An Approach to Wealth Modelling

2000 Mathematics Subject Classification: 60G48, 60G20, 60G15, 60G17. JEL Classification: G10

International trade law, plain packaging and tobacco industry political activity:the Trans-Pacific Partnership

Tobacco companies are increasingly turning to trade and investment agreements to challenge measures aimed at reducing tobacco use. This study examines their efforts to influence the Trans-Pacific Partnership (TPP), a major trade and investment agreement which may eventually cover 40% of the world's population; focusing on how these efforts might enhance the industry's power to challenge the introduction of plain packaging. Specifically, the paper discusses the implications for public health regulation of Philip Morris International's interest in using the TPP to: shape the bureaucratic structures and decision-making processes of business regulation at the national level; introduce a higher standard of protection for trademarks than is currently provided under the Agreement on Trade Related Aspects of Intellectual Property Rights; and expand the coverage of Investor-State Dispute Settlement which empowers corporations to litigate directly against governments where they are deemed to be in breach of investment agreements. The large number of countries involved in the TPP underlines its risk to the development of tobacco regulation globally.

Corporate governance disclosure in the Gulf countries

Corporate governance disclosure is important for countries aiming to attract international investors and reduce companies’ cost of capital. The relationship between corporate governance disclosure (CGD) and its determinants is the main objective of the current research. Accordingly, the research aimed to: (i) assess CGD level in the Gulf countries; (ii) investigate the impact of ownership structure (proportion of institutional, governmental, managerial and family ownership) on CGD; (iii) explore the effect of board characteristics (proportion of independent board members, proportion of family members on board, CEO/chairman duality and board size) on CGD; (iv) examine the relationship between diversity (proportion of foreign and female members on a board and in the senior management team) and CGD; and (v) test the association between firm characteristics (company size, age, liquidity, profitability, leverage, industry and auditor types) and CGD. Gulf countries (Bahrain, Kuwait, Oman, Qatar, Saudi Arabia, and the United Arab Emirates) were selected for the study since they share similar characteristics and represent a relatively homogeneous category in the Middle East and North African region. A CGD index of 232 items was developed and divided into six categories: ownership structure and investor rights; financial transparency and information disclosure; information on auditors; board and senior management structure and process; board committees; and finally corporate behaviour and responsibility. Annual reports available for listed non-financial companies of the Gulf countries were 270 for the year 2009. The maximum CGD level was 63%, whereas the minimum was 5%, with an average disclosure level of 32%. Several regression models were conducted to enhance the robustness of the results and conclusions of the study. The results indicated that five variables had a significant positive relationship with CGD: proportion of independent members on a board, proportion of foreign members on a board, proportion of foreign members in the senior management team, auditor type and profitability. The research contributes to the literature on corporate governance voluntary disclosure in developing countries. Practical contributions consist of several recommendations to policy makers, regulators, and professional institutions in the Gulf countries.

A közép-kelet-európai bankfúziók eredményessége (The success of the bank mergers in Central Eastern Europe)

Az elmúlt években a nagy európai bankcsoportok egyre több közép-kelet-európai bankot vásároltak fel. Tanulmányunkban a bankfúziók értékteremtő hatását részvényesi szemmel elemezzük. A közép-kelet-európai régióban tevékenykedő hét legnagyobb bankcsoport 2000 és 2008 közötti akvizíciós tranzakcióit az eseményelemzés módszerével vizsgáljuk. Úgy tűnik, a részvényesek összességében értékelik a bankcsoportok akvizíciós törekvéseit: a fúziók kicsit több mint felében pozitív a kumulált abnormális hozam, és enyhén pozitív az összes esemény abnormális hozamának átlaga is. Számításaink során elsőként az egyes bankcsoportok felvásárlási stratégiáját értékeljük. A felvásárlás bejelentése körüli háromnapos időintervallumot alapul véve, a Raiffeisen és az OTP stratégiája tekinthető a legsikeresebbnek, míg az Erste felvásárlásai a legkevésbé eredményesnek. Ezt követően rávilágítunk arra, hogy eltérő befektetői szándékból ugyan, de mind a legmagasabb, mind a legalacsonyabb értékű ügyletek esetében a pozitív abnormális hozamú fúziók vannak túlsúlyban. Végezetül megállapítjuk, hogy az országhatáron átívelő ügyletek befektetői megítélése nem rosszabb az országhatáron belüli tranzakciókénál. /===/ The big European banking groups have been buying up more and more banks in Central Eastern Europe. The study analyses the value-enhancing effects of the mergers from the shareholder’s angle by examining by occurrence analysis methods the Central East European acquisition transactions of the seven biggest banking groups between 2000 and 2008. The shareholders as a whole seem to appreciate the acquisition activity of the banks: cumulative abnormal yield is positive in over half the mergers and average abnormal yield of all occurrences is mildly positive as well. The authors evaluate first the acquisition strategies of each banking group. Based on a three-day period round the acquisition announcement, Raiffeisen and OTP seem to have the most successful strategies and Erste the least successful. Light is then shed on investment intentions in each case, but mergers with a positive abnormal yield predominate among the highest and the lowest value transactions. Finally, the investor evaluation of cross-border transactions is no worse than for domestic ones.

