Rethinking the impact of GDP on financial development: Evidence from heterogeneous panels

This paper examines the nonlinear impact of real GDP per capita on financial development in a panel of 125 countries. It also determines the moderating effect of inflation on the impact of GDP on financial development. It employs the dynamic panel system generalized method of moments (GMM) and the dynamic common correlated effects (CCE) to do both panel and country‐specific analysis, as well as control for cross‐sectional dependence, heterogeneity and endogeneity. This study shows that GDP has a positive impact on financial development in the entire panel. However, when we split the panel into different income groups, we find a positive impact in the high‐ and middle‐income groups while the impact is insignificant in the low income group. Although we find no evidence of a nonlinear impact of GDP on financial development in the panel, the country‐specific analysis reveals a significant nonlinear relationship between GDP and financial development in 73 countries. We also show that inflation adversely moderates the positive impact of GDP on financial development in middle‐income countries. This study implies that the relationship between GDP and financial development depends on the levels of GDP and inflation rate. We recommend some policy options based on the findings.     

A Case Study on Organisational Performance Measurement Systems for Customer Intimacy

Organisations have been urged to embrace "customer intimacy" in order to become market leaders. However, the complexities of developing and implementing performance measures for customer intimacy are yet to be investigated. This study investigates the introduction of customer-focused performance measures in a wholesale financial services company pursuing customer intimacy. The study demonstrates the multi-dimensional nature of customer intimacy, examines the potential trade-offs in the design of customer-focused performance measurement systems and identifies social and technical factors that shaped the fate of the new performance measurement system studied.     

When does the share price equal the present value of future dividends?

Summary This paper discusses an explicit necessary and sufficient condition on the dividend stream of a publicly traded company, under which the price of the company's share is equal to the present value of the future dividends that will accrue to it. When it is not, the share price equals the present value of the future per share dividend plus the limiting per share value of the company at infinity. It uses a well-accepted generalization of the Miller-Modigliani framework, and assumes that the firm is an infinite horizon firm which may engage in repurchasing its own shares. It develops a proper dividend approach that can value such a firm for any dividend stream. The paper concludes by clarifying some remarks in the Miller-Modigliani paper.For helpful discussions and comments, I thank Laurence Booth. Mike Gordon, Robert Jarrow, Raymond Kan, Rajnish Mehra, David Quirin, and Rishin Roy. Support from Social Sciences and Humanities Research Council of Canada is greatly appreciated.     

The valuation-relevance of the foreign translation adjustment: The effect of barriers to entry

We examine the economic effects of barriers to entry on the association between foreign currency translation adjustments and the stock returns of multinational firms operating in the manufacturing and service industries. Firms that are innovation leaders, that is, firms that are research and development (R&D) intensive and firms with high foreign asset intensity (i.e., asset-intensive firms), are our proxies for firms operating in environments with barriers to entry (i.e., environments in which competition is less intense). We hypothesize and find that foreign currency translation adjustments are positively associated with abnormal stock returns for firms operating in environments with barriers to entry in both manufacturing and service industries. This finding highlights the importance of assessing the valuation-relevance of foreign currency translation adjustments by considering the economic contexts of foreign currency movements. Overall, the evidence shows that the accounting rules governing foreign currency translations generally produce results consistent with the economic effects of foreign exchange rate changes.     

FDICIA and bank failure contagion: Evidence from the two failures of first city bancorporation

We investigate contagion effects from the two failures of First City Bancorporation—the only large regional bank to fail before and after FDICIA. FDICIA imposes changes in the bank failure resolution process that expose uninsured depositors to substantially greater risk. We find that shocks to First City’s weekly returns affect the conditional volatility of all but the most financially sound banks in the 1985–1987 period. This risk spillover effect is not evident in the period leading up to First City’s 1992 failure, however, which suggests that the regulatory changes embodied in FDICIA have not contributed to a more risky banking system. We appreciate the comments of Richard Cebula, Ken Kroner, Jim Pappas, Joseph Mason, an anonymous reviewer, and seminar participants at the 1996 meetings of the Financial Management Association.     

The theory of corporate takeover bids: A subgame perfect approach

In this paper I re-examine Grossman & Hart's (1980a) earlier work on corporate takeovers and address three main shortcomings of their theory. First, their theory implies that in the ‘Nash equilibrium’ either all shareholders will decide to tender their shares or all will refuse the raider's tender offer. Hence, they look only at the pure strategy equilibria. Second, there does not exist any free-rider problem in the extreme cases of pure strategy equilbria because everyone sells his or her share and the raider does not have to deal with any minority shareholder in the equilibrium. On the other hand, if the raid fails and no one sells, then there is no question of dilution either. I show some mixed-strategy equilibria using assumptions of Grossman and Hart. Third, Grossman and Hart claim that their theory rules out the possibilities of takeovers by the inefficient raider in which the shareholders who tender their shares are worse off than they would have been otherwise with the incumbent management. It appears from the model that their argument is based on rather arbitrary assumptions.     

Strategy and environment as determinants of performance: Evidence from the Japanese machine tool industry

This study examines the roles played by the environment and realized strategies on firm-level performance in the Japanese machine tool industry. We examine the effect of environment and strategy on performance using longitudinal data on a sample of 25 Japanese machine tool firms over the period 1979-92. Our results indicate that both firm strategies and the environment play significant roles in influencing profitability and growth. More specifically, whereas both strategy and environmental variables are significantly related to firm profitability, only environmental variables are associated with firm growth. Additionally, in contrast to U.S. based studies, we find that capital expenditures and technological change are not negatively associated with profitability. Rather technological change has a positive impact on firm growth. We discuss the implications of these results for strategic management and provide suggestions for future research.     

Cross-listing and subsequent delisting in foreign markets

Employing a sample of stocks cross-listed and subsequently delisted from foreign markets, we examine the consequences of delisting to investors in terms of price, risk, and liquidity. We also provide a direct comparison between the firm's performance after a foreign cross-listing and after its subsequent delisting. We find a positive cross-listing and negative delisting effect on stock price, both of which dissipate in the long run. No significant changes in the market risk are found for either event. Foreign cross-listing and delisting are associated with increasing and decreasing long term trading volume respectively. Further analysis reveals that firms delist in response to low host market return and low firm trading volume in the host market. The changes in liquidity and market risk from delisting relate those from cross-listing. Finally, our results show that the bonding hypothesis fails to explain the listing premium and the delisting loss.     

The value relevance of corporate restructuring charges

We document in this study that investors react positively to restructuring that is expected to be successful in improving firm performance. Investors’ reaction is significantly negative to unsuccessful firms when the magnitude of restructuring charges is high. Our results also show that investors’ reaction is significantly positive to restructuring that is intended to save costs through “workforce reduction” and “facility closings/consolidations”, but it is insignificant when restructuring is undertaken to recognize decline in asset values by asset write-offs and/or write-downs. Investor reaction is measured by 12-month buy-and-hold abnormal returns, whereas successful restructuring to improve the firm performance is based on the change in operating performance, measured by the industry-adjusted return on equity (ROE), over two subsequent years after restructuring.