Integration of International Long-Term Interest Rates: A Fractional Cointegration Analysis

In this study, we re-examine the relationship among interest rates on the long-term government bonds of five industrialized countries. Using both the variance ratio test and fractional cointegration analysis, we find significant evidence that indicates the five government bond rates are fractionally cointegrated. In specific, our results show that the error correction term of the system of the five interest rates follows a mean-reverting, fractionally integrated process.     

Optimal Dynamic Taxation with Distinctive Forms of Social Status Attainment

We examine the role of both consumption‐ and wealth‐induced social comparisons in setting dynamic optimal income taxation. Under complete information, state‐invariant labor income taxes are used to remedy the externality caused by consumption‐induced social comparisons, while state‐contingent capital income taxes are used to remedy the externalities caused by both consumption‐ and wealth‐induced social comparisons. Under incomplete information, distinct types of agents are subject to an identical marginal capital income tax, which removes social comparisons. To solve the information problem, low‐productivity agents could be subject to a lower marginal labor tax than high‐productivity agents, which contradicts the traditional result in the Mirrlees–Stiglitz models.     

Transmission of Stock Returns and Volatility between the U.S. and Japan: Evidence from the Stock Index Futures Markets

In this paper, we examine the nature of transmission of stock returns and volatility between the U.S. and Japanese stock markets using futures prices on the S&P 500 and Nikkei 225 stock indexes. We use stock index futures prices to mitigate the stale quote problem found in the spot index prices and to obtain more robust results. By employing a two-step GARCH approach, we find that there are unidirectional contemporaneous return and volatility spillovers from the U.S. to Japan. Furthermore, the U.S.'s influence on Japan in returns is approximately four times as large as the other way around. Finally, our results show no significant lagged spillover effects in both returns and volatility from the Osaka market to the Chicago market, while a significant lagged volatility spillover is observed from the U.S. to Japan. This revised version was published online in August 2006 with corrections to the Cover Date.     

Innovation and the Operational Performance of Newly Established Small and Medium Enterprises in Taiwan

New Enterprises have been sprouted out prosperously in Taiwan. According to business income tax data, 143 thousand new enterprises were established between 1996–1998, which accounts for about 25% of total number of enterprises, and 98.68% of these new enterprises are SMEs.In this research, a randomly sampled 1,047 new enterprises which established after 1996 were surveyed through telephone. The survey discovered that three-quarters of these new enterprises adopted at least one out of nine types of innovative activities which were listed in the questionnaire.The logistic regression results of this study show that three main areas of innovation which were grouped from the nine activities by principal component analysis all had a positive relationship with operational performance of new enterprises. Innovative action had the biggest impact on sales growth, whilst the cultivation of an innovative atmosphere and the ability to innovate within the organization had the biggest impact on profits. In short, entrepreneurs in Taiwan are actively innovating, and this innovation is reflected in the performance of their enterprises.     

Effects of Preferred Stock Re-rating on Common Stock Prices: Further Evidence

This study examines the price reactions of common stocks to changes in preferred stock ratings, with focuses on firms with less information available in the market as well as on firms with a relatively larger proportion of preferred stock financing. Emphasis on differential information and the relative size of preferred stocks across firms provide a more powerful test of the effect of rating changes on stock prices. Contrary to previous studies that report no price effect on common stocks due to preferred stock re-ratings, these results show that for low-information firms and for firms with a larger proportion of preferred stocks in their capital structure, a preferred stock rating downgrade exerts significant negative price effect on common stocks during the two-day announcement period. Our findings also have implications for future studies of other firm-specific events such as security offerings, stock repurchases, and convertible calls.     

Internationalization and Auditor Choice

Prior research shows that internationalization increases information asymmetry and conflicts of interest between managers and outside investors, which lead to greater agency problems. Agency theory predicts a demand for higher quality auditors when agency problems are more severe. This study investigates whether the extent of internationalization influences auditor choice and whether audit quality has performance implications for internationalization. Using a set of U.S. firms from 2003 to 2009, we find the extent of internationalization positively related to audit quality. Furthermore, higher quality audits positively moderate the relation between internationalization and firm performance. Taken together, these results suggest that higher quality audit mitigates the agency problem associated with internationalization.