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82. Limited Market Participation and Asset Prices in the Presence of Earnings Management
- Author:
- Bo Sun
- Publication Date:
- 06-2011
- Content Type:
- Working Paper
- Institution:
- Board of Governors of the Federal Reserve System
- Abstract:
- We examine the role of earnings management in explaining the properties of asset prices and stock market participation. We demonstrate that investors' uncertainty about the extent of manipulation can cause excess movements in stock price relative to fluctuations in output. When faced with information asymmetry about fundamentals in the presence of earnings management, investors demand a higher equity premium for bearing the additional risk associated with their payoffs. In addition, when investors have heterogeneous beliefs about managerial manipulation, the dispersion in belief endogenously gives rise to limited stock market participation. Our model suggests that the increasing stringency of corporate governance and varying composition of investors may have played a role in the contemporaneous run-up of market participation rates in the recent years.
- Topic:
- Markets, Finance, Investment, and Stock Markets
- Political Geography:
- Global Focus
83. Evaluating the Forecasting Performance of Commodity Futures Prices
- Author:
- Trevor A. Reeve and Robert J. Vigfusson
- Publication Date:
- 08-2011
- Content Type:
- Working Paper
- Institution:
- Board of Governors of the Federal Reserve System
- Abstract:
- Commodity futures prices are frequently criticized as being uninformative for forecasting purposes because (1) they seem to do no better than a random walk or an extrapolation of recent trends and (2) futures prices for commodities often trace out a relatively flat trajectory even though global demand is steadily increasing. In this paper, we attempt to shed light on these concerns by discussing the theoretical relationship between spot and futures prices for commodities and by evaluating the empirical forecasting performance of futures prices relative to some alternative benchmarks. The key results of our analysis are that futures prices have generally outperformed a random walk forecast, but not by a large margin, while both futures and a random walk noticeably outperform a simple extrapolation of recent trends (a random walk with drift). Importantly, however, futures prices, on average, outperform a random walk by a considerable margin when there is a sizeable difference between spot and futures prices.
- Topic:
- International Trade and Finance, Markets, Investment, and Commodities
- Political Geography:
- Global Focus
84. A Theory of Capital Rationing
- Author:
- Jan Toporowski
- Publication Date:
- 09-2010
- Content Type:
- Working Paper
- Institution:
- School of Oriental and African Studies - University of London
- Abstract:
- This paper revisits some of the issues originally put forward by the author as the theory of capital market inflation, in the book The End of Finance (Toporowski 2000). The paper makes much clearer the key assumptions and relationships between the operations of the capital market dominated by institutional investors, and the balance sheets of companies. In this way, it presents a theory of how macroeconomic dynamics may be affected by disequilibrium in the capital market. The first part of the paper examines the demand for new equity issues by institutional investors, namely insurance companies and pension funds. In the second part of the paper it is argued that the tendency of pension funds to mature may be a factor in forcing companies into debt and thus discouraging their investment and restricting their cash flow. The tendency towards forced indebtedness may be reinforced by an inelastic demand for capital by banks. The third part of the paper argues that the inelastic supply of capital in the capital market gives rise to processes of capital market inflation or deflation. The first of these may make banks more fragile. The second may contribute to deflationary processes in the macroeconomy. A fourth section argues that further instability is added by international capital market integration.
- Topic:
- Debt, Markets, Banks, and Investment
- Political Geography:
- Global Focus
85. Friends or Foes? The Stock Price Impact of Sovereign Wealth Fund Investments and the Price of Keeping Secrets
- Author:
- Jason Kotter and Uger Lel
- Publication Date:
- 08-2008
- Content Type:
- Working Paper
- Institution:
- Board of Governors of the Federal Reserve System
- Abstract:
- This paper examines the stock price impact of 163 announcements of Sovereign Wealth Fund (SWF) investments. We document an average positive risk-adjusted return of 2.1 percent for target firms during two days surrounding SWF acquisition announcements. The announcement effect is both statistically and economically significant. A multivariate analysis shows that the degree of transparency of SWF activities is an important determinant of the market reaction, and both the SWF and the existing shareholders of the target firm benefit from improved SWF disclosure. In addition, target firms’ profitability, growth, and governance do not change significantly in the three-year period following the SWF investment relative to a control sample. These results are robust to a battery of tests. Overall, our findings suggest that SWF investments convey a positive signal to market participants about the target firm, increased SWF transparency
- Topic:
- International Trade and Finance, Global Markets, Financial Markets, and Investment
- Political Geography:
