Henley Business School Discussion Paper Series

Easily accessible research

The Henley Business School Discussion Paper Series exists to disseminate new research of academic distinction at an early stage of development by its faculty and affiliates. The series is also distributed on SSRN and REPEC to make the research easily accessible internationally.

Please direct any comments or questions to the corresponding author of the paper concerned.

Forecasting and Forecast Narratives: The Bank of England Inflation Reports

 Professor Michael Clements   J. James Reade  

Series Reference: ICM-2016-10

We analyze the narratives that accompany the numerical forecasts in the Bank of England's Inflation Reports. We focus on whether the narratives contain useful information about the future course of key macro variables over and above the point predictions, in terms of whether the narratives can be used to enhance the accuracy of the numerical forecasts. We also consider whether the narratives are able to predict future changes in the numerical forecasts. We find that sentiment related to speci?c aspects of the economic outlook (say, demand conditions, or supply conditions)
can enhance point forecast performance, and changes in sentiment (expressed in the narrratives) can predict subsequent changes in the point forecasts.
Keywords: Sentiment indices, inflation forecasting, output growth, forecast encompassing. 

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The Impact of Stop-Go Demand Management Policy on Britain's Consumer Durables Industries, 19521965

 Professor Peter Scott  Professor James Walker 

Series Reference: IBH-2016-02

We examine the impacts of British government ‘stop-go’ policy on domestic sales of consumer durables over 1952 – 1965, via hire purchase restrictions and punitive Purchase Tax rates. Our analysis includes a general review of contemporary evidence regarding the impacts of these measures, a more detailed study of the television sector, and time-series econometric analysis for both televisions and a representative high-ticket labour-saving consumer durable –washing machines. We find that the restrictions had devastating impacts on Britain’s consumer durables industries, preventing firms from fully exploiting economies of scale, reducing output growth and international competitiveness, and eroding industrial relations. Government officials were aware of these problems, but considered them a price worth paying to facilitate moves towards sterling convertibility and the re-establishment of the City as a leading financial and trading centre.

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Theorizing the Meaning(s) of Expatriate: Establishing Boundary Conditions

  Yvonne McNulty   Professor Chris Brewster 

Series Reference: JHD-2016-05

This paper examines the concept of expatriates, arguing that sloppy use of the term in the past has led to problems of inconsistent research, incompatible findings and a lack of clarity in the field. The increasing interest over the last dozen years or so in other forms of international
experience, often equally poorly conceptualised, has compounded the problem. We argue for the need for greater construct clarity in studies of expatriates and, by extension, of other forms of international experience. Specifically we attempt to clarify to whom does the term ‘expatriate’, and specifically ‘business expatriate’, apply and the boundary conditions under which expatriate employment is enacted.
expatriates, expatriate definition, boundary conditions for expatriation, business expatriates, migrants, sojourners

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Conceptualising the Future of HRM and Technology Research

  Tanya Bondarouk   Professor Chris Brewster 

Series Reference: JHD-2016-06

This paper examines the role of information technology (IT) directly on one central aspect of work in the twenty-first century, its impact on human resource management (HRM) itself. We use the long-established ‘Harvard’ model of HRM, offering a more contextualised view of HRM, a more expansive view of stakeholders, and a wider and more long-term approach to outcomes. Applying those principles to the literature on IT and HRM helps us clarify both the advantages and disadvantages to different stakeholders of the intersection between HRM and technology. We show that rapid technological developments offer a new, smart, digital context for HRM practices with the better quality HRM data and enabling a strong HRM ownership by all stakeholders. At the same time, we see a tension in HRM responsibilities between HRM professionals and organizational members who are not directly assigned HRM tasks but are the subject of them. On the basis of that analysis we offer suggestions for future research.
information technology, human resource management, contextual HRM, multi-stakeholder perspective, e-HRM, HRM outcomes, Harvard approach

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Human Resource Management: The Promise, the Performance, the Consequences

 Professor Chris Brewster   Paul N Gooderham    Wolfgang Mayrhofer  

Series Reference: JHD-2016-07

Reviewing the trajectory of human resource management research over the last thirty years, this polemical paper argues that the dominant focus has been on 'Strategic HRM' or HRM that is supposed to improve firm performance in some way. It argues that this narrow focus has not
only proved disappointing in its own terms but has led to the subject being addressed in a simplistic neo-liberal way that fails to take into account the wider constituency of HRM stakeholders and does not address many of the 'big issues' that these stakeholders face in practice. It calls for a wider and more realistic research agenda.
HRM strategy, job satisfaction, sustainable HRM, contextual HRM

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Are Macro-Forecasters Essentially the Same? An Analysis of Disagreement, Accuracy and Efficiency

 Professor Michael Clements 

Series Reference: ICM-2016-08

We investigate whether there are systematic differences between forecasters in terms of their levels of disagreement and the accuracy of their forecasts, and whether these di¤erences are related to whether or not a forecaster efficiently uses their available information. We ?find that forecasters are not interchangeable. At any point in time, the level of disagreement between forecasters is more likely to be due to a given set of forecasters, as opposed to any randomly-selected set of forecasters. In terms of forecast accuracy, we also ?nd persistence, in that forecasters who are more (less) accurate in one period tend to be more (less) accurate in a subsequent period. Finally, we reject efficiency for around half of all forecasters at short horizons (depending on the variable in question), and ?find that efficient forecasters tend to be more accurate and less contrarian. Our results do not support the notion that contrarian forecasts stand apart by virtue of having superior information - knowing something that others do not.

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Sir Clive W J Granger's Contributions to Forecasting

 Professor Michael Clements 

Series Reference: ICM-2016-09

Some of Clive Granger?s many and varied contributions to economic forecasting are reviewed. These include contributions to forecast combination and forecast efficiency, to improving forecast practice, to forecast evaluation, and to the theory of forecasting. We also discuss some of the subsequent research and developments in these areas, which have sought to generalize the applicability of Granger?'s work. We also consider research in related areas motivated at least in part by Granger?'s work.

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Pension Funds and the Principles for Responsible Investment: Multiplying Stakeholder Salience?

 Dr Andreas G. F. Hoepner   Arleta A A Majoch  

Series Reference: ICM-2016-07

From a simple idea to unite pension funds in their quest for responsible investment at its launch in April 2006, the United Nations supported Principles for Responsible Investment (PRI) have grown in just one decade into an initiative with more than 1,500 fee paying signatories. These signatories consist of asset owners (e.g. pension funds, charities), the asset managers that serve them and service providers to both groups. Jointly, the PRI’s signatories hold over $60 trillion in assets under management, which makes PRI into one of the more prevalent non-for-profit organisations worldwide. This paper undertakes an empirical investigation of the stakeholder relationships PRI and its asset owner signatories during five crucial years of PRI’s emergence: 2007-2011. Guided by stakeholder salience theory, we explore the factors that drive asset owners to subscribe to PRI. Using a variety of public data sources, we overcomes the limitation of self-reported data qualifying the findings of Majoch et al. (2016). We find that for asset owners the most salient factors are utilitarian power, societal and pragmatic legitimacy, management values, and coalition building though the relevance of individual factor is not static but evolves over time with PRI’s emergence.

legitimacy, pension

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Tail Systemic Risk And Banking Network Contagion: Evidence From the Brazilian Banking System

  Miguel A Rivera-Castro    Andrea Ugolini    Juan C Arismendi Z  

Series Reference: ICM-2016-05

In this study the tail systemic risk of the Brazilian banking system is examined, using the conditional quantile as the risk measure. Multivariate conditional dependence between Brazilian banks is modelled with a vine copula hierarchical structure. The results demonstrate that Brazilian financial systemic risk increased drastically during the global fi nancial crisis period. Our empirical findings show that Bradesco and Italy are the origin of the larger systemic shocks from the banking system to the financial system network. The results have implications for the capital regulation of financial institutions and for risk managers' decisions.

