponent striking him with an iron bar, or punching him outside the usual terms of boxing. Or a person watching a cricket match getting hurt by the ball can be consented. No act is actionable as a tort at the suit of a person who has expressly or impliedly assented to it. In order to plead this defence, it is necessary that the plaintiff should have consented to physical risk or damage as well as to legal risk (i.e. he will get no remedy in law). ESSENTIAL CONDITIONS ââ€" ª Consent must be given freely ââ€" ª Consent must not have been given to an illegal act ââ€" ª Knowledge of risk is not the same thing as consent to run the risk OR 1. A voluntary 2. Agreement 3. Made in full knowledge of the nature and extent of the risk. 1.Voluntary The agreement must be voluntary and freely entered for the defence of Volenti non fit injuria to succeed. If the Claimant is not in a position to exercise free choice, the defence will not succeed. This element is most commonly seen in relation to employment relationships, rescuers and suicide. 2.Agreement The second requirement for the defence of Volenti non fit injuria is agreement. The agreement may be express or implied. An example of an express agreement would be where there exists a contractual term or notice. 3.Knowledge The Claimant must have knowledge of the full nature and extent of the risk that they ran. The test for this is subjective and not objective and in the context of an intoxicated Claimant, the question is whether the Claimant was so intoxicated that he was incapable of appreciating the nature of the risk. Volenti is sometimes described as the plaintiff â€Å"consenting to run a risk.† In this context, volenti can be distinguished from legal consent in that the latter can prevent some torts arising in the first place (for example, consent to a medical procedure prevents the procedure from being a trespass to the person, or consenting to a person visiting your land prevents them from being a trespasser). | | | | Volenti in English[6] In English tort law, volenti is a full defence, i.e. it fully exonerates the defendant who succeeds in proving it. The defence has two main elements: The claimant was fully aware of all the risks involved, including both the nature and the extent of the risk; and The claimant expressly (by his statement) or impliedly (by his actions) consented to waive all claims for damages. His knowledge of the risk is not sufficient: sciens non est. volens (â€Å"knowing is not volunteering†). His consent must be free and voluntary, i.e. not brought about by duress. If the relationship between the claimant and defendant is such that there is doubt as to whether the consent was truly voluntary, such as the relationship between workers and employers, the courts are unlikely to find volenti. It is not easy for a defendant to show both elements and therefore contributory negligence usually constitutes a better defence in many cases. Note however that contributory negligence is a partial defence , i.e. it usually leads to a reduction of payable damages rather than a full exclusion of liability. Also, the person consenting to an act may not always be negligent: a bungee jumper may take the greatest possible care not to be injured, and if he is, the defence available to the organiser of the event will be volenti, not contributory negligence. In the first case (decided before the Occupier’s Liability Act was passed), a girl who had trespassed on the railway was hit by a train. The House of Lords ruled that the fencing around the railway was adequate, and the girl had voluntarily accepted the risk by breaking through it. In the second case, a student who had broken into a closed swimming-pool and injured himself by diving into the shallow end was similarly held responsible for his own injuries. The third case involved a man who dived into a shallow lake, despite the presence of â€Å"No Swimming† signs; the signs were held to be an adequate warning. The defence of volenti is now excluded by statute where a passenger was injured as a result of agreeing to take a lift from a drunk car driver. However, in a well-known case of Morris v Murray [7][volenti was held to apply to a drunk passenger, who accepted a lift from a drunk pilot. The pilot died in the resulting crash and the passenger who was injured, sued his estate. Although he drove the pilot to the airfield (which was closed at the time) and helped him start the engine and tune the radio, he argued that he did not freely and voluntarily consent to the risk involved in flying. The Court of Appeal held that there was consent: the passenger was not so drunk as to fail to realise the risks of taking a lift from a drunk pilot, and his actions leading up to the flight demonstrated that he voluntarily accepted those risks. Rescuers For reasons of policy, the courts are reluctant to criticize the behavior of rescuers. A rescuer would not be considered volens if: He was acting to rescue persons or property endangered by the defendant’s negligence; He was acting under a compelling legal, social or moral duty; and His conduct in all circumstances was reasonable and a natural consequence of the defendant’s negligence. An example of such a case is Haynes v. Harwood[8], in which a policeman was able to recover damages after being injured restraining a bolting horse: he had a legal and moral duty to protect life and property and as such was not held to have been acting as a volunteer or giving willing consent to the action – it was his contractual obligation as an employee and police officer and moral necessity as a human being to do so, and not a wish to volunteer, which caused him to act. By contrast, in Cutler v. United Dairies [9]a man who was injured trying to restrain a horse was held to be v olens because in that case no human life was in immediate danger and he was not under any compelling duty to act. Unsuccessful attempts to rely on volenti: Examples of cases where a reliance on volenti was unsuccessful include: Nettleship v. Weston[10] Baker v T E Hopkins & Son Ltd[11]). In the first case, the plaintiff was an instructor who was injured while teaching the defendant to drive. The defence of volenti failed i.e. because the plaintiff specifically inquired if the defendant’s insurance covered him before agreeing to teach. In the second case, a doctor went in to try to rescue workmen who were caught in a well after having succumbed to noxious fumes. He did so despite being warned of the danger and told to wait until the fire brigade arrived. The doctor and the workmen all died. The court held that it would be â€Å"unseemly† to hold the doctor to have consented to the risk simply because he acted promptly and bravely in an attempt to save lives. Hall v. Brooklands Auto-Racing Club [12] The plaintiff paid to enter a motor-car race track to watch races on a track owned and managed by the defendants. On the evening the plaintiff was spectating, two of the race-cars collided near the barrier between the spectators and the track. The cars collided with the barrier and caused severe injury to the plaintiff and others. The defendants were held liable to pay damages by a jury who found that they had not taken reasonable precautions to protect spectators. On appeal by the defendant, it was held that there was no evidence to find the defendants had not taken reasonable precautions and that there was no obligation to ensure safety in all circumstances, just that reasonable precautions were taken. The defendant’s case was upheld. Wooldridge v Sumner [13] Facts The plaintiff, Mr. Wooldridge, who was a photographer at a horse race, was injured by the horse belonging to the defendant, Sumner, which was ridden in a competition by Sumner’s, who was a skilled and experienced horseman. 1 Judgment The Court of Appeal held that Sumner owed no duty of care to Wooldridge in this case. As a spectator, Wooldridge accepted the risks involved in a horserace he came to watch. As a reasonable participant in the race, which is a fast and competitive sport, the horseman was expected to concentrate on the race and not on the spectator. In the course of a fast moving competition such as this one, he could be expected to make errors of judgment. As long as the damage was not caused recklessly or deliberately, the participant in a race could not be held liable for the spectators’ injuries because he was not negligent, i.e. not in breach of his duty. Dann v. Hamilton [14] The Claimant was injured when she was a willing passenger in the car driven by the Mr. Hamilton. He had been drinking and the car was involved in a serious crash which killed him. In a claim for damages the Defendant raised the defence of volenti non fit injuria in that in accepting the lift knowing of his drunken condition she had voluntarily accepted the risk. Held: The defence was unsuccessful. The claimant was entitled to damages. Asquith J: â€Å"There may be cases in which the drunkenness of the driver at the material time is so extreme and so glaring that to accept a lift from him is like engaging in an intrinsically and obviously dangerous occupation, intermeddling with an unexploded bomb or walking on the edge of an unfenced cliff. It is not necessary to decide whether in such a case the maxim volenti non fit injuria would apply, for in the present case I find as a fact that the driver’s degree of intoxication fell short of this degree†. HAYNES v HARWOOD [15] facts The plaintiff, a police constable, was on duty inside a police station in a street in which, at the material time, were a large number of people, including children. Seeing the defendants’ runaway horses with a van attached coming down the street he rushed out and eventually stopped them, sustaining injuries in consequence, in respect of which he claimed damages. HELD 1) That on the evidence the defendants’ servant was guilty of negligence in leaving the horses unattended in a busy street. 2) that as the defendants must or ought to have contemplated that some one might attempt to stop the horses in an endeavour to prevent injury to life and limb, and as the police were under a general duty to intervene to protect life and property, the act of, and injuries to, the plaintiff were the natural and probable consequences of the defendants’ negligence. 3) That the maxim â€Å"volenti non fit injuria† did not apply to prevent the plaintiff recovering. . 1 Imperial Chemical Industries v Shatwell [16] Volenti non fit injuria, [Latin: no wrong is done to one who consents] The defense that the plaintiff consented to the injury or (more usually) to the risk of being injured. Facts The plaintiff and his brother were were certificated and experienced shotfirers employed by ICI Ltd in a quarry owned by the defendant company. Part of the brothers’ works included wiring up detonators and checking the electrical circuits. There was an old practice where a galvanometer was applied directly to each detonator for testing purposes. This practice was known to be dangerous and was outlawed by statutory regulation. The plaintiff claimed his brother was 50 per cent to blame for the explosion and the employer was vicariously liable. The plaintiff was awarded half of the total amount of damages. The defendant appealed. The Decision The plaintiff and his brother were both experts. They freely and voluntarily assumed the risk involved in using the galvanometer. There was no pressure from any other source. To the contrary, they were specifically warned about complying with the new safety regulations. The defence of volenti non-fit injuria will apply when there is true and free consent to the risk. Note (1) the employers not being themselves in breach of duty, any liability of theirs would be vicarious liability for the fault of J, and to such liability (whether for negligence or for breach of statutory duty) the principle volenti non fit injuria afforded a defence, where, as here, the facts showed that G and J knew and accepted the risk (albeit a remote risk) of testing in a way that contravened their employers’ instructions and the statutory regulations. (2) Each of them, G and J, (the brothers) emerged from their joint enterprise as author of his own injury, and neither should be regarded as having contributed a separate wrongful act injuring the other. The defence of volenti non fit injuria should be available where the employer is not himself in breach of statutory duty and is not vicariously in breach of any statutory duty through neglect of some person of superior rank to the plaintiff and whose commands the plaintiff is bound to obey, or who has some special and different duty of care. Nettleship v Weston [17] is an English Court of Appeal judgment dealing with the breach of duty in negligence claims. In this case the court had considered the question of the standard of care that should be applied to a learner driver, and whether it should be the same as is expected of an experienced driver. | | Facts Mr. Nettleship, the plaintiff, agreed to teach Mrs. Weston, the defendant, to drive in her husband’s car, after he had inquired the insurance policy. During one of the lessons, the defendant lost control of the car and caused an accident in which the plaintiff was injured. The defendant argued that the plaintiff was well aware of her lack of skill and that the court should make allowance for her since she could not be expected to drive like an experienced motorist. 