The effect of foreign entry and ownership structure on the Philippine domestic banking market

We examine the response of domestic Philippine banks to the relaxation of foreign entry regulations that occurred in the Philippines. We find evidence that foreign bank entry is associated with a reduction in interest rate spreads and bank profits, but only for those domestic banks that are affiliated to a family business group. Foreign entry corresponds more generally with improvements in operating efficiencies, but a deterioration of loan portfolios. Overall, we conclude that foreign competition compels domestic banks to be more efficient, to focus operations due to increased risk, and to become less dependent on relationship-based banking practices.     

Foreign institutional investors,information asymmetries,and asset valuation in emerging markets

This study investigates the effects of information asymmetries and asset valuation model differences (investor heterogeneity) between foreign and domestic investors on their distinct portfolio holdings in an emerging market setting. I argue that information asymmetry and investor heterogeneity views significantly interact in explaining the different asset allocation decisions of foreign and domestic investors. Employing a large dataset from Turkey, the findings suggest that both information asymmetry and investor heterogeneity view play a key role in explaining the investment decisions of different investor groups. Specifically, different from domestic investors, foreign investors are more likely to invest in firms with a higher global market performance which supports the investor heterogeneity view. However, this relationship only holds for firms with high information asymmetries. The difference in valuation models between foreign and domestic investors converge when asymmetric information problems between these investor groups weaken. This study contributes to the international finance literature by providing a new explanation of why foreign and domestic investors invest in different assets.     

Asymmetric volatility in the foreign exchange markets

We examine the presence or absence of asymmetric volatility in the exchange rates of Australian dollar (AUD), Euro (EUR), British pound (GBP) and Japanese yen (JPY), all against US dollar. Our investigation is based on a variant of the heterogeneous autoregressive realized volatility model, using daily realized variance and return series from 1996 to 2004. We find that a depreciation against USD leads to significantly greater volatility than an appreciation for AUD and GBP, whereas the opposite is true for JPY. Relative to volatility on days following a positive one-standard-deviation return, volatility on days following a negative one-standard-deviation return is higher by 6.6% for AUD, 6.1% for GBP, and 21.2% for JPY. The realized volatility of EUR appears to be symmetric. These results are robust to the removal of jump component from realized volatility and the sub-samplings defined by structural-changes. The asymmetry in AUD, GBP and JPY appears to be embedded in the continuous component of realized volatility rather than the jump component.     

Reported and secret interventions in the foreign exchange markets

Using a new approach relying on news wire reports, we estimate the proportion of secret interventions (i.e., unreported official interventions) in the foreign exchange markets that have been conducted by the three major central banks since 1985. We therefore revisit the estimation of conditional probabilities of secret operations and compute them by both central bank and operation type. The proportion of secret interventions is found to be lower for concerted operations and to display a great deal of variability over time as well as across the three major central banks. Our analysis reveals that the Bank of Japan has recently adopted an intervention policy more based on secret operations.     

Openness, profit opportunities and foreign banking

Using new data from the World Bank and OCC surveys, we show correlations across a wide range of countries between foreign banking and domestic economic, financial and bank regulatory conditions. Foreign banking tended to be more prevalent in countries that were more open to foreign ownership of their banks, more open to banks’ engaging in a wider range of financial activities and more open to international trade. Restrictions on foreign ownership of domestic banks that were in place in the late 1970s reduced the current extent of foreign banking. Foreign banking was negatively correlated with current restrictions on banks’ securities, insurance and real estate activities. Countries that had more international trade tended to have more foreign banking. Foreign banking was more pervasive in countries where banking was more profitable and where the domestically-owned banking sector was smaller relative to GDP.     

Price clustering in foreign exchange spot markets

This paper documents the existence of price clustering in the foreign exchange spot market for the German mark, the Japanese yen, the United Kingdom pound, the French franc, the Italian lira, and the Swedish krona. The U.S. dollar exchange rate indicative quotes for these currencies tend to exhibit clustering around right-most digits that end in either a “zero” or a “five.” The tendency for exchange rates to cluster has increased with increases in trading volume and volatility. Moreover, the tendency for exchange rates to cluster differs across currencies.     

