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Research in Emerging Financial Markets


The research conducted in this project is of a mostly fundamental character, with a focus on the particular problems of emerging financial markets. Research was based on rigorous analytical techniques and best practice econometrics applied to issues and topics of real world importance.

Research work was carried out in the three main directions, which coincided with the main research directions of the planned HSE laboratory:

1. Finance, banking, and the macroeconomy

1.1. Interrelations between banking and currency crises

The goal in this research area is the study of the interrelations of fundamental and non-fundamental causes of financial crises. In particular, we investigated the potential of both classical models (of the Diamond-Dybvig type) and evolutionary (agent-based) models to analyse the probability of occurrence and for the dynamics of banking and currency crises. We also analyzed the impact of particular exchange rate regimes on financial fragility in a global environment.

1.2. The Impact of External Borrowing on Capital Structure of Russian Companies

The objective of this study was to investigate the dynamics of companies’ capital structure during the course of capital account liberalization in Russia. This project addresses the following questions: 1) Did relaxation of financial constraints for companies that entered international capital markets led to a freeing of credit on the domestic capital market and to a reduction of capital costs for the Russian corporate sector as a whole? 2) How did the growth of external borrowing affect the term length of liabilities and relative weight of long-term assets of Russian companies? 3) What is the link between the corporate sector choice of capital structure and the macroeconomic performance of Russia?

2. Efficiency of financial markets

This research direction analyzes the efficiency of financial markets, their institutions, and the pricing of different types of assets. These classical topics in financial economics are specifically applied to emerging financial markets.

2.1. Option Pricing in Stocks during Takeover Bids

This paper models the dynamics of the target stock price in pending merger and acquisition deals. It explicitly accounts for the possibility of multiple takeover negotiation breakdowns and resumptions. Furthermore, we have developed an arbitrage-free framework for pricing European options on the target stock, and suggested ways of estimating the parameters from real data.

2.2. Do Locals Perform Better Than Foreigners: Evidence from Mutual Funds Investing in Russia

The mutual fund industry has grown considerably over the last decade in Russia. A large amount of literature in financial economics tests the hypothesis of financial market efficiency against the alternative hypothesis that mutual fund managers can systematically perform better than the market. There are only a very few such studies for Russia. One particular question that we investigate is whether local or foreign fund managers of mutual funds invested in Russia are performing better. Both their capability of selection and their market timing are compared using a large database of equity, fixed-income and mixed funds invested in the Russian market.

3. Corporate governance

The study of corporate financial decisions and of the interactions between shareholders, managers and other stakeholders of companies has nowadays become one of the key areas of interest among financial economists in the world. Financing constraints due to the underdevelopment of financial markets and insufficient investor protection make this research area particularly relevant for emerging markets.

3.1. Optimal Executive Compensation

This project addresses the dynamic relationship between a principal and an agent characterized by moral hazard, limited commitment, and history-dependent reservation utilities. The framework entails the possibility of permanent and temporary separations and introduces security holdings on the part of the agent, which significantly complicates the incentive structure of the optimal contract. We’ve calibrated and computed the model based on US data (S&P500 companies for the period 1993-2006) in order to be able to compare the results with the observed CEOs’ compensation packages.

3.2. Does Nationalization Work? – Evidence from Russian State Takeovers

There has been a recent trend toward more state influence in certain sectors in the Russian economy. We study the related incidence of nationalizations, in most cases the purchase of previously privatized companies by state-owned enterprises and its effect on the performance of the acquired firms. To this end, we have constructed a database of nationalization deals in Russia for the years 2001-2008. Apart from the overall effect on performance we investigate some of the mechanisms through which state ownership may affect company performance, in particular, access to soft loans, changes in financial leverage, the composition of the board of directors, and changes in the top management.

3.3. The impact of a firm’s ownership structure on risk taking –

Evidence from foreign direct investment programs of Japanese firms

This research project analyses the relationship between the risk involved in foreign direct investment projects and the ownership structure of a company. Following the literature on ownership effects, the ownership structure of a company should play a non-negligible role for corporate risk taking. This should be rendered evident in the risk involved in a firm’s foreign expansion policy via foreign direct investments (FDI). The paper focuses on the role of bank and insider ownership. Two databases on Japanese listed firms and their foreign affiliates are merged in a parent firm panel from 1990-2004.

3.4. Emerging market multinationals – do they create value and why? – A quantitative analysis

This research analyses cross-border mergers & acquisitions (M&A) initiated by emerging market firms. It explores whether and how these deals create value. M&A activity by emerging market firms has sharply increased over the past years. Although there is a substantial amount of qualitative analysis, quantitative analysis is still limited and inconclusive. We aimed to provide a comprehensive picture of emerging market multinational firms from various countries including Russia.

In particular, we tried to answer the following research questions:

- Do varying deal motivations have differing value effects?

- Is the property rights protection environment of the acquiring firm of importance?

- Does the firm level governance structure play a role?

- Do firms from emerging markets tend to overpay for their targets more frequently than firms from developed countries?

3.5. Behavioral aspects of corporate decision making

The project aims to explore the role of psychological factors of managerial behavior, and in particular, to estimate their effect on the efficiency and quality of managerial decisions. Specifically, we studied the effect of managerial confidence in the quality of their own forecasts on the efficiency of enterprise activity, from both a theoretical and empirical perspective. As an empirical base for the project, we used the Russian Economic Barometer survey data from 1996-2009.

The tasks set by the researchers in the context of this project have been completed. We have developed models that characterize aspects of current interest for financial markets and corporate governance.

Thus, the result of the “Research on the emerging financial markets” project was the following:

1. An academic report combining the papers prepared by ICEF academics in the areas of monetary policy, financial markets, and corporate governance. Some of them will be published in the ICEF Working Paper Series WP9 “Research in Economics and Finances” and in international scientific journals.

2. Elaboration of the concept and the basic organizational structure of the research laboratory that was established at ICEF in cooperation with the LSE.