3 Judgment The Court of Appeal, consisting of Lord Denning MR, Salmon LJ and Megaw LJ held that applying a lower standard to the learner driver because the instructor was aware of his inexperience would result in complicated shifting standards. It would imply, for example, that an inexperienced doctor owed his patient a lower standard of care if the patient was aware of his lack of experience. The standard of care for a learner driver would be the usual standard applied to drivers: that of an experienced and skilled driver. The policy consideration that played a role in this decision was that the learner driver was covered by insurance. Over the dissent of Megaw LJ, the Court of Appeal held that the instructor was also responsible for the accident as he was partially in control of the car and should only be able to recover half of his damages due to negligence. Able to recover half of his damages due to contributory negligence. Baker v T E Hopkins & Son Ltd[18] 1 Facts Two employees of the defendant company were overcome by carbon monoxide fumes in a well they were attempting to decontaminate. The plaintiff, a doctor, went in to try to rescue them even though he was warned of the fumes and told that the fire brigade was on the way. All the three men died. 2 Judgment The defendant company argued that the (the estate of) the plaintiff doctor should either not be compensated because the doctor knowingly accepted the risk he was taking or his damages would be reduced for contributory negligence. The Court of Appeal considered that such a suggestion was â€Å"ungracious† and that it was unseemly and irrational to say that a rescuer freely takes on the risks inherent in a rescue attempt. The doctor’s contributory negligence could only be recognized if he showed â€Å"a wholly unreasonable disregard for his own safety†. 3 Significance This case is one of the many in which the courts have refused to hold rescuers who have suffered in their rescue attempts to have negligently contributed to their injuries or accepted the risks involved in their rescue attempt. This applies to both amateur and professional rescuers, such as fire fighters (See Ogwo v. Tailor [19]) INDIAN CASES United India Insurance Co. Ltd. vs Guguloth Khana And Ors.[20] Facts:– On 23-5-1991 a lorry bearing No. AP 26-T-364 belonging to M/s. Amruthesh Transport Company started at Warangal with some load of groundnut oil cake to go to Anakapalle in Visakhapatnam. One Ch. Mallikarjun was engaged as driver of the said lorry. There was a comprehensive insurance policy for the lorry with the United India Insurance Company. When the lorry reached near Thorrur village on the way leading to Khammamm P.W.D. Road, several villagers were waiting on the road, due to lack of transport facility because of the assassination of Sri Rajiv Gandhi on the previous day (22-5-1991). Then, about 25 persons, including some children and women boarded the lorry. The lorry, after travelling about five kilometers from Thorrur village and reached near Mattedu village, the driver of the lorry applied sudden brakes whereby the lorry turned turtle, as a result of which twelve persons died on the spot and three more persons also died after they were taken to hospital. Ten persons sustained injuries. The claimants, either the injured or the legal heirs of the persons who died in the accident, have filed the O.Ps against the owner, driver and insurer of the lorry. Before the Motor Accidents Claims Tribunal, the driver of the lorry who was served with notices in the O.Ps remained ex parte. Before the Tribunal, owner of the lorry filed counter, denying the averments in the O.Ps, contending that the driver of the lorry was not responsible for the accident. It was contended that at the time of the accident, another lorry was coming in the opposite direction at high speed in a rash and negligent manner, and to avert accident, the driver of the lorry applied sudden brakes by taking the lorry to the extreme left side of the road. Due to bad condition of the road, the lorry turned turtle resulting in fatal road accident. He also contended that he has given strict instructions to the lorry drivers not to carry passengers on their lorries. Before the Tribunal, the present appellant-Insurance Company also filed counters admitting that the lorry involved in the accident was insured with it as a goods vehicle, in which passengers are not allowed to travel. It was contended that as per the conditions of insurance policy only six persons are authorized to travel in the lorry and that the persons who travelled in the lorry were unauthorized passengers. It was contended that even if for any reason it is considered that the deceased and injured are non-fare paying passengers, the liability of the Insurance Company is limited to Rs. 15,000/- in case of death and lesser amount for injuries. The Insurance Company disputed the quantum of compensation claimed in the O.Ps. by the respective claimants. Issues raised †¢ Whether the accident took place due to rash and/or negligent driving by respondent No. 1? †¢ To what compensation if any, the petitioners are entitled to and if so, against which of the respondents? †¢ To what relief ? Subsequently, the issues were recast as under: âž ¢ Whether the accident took place due to rash and/or negligent driving of the lorry by its driver Ch. Mallikarjun? âž ¢ Whether there were specific instructions issued to the drivers of the Transport Company that they should not carry passengers enroute and if so, on that ground that owner of the crime vehicle is not liable to pay the compensation in the claim petitions? âž ¢ Whether the third respondent Insurance Company is not liable to cover the risk of the deceased and injured involved in the accident under the terms of the Insurance policy, the copy of which is marked as Ex.B-1 along with the terms and conditions of the policy including Indian Motor Tariff marked as Ex. B-2? âž ¢ Whether the petitioners are entitled for compensation, if so, to what amount and from whom? âž ¢ To what relief? . Decision (a) On consideration of the oral and documentary evidence on record, the Tribunal held that the accident has taken place due to rash and negligent driving of the lorry by its driver. The Tribunal negatived the contention of the owner of the lorry that he is not liable to pay compensation. Basing on these two findings and the medical and documentary evidence available on record, different amounts of compensations were granted to the different claimants in the respective O.Ps, who are arrayed as respondents in the appeals. (b) Aggrieved by the same, the present appeals are filed by the Insurance Company. (c) The first contention advanced by the Counsel for the appellant-Insurance Company is that the injured/deceased who travelled in the lorry are unauthorized passengers in a goods vehicle and the insurance policy issued is for the goods vehicle and there is no reason to fasten the liability on the Insurance Company; it is a violation of policy conditions and there is no need to fix the liability against the present appellant-Insurance Company. (d) The second contention advanced by the Counsel for the appellant-Insurance Company is that the owner of the lorry got examined R.W. 1, Manager in the Transport Company, who stated that he was informed by the driver of the lorry that the injured/ deceased unauthorisedly entered the lorry, and the maxim/doctrine â€Å"volenti non fit injuria† applied to this case as they voluntarily entered into the lorry at their own risk and there is no reason to fasten liability on the Insurance Company. (e) In these cases, so far as the first contention of the Counsel for appellant that the claimants/respondents are travelling as a gratuitous passengers in a goods vehicle and not entitled for compensation and the Insurance Company is not liable to pay any such compensation, is concerned, it is contrary to the principle laid down by the Supreme Court in New India Assurance Company v. Shri Satpal Singh and Ors[21]. . In that case, the Supreme Court considering clause (ii) of proviso to Sub-section (1) of Section 95 of the Motor Vehicles Act, 1939 (Old Act) and Section 147 of the Motor Vehicles Act, 1988 (new Act), and noticing the absence of a similar clause in the new Act, held†Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦under the new Act an insurance policy covering third party risk is not required to exclude gratuitous passengers in a vehicle, no matter that the vehicle is of any type or class†. In view of the above ruling of the Supreme Court, there is no merit in the first contention of the appellant, that the injured/legal heirs of the deceased in these cases are not entitled to any compensation on the ground that they are gratuitous passengers, is without substance and the same is hereby rejected. . [i](f) Learned Counsel for the appellant-Insurance Company relied on the decision in V. Gangamma v. New India Assurance Co. wherein a learned Single Judge of this Court held that the Insurance Company is not liable to pay compensation to the dependants of the deceased persons who are travelling in the vehicle at the time of accident as trespassers and not as passengers. The facts of that case are entirely different from that of the facts in these appeals. In the case cited, the claimants were treated as passengers on the basis of evidence of R. W. 1 (the driver of the lorry therein), who categorically stated that the claimants-therein have forcibly entered into the lorry asking him to take them to particular place and threatened to beat him if he does not do so. In the present cases, there is no evidence to show that the claimants/deceased entered into the lorry forcibly with any threat to the driver of the lorry. So, the decision in Gangamma’s case (3 supra) is not applicable to the case on hand. The appeals was dismissed. BIBLIOGRAPHY †¢ Rmaswamy Ayers LAW OF TORTS 10th edn.(by A Lakshminath &M Ssridhar) †¢ Winfield and jodowiez, TORT WVH Jogers,7th edn. †¢ 1990] 3 All ER 801 ( Court of Appeal), †¢ [1935] 1 KB †¢ [1933] 2 KB 297 †¢ [1971] 3 All ER 581 (Court of Appeal †¢ [1959] 3 All ER 225 (Court of Appeal †¢ (1933) 1 KB 205 †¢ [1963] 2 QB 23 †¢ 1959] 3 All ER 225 (Court of Appeal †¢ [1988] AC 431). †¢ II (2001) ACC 392, 2001 (2) ALT 185 [1999] RD-SC 411 ———————– [1] Rmaswamy ayers LAW OF TORTS 10th edn.p.939(by A Lakshminath &M Ssridhar) [2] Rmaswamy ayers LAW OF TORTS 10th edn.p.940(by A Lakshminath &M Ssridhar) [3] Rmaswamy ayers LAW OF TORTS 10th edn.p.940(by A Lakshminath &M Ssridhar) [4] Rmaswamy ayers LAW OF TORTS 10th edn.p.940(by A Lakshminath &M Ssridhar) [5] Winfield and jodowiez,TORT WVH Jogers,7th edn.P.1057 [6] Winfield and jodowiez,TORT WVH Jogers,7th edn.P.1058 [7]1990] 3 All ER 801 ( Court of Appeal), [8] [1935] 1 KB 146 [9] [1933] 2 KB 297 [10] [1971] 3 All ER 581 (Court of Appeal [11] [1959] 3 All ER 225 (Court of Appeal [12] (1933) 1 KB 205 [13] [1963] 2 QB 23 [14] [1939] 1 KB 50 [15] [1935] 1 KB 146 [16] [1964] All ER 999 [17] [1971] 2 QB 691 [18] 1959] 3 All ER 225 (Court of Appeal [19] [1988] AC 431). [20] II (2001) ACC 392, 2001 (2) ALT 185 5 [21] [1999] RD-SC 411 ———————– ———————– |LAW OF TORTS |August 29 | | |2013 | |THIS RESEARCH PAPER BRINGS OUT THE APPLICATION OF VOLENTI NON FIT INJURIA, AS A | VOLENTI NON FIT INJURIA &CASES | |DEFENCE IN TORT LAW. | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |

