Showing papers in "Emerging Markets Finance and Trade in 2009"
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TL;DR: In this article, the authors assume that the change in economic system and therefore corporate governance has been only gradual; other forces must be at work when firms decide on their capital structures compared to those of mature market economies.
Abstract: Although empirical research has shown that some capital structure differences can be explained by modern capital structure theory in mature market economies, the forces behind capital structure decisions in emerging European economies remain a puzzle We assume that, in these countries, the change in economic system, and therefore corporate governance, has been only gradual; other forces must be at work when firms decide on their capital structures compared to those of mature market economies After identifying possible relevant factors in Slovenian firms, we show that throughout the period from 1999 to 2006, these factors explained the greatest part of capital structure differences However, the explanatory power of the proposed factors is changing, which implies changing corporate governance and financial behavior of Slovenian firms during transition
99 citations
TL;DR: In addition to enterprise characteristics (such as size, ownership, and education of the manager), policy-related variables also affect export performance, such as restrictive trade and customs regulation and poor customs administration as discussed by the authors.
Abstract: There has been much concern about Africa's recent export performance. Even though tariff and non-tariff barriers to trade have been falling, Africa's share of world exports has declined and most African countries remain highly dependent on a narrow range of primary commodities for export earnings. The author looks at factors that affect the export performance of manufacturing enterprises in eight African countries. In addition to enterprise characteristics (such as size, ownership, and education of the manager), policy-related variables also affect export performance. Manufacturing enterprises are less likely to export in countries with restrictive trade and customs regulation and poor customs administration. In contrast, there is less evidence that the quality of domestic transportation infrastructure has a large impact on export performance. Although the coefficient on this variable is negative, it is statistically insignificant in most model specifications.
75 citations
TL;DR: In this paper, the authors investigated the relations of board structure, ownership concentration, and ownership type with the performance of banks operating in Turkey from an agency theory and resource-dependency perspective.
Abstract: This study investigates the relations of board structure, ownership concentration, and ownership type with the performance of banks operating in Turkey from an agency theory and resource-dependency perspective. We use financial ratios and established measures of board characteristics and ownership structure. Our results indicate that board size and duality do not significantly influence the returns on assets of Turkish banks. On the other hand, the tenure of board members is negatively related to performance. Our analysis of board composition reveals a curvilinear relationship with banks' performance, implying that boards composed of a majority of either insiders or outsiders enjoy high performance. Also, ownership concentration and ownership type do not influence firm performance. The results of the financial variables are robust in all models.
65 citations
TL;DR: In this article, the relation between investor sentiment and stock returns on the Istanbul Stock Exchange, employing vector autoregressive (VAR) analysis and Granger causality tests, was investigated, and it was found that investor sentiment does not appear to forecast future stock returns; only the turnover ratio of the stock market seems to have forecasting potential.
Abstract: This paper investigates the relation between investor sentiment and stock returns on the Istanbul Stock Exchange, employing vector autoregressive (VAR) analysis and Granger causality tests. The sample period extends from July 1997 to June 2005. In the VAR models, stock portfolio returns and investor sentiment proxies are used as endogenous variables. Two dummy variables accounting for natural and economic crises are used as exogenous variables. The analysis results suggest that, excepting shares of equity issues in aggregate issues, stock portfolio returns seem to affect all investor sentiment proxies, namely closed-end fund discount, mutual fund flows, odd-lot sales-to-purchases ratio, and repo holdings of mutual funds. Investor sentiment does not appear to forecast future stock returns; only the turnover ratio of the stock market seems to have forecasting potential.
62 citations
TL;DR: This article explored the role of foreign direct investment in economic growth in Malaysia, appropriately controlling for other proximate drivers of economic growth: domestic investment, exports, financial markets, and human capital.
Abstract: This paper explores the role of foreign direct investment (FDI) in economic growth in Malaysia, appropriately controlling for other proximate drivers of economic growth: domestic investment, exports, financial markets, and human capital. Domestic capital formation, FDI, human capital, and financial deepening significantly affect economic growth. FDI has a positive and significant effect on economic growth, but its effect is of lesser magnitude than that of domestic investment. Human capital and financial markets interact with FDI and, thus, are important for both short- and long-term growth processes. The results suggest that it is important to encourage domestic as well as foreign investment to put Malaysia back on its precrisis growth path.
