Essays on the Linkages Between Financial Markets, and Risk Asymmetries (summary section only)

During the last few decades there have been far going financial market deregulation, technical development, advances in information technology, and standardization of legislation between countries. As a result, one can expect that financial markets have grown more interlinked. The proper understanding of the cross-market linkages has implications for investment and risk management, diversification, asset pricing, and regulation. The purpose of this research is to assess the degree of price, return, and volatility linkages between both geographic markets and asset categories within one country, Finland. Another purpose is to analyze risk asymmetries, i.e., the tendency of equity risk to be higher after negative events than after positive events of equal magnitude. The analysis is conducted both with respect to total risk (volatility), and systematic risk (beta). The thesis consists of an introductory part and four essays. The first essay studies to which extent international stock prices comove. The degree of comovements is low, indicating benefits from international diversification. The second essay examines the degree to which the Finnish market is linked to the “world market”. The total risk is divided into two parts, one relating to world factors, and one relating to domestic factors. The impact of world factors has increased over time. After 1993, when foreign investors were allowed to freely invest in Finnish assets, the risk level has been higher than previously. This was also the case during the economic recession in the beginning of the 1990’s. The third essay focuses on the stock, bond, and money markets in Finland. According to a trading model, the degree of volatility linkages should be strong. However, the results contradict this. The linkages are surprisingly weak, even negative. The stock market is the most independent, while the money market is affected by events on the two other markets. The fourth essay concentrates on volatility and beta asymmetries. Contrary to many international studies there are only few cases of risk asymmetries. When they occur, they tend to be driven by the market-wide component rather than the portfolio specific element.

Essays on Illegal Activities, Institutions and Economic Growth

In public economics, two extremist views on the functions of a government compete: one emphasizes government working for the public interest to provide value for the citizens, while another regards government mainly as a workhorse for private interests. Moreover, as the sole legitimate authority, the government has the right to define the rules and laws as well as to enforce them. With respect to regulation, two extremes arise: from too little regulation to too much of it. If the government does not function or ceases to exist, the state falls into anarchy or chaos (Somalia). If it regulates too much, it will completely suffocate private activities, which might be considered extralegal (the former Soviet Union). In this thesis I scrutinize the government s interventionist policies and evaluate the question of how to best promote economic well-being. The first two essays assume that the government s policies promote illegal activity. The first paper evaluates the interaction between the government and the mafia, and pays attention to the law enforcement of underground production. We show that the revenue-maximizing government will always monitor the shadow economy, as monitoring contributes to the government s revenue. In general, both legal and illegal firms are hurt by the entry of the mafia. It is, however, plausible that legal firms might benefit by the entry of the mafia if it competes with the government. The second paper tackles the issue of the measurement of the size of the shadow economy. To formulate policies it is essential to know what drives illegal economic activity; is it the tax burden, excess regulation, corruption or a weak legal environment? In this paper we propose an additional explanation for tax evasion and shadow production, namely cultural factors as manifested by religion as determinants of tax morality. According to our findings, Catholic and Protestant countries do not differ in their tax morale. The third paper contributes to the literature discussing the role of the government in promoting economic and productivity growth. Our main result is that, given the complex relationship between economic growth and economic freedom, marketization has not necessarily been beneficial in terms of growth. The last paper builds on traditional growth literature and revisits the debate on convergence clubs arising from demographic transition. We provide new evidence against the idea that countries within a club would converge over time. Instead, we propose that since the demographic transition is a dynamic process, one can expect countries to enter the last regime of stable, modern growth in stages.

Appropriate Institutions and Economic Growth - one size fits no-one

Modern-day economics is increasingly biased towards believing that institutions matter for growth, an argument that has been further enforced by the recent economic crisis. There is also a wide consensus on what these growth-promoting institutions should look like, and countries are periodically ranked depending on how their institutional structure compares with the best-practice institutions, mostly in place in the developing world. In this paper, it is argued that ”non-desirable” or “second-best” institutions can be beneficial for fostering investment and thus providing a starting point for sustained growth, and that what matters is the appropriateness of institutions to the economy’s distance to the frontier or current phase of development. Anecdotal evidence from Japan and South-Korea is used as a motivation for studying the subject and a model is presented to describe this phenomenon. In the model, the rigidity or non-rigidity of the institutions is described by entrepreneurial selection. It is assumed that entrepreneurs are the ones taking part in the imitation and innovation of technologies, and that decisions on whether or not their projects are refinanced comes from capitalists. The capitalists in turn have no entrepreneurial skills and act merely as financers of projects. The model has two periods, and two kinds of entrepreneurs: those with high skills and those with low skills. The society’s choice of whether an imitation or innovation – based strategy is chosen is modeled as the trade-off between refinancing a low-skill entrepreneur or investing in the selection of the entrepreneurs resulting in a larger fraction of high-skill entrepreneurs with the ability to innovate but less total investment. Finally, a real-world example from India is presented as an initial attempt to test the theory. The data from the example is not included in this paper. It is noted that the model may be lacking explanatory power due to difficulties in testing the predictions, but that this should not be seen as a reason to disregard the theory – the solution might lie in developing better tools, not better just better theories. The conclusion presented is that institutions do matter. There is no one-size-fits-all-solution when it comes to institutional arrangements in different countries, and developing countries should be given space to develop their own institutional structures that cater to their specific needs.

