International Research Journal of Finance and Economics
 Issue 116
 Nov, 2013
The Effect of the Macroeconomic Environment on the Degree of Pass-Through from Policy Rates to Retail Rates
Andualem Mengistu
In this paper we employ a fixed effects panel data model to estimate an unbiased relationship between policy rate and retail rates. In particular, we use data from 42 countries covering the period 2003-2012 and construct a panel dividing the data into two periods (period 1: 2003-2007 and period 2: 2008-2012). We summarize our findings in this paper as follows. First, though we find that higher inflation and lower policy rate volatility is associated with higher lending pass through in both cross-section and fixed effects estimation, the coefficients on these variables in the fixed effects regression are bigger in absolute value than those of the cross-section regression. We therefore conclude that there are country-fixed effects that lead to biased estimated coefficients in the cross section regression. Second, the effect of fixed effects is stronger in the relationship between macroeconomic variables and deposit rate pass through. For instance, both high GDP and high inflation are associated with higher deposit rate pass through in our cross-section regression. But both variables are statistically insignificant in the fixed effects regression. In fact, the only variable with explanatory power for deposit rate pass through in the fixed effects model is policy rate volatility. Specifically, higher variation in the policy rate leads to lower pass through from the policy rate to the deposit rate. Third, we find that credit market risk and time-fixed effects do not explain the pass through from policy rate to retail rate in either of the estimation methods.
Keywords: Pass through, macroeconomic variables, country fixed effect
JEL Classification Codes: E43, C51
The Utilizing of Financial Analysis in Credit Decision in Palestinian Commercial Banks
Mansoor Maitah, Khaled Zidan and Nassir Ishneen
The purpose of this study is to recognize the utilizing degree of objective financial and accounting methods used by the credit managers and analysts at the Palestinian Commercial Banks to judge the credit worthiness of the credit facilities demanders when taking decision for granting them the facilities by recognizing the utilizing degree of using the comparison analysis methods to the financial statements (the horizontal and vertical analysis), the financial ratios, and the predictive models of financial failure. To achieve the Purposes of this study the researchers designed a questioner distributed to the population of the study which represents all credit managers and analysts in credit facilities administrations at Palestinian Commercial Banks which are listed in Palestinian Stock Exchange. The findings showed several results such as: the increasing degree of using some financial and accounting methods, indicators and models by the credit managers and analysts when studying client's financial position in order to make decision about granting the credit facilities. There are differences in using financial ratios, when studying the financial position of the credit facilities demanded by the clients, and these differences showed that liquidity ratios are the most used ratios followed by profitability rations.
Keywords: G20, Credit Facility, Financial Ratios, CreditDecision, Palestine.
JEL Classification Codes: G20
Capital Structure Puzzle: The Interrelationship between Leverage, Taxes and other Micro Economic Factors
Pankaj Sinha and Vishakha Bansal
The capital structure puzzle still remains unsolved. Every year there are many incidences of firms, reporting very high and risky levels of debt ratios. Since debt has tax advantages over other sources of capital, this paper employs simulated marginal tax rate (MTR) and its variants to study the tax effects on leverage ratios of profitable Indian companies. The paper analyses three different measures of leverage; debt to asset (DAR) ratio, incremental debt to total assets ratio (DINC) and debt to capital employed (DAR1) ratio. For each measure of leverage ratio, different specifications based on four variants of MTR have been considered. The results confirm significant tax effects on debt ratios of profitable Indian companies. It was found that DINC is highly autoregressive and independent variables considered in this paper explain around 55% of the variation in DAR1. The study suggests a new measure of retained earnings (ERTA).
Keywords: Marginal tax Rate, debt, leverage, capital structure, tax, incremental debt, debt to equity ratio, capital employed, corporate finance, financial distress.