Keywords: Systemic Risk, Brazilian Banking System, Banking Network, Financial Contagion, Financial Crisis

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Multivariate Elliptical Truncated Moments

  Juan C Arismendi    Simon Broda  

Series Reference: ICM-2016-06

In this study, we derived analytic expressions for the elliptical truncated moment generating function (MGF),the zeroth-, first-, and second-order moments of quadratic forms of the multivariate normal, Student's t, and generalised hyperbolic distributions. The resulting formulae were tested in a numerical application to calculate an analytic expression of the expected shortfall of quadratic portfolios with the bene t that moment based sensitivity measures can be derived from the analytic expression. The convergence rate of the analytic expression is fast - one iteration - for small closed integration domains, and slower for open integration domains when compared to the Monte Carlo integration method. The analytic formulae provide
a theoretical framework for calculations in robust estimation, robust regression, outlier detection, design of experiments, and stochastic extensions of deterministic elliptical curves results.

Keywords: Multivariate truncated moments, Quadratic forms, Elliptical Truncation, Tail moments,
Parametric distributions, Elliptical functions

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The introduction of the joint-stock company in English banking and monetary policy

  Victoria Barnes   Dr Lucy Newton 

Series Reference: IBH-2016-01

Following the passage of the 1826 Act, the joint-stock bank entered the English banking system and its dominance over the private bank is often thought to be a result of laissez-faire political ideology. This article shows that banking and monetary policy in the nineteenth century was far from liberal or permissive as regulators legislated with a clear idea of the intended outcomes of their actions. Yet, as policy-makers were often unsuccessful in their attempts to introduce change in the banking system, they became interventionist in an effort to rectify their mistakes. By placing regulation in its political context, we show that the emergence of a set of banks with shareholders, sleeping partners and investors as owners was both unexpected and unintentional. It reveals their subsequent attempt to repeal the 1826 Act and dissolve the offending companies through more legislation.

Banks, nineteenth century, policy-making, legislation

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Import, Export and Multinationality. Evidence from Swedish Firms

 Professor Davide Castellani   Claudio Fassio  

Series Reference: JHD-2016-08

This paper studies the role of imported inputs in explaining firms’ export behaviour. Unlike most of the existing literature we are also able to control for the participation of domestic firms to multinational networks. This allows us to test to what extent the recurrent evidence that
importing foster exporting activity is instead a figment of the fact that importers are also part of multinational groups. Our evidence, based on Swedish manufacturing firms, suggests that imported inputs, rather than multinationality, are a key determinant of firms’ export propensity
and product scope. This result is particularly strong for SMEs, and it is driven by imported intermediates and (to a lesser extent) capital goods.
importing, exporting, multinational enterprises, Sweden

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Which Sentiment Indicators Matter? An Analysis of the European Commercial Real Estate Market

  Steffen Heinig   Dr Anupam Nanda   Sotiris Tsolacos  

Series Reference: ICM-2016-04

Property markets exhibit several classic market inefficiencies, which can lead to irrational behaviour and a better understanding of connections between yield modeling and the role of sentiment is of immense interest to property funds, pension funds, banks, insurance companies
and other participants. While past studies have examined the role of sentiment in market performance, the conclusions have remained mixed. This paper compares established models against two new innovative methods, paying more attention towards the expectations of market
participants to explain yield adjustments and swings in property values. Forecast evaluations reveal that models incorporating property-specific and google trend sentiment outperform the base model. The European market offers an interesting testing ground for our research questions
as the interest of investors and banks in abrupt movements in yields and pricing and the role of market sentiment has grown in Europe post global financial crisis due to high level of nonperforming loans.

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Multinationality, R&D and productivity: Evidence from the top R&D investors worldwide

 Professor Davide Castellani   Sandro Montresor    Torben Schubert    Antonio Vezzani  

Series Reference: JHD-2016-04

This paper investigates the effects of multinationality on firm productivity, and contributes to the literature in two respects. First, we argue that multinationality affects productivity both directly and indirectly, through higher incentives to invest in R&D. Second, we maintain that the multinational depth and breadth have different direct effects on productivity and R&D. Using data from the top R&D investors in the world, we propose an econometric model with an R&D and a productivity equation that both depend on multinationality. We find: i) multinational
depth has a positive effect on productivity, while the effect of multinational breadth is negative; ii) multinationality (along both dimensions) has a positive effect on R&D intensity, translating into an indirect positive effect on productivity; iii) the positive indirect effect is however not large enough to compensate the negative direct effect of multinational breadth.

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R&D and Productivity in the US and the EU: Sectoral Specificities and Differences in the Crisis

 Professor Davide Castellani   Mariacristina Piva    Torben Schubert    Marco Vivarelli  

Series Reference: JHD-2016-03

Using data on the US and EU top R&D spenders from 2004 until 2012, this paper investigates the
sources of the US/EU productivity gap. We find robust evidence that US firms have a higher capacity to translate R&D into productivity gains (especially in the high-tech industries), and this contributes to explaining the higher productivity of US firms. Conversely, EU firms are more likely to achieve productivity gains through capital-embodied technological change at least in medium and low-tech sectors. Our results also show that the US/EU productivity gap has worsened during the crisis period, as the EU companies have been more affected by the economic crisis in their capacity to translate R&D investments into productivity. Based on these findings, we make a case for a learning-based and selective R&D funding, which – instead of purely aiming at stimulating higher R&D expenditures – works on improving the firms’ capabilities to transform R&D into productivity gains.

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Corporate Carbon Emission and Financial Performance: Does Carbon Disclosure Mediate the Relationship in the UK?

  Yang Stephanie Liu    Xiaoyan Zhou   Dr Jessica Yang   Andreas G F Hoepner  

Series Reference: ICM-2016-03

Academic debate relating to the link between corporate environmental disclosures, environmental performance and financial performance is persistent and controversial. In this paper, we investigate whether and if so, how, carbon emission performance is related to corporate financial performance and how disclosures of carbon emission in the annual and standalone reports mediate such relationship. Specifically, we construct a 42-item disclosure index to quantify the quality of corporate carbon emission information of 62 FTSE 100 companies from the period of 2010 to 2012. We find that while carbon emission is negatively associated with financial performance, it is positively related to the level of carbon disclosures which is significantly and positively related to financial performance. The findings show that market responses to excessive carbon emission; however, companies with poor carbon performance tend to use disclosure strategically to manage the legitimacy threat and to reduce
the information asymmetry.

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Multinational Enterprises and Economic Development in Host Countries: What We Know and What We Dont Know

 Professor Rajneesh Narula   André Pineli  

Series Reference: JHD-2016-01

The attraction of multinational enterprises (MNEs) has become a key component of development policies. Generous incentive packages are offered by governments to attract foreign direct investment (FDI), although few countries perform proper cost/benefit analyses. MNEs can have a decisive influence on the development path of countries, although the effectiveness of an FDI-assisted development strategy depends on a variety of factors. Net benefits depend not only on quantity, but also on the quality of FDI. Quality has to do with the MNE’s investment motivations, the affiliates’ mandate and autonomy, which in turn determine the potential for linkages and spillovers. These effects also depend on the capacity of domestic
firms to absorb, internalise and upgrade their knowledge assets. A sound FDI policy must not be exclusively concerned with attracting capital investment, but must prioritise enhancing the local embeddedness of the MNEs.

Globalization and subsequent changes in economic organization require both policy makers and scholars to reconsider their understanding of FDI and development. “FDI” and “MNEs” are no longer synonyms, as MNEs are increasingly able to control value chains without ownership through equity. Poor data and weak methodologies mean making realistic estimations of development effects is also increasingly fraught with difficulty. The tools to measure linkages and spillovers are increasingly outdated, as we cannot estimate non-equity engagements or knowledge flows, and this means we are unable to objectively judge if foreign investments have a net positive or negative effect, and whether such effects persist or attenuate over time.

