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.

Capital markets and the market structure of foreign investments

Contrary to the long-received theory of FDI, interest rates or rates of return can motivate foreign direct investment (FDI) in concert with the benefits of direct ownership. Thus, access to investor capital and capital markets is a vital component of the multinational’s competitive market structure. Moreover, multinationals can use their superior financial capacity as a competitive advantage in exploiting FDI opportunities in dynamic markets. They can also mitigate higher levels of foreign business risks under dynamic conditions by shifting more financial risk to creditors in the host economy. Furthermore, the investor’s expectation of foreign business risk necessarily commands a risk premium for exposing their equity to foreign market risk. Multinationals can modify the profit maximization strategy of their foreign subsidiaries to maximize growth or profits to generate this risk premium. In this context, we investigate how foreign subsidiaries manage their capital funding, business risk, and profit strategies with a diverse sample of 8,000 matched parents and foreign subsidiary accounts from multiple industries in 38 countries.We find that interest rates, asset prices, and expectations in capital markets have a significant effect on the capital movements of foreign subsidiaries. We also find that foreign subsidiaries mitigate their exposure to foreign business risk by modifying their capital structure and debt maturity. Further, we show how the operating strategy of foreign subsidiaries affects their preference for growth or profit maximization. We further show that superior shareholder value, which is a vital link for access to capital for funding foreign expansion in open market economies, is achieved through maintaining stability in the rate of growth and good asset utilization.

A two-factor model of the U.K. yield curve

I model the forward premium in the U.K. gilt-edged market over the period 1982–96 using a two-factor general equilibrium model of the term structure of interest rates. The model permits the decomposition of the forward premium into separate components representing interest rate expectations, the risk premia associated with each of the underlying factors, and terms capturing the direct impact of the variances of the factors on the shape of the forward curve.

Econometrics of yield spreads in the money market:a note

The literature on bond markets and interest rates has focused largely on the term structure of interest rates, specifically, on the so-called expectations hypothesis. At the same time, little is known about the nature of the spread of the interest rates in the money market beyond the fact that such spreads are generally unstable. However, with the evolution of complex financial instruments, it has become imperative to identify the time series process that can help one accurately forecast such spreads into the future. This article explores the nature of the time series process underlying the spread between three-month and one-year US rates, and concludes that the movements in this spread over time is best captured by a GARCH(1,1) process. It also suggests the use of a relatively long term measure of interest rate volatility as an explanatory variable. This exercise has gained added importance in view of the revelation that GARCH based estimates of option prices consistently outperform the corresponding estimates based on the stylized Black-Scholes algorithm.

