International Research Journal of Finance and Economics  Issue 117  Dec, 2013

 

Aligning Risk Incentives and Reducing Agency Costs using Warrants	8-19
Masatoshi Miyake
Abstract: This paper addresses the risk incentive problem, a long-recognized conflict of interest between shareholders and bondholders. We evaluate risk incentives for both parties using the Black-Scholes model that incorporates a knock-out provision, making possible a quantitative analysis of agency cost arising from the incentives. The difference in respective incentives is a factor that raises agency cost. As a means of resolving this problem, we examine issuing a bond with warrant features. We demonstrate that agency cost can be escaped without diluting existing shareholders’ ownership through the warrant bond’s signaling effect. Numerical examples demonstrate this conclusion. Keywords: Shareholder–bondholder relationship, Risk incentive problem, Agency cost, Warrant bond, Option pricing theory, Knock-out provision JEL Classification Codes: D74, D81, G30, G31, G33
Measuring Performance and Analyzing Inefficiency Determinants of Equity Mutual Funds: A Stochastic Frontier Approach	20-36
Saâd Benbachir and Achraf Louati
Abstract: In this paper, we applied a method known as Stochastic Frontier Analysis to measure the performance and to determine the inefficiency sources of 44 Moroccan equity mutual funds. We have adopted the Battese and Coelli approach which consists to estimate the coefficients of the explanatory variables of both the Cobb Douglas production function and the inefficiency error using the maximum likelihood method. All these variables were found statistically significant. Our results showed that the reduction of the subscription fees and the increasing of the redemption fees lead to the improvement of technical efficiency scores. Furthermore, our model permitted us to assess the technical efficiency scores and to classify the 44 Moroccan equity mutual funds. Keywords: Mutual funds, stochastic frontier analysis, technical efficiency, panel data model, maximum-likelihood method, portfolio performance, inefficiency determinants JEL Classification Codes: C01, C23, G23
Do Workers’ Remittances Promote Banking Sector Development in Jordan?	37-54
Alaaeddin Al-Tarawneh and Ghazi Al-Assaf
Abstract: In this paper we investigate the potential impact of workers’ remittances on different indicators of banking sector development using Jordanian data. The study has found evidence of significant positive effects of remittances growth on the growth of various financial development indicators, especially credit to private, financial assets ratio, and financial depth over the period 1964 to 2010. These results are obtained using a cointegration analysis, both the E-G procedure and the Johansen tests within the VECM framework. The E-G results show remittances growth has a significant effect on the growth of credit to private sector indicator, financial assets ratio, and financial depth. In addition, Johansen test reveals that there is at least one cointegrating vector among remittances and financial development indicators. Keywords: Marginal tax Rate, debt, leverage, capital structure, tax, incremental debt, debt to equity ratio, capital employed, corporate finance, financial distress. JEL Classification Codes: J30, O16, G21, C32
Relation between Real Exchange Rate and Foreign Trade Balance: Relevance of the J Curve Analysis in Turke	55-66
Cemil Erarslan
Abstract: The J curve analysis suggests that real losses in the value of national currency will lead to foreign trade deficit by initially reducing export and increasing import. When foreign trade connections are re-established, amount of exports will grow while exports will decrease, which will in turn cause foreign trade surplus. This study is intended to investigate if relations proposed by the J curve analysis are relevant for the Turkish economy during the period of 2003-2012. This study uses quarterly data of 2003:QI-2012:Q4 for Turkey and the VAR analysis to test the relevancy of J curve analysis. Findings of the VAR analysis suggest no result supporting relevancy of the J curve in Turkey during the period under investigation. Keywords: Real Exchange Rate, Foreign Trade Account, J Curve, VAR Analysis. JEL Classification Codes: F10, F14, F31.
