Price‐Setting Behaviour in Lesotho: Stylised Facts from Consumer Retail Prices

This paper documents some of the main features of price‐setting behaviour by retail outlets in Lesotho over the period March 2002 to December 2009. These features include the frequency, size, duration and synchronisation of price changes. In addition, the paper compares price‐setting behaviour in Lesotho and South Africa using a comparable set of products. The findings reveal considerable heterogeneity in price‐setting behaviour across products, outlets, locations and time. Variations in inflation are strongly correlated with the average size of price changes, but rising inflation raises the frequency of price increases and reduces the frequency of price decreases. Price decreases constitute an important determinant of inflation movements. Surprisingly, the frequency and size of price changes in Lesotho differ substantially from those in South Africa, despite the presence of common retail chains and their joint membership in a customs union and common monetary area. These findings open up opportunities for further research into the sources of heterogeneity across products and Lesotho and South Africa in the setting of prices.     

Tacit Collusion in Price‐Setting Oligopoly: A Puzzle Redux

We study tacit collusion in price‐setting duopoly games with strategic complements and substitutes. While this problem has been considered by several studies, this article sheds new light on the comparison by focusing on the relationship between dynamic stability of equilibrium and tacit collusion. We find when controlling for the absolute slope of the reaction functions, there are no robust differences in either the convergence properties or tacit collusion between complements and substitutes treatments.     

The Link between Earnings Conservatism and the Price‐to‐Book Ratio*

We hypothesize and find that (1) earnings conservatism, the tendency of firms to recognize bad news in earnings on a more timely basis than good news, is substantially greater in portfolios of firms with lower price‐to‐book ratios than in portfolios of firms with higher price‐to‐book ratios; and (2) the negative association between earnings conservatism and the price‐to‐book ratio stems primarily from the accrual component of earnings, not the operating cash flow component of earnings. Our results suggest that studies using earnings‐returns associations to investigate cross‐sectional or time‐series differences in earnings conservatism risk drawing erroneous inferences unless the research designs control for cross‐sectional or time‐series variation in price‐to‐book ratios.     

Technological Capability and FDI in Asia: Firm‐level Relationships among Japanese Manufacturers*

The present paper reexamines the relationship between technological capabilities and FDI decisions at the firm level. The data cover 118 300 Japanese firms in all manufacturing industries. The R&D of Japanese firms has a noticeably weaker relationship with FDI in Asia than with FDI in industrial countries. This finding is confirmed to be robust even when alternative estimation techniques are used and when R&D expenditure data are replaced by patent data. The estimation results also reveal non‐negligible fixed entry costs for FDI, a finding consistent with the observation that only approximately 2 percent of the firms invest abroad.     

Tunneling by Related‐party Transactions: Evidence from Korean Conglomerates

This study analyzes tunneling created by related‐party transactions (RPT) in relation to controlling shareholders' cash‐flow rights. Results of the analysis confirm a statistically significant relation between cash‐flow rights and the earning rates of major controlling shareholders, indicating a transfer of wealth through RPT among affiliates of business groups. Furthermore, it is found that more sales made through RPT out of the total sales result in a higher earning rate, which implies that RPT affect the differences in earning rates among affiliates.     

The Sarbanes‐Oxley Act of 2002 and Capital‐Market Behavior: Early Evidence*

The Sarbanes‐Oxley Act of 2002 (“the Act”) was enacted in response to numerous corporate and accounting scandals. It aims to reinforce corporate accountability and professional responsibility in order to restore investor confidence in corporate America. This study examines the capital‐market reaction to the Act and finds a positive (negative) abnormal return at the time of several legislative events that increased (decreased) the likelihood of the passage of the Act. We interpret this finding as evidence supporting the notion that the Act is wealth‐increasing in the sense that its induced benefits significantly outweigh its imposed compliance costs. We also find that the market reaction is more positive for firms that are more compliant with the provisions of the Act prior to its enactment.     

