Partial Adjustment Model Research Articles

Dynamic relationship between China's inward and outward foreign direct investments

This paper studies the dynamic relationship of China's inward and outward foreign direct investments (FDI). It first identifies the key determinants of China's outward FDI (OFDI) in 172 host countries during 2003–2009 using a partial stock adjustment model. It finds strong evidence of dynamic adjustment in China's OFDI stock with an agglomeration effect. The dynamic adjustment and agglomeration effects are stronger in “high-tech” countries than in “low-tech” ones but indifferent in host country's resource endowments and income levels. The empirical results suggest that there exists a substantial adjustment cost in China's OFDI and that China's existing OFDI stock can gradually adjust toward its long-term equilibrium level, which is not only greater but also more volatile than the actual stock. Of particular interest is that we find a strong and positive relationship between lagged inward FDI (IFDI) and contemporaneous OFDI, implying that capital outflow from China has been partially induced by the countries which have invested in China.

Leverage Levels and the Timing Element in Equity Issues: Empirical Evidence from the UK

The dynamic trade-off view of capital structure is based on partial adjustment models that find that firms adjust towards target levels. In this paper, we estimate the speed of adjustment based on the first difference of the lead leverage levels (actual lead) and lag leverage levels (actual lag) to the first difference of simulated lead (target) leverage levels and lag levels (actual lag leverage) for UK firms. Consistent with the literature we find that firms adjust the lag (current) leverage levels faster to lead levels when they are above lead levels relative to periods when they are below lead levels. This is due to managerial actions in minimizing present value of bankruptcy costs when firms are over-levered. Bringing in the market timing view of capital structure, we measure deviation of market prices to predicted theoretical values, and find that speed of adjustment is influenced by equity mispricing. We find that firms adjust faster to lead levels when lag levels are above lead levels and the extent of deviation above theoretical values is not excessive relative to when deviations of prices from theoretical levels are too high. Furthermore, looking at firms below lead levels, we find that firms adjust faster to lead levels when equities prices below theoretical values severely deviate; suggesting that firms increase debt issues when equity prices are acutely suppressed. This indicates managers are consistently looking at windows of opportunities when issuing or repurchasing to ensure successful timing attempts. Thus, our findings suggest that although market timing could also work within a trade-off framework where managers are timing based on the deviation from theoretical prices as well as moving towards simulated lead levels, the extent of the integration of both explanations of capital structure remains puzzling.

Examining the Japanese seaweed market before and after the earthquake using a partial adjustment model of LA-AIDS

This study examines the changes in market demand for wakame seaweed before and after the Great East Japan Earthquake. For this purpose, we use scanner data comprising prices, quantity, brands, countries/places of origin, and product types of wakame for ten regional markets during the period 2005–2014. The Japanese seafood market suffered from the direct and indirect impact of the earthquake in 2011. Serious damage caused by the earthquake and tsunamis would have at least caused significant changes in the demand elasticities for wakame. However, using a linear-approximated almost ideal demand system (LA-AIDS) model, we find that, although disparities exist in the estimated elasticities between the pre- and post-earthquake periods, there is no significant change in the demand for wakame. Moreover, own-price elasticities of Sanriku wakame did not change even after the earthquake, and cross-price elasticities of Sanriku and its rival, Naruto, did not reveal a remarkable structural change from substitution to complementation or vice versa. This study concludes that the damage to the wakame seaweed market in Japan is at least limited.

FAKTOR-FAKTOR YANG MEMPENGARUHI TINGKAT PENGANGGURAN DI DAERAH ISTIMEWA YOGYAKARTA (DIY) TAHUN 1985-2011

This study aims to identify and analyze the efect of economic growth, real minimum wages, infation and the economic crisis in Indonesia in 1998 on the unemployment rate in the Special Region of Yogyakarta (DIY) in the 1985-2011 period. The data used are secondary data obtained from the Central Bureau of Statistics published in the various editions. Te analytical tool used to answer the problem formulation is the regression analysis using partial adjustment models (PAM). The analysis and hypothesis testing show that the economic growth, infation rate and the period of economic crisis in Indonesia in 1998 have a signifcant efect on the unemployment rate in the province, while the real minimum wage has no efect on the unemployment rate in the province.Keywords: unemployment, economic growth, real minimum wages, infation rates, partial adjustment models (PAM).

