Testing the CAPM revisited

This paper re-examines the tests of the Sharpe–Lintner Capital Asset Pricing Model (CAPM). The null that the CAPM intercepts are zero is tested for ten size-based stock portfolios and for twenty five book-to-market sorted portfolios using five-year, ten-year and longer sub-periods during 1965–2004. The paper shows that the evidence for rejecting the CAPM on statistical grounds is weaker than the consensus view suggests, and highlights the pitfalls of testing multiple hypotheses with the conventional heteroskedasticity and autocorrelation robust (HAR) test with asymptotic P-values. The conventional test rejects the null for almost all sub-periods, which is consistent with the evidence in the literature. By contrast, the null is not rejected for most of the sub-periods by the new HAR tests developed by Kiefer et al. (2000), Kiefer and Vogelsang (2005), and Sun et al. (2008).     

Welfare Effect of Mergers and Multilateral Trade Liberalization

In a two‐country model where firms behave à la Cournot, we show that trade liberalization increases (decreases) the social desirability of those mergers that generate sufficiently large (small) reductions in marginal cost. There exists a range of intermediate levels of marginal cost savings such that marginal tariff reductions increase (decrease) the desirability of merger at sufficiently low (high) tariff levels. Moreover, in the neighborhood of free trade, we show that if trade liberalization increases the profitability of a merger, it necessarily also increases its desirability.     

An experimental investigation of soft price caps in uniform price auction markets for wholesale electricity

This paper presents the results from an auction experiment using industry professionals and student participants who compete in a simulated wholesale market for electricity. Motivated by the intervention by FERC in response to the “meltdown” of the California spot market, we investigate the effect of including a “soft” price cap in a uniform price auction as a means of mitigating high prices. When prices are driven above the soft cap, offer curves become flat, in contrast to the hockey stick shape observed in a typical uniform price auction for electricity. This flat offer curve leads to market prices that are relatively insensitive to both generation costs and demand reductions.      

Non-audit services provided to audit clients,independence of mind and independence in appearance: latest evidence from large UK listed companies

This paper investigates whether the provision of non-audit services (NAS) to audit clients impairs auditor independence of mind and independence in appearance. The main contributions of this paper are in terms of its timeliness with respect to regulatory changes, the simultaneous examination of both forms of auditor independence and the methodological innovation whereby it uses a variable derived from the level of abnormal audit fees as a moderating variable in order to capture the direct impact of the NAS fee level on auditor independence as well as how its influence is moderated by the level of unexpected audit fees. Our results indicate that auditor independence of mind is compromised by the size of NAS fees, particularly for clients who pay below the level of expected audit fee. The stock market perceives that auditor independence is compromised by NAS fees but, at the same time, additional tests indicate that there are benefits that accrue from NAS and, in particular, the relation between return and non-discretionary net income is increasing in NAS fees. The balance of evidence suggests that the European Union is correct in undertaking some reform of the auditing market.     

Range-based multivariate volatility model with double smooth transition in conditional correlation

This paper proposes a multivariate model named Double Smooth Transition Conditional Correlation Conditional Autoregressive Range (DSTCC-CARR for short). Determined by two transition variables, the correlations smoothly transit from one state to another. Together with the DSTCC-GARCH model, the model is employed to investigate the interdependence between Hong Kong's and international stock markets. It is proved by the empirical analysis that the DSTCC-CARR model is more credible and efficient than the DSTCC-GARCH model. Linkages among Hong Kong's and other world's markets captured by these two models are testified to be consistent with history, and have meaningful interpretations.     

Planting flexibility: Implications for agricultural sustainability

There is a general belief that federal commodity programs restrict adoption of more sustainable production systems. In the 1990 farm legislation, Congress introduced limited planting flexibility to address these concerns and to reduce federal farm program costs. This program estimates the impact of planting flexibility on selected agricultural sustainability indicators and its policy implications. Results show that planting flexibility is a necessary but not sufficient condition for implementing more sustainable production systems. Other factors such as the availability of economically viable alternatives, macroeconomic conditions, and local resource and environmental concerns need to be considered. Policy reforms can help in achieving economic and environmental gains only in locations with economically viable alternatives. In other cases, increased research and development of new systems are needed to achieve desired results.     

Product innovation for the people's car in an emerging economy

As product offerings of multinational enterprises (MNEs) continue to primarily serve the relatively well-to-do consumers in emerging economies, innovations to meet the unique affordability and acceptability criteria of masses at the base of the pyramid (BoP) continues to remain a daunting challenge. The academic literature is sparse on comprehensive in-depth studies about the intricate processes involved in shaping and managing technology development for the masses. Focusing on product innovation by Tata Motors of India with the Nano—the world's cheapest car, our case study aims to understand how the innovator's choices regarding the use of technology, product design and organizational practices for new product development enabled it to meet the challenge of innovation for India's masses. Drawing on Christensen's work on disruptive innovations, our analysis shows how frugal use of resources through a new combination of existing component technologies created a new modular product to achieve the unique price–performance requirements demanded by the BoP. Our findings show that collaboration with suppliers for component design and their early integration in the design phase substantially lowered costs and helped eliminate unnecessary frills whilst incorporating features valued by mass markets. Our study has important managerial implications for MNEs and provides critical insights into the processes for a new blueprint for an untapped market segment in the automobile industry.