Showing papers in "International journal of business in 2005"

R&D Investment and the Financial Performance of Technological Firms

Abstract: The growth of technological firms is based on the exploitation of innovative products and services thus forcing them to strongly invest in research and development (R&D). If the R&D expenditures announce the strategic positioning of firms, they can also significantly decrease the financial performances in terms of net income, return and risk. With the IAS 38 standard, the R&D expenditures can be accounted as expenses or assets. This choice has an impact on financial performances but this effect is difficult to forecast because these expenditures increase the information asymmetry between shareholders and managers. We demonstrate that it is preferable to capitalize the R&D expenditures if the firm is able to draw an immediate commercial exploitation from them or to adopt a swarming strategy of innovative projects (spin-off) as the benefits arise in the future. JEL: G32, G14, L19, O33

The Financial and Governance Characteristics of Australian Companies Going Private

Abstract: This paper presents a simple framework for the analysis, valuation and simulation of several real options in the presence of shadow costs of incomplete information. Information costs can be viewed as sunk costs in the spirit of Merton's (1987) model of capital market equilibrium with incomplete information. We incorporate these sunk costs in standard discounted cash flow techniques and present the basic concepts of real options. The justification of information costs in real projects is based on the observation that RD G13; G14; G31 Keywords: Asset pricing; Option pricing; Information and market efficiency; Capital budgeting; Investment policy (ProQuest: ... denotes formulae omitted.) I. INTRODUCTION A company's value creation is determined by resource allocation and the proper evaluation of investment alternatives. Managers make capital investments to create future growth for shareholders. Investments lead to patents or technologies, which open up new growth possibilities. In general, managers use the basic investment techniques as the capital asset pricing model (CAPM), the cost of capital and the discount cash flow techniques, DCF. In investment valuation, organisations also use quantitative approaches such as net present value (NPV), decision tree analysis (DTA), payback time, or scenario/simulation which do not account for intangible factors such as future competitive advantage, future opportunities, managerial flexibility, the strategic value of the investment, etc. This is because the expected outcomes are not easy to forecast and the variability of investment returns may be extremely high. New techniques for capital budgeting incorporate real options, active management, and strategic interactions between investment and financing decisions.1 Information plays a central role in the capital budgeting process and in investment and financing decisions. Edwards and Wagner (1999) study the role of information in capturing the research advantage and how to incorporate information into the decision process of active investment management. They show that implementation costs make sense only when weighed against the benefit of enhanced performance. They recognise that the most valuable commodity in the market is information that reduces uncertainty. In this spirit, trading cost information is part of the research that gives a manager active advantage. Edwards and Wagner (1999) show that managers must measure and develop confidence in the value of their research and then incorporate feedback from the market. Merton (1987) adopts most of the assumptions of the original CAPM and relaxes the assumption of equal information across investors. He assumes that investors only hold securities of which they are aware. In his model, the expected returns increase with systematic risk, firm-specific risk, and relative market value. The expected returns decrease, however, with relative size of the firm's investor base, referred to in Merton's model as the "degree of investor recognition". The intuition behind Merton's model is that investors consider only a part of the opportunity set, that full diversification is not possible, and that firm specific risk is priced in equilibrium. The main distinction between Merton's model and the standard CAPM is that investors invest only in the securities about which they are "aware". This assumption is referred to as incomplete information. The more general implication is that securities markets are segmented. …

Entry Methods and International Marketing Decision Making: An Empirical Investigation

Abstract: This paper investigates levels of adaptation and standardisation in international marketing tactics, and examines whether multinational companies are adapting or standardising their marketing mix elements in international markets. It is based on empirical research with some of the largest UK-based multinational companies. The research shows that both adaptation and standardisation are used at the same time within the respondent group. Levels of integration are dependent upon consideration of the relationship between the rationale for internationalisation and elements identified, and an understanding of how these are affected by a number of factors (one of them being Entry Methods, the factor under consideration here).

A general formula for the WACC

Abstract: Recent controversies testify that the tax shield valuation remains a hot topic in the financial literature. Basically, two methods have been proposed to incorporate the tax benefit of debt in the present value computation: The adjusted present value (APV), and the classical weighted average cost of capital (WACC). This note clarifies the relationship between these two apparently different approaches by offering a general formula for the WACC. This formula encompasses earlier results obtained by Modigliani and Miller (1963) and Harris and Pringle (1985).

An analysis of the short- and long-run relationships between South Asian and developed equity markets

Abstract: In this paper, I conduct a detailed, large sample analysis of the short- and long-run relationships between the South Asian markets of India, Pakistan and Sri Lanka and the major developed markets during July 1997--December 2003. Using a multivariate cointegration framework and vector error-correction modeling I find that the Indian market is influenced by the US, UK and Japan and that this influence has persisted following the September 11, 2001 terrorist attacks on the US. For Pakistan and Sri Lanka I find that these markets are relatively isolated from the major developed markets during the entire sample period. I also find that the three South Asian equity markets are becoming more integrated with each other but at a relatively slow pace. JEL: F30, F36, G15 Keywords: South Asian markets; Emerging markets; Cointegration; Vector error-correction model I. INTRODUCTION Previous researchers have examined the short- and long-run relationships among the major developed equity markets and markets in the Asian region for several years. Some researchers, including Eun and Shim (1989), Cheung and Mak (1992), Park and Fatemi (1993), Chung and Liu (1994), Arshanapalli, Doukas and Lang (1995), and Janakiramanan and Lamba (1998), use vector autoregression (VAR) modeling and impulse response analysis to examine these relationships. The main focus of these studies is to examine the short-run causal linkages among equity markets to better understand how shocks in one market are transmitted to other markets. These studies typically find that the US influences most markets in the Asian region, while markets in this region have little influence on the US market. The UK appears to exert some influence on markets in Japan, Australia, and Hong Kong. Previous studies also find that Japan, the second largest equity market, has little influence on other equity markets. In addition, the linkages among Pacific-Basin equity markets can often be attributed to the direct and indirect influences of the US market. Other studies, including Chan, Gup and Pan (1992, 1997), Kasa (1992), Hung and Cheung (1995), and Masih and Masih (2001), use the cointegration framework to examine the long-run relationships and the level of market integration among markets in the Asian region and between these markets and developed markets. Some researchers, such as Arshanapalli and Doukas (1993), Masih and Masih (1997, 1999) and Sheng and Tu (2000), have specifically focused their attention on the effect of market crashes on the relationships among these markets. (1) These studies generally tend to find a long-run relationship among Asian equity markets and the major developed markets of Japan, US, and UK. While previous researchers have examined the linkages among various equity markets in the Pacific-Basin region, South Asian markets have received very little interest resulting in few studies that have examined the short- and long-run behavior of these markets in any detail. One exception is Ghosh, Saidi and Johnson (1999) who examine the long-run relationship between the US and Japan and the Indian market during the Asian financial crisis period of 1997. They find a long-run cointegrating relationship between the US and the Indian market but not between Japan and India. However, their conclusions are limited in scope because of the very short time period of 201 trading days examined. In addition, they examine the relationship among these markets in a bivariate, rather than multivariate, setting. (2) Countries in the South Asian region have experienced considerable political and social turmoil over the past few years. At the same time, these countries have also deregulated their capital markets and removed barriers to international investment. In addition, the Asian financial crisis in 1997 and the substantial market falls following the terrorist attacks on the US on September 11, 2001 may have exerted influence on these markets potentially making them more integrated with major developed markets. …

The Impacts of Political Events on Foreign Institutional Investors and Stock Returns: Emerging Market Evidence from Taiwan

