Real options and multinational investments : an empirical study of risk, performance and organisational awareness

DUE TO COPYRIGHT RESTRICTIONS ONLY AVAILABLE FOR CONSULTATION AT ASTON UNIVERSITY LIBRARY AND INFORMATION SERVICES WITH PRIOR ARRANGEMENT This thesis is a cross-disciplinary study of the empirical impact of real options theory in the fields of decision sciences and performance management. Borrowing from the economics, strategy and operations research literature, the research examines the risk and performance implications of real options in firms’ strategic investments and multinational operations. An emphasis is placed on the flexibility potential and competitive advantage of multinational corporations to explore the extent to which real options analysis can be classified as best practice in management research. Using a combination of qualitative and quantitative techniques the evidence suggests that, if real options are explored and exploited appropriately, real options management can result in superior performance for multinational companies. The qualitative findings give an overview of the practical advantages and disadvantages of real options and the statistical results reveal that firms which have developed a high awareness of their real options are, as predicted by the theory, able to reduce their downside risk and increase profits through flexibility, organisational slack and multinationality. Although real options awareness does not systematically guarantee higher returns from operations, supplementary findings indicate that firms with evidence of significant investments in the acquisition of real options knowledge tend to outperform competitors which are unaware of their real options. There are three contributions of this research. First, it extends the real options and capacity planning literature to path-dependent contingent-claims analysis to underline the benefits of average type options in capacity allocation. Second, it is thought to be the first to explicitly examine the performance effects of real options on a sample of firms which have developed partial capabilities in real options analysis suggesting that real options diffusion can be key to value creation. Third, it builds a new decision-aiding framework to facilitate the use of real options in projects appraisal and strategic planning.

Advances in predicting and manipulating the immunogenicity of biotherapeutics and vaccines

Therapeutic proteins are vital to the future of human health provision and the survival and profitability of the global pharmaceutical industry. Returns from protein therapeutics are experiencing unprecedented growth: both their number and their economic dividend have increased by an order of magnitude in the last 10 years. The potential immunogenicity of protein therapeutics raises many clinical and safety concerns. Many poorly understood factors relating to both product and host affect immune responses. Available laboratory measurement of immunogenicity is of little utility for predicting the clinical properties of biotherapeutics. Coupled with assay variability and standardization issues, this precludes adequate prediction of the biological or clinical responses of therapeutic proteins, arguing for the utilization of informatic strategies in the analysis and prediction of protein immunogenicity. Currently, many unresolved issues must be addressed and thus circumvented before effective prediction can become routine.

Multivariate FIAPARCH modelling of financial markets with dynamic correlations in times of crisis

This paper applies the vector AR-DCC-FIAPARCH model to eight national stock market indices' daily returns from 1988 to 2010, taking into account the structural breaks of each time series linked to the Asian and the recent Global financial crisis. We find significant cross effects, as well as long range volatility dependence, asymmetric volatility response to positive and negative shocks, and the power of returns that best fits the volatility pattern. One of the main findings of the model analysis is the higher dynamic correlations of the stock markets after a crisis event, which means increased contagion effects between the markets. The fact that during the crisis the conditional correlations remain on a high level indicates a continuous herding behaviour during these periods of increased market volatility. Finally, during the recent Global financial crisis the correlations remain on a much higher level than during the Asian financial crisis.

Do external funds yield lower returns? Recent evidence from East Asian economies

One of the central explanations of the recent Asian Crisis has been the problem of moral hazard as the source of over-investment and excessive external borrowing. There is however rather limited firm-level empirical evidence to characterise inefficient use of internal and external finances. Using a large firm-level panel data-set from four badly affected Asian countries, this paper compares the rates of return to various internal and external funds among firms with low and high debt financing (relative to equity) among financially constrained and other firms. Selectivity-corrected estimates obtained from random effects panel data model do suggest evidence of significantly lower rates of return to long-term debt, even among firms relying more on debt relative to equity in our sample. There is also evidence that average effective interest rates often significantly exceeded the average returns to long-term debt in the sample countries in the pre-crisis period. © 2006 Elsevier Inc. All rights reserved.

Regional policy and spillovers from FDI in the UK

This paper tests one of the fundamental assumptions of regional policy makers over the last 20 years. Western governments, in seeking to attract internationally mobile capital have spent significant sums of public money on subsidies and grants. This is justified on the basis that the social returns to FDI are significantly greater than the private returns, due to productivity or technology spillovers from inward investors to domestic industry. However, this paper generates some estimates of these spillovers for both assisted areas and non-assisted areas in the UK, and questions the size of these social returns, arguing that productivity spillovers do not occur in regions where significant inward investment incentives are available.

Optimal geographic diversification and firm performance:evidence from the U.K.

