Three essays in international finance

Executive Summary The first essay of this dissertation investigates whether greater exchange rate uncertainty (i.e., variation over time in the exchange rate) fosters or depresses the foreign investment of multinational firms. In addition to the direct capital financing it supplies, foreign investment can be a source of valuable technology and know-how, which can have substantial positive effects on a host country's economic growth. Thus, it is critically important for policy makers and central bankers, among others, to understand how multinationals base their investment decisions on the characteristics of foreign exchange markets. In this essay, I first develop a theoretical framework to improve our knowledge regarding how the aggregate level of foreign investment responds to exchange rate uncertainty when an economy consists of many firms, each of which is making decisions. The analysis predicts a U-shaped effect of exchange rate uncertainty on the total level of foreign investment of the economy. That is, the effect is negative for low levels of uncertainty and positive for higher levels of uncertainty. This pattern emerges because the relationship between exchange rate volatility and 'the probability of investment is negative for firms with low productivity at home (i.e., firms that find it profitable to invest abroad) and the relationship is positive for firms with high productivity at home (i.e., firms that prefer exporting their product). This finding stands in sharp contrast to predictions in the existing literature that consider a single firm's decision to invest in a unique project. The main contribution of this research is to show that the aggregation over many firms produces a U-shaped pattern between exchange rate uncertainty and the probability of investment. Using data from industrialized countries for the period of 1982-2002, this essay offers a comprehensive empirical analysis that provides evidence in support of the theoretical prediction. In the second essay, I aim to explain the time variation in sovereign credit risk, which captures the risk that a government may be unable to repay its debt. The importance of correctly evaluating such a risk is illustrated by the central role of sovereign debt in previous international lending crises. In addition, sovereign debt is the largest asset class in emerging markets. In this essay, I provide a pricing formula for the evaluation of sovereign credit risk in which the decision to default on sovereign debt is made by the government. The pricing formula explains the variation across time in daily credit spreads - a widely used measure of credit risk - to a degree not offered by existing theoretical and empirical models. I use information on a country's stock market to compute the prevailing sovereign credit spread in that country. The pricing formula explains a substantial fraction of the time variation in daily credit spread changes for Brazil, Mexico, Peru, and Russia for the 1998-2008 period, particularly during the recent subprime crisis. I also show that when a government incentive to default is allowed to depend on current economic conditions, one can best explain the level of credit spreads, especially during the recent period of financial distress. In the third essay, I show that the risk of sovereign default abroad can produce adverse consequences for the U.S. equity market through a decrease in returns and an increase in volatility. The risk of sovereign default, which is no longer limited to emerging economies, has recently become a major concern for financial markets. While sovereign debt plays an increasing role in today's financial environment, the effects of sovereign credit risk on the U.S. financial markets have been largely ignored in the literature. In this essay, I develop a theoretical framework that explores how the risk of sovereign default abroad helps explain the level and the volatility of U.S. equity returns. The intuition for this effect is that negative economic shocks deteriorate the fiscal situation of foreign governments, thereby increasing the risk of a sovereign default that would trigger a local contraction in economic growth. The increased risk of an economic slowdown abroad amplifies the direct effect of these shocks on the level and the volatility of equity returns in the U.S. through two channels. The first channel involves a decrease in the future earnings of U.S. exporters resulting from unfavorable adjustments to the exchange rate. The second channel involves investors' incentives to rebalance their portfolios toward safer assets, which depresses U.S. equity prices. An empirical estimation of the model with monthly data for the 1994-2008 period provides evidence that the risk of sovereign default abroad generates a strong leverage effect during economic downturns, which helps to substantially explain the level and the volatility of U.S. equity returns.

Emerging pharmacotherapies for alcohol dependence: a systematic review focusing on reduction in consumption.