Abstract: This study investigates the possible impact of various political events on Taiwan’s stock performance. When market-adjusted techniques are applied, seemingly Taiwan’s stock market often reacts to the occurrences of political incidents with a significant abnormal price performance. Nevertheless, after employing an MVRM framework that accounts for market risk differences across firms and for distributional tendencies in daily returns, we find that price reactions to most of the political events are rather insignificant, implying those events be largely uninformative with only a few exceptions. The abnormal return behaviors are also frequently comparable between firms with smalland large foreign institutional ownerships. Some considerable volatility shifts in portfolio returns, however, are observed after specific events occur. JEL: F21; F30; G15

Dynamic Linkages Among the Emerging Middle Eastern and the United States Stock Markets

Abstract: Vector Auto Regression (VAR) and Bayesian Vector Auto-Regression (BVAR) models are used to trace the dynamic linkages across daily returns of stock market indexes in the Middle East and the United States, and to investigate how a shock in one market is transmitted to other markets. The Middle East Countries include Egypt, Israel, Jordan, Lebanon, Morocco, Oman, and Turkey. The dynamic linkages among these stock markets are found to be relatively small. The conclusion is that although markets are efficient, there are dynamic linkages that can be explored and exploited to benefit the diversified international investors. JEL: C32, F0, G0, N2, O5 Keywords: Middle East; Stock market indices; Vector auto-regressions; Bayesian vector auto-regression; Dynamic linkages; Egypt, Israel; Jordan; Lebanon; Morocco; Oman; Turkey I. INTRODUCTION The process of globalization is creating a new world. The benefits and costs of international portfolio diversification need to be considered by anyone holding a financial portfolio. Similarly, the firm that is considering raising new resources needs to address the requirements of the global marketplace. The globalization process is being driven by technical changes and falling barriers to international transactions. It is further characterized by the exchange of knowledge and information among countries. These exchanges are encouraged by the unprecedented decrease of information costs. In the recent decade, markets, businesses, regions, and continents have become more interdependent upon one another. This phenomenon encourages a wide range of financial services and fundraising throughout the world. The globalization of economic activity, the increased world wealth, and the reduction in transaction costs associated with the information revolution all direct investors to consider the newly emerging financial markets. This process has led to the introduction of public share offerings to (do you want to say "to nearly two dozen countries" or "of nearly two dozen countries" nearly two-dozen countries and spawned a global market culture among millions of new investors. At the end of the second millennium, the global stock market capitalization has surpassed the world gross domestic product. Morgan Stanley Capital International estimates the market value of stock traded on the world's 48 largest markets at $31.7 trillion at the end of November 1999. Global GDP, the value of world's total output of goods and services, is estimated by the International Monetary Fund to be at $30.1 trillion. At the end of the century, more countries than ever were participating in capital markets. Moreover, companies all around the globe increasingly rely on the stock market to raise funds. This process is aided by the progression of countries to privatize their holdings and to transfer ownership from the state to private investors. This phenomenon is not restricted to the United States, where the number of listed companies has increased by more than five times since 1990 to more than 10,000, or Western Europe, where governments auctioned off large portions of state-owned enterprises to the public. Estimates by Morgan Stanley Capital International reveal that the combined market capitalization for the United Kingdom, Germany and France increased by 250% in the last decade. Moreover, only ten years ago, countries such as China, the Soviet Union and its former Eastern Block of satellite countries which had just abandoned command economies and were lacking any stock market, had enlisted more than 1,300 publicly traded counties at the end of 1998 exchanges. This paper uses Vector Auto Regression (VAR) and Bayesian VAR models to trace the dynamic linkages across daily returns of the national stock market indexes in the Middle East and major world stock market indexes in the United States. The fate of the economy of a country is intertwined with the performance of its stock markets. …

The persistence of european bond fund performance: does conditioning information matter?

Abstract: In this paper we investigate if past performance can be used to predict future performance in the European bond fund market. Both unconditional and conditional measures of performance are considered. To our knowledge, this is the first study, which directly analyses the impact of conditioning information in assessing the persistence phenomenon in relation to bond funds. We find empirical evidence that indicates consistency of European bond performance. This evidence is particularly strong for the case of Spanish bond funds. Some evidence of persistence is also found for French and German bond funds. Additionally, it seems that the persistence is concentrated mainly in the poor performing funds. The results were similar whatever methodology, cross-sectional regression analysis or contingency tables, is used for assessing performance persistence. Our findings indicate that the evidence of performance persistence decreases when we consider conditional alphas, particularly for the multi-index model, which suggests that some of the persistence phenomenon is driven by time-varying betas. JEL: G11, G12, G14

A Stock Market Reaction Following Convertible Bond Issuance: Evidence from Japan

Abstract: This paper examines the stock price reaction to the announcement of convertible bonds (CBs) issuance during the period 1996 through 2002 in Japan. We discover a significantly negative stock price reaction to the announcement of CBs. This result conforms to the negative stock reaction in the U.S. market but is inconsistent with the previous study in Japan. Firm size is evidenced increasing the negative cross-sectional variation of abnormal stock return, while the growth options have positive relationship. There is no evidence of the association between the leverage and the abnormal return. In addition, the long-term performance of the stock prices after the CBs issuance firms are found under-performing the market index and what they should have done given their levels of systematic risks. Coupling with the negative stock price reaction around the issuance announcement period, the Japanese issuance firms under-react to the CBs issuance, consistent with the under-reaction hypothesis that has been explained by the U.S. empirical results. JEL: G10 Keywords: Convertible bond; Japan; Event study I. INTRODUCTION Convertible bonds (CBs) are hybrid instruments with characteristics of both debt and equity. Like straight bonds, convertible bonds receive coupons and principal payments. At the same time, convertible bondholders have the option to convert their bonds into stocks at a conversion ratio. Most convertible bonds have features that the issuer can call the convertibles before maturity. Having the option of being exchanged into equity, a convertible bond has a coupon rate that is lower than that of the straight bond. The equity effects of the issuance of convertible bonds have important implications for financing policy. For the U.S. market, Smith (1986) concludes that stock price reaction is not significant to new debt issuance announcement, but it is significantly negative to new equity issuance announcement. Moreover, the price reaction is significantly negative to CBs issuance announcement with a smaller absolute value than that to the pure equity issuance. Under these different stock price reactions, U.S. corporate managers may make up their minds what type of offerings to choose to avoid harming existing stockholders. In the U.S. market, it is shown by many researchers that the stock prices are significantly negative to the CBs issuance announcements. Dann and Mikkelson (1984), Eckbo (1986), and Mikkelson and Partch (1986) report negative abnormal returns during the announcement period for the CBs issuance firms. However, Kang and Stulz (1996) find a positive share price reaction to the announcement of the CBs issuance in Japan during period 1985 through 1991. They contribute the differences of the equity effect to the differences of the "organization of firms" between the Japanese and American firms. That means American managers' goal is to maximize the wealth of current shareholders while Japanese managers' goal is to invest in all positive NPV projects. The "bubble economy effects" hypothesis for the positive stock reaction has been rejected by Kang and Stulz (1996). The "bubble economy" in Japan means the phenomenon that the Japanese stock market had large positive returns during the second half of the 1980s and crashed at the beginning of 1990s. Kang and Stulz split the sample into announcements before 1990 and those in 1990 and 1991. They reject the "bubble economy effects" hypothesis by the result that the difference between the two sub-samples is not significant. However, the result is suspicious as the number of sub-sample in 1990 and 1991 accounts only 9% of the total sample. This forms the major interest of this paper: are there any differences of the abnormal stock returns to the announcement of the CBs issuance between the bull and post-bull market in Japan? This paper examines the stock price reaction to the announcement of CBs issuance from 1996 to 2002 in Japan. …