Agency theory problems behind the fall of shopping centers

The present article assesses agency theory related problems contributing to the fall of shopping centers. The negative effects of the financial and economic downturn started in 2008 were accentuated in emerging markets like Romania. Several shopping centers were closed or sold through bankruptcy proceedings or forced execution. These failed shopping centers, 10 in number, were selected in order to assess agency theory problems contributing to the failure of shopping centers; as research method qualitative multiple cases-studies is used. Results suggest, that in all of the cases the risk adverse behavior of the External Investor- Principal, lead to risk sharing problems and subsequently to the fall of the shopping centers. In some of the cases Moral Hazard (lack of Developer-Agent’s know-how and experience) as well as Adverse Selection problems could be identified. The novelty of the topic for the shopping center industry and the empirical evidences confer a significant academic and practical value to the present article.

Post Crisis Lessons for Open Economies: Are They All New?

This paper will argue that the American economy could and will absorb the recent shocks, and that in the longer run (within a matter of years), it will somehow convert the revealed weaknesses to its advantage. America has a long record of learning from its excesses to improve the working of its particular brand of capitalism, dating back to the imposition of antitrust controls on the robber barons in the late 1800s and the enhancement of investor protection after the 1929 crash. The American economy has experienced market imperfections of all kinds but it almost always has found, true, not perfect, but fairly reliable regulatory answers and has managed to adapt to change, (e. g. Dodd-Frank Act on financial stability). The U.S. has many times pioneered in the elaboration of both theoretical and policy oriented solutions for conflicts between markets and government to increase economic welfare (Bernanke, 2008, p. 425). There is no single reason why it should not turn the latest financial calamities to its advantage. At the same time, to regain confidence in capitalism as a global system, global efforts are indispensable. To identify some of the global economic conflicts that have a lot to do with U.S. markets in particular, we seek answers to global systemic questions.

Measuring and managing liquidity risk in the Hungarian practice

The crisis that unfolded in 2007/2008 turned the attention of the financial world toward liquidity, the lack of which caused substantial losses. As a result, the need arose for the traditional financial models to be extended with liquidity. Our goal is to discover how Hungarian market players relate to liquidity. Our results are obtained through a series of semi-structured interviews, and are hoped to be a starting point for extending the existing models in an appropriate way. Our main results show that different investor groups can be identified along their approaches to liquidity, and they rarely use sophisticated models to measure and manage liquidity. We conclude that although market players would have access to complex liquidity measurement and management tools, there is a limited need for these, because the currently available models are unable to use complex liquidity information effectively.

Measuring and managing liquidity risk in the Hungarian practice

The crisis that unfolded in 2007/2008 turned the attention of the financial world toward liquidity, the lack of which caused substantial losses. As a result, the need arose for the traditional financial models to be extended with liquidity. Our goal is to discover how Hungarian market players relate to liquidity. Our results are obtained through a series of semistructured interviews, and are hoped to be a starting point for extending the existing models in an appropriate way. Our main results show that different investor groups can be identified along their approaches to liquidity, and they rarely use sophisticated models to measure and manage liquidity. We conclude that although market players would have access to complex liquidity measurement and management tools, there is a limited need for these, because the currently available models are unable to use complex liquidity information effectively.

State subsidy and moral hazard in corporate financing

This paper investigates the impact of state subsidy on the behavior of the entrepreneur under asymmetric information. Several authors formulated concerns about state intervention as it can aggravate moral hazard in corporate financing. In the seminal paper of Holmström and Tirole (1997) a two-player moral hazard model is presented with an entrepreneur initiating a risky scalable project and a private investor (e.g. bank or venture capitalist) providing outside financing. The novelty of our research is that this basic moral hazard model is extended to the case of positive externalities and to three players by introducing the state subsidizing the project. It is shown that in the optimum, state subsidy does not harm, but improves the incentives of the entrepreneur to make efforts for the success of the project; hence in effect state intervention reduces moral hazard. Consequently, state subsidy increases social welfare which is defined as the sum of private and public net benefits. Also, the exact form of the state subsidy (ex-ante/ex-post, conditional/unconditional, refundable/nonrefundable) is irrelevant in respect of the optimal size and the total welfare effect of the project. Moreover, in case of nonrefundable subsidies state does not crowd out private investors; but on the contrary, by providing additional capital it boosts private financing. In case of refundable subsidies some crowding effects may occur depending on the subsidy form and the parameters.

