Eurasian energy prospects and politics : Need for a longer-term western strategy

The Eurasian world around the Caspian Sea is likely to become an important oil and natural gas producer. This region is a gateway to three regions that are of great strategic importance to the West: to the east lies China and the rest of Asia; to the south lies Iran, Afghanistan, and the Islamic world; to the west and north lies Russia, Turkey and Europe. This is a region much larger than Western Europe. Future developments in Eurasia will therefore affect fundamentally not only the security of Western energy supplies, but also the traditional geopolitical equation in that part of the globe. The West needs to address current problems there as well as to pursue a proactive policy of conflict prevention. The European Union already imports half of its primary energy requirements, which will increase to 75% by the year 2020. Mutually rewarding energy cooperation offers the best means for integrating this region into the world family of market democracies. Turkey, a reassuringly Western ally, stands well positioned geographically, politically and economically to act as an energy ‘bridge’ between Eurasia and the West.     

Price uncertainty and corporate value

This study examines the sensitivity of equity values of oil producers to changes in the uncertainty of future oil prices. We document that this sensitivity is negatively correlated with a firm's debt ratio and its production costs. These results indicate that companies that are more likely to experience financial distress or underinvestment from low cash flows are adversely affected by increases in the uncertainty of future cash flows. We conclude that corporate risk management can increase shareholder value by reducing the expected costs of financial distress and underinvestment.     

ADDING VALUE FOR SHAREHOLDERS IN SOUTH AFRICA: AN ANALYSIS OF THE REMBRANDT RESTRUCTURING

Thanks to a restructuring movement known as "unbundling," which involves the selling or otherwise splitting off of unrelated businesses, the South African corporate landscape has changed materially from the system dominated by family controlled groups of companies that the author described in this journal six years ago. Holding companies like Anglo-American, the largest and best known of all the groups, have become more both more focused and more international (in those lines of business they have chosen to retain). At the same time, they have relinquished a good deal of control to outside shareholders.
But if unbundling has succeeded in adding value in some cases, it is by no means a panacea for shareholders. Value is likely to be added for shareholders only when such restructurings are expected to (1) increase the efficiency of existing operations; (2) discontinue value-destroying investments; or (3) encourage new investment only in projects that are expected to return more than their cost of capital. For this reason, a restructuring like the one recently completed by the Rembrandt group—one that simply divided the company into two major parts while retaining the old managerial control structure—does not hold out much promise for shareholders.
Besides challenging the basic premise of the Rembrandt structuring, the author also questions a common practice among financial analysts: the tendency to view a company that trades at a "discount" to its net asset value as an obvious candidate for unbundling. As currently calculated, the relationship between a holding company's market value and the net asset values of its listed (and unlisted) subsidiaries provides an unreliable indication both of the extent to which management has succeeded in delivering value in the past, and whether an unbundling is likely to increase shareholder value in the future.     

Excess value and restructurings by diversified firms

We examine whether restructuring decisions by diversified firms are related to their excess values. We find that changes in diversification level, measured as changes in the number of segments or number of industries, are positively and significantly associated with excess values. Further, at lower levels of excess values, firms are significantly more likely to increase focus than maintain their existing levels of diversification and, at higher levels of excess values, they are significantly more likely to diversify further than maintain or reduce their current levels of diversification. These findings indicate that excess value variations are meaningful and predict restructuring decisions.     

A Better Way to Measure Operating Performance (or Why the EVA Math Really Matters)

Most companies rely heavily on earnings to measure operating performance, but earnings growth has at least two important weaknesses as a proxy for investor wealth. Current earnings can come at the expense of future earnings through, for example, short‐sighted cutbacks in investment, including spending on R&D. But growth in EPS can also be achieved by investing more capital with projected rates of return that, although well below the cost of capital, are higher than the after‐tax cost of debt. Stock compensation has been the conventional solution to the first problem because it's a discounted cash flow value that is assumed to discourage actions that sacrifice future earnings. Economic profit—in its most popular manifestation, EVA—has been the conventional solution to the second problem with earnings because it includes a capital charge that penalizes low‐return investment. But neither of these conventional solutions appears to work very well in practice. Stock compensation isn't tied to business unit performance—and often fails to provide the intended incentives for the (many) corporate managers who believe that meeting current consensus earnings is more important than investing to maintain future earnings. EVA doesn't work well when new investments take time to become profitable because the higher capital charge comes before the related income. In this article, the author presents two new operating performance measures that are likely to work better than either earnings or EVA because they reflect the value that can be lost either through corporate underinvestment or overinvestment designed to increase current earnings. Both of these new measures are based on the math that ties EVA to discounted cash flow value, particularly its division of current corporate market values into two components: “current operations value” and “future growth value.” The key to the effectiveness of the new measures in explaining changes in company stock prices and market values is a statistical model of changes in future growth value that captures the expected effects of significant increases in current investment in R&D and advertising on future profits and value.     