Matthew Carter Essay Example | Topics and Well Written Essays - 1500 words

Matthew Carter - Essay Example Carter visited New York four years after completing his internship at Enschede. The visit introduced him to the world of type designing, in which he soon developed intense interest. He was astounded by the positive advancement in typographic creations as evidenced in the compositions of designers like Milton Glaser, Herb Lubalin and others that contributed to the progressiveness of New York’s commercial art industry in 1960. When Carter returned to London from New York, he found that its commercial art scene lacked contemporary sans serif type. He joined forces with men such as Alan Fletcher, Bob Gill, David Collins, Colin Forbes and others to create many sans serif faces for the country’s young and inexperienced graphic design industry. One such sans serif face was made for Heathrow airport’s new terminal. Carter’s fascination with New York’s progressiveness lured him to the U.S again. He took up employment at Mergenthaler Linotype located in Brook lyn. While being intensely influenced by its director of typographic development Jackson Burke, Carter began threw his heart and soul into his work and started designing new typefaces for photocomposition. One of them was Snell Roundhand, a script face that he created in 1966 that exquisitely displayed the relative advantages of photosetting

Contributions of the Austrian School of Thought Essay

Contributions of the Austrian School of Thought - Essay Example The historical school suggested that economic science cannot generate universal principles so scientific research should study historical examination in detail. Principles of Economics reiterated the universal laws’ view of political economy using marginal analysis. Roscher’s students gave Menger and his followers the title of Austrian School for being faculty members at the University of Vienna. There have been no leading figures in economists from any Austrian university in the Austrian school of economics since the 1930s. Between 1930s and 1940s, scholars associated with the Austrian school were located at different universities in Britain and the US. Many ideas of the mid-twentieth-century Austrian economists originate in the classical economists’ ideas or ideas of economists from the early-twentieth-century. The present Austrian school economists are influenced by modern economists. There is no substantive meaning of the label â€Å"Austrian†, though a unique Austrian school of economics does exist in the economic profession. This article discusses the major propositions of economics believed by the Austrians. According to the first proposition, only individuals select which implies that man starts all economic analysis with plan and purpose. Choices are made by individuals rather than by collective entities. The second proposition suggests that the market order study is basically about exchange behavior and organizations undergoing exchange. The science exploring market order is categorized under catallactics. Catallactics discusses emerging exchange relationships in the market, bargaining in the process of exchange, and the institutions that participate in exchange. The third proposition states that the social sciences’ facts are what individuals think about and also believe. Being humans, we can understand other humans’ purposes and plans. Human action sciences vary from natural sciences. Human sciences are ruin ed with them being forced into natural sciences’ philosophical mold. The fourth proposition considers costs and utility to be subjective because the human mind filters all economic phenomena. One has to choose among the various available paths while deciding the courses of action. Focus on choice alternatives leads to opportunity costs. Any action’s cost is the value of the most valuable alternative left out while that action is selected. The fifth proposition states that economization of the price system is based on the information needed by individuals to process in decision making. Price summarizes exchange terms on the market. Market prices quickly change with the change of underlying conditions thus causing people to quickly adjust. According to the sixth proposition, private property is a compulsory condition in the means of production that is needed for rational calculation of economics. Private ownership offers strong incentives for scarce resources’ eff icient allocation. Economic planners cannot correctly calculate the alternative use of production means if money prices do not reflect the means of production’s relative scarcities. The seventh proposition considers the competitive market to be an entrepreneurial discovery process as competition is thought by many economists to be a state of affairs. The entrepreneur plays the role of change agent that pulls and prods markets in different directions since competition is an activity. Market economy and

IT case study Outline Example | Topics and Well Written Essays - 2000 words

IT case study - Outline Example t business metrics, beneficial service assets to the cafà ©, service utility, outcomes obtained from practicing demand management, importance of early life support and whether the cafà © should have the service desk (Lytras, Ziderman & Manolova, 2010. pp.156). IT infrastructure library is the process of supplying paramount practices for the IT services. The application of this method is rising because various business premises depend on IT to satisfy and attain the company’s’ strategies. Therefore, Bill Melmac, the owner of Melmac cafà © should consider implementing the IT infrastructure Library in its business. This will be of benefit because the library has dissimilar theories and procedures that direct any business to decide on the best and efficient idea pertaining the operation and management of the business. ITIL will offer Bill Melmac with advices and different IT courses on the management of his business services (Lytras, Ziderman & Manolova, 2010. pp.157). ITIL will equip Bill Melmac with general knowledge regarding the cafà © service strategies, the designs that he should apply in delivering the ordered foods to the clients, the best service transition applicable in his business, advisable service operations and how he can continuously improve his cafà © services. Subsequently, after applying the ITIL in his cafà ©, Bill will convey the perfect ITIL package management solutions to his cafà ©. He will also identify the specific requirements for his business and implement them consequently. He will ascertain the suitable ITIL service management solutions that are important in solving his business problems and ensure that the service is very cost effective (Lytras, Ziderman & Manolova, 2010. pp.156). Business outcome refers to the target or the benefits that a given business premise works hard to achieve after it experiences interventions or makes changes. Business outcomes are the main reasons why many companies engage dissimilar activities, initiatives,

Advantages of open source software Essay Example | Topics and Well Written Essays - 1500 words

Advantages of open source software - Essay Example Today open source software has become critical for almost every organization.Almost everything requires open source software,be it telecommunication systems,inventory, accounting,personal productivity applications,contact management and operating systems amongst others.As far as the democracy peace and economy is concerned open software provides access to better technology to even those who cannot afford them. Since, technology is crucial to the economy in terms of the cost it saves by increasing the end productivity; the better access to technology has increased the productivity and thus the GDP of the entire world. Even cheaper technology is the success of most of the developing countries. The growth of the developing countries has provided better returns for the companies across the globe in-turn because they now have been able to easily get some part of their business outsourced to these destinations and decrease costs. This has lead to employing further more people and improving the technology further helping people across the world.The source code should be available with the software and distribution in terms of the compiled form should also be available. There should be a well publicized form of distributing the software just like distributing on the internet when the product is not distributed with the source code.There should be permission by the license for the distribution of software which is made from modified source code. The license needs to have derived works for having a distinct name or version number. 5. No Discrimination against Persons or Groups The license must not discriminate against any person or group of persons. It should be accessible to whoever wants. 6. No Discrimination against Fields of Endeavor The license must not restrict anyone from making use of the program in a specific field of endeavor. For example, it may not restrict the program from being used in a profit generation entity, or from being used for genetic research. 7. Distribution of License The rights attached to the program must apply to all to whom the program is redistributed without the need for execution of an additional license by those parties. 8. License Must Not Be Specific to a Product The rights attached to the program must not depend on the program's being part of a particular software distribution. If the program is extracted from that distribution and used or distributed within the terms of the program's license, all parties to whom the program is redistributed should have the same rights as those that are granted in conjunction with the original software distribution. 9. License Must Not Restrict Other Software The license must not place restrictions on other software that is distributed along with the licensed software. For example, the license must not insist that all other programs distributed on the same medium must be open-source software. 10. License Must Be Technology-Neutral No provision of the license may be predicated on any individual technology or style of interface. Following are the examples of open source software2: Linux (http://www.linux.org/): Originating from UNIX system and basically an operating system and kernel.

Total Quality Management Question#1 Essay Example | Topics and Well Written Essays - 2000 words

Total Quality Management Question#1 - Essay Example (Course book 1.3) There are several dimensions to identify what customers want for the products and services. David A Garvin (1984) suggests that there are 7 dimensions of quality which are performance, features, reliability, conformance, durability, serviceability and aesthetics (Garvin, 1984). Performance means a product's primary operating characteristics, for example, the characteristics of an automobile would be acceleration, braking distance, steering and handling. Features is the "bells and whistles" of a product, for example, a car may have power options, a tape or CD deck, antilock brakes, and power seats. Reliability means the probability of a product's surviving over a specified period of time under stated conditions of use, for example, a car's ability to start on a cold winter morning and frequency of failures are reliability factors. Conformance means the degree to which physical and performance characteristics of a product match with the pre-established standards, for example, a car's fit, finishing and freedom from noises and squeaks can reflect this dimension. Durability means the amount of use one gets from a product before it physically deteriorates or until replacement is preferable, for example, a car with corrosion resistance and the long wear of upholstery fabric. Serviceability means the speed, courtesy, and competence of repair work, for example, the concerns on access to spare parts, the number of miles between major maintenance services, and the expense of service for an automobile owner. Aesthetics means how a product looks, feels, sounds, tastes, or smells, for example, a car's color, instrument panel design, control placement, and "feel of the road" may make it aesthetically pleasing (Evans & Lindsay 2005, p163) For Billing department of a major copiers company, Company A (Co A), in Hong Kong, its primary responsibility is to provide fast, accurate and easy to understand invoices to external customers who in turn use them to process their payment. The meaning of "Fast" for Co. A means invoices must be sent out after one week of the report meter reading cutoff date, under our normal process. "Accurate" means the amount of invoices billed to customers must be correctly calculated using the meter reading reported from customers under service agreement. Not only the amount of invoices must be correct, but also the customers' information such as customers' name, billing addresses, installation addresses, serial numbers and models of equipments, billing period and invoice due date etc., must be correctly stated on the invoices for customers to review. However, only accuracy in calculation is not a good quality service from a customer's perspective. The ease of understanding of invoices is also def ined as quality for Co. A. If the invoices are not easy to understand or read, customers may confuse or take lots of time to read them which causes inconvenience or dissatisfaction to customers. "Understandable" means the invoice must be accurately reflecting the actual amount charges, and different types of charges shown must be distinguishable and the layout is in a readable format for customers with sufficient information that customers required. The information like last meter readings, the current meter readings , current month's meter usage, the unit

Social Deviance Within Popular Culture Essay Example | Topics and Well Written Essays - 2750 words

Social Deviance Within Popular Culture - Essay Example They further emphasize that It would be biased to remain on this issue only and avoid many debating point for interested public since popular culture and the church issue both make impact on Public mind and catch their immediate attention. Camacho (2008) summarize the going on in the immensely popular television reality show "The girls Next Door" which is showing viewers some of the realities of the Playboy fantasy. It is a series created by Playboy magazine founder and Editor-in-chief Hugh Hefner and executive producer Kevin Burns. It is broadcast on the E! cable television network,. that offers viewers an elaborate inside look at the inner workings of the infamous yet curiosity generating Playboy mansion. The show tracks movements ofs Hefner's three live-in girlfriends -- Holly Madison, Bridget Marquardt, and Kendra Wilkinson -- as they live and travel with Hefner and help him host parties at the mansion. The ladies do everything from undressing and putting on S&M outfits and performing stripteases to wrapping Hef's birthday gifts with G-strings. In between are raunchy conversations that include discussing the desire to masturbate and questions about posing nude before bikini waxes became popular. The original eight -episode run of the series was expanded to fifteen episodes with the first season finale airing in early December 2005. The series' second season began on July 30, 2006. To celebrate the launch of the second season, a second nude pictorial of the trio was published in September 2006. The third season of the show began airing March 4, 2007. Their third Playboy appearance was in the March 2008 issue, celebrating them being voted fourth in Playboy's annual "Sexiest Celebrities" online poll (Wikipedia). The Girls Next Door http://en.wikipedia.org/wiki/The_Girls_Next_Door Camacho (2008) goes on, to feeling a little unhapy for the overdose of sex and glamour and says that like anything Playboy, the show is hedonistic and narcissistic and underscores Hefner's trademark of continuing love for beautiful women and sexual freedom. She feels somewhat apprehensive for the fact that even though these women are educated and have career goals, viz. Bridget is appearing for her second master's degree, while Holly is working to get her real estate license soon and Kendra is studying college courses online. Their choice to live in the mansion's polygamous environment and often-ditzy behavior make it hard to take them seriously. Unfortunately, they personify the stereotype of the empty-headed pinup girl whose mere presence serves to satisfy people's sexual fantasies. It is also a dilemma whether women attain educational qualification to prove themselves while at the same time they involve themselves in deeds of mere glamour and as sex object. As result, this series offers little more than an invitation to stop imagining and to actually look at real-life women as sexual objects to an ordinary spectator. However a sociologist may seek answer to some points of social deviance in the show such as: The rich playboy living with multiple girl friends or showing polygamy yet getting immense public popularity The girls using their sexual attractiveness to attain power, money and fame rather than giving due weight to