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The Modern MNE as an Efficient Meta-integrator: Emerging Market MNEs Need to Foster Internal Embeddedness to Succeed

 Professor Rajneesh Narula 

Series Reference: JHD-2016-02

The modern MNE has to be a ‘meta-integrator’, able to leverage knowledge within and between its different constituent affiliates, which requires efficient internal markets and well-structured cross-border hierarchies. EMNEs will need to strengthen the ownership advantages necessary to achieve such internal embeddedness, which are hard to acquire, and must be learnt. I couch this discussion in the ongoing debate about the nature of ownership advantages. The ability to be competitive in an era of globalization depends as much on the EMNE’s technological assets as it does on its ability to achieve economies of common governance. The EMNE (like all MNEs) has to be able to promote internal knowledge flows, both to and from the parent, as well as between affiliates located in different countries, and the ability to achieve organizational, scale and scope economies.

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Are Macroeconomic Density Forecasts Informative?

 Professor Michael Clements 

Series Reference: ICM-2016-02

We consider whether survey density forecasts (such as the in?ation and output growth histograms of the US Survey of Professional Forecasters) are superior to unconditional density forecasts. The un-conditional forecasts assume that the average level of uncertainty experienced in the past will prevail in the future, whereas the SPF projections ought to be adapted to current conditions and the outlook at each forecast origin. The SPF forecasts might be expected to outperform the unconditional densities at the shortest horizons, but this does not transpire to be the case, for either the aggregate or individual respondents?forecasts.

Keywords: probability distribution forecasts, aggregation, Kullback-Leibler information criterion.

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Towards a Carbon Data Science

  Pei-Shan Yu    Andreas G F Hoepner    Hampus Adamsson  

Series Reference: ICM-2016-01

This report provides a critical review of the emissions accounting, reporting and footprinting of carbon dioxide (CO2) currently practiced in the industry to develop a data science for carbon. While providers of carbon footprinting deserve considerable credit for educating asset managers and effectively building an industry, the quality of corporate carbon accounting and reporting still poses significant challenges. Statistical concepts related to carbon footprinting also need further development. We conclude our report by highlighting the three main challenges to be in arriving at Carbon Data Science. First, the vast majority of corporations need to be incentivised to report their carbon emissions accurately, coherently and consistently across reporting schemes. Second, while it seems inevitable for corporations to use estimations in producing their carbon emission inventory, these estimations should be made in compliance with the precautionary principle (i.e. if in doubt, err on the side of the planet). The precautionary principle should equivalently be applied to estimations of carbon emissions by those corporations not (yet) reporting themselves. Third, from an investor perspective concerned about aggregating corporate carbon footprints, the issue of ‘double counting’ has to be addressed more succinctly. For instance a utility provider’s scope 1 is the scope 2 of many other firms and, consequently, some investors’ portfolio carbon footprint might be overstated. While we limit our report to CO2 for simplicity, we consider our findings equivalently applicable to the other greenhouse gases.

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Extending the Better Balance Model: How Psychology Could Help to Solve the Problem of Sustainability

 Professor Kevin Money   Stephen Pain   Professor Carola Hillenbrand 

Series Reference: JMC-2016-01

This paper extends the Better Balance Model of Sustainability presented in our previous discussion paper, in which we proposed that solutions to issues such as climate change and population growth may emerge if businesses seek to better understand and harness the underlying human motivations responsible for driving sustainable and unsustainable behaviour.  By drawing on psychological theory, we propose that sustainable behaviours could be encouraged by redressing three key imbalances: (1) When human drives/motivations are  unbalanced – this can lead dysfunctional and unsustainable behaviour; (2) When there is an imbalance between learning from positive and negative outcomes – this can lead to unsustainable behaviour; (3) When there is an imbalance between people’s public and private identities – this can lead to dysfunctional and unsustainable behaviour. Sustainable behaviour is therefore a function of balancing these three key aspects. The paper concludes by presenting a model of sustainability that can be applied as a tool to redress imbalances and encourage balance and, thus, sustainable behaviours.

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Public Listing, Context and CSR: The Effects of Legal Origin

  Marc Goergen    Salim Chahine    Geoffrey Wood   Professor Chris Brewster 

Series Reference: JHD-2015-09

The literature on legal origin argues that legal institutions mold what firms do: within common law systems, shareholder rights are much stronger, reducing agency issues. We explore whether publicly-listed companies are more likely to have corporate social responsibility (CSR) codes than privately-held companies, and whether the association between a public listing and the existence of a CSR code is affected by the company’s location within a specific institutional and cultural setting. We conclude that proposals to introduce more ethical dimensions to the behavior of firms need to be thought through: what works in one location may be inappropriate in another.

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Forecasters’ Disagreement about How the Economy Operates, and the Role of Long-run Relationships

 Professor Michael Clements 

Series Reference: ICM-2015-09

Macro-variables such as consumption, investment and output are expected to move together in the long run. We consider whether survey forecasts of these quantities suggest beliefs about equilibrium relationships play a prominent role in expectations formation. Evidence is brought to bear from an analysis of multivariate measures of forecaster disagreement, as well as tests of forecast optimality. The analysis of disagreement provides little support for the proposition that equilibrium considerations play a key role. Moreover, we generally reject forecast optimality for a majority of forecasters, but there is no evidence that this is due to long-run mis-speci?cation.

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Measuring Entrepreneurial Ecosystems: The Regional Entrepreneurship and Development Index (REDI)

  László Szerb    Zoltán J Ács    Éva Komlósi    Raquel Ortega-Argilés  

Series Reference: CFE-2015-02

In this paper the Regional Entrepreneurship and Development Index (REDI) has been constructed for capturing the contextual features of entrepreneurship across EU regions. The REDI method builds on the National Systems of Entrepreneurship Theory and provides a way to
profile Regional Systems of Entrepreneurship. Important aspects of the REDI method including the Penalty for Bottleneck (PFB) analysis, which helps identifying constraining factors in the Regional Systems of Entrepreneurship. The paper portrays the entrepreneurial disparities
amongst EU regions and provides country and regional level, tailor-made public policy suggestions to improve the level of entrepreneurship and optimize resource allocation over the different pillars of entrepreneurship.

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Red versus Blue: Do Political Dimensions Influence the Investment Preferences of State Pension Funds?

  Andreas Hoepner    Lisa Schopohl  

Series Reference: ICM-2015-08

Studying the equity holdings of 31 U.S. state pension funds, we find evidence that the political leaning of their members and political pressures by state politicians impact funds’ investment decisions. State pension funds from states with Democratic leaning members tend to tilt their portfolios more strongly towards companies that perform well on environmental, social and governance (ESG) issues, as compared to their Republican counterparts. This tendency is especially strong if the majority of the state government are Democrats. State pension funds intensify their ESG investing when their members’ political leaning changes from Republican to Democratic, and vice versa, suggesting that these funds align their ESG investment approach with the political leaning of their members. Finally, we find that the state pension funds in our sample neither under- nor outperform on their politically-motivated ESG holdings, implying that their ESG preferences are unlikely financially-driven.

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The Negative Credit Risk Premium Puzzle: A Limits to Arbitrage Story

  Chris Godfrey   Professor Chris Brooks 

Series Reference: ICM-2015-07

Prior research has documented that, counter-intuitively, high credit risk stocks earn lower – not higher – returns than low credit risk stocks. In this paper we provide evidence against rational expectations explanations, and show that a model incorporating limits-to-arbitrage factors is capable of explaining this apparent anomaly. We demonstrate that the negative pricing of credit stocks is driven by the underperformance of stocks which have both high credit risk and which have suffered recent relative underperformance, and that their ongoing poor performance can be explained by a mixture of four limits-to-arbitrage factors – idiosyncratic risk, turnover, illiquidity and bid-ask spreads. Collectively, these impede the correction of mispricing by arbitrageurs, especially on the short leg of the trade, where commonly reported returns are unattainable.