Sequential entry and plant location in oligopolistic competition

Weberian location theory is confined to a single firm framework, and pays very little attention to the interdependence among firms. To fill up this gap, this article incorporates oligopolistic competition into a simple Weberian model to investigate industrial location patterns when firms are shortsighted, enter sequentially, and locate once-and-for-all. It is shown that the location of a new entrant is closer to (farther away from) the market site compared with the existing firms if the industry is characterized by diseconomies (economies) of scale.     

The emergence of information sharing in credit markets

We provide the first systematic empirical analysis of how asymmetric information and competition in the credit market affect voluntary information sharing between lenders. We study an experimental credit market in which information sharing can help lenders to distinguish good borrowers from bad ones. Lenders may, however, also lose market power by sharing information with competitors. Our results suggest that asymmetric information in the credit market increases the frequency of information sharing between lenders significantly. Stronger competition between lenders reduces information sharing. In credit markets where lenders may fail to coordinate on sharing information, the degree of information asymmetry, rather than lender competition, drives actual information sharing behavior.     

Foreign participation and banking competition: Evidence from the Indonesian banking industry

Foreign participation in Indonesian banking has expanded from the establishment of foreign de novo banks into the acquisition of existing local banks. The increase in foreign participation has therefore not been associated with a growing number of banks. This study aims to examine the competitive behavior of foreign and local banks as a competitive banking industry is important in boosting economic efficiency and economic growth. This study also examines the role of modes of entry of foreign banks on competition, either through the establishment of foreign de novo banks or the acquisition of local banks. The recent methodological refinements of the Panzar–Rosse method developed by Bikker et al. (2011) are employed to estimate the level of competition among local and foreign banks. Generally, the foreign banks, particularly foreign de novo banks behaved more competitively than local banks, and their penetration is therefore important in creating a contestable market. This study found that in terms of assets, on average foreign de novo banks were smaller, more efficient, and had lower overhead costs, so they could offer lower loan rates and disburse more loans. The recent consolidation in the Indonesian banking industry may have an adverse impact on competition as it restricts the establishment of foreign de novo banks.     

Organized labor and information asymmetry in the financial markets

Prior results from the labor relations literature suggest that revealing information weakens management’s position in collective bargaining. Thus, when facing organized labor, management has an incentive to preserve the information asymmetry with outsiders. This study uses a sample from a large cross-section of the economy over several years to test this relation. Results are consistent with this prediction. Strong organized labor is associated with higher bid-ask spreads, higher probability of informed trading, lower trading volume and lower analyst coverage. These relations hold after controlling for numerous factors such as growth opportunities or risk.

Imperfect competition in differentiated credit contract markets

This paper studies a duopolistic credit market in which borrowers differ in risk. In our competition game, one lender is in an advantaged position with respect to the other due to past relations with the borrowers. We investigate the features of the equilibrium contract and show that the best borrower is indifferent between the dominant and the opponent lenders’ contract while the other borrowers prefer that of the dominant lender. Also, repayment and collateral do not depend upon the borrowers’ respective project risk. The author is grateful to Jean-Charles Rochet for his comments and encouragement. The author acknowledges the reviewer’s very careful reading of the paper. The final version has benefited considerably from his comments and suggestions.     

The interrelatedness of global equity markets, money markets, and foreign exchange markets

This article investigates different aspects of global financial markets, specifically relationships among equity markets, money markets, and foreign exchange markets across countries. To represent the three major financial markets of the world, Japan is the proxy for Asia, Germany is the proxy for Europe, and the United States is the proxy for North America. Strong evidence exists that international money markets and international equity markets are becoming increasingly integrated over time. This article incorporates foreign exchange values as partial determinants of equity returns and money market returns and investigates the interactions among these three asset markets from a global perspective.     

The day-of-the-week effect in foreign exchange markets: multi-currency evidence

To investigate to what extent transaction mechanism matters, we examine the daily returns of 29 foreign exchange rates in the New York market. This paper finds that the day-of-the-week effect existed in the 1980s for some, not all, currencies. The fact that the day-of-the-week effect existed for only some currencies suggests that the US transaction mechanism alone cannot explain the anomaly. Furthermore, this paper finds that the day-of-the-week effect disappears for almost all currencies in the 1990s. This latter result is consistent with previous studies on anomalies in the stock markets.     

Tick test accuracy in foreign exchange ECN markets

Recent computer quoting activity has increased the allure of the tick test because the quote rule and its variants require matching asynchronous trade and quote records. We find tick test accuracy of 1.2 million forex trades is about 67% which falls to 63% for zerotick trades (half the sample). Accuracy declines as quoted spreads decrease and as time to the previous trade increases. We observe extreme asymmetry for midquote changes, where buyer accuracy is 96% (27%) for up (down) changes, respectively. The quote rule is about 77% accurate. The group tick test is superior to the bulk volume classification method.     

