Public infrastructure as a determinant of productive performance in China

Public infrastructure investment is an essential part of China’s regional development policy. This raises the question to what degree public infrastructure capital matters for labor productivity in China, at the regional level as well as over time. This paper estimates cost function models of production in industrial enterprises, using province-level data from 1993 to 2003. The estimated rate of return in industrial production is 23–25%, and on average public infrastructure contributes 2–3% points to the growth in labor productivity among these enterprises.     

Public inputs and dynamic producer behavior: endogenous growth in U.S. agriculture

This paper is an attempt to understand the impact of public R&D and public infrastructure on the performance of the U.S. agricultural sector during the last part of the twentieth century. A neoclassical Solow growth model is not sufficient for this understanding given the sustained growth performance of the sector. We base our analysis on a well-known endogenous growth model, the ‘AK model’ where non-convexities are introduced through non-rival inputs. Based on these models and within the dynamic models that rationalize private and public decision making, we have identified three testable hypotheses regarding the aggregate agricultural production technology. They are: (1) increasing returns to scale over all inputs; (2) positive effect of additional units of public inputs on the long-run demand for private capital; and (3) negative impact of public inputs on cost. They are tested using two estimation procedures on two data sets for U.S. agriculture. One, covering the period 1948–1994, developed by USDA, the other, covering the period 1926–1990, from Thirtle et al. Maximum likelihood estimates do not conform to the regularity and behavioral properties of the economic model rendering them unusable for testing these hypotheses. Bayesian estimates, although not totally satisfactory, do not reject the hypotheses after prior imposition of some of the regularity conditions. This supports the notion of an important role for public inputs on the rapid and sustained growth of the sector. We calculate that, on average, one additional dollar spent on public R&D stock reduces private cost by $6.5, implying a return on these public expenses of 190%.

The relationship between the smoothing of reported income and risk-adjusted returns

This paper uses risk-adjusted returns for the firms in the S&P 500 to test whether the stock market response to accounting performance measures is related to the smoothness of companies’ reported earnings. Three income models, increasing in their measure of smoothness, test the hypotheses using cumulative average abnormal returns. The results indicate that companies that report smooth income have significantly higher cumulative average abnormal returns than firms that do not. When size is considered, market returns are higher for small companies than for large companies. There is also a significant relationship between the type of industry and income smoothing.     

<Emphasis Type="BoldItalic">Mad Money</Emphasis> stock recommendations: market reaction and performance

We examine the stock recommendations of Jim Cramer televised on CNBC’s Mad Money, and document significant market reactions (i.e., announcement returns and volume) to Cramer’s recommendations, particularly for small capitalization stocks. The following findings indicate that the announcement returns are primarily due to price pressure from uninformed trading as opposed to the recommendations providing new value related information: announcement returns reverse following buy recommendations; bid-ask spreads temporarily decline; and there is no evidence of positive longer-term abnormal returns. One implication, when considered in combination with other works, is that investors should be cautious in following stock recommendations announced in the mass-media.     

Building the Knowledge Stock: Lags,Depreciation, and Uncertainty in R&D Investment and Link with Productivity Growth

The search for an appropriate methodology to investigate the relation between R&D investment, knowledge stock and productivity growth is the main purpose of the paper. In analogy with physical assets, we present a model of knowledge capital formation which allows the calculation of the relevant user cost, as well. The proposed model accumulates R&D investment based on a stochastic gestation lag and a geometric depreciation of the stock. The basic parameters underlying the lag structure differ according to the types of research expenditure. The approach is applied to public R&D investment in Italian agriculture; the results provide interesting information about the economic structure of public research effort in Italian agriculture and plausible estimates of its internal rate of return.     

