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This section contains information about articles under review and waiting for publication in next issues of the journal.

The interaction between individual and industry momentum
Hsiao-Hung Chu, Ph.D. student, Department of Business Administration, National Cheng Kung University, Taiwan
Min-Hsien Chiang, Professor, Institution of International Business, National Cheng Kung University, Taiwan


Abstract. In a developing country in which the majority investors are individuals, the stock market is a contrarian one. In contrast, in a developed country in which the majority investors are institutions, the stock market is a momentum one. Furthermore, the industry type is important in explaining the momentum phenomena, with different effects in momentum and contrarian countries. Specifically, industry factors will decrease the momentum phenomenon and increase the contrarian one. The investment portfolios presented in this work are developed by buying individual stocks which are part of a winning industry in a contrarian country, and individual stocks which are part of a median industry in a momentum country, thus earning more profits.


Ranking of mutually exclusive investment projects - how cash flow differences can solve the ranking problem

Christian Kalhoefer, Head of the Department of Finance, The German University in Cairo, Egypt

Abstract. The discussion about the best method to be used in capital budgeting has been long and intensive. Differences between Net Present Value and Internal Rate of Return seem to cause everlasting problems, while especially the Internal Rate of Return often is neglected as an appropriate measure. A famous example of the problems caused by the different approaches is the ranking of mutually exclusive projects. The paper explains the reason for these differences and states how this problem can be solved. This is, other than in previous contributions, done without introducing new and more complicated measures, but by explaining the nature of and differences between Net Present Value and Internal Rate of Return.


Bank lending channel in China's monetary policy transmission mechanism: a VECM approach
Shuzhang Sun, Lincoln University, New Zealand
Christopher Gan, Lincoln University, New Zealand
Baiding Hu, Lincoln University, New Zealand


Abstract. This paper tests the existence of the bank lending channel to explain the monetary policy transmission in China form 1997Q1 through 2008Q4. To disentangle the bank loan supply and bank loan demand effects of monetary policy movement, this study uses a VECM model to test for a number of exclusion and exogeneity restrictions on the existing cointegration relationships among the variables. In the identified loan supply equation, loan supply is negatively related to required reserve ratios and official one-year lending rate in the long term. This confirms the existence of a lending channel for monetary transmission in China. The VECM's short-term dynamics show that the short-run disequilibria in the loan supply are corrected through changes in the lending rate, suggesting that monetary policy plays a role in restoring equilibrium in the credit market by affecting the official commercial bank lending rate. The result shows under a "window guidance" system bank lending channel plays an important role in China's monetary policy transmission.


Pricing interest rate derivatives under different interest rate modeling: a critical and empirical comparison

Antonio De Simone, Department of Mathematics and Statistics, University of Napoli Federico II, Faculty of Economics, Napoli, Italy

Abstract. This paper deals with issues related to the choice of the interest rate model to price interest rate derivatives. After the development of the market models, choosing the interest rate model is become almost a trivial task. However their use not always is possible, so that the problem of choosing the right methodology still attains.
The aim of this paper is to compare some of the most used interest rate derivatives pricing models to understand what are the issues and the drawbacks connected to each one.
It is shown why and in which cases the use of each model does not give appreciable results and when, on the other hand, the opposite occurs. More exactly, it will be shown that the lack of data on the implied volatilities or the inefficiencies in the financial market can prevent the use of the market models, because a satisfying calibration of the interest rate trajectories cannot be guaranteed. Moreover it is shown how the smile effect in the interest rate options market can affect the price provided by each model and, more exactly, that the difference between the price provided by the models and the observed market prices gets larger, as the strike price increases.


Short sales constraints and stock price behavior: Evidence from the Taiwan Stock Exchange
Feng-Yu Lin, Graduate School of Finance, National Taiwan University of Science and Technology, Taipei, Taiwan, R.O.C.
Cheng-Yi Chien, Department of Finance, Feng Chia University, Taichung, Taiwan, R.O.C.
Day-Yang Liu, Graduate School of Finance, National Taiwan University of Science and Technology, Taipei, Taiwan, R.O.C.
Yen-Sheng Huang, Department of Business and Management, Ming Chi University of Technology, Taipei, Taiwan, R.O.C.

