This thesis examines how bank market structure affects industry performance in developing countries. A high degree of bank concentration would be associated with tight constraints and high borrowing costs, while it has also been argued that, it would be easier for firms to access credit if the banking system is concentrated. Foreign banks are seen to promote financial development and spur economic growth; while critics suggest that a larger foreign bank presence in developing countries is associated with less credit to the private sector. Also, government ownership of banks is responsible lower economic and slow financial development, while others argue that government banks promote long-run growth. The implications of bank market structure on the real economy are examined using cross-country, cross-industry panel data from developing countries, along with a variety of econometric techniques, and standard measures of industry performance. The research aims to ascertain whether bank market structure in developing countries influences financing for firms differently as a result of industry-specific characteristics. It also examines if institutional characteristics helps in explaining industrial performance in the short-run. As a follow-up to one of the findings, the research examines if banks would prefer to fund innovative firms in a liberalized environment by exploring the impact of financial development on the export structure. The main empirical findings are as follows: first, it may not be possible to identify robust or consistent findings concerning the effects of good institutions; secondly, it might not necessarily be the case that financial development specifically benefits firms based on specific industry characteristics; and finally, the research finds that banking sector development reduces export sophistication and increases export concentration. This may suggest that banking sector development enforces specialization according to existing comparative advantage.

This study initially aimed to evaluate dynamic capability theory using a longitudinal empirical case of a highly successful FTSE-100 company operating within a volatile market. Using a range of rich qualitative data to open the “black box”, dynamic capabilities theory is extended through a detailed account of the process through which the case firm reconfigures and deploys their so-called zero-order or operational capabilities. Although there is a burgeoning literature, research findings remain diverse, disparate and largely conceptual. The limited examples of empirical work in the extant literature, tend to focus on what dynamic capabilities are with little attention in demonstrating how they actually operate. This study details several stages of significant change within the case firm as it moves from start up to its current MNE status. In-depth interviews with the senior team both past and present capture discussions of those factors underlying the success of this firm. Thematic development revealed examples of resource configurations and routines that matched dynamic capability as defined in literature. However, attempts to use Winter's (2003) hierarchy of capability to organize the data proved inadequate; far from being heterogeneous, the dynamic capability found looks like best practice; and whilst operational capability can be seen to evolve, the dynamic capability identified has not. Turning to the wider strategic management literature one can argue that the dynamic capability found in this firm fits better with a wider set of concepts such as knowledge management, absorptive learning, organizational change, leadership, HR practices, strategic decision making, team building, etc. Using a dynamic capability perspective, the findings might extend the under-developed notions of dynamic managerial capability and entrepreneurial fitness. Dynamic managerial capability, as described in the literature, can be articulated within the case firm. Managerial agency is key to competitive success in this firm and this study shows that the concept of agency is more encompassing than that of dynamic managerial capabilities and Teece’s (2007) vision of sensing, seizing and reconfiguring. There are cognitive aspects to creating the context for leadership action and the roles of sense-making and sense-giving to sustain the organizational culture and create the framework for innovation, learning and change. Yet, it is equally possible to account for competitive advantage within this case without recourse to dynamic capability theory. By linking the data gathered to the concept of "dominant logic" (Prahalad & Bettis, 1986; 1995), it is argued that traits and attitudes of the founders and senior managers of the case firm contribute to the “logic” that drives action. Over time these traits have been expressed as a series of simple rules that, in turn, have been operationalized in an organizational culture providing the context for the development of both routines and ad-hoc action. The thesis then demonstrates analytically how rules and their underlying traits act as a mechanism for the creation, sustenance and adaptation of operational capabilities traceable directly to actions taken in response to or in anticipation of environmental changes as well as actions taken in the context of an organizational culture which reflects these rules and underlying traits. It is through managerial agency that rules are created, the culture sustained and “entrepreneurial fitness” is achieved. As such, the research presented here contributes to the resource-based theory of the firm without recourse to the dynamic capabilities construct.

