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Article
Publication date: 1 July 1997

Oscar Varela and Atsuyuki Naka

This paper studies the exchange rate exposure of investments by the United States, Japan and Germany in the London International Stock Exchange (LSE) from 1982 to 1991…

Abstract

This paper studies the exchange rate exposure of investments by the United States, Japan and Germany in the London International Stock Exchange (LSE) from 1982 to 1991. Japanese and German investments are fully exposed to their own exchange rates, and the US is “supernominally” exposed to its own exchange rate. No significant changes in exposure are associated with the Plaza and Louvre Accords. The 1987 worldwide stock market crash exhibits a significant decrease in US exposure, and increase in German exposure. US, Japanese and German investments are also fully exposed to their own exchange rates for the periods before and after the 1986 “Big Bang” in London, except that US investments are “supernominally” exposed in the pre‐Big Bang period.

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Managerial Finance, vol. 23 no. 7
Type: Research Article
ISSN: 0307-4358

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Article
Publication date: 17 October 2018

Hussein Abdoh and Oscar Varela

This study aims to investigate the effect of product market competition on the exposure of firms’ returns to consumption fluctuations (C-CAPM beta).

Abstract

Purpose

This study aims to investigate the effect of product market competition on the exposure of firms’ returns to consumption fluctuations (C-CAPM beta).

Design/methodology/approach

The C-CAPM beta comes from a regression of a stock’s returns against consumption growth, with controls for the Fama–French three factors and momentum. The Herfindahl–Hirschman index of concentration measures competition, with other measures like deregulation and tariff reductions used for robustness tests. Industries are categorized using different SIC digits, with the NAICS measure used for robustness tests. The C-CAPM beta is regressed to competition, with appropriate control variables, to find its relationship.

Findings

Higher levels of competition reduces the C-CAPM beta. The results are consistently robust to different measures of product market competition and industry identification.

Practical implications

Product market competition influences the sensitivity of systematic risk, as measured by the C-CAPM beta, to consumption, such that higher levels of competition reduce systematic risk.

Originality/value

This research contributes to a literature that admittedly is still murky, as the relationship between competition and systematic risk is still unsettled. No study (to the authors’ knowledge) examines the effect of competition on firms’ exposure to consumption. This research adds to the literature on the role of competition in risk, specifically with respect to consumption.

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Studies in Economics and Finance, vol. 35 no. 4
Type: Research Article
ISSN: 1086-7376

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Article
Publication date: 12 February 2018

Hussein Ali Ahmad Abdoh and Oscar Varela

The purpose of this paper is to examine the effects of product market competition on capital spending (investments) financed by cash flow (CF), and the role of financial…

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1005

Abstract

Purpose

The purpose of this paper is to examine the effects of product market competition on capital spending (investments) financed by cash flow (CF), and the role of financial constraints (FC) on these effects.

Design/methodology/approach

The Herfindahl-Hirschman index of concentration measures competition. Earnings retention, working capital, the Kaplan and Zingales (1997) index and CF shortfalls measure FC. Regressions relating capital spending to competition are performed for the full sample, as well as financially constrained and unconstrained, and growth and value firms’ sub-samples. For robustness, large reductions in import tariffs are examined to exogenously measure competition, with the impact of these on capital spending tested via the difference-in-difference method.

Findings

The results show that competition fosters valuable investments when firms are financially unconstrained, especially for growth firms, and reduces these investments when they are financially constrained, especially for value firms.

Practical implications

The role of policy makers in alleviating FC should be focused toward growth firms that operate in competitive industries. As well, increasing financial pressure on value firms in competitive industries can have desirable effects, as it forces these firms to reduce investment inefficiency.

Originality/value

Many firm-specific and environmental factors drive the relation between competition and investment. Khanna and Tice (2000) find profitable firms increasing and highly levered firms decreasing investments in response to Wal-Mart’s entry into their markets. Jiang et al. (2015) suggest that environments with predictable growth drive a positive relation between competition and investments. This study claims that another factor that affects this relation is the firm’s level of FC.

Details

Managerial Finance, vol. 44 no. 2
Type: Research Article
ISSN: 0307-4358

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Article
Publication date: 30 January 2019

Anh Ngo, Oscar Varela and Xie Feixue

This paper aims to examine the effects of lines of credit on a firm’s market timing behavior and the pricing of its seasoned equity offerings (SEOs). It shows that firms…

Abstract

Purpose

This paper aims to examine the effects of lines of credit on a firm’s market timing behavior and the pricing of its seasoned equity offerings (SEOs). It shows that firms with lines of credit are more likely to time the equity market and receive less underpricing for their SEOs. It also shows that the propensity of firms with lines of credit to time the market is particularly significant for financially unconstrained firms. The results are robust to different measures of market timing and financial constraint, and these fill the gap in the literature that, to the best of the authors’ knowledge, has not examined the relation between lines of credit, market timing and value creation as related to equity offerings.