JEL Classification Codes:
G32, G38
Sovereign Contagion Effect on Eurozone Debt Crisis
Yi-Chen Wang, Ching-Wen Wang and Shyan-Rong Chou
European sovereign debt holders are deeply worried about the excessive national debt refinancing problem in the first quarter of 2010, especially when the Greece was downgrade by Standard and Poors on April, 2010. This paper adopts the extreme value theory (EVT) and single-factor Gaussian copula function to capture the tail distribution of stock returns as well as the tail dependency, and provides the evidences on the cross-country and cross-regional contagion effect on the Eurozone sovereign debt crisis. The empirical results illustrate that regional absolute contagion is higher in the developed region, and lower in the frontier region. In the meanwhile, Italy distressed induces highest contagious probability, while Ireland distressed cause highest decrease of contagious probability. The fundamental-based contagion is evidenced around the period of Eurozone debt crisis, the degree of co-crash effect on Eurozone debt crisis depends on the geographical, political, and trading dependences between countries. By analyzing the determinants of the sovereign distressed probability, our result reveals that the sovereign debt holders should be highly concerned about the variation of the debt or expenditure indicators of the refinancing country since the sovereign credit risk is highly sensitive to those indicators.
Keywords: Eurozone crisis, contagion risk, sovereign credit risk.
JEL Classification Codes: F37, G01, G17, O52
Public Debt in Lebanon: Structural Analysis and Prediction
Mahmoud Mourad
The public debt in Lebanon is of major interest to the political authorities. This debt was needed to rebuild the country after a string of domestic and foreign wars that led to a serious deterioration of the infrastructure throughout Lebanon. All started at the end of 1992 after the Taif agreement, with the first government of the former Prime Minister Rafic Hariri. The Lebanese government appealed to the domestic sources of funds formed by the central bank and the commercial banks, and then it turned to foreign sources. Firstly, our paper will analyze the structures of ratio variables: (Foreign Debt)/GDP, (Domestic Debt)/GDP and (Gross Debt)/GDP. We will use the technique of co-integration proposed by Engle and Granger to study the possible presence of an equilibrium relationship between the ratio variables. Secondly, we use the autoregressive integrated univariate models (ARI) applied to each of our monthly variables, which are the Domestic Debt (DD), the Foreign Debt (FD), the Gross Debt (GD) and the Net Total Debt (NTD), the long and short term bonds (LTB and STB) covering the period from January 1994 to October 2012 (226 months). Finally, we use our estimated models to perform two types of forecasts ex-post and ex-ante. Results: Three main results have emerged out of this paper. First, the Foreign and Gross Debt to GDP ratios have a similar trend. The two ratios turned out to be cointegrated. Second, the debt ratios take a downward trend in the ex-ante forecasts for the period 2013-2015, promoting a dynamic sustainable debt of the Lebanese government. In parallel, the debt ratios turned out to be non-stationary indicating an ineffective sustainability. Last but not least, the predictive performance of our proposed simple models shows that Lebanon maintains a favorable long term policy of domestic debt.
Keywords: Gross public debt, domestic, foreign, bonds, stationarity , cointegration, forecasting
Does Global Financial Crisis Causes Financial Contagion Effects on European Stock Markets?
Vítor Gabriel and José Pires Manso
This paper studies the impact of the global financial crisis contagion across European stock markets. For this research, we selected seven European stock markets and picked up the period between 04/10/1999 and 30/06/2011. To identify the occurrence of contagion effect, we used the multivariate dynamic conditional correlation (DCC) developed by Engle (2002), and tests the average correlation coefficients, estimated by the DCC model in order to understand if coefficients recorded in the global financial crisis sub-period differ from those recorded in the previous sub-periods. The analysis revealed that the correlation coefficients increased significantly in the last sub-period, which confirms the existence of contagion effects among stock markets studied.
Keywords: Global Financial Crises, International Stock Markets, Contagion Effects, DCC-GARCH.
JEL Classification Codes: G01, G15
Firm–Level Determinants of Foreign Direct Investment: The Case of Egypt
Islam Azzam and Jasmin Fouad
Understanding the main firm-level determinants of Foreign Direct Investment (FDI) is important to help guide firms towards policies and procedures to support the overall macroeconomic policies in attracting FDI. The paper applies a static panel data approach based on 8,185 companies in Egypt for the period 2006-2010. Our results support the hypothesis that both firm size and asset turnover are significant determinants of FDI. While the profitability variable is not a significant determinant of FDI, profitability is positively affected by FDI. Furthermore the results suggest that an improvement in asset management will help attract more foreign direct investment.