This thesis investigates four interrelated research issues in the context of takeover likelihood modelling. These include: (1) the determinants of target firms’ takeover likelihood, (2) the extent to which targets can be predicted using publicly available information, (3) whether target prediction can form the basis of a profitable investment strategy, and – if not – (4) why investing in predicted targets is a suboptimal investment strategy. The research employs a UK sample of 32,363 firm-year observations (consisting of 1,635 target and 31,737 non-target firm-year observations) between 1988 and 2010. Prior literature relies on eight (old) hypotheses for modelling takeover likelihood – determinants of takeover likelihood. Consistent with prior studies, I find that takeover likelihood increases with the availability of free cash flow (Powell (1997, 2001, 2004)), the level of tangible assets (Ambrose and Megginson (1992)) and management inefficiency (Palepu (1986)), but decreases with firm age (Brar et al. (2009)). The empirical evidence lends no support to the firm undervaluation, industry disturbance, growth-resource mismatch or firm size hypotheses (Palepu (1986)). I extend prior research by developing eleven (new) hypotheses for target prediction. Consistent with the new hypotheses, I find evidence that takeover likelihood is an inverse U-shaped function of firm size, leverage and payroll burden. Takeover likelihood also increases with share repurchase activity, market liquidity and stock market performance and decreases with industry concentration. As anticipated, the new hypotheses improve the within-sample classification and out-of-sample predictive abilities of prior takeover prediction models. This study also contributes to the literature by exploring the effects of different methodological choices on the performance of takeover prediction models. The analyses reveal that the performance of prediction models is moderated by different modelling choices. For example, I find evidence that the use of longer estimation windows (e.g., a recursive model), as well as, portfolio selection techniques which yield larger holdout samples (deciles and quintiles) generally result in more optimal model performance. Importantly, I show that some of the methodological choices of prior researchers (e.g., a one-year holdout period and a matched-sampling methodology) either directly biases research findings or results in suboptimal model performance. Additionally, there is no evidence that model parameters go stale, at least not over a ten-year out-of-sample test period. Hence, the parameters developed in this study can be employed by researchers and practitioners to ascribe takeover probabilities to UK firms. Despite the new model’s success in predicting targets, I find that, consistent with the market efficiency hypothesis, predicted target portfolios do not consistently earn significant positive abnormal returns in the long run. That is, despite the high target concentrations achieved, the portfolios generate long run abnormal returns which are not statistically different from zero. I extend prior literature by showing that these portfolios are likely to achieve lower than expected returns for five reasons. First, a substantial proportion of each predicted target portfolio constitutes type II errors (i.e., non-targets) which, on average, do not earn significant positive abnormal returns. Second, the portfolios tend to hold a high number of firms that go bankrupt leading to a substantial decline in portfolio returns. Third, the presence of poorly-performing small firms within the portfolios further dilutes its returns. Fourth, targets perform poorly prior to takeover bids and this period of poor performance coincides with the portfolio holding period. Fifth, targets that can be successfully predicted tend to earn lower-than-expected holding period returns, perhaps, due to market-wide anticipation. Overall, this study contributes to the literature by developing new hypotheses for takeover prediction, by advancing a more robust methodological framework for developing and testing prediction models and by empirically explaining why takeover prediction as an investment strategy is, perhaps, a suboptimal strategy.

