...development and economic growth nexus 1 1.3 Review of the empirical literature 4 1.3.1 Time series 5 1.3.2 Cross-country studies 6 1.3.3 Panel data studies 7 3 Conclusions 8 4 References 9 1 Introduction “Finance is powerful. The financial system can be an engine of economic prosperity – or a destructive cause of economic decline and misery.” Levine, R. (2011) p.85 Obviously, financial system and economy are related. But what is the nature of this relationship? The objective of this paper is to critically evaluate the existing theoretical and empirical literature on the finance-growth nexus. What is the role of the financial sector in economic growth? Does finance cause growth or simply follows it? There is no wide agreement about this task among recognised economists. Even Nobel Prize winners disagree in regard to the role of finance in economic development. Levine (2003) states that the role of finance as a major determinant of economic growth is over-stressed. Moreover Levine (2003) argued that where enterprise leads finance follows. Quite the opposite, important acknowledgment should be taken into account and it follows as “[the idea] that financial markets contribute to economic growth is a proposition too obvious for serious discussion.” Levine (2003) p.1 Similar to that, he also declared that the finance growth nexus cannot be safely ignored without substantially impeding our understanding of economic growth. Our understanding...
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...LONG TERM PERFORMANCE OF VALUE VS. GROWTH STOCKS: EVIDENCE FROM INTERNATIONAL MARKETS Zugang Liu, Pennsylvania State University Hazleton, USA Jia Wang, Rowan University, Glassboro, NJ, USA ABSTRACT This paper studies the long-term risk and return characteristics of value stocks versus growth stocks for three international markets: Asia, Scandinavia, and Europe. We focus on the downside of returns and use Value at Risk as our risk measure. We find that value stocks outperform growth stocks in terms of both risks and returns across all time horizons for all three markets. We further conduct cross country analysis. Interestingly, we find that there is some risk and return trade off in short term investment horizon across the three countries. When investment horizon lengthens, Scandinavian market has the best performance in both risks and returns for both value and growth indexes. Keywords: Value, Growth, Risk, Time Horizon 1. INTRODUCTION Value or growth? This is an age old debate in the investment world. Value style stock commonly refers to a stock that is undervalued relative to its fundamentals (i.e. dividends, earnings, sales, etc) and often has a low market to book ratio, a high dividend yield or a low P/E ratio. Growth style stocks are often shares from companies that are expected to grow at a higher than average rate and such stocks often have high market to book ratios, low dividend yields or high P/E ratios. Which one is more profitable? Basu (1977), among others, reports...
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...Financial Issue Paper Could our economy possibly be suffering because the industry is not looking at the bigger picture and instead looks at short term goals? That is the belief of some as Rana Foroohar states in her article for Time, “…because finance looks for quick growth rather than long-term rewards” (Foroohar). Her response is to that of a paper written by Stephen G. Cecchetti, a professor at Brandeis International Business School and a senior economist from BIS, Enisse Kharroubi asking why the financial sector growth out crowds the real economic growth. From another perspective comes the view that financialization has brought a systematic transformation to the capitalist economy. A four part interview printed on Truthout with Costas Lapavitas takes a look on the brighter side of how the industry has been doing great things for the economy over the past few decades. Foroohar says that because the industry invests in industries such as real estate and construction instead of in industries with more life behind them like technology or pharmaceuticals that is another reason for economic growth to be put on the back burner. Finance tends to rise from “…lower capital investment in the real economy, greater inequality, and the demise of more productive industries.” (Foroohar). This puts into perspective just why the economic growth seems to be non-existent while financial firms continues to rise. There is also the interesting point shown in the paper written by Cecchetti and...
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...A R Munich Personal RePEc Archive Economic Factors Influencing Corporate Capital Structure in Three Asian Countries: Evidence from Japan, Malaysia and Pakistan Muhammad Mahmud and Gobind M. Herani and A.W. Rajar and Wahid Farooqi KASBIT, KABIT, Sindh University, Indus Institute of Higher Education 20. April 2009 Online at http://mpra.ub.uni-muenchen.de/15003/ MPRA Paper No. 15003, posted 4. May 2009 07:34 UTC Indus Journal of Management & Social Sciences, 3(1):9-17 (Spring 2009) http://indus.edu.pk/journal.php Economic Factors Influencing Corporate Capital Structure in Three Asian Countries: Evidence from Japan, Malaysia and Pakistan Muhammad Mahmud*, Gobind M. Herani** A. W. Rajar*** and Wahid Farooqi**** ABSTRACT This study is an attempt to determine the factors that influence a firm’s choice of capital structure in three Asian countries: Japan, Malaysia and Pakistan. The specific objective is to investigate if country’s economic factors play a significant role in determining capital structure between markets. These countries are chosen in order to represent three different stages of economic development. Literature review reveals that considerable research has been made in the industrialized countries on the similar topic. Capital structure is one of the most complex areas of strategic financial decision making due to its interrelationship with macroeconomic variables. This study reveals that per capita GNP growth for Japan and Malaysia is significantly...
