DO EXTERNAL FUNDS YIELD LOWER RETURNS ? RECENT EVIDENCE FROM EAST ASIAN ECONOMIES

Using a large firm level panel data set from four Asian countries, this paper compares the returns to various internal and external funds. A novel feature of our analysis is that we distinguish between financially constrained and unconstrained firms and determine selectivity-corrected estimates of rates of return to internal and external funds in markets characterised by information problems. Results derived from a unique random effects panel data model with selection and unobserved heterogeneity suggest evidence of significant misallocation, especially in external financing of investment. While these results contrast some of the existing results, they seem to complement the moral hazard arguments put forward by the macro literature on the recent Asian crisis.Efficiency, Misallocation of capital, Returns to internal and external funds, Debt and equity, Financial constraint, Random effects model with selection

Spillovers from FDI and Skill Structures of Host-Country Firms

This paper uses panel data across UK manufacturing from 1983 to 1992, to test whether inward flows of FDI have contributed to increasing trends in the employment of relatively higher skilled individuals. Moreover, the paper isolates the effect on domestic firms, and shows that this effect is a function of the size of the foreign productivity advantage. The results show, that even after controlling for the factors most commonly used to explain relative employment shifts – namely technological change and import intensity, that FDI has a role to play in influencing employment trends.multinationals; spillovers; relative employment

Domestic wage determination: Regional Spillovers and inward investment

This paper evaluates the extent of inter- industry, and inter-regional wage spillovers across the UK. A large literature exists suggesting that wages elsewhere affect wage determination and levels of satisfaction, but this paper extends the analysis to examine the effects of inward investment in the process. Thus far the specific effect of foreign wages on domestic wage determination has not been evaluated. Using industry and regional level panel data for the UK the paper reports evidence that such wage spillovers do occur, and that they are more widespread for skilled, than for unskilled workers and also lower in areas of high unemployment.Wage determination; regional spillovers; alternative wage

Evolution of Capital Strcture in East Asia: Corporate Inertia or Endeavours?

The present paper examines the capital structure adjustment dynamics of listed non-financial corporations in seven East Asian countries during 1994-2002. Compared to firms in the least affected countries, average leverages were much higher among firms in the worst affected countries while the average speeds of adjustment were lower. This general ranking is robust to various alternative specifications and sample selections. We argue that this pattern is closely linked to weaknesses in regulatory environment and lack of access to alternative sources of finance in the worst affected countries.

The impact on domestic productivity of inward investment in the UK

One of the basic tenets of UK industrial policy, that attracting inward investment into the UK stimulates domestic productivity growth, is examined. A model of productivity growth is developed for the indigenous sector of UK manufacturing, linking domestic productivity growth to theoretical explanations of inward investment. The paper demonstrates that inward investment does stimulate productivity growth in the domestic sector of around 0.75 per cent per annum. However, this cannot be attributed to investment or output spillovers, but is a result of the productivity advantage exhibited by the foreign firms

Dynamic Adjustment of Corporate Leverage: Is there a lesson to learn from the Recent Asian Crisis?

Much of the macro literature on the recent Asian crisis argues that a major cause was over borrowing and over investment encouraged by poor supervision and the resulting moral hazard problem. Surprisingly however there is little firm-level evidence to corroborate this. The present paper examines the extent to which firms in these countries had deviated from their optimal levels of leverage and also the determinants of their ability to adjust their capital structure. Results obtained using the Worldscope firm-level panel data for the four of the worst affected countries suggest that higher quality firms had lower optimal leverage while firms with excess capital stock had higher optimal leverage required to finance this capital expenditire. Further, there are signs of corporate inertia in the worst affected countries exhibiting very slow adjustment processes in their capital structure. This result holds even for those firms potentially better placed to control their levels of leverage. These results seem to strengthen the moral hazard argument of bad loans in poorly regulated and supervised East Asian economies.Moral hazard, Optimum leverage, Dynamic model, Speed of adjustment

How Ownership Structure Affects Capital Structure and Firm Performance? Recent Evidence from East Asia

Despite the seminal work of Claessens et al. (2002), role of ownership structure on capital structure and firm performance in East Asian corporattions remains much unexplored. Within the framework of Bajaj et al. (1998), the present paper empirically examines the effects of a controlling manager and degree of monitoring (a measure of moral hazard) on capital structure and firm performance among a sample of Korean and Indonesian firms. In doing so, we not only allow for simultaneity between capital structure and firm performance (a la Berger and di Patti, 2003), but also the non-linearity in these relationships. Our empirical results in essence depend on whether a firm is run by a family and also whether there is a manager who is also a controlling owner. There is evidence that family ownership could mitigate the problem of moral hazard though it could exacerbate the problem of over-lending in our samples. Also the effects of ownership structure on firm performance cannot be delineated from its effects on leverage. As such, the results presented here confirm and extend the essential findings of Claessens et al. (2002) and Bajaj et al. (1998).Asian Crisis, Corporate Governance, Capital structure, Firm performance, Expropriation of minority shareholders, 3SLS estimates, Simultaneity bias, Non-linearity.

How Ownership Structure Affects Capital Structure and Firm Performance? Recent Evidence from East Asia

Despite the seminal work of Claessens et al. (2002), who highlighted the role of ownership structure on firm performance in East Asia, the relationship between capital structure and ownership remains much unexplored. This is important, given recent empirical and theoretical work linking capital structure and performance. The novelty of the present paper is that in examining the effects of ownership concentration on capital structure and firm performance, it not only allows for simultaneity between capital structure and firm performance, but also controls for one possible source of moral hazard related to the higher voting rights relative to cash flow rights. The paper clearly establishes that results are rather country-specific and the effects of ownership structure on firm performance cannot be delineated from its effects on leverage. More interestingly, these results highlight that higher voting rights could pose some moral hazard problem if there is a controlling manager shareholder called Cronyman in our analysis. Evidently family ownership could mitigate some of these moral hazard problems, though it could exacerbate the problem of over-lending. As such, the results presented here confirm and extend the essential findings of Claessens et al. (2002), though illustrate the importance of allowing for simultaneity between capital structure and firm performance.

Dynamic Adjustment of Corporate Leverage: Is there a lesson to learn from the Recent Asian Crisis?

While the aggregate macroeconomic analysis of the recent Asian Crisis highlights the moral hazard problem of bad loans in poorly supervised and regulated East Asian economies, there is very little firm-level analysis to characterize it. The present paper attempts to fill in this gap of the literature and focuses on the process of dynamic adjustment of the actual leverage towards the optimum. Our results based on the Worldscope firm-level panel data indicate a close correspondence between excess leverage and excess capital stock and also reveal signs of corporate inertia. This inertia has been evident not only among firms with excess capital stock, but also among those with larger share of short-term debt in the worst affected countries, especially during the pre-crisis and crisis periods; the adjustment process was however speeded up in the post-crisis period. One possible way out of this problem of bad loans would be to develop the equity market and induce the firms to rely more on equity finance.Moral hazard, Over-lending and over-investment, Speed of adjustment, Inertia, Generalised Methods of Moments