Knowledge that Transforms

The purpose of this paper is to provide a comprehensive analysis of corporate valuation around the world. Specifically, we (i) document and compare corporate valuation around the world, and (ii) identify the key factors that drive cross-country differences in valuation. In doing so, we utilize the country-level Tobin’s q (CTQ), computed as the ratio of the aggregate market value to book value of all assets held by all public firms domiciled in a country, which amounts to the Tobin’s q for the ‘market portfolio’ of the country. The key findings of the paper are: First, CTQ varies greatly across countries, ranging from 0.73 for Venezuela to 2.11 for Finland, with the international mean of 1.30 during our sample period 1999–2004. Despite the steady integration of the world economy in recent years, corporate valuation remains starkly different across countries. Second, apart from the effect of corporate governance, cross-country differences in corporate valuation are significantly driven by the growth options of countries represented by the R&D intensities, capital expenditures, and GDP growth. In addition, the degree of capital market openness has a significant, independent effect on valuation. Third, our regression analyses show that CTQ varies directly with shareholder rights, enforcement of insider trading laws, GDP growth, R&D intensity, and the degree of capital market openness. The key findings remain robust to the inclusion of inflation and industry effects.

This paper studies how the cost of switching banks affects the profits available from relationship based lending when the relationship produces inside information. Lower switching cost compounds the adverse selection problem, discouraging outsider banks to depress loan rates. The adverse selection effect eases off along with higher switching cost, leading to more aggressive bidding and thereby reduction in insider profits. Above a certain threshold, however, the adverse selection effect vanishes completely and the insider profits turn increasing in the switching cost. The model predicts that the availability of relationship credit is non-monotonously related to the magnitude of the switching cost.

National banks and Financial Holding Companies (FHC) solicited permission from the Federal Reserve Board and the Treasury Department to add real estate brokerage and management services to list of permissible business activities under the 1999 Gramm–Leach–Bliley Act (GLB). To date, permission has been denied due to the Community Choice in Real Estate Act, HR 111 and S 98. This study offers a method of combining the financial data of two independent industries. Additionally, this study identifies the scale returns and cost complementarities that may occur if banks offered real estate brokerage services under a single organization. Considerable evidence suggests that joining bank and real estate activities under a single organization would continue to generate increasing returns to scale for banks even when large levels of real estate brokerage services are offered by the joint institution. In addition, the results indicate evidence that bank acquisitions of real estate brokerages do create some cost saving synergies from cost complementarities between product lines. Finally, complementarities exist between traditional bank services and real estate services most at low levels of real estate outputs.

Recent stock price movements have led to a re-examination of the present value model. An increasing belief is that although dividends and prices are indeed cointegrated, they may exhibit non-linear dynamics in the process of reversion. This paper implements an empirical model designed to capture two possible explanations for such non-linearity, namely transaction costs and noise traders. Utilising data from a number of countries we show that the dynamics of the log dividend yield are, first, characterised by an inner random walk regime, where the benefits of engaging in trade do not outweigh the costs and so the process moves randomly. Second, a reverting outer regime where the dynamics of reversion differ between positive and negative deviations, such that price rises greater than the level supported by dividends exhibit a greater degree of persistence than price falls relative to dividends.

This paper investigates whether investment in information technology (IT) – hardware, software and other IT services – influences the performance of banks. Using a sample of 737 European banks over the period 1995–2000 we analyse whether IT investment is reflected in improved performance (measured using both standard accounting ratios and cost and alternative profit efficiency measures). Despite banks being major investors in IT we find little relationship between total IT investment and improved bank profitability or efficiency indicating the existence of a profitability paradox. However, the impact of different types of IT investment (hardware, software and services) on banks’ performance is heterogeneous. Investment in IT services from external providers (consulting services, implementation services, training and education, support services) appears to have a positive influence on accounting profits and profit efficiency, while the acquisition of hardware and software seems to reduce banks’ performance.

We analyze the cross-country determinants and financial stability implications of the mix of international banks’ foreign claims. We distinguish between local claims – extended by host country affiliates – and cross-border claims – booked outside the receiving country. Using data on Italian, Spanish, and US banks’ foreign claims, we find that the share of local claims is driven by restrictions on banking sector openness and by local scale economies/business opportunities. The impact of limits on property rights, entry requirements, start-up and informational costs is less robust. Finally, foreign claim volatility is lower in countries with a larger share of local claims.

This paper reports an empirical assessment of competitive conditions among the major British banks, during a period of major structural change. Specifically, estimates of the Rosse–Panzar H-statistic are reported for a panel of 12 banks for the period 1980–2004. The sample banks correspond closely to the major British banking groups specified by the British Banking Association. The robustness of the results of the Rosse–Panzar methodology is tested by estimating the ratio of Lerner indices obtained from interest rate setting equations. The results confirm the consensus finding that competition in British banking is most accurately characterised by the theoretical model of monopolistic competition. There is evidence that the intensity of competition in the core market for bank lending remained approximately unchanged throughout the 1980s and 1990s. However, competition appears to have become less intense in the non-core (off-balance sheet) business of British banks.