57 citations
TL;DR: This article investigated the determinants of currency risk management in non-financial firms in Argentina, Brazil, Chile, and Mexico, based on a panel data sample of firms that list as American depositary receipts from 2001 to 2004.
Abstract: This paper investigates the determinants of currency risk management in nonfinancial firms in Argentina, Brazil, Chile, and Mexico, based on a panel data sample of firms that list as American depositary receipts from 2001 to 2004. Our evidence indicates that derivatives held for hedging purposes can yield cash flows of the same order of magnitude of capital expenditures, operational earnings, and financial expense, unlike what was previously found by Guay and Kothari (2003) for U.S. firms. We study not only the decision to use derivatives, but also the magnitude of derivatives holdings and the importance of operational hedging in firms' risk management strategies. We find that economies of scale, financial distress costs, informational asymmetry, and growth opportunities are important for risk management decisions, and that firms do not hedge because of potential tax benefits.
44 citations
TL;DR: In this paper, the authors identify possible relevant factors in Slovenian firms, and show that these factors explained the greatest part of capital structure differences in emerging European economies, but the explanatory power of the proposed factors is changing, which implies changing corporate governance and financial behavior of Slovenian firm during transition.
Abstract: Although empirical research has shown that some capital structure differences can be explained by modern capital structure theory in mature market economies, the forces behind capital structure decisions in emerging European economies remain a puzzle. We assume that, in these countries, the change in economic system, and therefore corporate governance, has been only gradual; other forces must be at work when firms decide on their capital structures compared to those of mature market economies. After identifying possible relevant factors in Slovenian firms, we show that throughout the period from 1999 to 2006, these factors explained the greatest part of capital structure differences. However, the explanatory power of the proposed factors is changing, which implies changing corporate governance and financial behavior of Slovenian firms during transition.
43 citations
TL;DR: In this paper, the authors present estimates of monetary transmission for five new EU member countries in Central and Eastern Europe with more or less flexible exchange rates using the vector autoregressive methodology.
Abstract: Using the vector autoregressive methodology, we present estimates of monetary transmission for five new EU member countries in Central and Eastern Europe with more or less flexible exchange rates. We select sample periods to estimate over the longest possible period that can be considered as a single monetary policy regime. To identify the vector autoregression (VAR), structural restrictions and the widely used Cholesky ordering are employed. We conclude that the structural VAR yields much better results. Fewer countries suffer from a price puzzle (i.e., an increase in prices following a monetary contraction). Our results also indicate that there are substantial differences in monetary transmission across the countries in our sample.
41 citations
TL;DR: In this article, the authors investigate the relation between the extent of diversification in firms and their performance at different life cycle stages and show that corporate diversification erodes firm value.
Abstract: This paper investigates the relation between the extent of diversification in firms and their performance at different life cycle stages. To illustrate the joint endogeneity of diversification and performance, we treat both the extent of diversification and firm performance as endogenous variables in a simultaneous equation system. Empirical results reveal that corporate diversification erodes firm value. Overall, firms in their growing stages experience a significant diversification discount; however, mature firms do not show such findings. Although unrelated diversification leads to trading at a discount in all growing and mature firms, conversely, related diversification exhibits an evident premium in mature firms.
38 citations
TL;DR: In this article, the authors present empirical evidence that largely supports the hypothesis that the stock markets of South American countries are highly affected by changes in commodity prices after controlling for changes in exchange rates, interest rates, and North American stock market changes.
Abstract: Using Geweke feedback measures, we present empirical evidence that largely supports the hypothesis that the stock markets of South American countries are highly affected by changes in commodity prices after controlling for changes in exchange rates, interest rates, and North American stock market changes. In total, six different Goldman Sachs commodity price indexes are tested against the unexplained variation in stock market returns for Argentina, Brazil, Chile, Colombia, Peru, and Venezuela, covering the period 1995-2007. The Argentinian, Brazilian, and Peruvian stock markets are significantly affected by changes in commodity prices the same day. Venezuela's stock market, however, does not react to changes in commodity prices, even including energy prices. Stock market returns for Chile show a contemporaneous relation with energy and metals prices, whereas Colombia's equity market is affected by price changes for agricultural and industrial metals. In all cases, we find a contemporaneous relation and no...