Market reaction to large bank merger announcements in oligopolies

This paper evaluates the individual and rival stock price reactions to large bank merger announcements and subsequent regulatory rejection in an oligopoly. The results show that the announcements produce significant positive abnormal returns for the merger candidates. Regulatory obstacles and denial of the proposed mergers produce significant negative returns. Analysis of the rivals’ reactions doesn’t produce consistent significant results. This suggests that the market reactions for the merging banks results are driven by expected increases in efficiencies. The rivals’ reaction is explained by the fact that the market would remain contestable after the mergers since the offered products are homogeneous.(JEL G14, G34)     

The underwriter’s early lock-up release: Empirical evidence

A lock-up agreement is an arrangement between the underwriter and certain pre-IPO shareholders. This paper examines the influence of an underwriter’s early lock-up release on shareholder wealth. The study found significant negative abnormal returns associated with the early lock-up release annoucement. Negative abnormal returns are more pronounced for venture capital backed firms than for firms not venture capital backed. In addition, scheduled lock-up release day abnormal returns, found in previous studies to be significantly negative, are reduced for firms announcing the early lock-up release.(JEL G24, G30)     

Co-determination of capital structure and stock returns—A LISREL approach: An empirical test of Taiwan stock markets

Titman and Wessels (1988) utilize a structural-equations model (LISREL) to find out the latent determinants of capital structure. Maddala and Nimalendran (1996) indicate that the problematic model specification causes the poor results in Titman and Wessels’ research. Chang, Lee, & Lee (2009) apply a Multiple Indicators and Multiple Causes (MIMIC) model to re-examine the same issue as Titman and Wessels did but found more convincing results. We extend Titman and Wessels’ research from using a single-equation approach to a multi-equations approach. In addition to the determinants of firms’ capital structure, those of stock returns are determined simultaneously. Literature indicates that a firm's capital structure may affect its stock returns (Bhandari, 1988), and the reverse is true too (Baker and Wurgler, 2002, Lucas and McDonald, 1990, Welch, 2004). Hence, a firm's determinants of its capital structure and those of its stock returns should be decided simultaneously, rather than independently. By solving the simultaneous equations, we examine the empirical relationship between the two endogenous variables: capital structure and stock returns and find out their common determinants as well. Our results show that stock returns, expected growth, uniqueness, asset structure, profitability, and industry classification are the main factors of capital structure, while the primary determinants of stock returns are leverage, expected growth, profitability, value and liquidity. The level of debt ratios and stock returns are mutually determined by the aforementioned factors and themselves.     

Higher moment exchange rate exposure of S&P500 firms

We examine the impact of higher order moments of changes in the exchange rate on stock returns of U.S. large-cap companies in the S&P500. We find a robust negative effect of exchange rate volatility on S&P500 company returns. The consumer discretionary and the consumer staples sectors have significant negative exposure to exchange rate volatility suggesting that exchange rate volatility affects stock returns through the channel of international operations. In terms of industries, the household products and personal products industries have significant negative exposure as well. The impact in the financial sector suggests that derivatives and hedging activity can mitigate exposure to exchange rate volatility. We find weak evidence that exchange rate skewness has an effect on S&P500 stock returns, but, find evidence that exchange rate kurtosis affects returns of companies that are more exposed to exchange rate volatility.     

Abnormal research and development investments and stock returns

We investigate the relation between abnormal research and development (R&D) investments change and expected stock returns. We provide evidence that firms that abnormally increase their R&D investments (RDI) earn higher returns in comparison to the market portfolio. Specifically, our findings document an economically significant annual positive abnormal RDI returns that ranges from 3.2% to 11.5%. These findings are robust to well-established risk factors in the literature and suggest that the abnormal increases in RDI impacts stock returns.     

