Jongmoo Jay Choi

Is Foreign Exchange Risk Priced in the Japanese Stock Market

The exchange rate is an important variable that affects international competitiveness and performance of Japanese firms. We use an unconditional and a conditional multi-factor asset pricing model to examine whether exchange risk is recognized and priced in the Japanese stock market. The results indicate that the exchange risk is generally priced in Japan. More specifically, we provide evidence, in the unconditional model, that the exchange risk is priced in both weak and strong yen periods, when the bilateral yen/U.S. dollar exchange rate measure is used. The results are more mixed when the trade-weighted exchange rate is used. For the conditional model, the exchange risk is priced regardless of the exchange rate measure used. The combined evidence from the two models suggests an interesting observation about the role of the secular exchange rate trend in shaping the perception of exchange risk in the Japanese capital markets.

Probing corporate governance globally: Impacts of business systems and beyond

Effective mechanisms for corporate governance are essential for market-based economic systems. This chapter addresses the necessity of corporate governance research to address the competing goals of various stakeholders in the firm: managers, suppliers of financial capital, and other stakeholders. The review of literature reveals that firm-level complexity, as well as diversity of national business systems, are important for understanding corporate governance practices and regulations around the world.

Mergers and Consolidation of Financial Service Firms: Global Trends and Strategies for Value Creation

The financial services industry is experiencing rapid consolidation globally. Consolidation has proceeded not only in the same market but also across different market segments and across national boundaries. In this paper, we (a) outline the general trend of the mergers and acquisitions (MA (b) identify and analyze the reasons that contribute to the consolidation of the financial service industry; (c) examine some cases of successful and unsuccessful financial service MA and (d) arrive at some strategic implications.

Introduction to Value Creation in Multinational Enterprise

In a fundamental sense, creation of value is the purpose of a firm. Values – measured by profits, cash flows, stock prices, or some strategic objectives – are the ultimate reasons why a firm exists. The ongoing and ever-expanding discussion of globalization, whether based on trade flows or financial flows, draws attention to the value of multinational enterprise. Existing empirical work on the impact of multinational firms, however, is inconclusive. Some observers point to the valuation discount with international operations due to the costs of agency and control and the difficulty of coordinating complex organizations and cultures. Others emphasize the value of a multinational network and the operational efficiency of a multinational enterprise (MNE). Thus, issues related to value creation are important and lively areas of business and finance. In fact, value creation is now at the frontier between the functional areas of finance and strategy. In international finance, the topic also interacts with economics in the areas of strategic trade policy and exchange rate behavior, as well as business strategy, as it relates to the management of an MNE. The role of government policy is also part of the debate, because the importance of public policy and the behavior of policymakers are elevated when finance and business become international, as evidenced by consistent attention to political risk.

The Political Economy of Chinese Finance

Volume 17 of International Finance Review focusses on a variety of issues relating to the political economy of Chinese finance.

Strategic and Financial Determinants of Foreign Direct Investments

Conventional foreign direct investment (FDI) theories regard FDIs as strategic moves based on operational or industrial organization considerations. We demonstrate that financial factors are also important in corporate FDI decisions. The financial factors concern internal capital market strength and corporate governance and include exchange rate changes, internal and external financing cost, risk diversification, and agency costs. There is variability in the significance of financial variables depending on industries and destinations. The integrated model with both strategic and financial factors is superior to either component model in explaining FDIs. However, financial factors are no less important in explaining the prevailing FDI phenomena than strategic or operational variables.

Market Socialism with “Chinese Characteristics”

Abstract Purpose The paper provides an overview of material helpful in placing the subsequent papers in context, as well as a summary of the research contributions made by the individual papers themselves. Methodology/approach We begin with a timeline of China’s Economic Reform, including both major events that permitted the opening and expansion of the nation’s economy, and important milestones of the historical movement. We then consider the impact of philosophy and culture (particularly, Confucianism and socialism) on China’s society and government, which leads naturally to certain observations regarding the political-economic model in which state-owned enterprises play a central role. In the final section, we briefly summarize the contents of the remaining papers.

The US versus Asian financial crisis

The current US financial crisis has elicited unprecedented responses by various government agencies and institutions. The current crisis is the most serious since the 1930s in terms of its financial and economic impacts and global repercussions, but its origin in the largest developed country in the world contrasts with other crises originated in emerging markets. We survey the issues pertaining to the similarities and differences in the causes and policy responses in the current US financial crisis versus the Asian financial crisis in 1997–1998. We discuss the implications for prevention and management of similar financial crises in the future.

RECOGNITION OF FOREIGN EXCHANGE RISK IN THE JAPANESE STOCK MARKET

This paper examines the exchange risk sensitivity of Japanese firms, and the exchange risk pricing in the Japanese stock market for the period of 1975–2001. We find that an appreciation of the yen is positively associated with industry portfolio returns. This supports the dominance of wealth effects over cash flow effects. This is in contrast to U.S. studies that report a weak, negative relationship between stocks and the domestic currency. The results are more pronounced in the pre-Crash period, and vary somewhat depending on the exchange risk measures used. Similarly, the exchange risk is priced in the pre-Crash period, but not in the post-Crash period. These results suggest that the exchange rate elasticity of the Japanese economy has declined in the post-bubble period of economic stagnation.

THE JAPANESE FINANCE: IS IT UNIQUE?

Japan has always been an “odd man out” from the standpoint of Western norm or Western finance. It is a country that is as developed as any in the West. However, it is also a country that possesses the significant institutional and cultural traits that separate it from the West. An important question in finance is to what extent the basic models of finance, developed with the Western “perfect market” view in mind, can be applied to Japan; or conversely, what critical adjustments must be made to make models amenable to the reality of Japanese finance.