International Finance

***********************************************************
                Short Reviews of Academic Articles
***********************************************************
>Appeared in January 13th, 2004 newsletter

OK, this one is bound to Ruffle some feathers (get it?). Further let me
preface it by saying I am not endorsing, just reporting and slightly
interpreting. (can you tell I do not want many negative emails.
PLEASE!) Religion might be more beneficial from a shareholder
perspective in nations with less developed markets and investor
protections. Why? Ruffle and Sosis find that those who are closing
aligned within a religious community are more apt to cooperate.
Developed markets often create regulatory institutions (such as SEC) and
rely on court systems to get the same cooperation. (BTW sorry about the
pun, I couldn't pass it up)
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=441285

After controlling for size and productivity, Bernard and Sjoholm find
that foreign owned plants are more likely to close (shut down) than
domestically owned plants. This should not be a surprise as foreign
firms not only have fewer ties, but more options. Thus, the transaction
costs of closing a plant should be lower. While this study was done
only in Malaysia, it is likely that it holds elsewhere as well.
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=455280

>Appeared in August 27th, 2003 newsletter

Investors have long exhibited a “home country bias” whereby they hold
more shares of firms from their own country than would seem warranted
based off of typical diversification theory. This seeming anomaly has
been partially explained in many ways (my favorite is Butler’s view that
when markets fall, the correlation is actually greater than the long run
correlation, hence overstating the value of diversification). Li looks
at this from a different perspective by trying to examine how risky the
foreign marklets would have to be before investor behavior would make
sense. He finds that “in order to hold predominantly domestic equities,
each G7 investor has to believe that the risk of foreign investment is
several times higher than the actual risk.”
http://papers.ssrn.com/abstract_id=403480

Sarkissian and Schill report that firms themselves also have a
“home-country bias.” Somewhat surprisingly they find that firms that
cross list securities tend to do so more often in markets that are
similar (and hence more correlated with) the firm’s home market. (note
this differs with previous work because it does not examine where the
greatest benefits are, but rather only looks at what actually happens.
Theory would suggest that if listing internationally is to maximize
capital market availability, then the greatest benefits would be in
nations where there is a low correlation.) In the authors’ words the
“findings suggest that the same familiarity constraints that affect
investment-portfolio selection also exert a profound influence on
financing decisions.”
http://papers.ssrn.com/abstract_id=267103

In yet another paper (this is getting ridiculous! How does he have time
for all of this?), Sarkissian and Schill try to explain why this home
country bias may exist. After looking at why firms list their shares
internationally and find that much of the supposed cost of capital
saving is probably exaggerated in previous studies. Consistent with the
hypothesis that firms list in nations where there are better shareholder
protections, foreign firms that list in the US experience the greatest
benefit.
http://papers.ssrn.com/abstract_id=395140
Dare I say Micheal Schill is en feugo? Wow.

While the above article is no doubt correct in saying that sometimes the
benefits of cross-listing are overstated, there are many market
imperfections that firms attempt to make full advantage of by becoming a
multinational firm. For instance, Desai, Foley, and Hines have a cool
paper that finds that multinational firms sell more debt in nations with
higher tax rates. Moreover, the authors find that in nations with
poorly developed capital markets, the subsidiaries borrow more from
“related parties” than from unrelated parties. Why? Best guess is that
there would be lower expected cost of non-compliance. This ability to
structure loans around market imperfections is one area where MNCs have
an advantage over local firms.
http://papers.ssrn.com/abstract_id=405023

 Khanna, Palepu, and Srinivasan examine the relatively new S&P
Transparency and Disclosure scores for 466 firms from Asian-Pacific
countries. Consistent with theory, they find that the more the
interaction with US firms, the more transparent the firm’s disclosure
practices. Specifically they find “a positive association between these
disclosure scores and the following types of market interactions:
business operations in the US, US listing, international equity
ownership, US equity or direct investment in the company’s home country,
and business travel from the home country to the US.”
http://papers.ssrn.com/abstract_id=408621
 
>Appeared in June 5th, 2003 Newsletter

When we take a longer term look at the changing face of finance, we can
see definite changes in certain regions. For example, over the past
20-30 years there has been a significant movement towards more market
oriented financing in Europe. Rajan and Zingales look at this trend and
discuss some of the causes and consequences. Morevoer, they speculate,
that political support for a continuation of this movement may be
waning. Interesting analysis!
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=389100

>Appeared in March 3rd, 2003 newsletter

This one should come as no shock. Countries with greater property right
protections experience higher growth. That is the conclusion of a
forthcoming Journal of Finance article by Claessens and Laeven that
finds that this may explain the somewhat troubling fact that firms in
developing nations have higher fixed assets to total assets than in
developed nations, which goes against standard theory that growth firms
have fewer assets in place.
http://www.afajof.org/Pdf/forthcoming/Laeven.pdf

Why do foreign firms that list in the US have a higher valuation (as
measured by q values) than firms that do not list in the US? A theory
proposed by Doidge, Karolyi, and Stulz suggest that it is the
combination of better access to capital and less ability to expropriate
wealth.
http://jfe.rochester.edu/02367.pdf

>Appeared in April 30th, 2002 newsletter

The equity risk premium has a long and storied history. This is the
premium that investors require to assume the risks associated with
holding equity investments. However, what has puzzled investors and
academics is why the premium has been so high for so long. (In other
words, dividends do not seem risky enough to lead to investors demanding
such a high return.) This has been termed the equity risk premium
puzzle and has been studied with varying degrees of success by many
researchers. Now Nicholas Barberis has used Behavioral Finance to
successfully describe the premium. This is based on the idea that
investors are not as concerned with their losses if their losses if the
money lost was "won" in an earlier round of the stock market game.
However, losses of invested money for some reason seems to hurt more and
thus lead to higher discount rates. So when this idea is applied it
leads to lower discount rates (and accordingly higher stock prices) in
good times and higher discount rates (and accordingly lower stock
prices) when the stock market has fallen. This is a recipe for
volatility and a time-varying discount rate, something simple models
such as CAPM do not account for.
http://gsbwww.uchicago.edu/news/capideas/fall01/stockmarket.html
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=214388