Understanding and Accessing Financial Markets-Event Study

Seminar in Financial Management

Kiky Natalia

IBMP

16568

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Title

• CRP

Foreign Ownership and Investment: Evidence from Korea

• Students

China’s pattern of trade and growth after WTO accession

Lessons for other developing countries

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Topic

• CRP

Whether an increase in foreign ownership affects investment in Korea.

• Students

Review China’s post-WTO transition experiences, synthesize and update studies on China’s pattern of trade and structural transformation, and provide both positive and negative lessons for other developing countries

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• Theory used by article/ research• Modigliani and Miller (1958) maintained

that firm’s investment depend solely on the profit opportunity.

• Jensen and Meckling (1976), Managers who are not owners may pursue their own interest not the stockholder interest.

CRP

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• Jensen (1986) Argues that managers tend to spend all available funds on investment projects at their own discretion.

• Foreign ownership is inversely related to information asymmetry between firms and the market. (Jiang and Kim, 2004)

• DFI eases credit constraints by bringing in capital, foreign firms were less credit constrained than domestic firms. (Harrison and McMillan, 2003)

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• Foreigners prefer large firms, firms paying low dividends, and firms with large cash positions. (Dahlquist and Robertsson, 2001)

• Foreign investors have a tendency to demand better corporate governance in order to protect their investments. (Rajan and Zingales, 1998)

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Hypothesis of research

• Cash flow sensitivity of investment is lower in firms with high foreign ownership than in firm with low foreign ownership.

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Variables used in research• Kt Capital at the beginning of period t

• It Capital expenditure during periond t

• Qt Average Q at the beginning of period t

• TAt Total asset at the beginning of period

• Bt BV at the beginning of period t

• Et Market value of equity at the beginning t

• CFt Cash flow during period t

• Highi 1 for firm with high for own, 0 for low

• Lowi 1 for firm with low for own, 0 for high

• Beforet 1 before 1998, = 0 after 1998

• Aftert 1 after 1998, = 0 before 1998

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Method of analysis• OLS estimation method for dynamic

investment models is likely to result in biased estimates because of endogeneity and heterogeneity problem.

• Generalized method of moments (GMM) is used for dynamic panel models and depends mainly on the adoption of appropriate instruments and the efficient elimination of unobserved firm effects.

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Result of the analysis/ research (Conclusion)

• The findings simply suggest that foreign ownership plays a role in reducing financial constraint on firms, and thus improves accessibility of external financing for investment. In addition to capital inflows, the relaxation of the information asymmetry can also be a potential benefit of open financial markets.

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• Theory used by article/ research• The fact

1. As of 2008, the real gross domestic product (GDP) expanded at an annual average pace of more than 10 percent

2. China has grown to be the third largest economy and the third largest trading nation in the world.

3. In 2008 alone, 73 cases AD cases and 10 CVD cases were initiated against China’s imports

STUDENTS

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4. It is now the right time to asses China’s experiences from implementing WTO commitment in the last eight years, and to draw some lessons for currently acceding countries and recently acceded WTO

members. (After eight years the WTO accession, China’s transition period as a new WTO member is over)

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• A new World Bank study showed that using the $1.25 per-day consumption measure, the proportion of the population living in poverty fell from 84 percent in 1981 to 15.6 percent in 2005 , and over 600 million people were lifted out of poverty ( Chen and Ravallion, 2008)

•  According to previous studies, pragmatic policy reforms that established homegrown institution , which resulted from the wealth of understanding gained from policy experimentations, seemed to be the key to growth and poverty reduction in the first stage of reforms ( Lin 2007, Wang 2005)

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• Trade tension is on the rise with major trading partners as reflected by the number of anti-dumping and countervailing cases ( Zhao and Wang 2008)

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Hypothesis of research

• Market liberalization alone is not sufficient, and economic system reform and the liberalization are closely related and complement and promote each other.

• Experimentations via special economic zones (SEZs) and opening to foreign direct investment (FDI), which facilitated and supported cluster development and learning by doing, are needed for industrial upgrading and export competitiveness

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Variables used in research

• Chinese government regulations (Export VAT rebate policy, Export regulations, Foreign Investment Regulations).

• Shares of domestic and foreign value added

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Method of analysis

• HIY method• KWW method

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Result of the analysis/research (Conclusion)

• Global economic factors such as the WTO accession, Doha development Agenda and the recent financial turn oil in the USA reinforce the need to rebalancing China’s growth

• Recent global economic crisis has enhanced China’s own determination to engage in institutional reforms to achieve a better, greener, and more sustainable growth development path

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THANK YOUFOR YOUR ATTENTION