Fixed-Smoothing Asymptotics in a Two-Step Generalized Method of Moments Framework

The main aim of the paper is to empirically measure the impact of terrorism and other (institutional, economic, natural) factors on the foreign direct investments (FDI inward stock) of transition economies in the world. Methodology includes the application of two-step system GMM (Generalized Method of Moments) estimator of dynamic panel analysis. The research covers a group of 16 countries from 2000 to 2016. Research findings confirm that terrorist incidents, economic and institutional variables affect FDI inward stock of transition economies. It can be concluded that institutional variables (Government effectiveness, control of corruption) recorded the most significant impact on the inward FDI stock in the transition economies of the global economy. From the results, we can see the international competitiveness of transition countries about the influence of the variables of terrorism and other relevant model variables on foreign direct investments (FDI).

Continuum-Generalized Method of Moments (C-GMM) covers the Generalized Method of Moments (GMM) shortfall which is not as efficient as Maximum Likelihood estimator by using the continuum set of moment conditions in a GMM framework. However, this computation would take a very long time since optimizing regularization parameter. Unfortunately, these calculations are processed sequentially whereas in fact all modern computers are now supported by hierarchical memory systems and hyperthreading technology, which allowing for parallel computing. This paper aims to speed up the calculation process of C-GMM by designing a parallel algorithm for C-GMM on the multi-thread systems. First, parallel regions are detected for the original C-GMM algorithm. There are two parallel regions in the original C-GMM algorithm, that are contributed significantly to the reduction of computational time: the outer-loop and the inner-loop. Furthermore, this parallel algorithm will be implemented with standard shared-memory application programming interface, i.e. Open Multi-Processing (OpenMP). The experiment shows that the outer-loop parallelization is the best strategy for any number of observations.

PurposeThe purpose of this paper is twofold: first, to investigate the relationship between ownership concentration and firm performance and, second, to determine the moderating role of investor protection quality on the ownership concentration-performance relationship from a dynamic perspective.Design/methodology/approachThe study is based on secondary financial data of 236 Indian manufacturing firms obtained from CAPITALINE database, pertaining to a period of five years. This study uses ordinary least squares, fixed effects and two-step generalized method of moments (GMM) techniques to arrive at results.FindingsResults of the study confirm the inverted U-shaped relationship between ownership concentration and firm performance and a significant positive effect of investor protection quality on firm performance. With regard to moderating role of investor protection quality on ownership concentration–performance relationship, results show that investor protection quality would significantly moderate the ownership concentration–performance relationship.Originality/valueThe study is a pioneer in proving that an inverted U-shaped relationship exists between ownership concentration and firm performance in an emerging market in general and India in particular. This study extends the corporate governance literature by examining ownership concentration–performance relationship in a dynamic perspective and in an unexplored market.

The influence of market sentiments on the bankruptcy risk propensity of firms has been extensively explored in the literature. However, less attention has been paid to whether the corporate life cycle plays any role in this nexus. The purpose of this research is to unveil how the corporate bankruptcy risk propensity responds to market sentiments, and whether this sentiments–risk relationship varies over different stages of the corporate life cycle. Using a sample of 301 Pakistani non-financial listed firms for 2005–2014, we employ two-step generalized method of moments (GMM) regression estimation to address the issue of endogeneity. Empirical evidence reveals that managers tend to escalate a firm’s bankruptcy risk during high market sentiments. Further analysis indicates that during the period of positive market sentiments, introduction stage firms prefer to assume the highest bankruptcy risk followed by decline and growth firms, while mature firms continue to be risk-averse. This research contributes to the corporate finance literature by suggesting that managerial risk-taking is influenced by market sentiments and corporate managers show a different attitude towards risk at different stages of the corporate life cycle. Therefore, to ensure enterprise sustainability, capital market regulators should have a robust risk management framework in place to discipline the excessive risk-taking by firm managers over different stages of the corporate life cycle. Moreover, investors and creditors shall take into consideration the respective life cycle stage of the firm to minimize the risk exposure of their investment portfolios. Our results are robust to alternate econometric specifications and alternate variable specifications.