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...European Scientific Journal January 2013 edition vol.9, No.1 ISSN: 1857 – 7881 (Print) e - ISSN 1857- 7431 AGRICULTURE FINANCING AND ECONOMIC GROWTH IN NIGERIA Obansa S. A. J. Departments of Economics University of Abuja I. M. Maduekwe Departments of Economics and Agric. Economics Department University of Abuja Abstract The importance of agricultural surplus for the structural transformation accompanying economic growth is often stressed by development economists. This lead to the question: Does agriculture financing matters in the growth process? To this end, the need to investigate the impact of agriculture financing on economic growth appears more imperative for Nigeria. This paper employed secondary data and some econometric techniques such as Ordinary Least Square (OLS); Augmented Dickey-Fuller (ADF) unit root test; Granger Causality test. The results of the various models used suggest that there is bidirectional causality between economic growth and agriculture financing; and there is bidirectional causality between economic growth and agricultural growth. It further suggests that productivity of investment will be more appropriately financed with foreign direct private loan, share capital, foreign direct investment and development stocks. And also capital-output ratio will be more appropriate financed with multilateral loan, domestic savings, Treasury bill, official development assistant, foreign direct investment and development stock. It is recommended that maintenance...
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...Student’s Name Institution Instructor Date Budget Deficit Budget Deficit Budget is an estimate of the income and expenditure for some country for some set period of time say one year. Budgeting is vital in an economic perspective for the economy that desires to meet the needs of its people. Budgeting also aids an economy to hypothesise and attain the best output and revenue from the dealings in the production process. As such budgeting and forecasting serve the basic role of the economic progress of the economy based on the operations of the countries to attain the millennium development goals. Basically, the budgeting approaches used by the economy may create the deficit or at some point result in the surplus. Reduction in tax payments, increased unemployment, poor planning, increased military spending and poor projection and underestimations result in the budget deficit. During periods of economic recession in some country budget deficit is also likely to be experienced. Expansionary fiscal policy may lead to budget deficit since it involves increase in government spending. Such condition is very challenging to the economic growth and development and may also increase the rate of borrowing of a country to surpass its budget (Aaron, 2014, pp. 1). Budget deficit can be explained as the difference between the government revenue and the government expenditure calculated over some set period (one year). It occurs when the expenditure has exceeded the income for some set...
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...we provide a detailed example of applying the free cash flow to equity valuation model proposed in Damodaran (2006). Damodaran (2006) argues that the value of a stock is the discounted present value of the future free cash flow to equity discounted at the cost of equity. We combine the free cash flow to equity model with the super-normal growth model to determine the current value of Coca-Cola. At the time of this paper, we determined a value of Coca-Cola at $161 billion using the free cash flow to equity model, and the actual market value of Coca-Cola was $150 billion. Keywords: Coca-Cola; Free Cash Flow to Equity; Equity Valuation; Super-normal Growth Model CORPORATE FINANCIAL MANAGEMENT AND STOCK VALUATION C orporate financial management encompasses the efficient acquisition and allocation of funds. The objective of corporate financial management is to maximize the value of the firm. Solomon (1963, page 22, Chapter II) argues that wealth maximization should be the goal of corporate financial management because this criterion maximizes the wealth of the owners of corporations and maximizes the wealth of a society by maximizing economic output. The value of the firm is measured by the market capitalization of the firm. The market capitalization for the firm is calculated by multiplying the total number of shares outstanding times the market price per share. The value of the firm is determined by the risk and return characteristics of the firm. Firms that wish to achieve...