In contemporary times, monetary policy is evaluated by examining monetary policy shocks represented by changes in nominal interest rates rather than changes in the money supply. In this thesis, we studied three interrelated concepts: the monetary policy transmission mechanism, interest rate spreads and the spread adjusted monetary policy rule. Chapter 1 sets out a theoretical background by reviewing the evolution of monetary policy from money growth targeting to the standard approach of interest rate targeting (pegging) in the new consensus. The new consensus perspective models the economy with a system of three equations: the dynamic forward-looking IS-curve for aggregate demand, an inflation expectation-augmented Phillips curve and the interest rate rule. Monetary policy is defined as fixing the nominal interest rate in order to exert influences on macroeconomic outcomes such as output and expected inflation while allowing the money supply to be determined by interest rate and inflation expectations. Having set out this background, Chapter 2 empirically investigates long-standing questions: how does monetary policy (interest rate policy) affect the economy and how effective is it? This chapter seeks to answer these questions by modelling a monetary policy framework using macroeconomics data from Namibia. Using the new consensus macroeconomic view, this empirical analysis starts from the assumption that money is endogenous, and thus it identifies the bank rate (i.e. Namibia’s repo rate) as the policy instrument which starts the monetary transmission mechanism. We estimated a SVAR and derived structural impulse response functions and cumulative impulse response functions, which showed how output, inflation and bank credit responded to structural shocks, specifically the monetary policy and credit shocks in the short run and the long run. We found that in the short run quarterly real GDP, inflation and private credit declined significantly in response to monetary policy shocks in Namibia. Monetary policy shocks as captured by an unsystematic component of changes in the repo rate considerably caused a sharp decrease for more than three quarters ahead after the first impact in quarterly real GDP. Furthermore, structural impulse response functions showed that real GDP and inflation increased in response to one standard deviation in the private credit shock. In the long run, the cumulative impulse response functions showed that inflation declined and remained below the initial level while responses in other variables were statistically insignificant. South African monetary policy shock caused significant negative responses in private; however, the impacts on quarterly GDP were barely statistically significant in the short run. In all, this empirical evidence shows that the monetary policy of changing the level of repo rate is effective in stabilising GDP, inflation rate and private credit in the short run; and in the long run domestic monetary policy significantly stabilises inflation too. The structural forecast error variance decompositions show that the variations of output attributed to interest rate shock show that the interest rate channel is relatively strong compared with the credit channel. This is substantiated by the fact that repo rate shocks account for a large variation in output compared with the variation attributed to private credit shock. We conclude in this chapter that domestic monetary policy through the repo rate is effective, while the effects from the South African policy rate are not emphatically convincing in Namibia. Therefore, the Central Bank should keep independent monetary policy actions in order to achieve the goals of price stability. In Chapter 3 we investigate the subject of ‘interest rate spreads’, which are seen as the transmitting belts of monetary policy effects in the economy. While it is widely acknowledged that the monetary policy transmission mechanism is very important, it is also clear that the successes of monetary policy stabilisation are influenced by the size of spreads in the economy. Interest spreads are double-edged swords, as they amplify and also dampen monetary effects in the economy. Hence, we investigate the unit root process with structural breaks in interest rate spreads, and the macroeconomic and financial fundamentals that seem to explain large changes in spreads in Namibia. Firstly, descriptive statistics show that spreads always exist and gravitate around the mean above zero and that their paths are significantly amplified during crisis periods. Secondly, the Lanne, Saikkonen and Lutkepohl (2002) unit root test for processes with structural breaks shows that spreads have unit root with structural breaks. Most significant endogenous structural breaks identified coincide with the 1998 East Asia financial crisis period, while the global financial crisis only caused a significant structural break in quarterly GDP. Thirdly, using the definitions of the changes in base spread and retail spread, we find that inflation, unconditional inflation, economic