Victim- Blaming Assignment Example | Topics and Well Written Essays - 500 words

Victim- Blaming - Assignment Example at have attracted the attention nationally and on social media are the latest trends of police officers shooting dead blacks in America beginning with the recent coverage of the shooting case of Mike Brown in Missouri to Walter Scot in South Carolina (BBC, 2015). In all cases, the media was full of outrage from the subscribers, some of whom condemn the acts while others question the actions of the victims leading to their shooting. Media on the other hand instead of playing neutral, have always portrayed bias in reporting (being black). â€Å"In the aftermath of deaths like these, the media scrutiny almost reflexively falls on the victims rather than the police, especially if the former come from a poor or minority neighborhood† (Alterman & Richardson, 2014). Sadly, even the New York Times referring to the case on Mike Brown, was quick to ask if the victim brought it on himself or if his upbringing or family suggest the police somehow could not be blamed (Alterman & Richardson, 2014). Social media was full with arguments and counter arguments for the cases. Some were reading racial hatred while others read arrogance on the side of the victim. Other social media users questioned if there was bad motive for the systematic murdering of t he blacks by the white police officers. Whatever the case, my viewpoint is that the constitution guarantees the right to life for every American citizen whether black, Hispanic, white or whichever color. In fact this right to life is guaranteed by every country’s constitution worldwide. Nobody regardless of your position in the society should be allowed to take that right from anybody. For these cases of police shooting, one is left wondering whether the due process was followed especially when a police officer fires 8 shots at unarmed civilian running away from the police. One is left wondering if the motive was to enforce the law or to kill. In fact the statistics show that police officers kill black males at a rate 21 times

Orruption in Primary Education in Bangladesh Essay Example for Free

Orruption in Primary Education in Bangladesh Essay Introduction The adult literacy rate is 51 percent The average number of teacher per primary school is only 4 Average number of students per primary school is 273 The primary teacher-student ratio is 67:1 Source: Bangladesh Bureau of Statistics 2 Development in Primary Education Adoption of an education policy in 2000 Five-year cycle to an eight-year cycle by 2010 Free and compulsory primary education for all children; Free education for girls up to grade eight; Free books for all children at primary level; 3 Development in Primary Education A food-for-education programme Primary Education Stipend Programme (PESP) Creation of a separate Primary and Mass Education Division (PMED) A proliferation of non-formal education programme by NGOs, and 4 Achievements in Primary Education Net enrolment rate has reached 80 percent Over 70 percent of the students now complete the five-year primary cycle 60 percent are present in school on an average day Source: Campaign for Popular Education The University Press Ltd. 5 State of Corruption, Mismanagement and Irregularities in Primary Education All these programmes are infested with endless flaws and irregularities. TIB Household Corruption Survey identified the education sector as fifth corrupt sectors (2002) TIB Corruption Database identified the education sector as the third most corrupt sectors (2004) TIB and Committees of Concerned Citizens (CCCs) conducted a Report Card Survey in the primary education to identify the gaps and flaws in our basic education level as well as to locate and dispose of corruption. 6 Committees of Concerned Citizens (CCCs) TIB developed six Committees of Concerned Citizens (CCCs) Mymensingh Kishoregonj Nalitalari Madhupur Muktagacha, Jamalpur The main objective of the formation of the CCCs is to create local groups which would serve as local lobbyists seeking to curb corruption, instigate reform and promote integrity in the public service delivery system. 7 Sources of Data Corruption in Primary Education: A Report Card Survey, TIB (2001) Report card survey is a simple approach for organizing public feed back Report Cards are designed to assess the nature, types, extent and implications of corruption, and at the same time facilitate stakeholders participatory movement for improving the quality of service in the sector. 8 Name of Areas and number of different respondents for the Report Card Survey (2001) Respondents Area Mymensingh Muktagachha Jamalpur Kishoregonj Nalitabari Madhupur Gouripur Sharishabar Total Headmaster 23 25 20 21 19 20 21 22 171 Student 115 124 120 120 120 120 113 134 966 Guardian 115 124 120 120 120 120 113 134 966 Total 253 273 260 261 259 260 247 290 2103 9 Sources of Data Corruption in Bangladesh: A Household Survey, TIB (2002) Information from 3030 Households Corruption Database: TIB (2004) Information from 26 Dailies Corruption in Bangladesh: A Household Survey, TIB (2005) Information from 3000 Households Quality with Equity: The Primary Education Agenda, Campaign for Popular Education Bangladesh (2005) 8212 Respondents 10 Corruption in admission in primary education TIB Report card Survey (2001) shows that 6. 52% of the primary students paid Tk 63/- on average as admission fees . TIB Household Corruption Survey (2005) showed that 40% primary students had to pay 209 taka as admission fees 11 Irregular subscription/fees TIB Report Card Survey (2001) revealed that each student of primary schools had to pay 47 taka on average subscription for at least nine purposes which is illegal TIB Household Corruption Survey (2005) revealed that each student of primary schools had to pay 58 taka on average subscription for at least nine purposes which is illegal 12 Percentage of students who paid illegal fees 100 90 80 70 60 50 40 30 20 10 0. Sp or ts Bo ok s rit ua ls m ot io n ex am ex ta in m lE po se s th er pu r am . xa en t En te r Pr om 2n d Re lig io us m 1s tT er Te Fi na rm 2001 2005 Source Corruption in Primary Education: A Report Card Survey (2001) Corruption in Bangladesh: A Household Survey (2005) O 13 Amount of average illegal fess 2001 30 27 24 21 18 15 12 9 6 3 0 m ion ok s . ex am or ts t en ls r it ua us io O th er inm lE Bo ex Sp os es pu rp am xa ot om Pr te En 2005 er m Fi na tT Te rm rta 1s d 2n Source Corruption in Primary Education: A Report Card Survey (2001) Corruption in Bangladesh: A Household Survey (2005). Re l ig 14 Corruption in Food for Education Program 16 % of the cases the criterion was not observed 15. 5% of the students paid on an average Taka 32 to be included in the programme Subscription was collected by teachers, Dealers and from Others On average every student received 2. 47 Kgs food grain less every time Missing 1241 tons of food grain in 8 Upazillas equivalent to 12 million taka (1USD=52 taka) Source: Corruption in Primary Education:A Report Card Survey (2001) 15 Primary Education Stipend Programme (PESP). Started from July 2002 substituting the former Food for Education Programme (FFE). Aim of attracting and keeping more children, especially of the poor Forty percent of the students in rural area are eligible to receive Tk 100 stipend per month Identification of 40 percent of pupil enrolled in grades 1-5 from the poorest households by School Management Committee (SMC) To remain eligible for the monthly stipend, a student has to attain minimum 40 percent marks in term examinations and have 85 percent monthly class attendance. 16 Corruption in Primary Education Stipend Programme (PESP). Over two-thirds of the children from the poorest category were not selected to be recipients of stipend; 27 percent of children from affluent households received the stipend 32. 4% primary school students who have been enrolled for stipend had to pay 40 taka for their enrolment 46 percent of the stipend holders did not receive the full amount of stipend Source Corruption in Bangladesh: A Household Survey (2005) Source: Campaign for Popular Education The University Press Ltd. 17 Corruption in Upazilla Primary Education Offices 34% of the responding headmasters said that bribes are occasionally required to be paid 13% said that they have to do so every time. Source: Corruption in Primary Education:A Report Card Survey (2001) 18 Consequences of corruption Concerned officials of primary education collected 19. 85 million taka (1USD=52 taka) as illegal subscription from 8 areas (out of 500 areas). Concerned primary education officials collected 546 million taka (1USD=60 taka) as illegal fees from all over Bangladesh Concerned PESP officials collected 25 million taka from primary students to enroll them in the PESP from all over Bangladesh . Source Corruption in Primary Education: A Report Card Survey (2001) Corruption in Bangladesh: A Household Survey (2005) 19 Perpetrators of Corruption 1. Teachers 2. Food dealers 3. Management committee of institutions 4. Employees of institutions Source Corruption in Primary Education: A Report Card Survey (2001) Corruption in Bangladesh: A Household Survey (2005) 20 Causes of corruption 1. Absence of accountability 2. Discretionary power 3. Lack of transparency 4. Monopoly power 5. Influence of powerful people Source Corruption in Bangladesh: A Household Survey (2002) 21 The objectives of CCCs advocacy activities on Primary Education. Ensuring quality education in all classrooms implying that there shall remain no room for pursuing any kind of ill motives for personal gain of any concerned party; Promoting collection of reasonable and standard fees in all primary schools; Ensuring that schools keep proper record of official fund collection and expenditure; Promoting the effectiveness of School Management Committees (SMC) and the Parent-Teacher Associations (PTA) to work as watchdog bodies for the betterment of local-level education; Suggesting strategies for meaningfully reducing the rate of dropouts. 22. TIB initiatives to curb corruption from Primary education: Success of CCCs The advocacy undertaken by CCCs for achieving the above objectives are at three level; Firstly, the CCCs are working to increase mass people through mobile theatres, mothers’ gathering and parents-teachers gathering etc. Secondly, the CCCs are trying to build coalition with School Management Committee (SMC), Upazilla Education Committee, and with the Civil Society. Finally, the CCCs are working with the concerned officials including Upazilla Education Offices, District Education Offices, Upazilla and District administrations etc. 23 TIB initiatives to curb corruption from Primary education: Success of CCCs Most of the upazilla primary education offices have taken initiatives for curbing corruption in their offices. As a result, corruption has somewhat reduced in the offices of the upazilla primary education offices. A number of teachers informed the CCCs that they are not giving bribes in the education office for their services. Because of CCC advocacy, a number of education offices decided on a fixed amount of fees for various purposes. The teachers are no longer collecting illegal fees from the students. 24 TIB initiatives to curb corruption from Primary education: Success of CCCs The CCCs have been invited by the Upazilla Education offices to participate in preparing yearly plan. The concerned education officials have requested the CCCs to help them to form the School Management Committee (SMC); The CCCs obtained formal consent to work with two Primary Schools for turning them into â€Å"Islands of Integrity† in each area; Many facets of the local education system appeared to have acted on the CCC-designed recommendations. 25 TIB initiatives to curb corruption from Primary education: Success of CCCs TIB’s suggestions, voiced via CCCs, were taken seriously and changes to record-keeping systems were made as per CCC recommendations; the CCCs had 15 specific reform-oriented recommendations; CCCs have been successful in persuading school authorities to clearly specify the school tuition fees, the rate of stipends, and supplying books on time, at no extra cost to guardians. It was made clear that the CCCs would continue to act as watchdogs for ensuring transparency and accountability; 26 Further Information Md. Sydur Rahman Molla Senior Programme Officer Research Department Transparency International Bangladesh Progress Tower (5th Floor), H # 01, R # 23, Gulshan –1, Dhaka –1212 PH: 880 2 9884811, 8826036, Fax: 880 2 9884811 Email: [emailprotected] org Web: www. ti-bangladesh. org 27 Thanks 28.