Foreign direct investment and financial markets influences: Results from the United States

This paper investigates the linkages among Foreign Direct Investment (FDI-greenfield and mergers and acquisitions (M&A)) decisions and equity market returns and volatilities. The central premise is that FDI decisions by Multinational Enterprises (MNE) are influenced, among other factors, by risk and uncertainty indicated by equity market returns and volatilities in the destination (host) countries. This is because of the events on the stock markets in general, and their volatilities, in particular, signal the vitality of the investment climate of the target country. Including capital market variables among the determinants of FDI is important for assessing the cost of capital and for evaluating direct investment and asset allocation decisions.Secondary time-series data (quarterly) were used on incoming US FDI from 1994 to 2018 along with data on independent variables such as exchange rates, inflation, market size, equity market returns, and equity market volatilities. Thus, the paper endeavors to contribute to the International Business literature by highlighting the role played of equity returns and volatilities in FDI decisions and therewith attempts to integrate finance (capital markets) with International Business/Strategic Decision making. Several different regression specifications (OLS, Fixed, and random-effects and VAR) were utilized to analyze the data, and capital market variables (stock returns and volatilities) were found to influence the location of production facilities by a multinational enterprise (MNE). In other words, the share of production capacity optimally located abroad, as well as M&A decisions, are influenced by capital market returns and volatilities.     

Efficiency of the Indian leather firms: some results obtained using the two conventional methods

Indian leather industry has massive potential for generating employment and achieving high export-oriented growth. However, its economic performance has not been assessed much till date. The present paper attempts to fill in this gap by examining technical efficiency (TE) of individual leather producing firms for some years since the mid-1980’s. Analyzing the industry’s firm-level data through the two conventional tools, viz., data envelopment analysis and stochastic frontier analysis, the paper observes a significant positive association between a firm’s size and its TE, but no such clear relation between a firm’s age and TE. It also finds significant variation in TE across firms in different groups of states as well as under different organizational structures and observes some technological heterogeneity across states. Although, non-availability of panel data does not allow one to assess effects of economic reforms on the performance of the Indian leather firms, the average firm-level TE, however, seems to be on an increasing path, except for downswing in the immediate post-reform years.     

Impact of uncertainty on high frequency response of the U.S. stock markets to the Fed's policy surprises

This paper examines the impact of uncertainty on estimated response of stock returns to U.S. monetary policy surprise. This is motivated by the Lucas island model which suggests an inverse relationship between the effectiveness of a policy and the level of uncertainty in the economy. Using high frequency daily data from the Federal funds futures market, we first estimate the response of S&P 500 stock returns to monetary policy surprises within the time varying parameter (TVP) model. We then analyze the relationship of these time varying estimates with the benchmark VIX index and alternative measures of uncertainty. Evidence suggests a significant negative relationship between the level of uncertainty and the time varying response of S&P 500 stock returns to unanticipated changes in the interest rate. Thus, at higher levels of uncertainty the impact of monetary policy shocks on stock markets is lower. The results are robust to different measures of uncertainty.     

Autocorrelation,return horizons,and momentum in stock returns

In this study we examine Lewellen’s (Rev Financ Stud 15:533–563 2002) claim that momentum in stock returns is not due to positive autocorrelation as behavioral models suggest. Using portfolio-specific data, we find the autocovariance component of the momentum profit to be negative, suggesting no return continuations. However, we also find that the autocorrelations calculated from short-term (e.g., monthly) returns are quite different from long-horizon (e.g., annual) autocorrelations. While the first-order autocorrelations of 6– and 12-month returns tend to be negative, the autocorrelations across twelve lags in monthly returns of the industry, size, and B/M portfolios are in general positive. Our results show that these portfolios exhibit return continuations when returns are measured on a monthly basis. Therefore, our finding appears to be consistent with the behavioral models, which suggest positive autocorrelation in stock returns.     

An empirical analysis of cross-security information asymmetry and the “pecking order” hypothesis

This paper suggests that any examination of the “pecking order” hypothesis must consider the possibility that a firm's level of information asymmetry is related to the type of security it issues. The empirical results show that, on average, firms issuing common stock exhibit higher information asymmetry levels (as proxied by financial analysts' earnings forecast errors) than do firms issuing debt. However, after controlling for information asymmetry, abnormal returns to common stock announcements remain significantly less than those of debt issues which supports the existence of a “pecking order” in capital procurement.     

