Contents of Volume 5, Number 1

Special Issue: Development Finance (Guest Editors: Dr. Sushanta Mallick, Dr. Sailesh Tanna)

June 2009

Special Issue Papers

Investment, Financial Liberalisation and Complementarity Hypothesis: Panel Data Approach for India

T. Moore

Abstract: This paper innovatively adopts McKinnon’s complementarity hypothesis as a theoretical framework for investigating the effect of financial constraints on investment for Indian firms using the panel dataset for the period from 1988 to 2005. The paper examines the extent to which financial liberalisation has been effective in reducing the financial constraints measured by the cash flow sensitivity of investment. The empirical result reveals that cash and investment are, in general, complementarily supporting the hypothesis. However, after the de-regulation of interest rates in 1997, the cash sensitivity of investment becomes statistically insignificant for small and medium firms, while it remains significant for large firms. The results seem to suggest that financial liberalisation impacted more on small and medium firms than on large firms in terms of relaxing financial constraints.

Financial Repression and Economic Growth in Pakistan: A Co-integration Analysis

S. Ghatak, R. Chandio

Abstract: The financial liberalization hypothesis advocated by McKinnon and Shaw (1973) postulates that financial liberalisation via a rise in real interest rates in financially repressed developing countries would induce higher savings, especially financial savings, increase credit supply, stimulate investment and hence economic growth. Some empirical research on Asia supports this hypothesis. Pakistan made several attempts to initiate a similar liberalization process since 1980s. To capture the effects of financial liberalization, this paper estimates the impact of changes in real interest rates on savings, investment and real money balances in Pakistan from 1970 to 2000. The results of co-integration and error-correction analyses do not provide support for the financial liberalization hypothesis.

What is Wrong with “Adjusted” Accounting Ratios that are Commonly Used by the Microfinance Industry to Measure Financial Performance?

R. Manos, J. Yaron

Abstract: The microfinance industry commonly uses the adjusted return on equity, the adjusted return on assets and the financial self sufficiency index (FSS) as measures of overall financial performance and sustainability. It is generally perceived that these ratios fully and adequately adjust for the impact of subsidies. This paper argues that these performance ratios do not fully account for the real economic value of subsidies received, and the consequences of using them are as follows: First, it leads to reporting a shorter period for the average microfinance institution to become profitable, compared with the time it actually takes for those that reach that stage. Second, the present value of subsidies that the typical microfinance institution consumes until it reaches subsidy-independence is higher than implied by the distorted ratios. Third, at any point in time, the number of profitable and self sufficient microfinance institutions is smaller than the number of those that claim to be in that position.

Capital Structure and Ownership: A New Approach with Comparative Evidence from Malaysia and Thailand

S. Prasad, C.J. Green, V. Murinde

Abstract: This paper argues that demand theory can provide an interesting framework for studying company capital structure to supplement more traditional ad hoc models of leverage. Using the demand theory approach, the paper analyses the capital structure of an unbalanced panel of Malay and Thai non-financial companies in terms of four financing sources: short-term and long-term debt, equity and retentions. This paper finds that the costs of different sources of capital have a significant impact on the capital structure of the sample companies in these countries. Furthermore, after controlling for cost of capital considerations, more standard conditioning variables are less significant. In addition, ownership concentration is not significant at all in Thailand and only marginally so in Malaysia.

Foreign Capital Inflows, Economic Policies and the Real Exchange Rate in Sub-Saharan Africa: Is there an Interaction Effect?

J. Nwachukwu

Abstract: This paper presents a dynamic heterogeneous panel data model in which the reaction of the real exchange rate to external finance includes interactions with trade openness and the fiscal, monetary and nominal exchange rate policies of twenty-four Sub-Saharan African countries from 1978-2001. As expected, a rise in international transfers exerts a real appreciation pressure in reform-compliant economies. However, the results from this paper indicate that this estimated inflationary effect of capital inflows could be effectively contained by associated policy interventions to contract government expenditure, relax rigidities in factor markets, liberalise trade controls and address problems of credit rationing in the private sector.

Regular Papers

Optimal Capital Structure Decision in a Multi-Criteria Framework: Solutions for an M&A Case as Proposed

by Practicing Financial Experts

M. Schauten, J. Spronk

Abstract: In this paper, we analyze financing solutions as proposed by two consultants, one full service banker and one investment banker, for a merger and acquisition problem. We asked each specialist to construct three financing proposals: the first would focus on the interests of current shareholders; the second would center on the interests of management; and the third would examine how the specialist should advise the management of the bidder. We compare the resulting proposals using criteria described by the authors in a previous paper, along with additional criteria mentioned by the specialists. We find that: i) the solutions differ between specialists; ii) the solutions and criteria applied by the specialists depend on the stakeholder (shareholders versus management) that the solution is tailored for; and iii) some economic criteria do not appear to be as relevant as suggested by theory.

Corporate Dividend Policies: Survey Evidence from Finance Directors in the UK and Greece

S. Archbold, I. Laziridis

Abstract: This paper reports the results of a questionnaire survey on dividend policy addressed to finance directors of UK and Greek listed firms. We survey 313 finance directors in the UK and 312 in Greece to examine their views of and understanding about the dividend decision in order to compare practice with our theoretical propositions. We know of only one other study that compares dividend policy in two countries. The UK and Greek comparison is of interest because they differ in terms of size, economic development and structure, and sophistication of their respective capital markets. We find that the conservative nature of dividend policies is common to both groups, however, unlike the UK, Greek finance directors are influenced by temporary changes in earnings and it appears that Greek finance directors and investors are much more willing countenance fluctuating patterns of dividends than is the case in the UK and the US. Another difference between the two groups concern their attitudes to signalling, although there was no support for the more sophisticated signalling hypotheses advanced in the literature. There was no support for the agency or tax explanations of dividend policy and only weak support for clientele effects.

Optimal Portfolio Analysis for the Czech Republic, Hungary and Poland During 2001– 2006 Period 

G. Xanthos, D. Tserkezos

Abstract:  This paper examines the strategy of investing in selected East European stock markets: The Czech Republic, Hungary, and Poland. These stocks markets are representative of the emerging stock markets of Eastern Europe and examined from the perspective of an investor who invests solely in the Eastern European markets. International Portfolio investment gradually increased during the late 2000’s in this region. Four portfolio construction techniques were used including the Markowitz mean-variance analysis. The optimal portfolios are evaluated using standard selection criteria and it is shown that possessing a diversified international portfolio which includes some of the aforementioned stock markets is beneficial.  

Constructing and Empirically Evaluating Two Statistical Models of Corporate Bankruptcy in Greece

D.P. Charalambidis, D.L. Papadopoulos

Abstract: The purpose of this paper is to create two predictive models of corporate bankruptcy using multivariate discriminant analysis and logit analysis. Models’ construction is based on a sample of 33 non-listed Greek firms that went bankrupt during the ‘90 and 60 listed firms at the Greek Stock Exchange that survived during the same period. The proportion of bankrupt and non-bankrupt firms in the total firm population and the cost of prediction errors are both incorporated into the analysis. Results show that both models can discriminate bankrupt from non-bankrupt firms to a percentage higher than 90%.