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1 – 10 of over 25000Besnik Krasniqi, Nick Williams, Iraj Hashi, Fisnik Reçica, Ermal Lubishtani and Liridon Kryeziu
This paper aims to examine the influence of formal and informal institutional quality on country-level variations in foreign equity shares in transition economies (TEs).
Abstract
Purpose
This paper aims to examine the influence of formal and informal institutional quality on country-level variations in foreign equity shares in transition economies (TEs).
Design/methodology/approach
Drawing on institutional theory and transaction cost theory, this paper examines the influence of formal and informal institutional quality on country-level variations in foreign equity shares in TEs. The authors use a two-step empirical strategy, identifying clusters of explanatory variables and running generalized least squares random effect estimations to test for the influence of explanatory and control variables on foreign equity shares.
Findings
Foreign equity share is positively affected by informal institutions and negatively by formal institutions. However, when control for stage of transition we find that the the presence of informal institutions in more rapidly or advanced transforming economies negatively influences foreign equity shares. Complex infrastructure discourages foreign equity shareholdings, and foreign companies use informal practices to overcome unfavourable host country conditions. Government size has a negative effect, and gross domestic product per capita positively affects foreign equity shares.
Research limitations/implications
The study is the new groundwork for the re-enactment of a fruitful discussion on foreign equity. The study has practical implications for managers, too – managers of foreign-owned firms operating in weakly installed institutional environments should carefully analyse the entry strategies because of the high presence of informal institutions. Furthermore, managers could understand the various facilitation roles of informal institutions in any firm internationalisation effort to arrive at optimal ownership holdings for better internationalisation performance. Although the study is based on a sample of transition countries, the findings have implications for other emerging economies’ contexts sharing similar institutional settings.
Originality/value
This study provides a unique empirical investigation and evidence based on country-level indicators on the effect of formal and informal institutions on foreign equity shares holdings in TEs, reinforcing the importance of impacts of both the formal and informal dimensions on ownership decisions of foreign investors.
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This paper addresses the topic “The interaction between financial institutions and firms in the nonfinancial sectors” in the special issue of “Banking and finance in China.” The…
Abstract
Purpose
This paper addresses the topic “The interaction between financial institutions and firms in the nonfinancial sectors” in the special issue of “Banking and finance in China.” The purpose of this paper is to examine the trading behavior and price effects of foreign institutions under the celebrated Qualified Foreign Institutional Investor (QFII) scheme on all non-financial firms in the Chinese A-share markets.
Design/methodology/approach
Using quarterly equity-level foreign institution transactions from 2005Q1 to 2011Q4 in the Chinese A-share market, the author finds a positive and significant contemporaneous relationship between foreign flows and equity returns. For each quarter, the author sorts the stocks into ten portfolios based on the percentage of foreign flows, and employs the bivariate vector autoregression (VAR) model to examine the contemporaneous association in detail.
Findings
Foreign institutions in the Chinese A-share markets do not show positive or negative feedback trading; however, their flows have a strong impact on future equity returns because of informational advantage. Additionally, different associations are found between foreign flows and equity returns.
Research limitations/implications
Constraints on data availability exist, and a quarterly dimension is too coarse to provide a statistically precise result, although certain related papers use quarterly dimension data. Further research is required using higher frequency data.
Originality/value
This paper provides a first look at foreign institution trading patterns and price effects on local equity returns in the Chinese A-share markets. Additionally, the equity level data allow the author to exclude the stocks that were not bought by foreign institutions and to detect the “pure effect” of foreign flows on equity returns.
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Joseph J. French and Vijay Kumar Vishwakarma
The purpose of this paper is to dissect the dynamic linkages between foreign equity flows, exchange rates and equity returns in the Philippines.
Abstract
Purpose
The purpose of this paper is to dissect the dynamic linkages between foreign equity flows, exchange rates and equity returns in the Philippines.
Design/methodology/approach
Using a parsimonious SVARX‐GARCH model and unique daily equity flow data, this research models the relationship between net equity flows, conditional variance of stock returns and conditional variance of exchange rates.
Findings
The authors find several noteworthy results, which are unique to this study and several results that confirm existing literature. Much of existing literature on foreign equity flows into emerging economies find that foreign equity investors are trend chasers and equity flows are auto correlated. The authors confirm these finding in the Philippines and document two new and important findings. First, it was found that unexpected increases in foreign equity flows to the Philippines increases the conditional volatility of the Filipino stock market significantly over the next two weeks of trading. The second major finding is that unexpected shocks to foreign equity flows sharply increases the conditional variance of the USD/PHP exchange rate over the next two to three weeks of trading.