This paper examines the relationship between multinationality and firm performance. The analysis is based on a sample of over 400 UK multinationals, and encompasses both service sector and manufacturing sector multinationals. This paper confirms the non-linear relationship between performance and multinationality that is reported elsewhere in the literature, but offers further analysis of this relationship. Specifically, by correcting for endogeneity in the investment decision, and for shocks in productivity across countries, the paper demonstrates that the returns to multinationality are greater than those that have been reported elsewhere, and persist to higher degrees of international diversification.

Using non-parametric search algorithms to forecast daily excess stock returns

Are the learning procedures of genetic algorithms (GAs) able to generate optimal architectures for artificial neural networks (ANNs) in high frequency data? In this experimental study,GAs are used to identify the best architecture for ANNs. Additional learning is undertaken by the ANNs to forecast daily excess stock returns. No ANN architectures were able to outperform a random walk,despite the finding of non-linearity in the excess returns. This failure is attributed to the absence of suitable ANN structures and further implies that researchers need to be cautious when making inferences from ANN results that use high frequency data.

Predicting returns in U.S. financial sector indices

This study focuses on: (i) the responsiveness of the U.S. financial sector stock indices to foreign exchange (FX) and interest rate changes; and, (ii) the extent to which good model specification can enhance the forecasts from the associated models. Three models are considered. Only the error-correction model (ECM) generated efficient and consistent coefficient estimates. Furthermore, a simple zero lag model in differences which is clearly mis-specified, generated forecasts that are better than those of the ECM, even if the ECM depicts relationships that are more consistent with economic theory. In brief, FX and interest rate changes do not impact on the return-generating process of the stock indices in any substantial way. Most of the variation in the sector stock indices is associated with past variation in the indices themselves and variation in the market-wide stock index. These results have important implications for financial and economic policies.

An empirical investigation of the effect of rights issue announcements on share returns and the determinants of abnormal returns on the Kuala Lumpur Stock Exchange

This thesis examines the effect of rights issue announcements on stock prices by companies listed on the Kuala Lumpur Stock Exchange (KLSE) between 1987 to 1996. The emphasis is to report whether the KLSE is semi strongly efficient with respect to the announcement of rights issues and to check whether the implications of corporate finance theories on the effect of an event can be supported in the context of an emerging market. Once the effect is established, potential determinants of abnormal returns identified by previous empirical work and corporate financial theory are analysed. By examining 70 companies making clean rights issue announcements, this thesis will hopefully shed light on some important issues in long term corporate financing. Event study analysis is used to check on the efficiency of the Malaysian stock market; while cross-sectional regression analysis is executed to identify possible explanators of the rights issue announcements' effect. To ensure the results presented are not contaminated, econometric and statistical issues raised in both analyses have been taken into account. Given the small amount of empirical research conducted in this part of the world, the results of this study will hopefully be of use to investors, security analysts, corporate financial managements, regulators and policy makers as well as those who are interested in capital market based research of an emerging market. It is found that the Malaysian stock market is not semi strongly efficient since there exists a persistent non-zero abnormal return. This finding is not consistent with the hypothesis that security returns adjust rapidly to reflect new information. It may be possible that the result is influenced by the sample, consisting mainly of below average size companies which tend to be thinly traded. Nevertheless, these issues have been addressed. Another important issue which has emerged from the study is that there is some evidence to suggest that insider trading activity existed in this market. In addition to these findings, when the rights issue announcements' effect is compared to the implications of corporate finance theories in predicting the sign of abnormal returns, the signalling model, asymmetric information model, perfect substitution hypothesis and Scholes' information hypothesis cannot be supported.

Hand in hand:privatising five star hotels in Egypt through the stock market will enhance the latter's role as well as set an example of the benefits that could be gained from privatisation

This thesis examines the possibility of privatising public owned five star hotels in Egypt through its stock market in order to give a boost to the Egyptian privatisation programme and to help activate its stock market. To explore these aspects, two main technical exercises were executed. First the writer constructed, for the first time in Egypt, a daily price index for Cairo Stock Exchange and an index for the tourism sector, in order to analyze the efficiency of the capital market. This technical analysis showed that Cairo stock exchange is inefficient, stagnant and undergoes minimal fluctuations, especially when compared to other developed and emerging markets. Second, given the importance and complexity of the valuation of SOEs prior to their privatisation, a sample of three five star hotels that could be prime candidates for privatisation via the stock market in Egypt were selected and a detailed financial analysis for the three hotels was concluded. The result was a valuation range for the three hotels using various valuation methods. Nevertheless it was found out that the final value of hotels will be determined by the market itself. Depite the inefficiency of Cairo Stock Exchange, the thesis did not rule out privatisation through the stock market. On the contrary it cited several examples of developing countries that were able to successfully privatise some of their SOEs via their rudimentary capital markets. Finally, the thesis recommended that five star hotels could be pefect candidates for privatisation via the stock market in Egypt. This is because five star hotels are profitable, privately managed, non strategic and not highly capital intensive businesses. In addition, they do not suffer from overstaffing and the industry in which they operate i.e. tourism sector, has high growth prospects and is of an international nature. Therefore it is anticipated that privatisation of five star hotels can attract a lot of investors because of the relatively high returns. This in turn will help activate and popularize the capital market in Egypt. At the same time the benefits of privatisation would be more visible which will give more momentum to the privatisation programme and make it more politically acceptable.

