Interdependence and dynamic linkages between the emerging stock markets of South Asia

The present article examines the dynamic linkages between the stock markets of Bangladesh, India, Pakistan and Sri Lanka using a temporal Granger causality approach by binding the relationship among the stock price indices within a multivariate cointegration framework. We also examine the impulse response functions. Our main finding is that in the long run, stock prices in Bangladesh, India and Sri Lanka Granger‐cause stock prices in Pakistan. In the short run there is unidirectional Granger causality running from stock prices in Pakistan to India, stock prices in Sri Lanka to India and from stock prices in Pakistan to Sri Lanka. Bangladesh is the most exogenous of the four markets, reflecting its small size and modest market capitalization.     

Financial restatements and Sarbanes–Oxley: Impact on Canadian firm governance and management turnover

Canadian firms have different roots (e.g., more concentrated ownership and smaller size) than U.S. firms and Canadian regulatory enforcement follows a different route (principle- versus rule-based) that embodies the underlying intent of Sarbanes–Oxley (SOX). Financial restatements are more likely when Canadian firms have lower blockholder or management ownerships, lower proportions of unrelated directors, no financial savvy audit committee members and are not audited by prestigious auditing firms. To signal that they are dealing with the impact of agency problems on cash flow uncertainties, restating firms exhibit significantly higher turnovers of CEOs, CFOs and external auditors post-restatement, and they converge towards control-group governance post-restatement by making changes to the identified determinants of financial restatement likelihood. Consistent with prior results for U.S. firms, SOX had a small (extraterritorial) impact on the likelihood of post-restatement turnovers of management and other corporate overseers for Canadian restating firms.     

Corporate Governance and Development

The literature shows that good corporate governance generallypays—for firms, for markets, and for countries. It isassociated with a lower cost of capital, higher returns on equity,greater efficiency, and more favorable treatment of all stakeholders,although the direction of causality is not always clear. Thelaw and finance literature has documented the important roleof institutions aimed at contractual and legal enforcement,including corporate governance, across countries. Using firm-leveldata, researchers have documented relationships between countries’corporate governance frameworks on the one hand and performance,valuation, the cost of capital, and access to external financingon the other. Given the benefits of good corporate governance,firms and countries should voluntarily reform more. Resistanceby entrenched owners and managers at the firm level and politicaleconomy factors at the level of markets and countries partlyexplain why they do not.      

REFORMING FINANCE IN TRANSITIONAL SOCIALIST ECONOMIES

Financial reforms initiated in most transitional socialist economiesdo not yet adequately provide many of the financial servicesassociated with market-oriented financial systems. Such services—mobilizingresources, selecting firms and allocating capital, monitoringfirm managers, and facilitating the management of transactionsand risk—are a necessary condition for economic reformto improve living standards. This article envisages four central strategies to guide reformof the financial sector: • Building an infrastructure based on clear and enforceableproperty rights, modern accounting and auditing standards, reliablepayments systems, sound prudential and enforcement regulations,and professionals trained in finance • Ending the shell game of trying to hide the losses ofstate-owned enterprises, and separating government decisionsto finance "priority" firms from the allocation decisions ofindependent financial institutions • Privatizing some financial institutions early—althoughnot necessarily precipitously—in concert with the privatizationof firms and supervisory capabilities, meanwhile cleaning upbank loans to maximize the chances that firms and banks willsucceed as private entities • Improving the tax system and stressing a prudent interestrate policy to reduce uncertainty, distortions, and excessiverepression of the financial sector.      

Growth and Equity in Developing Countries: A Reinterpretation of the Sri Lankan Experience

In the important debate between the proponents of direct (basicneeds) and indirect (economic growth) measures of promotingwelfare, Sri Lanka has frequently been cited as one countrywhich has successfully pursued the direct approach—ithas raised living standards without much cost in terms of reducedgrowth. This conclusion, however, is based on analyses whichdo not account for the initial conditions of the countries beingcompared. After methodologically incorporating these concerns,neither the improvement in living standards nor the 2.0 percentper capita growth rate during the period of direct policy measures(1960–78) was exceptional. In contrast, during the periodof more indirect growth-promoting policies (1977–84),(i) economic growth more than doubled to an average rate of4.3 percent per capita per annum; (ii) expenditure inequalitydid not significantly change; (iii) consumption expendituresof the population, and the poor, generally increased; and (iv)several living standard indicators continued to improve.     

