This paper discusses important features of financial dollarization and its implications for the macro economy and financial sector deepening. Despite the need to slow down the rate of inflation and keep exchange rates under control, to achieve growth and economic development, monetary policies may permit increases in the base money to keep pace with real GDP growth. In heavily dollarized economies, during periods of sharp devaluations of the domestic currency, financial assets and liabilities shift toward foreign currency, exacerbating downward pressure on the exchange rate. When central banks face pressures to keep the exchange rate steady in nominal terms, interest rates in the domestic currency are set at levels substantially higher than those on dollar assets. In such states of the world, banks prefer to lend to the government sector at these higher rates than to the private sector. Although private firms may benefit from lower rates on dollar loans, they also face significant exchange rate or currency risk due to the currency mismatch emerging from their dollar debt while their receivables may tilt toward domestic currency denominated instruments. This weakens their balance sheet, which in turn increases the exposure of the banking sector to a variety of risks.

We investigate the effect of the power of creditors, property rights protection, and institutional quality, on bank profits using a panel of 498 banks from 46 countries. Results show that better institutions and stronger property rights protection reduce bank profits, while stronger power of creditors drives up bank profits significantly. Results imply that better institutions and enhanced property rights protection lead to greater flow of credit allowing firms and investors to undertake more profitable ventures. By extension, stronger creditor rights erect steeper barriers to external finance for firms and investors. National indicators of economic freedoms may be more important to lowering the spread than strict creditor rights. Seemingly, credit markets fail when economic institutions fail or when governments intervene into these markets in ways that impede the safety and soundness of financial transactions and private contracting.

This study analyzes how prevailing institutional arrangements i.e., property rights, contracting rights, political institutions, and corporate governance practices affect privatized firms’ performance, capital markets development, and economic growth. Most of the studies surveyed show that privatization enhances privatized firms performance, efficiency, and profitability, which percolates to economic growth. Privatized firms performed better in countries with better regulatory and legal frameworks. Partial privatization may be beneficial in countries with weak institutions, namely, the French civil law countries. The stronger the economic and the governing institutions, the easier it is for privatized firms to thrive and contribute to economic growth. Overall, privatization allows firms to achieve improved efficiency while driving the development of the financial sector.

The Dim Sum bond market in Hong Kong, which allows China to regulate the amount of offshore yuans that flow back into the mainland, has grown steadily since its inception in 2007 and is expected to surpass in 2013 the threshold level that would attract insurers and long-term issuers to the market. Yet, the market has not matured sufficiently relative to the yuan deposit market in Hong Kong that has grown at a much faster pace on account of trade liberalization and the use of yuans in China's international trade settlements. Even though Hong Kong has fulfilled its role as an offshore currency center for the yuan, it is being challenged by Taiwan, Singapore, and London in terms of being the premier location for the issuance of yuan-denominated bonds outside of Mainland China.

This paper studies pension fund design in the context of investment in the debt and equity of a firm. We employ a general equilibrium framework to demonstrate that: (i) the asset location ‘puzzle’ is purely a partial equilibrium phenomenon, conceived in a risk neutral setting, that disappears with the introduction of sufficient risk aversion; (ii) the inability of policy makers to manage an economy with multiple firms yields a mixed equilibrium, where bonds are observed in both taxable and tax-deferred accounts; and (iii) the Pareto-efficient pension plan comprises of a defined benefit plan.

Pledging collateral to secure loans is a prominent feature in financing contracts around the world. Existing theories disagree on why borrowers pledge collateral. It is even more challenging to understand why in some countries collateral coverage exceeds, for example, 300% of the value of a loan. This study looks at the association between collateral coverage and country-level governance and various institutional proxies. It investigates the economic implications of steep collateral coverage and sketches policy options to lower ex-ante asymmetric information and ex-post agency problems. Within this framework, should a lender collect the debt forcibly on default and liquidated assets fetch prices below outstanding loan values, the lender's loss is covered through credit insurance, which would significantly reduce the need for steep collateral coverage. This proposal may increase level of private credit, investment and growth; particularly, in a number of developing countries where collateral spread is the main inhibitor of finance.

This paper presents a framework for understanding the interactions between political and legal institutions, property rights protection, and their implications for financial development. Whereas the literature has answered questions on why some countries lag behind in terms of financial and economic development, the current study suggests how to get around some institutional attributes to spearhead financial intermediation and economic growth through a set of institutional, information, and banking reforms. It finds little support that common law legal heritage is more suitable than French civil law for some key features of financial development. It concludes that types of institutional and market reforms are more relevant to financial intermediation than legal systems. It proposes some ways forward to increase financial intermediation; and expects, over the long run, the proposed approach to financial development to be beneficial for a number of developing countries.