Design/methodology/approach

The paper first investigates the relationship between lines of credit and the probability of a firm issuing SEOs using a logistic model. The paper then investigates whether firms with lines of credit engage in market timing behavior using ordinary least square regressions with two-way cluster-robust standard errors (standard errors that are robust to simultaneous correlation along two dimensions, such as firms and time) with two measures of market timing and two measures for financial constraints. Finally, the paper examines the relationship between lines of credit and SEO underpricing.

Findings

It was found that firms with lines of credit are more likely to time the equity market, perhaps driven by the financing flexibility resulting from the existence of their lines of credit. This finding comes mainly from financially unconstrained firms, as such an effect is not observed among financially constrained firms with lines of credit. It is further shown that firms with lines of credit are more likely to experience less severe equity underpricing, perhaps owing to market timing behavior. The results provide evidence on how lines of credit may create value to a firm through its market timing.

Originality/value

The paper sheds new light on how lines of credit may create value to a firm through the market timing channel.

Details

Review of Accounting and Finance, vol. 18 no. 1
Type: Research Article
ISSN: 1475-7702

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Article
Publication date: 1 July 1992

Tarun K. Mukherjee and Oscar Varela

The effects of a proxy contest for control on a company are examined in this paper over a short, intermediate and long‐term post‐contest period of time. Major findings are…

Abstract

The effects of a proxy contest for control on a company are examined in this paper over a short, intermediate and long‐term post‐contest period of time. Major findings are as follows. First, compared to a non‐contest matchinggroup of firms, proxy contest for control firms as a whole are poor performers in the immediate post‐contest period. Successful contest firms, however, tend to improve performance whereas unsuccessful ones tend to deteriorate in the short‐term. Second, contest outcome does not appear to affect survivability over either the intermediate or long term. However, over the intermediate term, unsuccessful contest firms more often suffer losses and are acquired, and are less often involved in divestiture and expansion activities. Finally, in the long term, successful contest firms show a higher incidence of bank‐ruptcy and are more likely to engage in a name change.

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Managerial Finance, vol. 18 no. 7/8
Type: Research Article
ISSN: 0307-4358

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Article
Publication date: 5 January 2010

Mahfuzul Haque and Oscar Varela

The purpose of this paper is to apply safety‐first portfolio principles in an environment where financial risk exists because of the probability of terrorist attacks…

Abstract

Purpose

The purpose of this paper is to apply safety‐first portfolio principles in an environment where financial risk exists because of the probability of terrorist attacks, where the catastrophic events of September 11, 2001 (911) are the focal point of the analysis.

Design/methodology/approach

Safety‐first portfolios of US equities bilaterally combined with 12 developed and emerging region global equity indices are obtained for 911. Extreme value theory and safety‐first principles are used to optimize these portfolios for US risk‐averse investors. The actual performances of all portfolios in the post‐911 period are compared to the optimal results. The robustness of the results is examined by replicating the analysis for the period following July 7, 2006, when no actual terrorist attacks occurred on US soil.

Findings

Optimal ex ante (ex post) safety‐first portfolios on 911 have high (low) US weights, and on July 7, 2006 low US weights. The differences are attributed to changes in market projections and/or conditions. In all cases, wealth is preserved even without the ex post optimal portfolios.

Practical implications

Safety‐first portfolio optimization can protect wealth given financial risks of extreme events like terrorist attacks.

Originality/value

The paper shows that quantitative assessments of financial risk are feasible, even though uncertainty with experts' risk assessments of extreme events such as 911 exists because of limited historical data and low probability of occurrence. The results are useful to investors developing international diversification strategies to protect wealth given the risks of terrorist attacks.

Details

The Journal of Risk Finance, vol. 11 no. 1
Type: Research Article
ISSN: 1526-5943

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Article
Publication date: 3 August 2012

Anh Duc Ngo and Oscar Varela

The purpose of this paper is to examine the impact of earnings smoothing on the underpricing of seasoned equity offerings (SEOs). It aims to investigate whether earnings…

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Abstract

Purpose

The purpose of this paper is to examine the impact of earnings smoothing on the underpricing of seasoned equity offerings (SEOs). It aims to investigate whether earnings smoothing can add value to firms by reducing the degree of SEO underpricing.

Design/methodology/approach

The sample of US common stock seasoned equity offerings (SEOs) by non‐regulated firms during 1989‐2009 was used to conduct various cross‐section, univariate, and multivariate tests, using several proxies for earnings smoothing, in order to confirm the impact of earnings smoothing on the degree of SEO underpricing. Three‐stage least square estimation was used to address the possible endogeneity of pricing and earnings smoothing.