A Temporal Association Rule Mining Based Decision Support System for Stock Trading	67-79
Binoy B. Nair, V.P Mohandas G. Varun, I. Chaitanya, K. Surya Krishna, S. Mohan Karthik and B. Jaya Vishnu Kumar
Abstract: In this paper, a stock trading recommender system which can mine association rules from stock time series to generate trading recommendations is presented. The proposed system generates the transaction database from the time series and then mines temporal association rules from the generated database, which can then be used for making trading recommendations. Symbolic Aggregate approximation (SAX) is employed to convert the time series into its equivalent symbolic representation. The day of the week information is added to each symbol and the resulting symbol-day pair forms a single item of the transaction database. Association rules are mined from the resulting items. Parameters of the system are optimized using Artificial Bee Colony (ABC) optimization algorithm to obtain the best possible in-sample performance. The optimum set of parameters obtained is used for testing the out-of-sample performance. The proposed system is validated on four different stocks belonging to two different stock markets (UK and India), over three different time frames under different market trends (uptrend, downtrend and no trend). The results indicate that the proposed system outperforms the traditional benchmark buy-and- hold strategy over all the timeframes for all the stocks considered, indicating that the proposed system can be used effectively for generating stock trading recommendations. Keywords: Stock trading, association rule mining, decision support system, SAX, Artificial Bee Colony JEL Classification Codes: C53, C58.
The Jordanian Export Performance in Perspective: A Constant-Market-Shares Analysis	80-94
Buthaina Muhtaseb
Abstract: This study uses Constant-Market-Shares (CMS) analysis technique to examine Jordan’s export performance. The recently developed UNIDO method has been applied to Jordan’s merchandise exports during 1998-2010. WITS database has been utilized, covering 150 countries and 96 products at the HS 2-digit level. The results reveal that the remarkable increase in Jordan’s world export market share was partially caused by the relatively favorable competitiveness effect. The remaining effects of almost all structural static and dynamic factors were positive but some had only a limited influence. Jordan was more successful in directing its geographic specialization pattern toward those regions with faster growing demand, in comparison with that of commodities. Although Jordan has enjoyed some flexibility and was somewhat dynamically efficient in changing its international specialization pattern in accordance with world import demand, its exports remained concentrated in low and med-high technology sectors. Keywords: Export Performance; Constant-Market-Shares (CMS) Analysis; Competitiveness; Jordan (1998-2010). JEL Classification Codes: F1, F14, F15
Investigating Financial Literacy in Emirati Society	95-107
Khalil Hilu, Ashraf Khalil Salam Abdallah and Ebere Iroadu
Abstract: Financial literacy is one of the key factors needed in making informed financial decisions. As businesses continue to be more profit driven, more financial and economic intrigues arise that continue to put individuals at the risk of spending more and more without considering the short term and long term effects. We conducted a study to assess financial literacy and financial decision making within Emirati society. Our results show that financial literacy is lacking among Emiratis. In addition, the majority of Emiratis do not keep record of their revenues or expenditures. Also, almost half of respondents owe loans to other peoples and 1/5 of them have bank loans. We expect that the outcome of this research will be useful for designing educational programs and policies to promote financial planning and security within Emirati society. We also posit that deeper and more informed understanding of this problem is a precursor for developing effective financial education programs with the aim of improving saving behavior and informed financial decision-making, in particular among UAE nationals.
