System Generalized Method Of Moments Estimator Research Articles

New Evidence Using a Dynamic Panel Data Approach: Cereal Supply Response in Smallholder Agriculture in Ethiopia

Increasing agricultural production is essential to improving food availability and farm household incomes in developing economies. This study investigated the dynamic supply responses of major cereal crops to price and nonprice factors in Ethiopia using the Ethiopian Rural Household Survey (ERHS) panel dataset from 1994 to 2009. According to the Nerlovian expectation and adjustment approach in conjunction with the system GMM (generalized method of moments) estimator, both the planted areas and produced yields of major crops (teff, wheat, and barley) are influenced by price and nonprice factors in Ethiopia. The supply of major cereal crops is affected positively by their own prices and negatively by the prices of substitute crops. Nonprice factors such as education, farm size, fertilizer, land quality, and precipitation also affect supply of major cereals. Both the short-term and long-term acreage and yield response elasticities of teff and barley are positive. Moreover, the adjustment coefficients are positive for teff, barley, and wheat. The results suggest that Ethiopian farmers are capable of analyzing market signals and responding positively to price increases of staple crops. The findings also imply that the Ethiopian agricultural sector has been responsive to the cereal price increases observed since 2006. The remarkable growth of Ethiopian agriculture over recent decades is partly explained by the increase in agricultural prices. This study recommends that a fine-tuned balance between government interventions and market solutions is important, in addition to improving farmers’ agronomic practices, for increasing agricultural production.

Entrepreneurial Behavior, Institutional Trust and National Innovation: A Macro-Level Empirical Study

Schumpeterian fundamentalism supports the argument that innovation is a dynamic process and novelties are initiated through economic agents namely the entrepreneurs; vis-à-vis a strong institutional environment is required to facilitate the innovation process. Therefore, the present study undertakes the macro-level empirical analysis on determining the impact of entrepreneurial behavior, property rights and state effectiveness on country’s innovation. The data is of panel nature consisting of 55 countries and a time period from 2010 to 2016. The empirical analysis is done using system GMM (Generalized Method of Moments) estimation technique. The study shows that the fear of failure rate and total early stage entrepreneurs reduces innovation in a country whereas there is a significant positive relationship between established business entrepreneurs and innovation. However, perceived opportunities have an insignificant impact. This means that it is not inevitable that opportunities necessary trigger innovation. In addition, the study shows that property rights play an integral role in developing institutional trust which boosts entrepreneurialism to undertake innovative venture. On the other hand, state effectiveness is negatively related to innovation i.e. institutional trust is brought down in fragile countries which retard country’s innovation.

Financial instability and CO2 emissions: cross-country evidence

In the energy economics literature, a few scientific studies are found on the topic of financial instability and environmental quality. The current study is an attempt to fill this gap by examining the association between financial instability, economic growth, energy consumption, trade openness, urban population and CO2 emissions in 54 developing economies using panel data from 1980 to 2016. For empirical analysis, we employ fixed effects, difference generalized method of moments (GMM) and system GMM estimator. Empirical evidence confirms that financial instability has a significant negative impact on CO2 emissions, whereas the increase in economic growth, energy consumption and urban population are harmful to the environment. The findings of this empirical study offer new outcomes for policymakers to design inclusive financial, economic and energy consumption strategies to reduce the adverse effect of environmental pollution.

Board, audit committee, ownership and financial performance – emerging trends from Thailand

PurposeThis study aims to investigate the effects of corporate board and audit committee characteristics and ownership structures on market-based financial performance of listed firms in Thailand.Design/methodology/approachIt applies system GMM (generalized method of moments) as the baseline estimator approach, and ordinary least squares and fixed effects for robustness checks on a sample of 452 firms listed on the Thai Stock Exchange for the period 2000-2016.FindingsRelying mainly on the system GMM estimator, the empirical results indicate some emerging trends in the Thai economy. Contrary to expectations for an emerging market and prior research findings, ownership structures, particularly ownership concentration and family ownership, appear to have no significant influence on market-based firm performance, while managerial ownership exerts a positive effect on performance. Moreover, as expected, board structure variables such as board independence; size; meeting and dual role; and audit committee meeting show significant explanatory power on market-based firm performance in Thai firms.Practical implicationsThese findings are important for policymakers in constructing an appropriate set of governance mechanisms in an emerging market context, and for corporate entities and investors in shaping their understanding of corporate governance in the Thai institutional context.Originality/valueUnlike previous literature on the Thai market, this study is the first to use the more advanced econometric method known as system GMM estimator for addressing causality/endogeneity issues in governance–performance relationships. The findings indicate new trends in the explanatory power of ownership structure variables on market-based firm performance in Thai-listed firms.