growth rate and interest rate volatilities, and changes in the bank rate and risk premium and South Africa’s spread are some of the significant macroeconomic factors that explain changes in interest rate spread in Namibia. Whether we define interest spread as the retail spread, that is, the difference between average lending rate and average deposit rate, or the base spread, which is the difference between prime lending rate and the bank rate, our empirical results indicate that there macroeconomics and financial fundamentals play a statistically significant role in the determination of interest rate spreads. In the last chapter, we estimate the monetary policy rule augmented with spread - the so called Spread-adjusted Taylor Rule (STR). The simple Spread-adjusted Taylor rule is suggested in principle to be used as simple monetary policy strategy that responds to economic or financial shocks, e.g. rising spreads. In an environment of stable prices or weak demand, rising spreads have challenged current new consensus monetary policy strategy. As a result, the monetary policy framework that attaches weight to inflation and output to achieve price stability has been deemed unable to respond sufficiently to financial stress in the face of financial instability. In response to this challenge, the STR explicitly takes into account the spread to address the weakness of the standard monetary policy reaction in the face of financial instability. We apply the Bayesian method to estimate the posterior distributions of parameters in the simple STR. We use theory-based informed priors and empirical Bayesian priors to estimate the posterior means of the STR model. Our results from this empirical estimation show that monetary policy reaction function can be adjusted with credit spread to caution against tight credit conditions and therefore realise the goal of financial stability and price stability simultaneously. The estimated coefficients obtained from the spread-adjusted monetary policy are consistent with the calibrated parameters suggested by (McCulley & Toloui, 2008) and (Curdia & Woodford, 2009). We find that, on average, a higher credit spread is associated with the probability that the policy target will be adjusted downwards by 55 basis points in response to a marginal increase of one per cent in equilibrium spread. This posterior mean is likely to vary between -30 and -79 basis points with 95% credible intervals. Altogether in this chapter we found that a marginal increase in the rate of inflation above the target by one per cent is associated with probability that the repo rate target will be raised by an amount within the range of 42 to 75 basis points, while little can be said about central banks’ reaction to a marginal increase in output.

Search and matching models such as those of Mortensen and Pissarides (1994) and Pissarides (2000) have come under criticism in recent years. Analysis of the model by Shimer (2005) and others has focussed in particular on the models’ inability to generate sufficient volatility in variables such as the unemployment and vacancies rates, and the vacancyunemployment ratio. Newer models have sought to ameliorate these empirical issues by changing the model – for example by adding wage rigidity or by amending the specification of the costs of search. In Chapters 3 and 4 of this thesis, we re-address some of these issues using the method of indirect inference. The method allows us to formally test the hypothesis that data was generated by a particular model under a given set of parameter values. It therefore offers a statistically founded replacement for the somewhat arbitrary moment-by-moment comparisons found in much of the existing literature. We apply the method to Shimer’s analysis of the Mortensen Pissarides model, and concur with his analysis that, under his chosen parameters, the model fails to fit the data. We also apply the method to the model used in Yashiv’s (2006) paper, which argues using moment comparisons that the standard model can be improved by adding convex search costs. In contrast, we find that the augmented model is rejected under formal indirect-inference tests. The aggregate search and matching literature has also generated an empirical debate about the relative importance of labour market flows, expressed in terms of the hazard rates of labour market transition faced by workers. Many studies decompose changes in steady-state unemployment in terms of the contributions of various hazard rates. This thesis also extends this literature so as to model the contributions of hazards for two distinct and contiguous geographical areas – those of Wales and the rest of the United Kingdom, using Labour-Force-Survey panel data. We find some evidence that in this regard, the UK hazards are weighted towards the hazards “out of” unemployment, whereas for Wales the hazards “into” and “out of” unemployment are of approximately equal importance. We also find however that the results are sensitive to whether or not the data are smoothed, and whether a steady-state is imposed.