International stock portfolio selection and performance measures recognizing higher moments of return distributions

Since the seminal works of Markowitz (1952), Sharpe (1964), and Lintner (1965), numerous studies on portfolio selection and performance measure have been based upon the mean-variance framework. However, several researchers (e.g., Arditti (1967, and 1971), Samuelson (1970), and Rubinstein (1973)) argue that the higher moments cannot be neglected unless there is reason to believe that: (i) the asset returns are normally distributed and the investor's utility function is quadratic, or (ii) the empirical evidence demonstrates that higher moments are irrelevant to the investor's decision. Based on the same argument, this dissertation investigates the impact of higher moments of return distributions on three issues concerning the 14 international stock markets.^ First, the portfolio selection with skewness is determined using: the Polynomial Goal Programming in which investor preferences for skewness can be incorporated. The empirical findings suggest that the return distributions of international stock markets are not normally distributed, and that the incorporation of skewness into an investor's portfolio decision causes a major change in the construction of his optimal portfolio. The evidence also indicates that an investor will trade expected return of the portfolio for skewness. Moreover, when short sales are allowed, investors are better off as they attain higher expected return and skewness simultaneously.^ Second, the performance of international stock markets are evaluated using two types of performance measures: (i) the two-moment performance measures of Sharpe (1966), and Treynor (1965), and (ii) the higher-moment performance measures of Prakash and Bear (1986), and Stephens and Proffitt (1991). The empirical evidence indicates that higher moments of return distributions are significant and relevant to the investor's decision. Thus, the higher moment performance measures should be more appropriate to evaluate the performances of international stock markets. The evidence also indicates that various measures provide a vastly different performance ranking of the markets, albeit in the same direction.^ Finally, the inter-temporal stability of the international stock markets is investigated using the Parhizgari and Prakash (1989) algorithm for the Sen and Puri (1968) test which accounts for non-normality of return distributions. The empirical finding indicates that there is strong evidence to support the stability in international stock market movements. However, when the Anderson test which assumes normality of return distributions is employed, the stability in the correlation structure is rejected. This suggests that the non-normality of the return distribution is an important factor that cannot be ignored in the investigation of inter-temporal stability of international stock markets. ^

The political economy of sovereign debt

This dissertation examines international lending arrangements between a competitive foreign investor and a less-developed country. Given that the benefits and costs of borrowing are distributed unequally across society, it is of interest to examine the conditions under which borrowing occurs and how the borrowed funds are allocated. Three theoretical models are developed to consider optimal lending arrangements in the presence of sovereign risk. The models show how a society's level and distribution of wealth influences its access to loans and the terms of the loan agreements. Optimal loan contracts are established, which place either a debt ceiling or a debt floor on the amount of the loan that, will be offered. ^

The advantage of Spanish multinational enterprises in Latin America

Multinational enterprises (MNEs) from Spain made large foreign direct investments (FDIs) in Latin America between 1990 and 2002, making Spain the second largest direct investor in this region since 1998, behind the United States. This dissertation explains the reasons that led Spanish firms to make these FDIs, as well as their operations in Latin America. Seven Spanish MNEs were included in this study, BBVA and SCH (banking), Telefónica (telecommunications), Endesa, Iberdrola and Unión Fenosa (public utilities), and Repsol-YPF (oil and natural gas). Quantitative and qualitative data were used. Data were collected from the firms' annual reports, from their archives and from personal interviews with senior executives, as well as from academic and specialized publications. ^ Results indicate that the large Spanish FDIs in Latin America were highly concentrated in a few firms from five sectors. The FDIs of these firms alone accounted for 70 percent of total Spanish FDI in Latin America in this period. The reasons for these investments were firm-specific and sector specific. A series of institutional conditions existed in Spain between the 1970s and the 1990s that allowed the employees of the firms to develop the knowledge and devise strategies to adjust to that set of conditions. First, the policies of the Spanish state favored the creation of large firms in these sectors, operating under conditions of monopoly sometimes. Secondly, the consumers put pressure on the firms to provide better and cheaper products as the Spanish economy grew and modernized. Thirdly, the employees of the firms had to adjust their services and products to the demands of the consumers and to the constraints of the state and the market. They adjusted the internal organization of the firm to be able to produce the goods and services that the market demanded. Externally, they also adopted patterns of interaction with outside agents and institutions. This patterned behavior was the “corporate culture” of each firm and the “normative framework” in which their employees operated. When the managers of the firms perceived that there were similar conditions in Latin America, they decided to operate there as well by making FDIs. ^