This research investigates the hidden characteristics of real-earnings management (REM) as a competitive strategy, challenging the mainstream view of it as an opportunistic practice. This work employs a dynamic panel data two-step generalised method of moments (GMM). The sample comprises companies listed on the Indonesia Stock Exchange from 2009 to 2024. This paper presents crucial theoretical implications for real-earnings management as an efficient practice that challenges the mainstream view of opportunistic financial reporting. Firstly, the persistence of real-earnings management practice is evidence of a violation of the temporary or abnormal practice. Secondly, the interrelationships among the components form an internal supply chain. Third, the effects of real-earnings management on income sustainability are evident. Finally, the positive influence of the macroeconomic situation on the abnormal operating cash flow arrangement affirms the non-opportunistic nature of the practice. However, this paper also admits that ex post analysis is limited in its ability to characterise current REM. This paper provides a framework for future research to incorporate the still-unexplored potential determinants of each REM criterion, and the urgent need to complement these measurements with a regression residual model is clear.

The role of government integrity in the impact of environmental taxes on comparative advantage in environmental goods and climate change in emerging markets

The majority of Indian firms have a promoter and family-owner-dominated ownership structure; therefore, the agency problem prevailing in such a setting would be the conflict of interest between the majority and minority shareholders. This motivated us to examine the adverse effect of not investing at the level implied by the firms’ characteristics, termed investment inefficiency, on the ex-ante measure of expected returns, the implied cost of capital. Our study finds a positive relationship between investment inefficiency and expected returns in the baseline results estimated using pooled ordinary least squares (OLS) and the robustness results estimated using a two-step generalized method of moments (GMM). The sample of the study consists of listed firms in India from 2016 to 2021. JEL Codes: G11, G31

PurposeThe Sustainable Development Goal (SDG) 16 outlines sustainability as associated with peace, good governance and justice. The perception of international tourists about security measures and risks is a key factor affecting destination choices, tourist flow and overall satisfaction. Thus, we investigate the impact of armed forces personnel, prices, economic stability, financial development and infrastructure on tourism.Design/methodology/approachThis research used data from 130 countries from 1995 to 2019, which were divided into four income groups. This study employs a two-step generalized method of moments (GMM) technique and a novel tourism index comprising five relevant indicators of tourism.FindingsA 1% increase in armed forces personnel expands tourism in all income groups – 0.369% High Income Countries (HICs), 0.348% Upper Middle Income Countries (UMICs), 0.247% Lower Middle Income Countries (LMICs) and 0.139% Low Income Countries (LICs). The size of the tourism-safety coefficient decreases from high to low-income groups. The impact of inflation is significantly negative in all panels, excluding LICs. The reduction in tourism was 0.033% in HICs, 0.049% in UMICs and 0.029% in LMICs for a 1% increase in prices. The increase in the global tourism index is more in LICs (0.055%), followed by LMICs (0.024%), UMICs (0.009%) and HICs (0.004%) for a 1% expansion in the gross domestic product (GDP)/capita growth. However, the magnitude of the growth-led tourism impact is greater in developing countries. A positive impact of foreign direct investment (FDI) inflow was found in all panels like 0.016% in HICs, 0.050% in UMICs and 0.119% in LMICs for a 1% increase in FDI inflow. The rise in the global tourism index is 0.097% (HICs), 0.124% (UMICs) and 0.310% (LMICs) for a 1% rise in the financial development index. The increase in the global tourism index is 0.487% (HICs), 0.420% (UMICs) and 0.136% (LICs) for a 1% rise in the infrastructure index.Research limitations/implicationsEmpirical analysis infers important policy implications such as (a) establishment of a peaceful environment via recruitment of security personnel, use of safe city cameras, modern technology and law enforcement; (b) provision of basic facilities to tourists like sanitation, drinking water, electricity, accommodation, quality food, fuel and communication network and (c) price stability through different tools of monetary and fiscal policy.Originality/valueFirst, it explains the effect of security personnel on a comprehensive index of tourism instead of a single variable of tourism. Second, it captures the importance of economic stability (i.e., economic growth, financial development and FDI inflow) in the tourism–peace nexus.