Medicines information sources and services for consumers : A special focus on the Internet and people with depression

The range of consumer health and medicines information sources has diversified along with the increased use of the Internet. This has led to a drive to develop medicines information services and to better incorporate the Internet and e-mail into routine practice in health care and in community pharmacies. To support the development of such services more information is needed about the use of online information by consumers, particularly of those who may be the most likely to use and to benefit from the new sources and modes of medicines communication. This study explored the role and utilization of the Internet-based medicines information and information services in the context of a wider network of information sources accessible to the public in Finland. The overall aim was to gather information to develop better and more accessible sources of information for consumers and services to better meet the needs of consumers. Special focus was on the needs and information behavior among people with depression and using antidepressant medicines. This study applied both qualitative and quantitative methods. Consumer medicines information needs and sources were identified by analyzing the utilization of the University Pharmacy operated national drug information call center (Study I) and surveying Finnish adults (n=2348) use of the different medicines information sources (Study II). The utilization of the Internet as a source of antidepressant information among people with depression was explored by focus group discussions among people with depression and with current or past use of the antidepressant(s) (n=29, Studies III & IV). Pharmacy response to the needs of consumers in term of providing e-mail counseling was assessed by conducting a virtual pseudo customer study among the Finnish community pharmacies (n=161, Study V). Physicians and pharmacists were the primary sources of medicines information. People with mental disorders were more frequent users of telephone- and Internet-based medicines information sources and patient information leaflets than people without mental disorders. These sources were used to complement rather than replace information provided face-to-face by health professionals. People with depression used the Internet to seek facts about antidepressants, to share experiences with peers, and for the curiosity. They described that the access to online drug information was empowering. Some people reported lacking the skills necessary to assess the quality of online information. E-mail medication counseling services provided by community pharmacies were rare and varied in quality. Study results suggest that rather than discouraging the use of the Internet, health professionals should direct patients to use accurate and reliable sources of online medicines information. Health care providers, including community pharmacies should also seek to develop new ways of communicating information about medicines with consumers. This study determined that people with depression and using antidepressants need services enabling interactive communication not only with health care professionals, but also with peers. Further research should be focused on developing medicines information service facilitating communication among different patient and consumer groups.

Essays on Financial Analyst Forecasts and Recommendations

The trade of the financial analyst is currently a much-debated issue in today’s media. As a large part of the investment analysis is conducted under the broker firms’ regime, the incentives of the financial analyst and the investor do not always align. The broker firm’s commercial incentives may be to maximise its commission from securities trading and underwriting fees. The purpose of this thesis is to extend our understanding of the work of a financial analyst, the incentives he faces and how these affect his actions. The first essay investigates how the economic significance of the coverage of a particular firm impacts the analysts’ accuracy of estimation. The hypothesis is that analysts put more effort in analysing firms with a relatively higher trading volume, as these firms usually yield higher commissions. The second essay investigates how analysts interpret new financial statement information. The essay shows that analysts underreact or overreact to prior reported earnings, depending on the short-term pattern in reported earnings. The third essay investigates the possible investment value in Finnish stock recommendations, issued by sell side analysts. It is established that consensus recommendations issued on Finnish stocks contain investment value. Further, the investment value in consensus recommendations improves significantly through the exclusion of recommendations issued by banks. The fourth essay investigates investors’ behaviour prior to financial analysts’ earnings forecast revisions. Lately, the financial press have reported cases were financial analysts warn their preferred clients of possible earnings forecast revisions. However, in the light of the empirical results, it appears that the problem of analysts leaking information to some selected customers does not appear systematically on the Finnish stock market.

Value Creation in Professional Service Processes. Propositions for Understanding Financial Value from a Customer Perspective

Many service management studies have suggested that service providers benefit from having long-term relationships with customers, but the argument from a customer perspective has been vague. However, especially in the business-to-business context, an analysis of financial value creation seems appropriate also from a customer perspective. Hence, the aim of this study is to develop a framework for understanding monetary value creation in professional service assignments from a customer perspective. The contribution of this study is an improved insight and framework for understanding financial value creation from a customer perspective in a professional service delivery process. The sources for monetary differences between transactional and long-term service providers are identified and quantified in case settings. This study contributes to the existing literature in service and relationship management by extending the customer’s viewpoint from perceived value to measurable monetary value. The contribution to the professional services lies in the process focus as opposed to the outcome focus, which is often accentuated in the existing professional services literature. The findings from the qualitative data suggest that a customer company may benefit from having an improved understanding of the service delivery (service assignment) process and the factors affecting the monetary value creation during the process. It is suggested that long-term relationships with service providers create financial value in the case settings in the short term. The findings also indicate that by using the improved understanding, a customer company can make more informed decisions when selecting a service provider for a specific assignment. Mirel Leino is associated with CERS, the Center for Relationship Marketing and Service Management at the Swedish School of Economics and Business Administration