Middle Eastern Finance and Economics

Issue 19
September, 2013

An Investigation of the Accrual Anomaly in the Turkish Stock Market

Sibel Celik, Nasif Ozkan and Yasemin Deniz Akarim

This paper aims to test the presence of the accrual anomaly in manufacturing sector of Istanbul Stock Exchange within the framework of the persistence of accrual and cash flow components of current earnings by applying Sloan (1996)'s methodology. As a result of Mishkin test, we find little evidence that support the existence of accrual anomaly in the Turkish Stock Market. This study is unique because it is the first time that the accrual anomaly is investigated in the Istanbul Stock Exchange and uses comprehensive dataset including 131 publicly traded manufacturing firms.
Keywords: The Accrual Anomaly, Mishkin Test, Istanbul Stock Exchange, Efficient Market Hypothesis.
JEL Classification Codes: G14, M41

The Tunisian Economy under the European Sovereign Debt Crisis
Ines Slama, Mohamed Belhedi and Moez Labidi

The global financial crisis of 2007-2008, coupled with the outbreak of the European sovereign debt crisis has greatly impacted the growth of Tunisia. The volume of Tunisian exports had its sharp fall in the second quarter of 2009 (down 25%). In this paper we investigate the impact of the European sovereign debt crisis (the main trading partner of Tunisia) on the Tunisian economy. Our goal is to identify and assess the contribution of this crisis to fluctuations in macroeconomic fundamentals of Tunisia (ie GDP, exports ...). The methodology used is Structural Vector Autoregressions (SVARs) estimated with restrictions contemporary and long-term to measure the impact of these shocks on Tunisia.
Keywords: International financial crisis, sovereign debt crisis, transmission channels, structural VAR.
JEL Classification Codes: G01, H63, F42, C22.

The Impact of Economic Variables on the Foreign Trade Sector in Jordan from the Year (2000 - 2010)
Talal Bataineh

This study examined the impact of some economic variables, represented by inflation, the average per capita income, and the exchange rate on the foreign trade sector in Jordan during the period from (2000-2010) in order to achieve the objectives of this study the data were analyzed using SPSS where the study found a positive and significant impact to the average per capita income on both exports and imports, as well as the rate of inflation, but its effect on exports was greater than imports. As for the dinar exchange rate it did not have an impact, largely due to the monetary authorities in Jordan which verified the dinar exchange rate. Based on the results of the study we recommend that further encouragement and support for the private sector to maintain the level of stable prices and encourage investment by providing incentives and promoting for important products.
Keywords: Inflation, per capita income, the dinar exchange rate, exports, imports.

The Relationship between Taiwan Depositary Receipts(TDRs) and Underlying Stock
Yu-Min Wang, Chia-Fei Lin, Hung-Hui Wu and Ching-Lin Hu

In this study, we examine Taiwan Depositary Receipts (TDRs) issued by companies from Singapore, Hong Kong, Thailand, and South Africa, and investigate the transmission of returns from underlying stock price, the Taiwan Stock Exchange Capitalization Weighted Stock Index, and exchange rate to TDRs. We found that TDR price was positively correlated with underlying stock price, indicating an apparent and frequent synchronous variation between these two assets, whereas no apparent correlation was observed between TDR price and TAIEX and exchange rate. In addition, we employed Granger causality tests (Toda & Yamamoto, 1995) and found that underlying stock price, TAIEX, and exchange rate primarily exhibited one-way leading influences on TDR price. Finally, the results of the regression equation show that the current and one-period-lagged returns of underlying stocks and the TAIEX affect those for TDRs, whereas the exchange rate exhibits a less obvious significance. Furthermore, the results highlight the presence of a substantial excess return resulting from the regression-based trading rule strategy compared to that for the buy-and-hold strategy.
Keywords: Price Transmission, Taiwan Depositary Receipts (TDRs), Trading Strategies.
JEL Classifications Codes: G10, G11, G14, G15

The Malfunctioning of the Gulf Cooperation Council Single Market: Features, Causes and Remedies
Mahmood Abdulghaffar, Omar Al-Ubaydli and Omar Mahmood

Five years after its inception, the Gulf Cooperation Council (GCC) single market is malfunctioning in a litany of ways: there remain restrictions on the movement of goods, capital and labor across political boundaries. This paper describes the GCC single market's malfunctions. We also propose remedies, taking advantage of the single market experiences of, among others, the European Union. A key conclusion is that there is an absence of GCC supranational political institutions powerful enough to enforce rules, with the exception of the Supreme Council, which is itself not designed to deal with day-to-day issues such as enforcing a single market. Consequently, the GCC needs to alter its institutional structure if it wants the single market to operate correctly.
Keywords: Single market, Economic integration, Gulf Cooperation Council
JEL Classification Codes: F15, F2, F36, F53, F6.