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Is Happiness Conducive to Entrepreneurship? Exploring Subjective Well-Being – Entrepreneurship relationship across Major European Cities

  David B Audretsch   Dr Maksim Belitski 

Series Reference: CFE-2015-01

Using perception of quality of life survey by Eurostat we construct the City Ecosystem Index (CEI)– a systemic indicator that measures subjective well-being in European cities. The purpose of the index is to inform public, policy-makers and entrepreneurs by providing a holistic view on subjective well-being across European cities. Once contrasted with the Global and Regional Systems of Entrepreneurship indices, which illustrate entrepreneurship environment in regions, we demonstrate that happiness of cities is associated with a higher entrepreneurial activity. CEI may be used as a control variable when predicting the level of entrepreneurship and entrepreneurial aspirations in cities.

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Better Balance: A Psychological Approach to the Problem of Sustainability

 Professor Kevin Money   Stephen Pain   Professor Carola Hillenbrand 

Series Reference: JMC-2015-01

This paper presents a new model of sustainability, which proposes that solutions to issues such as climate change and population growth may emerge if businesses seek to better understand and harness the underlying human motivations responsible for driving sustainable and unsustainable behaviour. By drawing on the theories of Lawrence and Nohria (2002) and Seligman (2011, 2012), the authors argue that unsustainable behaviour is a result of imbalances in the achievement of human drives within our societies. The paper then invites the reader to reconsider the purpose of business as helping to achieve psychological balance within individuals, organisations and societies by being: (1) a provider of quality products; (2) a defender of what is important to people; (3) a facilitator of conversations and communities; (4) an educator in the space of sustainable consumption and wellbeing; (5) a co-creator of

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Pension Scheme Redesign and Wealth Distribution between the Members and Sponsor: The USS Rule Change in October 2011

  Emmanouil Platanakis   Professor Charles Sutcliffe 

Series Reference: ICM-2015-06

The redesign of defined benefit pension schemes usually results in a substantial redistribution of wealth between age cohorts of members, pensioners, and the sponsor. This is the first study to quantify the redistributive effects of a rule change by a real world scheme (the Universities Superannuation Scheme, USS) where the sponsor underwrites the pension promise. In October 2011 USS closed its final salary scheme to new members, opened a career average revalued earnings (CARE) section, and moved to ‘cap and share’ contribution rates. We find that the pre-October 2011 scheme was not viable in the long run, while the post-October 2011 scheme is probably viable in the long run, but faces medium term problems. In October 2011 future members of USS lost 65% of their pension wealth (or roughly £100,000 per head), equivalent to a reduction of roughly 11% in their total compensation, while those aged over 57 years lost  almost nothing. The riskiness of the pension wealth of future members increased by a third, while the riskiness of the present value of the sponsor’s future contributions reduced by 10%.Finally, the sponsor’s wealth increased by about £32.5 billion, equivalent to a reduction of 26% in their pension costs

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Economic Institutions and the Location Strategies of European Multinationals in their Geographical Neighbourhood

  Andrea Ascani    Riccardo Crescenzi    Simona Iammarino  

Series Reference: JHD-2015-07

This paper investigates how the location behaviour of Multinational Enterprises (MNEs) is shaped by the economic institutions of the host countries. The analysis covers a wide set of geographically proximate economies with different degrees of integration with the ‘Old’ 15 European Union (EU) members: New Member States, Accession and Candidate Countries, as well as European Neighbourhood Policy (ENP) countries and the Russian Federation. The paper aims to shed new light on the heterogeneity of MNE preferences for the host countries’ regulatory settings (including labour market and business regulation), legal aspects (i.e.protection of property rights and contract enforcement) and the weight of the government in the economy. By employing data on 6,888 greenfield investment projects, the randomcoefficient Mixed Logit analysis here applied shows that, while the quality of the national institutional framework is generally beneficial for the attraction of foreign investment, MNEs preferences over economic institutions are highly heterogeneous across sectors and business functions.

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Does Corporate Financial Risk Management Add Value? Evidence from Cross-Border Mergers and Acquisitions

  Zhong Chen    Bo Han    Yeqin Zeng  

Series Reference: ICM-2015-05

We study the effect of financial hedging on firm performance with a sample of 1369 cross-border mergers and acquisitions (M&As) initiated by S&P 1500 firmsbetween 2000 and 2014. Our results show that derivatives users have higher acquirer cumulative abnormal returns (CARs) around deal announcements than non-users, which translates into a $174.3 million shareholder gain for an average-sized acquirer.
Related to the CAR improvement, acquirers with financial hedging programs also have lower implied stock volatilities and higher deal completion probabilities than those without such programs. In addition, nancial hedging reduces acquirers' waiting costs, allowing the longer negotiation time between acquirers and targets. Finally,we find that nancial hedging has a long-term e ect on acquirer firm value such that
derivatives users have better post deal long-run performance than non-users. Overall, our findings provide new insights on a link between corporate nancial hedging and investment decisions.

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The Importance of Domestic Capabilities for FDI-assisted Development: Lessons from Asia and Latin America

 Professor Rajneesh Narula 

Series Reference: JHD-2015-05

This paper argues that the rapid growth of certain emerging economies over the last two decades is not only due to liberalised markets, MNEs and laissez-faire policies, but also to the effects of industrial development strategies that continue to share several similarities to the import-substitution industrialisation approach. The building up of capabilities in the domestic sector is crucial. At the same time, the heterogeneity in country experiences and their varying degrees of success at becoming internationally competitive indicates that understanding MNE assisted development requires us to go beyond just improving absorptive capacities. We also need to understand the role of political economy and issues of path-dependency in both policies and resources. I illustrate my arguments by contrasting the experiences of East Asian and Latin American economies.

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Disentangling the Role of Modularity and Bandwidth in Entry Mode Choice: The Case of Business Services Offshoring

  Stefano Elia   Professor Rajneesh Narula   Silvia Massini  

Series Reference: JHD-2015-06

This paper investigates the role of modularity on entry mode choice of companies’ offshoring of business services. We distinguish between functional modularity, which reflects the possibility to subdivide a function into smaller modules, and architectural modularity, which reflects the interdependence between these modules. Lower architectural modularity requires greater interaction (greater ‘bandwidth’) between the organizational units to reintegrate the individual modules. Using modularity appropriately can decrease transaction costs and reduce the risks of knowledge leakages associated with offshoring, and improve the effectiveness of the sourcing process, thus increasing the probability that firms opt for less hierarchical entry modes. Firms that are less experienced with offshoring tend to underestimate the associated resources and costs of architectural modularity and select entry modes that do not provide sufficient bandwidth to efficiently reintegrate offshored modules, increasing the risk of failure of the offshoring initiatives. Our empirical analysis, which involves 490 offshoring initiatives, supports our arguments, especially in high-tech and knowledge-intensive industries.

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Does Corporate Financial Risk Management Add Value? Evidence from Cross-Border Mergers and Acquisitions

  Zong Chen    Bo Han    Yeqin Zeng  

Series Reference: ICM-2015-04

We study the effect of financial hedging on firm performance, using a sample of 1369 cross-border mergers and acquisitions (M&As) initiated by S&P 1500 firms between 2000 and 2014. Our results show that derivatives users have higher acquirer cumulative abnormal returns (CARs) around deal announcements than non-users, which translates into a $174.3 million shareholder gain for an average acquirer. The possible explanations of the CAR improvement are the lower stock return volatility and higher deal completion probability. Furthermore financial hedging can lower acquirers' waiting costs, offering longer time for acquirers to negotiate with targets. At last, these short-run improvements have a permanent effect on firm value such that derivatives users have better long-run performance than non-users after cross-border deal completion. Overall our findings provide new insights on a link between financial hedging and corporate investment decisions.

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The HRM of Foreign MNCs Operating in Europe

 Dr Chul Chung   Masayuki Furusawa  

Series Reference: JHD-2015-04

Europe has been a major destination for foreign direct investment as one of the triad economies with the USA and Japan. MNCs have brought not just financial resources but also human resources and, in many cases, particular ways of managing workforces from their home base. Transferring HRM practices could be highly complex and challenging, as human resources are the most country-bounded resources. Foreign MNCs operating in Europe face cross-national challenges stemming from the process of transfer and adaptation of HRM practices, due to the uniqueness of European traditions as well as the national diversity within Europe in relation to employment relations. This paper examines how MNCs from three different countries – the USA and Japan, the two other triad economies, and South Korea, a home base of emerging MNCs – have dealt with the challenges in managing human resources in their European operations within the given institutional contexts.