Abstract. This paper examines the impact of short sales constraints on stock price behavior using data from the Taiwan Stock Exchange. The data involves 33 constituent stocks of the Taiwan 50 index fund over the 480 days in both the pre- and post-period surrounding the lift of the uptick rule effectively on May 16, 2005. The results indicate that the R2 estimated from the market model is significantly higher in the pre-period than that in the post-period. Similarly, the cross-autocorrelation between the individual stock returns and the lagged market returns is significantly higher in the pre-period than that in the post-period. The results are consistent with the delayed price discovery hypothesis in that short sales constraints delay the incorporation of information into securities prices.

Moreover, there is no significant difference in the 3-day cumulative abnormal returns between the pre- and the post-period following large price declines. The results do not support the overvaluation hypothesis which predicts a significant overvaluation in the pre-period when the uptick rule is imposed. However, the empirical results indicate a significantly negative overnight abnormal return following the large price decline in the pre-period than that in the post-period, followed by a significantly positive trading-time abnormal return in the pre-period than that in the post-period. The results are consistent with the hypothesis that investors overreact to bad news in the presence of short sales constraints, followed by a price reversal in the subsequent trading-time period.


Employees, firm size and profitability in U.S. manufacturing industries
John R. Becker-Blease, College of Business, Oregan State University, Corvallis, Oregon, USA
Fred R. Kaen, Whittemore School of Business and Economics, University of New Hampshire, Durham, USA
Ahmad Etebari, Whittemore School of Business and Economics, University of New Hampshire, Durham, USA
Hans Baumann, H.B. Services Partners, LLC, USA

Abstract. We examine the relation between firm size and profitability within 109 SIC four-digit manufacturing industries. Depending on our measure of profitability, we find that profitability increases at a decreasing rate and eventually declines in up to 47 of our industries. No relation between profitability and size is found in up to 52 of our industries. These two categories account for 97 of our 109 industries. Profitability continues to increase as firms become larger in up to 11 industries. Hence, the relation between size and profitability is industry specific. But, regardless of the shape of the size profitability function, we find that profitability is negatively correlated with the number of employees for firms of a given size measured in terms of total assets and sales.
These results are puzzling in the context of work by others who report that common stock returns are negatively correlated with size when size is measured by the market value of a company or with the work of those who argue that size is a proxy for risk. Interpreted against these works, our findings may mean that large firms earn excess returns, that small firms fail to earn their cost of capital, or that accounting returns simply behave differently than market returns with respect to firm size.

Evans and Archer - forty years later
Hicham Benjelloun, Assist. Prof. of Finance, Qatar University, Qatar


Abstract. The question of how large a diversified portfolio needs to be to significantly reduce risk is an important question in the academic field of finance. The first paper devoted to this question was Evans and Archer (1968). Later research has criticized the outcome and methodology of this paper, claiming that alternative weighting schemes or other measures of risk should have been considered. I argue that Evans and Archer's paper is still relevant. I use two weighting schemes, two measures of risk and different time periods to find that 40-50 stocks is all that is needed to achieve diversification in the US stock market.


The failure of BRIC equities as a diversifying agent for US investors: a note
Vrishali Javeri, University of Massachusetts, Amherst, USA
Robert A. Strong, University of Maine, USA

Abstract. Investors widely assume that they enjoy risk reduction benefits whenever they hold securities whose returns are less than perfectly correlated. Because of their historically low correlation with US markets, equity shares in the emerging markets are alleged to have especially powerful diversification potential. In fact, however, the volatility of a two-security portfolio can only be reduced below that of the more stable component when the securities have a correlation coefficient less than the ratio of the two individual volatilities (with the larger in the denominator). A portfolio is most likely to fail to meet this criterion if it contains both stable and very volatile securities because the ratio of their standard deviations will be small. To illustrate this phenomenon, our paper focuses on a subset of the emerging markets, the so-called BRIC countries: Brazil, Russia, India, and China. When combined with a US portfolio, the higher volatility of the BRIC country indexes results in a US investor finding no portfolio with a volatility less than that of a 100% domestic portfolio. For a resident of one of the BRIC countries, however, there are benefits to diversification across the BRIC markets.