Industrial Production and Unemployment in Emerging Economies
Çigdem Boz

It is well known that industrial production stands as the real measure of economic activity, constituting a certain proportion of Gross Domestic Product. Nevertheless, high levels of industrial production do not mean an increase in levels of employment in all economies. This is especially valid for the expansionary post-2001 period until the global financial and real crisis. This paper focuses on the dilemma between high levels of unemployment and high levels of industrial production in some middle size emerging market countries. We argue that the vast amounts of capital flows into such emerging markets between January 2000 and April 2010 period hardly helped to create any jobs due to the appreciation of domestic currency and the rise in domestic interest rates. This paper examines the validity of Okun's law which describes a negative relationship between the change in real output and the change in unemployment rates for some emerging economies by empirically analyzing the causality between industrial production and unempleyment using pairwise Granger causality test applied just after the panel unit root and cointegration tests. Our preliminary results show that unemployment and industrial production follow similar patterns, rather than diverging from each other.
Keywords: Okun's law, Unemployment; Emerging Markets;
JEL Classification Codes: E23, E24

The Most Valuable Companies Possess Optimal Capital
Shyan-Rong Chou, Ginny Ju-Ann Yang and Chen-Hsun Lee

In this paper, we use the unit root test at both panel level and individual company, in order to provide some quantitative evidence of the individual and common financial behavior of Taiwan 50 listed nonfinancial companies' debt-to-assets ratio. Our approach is based on the idea that conventional unit root tests have lower power in detecting the nonlinear mean reverting behavior if the debt ratios follow a nonlinear mean reversion process and fail to deal with the cross dependence problem. Hence, we use the non-linear panel unit root test of Hardi and Rao (2008) to reflect structural change and capture the mean reverting property of debt ratios in the non-financial companies of the Taiwan 50. Due to the cross-sectional dependency of this approach, the nuisance parameter problem is solved. Using the panel unit root test of Hardi and Rao (2008), the Taiwan 50 non-financial firms provide evidence to support the static trade off theory and signal factor hypothesis, which states that information symmetry implies optimal capital structure.
Keywords: Trade-off theory, pecking order theory, panel unit root test, capital structure;

A New Data Mining System for Decision Supports on Financial Credit Scoring
Chi-Yun Chiang and Shian-Chang Huang

In financial credit scoring, one usually encounters large amount of information from public financial statements and stock markets. When performing credit scoring, the high dimensional data usually make traditional classifiers infeasible due to the curse of dimensionality. This study addresses the problem via the utilization and integrating of supervised maximum variance unfolding (S-MVU, Song et al. 2008) and support vector machines (SVMs). In the proposed new credit scoring system, S-MVU reduces the high dimensionality of nonlinear distributed financial input data, and SVM performs the final classification. Empirical results indicated that one-vs-one SVM with S-MVU outperforms other multi-class SVMs and traditional classifiers such as Bayesian networks, logistic regressions, and the nearest neighbors method. Compared with other dimensionality reduction methods the performance improvement owing to S-MVU is significant and robust.
Keywords: Supervised Maximum Variance Unfolding, Dimensionality Reduction, Support Vector Machine, Multi-class Classification, Credit Rating

Beirut's Real Estate Twilight Zone
Jamil Chaya

This paper compares two Lebanese investment venues for domestic and foreign investors: residential real estate and Lebanese government bonds. The paper develops a comprehensive cash flow and sensitivity analysis to equip the reader with the tools to understand the options available. The results illustrate that as of Q4 2013, debt financing could not justify the purchase of a property when faced with the alternative in the bond market. In the case of an unleveraged property purchase which is then rented out, the returns are at least as good as bond returns, only if capital appreciation is above an average of 7.5% per year. In conclusion, the investment decision is contingent on the beliefs and risk profile of the investor. However, in terms of performance indicators like risk-adjusted returns and optionality, the bond market as it stands is the better venue.
Keywords: Lebanon, real estate, sovereign bonds, Treasury bills, Treasury bonds, Nelson-Siegel-Svensson, cash flow analysis, sensitivity analysis, net present value, internal rate of return, risk adjusted return, foreign investment, emerging market, foreign exchange

Examining the Market Efficiency of the Saudi Arabian Equity Market
Declan McCrohan

