In the first paper of my dissertation I document that industries with low offshoring potential have 7.31% higher stock returns per year compared to industries with high offshoring potential, suggesting that the possibility to offshore affects industry risk. This risk premium is concentrated in manufacturing industries that are exposed to foreign import competition. Put differently, the option to offshore effectively serves as insurance against import competition. A two-country general equilibrium dynamic trade model in which firms have the option to offshore rationalizes the return patterns uncovered in the data: industries with low offshoring potential carry a risk premium that is increasing in foreign import penetration. Within the model, the offshoring channel is economically important and lowers industry risk up to one-third. I find that an increase in trade barriers is associated with a drop in asset prices of model firms. The model thus suggests that the loss in benefits from offshoring outweighs the benefits from lower import competition. Importantly, the model prediction that offshorability is negatively correlated with profit volatility is strongly supported by the data. In the second paper (co-authored with Andrea Tamoni and Alex Hsu) we study the impact of fiscal policy shocks on bond risk premia. Government spending level shocks generate positive covariance between marginal utility and inflation (term structure level effect) making nominal bonds a poor hedge against consumption risk leading to positive inflation risk premia. Volatility shocks to spending have strong slope effect (steepening) on the yield curve, producing positive nominal term premia. For level and volatility shocks to capital income tax, term structure level effects dominate, delivering negative risk premia. Fluctuations in term premia are entirely driven by volatility shocks. Lastly, fiscal shocks are amplified at the zero lower bound. The third paper (co-authored with Andrea Tamoni and Alex Hsu) discusses how risk aversion (RA) affects the macroeconomic response to uncertainty shocks. In the data, heightened level of RA during the 2008 crisis amplified the decline of output and investment by roughly 21% and 16%, respectively, at the trough of the recession. The degree of RA determines the impact of second moment shocks in DSGE models featuring stochastic volatility. Ceteris paribus, higher RA leads to stronger responses of macroeconomic variables to uncertainty shocks, making un certainty shocks as economically significant as level shocks. Conversely, elevated RA can amplify or dampen responses to level shocks depending on whether RA exaggerates or attenuates consumption growth expectations.

The analysis is undertaken through exploration of a reduced form relationship. Two questions are central to the study. The first involves the role of structural breaks in the relationship between inflation and monetary growth. We explore this through an application of Qu (2008) SQ and DQ tests which analyse structural breaks in both the mean and quantiles of the conditional distribution. The second question involves the role of nonlinearity in the relationship between inflation and monetary growth. The results from the SQ and DQ tests suggest the existence of multiple structural breaks in the linear relationship between inflation and monetary growth. In the thesis, we propose a modification to the critical values underlying these tests to capture the effect of various sample sizes. The results of Monte Carlo experiments suggest that this modification improves the power of test when compared to the results given by Qu (2008). From the estimation of Markov switch model and infinite Hidden Markov model, we find that the relationship between monetary growth and inflation exhibits a maximum of five regimes over the period 1966 to 2012. However, after introduction of inflation targeting in UK in 1992, the relationship between inflation and monetary growth stayed in one regime most of the time. The financial crisis of 2008 only changed the relationship between monetary growth and inflation for a short period before returning to the pre-crisis regime. The iHMM demonstrates a range of capabilities, notably the ability to detect structural change even at the end of the sample. This feature is desirable in monitoring potential structural breaks generally and given the importance of the specific relationship between money and inflation for practical policy purposes.

This thesis investigates the cross-sectional stock returns in connection with two corporate characteristics: distress risk and profitability. These are two fundamental factors that determine expected stock returns. The research seeks to explain stock return premiums which are driven by these factors. The first chapter, Limit of Arbitrage and the Distress Puzzle, investigates what lies behind the long-term, persistent distress risk premiums. This chapter finds the distress risk premium is clustered in firms with high bid-ask spread, dollar volume, idiosyncratic volatility and short-selling constraints such as low institutional ownership and low short interest ratio. Upon dissecting the distress risk indicator as measured by failure probability based on Campbell et al. (2008, 2011), it appears that high distress risk firms with extremely small market capitalisation primarily contribute to this equity premium. After the double-sorting method is applied to firms based on these factors and distress risk, the average value-weighted distress premium increases from 0.62% per month for market-wide level to 1.35%- 2.17% per month for the top 20% limit-of-arbitrage effect firms. Furthermore, the interaction of distress risk with stock’s bid-ask spread, illiquidity ratio, short-selling constraints and idiosyncratic volatility further distinguishes the predicting power of distress risk, in which the difference of predicting power of firm’s failure probability can be as large as five standard errors from zero. The second chapter, Profitability, Insider Ownership and Cross-sectional Stock Returns, examines how profitability anomalies are related to firm’s insider ownership regarding determining cross-sectional stock returns in the U.S. market. Gompers et al (2003) find low agency cost firms tend to outperform others and attribute the effect to improved profitability and value-creating decision from corporate governance channel. Portfolio-level analyses confirm that firms with lower agency costs, as proxied by various forms of insider ownership, are positively associated with stock returns. Besides firm’s insider ownership is positively related to the profitability premium in the U.S. stock market for the period 1980-2015. However, in cross-sectional analyses the interactive relationship between firm’s profitability and institutional ownership is sensitive to additional risk factors and sample volume. The third chapter, Profitability Premium, Firm’s Distress Risk and Stock Returns documents a robust relationship between the two pricing factors, linking the two empirical findings together. This chapter finds a significant interaction effect of firm’s profitability, as well as distress risk, in co-determining stock returns cross-sectionally. In line with the findings of Altman (1968), as well as Fama and French (2006), that firm’s past information of profitability predicts future distress event and vice versa. This chapter finds that the profitability premium is partially clustered with firms having high distress risk, and the predicting power of firm’s profitability ratio is different over three standard errors from zero between low and high distress risk firms. Theses findings shed light on exploring the two fundamental pricing factors under a unified framework of asset pricing.

