Economic Issues Volume 29

ECONOMIC ISSUES

Volume 29 (2024)

Part 1, Spring

Please select from the titles below:

Special Issue on the Asia and Pacific Economies

N Salike, K Y Lim and C Liu, Introduction to the Special Issue on the Asia and Pacific Economies, Vol.29, No.1, p.1-4
Z Fang, D Ding and C Guan, Does Methodology Matter? Revisiting the Energy-growth Nexus in Asia Pacific Economies, Vol.29, No.1, p.5-34
J Zhang and H Liu, Analysis of Co-movement in Asia-Pacific Stock Markets Against the Background of the US-China Trade War, Vol.29, No.1, p.35-69
N P R Deyshappriya, N Fernando and K M N Jeewanthi, Financial Literacy and Its Impact on Loan Repayment Decisions: Evidence from Rural Households in Sri Lanka, Vol.29, No.1, p.71-92

Articles

Book Reviews

Part 2, Autumn

Please select from the titles below:

Articles

Book Reviews

Part 1, Spring

Special Issue on the Asia and Pacific Economies

Introduction to the Special Issue on the Asia and Pacific Economies

by N Salike, K Y Lim and C Liu

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Does Methodology Matter? Revisiting the Energy-growth Nexus in Asia Pacific Economies (p.5)

by Z Fang, D Ding and C Guan

Abstract: There have been many studies on the energy-growth nexus since the 1970s. However, the findings are mixed. Reasons for the inconsistent findings include different time spans and countries or regions examined, different frameworks, as well as different methodologies adopted, by various studies. In this paper, we examine how methodology affects findings regarding the energy-growth nexus employing a sample of Asia Pacific economies for the period of 1965–2019, using a supply-side framework that takes into consideration both physical capital and human capital in the production function. Methodologies considered in this paper include the widely used vector error correction model and autoregressive distributed lag model (ARDL) for time series and panel data, and Granger non- causality tests. Coefficients are estimated and compared using various methodologies including the cointegrating approach, Dynamic OLS, Fully- Modified OLS, and others. The conclusion obtained from this study will contribute to a better understanding of the varying findings in the literature and highlight the importance of choosing an appropriate methodology for the data analysis.

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Analysis of Co-movement in Asia-Pacific Stock Markets Against the Background of the US-China Trade War (p.35)

by J Zhang and H Liu

Abstract: This paper employs event study methodology to investigate the impacts of the US-China trade war on stock market co-movements among the Chinese Mainland, Hong Kong, the US, Japan and Singapore, over the period from 3 January 2017 to 3 February 2023. It examines in particular the time-varying stock market co-movement at overall market level and specific sector level. The paper uses the day 6 July 2018 to separate the period into two stages, and identifies structural breaks and spillover patterns of cross-market co- movements at different phases. The empirical results indicate that stock market co-movements at overall market level among Asia-Pacific economies are significantly affected by news releases. The stock market co-movements among Asia-Pacific economies after 6 July 2018 are more sensitive to the news of the US-China trade war, which is particularly true in Communication Services and Industrials. The magnitudes of stock market co-movement between the US and Mainland China in Communication Services, Energy, Industrials and Healthcare tend to be lower because of decoupling.

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Financial Literacy and Its Impact on Loan Repayment Decisions: Evidence from Rural Households in Sri Lanka (p.71)

by N P R Deyshappriya, N Fernando and K M N Jeewanthi

Abstract: The study examines the impact of financial literacy on loan repayment decisions of rural sector households in Uva Province of Sri Lanka. Data were collected from 975 households located in 10 Divisional Secretariats (DS) in both Badulla and Monaragala districts. Probit Regression Analysis was employed to analyse the collected data and the analysis confirms that higher financial literacy increases the probability of paying back the loans of the rural households. Apart from that, the study finds that there is a non-linear relationship between age and loan repayment decisions, while factors such as being married, receiving remittances, being non-disabled and the debt to income ratio also significantly affect loan repayment decisions of rural households in Sri Lanka. Consequently, the study strongly recommends improving the financial literacy of rural households in Sri Lanka, by arranging appropriate training and educational programmes, with the impact of such programmes helping to stabilise the financial system.

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Articles

Does crime type matter in understanding the nexus between universal credit and crime? Evidence from England and Wales (p.93)

by R Pickering and K Y Lim

Abstract: Motivated by a seemingly negative correlation between universal credit and crime in England and Wales, we present a novel theoretical framework of crime and welfare spending, where crime-specific human capital-induced heterogeneity exists between criminal activities. This provides a theoretical basis to three empirically testable propositions. We evaluate these using county-level data for 10 different crime types. We find significant heterogeneity across different crime types in affecting the crime-universal credit nexus. Notably, criminal damage and arson exhibit both positive level and introductory effects, implying these to be human capital dependent, whereas public disorder and weapons possession exhibit a negative crime-universal credit nexus.