The implementation of the Maastricht criteria, establishment of the Stability and Growth Pact (SGP), creation of the European Central Bank (ECB) and the Economic and Monetary Union (EMU) raised several challenges for the European Union (EU) countries. The main aim of this dissertation is to analyse the economic implications of those institutional changes. Chapter 2 provides an empirical answer to the question of whether Maastricht and SGP fiscal rules have affected growth in the EU countries. Results from the estimation of a growth equation show that growth of real GDP per capita in the EU was not negatively affected in the period after Maastricht. The main conclusion of this analysis is that the institutional changes that occurred in some European countries after 1992 were not harmful to growth. Chapter 3 tries to identify the main causes of excessive deficits in the EU. A conditional logit model is estimated over a panel of EU countries, where an excessive deficit is defined as a deficit higher than 3% of GDP. Results indicate that a weak fiscal stance, low economic growth, elections and majority left-wing governments are the main causes of excessive deficits. They also show that the institutional constraints imposed after Maastricht over the EU countries have succeeded in reducing the probability of excessive deficits, especially in small countries and in countries traditionally affected by large fiscal imbalances. A widespread idea in the business cycles literature is that the older is an expansion or contraction, the more likely it is to end. Chapter 4 provides further empirical support for this idea of positive duration dependence controlling simultaneously for the effects of other factors on the duration of expansions and contractions. This study employs for the first time a discrete-time duration model to analyse the impact of some variables on the likelihood of an expansion and contraction ending for a group of EU and non-EU countries. The evidence suggests that the duration of expansions and contractions is not only dependent on their actual age: the duration of expansions is also positively dependent on the behaviour of the OECD composite leading indicator and on private investment, and negatively affected by the price of oil and by the occurrence of a peak in the US business cycle; the duration of a contraction is negatively affected by its actual age and by the duration of the previous expansion. Finally, Chapter 5 raises the question of whether central banks’ monetary policy can be described by a linear Taylor rule or, instead, by a more complex nonlinear rule. This chapter also analyses whether those rules can be augmented with a financial conditions index containing information from some asset prices and financial variables. A forward-looking specification is employed in the estimation of the linear and nonlinear rules. A smooth transition model is used to estimate the nonlinear rule. The results indicate that the behaviour of the Federal Reserve of the United States can be described by a linear Taylor rule, whilst the behaviour of the ECB and Bank of England is best described by a nonlinear Taylor rule. In particular, these two central banks tend to react to inflation only when inflation is above or outside their targets. Moreover, the evidence also suggests that the recently created ECB is targeting financial conditions, contrary to the other two central banks.

This thesis investigates empirically the relationship between money, income and interest rates in the U.K. over the period 1963 to 1978. After developing univariate models of the time series' proxying these theoretical variables, the paradox existing between the conventional theoretical model, the IS/LM framework, and the usual empirical practice of directly estimating the demand for money function is investigated. It is shown that the crucial issues are the exogeneity assumptions placed on the IS/LM framework. As such assumptions cannot be tested in a static framework, a dynamic analogue of the IS/LM model is developed, along with appropriate methods for testing exogeneity in dynamic multivariate systems. Empirical tests show that the assumptions of the exogeneity of money and government expenditure are invalid, but that the direct estimation of demand for money functions is appropriate. This leads to an investigation of the dynamic structure and functional form of this function using recently developed techniques based on specification search procedures. A major conclusion of this study is that the IS/LM model is an invalid framework for empirical research, and in particular money cannot be regarded as being exogenously determined. Indeed, there is no evidence of feedback from money to either real income or prices, although both statistical and economic reasons are advanced for the possibility that such feedback cannot be detected by the techniques employed. Important short run dynamic effects are found on the demand for money with respect to real income, prices and interest rates. Furthermore, both the wage rate and an own rate of interest variable are also important determinants of money demand. The demand for narrow money function also exhibits sensible long run behaviour and has an adequate predictive performance but, unfortunately, the broad money function has no long run properties and predicts unsatisfactorily.