UTJECAJ TERORISTIČKIH NAPADA NA PRILJEV IZRAVNIH STRANIH ULAGANJA U TRANZICIJSKIM ZEMLJAMA

The main aim of the paper is to empirically measure the impact of terrorism and other (institutional, economic, natural) factors on the foreign direct investments (FDI inward stock) of transition economies in the world. Methodology includes the application of two-step system GMM (Generalized Method of Moments) estimator of dynamic panel analysis. The research covers a group of 16 countries from 2000 to 2016. Research findings confirm that terrorist incidents, economic and institutional variables affect FDI inward stock of transition economies. It can be concluded that institutional variables (Government effectiveness, control of corruption) recorded the most significant impact on the inward FDI stock in the transition economies of the global economy. From the results, we can see the international competitiveness of transition countries about the influence of the variables of terrorism and other relevant model variables on foreign direct investments (FDI).

Effect of HIV/AIDS on Economic Growth in Sub-Saharan Africa: Recent Evidence

This paper examines the effect of human immunodeficiency virus/acquired immunodeficiency syndrome (HIV/AIDS) on economic growth in sub-Saharan Africa (SSA) using data from 46 SSA countries spanning the period 2000–2015. Results based on the system-generalized method of moments estimation showed that a 1% increase in the HIV/AIDS prevalence rate in SSA decreased the growth in per capita income by 0.47%. The impact of HIV/AIDS on economic growth was felt most in Eastern Africa followed by West Africa, although the prevalence rate was highest in Southern Africa. In particular, a 1% increase in the prevalence rate of HIV/AIDS in Eastern Africa and West Africa retarded growth in per capita income by 0.64% and 0.47%, respectively, over the study period. The paper suggests that for SSA to minimize the impact of HIV/AIDS prevalence on growth, African governments should take a cue from the southern African countries by making anti-retroviral drugs more accessible and affordable to persons living with the disease.

Further Results on the Weak Instruments Problem of the System GMM Estimator in Dynamic Panel Data Models

AbstractIn this paper, we investigate the weak instruments problem of the generalized method of moments (GMM) estimator for dynamic panel data models. Specifically, we complement Bun and Windmeijer (2010) by considering the alternative first‐difference and level models transformed by the forward GLS transformation. We demonstrate that this transformation yields a higher concentration parameter compared with the original models. This indicates that the proposed transformation yields stronger instruments even though the instruments used are identical. The Monte Carlo simulation results show that the system GMM estimator for the transformed model, called the forward system GMM estimator, performs better than the conventional system GMM estimator.

Effect of Infrastructure and Foreign Direct Investment on Economic Growth in Sub-Saharan Africa

This article investigates the effect of infrastructure and foreign direct investment (FDI) on economic growth in Sub-Saharan Africa (SSA) using panel data on 46 countries covering the period 2003–2017. The data were analyzed using fixed effects, random effects, and system generalized method of moments (GMM) estimation techniques. Based on the system GMM estimates, the results indicate that a 1 percent improvement in electricity and transport infrastructure induces growth by 0.09 percent and 0.06 percent, respectively. Additionally, FDI proved to be growth enhancing only when interacted with infrastructure. The interactive effect of FDI and infrastructure improves economic growth by 0.016 percent. The results suggest that public provision of economic infrastructure reduces the cost of production for multinational enterprises, thus providing an incentive to increase investment in the domestic economy to sustain economic growth. The results also suggest that the impact of FDI on economic growth is maximized when some level of economic infrastructure is available. Our findings thus provide ample justification on the need for a significant government investment in infrastructure to provide a less costly business environment for both local and multinational enterprises to improve economic growth.