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A Set of Motives to Unite Them All? Revisiting the Principles and Typology of MNE Motives

  Alvaro Cuervo-Cazzura   Professor Rajneesh Narula 

Series Reference: JHD-2015-03

We reflect on the background and evolution of the internationalization motives over the last few decades, and provide suggestions for how to use the motives for future analyses. We also reflect on the contributions to the debate of the accompanying articles of the forum.There continue to be new developments in the way in which firms organize themselves as MNEs and this implies that the ‘classic’ motives originally introduced by Dunning in 1993 need to be revisited. Dunning’s motives and arguments were deductive and atheoretical, and were intended to be used as a toolkit, used in conjunction with other theories and frameworks. They are not an alternative to a classification of possible MNE strategies.

This paper provides a deeper and nuanced understanding on internationalization motives for future research to build on.

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Strategic Trade Policy, Competition and Welfare: The Case of Voluntary Export Restraints between Britain and Japan (1971–2002)

 Professor James Walker 

Series Reference: IBH-2015-01

We evaluate the voluntary export restraint (VER) placed on Japanese automobile exports from 1977 to 1999 by the UK. We show that the policy failed to assist the British domestic car industry. Instead, UK-based US multinationals and Japanese manufacturers were the primary beneficiaries, at a substantial cost to UK consumers. While there are a number of caveats, the policy was on balance damaging to the UK economy in welfare terms.

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Creating More Stable and Diversified Socially Responsible Investment Portfolios

 Professor Charles Sutcliffe   Emmanouil Platanakis   Dr Ioannis Oikonomou 

Series Reference: ICM-2015-03

This study is the first to apply a robust estimation technique when constructing Socially Responsible Investing (SRI) portfolios and to highlight that the selection of the optimisation process in this industry matters. We go beyond the mean-variance Markowitz framework in order to bypass issues surrounding the significant estimation risk that causes unstable, poorly diversified and suboptimal portfolios. Using data from MSCI KLD on the social responsibility of US firms, we construct SRI portfolios which exhibit higher risk-adjusted performance, lower total risk, greater stability and diversification compared to conventional and SRI equity indexes, as well as more naïve forms of optimization. Our main conclusions are robust to a series of tests, including the use of different estimation windows, stricter screening criteria, and alternative ways of evaluating portfolio performance.

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The Service Cost – Unit Value Retail Continuum and the Demise of the American ‘Five and Dime’ Variety Store, 1914–1941

 Professor Peter Scott  Professor James Walker 

Series Reference: IBH-2014-02

We examine a classic ‘wheel of retailing’ episode – the abandonment of the five and dime pricing formula by American variety chains. Variety stores moved from a conventional product lifecycle, focusing on cost reduction through standardisation, to an inverse movement up the ‘service cost - unit value’ continuum. We show that, rather than reflecting deteriorating managerial acumen, this was a response to market saturation in their low price niche. However, rapid changes in retailing methods entailed significant risks, while - even where these were successfully negotiated - higher sales came at the cost of lower margins and an erosion of competitive advantage.

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The ‘Buying and Selling of Money for Time’: Foreign Exchange and Interest Rates in Medieval Europe

 Professor Adrian Bell  Professor Chris Brooks  Dr Tony Moore 

Series Reference: ICM-2015-01

Interest rates are one of the most (if not the most) important economic variables. Today, ready access to credit at low rates has encouraged business investment and economic growth,property ownership, a high standard of living and large governmental expenditure, while the
manipulation of base interest rates by governments or central banks is used as a macroeconomic tool. The medieval world, by contrast, has been seen as a period of restricted access to credit and high interest rates. In part, this has been explained in terms of the religious prohibition of usury (Gilchrist, 1969). As a result, loans would be expensive to repay, with a negative knock on effect on the viability of business activity and thus economic growth. Recent work on the middle ages has qualified this negative depiction, presenting evidence of financial innovation (Bell et al.,2007; Bell and Sutcliffe, 2010) and widespread use of credit even in rural areas (Briggs, 2009). Further, interest rates are a vital input into most economic theories and models. A better understanding of the interest rates prevailing during the Middle Ages therefore has the potential to contribute greatly to our knowledge of medieval financial and economic development by facilitating the application of modern ideas and models.

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Assessing Macro Uncertainty In Real- Time When Data Are Subject To Revision

 Professor Michael Clements 

Series Reference: ICM-2015-02

Model-based estimates of future uncertainty are generally based on the in-sample ?t of the model, as when Box-Jenkins prediction intervals are calculated. However, this approach will generate biased uncertainty estimates in real time when there are data revisions. A simple remedy is suggested, and used to generate more accurate prediction intervals for 25 macroeconomic variables, in line with the theory. A simulation study based on an empirically-estimated model of data revisions for US output growth is used to investigate small-sample properties.

Keywords: in-sample uncertainty, out-of-sample uncertainty, real-time-vintage estimation

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Hollywood Studios, Independent Producers and International Markets: Globalisation and the US Film Industry c.1950–1965

 Professor Peter Miskell   Yunge Li  

Series Reference: IBH-2014-07

This paper examines the internationalisation of Hollywood entertainment in the period c.1949-1965. Two observations are commonly made about the US motion picture industry in this period. The first is that the era witnessed the ‘disintegration’ of the studio system, with the major
vertically integrated ‘studios’ forced to sell off their cinema chains and also becoming increasingly reliant on ‘independent’ producers to supply their product. The second is that the period saw US producers and distributors become increasingly reliant on foreign markets as a source of revenue. This paper analyses the 665 films released internationally in this period by Warner Bros. and MGM, for which reliable financial data is available from surviving studio ledgers. It examines the foreign revenues earned by these films, and compares this with the 'international orientation’ of the pictures themselves (an international orientation index is constructed on the basis of each film’s setting, characters, stars and other creative inputs). The paper finds that the growing importance of foreign markets for US distributors was reflected in the balance of their film portfolios, with an increasing proportion of films with a strong international orientation as the period progressed. The evidence also indicates that independent producers, rather than major studios themselves, were increasingly responsible for the production of this internationally oriented product. Finally, the paper examines the geographical locations where these internationally oriented films were set, and compares this with the international distribution of film revenues for the major studios. Certain national locations were clearly more commonly used as film settings than others, and such differences cannot be simply be explained by their relative value as film markets.

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Hollywood Films and Foreign Markets in the Studio Era: A Fresh Look at the Evidence

 Professor Peter Miskell 

Series Reference: IBH-2014-08

The international appeal of Hollywood films through the twentieth century has been a subject of interest to economic and film historians alike. This paper employs some of the methods of the economic historian to evaluate key arguments within the film history literature explaining the global success of American films. Through careful analysis of both existing and newly constructed datasets, the paper examines the extent to which Hollywood’s foreign earnings were affected by: film production costs; the extent of global distribution networks, and also the international orientation of the films themselves. The paper finds that these factors influenced foreign earnings in quite distinct ways, and that their relative importance changed over time. The evidence presented here suggests a degree of interaction between the production and distribution arms of the major US film companies in their pursuit of foreign markets that would benefit from further archival-based investigation.

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Constructing Corporate Identity before the Corporation: Fashioning the Face of the First English Joint Stock Banking Companies

  Victoria Barnes   Dr Lucy Newton 

Series Reference: IBH-2014-06

The article considers how the first joint-stock banks established themselves as a new form of banking that would ultimately, by the end of the nineteenth century, dominate the domestic banking system in England and Wales. We undertake a new investigation of the portraits of senior bank staff. It adds to the literature focusing on corporate identity. Visual representations form part of a corporate identity, which in turn is linked to the building of a reputation. Jointstock banks, as new entrants and a new type of financial institution, faced fierce opposition. Portraiture, as a well-established art form, projected a historical legacy that did not, as yet, exist. Through portraiture, banks solidified and added to the sitter’s social standing and signalled the new institution’s reputation for high culture, power and professionalism to those viewing these works within a localised social hierarchy and business environment.