Editorial

The year so far has been a slow start for many businesses, but at least we have not seen the collapse of as many businesses that we were seeing around two years ago. We are, however, still well and truly in the midst of a global recession. Interest rates are still at an all time low, UK house prices seem to be showing little signs of increase (except in London where everyone still seems to want to live!) and for the ardent shopper there are bargains to be had everywhere. It seems strange that prices on the high street do not seem to have increased in over ten years. Mobile phones, DVD players even furniture seems to be cheaper than they used to be. Whist much of this is down to cheaper manufacturing and the rest could probably be explained by competition within the market place. Does this mean that quality suffered too? Now that we live in a world when if a television is not working it is thrown away and replaced. There was a time when you would take it to some odd looking man that your father would know who could fix it for you. (I remember our local television fix-it man, with his thick rimmed bifocal spectacles and a poor comb-over; he had cardboard boxes full of resistors and electrical wires on the floor of his front room that smelt of soldering irons!) Is this consumerism at an extreme or has this move to disposability made us a better society? Before you think these are just ramblings there is a point to this. According to latest global figures of contact lens sales the vast majority of contact lenses fitted around the world are daily, fortnightly or monthly disposable hydrogel lenses. Certainly in the UK over 90% of lenses are disposable (with daily disposables being the most popular, having a market share of over 50%). This begs the question – is this a good thing? Maybe more importantly, do our patients benefit? I think it is worth reminding ourselves why we went down the disposability route with contact lenses in the first place, and unlike electrical goods it was not just so we did not have to take them for repair! There are the obvious advantages of overcoming problems of breakage and tearing of lenses and the lens deterioration with age. The lenses are less likely to be contaminated and the disinfection is either easier or not required at all (in the case of daily disposable lenses). Probably the landmark paper in the field was the work more commonly known as the ‘Gothenburg Study’. The paper, entitled ‘Strategies for minimizing the Ocular Effects of Extended Contact Lens Wear’ published in the American Journal of Optometry in 1987 (volume 64, pages 781-789) by Holden, B.A., Swarbrick, H.A., Sweeney, D.F., Ho, A., Efron, N., Vannas, A., Nilsson, K.T. They suggested that contact lens induced ocular effects were minimised by: •More frequently removed contact lenses •More regularly replaced contact lenses •A lens that was more mobile on the eye (to allow better removal of debris) •Better flow of oxygen through the lens All of these issues seem to be solved with disposability, except the oxygen issue which has been solved with the advent of silicone hydrogel materials. Newer issues have arisen and most can be solved in practice by the eye care practitioner. The emphasis now seems to be on making lenses more comfortable. The problems of contact lens related dry eyes symptoms seem to be ever present and maybe this would explain why in the UK we have a pretty constant contact lens wearing population of just over three million but every year we have over a million dropouts! That means we must be attracting a million new wearers every year (well done to the marketing departments!) but we are also losing a million wearers every year. We certainly are not losing them all to the refractive surgery clinics. We know that almost anyone can now wear a contact lens and we know that some lenses will solve problems of sharper vision, some will aid comfort, and some will be useful for patients with dry eyes. So if we still have so many dropouts then we must be doing something wrong! I think the take home message has to be ‘must try harder’! I must end with an apology for two errors in my editorial of issue 1 earlier this year. Firstly there was a typo in the first sentence; I meant to state that it was 40 years not 30 years since the first commercial soft lens was available in the UK. The second error was one that I was unaware of until colleagues Geoff Wilson (Birmingham, UK) and Tim Bowden (London, UK) wrote to me to explain that soft lenses were actually available in the UK before 1971 (please see their ‘Letters to the Editor’ in this issue). I am grateful to both of them for correcting the mistake.

A fedezetlen bankközi forintpiac hálózati dinamikájának vizsgálata a likviditási válság előtt és után (Examination of the network dynamics of the uncovered interbank forint markel before the liquidity crisis and after)

A cikkben a magyar fedezetlen bankközi forintpiac hálózatának időbeli alakulását vizsgáljuk 2002 decemberétől 2009 márciusáig. Bemutatjuk a piac általános jellemzőit (forgalom, kamatláb, koncentráció stb.) és az alapvető hálózati mutatókat. Azt tapasztaljuk, hogy az időszak első felében ezek a jellemzők lényegében stabilak voltak. 2006-2007-től kezdve azonban a mutatók egy része kezdett jelentősen megváltozni: a hitelfelvevők koncentrációja nőtt, az átlagos közelség és az átlagos fokszám csökkent, továbbá a hálózat magjának mérete is csökkent. Ezek a jelek arra utalhatnak, hogy a bankok már a válság kitörése előtt érzékelték a növekvő hitelkockázatot, és egyre inkább megválogatták, hogy kinek adnak hitelt. Figyelemre méltó, hogy mindeközben az általános piaci mutatók (forgalom, kamatláb, illetve ezek volatilitása) semmiféle változásra utaló jelet nem tükröztek egészen 2008 októberéig, de ekkor hirtelen minden mutatóban egyértelművé vált a rezsimváltás. Végül részletesen elemezzük az egyes szereplők viselkedését, és megmutatjuk, hogy válságban az egyes szerepek drasztikusan megváltoztak (például forrásokból nyelők lettek, és fordítva). / === / The article examines the changes in the network of Hungary's uncovered interbank forint market over the period Decembcr 2000 to March 2009. It presents the general features of the market (volume, interest rates, concentration etc.) and its basic network. It is found that the features were largely stable in the first half of the period, but some of the indicators began to change significantly in 2006-7: the concentration of borrowers incrcased, average distance and average degree declined, as did the size of the core of the network. These signs pointed to the fact that the banks had sensed an increase in credit risk even before the crisis broke and were becoming increasingly choosy selective in their lending. Meanwhile, however. there aerc no indications of change in the general market indicators (volume, interest rates, or volatility of these) right up to October 2008, when the change of regime was clear in all indicators. Finally, the authors analyse in detail the behaviour of each participant and show that thc roles of some altered drastically with the crisis (e.g. sources became consumers and vice versa).

