Kimberly C. Gleason

The Interrelationship between Culture, Capital Structure, and Performance: Evidence from European Retailers

Abstract Research has shown that capital structure influences firm performance. It is generally accepted that variables other than capital structure also influence corporate performance. While this line of research has been extended to an international setting, research on the influence of national culture on capital structure is rather sparse, an issue addressed in this article. Using data from retailers in 14 European countries, which are grouped into four cultural clusters, it is shown that capital structures for retailers vary by cultural clusters. This result holds in the presence of control variables. Using both financial and operational measures of performance, it is shown that capital structure influences financial performance, although not exclusively. A negative relationship between capital structure and performance suggests that agency issues may lead to use of higher than appropriate levels of debt in the capital structure, thereby producing lower performance.

Trading rule profits in Latin American currency spot rates

Abstract The efficiency of foreign exchange markets has received extensive attention in the literature in recent years, especially with regard to technical trading. We extend the existing evidence on this topic by applying the moving average (MA) and channel (CH) trading rules to 13 Latin currencies to see if opportunities for profitable trading exist. Our results show that although not all of the Latin American currencies can be exploited through the use of trading rules that we use, there are some that appear amenable to our technical analysis. Specifically, the results suggest that MA trading rules are profitable for four currencies, namely the Brazilian real, the Mexican peso, the Peruvian new sol, and the Venezuelan bolivar. We further find that CH rules are profitable for the Brazilian real, the Mexican peso, and the Venezuelan bolivar. Our results suggest that due to differences in the statistical properties of exchange rates, some trading rules may be more suitable for certain types of currencies.

Operating characteristics, risk, and performance of born‐global firms

Purpose – To determine what characteristics distinguish firms that conduct international business within three years of going public and six years from founding, and how these firms perform. Design/methodology/approach – A logistic regression analysis is used to identify characteristics that distinguish firms that are international at the time they go public, versus those that are not. The paper also assesses post-IPO performance and apply multivariate analysis to determine how performance varies among these firms. Findings – Compared to firms of similar age who do not pursue rapid internationalization, born-global firms are generally larger, more diversified, and have more venture capital backing. Their founders, board members and managers exhibit more international experience. The returns 12 and 18 months post-IPO are significantly higher for born-global firms than for a control sample of firms who do not engage in rapid internationalization. Furthermore, those born-global firms with joint ventures or acquisitions in several countries perform better than those that only export within the first six years since their inception. Research limitations/implications – Managerial implications include having a board of directors with sound international business experience as well as using a venture capital firm to provide monitoring and oversight of operations at home and in the foreign market. Originality/value – This paper is original in that it is the first to provide a financial markets-oriented empirical investigation of the “born-global” phenomenon using a sample of newly public American firms.

Delaware Incorporation and Earnings Management: An Empirical Analysis

Motivated by agency theory, this study examines whether the extent of earnings management significantly differs in firms incorporated in Delaware versus those incorporated elsewhere in the U.S. Delaware corporate law has been argued to affect agency costs. To the extent that shareholders make poor investment decisions based on managed accounting numbers, earnings management can be regarded as an agency cost. The evidence indicates that earnings management occurs to a lesser extent in Delaware firms. In addition, Delaware incorporation combined with a predominance of outside independent directors on the board, further constrains earnings management. Finally, the results suggest that earnings management is not diminished in Delaware firms that are controlled by founding families.

Efficiency tests in the French derivatives market

Abstract The French derivatives market, the Marche a Terme International de France (MATIF) or the French International Futures and Options Exchange is one of the major derivatives markets in the world. The efficiency of four financial contracts traded on the MATIF-CAC40 Index Futures, ECU Bond Futures, National Bond Futures, and PIBOR 3-Month Futures are examined in this paper. Test results from serial correlations, unit root tests, and variance ratio tests provide overwhelming evidence that the random walk hypothesis cannot be rejected for these contracts.

Wealth effects for acquirers and divestors related to foreign divested assets

Abstract This study examines acquisitions of foreign divested assets by U.S. firms. The results indicate that the excess returns to these acquisitions is a significant 0.48%, suggesting that capital markets perceive potential synergies from the effective utilization and strategic management of these assets by U.S. companies. The wealth effects to divestors of these foreign assets is 0.65%, significant at the 1% level, indicating that firms benefit from reducing their geographic scope of operations. We further examine excess returns to acquirers, and we find that several firm-specific characteristics foster anticipation of positive performance gains resulting from the acquisition of divested assets in foreign countries. Similar results are observed for the divesting firms also. Analysis of long horizon performance provides weak indication that performance of divesting firms improves subsequent to the divestment.

Dimensions of international expansions by US firms to China: Wealth effects, mode selection, and firm-specific factors

Abstract Chinas recent efforts to attract foreign investment have been viewed favorably by US firms, who have explored a variety of strategies for expanding to China. This paper provides evidence related to a comprehensive set of strategies used by US firms to expand to China. For the 302 announcements of expansion by US firms into the Chinese market, several firm-specific factors are found to affect both the choice of mode entry and the reaction of investors to the announcement of the expansion. The results suggest that firms with a high investment in proprietary assets prefer foreign direct investment (FDI) modes to non-FDI modes, as do firms with high levels of geographic diversification. Firms entering the Chinese market utilize non-FDI modes, while those who have established a presence in China prefer FDI modes. The reaction of the stock market to expansions to China is positive; average excess returns of 0.75% are observed for the two days surrounding the announcement. Both FDI and non-FDI categories of expansion have statistically significant excess returns. Analysis by mode of expansion shows that expansions through joint ventures (JVs) and contracts are the most desirable alternatives. Other modes of expansion do not result in significant excess returns. Finally, a firms prior financial performance has a significant influence on its ability to profitably expand to China.

