Determinants of Capital Structure for Japanese Multinational and Domestic Corporations*
Shumi Akhtar(School of Finance and Applied Statistics, Faculty of Economics and Commerce, Australian National University)
Barry Oliver(School of Finance and Applied Statistics, Faculty of Economics and Commerce, Australian National University)

Our study examines whether there are systematic differences in standard leverage determinants for a sample of Japanese multinational (MNCs) and domestic corporations (DCs). We find that on a univariate basis Japanese MNCs differ significantly on most variables relative to Japanese DCs. These variables include leverage, age, collateral value of assets, free cash flows, foreign exchange risks, growth, non-debt tax shields, political risks, profitability and size. Business risks are not found to be significantly different between the two groups of organizations. When modeling capital structure and the determinants of capital structure we find that Japanese multinationals have significantly less leverage than Japanese DCs, and that multinationality is an important aspect of leverage for Japanese firms. We find that business risks are not significant for modeling capital structure of domestic firms but they are for multinationals and foreign exchange risks are not significant for multinationals but are significant for domestic firms. Business risks are negatively related to leverage for multinationals and we document that significant positive leverage effects of foreign exchange risks and size are subsumed by the negative effect of business risks to explain the lower leverage experienced by Japanese multinationals relative to Japanese DCs. The lack of significance of foreign exchange risks for DCs can be explained by economies of scale in risk management, such as derivatives. Domestic firms seem to manage increased foreign exchange risks through lower leverage rather than derivative use. On the other hand, the larger multinationals can take advantage of economies of scale in risk management. Consequently, foreign exchange risks of multinationals can be managed through derivatives and other risk management operations and not reduced leverage.

*Special thanks to Tom Smith, participants at the 2005 AFAANZ conference and Bruce Grundy(editor) for comments and suggestions on earlier drafts.

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Deal or No Deal, That is the Question: The Impact of Increasing Stakes and Framing Effects on Decision-Making under Risk
Robert Brooks(Department of Accounting and Finance Faculty of Business and Economics, Monash University)
Robert Faff(Department of Accounting and Finance Faculty of Business and Economics, Monash University)
Daniel Mulino(Department of Accounting and Finance Faculty of Business and Economics, Monash University)
Richard Scheelings(Department of Accounting and Finance Faculty of Business and Economics, Monash University)

In this paper, we utilize data from the Australian version of the TV game show, ‘Deal or No Deal’, to explore risk aversion in a high real stakes setting. An attractive feature of this version of the game is that supplementary rounds may occur which switch the decision frame of players. There are four main findings. First, we observe that the degree of risk aversion generally increases with stakes. Second, we observe considerable heterogeneity in people’s willingness to bear risk – even at very high stakes. Third, we find that age and gender are statistically significant determinants of risk aversion, while wealth is not. Fourth, we find that the reversal of framing does have a significant impact on people’s willingness to bear risk.

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A Stochastic Measure of International Competitiveness*
Kenneth W. Clements(UWA Business School, The University of Western Australia)
H. Y. Izan(UWA Business School, The University of Western Australia)
Yihui Lan(UWA Business School, The University of Western Australia)

Government agencies produce indexes that purport to measure international competitiveness. The most common version is the real effective exchange rate, which is some form of weighted average of the real exchange rates of the country’s trading partners. Such indexes convey a false sense of accuracy as they ignore the volatility among the component real exchange rates of the partners. As long as all real rates do not move in an equiproportionate fashion, in a fundamental sense real effective exchange rates are subject to estimation uncertainty. We demonstrate how this uncertainty can be measured and used to enhance current practice.

*We would like to acknowledge the research assistance of Lucas Weber and the help of Luci Ellis in providing data. This research was supported in part by the ARC. Our thanks are also due to the Editor of this journal, Bruce Grundy, for his comments and suggestions. For a longer version of this paper, see Clements et al. (2007a).

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An Analysis of the Magnet Effect under Price Limits*
Daphne Yan Du(Barclays Global Investors)
Qianqiu Liu(University of Hawaii Shidler College of Business)
S. Ghon Rhee(SKKU Business School, Korea, and University of Hawaii Shidler College of Business)

Using the Korea Stock Exchange’s transaction data and limit order book, we document the accelerating patterns of market activity before limit hits. We confirm the existence of the magnet effect from several key market microstructure variables, using a parsimonious quadratic function of the time until the price limit hit. In addition, this paper is the first to isolate the intraday momentum effect from the magnet effect during the period before stock prices hit daily price limits.