Keywords: Foreign direct investment, firm size, panel data, Egypt
JEL Classification Codes: C23, F21, L25
The Impact of Change in Tourism Policy on Employment and Added Value in Hospitality and Restaurant Industries
Jian-fa Li, Cheng-Yih Hong and Chun-Ming Chien
This study investigates the economic spillover effects of the tourism consumption from international tourists on an island economy by employing the industry-related spillover model and the employment-created model. Among the determinants causing the difference in spillover effect between the hospitality and restaurant industries, the employment coefficient, the ratio of earning share, and final demand production inducement dependency are the key factors.
Keywords: Change in tourism policy;Employment-Created model;Employment; Added value.
The Impact of Change in Trade Structure between Taiwan and China on Taiwan Industry
Cheng-Yih Hong, Jian-fa Li and Chun-Ming Chien
In the late 1970s, China's economic policies have changed from the closed one to the opening up to attract the foreign investments. Meanwhile Taiwan's economy is also facing transition in industrial structure. China's opening-up policy provides Taiwan’s business development with a great choice. With trading with China, since Taiwan's rapid capital outflow toward mainland China, the domestic industries are facing the so-called "hollowing out" controversy and other issues. Therefore, there are the domestic industrial structure adjustment and transformation in Taiwan. As we take a close look at the average economic growth rate in China being 5.53% in 1985-90 to 13.35% in 1990-1995, 9.52% in1995- 2000, 14.06% in 2000-2005, 11.22 in 2005-2010. Although the financial turmoil in 2008, the China's economic growth to 2010 is still maintained a high level of 10.33%. The rise of the Chinese economy has drawn the attention of the world. The present study aims to investigate the relationship between the development of cross-strait economic and trade and Taiwan's industrial structure change. The need for trade and economic development means that there are complementary on the two sides. .Changes in the industrial structure often reflects that the competition also exists between Taiwan and mainland China. China has nearly 30 years of economic reform and opening up. The complementary and competitive relationship has existed and been more closely with the globalization.
The Gold Earthquake
Fernando Llano-Ferro
On Monday, April 15th 2013 the price of gold dropped from $1535.50 to $1395.00 per troy ounce. Analyzed within a Gaussian distribution framework this would be a nearly 7 standard deviation event. Therefore, a move of this size would occur once in one billion years. This paper studies a 40 year history of the time series price of gold, using the classical power-law Gutemberg-Richter earthquake recurrence equation. The result, within this methodology, indicates that even though a 9.15 % drop in the price of gold is a rare event it could easily repeat itself several times within a lifetime.
Keywords: Gutemberg-Richter, Gold, time-series
JEL Classification Codes: C22
Earnings Management, Firm Performance, and the Value of Indian Manufacturing Firms
Amarjit Gill, Nahum Biger, Harvinder S. Mand and Neil Mathur
The purpose of this study was to test whether the practice of earnings management that affects and perhaps benefits management of Indian companies has an effect on a firms’ performance, and whether earnings management has an effect on other stakeholders. This study applied a co-relational research design. A sample of 250 firms was selected from Top 500 Companies listed on the Bombay Stock Exchange (BSE) for a period of 4 years (from 2009-2012). The findings of this study indicate that the more intense the practice of earnings management, the greater it’s adverse effect on corporate rate of return on assets in the following year. The study also found that to some extent, the market realizes that management acts with selfish motives and responds by lowering share prices and corporate market value. This study contributes to the literature on the association between several features of earnings management and firm performance, and the value of the firm. It is confined to Indian firms where companies perform intense earnings management. The findings may be useful for financial managers, investors, financial management consultants, and other stakeholders.
Keywords: Earnings management, Firm performance, Market value of the firm, Shareholders’ wealth.