Practical implications
Taken together, the results indicate that foreign equity investment, while providing many benefits for small open economies such as the Philippines, does in the short run increase the conditional variance of both the equity market and exchange rates. Policy makers must weigh the benefits of increased risk sharing and the potential for lower costs of capital with the short‐run potential for increase swings in asset prices.
Originality/value
This paper is one of the only studies of its kind to test the impact of foreign equity flows on the conditional volatility of returns and exchange rates.
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This paper investigates the foreign ownership structure of service equity joint ventures (EJVs) in China. In less than 20 years, China has emerged from a closed economy to become…
Abstract
This paper investigates the foreign ownership structure of service equity joint ventures (EJVs) in China. In less than 20 years, China has emerged from a closed economy to become the second largest recipient of foreign direct investment (FDI) in the world. Now that China is a member of the World Trade Organisation, liberalisation of FDI is expected to accelerate even further. Despite the fact that an increasing proportion of FDI in China is in the form of equity joint ventures in the service sector, little is known of the ownership structure of service EJVs. Using a database of 6,430 foreign EJVs, in China from 1984 to 1996, this paper shows that foreign equity ownership differs significantly between service and manufacturing EJVs with foreign ownership generally being higher in service EJVs. The overall results also suggest that the gradual liberalisation of FDI in the service sector by Chinese authorities has had a positive effect on foreign equity ownership.
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Qiangbing Chen, Yali Liu and Lu Jiang
The paper aims to study the impact of cultural differences on the ownership structure of international joint ventures in China. It is reasoned that foreign investors, when faced…
Abstract
Purpose
The paper aims to study the impact of cultural differences on the ownership structure of international joint ventures in China. It is reasoned that foreign investors, when faced with larger culture‐related investment uncertainties, may have the incentive to acquire more control rights to contain the risks by acquiring more equity shares in the joint ventures.
Design/methodology/approach
Data on international joint ventures in China were used to test the theory. The data contain 941 observations from Beijing, Shanghai, Shenzhen and Tianjing, covering a 13‐year time span. Pooled ordinary least square is used in the model estimation.
Findings
Cultural distance between China and foreign countries was found to increase the foreign equity share in the joint ventures, a finding contrary to traditional view. In addition, it was found that cultural distance in different dimensions does not play an equal role in affecting foreign equity shares. Last, there is significant evidence that the allocation of ownership between foreign and domestic investors in the joint ventures is influenced by the investor's relative importance in supplying different types of resources.
Originality/value
The paper introduces a new perspective into the study of culture and international joint venture. Foreign investors may be able to reduce investment risk by increasing equity shares, which gives them more internal control, in international joint ventures. In contrast, the traditional view is that larger cultural distance tends to discourage foreign equity ownership.
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Athanasios Koulakiotis, Katerina Lyroudi, Nikos Thomaidis and Nicholas Papasyriopoulos
The purpose of this paper is to examine volatility transmissions between portfolios of cross‐listed equities and exchange rate differences and also the volatility persistence for…
Abstract
Purpose
The purpose of this paper is to examine volatility transmissions between portfolios of cross‐listed equities and exchange rate differences and also the volatility persistence for home, foreign equities, and exchange rate differences in the UK and German markets.
Design/methodology/approach
A primary focus of this paper is to see if there is an impact first on the volatility persistence for foreign equities that are listed in the UK and German markets, second on the respective home portfolios of cross‐listed equities, and third on the exchange rate differences. In addition, whether there are any bilateral spillovers between the following equity portfolios: foreign cross‐listed equities, home cross‐listed equities, and also local or global exchange rate differences are investigated.
Findings
The paper finds that the volatility persistence is more prominent than error persistence from cross‐listed equities, foreign or home, and the exchange rate differences. Furthermore, the transmission mechanism indicates a bilateral integration process in some of the cases that were examined. Based on these results, it is concluded that in the UK market the foreign cross‐listings affect less the domestic equities compared to the German market.
Originality/value
This paper examines the interdependence of portfolios of home and foreign equities for cross‐listings that belong to the same stock exchange with two exchange rates, a local and a global one in order to provide more evidence in this area of literature.
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Joseph J. French and Nazneen Ahmad
The purpose of this paper is twofold; first, to understand the long‐run dynamics between returns, valuation measures and foreign investment in the USA; second, to determine if…
Abstract
Purpose
The purpose of this paper is twofold; first, to understand the long‐run dynamics between returns, valuation measures and foreign investment in the USA; second, to determine if these dynamics change following financial market upheaval.