PurposeThe purpose of this paper is to examine the relationship between working capital management (WCM) and firm profitability for a sample of 437 non-financial Indian companies.Design/methodology/approachThe study is based on secondary financial data obtained from Capitaline database, pertaining to a period of ten years. This study employs two-step generalized method of moments (GMM) techniques to arrive at results.FindingsThe results of the study confirm the inverted U-shape relationship between WCM and firm profitability. In addition, the authors also found that the firms should complete its CCC on an average by 63 days.Originality/valueUnlike prior studies that found a linear relationship between WCM and firm profitability. This study provides newer evidence for an inverted U-shaped relation between investment in working capital and firm profitability in India. In addition, this study uses GMM to control the potential problems of endogeneity.

The dynamic effect of corporate financial hedging on firm value: The case of Indian MNCs

Chapter 13 - Capital Regulation, Efficiency, and Risk Taking: A Spatial Panel Analysis of US Banks

PurposeThis study aims to examine the effects of institutions on private investment (PI) using panel data analysis, where the sample countries consist of 100 countries around the world and the time period is covering from 2007 to 2016. The system generalized method of moments (GMM) estimator, introduced by Arellano and Bond (1991) and further developed by Blundell and Bond (1998) is used to analyze the data sets.Design/methodology/approachThis study uses the panel data approach to estimate the empirical model due to the panel nature of the data. In particular, due to the presence of lagged dependent variables and the ability to capture individual country-specific effects, the system GMM estimator, introduced by Arellano and Bond (1991) and further developed by Blundell and Bond (1998), is adopted to analyze the roles of institutions in PI. The system GMM is developed specifically to solve the problems of weak instruments and persistency (Blundell and Bond, 1998). Jointly, they suggest to adopt additional moment conditions where lagged difference of the dependent variable is orthogonal to the level form of the disturbances. The system GMM estimator is able to combine the moment conditions for the different models, as well as the level model, thereby (is capable of) generate consistent and efficient parameters. Due to the dynamic nature of the data, this study uses one-step and two-step system GMM to investigate the roles of institutions in PI.FindingsThe empirical results based on the two-step system GMM demonstrate that the quality of institutions plays an important role in stimulating PI. The finding is reinforced by the analysis of the institutional sub-components’ effects on PI.Originality/valueThis study is unique as its measurement of institutions is multi-dimensional (including law and order, rules and regulation, government stability, bureaucratic quality, control of corruption, socio-economic condition, etc.), and hence are more comprehensive. Second, it is different than the previous studies as its sample of countries includes both democracies and non-democracies, as well as both developed and non-developed economies in which policy implications are widely acceptable. Third, this study contributes to the policymakers especially those in the debt-ridden economies where governments are budget-tightening (limited capacity for public investment), as to which practical direction should be focused on so as to attract PI and eventually sustainable growth can take place.

Assessing GMM Estimates of the Federal Reserve Reaction Function

Finite-sample corrected inference for two-step GMM in time series

The dynamic trade-off model emphasizes that random shocks and other constraints may force firms to deviate from their optimum debt ratio. In addition, firms must incur adjustment costs for them to revert to their target level due to market frictions. However, prior literature in Saudi does not consider the effect of adjustment costs in determining how board governance mechanisms influence capital structure. By exploiting the generalized method of moments framework (GMM), this study analyzed the balanced panel of 100 Saudi non-financial listed firms covering the period from 2010 to 2019. The research found that Saudi firms observed a dynamic adjustment to attain their target leverage at 30.46% annually. Besides that, findings from the present study equally indicate strongly that board size and CEO tenure are negatively associated with leverage. There is also strong evidence that Saudi firms with a substantial number of independent directors pursue a more levered capital structure. Gender diversity appears insignificant in predicting the firms’ target debt ratio. Consequently, the Saudi board of directors and firms’ managers should consider the adjustment costs and other market frictions when designing the optimum debt-equity ratio.