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54381. The Value of Financial Intermediaries: Empirical Evidence from Syndicated Loans to Emerging Market Borrowers

Author:
Gregory P. Nini
Publication Date:
09-2004
Content Type:
Working Paper
Institution:
Board of Governors of the Federal Reserve System
Abstract:
Empirical estimates of the benefit of financial intermediation are constructed by examining the role played by local banks in facilitating syndicated loans to borrowers in emerging market countries. Assuming that local banks possess a superior monitoring ability, the market is ideal for studying the value of intermediation since cross-border lending into emerging markets is plagued by particularly high information and agency costs and the supply of local bank capital is in limited short run supply. Using variation in the propensity of local banks to participate in foreign arranged syndicates, there are two economically important results. First, local banks are much more likely to participate in unconditionally riskier loans. Second, after controlling for borrower characteristics, loan characteristics, and the endogeneity of the local bank lending decision, loans with local bank participation have spreads that are 10 percent lower (29 basis points) than otherwise similar loans. Combined, the results support the conclusion that local banks, a particularly special type of financial intermediary, provide value by considerably reducing financing costs, especially for riskier borrowers.
Topic:
Economics, Emerging Markets, and International Trade and Finance
Political Geography:
United States

54382. What Makes Investors Over or Underweight? Explaining International Appetites for Foreign Equities

Author:
Carol C. Bertaut and Linda S. Kole
Publication Date:
09-2004
Content Type:
Working Paper
Institution:
Board of Governors of the Federal Reserve System
Abstract:
Using data from the IMF Coordinated Portfolio Investment Surveys conducted in 2001, we analyze the determinants of 31 countries' international equity holdings. We show that investors in all countries underweight U.S. equities in their portfolios, many by more than they underweight foreign equities in general. Such behavior is surprising given the common perception of the United States as a desirable investment destination due to its well-developed legal and regulatory environment. Instead we find that investors in some countries are overweight in equities from other countries with which they have close regional or political ties. Such ties, along with distance, trade, issuance of U.S. ADRs or cross-listing on the London Stock exchange, market concentration, and estimated betas help explain patterns of diversification. However, even when all these variables are included, we find significant fixed effects for most countries, suggesting that a considerable amount of cross-country variation in investment positions and in home bias remains to be explained. Our work confirms previous findings and extends results most completely documented for the United States to other major investor countries. But it also suggests caution should be used when interpreting results derived from studies of one or a few countries.
Topic:
Economics, Emerging Markets, and International Trade and Finance
Political Geography:
United States and London

54383. Battling International Bribery 2004

Publication Date:
09-2004
Content Type:
Working Paper
Institution:
Board of Governors of the Federal Reserve System
Abstract:
This sixth and annual report required under the Senate Resolution of Advice and Consent of July 31, 1998, examines the progress that parties have made in implementing and enforcing the Organization for Economic Cooperation and Development (OECD) Convention on Combating Bribery of Foreign Public Officials in International Business Transactions (Antribribery Convention).
Topic:
Foreign Policy, Defense Policy, and Economics
Political Geography:
United States

54384. Review of Implementation of the Convention and 1997 Recommendation

Publication Date:
09-2004
Content Type:
Working Paper
Institution:
Board of Governors of the Federal Reserve System
Abstract:
The Convention was signed by the United States on December 17, 1997 and ratified on November 10, 1998. The U.S. deposited its instrument of ratification with the OECD on December 8, 1998. Congress responded to the signature of the Convention by amending the Foreign Corrupt Practices Act (the “FCPA”) on October 21, 1998. The new legislation, which entered into force on November 10, 1998, extends the FCPA to any person who engages in any act while in the territory of the U.S. and to any U.S. national and company engaged in an act outside the U.S. in furtherance of a proscribed purpose; adds “securing any improper advantage” to the list of improper purposes for payments to foreign officials; expands the term “a foreign official” to include any person acting for or on behalf of “public international organisation”; and allows the U.S. Attorney General to seek injunctive relief against foreign citizens or residents and entities other than “issuers” or “domestic concerns” that have engaged in or are about to engage in a violation of the FCPA.
Topic:
Foreign Policy, Defense Policy, and Economics
Political Geography:
United States

54385. Defense Science Board 2003 Summer Study on DoD Roles and Missions in Homeland Security, Volume B

Publication Date:
09-2004
Content Type:
Working Paper
Institution:
Board of Governors of the Federal Reserve System
Abstract:
During the Cold War, the United States developed and refined intelligence capabilities upon a number of key factors: Known adversaries, the Soviet Union and the Communist Bloc, including China and North Korea; Known geographic boundaries: that of the communist nation states (We knew where to look); Known conflict of ideology: communism vs. capitalism; Observable (with some degree of confidence over time) military capabilities of adversaries; and Indications (and in some cases, warning - developed over the years) of activity potentially hazardous to the United States and NATO.
Topic:
Defense Policy, National Security, and Science and Technology
Political Geography:
United States, China, and North Korea

