Security Markets versus Bank Finance: Legal Enforcement and Investors' Protection

When minority investors’ rights are poorly protected, the ability of firms to raise equity capital is impaired, leading to less finance for new ventures. Fewer firms will be financed with outside equity, resulting in a low market capitalization relative to GNP. External funding requires easily enforceable claims such as debt or requires long‐term relationships with institutions. Provision of funding shifts from risk capital to debt, and to a predominance of intermediated over market finance. We report supporting evidence for a few countries. To measure investor protection, we use a price measure, the premium on voting stock, related to the control premium. In countries where the voting premium is large, corporate financing is dominated by bank lending and equity markets are much smaller.     

Regional and global spillovers and diversification opportunities in the GCC equity sectors

This paper examines the international diversification benefits of bloc-wide equity sectors in the oil-rich Gulf Cooperation Council (GCC) countries by comparing alternative spillover models that encompass local, regional and global factors. Some GCC-wide equity sectors/subsectors are found to display segmentation from global markets during periods of high and extreme market volatility, and thus can serve as safe havens for international portfolio investors during such periods. The in- and out-of-sample portfolio analyses further suggest that supplementing global portfolios with positions in the GCC markets yields significant international diversification benefits, consistently offering much improved risk-adjusted returns across the alternative spillover models.     

The Changing Role of Financial Stress,Oil Price,and Gold Price in Financial Contagion among US and BRIC Markets

The objective of this paper is to explore the determining factors behind financial contagion between US and BRIC (Brazil, Russia, India, and China) equity markets. To this end, we investigate the effects of global macroeconomic factors on the time‐varying correlations among these markets obtained by asymmetric dynamic conditional correlation method. Utilizing quantile regression analysis, we examine the determinants of financial contagion at different levels of time‐varying correlations. The results of quantile regression analyses reveal that global financial crisis (GFC) (2008) leads to changes in the dependence structure between dynamic conditional correlations among equity markets and global macroeconomic factors, such as global financial stress, oil prices, and gold prices. Following the GFC, monetary, and fiscal policy changes in the BRIC markets and hence changing macroeconomic risks of these markets are conducive to these changes. Our findings also demonstrate the importance of cross‐market rebalancing channel for information transmission across US and BRIC markets.     

Examining the Role of Brand Equity in Business Markets: A Model,Research Propositions,and Managerial Implications

ABSTRACT

This paper presents a model of brand equity for business markets. It is argued that the potential benefits of branding and brand equity development have been neglected in business markets and that a general model and stream of relevant empirical research could be useful to managers in business markets depending on the situational nature of their market and competitive structure. The model adapts and extends existing brand equity literature to reflect the unique aspects involved in a business-to-business marketing context. The model developed considers marketing strategies as antecedents, two different classes of moderator variables, brand equity as a perception by the buyer or the market, a series of consequences of brand equity perceptions, and perceived risk as a moderator of the brand equity-consequences relationship. Propositions have been defined and discussed to help facilitate research and provide guidelines for industrial marketing managers.     

Trade‐related Job Loss,Wage Insurance and Externalities: An Ex Ante Efficiency Rationale for Wage Insurance

The extension of adjustment assistance to those who have suffered trade‐related job displacement is widely supported on both sides of the economics of globalisation debate. The form that such assistance should take, namely wage insurance, is also the subject of wide agreement. Nevertheless, the formal economic rationales offered for such a policy are varied, including political economy arguments, equity arguments and market failure/ex post efficiency arguments. This note proposes an ex ante efficiency‐based rationale for the provision of adjustment assistance in the specific form of wage insurance. Job displacement imposes pecuniary externalities on displaced workers, which, in a complete markets setting, induce only shifts along the ex ante Pareto‐efficient frontier. However, when markets are incomplete, pecuniary externalities become welfare‐relevant. Without the possibility of diversifying or hedging the risk of pecuniary external diseconomies of job displacement using contingent claims, welfare is reduced ex ante. Wage insurance – whether publicly underwritten, privately underwritten (as in Shiller's (2003 ) ‘livelihood insurance’), or supplied on a mixed public/private basis – completes the market for contingent claims, allowing workers to diversify or hedge the risk of trade‐related pecuniary external diseconomies. By facilitating risk sharing, wage insurance removes an impediment to ex ante Pareto efficiency. Moreover, wage insurance affects not only post‐displacement behaviour by increasing the incentive to reacquire employment quickly, but it also affects pre‐displacement consumption and investment behaviour, in particular, lowering the threshold at which workers will be willing to undertake irreversible investment in industry‐specific skills.     

