This work comprises five chapters that explore in detail issues related to real exchange rate volatility and trade openness. In the case of real exchange rate volatility, we start with the decomposition of this measure to determine the relative contribution of traded and nontraded goods to the variance of the real exchange rate. We obtain evidence in favour of a relevant role for non-traded goods. Our estimation of the real exchange rate volatility is included in the second chapter. Our results, based on a cross-section regression, show that the existing link of openness to real exchange rate volatility is weaker when we control for imposed and natural trade barriers. At the same time we are able to obtain a relationship between inflation volatility and the variation of the real exchange rate. Chapters three and four are related to our real exchange rate volatility model. We decide to obtain a specication for openness that could help us explore in detail the idea of country characteristics aecting trade flows. Our rst approach considers a cross-section estimation to identify the factors that consistently aect trade openness. The second approach considers a more dynamic specication. We are able to establish a link between country characteristics and trade openness. At the same time our results capture interesting changes in the eects of the dependent variables on openness across time. The final chapter takes us back to the analysis of real exchange rate volatility. In this case, we explore which measure is the most appropriate amongst those calculated from series in levels and the ones in first dierences. We conclude that series that do not show less stationary behaviour require longer time series (more observations) in order to display results that close to the reference value.

We hypothesise that certain market conditions could lead to liquidity shocks that will consequently increase SEO underpricing (defined as the close-to-offer return). We propose three scenarios of market conditions, namely aggregate issues with large volume, large market declines and market volatility. Using a sample of about 5,000 seasoned equity offerings from 1987 to 2009, we found that market volatility is significantly and positively related to SEO underpricing after controlling for other factors. We employed an estimation method proposed by Chambers and Dimson (2009) to examine the behaviour of SEO underpricing over our sample period from 1987 to 2009. We found that after controlling for changing risk composition, price practice, market conditions and the influence of underwriter reputation and analyst coverage, there was still an upward shift in SEO underpricing over the sample period, and the pattern cannot be fully explained by the practice of setting offer prices at lower integers. We borrowed the investment banking power hypothesis from the literature and argued that the upward shift of SEO underpricing over the sample period could be explained by the increase of investment banking power. As the industry structure of underwriting transfers from a competitive market to an oligopoly market, banks use non-price dimensions to gain market power and consequently increase SEO underpricing.

During the past three decades policy makers from a number of developing countries have undertaken outward-oriented economic reforms with the objective of stimulating global capabilities and allowing domestic firms to catch up with the technological frontier. In the case of India, one of the most important features of such economic reforms has been the promotion of exports and outward foreign direct investments (FDI). Using a rich set of econometric methodologies, we examine the forces underlying Indian firms’ global strategies in the form of exporting and investing abroad and the impact of such decisions upon their future performance. Our analysis covers the years from 1999 to 2007, a period of gradual internationalization of Indian firms in response to ongoing trade and FDI liberalization. We contrast the strategies followed by manufacturing and service firms and pay particular attention to the role of technological and financial factors in shaping firms’ globalization processes. The first chapter of this thesis starts with an analysis of the individual and complementary effects of exporting and investing abroad in stimulating the development of firms’ in-house technological capabilities. We find that outward FDI substitutes the rate of technology investments at home, a result that is consistent with the notion of technology-seeking Indian multinationals investing abroad with the purpose of acquiring foreign technology. In contrast, we uncover evidence of technology-enhancing effects from exporting amongst Indian multinationals, indicating that exporting has been an important channel through which Indian multinational expansion has encouraged greater domestic economic activity. Finally, we fail to find evidence that exporting non multinational firms always invest more in technology than non-exporting ones. Rather, the nature of this association varies according to the sector under consideration and the type of technology. In the second chapter we analyze the process of productivity growth in Indian firms. We examine the individual and complementary roles of technology investments and international activities in stimulating innovation and technological convergence, two potential sources of firms’ productivity growth. Our findings indicate that technological convergence has been an important source of productivity growth in India, with service firms converging faster to the technological frontier than manufacturing companies. We also find that exporting boosts the rate of innovation of Indian multinationals, whereas their overseas investments speed up their rate of technological convergence. In the case of non-multinational companies, exporting stimulates productivity growth by accelerating their rate of technological transfer. There are also positive complementary effects between international activities and technology investments in stimulating firms’ productivity growth either through innovation and/or through technological transfer. Finally, in the third chapter we evaluate the role of external finance for service exports. In contrast to some findings for the manufacturing sector, we find that external finance is not a significant determinant of Indian service firms’ exporting activity.  .