*We are indebted to Editor Bruce Grundy for his detailed comments for improvement of this paper. We also thank Stephen Brown, Rosita Chang, David Cho, Carole Comerton-Forde, David Ding, Jack De Jong, Victor Huang, Petko Kalev, Kenneth Kim, Yong Kim, Chunlin Liu, Greg Stone, A. Subrahmanyam, Jimmy Yang, Tony Tang, and workshop participants at the Korea Stock Exchange, University of Hawaii, University of Sydney, Wilfrid Laurier University, Hitotsubashi University, National Chengchi University, University of Kobe, Universiti Sains Malaysia, and MIR Asset Management Ltd. We would like to thank the Korea Stock Exchange for providing the data for this study.

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Capital Investments and Stock Returns in Japan*
Sheridan Titman(Department of Finance, University of Texas at Austin)
K.C. John Wei(Department of Finance, Hong Kong University of Science and Technology)
Feixue Xie(Department of Economics and Finance, University of Texas at El Paso)

The negative relation between capital investments and subsequent stock returns, found in the United States, is not observed in Japan, which is inconsistent with the risk-based explanation. More specifically, we find no significant relation between capital expenditures (CE) and subsequent stock returns for either the entire sample or for keiretsu firms. However, in the pre-1990 subperiod, there is a positive relation between increased CE and subsequent risk-adjusted returns among independent firms, especially for those firms that have high cash flows and/or low leverage. These results are consistent with existing evidence that independent firms are financially constrained in the pre-1990 period and that keiretsu main bank monitoring effectively controls the overinvestment problem.

*The authors appreciate helpful comments from seminar participants at the Hong Kong University of Science and Technology, National Dong Hwa University, University of Texas at El Paso, the APFA/PACAP/FMA Finance Conference in Tokyo, and the FMA meetings in San Antonio, Texas. The authors also thank Dr. Virginia Unkefer for editorial assistance. Sheridan Titman and John Wei acknowledge the financial support from an RGC Competitive Earmarked Research Grant of the Hong Kong Special Administration Region, China (HKUST6014/99H).

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Pyramidal Discounts: Tunneling or Overinvestment?*
Martin Holm?n(Department of Economics, Uppsala University)
Peter H?gfeldt(Department of Finance, Stockholm School of Economics)

Swedish families exploit the strong separation between ownership and control in pyramiding to establish control over several firms’ internal cash flows via a very small capital investment. We establish that the discounts on the portfolio firms at the bottom of the pyramid as well as pyramid holding company are directly linked to costs from overinvestment that increase with the separation between ownership and control. In a financially developed economy where pyramids are transparent and the tax system regulates the flow of dividends within the pyramid and to shareholders, the primary cause of the discounts is not tunneling but overinvestment costs.

*We appreciate the generosity of The Bank of Sweden Tercentenary Foundation and The Jan Wallander and Tom Hedelius Foundation. Peter Högfeldt gratefully acknowledges support from The Foundation for Economics and Law and the hospitality of CDDRL at Stanford Institute of International Studies. We would like to thank an anonymous referee, Heitor Almeida, Malcolm Baker, Sudipto Dasgupta, Joseph Fan, Ulrich Hege, Urban Jansson, Tim Jenkinson, Charles Kahn, Raja Kali, Randall Morck, Enrico Perotti, Stephen Ross, Subrata Sarkar, Andrei Shleifer, Fredrik Synnerstad, and Daniel Wolfenzon, and participants at the CEPR/ECGI/INSEAD/NBER/University of Alberta joint conference on The Evolution of Corporate Governance and Family Firms in Fontainebleau, the workshop on The Governance of Closely Held Corporations at Copenhagen Business School, the HKUST Summer Symposium on Family Business Research, the European Finance Association’s meeting in Moscow, the SIFR Corporate Governance Conference, and seminar participants at HECER, Helsinki, and University of Bologna for valuable comments.

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