Globalization, Transparency and Economic Growth: The Vulnerability of Chinese Firms to Macroeconomic Shocks

The process of globalization encompasses economic and financial integration. Abolition of capital controls and dismantling of barriers of different kinds are important ingredients of the process that will entirely change the exposure of previously sheltered companies to shocks on the global economic arena. Lessons learned by policy-makers in already globalized countries are that market participants should be prepared to meet the new exposure to fluctuating exchange rates, interest rates and inflation rates. China has recently adopted International Financial Reporting Standards (IFRS) in her efforts to improve the quality of information available for risk management and for pricing of risk. This paper claims that further improvements are needed and presents a new framework for how to understand and measure the impact of different scenarios on corporate performance. It also elaborates on how to communicate the macroeconomic effects to external stakeholders of the firm in a way that fosters further economic growth in China.International Financial Reporting Standards; Transparency; Economic Growth; Macroeconomic Impact; Globalization

The Effects of Internationalization on CEO Compensation

This study examines the relation between the internationalization of firms and CEO compensation. Starting from a sample of Norwegian and Swedish listed firms we analyze the effects of internationalization as manifest in the capital market (international cross-listing), the market for corporate control (foreign board membership), and the product and service market (export and foreign sales). We conclude that all three markets contribute positively to the compensation level of CEOs. We argue that part of the higher CEO compensation in internationally oriented firms - as compared to less internationalized firms within the same country - reflects a risk premium for reduction in job security.CEO Compensation; Internationalization; Corporate Governance; CEO Tenure; Cross-Listing; Foreign Board Membership

The Impact of Foreign Board Membership on Firm Value

This study examines the effect of foreign (Anglo-American) board membership on corporate performance measured in terms of firm value (Tobin’s Q). On a basis of firms with headquarters in Norway or Sweden the study indicates a significantly higher value for firms that have outsider Anglo-American board member(s), after a variety of firm-specific and corporate governance related factors have been controlled for. We argue that this superior performance reflects the fact that these companies have successfully broken away from a partly segmented domestic capital market by “importing” an Anglo-American corporate governance system. Such an “import” signals a willingness on the part of the firm to expose itself to improved corporate governance and enhances its reputation in the financial market.Foreign Board Membership; Corporate Governance; Board Monitoring; Cross-Listing

Producer Prices in the Transition to a Common Currency

We analyze producer price developments in the transition from a national exchange rate regime to a monetary union. The focus is on the European Economic and Monetary Union (EMU). Stylized facts witness about an exploding gaps in producer-price inflation during the years immediately following the completion of the EMU. Price convergence is found to be an important driver throughout the entire euro period (1999-2005), but with no significant differences in speed compared to the pre euro period. Productivity growth had its primary effect in the first years and effective exchange-rate changes in the later years of the euro period.Producer prices; Relative prices; Price convergence; Euro; Balassa-Samuelson

EU – China and the Non-transparent Race for Inward FDI

In this paper it is argued that the restructuring following the stiffer competition stemming from increased global integration will trigger a race between countries to attract inward foreign direct investment (FDI). It is further argued that this race consists of last minute efforts and tailor-made packages designed by governments and their agencies to temporarily improve their country’s otherwise inferior profile. This race is non-transparent and the factors used to compete for inward FDI (the 'elements' of the race) deviate from those of long-term efforts to develop a favourable investment climate and improve productivity, as well as medium-term efforts, such as lowering corporate taxes. The paper elaborates on the research problem of properly understanding the drivers of inward FDI in the absence of data on the elements of the non-transparent race. It also addresses the economic policy problem following from this race with a scenario where a large share of global FDI ends up in China, putting the cohesion of the EU at stake and triggering a regional race within China.Inward FDI; China; European Union; Investment-diverting Policies