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Risk-adjusted Valuation of the Real Option to Invest

  Carol Alexander    Xi Chen   Professor Charles Ward 

Series Reference: ICM-2014-19

This paper resolves the conceptual ambiguity of real option value and derives a model using risk-adjusted discount rates that can be applied to value the option to invest in a project. The approach adopts stochastic revenue and costs which provide a general solution with the added virtue of applicability. We found the option value arises from the difference between an individual investor and the market in financing efficiency and risk preferences. Investors’ taking on idiosyncratic risks are crucial to obtaining the real option value; hedging project risks can significantly reduce the associated real option value.

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The Equity-like Behaviour of Sovereign Bonds

 Dr Alfonso Dufour   Andrei Stancu   Dr Simone Varotto 

Series Reference: ICM-2014-16

Using a rich dataset of high frequency historical information we study the determinants of European sovereign bond returns over calm and crisis periods. We find that the importance of the equity risk factor varies greatly over time and crucially depends on country risk. In low risk
countries, government bond returns are negatively related to equity returns, regardless of market conditions. Investors appear to migrate from low risk government bonds to stocks in calm periods and in the opposite direction when markets are under stress. On the other hand,
government bonds of high risk countries lose their “safe-asset” status and exhibit more equity-like behaviour during the sovereign debt crisis, with positive and strongly significant co-movements relative to the stock market. Interestingly, this segmentation of the government bond market results in higher diversification benefits for fixed income investors and pension funds in periods of sovereign stress.

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Systemic Risk and Bank Size

 Dr Simone Varotto   Lei Zhao  

Series Reference: ICM-2014-17

In this paper we analyse aggregate and firm level systemic risk for US and European banks from 2004 to 2012. We observe that common systemic risk indicators are primarily driven by firm size which implies an overriding concern for “too-big-to-fail” institutions. However, smaller banks may still pose considerable systemic threats, as exemplified by the Northern Rock debacle in 2007. By introducing a simple standardisation, we obtain a new risk measure that identifies Northern Rock as a top ranking systemic institution up to 4 quarters before its bailout. The new indicator also appears to have a superior ability to predict which banks would be affected by the most severe stock price contractions during the 2007-2009 sub-prime crisis. In addition we find that a bank’s balance sheet characteristics can help to forecast its systemic importance and, as a result, may be useful early warning indicators. Interestingly, the systemic risk of US and European
banks appears to be driven by different factors.

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Corporate Governance, Bank Mergers and Executive Compensation

  Yan Liu    Carol Padgett   Dr Simone Varotto 

Series Reference: ICM-2014-18

Using a sample of US bank mergers from 1995 to 2012, we observe that the pre-post merger changes in CEO bonus are significantly negatively related to the strength of corporate governance within the bidding bank. This suggests that bonus compensation is not consistent with the “optimal contracting hypothesis”. Salary changes, on the other hand, are not affected by corporate governance but are positively correlated with pre-post merger changes in the M/B ratio of the bidding banks, in line with “optimal contracting”. We also find that good governance is associated with more accretive deals for the bidder. Overall, our results are consistent with the notion that, unlike salary and long-term compensation, bonus compensation is not aligned with value creation and is more vulnerable to CEO manipulation in banks with poor corporate

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Liquidity Risk Premia in the International Shipping Derivatives Market

  Amir Alizadeh   Dr Konstantina Kappou   Dimitris Tsouknidis    Ilias Visvikis  

Series Reference: ICM-2014-15

The study examines the existence of liquidity risk premia on freight derivatives returns. The Amihud liquidity ratio and bid-ask spreads are utilized to assess the existence of liquidity premia. Other macroeconomic variables are used to control for market risk. Results indicate that liquidity risk is priced and both liquidity measures have a significant role in determining freight derivatives returns. Consistent with expectations, both liquidity measures are found to have positive and significant effects on the returns of near-month freight derivatives contracts. The results have important implications for modeling freight derivatives returns, and consequently,for trading and risk management purposes.

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British Working-class Household Composition, Labour Supply and Commercial Leisure Participation during the 1930s

 Professor Peter Scott  Professor James Walker  Professor Peter Miskell 

Series Reference: IBH-2014-03

The early twentieth century constituted the heyday of the ‘breadwinner-homemaker’ household, characterised by a high degree of intra-household functional specialization between paid and domestic work according to age, gender, and marital status. This paper examines the links between formal workforce participation and access to resources for individualized discretionary spending in British working-class households during the late 1930s, via an analysis of household leisure expenditures. Leisure spending is particularly salient to intra-household resource allocation, as it constitutes one of the most highly prioritized areas of individualized expenditure, especially for young, single people. Using a database compiled from surviving returns to the Ministry of Labour’s national 1937/38 working-class expenditure survey, we examine leisure participation rates for over 600 households, using a detailed set of commercial leisure activities together with other relevant variables. We find that the employment status of family members other than the male breadwinner was a key factor influencing their access to commercial leisure. Our analysis thus supports the view that the breadwinner-homemaker household was characterised by strong power imbalances, that concentrated resources - especially for individualized expenditures - in the hands of those family members who engaged in paid labour.

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Demonstrating Distinction at ‘the Lowest Edge of the Black-coated Class’: The Family Expenditures of Edwardian Railway Clerks

 Professor Peter Scott  Professor James Walker 

Series Reference: IBH-2014-04

Families at the bottom end of the Edwardian white-collar income spectrum demonstrated middle-class status through observable consumption, at the cost of squeezing other expenditures, including ‘necessities’. This had negative economic impacts, lowering living standards due to inefficiently high budget shares for positional goods. Drawing on the work of Pierre Bourdieu, we examine how railway clerks sought to demonstrate ‘distinction’ from manual workers through certain conspicuous expenditures and how this strategy was progressively undermined by falling real incomes over the Edwardian period.

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Producer-driven Supply Chains for Inter-war Entertainment Radio: Were Dealers ‘Over-sold’ on Marketing?

 Professor Peter Scott  Professor James Walker 

Series Reference: IBH-2014-05

We examine early supply chains for entertainment radio sets. Manufacturers sought to coordinate down-stream distribution to maximise profits and create barriers to entry. Lacking the market power of auto manufacturers, they developed cooperative strategies using authorised distributors and dealers who were incentivised to follow the manufacturer’s policy. This included home demonstration – which dealers increasingly perceived to benefit only the upstream value chain. Our analysis indicates that while dealer revenue from direct selling was largely negated by increased costs, it constituted one of several barriers to entry, which underpinned the competitive advantage of the specialist dealer.

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The Effects of Corporate and Country Sustainability Characteristics on the Cost of Debt: An International Investigation

  Andreas Hoepner   Dr Ioannis Oikonomou   Bert Scholtens    Michael Schröder  

Series Reference: ICM-2014-14

We investigate the relationship between corporate and country sustainability on the cost of bank loans. We look into 470 loan agreements signed between 2005 and 2012 with borrowers based on 28 different countries across the world and operating in all major industries. Our principal findings reveal that country sustainability related to both social and environmental frameworks has a statistically and economically impactful effect on direct financing of economic activity. An increase of one unit in country sustainability scores is associated with an average decrease in the costs of debt by 64 basis points. Our analysis shows that the environmental dimension of a country’s institutional framework is approximately two times as impactful as the societal dimension when it comes to determining the cost of corporate loans. On the other hand, we find no conclusive evidence that firm-level sustainability influences the interest rates charged to borrowing firms by banks.

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Sources of Stakeholder Salience in the Responsible Investment Movement: Why Do Investors Sign the Principles for Responsible Investment?

  Arleta A Majoch    Andreas G F Hoepner    Tessa Hebb  

Series Reference: ICM-2014-13

Using five years of internal proprietary data collected directly from United Nations supported Principles for Responsible Investment (PRI) signatories, we examine the attributes of the stakeholder relationship between investment organizations and the PRI. The analysis is carried out in the framework of Mitchell’s et al. (1997) theory of stakeholder salience and its further developments by Gifford (2010).The findings highlight pragmatic legitimacy, organizational legitimacy, power attributes and management values as the factors having the most impact on the salience of the claim to sign the PRI in the eyes of investors.