Worldwide reach of short selling regulations

We characterize legality and incidence of short selling in a worldwide, multimarket framework. Home country short selling restrictions curtail home market stock borrowing by 45% and reduce short selling of the country's American Depository Receipts (ADRs) by 68% due to regulatory reach. Also, the 2008 US ban on short selling of financial firms reduced borrowing in foreign locations. These findings are robust to controls for option availability, enforcement, returns, firm size, trading volume, dividends, ADR level, volatility, days-to-cover, and industry sector. Further, we show that investor conduct resulting from adherence to professional standards is a more powerful mechanism of regulatory reach than intergovernment cooperation.     

The short-run underpricing of initial public offerings in the Sri Lankan stock market

This study investigates underpricing of IPOs in Sri Lanka. On average, IPOs are underpriced by 34%. Small issues are more underpriced than large issues, and privatization issues are more underpriced than conventional issues. Investor sentiment is positively related with underpricing and affects small and large issues similarly. Small privatization issues are more underpriced than large privatization issues and partially explain the asymmetry in underpricing between small and large issues. However, even after controlling for investor sentiment, privatization, hot-market conditions, underwriter-size, and industry, small issues remain more underpriced than large issues. The results strongly support the uncertainty hypothesis for larger underpricing of small issues, and privatization issues.     

The Valuation Impact of SEC Enforcement Actions on Nontarget Foreign Firms

This study shows that the Securities and Exchange Commission's (SEC) enforcement intensity toward the foreign firms under its jurisdiction has increased dramatically over the past two decades. Because enforcement events signify an increased threat of future enforcement, I examine the stock returns of foreign firms not targeted by the SEC during windows around enforcement actions that target foreign firms. This design captures the net effects of public enforcement and helps to rule out omitted variables as alternative explanations, because other factors would have to align with enforcement events that do not occur in an obvious pattern (and are therefore unlikely to map onto other news). Nontarget firms experience positive stock returns during the event windows, which is consistent with enforcement constraining the risks of expropriation. The cross‐sectional pattern in returns reveals greater returns for firms from weak home legal environments. Finally, consistent with the market adjusting to a new enforcement regime, the magnitude of event returns declines over time. Overall, SEC enforcement is associated with increases in the value of foreign firms, supporting the premise of the legal bonding hypothesis.     

斯里兰卡社会福利探析

摘要：尚属发展中国家的斯里兰卡向民众提供了项目丰富的社会福利,降低了民众的生存风险,同时也为经济发展提供了优质的人力资源。普选、福利刚性、宗教和意识形态等都是深刻地影响着斯里兰卡的社会福利。囿于经济发展水平和政府财力,斯里兰卡的社会福利供给方面也存在某些不足。在今后转变经济增长方式的过程中,斯里兰卡应该更加重视社会福利建设,实现社会福利和经济发展的良性互动。     

PRODUCER TURNOVER AND PRODUCTIVITY GROWTH IN DEVELOPING COUNTRIES

The reallocation of resources, either across sectors or acrossproducers within a sector, can serve as a potential source ofproductivity growth. New research findings exploit comprehensivemicroeconomic data on the manufacturing sectors of Chile, Colombia,and Morocco to document resource shifts as producers enter,expand, contract, and exit operation. The micro-level adjustmentis substantial; between 25 and 30 percent of the total numberof manufacturing jobs turn over each year. In the short run,the productivity effects of this turnover are modest becausethe new plants that come on line are only slightly more productivethan the ones they replace—and both are typically small.In the longer term, however, the turnover generates more substantialincreases in productivity because the new firms that surviverecord substantial productivity gains in their early years.Moreover, firms that exit are typically on a downward productivityspiral and would probably have dragged down sectoral efficiencyfarther if they had continued in operation.      