Recognizing Macroeconomic Fluctuations in Value Based Management

Value Based Management (VBM) has become a common tool for ex ante and ex post evaluation of corporate strategies and projects from the perspective of shareholder value maximization (SVM). VBM-frameworks are designed to support investment and divestment decisions, ex post evaluation of management and their major strategic decisions, and bonus-systems. Traditional VBM frameworks make no distinction between sources of temporary changes in performance, and sources of performance reflecting the intrinsic competitiveness of the firm. Temporary changes in performance are often caused by macroeconomic fluctuations. In this article we develop an approach for “filtering” the impact of macroeconomic fluctuations out of measures of performance in order for management to obtain better information for purposes of investment, divestment, and exposure management decisions. We focus on filtering for purposes of performance assessment employed in compensation schemes. A case study illustrates the approach, and shows the potential magnitude of effects from macroeconomic events.Value Based Management (VBM); Shareholder Value Analysis (SVA); Economic Value Added (EVA); Performance Measurement; Macroeconomic Fluctuations; Bonus System

Financial Determinants of Foreign Direct Investment

We argue that mainstream FDI theory underplays financial motivations for interna-tional investment, and suggest several possible channels for a distinct cost-of-capital effect on FDI. Using a sample of European firms’ cross-border acquisitions, and controlling for traditional firm-level determinants of FDI, we find strong evidence in favor of a cost-of-equity effect, whereas the effect of debt costs is indeterminate. We further find that financial determinants are more important for firms originating in relatively less financially developed countries and for firms with high knowledge intensity.FDI; Cross-border Acquisitions; Investment-q; Cost of Capital; Cross-listing; Segmentation

On the Static Efficiency of Secondary Bond Markets

The major strand of finance literature understands market efficiency through the market’s ability to process information into prices. Another strand of literature refers to the economists’ usual sense of the word, i.e. that markets ensure that resources are allocated to their most profitable expected use, and provide services at the lowest cost. This paper, deploying the second definition, suggests a concept of static efficiency, and claims this can also be seen as a measure of market quality. The paper develops a measure of qualitative static efficiency for bond markets built on four indicators: transparency, number of maturities and issuers, spread, and liquidity. Indicators of market quality should be easily accessible, and permit international and inter-temporal comparison. Using Nordic markets as case studies, we show that these markets became more efficient during the 1990’s, but that transparency of efficiency remains a problem. A number of measurement problems with the static efficiency indicators are discussed, as well as interdependence issues. The paper concludes with comments on future applications of the static efficiency measure.Efficiency; Transparency; Market Liquidity; Bond Markets

Exchange-Rate and Interest-Rate Driven Competitive Advantages in the EMU

Real exchange and interest rates may still fluctuate inside the EMU and give rise to changes in competitiveness. We find, in contrast to what is generally expected, no convergence in these variables after the introduction of the euro. On the contrary, a divergence is found that is extraordinary when compared to the preceding 40 years. The magnitude of the divergence should urge on a wave of restructuring in the EMU, conditioned upon adequate policy responses. The worst-case scenario involves a flight to structural support and protectionism, challenging the whole idea of the EMU.   Real Exchange Rates; Real Interest Rates; EMU; Competitive Advantage; Restructuring

Corporate Distress and Restructuring with Macroeconomic Fluctuations: The Cases of GM and Ford

Traditional methods for evaluating corporate credit risk rarely consider the impact of the macro economy on corporate value and performance. We argue that lenders and management can obtain valuable information about the need for and approach to restructuring by decomposing default predictions into "intrinsic" and macroeconomic factors. We apply a method previously used for measuring macroeconomic exposures on default predictions in order to filter out macroeconomic factors. In this paper the method is applied on an analysis of the Z-scores for GM and Ford for the period 1996–2005. The macro economy has affected the two firms in different ways with implications for managements' and creditors' approaches to restoring their financial health.Credit Risk; Creditworthiness; Z-Scores; Default Predictions; GM; Ford; Restructuring; Macroeconomic Exposure