Kockázattal kiegészített Taylor-szabályok becslése Magyarországra = Estimation of risk-augmented Taylor rules for Hungary

Cikkünkben a magyar monetáris politikát vizsgáljuk olyan szempontból, hogy kamatdöntései meghozatalakor figyelembe vette-e az országkockázatot, és ha igen, hogyan. A kérdés megválaszolásához a monetáris politika elemzésének leggyakoribb eszközét használjuk: az ország monetáris politikáját leíró Taylor-szabályokat becslünk. A becslést több kockázati mérőszámmal is elvégeztük több, különféle Taylor-szabályt használva. Az érzékenységvizsgálatban az inflációhoz és a kibocsátási réshez is alkalmaztunk más, az alapspecifikációban szereplőtől eltérő mérőszámokat. Eredményeink szerint a Magyar Nemzeti Bank kamatdöntései jól leírhatók egy rugalmas, inflációs célkövető rezsimmel: a Taylor-szabályban szignifikáns szerepe van az inflációs céltól való eltérésének és - a szabályok egy része esetén - a kibocsátási résnek. Emellett a döntéshozók figyelembe vették az országkockázatot is, annak növekedésére a kamat emelésével válaszoltak. Az országkockázat Taylor-szabályba történő beillesztése a megfelelő kockázati mérőszám kiválasztása esetén jelentős mértékben képes javítani a Taylor-szabály illeszkedését. _____ The paper investigates the degree to which Hungarian monetary policy has considered country risk in its decisions and if so, how. The answer was sought through the commonest method of analysing a countrys monetary policy: Taylor rules for describing it. The estimation of the rule was prepared using several risk indicators and applying various types of Taylor rules. As a sensitivity analysis, other indicators of inflation and output gap were employed than in the base rule. This showed that the interest-rate decisions of the National Bank of Hungary can be well described by a flexible inflation targeting regime: in the Taylor rules, deviation of inflation from its target has a significant role and the output gap is also significant in one part of the rules. The decision-makers also considered country risk and responded to an increase in it by raising interest rates. Insertion of country risk into the Taylor rule could improve the models fit to an important degree when choosing an appropriate risk measure.

Bank financing of Hungarian SMEs: Getting over to credit crisis by state interventions

In this article we aimed to present and analyse the 21st century history of bank financing in the Hungarian small and medium enterprise (SME) sector in the period ranging from 2000 to 2012. The credit products offered by banks and credit unions are the most fundamental means of external financing capable of fulfilling the financing needs of a wide array of SMEs. The conditions of accessing credits and their prices exert a decisive influence on the profitability and business opportunities of SMEs. As a result of economic slowdown SMEs had to face higher interest rates, decreasing credit limits, and bank financing options that became increasingly slowly accessible alongside stricter conditions. Due to this process SMEs business performance had been falling continuously which has a destructive contribution to the national economy. In the first chapter of the article we present the dynamic development of credit financing in the Hungarian SME sector, along with the causes that triggered it, then we will continue with the negative tendencies dating from the onset of the 2008 debt crisis. In the second chapter we discuss the vicious circle, due to which the business performance of the SMEs, as well as the conditions of access to credits and their prices, have entered into a negative spiral. In the third and final chapter we make suggestions regarding the direction and means of necessary government intervention, in order to stop and reverse the negative tendencies observed in SME credit financing.