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Assessing the Evidence of Macro-Forecaster Herding: Forecasts of Inflation and Output Growth

  Professor Michael Clements  

Series Reference: ICM-2014-12

We consider a number of ways of testing whether macroeconomic forecasters herd or anti-herd, i.e., whether they shade their forecasts towards those of others or purposefully exaggerate their differences. When applied to survey respondents' expectations of inflation and output growth the tests indicate conflicting behaviour. We show that this can be explained in terms of a simple model in which differences between forecasters are primarily due to idiosyncratic factors or reporting errors rather than imitative behaviour. Models of forecaster heterogeneity that stress informational rigidities will also falsely indicate imitative behaviour.

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Variety is the Spice of Life – and Boardrooms

 Dr Carol Padgett 

Series Reference: ICM-2014-11

We examine the impact of board diversity on both the corporate value and equity risk of British companies since the financial crisis. We find that the inclusion of overseas directors on boards improves market value and reduces equity risk. When the number of female directors included on the board reaches a critical mass this also increases corporate value but has no effect on risk. These findings do not change when we allow for the presence of board members who are qualified accountants or who hold MBAs. Diversity in and of itself has a significant effect on corporate performance.

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Asset Recombination in International Partnerships as a Source of Improved Innovation Capabilities in China

  Simon Colinson   Professor Rajneesh Narula 

Series Reference: JHD-2014-05

This paper examines how multinational enterprises (MNEs) and local partners, including suppliers, customers and competitors in China, improve their innovation capabilities through collaboration. We analyse this collaboration as a three-way interaction between the ownership specific (O) advantages or firm-specific assets (FSAs) of the MNE subsidiary, the FSAs of the local partner, and the location-specific assets of the host location. Our propositions are examined through a survey of 320 firms, supplemented with 30 in-depth case studies. We find that the recombination of asset-type (Oa) FSAs and transaction-type (Ot) FSAs from both partners leads to new innovation-related ownership advantages, or ‘recombinant advantages’. The study reveals important patterns of reciprocal transfer, sharing and integration for different asset categories (tacit, codified) and different forms of FSA and explicitly links these to different innovation performance outcomes. Ot FSAs, in the form of access to local suppliers, customers or government networks are particularly important for reducing the liability of foreignness for MNEs.

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Commodity Risk Factors and the Cross-Section of Equity Returns

 Professor Chris Brooks   Adrian Fernandez- Perez    Joelle Miffre   Dr Ogonna Nneji 

Series Reference: ICM-2014-09

The article examines whether commodity risk is priced in the cross-section of equity returns. Alongside a long-only equally-weighted portfolio of commodity futures, we employ as an alternative commodity risk factor a term structure portfolio that captures the propensity of commodity futures markets to be backwardated or contangoed. Equity-sorted portfolios with greater sensitivities to the two commodity risk factors command higher average returns. The two commodity portfolios are also found to explain part of the size, value and momentum anomalies. Conclusions regarding the pricing of the commodity risk factors are not an artifact driven by crude oil and are robust to the inclusion of financial and macroeconomic variables and to the addition of a composite leading indicator in the pricing model.

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Do US Macroeconomics Forecasters Exaggerate Their Differences?

  Professor Michael Clements  

Series Reference: ICM-2014-10

Application of the Bernhardt, Campello and Kutsoati (2006) test of herding to the calendar-year annual output growth and inflation forecasts suggests forecasters tend to exaggerate their differences, except at the shortest horizon when they tend to herd. We consider whether these types of behaviour can help to explain the puzzle that professional forecasters sometimes make point predictions and histogram forecasts which are mutually

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Monte Carlo Approximate Tensor Moment Simulations

  Juan C Arismendi Z    Herbert Kimura  

Series Reference: ICM-2014-08

An algorithm to generate samples with approximate first-, second-, and third-order moments is presented extending the Cholesky matrix decomposition to a Cholesky tensor decomposition of an arbitrary order. The tensor decomposition of the first-, second-, and third-order objective moments generates a non-linear system of equations. The algorithm solves these equations by numerical methods. The results show that the optimisation algorithm delivers samples with an approximate error of 0.1%{4% between the components of the objective and the sample moments. An application for sensitivity analysis of portfolio risk assessment with Value-at-Risk (VaR) is provided. A comparison with previous methods available in the literature suggests that methodology proposed reduces the error of the objective moments in the generated samples.

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International R&D Alliances by Firms: Origins and Development

 Professor Rajneesh Narula   Andrea Martínez-Noya  

Series Reference: JHD-2014-06

There has been a dramatic increase in all forms of international cooperation in science, technology and innovation over last three decades. This chapter focuses on a specific subset of such cooperative agreements: those that primarily (but not exclusively) involve firms that seek some commercial benefit from the outputs of inter-firm collaboration, known as strategic technology partnering (STP). Special attention is given to clearly define the unique nature of these collaborative agreements, as well as the reasons and theories behind their growth. We focus on their international dimension, identifying international STP trends, and how the crossborder aspect of these alliances impinges on their formation and success. Finally, managerial challenges and policy implications related to STP are also discussed.

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The Apple Doesn’t Fall Far from the Tree: English Bank Regulation and Branching Strategies in the Nineteenth Century

 Dr Lucy Newton   Victoria Barnes  

Series Reference: IBH-2014-01

After the Bank Charter Act in 1833, English banks could branch nationally without legal or geographical restriction. Many new joint stock banks took this opportunity to branch and thus created the foundation for modern branch banking in the UK. Drawing upon a new dataset, this article maps the locations of joint-stock banks and their branches. Bank size and spread demonstrate that many branched vigorously but stopped at the creation of local or multiregional structures. Our research shows that branching strategies were influenced by ‘soft’ Parliamentary pressure (but not regulation), prominent branch bank failures and a lack of managerial expertise.

banks, strategy, branches, regulation, management

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An Analytic Approximation of the Implied Risk-neutral Density of American Multi-asset Options

  Juan C Arismendi Z    Marcel Prokopczuk  

Series Reference: ICM-2014-07

The price of a European option can be computed as the expected value of the payoff function under the riskneutral measure. For American options and path-dependent options in general, this principle can not be applied. In this paper, we derive a model-free analytical formula for the implied risk-neutral density under which the expected value will be the price of the equivalent payoff with the American exercise condition. The risk-neutral density is semi-parametric as it is the result of applying the multivariate generalised Edgeworth expansion (MGEE), where the moments of the American density are obtained by a reverse engineering application of the Longstaff and Schwartz (2001) least-squares method (LSM). The theory of multivariate truncated moments is employed for approximating the option price, with important consequences for the hedging of variance, skewness, and kurtosis swaps.

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Anticipating Early Data Revisions to US GDP and the Effects of Releases on Equity Markets

  Professor Michael Clements    Ana Beatriz Galvão  

Series Reference: ICM-2014-06

The effects of data uncertainty on real-time decision-making can be reduced by predicting early revisions to US GDP growth. We show that survey forecasts efficiently anticipate the first-revised estimate of GDP, but that forecasting models incorporating monthly economic indicators and daily equity returns provide superior forecasts of the second-revised estimate.We consider the implications of these findings for analyses of the impact of surprises in GDP revision announcements on equity markets, and for analyses of the impact of anticipated future revisions on announcement-day returns.

