Isaac T. Tabner

CORPORATE GOVERNANCE IN JAPAN AND THE UK: CODES, THEORY AND PRACTICE

We reflect on the evolution of corporate governance and the role of institutional investors in enhancing governance in Japan and the UK. Japan places emphasis on stakeholder capitalism, whereas the UK places emphasis on shareholder capitalism. Nonetheless, in both countries, institutional investors have exerted significant influence on the evolution of corporate governance. Institutional investors in the UK have more power over company management than their Japanese counterparts, although it is alleged that these powers are not exercised to their best potential in either country.

CHOICE, CONFUSION AND COMPETITION IN THE MARKET FOR MARKETS: AIMING FOR AIM IN THREE JUNIOR ASIAN STOCK EXCHANGES

A review of literature on the theory of stock exchange competition provides the basis for a template model of a successful stock exchange. Three junior stock exchanges in East Asia which stated their ambitions to become a regional exchange for emerging firms are compared with the template and with the AIM section of the London Stock Exchange; the Tokyo Stock Exchange Mothers, Hong Kong Stock Exchange Growth Enterprise Market and the Singapore Exchange Catalist. Our analysis indicates that the AIM and Catalist markets have the closest fit to our template model, while the GEM and Mothers show material departures from it.

The Margin of Safety and Turning Points in House Prices: Observations from Three Developed Markets

Using quarterly data from 1960 (United Kingdom), 1963 (United States), and 1977 (Japan) through the second quarter (Q2) of 2010 (all three markets), the authors examined long-run mean-reverting relationships between house prices and inflation, disposable income, GDP, and rents. At the end of Q2 2010, U.S. prices were below their mean-reverting levels and at the lower end of their historical range. Equivalent U.K. and Japanese prices were at or slightly above their mean-reverting levels. Using quarterly data from 1960 (for the United Kingdom), 1963 (for the United States), and 1977 (for Japan, the Tokyo area) through Q2 2010 (all three markets), we examined long-run mean-reverting relationships between new house prices and inflation, disposable income, GDP, and rents. After adjusting for estimated drift and trend coefficients, we found that over the period Q4 2006–Q2 2010, on the one hand, U.S. house prices moved from near the top of their historical range toward the bottom relative to inflation, disposable income, and GDP per capita. On the other hand, yields moved from near the bottom to near the top of their historical range. By Q2 2010, the U.K. market was at trend in relation to inflation and disposable income but slightly above trend in relation to GDP per capita and yields. Japanese new house prices were slightly above trend in relation to inflation, disposable income, and GDP per capita but below trend relative to yields. Hence, for investors and households contemplating the purchase of new homes at the end of Q2 2010, the margin of safety was greatest in the U.S. market, close to historical averages in the United Kingdom, and slightly below average in Japan. In terms of rational expectations theory, U.S. prices were factoring in a lot of pessimism regarding future income and per capita GDP growth, U.K. prices were neither particularly pessimistic nor particularly optimistic, and Japanese prices appeared to be factoring in mildly optimistic assumptions concerning income and economic growth. Although prices in the United States and the United Kingdom appeared high by historical standards immediately prior to the 2008 financial crisis, the precrisis expansion was relatively moderate compared with the expansion experienced in Japan between Q4 1990 and Q2 1991. In fact, Japanese prices peaked at 79 percent, 62 percent, 58 percent, and 30 percent away from the whole-sample-period trend values for, respectively, inflation, disposable income, GDP, and yields. These percentages can be compared with equivalent whole-sample deviations of 17 percent, 15 percent, 13 percent, and 21 percent for the U.S. market and 33 percent, 36 percent, 34 percent, and 45 percent for the U.K. market. A comparison of the three markets for new houses shows that the U.S. market has the strongest mean-reverting tendencies relative to trends and also the most statistically significant positive and negative trend coefficients. Furthermore, deviations from trend appear to have a smaller range and standard deviation in the U.S. market than in the other two markets for all the deflated house price series and yields. The reason may be that the U.S. market faces fewer supply constraints than the other two markets, where population density is much greater; hence, the relatively greater price elasticity of supply in the U.S. market has a more moderating effect on price expansions relative to the underlying macroeconomy than it does in Japan and the United Kingdom. To speculate that house prices are to rise or fall indefinitely is to speculate that per capita wealth will also rise or fall indefinitely. Given technological advances, this assumption may not be unrealistic, but history has shown that long-term trends in economic growth are punctuated by cyclical expansions and contractions. For most people, housing investment provides a geared (levered) but, in the medium term, imperfectly correlated exposure to economic growth. Neglect of this final observation is liable to result in a failure to provide an adequate margin of safety when making decisions on housing choice, investment, and housing policy. Despite apparent extremes of relative over- and undervaluation, no instances occurred in the past sample periods when prices failed to revert to either the rolling or the whole-sample trend in any of the three markets studied.