54386. Base Structure Report Fiscal Year 2004

Publication Date:
09-2004
Content Type:
Working Paper
Institution:
Board of Governors of the Federal Reserve System
Abstract:
Since the 1999 edition, the Department of Defense has used its consolidated real property inventory (the Facilities Analysis Database) as the basis for the annual publication of the Base Structure Report. This report contains a comprehensive listing of installations and sites owned and used by the Department. It summarizes the current facilities inventory and provides other basic information, such as information concerning the site locations, names of the nearest city, and, where available, includes personnel authorizations.
Topic:
Security, Defense Policy, and Economics
Political Geography:
United States

54387. The Performance of International Portfolios

Author:
Francis E. Warnock, Charles P. Thomas, and Jon Wongswan
Publication Date:
08-2004
Content Type:
Working Paper
Institution:
Board of Governors of the Federal Reserve System
Abstract:
This paper evaluates the performance of U.S. investors' portfolios in the equities of over 40 countries over a 25-year period. We find that these portfolios achieved a significantly higher Sharpe ratio than foreign benchmarks, especially since 1990. We uncover three potential reasons for this success. First, U.S. investors abstained from momentum trading and instead sold past winners. Second, conditional performance tests provide no evidence that the superior (unconditional) performance owed to private information, suggesting that the successful exploitation of publicly available information played a role. Third, the documented preference for cross-listed and well-governed foreign firms appears to have served U.S. investors well. We conclude with a short discussion of the implications of our findings for the home bias literature.
Topic:
International Relations, Economics, and International Trade and Finance
Political Geography:
United States

54388. Corporate Governance and the Shareholder Base

Author:
Francis E. Warnock and Karl V. Lins
Publication Date:
08-2004
Content Type:
Working Paper
Institution:
Board of Governors of the Federal Reserve System
Abstract:
This paper uses a sample of 4,410 firms from 29 countries to investigate the relation between corporate governance and the shareholder base. In contrast to previous work, our results strongly support the notion that poor corporate governance, at both the firm and country level, negatively impacts the willingness of foreign investors to hold a firm's equity. Specifically, we find that firms whose managers have sufficiently high control rights that they may reasonably be expected to expropriate minority equity investors attract significantly less U.S. investment, especially in countries with poor external governance. Our findings suggest that the prices U.S. investors are asked to pay for firms with poor governance are not low enough to fully compensate them for expected expropriation or increased estimation risk associated with expected poor disclosure by these firms. Because prior research shows that a smaller shareholder base is associated with a lower firm value, our results are consistent with the notion that the shareholder base represents an important channel through which poor expected corporate governance contributes to a reduction in firm value.
Topic:
Economics, Government, and International Trade and Finance
Political Geography:
United States

54389. Look at Me Now: The Role of Cross-Listing in Attracting U.S. Investors

Author:
Francis E. Warnock, John Ammer, Sara B. Holland, and David C. Smith
Publication Date:
08-2004
Content Type:
Working Paper
Institution:
Board of Governors of the Federal Reserve System
Abstract:
We use a comprehensive 1997 survey to examine U.S. investors' preferences for foreign equities. We document a variety of firm characteristics that can influence U.S. investment, but the most important determinant is whether the stock is cross-listed on a U.S. exchange. Our selection bias-corrected estimates imply that firms that cross-list can increase their U.S. holdings by 8 to 11 percent of their market capitalization, roughly doubling the amount held without cross-listing. All else equal, we find that firms experience smaller increases in U.S. shareholdings upon cross-listing if they are Canadian, from English speaking countries, are members of the MSCI World index, or had higher quality accounting standards prior to crosslisting. We argue that these findings suggest that improvements in information production explain U.S. investors' attraction to foreign stocks that cross-list in the United States.
Topic:
Economics, Government, and International Trade and Finance
Political Geography:
United States and Canada

