Effects of exchange rate variations on bilateral trade with a vehicle currency: Evidence from China and Singapore

Using a testable gravity-type bilateral trade model derived from an underlying demand and supply model, this paper explores the effects of exchange rate variations on bilateral trade in an exchange rate regime with a vehicle currency. The introduction of the vehicle currency allows us to figure out whether variations in the trade volume due to the fluctuation of the bilateral exchange rate are primarily due to changes in demand or in supply, or both. More specifically, in this theoretical framework, the appreciation of one country's currency against the vehicle currency is expected to promote its imports, but the effect of revaluation of the country's currency against the vehicle currency on its exports is ambiguous. Moreover, high volatility of the exchange rate of one country's currency against the vehicle currency is also expected to depress its import volume. From the empirical point of view, the decomposition of the bilateral exchange rate of two currencies into the bilateral rates of these two currencies against the vehicle currency provides a new alternative to avoid the econometric problem of potential reverse causality in assessing the effects. Through compiling a novel monthly bilateral-trade dataset between China and Singapore over 21 years or 252 months, we empirically test the predictions of our model, which get robust support from the results.     

Currency boards, dollarized liabilities, and monetary policy credibility

The recent collapse of the Argentine currency board raises new questions about the desirability of formal fixed exchange rate regimes. This paper examines the relative performance of a currency board with costly abandonment in the presence of dollarized liabilities to a fully-discretionary regime. Our results demonstrate that neither regime necessarily dominates with only idiosyncratic firm shocks, but discretion unambiguously dominates with the addition of shocks to the dollar-euro rate. The relatively strong performance of the discretionary regime in this model stems from the benign impact of dollarized liabilities on the monetary authority’s time-inconsistency problem.     

Why Manufacture Offshore? An Empirical Analysis of Valuation Effects

In this study, announcements by U.S. firms of offshore joint venture manufacturing during the 1980s are used to provide more comprehensive evidence than past studies on the wealth effects of offshore joint ventures. Evidence shows that the target country's level of economic development and political stability, currency strength of the originating country (U.S. in this study) relative to that of the target country, U.S. firm's mode of entry, and the relative value of the U.S. firm's investment in the joint venture affect the wealth of U.S. firms which engage in offshore joint ventures. The target country's level of economic development, its political stability, and the currency strength of the originating country relative to the target country are shown to be the dominant economic factors. Of particular importance, evidence indicates that the target country's level of economic development is a more important determinant of excess returns than is its political stability.     

Does external uncertainty matter in corporate sustainability performance?

Motivated by the prevalence of corporate sustainability and the rise of uncertainty at the national level, we investigate the impact of three sources of uncertainty; namely, economic policy, climate change, and political instability, on firms' sustainability performance. Using a sample of 6804 firms from 72 countries spanning 15 years, our study revealed that uncertainty due to climate change, economic policy, and political instability negatively affects firms' sustainability performance. This finding is in line with the real options theory that uncertainty in an external environment discourages firms' long-term investment (e.g. investment in corporate sustainability). In addition, the results show that the option for delay in sustainability investment moderated the relation between uncertainty at the national level and firms' sustainability performance. Firms with better sustainability performance had higher firm value when facing uncertainty. Interestingly, firms with higher profitability performed better in sustainability when facing uncertainty at the national level.     

Corporate boards' political ideology diversity and firm performance

We investigate whether diversity in points of view within corporate boards, as captured by the diversity in political ideology of board members, can affect a firm's performance. We employ personal political contributions' data to measure political ideology distance among groups of inside, outside directors and the CEO. Our empirical evidence strongly supports the notion that outside directors' monitoring effectiveness is more likely to be enhanced when their viewpoints are distinct from those of management. We find that ideologically diverse boards are associated with better firm performance, lower agency costs and less insiders' discretionary power over the firm's Political Action Committee (PAC) spending. Taken together, our results lead us to conclude that multiplicity of standpoints in corporate boardrooms is imperative for board effectiveness.     