Consequences of the halloween nightmare: analysis of investorsõ response to an overnight tax legislation change in the canadian income trust sector

On October 31, 2006, the Canadian federal government announced increased taxation of income trusts, beginning in 2011. Using discounted cash flow analysis, we investigated timing of the market adjustment. Energy, utility, and business trust prices dropped by predicted amounts, indicating a rational market response. Following the announcement, however, affected sectors reacted differently: Energy and utility trusts were more likely to merge within their sectors while business trusts became private equity targets. The income trust case is a classic example of a natural event, and our results underscore the efficiency of Canadian capital markets. Copyright © 2010 ASAC. Published by John Wiley & Sons, Ltd.     

Liquidity and stock returns in emerging equity markets

Using data for 27 emerging equity markets for the period January 1992 through December 1999, we document the behavior of liquidity in emerging markets. We find that stock returns in emerging countries are positively correlated with aggregate market liquidity as measured by turnover ratio, trading value and the turnover–volatility multiple. The results hold in both cross-sectional and time-series analyses, and are quite robust even after we control for world market beta, market capitalization and price-to-book ratio. The positive correlation between stock returns and market liquidity in a time-series analysis is consistent with the findings in developed markets. However, the positive correlation in a cross-sectional analysis appears to be at odds with market microstructure theory that has been empirically supported by studies on developed markets. Our findings regarding the cross-sectional relation between stock returns and liquidity is consistent with the view that emerging equity markets have a lower degree of integration with the global economy.     

Are green bonds priced lower than their conventional peers?

The green bond market's rapid growth has alerted issuers and investors to this sustainable area of investment. This study ascertains whether green bonds are priced lower than conventional bonds—whether a negative green bond premium exists in both Chinese and global bond markets—and the driving forces behind any such green bond premium. First, an event study is set up to observe stock market's reaction upon issuance of green bonds to test whether green bonds are embedded with additional value by improving the issuer's equity market performance. Then, using the matching method and a two-layer regression process, the study estimates the green bond premium in the Chinese and global markets, respectively, and analyses factors affecting the green bond premium. The event study reveals that green bond issuance could reduce the issuer's equity return performance. The regression models found no significant negative green bond premium in either Chinese or global markets, indicating that green bonds are not priced significantly lower than conventional bonds. However, global market models show that issuing green bonds in CNY could reduce the green bond premium, unlike in USD or EUR.     

SUPPLY CHAIN STRATEGY FOR NASCENT FIRMS IN EMERGING TECHNOLOGY MARKETS

The extant literature provides sound guidance for applying appropriate supply chain strategies to address conventional market structures and supply chain objectives. However, our knowledge of the unique objectives, characteristics, and elements of supply chain development by nascent technology firms in new markets they have helped create is more limited. We outline the strategy for this “emergent” phase of a firm's development of their supply chain. This strategy emphasizes establishing market legitimacy and a basic structural foundation through a core of strong collaborative relationships. The strategy also maximizes organizational flexibility and iterative market intelligence gathering through continuous experimentation with potential markets and through potential partners. The strategy is contrasted with extant supply chain strategies and implications and directions for future research are offered.     