36 citations
TL;DR: In this paper, the authors explored sources of growth in the Turkish economy by performing growth accounting exercises over the 1960-2004 period and relevant sub-periods, and analyzed the role of infrastructure investment, macroeconomic instability, and imports on total factor productivity.
Abstract: This paper explores sources of growth in the Turkish economy by performing growth accounting exercises over the 1960-2004 period and relevant subperiods. It also analyzes the role of a number of important policy-related factors, such as infrastructure investment, macroeconomic instability, and imports, on total factor productivity (TFP) by performing cointegration and impulse response analyses. The results suggest that both TFP and capital accumulation were crucial sources of growth during the sample period. Nevertheless, TFP growth displayed enormous variation from 1960 to 2004. The descriptive and empirical evidence suggests that TFP is positively affected by imports and public infrastructure investment and negatively affected by macroeconomic instability.
TL;DR: In this article, the authors constructed a quarterly inflation model for Croatia, using the general-to-specific approach to model inflation dynamics, which suggests that inflation inertia and Croatian trading partners' inflation are most important for explaining the short-run behavior of inflation.
Abstract: This paper constructs a quarterly inflation model for Croatia, using the general-to-specific approach to model inflation dynamics. A two-step procedure is followed. First, we conduct a long-run sectoral analysis of inflation sources, yielding long-run determinants of inflation: markup, excess money, nominal effective exchange rate, and the output gap. Second, we estimate an equilibrium error correction model of inflation, deploying, among other variables of interest, the long-run solutions derived in the first step. The derived model of inflation suggests that inflation inertia and Croatian trading partners' inflation are most important for explaining the short-run behavior of inflation. Apart from these two variables, markup, excess money, output gap, nominal exchange rate, and broad money also contribute to inflation changes in the short run.
TL;DR: In this paper, the authors model the FDI financial life cycle to describe the evolution of profits, reinvested earnings, and repatriated dividends for an FDI project to show that this inflow of investment to transition economies has caused large distortions in their current account deficits.
Abstract: The imputation of reinvested earnings from foreign direct investment (FDI) as a debit in the balance of payments exaggerates the current account deficit. This phenomenon is of major importance for transition economies because they received massive inflows of FDI in the late 1990s. We model the FDI financial life cycle to describe the evolution of profits, reinvested earnings, and repatriated dividends for an FDI project to show that this inflow of investment to transition economies has caused large distortions in their current account deficits. We verify the workings of the FDI financial life cycle and estimate its duration using a sample of eight transition economies.
TL;DR: In this article, the authors analyzed trends in trade flows and foreign direct investment in computer services and other business services and found that the Central and East European countries (CEECs) are important suppliers of outsourcable services to the EU-15.
Abstract: Central and East European countries (CEECs) that have recently acceded to the European Union are increasingly emerging on the map of global companies as possible locations for outsourcing services. Starting from the assumption of labor cost differentials in favor of the CEECs, the paper explores the CEECs' capacity and potential to supply outsourcable services to the EU-15. We analyze trends in trade flows and foreign direct investment in computer services and other business services. Although the available statistical data are deficient and excessively aggregated, the scattered evidence suggests that the CEECs are important suppliers of outsourcable services to the EU-15. Apart from labor cost differentials, other factors, such as the availability of skilled workforce as well as geographical and cultural proximity, might also contribute to EU-15 companies' preference for the CEECs when deciding on the location for international outsourcing of services. Increased specialization within the enlarged Europea...
TL;DR: In this paper, an autoregressive distributed lag (ARDL) bounds-testing procedure and Granger causality within vector error-correction models (VECM) were applied to the period after the liberalization of capital flows (August 1989-August 2006).
Abstract: This paper investigates the hypothesis that there is a causal relation between speculative pressure and real exchange rate overvaluation, banking-sector fragility, and the level of international reserves in Turkey. An autoregressive distributed lag (ARDL) bounds-testing procedure and Granger causality within vector error-correction models (VECM) are applied to the period after the liberalization of capital flows (August 1989-August 2006). The results of the ARDL bounds test support the theory that exchange market pressure is in a long-run equilibrium relation with the three hypothesized variables over the sample period. On the other hand, the results of the short-run and long-run Granger causality tests indicate the existence of Granger causality running from the three variables to exchange market pressure. The findings further suggest that a feedback relation exists between banking-sector fragility and exchange market pressure.
