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Published Articles for Year 2007
Multinational Finance Journal, 2007, vol. 11, no. 1/2, pp. 1-31 | https://doi.org/10.17578/11-1/2-1
Rubi Ahmad , University of Malaya, Malaysia    Corresponding Author
Mohamed Ariff , Bond University, Australia
Michael Skully , Monash University, Australia

Abstract:
What was termed government-guided merger was a unique banking sector reform implemented in 2002 by the central bank of Malaysia guiding a larger number of depository institutions to form 10 large banks. This paper identifies the factors entering this massive merger exercise. Similar to the finding in bank merger literature, we find larger banks became acquirers. Also, low risk banks had higher probability of becoming an acquiring bank while high-risk banks became targets for takeover. Surprisingly managerial performance—financial ratios and changes in productivity reported as significant factors in prior market-based merger studies—was not significant in this study. Banks closely connected to government had greater chance of becoming acquiring banks while the reverse is true of target banks. These findings have not been reported in other studies of mergers, and are likely to be useful to central banks considering similar reforms.

Keywords : bank mergers; acquiring banks; managerial performance; government connections
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Multinational Finance Journal, 2007, vol. 11, no. 1/2, pp. 33-76 | https://doi.org/10.17578/11-1/2-2
Hubert Ooghe , Vlerick Leuven Gent Management School and Ghent University, Belgium    Corresponding Author
Sofie Balcaen , Ghent University, Belgium

Abstract:
Faced with the question as to whether failure prediction models can easily be transferred and applied to a new data setting, this study examines the performance of seven models on a dataset of Belgian company failures after re-estimation of the coefficients. The validation results indicate that some models are widely usable: they are strongly predictive when applied to the new data set. The Gloubos-Grammatikos models and Keasey-McGuinness appear among the best performing models, and also Ooghe-Joos-De Vos and Zavgren seem to be widely usable, respectively for failure prediction 1 and 3 years prior to failure. At the same time, the Altman and Bilderbeek models show very poor results when applied to the Belgian dataset. The best performing models seem to combine the right variables in an intuitively right sense and it appears that the combination of some types of variables generally leads to good predictive results. On the contrary, the estimation technique, complexity and number of variables do not explain the predictive performances.

Keywords : failure prediction model; international comparison; validation; annual accounts; re-estimation
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Multinational Finance Journal, 2007, vol. 11, no. 1/2, pp. 77-96 | https://doi.org/10.17578/11-1/2-3
Amin Mawani , York University, Toronto, Canada    Corresponding Author

Abstract:
This paper illustrates a methodology for estimating corporate marginal tax rates in the presence of tax losses, and within the context of Canadian tax law.

Keywords : taxation; marginal tax rates; tax losses; corporate tax rates.
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Multinational Finance Journal, 2007, vol. 11, no. 1/2, pp. 97-122 | https://doi.org/10.17578/11-1/2-4
Antonis Demos , Athens University of Economics and Business, Greece    Corresponding Author
George Vasillelis , Imperial College and Dresdner-Kleinwort-Benson Bank, U.K.

Abstract:
The stock market predictability has been a favorite topic of scholars and practitioners alike. It seems that some small predictability is present in all major stock markets worldwide. This predictability can be attributed to the risk premium structure and/or to inefficiencies present in the markets. This paper investigates the predictability of returns of some major shares listed in the London Stock exchange, using economic as well as accounting variables. We first measure the predictability of these variables by regressing individual stock returns on their corresponding accounting variables and the economic ones. Second, we estimate for the returns a seasonal latent factor model with time varying volatility. Provided that our measure of risk is an adequate one, the residuals of this estimation are free of the predictability of risk premium, and consequently one expects that any accounting and factor economic variables would have no predictive power. An LM-type test is developed and employed to indicate that indeed the U.K. stock market predictability is due to the risk premium structure, and the explanatory power of the variables considered here is due to them being an approximation of risk. However, when we perform the test jointly for all assets, we reject the zero predictability hypothesis at 5% but not at 1%.

Keywords : conditional heteroskedastic latent factor; LM test; stock returns
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Multinational Finance Journal, 2007, vol. 11, no. 1/2, pp.123-156 | https://doi.org/10.17578/11-1/2-5
Pascal Alphonse , Lille School of Management, University of Lille 2, France    Corresponding Author

Abstract:
This article examines whether mean reversion in stock index basis changes is actually induced by arbitrage trading, using intra-day arbitrage trade data. The empirical evidence suggests that arbitrage trading alone cannot account for all of the mean reversion in basis changes, even when infrequent trading is controlled for. This general mean reversion is consistent with mean reversion in liquidity and partial adjustment in the cash market. The behavior of arbitrageurs appears highly competitive. We find that on average the net arbitrage profit is at the competitive level of zero. Furthermore, it is suggested that some mispricing persistence may be related to time-varying liquidity. Accordingly, the results indicate that arbitrageurs pay attention to the depth of the market and value the early unwinding option

