Nonlinear Models in Corporate Finance Research: Review,Critique, and Extensions

Since the work of Morck, Shleifer and Vishny (1988), nonlinear model specification has gained more attention in corporate finance research. In this paper, we provide a detailed review of the previous studies that have examined nonlinear relations in corporate finance. We review the theory and evidence in these studies and discuss the advantages and disadvantages of the various methodologies used to detect nonlinearity. We also suggest two possible methodological extensions, which we apply in the empirical analysis of R&D investment and firm value.     

Merger and acquisition FDI,relative wealth and relative access to bank credit: Evidence from a bivariate zero-inflated count model

We use a bivariate zero-inflated negative binomial model to examine Japanese merger and acquisition (M&A) FDI jointly with other types of Japanese FDI (or non-M&A FDI) into the United States. We find that for firms likely to engage in FDI, their rates of FDI are affected by the financial health of their main banks. However, only the rate of M&A FDI is affected by relative wealth. The rate of non-M&A FDI is affected by profitability and firm size. Our findings show the importance of distinguishing M&A FDI from non-M&A FDI and of considering the two types of FDI jointly.     

The moderating roles of job control and work-life balance practices on employee stress in the hotel and catering industry

This study investigated the relationships among job stressors, coping resources, and job stress. Data were collected from food service employees (n = 255) in the hotel and catering industry. Hierarchical regression showed main significant effects of job demands and job control and three-way (job demands × job control × work-life balance practices) interactions on job stress. The results further demonstrated that high job demands coupled with low job control and the availability of work-life balance practices resulted in a higher level of stress. Implications for Karasek's job demand–control model, managerial practice and future research are provided.     

BROKERAGE ANALYSTS' RATIONALE FOR INVESTMENT RECOMMENDATIONS: MARKET RESPONSES TO DIFFERENT TYPES OF INFORMATION

We examine the rationales provided when sell‐side analysts change investment recommendations. Although most changes in investment advice cite company fundamentals, analysts justify one in eight recommendation changes solely on the basis of price movements. Although markets react to price‐basis recommendations, these reactions are smaller and less prolonged than to recommendations citing company fundamentals, consistent with investors' giving more weight to recommendations conveying fundamental information. Our results also suggest that sell‐side analysts' incentives are tilted against downgrades. Price responses to downgrades are more pronounced than to upgrades, even controlling for the rationale. Moreover, the language justifying an upgrade is more likely to cite a general change in business prospects. In contrast, downgrades are more likely accompanied by an explicit reduction in the analyst's earnings forecast. JEL classification: G24, G14, G12.     

Modeling Speculative Activity in the Hong Kong Residential Property Market

Using the Granger definition in a bivariate context, this paper investigates the relation between speculation and real estate prices in Hong Kong. Based on monthly data, the paper shows that in the mass residential property market, speculation and property prices are each integrated of order one, and hence cointegrated. A vector error correction model is then estimated for speculation. The error correction term is found to be statistically significant, implying Granger causality running from property prices to speculation in the mass residential property market. The empirical findings provide evidence that fluctuations in residential property prices cause fluctuations in housing speculation. A long-term solution to curb speculative activities and stabilize property prices is to increase the supply of housing land, and in turn the supply of private residential property. Steady property supply of will reduce acceleration of property prices and thus restrict speculation.     

Growth accounting for a technology follower in a world of ideas: The case of Singapore

We account for the sources of Singapore's growth by being explicit about the channels through which Singapore benefits from international R&D spillovers. We find that 61.5% of Singapore's real GDP per worker growth over the 1970–2004 period is due to multifactor productivity growth. More specifically, 52.1% of the growth is explained by an increase in the effectiveness of accessing ideas through improvement in Singapore's educational quality as well as increases in machinery imports and foreign direct investment from the G5 countries. Taking account of technology transfer raises the average rate of return to capital to 12.5%.     

Market Crashes and Informational Avalanches

This paper analyses a security market with transaction costs and a sequential trading structure. Transaction costs may prevent many traders from revealing their private information if they trade in a sequential fashion. Due to the information aggregation failure, hidden information gets accumulated in the market which may be revealed by a small trigger, yielding a high volatility in the absence of an accompanying event. The paper first characterizes the optimal trading strategy of the agent which constitute the unique equilibrium. Further properties of the price sequence are obtained using the concepts of informational cascade and informational avalanche.
The results are applied to the explanation of market crashes. In particular, the dynamics of market crashes are illustrated as evolving through the following four phases: (1) boom; (2) euphoria; (3) trigger; and (4) panic; where the euphoria corresponds to the informational cascade and the panic corresponds to the informational avalanche.     

DO FOREIGN INVESTORS PRICE FOREIGN EXCHANGE RISK DIFFERENTLY?

We test whether foreign investors price foreign exchange risk differently from local investors. Drawing from the closed‐end country fund literature, we argue that both differential access to information by foreign versus local investors and different sources of exchange risk that investors face (economic or translation exposure) will lead to different pricing of the exchange risk associated with American Depositary Receipt (ADR) investments. We apply a two‐step method to country portfolios of ADRs of Australia, France, Japan, and the United Kingdom traded on the New York Stock Exchange. Our results show that foreign investors generally price exchange risk differently from local investors, and that the source and magnitude of differences in exchange risk pricing vary significantly across countries. Although significant differences in pricing exchange risk between foreign and local investors are observed for Australia, France, and Japan, no such pricing difference is noticed for the United Kingdom. Furthermore, the pricing differences observed for Australian and French ADRs are mainly attributed to the exchange risk of underlying share returns (economic exposure), whereas the pricing differences for Japanese ADRs are mainly attributed to the exchange risk associated with currency translation (translation exposure). We offer some explanations for our findings.     

Effects of Executive Share Option Plans on Shareholder Wealth and Firm Performance: The Singapore Evidence

The main purpose of our paper is to study the institutional nature and characteristics of executive share option plans (ESOPs) in Singapore, a fast-growing economy and an important investment location in Asia. Our study provides an interesting comparison between the characteristics of ESOPs in Singapore and those in the US. Our paper also investigates the short-term market reaction to ESOP announcements and the long-run stock and operating performance of the sample firms following the adoption of the ESOPs. Results indicate weak evidence of a positive abnormal return on the days surrounding the announcement of the ESOPs. However, there is no evidence of long-term superior stock and operating performance for the ESOP firms relative to benchmarks. The lack of significant incentive effects for the sample firms reflects mainly the unique regulatory environment in Singapore.