This thesis is structured into two main parts to investigate the role of financial flexibility in firms’ liquidity and financing management. Financial flexibility is the most important practical determinant to managers when they make financing decisions. This missing link, financial flexibility, is identified by practitioners and used in this thesis to fill the missing gap between theory and practice in corporate finance. Part A of this thesis analyses the trends in firms’ internal financial flexibility and examines the role of this internal flexibility on investment behaviour of firms. Part B of this thesis then move on to examine the role of both internal and external financial flexibility on firms’ financing behaviour. Part A examines the relationship between debt capacity and cash as part of firms’ internal financial flexibility. Firms use both debt capacity and cash holdings for their internal flexibility management; and debt capacity is used here to explain the trends observed in cash holdings. Debt capacity is the most important determinant of cash holdings and has better ability to predict cash level compared to conventional cash determinants. Together, both debt capacity and cash contribute to firms’ internal financial flexibility and are able to explain most of firms’ investment behaviour, even during a recession period. Part B examines the role of financial flexibility in capital structure decisions. Financial flexibility is measured internally as cash and debt capacity, and externally as equity liquidity using a novel external equity flexibility index based on common equity liquidity measures. The conventional pecking order and trade-off models are used to measure the impact of financial flexibility on firms’ capital structure. The pecking order theory is contingent upon firms’ internal flexibility – debt capacity. Finally, supporting the notion that financial flexibility is the most important consideration in financing decisions, debt capacity and external equity flexibility are shown to be the most important determinants of leverage.

In this thesis, we investigate the relationship between the US stock returns and downside risk in a cross-sectional context. When the classic market model with a moving window approach is adopted, downside risk estimated coefficients exhibit a positive impact on stock returns. However, when two other non-linear time-varying models; the cuiic piecewise polynomial function (CPPF) and the Fourier Flexible Form (FFF) models are adopted, downside risk estimated coefficients show a negative impact on stock returns, Cross-sectinally, the reisk estimated coefficients of the town non-linear models produce a much better fit than the classic market model. The predictive power for future stock returns of downside risk estimated coefficients are found to be weak. Two more risk factors: commodityh market risk and Aruoba-Diebold-Scotti (ADS) business condition index risk (both downside and upside versions thereof), are shown to have a significant effect on stock returns.

There has been considerable empirical research on style investment in the United States and a fair amount in Europe but relatively little published research in the Asian markets. It is commonly believed that fundamental stock valuation and style analysis works only in developed markets like the United States and that more qualitative methods should be used in inefficient markets such as Asia (including developed economies and emerging economies in Asia). We therefore determine whether style investment strategies can be applied consistently in the Asian Equity Markets. Our study encompasses markets in developed Asia which includes Japan, Hong Kong and Singapore as well as markets in emerging Asia comprising Indonesia, Korea, Malaysia, Philippines, Taiwan and Thailand. We also investigate the significance of the theoretical drivers behind the valuation ratios which are used as proxies for classifying value and growth stocks. The traditional valuation ratios, which are influenced by the 'Price' factor, may contain systematic errors and may not reflect the underlying intrinsic valuations of both value and growth' companies. This raises the question whether they are valid ratios for screening value and growth stocks. We therefore analyse a style investment strategy using a combination of theoretical drivers of the proxies based on historical data or a mix of historical and forecast data. We also investigate the reasons behind the existence of 'value-growth premiums'. We focus on elements of behavioural finance based on expectational error to explain the superior performance of value strategies. There may be many different sources of expectational error which range from investors and analysts extrapolating past earnings/sales growth too far into the future, to reliance on analysts' earnings forecasts, to portfolio flows or various cognitive errors/research biases. To date, there has not been a consensus on the sources of extreme expectations. Our thesis determines whether extreme expectations are driven by extrapolation of past performance, portfolio flows and/or analysts' forecast errors to explain the value/growth effect. The results of the thesis aim to provide a deeper understanding of style investment in the Asian Equity Markets and enable a fund manager to better implement active style strategies.