Keywords : market microstructure; arbitrage trading; liquidity; stock index futures; market efficiency
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Multinational Finance Journal, 2007, vol. 11, no. 3/4, pp. 157-178 | https://doi.org/10.17578/11-3/4-1
Manfred Frühwirth , Vienna University of Economics and Business Administration, Austria    Corresponding Author
Paul Schneider , Vienna University of Economics and Business Administration, Austria
Markus S. Schwaiger , Austrian Central Bank and Vienna University of Economics and Business Administration, Austria

Abstract:
The Amin/Bodurtha framework was developed for the valuation of American-style financial instruments driven by three sources of uncertainty— domestic interest rate risk, foreign interest rate risk and exchange rate risk. The model is not only appropriate for pricing a number of financial derivatives, but also, as we show, for valuing foreign investment projects in the presence of real options. In this paper we propose the most natural directly implementable specification within the Amin/Bodurtha framework that permits all combinations of up and down moves of these three risk factors without restricting volatility functions of the factors or correlations between them. By use of the depth-first algorithm, we can show that this specification is implementable at reasonable computation times

Keywords : American-style derivatives; multinational timing decisions; depth-first algorithm
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Multinational Finance Journal, 2007, vol. 11, no. 3/4, pp. 179-210 | https://doi.org/10.17578/11-3/4-2
Thomas C. Chiang , Drexel University, U.S.A    Corresponding Author
Cathy W.S. Chen , Feng Chia University, Taiwan
Mike K.P. So , The Hong Kong University of Science and Technology, China

Abstract:
This paper examines the hypothesis that both stock returns and volatility are asymmetric functions of past information derived from domestic and U.S. stock-market news. The results show the presence of negative autocorrelation, which is consistent with the dominance of positive-feedback trading behavior. By employing a double-threshold autoregressive GARCH model to investigate four major index-return series, the study finds significant evidence to sustain the asymmetric hypothesis of stock returns. Specifically, this paper finds that negative news will cause a decline in national stock returns that is larger than the gain caused by good news of an equivalent magnitude. This also holds true for the conditional variance. The return appears to be more volatile and persistent when bad news hits the market than when good news does.

Keywords : asymmetry; threshold GARCH; volatility; Bayesian estimation; posterior-odds ratio
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Multinational Finance Journal, 2007, vol. 11, no. 3/4, pp. 211-252 | https://doi.org/10.17578/11-3/4-3
Sabri Boubaker , Université Paris XII, Val de Marne, France    Corresponding Author

Abstract:
The purpose of this study is to provide an empirical analysis of the relationship between ownership structure of French firms and their value. Using data for 510 French publicly traded firms, the current study provides evidence in support of the entrenchment hypothesis. The results show that large controlling shareholders maintaining grip on control while holding only small fraction of cash flow rights are inclined to expropriate minority shareholders, which in turn detrimentally affects the firm’s valuation. The evidence also indicates that pyramiding is the main device set to unduly entrench the large controlling shareholder. Additional analysis reveals that the identity of the second largest controlling shareholder matters. Sharing control with a family constrains the largest controlling shareholder to steer clear of self-serving behavior. However sharing control with a widely held firm or with a financial institution fosters this self-serving behavior.

Keywords : ownership structure; corporate governance; minority expropriation
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Multinational Finance Journal, 2007, vol. 11, no. 3/4, pp. 253-285 | https://doi.org/10.17578/11-3/4-4
Erik R. Lidén , Göteborg University, Sweden    Corresponding Author

Abstract:
The paper analyzes stock-price reactions to stock recommendations published in printed Swedish media and also trading volumes at and around the publication day, bid/ask spreads, and the post publication drift in recommended stocks for the period 1995 – 2000. Its small size and limited number of actors makes the Swedish stock market an interesting comparison to the U.S. stock markets. The positive publication-day effect for buy recommendations was almost fully reversed after 20 days, supporting the price pressure hypothesis, and the effect for sell recommendations was negative and prices continued to drift down, supporting the information hypothesis. Analysts seem to hand their information to clients before publication, whereas no such information leaking pattern was observed for journalists. The impact to recommendations from journalists was significantly larger than analyst recommendations, implying a tradeoff between the size of pre-publication cumulative abnormal returns and the publication-day effect.

Keywords : price pressure hypothesis; information hypothesis; journalists; analysts
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Multinational Finance Journal, 2007, vol. 11, no. 3/4, pp. 287-322 | https://doi.org/10.17578/11-3/4-5
Haitham A. Al-Zoubi , United Arab Emirates University, UAE    Corresponding Author
Aktham Maghyereh , United Arab Emirates University, UAE

Abstract:
This paper re-examines the issue of mean reversion in stock prices by incorporating the structural break effect in the long horizon regression. Before adjusting for structural break, the paper finds that previous studies understate the evidence of mean-reversion. The understatement is mainly due to the clustering heteroskedasticity and autocorrelation in the overlapping returns. After adjusting for structural break(s), no evidence of predictability for value-weighted returns has been documented. However, stronger evidence of mean reversion in stock prices is documented for equally-weighted portfolios. The reverse effect of structural break can be explained by the switch to mean aversion in the last subperiod of value-weighted portfolios while no such switch in equally weighted portfolios.

Keywords : moving blocks bootstrap; mean reversion; structural change long-horizon regressions
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