Research Paper Series

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Year RPS # Title Author/s
2003 2003-026(MO) CHANDLER REVISITED: INTERFACE BETWEEN STRATEGY AND STRUCTURE DURING INSTITUTIONAL TRANSITION Chi-Nien Chung & Ishtiaq P. Mahmood

This study examines if the relation between diversification and control—a classic concern of Chandler—still holds during institutional transitions. A growing number of deregulation across emerging economies in recent years has inspired scholars to examine the influences of institutional transitions on firms. While some studies focus on how the transition affects strategy, others shed light on the effects on structure. Yet none has looked at how transition affects the interface between strategy and structure. Our goal in this paper is to address this gap.
 
Our empirical analyses are based on longitudinal data on the 100 largest business groups in Taiwan over the time period of 1973-1998. While groups are somehow similar to multibusiness organizations studied by Chandler, important differences remain between groups and multibusiness firms. These differences cast doubts on using existing concepts and measures to examine Chandler’s arguments in the context of groups. The empirical contribution of this paper is to develop measures that are specific to groups.

2003 2003-025(FA) NONPARAMETRIC TESTS OF VOLUME-VOLATILITY DYNAMICS FOR STOCK RETURNS Wai Mun Fong

Intertemporal implications of the Mixture-of-Distributions Hypothesis (MDH) are derived based on the concept of time reversibility in statistical mechanics. The restrictions are tested using simple nonparametric tests that do not impose auxiliary assumptions on the stochastic process for trading volume, price volatility or information arrivals. The tests reject the standard MDH with one latent factor. In particular, shocks to volatility and volume are temporally asymmetric, contrary to the predictions of the MDH. The results indicate that multifactor models are needed to explain the dynamics of the volume-volatility relation.

2003 2003-024(FA) ON THE RELATIONSHIP BETWEEN INTEREST RATES AND VOLATILITY REGIMES IN DAILY STOCK RETURNS Wai Mun Fong

The relationship between stock market volatility and the economy is a recurring theme in empirical finance research. This study takes a two-state Markov switching model with time-varying transitions, a different approach from empirical ones, to investigating the information content of fundamentals in explaining stock volatility. By examining whether observable economic variables can explain such regime switches using daily data, Markov switching model delivers superior short-term volatility forecasts compared to simpler models that ignore regime shifts and economic variables. The model is therefore of practical appeal to active investors who either wish to take bets on or hedge against large market moves.
 
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2003 2003-023(MKTG) DETERMINANTS OF UNETHICAL AND OPPORTUNISTIC BEHAVIOR OF CONSUMER Doreen Kum & Jochen Wirtz

This paper integrates the literature on unethical behavior/decision making across various fields such as psychology, organizational behavior, crime, academic cheating and unethical consumer behavior. The proposed framework reconciles the various perspectives of the drivers of unethical behavior and aims to serve as a first step towards research on unethical consumer behavior such as cheating on service guarantees or excessive claims in service recovery situations.

2003 2003-022(FA) ANALYZING THE RELATIVE IMPORTANCE OF VOLATILITY COMPONENTS IN EMERGING MARKETS John M. Sequeira & Cher Hao Wong

While there is much empirical evidence of aggregate stock volatility in emerging markets being higher than developed markets, few known studies dissect the total volatility of the average firm in an emerging market into volatility derived from the firm’s own idiosyncratic behavior (FIRM), volatility imparted from being part of an emerging markets group (EMKT), and volatility from the domestic-level influences (COUNTRY). Using a sample of eighteen emerging markets over the period January 1995 to December 2000, we find a significant upward trend in all three volatility components. Apart from FIRM accounting for much of the total volatility, we find an increase in the share of COUNTRY against a fall in the share of FIRM after the Asian Crisis. We also find evidence of bilateral causality between EMKT and COUNTRY. Interestingly, our results suggest that the Asian Crisis had a significant effect on all eighteen emerging markets in our sample, whereas the effects of the Mexican Peso Crisis are only confined to the Latin American markets.
JEL Classification: G12, G15.
 
Keywords: Volatility; Emerging Markets; Variance Decomposition

2003 2003-021 (FA) THE ROLE OF DISCRETIONARY ACCRUALS AND CLASSIFICATION DECISIONS IN THE MANAGEMENT OF EARNINGS Alfred Loh L C, Sequeira, J.M., Wilkins, T. & Tan T H

The objective of this study is to evaluate the managerial incentives that may influence a Singapore-listed firm’s decision to take discretionary accruals and to classify gains and losses as normal operating or extraordinary items using both cross-sectional and pooled cross-sectional data over the period 1997 to 1999. Our findings reveal that there is an inverse relationship between the discretionary accrual decision and the classification decision for all periods of the analysis.
 
