US Investment Research Articles

IFRS and the regulatory environment: The case of U.S. investor allocation choice

This paper investigates whether a country’s use of international financial reporting standards (IFRS) is associated with increased US investment in foreign equities. The recent global trend towards the use of IFRS may signal attempts by policy makers to reduce information asymmetries for international investors. However, a concern is that these standards must be accompanied by a stronger regulatory environment in order for them to gain legitimacy. Investor allocation choice is based on US holdings of foreign equities and the regulatory environment is interpreted using two distinct factors: the legal standards system and the enforcement regime. We document that US investment is associated with IFRS only when it is combined with a strong regulatory environment, specifically a strong enforcement regime. We also find that mandating IFRS is attractive to US investors only when combined with a strong regulatory environment.

Returns or valuation? Foreign equity investment in the United States

PurposeThe purpose of this paper is twofold; first, to understand the long‐run dynamics between returns, valuation measures and foreign investment in the USA; second, to determine if these dynamics change following financial market upheaval.Design/methodology/approachTo address long‐run dynamic nature of the variables, multivariate autoregressive models are fitted for the period of January 1977 to November 2008. To gain additional insight about the nature of equity flows its dynamics are analyzed over the periods containing the 1987 stock market crash and the two major asset bubbles, e.g. internet bubble and the housing bubble.FindingsThe authors find that foreign institutional equity flows are more sensitive to innovations in valuation measures than innovations to excess US market returns; and that foreign investors increase their purchases of US market capitalization following a positive innovation to measures of valuation. The results imply that the behavior of foreign institutional investors are not described by “return chasing” alone. The authors further find that in times of increased uncertainty the joint dynamics between foreign equity flows and valuation measures decouples. Finally consistent with existing literature it was found that equity flows to the USA are autocorrelated.Originality/valueThere is a broad literature on the dynamics of US investment in emerging and developed markets, but very little (if any) research that analyzes the dynamics of equity flows to the US, returns, and measures of valuation. Furthermore, the literature on the behavior of equity flows surrounding financial crises is scant, particularly for developed markets.

Are Emerging Markets Relevant for Portfolio Diversification?

In the recent financial meltdown, along with the slump in developed markets, emerging markets also declined sharply, bringing into doubt their ability to provide diversification benefits. One of the stylised facts of volatility is its negative correlation with the equity market, which in conjunction with the launching of securities for trading volatility, leads to the emergence of a new asset class for portfolio diversification. From the perspective of investors in the US, this study investigates whether a domestic portfolio along with exposure to an alternative asset class like volatility index (VIX) fares better than investing in emerging markets. The results show that for the minimum variance portfolios, there is a significant increase in Sharpe ratio when VIX is included, instead of the emerging markets to the domestic portfolio. Adding VIX is bene-ficial, as the magnitude and direction of its correlation is not only predictable but also stable. While the emerging markets correlations with developed markets are positive and increasing thereby diminish-ing the diversification benefits. Hence, US investors in pursuit of risk reduction have an alternative investment opportunity in volatility-based contracts.

US Financial Regulations Circa 2010: The Coup De Grace of Dodd and Frank's Legislative Careers?

US government authorities permitted extensive financial sector de-regulation in the two decades prior to the 2007–2008 financial crisis. The last step in this de-regulatory trend was the switch to risk-weighted captial adequacy from fixed leverage ratios for US investment banks in 2004. Combined with a highly decentralised government regulatory structure that is lauded for the regulatory competition it allows, this de-regulation created considerable scope for regulatory arbitrage. Political compromise de-railed several important reform initiatives in the wake of the crisis. The reform failed to consolidate US regulatory institutions in any material way, backed away from original intentions to mitigate the ‘too big to fail’ problem and limit banks’ investment activities, and left the clean up of the mortgage giants, Fannie Mae and Freddie Mac, for further study. The greatest change came in the reform of consumer protection, derivatives trading and macro-prudential oversight.