Exchange Rate Volatility and the Level of Domestic Investment in Selected European Countries	108-117
Oktay Öksüzler, Sevket Tüylüoglu and Nurettin Öztürk
Abstract: The effects of exchange rate volatility on domestic investment is an important issue since the ending of Bretton Woods system in 1973. Most studies argue that exchange rate volatility leads price volatility. Price volatility could have positive or negative effects on domestic investment. The empirical literature provides mixed results. This paper investigates the effects volatility of exchange rate on domestic investment for selected the European Countries those adopted Euro in 1999. For this purpose, an investment model is developed and estimated by auto-regressive distributed lag (ARDL) approach by employing quarterly data between 1999 and 2010. As explanatory variables; GDP, interest rates, reel exchange rate, volatility of exchange rate and 2008 crises dummy variables are used. Both short and long run effects showed that as exchange rate volatility does not matter, income variable have been found to be the main determinant of domestic investment. Keywords: Exchange Rate Volatility, Investment, Auto-Regressive Distributed Lag (ARDL) JEL Classification Codes: C01 E22 052
Determinants of Terminal Value in the Evaluation of Companies: A Panel Data Approach to the Context of European Companies.	118-138
Pedro M. Nogueira Reis and Mário Gomes Augusto
Abstract: The uncertainty of the future of a firm has to be modelled and incorporated into the evaluation of companies outside their explicit period of analysis, i.e., in the continuing or terminal value considered within valuation models. However, there is a multiplicity of factors that influence the continuing value of businesses which are not currently being considered within valuation models. In fact, ignoring these factors may cause significant errors of judgment, which can lead models to values of goodwill or badwill, far from the substantial value of the inherent assets. Consequently, these results provided will be markedly different from market values. So, why not consider alternative models incorporating life expectancy of companies, as well as the influence of other attributes of the company in order to get a smoother adjustment between market price and valuation methods? This study aims to provide a contribution towards this area, having as its main objective the analysis of potential determinants of firm value in the long term. Using a sample of 714 listed companies, belonging to 15 European countries, and a panel data for the period between 1992 and 2011, our results show that continuing value cannot be regarded as the current value of a constant or growth perpetuity of a particular attribute of the company, but instead be according to a set of attributes such as free cash flow, net income, the average life expectancy of the company, investment in R&D, capabilities and quality of management, liquidity and financing structure. Keywords: Terminal value, continuing value, free cash flow, company valuation, dividends, life expectancy, earnings, panel data. JEL Classification Codes: G17, G32, G34, M10, M21, M41
Exchange Rates and Interest Rates: An Empirical Investigation of International Fisher Effect Theory-The Case of Egypt (2003-2012)	139-160
Abla El Khawaga, Mona Esam and Rasha Hammam
Abstract: This paper examines the validity of the International Fisher Effect (IFE) theory for the Egyptian economy. Two case studies are investigated: Egypt vs. USA and Egypt vs. Germany during the period (2003-2012). The long run relationship between nominal changes in exchange rate and nominal interest rate differential for each of the two case studies, is examined using Autoregressive Distributed Lag bounds test approach to co-integration and error correction model. The short run relationship is examined through impulse response function and variance decomposition. Besides, granger causality test is employed to identify the direction of the relationship. The empirical findings revealed partial significance of IFE in the case of Egyptian pound vs. US dollars, while no sign of IFE was detected in the case of Egyptian pound vs. Euro currency. The irrelevance of IFE could be attributed to the irrelevance of Purchasing Power Parity theory in Egypt. This is in addition to Egypt’s limited financial integration with international financial markets. Keywords: International Fisher Effect, Nominal Interest Rate differential, Nominal Exchange Rate Changes, Autoregressive Distributed Lag Bounds, Co-integration, International Financial Integration. JEL Classification Codes: C22, F31, F37
The Relationship between Corporate Governance Mechanisms and Earnings Management	161-173
Mohammad Hossein Pourahmadi, Reza Saadati Balasang, Farzad Emadi and Abbas Ghaffari
Abstract: The aim of the present research is to study the relationship between the dimensions of corporate governance and earnings management in firms accepted in Tehran Stock Exchange. We have chosen 100 companies as our statistical sample by using a deletion sampling method and applying some conditions to select them. We have used the indexes such as institutional ownership, size of board of directors, and the independence of board of directors as corporate governance mechanisms and the model posed by Dichow & et al (2002) to estimate optional accruals. We have used a multiple-variable regression model to test the research variables. Testing the hypotheses was first carried out for each of independent variables in isolation, and then it was done in totality regarding control variables and finally was carried out in totality and without control variables. The research results showed that there is a negative and meaningful relationship between corporate governance strategies and earnings management when the independent variables are isolated and when all independent variables are applied along with control variables. But when control variables are not applied there was not any meaningful relationship observed between institutional ownership and earnings management. Keywords: Corporate Governance, board Size, board Independence, Institutional stockholders, Earnings Management.