International convergence of accounting standards : an investigation of the use of IAS ''options'' not acceptable under US GAAP

Abstract: This study investigates the use of accounting policies contained in national standards or IAS that are not acceptable under US GAAP. Four policy areas (measurement of tangible assets, available-for-sale marketable securities and intangible assets; and the treatment of research and development expenditure) were considered for 506 listed firms from the United Kingdom (UK), Australia, France, Germany and Japan at 1999/2000. The main use of policies equivalent to IAS "options" was among firms from the UK and Australia. The study outlined how IAS adoption in 2005 (in the UK, France, Germany and Australia) and further IASB/FASB convergence activities will impact on policies currently used by firms from the sample countries. Keywords: International accounting convergence; international accounting standards; IAS; US GAAP; accounting policy choice; measurement of tangible, intangible and financial assets, research and development (R&D) expenditure. I. INTRODUCTION International convergence of accounting standards has emerged as a common goal of standard setters for financial reporting, with the International Accounting Standards Committee (IASC), and subsequently the International Accounting Standards Board (IASB), as the focal point for harmonization initiatives (McGregor 1999). The IASC has worked for many years to develop one set of standards suitable for use by companies throughout the world (IASB 2003a). The importance of the international standard setter in the global community setting increased significantly with IOSCO1 recommending the use of IAS2 for cross-border listings (IOSCO 2000) and the announcement by the Commission of the European Union (EU) that listed companies from all member states must use IAS in their consolidated financial reports from 2005 (IASC 2000a). The influence of IAS has also increased following corporate collapses in the United States of America (US) in 2001 - 2002. Company failures such as Enron and WorldCom have prompted a re-evaluation of the so-called rule-based approach of US GAAP1 and consideration of the principles-based approach of IAS (Schipper 2003). There has been considerable progress in recent years in harmonizing IAS and US accounting standards and practices (see Deloitte Touche Tohmatsu 2003a). The US has become more involved with international standard setting following the creation of the IASB in 2000 (IASC 2000b). The US's standard setting agency FASB4 is one of the IASB's eight liaison standard setters. FASB commenced the IAS/US GAAP convergence project to address outstanding differences between the two sets of accounting standards (IASB 2002) and to work towards common requirements in IAS and US GAAP. Some of the remaining key differences between IAS and US GAAP are the focus of this study. A number of IAS require a policy, or allow the use of an optional treatment (that is, they allow a choice of accounting policy), that is not acceptable under US GAAP. To achieve uniform global standards these differences must be reconciled. They present a challenge to the FASB and IASB who seek to produce standards that are conceptually sound and are acceptable to preparers and users of financial statements. The aim of this study is to investigate the use of accounting policies in national standards and IAS that are not acceptable under US GAAP to determine the extent to which policies equivalent to IAS "options" are used among an international sample of firms. Thus the study shows the number of firms which use policies that are harmoni/ed with both US GAAP and IAS, effectively using an "international benchmark" policy. In some cases, harmonization reflects national requirements that arc consistent with the common US GAAP/IAS policies. In other cases, firms can exercise policy choice so it is possible to observe the extent to which firms choose a policy that is consistent with both US GAAP and IAS as Barth and Clinch (1996) suggested they might. The topic of the study is important because of the resources being devoted to international convergence of accounting standards and the impact that changes in standards have on firms' reported earnings. …

The Conflict between Agency Theory and Corporate Control on Managerial Ownership: The Evidence from Taiwan IPO Performance

Abstract: When a private-held firm goes public through an IPO (initial public offering) process, the managerial ownership of the IPO firm declines due to external equity financing. The effects of dilution of ownership structure on firm performance are different with respect to the agency theory and corporate control theory. For Taiwan IPOs, we argue that the level of managerial ownership of IPO firms at issuance is basically high enough to control the firm. We show that the increase of managerial ownership of IPO firms in the early aftermarket would be hazardous to firm performance. That is, the corporate control benefit dominates the agency costs of IPO firm from the point of view of managerial ownership. JEL: G32, G34 Keywords: Managerial ownership; Inside ownership; Agency theory; Corporate control; Initial public offerings I. INTRODUCTION The ownership structure of a firm is documented to be influential to its firm performance. Leland and Pyle (1977) argue that the ownership structure is a signal of the firm value. The ownership of a firm consists of managerial ownership, institutional ownership and individual ownership. If we consider the managers or the institutional investors have better understanding about the firm value, the proportion of shares owned by the managers or institutional investors conveys a signal about the value of the firm to the outside investors. Therefore, the stock price reacts to the change of the ownership structure. However, the effect of ownership structure change on the stock performance is undecided. The increase of the managerial ownership should convey a positive signal to the firm value because the benefit of the shareholders is connected to the benefit of insider manager. That is, the agency cost is reduced to raise the firm value when managers own more shares. On the other hand, the increase of the managerial ownership causes the managers to gain more power to control the firm and reduces the chance of being taken over. Firm value should decline if there is no potential raider to challenge the incumbent of the firm. Morck, Shleifer and Vishny (1988) argue that the effect of managerial ownership on the stock performance depends on the level of managerial ownership. When the managerial ownership is too low to be significant to control over the firm, the increase of managerial ownership facilitates the managers to control the firm and keeps the benefit of managers and outside investors closer. On the other hand, when the level of managerial ownership is high enough to control the firm, the managers do not need extra shares to gain control. Thus, increase of the managerial ownership deteriorates the possibility of outside management to offer a bid to the firm. Therefore, with a low level of managerial ownership, the increase of managerial ownership raises the value of the firm. Nevertheless, with a high level of managerial ownership, the increase of managerial ownership decreases the value of the firm. Practically, unless the managerial ownership is more than 50% it is difficult to tell whether or not a certain level of managerial ownership is high enough to control the firm. If we can find a specific sample whose managers own enough shares to control the firm, we can then test if the increase of managerial ownership decreases the value of the firm. That is, the loss of benefit of being taken over is greater than the benefit of saving agency cost. A privately owned company can go public and raise capital through an initial public offering (IPO). Rule 144A imposes a lock-up period for the incumbent shares to be sold to the public. (1) The lock-up period, typically, is 3 years. With the lock-up shares, the incumbent is forced to own enough shares to control the firm at the early stage of issuance. Therefore, the sample of IPO firms provides a good sample to test whether the increase of the managerial ownership decreases the value of the firm. …

Business Angels: The Smartest Money for Starters? Plea for a Renewed Policy Focus on Business Angels

Abstract: This paper develops different ways to stimulate business angel investment. Coping with the second equity gap can mainly happen by stimulating syndication and by setting up co-investment schemes. Investor readiness, corporate orientation, business angel networks, business angel academies and the integrated finance concept can be considered as key concepts in coping with the information asymmetry problem. Stimulating simultaneously these different aspects might be the best way to provide starters and young enterprises with smart money. Given the untapped potential of business angels, government initiatives in the field might realize a high value for public money. JEL: G24, G38