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Effect of the DFQF Market Access Initiative on Domestic Investment in Least Developed Countries (p.133)

by S K Gnangnon

Abstract: Trade Ministers of the World Trade Organisation adopted in 2005 an important Decision, namely the Duty-Free-Quota-Free Market Access Decision (“DFQF Decision”) that aimed to provide DFQF access for products originating from least developed countries (LDCs). The present analysis investigates the effect of the DFQF Decision on domestic investment in LDCs by comparing the domestic investment performance of LDCs to that of similar countries that are not beneficiaries of the DFQF market access initiative. The analysis covers a panel dataset of 40 LDCs (the treatment group) and 15 low-income countries (designated as such by the International Monetary Fund) in the control group (which is the main control group), over the period 1996 to 2019. For robustness check analysis, an alternative control group has been used that contains countries not in the LDC category and would not have met the criteria for graduating from this category if they were included in the category. Results based on the two-step system generalised method of moments suggest that the intensity of adverse environmental and exogenous shocks that affect LDC economies is an important factor that prevented them from expanding domestic investment further to the DFQF market access initiative. At the same time, the DFQF Decision led to the expansion of domestic investment in LDCs that enjoyed higher development aid flows, with the magnitude of this positive effect increasing as the amounts of development aid rose. These outcomes, therefore, underline the importance of not only helping LDCs cope with the adverse effects of environmental and external shocks on their economies, but also enhancing incentives for both LDC governments and private firms to expand domestic investment, which is key for exports, economic growth and development.

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Part 2, Autumn

Institutional Investors, Capital Structure, and Financial Turmoil: A European Cross-Country Study (p.1)

by C Glöer

Abstract: This study examines the impact of institutional ownership on corporate financing decisions, particularly in the midst of financial turmoil. The dataset encompasses 8,049 firm-year observations from 1,138 non-financial firms listed in France, Germany, and the United Kingdom. The observation period ranges from January 2002 to December 2018. Employing a multiple structural break analysis and several multivariate regression models, the results illustrate a significantly negative influence of institutional ownership on the debt ratio. This impact amplifies during periods of financial turmoil, with a heightened effect observed in the post-crisis era compared to the pre-crisis period. Regarding institutional investors’ heterogeneity, this study also highlights substantial differences between grey and independent institutions, but not between domestic and foreign institutions. Additional empirical tests underscore the causality of the effect. These findings even withstand robustness checks, including a comprehensive set of firm-specific capital structure determinants, diverse investor type classifications, and various subsamples.

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What determines tax havens? A historical investigation of tax haven factors (p.29)

by A Hartfield, C Liu and M H Sheikh

Abstract: This paper analyses the determining factors of tax haven status by investigating the factors from a historical perspective. Initially, we use tax variables, governance variables and a communication indicator to check if these factors can distinguish tax haven countries from non-tax havens, based on two data sets in 2006 and 2018. We apply principal component analysis combined with Welch’s t-test and logit model analysis. We find that collectively, the historical tax haven factors are outdated for 2018 data. Individually, historical tax haven criteria are not significant in explaining tax haven status, and alternative criteria and variables, such as the financial secrecy score, are required.

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FDI Inflows Under Expropriation Risk: Can Pro-Business Policies Overcome Investor Aversion? (p.57)

by S Shahnawaz

Abstract: Risk of expropriation in developing countries is an impediment to attracting foreign direct investment (FDI). This risk is often closely tied to the institutional setup of governance in host countries. While reforming institutions to reduce the risk of asset requisition requires political consent and long-term effort, the acute need for investment in developing nations demands urgent solutions. Developing countries attempt to overcome the adverse effects of this risk by introducing pro- business policies such as domestic and capital control tax incentives. This paper examines the scope of such a policy mix to pull in FDI in this context. Using a continuous-time stochastic framework that accommodates multiple variables and their interconnections, it concludes that reducing the cost of doing business has only limited efficacy under restricted conditions. Institutional reform that inspires investor confidence thus cannot be avoided.

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Bankruptcy Law, Creditor Rights, and Earnings Management: Evidence from India (p.77)

by A Srivastava

Abstract: This study investigates whether the implementation of a creditor-friendly bankruptcy law encourages firms to engage in earnings management. We exploit the 2016 enactment of the Insolvency and Bankruptcy Code (IBC) in India as an exogenous policy shock for this investigation. Our results show that bankruptcy risk, on average, does not motivate firms to manage their earnings. However, after the IBC was implemented in 2016, we notice an increase in firms’ tendencies to indulge in earnings management when their bankruptcy risk increases. This effect is expected to be more pronounced in the cross-section of financially distressed firms, given their higher bankruptcy risk. Nevertheless, we find no evidence in support of this claim. Thus, we suggest that our findings are driven by firm managers’ efforts to conceal their pursuit of empire-building activities from equity holders’ scrutiny during periods of heightened bankruptcy risk. These insights may assist policymakers in evaluating the consequences of creditor-friendly bankruptcy laws with learnings for future legislative endeavours.

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