Sovereign risk spillovers: A network approach

Understanding the global financial network for sovereign debt, particularly with a focus on interaction and spillover effects of sovereign risk, has become important for policy makers as they look to protect the stability of their economies. Using high dimensional Vector Autoregression techniques and network simulation on Sovereign Credit Default Swaps (CDS)’ data of 57 countries, we identify that the global sovereign CDS network is fully integrated as there is virtually no country without any connection to at least one specific node in the system. However, each country has a unique attribute in the network, as a risk exporter or importer and/or risk transmitter. Among developed countries, the US (unsurprisingly) holds the dominant position as a risk exporter while Germany is identified as a connecting country that transmits shocks. The most connected countries in the sovereign CDS network belong to the new European Union members. We examine possible drivers of the network relationships observed, in order to better understand the risk transmission process, and find that connections in the sovereign risk network are stronger within regional groups and countries with the same level of economic development. Central and Eastern Europe and Middle East and Africa have more interactive networks than Northern Western Europe, Asia Pacific and Latin America. We also identify that financial volatility and economic policy uncertainty increase the interactions in market-based default risk assessment.     

Blockholder ownership: Effects on firm value in market and control based governance systems

In this study, Granger tests are used to examine the relationship between blockholder ownership and the values of the largest companies in the European Union and the US. Previous studies on US data have found that blockholder ownership has no systematic effect on performance. We propose that these results may not apply to Continental Europe, where ownership concentration is typically higher, the level of investor protection is lower, and influential blockholders may have objectives other than shareholder value. In accordance with previous research, we find no significant association between blockholder ownership and prior or subsequent firm value in either the US or the UK. Nonetheless, in Continental Europe we find a negative association between blockholder ownership and firm value or accounting returns in the next period. Further analysis reveals that this association is significant only for companies with high initial levels of blockholder ownership (> 10%). We interpret this finding as evidence of conflicts of interest between blockholders and minority investors. The percentage of blockholder ownership in Continental Europe may be too high from a minority shareholder value viewpoint.     

Managerial ownership dynamics and firm value

From 1988 to 2003, the average change in managerial ownership is significantly negative every year for American firms. We find that managers are more likely to significantly decrease their ownership when their firms are performing well and more likely to increase their ownership when their firms become financially constrained. When controlling for past stock returns, we find that large increases in managerial ownership increase Tobin's q. This result is driven by increases in shares held by officers, while increases in shares held by directors appear unrelated to changes in firm value. There is no evidence that large decreases in ownership have an adverse impact on firm value. We rely on the dynamics of the managerial ownership/firm value relation to mitigate concerns in the literature about the endogeneity of managerial ownership.     

Two scenarios for Europe: “Europe confronted with high energy prices” or “Europe after oil peaking”

A significant change in trends regarding energy prices (in particular oil) has taken place in 2003 at the beginning of the Iraq War. It has revealed a very strong tension between oil prices on the one hand and the relationship between global oil supply and demand on the other. The strong growth rates of emerging economies up to 2008 have generated a very sharp increase in oil prices. The temporary economic recession of 2008-2009 has resulted in turn into a significant decrease of oil prices, down to a level which remained, however, twice as high as that of early 2003. With the economy recovering from the recession, it is highly probable that energy prices will continue to increase and that Europe will be confronted with high energy prices in the coming decades. Against this general background, two scenarios have been elaborated which differ mainly by the time of occurrence of oil peaking.¹ The differences between the scenario hypotheses are therefore differences of context in relation to exogenous factors. Policies are also considered in the scenarios, but they are not at the forefront and their impact is considered as limited in relation to that of exogenous factors.The first scenario “Europe in a context of high energy price” assumes that the process of oil peaking will not take place before 2030, but that oil price increase will nevertheless be sustained and substantial until then. Numerous adjustments will have to be made in the economy and their territorial impacts will be significant (less polycentricity, more compact cities, decline of the importance of road and air transport). The second scenario “Europe after oil production peaking” assumes that oil production will peak around the mid-2010s (followed by gas production peaking around 2025), despite significant investments to increase production. In a context of steadily growing oil and gas demand, Europe will be confronted with serious economic difficulties. The territorial impacts will be different from those suggested by the first scenario, with stronger pressure put on rural areas and a loss of attractiveness of large cities related to increasing unemployment and social tensions. In both scenarios, the countries of central and eastern Europe will be more severely hit by the new energy context.The scenarios were elaborated in 2005 and slightly reviewed in 2009 in order to take account of the impacts of the economic recession in Europe and of the growing concerns about climate change.     