Audit‐Firm Tenure and the Quality of Financial Reports*

This study examines whether the length of the relationship between a company and an audit firm (audit‐firm tenure) is associated with financial‐reporting quality. Using two proxies for financial‐reporting quality and a sample of Big 6 clients matched on industry and size, we find that relative to medium audit‐firm tenures of four to eight years, short audit‐firm tenures of two to three years are associated with lower‐quality financial reports. In contrast, we find no evidence of reduced financial‐reporting quality for longer audit‐firm tenures of nine or more years. Overall, our results provide empirical evidence pertinent to the recurring debate regarding mandatory audit‐firm rotation — a debate that has, to date, relied on anecdotal evidence and isolated cases.     

Job Mismatch and On‐the‐job Search Behavior Among University Graduates in Malaysia

This paper examines the incidence and the effects of job mismatch on workers' job search behavior while working in Malaysia. Using the 2007 Graduate Tracer Study (GTS‐07) dataset, approximately 32 percent of workers were deemed mismatched and 52 percent were actively looking for another job. Using a logit model, the risk of being engaged in on‐the‐job search activity was higher among the mismatched workers and the magnitude of the effects was greater for the severely mismatched than for the moderately mismatched workers. This suggests that the mismatched workers are heterogeneous. This might be due to different traits of workers or there may be unobserved heterogeneity that varies from one mismatched to another mismatched worker.     

Firm Productivity and Foreign Direct Investment into Non‐core Activities*

As foreign direct investment (FDI) often originates from multinational enterprises (MNEs) with non‐core activities and not single‐product firms, as MNE theory typically suggests, we hypothesize that such firms are more productive than MNEs without non‐core activities as well as non‐MNE firms. We test this hypothesis using Kolmogorov–Smirnov stochastic dominance Tests and Japanese firm‐level productivity and FDI data for the period 1985–2001. We find that both manufacturing and service multinational firms with non‐core foreign investments stochastically dominate firms without non‐core activities. We also find cost‐complementarities between certain core and non‐core FDI activities that span both manufacturing and service affiliates.     

Control–ownership Disparity and Business Performance: A Study of Korean Firms

In Korea, there is a large disparity between voting and cash flow rights (control–ownership disparity). Using firm‐level data from Korea for the 2004–2009 period, the present study examines whether control–ownership disparity influenced firm performance. Specifically, the study analyzes whether the effects of control–ownership disparity on firm performance vary according to the type of firm (publicly traded vs private firms) and to the major shareholder's ownership stake (greater than 50 percent vs less than or equal to 50 percent). According to the results, the negative effect of control–ownership disparity on firm performance was weaker for publicly traded firms, and control–ownership disparity had a negative effect on firm performance when the major shareholder's ownership stake exceeded 50 percent.     

How the Internet Promotes China's Exports: A Firm‐level Perspective

The development of information and communications technology (ICT), particularly the Internet, has reduced trade costs. However, it remains unclear whether these reduced costs are reflected in the “extensive margins” of firms’ exports (which refer to the probability of firms exporting) or the “intensive margins” (which refer to the value of firms’ export). To test this, we used the concepts of information cost and binary margins, an augmented trade model of firm heterogeneity, a two‐stage Heckman estimation, and data from the World Bank Enterprise Survey of Chinese firms in 2012. The results revealed that reduced trade costs from the use of ICT were positively related to extensive margins but that the connection with intensive margins was not significant. The results lead to the conclusion that reduced information costs related to a firm's exporting behavior were primarily reflected in variable trade costs. This study offers theoretical and empirical evidence for China's policies towards the Internet, which are relevant for the export of manufactured goods. The government should encourage the use of ICT to enhance firms’ export opportunities while facing current trade policy uncertainty.     