Large Shareholders’ Power and the Quality of Corporate Governance: An Analysis of Brazilian Firms

This paper analyzes the incentives of large shareholders to implement the corporate governance system that favors their interests within a framework of highly concentrated ownership and poor legal protection for investors. A metric for corporate governance based on the fulfillment of non-mandatory rules of good corporate governance is used. System GMM (Generalized Method of Moments) estimates for a balanced panel data of Brazilian firms reveal that the ownership concentration is detrimental to corporate governance quality and the quality of board composition. In accordance with the expropriation effect on principal-principal agency conflicts, by weakening the corporate governance system and board composition, large controlling shareholders may use private benefits of control. As proposed by the substitution effect, in a complementary way, controlling shareholders may renounce strong boards and directly perform management monitoring, mitigating agency conflicts with managers. Finally, the ability of large shareholders other than the main blockholder is not enough to contest his/her power to shape the corporate governance system. The work provides evidence of the prominence of the principal–principal agency problem in an emerging market, by analyzing the effect of ownership concentration over the quality of the corporate governance system, and also that other large non-controlling shareholders are not able to contest the power of the main blockholder.

Large shareholders’ power and the quality of corporate governance: An analysis of Brazilian firms

This paper analyzes the incentives of large shareholders to implement the corporate governance system that favors their interests within a framework of highly concentrated ownership and poor legal protection for investors. A metric for corporate governance based on the fulfillment of non-mandatory rules of good corporate governance is used. System GMM (Generalized Method of Moments) estimates for a balanced panel data of Brazilian firms reveal that the ownership concentration is detrimental to corporate governance quality and the quality of board composition. In accordance with the expropriation effect on principal-principal agency conflicts, by weakening the corporate governance system and board composition, large controlling shareholders may use private benefits of control. As proposed by the substitution effect, in a complementary way, controlling shareholders may renounce strong boards and directly perform management monitoring, mitigating agency conflicts with managers. Finally, the ability of large shareholders other than the main blockholder is not enough to contest his/her power to shape the corporate governance system. The work provides evidence of the prominence of the principal–principal agency problem in an emerging market, by analyzing the effect of ownership concentration over the quality of the corporate governance system, and also that other large non-controlling shareholders are not able to contest the power of the main blockholder.

Is Corporate Political Activity an Investment or Agency? An Application of System GMM Approach

Corporate political activity (CPA) has been recognized as bearing a significant impact on financial performance (FP). Nevertheless, there has been a lack of considerable research to date. The results of the research regarding the relationship between CPA and FP have been contradictory and this has necessitated further investigation of this relationship. Nonetheless, rather than examining the relationship between CPA and FP, research scholars have revealed that a contingency perspective must be employed for revealing the conditions and the context which enhance the relationship between these two constructs. This study offers a quite distinctive viewpoint with respect to the link between CPA and FP as regards the corporate reputation perspective. For this reason, the study obtained data from the Fortune list of top 100 World Most Admired Companies (WMAC) for the period of 2007 and 2016. This data was utilized to examine the relationship between CPA and FP using the dynamic panel data system GMM (Generalized Method of Moments) estimator. This study finds virtually no support for the hypothesis that lobbying and PACs (political action committees) represent an investment in political capital. Instead, CPA is symptomatic of agency problems within firms. This study also argues that corporate reputation moderates the effect of CPA on the FP and the analysis supports the argument. Our results are particularly useful in light of the reputable corporation, which is greatly to likely increase the use of corporate funds for political contributions.

The effect of corruption on FDI and its modes of entry

PurposeThe purpose of this paper is to empirically investigate the impact of corruption on foreign direct investment (FDI) and its two major modes of entry: greenfield investment (greenfield) and cross-border mergers and acquisitions (M&As).Design/methodology/approachData are collected from 131 countries. Modern econometric techniques, including the generalized method of moments (GMM) estimator, two-stage least square estimator and two-step system GMM estimator, are used to evaluate the impact of corruption on FDI activities.FindingsThe empirical results illustrate that corruption is a deterioration factor that significantly hinders FDI inflows. However, this finding turns out to be contradictory when the two major components of FDI – greenfield investment and cross-border M&As – are separately examined. Specifically, while corruption consistently discourages cross-border M&As over time, it appears to exert positive effect on greenfield investments.Originality/valueThis is among the first to empirically examine the impact of corruption on FDI and its modes of entry in a number of countries spanning different time windows. In this sense, this paper also captures the changing nature of societies and economic conditions overtime and, therefore, enable academic researchers, policy-makers and business practitioners to draw broad inferences from the empirical results.

