The usefulness of earnings versus book value for predicting stock returns and cross corporate ownership in Japan

Using a sample of Japanese firms, this paper evaluates the usefulness of the two fundamental products of an accrual accounting system, namely accrual earnings and book value of equity for predicting stock returns. Our analysis shows that both earnings and book value for Japanese firms have the ability to provide for profitable trading strategies or improved portfolio decisions, and that relative to the trading strategy based on earnings or book value alone, the trading strategy based on a combination of both earnings and book value generates substantially higher returns for all cases. This suggests that book value (or earnings) captures certain aspects of equity values that are not captured by earnings (book value). Our multivariate regression results further indicate that the predictive ability of earnings is dominated by that of book value. Finally, it is found that the predictive ability of book value is sensitive to the degree of cross corporate ownership, while it is insensitive to the degree of real estate holding.     

Decomposition of the increase in earnings inequality in urban China: A distributional approach

This study examines changes in Chinese urban income distribution from 1987 to 1996 and 1996 to 2004 using nationwide household data and investigates the causes of these changes. The Firpo, Fortin, and Lemieux (2007, 2009) method based on unconditional quantile regressions is used to decompose changes in income distribution and income inequality measures, such as variance and a 10:90 ratio. The decomposition results show that wage structure effects, such as a widening gender earnings gap, increases in returns to college education, and increases in earnings differentials between industries, company ownership types, and regions, have been the major contributors to the overall increases in income inequality. It was also found that at different points on the income distribution (e.g., the lower or upper half), the contributing factors that increase income inequality are different.     

Bank market power, economic growth and financial stability: Evidence from Asian banks

This paper examines whether Asian banks are still prone to moral hazard in the aftermath of the 1997 Asian crisis. Using a sample of commercial banks from 12 Asian countries during the 2001–2007 period, our empirical findings highlight that greater market power in the banking market results in higher instability. Although banks are better capitalized in less competitive markets their default risk remains higher. A deeper investigation however shows that such behaviour is dependent on the economic environment. Higher economic growth contributes to neutralize greater risk taking and higher instability in less competitive markets.     

Evading the ‘Taint of Usury’: The usury prohibition as a barrier to entry

The development of capital markets in medieval Europe was shaped for centuries by the religious ban on lending money at interest. This paper examines how this prohibition developed as the outcome of strategic behavior by religious, commercial and political elites. A model is developed to analyze this hypothesis and to examine how the usury prohibition developed over time. It suggests that an important reason for the persistence of the ban was that it created a barrier to entry that enabled secular rulers, the Church, and a small number of merchant-bankers to earn monopoly rents.     

Labor supply response and preferences specification: Estimates for prime-age males in Japan

In this paper, we estimate labor responses of Japanese prime-age males by taking into consideration the Japanese income tax system and utilizing a large micro-data set. We employ three maximum likelihood methods: (i) a modified version of [Hausman, 1979] and [Hausman, 1981] , which assumes a linear labor supply function; (ii) that given by Zabalza (1983), which assumes CES preferences; and (iii) that given by Van Soest (1995), which employs the translog utility function and assumes discrete labor hour choice. While the estimates based on the Hausman and Zabalza methods fare poorly, those based on the Van Soest method result in more plausible labor responses. However, these responses are larger than those of the North American and European counterparts.     

A politically feasible social security reform with a two-tier structure

This paper investigates the welfare implications and political feasibility of social security reforms with a two-tier structure in Japan. We evaluate social security reforms from two points of view: (i) the ex-ante expected value of future generations, and (ii) whether current generations prefer reform to the status-quo system, which we call political feasibility. To evaluate the reforms, we use a large-scale overlapping generations model with idiosyncratic income risk and a two-tier structure. The first tier guarantees a basic pension and the second tier consists of the earnings-related part. Calibrating the parameters of the model to the Japanese economy, we compute the transition path and the two welfare criteria. We find that, given the two-tier structure in Japan, an increase in the basic pension and the abolition of the earnings-related part of the social security system improve the welfare of future generations, and ensures political feasibility when a consumption tax is the source of revenue.     

Money demand in China and time-varying cointegration

Many studies analyze the money demand using a (fixed coefficient) cointegrating regression model, which may not be appropriate to deal with the money demand of a transition economy like China. This paper investigates this issue using a time-varying cointegration approach based on the quarterly data from 1996 to 2009. We find some interesting results: (i) the estimates of the income elasticities are between 0.60 and 0.75, which are comparable with the previous studies; (ii) the estimated interest rate elasticity supports the argument that the overall effect of the interest rate on the money holding is weak although there are some mild evidences that it has been strengthened in recent years; (iii) the substitution effect of equity asset dominates the wealth effect, especially, during the bullish market period. Our result is robust to the alternative choices of the scale or opportunity cost variables and shows that omission of the stock prices in the money demand function would possibly yield a misspecification problem.     

