Accounting for Sovereign Risk When Investing in Emerging Markets

In theory, political risk is project‐specific and should be accounted for in the estimation of the expected investment cash flows. But in practice, the political risk associated with this type of investment is typically accounted for implicitly by adjusting the investment's required rate of return or the discount rate. As the authors discuss in the article, this approach disguises the specific assumptions being made about the risk of expropriation and so makes it difficult to assess this risk properly. While defending some aspects of current practice, the authors argue that corporate executives should consider some changes. For example, although a project analysis that is shared with the host government could incorporate a risk adjustment to the discount rate, the authors suggest that more explicit analysis of the anticipated risk of expropriation should be incorporated into the analysis of expected project cash flows. This analysis could involve making specific assumptions about the “term structure” of expropriation risk over the life of the investment. Finally, the authors note that the political risk of making investments in emerging economies can be managed to some extent. Investments can be structured in ways that reduce political risk by structuring project cash flows in ways that better align the incentives of the project sponsor and the government of the host country.     

Strategy choices among internationalizing US airlines

This paper surveys and analyzes the internationalization strategy of US airlines. We first discuss globalization factors acting on the industry, particularly, government actions, the emergence of international markets, competition (including the role of firm specific assets in conferring competitive advantage), and supply cost factors, principally labor, fuel, and aircraft procurement. We then discuss the gains from internationalization, and the recent performance of US airlines, from which we develop internationalization strategy guidelines for airlines, classified as market-oriented and efficiency-oriented. Finally, we trace some broad lessons from the aviation industry for other service sectors facing similar deregulation and globalization pressures.     

Empirical Evaluation of Asset–Pricing Models: A Comparison of the SDF and Beta Methods

The stochastic discount factor (SDF) method provides a unified general framework for econometric analysis of asset–pricing models. There have been concerns that, compared to the classical beta method, the generality of the SDF method comes at the cost of efficiency in parameter estimation and power in specification tests. We establish the correct framework for comparing the two methods and show that the SDF method is as efficient as the beta method for estimating risk premiums. Also, the specification test based on the SDF method is as powerful as the one based on the beta method.     

Acquisitions and the Information Environment of Firms

This paper investigates how acquisitions affect analyst following of firms. Analyst following increases as a result of a merger. However, all of that increase can be attributed to the changes in firm-specific characteristics resulting from the merger. Changes in analyst following around mergers are positively related to changes in firm size, expenditures on R&D, and the ratio of book to the market value of equity. Finally, the relatedness of merger appears to be an important determinant of analyst following of firms engaged in acquisitions.     

Do Stringent Environmental Regulations Reduce International Competitiveness? Evidence from an Inter-industry A nalysis

An increasing interest has emerged among policy makers and academics on the question "Do stringent environmental regulations lead to loss of international competitiveness in terms of declining exports and increasing imports compared with those from the countries which have lower environmental standards and regulations?". This paper examines this issue by conducting an inter-industry analysis of New Zealand manufacturing industries. By analysing the patterns and determinants of comparative advantage of 109 industries over the last 13 years, we found no strong evidence to suggest that environmental standards lead to loss of competitiveness.     

PARTNER CONGRUENCE IN ELECTRONIC DATA INTERCHANGE (EDI)‐ENABLED RELATIONSHIPS

Business partnerships are a prerequisite for an effective supply chain. EDI‐enabled business partnerships are crucial in linking suppliers and customers. This paper develops congruence factors for customer‐supplier EDI partnerships. Data were collected from sixty‐four customer‐supplier dyads of firms using a questionnaire instrument. By factor analyzing thirty‐one items, six congruence factors were identified: top‐level strategic commitment, trading partner flexibility, joint partnering for EDI, readiness for high‐level EDI implementation, EDI infrastructure, and partner communication. Additional analysis revealed that customer firms placed significantly more emphasis on congruence factors than supplier firms except for “joint partnering for EDI.” These findings have implications for assessing business partnerships in the networked economy.     

Civil war,public goods and the social wealth of nations

This paper establishes and explores the implications of a somewhat surprising empirical finding. Although civil war adversely affects the performance of social indicators in general, poorer countries lose less, in absolute and relative terms, than richer countries. It is argued that the explanation may lie in the extent to which richer countries have better social (and economic) indicators because of more public goods, and adaptation of economic and social mechanisms to the greater abundance of public goods such as physical infrastructure. Civil war destroys public goods, and therefore damages disproportionately the countries most dependent on them. A further implication of this framework is that the post‐conflict rebound in social indicators should be relatively stronger in poorer countries. The data bear out this prediction. Our results should not of course be read as implying that poorer countries need less support to avoid civil war and to cope with its aftermath. Although their losses are less, they start from a lower base; so even small declines severely impact human well‐being. Properly understood, our results highlight the central role that public goods play in underpinning the social (and economic) wealth of nations.     

Informality: Causes,consequences and policy responses

A stylized prediction of the development economics discourse is that informality will disappear with development, and yet in the last 20 years conventional measures of informality, far from declining, have either remained stagnant or have actually increased. This includes countries such as India where economic growth has been at historically high levels. What exactly is informality and what are its magnitudes and trends? What are the causes of informality and why is it not decreasing as predicted by standard theories of development? What are the consequences for inclusive economic growth of a large and increasing informal sector? What are feasible and desirable policy responses to informality? These are the questions that motivate this broad based overview of informality. The questions will be addressed based on recent and ongoing research on India and globally.     

International Capital Mobility and Free Trade Once Again*

Using a Heckscher–Ohlin model, this paper re‐examines Robert Mundell's famous thesis that free trade and unimpeded capital mobility are perfect substitutes. Under very general conditions which, according to many economists, have caused international convergence of factor rewards, we show that in a polluted environment free trade is inferior to free international investment. This happens even though commodity prices and factor rewards are the same with both policies. The practical side of our thesis is that the world will be better off by reducing the volume of trade while removing all barriers to foreign direct investment that at present hamper the service industries.     

On extremes of mixtures of distributions

In this article we study the max domains of attraction of mixtures of distributions belonging to the max domain of attraction of max stable laws.