Nonlinear Analysis of Commodity Market: The Case of Gold	174-187
Majid Delavari, Ali Asghar Esfandiyari and Zeinab Hasani Asl
Abstract: The world gold price index is one of the most important indicators influencing the economic and political factors in any country; it represents many of the international monetary and financial changes and explaining its behavior can be guide policy makers in their orientation to monetary and currency policies in the economy. Accordingly, the present study was an attempt to scrutinize the behavior of the gold market, have a more realistic view of modeling the structure of this market, and present an approach to finding the type of models that are more appropriate for forecasting this variable. The data related to the daily price of gold in the world markets from 1/2/1973 to 5/21/2013 for this purpose. First, predictability (or randomness) of this series was tested using the Variance Ratio test. Then based on the BDS test, nonlinearity of the price structure of word’s gold price was tested. Finally, using the Ramsey, ARCH, and McLeod-Li tests the existence of a nonlinear structure in the second-order moment of this series was examined. The results of these tests confirmed predictability of this time series. The results further showed that gold price had a nonlinear structure in the time series under examination. Keywords: Gold Price, ARCH test, BDS test, Variance Ratio test. JEL Classification Codes: : C12, C22, C58, G14.
US Stocks and the US Dollar II	188-216
Samih Antoine Azar
Abstract: In the literature there is very weak evidence for a significant relation between US stocks and the US dollar. This paper aims to reconsider this research question. A monthly data set for eleven exchange rates against the US dollar together with the monthly S&P 500, that all cover the float period of foreign exchange rates, are used. Two econometric specifications are conjectured: a least squares regression with a calendar breakpoint, and a Markov switching regression with two regimes. The evidence is strong that, for almost all currencies that have a breakpoint, the recent sample uncovers a significant relation between US stocks and the US dollar, while the older sample proves false such a relation. The evidence is also strong that for almost all currencies one of the two regimes reveals a significant relation between US stocks and the US dollar, while the other one does not. Moreover, the coefficient estimates on the rate of change of each foreign currency are close to each other in the two econometric specifications. The conclusion is that the relation between US stocks and the US dollar is subject to shifts and, when these shifts are accounted for, this relation is found to be statistically very significant. Another conclusion is that in general a depreciation of the US dollar leads to higher US stock prices. Keywords: S&P 500 stock returns, US dollar, eleven foreign currencies, Gordon constant growth dividend model, least squares with breakpoint, Markov switching regression with two regimes, corporate bond yields, dividend yield, average equity return. JEL Classification Codes: G12, F31, C22, C24, C12.
Government Revenues and Expenditures: Causality Tests for Jordan	217-224
Khaled I Batayneh
Abstract: The main purpose of the study is to examine the causal relationship between government revenues and expenditures of the Jordan government over the period from 1980 to 2008 using cointegration and error-correction methodology. This statistical technique provides an additional channel of causation between government revenues (r) and government expenditures (x). The empirical results show that unidirectional causality running from expenditures to revenues (spend – revenue hypothesis), suggesting the preference of controlling or reducing expenditures. Keywords: Government revenues; Government expenditures; Cointegration; Causality; Jordan.
India’s Integration and Dynamic Linkages with World Emerging Economies and the US – Opportunities for Portfolio Diversification	225-245
Ranjan Dasgupta
Abstract: This study aims at investigating the relative integration and dynamic linkages of emerging economies all over the world and the US with India to find the most attractive international portfolio diversification opportunities between 2003-12 for the overall study period and for pre-, during-, and post-US financial crisis periods. It undertakes pair-wise Granger causality test, Johansen and Juselius’s and Engle-Granger’s co-integration techniques, and Vector autoregressions to fulfill its objectives. The results show many unidirectional but no bidirectional causal relationships, and some long-term co-integrating integration in between above markets. Thus, it is concluded that these emerging economies stock markets are the most favourable investment destinations for the US and global investors especially China, Brazil and India. Also, it is original, particularly in the area of selection of markets for assessing the Indian stock market’s integration and dynamic linkages. Keywords: Emerging economies and US stock markets; Integration and Dynamic linkages; Portfolio diversification; JJ and Engle-Granger’s cointegration tests; Pairwise Granger causality tests; Impulse response functions.