Foreign institutional ownership and stock market liquidity: Evidence from Indonesia

From January 2002 to August 2007, foreign institutions held almost 70% of the free-float value of the Indonesian equity market, or 41% of the total market capitalization. Over the same period, liquidity on the Jakarta Stock Exchange improved substantially with the average bid–ask spread more than halved and the average depth more than doubled. In this study we examine the Granger causality between foreign institutional ownership and liquidity, while controlling for persistence in foreign ownership and liquidity measures. We find that foreign holdings have a negative impact on future liquidity: a 10% increase in foreign institutional ownership in the current month is associated with approximately 2% increase in the bid–ask spread, 3% decrease in depth, and 4% rise in price sensitivity in the next month, challenging the view that foreign institutions enhance liquidity in small emerging markets. Our findings are consistent with the negative liquidity impact of institutional investor ownership in developed markets.     

Revenue-sharing contracts across an extended supply chain

Revenue-sharing contracts have been heavily researched and promoted in the academic literature. However, despite some well-documented examples (e.g., the way Blockbuster and film studios were able to increase availability of the latest video releases in rental shops through a revenue-sharing contract), they seem to be much less prevalent in practice. A possible reason for this gap between theory and practice is that most academic research has focused on two-party contracts involving only one buyer and one supplier, while in reality, most supply chains consist of multiple stages. When there are several stages in the chain—as is the case for many extended, global supply chains—the traditional revenue-sharing contract is no longer optimal for the two contracting parties, as every other participant in the chain is able to leverage the revenue-sharing contract to its own advantage. Put another way, a revenue-sharing contract between only two parties is not incentive-compatible across all participants. Accordingly, we suggest that a revenue-sharing contract should involve all the supply chain partners, and propose a spanning revenue-sharing contract that accomplishes coordination and incentive-compatibility across the same.     

The impact of capital market competition on relationship banking: Evidence from the Japanese experience

Disagreement exists about the potential effects of changes in competition on relationship lending. Boot and Thakor (2000) predict that an increase in capital market competition should lead to a reduction in relationship lending; however, Dinç (2000) predicts that greater capital market competition should increase relationship lending. Thus far, data limitations have precluded empirical tests of these competing hypotheses. In this study, we use a unique data set drawn from the deregulation of the Japanese financial system. Our findings show that increased capital market competition is associated with reduced relationship lending. However, the effect differs according to the maturity of the loans; increased capital market competition is associated with reduced long-term, but greater short-term, relationship lending.     

How does the call market method affect price efficiency? Evidence from the Singapore Stock Market

On August 21, 2000, the Singapore Exchange (SGX) adopted the call market method to open and close the market while the remainder of the day’s trading continued to rely on the continuous auction method. The call method significantly improved the price discovery process and market quality. A positive spillover effect is observed from the opening and closing calls. Day-end price manipulation also declined after the introduction of the call market method. However, the beneficial impact from the call market method is asymmetric, benefiting liquid stocks more than illiquid stocks.     

CEO inside debt and convertible bonds

The question whether convertible bonds are issued to combat the risk‐shifting problem is a subject of debate in the literature, primarily because of the unavailability of clear measures regarding managerial risk‐shifting incentives. Taking advantage of recently developed inside debt‐holding measures for CEOs, we find strong evidence in support of the risk‐shifting hypothesis. When a CEO holds a large amount of inside debt, three distinct patterns emerge: (i) the firm exhibits a lower ratio of outstanding convertibles to total debt; (ii) the firm is less likely to issue convertibles than straight debt; and (iii) the firm devises contract terms to decrease the chance of conversion when it issues convertibles.     

Financial Factors in the Business Cycle of a Small Open Economy: The Case of Korea

Financial factors influencing the business cycle have received considerable attention in recent years in the aftermath of the global financial crisis in 2008. This paper examines the role of financial factors in the business cycle by considering Korea, a small open economy, that experienced a severe financial crisis in 1997 as well as the recent global financial crisis. We estimate small open economy Bayesian DSGE (dynamic stochastic general equilibrium) models with financial factors and analyze the role of these financial factors in the business cycle in the context of Korea. The results indicate that the model based on an endogenous financial accelerator and a modified monetary policy rule provides a better explanation to the data than that without the financial factors and justify the recent attention to financial factors influencing the business cycle.     

Targeting Rules for an Open Economy

This study extends the formal analysis of inflation targeting monetary policy using the standard New Keynesian framework to a small open economy by adding inflation and output persistence as well as a direct exchange rate channel to domestic inflation. We find that output variability is lower under CPI inflation targeting than under domestic inflation targeting. However, CPI inflation results in higher variability of the real exchange rate than domestic inflation targeting. Output and the nominal interest rate are less volatile under flexible inflation targeting than under almost-strict inflation targeting. We also find that almost-strict domestic inflation targeting cannot completely insulate domestic inflation from foreign shocks due to a direct exchange rate channel. The model is calibrated to Canadian data.     

Investment in salvage equipment

Manufacturers are faced with three options for disposing of excess finished items: they can (1) continue to mark down the item until it sells; (2) dispose of or scrap it; or (3) salvage it in order to reclaim valuable raw materials and components. In many situations the option of a markdown is not viable, thus the choice is to either scrap or salvage. Although many manufacturers have invested in salvage equipment, they have not deduced the impact of this investment as it affects not only the risk-adjusted value of the project but also the production run size and the selling price. Hence, their decisions frequently turn out to be suboptimal. This paper develops a project-valuation model that adds a new dimension to traditional capital budgeting decisions by incorporating salvage capacity.     

Does Reputation Contribute to Reducing Organizational Errors? A Learning Approach

In this study I examine the effect of a firm's reputation for product quality on its effort in learning to reduce its product defect rate. Theoretical ideas on the motivation of learning associated with social aspiration levels and the self-serving bias combined with social categorization suggest that poor quality reputation firms are more likely than their counterparts with a good reputation to attend to potential product defects and consequently reduce their defect rate. However, a stream of research on the motivation of learning stemming from historical aspiration levels and slack search leads to a different argument: a reputation for good quality is more likely to provide firms with a motivation to avoid product defects. I build upon these two competing arguments and hypothesize that stronger motives for learning exist in situations where firms have either a weak or strong reputation for product quality. My study of product recalls in the US automotive industry highlights an inverted U-shaped relationship, indicating the liability of an intermediate reputation in reducing product defects.