A Primer on the Financial Policies of Chinese Firms: A Multi‐country Comparison

Chinese companies have grown rapidly over the past few decades, and become increasingly global in the process. In the past five years, the aggregate market capitalization of public companies in China increased more than ten‐fold and their revenue from outside China grew 60%. Nevertheless, Chinese companies have financial policies that are notably different from those of their global counterparts in North America and Europe, and that difference could end up limiting their future profitability and growth. In this report, J.P. Morgan's Corporate Finance Advisory team compares the capital structures of large Chinese companies to those of the largest companies in the U.S., the U.K. and Germany. Among the most important findings, Chinese companies have materially more leverage, much greater reliance on bank loans than bonds, and maturities that are almost 80% shorter than those of typical U.S. companies. To bring their balance sheets in line with those of their global peers, Chinese companies are likely to have to raise over 5 trillion yuan (over $750 billion) in equity while also issuing roughly the same amount in bonds. At the same time, in order to attract that capital on economic terms, they will likely need to find ways to increase the profitability of their businesses, whose return on equity is well below international standards. As the authors point out in closing, making such significant changes in financial and operating policies could be challenging for all stakeholders, and cause some potential dislocation in the short run. But however disruptive, such changes are most likely to ensure the ability of Chinese companies to create the most value in the long run.     

A longitudinal examination of intellectual capital reporting in Marks & Spencer annual reports, 1978–2008

This paper examines the intellectual capital content of Marks & Spencer annual reports over a 31 year period from 1978 to 2008 using a content analysis instrument. Motivated by the gap among prior studies in respect of longitudinal samples, the paper also sets out to note the ways in which the annual report has changed over the three decades in response to the supposed change from the assumption that fixed assets and operations were the key driver of value creation to a belief that knowledge and the stock of intellectual assets had become a more powerful explanation of value-added. The paper finds an overall increase in intellectual capital reporting over the 31 years but notes a particular increase in relational capital reporting and a re-ordering of sub-categories over time. Narrative (as opposed to quantitative) reporting has increased and ‘factual’ (as opposed to opinion and judgement) reporting has decreased. The paper concludes that annual report narratives have reflected a wider change in the market for information among investors and other stakeholders. Whilst the exact nature of these market changes was beyond the scope of this paper, it is concluded that changing patterns of ICR reflect the increased complexity of the messages being conveyed in voluntary reporting. The increased reliance on IC in value creation has, we argue, created a need for narrative of less factual certainty and with more ambiguity and circumspection in describing increasingly complex knowledge assets.     

Update on HIV infection

In the third decade of the global epidemic, it is evident that human immunodeficiency virus (HIV) disease is quite different from the disease first recognized among a small number of homosexual men in 1981. The spread of HIV has been particularly alarming in developing countries, especially sub-Saharan Africa and Southeast Asia, and it continues to threaten other populations in Eastern Europe, Latin America and the Caribbean. HIV therapeutic advances have resulted in a marked decrease in acquired immunodeficiency syndrome (AIDS) incidence and death in the United States and Western Europe. With the introduction of "triple therapy," antiretroviral treatment has resulted in an extraordinary increase in the quality of life and life expectancy among HIV-infected persons. However, the rate of decline in AIDS incidence and deaths from the latter part of 1998 through 2000 has slowed for a number of reasons. Even with the stabilization of HIV in Western countries, it remains as important as ever to follow sound insurance principles to address HIV risk. The clinical success stories have yet to be translated into the insurance realm. A very strict analysis of the medical literature will be needed.     

Do Investment Banks Have Incentives to Help Clients Make Value‐Creating Acquisitions?

