The impact of capacity expansion on the market value of the firm

This paper empirically investigates the impact of capacity expansion decisions on the market value of the firm. Event study methodology is used to estimate the abnormal change in stock prices around capacity expansion decision announcements. On the day of the announcement, the magnitude of the price change is abnormally high, evidenced by a significantly positive mean standardized square of the abnormal change (Beaver's U-statistic). We also analyze factors that we could affect the direction and magnitude of the abnormal change in the stock prices. We find that the change in price on the day of the announcement is positively and significantly related to the real growth rate of the industry, and negatively and significantly related to the variability of demand. A negative relationship between the price change and industry capacity utilization is also found which can have important implications for companies which follow the wait-and-see approach to capacity expansion decisions. We also find management ownership to be a significant predictor in explaining stock price changes around these announcements.     

‘I’ve been to Bali too’ (and I will be going back): are terrorist shocks to Bali's tourist arrivals permanent or transitory?

International visitor arrivals to Bali are examined using univariate and panel Lagrange multiplier (LM) unit root tests with one and two structural breaks to ascertain if shocks to the time path of tourist arrivals are permanent or transitory. The univariate LM unit root tests with one and two structural breaks fail to reject the null hypothesis of a unit root in international visitor arrivals to Bali. However, the panel LM unit root tests with one and two structural breaks applied to a panel of Bali's 11 major source markets reject the null and support the alternative hypothesis of a joint trend-stationary series with transitory shocks. This result suggests that, the effects of the recent terrorist acts on Bali on the growth path of tourist arrivals from major markets are only transitory and that as a consequence Bali's tourism sector is sustainable in the long run.     

Evaluating inflation targeting as a monetary policy objective for India

This study formulates a small open economy model for India with exchange rate as a prominent channel of monetary policy. The model is estimated using the Instrumental Variable-Generalized Methods of Moments (IV-GMM) estimator and evaluated through simulations. This study compares different cases of domestic and CPI inflation targeting, strict and flexible inflation targeting, and simple Taylor type rules. The analysis highlights the unsuitability of simple Taylor-type monetary rules in stabilizing the Indian economy and suggests that discretionary optimization works better in stabilizing this economy. There seems to be a trade-off between output gap stabilization and exchange rate stabilization in flexible domestic inflation targeting and CPI inflation targeting respectively. However, flexible domestic inflation targeting seems a better alternative from an overall macro stabilization perspective in India where financial markets are still not sufficiently integrated to ensure quick transmission of interest rate impulses and existence of rigidities in the economy.     

Import Dependency and Structural Adjustment in Sub-Saharan Africa

One of the effects of structural adjustment programs in Sub-SaharanAfrica has been the reduction of imports in the face of scarceforeign exchange. This article takes the analysis of importdemand beyond the traditional income and price determinantsto account for factors likely to be important to Sub-SaharanAfrican countries in the 1990s. First, the effect of demandon imports is reflected by the level of absorption rather thanthe less direct income variable. Second, because adjustmentprograms may cut government consumption and, through increasesin interest rates, reduce investment, these components of absorptionare also considered independently to assess their differentialeffect on imports. Third, import barriers are often set in dollarterms to limit the use of foreign exchange. Because reliableand complete data for import restrictions are not available,the ratio of exports to debt is included as an indicator offoreign exchange availability to reflect its effect on tradebarriers and thus imports. The findings suggest that this morecomprehensive assessment of import demand will be needed ifthe size and even direction of changes in import demand in responseto policy reform is to be understood and anticipated.     

Distribution of a generalized t ratio for biased estimators

For certain biased estimators the standard error can be small (even zero) and Student's t ratio over-estimates their statistical significance. This paper studies the distribution of a generalized t ratio where the denominator has the square root of an unbiased estimate of the mean squared error.