Liquidity and macroeconomic management in emerging markets

Emerging markets have received considerable attention for foreign investment and international diversification due to the possibility of higher earnings and a low level of integration with global equity markets. These high returns often need to be balanced by the high liquidity costs of trading in illiquid emerging markets. Several studies have shown that central bank and government policies are significant determinants of market liquidity. We investigate the influence of monetary and fiscal policy variables on the market and firm level liquidity of eight emerging stock markets of Asia. Using four different (il)liquidity measures and nine macroeconomic variables, we find that changes in the money supply, government expenditure and private borrowing significantly affect stock market liquidity. Illiquidity is also strongly affected by the bank rate, short-term interest rate and government borrowing. We demonstrate that ‘crowding out’ and ‘cost of funds’ effects exist in these markets. Other major findings are that some markets are more sensitive to local macroeconomic news than world factors, the impact on size based portfolios largely depends on the instruments used by the central banks and government, the liquidity of the manufacturing sector is affected by changes in any policy variables, financial institutions are only influenced by monetary policy variables, and the service sector is least affected.     

Mexico's integration into the North American capital market

We explore a model of time varying regional market integration that includes three factors for the North American equity market, the local Mexican equity market and the peso/dollar exchange rate. We argue that a useful instrument for the degree of integration is the sovereign yield spread. Applying our methodology to Mexico over the 1991–2002 period, we show that the degree of market integration was higher at the end of the period than at the beginning but that it exhibited wide swings that were related to both global as well as local events. We also discover that Mexico's currency risk is priced. Further, the currency returns process reveals strongly significant asymmetric volatility that is strongly related to the asymmetric volatility of the Mexican equity market returns process. A plausible reason for these results is that currency devaluations in emerging markets like Mexico can cause default-risk crises in local banking systems that mismatch local-currency assets and hard currency liabilities, whereas appreciations produce no such problems. Devaluations that destabilize banking systems are, therefore, more likely than appreciations to increase the volatilities of both the currency's and the equity market's returns.     

On the Pricing of Contingent Claims with Frictions

This paper studies the problem of pricing contingent claims in a market which has frictions in the form of costs, such as penalty functions corresponding to constraints. An arbitrage-free interval is identified, and a fair price based upon utility functions is proposed. It provides a framework to study incomplete markets that is simplier than the one related to constraints on portfolios introduced by Karatzas and Kou.     

Ethics, Equity, and Social Justice in The New Economic Order: Using Financial Information for Keeping Social Score

In the present world order unbridled forces of free market capitalism are frequently cited for much of the social injustice, inequity, and disparity of wealth between the rich and the poor. Although history's verdict in favor of the free markets could hardly be harsher or clearer, it is clear that after the initial wave of triumph, the free market paradigm has developed some cracks in its façade. What marks the trail of such sustained and pronounced move toward free markets in terms of ethics, morality, social welfare and social justice? How does one keep a social score in this seemingly relentless and irreversible move all over the world toward free market capitalism? In this paper we shall attempt to address these and related questions. Drawing on concepts from organization theory and social philosophy and using publicly available financial information, we shall illustrate how, amidst the myriad and mixed noises, some sense of order and signal can be discerned in addressing issues of equity and social justice. Toward this end, first, we provide a broad contrast between two models of financial markets: the command model and the free market model and proceed to examine publicly available financial information and analyze the trends and patterns with graphical representations using publicly available data from Handbook of International Economic Statistics. Next, we explore the implications of financial performance measures for social welfare and social justice and discuss the social perils of free markets using the Mexican and Asian Financial crises as the focal points. Finally, we present a set of recommendations for smoother structural transition.     

Gray markets: past,present, and future

This article conducts a literature review on three gray market areas: strategy, legal issues, and consumer behavior. Previous gray market strategy-based articles do not discuss the impact of the Web on gray market activity, limit their analysis to international gray markets, and do not identify situations where gray market activity is profitable for a manufacturer and its authorized resellers. Like the strategy-based articles, the legal issue-based articles confine their discussion to international gray markets. A current US Supreme Court case that expands the potential for gray market activity is discussed. The third research stream focuses on the impact of brand image and brand equity and the relationship of perceived risk and gray market acceptance by consumers. The authors develop an overall strategy for dealing with gray market activity based on balancing positive and negative issues. In some cases, it is prudent for manufacturers and resellers to view gray markets as an alternative strategy to private labels, second-tier brands, or fighting brands. In other instances, firms need to explore supply- and demand-based strategies to deter gray market activity. Alternative organization formats for gray market surveillance and control are discussed. Difficulties associated with conducting gray market research as well as directions for future research in gray markets are covered.     