Long-Range Dependence in Daily Volatility on Tunisian Stock Market

Abstract: The aim of this paper is to surround the volatility dynamics on the Tunisian stock market via an approach founded on the detection of persistence phenomenon and long-term memory presence. More specifically, our object is to test whether long-term dependent processes are appropriated for modelling Tunisian stock market volatility. The empirical investigation has been driven on the two Tunisian stock market indexes IBVMT and TUNINDEX for the period (1998-2004) in daily frequency. Through the estimation of FIGARCH processes, we show that long-term component of volatility has an impact on stock market return series. JEL: C22, C52 Keywords: Volatility; Long-term memory; Fractional integration; FIGARCH process I. INTRODUCTION Volatility persistence is a subject that has been thoroughly investigated since the introduction of ARCH models by Engle (1982). It is not only important in forecasting future market movements but also is central to a host of financial issues such as portfolio diversification, risk management, derivative pricing and market efficiency. Although, it is common to find a significant statistical relationship between current measures of volatility and lagged values, it has been very difficult to find models that adequately specify the time series dependencies in volatilities in speculative returns data. Ding, Granger and Engle (1993) show that stock market absolute returns exhibit a long-memory property in which the sample autocorrelation function decay very slowly and remain significant even at high order lags. Evidence in favour of long-range dependence in measure of volatility has been largely documented. Despite the fact that emerging markets in the last two decades had attracted the attention of international investors as means of higher returns such as with diversification of international portfolio risk. Few studies had investigated the issue of volatility persistence using nonlinear estimation models. Emerging markets differ from developed markets. The former are in most, cases are characterized the by lack of institutional development, thinly traded markets, lack of corporate governance and market microstructure distortions. Theses factors hinder the flow of information to market participants. Moreover, in most of these markets, participants slowly react to information due to the lack of equity culture. This paper will focus on Tunisian Stock Exchange (henceforth, TSE) revisiting the issue of volatility persistence in stock market returns. We attempt to investigate empirically market returns, volatility persistence in a distinct approach from previous researches and this by testing for presence of fractional dynamics (i.e. long memory process in TSE volatility). Thus, this investigation proves to be a first essay in the Tunisian context. As we raised, the categorical absence of empirical studies founded on the fractional integrated behaviour in the conditional variance of Tunisian stock returns. Data used are the two Tunisian stock indexes (IBVMT index and TUNINDEX) daily returns during the period from December 31, 1997 till April 16, 2004. The empirical results provided evidence that the daily stock market volatility exhibits long-range dependency. The fractional integrated behaviour in the conditional variance of the daily Tunisian stock indexes have important implications on efficiency tests and on optimal portfolio allocations and consequently for optimal hedging decisions. The remaining sections are organized as follows. The next respected on the theoretical background of long memory and discusses its measurement. Section III presents some practical considerations of long memory processes. Section IV provides an overview on the Tunisian stock market while section V reviews the fractionally integrated GARCH model. Results are presented in section VI with conclusions in section VII. II. THEORETICAL BACKGROUND To this level, it seems to be worth to elucidate the conceptual issues of volatility, standard deviation and risk. …

Business Applications of Emulative Neural Networks

Abstract: This paper surveys research on Emulative Neural Network (ENN) models as economic forecasters. ENNs are statistical methods that seek to mimic neural processing. They serve as trainable analytical tools that “learn” autonomously. ENNs are ideal for finding nonlinear relationships and predicting seemingly unrecognized and unstructured behavioral phenomena. As computing power rapidly progresses, these models are increasingly desirable for economists who recognize that people act in dynamic ways with rational expectations. Unlike traditional regressions, ENNs work well with incomplete data and do not require normal distribution assumptions. ENNs can eliminate substantial uncertainty in forecasting, but never enough to completely overcome indeterminacy. JEL: C3, C32, C45, C5, C63, F3, G15.

Pricing in the New Economy: Lessons from the Period of the E-Commerce Bubble

Abstract: The New Economy increased U.S productivity sharply after 1995. The latest economics literature on the topic, which generally forecasts a secure future for the information economy, is reviewed. The down side of the New Economy were the strategies, especially the pricing strategies of NASDAQ and virtual firms. The critique of Michael Porter regarding the non-strategic price-cutting common to those firms is reviewed. Traditional models by Sweezy and Baumol, which focus on pricing in imperfectly competitive industries, are applied to provide a cogent theory as to why those firms made mistakes that were once viewed as common for neophyte industries. JEL: A1, D4, L1, M2 Keywords: New economy; Information economy; Pricing strategy; Transactions costs; Imperfect competition; Revenue maximization I. INTRODUCTION Use of the term "New Economy" to describe the information economy was probably unfortunate. If the New Economy is a lasting phenomenon, the term must ultimately become an anachronism. But more serious is the misconception that the New Economy perished with the bursting of the NASDAQ bubble and the arrival of recession. It is true that to some people the New Economy was the belief that recessions had been permanently vanquished and that stock prices, which had ultimately become bubble prices, represented legitimate possibilities for future wealth, i.e., the actual present value of firms. Serious economists saw the New Economy as much more, including the following three elements. First, it entailed the revival in productivity growth in the United States beginning in 1995. Second, it included developments in the information and communications technologies that rendered all sectors of the economy more productive. Finally, it had reference to the necessary institutional and organizational changes that permitted firms to accommodate themselves to the exigencies of the digital economy--these required the reorganization of the firm, coping with industrial competition unlike that of preceding eras, and changes so sweeping that many thought erroneously that the basic rules of economics had changed. The recession of 2001 proved the belief that recessions had been permanently overcome to be misguided. But none of the other propositions were really changed by the recession. Those who tend to doubt that the New Economy was merely chimerical or transitory have not found substantiation from the literature, since specialists have provided evidence to the contrary. We need only to refer briefly to the substantive literature that insists that the information economy is alive and well, the recession notwithstanding. This article is motivated by the view of that literature, viz., that information and communications technologies (ICT) have irrevocably changed the US economy. Section II will review the most significant econometric findings related to the upward shift in productivity attributed to the New Economy and the evidence that it is not defunct. This will be done only briefly to motivate the assertion that pricing issues are important for the information economy, which continues. Section III will ask what went wrong with the New Economy. That information is important for the US economy, which continues in some areas to be on the cutting edge of global development. It is also important for other advanced economies interested in avoiding the pitfalls encountered by some US firms in the bubble period of the late 1990s. Section IV discusses the issue of the non-strategic pricing practices mentioned in Section III. The pricing discussion will address the imperfectly competitive conditions that permit economists to enjoy the process of abstraction, albeit at a level of only modest sophistication. II. THE NEW INFORMATION ECONOMY CONTINUES The development of the information economy has been driven by a rapid decline in the prices of computers and other information and communications equipment. …

International Competitiveness and Sugar Strategy Options in Australia, Brazil and the European Union

Abstract: Understanding of international competitiveness has primarily been pursued in terms of economic variables and market conditions. The roles of the government, the socio-cultural-political context in international business, and their effects on competitiveness have largely been ignored. This study involves an investigation into the circumstances of international competitiveness and how it is pursued by firms from different sugar producing and marketing nations. It employs a qualitative method of comparative analysis between Australia, Brazil, and the European Union. This paper highlights the variations of the theme of international competitiveness reflected through different strategies chosen by the three dominant sugar economies Keywords: Competitiveness, Sugar strategy, Production and marketing regimes, Australia, Brazil, European Union I. INTRODUCTION The concept of competitiveness captures meaningful and far-reaching characteristics in the world economy and provides important understanding of the distribution of wealth, both in the national and global context. However, while competitiveness is a major issue (Dunning, 1995, Porter, 1990), it has still not been well defined (Connor, 2003, Martin, et al., 1991) with the analytical unit variously being the country, the industry and the firm. The micro-economic application of the concept of competitiveness is well known in so far as it relates to the ability and desire of a firm to compete and grow and be efficient and profitable in a market. The macro-economic meaning of the term remains obscure. Porter (1990) while stating that 'there is no accepted definition of competitiveness' (p. xii), asserts that 'the only meaningful concept of competitiveness at the national level is national productivity' (p. 6). In relation to national competitiveness, one definition that stands out as being widely used and most widely accepted as useful; namely that is defined by the Organisation for Economic Cooperation and Development (OECD): "...the degree to which a country can, under free and fair market conditions, produce goods and services which meet the test of international markets, while simultaneously maintaining and expanding the real incomes of its people over the long term." (Oughton, 1997) In combining the various definitions of competitiveness at the micro and macro levels, national competitiveness can be construed as an aggregate of competitive and efficient activities of firms that simultaneously increases nation's productivity and the national standard of living. However, competitiveness, in respect to the real world market, is quite dissociated from the consequences of productivity and efficiency. It has been observed that being the most efficient producer internationally does not necessarily guarantee a nation's competitiveness in terms of raising the standard of living. In some of the world markets, very efficient producers and industries are striving to survive even in developed economies and in such situations, the income-raising sense in which the term has been applied (i.e. the concept of competitiveness as high efficiency and productivity) is defied. Therefore, in effect, high productivity levels, be it absolute or relative, does not essentially lead to competitiveness. Behind such occurrences of competitiveness, lies the crucial element of imperfect competition. In economics, the real world of imperfect competition is represented by two specific types of market behaviour: monopolistic competition and oligopoly. Economic theories propound that oligopolistic advantages (firm-specific advantages) drive international competitiveness. However, many international business activities are a consequence of the fact that markets are imperfect in a 'politically constructed environment' (Boddewyn and Brewer, 1994, p. 121) that is markets created, aided and abetted by governmental interventions (Boddewyn and Brewer, 1994). It is this environment that enables firms to gain economic advantages in the international market. …