Findings

Smooth earnings performance resulting from discretionary accruals is negatively related to SEO underpricing and improves earnings informativeness. Consistent with risk management and signaling theories, managers' efforts to produce smooth earning reports may add value to their firms. Based on the mean values for SEOs, such smoothing reduces underpricing by $0.33 per share offered and increases the value of the average offering by $1.65 million. Smoothed earnings also conveys information about the firms' future performance, as firms with a long historical pattern of smooth earnings prior to SEOs significantly outperform, for at least three years after the SEO, those with more volatile earnings, with respect to stock returns and operating performance.

Originality/value

The paper contributes specifically to the current literature on earnings smoothing by demonstrating that high quality firms that expect larger quantity of cash flows in the near future are more likely to actively smooth earnings via discretionary accruals before SEOs to reduce underpricing. The paper contributes generally by showing that firms can signal their quality to outside investors by showing smooth earnings over a long period of time and such firms are more likely to experience a lower degree of underpricing through SEO episodes.

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Article
Publication date: 1 July 1992

Gail E. Farrelly

This essay considers some of the negative effects of proxy contests and emphasizes that the proxy contest should be the choice of last resort. When costs are weighed…

Abstract

This essay considers some of the negative effects of proxy contests and emphasizes that the proxy contest should be the choice of last resort. When costs are weighed against benefits, it would seem that there are better and cheaper ways for owners and managers to communicate and settle their differences. Recent research on this topic is considered and suggestions for research to judge the long‐term effects of proxy contests are offered. The essay concludes with some thoughts on how newly emerging corporate governance schemes may eventually obviate the need for proxy contests.

Details

Managerial Finance, vol. 18 no. 7/8
Type: Research Article
ISSN: 0307-4358

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Book part
Publication date: 10 March 2010

Ana Cristina Maldonado

The Revolution is 50, Raúl has succeeded Fidel, and many dissidents who participated in the 2002 Varela Project initiative are in jail. What hope for “cambio” (change) in…

Abstract

The Revolution is 50, Raúl has succeeded Fidel, and many dissidents who participated in the 2002 Varela Project initiative are in jail. What hope for “cambio” (change) in Cuba? Legal dissent – constitutional proposals, a legislative agenda, and grassroots civil rights organizing – may be the key. The Movimiento Cristiano Liberación (MCL), led by the Nobel Peace Prize-nominated Oswaldo Payá, presents the strongest challenge to the power of Cuba's 50-year-old Revolutionary government. This dissident group is at the heart of the development of the 2002 Varela Project and forms the core of the leaders arrested in the 2003 Cuban Spring crackdown. This paper traces the history of MCL's “legal dissent” strategy, from the evolution of the Varela Project to their development of an entire legislative agenda, crafted with nation-wide grassroots participation over the last six years since the crackdown. Using data from international NGO surveys conducted within Cuba, we analyze the strengths and weaknesses of the MCL's proposal vis-à-vis the political and economic concerns and interests of the broader population. Cuba's government seeks to consolidate its rule through its institutions, specifically, through the Cuban Communist Party. It remains to be seen whether the MCL's legal dissent strategy can successfully mobilize a broad segment of the Cuban population, and channel the political aspirations of reformers whose interests are not served under one-party rule.

Details

Research in Social Movements, Conflicts and Change
Type: Book
ISBN: 978-0-85724-036-1

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Article
Publication date: 3 September 2018

Rick N. Francis, Grace Mubako and Lori Olsen

This study aims to remind researchers that measurement errors and inappropriate inferences may result from improperly combining and adjusting certain Center for Research…

Abstract

Purpose

This study aims to remind researchers that measurement errors and inappropriate inferences may result from improperly combining and adjusting certain Center for Research in Security Prices (CRSP) measures.

Design/methodology/approach

In addition to real-world working examples, the study uses earnings announcements data to examine the effects of improperly combining and adjusting CRSP measures.

Findings

This study assists researchers with the following two considerations when using CRSP data: stand-alone share prices adjusted with CRSP adjustment factors are inaccurate in the presence of property dividend, spin-off and rights offering events; and ignoring covertly missing stock returns may create misleading test results. The primary objectives of the study are to help researchers increase the integrity of their studies and the probability of publication.

Research limitations/implications

Inadequate consideration for the two issues discussed in the paper may change the researcher’s statistical inferences.

Originality/value

Archival researchers who overtly address and discuss the existence of these issues achieve two important and related benefits. First, the researcher increases his or her credibility with editors and reviewers, which enhances the probability of a published study. Second, the researcher increases his or her perceived technical competency, which potentially affects promotion and tenure decisions, editorial membership decisions, co-authorship opportunities and other professional effects. Doctoral students will find this study to be particularly useful.

Details

Accounting Research Journal, vol. 31 no. 3
Type: Research Article
ISSN: 1030-9616

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