Exchange rate movements and foreign direct investment (FDI): Japanese investment in Asia, 1987–2008

The paper estimates the impact of exchange rate movements on foreign direct investment (FDI). By using the panel data of Japanese FDI flows to nine dynamic Asian economies during 1987–2008, the paper finds that (i) FDI declined with a depreciation of the yen against host country currencies; (ii) it increased with exchange rate volatility; and (iii) it was little affected by the Asian financial crisis, especially when disguised financial flows were removed from the data. A novel result concerns the negative response of FDI to the third moment of monthly exchange rate changes: the volume of FDI was smaller when the distribution was positively skewed (i.e., when the yen was biased towards relatively large depreciation shocks). If skewness proxies for expected mean-reverting changes, this supports the idea that source country investors care about the future stream of revenues and returns denominated in their own currency. These results are robust, with other standard control variables having statistically significant coefficients with expected signs.     

An alternative method of measuring economic efficiency: The case of grain production in China

The objective of this paper is to suggest a simple method to gauge the economic efficiency of firms, when there are no reliable price data. Applying the suggested method on the recent Chinese farm-household survey data collected during 1993 and 1994, this study shows that majority of grain farmers in China are not producing at the optimum levels which yield maximum profits. The analysis also indicates that output can be increased by consolidating rather than further segmenting the operational area of grains.     

Land fragmentation and farm productivity in China in the 1990s

The main objective of this study is to examine the effects of fragmentation on farm productivity in China and to discuss policy implications. Some earlier work has questioned the importance of the economic costs of land fragmentation in developing economies. It has been argued that policymakers should focus instead on reducing the root causes of fragmentation: inefficiencies in land, labour, credit, and food markets. Our results, using a more recent and larger dataset from a household survey in China, find that fragmentation does have an economic cost in China. Production functions are estimated for each of the major grain crops in the sample provinces. We also argue that to reduce the economic costs, land consolidation in China should be undertaken with less government intervention. More attention should be given to the establishment of markets for land (or land use rights) and improvements in rural credit and grain markets.     

Building the dynamic linkages between R & D and productivity growth

This study attempts to integrate the dynamic and spillover characteristics of R & D into the explanation of total factor productivity growth. To characterize the dynamic feature of R & D, the dynamic growth model is reformulated to explicitly consider the contribution of R & D. The two different types of spillover effects are characterized as one that can be used directly and the other that needs to be assimilated by firms' own investment. Empirical application of the theoretical methodology facilitates investigating factors contributing to the growth of the manufacturing sector in Taiwan over the period 1980–1991. It is found that the scale-related components have a dominant contribution in the growth of total factor productivity contributing approximately 95.3% of the growth. Although the spillover effect is quite insignificant, accumulation of R & D capital contributes nearly half of the residual growth of the manufacturing sector.     

The trading behavior and price impact of foreign, institutional, individual investors and government: Evidence from Korean equity market

We examine the dynamic relation between stock returns and four types of investment flows using Korean daily data for the period 1998–2010, focusing on the investment/trading behavior of four types of investors – individual, institutional, government, and foreign – and the effect of cross-border investment flows on the Korean equity market. We find that, first, foreigners and institutional investors tend to drive the Korean equity market, and their trades seem to be information-driven, whereas individual investors do not drive the Korean equity market and their trades do not seem to be information-driven. Second, as a result, both foreigners and institutional investors performed well in the sample period, whereas individual investors performed poorly. Third, the four types of investors differ in their trading behavior. In response to U.S. market returns, foreigners and institutional investors tend to take a momentum strategy whereas individual investors and government tend to take a contrarian strategy.     

Threshold effect in international linkage of stock prices

This paper examines whether the international linkage of the stock price indexes found in previous studies is confirmed for the case where the stock index changes only slightly, utilizing the daily stock price index data from 1975 to 1995 for the US, UK, Germany, and Japan. Using dummy variables in the regressions, it is shown that small changes in the stock price index of any country do not affect the other country's index. In contrast, large changes have a significant effect in most cases. Thus, there is a threshold effect in international linkage of stock prices. It is also shown that negative large changes have a clearer effect than positive ones.     

