Ripples through markets: Inter-market impacts generated by large trades

This paper uses a sample of large trades executed on the London Stock Exchange's SEAQ-I market for European cross-traded firms to investigate their impact on home market prices when parallel markets suffer from information frictions. I find that (a) large London trades produce price impacts in home markets even though no timely information is published, (b) market makers appear to pre- and post-position their inventories by splitting orders across markets, and (c) the price discovery process across markets changes significantly around large trades with the foreign market making a significantly bigger contribution to price discovery at this time, even though information opaqueness exists.     

The Role of Infrastructure in Mexican Economic Reform

This article estimates the relationship between the provisionof public infrastructure and private output in sixteen sectorsin Mexico. The sector-specific cost functions depend on wages,the cost of capital, and the nominal values of the stocks ofthree types of infrastructure: electricity, transport, and communications.The article concludes that infrastructure in electricity andcommunications generally reduces the cost of sectoral production,but transportation infrastructure tends to increase costs ofsectoral production. It appears that Mexican public expenditureon electricity and communications has enhanced the productivityof private production, but expenditure on transport may actuallyhave had a detrimental effect on private output. In addition,although in general labor and infrastructure are substitutes,in the case of electricity and communications infrastructure,capital and infrastructure are complements. In the case of transportinfrastructure these conclusions are reversed.     

Tax reform, the informal economy, and bank financing of capital formation

This paper develops a model that relates businesses’ entry into the underground economy to tax rates and the need to access the banking system. The model uses a dynamic approach in which both firms and banks optimize and in which the benefits to a firm of accessing the banking system are endogenous. A firm compares the return to capital with the marginal tax rate on capital income and uses the difference to determine how much of the tax to pay. At the same time, banks use a firm’s capital tax payments, combined with the capital tax rate to obtain an estimate of the firm’s minimum capital value. If the firm pays at least some taxes then it will have access to the banking system, which will allow it to finance investment. If the firm pays no taxes, then it cannot access the banks and cannot invest. We compare the equilibria resulting from tax compliance and tax evasion. We calibrate the model to a highly stylized version of the Russian economy, and analyze the effect of potential tax changes on the underground economy. We compute a dynamic equilibrium for our model, and note that it tracks the path of certain macroeconomic variables of the Russian economy (GDP, budget and trade balances, price level and interest rate) with some accuracy for the years 2001–2008. We are unable to track the underground economy, as this data is unobservable. We then carry out a series of counterfactual simulations, first asking if non-capital intensive firms have an incentive to evade taxes under existing value added tax rates. We find that they do, and that the incentive would have been greatly reduced if the value added tax rate had been selectively reduced for the non-capital intensive sectors. We then ask what the effect would be if the corporate tax rate were raised on capital intensive sectors. The simulations indicate that the capital intensive sectors would not increase their entry into the underground economy.     

Geographic scope,product diversification,and the corporate performance of Japanese firms

The study extends research on the geographic scope, product diversification, and performance relationship by exploring both the antecedents and consequences of geographic scope. In so doing, it addresses a fundamental criticism of the geographic scope–performance relationship; namely, that the observed positive relationship between geographic scope and performance is spurious because it is the possession of proprietary assets that is the foundation of superior performance, not expansion into international markets per se. We tested the research model with data on the corporate performance of 399 Japanese manufacturing firms. In the partial least squares analyses used to examine the study’s six main hypotheses, we demonstrate that geographic scope was positively associated with firm profitability, even when the competing effect of proprietary assets on firm performance was considered. Further, we find that performance was not related to the extent of product diversification, although investment levels in rent‐generating, proprietary assets were related to the extent of product diversification. Copyright © 1999 John Wiley & Sons, Ltd.     

Beyond spatial representation

The correspondence between theory and observation is often evaluated by a comparison between a hypothesized constraint matrix and the spatial representation of a pxp similarity matrix. This comparison of constraint and proximity matrices assumes the accurate translation of similarities to proximities. If the translation is not exact (i.e., a stress or alienation coefficient greater than zero), the hypothesized structure is evaluated using a false representation of the observed data. The proposed model eliminates the need for spatial representation by making a direct comparison between the hypothesized constraint matrix and the multivariate structure of the bivariate similarities. Goodness of fit indices are used for three model comparisons; (1) single data set, one hypothesized structure; (2) single data set, two hypothesized structures; and (3) two data sets, one hypothesized structure.     

All change? Prospects for the UK economy under “New” Labour

The opinion polls suggest Labour will win the General Election and form the next government. In this article, Andrew Sentance discusses how the UK economy might fare under "New" Labour. He argues that there is likely to be a considerable degree of continuity in macroeconomic policy, but more change in approach to supply-side issues. He highlights four key policy challenges which Labour would face at an early stage if elected and which will give an indication of how policies developed in opposition will be applied in practice.     

Risk,return, and dividends

Using only the definition of returns, together with a transversality assumption, we demonstrate that given a dividend process, any one of three variables—expected return, return volatility, and the price–dividend ratio—completely determines the other two. By parameterizing only one of these processes, common empirical specifications place strong, and sometimes counter-factual, restrictions on the dynamics of the other variables. Our findings lend insight into the nature of the risk–return relation and the predictability of stock returns.     

Twitter investor sentiment and corporate earnings announcements

We examine the impact of firm-specific investor sentiment (FSIS) on stock returns for negative and positive earnings surprises. Using a measure constructed from firm-specific tweets, we find that FSIS has a greater impact on stock returns for negative relative to positive earnings surprises. We further show that the impact of FSIS is greater for firms whose valuation is uncertain and difficult to arbitrage. Moreover, we provide evidence of return reversals over post-announcement periods. Our results highlight the importance of FSIS around earnings announcements.