DRIVERS OF ENERGY INTENSITY IN PAKISTAN: AN ASSESSMENT USING INDEX DECOMPOSITION METHODS

We employ index decomposition techniques to decompose aggregate energy consumption into energy intensity, efficiency and structural change indices for Pakistan. Data suggests that energy inefficiencies play a prominent role in increasing energy intensity while structural changes cause small reduction in intensity index. Partial adjustment model was applied to investigate underlying forces of energy intensity and its components. Results illustrate that energy prices and capital-labor ratio have significant effect in reducing energy intensity through efficiency channel whereas; income predominantly increases energy intensity through inefficient energy use. Extensive policy intervention is required through implementing energy intensity reduction targets for efficient energy use.

Leverage Adjustment in Manufacturing Firms: Evidence from Pakistan

This study explores firms’ leverage behavior and speed of adjustment in the context of selected performance indicators in Pakistan’s manufacturing industry. Leverage behavior is predicted using ordinary least squares, based on four performance indicators: profitability, tangibility, size and growth. The speed of adjustment of leverage is estimated using a general linear model and partial adjustment model. We find that profitability, tangibility and growth play a significant role in leverage behavior and the speed of adjustment, although both differ across sectors. Moreover, exponential leverage adjustment appears to be better than linear leverage adjustment.

Macro-financial linkages and bank behaviour: evidence from the second-round effects of the global financial crisis on East Asia

This paper studies the link between macro-financial variability and bank behaviour, which justifies the second-round effects of the global financial crisis on East Asia. Following Gallego et al. (The impact of the global economic and financial crisis on Central Eastern and South Eastern Europe (CESEE) and Latin America, 2010), the second round effects are defined as the adverse feedback loop from the slumps in economic activities and sharp financial market deterioration, which may influence the financial performance of bank, inter alia via deteriorating credit quality, declining profitability and increasing problems in retaining necessary capitalization. Differentiating itself from other research, this study stresses adjustments in four dimensions of bank performance and behaviour: asset quality, profitability, capital adequacy, and lending behaviour, assuming that any change in a bank-specific characteristic is induced by endogenous adjustments of the others. The empirical results based on partial adjustment models and two-step system GMM estimation show that bank’s adjustment behaviour is subject to the variation in the macro-financial environment and the stress condition in the global financial market. There is no convincing evidence to support the effectiveness of policy rate cut to boots bank lending and to avoid a financial accelerator effect.

Does risk affect capital structure adjustments?

Purpose – This paper aims to theorize that if risk affects costs and benefits of capital structure adjustments, then it should affect the speed at which firms adjust their leverage toward the target. To investigate this hypothesis, the author empirically examines the role of firm-specific and macroeconomic risk on firms’ capital structure adjustments. Design/methodology/approach – The author augments the standard reduced-form partial adjustment model of capital structure by incorporating firm-specific and macroeconomic risk. The two-step robust system-generalized method of moments (GMM) estimator is used to estimate the proposed model for a large panel of UK manufacturing firms. An unbalanced annual panel data set covering the period from 1981 to 2009 is utilized for empirical analysis. Findings – The estimated adjustment speeds indicate that both firm-specific risk and macroeconomic risk significantly affect the speed at which firms adjust their capital structure toward the target. In particular, the author shows that firms adjust their leverage faster toward the target when firm-specific risk is relatively low. This is perhaps because firms face lower costs of adjustment when both firm-specific and macroeconomic risks are low. Overall, the paper provides evidence that different levels and different types of risk exert asymmetric effects on capital structure adjustments. Practical implications – The results presented in this paper suggest that managers have to carefully consider both the overall state of the economy and the solvency of their own business activities when making their financing decisions. The results also help in explaining why firms time equity and debt markets. Originality/value – The paper significantly adds to our understanding of asymmetries in adjustment speed across firms and over times. The paper can also be useful to understand why firms would not aggressively act to offset the effects of changes in the market value of equity or gains and losses in earnings.

Financial flexibility and the speed of target adjustment of capital structure: Panel data analysis

This study aims at investigating the impact of financial flexibility on the speed of target adjustment of capital structure. For this purpose, the partial adjustment model with interaction dummy term is used and tested using panel data analysis for a sample of 47 industrial firms listed in Amman Stock Exchange over the period of 1996 to 2014. The results of Random and fixed effects models showed that the target reversion of capital structure occurs slowly. The results also revealed that financial flexible firms adjust their leverage ratio much faster than less flexible firms. The tendency of making target reversion increases when inflexible firms have leverage above its target level, while inflexible firms with above-target leverage ratio adjust their leverage faster than flexible firms. These findings suggest that financial flexibility plays an important role on determining the financing decisions in Jordanian industrial firms. Moreover, they suggest how large bankruptcy risk is critical for industrial Jordanian firms. Hence, Industrial Jordanian firms should take into consideration the financial flexibility when they set their financial decisions to avoid the loss of profitable investment opportunities or experience the financial distress