Selected MENA countries' attractiveness to G7 investors

The objective of this paper is to evaluate the relative attractiveness of seven MENA countries (Algeria, Egypt, Iran, Saudi Arabia, Morocco, Tunisia and Turkey) as a location for foreign portfolio investment (FPI) from the G7 investors' viewpoints over the period 2001–2005. We suggest a methodology based on the combination of the gravity model, the analytic hierarchy process (AHP) and the goal programming model (GP). The gravity model is used to determine the attractiveness factors of a country with respect to FPI for 30 investing and 43 receiving countries. Results show the importance of information costs and bilateral trade in the determination of the bilateral asset holdings. The AHP method is applied to prioritize the set of FPI location alternatives according to variables' significance in the gravity model outcome; information costs, bilateral trade, GDP, investment freedom, institutional quality, and geographic distance. Results show that in general Saudi Arabia is the best destination for Japanese and US investors, Turkey is the favorite location for French, German, Italian and British investors and Algeria is the preferred country for Canadian investors. A combined AHP–GP model has been used to determine the degree of portfolio investment in each MENA country from the viewpoint of G7 investors. The relative attractiveness of MENA countries varies over time and across investors. In general, over the period 2001–2005, the most attractive country is Iran for Canadian, French and Italian investors, Turkey for German and British investors and Saudi Arabia for Japanese and US investors. For a MENA country to attract more FPI it should especially improve bilateral trade and institutional quality and reduce foreign investment restrictions and information costs.

Dos and don'ts for Chinese companies investing in the United States: Lessons from Huawei and Haier

AbstractThe implementation of the Chinese government's “Go Global” policy in 2000 has led to an unprecedented surge in Chinese outward foreign direct investment (OFDI). While Asia remains a favorite destination, the 2008–09 global financial crisis has presented opportunities for Chinese companies interested in cross‐border mergers and acquisitions in the United States. Chinese companies are keen on the United States because of access to the world's largest market and technology. However, Chinese companies have had to deal with difficulties ranging from regulatory hurdles and cultural differences. Given that the majority of OFDI is still carried out by state‐owned enterprises (SOEs), the primary obstacle for Chinese investors at the federal level is the Committee of Foreign Investment to the United States. This has proven to be an insurmountable obstacle so far for Chinese telecom company Huawei. However, the US investment environment is not all gloom and doom for Chinese companies. There are success stories too like Haier, which has managed to overcome cultural differences. This article aims to do a comparative study of Huawei and Haier and highlight the lessons the companies offer for Chinese companies interested in investing in the United States. © 2011 Wiley Periodicals, Inc.

Report Calls for US Funding to Speed Global Health Research and Innovation

A COALITION OF 30 NONPROFIT health organizations promoting the development of drugs, vaccines, and other health-related products designed for use in the developing world is calling on US policy makers and regulators to accelerate scientific innovation and streamline the approval process for safe and affordable new medical products that can be used worldwide. At a time when a sluggish economy is prompting the US Congress and the Obama administration to consider ways to reduce government spending, a report issued by the Global Health Technologies Coalition, funded by the Bill & Melinda Gates Foundation, makes a case in a policy report why US policy makers should sustain US investment in global health research and development (http://bit.ly/lsbDkG). “In times like this, when budgets are tight, policy makers are forced to make decisions about our national investments to spur economic growth,” said Kaitlin Christenson, director of the coalition, in explaining the rationale behind issuing the report. “But data show funding health innovations stimulates job creation here as well as addresses the United States’ moral imperative to help those around the world.” Thereportnotedthat inCalifornia, for example, global health activities in 2007 generatedanestimated$50billioninbusiness,supporting350000high-qualityjobs and $19.7 billion in wages and salaries. Federal funding is so critical for these nonprofit health organizations that substantial cutbacks could deal a serious blow to their programs. For example, coalition member FHI (formally Family Health International), which provides family planning and reproductive health services in more than 50 countries and also administers some of the largest HIV/AIDS programs worldwide, currently receives 85% of its funding from the US government. “The realities of the US deficit and problems with the global economy slow our ability to develop our programs, which in the long run save the world money,” said FHI president Ward Cates

