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Vol. 1, Number 1, January/April 2003

Equity Valuation Effects of Foreign Capital Expenditures: The Role of Property Rights
Philip C. English II
Texas Tech University
William T. Moore
University of South Carolina
Abstract Ɩ Full Text
We examine common stock price reactions to offshore capital expenditures undertaken by U.S. multinational firms. Arguments based on optionality and expropriability lead to predicted price reactions conditioned on the degree of ambiguity in property rights enforcement in the host country. Our findings based on 159 foreign investment decisions reveal a significant influence of property rights ambiguity on the valuation effect. For investment in countries where property rights are enforced as reliably as in the U.S., firms experience an average increase in equity value of $41.83 million, or $1.614 per dollar invested. For countries with greater ambiguity in enforcement, firms experience an average loss of $39.28 million. Controlling for risk, leverage and differential taxes, we find that property rights ambiguity is the dominant explanatory factor for the market’s reaction to these decisions.

Corporate Leverage and Growth: A General Equilibrium Analysis
Dilip K. Ghosh
Universiti Utara Malaysia and Rutgers University
Abstract Ɩ Full Text
Within the framework of general equilibrium in which there are two corporations generating net earnings by efficient utilization of debt and equity capital it is demonstrated that optimum capital structure indeed exists for each firm and for the economy in competitive capital market. Since the result is strikingly different from the celebrated proposition on capital structure, an attempt is made to compare this analytical model with the classic paradigm of Modigliani and Miller. The effects of resource allocation are also examined and the existing thoughts on leverage are brought out in this work that subsumes growth and capital accumulation.

Exchange Listing Changes: Volatility and Liquidity Effects in Taiwan
Lloyd P. Blenman
University of North Carolina, U.S.A
Dar-Hsin Chen & Chang-Wen Duan
Tamkang University, Taiwan
Abstract Ɩ Full Text
We examine the volatility, liquidity and returns effects on stocks that switch exchange listings from the ROSE to the TSE in Taiwan from 1992 to 2000. Switching firms earn statistically positive returns before the transfer day and earn statistically negative returns after that day. We find evidence of improved liquidity, ownership dispersion and actual trading volume for such firms. The relative volatility of trading volume, compared against the firms’ own histories, and volatility of returns also increase after a listing change. We show that increased trading volume and liquidity are associated with the abnormal returns around the transfer date. We find no evidence that the past earnings of firms significantly affect the abnormal returns realized in the post-listing period.
Keyword: Volatility, liquidity, abnormal returns, Taiwan, and listing transfer.
JEL Classification: G15, G14

Predicting Implied Volatility in the Commodity Futures Options Markets
Stephen Ferris
Universiti of Missouri-Columbia
Weiyu Guo
Universiti of Nebraska- Omaha
Tie Su
University of Miami
Abstract Ɩ Full Text
Both academics and practitioners have a substantial interest in understanding interest in understanding patterns in implied volatility that are recoverable from commodity futures option. Such knowledge enhances their ability to accurately forecast volatility embedded in these high risk option. This paper examines option-implied volatility contained in the heavily traded September corn futures option contracts for ten-year period, 1991-2000. We also test whether a “weekend effect” exists in the market for this contacts. We evaluate the performance of various measures widely employed in the literature to estimate historical volatility. We further report the nature of profit from a short straddle strategy which seek to exploit differences between option-implied and historical volatility.
Keywords: commodity futurs option, implied volatility
JEL Codes: G10/G12/G13

Shifting From Real Estate to Non-Real Estate Lending Activity: Evidence on the Risk and Return Profiles of Thrift Institutions
Harold A. Black
The University of Tennessee
Elijah Brewer III
Federal Reserve Bank of Chicago
William E. Jackson III
University of North Carolina
Abstract Ɩ Full Text
In this paper we study the important period where many thrifts shifted from traditional mortgage products into consumer loan products. Specifically, we examine the impact of this move toward consumer banking on the risk and return profiles of thrift institutions. One reason given for this shift was the shrinldng margins associated with the traditional mortgage lending business of the thrift industry. Other reasons are increased competition from pure-play competitors and the increased merger activity among commercial banks enabling thrifts to market themselves as consumer banks. All of these reasons help to explain why the traditional thrift model became less viable.
What strategic changes are necessary for thrift institutions to survive and compete effectively in the today’s financial environment? Thrifts may choose to rearrange their product mix, expand their investment portfolio, manage the enterprise more efficiently, or some combination of these, strategies. One strategy chosen by certain thrifts has been to shift from the traditional model of a mortgage-oriented lender to that of a consumer bank.
Using market data from the first quarter of 1985 to the fourth quarter of 1992, we examine whether thrift organizations that followed this consumer banking strategy increased or decreased their overall exposure to risk. Employing the volatility of equity returns as our measure of total thrift risk, we find that thrifts that specialized in consumer lending exhibited lower risk while maintaining similar common stock returns, relative to thrifts that did not specialize in consumer lending. This suggests that thrifts employing a strategy of significantly diversifying their asset portfolios by specializing in consumer lending were rewarded by the equity market. Conversely, thrifts that invested only a small proportion of their assets in the consumer banking strategy did not receive a similar reward from the equity market for diversifying into consumer banking.

Nearest-Neighbor Forecasts of U.S Interest Rates
John Barkoulas
University of Tennessee
Christopher F. Baum
Boston College
Atreya Chakraborty
Cambridge, MA 02144

Abstract Ɩ Full Text

We employ a nonlinear, nonparametric method to model the stochastic behavior of changes in several short and long term U.S interest rates. We apply a nonlinear autoregression to the series using the locally weighted regression (LWR) estimation method, a nearest-neighbor method, and evaluate the forecasting performance with a measure of root mean square error (RMSE). We compare the forecasting performance of the nonparametric fit to the performance of two benchmark linear model: an autoregressive model and a random-walk-with-drift model. The nonparametric model exhibits greater out-of-sample forecast accuracy that of the linear predictors for most U.S interest rate series. The improvements in forecast accuracy are statistically significant and robust. This evidence establishes the presence of significant nonlinear mean predictability in U.S interest rates, as well as the usefulness of the LWR method as modeling strategy for these benchmark series

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