Rational Habits in Residential Electricity Demand

Dynamic partial adjustment models of residential electricity demand account for the fact that households may not adjust electricity consumption immediately in response to changes in prices, income, and other relevant factors, because of behavioral habits or adjustment costs for the capital stock of appliances. However, forward-looking behavior is generally neglected. Expectations about future prices or consumption may have an impact on current decisions. In this paper we propose rational habit models for residential electricity demand and apply them to a panel of 48 US states between 1995 and 2011. We estimate lead consumption models using fixed effects, instrumental variables, and the GMM Blundell-Bond estimator. We find that expectations about future consumption significantly influence current consumption decisions, which suggests that households behave rationally when making electricity consumption decisions. This novel approach may improve our understanding of the dynamics of residential electricity demand and the evaluation of the effects of energy policies.

Analysis on the Decision Making of the Hanwoo Breeding Farms under Expectation Theories

The number Hanwoo is determined by the behavior of female breeding farms. The behavior is decided by the expected farm prices. This paper analyzes the behavior of Hanwoo female breeding farms. We use four expectation theories: naive expectation, adaptive expectation, partial adjustment, and rational expectation. We compare the estimation results of these four models to see which model fits well the actual data. We estimate female slaughter function and calf supply function. The results show that the behavior of the breeding farms can be explained by the naive expectation model and rational expectation model rather than the complicated adaptive expectation model and partial adjustment model. The result of the rational expectation model shows the best goodness of fit.

Long- and short-run elasticities of residential electricity consumption in China: a partial adjustment model with panel data

ABSTRACTWhile it has stabilized in developed world, the per capita residential electricity consumption (REC) in developing countries such as China is growing very rapidly and this trend is very likely to continue. Built upon a provincial level panel data, we employ a partial adjustment model to investigate the future trend of REC in China and factors that affect it. We estimate the income and price short-term and long-term elasticities for urban and rural China, respectively and compare the results with REC studies in other countries or regions. The findings provide useful information to understand how the REC would grow in China as household income increases and how effective that price could be as an intervention tool.

Drifting Towards Bordeaux? The Evolving Varietal Emphasis of U.S. Wine Regions

AbstractIn an ever-more-competitive global market, vignerons compete for the attention of consumers by trying to differentiate their product while also responding to technological advances, climate changes and evolving demand patterns. In doing so, they highlight their regional and varietal distinctiveness. This paper examines the extent to which the winegrape varietal mix varies within and among states of the United States and relative to the rest of the world, and how that picture has been evolving. It reports varietal intensity indexes for different regions, indexes of similarity of varietal mix between regions and over time, and price-based quality indexes across regions and varieties within and among the three west-coast States. Broadly speaking, the mix of winegrape varieties in the United States is not very different from that in the rest of the world and, since 2000, it has become even less differentiated and closer to that of France and the world as a whole. But individual U.S. regions vary considerably in the mix of varieties in which they specialize and in the quality of grapes they produce of a given variety; and region-by-variety interactions have complex influences on the pattern of quality and production. We use measures of regional varietal comparative advantage and a Nerlovian partial adjustment model to account for some of the shifting varietal patterns in the U.S. vineyard and in winegrape production. (JEL Classification: D24, L66, Q13)

Non Linear Speed of Adjustment to Lead Leverage Levels: Empirical Evidence from Firm Level Data

This paper tests the speed of adjustment of lag leverage levels (actual) to lead levels (target) levels using partial adjustment models based on the dynamic trade-off view of capital structure. We estimate baseline speed of adjustments for first differences to the first difference of modelled lead levels from lag levels of firm level leverage for a sample of UK firms. In line with our expectations derived from the literature, we find that the adjustment speed is faster when lag levels exceed lead levels relative to when lead levels exceed lag levels. Dissecting the motivation of this paper further we find that our results do not hold when the differences of firms above and under target levels are large. Thus although initial findings provide support for the expectation in the literature, we find that the theory does not hold when tested further suggesting that a more dynamic framework would be necessary to best explain target adjustment behavior.

