Correlation structure forecasting & ex ante portfolio selection strategies in the Japan market

Using monthly data for 160 stocks covering January 1977 to December 1991, we find that both the Historical Mean and the Industry Mean Models dominate the Global Mean and the Single Index Models. In theex-ante portfolio selection, the Historical Model dominates all other models when evaluated against the benchmark of the Global Minimum Variance Portfolio but a combination of historical correlation structure and Bayes-Stein Shrinkage expected returns dominates other models when the Optimal Tangency Portfolio is used as a benchmark for evaluation.     

CORPORATE GOVERNANCE AND CORPORATE PERFORMANCE: A COMPARISON OF GERMANY, JAPAN, AND THE U.S.

Contrary to assertions that there are fundamental differences in the efficiency of "market-based" and "relationship-oriented" corporate governance systems, this article presents evidence that the German, Japanese, and American systems appear about equally effective in disciplining poor managerial performance. For example, both the job security and total compensation of German and Japanese managers appear to be tied to stock performance and current cash flows- measures that some would refer to as "short-term"-to roughly the same extent as those of U.S. managers. Furthermore, the punishments and rewards for German and Japanese managers are not more sensitive to sales growth-a measure some would refer to as "long-term"-than those of their U.S. counterparts.
But, if there is no clear difference between the three governance systems in responding to poor stock and earnings performance, there is one important difference: the U.S. system is more effective than the German and Japanese systems in discouraging successful companies from overinvest-ing. One reason for this is the fact that U.S. managers hold much larger equity positions than managers in Japan and Germany. Another important factor, however, is the difficulty faced by Japanese companies in returning capital to their shareholders. Dividends are minimal; and, until 1995, it was illegal for a Japanese company to repurchase its stock.     

Examination of U.S.-based Japanese subsidiaries: Evidence of the transfer of the Japanese strategic cost management

As a result of global competition, many Japanese companies are now operating in the United States. This article presents a survey of the management accounting methods employed by U.S.-based Japanese manufacturers and documents evidence about the current direction of accounting practices that are being transferred from Japan to the U.S. work environment. The results of the study show that most of the U.S.-based Japanese firms are similar to Japanese domestic firms in their use of management accounting methods of target costing and value engineering, variable costing, and strategic adaptation of traditional methods such as standard costing and budgeting. It is also evident that U.S.-based Japanese affiliates may be influenced by U.S. practices, as shown by significant usage of activity-based costing and internal rate of return for evaluating capital investment projects. This article is an important part of a continuing effort to study the development of management accounting among foreign-owned subsidiaries in the U.S., helping them to meet the challenges of global competition. Additionally, expanding this line of research on foreign subsidiaries that apply world class management accounting practices in other countries may assist U.S. multinational firms in their overseas subsidiaries' operations. Two limitations of this study and, thus, suggestions for future research are identified. First, the data on U.S.-based Japanese affiliates were collected for one point in time. Second, this study did not match each U.S.-based Japanese affiliate with its parent in Japan.     

THE EFFECT OF U.S. TRADE DEFICIT ANNOUNCEMENTS ON THE STOCK PRICES OF U.S. AND JAPANESE AUTOMAKERS

The existing literature on the trade news effect on asset prices generally looks at exchange rates and stock market indexes. We focus on individual stocks: the U.S. and Japanese “Big Three” automobile stocks. We examine Japanese automobile American Depositary Receipts (ADRs), not the stocks per se, to avoid the time lag problem. First, we find deficit news shocks, especially the positive shocks, have a negative effect on the Japanese automobile ADRs. Second, we find only weak evidence that the news effect is different under different economic conditions. Third, trade news is found to be a competitive shock to the automakers in the sense of Karolyi and Stulz (1996) . Last, statistically generated U.S.–Japan bilateral trade deficit news and bilateral auto trade deficit news have no effect on the automobile stock in general.     