Odüsszeuszi utazás – az előretekintő iránymutatás tapasztalatai = An Odysseian journey - experience with forward guidance

Az alsó kamatkorlát melletti előretekintő iránymutatás a kamatpolitika helyettesítője, a várakozások és a pénzpiaci hozamok befolyásolásának nem konvencionális monetáris politikai eszköze. A jegybank a piaci szereplők számára előre jelezheti az alacsony kamatkörnyezet tartós fennmaradását (delphoi típus), és kötelezettséget is vállalhat erre (odüsszeuszi típus). Ez utóbbi esetben megváltozik a jegybanki reakciófüggvény: a jegybanki kamatdöntésekben nem az inflációs kilátások és az inflációs cél közötti eltérés, illetve a kibocsátási rés jut kitüntetett szerephez, hanem valamilyen állapotváltozó alakulása vagy az időtényező. A reakciófüggvény változásának hitelessége esetén a hozamok csökkenésére lehet számítani. Ha a jegybank a kamatszint fenntartásának feltételéül az állapotváltozók olyan értékeit jelöli meg, amelyek teljesülése esetén az inflációs célkövetés szabályai szerint amúgy sem emelt volna kamatot, akkor az előretekintő iránymutatás „üres beszéd”, és a hozamokra gyakorolt hatás is elmaradhat. Egyelőre nem eldönthető, hogy az előretekintő iránymutatás a kamatpolitika átmeneti helyettesítőjéből annak tartós kiegészítő elemévé válik-e. _____ Forward guidance is a substitute for interest-rate policy where the zero lower boundary applies. It is an unconventional monetary policy instrument intended to influence market yields and expectations. The central bank may give signals (forecasts) to the market on lasting maintenance of a low interest-rate environment (Delphi type) or may commit itself to do so (Odysseus type). In the latter case the reaction function changes: instead of inflation prospects and output gap, the main role in central bank rate decisions becomes the evolution of given macroeconomic state variables or the time factor. If changes of the reaction function are credible, a drop in security yields are expected. Forward guidance is just cheap talk if such values in economic state variables are set as conditions for keeping interest rates unchanged, which based on the rules of inflation targeting would not trigger an interest rate increase, regardless. In that case, no impact on yields may occur. For the time being it cannot be decided whether forward guidance is transitory or a lasting instrument of monetary policy.

Enhancing Promotional Strategies through the Use of Web 2.0

We have witnessed a rising interest – by both academic and managerial field – in the marketing application of Web 2.0 techniques. Yet the effective impact and change it brings is still unclarified. The importance of Web 2.0 is constantly on the rise. We see consumers join social networks, using social tools in an ever greater number, therefor it gives companies a new and effective tool for marketing communication and other marketing-related activities. In our research, we first aim to clarify the definition and boundaries of Web 2.0. Then through a literature review we collect some of the most important areas of marketing to be affected by this seemingly technological change. We also have a brief overview of challenges and risks firms face in this new environment.

Implicit rating: A potential new method to alert crisis on the interbank lending market

A new measure called “implicit rating” is introduced which might be a component of an early warning system. The proposed methodology relies on the aggregation of experts’ knowledge hidden in the transactional data of the interbank market of unsecured loans. Banks are simultaneously assessing the creditworthiness of each other which is reflected in the partner limits and in the interest rates. In the Hungarian interbank market the overall trading volume and the average interest rate did not show any negative trends before the crisis of 2008, however the average implicit partner limit started to decrease several months earlier, hence it might serve as a stress indicator.

