Presentation on theme: "Transparency and International Portfolio Investment (Journal of Finance 2005) R. Gaston Gelos and Shang-Jin Wei."— Presentation transcript:
Transparency and International Portfolio Investment (Journal of Finance 2005) R. Gaston Gelos and Shang-Jin Wei
“ A lack of transparency was a feature of the buildup to the Mexican crises of 1994-95 and of the emerging market crises of 1997-98.” International Monetary Fund (2001)
Objectives of Paper (1)To document empirically the effect of transparency at a country level on international investment (2)To examine the effect of transparency on herding among international funds
Literature: Transparency and investment Diamond and Verrechia (1991) Less information asymmetry -> more investment at the corporate level ********************************************************* If ( a) Non-transparency = information asymmetry (b) International and corporate investment are analogous Then, m ore transparency at a country level -> more investment by international funds
Transparency and Herding 1) Non-transparency -> Herding u Bikhchandani, Hirshleifer,& Welch, 1992 u Banerjee, 1992 u Devenow and Welch, 1996 u Bikhchandani and Sharma, 2000 2) Non-Transparency, no Herding Scharfstein and Stein, 1990 u Chevalier and Ellison, 1999
Empirical studies on herding Developed countries u Lakonishok, Shleifer and Vishny, 1992 u Grinblatt, Titman and Wermers, 1995 u Wermer 1999 Emerging Markets u Choe, Kho, Stulz, 1999 u Kim and Wei, 2002a and 2002b u Borensztein and Gelos, forthcoming u Kaminsky, Lyons, and Schmukler, 2002 No studies have linked herding behavior with country characteristics
Objectives and Unique Features of the Paper 1)To document empirically the effect of transparency at a country level on international investment 2)To examine the effect of transparency on herding among international funds Features of the paper a) A unique data on country allocation of over 300 international funds over 1996–2000 b) Separate measures of government transparency and corporate transparency
Data on Emerging Market Funds Source: eMergingPortfolio.com (formerly Emerging Market Funds Research, Inc.) Includes: country asset allocation of hundreds of equity funds - a few have a global investment strategy - most have a focus on emerging markets Period covered : January 1996–December 2000 - monthly basis Beginning of the sample : 382 funds with assets totaling US $117 billion End of 2000 : 639 funds
Make-up of data Funds domiciled in mostly advanced economies and offshore banking centers Example: (February 1999) 9 international funds 53 global emerging market funds 125 Asian regional funds 52 regional Latin American funds 39 funds focusing on other geographic areas Closer look: Argentina: 6.5 % of local market cap Hungary and Korea: 4.5 %
Investment Flows flows to individual countries are inferred from the asset position data under the assumption that the funds hold that country’s index and that flows occur halfway through the period. Investment flow from fund i to country c in month t : Flow cit = [Assets i,c,t – Assets i,c,t-1 (1+ Index return ct )] /(1+ Index return ct ) 1/2
Measuring (Lack of) Transparency Government Opacity A) MACRODATA OPACITY – (data release 1996, 97 & 00) B) MACROPOLICY OPACITY -- predictability Corporate Opacity level of financial disclosure and availability of information about companies (Global Com. Report) Composite Opacity PriceWaterhouseCoopers’ survey of banks, firms, equity analysts, and in-country staff in 2000 in five areas
Transparency and Country Asset Allocation where w i,j,t denotes the weight of country i in fund j’s portfolio at the end of period t and α j is a fund fixed effect
Table 2. Opacity and Investment by Global Funds
Additional Controls: Part 1 z1. Liquidity of market z2. Protection of minority shareholders y(PSSV, 98; PRG, 2000) z3. Closely held ownership z4. Level of economic development z5. Other economic risks z6. Other political risks
Table 3. Opacity and Investment by Global Funds: Adding Control Variables
Additional controls: Part 2 z7. Past returns z8. Crisis periods z9. Exchange rate regimes (de facto classification a la Reinhart and Rogoff 2002) z10. Alternative measure of corporate opacity (LLSV quality of accounting system)
Table 4. Opacity and Investment by Global Funds: Adding Exchange Rate Regimes
Going back to the basics zTo ensure the results don’t come from a few outliers zA) Classify all countries to those whose opacity is below the median vs. those whose opacity is above the median zB) Compare the actual investment with the prediction of the ICAPM
Table 6. Horserace Between Transparency Measures (additional control variables exist but not reported)
Transparency and Herding zHerding concept: The pattern that investors mimic each other’s behavior, sometimes ignoring private information that is socially useful. zMeasure: The extent to which investors’ trading patterns are correlated, or the extent to which they all buy or sell a common sub-set of assets.
Transparency and Investors’ Herding Behavior Herding Measure: HM it = |p it -E[p it ]| - E|p it -E[p it ]| where p it is the proportion of all funds active in country i in month t that are buyers: and E[p it ] is its expected value. By taking the absolute value, the first term in equation (3) captures imbalances in both directions, buying or selling
total number of net buyers across all countries divided by the total number of active funds in that month: Absolute value of the first expression is not centered around zero, the expected value E|p it -E[p it ]| needs to be subtracted. Under the null hypothesis of no herding, expected value is calculated assuming that the number of buyers follows a binomial distribution Expected fraction of buyers E[p it ]
Flows During Crises Where f ijt is the flow of fund j into country i at time t, A ijt-1 are the assets of fund j in country i at time t-1, η j is a fund fixed effect and ν i a country random effect. A negative value of α indicates that capital outflows are greater in less transparent countries.
Table 11. Asian and Russian Crises: Fund Flows and Opacity
Table 12. Asian and Russian Crises: Fund flows and Opacity, including Control Variables
Table 13. Asian and Russian Crises: Horserace Among Opacity indices
Conclusions z1. Strong evidence that international funds invest less in opaque countries. z2. Moderate evidence that herding intensity by funds is related to opacity in countries. z3. Moderate evidence that capital exodus during a crisis is bigger in less transparent countries.
“What is your opinion on the connection between transparency and investment? zAfrica:Investment? zEastern Europe:Opinion? zRussia:Transparency? zPresident Clinton:Is?