The evidence from Canadian firms on multinational diversification and performance

Abstract The purpose of this paper is to identify the effects of multinational diversification on corporate financial performance. This issue is examined for Canadian firms by using four years of individual as well as pooled time-series-cross-sectional data for the years 1992–1994 and 1997. Using three distinct measures of financial performance and two measures of multinational diversification and controlling for size, leverage, growth, and efficiency, we replicate the procedures in prior studies to show that, in general, lower performance is associated with multinationality. However, when a nonlinear specification is used, a hurdle level for foreign assets deployment is identified. Prior to this threshold level, financial performance is inversely related to degree of multinational diversification, but beyond this level, the relationship is positive. We provide an explanation for this U-shaped relationship.

Effect of Regulation FD on Asymmetric Information

On 23 October 2000, the U.S. SEC put Regulation Fair Disclosure into effect. It requires companies to disseminate releases of material information to all investors, not selectively. Proponents of Regulation FD argued that the flow of information would improve; critics of the regulation asserted that Regulation FD would increase volatility and reduce the quantity of information being released into the market, resulting in an increase in asymmetric information. We examined components of the bid–ask spread surrounding news releases and trading activity by retail versus institutional investors before and after the institution of Regulation FD. Our results indicate no significant increase in volatility after Regulation FD, and we found little or no increase in the adverse-selection component of bid–ask spreads. Overall, our results do not support critics of Regulation FD. On 23 October 2000, the U.S. SEC put Regulation Fair Disclosure into effect. It requires companies to disseminate releases of material company information to all investors rather than to select investors. The idea was to create a level playing field for all market participants. For example, prior to Regulation FD, companies could restrict who could be part of a conference call. The exclusion of retail investors, some institutional analysts and investors, and in particular, the media, was a significant catalyst in bringing about Regulation FD. Regulation FD requires that companies release material, market-moving information to all investors simultaneously through a press release or an 8-K filing with the SEC. If a company holds a press conference, it must provide adequate time for investors to learn of the conference before it is held, and the conference must be made available to the widest audience possible—by allowing anyone to dial into a conference call or by making a webcast available in real time over the Internet. Regulation FD also provides a mechanism for dealing with the unintentional disclosure of material nonpublic information. Proponents of Regulation FD argued that it would improve the flow of information. Critics asserted that the regulation would decrease information coming out of companies, which was expected to increase volatility and reduce the quantity of information being released into the market, resulting in an increase in asymmetric information. When asymmetric information increases, market makers widen their bid–ask spreads to compensate for the increased risk of trading against an informed investor. To analyze the effects of Regulation FD, we examined—before and after Regulation FD—volatility, trading activity by retail versus institutional investors, and bid–ask spreads (and the spread’s components) to determine whether the regulation has increased the cost of trading to investors. Among the components of the spread, we focused on adverse selection because it should be the most sensitive to the impact of changes in information flows from companies. If Regulation FD reduced the amount and quality of information put out by companies, the adverse-selection component should have increased. If Regulation FD has not affected the information flow, the adverse-selection component should not have changed. We analyzed 4,278 conference calls made prior to Regulation FD and 3,322 calls made after Regulation FD. The total period covered is 1 January 1999 through 27 February 2001. We broke down the full sample of calls by the subject of the call and focused analysis on the largest group, namely, calls to make earnings announcements. We also broke out from the sample calls that were closed before Regulation FD. We found for the post-FD period an increase in the number of conference calls per day and in the number of companies per day making calls. Tests on volatility in the pre- and post-FD periods indicate that volatility did not increase after implementation. Indeed, it is more likely that Regulation FD contributed to lower volatility. When we examined bid–ask spreads and their components before and after Regulation FD, we found that both absolute (in dollar terms) and relative (in percentage terms) mean and median spreads increased significantly after Regulation FD. The adverse-selection component of the bid–ask spread, however, has had no significant change since Regulation FD in either absolute or relative terms. These results are contrary to the expectations of critics of Regulation FD. Overall, our results indicate that Regulation FD has not been detrimental to investors.

A comprehensive examination of the compass rose pattern in futures markets

This article provides a comprehensive examination of the existence, or the lack thereof, of the compass rose pattern in futures markets. The results from 118 futures contracts traded on 31 futures exchanges in 15 countries show that the compass rose pattern exists only in some futures contracts, in contrast to the robust existence among stocks documented by Crack and Ledoit (1996) and Chen (1997). Not all contracts on the same exchange exhibit this pattern. However, the pattern appears to be concentrated in some sectors. Although this evidence suggests that effective tick sizes that are different among contracts may be the determining factor for the existence of the pattern, contradicting evidence also suggests that there are other yet‐to‐be‐identified determinants at work. Furthermore, whereas the pattern is absent in the daily returns of primary stock index futures contracts such as the Major Market Index (MMI), it is very easily observable in the intraday returns of the same futures contract. The elusiveness of the pattern is further demonstrated in the returns on the cash S&P 500 Index, which does not exhibit the pattern until the focus is on returns that are within a 1% boundary.