Women and development in Senegal: Microcredit and household well being

The challenging living conditions of many Senegalese families, and the absence of a providing spouse, have led women to covet new economic opportunities, such as microcredit loans. These loans offer Senegalese women the possibility to financially support their households and become active participants in their economies by starting or sustaining their micro businesses. The study takes place in Grand-Yoff, an overpopulated peri-urban area of the Senegalese capital city Dakar, where most people face daily survival issues. This research examines the impact of microcredit activities in the household of Senegalese female loan recipients in Grand-Yoff by examining socioeconomic indicators, in particular outcomes of health, education and nutrition.^ The research total sample is constituted of 166 female participants who engage in microcredit activities. The research combines both qualitative and quantitative methods. Data for the study were gathered through interviews, surveys, participant observation, focus-groups with the study participants and some of their household members, and document analysis.^ While some women in the study make steady profits from their business activities, others struggle to make ends meet from their businesses’ meager or unreliable profits. Some study participants who are impoverished have no choice but to invest their loans directly into their households’ dire needs, hence missing their business prerogative. Many women in the study end up in a vicious cycle of debt by defaulting on their loans or making late payments because they do not have the required household and socioeconomic conditions to take advantage of these loans. Therefore, microcredit does not make a significant impact in the households of the poorest female participants. The study finds that microcredit improves the household well-being - especially nutrition, health and education - of the participants who have acquired significant social capital such as a providing spouse, formal education, training, business experience, and belonging to business or social networks.^ The study finds that microcredit’s household impact is intimately tied to the female borrowers’ household conditions and social capital. It is recommended that microcredit services and programs offer their female clients assistance and additional basic services, financial guidance, lower interest rates, and flexible repayment schedules. ^

Making Alan Greenspan Your Hotel Investment Partner

The author presents a capitalization model applied in hotel valuation which is then used to illustrate how an increase in interest rates result in a lower valuation for hotels. It is demonstrated that changes in hotel valuations of up to 20 percent can be directly attributed to changes in interest rates.

Variables affecting government debt: A comparison of certificates of participation, tax -exempt revenue bonds and tax -exempt general obligation bonds

This dissertation analyzed and compared variables affecting interest rate and yield of certificates of participation, tax-exempt revenue bonds and tax-exempt general obligation bonds. The study employed qualitative and quantitative analysis methods. ^ Qualitative research methods included surveys, interviews and focus groups. The survey solicited debt load information from 67 Florida school districts (21 responded) and addressed the question which districts used certificates of participation and why. Eight individuals with experience dealing with all three debt instruments were interviewed. A follow-up focus group of six school district financial officers gathered additional data. Results from the qualitative methods revealed school districts used certificates of participation based on millage authority amount available relative to overall tax base. Also identified was the belief of a significant difference in certificates of participation costs and the other two debt instrument types. ^ The study's quantitative methods analyzed 1998 and 1999 initial issues of Moody's AAA rated certificates of participation, tax-exempt revenue bonds and tax-exempt general obligation bonds. Through an analysis of covariance (ANCOVA), the study examined interest rates and yields while controlling for the covariates of credit enhancement, issue size, and maturity date. The analysis identified no significant difference between interest rates of certificates of participation and tax-exempt general obligation bonds (p < 0.05). There was a significant difference between interest rates of tax-exempt revenue bonds and tax-exempt general obligation bonds. This study discerned no significant difference between yield on certificates of participation and tax-exempt general obligation bonds. It identified a difference in yield between both certificates of participation and tax-exempt general obligation bonds compared with tax-exempt revenue bonds. ^ The study found COPs to have lesser overall costs than RV bonds. COPs also have a quicker entry into the market resulting in construction cost savings. The study found policy implications such as investment portfolio limitations and public choice issues about using COPs as a mechanism to grow government. ^

Do R&D strategies in high-tech sectors differ from those in low-tech sectors? An alternative approach to testing the pooling assumption

Most studies investigating the determinants of R&D investment consider pooled estimates. However, if the parameters are heterogeneous, pooled coefficients may not provide reliable estimates of individual industry effects. Hence pooled parameters may conceal valuable information that may help target government tools more efficiently across heterogeneous industries. There is little evidence to date on the decomposition of the determinants of R&D investment by industry. Moreover, the existing work does not distinguish between those R&D determinants for which pooling may be valid and those for which it is not. In this paper, we test the pooling assumption for a panel of manufacturing industries and find that pooling is valid only for output fluctuations, adjustment costs and interest rates. Implementing the test results into our model, we find government funding is significant only for low-tech R&D. Foreign R&D and skilled labour matter only in high-tech sectors. These results suggest important implications for R&D policy.