Remittances and labour market outcomes: Evidence from Mexico

AbstractThe effects of remittances on labour market outcomes have been studied by many researchers, primarily using micro‐level data. While a few studies have also used macro‐level data, they suffer from endogeneity bias due to the inclusion of remittances in their estimations. The present study attempts to fill the gap in the literature by using a set of panel data of Mexican states and by addressing the endogeneity bias with a system GMM (generalized method of moments) estimator. The main conclusions are that remittances increase labour force participation rates and reduce median hours worked, critical employment and unemployment duration.

Remittances and output growth volatility in developing countries: Does financial development dampen or magnify the effects?

The paper empirically investigated the relationship between remittance flows and output growth volatility for an extensive sample predominated by emerging and developing countries. Following this broad treatment, it goes further to estimate the extent to which the degree of financial development (FD) impacts on the remittances–growth volatility nexus. This novelty distinguishes the work from previous studies. Using the system-generalized method of moments estimator, which corrects for endogenity and omitted variable concerns, on data spanning the period 1996–2012 for a total of 71 countries some interesting findings ensued. One, both remittances and FD had growth volatility dampening effects. Two, the interaction between proxies for FD and remittances produced mixed results. Three, when volatility of FD is accounted for, the interactive term had mixed results. For instance, banking sector credit produces positive and insignificant coefficients, while private sector produced significant and negative coefficients. Summarily putting these results in other words, the counter-cyclicality of remittances was established, while the complementary dampening effect of financial development is dependent upon its measure. On the basis of the foregoing, a few related policy lessons are documented to conclude the paper.

Dynamic Capital Structure Adjustment: Which estimator yields consistent and efficient estimates?

The partial adjustment model is key to a number of corporate finance research areas. The model is by its nature an autoregressive-distributed lag model that is characterised by heterogeneity among individuals and autocorrelation due to the presence of the lagged dependent variable. Finding a suitable estimator to fit the model can be challenging, as the existing estimators differ significantly in their consistency and bias. This study used data drawn from 143 non-financial firms listed on the Johannesburg Stock Exchange (JSE) to test for the consistency and efficiency of the leading partial adjustment model estimators. The study results confirm the bias-corrected least squares dummy variable (LSDVC) initialised by the system generalised method of moments (GMM) estimator, the random effects Tobit estimator and the system GMM estimator as the most suitable estimators for the partial adjustment model. The difference GMM estimator and the Anderson-Hsiao instrumental variables estimator are inconsistent and biased in the context of the partial adjustment model.

The Effect of Environmental Regulation on Employment in Resource-Based Areas of China-An Empirical Research Based on the Mediating Effect Model.

While environmental pollution is becoming more and more serious, many countries are adopting policies to control pollution. At the same time, the environmental regulation will inevitably affect economic and social development, especially employment growth. The environmental regulation will not only affect the scale of employment directly, but it will also have indirect effects by stimulating upgrades in the industrial structure and in technological innovation. This paper examines the impact of environmental regulation on employment, using a mediating model based on the data from five typical resource-based provinces in China from 2000 to 2015. The estimation is performed based on the system GMM (Generalized Method of Moments) estimator. The results show that the implementation of environmental regulation in resource-based areas has both a direct effect and a mediating effect on employment. These findings provide policy implications for these resource-based areas to promote the coordinating development between the environment and employment.

Quasi maximum likelihood estimation of dynamic panel data models

ABSTRACTThis article establishes the almost sure convergence and asymptotic normality of levels and differenced quasi maximum likelihood (QML) estimators of dynamic panel data models. The QML estimators are robust with respect to initial conditions, conditional and time-series heteroskedasticity, and misspecification of the log-likelihood. The article also provides an ECME algorithm for calculating levels QML estimates. Finally, it compares the finite-sample performance of levels and differenced QML estimators, the differenced generalized method of moments (GMM) estimator, and the system GMM estimator. The QML estimators usually have smaller— typically substantially smaller—bias and root mean squared errors than the panel data GMM estimators.