CAPM and Three Factor Model in Cost of Equity Measurement

CAPM and Three Factor Model in Cost of Equity Measurement 1.0 INTRODUCTION AND OBJECTIVES Central to many financial decisions such as those relating to investment, capital budgeting, portfolio management and performance evaluation is the estimation of the cost of equity or expected return. There exist several models for the valuation of equity returns, prominent among which are the dividend growth model, residual income model and its extension, free cash flow model, the capital asset pricing model, the Fama and French three factor model, the four factor model etc. Over the past few decades, two of the most common asset pricing models that have been used for this purpose are the Capital Asset Pricing Model (a single factor model by Sharpe 1964, Lintner 1965) and the three factor model suggested by Fama and French (1993). These two models have been very appealing to both practitioners and academicians due to their structural simplicity and are very easy to interpret. There have however been lots of debates and articles as to which of these two models should be used when est imating the cost of equity or expected returns. The question as to which of these two models is better in terms of their ability to explain variation in returns and forecast future returns is still an open one. While most practitioners favour a one factor model (CAPM) when estimating the cost of equity or expected return for a single stock or portfolio, academics however recommend the Fama and French three factor model (see eg. Bruner et al, 1998). The CAPM depicts a linear relationship between the expected return on a stock or portfolio to the excess return on a market portfolio. It characterizes the degree to which an assets return is correlated to the market, and indirectly how risky the asset is, as captured by beta. The three-factor model on the other hand is an extension of the CAPM with the introduction of two additional factors, which takes into account firm size (SMB) and book-to-market equity (HML). The question therefore is why practitioners prefer to use the single factor model (CAPM) when there exist some evidence in academics in favour of the Fama and French three factor model. Considering the number of years most academic concepts are adopted practically, can we conclude that the Fama and French three factor model is experiencing this so-called natural resistance or is it the case that the Fama and French model does not perform significantly better than the CAPM and so therefore not worth the time and cost? The few questions I have posed above form the basis for this study. It is worth noting that while the huge academic studies on these models produce interesting results and new findings, the validity of the underlying models have not been rigorously verified. In this paper, while I aim to ascertain which of the two models better estimates the cost of equity for capital budgeting purposes using regression analysis, I also will like to test whether the data used satisfy the assumptions of the method most academicians adopt, i.e. the Ordinary Least Squares (OLS) method. I will in particular be testing for the existence or otherwise of heteroscedasticity, multicollinearity, normality of errors serial correlation and unit roots, which may result in inefficient coefficient estimates, wrong standard errors, and hence inflated adjusted R2 if present in the data. I will then correct these if they exist by adopting the Generalised Least Squares (GLS) approach instead of the widely used Ordinary Least Squares (OLS) before drawing any inference from the results obtained. My conclusion as to which of the models is superior to the other will be based on which provides the best possible estimate for expected return or cost of equity for capital budgeting decision making. Since the cost of capital for capital budgeting is not observed, the objective here, therefore, is to find the model that is most effective in capturing the variations in stock returns as well as providing the best estimates for future returns. By running a cross sectional regression using stock or portfolio returns as the dependent variable and estimated factor(s) based on past returns as regressors, R2 measures how much of the differences in returns is explained by the estimation procedure. The model that produces the highest adjusted R2 will therefore be deemed the best. The Fama-French (1993, 1996) claimed superiority of their model over CAPM in explaining variations in returns from regressions of 25 portfolios sorted by size and book-to-market value. Their conclusion was based on the fact that their model produced a lower mean absolute value of alpha which is much closer to the theoretical value of zero. Fama and French (2004, working paper) stated that if asset pricing theory holds either in the case of the CAPM (page 10), or the Fama and French three-factor model (page 21), then the value of their alphas should be zero, depicting that the asset pricing model and its factor or factors explain the variations in portfolio returns. Larger values of alpha in this case are not desirable, since this will imply that the model was poor in explaining variation in returns. In line with this postulation, the model that yields the lowest Mean Absolute Value of Alpha (MAVA) will therefore be considered the best. But since alpha is a random variable, I will pro ceed to test the null hypothesis H0: ÃŽ ±i = 0 for all i, by employing the GRS F-statistic postulated by Gibbons, Ross and Shanken (1989). My third and fourth testing measures are based on postulates by econometricians that, the statistical adequacy of a model in terms of its violations of the classical linear regression model assumptions is hugely irrelevant if the models predictive power is poor and that the accuracy of forecasts according to traditional statistical criteria such as the MSE may give little guide to the potential profitability of employing those forecasts in a market trading strategy or for capital budgeting purposes. I will therefore test the predictive power of the two models by observing the percentage of forecast signs predicted correctly and their Mean Square Errors (MSE). One other motivation for this study is also to ascertain whether the results of prior studies are sample specific, that is, whether it is dependent on the period of study or the portfolio grouping used. Theoretically, the effectiveness of an asset pricing model in explaining variation in returns should not be influenced by how the data is grouped. Fama and French (1996) claimed superiority of their model over the CAPM using the July 1963 to December 1993 time period with data groupings based on size and book-to-market equity. I will be replicating this test on the same data grouping but covering a much longer period (from July 1926 to June 2006) and then on a different data grouping based on industry characteristics. Testing the models using the second grouping of industry portfolios will afford me the opportunity to ascertain whether the effectiveness of an asset pricing model is sample specific. I will also carry out the test by employing a much shorter period (5 years) and compari ng it to the longer period and then using the one with the better estimate in terms of alpha and R2 to carry out out-of-sample forecasts. The rest of this paper is structured as follows. Chapter 2 will review the various models available for the estimation of equity cost with particular emphasis on the two asset-pricing models and analysing some existing literature. Chapter 3 will give a description of the data, its source and transformations required, with Chapter 4 describing the methodology. Chapter 5 will involve the time series tests of hypothesis on the data and Chapter 6 will involve an empirical analysis of the results for the tests of the CAPM and the Fama and French three-factor model. Finally, Chapter 7 contains a summary of the major findings of my work and my recommendation as well as some limitations, if any, of the study and recommended areas for further studies. 2.0 RELEVANT LITERATURE The estimation of the cost of equity for an industry involves estimation of what investors expect in return for their investment in that industry. That is, the cost of equity to an industry is equal to the expected return on investors equity holdings in that industry. There are however a host of models available for the estimation of expected returns on an industrys equity capital including but not limited to estimates from fundamentals (dividends and earnings) and those from asset pricing models. 2.1 Estimations from Fundamentals Estimation of expected returns or cost of equity in this case from fundamentals involves the use of dividends and earnings. Fama and French (2002) used this approach to estimate expected stock returns. They stated that, the expected return estimates from fundamentals help to judge whether the realised average return is high or low relative to the expected value (pp 1). The reasoning behind this approach lies in the fact that, the average stock return is the average dividend yield plus the average rate of capital gain: A(Rt) = A(Dt/Pt-1) + A(GPt) (1) where Dt is the dividend for year t, Pt-1 is the price at the end of year t 1, GPt = (Pt Pt-1)/Pt-1 is the rate of capital gain, and A( ) indicates an average value. Given in this situation that the dividend-price ratio, Dt/Pt , is stationary (mean reverting), an alternative estimate of the stock return from fundamentals is: A(RDt) = A(Dt/Pt-1) + A(GDt) (2) Where GDt = (Dt Dt-1)/Dt-1is the growth rate of dividends and (2) is known as the dividend growth model which can be viewed as the expected stock return estimate of the Gordon (1962) model. Equation (2) in theory will only apply to variables that are cointegrated with the stock price and may not hold if the dividend-price ratio is non-stationary, which may be caused by firms decision to return earnings to stockholders by moving away from dividends to share repurchases (Fama and French 2002). But assuming that the ratio of earnings to price, (Yt/Pt), is stationary, then an alternative estimate of the expected rate of capital gain will be the average growth rate of earnings, A(GYt) = A((Yt Yt-1)/Yt-1). In this case, the average dividend yield can be combined with the A(GYt) to produce a third method of estimating expected stock return, the earnings growth model given as: A(RYt) = A(Dt/Pt-1) + A(GYt) (3) It stands to reason from the model in Lettau and Ludvigson (2001) that the average growth rate of consumption can be an alternative mean of estimating the expected rate of capital gain if the ratio of consumption to stock market wealth is assumed stationary. Fama and French (2002) in their analysis concluded that the dividend growth model has an advantage over the earnings growth model and the average stock return if the goal is to estimate the long-term expected growth of wealth. However, it is a more generally known fact that, dividends are a policy variable and so subject to changes in management policy, which raises problems when using the dividend growth model to estimate the expected stock returns. But this may not be a problem in the long run if there is stability in dividend policies and dividend-price ratio resumes its mean-reversion (although the reversion may be at a new mean level). Bagwell and Shoven (1989) and Dunsby (1995) have observed that share repurchases after 1983 has been on the ascendancy, while Fama and French (2001) have also observed that the proportion of firms who do not pay dividends have been increasing steadily since 1978. The Fama and French (2001) observation implies that in transition periods where firms who do not pay dividends increases steadily, the market dividend-price ratio may be non-stationary; overtime, it is likely to decrease, in which case the expected return will likely be underestimated when the dividend growth model is used. The earnings growth model, although not superior to the dividend growth model (Fama and French (2002)), is not affected by possible changes in dividend policies over time. The earnings growth model however may also be affected by non-stationarity in earnings-price ratio since it ability to accurately estimate average expected return is based on the assumption that there are permanent shifts in the expected value of the earnings-price ratio. 2.2 Estimations from Asset-Pricing Models One of the most fundamental concepts in the area of asset-pricing is that of risk versus reward. The pioneering work that addressed the risk and reward trade-off was done by Sharpe (1964)-Lintner (1965), in their introduction of the Capital Asset Pricing Model (CAPM). The Capital Asset Pricing Model postulates that the cross-sectional variation in expected stock or portfolio returns is captured only by the market beta. However, evidence from past literature (Fama and French (1992), Carhart (1997), Strong and Xu (1997), Jagannathan and Wang (1996), Lettau and Ludvigson (2001), and others) stipulates that the cross-section of stock returns is not fully captured by the one factor market beta. Past and present literature including studies by Banz (1981), Rosenberg et al (1985), Basu (1983) and Lakonishok et al (1994) have established that, in addition to the market beta, average returns on stocks are influenced by size, book-to-market equity, earnings/price and past sales growth respecti vely. Past studies have also revealed that stock returns tend to display short-term momentum (Jegadeesh and Titman (1993)) and long-term reversals (DeBondt and Thaler (1985)). Growing research in this area by scholars to address these anomalies has led to the development of alternative models that better explain variations in stock returns. This led to the categorisation of asset pricing models into three: (1) multifactor models that add some factors to the market return, such as the Fama and French three factor model; (2) the arbitrage pricing theory postulated by Ross (1977) and (3) the nonparametric models that heavily criticized the linearity of the CAPM and therefore added moments, as evidenced in the work of Harvey and Siddique (2000) and Dittmar (2002). From this categorization, most of the asset-pricing models can be described as special cases of the four-factor model proposed by Carhart (1997). The four-factor model is given as: E(Ri) Rf = ÃŽ ±i + [ E(RM) Rf ]bi + si E(SMB) + hi E(HML) + wiE(WML) + ÃŽ µi (4) where SMB, HML and WML are proxies for size, book-to-market equity and momentum respectively. There exist other variants of these models such as the three-moment CAPM and the four-moment CAPM (Dittmar, 2002) which add skewness and kurtosis to investor preferences, however the focus of this paper is to compare and test the effectiveness of the CAPM and the Fama and French three-factor model, the two premier asset-pricing models widely acknowledged among both practitioners and academicians. 