BACKGROUND: European Medicines Agency guidelines recognize two different treatment goals for alcohol dependence: abstinence and reduction in alcohol consumption. All currently approved agents are indicated for abstinence. This systematic review aimed to identify drugs in development for alcohol dependence treatment and to establish, based upon trial design, if any are seeking market authorization for reduction in consumption. METHODS: We searched PubMed and Embase (December 2001-November 2011) to identify agents in development for alcohol dependence treatment. Additional studies were identified by searching ClinicalTrials.gov and the R&D Insight and Clinical Trials Insight databases. Studies in which the primary focus was treatment of comorbidity, or n≤20, were excluded. Studies were then classified as 'abstinence' if they: described a detoxification/alcohol withdrawal period; enrolled patients who had undergone detoxification previously; or presented relapse/abstinence rates as the primary outcome. Studies in patients actively drinking at baseline were classified as 'reduction in consumption'. RESULTS: Of 602 abstracts identified, 45 full-text articles were eligible. Five monotherapies were in development for alcohol dependence treatment: topiramate, fluvoxamine, aripiprazole, flupenthixol and nalmefene. Nalmefene was the only agent whose sponsor was clearly seeking definitive approval for reduction in consumption. Development status was unclear for topiramate, fluvoxamine, aripiprazole and flupenthixol. Fifteen agents were examined in published exploratory investigator-initiated trials; the majority focused on abstinence. Ongoing (unpublished) trials tended to focus on reduction in consumption. CONCLUSIONS: While published studies generally focused on abstinence, ongoing trials focused on reduction in consumption, suggesting a change in emphasis in the approach to treating alcohol dependence.

Entrepreneur's Overconfidence, Private Benefits and the Market Performance of the Firm

Many firms around the world are managed and partially owned by entrepreneurs. These entrepreneurs hold under diversified portfolios and, therefore, bear idiosyncratic risk in addition to systematic risk. To compensate the additional risk borne, they extract private benefits. In this paper, we analyse how an entrepreneur's overconfidence affects the market performance of the firm, through the channel of private benefits. We show that two dimensions of overconfidence, namely overestimation of future cash-flows and underestimation of idiosyncratic risk (called miscalibration), have opposite effects on the private benefits extracted by the entrepreneur. As a consequence, firms managed and partially owned by overconfident entrepreneurs can deliver overperformance or underperformance, depending on the prevalence of overestimation or miscalibration of the beliefs of the entrepreneur.

Three essays on internationalization and firm entrepreneurial behavior

PAPER 1: A THEORY ON THE EFFECTS OF INTERNATIONALIZATION ON FIRM ENTREPRENEURIAL BEHAVIOR AND GROWTH Abstract This article addresses the relationship. Past findings reveal that the direct effects of internationalization on performance are mixed and inconclusive. Our framework integrates firm entrepreneurial behavior as a mediating force of the troublesome Drawing on the tension between the entrepreneurship literature and the organizational inertia theory, we argue that internationalization is key to minimizing the stifling effects of inertia and in engendering entrepreneurial behavior towards growth. We suggest that firms that internationalize at a young age and enjoy an intense degree of internationalization tend to become more entrepreneurial than do late and weakly internationalized firms. As a consequence, early and intense internationalizers experience superior growth. Aware of the inherent endogeneity of our propositions, we also discuss how consistent estimates can be obtained when testing the model empirically. PAPER 2: DOES INTERNATIONALIZATION MATTER FOR GROWTH? THE CASE OF SWISS SOFTWARE FIRMS. Abstract This paper seeks to address the issue of whether early and intense internationalization leads to superior firm growth. We revisit the hypotheses of previous studies within the emerging research domain of international entrepreneurship. Empirical analyses on the performance implications of internationalization have so far been limited and inconsistent. Our paper intends to make two contributions to the international entrepreneurship literature. First, we bring additional empirical evidence as to the inconclusive firm performance endogeneity in our causal model, using a sample of 103 Swiss international small and medium-sized enterprises (SMEs). On one hand, we find that the degree of internationalization significantly increases perceived firm growth (i.e., relative firm performance in a market); however, age at internationalization was unrelated to perceived firm growth. On the other hand, we reproduced the causal path of a highly cited study that showed how age at internationalization was significantly and negatively associated with objective firm growth (i.e., sales). Interestingly, our results support the study similar setting (OLS regression with comparable control variables); however, the effect for age at internationalization reverses when we correct for endogeneity. PAPER 3: EFFECT OF INTERNATIONALIZATION ON FIRM ENTREPRENEURIAL ORIENTATION AND PERFORMANCE: THE CASE OF SWISS SOFTWARE FIRMS. Abstract How does internationalization influence a firm orientation (EO) and is this related to firm growth? This paper inquires into the performance theorizing, we test a process model in which EO plays a mediating role in accounting for the relationship between internationalization and growth. We position this paper on the tension zone between the entrepreneurship literature and the organizational inertia theory. We lay out the argument that internationalization is source of opportunities that drives a firm and thus mitigates inertial pressure. Using a sample of Swiss software small and medium-sized enterprises (SMEs), we found that degree of internationalization (but not age of internationalization) increases EO, which subsequently increased firm growth.