The Return in Hedge-Fund Strategies

Abstract: This paper deeply examines the difference between traditional and absolute return hedge funds. It also described the development and characteristic of hedge funds as well as the different types of hedge fund investments. In addition, it also surveys some of the pitfalls that investors face when they try to make investment decisions using hedge fund data from commercial sources. Although hedge funds are often branded as a separate asset class, a point can be made that hedge fund managers are simply asset managers utilizing other strategies than those used by relative return (long-only) managers. The major difference between the two is the definition of their return objective: Hedge funds aim for absolute returns by balancing investment opportunities and risk of financial loss. Long-only managers, by contrast, define their return objective in relative terms. JEL: G1, G11, G12 Keywords: Hedge fund; Portfolio management I. INTRODUCTION Since the early 1990s, there has been a growing interest in the use of hedge funds among both institutional and private investors. (1) Due to their private nature, it is difficult to obtain adequate information about the operations of individual hedge funds and reliable summary statistics about the industry as a whole. Hedge funds are claimed to have been among the few bright spots in the investment world for the last two years. But just how well these alternative investment vehicles stack up against stocks, bonds, and mutual funds is difficult to gauge. This is because there is no generally accepted benchmark for measuring the performance of the nearly 6,000 hedge funds now operating around the world. Hedge funds are known to be growing in size and diversity. In practical terms, it is not easy to estimate the current size of the hedge funds industry unless all funds are regulated, or obligated to register their operations with a common authority. Brooks and Kat (2001) estimated that, as of April 2001, there are approximately 6,000 hedge funds with an estimated US$ 400 billion in assets under management and US$ 1 trillion in total assets. Three different features differentiate hedge funds from other forms of managed funds (e.g., mutual funds). Most hedge funds are small and organized around a few experienced investment professionals. In fact, more than half of the United States' hedge funds manage amounts of less than US$ 25 million. Furthermore, most hedge funds are leveraged. It is estimated that 70% of hedge funds use leverage and about 18% borrowed more than one dollar for every dollar of capital (Eichengreen and Mathieson (1998)). Another unique feature of hedge funds is their short life span. According to Lavino (2000), hedge funds have an average life span of about 3.5 years. Very few have a track record of more than 10 years. These features lead many investors to view hedge funds as "risky" and "opportunistic." But what exactly is the difference between traditional and absolute return investing? How did the hedge fund industry evolve? Which different types of hedge funds can be distinguished and what does their performance structure look like? Finally, what are the risks, returns, and pitfalls of investing in hedge funds? This paper will carefully examine these critical issues. It will introduce the reader to the basic elements of portfolio theory as well as the differences between long-only and absolute return funds. The focus lies on portraying what hedge funds are, the different types that exist, their history, and their performance structure. As mentioned before, it will also show advantages, disadvantages, and critical issues regarding hedge fund investing. II. THE DIFFERENCE BETWEEN LONG-ONLY AND ABSOLUTE RETURN FUNDS How does traditional portfolio management work? First of all, traditional long-only portfolio management can be divided into two groups: passive and active portfolio management. …

Foreign Exchange Market Efficiency: Fractional Cointegration Approach

Abstract: In the present study, we investigate the market weak efficiency hypothesis (MEH) in the case of the Tunisian exchange market. For this aim, we use fractional cointegration tests based essentially on estimation of an error correction bivariate ARFIMA model. The cointegration tests are conducted using spot and 1- month forward daily exchange rate of the Tunisian Dinar (TND) vis-a-vis the US dollar (USD), the Euro and the Japanese Yen (JPY) during the period between January 1999 and December 2003. For this, an error correction bivariate ARFIMA model (VECFM) was estimated. The results indicate evidence of fractional cointegration between the one-month forward rate and the spot rate relative to these parities (TND/USD) and (TND/Euro). JEL: F30, F31, G14 Keywords: Informational efficiency; Exchange rates; Standard cointegration tests; Fractional integration; Long memory; Bivariate ARFIMA model; Vectoriel error correction fractional model (VECFM) (ProQuest Information and Learning: ... denotes formulae omitted.) I. INTRODUCTION The informational efficiency of the foreign exchange market is a subject that has been a topic of renewed attention by empirical and theoretical analysis in the field of international finance. One of the reasons underlying the regeneration of interest in testing the efficient markets hypothesis (EMH) within the framework of the foreign exchange market lies in the importance of the role of this market in the determination of exchange rates particularly in a world economy characterized by an increasing integration. Consequently, the determination of the exchange rates is not simple, considering that they are today sensitive to any event affecting the domestic as well as the international markets. A second reason relates to the development of the practical and sophisticated time-series techniques, in particular those relating to the theory of cointegration often used to test the efficiency of the foreign exchange market. The objective of this study is to investigate the weak efficiency (Fama (1984, 1998) of the Tunisian foreign exchange market by means of fractional cointegration tests and estimation of an error correction bivariate ARFIMA model. This paper is organized as follows: we proceed initially by the presentation of some concepts relating to the theory of cointegration. A particular interest will be granted to the concept of fractional cointegration. For better clarifying this concept, we start with a presentation of the characteristics of ARFIMA processes before analyzing the interest of the taking into account of fractional integration by the tests of cointegration. A third section of this paper will be devoted to report the empirical investigations. II. THEORETICAL CONCEPTS A. The Cointegration The concept of cointegration is viewed as a long term equilibrium relationship which can be defined between nonstationary variables. This theory allows, in fact, specifying stable relations in the long run while jointly analyzing the short term dynamics of the considered variables. A definition of the concept of cointegration was presented by Granger (1981) and Granger and Weiss (1983) such as: The components of a vector X^sub t^ are said to be co-integrated of order, d, b, denoted X^sub t^ ~ CI(d,b) if : (1) Each series of X^sub t^ is integrated of order d noted x^sub jt^ [asymptotically =]I(d), and (2) There is a set of constants β^sub j^ such as: ... with d^sub z^=d-b and d^sub z^ Usually, in standard cointegration tests, studied series are considered to be nonstationnary in levels (I(1)), and the cointegrating linear combination is I(0). But this distinction between process I(1) or I(0) is arbitrary, since the conditions of cointegration stipulate only that the equilibrium error Z^sub t^ must be stationary. …

Should Global Rules Have Legal Teeth? Policing (WHO Framework Convention on Tobacco Control) vs. Good Citizenship (UN Global Compact)