Stock return exposure to exchange rate risk: A perspective from delayed reactions and hedging effects

This paper investigates the absence of prevailing evidence on the significant exposure of US stocks to exchange rate risk by considering a firm's pre-hedging currency exposure, its expected hedging activity and the delayed reaction of its stocks to currency movements. Although we demonstrate the importance of lagged exposure relative to contemporaneous exposure, the inclusion of the lagged effect in the exposure measurement still fails to raise the significance of the exchange rate risk with regard to the pricing for the overall sample of stocks. We further demonstrate that the weak evidence on priced currency risk is at least partly attributable to hedging activity, particularly for large firms. Finally, our results provide partial support for the asymmetric hedging hypothesis, in that asymmetric hedging is found to be responsible for reshaping the relationship between a firm's characteristics and its currency exposure.     

Foreign currency debt,financial crises and economic growth: A long-run view

Foreign currency debt is widely believed to increase risks of financial crisis, especially after being implicated as a cause of the East Asian crisis in the late 1990s. In this paper, we study the effects of foreign currency debt on currency and debt crises and its indirect effects on short-term growth and long-run output effects in both 1880–1913 and 1973–2003 for 45 countries. Greater ratios of foreign currency debt to total debt are associated with increased risks of currency and debt crises, although the strength of the association depends crucially on the size of a country's reserve base and its policy credibility. We found that financial crises, driven by exposure to foreign currency, resulted in significant permanent output losses. We estimate some implications of our findings for the risks posed by currently high levels of foreign currency liabilities in eastern Europe.     

Renewable Governance: Good for the Environment?

We conjecture that board renewal mechanisms—those substantive enough to renew the thinking of the board—are required before investors can address the mismatch between their preferences regarding environmental sustainability and what insiders at firms are actually doing. We identify the adoption of majority voting for directors and the introduction of a female director as two corporate governance mechanisms potentially strong enough to renew a board's thinking on sustainability. Using a sample of 3,293 firms from 41 countries, along with quasi-exogenous shocks to board renewal mechanisms in Canada and France, we find that both board renewal mechanisms are associated with significantly higher future environmental performance. Further tests provide suggestive evidence that board renewal is more strongly associated with environmental performance in settings with better institutions and more motivated institutional investors. These results suggest the importance of board renewal for alignment of firm policies with investor preferences around the world.     

新加坡的管理浮动汇率制度

目前,国内对新加坡管理浮动汇率制度的研究以定性讨论为主。本文从定量角度出发,研究新加坡管理浮动汇率制的运作,并以经济特征相似、实行货币局制度(典型的固定汇率制)的香港为参照系,评价新加坡管理浮动汇率的宏观经济表现是否更好。我们认为新加坡管理浮动汇率制使得其经济增长更快、更稳定,通货膨胀率更低,波动性更小。我国多年来实行的实际固定汇率制带来了与香港相似的宏观经济后果,实行管理浮动汇率制对我国具有重要意义。     

How Board Oversight Can Drive Climate and Sustainability Performance

The authors present persuasive evidence that board leadership is essential for solving critical sustainability issues like climate change. As fiduciaries to investors and stewards of a company's performance and success, corporate directors have a critical role to play in providing oversight of material risks to corporate strategy and performance, especially those posed by climate change. Drawing upon a report by Ceres and KKS Advisors, the authors show that perhaps most important among best practices for companies intent on establishing effective board governance are the creation of formal board mandates for sustainability, the recruitment of directors with sustainability expertise, and the linking of executive pay to sustainability performance. The authors' study also provides compelling evidence that when companies put in place such governance features, their sustainability performance improves notably. The international banking group BNP Paribas and the electric utility Iberdrola are held up as illustrations of governance systems that are likely to be effective in helping companies respond to climate change.     

Relationship-based debt financing of Chinese private sector firms: The role of social connections to banks versus political connections

We study whether a firm's social connections to banks can augment its political connections to help it obtain loans. In China, Regulation No. 18 (announced in 2013) prohibits all high-level government officials from being independent directors of firms. As a result, many firms lost their political connections. We find that after firms lose their politically connected independent directors, firms having no social connections to banks experience, on average, a 12% decrease in the bank loan ratio relative to the median ratio; but those whose board chairs or CEOs are socially connected to local bank branch heads experience a 22% increase in the loan ratio relative to the median. However, this positive effect is short lived and thus not a new equilibrium. Overall, our findings support the hypothesis that a firm's social connections to banks can augment its political connections to help it get bank financing.     