Indian equity options: Smile,risk premiums,and efficiency

We study the pricing of equity options in India which is one of the world's largest options markets. Our findings are supportive of market efficiency: A parsimonious smile-adjusted Black model fits option prices well, and the implied volatility (IV) has incremental predictive power for future volatility. However, the risk premium embedded in IV for Single Stock Options appears to be higher than in other markets. The study suggests that even a very liquid market with substantial participation of global institutional investors can have structural features that lead to systematic departures from the behavior of a fully rational market while being “microefficient.”     

The volatility effect in emerging markets

We examine the empirical relation between risk and return in emerging equity markets and find that this relation is flat, or even negative. This is inconsistent with theoretical models such as the CAPM, which predict a positive relation, but consistent with the results of studies for developed equity markets. The volatility effect appears to be growing stronger over time, which we argue might be related to the increased delegated portfolio management in emerging markets. Finally, we find that the volatility effect in emerging markets is only weakly related to that in developed equity markets, which argues against a common-factor explanation.     

A financial market forecast of industrial policy

This paper examines the reaction of foreign equity markets to anticipated changes in economic conditions. The ability of the equity markets to correctly anticipate economic behavior may be influenced by the existence of a national industrial policy designed to enhance economic growth. If market participants can rely on announced Industrial Policy to influence economic behavior, then security returns may lead economic events. To the extent that Industrial Policy is non-existent or inconsistently applied, market returns would not be expected to lead economic changes. This paper tests the hypothesis that Industrial Policy permits equity markets to correctly forecast economic condition.

Data for the United States, United Kingdom, West Germany, and Japan are used in testing for relationships between return on equity and industrial production. The period between 1952 and 1985 is employed in the analysis. The results suggest that the Japanese market is able to consistently anticipate changes in industrial production, while the markets in the remaining three countries are not able to anticipate economic policy.     

Growth,integration and trends in equity markets in Asia

The objective of this paper is to examine the growth and development in the Asian financial markets and then focus on equity-market developments in the Asian economies. Asian equity markets have grown exponentially over the last two decades. The trauma of the Asian crisis crystallized transformations in Asia's financial architecture. Equity markets were, in turn, no exceptions. Despite these problems, these markets slowly began expanding again. Attracted by rapid and sustained regional growth in Asia, international institutional investors and fund managers began investing in Asian equities. This inexorably led to an increase in market capitalization. However, growth in the equity markets was far from steady and uniform. This paper has dwelt on the performance of important equity markets in Asia and highlighted the diversity in them.     

Banks,stock markets,and China's ‘great leap forward’

Using quarterly data for 1995–2005, we examine the role of financial factors in China's recent increases in real sector activity. After describing the institutional challenges that China faces in building a well-functioning equity market to complement its banking system, a series of cointegrated vector autoregressive models and the associated variance decompositions and impulse response functions show that banking sector development was central to these successes. At the same time, we find that stock market development, as measured by market size and trading volume, did not contribute significantly to them. We suspect that lingering questions regarding the quality of China's stock markets are largely responsible for the latter result, though it also may reflect the smaller size of the “stock market economy” relative to the broader economy in which we measure outcomes.     

The Co‐Movement of Credit Default Swap Spreads,Equity Returns and Volatility: Evidence from Asia‐Pacific Markets

We provide a comprehensive analysis of the co‐movement of credit default swap (CDS), equity, and volatility markets in four Asia‐Pacific countries at firm and index level during the period 2007–2010. First, we examine lead–lag relationships between CDS spread changes, equity returns, and changes in volatility using a vector autoregressive model. At the firm level equity returns lead changes in CDS spreads and realized volatility. However, at the index level the intertemporal linkages between the three markets are less clear‐cut. Second, we apply the measures proposed by Diebold and Yilmaz (2014) to an analysis of volatility spillovers among the CDS, equities, and volatility asset classes. The results suggest that realized volatility (at firm level) and implied volatility (at index level) are the main transmitters of cross‐market volatility spillovers. Third, we analyze the impact of various structural factors and confirm the importance of realized volatility of equity returns as a determinant of CDS spreads.