54390. PPP Rules, Macroeconomic (In)stability and Learning

Author:
Luis-Felipe Zanna
Publication Date:
08-2004
Content Type:
Working Paper
Institution:
Board of Governors of the Federal Reserve System
Abstract:
Governments in emerging economies have pursued real exchange rate targeting through Purchasing Power Parity (PPP) rules that link the nominal depreciation rate to either the deviation of the real exchange rate from its long run level or to the difference between the domestic and the foreign CPI-inflation rates. In this paper we disentangle the conditions under which these rules may lead to endogenous fluctuations due to self-fulfilling expectations in a small open economy that faces nominal rigidities. We find that besides the specification of the rule, structural parameters such as the share of traded goods (that measures the degree of openness of the economy) and the degrees of imperfect competition and price stickiness in the non-traded sector play a crucial role in the determinacy of equilibrium. To evaluate the relevance of the real (in)determinacy results we pursue a learnability (E-stability) analysis for the aforementioned PPP rules. We show that for rules that guarantee a unique equilibrium, the fundamental solution that represents this equilibrium is learnable in the E-stability sense. Similarly we show that for PPP rules that open the possibility of sunspot equilibria, a common factor representation that describes these equilibria is also E-stable. In this sense sunspot equilibria and therefore aggregate instability are more likely to occur due to PPP rules than previously recognized.
Topic:
Economics, Government, and International Trade and Finance
Political Geography:
United States

54391. Is The Corporate Loan Market Globally Integrated? A Pricing Puzzle

Author:
Mark Carey and Gregory P. Nini
Publication Date:
08-2004
Content Type:
Working Paper
Institution:
Board of Governors of the Federal Reserve System
Abstract:
We offer evidence that interest rate spreads on syndicated loans to corporate borrowers are economically significantly smaller in Europe than in the U.S., other things equal. Differences in borrower, loan and lender characteristics associated with equilibrium mechanisms suggested in the literature do not appear to explain the phenomenon. Borrowers overwhelmingly issue in their natural home market, and bank portfolios display significant home “bias.” This may explain why pricing discrepancies are not competed away, but the fundamental causes of the discrepancies remain a puzzle. Thus, important determinants of loan origination market outcomes remain to be identified, home “bias” appears to be material for pricing, and corporate financing costs differ in Europe and the U.S.
Topic:
Economics, Government, and International Trade and Finance
Political Geography:
United States and Europe

54392. The President's Management Agenda: Results for the Department of Defense

Publication Date:
08-2004
Content Type:
Working Paper
Institution:
Board of Governors of the Federal Reserve System
Abstract:
The mission of the Department of Defense is to defend the nation and when necessary, defeat its enemies. Very few endeavors in life are so focused and results oriented. While we continue this primary mission of prosecuting the global war on terrorism and simultaneously defending our nation, we cannot overlook the fact that we must more effectively and efficiently manage the Department.
Topic:
Defense Policy, National Security, Terrorism, and War
Political Geography:
United States

54393. Final Report of the Independent Panel to Review DoD Detention Operations

Author:
Harold Brown, James R. Schlesinger, Tillie K. Fowler, Charles A. Horner, and James A. Jr. Blackwell
Publication Date:
08-2004
Content Type:
Working Paper
Institution:
Board of Governors of the Federal Reserve System
Abstract:
The events of October through December 2003 on the night shift of Tier at Abu Ghraib prison were acts of brutality and purposeless sadism. We now know these abuses occurred at the hands of both military police and military intelligence personnel. The pictured abuses, unacceptable even in wartime, were not part of authorized interrogations nor were they were even directed at intelligence targets. They represent deviant behavior and a failure of military leadership and discipline. However, we do know that some of the egregious abuses at Abu Ghraib which were not photographed did occur during interrogation sessions and that abuses during the interrogation sessions occurred elsewhere.
Topic:
Crime and War
Political Geography:
United States and Middle East

54394. Report of the Defense Science Board Task Force on Enabling Joint Force Capabilities: Phase II

Publication Date:
08-2004
Content Type:
Working Paper
Institution:
Board of Governors of the Federal Reserve System
Abstract:
Events of the past decade provide compelling evidence that the national security environment continues to evolve at a rapid pace and in unpredictable directions. Further, it is clear that meeting the demands of the evolving environment calls for new levels of adaptable military capabilities that, in turn, demand joint forces that are responsive and effective across a range of operations from small scale operations through major theater conflict. In the two most recent major contingencies – Operation Enduring Freedom (OEF) and Operation Iraqi Freedom (OIF) - we have seen new levels of understanding of the need for truly integrated joint capabilities and new levels of innovation in leveraging existing capabilities to achieve the needed level of effectiveness. Lessons Learned activities have verified important shifts in focus leading to a series of emerging concepts for more effectively integrating capabilities.
Topic:
Defense Policy, Environment, and National Security
Political Geography:
United States

54395. Does Monetary Policy Keep Up with the Joneses? Optimal Interest-Rate Smoothing with Consumption Externalities

Author:
Sanjay Chugh
Publication Date:
07-2004
Content Type:
Working Paper
Institution:
Board of Governors of the Federal Reserve System
Abstract:
Changes in monetary policy are typically implemented gradually, an empirical observation known as interest-rate smoothing. We propose the explanation that timenon- separable preferences may render interest-rate smoothing optimal. We find that when consumers have “catching-up-with-the-Joneses” preferences, optimal monetary policy reacts gradually to shocks to prevent inefficiently fast adjustments in consumption. We also extend our basic model to investigate the effects of capital formation and nominal rigidities on the dynamics of optimal monetary policy. Optimal policy responses continue to be gradual in the presence of capital and sticky prices, with a size and speed that are in line with empirical findings for the U.S. economy. Our results emphasize that gradualism in monetary policy may be needed simply to guide the economy on an optimally smooth path.
Topic:
Economics, Government, and International Trade and Finance
Political Geography:
United States