Design/methodology/approach
To address long‐run dynamic nature of the variables, multivariate autoregressive models are fitted for the period of January 1977 to November 2008. To gain additional insight about the nature of equity flows its dynamics are analyzed over the periods containing the 1987 stock market crash and the two major asset bubbles, e.g. internet bubble and the housing bubble.
Findings
The authors find that foreign institutional equity flows are more sensitive to innovations in valuation measures than innovations to excess US market returns; and that foreign investors increase their purchases of US market capitalization following a positive innovation to measures of valuation. The results imply that the behavior of foreign institutional investors are not described by “return chasing” alone. The authors further find that in times of increased uncertainty the joint dynamics between foreign equity flows and valuation measures decouples. Finally consistent with existing literature it was found that equity flows to the USA are autocorrelated.
Originality/value
There is a broad literature on the dynamics of US investment in emerging and developed markets, but very little (if any) research that analyzes the dynamics of equity flows to the US, returns, and measures of valuation. Furthermore, the literature on the behavior of equity flows surrounding financial crises is scant, particularly for developed markets.
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This paper delves into the mechanism of the contingency framework for foreign entry mode decisions and identifies two essential tasks that jointly determine the outcome of the…
Abstract
This paper delves into the mechanism of the contingency framework for foreign entry mode decisions and identifies two essential tasks that jointly determine the outcome of the entry mode decision. It then recognizes a critical weakness in previous research pertaining to the comparison of entry modes along a key decision criterion, the degree of control. Existing studies generally treat equity involvement as the only source of entrant control, while largely ignoring non‐equity sources of control (i.e., bargaining power and trust). Non‐equity sources of control, when underutilized, amount to missed opportunities, increased resource commitments, and heightened risk exposures in foreign markets. Drawing from a pluralism perspective in transaction and relationship governance, the author presents a more integrative method for the ranking of entry modes along the degree of control. The central message is that companies entering foreign markets should make an earnest effort to identify trust and bargaining power situations and fully utilize their control potential in making entry mode decisions.
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Stephen P. Ferris and Kwangwoo Park
We find a significant curvilinear relation between Japanese firm value and the percentage of equity held by foreign investors. Firm value rises until foreign ownership reaches…
Abstract
We find a significant curvilinear relation between Japanese firm value and the percentage of equity held by foreign investors. Firm value rises until foreign ownership reaches approximately 40%, and then it begins to decline. It appears that large foreign institutional investors invest in well-performing firms and serve as effective monitors. Our results remain robust even after controlling for other corporate governance variables, such as equity ownership by main banks and board membership by foreign investors. It seems that most of the increase in firm value and the performance improvement are due to rising levels of equity ownership in non-keiretsu (independent) firms by foreign investors. We also show that an increase in foreign ownership is correlated with a rise in R&D expenditures, suggesting that foreign institutional investors contribute to the long-term viability and competitiveness of Japanese firms.
Katharina Laufs, Michael Bembom and Christian Schwens
Using arguments from the upper echelons perspective this paper aims to examine the impact of CEO characteristics on small and medium-sized enterprises’ (SMEs’) equity foreign…
Abstract
Purpose
Using arguments from the upper echelons perspective this paper aims to examine the impact of CEO characteristics on small and medium-sized enterprises’ (SMEs’) equity foreign market entry mode choice and how these associations are jointly moderated by geographic experience of the firm and host-country political risk.
Design/methodology/approach
The empirical analysis draws on data gathered from German SMEs testing triple-interaction effects between CEO’s age, firm tenure and international experience, geographic experience of the firm (organizational level), and host-country political risk (environmental level).
Findings
Empirical findings validate that the influence of CEO’s age and firm tenure on SME foreign market entry mode choice varies by managers’ level of managerial discretion (i.e. latitude of action) as determined by the SME’s geographic experience and the level of political risks prevailing in the foreign market.
Practical implications
Empirical findings help SME owners and managers to understand how CEO’s age and firm tenure are related with individual’s risk-taking behavior and information-processing demands and how these contingencies vary by the context in which the individual CEO is nested.
Originality/value
This study contributes to the growing body of literature focussing on SME foreign market entry mode choice by emphasizing the important role of CEOs in the decision to internationalize. More specific, this study contributes by an examination of the interactive effect of CEO’s age, firm tenure and international experience, geographic experience of the firm and host-country political risk and, therefore, emphasizes the context and boundary conditions under which the association between CEO characteristics and foreign market entry mode choice is more or less pronounced.
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