Pandemic (COVID‐19) Policy,Regional Cooperation and the Emerging Global Production Network†

In this paper, we explore the possible policy responses to the COVID‐19 pandemic shock as well as the related economic (financial crisis) shocks on trade and global value chains (GVC) in East Asia. We find that regional policy coordination is critical to mitigate and isolate the pandemic shock. It is important to identify the pandemic events early to flatten the pandemic curve at the national and regional level. This supports a recent study by the World Bank (2020), which highlights the importance of early mitigation policies during the pandemic shock. The cost of the pandemic and economic shocks will increase significantly when several countries in the region experience the pandemic shock concurrently. In this case, flattening the regional pandemic curve becomes important. The results also indicate the need for greater coordination in East Asia to mitigate the pending economic shock in terms of unemployment, corporate bankruptcy and financial market fragility. The paper also highlights that the stability of the GVC network is critical during the pandemic in terms of hedging the risk of disruptions to the procurement of critical medical and health products as well as maintaining service linkages to manufacturing, such as the logistics sector. Regional policy coordination and the stability of GVC will be valuable in the post‐pandemic recovery of the region.     

Childbearing and the distribution of the reservation price of fertility: The case of the Korean baby bonus program

We study the fertility effects of a Korean pro-natalist policy. We show that using the same assumptions and the same binary-choice models used in this literature, and we can estimate the entire unconditional distribution of the reservation price of fertility, which is the minimal compensation an agent must receive to induce her to have a (or an additional) child. Our estimates show that the program’s benefit level and budget would have to be orders of magnitude (about 15 times) larger for the program to bring South Korea back to desired levels of fertility. We also found that over 74% of the program’s expenditures are associated with infra-marginal births – these are births that would have occurred even in the absence of the financial incentive. We show that this is likely not a unique characteristic of the Korean pro-natalist policy but instead a problem of most programs of this nature.     

Revisiting Cash Endowment and House Money Effects in an Experimental Auction of a Novel Agri‐food Product in the Philippines

This study explores the effect of varying cash endowments on bidding behavior in auction experiments conducted in a developing country. Our results suggest that cash endowment levels can have different effects on bidding behavior under second price auction and random nth price auction. In contrast to past studies conducted in developed countries, we generally do not see the presence of positive house money effect in our results. If behavior varies significantly as the cash endowment is varied, then care must be taken when designing auction experiments or when comparing results to other experimental results and theoretical predictions.     

Motivation of Parent–Child Co‐residence Behavior: Evidence from the China Health and Retirement Longitudinal Study

This paper examines the motivations of parent‐child co‐residence behavior in China using data from the China Health and Retirement Longitudinal Study. We test three possible motives: social norms, self‐interest and altruism. We find that social norms play an important role in household co‐residence behavior, showing that the belief that “sons take care of parents” is strong, and children in different birth orders take different responsibilities. Taking the one‐child policy as a natural experiment, we compared co‐residence behavior between only‐child and multi‐child families. This allowed us to test whether children in multi‐child families with wealthier parents more often co‐reside in order to compete for a bequest. We find that parents' wealth is more appealing to children in multi‐child families. The results support the life cycle theory that co‐residence decisions are motivated by self‐interest. We also find some evidence of altruism when parents and children make co‐residence decisions. These findings provide some insights for designing future elder‐support policies in China.     

High‐Frequency Contagion of Currency Crises in Asia*

Using daily data from the Asian currency crisis, the present paper examines high‐frequency contagion effects among six Asian countries. The ‘origin’ (of exchange rate depreciation, or decline in stock prices) and the ‘affected’ (currencies, or stock prices) in the daily spillover relationship were defined and identified. Indonesia is found to be the main origin country, affecting exchange rates of other countries. Contrary to conventional wisdom, evidence of high‐frequency crisis spillover from the Thai exchange rate to other currencies was weak at best. There exists a high‐frequency contagion in stock markets among East Asian countries. Contagion coefficients are positively correlated with trade indices, indicating that investors lower their financial assessment of a country that has trade linkage to a crisis origin country within days, if not hours, of a shock.