This thesis focuses on preliminary ratings, studying Credit Rating Agencies (CRAs) decisions in the light of different disclosure regulations. To begin, a brief introduction provides the rationale for these studies. Chapter 1 models the strategic interaction between a monopolistic CRA and an entrepreneur. The results have three main implications. First, consistently with a strand of the literature, disclosure is not necessarily welfare improving. Second, disclosure policies and regulation cannot be a one off decision, they require tailoring and timely revisions. Thirdly, for disclosure to be effective, the rating process needs to be as accurate as possible. Chapter 2 models a competitive situation, whereby the emphasis is on the effort choice made by the CRAs. The results have a few implications. First, if financial products are complex, mandatory disclosure has no effect. Second, in bad times, mandatory disclosure gives the second contacted CRA the incentives to invest in information. Overall, disclosure never results in more information in the system. Chapter 3 fulfils the role of drawing a junction among economic literature, policy proposals and CRA regulation in order to identify the problems which have been dealt with, the successes and failures and the upcoming challenges.

The emerging Asian economies have different financial system characteristics and exposure to shocks from the advanced economies, but the discussion regarding the role of monetary and macroprudential policies mainly revolve around the same issues. The first one is relating to the lack of understanding of macroprudential policy’s transmission mechanism. The second one is about the role of monetary policy as a financial stabilisation instrument. The third one concerns the interaction between monetary and macroprudential policies as macroeconomic and financial stabilisation instruments. Due to the vulnerabilities of the emerging Asian economies to the volatility of capital inflows, the discussion also involves the role of the capital flow management policy as part of the stabilisation instruments. Utilising a small open economy model that has been designed and calibrated based on the emerging Asian economies characteristics, this research contributes to the discussion on the above issues by studying the transmission of monetary, macroprudential and capital flow management policies and their interactions in facing a certain dominant shock driving the disturbances in the economy, evaluating the macroeconomic and financial stabilisation performance of the policy strategies that combine different policy instruments, and examining how the welfare of economic agents are affected by the implementation of these policy strategies. Model simulations show that not all countercyclical instruments can be used effectively in every shock. There are conditions in which the implementation of macroprudential policy can complement monetary policy to achieve macroeconomic and financial stability, but there are also conditions in which it may be preferable for the policymakers not to implement them. Understanding how a certain shock propagates in the economy and the nature of the interactions among the policy instruments in facing that particular shock are necessary for designing the optimal policy mix that can improve both macroeconomic and financial stability.

The study examines the board’s independence, gender and ethnic minority diversity and firm’s ownership structure in relation to performance. Its overall aim is to investigate the causal relationship between the internal governance mechanisms and firm’s financial performance, and based on empirical findings make recommendations for improvement. The study uses the GMM methodology which permits simultaneous control of both endogeneity of independent variables and fixed effects. The data comprise hand-collected panel dataset of firms that are listed on the Nigerian Stock Exchange over the 12-year period (2004-2015). The study provides evidence that, board independence enhances firm performance and that, performance impact of board independence is stronger in closely-held than the widely-held firms. Its findings suggest that the positive impact of board independence on firm performance is moderated by ownership structure. Findings also reveal an insignificantly negative association between the board independence and ownership concentration. The study finds a negative and significant association between the executive directors’ ownership, non-executive directors’ ownership, institutional and non-institutional blockholders’ ownership respectively and Tobin’s Q. It provides evidence that, except for non-executive directors’ ownership none of other forms of ownership improves firm performance. Finally, regarding the investigation of both the agency and resource dependence role of the females and ethnic minorities on the Nigerian corporate boards, finding reveals a significantly positive association between the ethnic minority directors’ representation, female directors’ presence on the board and firm performance. Findings of the study further suggest that, the female and ethnic minority directors are valued members of the corporate boards equally as the men and other ethnic director counterparts.