- Global Focus
86. Global Imbalances: A Source of Strength or Weakness?
- Author:
- Kristin J. Forbes
- Publication Date:
- 07-2007
- Content Type:
- Journal Article
- Journal:
- The Cato Journal
- Institution:
- The Cato Institute
- Abstract:
- Gross capital flows into the United States totaled $1.8 trillion in 2006. When combined with the $1.0 trillion the United States sent abroad, these net capital inflows funded the U.S. current account deficit of about $800 billion.1 The source of a large proportion of these capital inflows was developing economies—especially China and major oil exporters. Why are foreigners willing to invest such massive amounts of money in the U.S. economy? And perhaps even more surprising—why are countries with low levels of investment willing to send this relatively scarce resource to a capital-abundant economy instead of investing in their own countries? Understanding the motivation behind the millions of individual decisions that drive these capital inflows is critically important to understanding if this massive net transfer of capital into the United States reflects a strength or weakness of the global economy.
- Topic:
- Economy, Investment, and Capital
- Political Geography:
- Global Focus and United States of America
87. Reducing Global Poverty: Encouraging Private Investment in Infrastructure
- Author:
- Research and Policy Committee of the Committee for Economic Development
- Publication Date:
- 07-2006
- Content Type:
- Policy Brief
- Institution:
- The Conference Board
- Abstract:
- This paper builds on some of the findings and recommendations of the 2002 CED policy statement, A Shared Future: Reducing Global Poverty, which broadly examined the phenomenon known as globalization and offered a blueprint for how best to harness economic integration and political cooperation between developed and developing countries towards enhancing economic growth and combating global poverty. Encouraging Private Investment in Infrastructure evaluates various options for public-private partnerships and provides brief analyses of several successful projects in order to identify best practices.
- Topic:
- Globalization, Poverty, Infrastructure, and Investment
- Political Geography:
- Global Focus
88. Regulation, Investment, and Growth across Countries
- Author:
- John W. Dawson
- Publication Date:
- 10-2006
- Content Type:
- Journal Article
- Journal:
- The Cato Journal
- Institution:
- The Cato Institute
- Abstract:
- Numerous studies have explored the relationship between economic freedom and long-run economic growth across countries.1 One particular aspect of economic freedom that has received relatively little attention in the empirical growth literature, however, is the extent of government regulation. Determining the impact of regulation on cross-country economic performance has been virtually impossible because of the inherent difficulties in measuring the scope of regulation across countries. While a few studies investigate various aspects of specific regulations, none are able to assess the importance of a comprehensive measure of regulation on long-run economic performance in a large sample of countries.
- Topic:
- Regulation, Economic Growth, and Investment
- Political Geography:
- Global Focus
89. Grants Vs . Investment Subsidies
- Author:
- Ashok S. Rai and Tomas Sjöström
- Publication Date:
- 12-2001
- Content Type:
- Working Paper
- Institution:
- The John F. Kennedy School of Government at Harvard University
- Abstract:
- How should a government intervene to help the credit constrained poor? We study an economy where productivity and wealth are unobserved, and loans must be collateralized. We show that the e¢cient policy typically consists of o¤ering both a grant and an investment subsidy. Everybody will take the grant and only the relatively productive will take the subsidy. This policy reduces but does not eliminate investment distortions.
- Topic:
- Poverty, Investment, Collateral, Credit Constraints, Intervention, and Loan Subsidy
- Political Geography:
- Global Focus