Abstract: This study examines two multilateral initiatives, the World Health Organization's Framework Convention on Tobacco Control (FCTC) and the United Nations Secretary-General's Global Compact. These are two efforts to engage transnational corporations in the development process and in the articulation of a set of multilateral rules of engagement regarding good corporate behavior. The FCTC is more stringent and proscriptive, seeking to regulate corporate behavior. The second is an invitation to transnational corporations (TNCs) to cooperate voluntarily. The relative success of the two approaches is contingent on meeting seven parameters of legitimacy, and ultimately on the legal standing of the mechanism. JEL: E6, F0, F1, F2, F4, G3, H7, H8, I0, I1, I2, I3, K2, K3, K4, L1, L2, L4, L5, L6, M1, O1 Keywords: Globalization; Trade; Multinational (Transnational) corporation; International business; Marketing; Global corporate strategy; Economic growth; Government policy; Public health; International law; Illegal behavior and the enforcement of law; Antitrust policy and public enterprises; Tobacco; Corporate culture; Corporate social responsibility; Codes of conduct; United Nations; UN global compact; World Health Organization; Framework convention on tobacco control; Master settlement I. INTRODUCTION The literature on global strategy is generally silent or contradictory regarding the juxtaposition of corporate strategy and national policy (cf. Porter, 1985; Vernon-Wortzel, 1997; and Bartlett, Ghoshal, and Berkenshaw, 2004). Such scholarly work deals largely with corporate aspects, relegating the role of the external environment, and particularly government, to a secondary position (1). However, there is now on the policy plane a plethora of new initiatives at sub-national, national and international levels, and firms must take these into consideration when designing and implementing their corporate strategy. Navigating these national and international crosscurrents requires knowledge and a sense of responsibility on the part of firms and all stakeholders, including national policy makers and international organizations. One approach is the control by governmental bodies of tobacco's harmful effects. Spectacular successes have been achieved, thanks to the dogged determination of public officials in the United States--surgeons-general, state attorneys-general, and private attorneys. The story of how tobacco companies were called to task, how some came tumbling down, and how others survived and continue to prosper in a hostile environment makes a legendary chronicle. This paper suggests that the encounter between "big tobacco", governments, and international organizations, primarily the World Health Organization (WHO), is a triad within which groundwork for policy and strategy is laid. A second approach to resolving multilateral public policy problems is via appeal to voluntary corporate social responsibility. Over the past thirty years, myriad policy schemes have been proposed and promulgated with a view to enhancing global corporate compliance with laws, customs, standards and preferences of countries in which transnational corporations (TNCs) operate. These have ranged from corporate codes of conduct to industry standards, regional proclamations and international codes and guidelines. (2) The United Nations Secretary-General Kofi Annan's 1999 Global Compact stands at the pinnacle of these efforts due, in part, to his position as Secretary-General. II. THE CONCEPTUAL FRAMEWORK This is a comparative case study of two distinct UN policy initiatives--the World Health Organization's Framework Convention on Tobacco Control (FCTC) and the UN Secretary-General's Global Compact. Following Perlmutter and Sagafi-nejad (1981) and Sagafi-nejad and Perlmutter (2001) the seven "parameters of legitimacy" are used to assess the relative viability of the two approaches: 1) Desirability of the approach; 2) its feasibility; 3) intra-stakeholder consensus; 4) clarity of perception between stakeholders; 5) trust between stakeholders; 6) role legitimacy; and 7) legal status of the instrument. …

Global Diversification: Developed and Emerging Economies

Abstract: Within the strait jacket of diversification a la Markowitz and Roy efficient portfolio structures are first enunciated, and then within that generic structure of analytical framework benefits of diversification are studied for developed and emerging economies. The study attempts to examine the level of market segmentation/integration in the emerging markets of South-East Asia. It is found that opportunities for profit making exist for investors by appropriate diversification because the markets are largely segmented in the region. The returns are positively correlated with risk, but not significantly so. Non-market related factors appear more important in deciding the returns, thereby hinting at either a lack of beta's predictive capacity in a global context or operating inefficiencies in the business/economic mechanisms. JEL: G11, G15 Keywords: Equity diversification; Market segmentation/integration; Developed and emerging markets I. INTRODUCTION Diversification is the driver of portfolio selection, revision, and rebalancing of asset holdings. Since the classic works of Markowitz (1952), and Roy (1952), portfolio theory has become a fascinating area for examination, further insights and empirical studies for both academics and practitioners in view of risk, uncertainty and expectation. The research alluded to have the theoretical arguments for risk minimization at the core of the analytical examination or at the trade-off between return and risk of any portfolio. Markowitz mean-variance frontier brings out that trade-off structure. In yet another classic piece, Tobin (1958) derives the mean-variance locus with the additional insight on the choice of a risk-loving or risk-averting investor. The analysis of diversification highlighting the principle of safety first has initially been applied to domestic assets alone until Grubel (1968), Levy and Sarnat (1970, 1979), Solnik (1974), Losq (1979), Vaubel (1979), Friend and Losq (1979), among others, have brought diversification applied in the setting of international markets. Asset holdings in international capital markets certainly extend the efficiency envelope to the further benefits of investors. In all of the cited works and beyond, it is empirically established that international diversification reduces the risk. Essentially extending the methodology of Evans and Archer (1968), Solnik (1974) presents the following exhibits (Figure 1: a, b) and illustrates the relationship between risk for diversified U.S. stock portfolios vis-a-vis internationally-diversified stock portfolios of different sizes. [FIGURE 1 OMITTED] Table 1 shows that the proportion of the average common stock's total variance for each developed country selected which was un-diversifiable ranges from 19 percent in Belgium to 43.8 percent in West Germany. In other words, the average portfolio of domestic stocks achieved with only random diversification in Belgium has 19.0 percent as much risk as the typical individual stock traded in Belgium. Internationally diversified portfolio of randomly selected stock has only 11.7 percent as much variance as the typical individual stock. Here we see the effect of diversification as risk reducer, but the risk reduction is much higher in diversification across nations. In the work of Blume and Friend (1978) we observe that 66 percent of investors in NYSE with holding of one stock suffered loss compared to only 31 percent of the investors holding more than 20 securities. Lessard (1976) measures the following ratio of unsystematic risk to total risk (in percentage terms) in these domestic market portfolios after complete domestic diversification (Table 2): It is now evident that investors in United Kingdom can reduce 83 percent of risk by diversifying international, and Italy can eliminate 94 percent of its risk by the same method. Going further, Lessard further presents the betas of different domestic portfolios with world market, and then, on the basis of the security market line, calculates the difference in expected returns per annum between each national market portfolio and the portfolio of the same dispersion but with full international diversification. …