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...Crisis: How Monopoly-Finance Capital Produces Stagnation and Upheaval from the United States to China. The Great Financial Crisis and the Great Recession began in the United States in 2007 and quickly spread across the globe, which appear to be the turning point of the world history. The recovery plan was set to two year, however the world economy five years after crisis is still in the sluggishness. The Traid – United States, Europe, and Japan remain caught in a slow growth condition, financial instability, and high unemployment rate. As a consequence, the effects spread globally. Despite the slowdown of the global economy, China is the only country found out to be a bright spot as its economy is still expanding. Different views on the Stagnation In the United States, the focus of financial crisis shifted to the idea of economic stagnation. The idea of stagnation was introduced by authorities and published books as follow. Firstly, Ben Bernanke, chairman of Federal Reserve Board said on his speech in 2011 that the stagnation was not affects only the United States, but the global economy as a whole. He moreover stressed that he do not expect the long-run potential growth of the U.S. to be affected by the recession and crisis if the U.S. takes necessary steps to secure the outcome. Nonetheless his thought might sound useful, yet the necessary steps he mention left the public in doubt with no explanation. Secondly, the president of the America Economic Association, Robert...
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...ccsenet.org/ijef International Journal of Economics and Finance Vol. 3, No. 2; May 2011 Development of Financial Market and Economic Growth: Review of Hong Kong, China, Japan, The United States and The United Kingdom Anson Wong (Corresponding author) School of Accounting and Finance The Hong Kong Polytechnic University Tel: 852-2766-7866 E-mail: afanson@inet.polyu.edu.hk Xianbo Zhou Department of Economics Lingnan College, SUN YAT-SEN University, China E-mail: zhouxb@mail.sysu.edu.cn Received: July 20, 2010 Accepted: January 13, 2011 doi:10.5539/ijef.v3n2p111 Abstract The empirical evidence suggests that the development of stock markets in China, USA, United Kingdom, Japan and Hong Kong have independently a strongly positive correlation with their economic growth. The result brings out an important theory to support for the proposition that the stock market development is one of the key drivers of economic growth in developed and developing countries, whatever the modes of their financial systems, stage of their economic development and types of economic system. Keywords: Development of Stock Market, Economic Growth, China, Japan, United Kingdom, USA, Hong Kong 1. Introduction Numerous studies have proposed that the development of stock market is able to improve growth performance through its positive effects on capital flows, diversification of investment risk and pooling funding for the long-term industrial projects and provision of adequate...
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...Abstract This paper would discuss the effect of external debt on economic growth with four areas, the effect on private local investment, foreign direct investment, government expenditure and export growth. Three theoretical models are adopted, namely Debt Overhang Theory, Liquidity Constraint Hypothesis and Crowding-out Effect respectively. Two policy implications on debt relief and debt restructuring are analyzed. And finally, the paper will include the discussion on the necessary tradeoff with inflation and contractionary fiscal budgeting after debt servicing. KEY Words: Heavily In-debt Poor Countries (HIPC), External Debt/Foreign Debt) Sustainability, Debt-GNI Ratio, Debt-Export Ratio, Debt Service Ratio Word count (excluding table of content, tables and reference): 2974 Topic: The Effect of External Public Debt in Developing Countries on Economic Growth - An Empirical Study on Argentina Abstract P.1 1. Introduction P.3 1.1 Literature Review P.4 1.2 Structure and Magnitude of External Debt of Argentina P.4 1.3 Theoretical Relationship between External Debt and Economic Growth P.6 1.4 Research Question(s) and Framework P.7 2. Data Collection and Empirical Analysis P.7 2.1 The effect of external public debt on:...
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...BRIC economies will account for 44% of global GDP. The emerging market accounts for an increasing share of global activity. Two centuries of vigorous industrialization has propelled economies of North America, Western Europe and Japan into a dominant position in terms of their share of world output. But the past three decades have seen steady erosion from the peak they attained during the 1970. The emerging economies now account for over half of world output. These dynamic economies are changing the world economic order as they industrialize, improve their infrastructure and rapidly develop their service sectors. By 2050, they will account for almost 78% of global output. This projection uses realistic assumptions of annual growth rates of 5.3% to 2050, well below those posted in recent decades by the economies of developing Asia at over 7.5%. Growth at that pace is not sustainable over the long term – as economies mature, they inevitably lose some of their initial momentum. Within the emerging markets, four economies – Brazil, Russia, India and mainland China – collectively known as the BRIC economies, have become the focus of particular attention. These countries are transforming the existing patterns of economic activity and...