2.3 Theoretical Background: CAPM and Fama French Three-Factor Model There exist quite a substantial amount of studies in the field of finance relating to these two prominent asset pricing models. The Capital Asset Pricing Model (CAPM) of Sharpe (1964) and Lintner (1965) has been the first most widely recognized theoretical explanation for the estimation of expected stock returns or cost of equity in this case. It is a single factor model that is widely used by Financial Economists and in industry. The CAPM being the first theoretical asset pricing model to address the risk and return concept and due to its simplicity and ease of interpretation, was quickly embraced when it was first introduced. The models attractiveness also lies in the fact that, it addressed difficult problems related to asset pricing using readily available time series data. The CAPM is based on the idea of the relationship that exists between the risk of an asset and the expected return with beta being the sole risk pricing factor. The Sharpe-Lintner CAPM equation which describes individual asset return is given as: E(Ri) = Rf + [ E(RM) Rf ]ÃŽ ²iM i = 1,,N (5) where E(Ri) is the expected return on any asset i, Rf is the risk-free interest rate, E(RM) is the expected return on the value-weighted market portfolio, and ÃŽ ²iM is the assets market beta which measures the sensitivity of the assets return to variations in the market returns and it is equivalent to Cov(Ri, RM)/Var(RM). The equation for the time series regression can be written as: E(Ri) Rf = ÃŽ ±i + [ E(RM) Rf ]ÃŽ ²iM + ÃŽ µi i = 1,,N; (6) showing that the excess return on portfolio i is dependent on excess market return with ÃŽ µi as the error term. The excess market return is also referred to as the market premium. The model is based on several key assumptions, portraying a simplified world where: (1) there are no taxes or transaction costs or problems with indivisibilities of assets; (2) all investors have identical investment horizons; (3) all investors have identical opinions about expected returns, volatilities and correlations of available investments; (4) all assets have limited liability; (5) there exist sufficiently large number of investors with comparable wealth levels so that each investor believes that he/she can purchase and sell any amount of an asset as he or she deems fit in the market; (6) the capital market is in equilibrium; and (7) Trading in assets takes place continually over time. The merits of these assumptions have been discussed extensively in literature. It is evident that most of these assumptions are the standard assumptions of a perfect market which does not exist in reality. It is a known fact that, in reality, indivisibilities and transaction costs do exist and one of the reasons assigned to the assumption of continual trading models is to implicitly give recognition to these costs. It is imperative to note however that, trading intervals are stochastic and of non-constant length and so making it unsatisfactory to assume no trading cost. As mentioned earlier, the assumptions made the model very simple to estimate (given a proxy for the market factor) and interpret, thus making it very attractive and this explains why it was easily embraced. The CAPM stipulates that, investors are only rewarded for the systematic or non-diversifiable risk (represented by beta) they bear in holding a portfolio of assets. Notwithstanding the models simplicity in estimation and interpretation, it has been criticized heavily over the past few decades . Due to its many unrealistic assumptions and simple nature, academicians almost immediately began testing the implications of the CAPM. Studies by Black, Jensen and Scholes (1972) and Fama and MacBeth (1973) gave the first strong empirical support to the use of the model for determining the cost of capital. Black et al. (1972) in combining all the NYSE stocks into portfolio and using data between the periods of 1931 to 1965 found that the data are consistent with the predictions of the Capital Asset Pricing Model (CAPM). Using return data for NYSE stocks for the period between 1926 to 1968, Fama and MacBeth (1973) in examining whether other stock characteristics such as beta squared and idiosyncratic volatility of returns in addition to their betas would help in explaining the cross section of stock returns better found that knowledge of beta was sufficient. There have however been several academic challenges to the validity of the model in relation to its practical application. Banz (1981) revealed the first major challenge to the model when he provided empirical evidence to show that stocks of smaller firms earned better returns than predicted by the CAPM. Banzs finding was not deemed economically important by most academicians in the light that, it is unreasonable to expect an abstract model such as the CAPM to hold exactly and that the proportion of small firms to total market capital is insignificant (under 5%). Other early empirical works by Blume and friend (1973), Basu (1977), Reinganum (1981), Gibbons (1982), Stambaugh (1982) and shanken (1985) could not offer any significant evidence in support of the CAPM. In their paper, Fama and French (2004) noted that in regressing a cross section of average portfolio returns on portfolio beta estimates, the CAPM would predict an intercept which is equal to the risk free rate (Rf) and a beta coefficient equal to the market risk premium (E(Rm) Rf). However, Black, Jensen and Scholes (1972), Blume and Friend (1973), Fama and MacBeth (1973) and Fama and French (1992) after running series of cross-sectional regressions found that the average risk-free rate, which is proxied by the one month T-bill, was always less that the realised intercept. Theory stipulates that, the three main components of the model (the risk free, beta and the market risk premium) must be forward-looking estimates. That is they must be estimates of their true future values. Empirical studies and survey results however show substantial disagreements as to how these components can be estimated. While most empirical researches use the one month T-bill rate as a proxy to the risk-fr ee rate, interviews depicts that practitioners prefer to use either the 90-day T-bill or a 10-year T-bond (normally characterised by a flat yield curve). Survey results have revealed that practitioners have a strong preference for long-term bond yields with over 70% of financial advisors and corporations using Treasury-bond yields with maturities of ten 10 or more years. However, many corporations reveal that they match the tenor of the investment to the term of the risk free rate. Finance theory postulates that the estimated beta should be forward looking, so as to reflect investors uncertainty about future cash flows to equity. Practitioners are forced to use various kinds of proxies since forward-looking betas are unobservable. It is therefore a common practice to use beta estimates derived from historical data which are normally retrieved from Bloomberg, Standard Poors and Value Line. However, the lack of consensus as to which of these three to use results in different betas for the same company. These differences in beta estimates could result in significantly different expected future returns or cost of equity for the company in question thereby yielding conflicting financial decisions especially in capital budgeting. In the work of Bruner et al. (1998), they found significant differences in beta estimates for a small sample of stocks, with Bloomberg providing a figure of 1.03 while Value Line beta was 1.24. The use of historical data however requires th at one makes some practical compromises, each of which can adversely affect the quality of the results. Forinstance, the statistically reliability of the estimate may improve greatly by employing longer time series periods but this may include information that are stale or irrelevant. Empirical research over the years has shown that the precision of the beta estimates using the CAPM is greatly improved when working with well diversified portfolios compared to individual securities. In relation to the equity risk premium, finance theory postulates that, the market premium should be equal to the difference between investors expected returns on the market portfolio and the risk-free rate. Most practitioners have to grapple with the problem of how to measure the market risk premium. Survey results have revealed that the equity market premium prompted the greatest diversity of responses among survey respondents. Since future expected returns are unobservable, most of the survey participants extrapolated historical returns in the future on the assumption that future expectations are heavily influenced by past experience. The survey participants however differed in their estimation of the average historical equity returns as well as their choice of proxy for the riskless asset. Some respondents preferred the geometric average historical equity returns to the arithmetic one while some also prefer the T-bonds to the T-bill as a proxy for the riskless asset. Despite the numerous academic literatures which discuss how the CAPM should be implemented, there is no consensus in relation to the time frame and the data frequency that should be used for estimation. Bartholdy Peare (2005) in their paper concluded that, for estimation of beta, five years of monthly data is the appropriate time period and data frequency. They also found that an equal weighted index, as opposed to the commonly recommended value-weighted index provides a better estimate. Their findings also revealed that it does not really matter whether dividends are included in the index or not or whether raw returns or excess returns are used in the regression equation. The CAPM has over the years been said to have failed greatly in explaining accurate expected returns and this some researchers have attributed to its many unrealistic assumptions. One other major assumption of the CAPM is that there exists complete knowledge of the true market portfolios composition or index to be used. This assumed index is to consist of all the assets in the world. However since only a small fraction of all assets in the world are traded on stock exchanges, it is impossible to construct such an index leading to the use of proxies such as the SP500, resulting in ambiguities in tests. The greatest challenge to the CAPM aside that of Banz (1981) came from Fama and French (1992). Using similar procedures as Fama and MacBeth (1973) and ten size classes and ten beta classes, Fama and French (1992) found that the cross section of average returns on stocks for the periods spanning 1960s to 1990 for US stocks is not fully explained by the CAPM beta and that stock risks are multidimensional. Their regression analysis suggest that company size and book-to-market equity ratio do perform better than beta in capturing cross-sectional variation in the cost of equity capital across firms. Their work was however preceded by Stattman (1980) who was the first to document a positive relation between book-to-market ratios and US stock returns. The findings of Fama and French could however not be dismissed as being economically insignificant as in the case of Banz. Fama and French therefore in 1993 identified a model with three common risk factors in the stock return- an overall market factor, factors related to firm size (SMB) and those related to book-to-market equity (HML), as an alternative to the CAPM. The SMB factor is computed as the average return on three small portfolios (small cap portfolios) less the average return on three big portfolios (large cap portfolios). The HML factor on the other hand is computed as the average return on two value portfolios less the average return on two growth portfolios. The growth portfolio represents stocks with low Book Equity to Market Equity ratio (BE/ME) while the value portfolios represent stocks with high BE/ME ratio. Their three-factor model equation is described as follows: E(Ri) Rf = ÃŽ ±i + [ E(RM) Rf ]bi + si E(SMB) + hi E(HML) + ÃŽ µi (7) Where E(RM) Rf, , E(SMB) and E(HML) are the factor risk premiums and bi , si and hi are the factor sensitivities. It is however believed that the introduction of these two additional factors was motivated by the works of Stattman (1980) and Banz (1981). The effectiveness of these two models in capturing variations in stock returns may be judged by the intercept (alpha) in equations (6) and (7) above. Theory postulates that if these models hold, then the value of the intercept or alpha must equal zero for all assets or portfolio of assets. Fama and French (1997) tested the ability of both the CAPM and their own three-factor model in estimating industry costs of equity. Their test considered 48 industries in which they found that their model outperformed the CAPM across all the industries considered. They however could not conclude that their model was better since their estimates of industry cost of equities were observed to be imprecise. Another disturbing outcome of their study is that both models displayed very large standard errors in the order of 3.0% per annum across all industries. Connor and Senghal (2001) tested the effectiveness of these two models in predicting portfolio returns in indias stock market. They tested the models using 6 portfolio groupings formed from the intersection of two size and three book-to-market equity by examining and testing their intercepts. Connor and Senghal in this paper examined the values of the intercepts and their corresponding t-statistics and then tested the intercepts simultaneously by using the GRS statistic first introduced by Gibbons, Ross and Shanken (1989). Based on the evidence provided by the intercepts and the GRS tests, Connor and Senghal concluded generally that the three-factor model of Fama and French was superior to the CAPM. There have been other several empirical papers ever since, to ascertain which of these models is better in the estimation of expected return or cost of equity, most producing contrasting results. Howard Qi (2004) concluded in his work that on the aggregate level, the two models behave fairly well in their predictive power but the CAPM appeared to be slightly better. Bartholdy and Peare (2002) in their work came to the conclusion that both models performed poorly with the CAPM being the poorest. 