Ownership and Performance in a Lightly Regulated Environment

This article examines the relation between ownership and performance for New Zealand electricity lines firms over the period 1998 to 2006. The sample is of interest because it represents all firms within a single product industry (local electricity distribution), which is a natural monopoly subject to a light‐handed regulatory regime. Thus we are able to examine the theories of ownership on performance, while controlling for regulation, industry, product market competition, accounting methods and other factors that might impact profitability, such as network reliability and network density. The results suggest that listed firms have similar profitability to council‐owned firms and both listed and council‐owned firms outperform trust‐owned firms. The likely reason for the poorer performance of trust‐owned firms is that they have different agency costs than listed and council‐owned firms and the trustees have lower responsibility than directors. Hence, they have lower incentives to be profitable.     

Motivations behind human capital disclosure in annual reports

Although much has been discussed about voluntary disclosure of human capital in annual reports there has been limited examination of the motivations behind such disclosure. This study uses the perspective of the political economy of accounting to understand motivations. Using the method of content analysis, this paper examines human capital disclosure practices in annual reports of a sample of firms in Sri Lanka, a developing nation. Eleven case study interviews from the sample explore the motivations behind the disclosure practices of firms. Findings reveal that firms use disclosure to reduce tension between firms and their constituents, in the interest of further capital accumulation.     

Value relevance of the new environmental enforcement regime in China

Curbing environmental pollution has become a key priority in China, as reflected in the adoption of policies such as “New Normal” and the takeover of regulatory environmental enforcement by the top leadership of the central government in 2015. In this paper, we use a dataset of publicly-traded firms in the Shanghai and Shenzhen stock exchanges and the event study methodology to gauge the reaction of the investor class to the new environmental enforcement regime. Our results indicate that, together, the announcement and implementation of the new enforcement regime spurred a significant decline of over $29 billion in shareholder value of polluting companies, suggesting that capital market participants expect increased regulatory costs for targeted companies. We also find that neither political connections nor firm size mitigated the severity of the market losses. Instead, larger firms and state-owned enterprises with excess capacity experienced bigger declines in market value.     

Sri Lanka: Futures beyond conflict

Not so long ago, Sri Lanka was stereotypically portrayed as a stable, model democracy inhabited by friendly and fun-loving natives; a place in the sun reserved for enjoyment; an oasis in the so called (poverty and disease ridden) ‘Third World’; a virtual paradise for tourists and natives alike. In reality, Sri Lanka has seen the burgeoning of revolutionary struggles and nationalist fervour, from putschist attempts to capture state power to liberation and self-determination. The author argues that it is the model of parliamentary democracy that is largely responsible for the ethnic violence and bloodshed on this island. It ensured the rise of the post-colonial political élite who then ensured that all the hegemonic tendencies of colonialism were preserved and entrenched. It is imperative for shaping viable futures for Sri Lanka that a new ethics and moral code of good governance—which includes transparency in government and politics—is initiated.     

The environmental disclosures of the electricity generation industry: a global perspective

The electricity generation industry has been under close regulatory and public scrutiny for decades for the significant impacts its activities have on the environment. The industry is responsible for a large proportion of greenhouse gas (GHG) emissions, which has intensified public and regulatory scrutiny of late. Therefore, electricity generation firms face immense pressure to show environmental responsibility. Firms respond with environmental disclosures in their annual reports, in stand-alone-reports, and on websites. In this study, we use comprehensive disclosure indices to measure the quality (or comprehensiveness) of the CO₂ emissions related disclosure and the overall environmental disclosure of 205 electricity generation firms in 35 countries. We find that firms in countries with a high commitment towards the environment and a carbon emissions trading scheme (measures of social concern for environmental protection and emissions), are likely to disclose more comprehensive environmental information. In addition, we find that firm size, age of the assets, listing status, and media exposure influence disclosure. Environmental performance, measured by CO₂ emissions, is not significantly related to environmental disclosure among our sample firms. The theoretical implication of these findings is that social beliefs (that are different in different countries) prompt a legitimating disclosure response from firms that is not significantly affected by their performance against that social belief.     