Corporate restructuring: empirical evidence from the UK

Corporate restructuring is perceived as a challenge to research. Prior studies do not provide conclusive evidence regarding the effects of restructuring. Since there are discernible findings, this research attempts to examine the effects of restructuring events amongst the UK listed firms. The sample firms are listed in the LSE and London AIM stock exchange. Only completed restructuring transactions are included in the study. The time horizon extends from year 1999 to 2003. A three-year floating window is assigned to examine the sample firms. The key enquiry is to scrutinise the ex post effects of restructuring on performance and value measures of firms with contrast to a matched criteria non-restructured sample. A cross sectional study employing logit estimate is undertaken to examine firm characteristics of restructuring samples. Further, additional parameters, i.e. Conditional Volatility and Asymmetry are generated under the GJR-GARCH estimate and reiterated in logit models to capture time-varying heteroscedasticity of the samples. This research incorporates most forms of restructurings, while prior studies have examined certain forms of restructuring. Particularly, these studies have made limited attempts to examine different restructuring events simultaneously. In addition to logit analysis, an event study is adopted to evaluate the announcement effect of restructuring under both the OLS and GJR-GARCH estimate supplementing our prior results. By engaging a composite empirical framework, our estimation method validates a full appreciation of restructuring effect. The study provides evidence that restructurings indicate non-trivial significant positive effect. There are some evidences that the response differs because of the types of restructuring, particularly while event study is applied. The results establish that performance measures, i.e. Operating Profit Margin, Return on Equity, Return on Assets, Growth, Size, Profit Margin and Shareholders' Ownership indicate consistent and significant increase. However, Leverage and Asset Turn Over suggest reasonable influence on restructuring across the sample period. Similarly, value measures, i.e. Abnormal Returns, Return on Equity and Cash Flow Margin suggest sizeable improvement. A notable characteristic seen coherently throughout the analysis is the decreasing proportion of Systematic Risk. Consistent with these findings, Conditional Volatility and Asymmetry exhibit similar trend. The event study analysis suggests that on an average market perceives restructuring favourably and shareholders experience significant and systematic positive gain.

Breaking down the non-normality of daily stock returns

This paper investigates whether the non-normality typically observed in daily stock-market returns could arise because of the joint existence of breaks and GARCH effects. It proposes a data-driven procedure to credibly identify the number and timing of breaks and applies it on the benchmark stock-market indices of 27 OECD countries. The findings suggest that a substantial element of the observed deviations from normality might indeed be due to the co-existence of breaks and GARCH effects. However, the presence of structural changes is found to be the primary reason for the non-normality and not the GARCH effects. Also, there is still some remaining excess kurtosis that is unlikely to be linked to the specification of the conditional volatility or the presence of breaks. Finally, an interesting sideline result implies that GARCH models have limited capacity in forecasting stock-market volatility.

Is education the panacea for economic deprivation of Muslims? Evidence from wage earners in India, 1987-2005

Few researchers have examined the nature and determinants of earnings differentials among religious groups, and none has been undertaken in the context of conflict-prone multi-religious societies like the one in India. We address this lacuna in the literature by examining the differences in the average log earnings of Hindu and Muslim wage earners in India, during the 1987–2005 period. Our results indicate that education differences between Hindu and Muslim wage earners, especially differences in the proportion of wage earners with tertiary education, are largely responsible for the differences in the average log earnings of the two religious groups across the years. By contrast, differences in the returns to education do not explain the aforementioned difference in average log earnings. In conclusion, we discuss some policy implications.

Impact of derivatives trading on emerging stock markets:some evidence from India

It is generally accepted that the introduction of financial derivatives that facilitate hedging is an important step in the development of stock markets. However, financial derivatives can potentially increase volatility in the underlying cash market, which might be detrimental to the development of the stock market itself. Using data from India, we examine one possible route through which derivatives trading can increase cash market volatility: expiration day effect. Our results indicate that expiration of equity derivatives contracts does not have any effect on the intra-day volatility of the market index, and it reduces the volatility of inter-day returns to the index.

Does move to market have an impact on earnings gap across gender? Some evidence from India

We use Indian National Sample Survey employment–unemployment data for the urban sector for the years 1987 and 1999. Our results indicate that the gender wage gap had narrowed considerably between these two years, for all earnings deciles and for all education cohorts. The narrowing of the earnings gap can be attributed largely to a sharp increase in the returns to the labour market experience of women.