3.0 DATA SOURCES T CAPM and Three Factor Model in Cost of Equity Measurement CAPM and Three Factor Model in Cost of Equity Measurement 1.0 INTRODUCTION AND OBJECTIVES Central to many financial decisions such as those relating to investment, capital budgeting, portfolio management and performance evaluation is the estimation of the cost of equity or expected return. There exist several models for the valuation of equity returns, prominent among which are the dividend growth model, residual income model and its extension, free cash flow model, the capital asset pricing model, the Fama and French three factor model, the four factor model etc. Over the past few decades, two of the most common asset pricing models that have been used for this purpose are the Capital Asset Pricing Model (a single factor model by Sharpe 1964, Lintner 1965) and the three factor model suggested by Fama and French (1993). These two models have been very appealing to both practitioners and academicians due to their structural simplicity and are very easy to interpret. There have however been lots of debates and articles as to which of these two models should be used when est imating the cost of equity or expected returns. The question as to which of these two models is better in terms of their ability to explain variation in returns and forecast future returns is still an open one. While most practitioners favour a one factor model (CAPM) when estimating the cost of equity or expected return for a single stock or portfolio, academics however recommend the Fama and French three factor model (see eg. Bruner et al, 1998). The CAPM depicts a linear relationship between the expected return on a stock or portfolio to the excess return on a market portfolio. It characterizes the degree to which an assets return is correlated to the market, and indirectly how risky the asset is, as captured by beta. The three-factor model on the other hand is an extension of the CAPM with the introduction of two additional factors, which takes into account firm size (SMB) and book-to-market equity (HML). The question therefore is why practitioners prefer to use the single factor model (CAPM) when there exist some evidence in academics in favour of the Fama and French three factor model. Considering the number of years most academic concepts are adopted practically, can we conclude that the Fama and French three factor model is experiencing this so-called natural resistance or is it the case that the Fama and French model does not perform significantly better than the CAPM and so therefore not worth the time and cost? The few questions I have posed above form the basis for this study. It is worth noting that while the huge academic studies on these models produce interesting results and new findings, the validity of the underlying models have not been rigorously verified. In this paper, while I aim to ascertain which of the two models better estimates the cost of equity for capital budgeting purposes using regression analysis, I also will like to test whether the data used satisfy the assumptions of the method most academicians adopt, i.e. the Ordinary Least Squares (OLS) method. I will in particular be testing for the existence or otherwise of heteroscedasticity, multicollinearity, normality of errors serial correlation and unit roots, which may result in inefficient coefficient estimates, wrong standard errors, and hence inflated adjusted R2 if present in the data. I will then correct these if they exist by adopting the Generalised Least Squares (GLS) approach instead of the widely used Ordinary Least Squares (OLS) before drawing any inference from the results obtained. My conclusion as to which of the models is superior to the other will be based on which provides the best possible estimate for expected return or cost of equity for capital budgeting decision making. Since the cost of capital for capital budgeting is not observed, the objective here, therefore, is to find the model that is most effective in capturing the variations in stock returns as well as providing the best estimates for future returns. By running a cross sectional regression using stock or portfolio returns as the dependent variable and estimated factor(s) based on past returns as regressors, R2 measures how much of the differences in returns is explained by the estimation procedure. The model that produces the highest adjusted R2 will therefore be deemed the best. The Fama-French (1993, 1996) claimed superiority of their model over CAPM in explaining variations in returns from regressions of 25 portfolios sorted by size and book-to-market value. Their conclusion was based on the fact that their model produced a lower mean absolute value of alpha which is much closer to the theoretical value of zero. Fama and French (2004, working paper) stated that if asset pricing theory holds either in the case of the CAPM (page 10), or the Fama and French three-factor model (page 21), then the value of their alphas should be zero, depicting that the asset pricing model and its factor or factors explain the variations in portfolio returns. Larger values of alpha in this case are not desirable, since this will imply that the model was poor in explaining variation in returns. In line with this postulation, the model that yields the lowest Mean Absolute Value of Alpha (MAVA) will therefore be considered the best. But since alpha is a random variable, I will pro ceed to test the null hypothesis H0: ÃŽ ±i = 0 for all i, by employing the GRS F-statistic postulated by Gibbons, Ross and Shanken (1989). My third and fourth testing measures are based on postulates by econometricians that, the statistical adequacy of a model in terms of its violations of the classical linear regression model assumptions is hugely irrelevant if the models predictive power is poor and that the accuracy of forecasts according to traditional statistical criteria such as the MSE may give little guide to the potential profitability of employing those forecasts in a market trading strategy or for capital budgeting purposes. I will therefore test the predictive power of the two models by observing the percentage of forecast signs predicted correctly and their Mean Square Errors (MSE). One other motivation for this study is also to ascertain whether the results of prior studies are sample specific, that is, whether it is dependent on the period of study or the portfolio grouping used. Theoretically, the effectiveness of an asset pricing model in explaining variation in returns should not be influenced by how the data is grouped. Fama and French (1996) claimed superiority of their model over the CAPM using the July 1963 to December 1993 time period with data groupings based on size and book-to-market equity. I will be replicating this test on the same data grouping but covering a much longer period (from July 1926 to June 2006) and then on a different data grouping based on industry characteristics. Testing the models using the second grouping of industry portfolios will afford me the opportunity to ascertain whether the effectiveness of an asset pricing model is sample specific. I will also carry out the test by employing a much shorter period (5 years) and compari ng it to the longer period and then using the one with the better estimate in terms of alpha and R2 to carry out out-of-sample forecasts. The rest of this paper is structured as follows. Chapter 2 will review the various models available for the estimation of equity cost with particular emphasis on the two asset-pricing models and analysing some existing literature. Chapter 3 will give a description of the data, its source and transformations required, with Chapter 4 describing the methodology. Chapter 5 will involve the time series tests of hypothesis on the data and Chapter 6 will involve an empirical analysis of the results for the tests of the CAPM and the Fama and French three-factor model. Finally, Chapter 7 contains a summary of the major findings of my work and my recommendation as well as some limitations, if any, of the study and recommended areas for further studies. 2.0 RELEVANT LITERATURE The estimation of the cost of equity for an industry involves estimation of what investors expect in return for their investment in that industry. That is, the cost of equity to an industry is equal to the expected return on investors equity holdings in that industry. There are however a host of models available for the estimation of expected returns on an industrys equity capital including but not limited to estimates from fundamentals (dividends and earnings) and those from asset pricing models. 2.1 Estimations from Fundamentals Estimation of expected returns or cost of equity in this case from fundamentals involves the use of dividends and earnings. Fama and French (2002) used this approach to estimate expected stock returns. They stated that, the expected return estimates from fundamentals help to judge whether the realised average return is high or low relative to the expected value (pp 1). The reasoning behind this approach lies in the fact that, the average stock return is the average dividend yield plus the average rate of capital gain: A(Rt) = A(Dt/Pt-1) + A(GPt) (1) where Dt is the dividend for year t, Pt-1 is the price at the end of year t 1, GPt = (Pt Pt-1)/Pt-1 is the rate of capital gain, and A( ) indicates an average value. Given in this situation that the dividend-price ratio, Dt/Pt , is stationary (mean reverting), an alternative estimate of the stock return from fundamentals is: A(RDt) = A(Dt/Pt-1) + A(GDt) (2) Where GDt = (Dt Dt-1)/Dt-1is the growth rate of dividends and (2) is known as the dividend growth model which can be viewed as the expected stock return estimate of the Gordon (1962) model. Equation (2) in theory will only apply to variables that are cointegrated with the stock price and may not hold if the dividend-price ratio is non-stationary, which may be caused by firms decision to return earnings to stockholders by moving away from dividends to share repurchases (Fama and French 2002). But assuming that the ratio of earnings to price, (Yt/Pt), is stationary, then an alternative estimate of the expected rate of capital gain will be the average growth rate of earnings, A(GYt) = A((Yt Yt-1)/Yt-1). In this case, the average dividend yield can be combined with the A(GYt) to produce a third method of estimating expected stock return, the earnings growth model given as: A(RYt) = A(Dt/Pt-1) + A(GYt) (3) It stands to reason from the model in Lettau and Ludvigson (2001) that the average growth rate of consumption can be an alternative mean of estimating the expected rate of capital gain if the ratio of consumption to stock market wealth is assumed stationary. Fama and French (2002) in their analysis concluded that the dividend growth model has an advantage over the earnings growth model and the average stock return if the goal is to estimate the long-term expected growth of wealth. However, it is a more generally known fact that, dividends are a policy variable and so subject to changes in management policy, which raises problems when using the dividend growth model to estimate the expected stock returns. But this may not be a problem in the long run if there is stability in dividend policies and dividend-price ratio resumes its mean-reversion (although the reversion may be at a new mean level). Bagwell and Shoven (1989) and Dunsby (1995) have observed that share repurchases after 1983 has been on the ascendancy, while Fama and French (2001) have also observed that the proportion of firms who do not pay dividends have been increasing steadily since 1978. The Fama and French (2001) observation implies that in transition periods where firms who do not pay dividends increases steadily, the market dividend-price ratio may be non-stationary; overtime, it is likely to decrease, in which case the expected return will likely be underestimated when the dividend growth model is used. The earnings growth model, although not superior to the dividend growth model (Fama and French (2002)), is not affected by possible changes in dividend policies over time. The earnings growth model however may also be affected by non-stationarity in earnings-price ratio since it ability to accurately estimate average expected return is based on the assumption that there are permanent shifts in the expected value of the earnings-price ratio. 2.2 Estimations from Asset-Pricing Models One of the most fundamental concepts in the area of asset-pricing is that of risk versus reward. The pioneering work that addressed the risk and reward trade-off was done by Sharpe (1964)-Lintner (1965), in their introduction of the Capital Asset Pricing Model (CAPM). The Capital Asset Pricing Model postulates that the cross-sectional variation in expected stock or portfolio returns is captured only by the market beta. However, evidence from past literature (Fama and French (1992), Carhart (1997), Strong and Xu (1997), Jagannathan and Wang (1996), Lettau and Ludvigson (2001), and others) stipulates that the cross-section of stock returns is not fully captured by the one factor market beta. Past and present literature including studies by Banz (1981), Rosenberg et al (1985), Basu (1983) and Lakonishok et al (1994) have established that, in addition to the market beta, average returns on stocks are influenced by size, book-to-market equity, earnings/price and past sales growth respecti vely. Past studies have also revealed that stock returns tend to display short-term momentum (Jegadeesh and Titman (1993)) and long-term reversals (DeBondt and Thaler (1985)). Growing research in this area by scholars to address these anomalies has led to the development of alternative models that better explain variations in stock returns. This led to the categorisation of asset pricing models into three: (1) multifactor models that add some factors to the market return, such as the Fama and French three factor model; (2) the arbitrage pricing theory postulated by Ross (1977) and (3) the nonparametric models that heavily criticized the linearity of the CAPM and therefore added moments, as evidenced in the work of Harvey and Siddique (2000) and Dittmar (2002). From this categorization, most of the asset-pricing models can be described as special cases of the four-factor model proposed by Carhart (1997). The four-factor model is given as: E(Ri) Rf = ÃŽ ±i + [ E(RM) Rf ]bi + si E(SMB) + hi E(HML) + wiE(WML) + ÃŽ µi (4) where SMB, HML and WML are proxies for size, book-to-market equity and momentum respectively. There exist other variants of these models such as the three-moment CAPM and the four-moment CAPM (Dittmar, 2002) which add skewness and kurtosis to investor preferences, however the focus of this paper is to compare and test the effectiveness of the CAPM and the Fama and French three-factor model, the two premier asset-pricing models widely acknowledged among both practitioners and academicians. 