Volume, Volatility, and Periodic Closure with Information Uncertainty

Abstract: This paper investigates the effects of opening and closing on transactions demand, volume, and volatility of options prices and their underlying assets. We use an extension of the models in Merton (1971) as in Brock and Kleidon (1992), who consider a similar issue with respect to equity markets. The transactions demand at open and close in the underlying assets markets are studied in the presence of information costs using the main concepts in Merton's (1987) model of capital market equilibrium with incomplete information. As in other studies by Brock and Kleidon (1992), Smith and Webb (1994), Hong and Wang (2000), Bellalah and Zhen (2002), we show that periodic market closure leads to periodic changes in the demand for transaction services. We present some empirical work regarding the patterns in volume, volatility and spreads using a dataset for the Paris Bourse. The predictions of periodic demand with high volume at open and close in options markets and their underlying assets are consistent with other markets. They confirm also the more recent results in Hong and Wang (2000) and Bellalah and Zhen (2002). JEL: G1, G12, G13, G14, G15, F3 Keywords: Volume; Volatility; Periodic closure I. INTRODUCTION As in other markets, an options dealer or specialist in the Paris Bourse sets bid and ask spreads, provides immediacy and trades as a public in the underlying asset. The quote information disseminated to the public during the open period concerns the bid and offer prices. This information is no longer disseminated in the close period and there is an abrupt change from a regime of continuous trading to a regime of no trading. The question of how the trading behaviour at open and close is affected in stock markets is analyzed in Admatti and Pfeiderer (1988), Brock and Kleidon (1992), Smith and Webb (1994), Hsieh and Kleidon (1996), Hong and Wang (2000), Bellalah and Zhen (2002), etc. While these papers are interested only in stock markets, our work gives an answer to similar question simultaneously in options markets and their underlying assets markets. This work provides a model for market closure and tests some of its implications. There are several reasons why periodic trading demand shifts at the open and the close of the trading, most of which are based on the effect of the periodic inability to trade. We analyze some of these reasons and show that there is a greater demand to trade at open and close than at the other times of the trading day. The inability to trade modifies the optimal portfolio of investors. Investors engage expenses to collect, to analyze and get informed about the domestic and foreign markets. Therefore, information may play a central role in explaining the high demand to trade at market closure. This situation fits well with Merton's (1987) model of capital market equilibrium with incomplete information. Merton (1987) assumes that investors hold only securities of which they are aware. This assumption is motivated by the observation that portfolios held by investors include only a small fraction of all available traded securities. Following the work of Brock and Kleidon (1992), Merton (1971), Bellalah and Zhen (2002) and the foundations of Merton's (1987) model, we investigate the implications of the discontinuity in trading regimes in the presence of incomplete information. We extend the model in Brock and Kleidon (1992) to allow for the periodic market closures by showing an increased and less elastic demand to trade at these points in time. Our analysis accounts for the shadow costs of incomplete information in the spirit of Merton (1987) (1). The extended model implies higher transactions demand at open and close, confirming the higher volume around closure. Using a new data set, our empirical evidence gives some support to the implications of the model. In particular, we find that volume traded in the MONEP (Marche des Options Negociables de la Bourse de Paris) is concentrated at open and close. …

Portfolio Management with Safety Criteria in Complete Financial Markets

Abstract: We examine portfolio asset management under safety constraints that control the probability that the portfolio return falls under a given reference level. We extend previous results of Roy (1952) and Kataoka (1963) that have been proved in a oneperiod setting to both multiperiod discrete-time and continuous-time models. Basic examples illustrate the results. JEL: C 61, G 11

Measuring Transparency of Corporate Transitional Performance in Egypt: A Quantitative Approach

Abstract: This paper develops a model to quantify the major aspects of the privatized public enterprise transitional performance. The paper expands the literature on corporate performance to address the various factors that should be taken into account for monitoring the performance of the public enterprises considered for privatization. The paper incorporates measures adopted from the literature of corporate strategy, corporate governance, corporate finance, and international business. By using discriminant analysis, this paper develops a Z model that can be used for structuring the public enterprise transitional performance in Egypt as a developing transition economy. The results conclude that transparency of public enterprise transitional performance is determined by three dimensions, which are: (1) Measures of alternative corporate governance structures, (2) Measures of company's competitive position, and (3) Measures of the risk of financial transformation. JEL: L33, C30 Keywords: Public enterprise; Privatization; Transitional performance; Z score model; Egypt I. INTRODUCTION The institutional infrastructure in the developed economies has provided the literature relatively common measures of corporate performance. As for the transitional developing countries, the weak economic infrastructure does not help to adopt certain measures of corporate performance. In addition, the transition state requires studying public enterprise performance from many angles. According to a theory of privatization developed by Boycko et al., (1996), the dominant motive of privatization is the political control of public enterprise performance which has resulted in clear inefficiency. The theory explains public enterprise inefficiency through the politicians' tendency to obscure the true public enterprise performance through subsidies to protect their political interests: e.g., votes of the people whose jobs are in danger. For this reason, there is a need to monitor public enterprise performance in a stage of transition in order to assess their true capabilities taking into account that transitional developing countries lack enough resources that can subsidise public enterprise inefficiencies (1). The effective monitoring can come into place through conveying certain information to the stakeholders whose interests are tied up to the public enterprises performance. Examples of those stakeholders are individual shareholders, managers, employees, banks, corporations, domestic residents and foreigners (World Bank, 1988). The type of information to be conveyed is another important issue. Transitional developing countries lack the necessary infrastructure that supports the efficient market hypothesis (Stiglitz, 1990). The stock prices, therefore, do not reflect the true value of the public enterprises and cannot be used as an effective monitoring tool. In this regard, the type of information conveyed is to help resolving the challenge to economic analysis of privatisation (Vickers & Yarrow, 1991). In this sense, the model developed in this paper is to help monitoring and determining the critical factors of corporate performance that call for privatizing it. II. PRIVATIZED CORPORATE PERFORMANCE: A REVIEW Privatization has extended the literature on corporate performance to investigate the effects of changes in corporate capital and ownership structures on corporate performance. The literature on corporate performance in the developed countries helped a lot in understanding the credibility and validity of privatization programs. To that end, the issue of what determines privatized public enterprise performance in developing countries arises. Privatization programs in developing countries have been characterized by certain aspects that are different from corporate transformation. Many of the developing countries, particularly those with relatively low per capita income, lack the strong infrastructure for viable financial resources and competent managers (Vernon-Wortzel & Wortzel, 1989). …

An Empirical Study of Net Assets Disclosure: Inflation Accounting Revisited

Abstract: This paper analyzes the differences in methods of calculating and disclosing net assets between Statement of Financial Accounting Standards #33 (FAS33) and other existing current cost and constant dollar methods. Furthermore, this paper provides empirical evidence on the methods employed by a sample of 78 companies that calculate net assets for FAS33 reporting. We found there are many methods being applied to determine net assets. The lack of uniformity reduces the effectiveness of net assets disclosure required by FAS33. This study demonstrates that the Financial Accounting Standards Board should issue statements that are more well-defined and less ambiguous about preferred net asset disclosure methods. JEL: M41 Keywords: Owner's equity; Net assets; FAS 33; Constant dollar method; Current cost method I. INTRODUCTION The primary objective of net assets reporting is to provide useful information about net assets to those who are interested in it. More specific objectives can be found in FASB Statement of Financial Accounting Concepts No. 1: "Financial reporting should provide information about an enterprise's economic resources, obligations, and owner's equity. That information helps investors, creditors, and others identify the enterprise's financial strengths and weakness and assess its liquidity and solvency.--also provides a basis for investors, creditors, and others to evaluate information about the enterprise's performance during a period.--provides direct indications of the cash flow potentials of some resources and of the cash needed to satisfy many, if not most, obligations" (para. 41, underlining added) To make net assets disclosure useful, comparability of accounting information is essential. Comparability is one of the characteristics of information addressed in FASB Statement of Financial Concepts No. 2 that make it useful, and is one of the qualities considered when accounting choices are made. Comparability of accounting information enables users to identify and to explain the differences or similarities between two or more sets of economic facts. Differences and similarities in economic facts can be obscured by the use of incomparable accounting methods. In the United States, the first statement issued by FASB that set the standard for reporting the effects of inflation on business enterprises was Statement of Financial Accounting Standards No. 33 (FAS33), Financial Reporting and Changing Prices, in 1979. FAS33 required certain companies to disclose supplementary information on both a current cost basis and on a constant dollar basis. However, it was felt that the guidelines were not sufficiently focused so that the disclosure of supplemental information would have become standard. One of the main areas of concern was the determination of net assets. There appeared to be many interpretations of FAS33 on the measurement of net asset amounts after the effects of changing prices have been taken into account. In 1986, a time when the U.S. economy was experiencing little inflation, FAS33 was superseded by Statement of Financial Accounting Standard No. 89, Financial Reporting and Changing Prices (FAS89). FAS89 made the supplementary disclosure of current cost and constant dollar information voluntary. However, with crude oil prices surging past an unprecedented $55 a barrel in the fall of 2004 and oil prices more than 70 percent higher than the previous year, it might be time to re-examine the impact of price changes on net assets disclosure. This study has two purposes, which are: (1) to examine the nature of differences in net asset figures between the current cost and constant dollar methods, and (2) to use FAS33 financial reporting information to study the comparability of net asset disclosures. Section II will deal with the relationship between price changes and net assets disclosure using the constant dollar and current cost methods. …