Essays on the selection of securities: Decision on acquisition and issuance perspectives and decision rules

This dissertation is a discourse on the capital market and its interactive framework of acquisition and issuance of financial assets that drive the economy from both sides—investors/lenders and issuers/users of capital assets. My work consists of four essays in financial economics that offer a spectrum of revisions to this significant area of study. The first essay is a delineation of the capital market over the past half a century and major developments on capital markets on issues that pertain to the investor's opportunity set and the corporation's capital-raising availability set. This chapter should have merits on two counts: (i) a comprehensive account of capital markets and return-generating assets and (ii) a backdrop against which I present my findings in Chapters 2 through 4. ^ In Chapter 2, I rework on the Markowitz-Roy-Tobin structure of the efficient frontier and of the Separation Theorem. Starting off with a 2-asset portfolio and extending the paradigm to an n-asset portfolio, I bring out the optimal choice of assets for an investor under constrained utility maximization. In this chapter, I analyze the selection and revision-theoretic construct and bring out optimum choices. The effect of a change in perceived risk or return in the mind of an investor is ascertained on the portfolio composition. ^ Chapter 3 takes a look into corporations that issue market securities. The question of how a corporation decides what kinds of securities it should issue in the marketplace to raise funds brings out the classic value invariance proposition of Modigliani and Miller and fills the gap that existed in the literature for almost half a century. I question the general validity in the classic results of Modigliani and Miller and modify the existing literature on the celebrated value invariance proposition. ^ Chapter 4 takes the Modigliani-Miller regime to its correct prescription in the presence of corporate and personal taxes. I show that Modigliani-Miller's age-old proposition needs corrections and extensions, which I derive. ^ My dissertation overall brings all of these corrections and extensions to the existing literature as my findings, showing that capital markets are in an ever-changing state of necessary revision. ^

Essays on the impact of stakeholders' sentiment on the financial decision making process

The most important factor that affects the decision making process in finance is the risk which is usually measured by variance (total risk) or systematic risk (beta). Since investors’ sentiment (whether she is an optimist or pessimist) plays a very important role in the choice of beta measure, any decision made for the same asset within the same time horizon will be different for different individuals. In other words, there will neither be homogeneity of beliefs nor the rational expectation prevalent in the market due to behavioral traits. This dissertation consists of three essays. In the first essay, “ Investor Sentiment and Intrinsic Stock Prices”, a new technical trading strategy was developed using a firm specific individual sentiment measure. This behavioral based trading strategy forecasts a range within which a stock price moves in a particular period and can be used for stock trading. Results indicate that sample firms trade within a range and give signals as to when to buy or sell. In the second essay, “Managerial Sentiment and the Value of the Firm”, examined the effect of managerial sentiment on the project selection process using net present value criterion and also effect of managerial sentiment on the value of firm. Final analysis reported that high sentiment and low sentiment managers obtain different values for the same firm before and after the acceptance of a project. Changes in the cost of capital, weighted cost of average capital were found due to managerial sentiment. In the last essay, “Investor Sentiment and Optimal Portfolio Selection”, analyzed how the investor sentiment affects the nature and composition of the optimal portfolio as well as the portfolio performance. Results suggested that the choice of the investor sentiment completely changes the portfolio composition, i.e., the high sentiment investor will have a completely different choice of assets in the portfolio in comparison with the low sentiment investor. The results indicated the practical application of behavioral model based technical indicator for stock trading. Additional insights developed include the valuation of firms with a behavioral component and the importance of distinguishing portfolio performance based on sentiment factors.

Trojan horses: On the origins of national security concerns over foreign investments in the United States from 1919 to 2008

In this thesis I sought to explain the origins of national security concerns over foreign investments in the United States from 1919 to 2008. I identified and examined 29 cases of national security concerns over foreign investments in the United States during that period, and argued that in order to understand the circumstances under which foreign investments in the United States are perceived to be threats to the U.S. security we must rely on a combination of democratic peace theory and the version of political realism known as power transition theory. Thus, I tested the argument that national security concerns over foreign investments in the United States from 1919 to 2008 resulted from: (1) perceptions of international power transition, (2) perceptions of ideological and institutional differences between the United States and the home country of the investor, (3) perceptions of the strategic importance of the sector where the investment is made, and (4) perceptions of participation or control of the foreign investor by the government of the country of origin. I found that all these hypotheses have some explanatory power.