THE INTRADAY INTERDEPENDENCE STRUCTURE BETWEEN U.S. AND JAPANESE EQUITY MARKETS

Contrary to the efficient market hypothesis, previous research documents a significant correlation between lagged U.S. close-to-close stock market returns and current open-to-close Japanese equity market returns. We find that the significant correlation is limited to the first hour of Japanese trading, with subsequent hourly returns independent of lagged U.S. returns. This evidence suggests that the documented significant correlation is attributable to a sticky Japanese opening value associated with the use of nonsynchronous index data.     

Relevance of U.S.-GAAP for Japanese companies

We use differences in U.S.-GAAP and Japanese-GAAP accounting measures to evaluate the value-relevance of U.S.-GAAP reports. We show data provided in U.S.-GAAP financial statements of Japanese firms is value-relevant beyond that contained in domestic-GAAP statements. Our results complement extant research and support the proposition that U.S. reporting methods provide value-relevant data. Understanding the value-relevance of data from Japanese firms is important in its own right because of the major role these firms play in intenational markets. We also provide evidence on significant transnational firms that voluntarily provide U.S.-GAAP statements.     

STRONG FORM EFFICIENCY OF THE FOREIGN EXCHANGE MARKET AND BANK POSITIONS

This paper explores the strong form efficiency of the pound sterling-U.S. dollar market by analyzing the ability of U.S. commercial banks to formulate superior expectations vis-a-vis the market in two ways. First, Stein's theory is employed to distinguish between shifts and disturbances in the exchange market equilibrium. Second, the swap transaction framework extracts U.S. commercial banks' expectations from their observed behavior. Results obtained from both approaches suggest that the observed group has better than random forecasting accuracy.     

Do Japanese Analysts Overreact or Underreact to Earnings Announcements?

Several recent studies have used U.S. analysts' forecasts to test for underreaction or overreaction to information in earnings announcements. These tests have provided mixed results. Evidence in Mendenhall (1991) is that analysts underreact. By contrast. results in De Bondt and Thaler (1990) show overreaction by U.S. financial analysts to earnings announcements. The current study contributes to this topic by examining over/underreaction by Japanese financial analysts. Test results show that Japanese analysts do not overreact to earnings announcements, market to book ratios and sales growth. Instead. there is strong evidence that Japanese analysts underreact to earnings announcements and that their underreaction is more pronounced for firms with mostly permanent earnings. Our results also show that Japanese analysts display larger forecast biases for earnings reported under U.S. GAAP as opposed to Japanese GAAP. Finally, we find that US. analysts discount information in earnings announcements to a larger degree (relying to a greater extent on information in past prices instead) when compared to their Japanese counterparts. Further, in contrast to their Japanese counterparts, these analysts display no optimistic bias. The results above suggest that the impact of each country's unique culture and capital norms will have to be taken into account by policy makers in evaluating the feasibility of harmonization of accounting standards.     

The exchange rate exposure of U.S. and Japanese banking institutions

In this paper, we examine the foreign exchange exposure of a sample of U.S. and Japanese banking firms. Using daily data, we construct estimates of the exchange rate sensitivity of the equity returns of the U.S. bank holding companies and compare them to those of the Japanese banks. We find that the stock returns of a significant fraction of the U.S. companies move with the exchange rate, while few of the Japanese returns that we observe do so. We next examine more closely the sensitivity of the U.S. firms by linking the U.S. estimates cross-sectionally to accounting-based measures of currency risk. We suggest that the sensitivity estimates can provide a benchmark for assessing the adequacy of existing accounting measures of currency risk. Benchmarked in this way, the reported measures that we examine appear to provide a significant, though only partial, picture of the exchange rate exposure of U.S. banking institutions. The cross-sectional evidence is also consistent with the use of foreign exchange contracts for the purpose of hedging.     

