Toan M. Pham

The Predictiveness of Bankruptcy Models: Methodological Problems and Evidence

This paper addresses three methodological problems in previous studies of bankruptcy models using MDA and logit/probit techniques: (i) the use of choice-based and equally distributed samples in model estimation and validation; (ii) the use of arbitrary cut-off probabilities; and, (Hi) the assumption of equal costs of errors in prediction tests. Corrected MDA and probit models are estimated for a sample of Australian companies from 1966 to 1986. In contrast to previous studies our results show that first, bankruptcy prediction models based upon publicly available financial statement infor Mation possess insignificant predictive power; and second, the variables chosen for such models are characterised by non-multivariate normality and heteroskedasticity.

Estimation of the term structure of interest rates: an international perspective

Abstract The overall objective of this paper is to introduce a new methodology of fitting the term structure of interest rates or zero-coupon yield curves. Toward this end, Chebyshev polynomials are incorporated into a quantity called the interest cumulator and then subjected to a minimization procedure to yield parameters that subsequently maps out zero-coupon yield curves. This methodology is applied to Australian coupon bond data to estimate such yield curves. An international perspective is then provided by a comparison and contrast with international evidence in this area. Several innovations of the paper are discerned: (i) while Chebyshev polynomials are well known in engineering and science, this paper is the first to use it to develop a method to fit zero-coupon yield curves from observed coupon paying bond prices; (ii) the estimation procedure based upon the logarithm norm is found to be superior to the standard form based upon the price norm; (iii) Chebyshev polynomials possess desirable properties that improve the econometrics of yield curve fitting; (iv) the empirical results reveal exceptional goodness of fit; and (v) these results are the first published Australian zero-coupon yield curves.

Ex-Dividend Day Behavior in the Absence of Taxes and Price Discreteness

We examine the ex-dividend day behavior in a unique setting where (1) there are neither taxes on dividends nor on capital gains, (2) stock prices have been decimalized, (3) dividends are distributed annually, and (4) we have data that enable us to examine bid–ask bounce effects. In this economy, any price decline that is smaller than the dividends cannot be attributed to taxes and price discreteness. Like previous studies, we find that the stock price drops by less than the amount of dividends and there is a significant positive ex-day return. By examining abnormal volumes around the ex-dividend day, we find no evidence of short-term trading. We are able to account for our results using market microstructure models. When the impact of market microstructure is taken into account, the ex-dividend drop is not significantly different from the value of the dividend paid.

Dividend stability in a unique environment

Purpose - This paper aims to examine the stability of dividend policy using a unique data set. Design/methodology/approach - The paper is based on the Lintner model that is used to test the dividend smoothing behavior. The specific econometric method used for panel data is Tobit regression. Findings - The evidence shows that Omani firms adopt a policy of smoothing dividends. This stability of dividends does not support the predictions suggested by the high bank leverage, absence of taxes, and the variability of dividend payments in Oman. Research limitations/implications - This study highlights the need for further research in order to examine whether these results have any effect on dividend initiations and omissions in Oman. Practical implications - The findings of this study show that there are differences in dividend policies between the Omani companies and those in developed markets. Potential investors in the Omani market should be aware about these differences in making their investment decisions. Originality/value - This paper examines stability of dividend policy in a unique environment where firms distribute almost 100 percent of their profits in dividends, firms are highly levered mainly through bank loans, there are no taxes on dividends and capital gains, and there is variability in cash dividend payments. These factors suggest a diminished role of dividend stability in Oman. It is an empirical issue to examine whether this is indeed true. The authors are not aware of any other study on dividend stability using data with these unique factors.

Determinants of US investment in real estate abroad

Abstract The purpose of this paper is to analyse and discuss those factors which are contributing to the expansion of US FDI in real estate. The empirical results of this model of FDI in real estate show that as US foreign financial liabilities increase, there is an accompanying increase in its FDI in real estate. This result is consistent with the study by Russekh, F., Ruffin, R., 1986. The role of foreign direct investment in US capital flows. Am. Econ. Rev. 76, 1127–1130, who showed that US FDI abroad is a substitute for US financial assets. Furthermore, the empirical results indicate that as returns from the US stock market decline, there are more incentives for US investors to invest in foreign real estate. The empirical results also show that US financial wealth, US FDI in manufacturing and banking and US bilateral trade contribute positively to the expansion of US FDI in real estate.

Some Estimates of Direct and Indirect Bankruptcy Costs in Australia: September 1978–May 1983

This study estimates some direct and indirect costs of bankruptcy in the Australian context from September 1978 to May 1983. The findings are: first, there was some degree of capital market inefficiency in the processing of infor Mation relevant to the bankrupt firms; second, bankruptcy costs, in particular indirect costs, were sizeable, approximately over 20% of firms value; third, the expected present value of bankruptcy costs greatly exceeded the tax benefits from leverage for thirteen of the fourteen firms under study; and, fourth, there was a negative relationship between corporate leverage and the probability of bankruptcy (or expected bankruptcy costs), implying capital structure decisions are affected by the prospect of bankruptcy costs.

Dividend smoothing when firms distribute most of their earnings as dividends

Due to its distinctive institutional background, Oman offers a valuable opportunity to investigate the stability of the dividend policy. In Oman, (1) there are no taxes on dividends, (2) firms are highly levered mainly through bank loans, (3) there is a high concentration of stock ownership and (4) there is variability in cash dividend payments. These factors suggest a diminished role of dividend smoothing in Oman. Our results show that Omani financial firms have erratic dividend policies. These results are inconsistent with the predictions suggested by the relatively weak corporate governance, government ownership and dividend signalling.

Modelling the Currency Forward Risk Premium: A New Perspective

In this paper we seek to develop a new approach to the time series analysis of foreign exchange risk premia. We do so by assuming a geometric Brownian process for the spot exchange rate and expressing the no-arbitrage spot-forward price relationship under the historical probability measure. We are thereby able to obtain a stochastic differential equation system linking the spot exchange rate, the forward exchange rate and the risk premium (modelled directly as a mean-reverting diffusion process) which we estimate using Kalman filtering techniques. We are able to use observations at a range of frequencies since the framework we set up does not involve overlapping observations. The model is then applied to the French Franc/USD, DEM/USD, GBP/USD, and Japanese Yen/USD exchange rates from 1 January 1990 to 31 December 1998. For all currencies we find evidence that the forward risk premium is stationary and exhibits substantial positive time variation.

The Interaction of the Financing and Investment Decisions: Preliminary Results in the Australian Context

This paper investigates the presence of the interaction of investment and financing decisions in Australian firms. Using simultaneous equations incorporating the variables of investment, dividend, and new debt issue, interactive effects are found for two sub-periods.

Models of Inflation Forecasts: Some Australian Evidence

This paper provides Australian evidence of the comparative forecasting power of the three inflation models (interest rate, time series, and survey forecasts). In particular, it examines the rationality (in the Muthian sense) of the survey forecasts. The following results are obtained: first, the survey forecasts are rational; and, second, the survey has the highest forecasting power.