On Portfolio Analysis, Market Equilibrium and Corporation Finance with Incomplete Information

Abstract: This paper presents a new derivation of the Modigliani and Miller (1958, 1963, 1966) propositions using the simple model of capital market equilibrium with incomplete information presented in Merton (1987). The model is used to relate the maximization of stockholder expected utility to the selection of assets and to the financing and investment decisions within firms in a context of incomplete information. Expressions of the cost of capital are presented with and without corporate taxes in the presence of shadow costs of incomplete information. JEL: G11, G12, G31, G32 Keywords: Incomplete information; Cost of capital; Arbitrage I. INTRODUCTION The effects of uncertainty in financial and economic decision making have been studied without an explicit treatment of the implications of information uncertainty. The main conceptual frameworks are provided first by Modigliani and Miller, MM, (1958, 1963,1966). These authors develop a homogenous risk-class concept in order to eliminate the need for a general equilibrium model. Markowitz (1952), Sharpe (1964), Limner (1965) and Mossin (1966) provide a basis for making investment decisions using the market model or the capital asset pricing model. Hirshleifer (1964, 1965, 1966) provides a time-state preference approach to prove the Modigliani and Miller, MM no-tax proposition I. Unfortunately, this last approach does not lead to practical decision rules for capital budgeting within the firm. This paper derives the three MM Propositions using Merton's (1987) model of capital market equilibrium under incomplete information. The use of Merton's (1987) model is motivated by the increasing importance of information and its role in the process of valuation of firms and their assets. An important question in financial economics is how frictions affect equilibrium in capital markets since in a world of costly information, some investors will have incomplete information. As in Hamada (1969), this approach avoids the arbitrage proof in MM, the risk class assumption. The new derivation follows the analysis in Hamada (1969). A model is used relating the maximization of stockholder expected utility to the portfolio selection to, the financing and investment decisions in the corporation. This analysis provides a link between two branches of finance. Differences in information are important in financial and real markets. They are used in several contexts to explain some puzzling phenomena like the "home equity bias", the "weekend effect", "the smile effect", etc. Kadlec and McConnell (1994) conclude that Merton's shadow cost of incomplete information, reflects also the elasticity of demand and that it may proxy for the adverse price movement aspect of liquidity.(footnote 19, page 629). Foerster and Karolyi (1999) construct an empirical proxy for the shadow cost of incomplete information for each firm, using the methodology in Kadlec and McConnell (1994). Their results are supportive of the Merton (1987) hypothesis and consistent with Kadlec and McConnell (1994). There is a main difference between Merton's (1987) model and the model in Peress (2000). In both models agents spend time and resources to gather information about the security's payoff, but in Merton's model investors are not all aware of the existence of the security but, if they are, they have information of the same quality. Merton (1987) advances the investor recognition hypothesis in a mean-variance model. This assumption explains the portfolio formation of informationally constrained investors (ICI). The investor recognition hypothesis (IRH) in Merton's context states that investors buy and hold only those securities about which they have enough information. Merton (1987) adapts the rational framework of the static CAPM to account for incomplete information. Increasing empirical support for IRH-consistent behavior appeared in Falkenstein (1996), Huberman (1999), Shapiro (2000) among others. …

Implications of the General Agreement on Trade in Services (GATS) for Trinidad and Tobago's Financial Policy

Abstract: The January 1st, 1995, General Agreement on Trade in Services (GATS), which entered into force in March 1999, is intended to bring about complete liberalization of international trade in all services, the largest and fastest growing component of such trade. This includes the financial services sector. Financial liberalization can generate a number of benefits, including services specialization, economies of scope, economies of scale in technology acquisition, a reduction of systemic risk, and improved risk management. However, in the case of small island developing countries, as with those in the Caribbean, a number of risks are evident, including adverse selection, increased moral hazard, and decreasing loan quality. This research focuses upon the nature of the financial policy framework required in the Republic of Trinidad and Tobago, in order to limit the dangers and enhance the benefits arising from international financial policy liberalization. JEL: F30, F39, F41, G15, G28 Keywords: Financial policy; Risk management; Liberalization; Economic growth I. INTRODUCTION International trade is playing an increasingly important role in the financial services sector of many countries; principally through cross border transactions and expanding levels of foreign direct investment. (1) As global economic activity increases, the need for risk management has also become more urgent. With globalization, market liberalization and enhanced technology, there are expanded opportunities for trade in financial services. The Uruguay Round of trade negotiations placed on the front burner, issues such as competition policy, intellectual property rights and rights of establishment, thus increasing the need for participating countries to have healthy and efficiently operating financial sectors. The January 1, 1995 General Agreement on Trade in Services (GATS) was intended to facilitate the expansion of services sector trade. Since participating countries are required to either entirely reject or accept all agreements, accession therefore implies the need to work within GATS guidelines and principles, when engaging in trade in services. If GATS has generated new opportunities, it has also encouraged reform, especially among developing country enterprises. However, such countries are challenged by special constraints, in meeting the rules and obligations of GATS. For instance, banking sectors can require increased regulation, with financial market liberalization. Mishkin (1996) notes that if there were not an effective financial system in place prior to the implementation of a financial liberalization program, an eventual financial market collapse could well succeed a lending boom, characterized by adverse selection, moral hazard and the poor quality of loans. This paper focuses on the GATS because of the growing importance of international trade in services. (2) Our research examines the nature of the financial policy framework required in Trinidad and Tobago, in order to limit the dangers and enhance the benefits arising from international financial policy liberalization. In the sections that follow, we summarily discuss the principles of GATS; the net advantages of GATS for the Caribbean; the benefits and costs of financial liberalization; financial intermediation and economic growth; trends through the year 2003 in Trinidad and Tobago's economy and financial sector; and the impact of GATS upon the Republic's economy. The conclusion offers a number of policy recommendations. II. GATS PRINCIPLES The architecture of the GATS is based upon three main pillars: (a) A framework agreement, premised on the general principles of liberalization, (b) Sector-specific annexes, addressing issues such as: * The movement of natural persons * Maritime transport services * Financial services * Air transportation services * Telecommunications services (c) National schedules where governments present their positions regarding market access, national treatment and other service sector commitments, in accordance with specific supply modes (Weiss, 1995). …

Regulatory Changes in the Pharmaceutical Industry

Abstract: In August of 1997, the Food and Drug Administration (FDA) set new less restrictive guidelines for direct-to-consumer (DTC) advertisements by pharmaceutical companies. I examine the common stock price reaction of pharmaceutical companies following the announcement of new FDA guidelines on advertising. Positive announcement effects are found for the pharmaceutical industry following the FDA announcement. Evidence suggests that innovative firms emphasizing research and development (R&D) are more likely to capitalize on DTC advertising and benefit the most from the less restrictive guidelines of the FDA regarding DTC advertisements. JEL: G18, L50, L65