A variety of economic agents rely on information generated by the consumers when making their decisions. Not only consumers' rely on other consumers' ex- periences when making their buying decisions, but also some governmental agen- cies rely on customers' complaints to make inferences about the functioning of some markets. Little is known, however, about how this information interacts with the rms' investing and pricing decisions. A common denominator of the various types of information generated by the consumers is that its content de- pends on consumers' incentives to transmit information, which are not always obvious and may vary across markets and time. This thesis studies the role of the information generated by the consumers in two di erent contexts. The rst chapter studies whether customers' complaints about the quality provided by a regulated monopolist are informative about the rm's investment decisions. The second chapter considers the pricing decision of a monopoly rm when the con- sumers' buying decision is based on the reviews completed by previous consumers. The main contributions are twofold. First, by endogenising consumers deci- sion to lodge a complaint or complete a review, I am able to derive conclusions about the informational content of consumers behaviour and about its strategic interaction with the rms decisions. Second, the thesis makes a methodologi- cal contribution because it proposes a novel way of dealing with the free riding problem that lies at the very root of the generation of information by consumers.

This dissertation explores the economic origins of party-system structure and the role of economic institutions in determining political outcomes and electoral partici- pation. Chapter 2 studies the impact of unemployment on electoral fragmentation. Employing a four-party model of redistributive politics with two dimensions of choice (economic policy and ideology), we uncover a non-monotonic relationship between unemployment and fragmentation. In equilibrium, big parties woo the unemployed voters who are relatively more willing to switch their votes in response to generous redistribution. When the tax-base is large enough, allowing for more redistribution, an initial rise in unemployment favors the big parties by increasing the amount of the target constituency that is up for grabs. We identify two necessary conditions for opportunistic parties to be able to capitalize on this relationship: (i) the exis- tence of an e¤ective public redistribution mechanism and (ii) the lack of institutional checks and balances. Using data from OECD economies, we confirm empirically the relationship between economic and political outcomes. We find that variation in unemployment alone can account for two-thirds of the variation in party-system fragmentation. Using data from Greek local elections, to exploit the information shock, we test the role of institutional constraints in limiting opportunistic redis- tribution and increasing fragmentation. Overall, Chapter 2 lays a theoretical and empirical framework that relates economic outcomes with party-system structure. It also provides a special interest politics justification for redistribution. Finally, it highlights the importance of institutional constraints and economic institutions in guaranteeing political pluralism and power-sharing. Chapter 3, using again data from Greek elections explores empirically the link between economic adversity, trust and voter turnout. It identifies two links: one normative, declining trust in the party-system, and one rationalistic, the weakening of party-group linkages. We find that the fiscal shock caused a collapse in voter turn-out. Moreover, the decline was larger in regions with relatively larger public sector. Using suitable instruments from the institutional set-up of Ottoman Greece, we document a negative relationship between economic adversity and voter turn-out operating through both links (trust and party-group linkages). We also show that the size of the public sector acts as a catalyst in exacerbating the e¤ects of economic shocks on turn-out. The policy implications are clear: financial or institutional measures that reduce the size of public sector and aim at increasing transparency, trust and voter participation might have a second-order negative effect on turnout by reducing party-voter linkages. For Greece, the latter effect dominates, raising questions for the future of political participation.

Following the recent international financial crisis, a number of policy proposals have been made: one of which is the partitioning of banks into modules (groups), to contain financial shocks. The firewalls, which surround modules, prevent financial contagion: when a shock hits a bank it spreads to other banks in the same module, but not to banks in other modules. Conditional on bank modules avoiding shocks, businesses can achieve their latent business opportunities. The optimal banking system has a cost-benefit trade off: increased module size allows for more lucrative business opportunities, but increases systemic banking risk. This thesis, using a theoretical approach, assesses the importance of the distribution of business opportunities when using modules. When the distribution is uniform, the optimal structure of the banking industry is fully characterised: it surprisingly takes only two forms, either one all-encompassing module (containing all the banks), or atomistic modules (each module contains only one bank). The intuition behind this sharp characterisation is the increasing marginal returns that modules have on social welfare. A counter-example is constructed where, with a non-uniform matching of business opportunities, conversely, the efficient solution does have multiple modules each containing multiple banks. The model’s policy recommendation is that the banking system needs to be designed in accordance with the financial requirements of businesses.