Michael Bowe

Foreign Investor Behaviour and the Asian Financial Crisis

Abstract This studys objective is to identify the relative importance of local and foreign investor expectations in explaining the short-run behaviour of equity returns in Asian markets during a period encompassing the 1997 financial crisis. The analysis utilises the insight that the pricing behaviour of closed-end country funds (CEFCs) in relation to their constituent underlying assets, can be used as a mechanism for distinguishing between the relative impact of local and foreign investor expectations. To ensure robust results, the analysis incorporates several different empirical specifications (error correction models, multivariate VAR and single equation), and uses alternative measures of underlying asset prices in the Asia markets. The results suggest that both local and foreign investor expectations are important as a channel determining the pricing behaviour of Asian assets trading in Asian and US equity markets. This finding appears independent of the degree to which a specific Asian equity market is open to foreign investment. Moreover, the measured impact of country-specific foreign investor information is enhanced during periods of financial crisis. The findings lend credibility to the view that the trading behaviour of foreign investors was significant in sustaining the dimension and duration of the Asian crisis.

Is the European Capital Market Ready for the Single Currency

This paper defines, and investigates the extent of, capital market integration in the European Ecu government bond market sector utilising Johansens (1992) multivariate analysis. Evidence suggests the yield system is driven by a unique common trend, although we reject the zero-sum restriction on the cointegrating vector. The former finding is consistent with our definition of full Ecu capital market integration, the latter is not, although it is explainable by failure of the expectations hypothesis. Our results support market utilisation of the extant Ecu yield curve as the initial benchmark for pricing euro-denominated debt securities following stage III EMU. Copyright Blackwell Publishers Ltd 1999.

Debt‐equity swaps and the enforcement of sovereign loan contracts

This paper analyses the incentive compatibility effects associated with restructuring sovereign debt through a debt-equity swap scheme and the analytically related issue of providing new project finance in developing countries through equity convertible bond issues. Our central result is that these initiatives can generate efficient investment incentives and also provide a partial contractual enforcement mechanism by reconciling the investment interests of debtors and their external creditors. Unlike previous analysis of the benefits of swaps, our results make no appeal to risk considerations nor invoke informational asymmetries. We also derive a necessary condition for swaps to overcome the free-rider barrier to the provision of voluntary, market-based debt relief. In contrast to Brady Plan restructurings, this condition does not rely on taxation of the capital gains accruing to non-participating creditors. The results should be viewed in the context of the structural transformation which has recently occurred in the source of capital flows to developing countries, from syndicated bank lending to the international bond markets. The analysis advocates an enhanced role for equity convertible bond issues in this resurgence of international capital market activity.

Split Ratings and Differences in Corporate Credit Rating Policy between Moody's and Standard & Poor's

This paper investigates split credit ratings awarded by Moodys and Standard & Poors (S&P) to U.S. corporations. Bivariate probit model estimates, analyzing 5,238 firm-year observations from dual-rated S&P 500/400/600 index-constituent corporations, indicate firm-specific financial and governance characteristics predict split ratings. Large, profitable companies with enhanced interest coverage, a greater percentage of independent directors, and more institutional investment are less likely to receive splits. Moodys appears more conservative in its evaluations, assigning lower ratings to smaller, less profitable companies with low interest coverage. Moodys also associates external, independent constraints on managerial autonomy with a higher corporate credit standing relative to S&P.

Duration, trading volume and the price impact of trades in an emerging futures market

This paper examines the price impact of trading intensity on the MexDer TIIE28 interest rate futures contract, one of the worlds most actively traded contracts. A novel volume-augmented duration model of price discovery decomposes trading intensity into liquidity and information components. Duration between transactions exerts a positive influence on price changes, while increases in order flow and trade volume exert positive and negative influences, respectively. The liquidity component dominates the information measure, suggesting that liquidity considerations dictate trade timing. These findings are rationalized with reference to MexDers organizational structure, specifically the affirmative obligations placed upon marketmakers to trade a minimum volume.