Trading Arrangements and Industrial Development

This article outlines a new approach for analyzing the roleof trade in promoting industrial development. It offers an explanationas to why firms are reluctant to move to countries with lowerlabor costs and shows how trade liberalization can change theincentives for firms to locate in developing countries. It modelseconomic development as the spread of concentrations of firmsfrom country to country. Different trading arrangements mayhave a major impact on this development process. By changingthe attractiveness of countries as a base for manufacturingproduction, they can potentially trigger—or postpone—industrialdevelopment. The analysis shows that unilaterally liberalizingimports of manufactures can promote industrialization but thatmembership in a preferential trading arrangement is likely tocreate larger gains. South-South preferential trading arrangementswill be sensitive to the market size of member states, whileNorth-South arrangements seem to offer better prospects forparticipating southern countries, if not for excluded countries.     

Equity market valuation of human capital and stock returns

We investigate whether and how well firms’ stock market valuations reflect their employees’ collective skills and effectiveness relative to that of their industry peers and competitors. We devise a relative stock market valuation measure of human capital intangibles (EVHC) and find that portfolios of low EVHC firms systematically outperform portfolios of high EVHC firms by an average 1.34% per month. However, this is primarily a small firms effect, because for large firms the excess returns of the arbitrage portfolio that is long on the low EVHC stocks and short on the high EVHC stocks is zero. Our results suggest that reliance on human capital intangibles may proxy for risk not fully accounted for by conventional asset pricing models, or alternatively, that the market cannot correctly price human capital intangibles for small size firms.     

Unintended Consequences of Granting Small Firms Exemptions from Securities Regulation: Evidence from the Sarbanes‐Oxley Act

This paper provides evidence about the unintended consequences arising when small companies are exempted from costly regulations—these firms have incentives to stay small. Between 2003 and 2008, the SEC postponed compliance with Section 404 of the Sarbanes‐Oxley Act of 2002 (SOX) for “non‐accelerated filers” (firms with public float less than $75 million). We hypothesize and find that some of these firms had an incentive to remain below this bright line threshold. Moreover, we document that these firms remained small by undertaking less investment, making more cash payouts to shareholders, reducing the number of shares held by non‐affiliates, making more bad news disclosures, and reporting lower earnings than control firms. Finally, there is no evidence that firms remaining small are doing so to maintain insiders' private control benefits. These findings have implications beyond SOX because numerous federal and state regulations exempt small firms via bright line size thresholds.     

Do Small‐Group Health Insurance Regulations Influence Small Business Size?

State small‐group health insurance reforms, implemented in the 1990s, aimed at controlling the variability of health insurance premiums and to improve access to health insurance. These reforms only affected firms within a specific size range, and as a result, they may have affected the size of small firms around the legislative threshold and may also have affected the propensity of small firms to offer health insurance. We examine the relationship between small‐group reform and firm size and find evidence that small firms just below the regulatory threshold that were offering health insurance grew in order to bypass reforms.     

Nominal uncertainty,real uncertainty and macroeconomic performance in a time-varying asymmetric framework: Implications for monetary policy

This study examines the dynamic causal links and volatility spillovers of inflation, output growth and their uncertainties in four South Asian countries, namely, Pakistan, India, Bangladesh and Sri Lanka by utilizing asymmetric GARCH family models. Our empirical evidence supports a number of important conclusions. There is an overwhelming support for Friedman-Ball hypothesis of positive inflation-uncertainty trade-off for all countries excluding India and Sri Lanka. The Cukierman-Meltzer’s idea that inflation uncertainty generates inflation, hold for Bangladesh and Sri Lanka only and the Holland’s hypothesis of negative influence of inflation uncertainty on level inflation is supported by India only. The positive influence of output uncertainty on inflation (Devereux (1989) hypothesis) is supported by all countries excluding Bangladesh while nominal uncertainty (real uncertainty) has negative (positive) effect on output growth in Pakistan (Bangladesh). Output growth is reducing real uncertainty in all countries excluding Sri Lanka and nominal uncertainty in Pakistan only. There is significant negative relationship between inflation and output growth for Pakistan only while real uncertainty is positively (negatively) related with nominal uncertainty in India (Bangladesh). The estimated results are almost robust with the simultaneous estimation procedure for testing the main hypotheses. In general, there is asymmetric effect and persistence of the GARCH parameters for all countries. The study suggests that the concerned central banks should pay more attention to the effects of macroeconomic uncertainty and should focus their monetary policy strategy on stabilizing both output growth and inflation.