The Effects of China's Split-Share Reform on Firmss Capital Structure Choice

The Split share Structure Reform in year 2005-2006 raises the curtain for China's secondary privatization. It mitigates the agency conflicts between controlling shareholders and minority shareholders and, thus, brings substantial changes to China’s financing behaviors. This paper aims to examine its impact on firms’ capital structure decisions by applying a variety of trade-off and pecking order models. Using data from 1,176 non-financial Chinese listed firms during the period from 2000 to 2012, we present empirical evidence indicating that: firstly, equity tracks the financing deficit better than debt in Chinese firms, which is not consistent with the pecking order theory. This phenomenon is more prominent after year 2006 as the shares reform increases the trading activities in the secondary stock market and thus alleviates the asymmetric information problems. Secondly, the partial adjustment model suggests that Chinese firms have an optimal leverage ratio and they adjust below-target leverage ratios faster than above-target leverage ratios after the implement of the shares structure reform although they make a symmetric adjustment towards the target leverage ratio before year 2007. The implication is that the share-split structure reform reduces the agency costs and costs of upward leverage adjustment, leading to a faster target reversion for firms with below-target leverage ratio but not for those with above-target leverage ratio. Thirdly, the error correction model reveals that before the reform Chinese firms make dynamic adjustment towards target leverage at an asymmetric rate, with stronger and faster response to the changes in target leverage than to past divergence from long-run target leverage ratio. In the post-reform period, however, Chinese firms have made a symmetric adjustment towards the desired leverage as they correct the divergence of their actual leverage ratios from the long-run target level at a faster speed while they do not significantly speed up their response to the short-run target leverage changes. All these results further support the applicability of dynamic target adjustment models.

Dividends as Reference Points: A Behavioral Signaling Approach

We outline a dividend signaling model that features investors who are averse to dividend cuts. Managers with strong unobservable cash earnings pay high dividends but retain enough to be likely not to fall short next period. The model is consistent with a Lintner partial-adjustment model, modal dividend changes of zero, stronger market reactions to dividend cuts than increases, comparatively infrequent and irregular repurchases, and a mechanism that does not depend on public destruction of value, which managers reject in surveys. New tests involve stronger reactions to changes from longer-maintained dividend levels and reference point currencies of American Depository Receipt dividends. Received July 16, 2012; accepted September 15, 2015 by Editor David Hirshleifer.

The capital structure adjustment through debt financing based on various macroeconomic conditions in Korean market

We investigate the relationship between the capital structure and the economic conditions in Korean market. To find the adjustment behavior on capital structure depending on macroeconomic conditions, we use dynamic partial adjustment model to estimate adjustment speeds toward targets. As the data analyzed in the study, we use non-financial firms listed in the Korean stock exchange. Through the empirical test, we find evidence that is consistent with Hackbarth, Miao and Morellec (2006) and Cook and Tang (2010)’s arguments that firms tend to adjust faster their leverage toward target level in economic expansion. Thus, our findings support to the pecking order and market timing theories in terms of corporate finance theories on capital structure. In addition, our test results are re-confirmed with robust consistency even though we include year dummy variable in the empirical test model for controlling global financial crisis in contrast with Kim (2013).

REIT Leverage and Return Performance: Keep Your Eye on the Target

This paper examines U.S. REIT leverage decisions and their effects on risk and return. We find that REITs are highly levered relative to industrial firms, with an average market leverage of 46 percent over our 1990-2012 sample period. Using partial adjustment models, we further find that the speed of adjustment at which REITs close the gap between current debt levels and target leverage levels is 17 percent annually, with over-levered REITs tending to adjust more quickly to their target leverage ratios than under-levered REITs. We also find that REITs that are highly levered relative to the average REIT tend to underperform REITs with less debt in their capital structure. However, REITs that are highly levered relative to their target leverage tend to perform better on a risk-adjusted basis than under-levered REITs. Taken together, our results show that REIT leverage has significant return performance effects conditional on deviations from target leverage.

The Effect of Credit Crunches and Equity Financing Restrictions on the Capital Structure Adjustments of Chinese Listed Real Estate Companies

ABSTRACTWe construct a natural experiment framework based on a partial adjustment model to analyze the effect of credit crunches and equity financing regulations on capital structure adjustments made by Chinese listed real estate companies in the period 2001–12. The results indicate that when a credit crunch occurs, upward capital structure adjustment speeds significantly slow, while the speed of downward adjustments does not significantly change. Moreover, equity financing regulation has little effect on downward capital structure adjustment speeds but has a significant effect on upward capital structure adjustment speeds.

The demand for transport fuels in Turkey

In this paper, we estimate the demand for transport fuels in Turkey. Specifically, using four different models, namely a partial adjustment model, a distributed lag model, an autoregressive distributed lag model, and an error correction model, we estimate gasoline and diesel demand functions with quarterly data covering the period 2003:Q1–2014:Q3. We find a stable long-run relationship only for diesel demand, income and price. Our results imply that gasoline demand does not respond to income and price in the long run, reflecting a shift from gasoline towards diesel induced by differential tax policies. Furthermore, we find that transport fuel demand is price inelastic, making tax on fuel a perfect tool for raising budget revenues. In addition, our results suggest that fuel demand responds to negative and positive price changes symmetrically.