Firms’ investment decisions – explaining the role of uncertainty

PurposeThe purpose of this paper is twofold. First, based on the value optimization problem of the firm, the authors proposed a theoretical model for firms’ investment decisions, which incorporates the effects of both idiosyncratic (firm specific) and macroeconomic uncertainty/risk. Second, the authors empirically estimate the proposed model for Pakistan.Design/methodology/approachThe authors utilize an unbalanced firm-level panel data covering the period 1988-2013. To generate time-variant firm-specific uncertainty, the authors estimate the autoregressive model on firm sales for each firm included in the sample over the examined period. Firm-specific risk is also measured based on the square of the residuals of firms’ sales. Two measures of macroeconomic uncertainty are computed using the conditional variance obtained by estimating the ARCH model for consumer price index and industrial production index. Several alternative measures of both types of uncertainties are used to ensure the robustness of uncertainty effects. To mitigate the problem of endogeneity, the robust two-step system-generalized method of moments estimator is used to estimate the empirical model.FindingsThe results indicate that firms are likely to cut down their level of investment spending when either type of uncertainty increases. The results also reveal that the sensitivity of firms’ investment decisions to macroeconomic (aggregate) uncertainty is higher as compared to the firm-specific uncertainty. The authors show that these findings are robust to different uncertainty measures used in the analysis. The results related to firm characteristics suggest that the firm-specific variables namely the debt to assets ratio, the costs of debt to assets ratio, and the sales to assets ratio are also equally important in the determination of investment decisions of corporate manufacturing firms.Practical implicationsThe empirical findings of the paper are useful for firm managers, investors, and government authority. Specifically, the results help firm managers and investors to understand how firm-specific and macroeconomic uncertainty affects firms’ investment decisions. The finding that firms cut their investment spending in times of macroeconomic instability implies that declines in firms’ investment spending during the periods of macroeconomic turmoil may delay the process of recovery. Therefore, the policy makers should design such policies that encourage firms to invest more in economic crisis periods, which, in turn, would enhance the growth of the economy and help to overcome the problem of downturn/recession.Originality/valueThe authors first propose a theoretical model for firms’ investment decisions based on the value optimization problem of the firm by incorporating the role of both firm-specific and macroeconomic uncertainty. Next, unlike most of previous studies, they estimate the proposed model for non-financial firms operating in Pakistan. The authors predict that a higher exposure to both idiosyncratic and macroeconomic uncertainties leads to lower investment in Pakistani manufacturing firms. Further, the authors hypothesize that both types of uncertainties have differential effects on firms’ investment decisions.

The Effect of Corruption on FDI and Its Modes of Entry

Purpose – The purpose of this paper is to empirically investigate the impact of corruption on foreign direct investment (FDI) and its two major modes of entry: greenfield investment (greenfield) and cross-border mergers and acquisitions (M&As). Design/methodology/approach – Data is collected from 131 countries. Modern econometric techniques, including the generalized method of moments (GMM) estimator, two-stage least square estimator, and two-step system GMM estimator, are utilized to evaluate the impact of corruption on FDI activities. Findings – The empirical results illustrate that corruption is a deterioration factor that significantly hinders FDI inflows. However, this finding turns out to be contradictory when the two major components of FDI – greenfield investment and cross-border M&As, are separately examined. Specifically, while corruption consistently discourages cross-border M&As over time, it appears to exert positive effect on greenfield investments. Originality/value – This is among the first to empirically examine the impact of corruption on FDI and its modes of entry in a number of countries spanning different time windows. In this sense, this study also captures the changing nature of societies and economic conditions overtime, and therefore, enable academic researchers, policy-makers, and business practitioners to draw broad inferences from the empirical results.

Determinants of the effective tax rate in the tourism sector: a dynamic panel data model

This paper presents a dynamic model of the Effective Tax Rate (ETR) in the tourism sector. A dynamic model where the lagged endogenous variable ETR has been included as a regressor to identify the dynamic structure of the variable due to the existence of temporal adjustments between the short and long run in ETR payments has been estimated. The empirical analysis based on a panel data set over the 2008-2013 period explores the determinants of the ETR variable by using a Generalised Method of Moments (GMM) estimator controlling for heterogeneity in the tourism sector. The Arellano-Bond system GMM estimator has been used to estimate the model. The study seeks to shed light on the determinants of tax burden in the tourism sector covering the lack of studies on this topic