How Growth Opportunities are related to Corporate Leverage Decisions?
Hayat M. Awan, Institute of Management Sciences, BZ University, Multan, Pakistan
M. Ishaq Bhatti, School of Economics and Finance, Faculty of Law and Management , La Trobe University, Melbourne, Australia
Raza Ali, Institute of Management Sciences, BZ University, Multan, Pakistan
Azeem Qureshi, Institute of Management Sciences, BZ University, Multan, Pakistan

Abstract. Growth opportunity has been considered as a significant determinant of capital structure. The literature generally favors the negative relationship between the growth opportunities and leverage of firms. However, another school of thought finding such a relationship to be positive also exists. Purpose of this study is to find out how growth opportunities in Pakistan are related to leverage decisions for the listed manufacturing corporate concerns. We use financial data from a sample of 110 manufacturing companies listed on Karachi Stock Exchange (Pakistan) for 15 years (1982-1997) from 9 different sectors along with estimation of fixed-effects regression analysis to assess the subject relationship. We find a positive relationship between the growth opportunities and debt levels of the corporate firms of Pakistan. This positive relationship is highly significant for the segments of firms with ‘low' and ‘medium' growth opportunities. The reason for this finding may be that the owners of these firms view the available growth opportunities as unsustainable and more risky and intend to pass on that higher risk to the creditors. The socio-economic and political networks of such owners may help provide them easy access to credit market resulting into high debt level. Consequently, they might delay issuance of new common stocks to be issued at the future higher prices if the risky investment succeeds. We also observe a general tendency of the credit market, having limited options for profitable credit, to finance companies with little better future prospects. Moreover, unsustainable growth opportunities in economy, less developed capital markets, a high number of firms with low growth in Pakistan (in real terms) and their limited goodwill among the investors and general public (restricting them to issue shares of common stock) may also be the underlying reasons behind the corporate behavior causing such an overall positive relationship. Another important finding of this study is that industry type is also a relevant variable which affects the relationship between growth opportunities and leverage.

The equity premium puzzle and inflation-protected securities

Avner Bar-Ilan, Department of Economics, University of Haifa, Israel

Irina Potashinski, Department of Economics, University of Haifa, Israel


Abstract. We present data from six countries whose governments issued CPI-indexed bonds. We evaluate the equity risk premium where various bonds serve as the riskless asset. We find that the premium of equity relative to indexed bonds is large and the real return on bonds is low only during periods of disinflation.


Illicit accounting practice and corporate earnings irregularities

W. David Allen, Assoc. Prof. of Economics, Department of Economics and IS, College of Business Administration, University of Alabama, USA
Atul Rai, Assist. Prof. of Accounting, School of Accountancy, W. Frank Barton School of Business, Wichita State University, USA


Abstract. The paper develops a static model of earnings manipulation as illicit activity conducted by an accounting executive, such as a firm's chief financial officer or chief executive officer. In the model, the utility-maximizing executive decides upon an allocation of time, a costly resource, to the commission of licit and illicit accounting activity based on the expected benefits and costs of these actions. Illicit accounting practices may benefit the firm's profitability and possibly the executive's compensation but also incur risks of detection and subsequent sanctions, including jail time; the expected cost of the illicit activity potentially acts as a deterrence to such practices. We investigate comparative-static relationships that formalize how the individual's illegal activity might increase or decrease given variation in key exogenous factors, some of which may reflect official policy or procedure. Our analysis provides a more concrete conceptual foundation for empirical analysis than typically observed in the earnings-management literature.

Speculation and Nonlinear Price Dynamics in Commodity Futures Markets
Christof Sigl-Grub, Competence Center Commodity Investments, Department of Finance, Accounting, and Real Estate, European Business School, Germany

Dirk Schiereck, Department of Business Administration, Law and Economics, Tech University Darmstadt, Germany


Abstract. In this article we present theoretical considerations and empirical evidence that the short-run autoregressive behaviour of commodity markets is not only driven by market fundamentals but also by the trading of speculators. To empirically test this, we individually fit smooth transition autoregression models to commodity price series and find in many cases that the autoregressive behaviour of price changes turns more positive as the relative size of speculative positions increases. This is especially pronounced for recent years. We propose as an explanation a growing fraction of speculators who engage in momentum trading.
 

Profitability and causality of order imbalance based trading strategy in hedge stocks
Yong-Chern Su, Department of Finance, National Taiwan University, Taiwan
Han-Ching Huang, Department of Finance, Chung Yuan Christian University, Taiwan
Chien-Chang Chiu, Department of Finance, National Taiwan University, Taiwan

Abstract. For aggressive investors, their hedging actions (rotation) tend to result in abrupt price soaring and subsequent reversal in a short period. We try to screen the potential hedge targets and develop the associated trading strategies. The samples with maximum loss below 5% reveal a paradox of high potential upside and low downside. We find that hedgers seem to prefer specific sectors when screening potential rotation targets. We also document that the practice of "clearing the floats" plays a very important role in analyzing the waiting period for hedges and most price jumps, and also reversals are associated with volume augmentation.