54396. The ET Interview: Professor David F. Hendry

Author:
Neil R. Ericsson
Publication Date:
07-2004
Content Type:
Working Paper
Institution:
Board of Governors of the Federal Reserve System
Abstract:
This interview for Econometric Theory explores David Hendry's research. Issues discussed include estimation and inference for nonstationary time series; econometric methodology; strategies, concepts, and criteria for empirical modeling; the general-to-specific approach, as implemented in the computer packages PcGive and PcGets; computer-automated model selection procedures; David's textbook Dynamic Econometrics; Monte Carlo techniques (PcNaive); evaluation of these developments in simulation studies and in empirical investigations of consumer expenditure, money demand, inflation, and the housing and mortgage markets; economic forecasting and policy analysis; the history of econometric thought; and the use of computers for live empirical and Monte Carlo econometrics.
Topic:
Economics, Government, and International Trade and Finance
Political Geography:
United States

54397. Good News Is No News? The Impact of Credit Rating Changes on the Pricing of Asset-Backed Securities

Author:
John Ammer and Nathanael Clinton
Publication Date:
07-2004
Content Type:
Working Paper
Institution:
Board of Governors of the Federal Reserve System
Abstract:
We assess the impact of credit ratings on the pricing of structured financial products, using a sample of more than 1300 changes in Moody's or Standard and Poor's (S) ratings of U.S. asset-backed securities (ABS). We find that rating downgrades tend to be accompanied by negative returns and widening spreads, with the average effects stronger than those that have been reported in prior research on corporate and sovereign bond ratings. A portion of the negative implications of ABS downgrades are anticipated by price movements ahead of the rating action, although to a lesser degree than has been found for bond ratings. Accordingly, ABS market participants appear to rely somewhat more on rating agencies as a source of negative news about credit risk. Nevertheless, because ABS rating downgrades are relatively rare events, their effects account for only a small fraction of the variance of returns. In contrast to our results on downgrades, market reactions to ABS rating upgrades are virtually zero, on average. Together, the results imply even greater asymmetry in the value-relevance of ABS rating changes than has been found in event studies of changes in bond ratings.
Topic:
Security, Economics, and International Trade and Finance
Political Geography:
United States

54398. The Vertical Lift Industrial Base: Outlook 2004-2014

Publication Date:
07-2004
Content Type:
Working Paper
Institution:
Board of Governors of the Federal Reserve System
Abstract:
The vertical lift industrial base still is being shaped by government and industry responses to the Nunn-McCurdy cost breaches of 2001 and the unintended consequences of Department-endorsed teaming arrangements that resulted in an interlocked industrial base that restricted Department and industry flexibility. The Department's budget-driven remanufacture strategy in the 1990s produced a series of sole-sourced relationships, leaving few real competitive opportunities among the helicopter prime contractors to force technology refresh cycles. With limited competition, few new platform contracts, and declining government technology investments, industry was left little incentive to invest in independent research.
Topic:
Defense Policy, Industrial Policy, and Science and Technology
Political Geography:
United States

54399. 9-11 Commission Final Report

Publication Date:
07-2004
Content Type:
Working Paper
Institution:
Board of Governors of the Federal Reserve System
Abstract:
We present the narrative of this report and the recommendations that flow from it to the President of the United States, the United States Congress, and the American people for their consideration. Ten Commissioners—five Republicans and five Democrats chosen by elected leaders from our nation's capital at a time of great partisan division—have come together to present this report without dissent.
Topic:
Foreign Policy, Diplomacy, and Government
Political Geography:
United States

54400. The Proliferation Security Initiative

Publication Date:
06-2004
Content Type:
Working Paper
Institution:
Board of Governors of the Federal Reserve System
Abstract:
The Proliferation Security Initiative (PSI) is a global initiative aimed at stopping shipments of weapons of mass destruction (WMD), their delivery systems, and related materials worldwide, announced by President Bush, May 31, 2003. It stems from the National Strategy to Combat Weapons of Mass Destruction issued in December 2002. That strategy recognizes the need for more robust tools to defeat the proliferation of WMD around the world, and specifically identifies interdiction as an area where greater focus will be placed.
Topic:
Conflict Prevention, International Relations, Arms Control and Proliferation, and Weapons of Mass Destruction