Research shows that by enhancing visibility, advertising improves stock liquidity and returns. Unlike stock holders, bond holders may view advertising skeptically. Without proven effectiveness in improving revenues, large pre-interest advertising expenditures can be seen as eroding a firm's ability to meet its debt service obligations. We find that although greater advertising by a firm improves liquidity of its bonds in the market, it does not lower the firm's cost of debt. However, firms with ineffective advertising experience reduced bond market liquidity and a higher cost of debt. Without a real positive economic impact, advertising has little or no value for bond investors.

We explore how bond investors view corporate cash distributions through dividends and how that view influences corporate cost of debt. Explaining between 45 and 67 percent of variance in credit spreads at the time of issuance, our model reveals a non-linear association between dividend payouts and investment return expected by bondholders. In particular, while bondholders view cash disbursements in small amounts as a positive signal, large dividend payouts are viewed negatively. Our results thus provide support for both the signaling hypothesis and for the agency-cost-of-debt hypothesis. The results are robust even after controlling for firm size, growth opportunities, profitability, leverage, business risk, asset tangibility, and term structure. Exploiting the 2003 dividend tax cut as an exogenous shock, we demonstrate that our results are not vulnerable to endogeneity problems. Finally, we find no evidence of corporations timing the payouts strategically to influence the cost of debt.

Introduction In a world of increased uncertainty about the future value of exchange rates and increased visibility of foreign exchange gains and losses, it is not surprising that both commercial and financial firms have become more concerned about minimizing foreign exchange risks. Once a company becomes involved in international trade, be it the formation of a foreign subsidiary or simply the import or export of goods, it subsequently becomes subject to foreign exchange risk exposure. Foreign exchange risk exposure can be broken down into three categories for further development; these are real economic exposure, translation exposure, and transaction exposure.

The market for mergers and takeovers, often referred to as the market for corporate control [Manne (1965)], has always attracted the attention of investors and researchers because takeovers represent corporate investment decisions on a scale several times larger than the normal, ongoing, growth‐maintaining capital outlays by the typical value‐maximising firm. Although the theoretical justifications for such corporate actions are reasonably well understood, the true motives for the mergers and the strategies adopted by acquiring firms to consummate them can be complex and diverse in scope. Corporate acquisitions can therefore have widespread effects on the wealth of various groups of agents involved in the market for corporate control.

This paper studies optimal real estate organizational forms as a means of enhancing real estate values in the ongoing subprime crisis. We model the organizational response to stakeholder conflicts and regulatory changes to show how they evolve to an optimal form and undertake an optimal capital structure to enhance the welfare of investors. Using the examples of the REIT and RELP organizational forms, we show how the rivalry between taxable and institutional investors shapes the UPREIT form. We employ a two-period partial equilibrium model to demonstrate that UPREITs adapt to regulatory changes by (i) meticulously acquiring a hybrid form that contains the desirable features of both REITs and RELPs, and (ii) efficiently trading off debt claims between their constituent investor bases. This adaptation enhances welfare by mitigating administrative costs, agency costs, bankruptcy costs, illiquidity costs and taxes.

The paper extends the recent research on corporate non-market actions (Fernández & Usero, 2010, and Usero & Fernández, 2009). Specifically, we study whether corporate governance, in terms of managerial entrenchment, determines the choice and degree of lobbying engagements as a non-market strategy and with what impact on firm value. The results indicate that firms with more entrenched management have a greater tendency to engage in lobbying activities. Within the group of firms that lobby, there is a negative relation between the degree to which management is entrenched and lobbying intensity. In addition, there is a positive relation between lobbying intensity and value added by lobbying firms. Overall, the evidence suggests that corporate lobbying is not agency driven and may, in fact, create value.

We study the difference between U.S.-based multinational corporations (MNCs) and U.S. domestic corporations (DCs) in terms of management efficiency with return on capital as the measure of management efficiency. We use a fixed effect model to account for heterogeneity and/or the time-specific effect and find that MNCs have lower management efficiency than DCs, which holds after we control for the effects of firm size, GDP growth rate, and growth opportunity on management efficiency. One reason for the low efficiency is the MNCs’ inability to manage their assets well relative to DCs. We also find that there is an inverted U-shaped relationship between return on capital and degree of internationalization, which implies an optimal degree of internationalization. Our result does not confirm the recently proposed three-stage model.