Birds of a feather: Value implications of political alignment between top management and directors

For 2,695 US corporations from 1996 to 2009, we find that alignment in political orientation between the chief executive officer (CEO) and independent directors is associated with lower firm valuations, lower operating profitability, and increased internal agency conflicts such as a reduced likelihood of dismissing poorly performing CEOs, a lower CEO pay-performance sensitivity, and a greater likelihood of accounting fraud. Importantly, we show that our results are driven neither by the effects associated with various measures of similarity and diversity within the board nor the effects of local director labor market and political conditions on board structure. We provide evidence that our measure of individual political orientation reflects the person?s political beliefs rather than opportunistic attempts to seek political favor. Overall, our results suggest that diversity in political beliefs among corporate board members is valuable.     

Materiality in Corporate Governance: The Statement of Significant Audiences and Materiality

Materiality is an elusive, but fundamentally important concept in corporate reporting of all kinds—not only in traditional financial reporting, but in sustainability and integrated reporting as well. In the end, materiality is entity‐specific and based on judgment. Moreover, it is a judgment that should ultimately be made by a company's board of directors, which makes materiality as much a governance as a reporting issue. Whether a given ESG issue is material is in large part a function of the corporate stakeholders, or “audiences,” that the company's board of directors deems to be “significant”—that is, important to the company's ability to create value over the short, medium, and long term. The identification of such audiences—together with the time frames the board uses to evaluate the impact of the company's decisions on these audiences—provides the basis for determining the sustainability issues that corporate management must focus on for performance and reporting purposes. To help ensure that decisions about materiality receive the attention they deserve, the authors propose that corporate boards articulate their views in an annual “Statement of Significant Audiences and Materiality.” Contrary to the prevailing belief that the fiduciary duty of the board is to place shareholders’ interests first, nothing precludes corporate boards from issuing such a statement. Recent research, including the compilation of legal memos on fiduciary duty and nonfinancial reporting for all G20 countries, makes it clear that the board's fiduciary duty is to “the corporation itself.” In exercising this duty, directors have full discretion, under the business judgment rule and other authorities, to decide which audiences, along with the company's shareholders, should be deemed significant.     

Board gender composition,board independence and sustainable supply chain responsibility

The consideration of social and environmental factors in companies’ supply chain is a prevalent research topic because stakeholders are now inquisitive about the social and environmental impacts of companies’ suppliers. Using a sample of S&P 500 firms, we find that board gender composition and board independence are positively associated with sustainable supply chain responsibility (SSCR). We also identify three channels (CEO duality, sustainability committee and sensitive industries) through which board gender composition and board independence affect SSCR, where board gender composition consistently explains SSCR, but the effect of board independence is less pronounced in firms with CEO duality and firms with a sustainability committee. Finally, we explore the reason for the less-pronounced findings for board independence in our subsample analyses and find that, compared with independent female directors who continue to display significant associations with SSCR, independent male directors do not engender SSCR across the three subsample tests.     

Political Connections and the Cost of Bank Loans

This paper analyzes whether the political connections of listed firms in the United States affect the cost and terms of loan contracts. Using a hand‐collected data set of the political connections of S&P 500 companies over the 2003–2008 time period, we find that the cost of bank loans is significantly lower for companies that have board members with political ties. We consider two possible explanations for these findings: a Borrower Channel in which lenders charge lower rates because they recognize that connections enhance the borrower's credit worthiness and a Bank Channel in which banks assign greater value to connected loans to enhance their own relationships with key politicians. After employing a series of tests to distinguish between these two channels, we find strong support for the Borrower Channel but no direct evidence supporting the Bank Channel. Finally, we demonstrate that political connections reduce the likelihood of a capital expenditure restriction or liquidity requirement commanded by banks at the origination of the loan. Taken together, our results suggest that political connections increase the value of U.S. companies and reduce monitoring costs and credit risk faced by banks, which, in turn, reduces the borrower's cost of debt.     