No description available.

This thesis seeks to investigate a number of issues relating to the mandating of International Financial Reporting Standards (IFRSs) in Libya in 2006. This includes examining the factors that influenced the decision of the Libyan government to mandate these standards and, following this decision, examining the obstacles to implementing these standards in Libya. The benefits of these standards are also investigated. In addition, this thesis seeks to assess the level of compliance of the companies listed in the Libyan Stock Market (LSM) with the disclosure requirements of IFRSs over two years (2008-2009) after the mandating of the standards. Finally, the study investigates the association between the level of compliance with the disclosure requirements of these standards and corporation-specific characteristics, namely company size, type of audit firm, profitability, liquidity, listing status, ownership structure and industry type. To explore the factors, benefits and obstacles to the mandating, the research is based on multiple methods for collecting data. These methods include questionnaire surveys and semi-structured interviews. To assess the mandatory disclosure level, a checklist is developed involving 72 mandatory disclosure items which representing 7 International Accounting Standards (IASs). Finally, the infonnation disclosed in the financial statements of a sample of 14 companies listed in the LSM carefully examined against the checklist The results of the questionnaire surveys and interviews show that the mandating of these standards in Libya was a result of a mimetic external force, that is, the influence of global capital markets. At the same time, the role of the Libyan government as an internal coercive force exerted pressure, through legislation on an organisational field (the Libyan stock market), to mandate these IFRSs. Regarding the benefits, the most perceived benefits of JFRSs are the improved of quality of financial reporting in Libya and the attraction of foreign investors. Lack of training and lack of professionalism among accounting staff are the most frequently perceived obstacles to IFRSs implementation. Finally, this study reports that the degree of compliance with the disclosure requirements of IFRSs is low in both 2008 and 2009, and has not significantly improved over time. The multiple regression results reveal that there is no significant association between the disclosure requirements of IFRSs and any independent variables in 2008. Type of audit firm is the only independent variable that is being positive and significant to the level of CMD (Corporate Mandatory Disclosure) in 2009. This result suggest that the Libyan authorises should give more attention to companies which are audited by local firms.

I use a unique sample of 617 U.S. firms adopting the dual class structures for at least a period of their lifetime from 1994 to 2013 to examine the relation between the presence of disproportional voting rights and outside shareholder wealth. I find that the presence of restricted-voting shares is insignificantly related to the buy-and-hold-abnormal returns for the windows of 1-, 3- and 5-year after the initial public offerings. In addition, the presence of dual class structures would reduce a firm’s probability of being taken over by around 20% but would not increase the amount of takeover premium conditional on the successful takeover. Theses empirical findings are consistent with the theoretical prediction that dual class structures may have both positive and negative impact upon shareholder wealth and it is difficult to tell whether the positive or the negative impact prevails. Practically, the finding implies that, for policy makers, the decisions to allow for or abolish dual class structures may depend on the country’s legal environment.

This thesis addresses a number of questions on the optimal taxation of firms, with particular emphasis on the challenges to taxation in developing economies. Chapter 1 exploits bunching of firms at a tax kink to identify the effect of a tax rate change on investment. Building on the standard bunching framework, I estimate the frequency distribution of firms around the kink, and the share of bunching firms with excess investment. I apply this approach to administrative tax returns for firms in the United Kingdom and find that excess investment explains up to 20% of bunch ing. Chapter 2 examines the trade-off between production efficiency and revenue efficiency in taxation under imperfect enforcement. We exploit quasi-experimental variation created by a minimum tax scheme, a production inefficient policy used in many developing countries, which consists of taxing firms on turnover as their profit rate falls below a certain threshold. Using administrative tax records of corporations in Pakistan, we find large bunching around the profit rate kink createded by the minimum tax scheme and estimate that the turnover tax reduces evasion by up to 60-70% of corporate income. Chapter 3 analyzes the impact of interventions by the International Monetary Fund (IMF) on countries’ likelihood of adopting the value added tax (VAT). I discuss how the IMF has promoted VAT adoption by making lending conditional on adoption, providing administrative and technical assistance, and reducing the political costs of adoption. Applying a Cox proportional hazard model to a cross-country panel for the period 1975-2000, I find that countries that are under a lending agreement with the IMF are three times as likely to adopt the VAT than are countries not under a lending agreement.