Islamic banking, a niche financial sector that has captured the imagination of the financial elite and ordinary consumers alike, is unique in its regulation through the shariah. Primarily, it presents an added-value derived from its prohibition of riba (interest) in favour of profit from trade (al Bay) or leasing (ijarah). This thesis aims to explain Malaysia’s success in promoting Islamic banking products to a critical mass of consumers. More specifically, it seeks to explain the development and growth ineveryday Islamic banking practices amongst the Malay community in Kuala Lumpur. The thesis is based on a sociological framework that does not aim to explain the development and growth of Islamic banking in terms that are principally about religion. I argue that the development of Islamic banking in Malaysia is the result of a top-down strategy driven by the economic and political interests of Malaysia’s ruling elites. Following the crisis of trust in the political-economic model of development deployed up to the crisis of 1997-1998, Islam’s vast repertoire of ideas, language and symbols are a powerful and dexterous foundation of a strategy that simultaneously problematises ‘conventional’ banking and offers an alternative course through Islamic banking. Nevertheless, Islamic banking practices are not given and cannot be taken-for-granted. Thus, in seeking to understand why increasingly consumers trust Islamic banking’s promise of economic advantage with the added value of religious compliance, the study seeks to interpret Islamic banking practices from the perspective of the ‘ordinary’ consumer. Everyday Islamic banking practices are viewed in this thesis, as embedded within broader, historically determined, closely intertwined, social, economic, cultural and political circumstances. This study views the aforementioned circumstances that consumers find themselves in, on the one hand, and the banking practices they participate in, on the other, as interacting elements of a socially determinate whole. Trust, I suggest, is the common thread underpinning the everyday banking practices within the interacting elements of a socially determinate whole. Three ideal types that emerged from the data, the virtuoso, pragmatist and sceptic, are a used as a heuristic device to characterise the various interests driving trust in Islamic banking, and illustrate the heterogeneity of Islamic banking practices. More specifically, based on an analysis of the consumers’ account of their Islamic banking practices, the choice of Islamic over ‘conventional’ banking is based on two important factors. First, for those who perceive and are attracted to the added value of Islamic banking, trust in the shariah regulation and expertise, as underwritten by the state, is the first condition to their choice. Trust lubricates their choice by reducing complexity, mitigating risk and bridging the gap between knowledge and faith. Second, the personalised trust that characterises thick social ties bolsters confidence in Islamic banking. In rating Islamic banking as the most socially acceptable choice, family and peers are signalling confidence in the value and values of Islamic banking and are unwitting allies of the state and banks. Last, the study notes that shariah regulation has contradictory corollary effects: it is both functional and dysfunctional. Whilst it functions in enabling the growth of Islamic banking, it also contributes to social fragmentation within Malaysian society.