Dividend Payouts Versus Share Repurchases: Evidence from Japan
Feng-Shun “Leo” Bin, Dar-Hsin Chen and Wan-Ching Lien
This paper examines what may affect Japanese corporate choices between dividend payouts and share repurchases. Our sample consists of the standard accounting and stock market data from 2000 to 2008 taken from the COMPUSTAT database with results showing that share repurchases have grown in both dollar amount and popularity as a payout alternative for Japanese firms. However, unlike in the US, dividends remain the dominant form of payout policy in Japan. Moreover, firms that both pay dividends and repurchase shares have larger market capitalization size, higher non-operating income, and higher cash ratio; while firms that only pay dividends have higher cash flow, higher market-to-book ratio, higher operating income, and higher debt ratio. Finally, we observe that dividend payouts and share repurchases are not substitutes to each other in Japan.
Keywords: Payout Policy, Dividend, Share Repurchase, Firm Valuation
JEL Classification Codes:
: G15, G35, G38
Huge Capitals Shrinking Financially in Manufacturing & Practical Solutions
Michael Li (Li, Yong-Ming)
Huge capitals invested in manufacturing are shrinking always, here and there, obviously or unconsciously, which impact profit rates significantly. However, since the root causes inducing huge capital shrinkages are not studied in the theories of financial management and operations management, not investigated in the manufacturing practices, and not concerned by top managements or investors, there are no solutions and no effective actions available, supported (or not supported) by ERP system or MRP system (or by any other similar financial software systems), over the world, today. There are many huge cost saving methodologies in literatures, and 2 of them are in fashions: 6-Sigma and Lean Manufacturing, but none can help to stop, or correct, or prevent huge capitals shrinking. The existing finance audits and quality audits (internal or external) cannot help, neither. So, here is an alert to all manufacturers, and also practical solutions are presented herewith upon successful experiences.
Keywords: Investments Management, Financial Management, Operations Management, Quality Management, Fundamentals of Management.
JEL Classification Codes:
C88, D24, L15, L21, L23, L26, M11, M41, M42
Profit and Risk, Macroeconomics, and Productive Assets Quality: The Evidence of Conventional Bank and Shariah Bank in Indonesia
Tri Widyastuti and Bambang Suprayitno
This research investigates the impact of profit and risk’s indicators and macroeconomics conditions on the productive assets quality in particular the difference between conventional and shariah bank in Indonesia. Using a balanced panel of 28 conventional banks and 28 shariah banks, this study employs a linear panel data method using ordinary least square (OLS). For panel data analysis, the availability of seven years’ worth of data is required, particularly quarterly data which starts from 2004 to 2010. The results reveal that all variables have a significant impact on the productive assets quality for both conventional and shariah banks. Furthermore, apart from non-performing loan, operational efficiency ratio, exchange rate and inflation, KDTA, RATE, SBTA capital adequacy ratio, loan deposit ratio, gross domestic product, Indonesian treasury bills have a positive impact in affecting the productive assets quality of conventional bank and shariah bank. Overall, it can be concluded profit and risk’s indicators and macroeconomics conditions are vital in affecting the productive assets quality for both conventional and shariah bank in Indonesia.
Keywords: Profit and risk, macroeconomics indicators, productive assets quality, conventional bank, shariah bank, Indonesia
JEL Classification Codes: : E00, G21, M40
The Relationship between Exchange Rate and Interest Rate within the Context of the Uncovered Interest Parity (UIP) in Turkey*
Ugur Bülent Kaytanci and Bengül Gülümser Kaytanci
This study analyzes the relationship between exchange rate and interest rate within the context of the uncovered interest parity (UIP) in Turkey by reliance on ARDL method. The study which covers the period between 2002:01 and 2011:12 finds that UIP does not apply to Turkey for the period under review. This takes us to conclude that the exchange rates do not play a role that takes the domestic interest rates closer to the foreign interest rates.
Keywords: Exchange Rate, UIP, ARDL
JEL Classification Codes: F31, F41