Testing contagion of the 1997–98 crisis in Asian stock markets with structural breaks and incubation periods

This study tests for the existence of financial contagion, using a method that allows an incubation period before contagion takes effect. We define contagion as an increase in cross-market linkages following shocks. With daily data on Asian stock markets during the 1997–98 crisis, we find significant upward shifts in the linkages between the Asian markets of both crisis and non-crisis countries. The upward shifts are maintained even after controlling for heteroskedasticity and common world and regional factors, providing strong evidence for financial contagion.     

Institutional mechanism for ASEAN-India cooperation: Trends and prospects

ASEAN's dynamic structural change and India's imminent economic liberalisation and deregulation are expected to further strengthen the ASEAN-India relations. A key component in this relationshiup is the institutional mechanism that can facilitate investment and trade flows, social and cultural exchanges and technical cooperation. To intensify these links, ASEAN has established a sectoral dialogue partnership with India in 1993, covering trade, investment and tourism areas. The framework for cooperation also provides for private sector representation. In view of this increasingly important relationship, ASEAN has agreed to upgrade India as a Full Dialogue Partner in 1995. Future changes and streamlining of the ASEAN institutional mechanism is expected to further facilitate and strengthen the ASEAN-India relatiionship.     

Uncertainty and housing tenure choice by household types: Evidence from China

In this paper, we propose an uncertainty-preference-housing choice model and empirically investigate the effect of uncertainty on the probability of homeownership using microdata from Chinese cities. Introducing several measures of uncertainty, we observe that after the reform of the housing distribution system, unemployment uncertainty negatively affects the housing tenure choices of high-income families, whereas educational expenditure uncertainty has a negative effect on the homeownership rates of low-income families. We also find that unemployment uncertainty negatively affects the housing choices of local families and that medical expenditure uncertainty has a negative effect on housing choice for migrant families. Finally, an increase in unemployment uncertainty decreases the homeownership rate among families in which the head of household did not experience the change in enterprise ownership.     

The new main bank system

We develop a main bank model where the main bank decides whether or not to raise additional funds from the capital market to continue to invest in a borrowing firm when nonmain banks withdraw funds. We show that the threat of withdrawal of nonmain banks is more likely to force the main bank to perform efficiently in handling troubled loans, thereby preventing problems with zombie firms, if the potential cash flow (liquidation value) of the firm decreases (increases) relative to the amount funded by nonmain banks. The theoretical results provide both efficiency evaluations for the renewal of the main bank relation in Japan after the end of the 1990s and empirical implications for the renewed main bank system.     

The Korean stock market volatility during the currency crisis and the credit crisis

This paper studies the volatility of the Korean stock market during the Asian currency crisis of 1997–1998 and the global credit crisis of 2008–2009. We use a fad model with Markov switching heteroskedasticity, which was first proposed by Kim and Kim (1996). Using the monthly data from January 1980 to October 2009, we find that the volatility of the transitory component of the stock return, or fads, increased during the currency crisis, but did not rise much during the credit crisis. It implies that the stock price fluctuations were not driven by irrational sentiments during the recent global crisis as much as during the former crisis. However, when we consider the dollar value of the Korean stock index in order to estimate the volatility that foreign investors confront, we find that the volatility of the transitory component was raised during the credit crisis as well as during the currency crisis. That is, foreign investors experienced greater volatility than domestic investors in the recent financial market turmoil. This asymmetric volatility that domestic and foreign investors face is one of the characteristics of the credit crisis.For more detailed analysis, the same model was applied to the weekly data from January 2005 to October 2009 and provided the result that the data measured by won–dollar exchange rates were more increased than the raw data. It holds that foreign investors confronted much greater volatility than domestic investors while the stock volatility was relatively lower in the credit crisis state than in the currency crisis state.     

Restructuring of financial institutions and the corporate sector in Korea

This paper explores causes of the Korean currency crisis which started in November 1997. This paper also presents restructuring proposals and introduces the progress made so far. The urgency for quick restructuring and the necessity of the injection of money from both the government and foreign investors are emphasized. Restructuring of financial and corporate sectors should be pursued simultaneously. In the financial sector, the restructuring of banks should take precedence over other financial institutions. The key task in terms of bank restructuring involves the resolution of bad loans, recapitalization and the expedited reorganization of nonviable banks. Corporate reform is also important. Banks should play a central role in corporate workouts, especially in lowering excessive corporate debt and triggering corporate restructuring based on core competence. Transparency of corporate management, internationally accepted accounting practices, fuller disclosure requirements and stronger monitoring by minority shareholders are prerequisites for effective market discipline. Reform of ownership and governance structure are also important in enhancing managerial accountability of corporates as well as financial institutions.