Medical Students’ Paradox: Drug Company Materials Biased Yet Helpful, They Say

tion wants the United States to sustain and protect its investment in global health research and product development, develop concrete plans to incorporate research and development as a key priority within US global health programs, and ensure that US investments in global health research are coordinated, efficient, and streamlined. The report also focuses on the US Food and Drug Administration (FDA) and its ability to regulate health products to prevent, diagnose, and treat widespread infectious diseases. Specifically, the report suggests that the FDA make public the recommendations of its neglected disease review group (which advises the FDA commissioner about potential options to support and facilitate the development and evaluation of medical products to prevent, diagnose, and treat neglected diseases of the developing world) and allow for public comment. The coalition is urging the FDA to establish stronger partnerships with other regulatory stakeholders, suchas the World Health Organization and the European Medicines Agency, and to enhance its capacity in handling neglected diseases and better engage with groups developing global health tools. “The current system for global health products is complex, and the FDA has an opportunity to partner with the World Health Organization and nonprofits developing and distributing those products,” Christenson said.

Recent SEC sweep highlights the need for US investment advisers seeking business from sovereign wealth funds to develop policies for FCPA compliance

PurposeThe aim of this paper is to explain the provisions of the US Foreign Corrupt Practices Act that may be applicable to investment advisers seeking investments from foreign governments.Design/methodology/approachThe paper explains the background of the FCPA and its applicability to investment advisers, recommends policies and procedures for advisers to employ to reduce the risk of FCPA actions, recommends due diligence practices for third‐party relationships, and reminds advisers seeking business opportunities outside the USA of the importance of compliance with foreign anti‐bribery laws.FindingsThe FCPA applies to investment advisers whenever they seek a benefit, directly or indirectly, from a foreign official, as in the course of seeking investments in a sovereign wealth fund.Practical implicationsGiven the SEC's increased interest in pay‐to‐play activities, investment advisers who are seeking investments outside the USA should carefully review their existing FCPA policies, or develop new policies if they have not done so already.Originality/valueThe paper provides practical guidance from experienced financial services lawyers.

DETERMINANTS OF ADR RETURNS BEFORE AND AFTER DOMESTIC STOCK SEASONED EQUITY OFFERINGS: EVIDENCE FROM ASIAN AND LATIN AMERICAN EMERGING MARKETS / DEPOZITORINIŲ PAKVITAVIMŲ PASISKIRSTYMAS: AZIJOS IR LOTYNŲ AMERIKOS RINKOSE

This paper examines the critical determinants of American depository receipt (ADR) returns before and after domestic stock seasoned equity offerings (SEOs) for Asian and Latin American emerging economies during 1990–2007, which has never been probed in related issues. We employ the Time Series Cross Section Regressions and General Method of Moments methods to document that domestic stock returns play a vital role in explaining Latin American ADR returns, while US investor sentiment is crucial in explaining Asian ADR returns. Local investor sentiment is found to be considerably important than domestic stock returns in Asian ADR returns, while Latin American local investor sentiment (US investor sentiment) is more important before (after) domestic stock SEOs. The results do not support the view that ADR-reconciled earnings per share (EPS) and stock EPS provide significant information to explain ADR returns in Latin American and Asian emerging markets both before and after SEOs. Furthermore, international market differences in a specific geography should be considered when diversifying investments and efficiency accounting communication with accounting convergence does not need to be emphasized. Santrauka Nagrinėjami pagrindiniai Amerikos depozitoriumo pakvitavimų (ADR) grąžinimai, apimantys 1990–2007 metų laikotarpį. Straipsnio autoriai tai traktuoja kaip iki šiol netirtą reiškinį, nes analizuojamos dvi skirtingos rinkos – Azijos ir Lotynų Amerikos. Pasirinktu periodu šiose rinkose buvo jaučiamas ekonominis pakilimas. Straipsnio autoriai taiko laiko eilutės regresijos ir bendrąjį fiksuoto momento metodą. Tyrimo rezultatai parodė, kad yra tam tikrų skirtumųne tik tarp regionų, bet ir tarp atskirų investuotojų bei jų susiformavusių požiūrių į šias rinkas. Pažymima, kad turi būti įvertinami tiek rinkos, tiek geografiniai skirtumai difersifikuojant investicijas.

