1. Literature Review and Hypothesis Development Dr Liang Han ( 韩 亮 ) Reader in Financial Management Surrey Business School University of Surrey Guildford, Surrey, UK, GU7 2XH

2. An empirical paper: steps 1.Specifying an academic question 2.Reviewing the existing literature 3.Modelling technique and software skills 4.Data collection, estimation and results 5.Summary and conclusion 2

3. 3 What is a review? A critical, constructive analysis of the literature in a specific field through summary, classification, analysis, comparison. A scientific text relying on previously published literature or data. New data from the author’s experiments are not presented (with exceptions: some reviews contain new data). A stand-alone publication or as integral parts of master theses, doctoral theses or grant proposals, in the format of literature review. Here, we do not consider a ‘paper review’ or ‘book review’.

4. 4 What function does it play? to organize literature to evaluate literature to identify patterns and trends in the literature to synthesize literature to identify research gaps and recommend new research areas Therefore, potential audience could be experts in specific research areas students or novice researchers decision-makers

5. 5 Types of review Status quo review: Presentation of the most current research for a given topic or field of research. History review: Development of a field of research over time. Issue review: Investigation of an issue (i.e. a point of disagreement or a question) in a specific field of research. Theory/model review: Introduction of a new theory or model in a specific field of research.

6. 6 Some theories behind “A researcher cannot perform significant research without first understanding the literature in the field” (Boote and Beile, 2005, p. 3). A literature review is an account of what has been published on a topic by accredited scholars and researchers. Why should we do it? ◦ Ridley (2012), Randopph (2009), Hofstee (2006), Boyne (2009), Hart (1998), Gall et al., (1996)… ◦ Highlight our contribution to existing research.

7. 7 Reviewing the existing literature Literatures develop around very specific questions. So, the easiest way to approach an empirical paper is to acquaint yourself with the literature that has already articulated a very clear academic question. You could try to go and articulate a new question yourself but that may take a long time. 7

8. 8 Literature survey The best way to introduce yourself to a literature is to look for a survey article. A survey article tends to review all the questions and sub-questions in an area and lays them out for you to explore in an empirical paper. The survey would also tell you which questions have been fully explored and where there is a gap in the literature. A good empirical paper is one that tries to explore these remaining gaps in the literature, which enhances the significance of the study. 8

9. 9 Journal choice There are journals that exclusively publish survey articles: Journal of Economic Literature, Journal of Economic Perspective, Journal of Economic Surveys. You would also find survey articles in some of the top journals like American Economic Review, Journal of Political Economy, Quarterly Journal of Economics, Journal of Finance, Journal of Financial Economics. 9

10. 10 The field journals (journals dedicated to specialised areas), e.g., Journal of Corporate Finance, Journal of Banking and Finance, Journal of Empirical Finance too publish survey articles in specific areas and/or special issues devoted to certain areas from time to time. Make sure that you ascertain that the survey article is sound and is published at a good journal; if you are considering working papers, try to rely on working papers from reputed universities/researchers. Beware of the bad articles floating on the web. 10

11. 11 Bear in mind: Your problem is not new. Summarize the relevant literature. The best thing to do is to identify key concepts in this literature you are interested in that you want the reader to remember. Make a table of these concepts and the attributes given in the various papers you reviewed. In this overview at least the papers that motivated you need to be mentioned. 11

12. 12 It is extremely important to note that you do not need to review all literature, only the stuff you think that is relevant. At the end of the literature review, specify the particular hypothesis you have in mind. 12

13. 13 An ideal literature review It should be short and include only papers that are directly relevant to your paper, not every single paper written on the topic. In this section you should explain in more detail how your paper is different from what was done before, and what exactly your contribution is. For example: Is it new data? New/better methods? Do you have a new model/theory? Are you answering a new question? Are you able to overcome some problem that was prevalent in previous literature? Specific comparisons are useful. For example: “this paper improves on work by X (19..), Y(19..) and Z(19..) because we do K”

