Review of Pacific Basin Financial Markets and Policies

In this study, we intended to examine empirically how a firm's profitability performance would impact its growth process and the inference for Gibrat's Law. The basic study looks at small, medium and large firms' tendency to grow when their internally generated profits are high. The sample is 124 construction companies listed from years 2003 to 2010 at BURSA Malaysia. Data used is secondary data collected from BURSA Malaysia and annual reports. The result indicated that "growth" contributed significantly to profitability in both small and medium-sized construction companies, but was not significant in large companies. Thus, hypothesis two was supported. This study supports Gibrat's Law, showing that size and growth rate are independent.

This paper investigates the impact of Asian banks' income structure on competitiveness, profitability, and risk over the period 2005–2011. Exchange-listed commercial banks of eight Asian countries are included in the study sample. The cross-sectional regression results reveal that higher exposure of net non-interest income in Asian banks increases market risk and asset risk but lowers insolvency risk, ROA and ROE. On the other hand, higher exposure of net fees and commissions reduces return volatility, market risk, and asset risk but increases insolvency risk, ROA, and ROE. Further, exposure to trading and derivatives, along with other securities, tends to decrease banks' competitiveness.

We examine the ex-ante performance of 1185 firms that filed for bankruptcy between 1992 and 2009. Evidence suggests that firm specific poor operating performance and industry wide distress are the principal causes (contributing 42% each for cash flow shortfall) of corporate distress. We observe vitiating investment, operating, and financing performance of the sample firms starting from four years prior to their bankruptcy. Further, we report less severe decline in capital expenditure in the case of state controlled firms and business group affiliated firms, indicating the presence of "soft budget constraints" among the sample firms. Logistic regression, estimating firm level distress probabilities offer indirect evidence for "risk sharing argument" among business group affiliates.

This paper explores how the fearful market-based sentiment indicators affect investor trading behavior and market liquidity. Our results show that a high degree of fearful market-based sentiment induces more sell orders along with a reduction in market liquidity, and vice versa. In addition, most of our findings suggest that the fear sentiment, in the case of extremely high implied volatility, decreases net buying volume more significantly. As for the interaction between fearful market-based sentiment and institutional investor expectation, we show that net buying volume and market liquidity decrease (increase) more significantly than they normally do when the fearful market-based sentiment increases (decreases) in the state of bearish institutional investor expectation. The results provide support to the myopic loss aversion of investors.

We apply the Kalman filter method to estimate nine Asian markets and find evidence that stock return dispersions decline as markets experience stress conditions, supporting the existence of herding. This paper finds that herding behavior is time-varying and comoving across markets. Both linear and nonlinear Granger causality tests conclude that there is strong bilateral causality between herding and returns for all nine Asian markets. For markets in Japan, South Korea, and Thailand, we consistently find strong two-way causality exists in pairwise variables among herding, stock returns, and illiquidity. No consistent evidence can be drawn from other markets for other pairwise variables.

This study draws on classical conditioning to explain how investors react to short sale-related measures. Our results reveal that measures related to the capital cost of short sellers cause a conditioned response among investors. This explains how investors actually perceive and relate to short sale-related measures and shows that many measures fail to achieve the expected results. Additionally, the conditioned response to measures related to the capital cost of short sellers reveals investor sentiment about the adjustment of short sale margin requirements.

Overwhelming evidence indicates that firms time market conditions to issue equity. I investigate the motivations for security issuances in hot and cold markets. While it is commonly believed that firms tend to exploit overvaluations to issue equity and overinvest in so-called 'hot' markets, which often results in lower future returns, I show that security issuances in certain periods with lower adverse selection costs are motivated by fundamentals such as capital expenditures and financial constraints, and that these issuances can create shareholder wealth. In contrast, firms that issue equity during periods of high sentiment experience a decline in future returns.