Many have long suspected that investment banks, when advising corporate clients on potential acquisitions, have strong incentives just to “get the deal done” with little if any motive for urging clients to walk away from “bad” deals. The incentive to complete deals comes from compensation arrangements in which the bulk of the bankers' fees depend upon completion of the deals. Several earlier studies have provided support for this suspicion by reporting findings that show banks' market shares of advisory services depending mainly on two variables—their previous market shares and their deal completion rate—with little if any connection to the value created (or destroyed) for their clients' shareholders. In their recently published study, the authors revisit that relationship and reach a number of different conclusions: (1) advisors in acquisitions that create more value for clients are more likely to be chosen for future deals; (2) the changes in bankers' advisory market shares are strongly related to the value created for prior clients; and (3) the changes in banks' market values are positively correlated with the value created for their acquirer clients. In sum, the findings suggest that banks have significant market‐related incentives to advise their clients to pursue value‐creating acquisitions and to avoid deals likely to reduce their market values.     

Common stock repurchases: An analysis of returns to bondholders and stockholders

This paper examines the effects of a common stock repurchase on the values of the repurchasing firm's common stock, debt and preferred stock, and attempts to identify the dominant factors underlying the observed value changes. The evidence indicates that significant increases in firm values occur within one day of a stock repurchase announcement. These value changes appear to be due principally to an information signal from the repurchasing firm. Common stockholders are the beneficiaries of virtually all of the value increments, but no class of securities examined declines in value as a result of the repurchase.     

论欧元汇率波动：一个欧美博弈视角

欧元自1999年面世以来,其走势和前景引起众人关注,许多人纷纷利用购买力平价等各种汇率决定理论对其汇率走势进行预测,然而其汇率变化仍然出乎意料,欧元从最初的一路狂跌,到2002年以来强劲上扬。传统经济学理论无法预测和解释欧元的波动,而欧美博弈,尤其是美国政府的态度,对于欧元的波动影响颇大。欧元虽然潜力巨大,但是冲击美元的霸主地位尚需时日。     

Monetary policy,ownership structure,and risk-taking at financial intermediaries

This paper examines how ownership structure interacts with monetary policy in shaping financial intermediaries' appetite for risk. By constructing a large panel of banks across Western Europe, we provide evidence that differences in bank ownership influence the transmission of monetary policy via the risk-taking channel. While shareholder banks actively adjust the riskiness of their portfolios to changes in interest rates, stakeholder banks appear to be less responsive to such changes. These findings call for greater attention to the nature of bank ownership when setting monetary policy.     

Trajectories of Reform: Public Management Change in Four Countries

It is fashionable to think there is a tide, or sequence, of basically similar public management changes sweeping through Western Europe, North America and Australasia, and British ministers have proclaimed that the UK is an admired and copied leader in public sector reforms. This article argues that a uniform 'one-track' picture is not at all accurate. Looking at 15 years of change in Finland, New Zealand, Sweden and the UK, the authors argue there are not only significant differences between each of the countries, but a more general and persistent distinction between the two Nordic countries and the UK and New Zealand. In the 'Westminster system' countries, the aim appears to have been to minimize the extent and distinctiveness of the state sector, whereas in the Nordic countries much greater emphasis has been placed on modernizing the state apparatus so that it can deal better with a changing environment.     

Equity market integration in Central European emerging markets: A cointegration analysis with shifting regimes

We investigate the existence of long-run relations between emerging Central European stock markets and the mature stock markets of Europe and the United States. Allowing for instability in these long-run relations, we obtain evidence of links between the Central European markets that is stronger than has previously been reported. We also show that the Central European markets display equilibrium relations with their mature counterparts, which persist after controlling for structural changes. It follows that Central European markets have become more integrated with global markets.     

Investor Reaction to Salient News in Closed-End Country Funds

We use panel data on prices and net asset values to test whether dramatic country-specific news affects the response of closed-end country fund prices to asset value. In a typical week, prices underreact to changes in fundamentals; the (short-run) elasticity of price with respect to asset value is significantly less than one. In weeks with news appearing on the front page of The New York Times , prices react much more; the elasticity of price with respect to asset value is closer to one. These results are consistent with the hypothesis that news events lead some investors to react more quickly.     

Transparency as a remedy for agency problems in securitization? The case of ECB’s loan-level reporting initiative

Poor transparency of asset-backed securities (ABS) exacerbated the latest subprime lending crisis. In response, the European Central Bank introduced the ABS loan-level reporting initiative, obliging originators to disclose quarterly loan-by-loan information. However, does this increase in transparency alleviate the agency problems inherent in securitization? To answer this question, we examine a novel dataset of 107 ABS pools that are backed by more than 2.8 million loans for small and medium-sized enterprises from the first securitization repository in Europe. The results show that the increase in transparency indeed has valuable effects for investors, inducing originators to improve pool performance and diversification for existing as well as newly issued ABS. These effects persist for a large set of control variables and a broad variety of robustness tests.