Much of the Western world continues to struggle with significant levels of public debt as the global economy slowly recovers from the great economic recession of 2009. In contrast, the Saudi Arabian economy has one of the lowest public debt to GDP ratios in the world and its economy is flush with liquidity. Local regulators are considering loosening regulations for foreign investment into the local equity market - given the ripe economic conditions and growth outlook, it is expected that foreign investment inflows will soar once regulatory restrictions are removed. A possible barrier to such inflows could be the efficiency of the market which previous research has found to be weak-form inefficient up until 2009. This paper tests the market efficiency of the Saudi Arabian equity market and fifteen sector indices over the period January 2007 - March 2012 using three increasingly restrictive tests of the random walk model. There is little evidence to suggest that the market has become weak-form efficient and this may limit the expected influx of foreign investors into the market in 2013 and beyond.
Keywords: Market efficiency, financial markets, Tadawul index, Saudi Arabia, random walk, runs test, multiple variance ratio test, ADF test.
JEL Classification Codes: G120, G140

An Analysis of the Management Efficiency of Taiwanese PCB Industry - Using the 2-Stage Malmquist Index
Y. C. Lee and Y. H. Yang

This study was conducted on 24 PCB firms between 2007 and 2011, using the Malmquist Productivity Index (MPI) to analyze cross-period efficiency. By showing the relative positions and competitive profiles of the DMUs in a management matrix, the leading group with high efficiency and trailing group with low efficiency were indicated. The outcome showed H&T, KIN, WUS, CAD, and BOA were leading in performance with high efficiency while APCB, FHT and others were trailing with low efficiency.
Keywords: PCB business, management efficiency, Malmquist, management matrix

The Impact of RBCR on Asset Allocation in Taiwan Insurance Industry Lih-Feng Lin

Financial soundness in an insurance company is critical in protecting insurant's benefits. For the purpose of monitoring and controlling financial risks confronted by insurers, the supervision mechanisms and regulations in Taiwan have been modified several times in accordance with capricious financial conditions in the past. The Risk-Based Capital Regulations (RBCR), a financial monitoring model effected in July 2003, is specifically formulated to evaluate risks in assets and debts of an insurance company.This research applies value-maximization theory to analyze the effects of RBCR on investment portfolio in insurers. The result indicates that, the reason for portfolio adjustments in response to RBCR is mainly focused on marginal profit effect and marginal risk effect, rather than on reducing proportions of high-risk assets invariably. In addition, we have also conducted empirical analysis on the difference of capital and asset allocations before and after RBCR, without significant change in recent years.
Keyword: Risk based capital regulations, value-maximization, marginal profit effect, Marginal risk effect
Jel: G11, G22, C12

Pass-Through of Exchange Rate and Import Prices to Domestic Inflation: The Case of Egypt Ali A. Massoud

Following McCarthy (2000 and 2006) the present paper applies VAR model to estimate the pass-through of exchange rate and import prices' fluctuations to domestic inflation in Egypt, expressed by producer and consumer price indices. This model is built on pricing along a distribution chain that has three stages: import, producer, and consumer. Impulse responses and variance decomposition are the two outputs of the model used to assess the pass-through from exchange rate and import prices' movements to domestic inflation. The empirical results show that the pass-through of both exchange rate and import prices to PPI and CPI are modest. However, they are minimally larger for the CPI than for the PPI. The impacts of the movements of exchange rate and import prices mostly felt in the first four months of the shocks and last from 9 and 11 months for PPI and CPI, respectively. We can make an argument that there is a case of incomplete pass-through that can be attributed to five reasons as follows. (1) The choice of importers to adjust their profit margins instead of adjusting their price. (2) The price elasticity of the demand on some of the imported commodities may be high. (3) The inventory of some imported commodities that discourage importers from passing the whole increase in imported prices to domestic prices. (4) The export bans that the authorities impose on some commodities. (5) The government's subsidies for some important commodities.
Keywords: Exchange Rate Pass-through, Inflation, Exchange Rate Policies, Import price

Entrepreneurs' Need for Independence and their Non-Persistence Matjaz Gantar, Bostjan Antoncic and Jasna Auer Antoncic

The activities and performance of small and medium-sized enterprises (SMEs) depend largely on the personality of entrepreneurs. A hypothesis about the relationship between the entrepreneur's need for independence and their non-persistence in entrepreneurship was developed and empirically tested by using data collected via a structured questionnaire from SMEs in Slovenia. Logistic regression analysis was used to test the hypothesis. On the basis of the findings, which partially support the hypothesis, recommendations for research and practice are proposed.
Keywords: Entrepreneur, Need for Independence, Non-Persistence, SMEs