Value / personality - attitude - behavior hierarchy and its impact on individual performance in the context of market orientation

The purpose of this dissertation is to better understand how individual employees? values and personality traits influence their attitudes toward market orientation; how such attitudes impact their market-oriented behaviors; and how in turn, these behaviors lead to their superior individual performance. To investigate these relationships, an empirical study was conducted in the French speaking part of Switzerland and data were collected from a sample of service firms? employees from diverse departments and hierarchical levels. To a large extent, the results support the hypothesis of a hierarchical chain moving from value / personality to attitude to behavior to individual performance in relation to market orientation. Le sujet de cette thèse de doctorat est de mieux comprendre comment les valeurs et les traits de personnalité des employés influencent leurs attitudes envers l'orientation vers le marché ; comment ces attitudes ont un effet sur les comportements orientés vers le marché de ces employés et enfin, comment ces comportements conduisent à une meilleure performance individuelle. Afin d'étudier ces relations, une enquête a été conduite en Suisse romande et des données ont été collectées auprès d'un échantillon d'employés d'entreprises de service de différents départements et niveaux hiérarchiques. Les résultats sont concordants avec l'hypothèse d'une chaîne causale allant des valeurs / traits de personnalité aux attitudes, aux comportements et finalement à la performance individuelle dans le contexte de l'orientation vers le marché.

Political market and regulatory uncertainty: Insights and implications for integrated strategy

Managers can craft effective integrated strategy by properly assessing regulatory uncertainty. Leveraging the existing political markets literature, we predict regulatory uncertainty from the novel interaction of demand and supply side rivalries across a range of political markets. We argue for two primary drivers of regulatory uncertainty: ideology-motivated interests opposed to the firm and a lack of competition for power among political actors supplying public policy. We align three, previously disparate dimensions of nonmarket strategy - profile level, coalition breadth, and pivotal target - to levels of regulatory uncertainty. Through this framework, we demonstrate how and when firms employ different nonmarket strategies. To illustrate variation in nonmarket strategy across levels of regulatory uncertainty, we analyze several market entry decisions of foreign firms operating in the global telecommunications sector.

Labor Market Signaling and Self-Confidence: Wage Compression and the Gender Pay Gap

I extend Spence's signaling model by assuming that some workers are overconfident-they underestimate their marginal cost of acquiring education-and some are underconfident. Firms cannot observe workers' productive abilities and beliefs but know the fractions of high-ability, overconfident, and underconfident workers. I find that biased beliefs lower the wage spread and compress the wages of unbiased workers. I show that gender differences in self-confidence can contribute to the gender pay gap. If education raises productivity, men are overconfident, and women underconfident, then women will, on average, earn less than men. Finally, I show that biased beliefs can improve welfare.