The Many Faces of Information Disclosure

We examine the effects of a variety of mandatory information disclosure regimes on the expected revenues of issuing firms and on their endogenously-arising incentives for financial innovation. The main question we ask is: what kind of information and how much of it should firms be asked to disclose? The analysis uses a noisy rational expectations model in which some investors can choose to become informed at their own expense. Information disclosure then potentially affects the information-advantage of these investors vis-a-vis uninformed (liquidity) investors in the market, and hence their information-acquisition incentives. Thus, asking managers to disclose more information is not obviously desirable for the shareholders of issuing firms. Our main results are as follows. Mandating the disclosure of information about total firm value that would otherwise not have become available to any investor is always good for issuing firms. It increases their expected revenues and also strengthens financial innovation incentives. Mandating the disclosure of information about total firm value that would have been acquired anyway by informed investors but improves the quality of the information that uninformed investors have will benefit firms in emerging capital markets but hurt those in developed capital markets. In developed markets, the attention devoted to disclosure should thus shift from information that concerns total firm value to that which concerns the distribution of this value among claimants. Our conclusion is that disclosure requirements should be more stringent in less-developed capital markets, and that greater stringency in disclosure requirements on securities exchanges leads to a worsening of the borrower pool faced by banks. Our analysis also implies that competition among exchanges or securities regulators will not necessarily lead to a weakening of disclosure requirements.

Public Finance and Low Equilibria in Transition Economies; The Role of Institutions

This paper develops two stylised models of the transitional economy that challenge to some extent, the conventional approach to policy-reforms. In the first model, the absence of market-oriented institutions is responsible for the occurrence of a non-cooperative equilibrium, where the amount of public services provided by the state is too low, which, in turn, adversely affects the global performance of the productive sector. In the second model, the government, which aims to maximise tax receipts, will choose a taxation level that pushes too many firms out of the market; hence the global supply falls below its optimal level. In both models, strain and disruptions specific to transitional systems lead to abnormal responses of the real sector to standard policy measures. Efficient economic policies should explicitly take into account the institutional deficit.http://deepblue.lib.umich.edu/bitstream/2027.42/39703/3/wp319.pd

Investment and Instability

Although recent research has repeatedly found a negative association between investment and political instability, the existence and direction of causality between these two variables has not yet been investigated. This paper empirically tests for a causal and negative long-run relationship between political instability to investment. It finds that there is a robust causal relation from instability to investment, and that it is positive. In other words, an increase in political instability Granger causes an increase in investment. We identify three different theories that can explain this result.http://deepblue.lib.umich.edu/bitstream/2027.42/39721/3/wp337.pd

The Effects of Foreign Direct Investment on Domestic Firms: Evidence from Firm Level Panel Data in Emerging Economies

This paper uses firm level panel data to investigate empirically the effects of foreign direct investment (FDI) on the productivity performance of domestic firms in three emerging economies of Central and Eastern Europe-Bulgaria, Romania and Poland. To this end, a unique firm level panel data set is used with detailed information on foreign ownership at the firm level. Two main questions are addressed: 1) Do foreign firms perform better than their domestic counterparts? 2) Do foreign firms generate spillovers to domestic firms?http://deepblue.lib.umich.edu/bitstream/2027.42/39728/3/wp344.pd

Comparative Advertising in the Global Marketplace: The Effects of Cultural Orientation on Communication

This research examined the efficacy of one type of communication strategy, comparative advertising, in communicating product superiority to consumers across different cultures. In individualist cultures such as the United States, comparative advertising that highlights the superiority of the target brand is seen as more effective. However, in collectivist cultures such as Thailand, comparative advertising that highlights the similarity between brands is more likely to be effective. In addition, comparative advertising was more believable for unfamiliar brands in individualist cultures whereas comparison for familiar brands was more believable in collectivist cultures.http://deepblue.lib.umich.edu/bitstream/2027.42/39712/3/wp328.pd