14. 14 What to review? ◦ Existing theoretical frameworks ◦ Existing empirical evidence ◦ Existing empirical approaches ◦ Relationships between them The most frequent mistakes made in LR ◦ Does not clearly relate literature to your own study ◦ Relies on secondary sources rather than on primary ◦ Uncritically accept rather than critically examining ◦ Empirical approaches are ignored ◦ Stories behind empirical evidence are ignored ◦ …

15. Literature review Only refer to the papers that have something to say about the impact of x on y Do not provide definitions of obvious terms everybody knows about Optimally analyze the mechanisms: Why does x have an impact on y Are there any opposing/ complementary forces? 15

16. Literature review (example) Delis analyzes the impact of unemployment (x) on prices (y) in Babylonia. Bad paradigm: “Delis (2013) uses data for Babylonia over the period xxxx to yyyy and suggests that unemployment has a negative effect on inflation.” Good paradigm: “Delis (2013), using a sample from Babylonia over the period xxxx to yyyy, shows that the there is a positive impact of unemployment on inflation. This effect is distributed through the lower spending ability of citizens, which lowers aggregate demand and decreases prices. View this section as your theory: You expect an outcome, Why? 16

17. 17 Hypothesis At the end of the literature survey, you should be able to identify a key hypothesis pertaining your x and y variables and also the underlying rationale for the particular relationship (positive, negative or both, i.e., ambiguous) and the underlying intuition E.g., corporate governance reforms may boost firm value because it resolves the conflict of interest between the controlling and minority owners. However this may not necessarily hold: there may be cases when introduction of corporate governance reform may introduce conflict of interest between the controlling owners and the government, e.g., in Russia. 17

18. 18 Literature Review for Hypothesis Development Hypothesis: ‘…tentative guesses, good hunches…intended to be given a direct experimental test when possible’ (Rogers, 1996) ‘…a conjectural statement of the relation between two or more variables’ (Kerlinger, 1956) ‘…a formal statement that presents the expected relationship between an independent and dependent variable’ (Creswell, 1994) A research question is essentially a hypothesis asked in the form of a question. 18

19. 19 Hypothesis development is important. It ◦ Determines a casual relationship ◦ Determines the empirical materials you have to have ◦ Determines the empirical approaches you have to apply ◦ Determines the contribution you make ◦ … Do we have to have explicitly defined hypotheses? Where are hypotheses from? ◦ Literature review ◦ Theoretical modelling 19

20. 20 An example of literature review Story: The objective is to investigate how banking market structure affects small business cash holding decisions. Question: Which one is better for small firms? Competitive market vs. concentrated market Potential: There lacks of empirical studies on the effects of market on business liquidity. 20

21. 21 Is a competitive market good for small firms? Yes, because ◦ It improves the availability of external finance (Beck et al., 2004); ◦ ‘Hard’ information, e.g. collateral and rating, is always required in a concentrated market (Stein, 2002); ◦ It is cheaper to borrow in a competitive market (Holod and Peek, 2007; Degryse and Ongena, 2005). Under the ‘efficiency’ hypothesis’, small firms should hold less cash in a competitive market than in a concentrated market. 21

22. 22 Competition is NO good because ◦ Asymmetric information exists (Stiglitz and Weiss, 1981; Fama, 1985; Diamond, 1991…) ◦ In a concentrated market, banks have stronger motivations to collect ‘private’ information (Dell’Ariccia and Marquez, 2004; Berger et al., 2004). ◦ ‘Private’ information has higher value in a concentrated market because of the free-rider issue in a competitive market (Han et al., 2009). Under a ‘relationship lending’ hypothesis, small firms would hold more cash in a competitive market than in a concentrated market. 22

23. 23 Theoretical modelling for hypothesis development Han et al., 2009, JBFA Story and question: how loan conditions are affected by signals in a world with asymmetric information? Existing literature: Sorting by observed risk ( SBOR ) or sorting by private information ( SBPI ) Contribution: both observed risk and private information may work together – sorting by signalling and self- selection ( SBSS ) 23

24. 24 The model  Setting-up  Signalling Where 0.5≤α ≤1 where

25. 25  Bank ’ s offer  Self-selection mechanism  Individual Rationality (IR) condition  Incentive Compatibility (IC) condition

26. 26 Bank’s indifference curve in r and C High-type Low-type Collateral Interest rate Choice of Contracts