Accuracy of International Interest Rate Forecasts

This study exploits a unique data source with contemporaneous forecasts of three-month Euromarket interest rates for five different countries. Professional forecasts are explored in a way that avoids two limitations of previous research. First, rather than being restricted to just U.S. interest rates, data are used for five different countries: the United States, Germany, the United Kingdom, Japan, and Switzerland. Second, the study relies upon data gathered on a single date, rather than over a period of weeks. Consensus forecasts are evaluated against two naive models: a no-change model and a forward rate forecast. In general, the consensus forecasts prove superior to the no-change forecast. The consensus measures, though, are found to be inferior to the forward rate forecast. This is true even considering the dramatic success of the banks in forecasting U.S. rates in this period. However, if the spectacular, and perhaps uniquely successful U.S. results are excluded from consideration, the banks proved dramatically inferior to the forward rate of interest in forecasting interest rates. Thus, the ability of these banks to forecast three-month interest rates for these five countries exceeds that of a no-change forecast, but falls below the forecasting ability of the forward rate.     

Permanent and Transitory Driving Forces in the Asian-Pacific Stock Markets

This paper uses weekly data from November 1987 through May 1999 to examine whether U.S. or the Japan stock market (or both) is the main driving force behind major movements in eleven emerging Asian-Pacific stock markets. We find a robust cointegrating relation linking each of the emerging market with the two matured markets of the U.S. and Japan. The results also show that the U.S., rather than Japan, is the main permanent force driving the equilibrium relations across all Asian-Pacific markets. In contrast, the effect of the Japanese market on the Asian-Pacific region is only transitory. Therefore, strategic asset portfolios in the Asian-Pacific region should include Japanese stocks to diversify any country specific risks. As to U.S. investors, the persistent influence of the U.S. market may limit long-run diversification gains from Asian-Pacific stocks.     

Real‐Time Forecasting and Political Stock Market Anomalies: Evidence for the United States

Using monthly data from 1953 to 2003, we apply a real‐time modeling approach to investigate the implications of U.S. political stock market anomalies for forecasting excess stock returns in real‐time. Our empirical findings show that political variables, chosen on the basis of widely used model‐selection criteria, are often included in real‐time forecasting models. However, political variables do not contribute systematically to improving the performance of simple trading rules. For this reason, political stock market anomalies are not necessarily an indication of market inefficiency.     

An Analysis of Bidding in the Japanese Government Bond Auctions

We examine the bidding patterns and auction profits in the Japanese Government Bond (JGB) auctions and empirically test the predictions of auction theory. We find that the average profit in JGB auctions is not reliably different from zero, and the degree of competition and the level of uncertainty are insignificant in determining auction profits. The winning shares of the U.S. dealers are positively related to auction profits, whereas the winning shares of their Japanese counterparts show a negative association. We also find that the share of winnings of Japanese dealers tends to be correlated with the share of winnings of their compatriot dealers but a similar relation is not found for U.S. dealers.     

Letters to the shareholders: A content analysis comparison of letters written by CEOs in the United States and Japan

Previous studies suggest that letters to the shareholders are widely used in investors' decision-making processes. Letters to the shareholders, however, are unaudited and usually not subject to regulation. Hence, CEOs may use them strategically to manage the impressions shareholders have of the company. This paper focuses on letters to the shareholders from Japanese and U.S. companies. The research examines whether U.S. and Japanese CEOs explain the causes of good and bad news in different ways. The findings point to a number of interesting differences between the U.S. and Japanese letters to the shareholders, including: (1) that U.S. CEOs in particular emphasize good news; (2) that Japanese and U.S. letters are statistically indistinguishable with respect to the extent to which CEOs claim responsibility for good news; and (3) that while CEOs in general ascribe bad news to causes beyond their control, this tendency is particularly strong in Japanese letters. The implications of the study for both investors and regulators are discussed.     

Are recent segment disclosures of Japanese firms useful?: Views of Japanese financial analysts

Since 1990, the Japanese Ministry of Finance (MOF) has required Japanese firms to disclose segment data in annual financial statements. Using a survey instrument, we examine whether Japanese analysts find these segment disclosures to be useful. Our study finds that analysts perceive that segment data aid them in forecasting consolidated sales and net income. However, results also show that analysts are concerned that Japanese firms do not define segments meaningfully and consistently and are arbitrary in the allocation of common costs. Further, the analysts do not believe that the usefulness of segment data improves when it is audited. These results have implications for investors in Japanese stocks and accounting policy bodies, such as the US Securities and Exchange Commission (SEC).     