TL;DR: In this article, the authors apply the ARJI-trend model in conjunction with the procedure proposed by Bai and Perron (2003) to investigate the coexistence of permanent and transitory components and time-varying jumps in the A and B stock market indices of the Shanghai and Shenzhen Stock Exchanges.
Abstract: This study applies the ARJI-trend model in conjunction with the procedure proposed by Bai and Perron (2003) to investigate the coexistence of permanent and transitory components and time-varying jumps in the A and B stock market indices of the Shanghai and Shenzhen Stock Exchanges. Although the response to outside innovations is greater within the transitory component, it is short-lived; conversely, though there is a high level of persistence in the trend, new information has only a lesser effect on the permanent component. Jump variance can also affect total variance, though the effect is far lower than the variance for generalized autoregressive conditional heteroskedasticity. Accordingly, the market risk appears small. The reaction to news is heterogeneous within the Shanghai and Shenzhen indices; this may be the result of various market characteristics. During event periods, the permanent component, transitory components, and jump intensity are larger than their averages. After an upward trend, market...
TL;DR: In this article, the authors used the P-star model to explain inflation dynamics in Turkey and concluded that money is efficacious in predicting risk in price stability in Turkey, and compared the empirical performance of the Pstar model with the new classical Phillips curve relation.
Abstract: This paper uses the P-star model to explain inflation dynamics in Turkey. In P-star models, money determines the price gap, which is postulated to measure the pressure on prices in an economy. This pressure emerges when output is above the potential, the interest rate is lower than the natural rate, or there is pure excess money in the economy. The estimation results with the Turkish data show that the price gap contains considerable information for explaining inflation dynamics. Moreover, the model selection criterion that compares the empirical performance of the P-star model with the new classical Phillips curve relation favors the P-star model over the Phillips curve relationship. We conclude that money is efficacious in predicting risk in price stability in Turkey.
TL;DR: In this paper, the authors investigated how various macroeconomic policy shocks in Turkey affect unemployment and provided evidence on the differential responses of unemployment in selected sectors of economic activity and found that the response of total unemployment, as well as the response by selected sectors, responds differently to various macro economic policy shocks.
Abstract: This paper investigates how various macroeconomic policy shocks in Turkey affect unemployment and provides evidence on the differential responses of unemployment in selected sectors of economic activity. Our paper extends previous work in two respects. First, we consider not only the response of total unemployment, but also the response of unemployment by selected sectors of economic activity. Second, we consider not only the effect of monetary policy shocks, but also the effects of several other macroeconomic shocks. The results indicate that unemployment in different sectors of economic activity responds differently to various macroeconomic policy shocks.
TL;DR: In this paper, the authors empirically analyzed companies' capital structure and dividend decisions under distributed profit taxation (DPT), Estonia's corporate taxation regime since 2000, covering 26,000 observations of Estonian companies from 1995 to 2004.
Abstract: This paper empirically analyzes companies' capital structure and dividend decisions under distributed profit taxation (DPT), Estonia's corporate taxation regime since 2000. The sample covers 26,000 observations of Estonian companies from 1995 to 2004. The results show that the DPT system has led companies to pay less in dividends and retain more profits. Simultaneously, the importance of external financing in companies' total capital has decreased. The undistributed profits appear to be partially retained as surplus cash, instead of being reinvested into long-term productive assets. DPT seems to support companies' liquidity and sustainability; however, the allocation of funds is potentially inefficient.
TL;DR: In this paper, the authors investigated market behaviors (such as volatility, depth, and volume) and order-flow decomposition in a pure limit order futures market, the Taiwan Futures Exchange, and showed that a volatility (depth) increase is followed by a depth (volatility) decrease.