The accuracy of reports of foreign exchange intervention by the Bank of Japan: Does Tokyo know more?

This paper examines the accuracy of press reports of foreign exchange intervention by the Bank of Japan. We investigate whether the local news wire (JiJi News) reacted differently from the foreign press (Wall Street Journal) between January 2000 and December 2003. Our results show that the likelihood of intervention being reported given that it actually occurred is higher for the JiJi News than for the Wall Street Journal, but the JiJi News has many more instances of false speculative intervention reports. As such, the underreporting by the Wall Street Journal mitigates its overall errors as compared to the JiJi News. We find that the change of Japan's intervention strategy from the beginning of 2003 has a major impact on the accuracy of press reports. Logit analysis also demonstrates that the likelihood of intervention being firmly reported increased with the size of the intervention and the magnitude of appreciation of the Japanese yen.     

On the nature of credit demand and credit rationing in competitive credit markets

Conventional analyses of the credit rationing problem seek to explain that problem within the context of classic demand analysis. In this paper we demonstrate that it is generally inappropriate to apply the notion of classic demand to credit markets, consequently, conventional notions of credit rationing must be rejected. In providing a new definition of credit rationing we also establish the previously rejected characterized by credit rationing.     

The failure of new entrants in commercial banking markets: a split-population duration analysis

Almost one in four of the new commercial banks chartered in the United States during the 1980s failed. This study uses a split-population duration model to examine failure patterns and failure determinants for these banks and compares the results to a benchmark model estimated for small established banks. The results are consistent with a “life cycle” pattern of new bank failure: compared to small established banks, newly chartered banks are initially less likely, then substantially more likely, and finally equally likely to fail. These patterns were most extreme for banks chartered just prior to the banking recession of the late 1980s or early 1990s.     

The valuation-relevance of the foreign translation adjustment: The effect of barriers to entry

We examine the economic effects of barriers to entry on the association between foreign currency translation adjustments and the stock returns of multinational firms operating in the manufacturing and service industries. Firms that are innovation leaders, that is, firms that are research and development (R&D) intensive and firms with high foreign asset intensity (i.e., asset-intensive firms), are our proxies for firms operating in environments with barriers to entry (i.e., environments in which competition is less intense). We hypothesize and find that foreign currency translation adjustments are positively associated with abnormal stock returns for firms operating in environments with barriers to entry in both manufacturing and service industries. This finding highlights the importance of assessing the valuation-relevance of foreign currency translation adjustments by considering the economic contexts of foreign currency movements. Overall, the evidence shows that the accounting rules governing foreign currency translations generally produce results consistent with the economic effects of foreign exchange rate changes.     

The impact of foreign bank entry in emerging markets: Evidence from India

This paper uses the entry of foreign banks into India during the 1990s—analyzing variation in both the timing of the new foreign banks’ entries and in their location—to estimate the effect of foreign bank entry on domestic credit access and firm performance. In contrast to the belief that foreign bank entry should improve credit access for all firms, the estimates indicate that foreign banks financed only a small set of very profitable firms upon entry, and that on average, firms were 8 percentage points less likely to have a loan after a foreign bank entry because of a systematic drop in domestic bank loans. Similar estimates are obtained using the location of pre-existing foreign firms as an instrument for foreign bank locations. Moreover, the observed decline in loans is greater among smaller firms, firms with fewer tangible assets, and firms affiliated with business groups. The drop in credit also appears to adversely affect the performance of smaller firms with greater dependence on external financing. Overall, this evidence is consistent with the exacerbation of information asymmetries upon foreign bank entry.     

Entry mode choice of multinational banks

When expanding abroad, a multinational bank faces a trade-off between accessing a foreign country via cross border lending or financial foreign direct investment, i.e. greenfield or acquisition entry. We analyze the entry mode choice of multinational banks and explicitly derive the entry mode pattern in the banking industry. Moreover, we show that in less developed banking markets, a trend towards cross border lending and acquisition entry exists. Greenfield entry prevails in more developed markets. Furthermore, we identify a tendency towards acquisition entry in smaller host countries and towards greenfield entry in larger host countries.