Quarterly publication of the Multinational Finance Society     ISSN 1096-1879

Factors Determining Mergers of Banks in Malaysia’s Banking Sector Reform
(Multinational Finance Journal, 2007, vol. 11, no. 1/2, pp. 1–31)

Rubi Ahmad
University of Malaya, Malaysia
Mohamed Ariff
Bond University, Australia
Michael Skully
Monash University, Australia

What was termed government-guided merger was a unique banking sector reform implemented in 2002 by the central bank of Malaysia guiding a larger number of depository institutions to form 10 large banks. This paper identifies the factors entering this massive merger exercise. Similar to the finding in bank merger literature, we find larger banks became acquirers. Also, low risk banks had higher probability of becoming an acquiring bank while high-risk banks became targets for takeover. Surprisingly managerial performance—financial ratios and changes in productivity reported as significant factors in prior market-based merger studies—was not significant in this study. Banks closely connected to government had greater chance of becoming acquiring banks while the reverse is true of target banks. These findings have not been reported in other studies of mergers, and are likely to be useful to central banks considering similar reforms (JEL: G21, G34).

Keywords:  bank mergers, acquiring banks, managerial performance, government connections.

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Are Failure Prediction Models Widely Usable? An Empirical Study Using a Belgian Dataset
(Multinational Finance Journal, 2007, vol. 11, no. 1/2, pp. 33–76)

Hubert Ooghe
Vlerick Leuven Gent Management School and Ghent University, Belgium
Sofie Balcaen
Ghent University, Belgium

Faced with the question as to whether failure prediction models can easily be transferred and applied to a new data setting, this study examines the performance of seven models on a dataset of Belgian company failures after re-estimation of the coefficients. The validation results indicate that some models are widely usable: they are strongly predictive when applied to the new data set. The Gloubos-Grammatikos models and Keasey-McGuinness appear among the best performing models, and also Ooghe-Joos-De Vos and Zavgren seem to be widely usable, respectively for failure prediction 1 and 3 years prior to failure. At the same time, the Altman and Bilderbeek models show very poor results when applied to the Belgian dataset. The best performing models seem to combine the right variables in an intuitively right sense and it appears that the combination of some types of variables generally leads to good predictive results. On the contrary, the estimation technique, complexity and number of variables do not explain the predictive performances (JEL: G33,M49).

Keywords: failure prediction model, international comparison, validation, annual accounts, re-estimation.

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Simulating Firm-Specific Corporate Marginal Tax Rates in a Canadian Context
(Multinational Finance Journal, 2007, vol. 11, no. 1/2, pp. 77–96)

Amin Mawani
York University, Toronto, Canada

This paper illustrates a methodology for estimating corporate marginal tax rates in the presence of tax losses, and within the context of Canadian tax law (JEL: G3, H25, M4).

Keywords: taxation; marginal tax rates; tax losses; corporate tax rates.

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U.K. Stock Market Inefficiencies and the Risk Premium
(Multinational Finance Journal, 2007, vol. 11, no. 1/2, pp. 97–122)

Antonis Demos
Athens University of Economics and Business, Greece
George Vasillelis
Imperial College and Dresdner-Kleinwort-Benson Bank, U.K.

The stock market predictability has been a favorite topic of scholars and practitioners alike. It seems that some small predictability is present in all major stock markets worldwide. This predictability can be attributed to the risk premium structure and/or to inefficiencies present in the markets. This paper investigates the predictability of returns of some major shares listed in the London Stock exchange, using economic as well as accounting variables. We first measure the predictability of these variables by regressing individual stock returns on their corresponding accounting variables and the economic ones. Second, we estimate for the returns a seasonal latent factor model with time varying volatility. Provided that our measure of risk is an adequate one, the residuals of this estimation are free of the predictability of risk premium, and consequently one expects that any accounting and factor economic variables would have no predictive power. An LM-type test is developed and employed to indicate that indeed the U.K. stock market predictability is due to the risk premium structure, and the explanatory power of the variables considered here is due to them being an approximation of risk. However, when we perform the test jointly for all assets, we reject the zero predictability hypothesis at 5% but not at 1% (JEL: G12, G14, C10).

Keywords: conditional heteroskedastic latent factor, LM test, stock returns.

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Mispricing Persistence and the Effectiveness of Arbitrage Trading
(Multinational Finance Journal, 2007, vol. 11, no. 1/2, pp.123–156)

Pascal Alphonse
Lille School of Management, University of Lille 2, France

This article examines whether mean reversion in stock index basis changes is actually induced by arbitrage trading, using intra-day arbitrage trade data. The empirical evidence suggests that arbitrage trading alone cannot account for all of the mean reversion in basis changes, even when infrequent trading is controlled for. This general mean reversion is consistent with mean reversion in liquidity and partial adjustment in the cash market. The behavior of arbitrageurs appears highly competitive. We find that on average the net arbitrage profit is at the competitive level of zero. Furthermore, it is suggested that some mispricing persistence may be related to time-varying liquidity. Accordingly, the results indicate that arbitrageurs pay attention to the depth of the market and  value the early unwinding option (JEL: G13, G14).

Keywords: market microstructure, arbitrage trading, liquidity, stock index futures, market efficiency.

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