Losing Control: Policy Space to Prevent and Mitigate Financial Crises in Trade and Investment Agreements

This article examines the extent to which measures to mitigate the current financial crisis and prevent future crises are permissible under a variety of bilateral, regional and multilateral trade and investment agreements. US trade and investment agreements, and, to a lesser extent, the World Trade Organization, leave little room to manoeuvre with capital controls, despite increasing evidence that certain controls can prevent or mitigate crises. Investment rules under the treaties of most capital‐exporting nations allow for at least the use of temporary controls as a safeguard measure. The article offers a range of policies that could be deployed to improve US investment rules.

The Economic and Fiscal Contribution of US Investment in Ireland

Multinational companies from the United States of America are important sources of foreign investment in Ireland. The role of these companies in the Irish economy has been previously documented and is reviewed briefly. The main contribution of this paper is to present for the first time data on the fiscal impact of US companies in Ireland. The results show that US companies are significant sources of tax revenue. Over the last decade US companies have consistently paid around one third of the annual corporation tax revenue collected in Ireland. US companies also make large payments of value added tax, excise duty and income tax – the latter is due to the approximately one hundred thousand people employed in Ireland by US companies and indicates the substantial nature of US investment in this country. The sectoral composition of tax revenue from US companies and employment patterns over time are also examined.

A combined analytic hierarchy process and goal programming approach to international portfolio selection in the presence of investment barriers

The aim of this paper is to develop an integrated multiple criteria decision making approach combining the analytic hierarchy process (AHP) and the goal programming (GP) model to study the impact of a mixture of investment barriers on international portfolio selection, and therefore the home bias puzzle from the viewpoint of G-7 investors over the period 2001–2009. The AHP is used to determine the suitable international equity portfolios with respect to seven barriers to international investment. The GP model, incorporating the market weights of the maximum return, minimal variance, and AHP portfolios is formulated to determine the optimal international equity portfolios. The main results show that the AHP-GP optimal international portfolio weights are different from those predicted by the I-CAPM. Also, except for French and US investors, home bias values determined according to the AHP-GP portfolios are lower than those calculated on the basis of the value-weighted world market portfolio.

A Combined Analytic Hierarchy Process and Goal Programming Approach to International Portfolio Selection in the Presence of Investment Barriers

The aim of this paper is to develop an integrated multiple criteria decision making approach combining the analytic hierarchy process (AHP) and the goal programming (GP) model to study the impact of a mixture of investment barriers on international portfolio selection, and therefore the home bias puzzle from the view point of G-7 investors over the period 2001-2009. The AHP is used to determine the suitable international equity portfolios with respect to seven barriers to international investment: Information costs, investor behavior (optimism or pessimism toward financial market returns), geographical distance, transaction costs, expropriation risk, financial market size, and capital flow restrictions. The GP model, incorporating the market weights of the maximum return, minimal variance, and AHP portfolios is formulated to determine the optimal international equity portfolios. The main results show that the AHP-GP optimal international portfolio weights are different from those predicted by the I-CAPM. Also, except for French and US investors, home bias values determined according to the AHP-GP portfolios are lower than those calculated on the basis of the value weighted market portfolio. Hence, a combined AHP-GP model, as a more realistic approach to international portfolio selection, confirms the presence of the home bias and that this bias is generally less important than that obtained by applying a traditional approach.

National Security or Special Interests? US Support for the Panama Canal Expansion Programme

Of all the countries whose trade relies on the Panama Canal, it is the United States which took the deepest interest in its expansion. Washington gave an enthusiastic reception to the approval, in 2006, of a US$5.25 billion programme for enlarging the waterway. US endorsement primarily stemmed from a desire to promote international trade, a traditional foreign policy goal and an objective of influential domestic and transnational interest groups. Secondary aims included facilitating US investment and fostering stability in Panama. But the megaproject's hasty approval and incomplete nature may have unintended consequences that could affect conditions in Panama and US relations with that republic.