Bonding, Firm Value and Liquidity: An Analysis of Migrations Between the AIM and the Official List of the London Stock Exchange

Firms changing their listing from the less regulated AIM to the more regulated main section of the London Stock Exchange exhibit positive returns on the day the decision is announced, while for firms moving in the opposite direction both announcement and implementation day returns are negative. Following implementation, the pattern of returns is reversed for both categories of firm. Some of the changes in returns reflect changes in liquidity, while the remainder reflect adjustments to the cost of capital resulting from different bonding requirements and agency risks between the two listing regimes.

Buying versus Renting: The Net Present Value of Inflation and Housing Tenure Choices for Individual Households

The tenure decision upon whether to buy or to rent accommodation has long-term consequences for households’ financial wellbeing that influence macroeconomic development and stability when the cumulative effects of individual decisions are aggregated across populations. The author explains how the net present value (NPV) of ownership versus renting can be used as a framework for informing housing tenure decisions. Increases in holding periods, inflation and the spread between imputed rent and the opportunity cost of household savings shifts the balance in favour of ownership. With plausible assumptions the model demonstrates that households typically need a holding period of between five and ten years to achieve a breakeven NPV. The findings support the conjecture that inflation transfers wealth from renters and mortgage providers to owners, whereas deflation reverses the flow until rising default levels establish a new equilibrium.

Sympathy as a Determinant of Cross-Border Merger Activity

This paper introduces cross-country sympathy as a determinant of cross-border merger activity. We use abnormal votes exchanged between countries in the Eurovision Song Contest between 1999 and 2013 to proxy for sympathy across countries. We find that pairs of countries sharing high sympathy levels experience high levels of cross-border merger activity, while pairs of countries sharing low levels of sympathy exhibit low cross-border merger activity. Sympathy subsumes the significance of culture as a determinant of cross-border merger activity. We find that the relation is driven by private-to-private acquisitions rather than public-to-public merger deals, showing that managers of private firms are influenced more by sympathy.

Should I Buy or Should I Rent: And What is an Appropriate Discount Rate for Housing Consumption in Household Finance?

The Gordon Growth Model is used to derive widely differing fundamental values of the same gross rental yield for six hypothetical housing purchasers listed in declining order of magnitude: a fully funded consumer with a marginal tax rate of 40%, a fully funded buy to let investor with a marginal tax rate of 40%, a fully funded tax exempt consumer, a tax exempt buy to let investor, a tax exempt consumer with a 50% loan to value ratio and a buy to let investor with a 50% loan to value ratio and 40% marginal tax rate. Fundamental values are higher for wealthy and risk tolerant purchasers because lower discount rates are applicable to this group. Thus when aggregate wealth is high, and unequally distributed, wealthy consumers and investors will have a disproportionate effect on market prices making them higher than the fundamental values that are applicable to non-wealthy or risk-averse home purchasers. At such times, it is financially preferable for non wealthy households to rent their housing needs, as their discount rates are higher relative to wealthy investors and consumers who have exhausted their investment tax shelters and or are fully funded.