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End-User Collaboration for Process Innovation in Services: The Role of Internal Resources

  Mona Ashok   Professor Rajneesh Narula     Andrea Martinez-Noya  

Series Reference: JHD-2014-03

This paper focuses on how to improve process innovation in service sectors. To do so, we analyse how the interplay of external knowledge sources (specifically, the intensity of end-user collaboration and the breadth of external collaboration) and the firm’s internal resources impact process innovation at the firm level. Survey data from 166 Information Technology Services firms provide the empirical data, which is tested using the partial least squares structural equation model. Our results demonstrate that benefits from collaboration are not automatic, as the firm's commitment of internal resources fully mediates the impact of the intensity of end-user collaboration and breadth of external collaboration on process innovation. Thus, internal resources become critical to make effective use of the knowledge residing both internally and externally, and key managerial practices that enable a firm to extract benefits from external collaboration are identified.

end-user collaboration, external knowledge sources, internal resources, process innovation,
service industry

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The Viability of Sustained Growth by India’s MNEs: India’s Dual Economy and Constraints from Location Assets

 Professor Rajneesh Narula 

Series Reference: JHD-2014-04

This paper considers the longer-term viability of the internationalization and success of Indian MNEs. We apply the ‘dual economy’ concept (Lewis 1954), to reconcile the contradictions of the typical emerging economy, where a ‘modern’ knowledge-intensive economy exists alongside a ‘traditional’ resource-intensive economy. Each type of economy generates firms with different types of ownership advantages, and hence different types of MNEs and internationalisation patterns. We also highlight the vulnerabilities of a growth-by-acquisitions approach. The potential for Indian MNEs to grow requires an understanding of India’s dual economy and the constraints from the home country’s location advantages, particularly those in its knowledge infrastructure.

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Measuring Macroeconomic Uncertainty: US Inflation and Output Growth

  Professor Michael Clements    Ana Beatriz Galvão  

Series Reference: ICM-2014-04

We find that model estimates of the term structure of ex ante or perceived macro uncertainty are more in line with realized uncertainty than survey respondents perceptions for both inflation and output growth. Survey estimates contain short-term variation in short-horizon uncertainty which is less evident in the model-based estimates. We consider the extent to which these short-term variations coincide with short-term movements in stock market uncertainty.

We fi?nd that model estimates of the term structure of ex ante or perceived macro uncertainty are more in line with realized uncertainty than survey respondents ?perceptions for both infl?ation and output growth. Survey estimates contain short-term variation in short-horizon uncertainty which is less evident in the model-based estimates. We consider the extent to which these short-term variations coincide with short-term movements in stock market uncertainty.

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Real-Time Factor Model Forecasting and the Effects of Instability

  Professor Michael Clements  

Series Reference: ICM-2014-05

We show that factor forecasting models deliver real-time gains over autoregressive models for US real activity variables during the recent period, but are less successful for nominal variables. The gains are largely due to the Financial Crisis period, and are primarily at the shortest (one quarter ahead) horizon. Excluding the pre-Great Moderation years from the factor forecasting model estimation period (but not from the data used to extract factors) results in a marked fillip in factor model forecast accuracy, but does the same for the AR model forecasts. The relative performance of the factor models compared to the AR models is largely unaffected by whether the exercise is in real time or is pseudo out-of-sample.

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Asset Liability Modelling and Pension Schemes: The Application of Robust Optimization to USS

  Emmanouil Platanakis   Professor Charles Sutcliffe 

Series Reference: ICM-2014-02

This paper uses a novel numerical optimization technique - robust optimization - that is well suited to solving the asset-liability management (ALM) problem for pension schemes. It requires the estimation of fewer stochastic parameters, reduces estimation risk and adopts a prudent approach to asset allocation. This study is the first to apply it to a real-world pension scheme and to use the Sharpe ratio as the objective of an ALM problem. We also disaggregate the pension liabilities into three components - active members, deferred members and pensioners, and transform the optimal asset allocation into the scheme’s projected contribution rate. We extend the robust optimization model to include liabilities, and use it to derive optimal investment policies for the Universities Superannuation Scheme (USS), benchmarked against the same ALM model with deterministic parameters, the Sharpe and Tint model and the actual USS investment decisions. Over a 144 month out-of-sample period we find that robust optimization is superior to the three benchmarks on all the performance criteria.

Keywords: robust optimization, pension scheme, asset-liability model, Sharpe ratio, Sharpe-Tint model

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A Multi-asset Option Approximation for General Stochastic Processes

  Juan C Arismendi Z  

Series Reference: ICM-2014-03

We derived a model-free analytical approximation of the price of a multi-asset option defined over an arbitrary multivariate process, applying a semi-parametric expansion of the unknown risk-neutral density with the moments. The analytical expansion termed as the Multivariate Generalised Edgeworth Expansion (MGEE) is an infinite series over the derivatives of the known continuous time density. The expected value of the density expansion is calculated to approximate the option price. The expansion could be used to enhance a Monte Carlo pricing methodology incorporating the information about moments of the risk-neutral distribution. The numerical efficiency of the approximation is tested over a jump-diffusion density. For the known density, we tested the multivariate lognormal (MVLN), even though arbitrary densities could be used, and we provided its derivatives until the fourth-order. The MGEE relates two densities and isolates the effects of multivariate moments over the option prices. Results show that a calibrated approximation provides a good fit when the difference between the moments of the risk-neutral density and the auxiliary density are small relative to the density function of the former, and the uncalibrated approximation has immediate implications over risk management and hedging theory. The possibility to select the auxiliary density provides an advantage over classical Gram–Charlier A, B and C series approximations. The density approximation and the methodology can be applied to other fields of finance like asset pricing, econometrics, and areas of statistical nature.

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Regional and Product Diversification and the Performance of Retail Multinationals

  Chang Hoon Oh    Timo Sohl    

Series Reference: JHD-2014-02

Despite the importance of geographic expansion in the services sector, few studies have analyzed the relationships between international diversification, product diversification and performance for services firms. Here we investigate whether and how firms in the retail-trade sector may benefit by spreading their boundaries within and across regional boundaries. Using a panel data set of 68 large European retailers from 19 countries for the period between 1997 and 2010, we find that intra-regional diversification has a horizontal S-curve relationship and interregional diversification has an S-curve relationship with firm performance. Moreover, the results show that unrelated product diversification has a negative moderating effect on the relationship between inter-regional diversification and firm performance. Overall, these results add support in the services sector for the three-stage paradigm of international diversification and performance.

Keywords: Retail firms, geographic diversification, product diversification, regional diversification, performance, S curve.

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How Home Country Weaknesses Can Constrain Further EMNE Growth: Extrapolating from the Example of India

 Professor Rajneesh Narula   Tiju Prasad Kodiyat  

Series Reference: JHD-2014-01

This paper discusses the opportunities and limitations that the location-specific (L) assets of the home country represent for MNEs, particularly at the early stages of internationalization. The systemic weaknesses of the home country can constrain the long-term competitiveness of its firms, and ultimately, the competitiveness of its MNEs. It is the contention of this paper that many of the emerging countries have a constrained set of L assets from which their firms are able to develop ownership-specific assets. Are their economies developing improved L assets that will promote a new generation of EMNEs? We examine data for the case of India, an economy regarded as having considerable potential to expand to knowledge-intensive sectors. At the macro level, India’s performance is not different from countries of similar economic structure, and its current pockets of excellence are a reflection of its L assets. Our analysis suggests that the failure to foster and upgrade the L assets of emerging economies is likely to stunt the growth of their domestic firms, and ultimately any new MNE activity in the long-term.

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Did Purchasing Power Parity Hold in Medieval Europe?

 Professor Adrian Bell  Professor Chris Brooks  Dr Tony Moore 

Series Reference: ICM-2014-01

This paper employs a unique, hand-collected dataset of exchange rates for five major currencies (the lira of Barcelona, the pound sterling of England, the pond groot of Flanders, the florin of Florence and the livre tournois of France) to consider whether the law of one price and purchasing power parity held in Europe during the late fourteenth and early fifteenth centuries. Using single series and panel unit root and stationarity tests on ten real exchange rates between 1383 and 1411, we show that the parity relationship held for the pound sterling and some of the Florentine florin series individually and for almost all of the groups that we investigate. Our findings add to the weight of evidence that trading and arbitrage activities stopped currencies deviating permanently from fair values and that the medieval financial markets were well functioning. This supports the results reported in other recent studies which indicate that many elements of modern economic theories can be traced back over 700 years in Europe.

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