The effects of overseas expansion on shareholders wealth were studied in this paper. The results for a sample of 179 announcements of overseas expansion showed positive and significant cumulative average residuals (CARs). The results for initial overseas expansion were more positive than for subsequent overseas expansion. Five different methods of expansion were examined. Announcements of exports results in the highest, positive and significant CARs. CARs for licensing, opening an overseas subsidiary and acquiring a growing concern were marginally significant, while CARs associated with joint venture announcements were positive but insignificant. The results did not indicate that any differences were associated with the degree of industrialization of the host country.

This paper examines the momentum returns from portfolios constructed using the NYSE-AMEX stocks. Following the methodology of Jegadeesh and Titman (1993), we form the momentum portfolio by going long on winners, defined as securities with returns in the top decile of previous six-month cumulative return, and short on losers, defined as securities with returns in the bottom decile of previous six-month cumulative return. Consistent with previous literature, we find that momentum portfolios earn significantly higher returns in the six-month period following the formation period. But, we also find that loser portfolios earn returns significantly greater than zero during this period. Further examination of the returns to the momentum portfolio during up and down markets and during each month of the year reveal a strong seasonality in these returns. Specifically, we find higher returns to winners occur primarily in down markets and a significant reversal in momentum returns in observed in the month of January. These empirical results support neither the under reaction nor the overreaction hypothesis. Further research is needed to examine the sources of these momentum returns.

Evaluation of market reaction to regulatory accounting events such as the accounting standards policy setting process has commonly utilized event study methodology. However, this methodology quite often has resulted in inconsistent and conflicting findings due to partial anticipation of the events being examined and due to nonstationarity of the parameters in the estimation model. A multi-regime market model based methodology that allows for the proper treatment of these problems is proposed and is illustrated with an application in the policy setting process for SFAS No. 8.

The effects of multinationalism on the riskiness and capital structures of U.S. banks are examined in this paper. For the overall sample, there are no changes in various measures of risk when U.S. banks announce their decisions to expand in foreign markets. However, significant decreases are observed in the total risk and unsystematic risk measures for banks announcing expansion into non-risky developing countries and into risky developing countries. These results provide evidence on the tjsk reduction benefits of international diversification. A statistically significant increase in the debt ratios for the overall sample is also observed. This result may indicate managerial efforts to capitalize on the risk reduction benefits of foreign expansion, and to control agency costs of equity.

The paper offers a comprehensive and integrative review of the current literature on corporate political strategies sharing common boundaries with finance, accounting and corporate governance. While there appears to be a heightened interest among researchers in studying the value relevance of corporate political strategies [Chen et al. (2010), Goldman et al. (2009), Cooper et al. (2010), Richter et al. (2008), Hochberg et al. (2007), de Figueiredo and Edwards (2007), Faccio and Parsley (2009), and Myers (2009) among others], interestingly, finance and corporate governance scholars have yet to embrace the research on political strategies as part of their mainstream research. Taking a micro perspective at the firm level, we review the major scholarly works in the economics, finance and management disciplines with respect to the firm attributes shaping the corporate decision to engage politically, modes of corporate political participation, and the value impact of corporate political activity. The overarching theme of the review article is to integrate diverse - political economy and management - paradigms of corporate political participation and rationalize the value relevance within the corporate finance and corporate governance perspective. The paper also presents focused preliminary evidence on the determinants and value impact of corporate lobbying strategies. For the sample of 5452 firm-year observations, the results indicate that while for large firms corporate lobbying may not be agency driven and may create value, for small firms, despite low shareholder rights associating with higher lobbying engagements, lobbying still relates positively to value added.

This paper examines the probability of currency crises using a signal approach and a multivariate probit model. The results indicate that the signal approach can provide an effective warning system despite its nonparametric nature. The top three indicators that are useful in anticipating crises include international reserves, stock market indices, and gross domestic product (GDP), in that order. Excess money balances and the ratio of domestic credit to GDP are significant and have positive correlation with the probability of a crisis. The growth rate of exports and the stock indices are significant and have a negative relationship with a crisis probability. Overall, the results indicate that government policies, the macroeconomic environment, and investor panic/self-fulfilling expectations all play a role in the making of a crisis.