Will Mutual Fund Managers Follow the Leaders?

Mei-Chen Lin, Department of Finance, National United University, Taiwan
Li-Ching Ma, Department of Information Management, National United University, Taiwan


Abstract. After controlling for stock returns and turnover, empirical evidence shows that the changes in portfolio weights of the leaders were an important determinant of the holding changes for the followers in the subsequent month. However, the leading funds tended to avoid the stocks held by the follower funds. The portfolio strategy that follows the transactions of the
best funds did not provide positive returns in subsequent periods.


The bank: Controller or predator in the governance of nonfinancial firms?
Pablo de Andrés Alonso, Ph.D., Assoc. Prof. of Financial Economics, University of Valladolid, Spain
Valentín Azofra Alenzuela, Ph.D., Prof. of Financial Economics, University of Valladolid, Spain
Fernando Tejerina Gaite, Ph.D., Assoc. Prof. of Financial Economics, University of Valladolid, Spain

Abstract. This paper deal with one of the most interesting topics related with corporate governance: the role of the banks in the governance of non financial firms and its consequences on the value creation process. We explore the impact of bank participation in shareholding, board of directors, and financing on the governance of nonfinancial listed Spanish firms. We show that governance behavior depends on the bank's position of power within the firm, and that when banks participate in a firm where a nonbank controlling shareholder holds different control and cash flow rights, banks act as an efficient control mechanism. But if the controller is the bank and has the capacity to expropriate, then it becomes a predator. This opportunistic behavior is lessened when the bank's position as shareholder is combined with its interests as a creditor.

Earnings management and audit adjustments: an empirical study of listed companies
Oriol Amat, Prof. of Financial Economics and Accounting, Universitat Pompeu Fabra, Spain
Oscar Elvira, Universitat Pompeu Fabra, Spain

Abstract. Doubts about the reliability of a company's qualitative financial disclosure increase market participant expectations from the auditor's report. The auditing process is supposed to serve as a monitoring device that reduces management incentives to manipulate reported earnings. Empirical research confirms that it could be an efficient device under some circumstances and recognizes that our estimates of the informativeness of audit reports are unavoidably biased (e.g., because of a client's anticipation of the auditing process). This empirical study supports the significant role of auditors in the financial market, in particular in the prevention of earnings management practice. We focus on earnings misstatements, which auditors correct with an adjustment, using a sample of past and current constituents of the benchmark market index in Spain, IBEX 35, and manually collected audit adjustments reported over the 1997-2004 period (42 companies, 336 annual reports, 75 earnings misstatements). Our findings confirm that companies more often overstate than understate their earnings. An investor may foresee earnings misreporting, as manipulators have a similar profile (e.g., more leveraged and with lower sales). However, he may receive valuable information from the audit adjustment on the size of earnings misstatement, which can be significantly large (i.e., material in almost all cases). We suggest that the magnitude of an audit adjustment depends, other things constant, on annual revenues and free cash levels. We also examine how the audit adjustment relates to the observed market price, trading volume and stock returns. Our findings are that earnings manipulators have a lower price and larger trading volume compared to their rivals. Their returns are positively associated with the magnitude of earnings misreporting, which is not consistent with the possible pricing of audit information.

Testing of the international capital asset pricing model with Markov Switching Model in emerging markets

Turhan Korkmaz, Department of Business, Zonguldak Karaelmas University, Turkey
Emrah Ismail Cevik, Department of Business, Zonguldak Karaelmas University, Turkey
Serhan Gurkan, Department of Business, Zonguldak Karaelmas University, Turkey


Abstract. The purpose of this article is to examine the relationship between emerging markets and world index and to evaluate the risk of these countries. For this purpose Markov switching model (MS) is used to test ICAPM. The data range of 23 emerging markets that focused on is between January 1995 and April 2009. Empirical results obtained by using likelihood ratio (LR) test shows that MS-ICAPM is preferable to the linear model. The estimated beta coefficients (?) from linear model are between of the estimated beta coefficients (?0 and ?1) from MS-ICAPM. These findings suggest that risk can be varying according to the current regime. With this perspective, it is clear that the empirical results in this study would be extremely useful for investors who invest in different countries' stock market.
 
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