R&D and Technology Spillovers via FDI: Innovation and Absorptive Capacity

Two faces of R&D (innovation and learning) and technology spillovers from FDI (foreign direct investment) on a firm's productivity growth are examined in this paper. Using firm-level panel data on Czech manufacturing firms between 1995 and 1998, I find that: (i) the learning effect of R&D is far more important than the innovative effect in explaining the productivity growth of a firm, (ii) there is no evidence of technology spillovers to local firms from having a foreign joint venture partner, (iii) positive spillovers from FDI are found in electrical machinery and radio & TV sectors, which are also active investors in innovative R&D.http://deepblue.lib.umich.edu/bitstream/2027.42/39733/3/wp349.pd

Rethinking Marketing Programs for Emerging Markets

We point to a fundamental inconsistency in the emerging market strategies of multinational firms. On the one hand, they seek billions of new consumers in the emerging markets of China, India, Indonesia, and Latin America; on the other, their marketing programs are scarcely adapted for these markets. The result is low market penetration, low market shares, and poor profitability. These multinationals are trapped by their own devices in gilded cages, serving the affluent few and ignoring the potential of billions of new consumers that attracted them in the first place. In this paper, we propose that, in order to attract billions of new consumers, the marketing programs of multinationals need to be rethought from the ground up. We identify three key factors that characterize emerging markets: (1) low incomes, (2) variability in consumers and infrastructure, and (3) the relative cheapness of labor, which is often substituted for capital. We draw on numerous case studies from around the world to illustrate how to incorporate these realities into marketing programs. We conclude with a discussion of the implications of such an approach for the multinational's core strategic assumptions.http://deepblue.lib.umich.edu/bitstream/2027.42/39704/3/wp320.pd

The Evolution of Market Integration in Russia

We use a statistical model of commodity trade to measure the extent of integration between regional commodity markets within Russia. Monthly time-series data on regional commodity prices spanning 1994 through 1999 indicate substantial temporal fluctuations in integration over this period: an initial period of widespread integration gradually gave way to a period of disconnectedness in 1995 through 1997, which seems to have subsided by mid-1998. These temporal fluctuations exhibit strong statistical relationships with a host of aggregate variables; most notably, internal integration exhibits a strong negative relationship with international trade.http://deepblue.lib.umich.edu/bitstream/2027.42/39718/3/wp334.pd

Who is Afraid of Political Instability?

An unstable macroeconomic environment is often regarded as detrimental to economic growth. Among the sources contributing to such instability, the literature has assigned most of the blame to political issues. This paper empirically tests for a causal and negative long-term relation between political instability and economic growth, but finds no evidence of such a relationship. Sensitivity analysis indicates that there is a contemporaneous negative relationship and that, in the long run and ignoring institutional factors, the Sub-Saharan Africa group plays the determining role in steering this relationship into causal and negative.http://deepblue.lib.umich.edu/bitstream/2027.42/39710/3/wp326.pd

Modeling the Components of Market Discipline

This paper evaluates the role of inflation-forecast heterogeneity in US monetary policy making. The deviation between private and central bank inflation forecasts is identified as a factor increasing inflation persistence and thus calling for a policy reaction. An optimal policy rule is derived by the minimization under discretion of a standard central bank loss function subject to a Phillips curve, modified to include the forecast deviation, and a forward-looking aggregate demand equation. This rule, which itself includes the forecast deviation as an additional argument, is estimated for the period 1974-1998, covering the Chairmanships of Arthur Burns, Paul Volcker and Alan Greenspan, by using real-time forecasts of inflation and the output gap obtained from the FOMC’s Greenbook and the Survey of Professional Forecasters. The estimated rule remains remarkably stable over the whole sample period, challenging the conventional view of a structural break following Volcker’s appointment as Chairman of the Fed. Finally, the substantial decline in the significance of the interest-rate smoothing term in the rule indicates that monetary policy inertia may, to a large extent, be an artifact of serially correlated inflation-forecast errors that feed into policy decisions in real time.Market discipline, transparency, bank risk