The End of Investment Bank Capitalism? Financial Jobs and Power in the Securities Industry

Media often portray investment bankers as the culprits of the global financial crisis, while mainstream scholarly accounts blame government failures and global trade and financial imbalances. This paper investigates the role of investment banks in the global financial crisis and the US economy, by focusing on employment patterns and power relations in the financial sector between 1978 and 2008. It demonstrates that investment banking plays a central part in the securities industry, which has been by far the most expansive segment of the US financial sector, and a significant contributor to growing income inequality. The power of investment banking has risen over the last 30 years in the conditions of growing demand for investment services, technological changes, deregulation and globalization. Investment banks were at the heart of the shadow banking system, inventing many of the products used by it and often disguising its operation. With leading US investment banks converted into bank holding companies, and the threat of re-regulation, the future of investment banking is uncertain. One area of uncertainty is their relationship with Sovereign Wealth Funds, which involves both opportunities and challenges. The paper finishes with a call for more research on investment banking as an industry, which is a key to understanding the dynamics of contemporary world economy, including insights into the trajectory of commodity and carbon markets, as well as the shifting landscape of financial centres.

The terror that underpins the ‘peace’: the political economy of Colombia's paramilitary demobilisation process

Studies on terrorism have traditionally focused on non-state actors who direct violence against liberal states. These studies also tend to focus on political motivations and, therefore, have neglected the economic functions of terrorism. This article challenges the divorce of the political and economic spheres by highlighting how states can use terrorism to realise interconnected political and economic goals. To demonstrate this, we take the case of the paramilitary demobilisation process in Colombia and show how it relates to the US-Colombian free trade agreement. We argue that the demobilisation process fulfils a dual role. First, the process aims to improve the image of the Colombian government required to pass the controversial free trade agreement through US Congress to protect large amounts of US investment in the country. Second, the demobilisation process serves to mask clear continuities in paramilitary terror that serve mutually supportive political and economic functions for US investment in Colombia.

Are the Emerging Markets Relevant for Portfolio Diversification?

In the recent financial meltdown along with the developed markets emerging markets too declined sharply casting doubts on their ability to provide diversification benefits. One of the stylized facts of volatility is its negative correlation with the equity market, this in conjunction with the launching of securities for trading volatility lead to the emergence of a new asset class for portfolio diversification. From the US investors’ perspective this study investigates whether a domestic portfolio along with exposure to an alternative asset class like volatility index (VIX) fares better than diversifying by investing in emerging markets. The study finds that the Sharpe ratios of both the strategies are not statistically different under a naive asset allocation strategy. But for the minimum variance portfolios there is a significant increase in Sharpe ratio when VIX is included instead of the emerging markets to the domestic portfolio. Adding VIX is beneficial as the magnitude and direction of the correlation is predictable while the emerging markets correlations are not only positive but also the size of the correlation coefficient is increasing. Hence US investors in pursuit of risk reduction have an alternative investment opportunity in volatility based contracts.

Risk Diversification In World Stock Markets

The benefit of risk diversification refers to the reduction in the portfolio risk when different stocks are combined into a portfolio. This risk reduction benefit exists because not all stocks are moving together through time; this is presumably true for stocks from different countries. The smaller the degree of co-movements in the world stock markets (i.e., the less the correlation between the markets), the greater is the risk reduction effect. Thus, it makes sense for a US investor to invest globally as long as the foreign stock markets are not highly correlated with the U.S. market. Nevertheless, recent evidence shows that the correlations between the U.S. and various foreign stock markets are evolving through time due to the integration of world capital markets and international capital flows. Now that we witness the increased interdependence of the world stock markets, does it still make sense to diversify globally? In this paper, we address the question of global risk diversification from the US perspective.

International Diversification with Securitized Real Estate and the Veiling Glare from Currency Risk

This paper analyzes diversification benefits from international securitized real estate in a mixed-asset context. We apply regression-based mean-variance efficiency tests, conditional on currency-unhedged and fully hedged portfolios to account for foreign exchange risk exposure. From the perspective of a US investor, it is shown that first, international diversification is superior to a US mixed-asset portfolio, second, adding international real estate to an already internationally diversified stock and bond portfolio results in a further significant improvement of the risk-return trade-off and, third, considering unhedged international assets could lead to biased asset allocation decisions not realizing the true diversification benefits from international assets. Our in-sample results are quite robust in out-of-sample analysis and when investment frictions like short selling constraints are introduced.