This thesis explores both theoretically and empirically how firms design employees’ compensation contracts to motivate them to work and to adapt to external changes under an informed principal framework. The first chapter analyzes how a principal, privately informed about the changing market condition, structures the agent’s incentive contract to inform and motivate her to adapt. The results show that a failure to overturn employees’ belief about the changing market condition could lead to insufficient adaptation. Further, a more pressing market condition induces earlier adaptation and greater information revelation. Finally, the compensation structure underpinning insufficient adaptation imposes a legacy problem due to excessive use of long-term incentives, which restrains the reconfiguration of the contract in place. Based on the first chapter, the second chapter aims to explain asymmetric contractual adjustment of CEO compensation, only upward but not downward. I argue that a principal, privately informed about the firm’s changing productive efficiency, uses contracts to provide the agent with not only working incentives but also information about her productivity. The principal commits to a back-loaded compensation plan with an increasing salary or with an increasing short-term performance pay. Such rigid contracts achieve greater efficiency by inducing more efforts from the agent through profit sharing. The third chapter, co-authored with Peggy Huang and Moqi Xu, finds CEO contracts explicitly account for subjective reviews in a new dataset of CEO contracts and stated reasons for compensation changes. Our results suggest that firms prefer to keep early R&D successes from the public and thus raise salaries for early R&D success not yet realized in performance measures. Consistent with this explanation, standalone salary increases predict better long-run portfolio and stock returns, but only following positive subjective evaluations and in firms with high R&D investment.

Underwriting is a key factor in equity offerings and many scholars have sought to shed light on the role that underwriters play in the investment banking industry. My thesis extends existing studies by investigating how underwriters affect the flotation costs of SEOs and the likelihood of investor participation in equity offerings. With the repeal of the US Glass-Steagall Act in 1999, the barrier between commercial banking and investment banking was broken down and commercial banks could also participate in securities underwriting. Given that flotation costs reflect the market perception of a share issue, it is crucial to understand the perceptions that commercial bank co-managers convey to the market. However, most previous studies did not consider that the effects of commercial bank underwriters on SEO flotation costs may vary in the different situation. The first empirical chapter of my thesis will fill this gap. The empirical results support my hypothesis that the market perception of SEOs underwritten by a commercial bank varies in different circumstances. Commercial bank co-managers can increase SEO flotation costs if their behaviour and motivation convey the impression of opportunism to the market. It is widely accepted that investment banking is a relationship-based rather than transaction-based business. Nevertheless, due to technical difficulties, few studies have investigated how the underwriter-investor relationship affects investor participation. Therefore, the research reported in my second empirical chapter (Chapter 5) will fill the gap. The results suggest that: firstly, underwriter–investor networks increase the likelihood of investor participation and such influence is separate from the market function of underwriters; secondly, the underwriter–investor networks are effective not only in pure IPOs and pure SEOs but also interactively; and finally, the relationships built by lead managers are effective, as are those built by co-managers.

This thesis investigates the effects of financial frictions such as symmetric information on aspects of financial intermedation process, in particular banks and the securitisation industry. In the first paper, “Contingent capital structure”, I study the optimal financing arrangement of a bank with risk-shifting incentives and private information, in an environment with macroeconomic uncertainty. Leverage mitigates adverse selection problems owing to debt information insensitivity, but leads to excessive risk-taking. I show that the optimal leverage is procyclical, and contingent convertible (CoCo) bonds emerge as part of the implementation of the optimal contingent capital structure. However, the laissez-faire equilibrium entails excessive leverage and risk-taking, due to a bank’s private incentives to minimise market mispricing of its securities. It is socially optimal to impose countercyclical capital requirements. In the second paper, “Counter-cyclical foreclosure for securitisation”, John Chi-fong Kuong and I investigate the optimal forefclosure policy of delinquent mortgages in a model of mortgage-backed securitisation under asymmetric information. We show that it is optimal for a securitiser to commit to an ex-post value-destroying foreclosure policy to reduce the signalling cost. The optimal foreclosure policy, which can be implemented by contracting with a third-party mortgage-servicer, features a excessive foreclosure rate for a mortgage pools of poor quality, implying a counter-cyclical aggregate foreclosure rate and pro-cyclical repossessed property prices. Finally, the third paper, “Bankruptcy-remote securitisation with implicit guarantee”, explores the role of securitisation in the funding of banks under asymmetric information. In a two-period model, I argue that securitisation as an optimal funding source rely on both features. While implicit guarantee mitigates the asymmetric information problem, bankruptcy-remoteness allows a bank to shield its unsecuritised cash flows in a bad state, thereby relaxing its future financing contraint.