Timo P. Korkeamaki

What drives stock market growth? A case of a volatile emerging economy

ABSTRACT We study the determinants of the explosive stock market growth and increased foreign portfolio investment in Pakistan. Our results indicate that in contrast to evidence from developed markets, the aggregate stock returns are not driven by macroeconomic fundamentals in Pakistan. Moreover, foreign portfolio investors do not tend to react to changes in economic variables in Pakistan. As fundamentals fail to affect stock returns in Pakistan, they may be based more on speculative motives. Our results suggest that in the absence of a strong institutional and regulatory framework, economic policies have only a limited effect on stabilizing an emerging market.

Valuation of Innovation and Intellectual Property: The Case of Iphone

We use data on both daily stock returns and internet activity to estimate the value of Apples iPhone and related intellectual property. We find the private value of iPhone to be 10%–13% of Apples market cap. Grounded in the resource‐based theory, we argue that much of this value stems from Apples managerial capabilities to capitalize on the product, as proprietary technology explains about 25% of the private value. This effect arises from patent applications, rather than grants or trademarks. Our analysis of the global supply chain of iPhone suggests that besides Apple, firms in the supply chain are able to capture very limited value from iPhone. These results support the theory of dynamic capabilities, maintaining that a firms unique dynamic managerial and organizational capabilities are crucial for value creation in globally competitive innovative industries.

Institutional Investors and Foreign Exchange Risk

We study institutional appetite for stocks with FX exposure, and find variation among institution types. Institutions that are by their nature more likely to engage in active management of foreign exchange risk in their portfolio, namely mutual funds and hedge funds seek stocks with foreign exchange exposure. Institutions that are constrained by regulation tend to avoid foreign exchange exposure.

The Effects of the Euro on Interest Rate Sensitivity

Introduction of the euro altered the home currency financing markets for the euro zone firms in an unprecedented way. I study the consequences of the launch of the euro on interest rate sensitivity of the European stock markets, and find that while stock returns in most countries in the Western Europe were negatively correlated with interest rate changes prior to the euro, that correlation has disappeared since 1999. My evidence is consistent with hypothesis that recent growth in European corporate bond markets has enabled firms to better manage their interest rate risk.

Reforming corporate law in an emerging market

A sweeping and protracted reform of corporate law took place in Finland in the 1970s. We document how the reform brought significant improvements to investor protection and tightened disclosure rules at the cost of increasing the workload in corporate reporting. To study the economic consequences of the reform we develop a simple coordination game where the effects of investor protection on corporate valuation vary with equilibria. Then, using firm‐level daily stock return data, we find that the Finnish stock market generally reacts negatively to news of increased investor protection and workload, whereas news of delays in implementation of reform generate largely positive market responses. These results raise the question of whether stronger investor protection and greater transparency unambiguously promote development of stock markets.