We do not find that managers are more likely to make income-increasing accruals or report gains as normal operating items and losses as extraordinary items, to avoid reporting small earnings losses. There is however some evidence to suggest that managers make income-increasing accruals around the Asian Crisis period.  The effect of leverage on the accrual and classification decision is qualitatively similar; managers reduce their reliance on both discretionary accruals and the classification decision when there is an increase in leverage. The results also suggest that new managers are more likely to make income-decreasing accruals when there is a change in management. New managers are more likely to classify losses as normal operating items and gains as extraordinary items. The size of the firm is not significant in determining the use of extraordinary items in earnings management and is only marginally significant in determining the use of discretionary accruals.
 
Keywords: Discretionary; Accruals; Classification; Earnings

2003 2003-020 (FA) IS THERE INFORMATION CONTENT IN INSIDER TRADES IN THE SINGAPORE EXCHANGE? Wong Kie Ann, John M. Sequeira & Fong Soo Mei

Over the past decade, numerous studies have debated the usefulness of insider trading. One particularly important study relates to the informational role that insiders’ transaction volumes have on trading activity in the equity market. In our paper, we examine whether insiders’ purchases (sales) indicate positive (negative) earnings announcements. We argue that if insiders have early access to publicly announced information, then the issuance of good (bad) news should be preceded by insider buying (selling) activities. The results reveal that insiders’ trading volume play an important role in the dissemination of private information to the investing public. In particular, insiders’ purchases (sales) are found to be a good indication of good (bad) news. The information content in insiders’ trades may be exploited, provided investors are able to realize returns within one, and at most two months, after the announcement date.
 
Keywords: Insider trading; efficient market hypothesis

2003 2003-019 (FA) STOCK MARKET REACTIONS TO BOARD APPOINTMENTS Mak, Y.T, Sequeira, J.M. & Yeo M.C.

This study examines the reaction of the stock market to the appointment of directors, and whether this is conditional on directorial characteristics such as appointment type, number of directorships held, boardroom experience, and the existence of any family relationship. We find that the stock price effect of the appointment of busy directors is significantly negative with similar results obtained for family-related directors’ appointments. The market reaction to appointment of directors with prior boardroom experience is found to be significantly positive. We also find evidence that the appointment of non-executive directors is valued more highly by the stock market. 
 
JEL Classification: G32; G34; L22
 
Keywords: Corporate Governance, Board of Directors

2003 2003-018 (FA) THE MARKOV SWITCHING APPROACH TO MODELLING STOCHASTIC REGIME SHIFTS IN ECONOMICS AND FINANCE Fong Wai Mun , John M. Sequeira & Michael McAleer

Many economic and finance time series exhibit occasional episodes of discrete jumps in their levels or volatility. Examples of these include the October 1987 stock market crash and the sudden devaluation of the Mexican Peso in early 1995. Regime shifts such as these induce substantial nonlinearities in the stochastic process. Moreover, persistent regimes can often be mistaken for predictability of the underlying time series. These concerns have led to considerable interest among econometricians in models which can adequately capture nonlinearities arising from stochastic shifts in regimes. One such class of models is the family of Markov switching (MS) models proposed by Hamilton (1989). Markov switching models are appealing because they offer a tractable approach for modelling changes in regimes that are not observable by the econometrician. Estimation of Markov switching models are made possible by a nonlinear recursive algorithm developed by Hamilton to enable the analyst to draw probabilistic inference about he latent regimes based only on the observed data. The algorithm also produces the sample likelihood function which can be maximized to estimate a model’s parameters. Applications using the MS approach have increased substantially since the publication of Hamilton’s path breaking work. This paper is a survey of developments in Markov switching modelling since the inception of Hamilton’s (1989) paper. Issues covered by this survey include the connection between Markov switching models and iid mixture of distribution models, maximum likelihood estimation via the Hamilton algorithm, statistical inference of regimes using probability filters, specification tests, applications of MS models in economics and finance and recent developments in the estimation of complex MS models with GARCH dynamics and time-varying probabilities. 

2003 2003-017 (DS) EARLY CHILDHOOD CARIES RISK ASSESSMENT USING NEURAL NETWORKS AND MULTIVARIATE LOGISTIC REGRESSION H. Brian Hwarng, C. Stephen Hsu, Pui Han Lim & Na Xie

Early childhood caries poses a serious threat to the child’s well being and also affects the caries incidence in permanent dentition. Furthermore, resource constraints and the increasing cost of dental services are two compelling reasons for caries assessment in the field of preventive dentistry. In this paper, caries risk assessment (CRA) models are developed to identify high-risk children for preventive treatments in the context of Singapore. A salient feature of these CRA models is that they assess caries risk solely based upon a questionnaire. Both neural networks, including back-propagation, radial basis function, and learning vector quantization, and traditional multivariate logistic regression (LR) are adopted in developing the CRA models. The comparative study shows that while radial basis function is not a favorable choice, the performance of back-propagation and learning vector quantization networks is comparable to that of multivariate LR. The study shows that much improvement can be expected through better design of the questionnaire and data collection. It also demonstrates the utility of new emerging modeling tools, neural networks, for CRA.
 
Keywords: Caries risk assessment; Neural networks; Multivariate logistic regression; Questionnaire

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