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...sums over a specified period of time, it is important in the economy for corporations and smaller businesses in general as a financial vehicle that allows these entities to finance their ongoing operations and other investment projects by granting access to financing at fixed(generally) interest rates. As such, it is important to understand the bond market in order to understand interest rate fluctuations at which individuals and businesses borrow funds to finance investment and spending. (b)What is a stock? How do stocks affect the economy? (2 Marks) A stock represents a share of ownership in a corporation. It is effectively a claim on the earnings and assets of said corporation. In practice, stocks are a vehicle for corporations to raise funds for financing growth of the corporation. By issuing shares the company can grow its operations by investing the proceeds of the sale of stock into any type of business activity that would expand its potential profits. In practice, stocks are traded on stock markets which can be highly volatile based on the economic conditions in the specific market. Conversely stocks can have a strong effect on the economy one way or another. If companies are generally doing well in an economy, then the stock market is in a state of growth and thus the economy experiences a growth cycle as a result. On the other hand, if companies are performing poorly in a given economy the stock market will experience a period of recession or downturn and thus drag...
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...development finance in economic development in Sub-Saharan Africa. Development Finance is practice of using scarce financial resources in an unconventional ways in order to advance economic activity(ies). According to (Nyembezi, 2009), development finance makes the economy run smoothly and effectively. The aim of the development finance is to look at the challenges and design the framework as well as stimulating core activities that will develop the economic growth. As stated by (Nyembezi, 2009) development finance, in an economy, can be compared to oil in a vehicle engine that ensures its sound and smooth operation. According to (Ocran, 2012), development finance is concerned with the financing of development at: • Household level • Firm level • Geographical area/national/regional level This paper looks at the role of development finance at national and regional level in economic development in Sub-Saharan Africa. The Organisation for Economic Co-operation and Development (2002) defines development finance officially as funding “used in measuring the inflow of resources to recipient countries: including (a) bilateral official development assistance (ODA), (b) grants and concessional and non-concessional development lending by multilateral financial institutions, and (c) Other Official Flows for development purposes (including refinancing Loans) which have too low a Grant Element to qualify as ODA”. The role of development finance and economic growth The current...
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...Bank ADB’s vision is an Asia and Pacific region free of poverty. Its mission is to help its developing member countries reduce poverty and improve the quality of life of their people. Despite the region’s many successes, it remains home to approximately two-thirds of the world’s poor: 1.6 billion people who live on less than $2 a day, with 733 million struggling on less than $1.25 a day. ADB is committed to reducing poverty through inclusive economic growth, environmentally sustainable growth, and regional integration. Based in Manila, ADB is owned by 67 members, including 48 from the region. Its main instruments for helping its developing member countries are policy dialogue, loans, equity investments, guarantees, grants, and technical assistance. ASIAN DEVELOPMENT OUTLOOK 2015 FINANCING ASIA’S FUTURE GROWTH HIGHLIGHTS ASIAN DEVELOPMENT BANK 6 ADB Avenue, Mandaluyong City 1550 Metro Manila, Philippines www.adb.org ASIAN DEVELOPMENT BANK ASIAN DEVELOPMENT OUTLOOK 2015 Financing asia’s future GROWTH HIGHLIGHTS EVELOPMENT BANK ASIAN DEVELOPMENT BANK Creative Commons Attribution 3.0 IGO license (CC BY 3.0 IGO) © 2015 Asian Development Bank 6 ADB Avenue, Mandaluyong City, 1550 Metro Manila, Philippines Tel +63 2 632 4444; Fax +63 2 636 2444 www.adb.org; openaccess.adb.org OARsupport@adb.org; publications@adb.org Some rights reserved. Published in 2015. Printed in the Philippines. Publication Stock No. FLS157141-3 The views expressed...
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...entities). A modern financial system comprises financial institutions, instruments and markets that provide a wide range of financial products and services. Importantly, a financial system encourages accumulated savings which are then available for investment within an economy. Financial assets, or financial instruments, incorporate attributes of risk, return (yield), liquidity and time-pattern of cash flows. Savers are able to satisfy their own personal preferences by choosing various combinations of these attributes. By encouraging savings, and allocating savings to the most efficient users, the financial system has an important role to play in the economic development and growth of a country. A range of different financial institutions has evolved to meet the needs of financial market participants and to support economic growth. Chapters 2 and 3 examine the major types of financial institutions. At this stage the institutions are categorised by the nature of their principal activities. Depository institutions, such as commercial banks, building societies and credit unions, specialise in gathering savings in the form of deposits and use those funds in the provision of loans to customers. Investment banks and merchant banks tend to specialise in the provision of off-balancesheet advisory services to clients (e.g. merger and acquisition advice). Contractual savings institutions, such as insurance offices and superannuation funds,...
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