THE CASE FOR AN INDONESIAN CURRENCY BOARD

In February 1998, after consulting one of the authors of this article, President Suharto and his Economic and Monetary Resilience Council advocated the establishment of a fixed-rate currency board system in which the Indonesian rupiah would be backed by and convertible into U.S. dollars as a reserve currency. But the proposal, after being criticized by both the IMF and the U.S. government, was dropped.
This article presents the case for currency boards in the context of Indonesia. The authors argue that the popular objections to currency boards–including those offered in the preceding article as well as those used by the IMF in the case of Indonesia—are based on a number of prevalent misconceptions. Contrary to the claims of critics, currency boards can be set up even in countries lacking foreign currency reserves; they can be designed to insulate their workings from political pressure; and, through the creation of a network of international branch banks and other market mechanisms, they can function without a "political" lender of last resort.     

Exchange Rate Exposure,Foreign Currency Debt,and the Use of Derivatives: Evidence from Brazil

This paper studies the exchange rate exposure and its determinants for a sample of nonfinancial Brazilian companies from 1996 to 2006. The results indicate that the number of firms exposed to exchange rate fluctuations is higher in periods of crisis and under a fixed exchange rate regime. In addition, the results point out that, although companies' international activities, operational hedging, and financial policies are important determinants of firms' exposure, the changes in companies' exposure that took place when Brazil moved from a fixed to a floating exchange rate regime were mainly driven by changes in companies' foreign currency borrowing and the use of derivatives that occurred in that period.     

Dynamic Currency Linkages and Their Determinants: An Empirical Study for East Asian Economic Community Region

In this article, Copula GARCH models have been employed to study the inter-temporal process of currency market co-movements between ASEAN+6 countries (referred to in this study as East Asian Economic Community) and ASEAN+6 currency market index. Empirical results show that the sample countries of the region exhibit varying levels of currency co-movements with the Asian benchmark. Markov regime switching results show that many of the countries which had high dependences with the regional currency index as was found in copula estimations had also overlapping currency market cycles. Using Principal Component Analysis, we find that three statistical factors explain exchange rate co-movements which came out to be trade linkages, economic risk, and currency market openness in our dynamic panel data estimation.     

The UK's Exit Charge from the EU: Insights from Modes of Accounting

Whatever the final charge on the UK for leaving the EU, the money itself is relatively marginal to the former's public finances. However, this charge is politically sensitive and financially aggravating during one of the longest periods of fiscal austerity in the UK's history. The ways in which leaving is conceptualized have implications for any continuing financial obligations that must be managed within the context of fiscal austerity and political uncertainty. Yet, leaving the EU is a unique transaction: it is not analogous, for example, to a divorce settlement, the leaving of a club, the termination of a commercial contract, the leaving of a treaty-based international organization, or secession from a state. Analyzing the formulation of the charge in terms of the four modes of government accounting—financial reporting, statistical accounting, budgeting, and fiscal sustainability projections—enhances its fiscal transparency. It evidences not only the weakness and inconsistency of the UK's negotiating position but also the dominance in EU thinking of the short-term budgetary calculations of the 2014–20 Multiannual Financial Framework over its long-term sustainability without a large net contributor. The final amount paid by the UK will depend on the resolution of competing perspectives as well as on liabilities and contingent liabilities associated with the increasingly complex EU financial architecture.     

Exchange risk and universal returns: A test of international arbitrage pricing theory

According to the international arbitrage pricing theory (IAPT) posited by Solnik (1983), currency movements affect assets' factor loadings and associated risk premiums. Based on a novel universal return decomposition, we propose an empirical model to test this proposition and perform tests using U.S. stock returns in the period 1975–2008. Our results confirm that currency movements significantly affect the market betas of a large proportion of stocks. Further cross-sectional tests indicate that currency movements affecting the market factor are significantly priced in stock returns. Based on these and other findings, we conclude that Solnik's IAPT is supported. An important implication of our findings is that exchange rate risk can broadly affect stock returns through both factor loading and residual factor channels.