2.3 Theoretical Background: CAPM and Fama French Three-Factor Model There exist quite a substantial amount of studies in the field of finance relating to these two prominent asset pricing models. The Capital Asset Pricing Model (CAPM) of Sharpe (1964) and Lintner (1965) has been the first most widely recognized theoretical explanation for the estimation of expected stock returns or cost of equity in this case. It is a single factor model that is widely used by Financial Economists and in industry. The CAPM being the first theoretical asset pricing model to address the risk and return concept and due to its simplicity and ease of interpretation, was quickly embraced when it was first introduced. The models attractiveness also lies in the fact that, it addressed difficult problems related to asset pricing using readily available time series data. The CAPM is based on the idea of the relationship that exists between the risk of an asset and the expected return with beta being the sole risk pricing factor. The Sharpe-Lintner CAPM equation which describes individual asset return is given as: E(Ri) = Rf + [ E(RM) Rf ]ÃŽ ²iM i = 1,,N (5) where E(Ri) is the expected return on any asset i, Rf is the risk-free interest rate, E(RM) is the expected return on the value-weighted market portfolio, and ÃŽ ²iM is the assets market beta which measures the sensitivity of the assets return to variations in the market returns and it is equivalent to Cov(Ri, RM)/Var(RM). The equation for the time series regression can be written as: E(Ri) Rf = ÃŽ ±i + [ E(RM) Rf ]ÃŽ ²iM + ÃŽ µi i = 1,,N; (6) showing that the excess return on portfolio i is dependent on excess market return with ÃŽ µi as the error term. The excess market return is also referred to as the market premium. The model is based on several key assumptions, portraying a simplified world where: (1) there are no taxes or transaction costs or problems with indivisibilities of assets; (2) all investors have identical investment horizons; (3) all investors have identical opinions about expected returns, volatilities and correlations of available investments; (4) all assets have limited liability; (5) there exist sufficiently large number of investors with comparable wealth levels so that each investor believes that he/she can purchase and sell any amount of an asset as he or she deems fit in the market; (6) the capital market is in equilibrium; and (7) Trading in assets takes place continually over time. The merits of these assumptions have been discussed extensively in literature. It is evident that most of these assumptions are the standard assumptions of a perfect market which does not exist in reality. It is a known fact that, in reality, indivisibilities and transaction costs do exist and one of the reasons assigned to the assumption of continual trading models is to implicitly give recognition to these costs. It is imperative to note however that, trading intervals are stochastic and of non-constant length and so making it unsatisfactory to assume no trading cost. As mentioned earlier, the assumptions made the model very simple to estimate (given a proxy for the market factor) and interpret, thus making it very attractive and this explains why it was easily embraced. The CAPM stipulates that, investors are only rewarded for the systematic or non-diversifiable risk (represented by beta) they bear in holding a portfolio of assets. Notwithstanding the models simplicity in estimation and interpretation, it has been criticized heavily over the past few decades . Due to its many unrealistic assumptions and simple nature, academicians almost immediately began testing the implications of the CAPM. Studies by Black, Jensen and Scholes (1972) and Fama and MacBeth (1973) gave the first strong empirical support to the use of the model for determining the cost of capital. Black et al. (1972) in combining all the NYSE stocks into portfolio and using data between the periods of 1931 to 1965 found that the data are consistent with the predictions of the Capital Asset Pricing Model (CAPM). Using return data for NYSE stocks for the period between 1926 to 1968, Fama and MacBeth (1973) in examining whether other stock characteristics such as beta squared and idiosyncratic volatility of returns in addition to their betas would help in explaining the cross section of stock returns better found that knowledge of beta was sufficient. There have however been several academic challenges to the validity of the model in relation to its practical application. Banz (1981) revealed the first major challenge to the model when he provided empirical evidence to show that stocks of smaller firms earned better returns than predicted by the CAPM. Banzs finding was not deemed economically important by most academicians in the light that, it is unreasonable to expect an abstract model such as the CAPM to hold exactly and that the proportion of small firms to total market capital is insignificant (under 5%). Other early empirical works by Blume and friend (1973), Basu (1977), Reinganum (1981), Gibbons (1982), Stambaugh (1982) and shanken (1985) could not offer any significant evidence in support of the CAPM. In their paper, Fama and French (2004) noted that in regressing a cross section of average portfolio returns on portfolio beta estimates, the CAPM would predict an intercept which is equal to the risk free rate (Rf) and a beta coefficient equal to the market risk premium (E(Rm) Rf). However, Black, Jensen and Scholes (1972), Blume and Friend (1973), Fama and MacBeth (1973) and Fama and French (1992) after running series of cross-sectional regressions found that the average risk-free rate, which is proxied by the one month T-bill, was always less that the realised intercept. Theory stipulates that, the three main components of the model (the risk free, beta and the market risk premium) must be forward-looking estimates. That is they must be estimates of their true future values. Empirical studies and survey results however show substantial disagreements as to how these components can be estimated. While most empirical researches use the one month T-bill rate as a proxy to the risk-fr ee rate, interviews depicts that practitioners prefer to use either the 90-day T-bill or a 10-year T-bond (normally characterised by a flat yield curve). Survey results have revealed that practitioners have a strong preference for long-term bond yields with over 70% of financial advisors and corporations using Treasury-bond yields with maturities of ten 10 or more years. However, many corporations reveal that they match the tenor of the investment to the term of the risk free rate. Finance theory postulates that the estimated beta should be forward looking, so as to reflect investors uncertainty about future cash flows to equity. Practitioners are forced to use various kinds of proxies since forward-looking betas are unobservable. It is therefore a common practice to use beta estimates derived from historical data which are normally retrieved from Bloomberg, Standard Poors and Value Line. However, the lack of consensus as to which of these three to use results in different betas for the same company. These differences in beta estimates could result in significantly different expected future returns or cost of equity for the company in question thereby yielding conflicting financial decisions especially in capital budgeting. In the work of Bruner et al. (1998), they found significant differences in beta estimates for a small sample of stocks, with Bloomberg providing a figure of 1.03 while Value Line beta was 1.24. The use of historical data however requires th at one makes some practical compromises, each of which can adversely affect the quality of the results. Forinstance, the statistically reliability of the estimate may improve greatly by employing longer time series periods but this may include information that are stale or irrelevant. Empirical research over the years has shown that the precision of the beta estimates using the CAPM is greatly improved when working with well diversified portfolios compared to individual securities. In relation to the equity risk premium, finance theory postulates that, the market premium should be equal to the difference between investors expected returns on the market portfolio and the risk-free rate. Most practitioners have to grapple with the problem of how to measure the market risk premium. Survey results have revealed that the equity market premium prompted the greatest diversity of responses among survey respondents. Since future expected returns are unobservable, most of the survey participants extrapolated historical returns in the future on the assumption that future expectations are heavily influenced by past experience. The survey participants however differed in their estimation of the average historical equity returns as well as their choice of proxy for the riskless asset. Some respondents preferred the geometric average historical equity returns to the arithmetic one while some also prefer the T-bonds to the T-bill as a proxy for the riskless asset. Despite the numerous academic literatures which discuss how the CAPM should be implemented, there is no consensus in relation to the time frame and the data frequency that should be used for estimation. Bartholdy Peare (2005) in their paper concluded that, for estimation of beta, five years of monthly data is the appropriate time period and data frequency. They also found that an equal weighted index, as opposed to the commonly recommended value-weighted index provides a better estimate. Their findings also revealed that it does not really matter whether dividends are included in the index or not or whether raw returns or excess returns are used in the regression equation. The CAPM has over the years been said to have failed greatly in explaining accurate expected returns and this some researchers have attributed to its many unrealistic assumptions. One other major assumption of the CAPM is that there exists complete knowledge of the true market portfolios composition or index to be used. This assumed index is to consist of all the assets in the world. However since only a small fraction of all assets in the world are traded on stock exchanges, it is impossible to construct such an index leading to the use of proxies such as the SP500, resulting in ambiguities in tests. The greatest challenge to the CAPM aside that of Banz (1981) came from Fama and French (1992). Using similar procedures as Fama and MacBeth (1973) and ten size classes and ten beta classes, Fama and French (1992) found that the cross section of average returns on stocks for the periods spanning 1960s to 1990 for US stocks is not fully explained by the CAPM beta and that stock risks are multidimensional. Their regression analysis suggest that company size and book-to-market equity ratio do perform better than beta in capturing cross-sectional variation in the cost of equity capital across firms. Their work was however preceded by Stattman (1980) who was the first to document a positive relation between book-to-market ratios and US stock returns. The findings of Fama and French could however not be dismissed as being economically insignificant as in the case of Banz. Fama and French therefore in 1993 identified a model with three common risk factors in the stock return- an overall market factor, factors related to firm size (SMB) and those related to book-to-market equity (HML), as an alternative to the CAPM. The SMB factor is computed as the average return on three small portfolios (small cap portfolios) less the average return on three big portfolios (large cap portfolios). The HML factor on the other hand is computed as the average return on two value portfolios less the average return on two growth portfolios. The growth portfolio represents stocks with low Book Equity to Market Equity ratio (BE/ME) while the value portfolios represent stocks with high BE/ME ratio. Their three-factor model equation is described as follows: E(Ri) Rf = ÃŽ ±i + [ E(RM) Rf ]bi + si E(SMB) + hi E(HML) + ÃŽ µi (7) Where E(RM) Rf, , E(SMB) and E(HML) are the factor risk premiums and bi , si and hi are the factor sensitivities. It is however believed that the introduction of these two additional factors was motivated by the works of Stattman (1980) and Banz (1981). The effectiveness of these two models in capturing variations in stock returns may be judged by the intercept (alpha) in equations (6) and (7) above. Theory postulates that if these models hold, then the value of the intercept or alpha must equal zero for all assets or portfolio of assets. Fama and French (1997) tested the ability of both the CAPM and their own three-factor model in estimating industry costs of equity. Their test considered 48 industries in which they found that their model outperformed the CAPM across all the industries considered. They however could not conclude that their model was better since their estimates of industry cost of equities were observed to be imprecise. Another disturbing outcome of their study is that both models displayed very large standard errors in the order of 3.0% per annum across all industries. Connor and Senghal (2001) tested the effectiveness of these two models in predicting portfolio returns in indias stock market. They tested the models using 6 portfolio groupings formed from the intersection of two size and three book-to-market equity by examining and testing their intercepts. Connor and Senghal in this paper examined the values of the intercepts and their corresponding t-statistics and then tested the intercepts simultaneously by using the GRS statistic first introduced by Gibbons, Ross and Shanken (1989). Based on the evidence provided by the intercepts and the GRS tests, Connor and Senghal concluded generally that the three-factor model of Fama and French was superior to the CAPM. There have been other several empirical papers ever since, to ascertain which of these models is better in the estimation of expected return or cost of equity, most producing contrasting results. Howard Qi (2004) concluded in his work that on the aggregate level, the two models behave fairly well in their predictive power but the CAPM appeared to be slightly better. Bartholdy and Peare (2002) in their work came to the conclusion that both models performed poorly with the CAPM being the poorest. 3.0 DATA SOURCES T