Does options listing impact on the time-varying risk characteristics of the underlying stocks? Evidence from NYSE stocks listed on the CBOE

This article extends Mayhew and Mihov (2004) and Mazouz (2004) by investigating if either the (time-varying) systematic or diversifiable risk of a NYSE-traded stock is impacted when its option is listed on the Chicago Board Option Exchange (CBOE). We employ a Kalman Filter to estimate time-varying betas, and apply a GARCH(1,1) process on the one-step-ahead forecast error to estimate conditional diversifiable risk. An individual stock approach rather than the customary portfolio approach is adopted. A control sample accommodates possible risk changes resulting from the endogenous nature of the exchanges option listing decision, and the potential impact of changes in market- and industry-wide conditions. The evidence indicates that option listing has no significant predictable impact on either risk characteristic.

Too big to care, too small to matter: macrofinancial policy and bank liquidity creation

We estimate the volume of liquidity creation by U.S. bank holding companies between 1997 and 2015, and examine the impact of changes in macrofinancial policies on the dynamics of this process. We focus on three major policy developments occurring in the aftermath of the 2007-2009 financial crisis: bank capital regulation reform, monetary stimulus through quantitative easing, and the Troubled Asset Relief Program (TARP). The dynamics of bank liquidity creation differ considerably between small and large institutions. The level of bank capital requirements and the stance of monetary policy affect the liquidity creation of small and medium-sized banks, but not the largest institutions which control over 80% of the banking system’s assets. In contrast, TARP has only short-term effects on small and medium banks, and leads to a long-term decline in liquidity provision per dollar of assets of the largest banks.

The Use of Financial Contracting Arrangements to Constrain Rent-Seeking Behaviour of Managers of Subsidiary Firms: Evidence from UK and US Multinational Subsidiary Firms

We propose and test two hypotheses on how multinational (MNC) parents can use different financial contracting arrangements when financing their subsidiaries in order to constrain the rent-seeking behavior of subsidiary management. Furthermore, we also examine how the MNC parent can effectively enhance the monitoring of their subsidiaries by delegating this function to external financial institutions. One hypothesis analyses the use of short-term debt. The second hypothesis investigates the use of short-term external debt. Moreover, our analysis is enriched by investigating these two hypotheses in two different settings, namely by comparing between UK domestic and UK subsidiary firms and by comparing UK and US subsidiary firms. This enables us to measure the subsidiary effect and the location/distance effect. Using an unbalanced panel data of 11762 and 10096 firm-year observations we find that UK subsidiaries have more short-term debt and more short-term external debt compared to equivalent UK domestic firms and that US subsidiaries have more short-term debt and less short-term external debt compared to equivalent UK subsidiaries. Our results are both statistically and economically significant. We find these results in spite of our domestic firms being larger, being more profitable, having higher growth opportunities, and having higher tangibility, all factors which should translate in higher amounts of debt. Our results are robust, even after controlling for all the variables that have been found to affect leverage in the literature and when we use a matched sample approach to test our hypotheses. Furthermore, we also consider and rule out other possible explanations for our results.

The Costs of Arbitrage and Futures Market Trading Activity

Standardizing a futures contracts specifications to enhance its transfer-ability is problematic for any commodity whose cash market adopts relational contracting procedures. Standardization implies the contracts value cannot be completely determined by competitive arbitrage order flow, inhibiting the markets price discovery function, and leaving the futures price susceptible to manipulation. These effects may result in the markets failure. The model, based on the theory of storage, predicts that contracts with a higher spread-open position price volatility are more likely to contain a range of arbitrage indeterminacy, hence to experience difficulties in sustaining trading. The prediction is supported in an empirical examination of 104 US futures markets. The range of indeterminacy also increases the informational requirements of spread traders, reducing the effectiveness of spread arbitrage in maintaining the equilibrium intertemporal futures pricing relationship. Detailed evidence from 15 US contract markets demonstrates spread arbitrage is less effective in contract markets which subsequently fail.