Forecasting Japanese Stock Returns with Financial Ratios and Other Variables

This paper extends the previous analyses of the forecastability of Japanese stock market returns in two directions. First, we carefully construct smoothed market price–earnings ratios and examine their predictive ability. We find that the empirical performance of the price–earnings ratio in forecasting stock returns in Japan is generally weaker than both the price–earnings ratio in comparable US studies and the price dividend ratio. Second, we also examine the performance of several other forecasting variables, including lagged stock returns and interest rates. We find that both variables are useful in predicting aggregate stock returns when using Japanese data. However, while we find that the interest rate variable is useful in early subsamples in this regard, it loses its predictive ability in more recent subsamples. This is because of the extremely limited variability in interest rates associated with operation of the Bank of Japan’s zero interest policy since the late 1990s. In contrast, the importance of lagged returns increases in subsamples starting from the 2000s. Overall, a combination of logged price dividend ratios, lagged stock returns, and interest rates yield the most stable performance when forecasting Japanese stock market returns.     

WHEN ELECTIONS FAIL TO RESOLVE UNCERTAINTY: THE CASE OF THE 2016 U.S. PRESIDENTIAL ELECTION

In this article, we examine whether certain political election outcomes create, rather than resolve, uncertainty in financial markets. We posit that the market uncertainty associated with unanticipated election outcomes is not resolved before or on the election dates. To test this claim, we use the surprise outcome of the 2016 U.S. presidential election and two previous U.S. presidential elections as benchmarks. In contrast to prior elections, we find that the 2016 U.S. presidential election outcome did not resolve market uncertainty. Specifically, we show significant increases in transactions costs, adverse selection costs, and volatility in the days following the election date. We contribute to the literature by suggesting that unexpected elections can engender, rather than resolve, market uncertainty.     

The output gap and expected security returns

This paper analyzes the impact of the output gap on market excess returns. The output gap is usually defined as the deviation of output from potential output that is indicated by the trend output. However, this study departs from the common approach of calculating the output gap based on a simple trend line. It uses a flexible data-driven weighting scheme, and it uses only the available information that corresponds to each forecasting origin to derive the output gap. Overall, the proposed output gap is a strong predictor of U.S. market excess returns.     

Inflation Dynamics When Inflation Is Near Zero

We discuss the likely evolution of U.S. inflation in the near and medium terms on the basis of (i) past U.S. experience with very low levels of inflation, (ii) the most recent Japanese experience with negative inflation, and (iii) some preliminary U.S. micro evidence on downward nominal wage rigidity. Our findings question the view that stable long‐run inflation expectations and downward nominal wage rigidity will necessarily provide sufficient support to prices to avoid further declines in inflation. We show that an inflation model fitted on Japanese data over the past 20 years, which accounts for both short‐ and long‐run inflation expectations, matches the recent U.S. inflation experience quite well. While the model indicates that U.S. inflation might be subject to a lower bound, it does not rule out a prolonged period of low inflation or even mild deflation going forward. In addition, micro‐level data on wages suggest no obvious downward rigidity in the firm's wage bill, downward rigidity in individual wages notwithstanding. As a consequence, downward nominal wage rigidity may not be enough to offset deflationary pressures in the current situation.     

DISTRIBUTIONS OF FINANCIAL RATIOS IN THE COMMERCIAL BANKING INDUSTRY

Much research in banking assumes that the data are normally distributed. There has been little empirical confirmation of this assumption. In this paper, the normality assumption is subjected to an extensive test using data for virtually all U.S. commercial banks for several years. The statistical characteristics of 11 common financial ratios are investigated. The findings reject any broad assumption of population normality.