Abstract: This paper investigates market behaviors (such as volatility, depth, and volume) and order-flow decomposition in a pure limit order futures market, the Taiwan Futures Exchange. The results are different from those in equity markets due to relatively high adverse selection costs in futures markets. We show that a volatility (depth) increase is followed by a depth (volatility) decrease; a market order increase (decrease) subsequently induces higher (lower) volatility; and a limit order increase (decrease) results in more (less) market orders and limit orders. When the upside (downside) volatility rises, buyers decrease (increase) subsequent limit bid orders, and sellers increase (decrease) limit ask orders.
TL;DR: In this paper, the effect of a new corporate governance law in the emerging capital market of Chile to determine if capital markets perceived the intended protection of minority stockholders against wealth expropriation as effective was analyzed.
Abstract: This paper analyzes the effect of a new corporate governance law in the emerging capital market of Chile to determine if capital markets perceived the intended protection of minority stockholders against wealth expropriation as effective. The unique nature of the new law allowed for voluntary adoption during the initial three-year period, after which it became mandatory. We find no evidence of superior abnormal returns for those firms voluntarily adopting the new law versus those forced to accept the new law as it became mandatory. Trading volume also increased for those not adopting and declined for those that did voluntarily adopt. These results indicate that the capital markets did not perceive voluntary adoption of the new law as effective protection for minority shareholders. We also find a greater presence of institutional investors in the ownership structure of those firms not voluntarily adopting the new law, indicating their monitoring role by investing in firms with better corporate governance p...
TL;DR: In this paper, the authors study the determinants of the unusually high and volatile price differential between common (voting) shares and preferred (nonvoting), and propose three potential explanations for the price spread between these two classes of stock: the control contest model of the voting premium, the inferior liquidity of preferred shares, and the risk of expropriation of preferred shareholders as a class.
Abstract: This paper studies the determinants of the unusually high and volatile price differential between common (voting) shares and preferred (nonvoting) shares in Russia's emerging stock market. It focuses on three potential explanations for the price spread between these two classes of stock: the control contest model of the voting premium, the inferior liquidity of preferred shares, and the risk of expropriation of preferred shareholders as a class. The regression analysis, based on data from 1997 to 2005, supports the control contest explanation and the liquidity argument. The hypothesis of expropriation of preferred shareholders as a class receives limited support, and only in the early period of the Russian stock market's development. The paper addresses the issue of structural breaks in the evolution of the price differential, related to the 1998 financial crisis and to improvements in investor protection in Russia in the early 2000s. It also provides new estimates of the magnitude of the private benefits...
TL;DR: In this article, the authors examined corporate financing patterns in Ghana, in particular, whether listed Ghanaian corporations make considerable use of the stock market to finance their growth and examined the effect of stock market development on the importance of debt relative to external equity in the balance sheet of Ghanaian firms.
Abstract: This paper examines corporate financing patterns in Ghana, in particular, whether listed Ghanaian corporations make considerable use of the stock market to finance their growth. The paper also examines econometrically the effect of stock market development on the importance of debt relative to external equity in the balance sheet of Ghanaian firms. The results show that the average listed Ghanaian firm finances its growth mainly from short-term debt. The stock market, however, is the most important source of longterm external finance. Stock market development tends to shift the financial structure of Ghanaian firms toward more equity and less debt. Overall, the evidence suggests that the stock market is a surprisingly important source of finance for funding corporate growth.
TL;DR: In this article, the authors explore a possible link between an asymmetric dynamic process of stock returns and profitable technical trading rules, and show that the positive (negative) returns from buy (sell) signals are a consequence of trading rules that exploit the asymmetric dynamics of stock return that revolve around positive(negative) unconditional mean returns under prior positive (positive) return patterns.
Abstract: This paper explores a possible link between an asymmetric dynamic process of stock returns and profitable technical trading rules. Using Pacific Basin stock market indexes, we show that the dynamic process of daily index returns is better characterized by nonlinearity arising from an asymmetric reverting property, and that the asymmetric reverting property of stock returns is exploitable in generating profitable buy and sell signals for technical trading rules. We show that the positive (negative) returns from buy (sell) signals are a consequence of trading rules that exploit the asymmetric dynamics of stock returns that revolve around positive (negative) unconditional mean returns under prior positive (negative) return patterns. Our results corroborate the arguments for the usefulness of technical analysis.