Can the Public's Desire for Future Benefits Be Deduced form Their Private Decisions?

Abstract . How should benefits and costs occurring at different times be evaluated to decide whether to undertake tax financed public projects? What interest rate should be used? If public decisions were based on people's willingness to pay for future private income, they still could not be based on market interest rates. The benefits of public projects (except in the cases of private land values or affected fixed private capital investments) are not marketable. However, among other things, market interest rates do represent the opportunity costs of public investments. Still, many citizens are concerned about the welfare of future generations; they may have a lower time preference rate. Human capital investments are directly analogous to public investment to produce non marketable public goods. Both are illiquid; both yield returns higher than market rates. This indicates the private rates of time preference for most citizens are high.     

The negative impact of R&D capitalization: A value relevance approach

Abstract

Accounting for R&D costs is an open issue. SFAS N°2 mandates that all R&D costs must be immediately expensed. IAS 38 requires capitalization of R&D costs if they meet certain criteria. Recent research papers show the value relevance of capitalized R&D. We test the value relevance of R&D reporting in a sample of 197 French firms between 1993 and 2002. The French context provides an interesting field for R&D value relevance studies because both accounting treatments of R&D costs (expensing and capitalization) are allowed. Unlike previous studies, we find that capitalized R&D is negatively associated with stock prices and returns. This negative coefficient on capitalized R&D implies that investors are concerned with and react negatively to capitalization of R&D. We also find that the firms choosing to capitalize (successful) R&D are smaller, more highly leveraged, less profitable and have less growth opportunities. Taking into account these characteristics, our robustness checks confirm that capitalized R&D is not associated with higher prices and is related to lower returns.     

Structural change and technological development

It is important for our understanding of sectoral and regional structural change to analyze the R & D-activities. In this paper we show that R & D should be analyzed as an endogenous, intermediate, public investment variable rather than as ordinary capital investment. The allocation of resources for R&D cannot be decentralized regionally or sectorally but should preferably be decided on as a problem of optimal taxation. It is shown that the optimal rate of taxation for R&D is determined by possibilities of substitution between ordinary capital investments and R&D, by the propensity to invest and by the productivity of the R&D- producing sector. A dynamic model with accessibility representation of knowledge is finally formulated. This interregional R&D-model also has equilibrium growth properties. The equilibrium rate of growth of all regions of this model can be raised by decreasing any interregional distance or by raising any regional propensity to invest.     

The interaction of corporate dividend policy and capital structure decisions under differential tax regimes

We develop a valuation model that integrates corporate capital structure and dividend payout policies. The resulting “extended” Miller (J Financ 32:261–297, 1977) model explicitly incorporates the different tax rates on corporate income, personal interest, dividends, and capital gains. We apply the model to ten different U.S. tax regimes since 1979 and generate several testable predictions. When the dividend tax rate exceeds the capital gains tax rate, dividend payout can partially offset value-enhancing effects of leverage. When the two rates are close, dividend payout loses its moderating influence. Using the S&P 1500 universe, we obtain empirical results that are consistent with the model’s predictions.     

The impacts of education spending and finance reform on manufacturing property shadow values: a cost function approach

The effects of court-ordered education finance reform on property values and residential choice have received increasing attention in recent years (Fischel 2001). However, little attention has been focused on the effects of education finance reform on manufacturing sector property values within an optimizing framework. This is pursued here by modeling education expenditures and education finance reform as “free” variables to manufacturing firms in a cost function model together with input demand equations. This framework is applied to panel data on manufacturers’ capital (building and structures) stocks for the 48 continental US for 1982–1996 to estimate implicit (shadow) values to the manufacturing sector of education spending and school finance reform. On average, school finance reform lowers the implicit value of manufacturing firms’ stock of buildings and structures capital, while greater education spending lowers manufacturing variable costs.