TL;DR: In this paper, the authors investigated whether migration and trade can be regarded as complements or substitutes using the data on Turkish migration to Germany for the period 1963-2004, and they found that trade and migration are complements.
Abstract: This study investigates whether migration and trade can be regarded as complements or substitutes using the data on Turkish migration to Germany for the period 1963-2004. In contrast to previous studies that investigated this question using gravity equations, we conduct our analysis using the cointegration framework. In line with the previous literature, our results support the view that migration and trade are complements.
TL;DR: This paper showed that economic growth is insulated by the financial premium, contrasting with previously held beliefs that a negative relation between financial distortions and economic growth does not exist, and that agents' patience and the attitude of relative risk aversion are noteworthy in explaining the effects of external distortions on economic growth.
Abstract: Conventional wisdom suggests a negative relation between financial distortions and economic growth. This paper incorporates the financial premium, a good proxy for the degree of restrictions on financial transactions, into a standard AK-type endogenous growth model. The analytical results suggest that such a relationship does not exist. Economic growth is insulated by the financial premium, contrasting with previously held beliefs. Agents' patience and the attitude of relative risk aversion are noteworthy in explaining the effects of external distortions on economic growth. Our findings may apply to economies with parallel exchange markets.
TL;DR: In this paper, the authors test whether these advantages lead to voluntary liquidity provision (earning bid-ask spreads) or information trading (trading in the direction of the market).
Abstract: Theories show that liquidity provision implies negative contemporaneous correlation between trades and returns. Dealers on the Taiwan Stock Exchange are granted typical dealer trading advantages without obligations to provide liquidity and, thus, are ideal to test whether these advantages lead to voluntary liquidity provision (earning bid-ask spreads) or information trading (trading in the direction of the market). We find a strong positive correlation in aggregate, implying that these unrestricted dealers prefer information trading. We also find that smaller dealers are more likely to provide liquidity and that small-cap stocks (with larger bid-ask spreads) are more profitable for liquidity provision.
TL;DR: In this paper, the authors used a simultaneous equation model based on a three-stage least squares estimation to offer new empirical evidence that investors are hedgers or speculators during South Korea's elections.
Abstract: This study uses a simultaneous equation model based on a three-stage least squares estimation to offer new empirical evidence that investors are hedgers or speculators during South Korea's elections. Major investor groups include individuals, securities companies, and foreigners in the Korea Composite Stock Price Index (KOSPI 200) market. The results show that cash market volatility and futures market activity have lead behaviors with one another. However, the contemporaneous variables of cash market volatility and options market activity have only unidirectional causality. Most investors will trade futures and options contracts for speculating within the entire sample period. During political election periods, investors prefer to trade options contracts for hedging rather than futures contracts.
TL;DR: This paper investigated the causes and consequences of the decisions made by an initial public offering (IPO) reviewing committee using a unique data set from Taiwan and found that firms that were approved for listing are associated with better financial performance measures and are larger in equity size.
Abstract: We investigate the causes and consequences of the decisions made by an initial public offering (IPO) reviewing committee using a unique data set from Taiwan. Firms that were approved for listing are associated with better financial performance measures and are larger in equity size. Whether the committee unanimously approves an IPO firm depends on whether the firm's associated auditor changes or gives a nonunqualified report. The voting outcome has a discernable effect in the sense that unanimously approved firms are associated with higher financial performance measures (returns on equity, returns on assets, earnings per share, and the price-to-earnings ratio) than are nonunanimously approved firms, with the differences being more significant in the two years after the IPO.
TL;DR: In this paper, underwriters are required to retain at least 10 percent but no more than 25 percent of underwritten initial public offering (IPO) shares and sell the remainder to the public.
Abstract: In Taiwan, underwriters are required to retain at least 10 percent but no more than 25 percent of underwritten initial public offering (IPO) shares and sell the remainder to the public. We find that IPO underpricing causes underwriters to retain more shares to earn capital gains on retained shares and that underwriter retention is a signal of IPO underpricing. If underwriter retention is cancelled, underwriters need to be compensated through lottery draw processing fees or underwriting spreads. We show that issuers should compensate underwriters through underwriting spreads directly, rather than indirectly through underwriter retention or lottery draw processing fees.