141 10 3494 https://omeka.ibu.edu.ba/files/original/85a0f353462b765161afba55debe7cc6.pdf 2cd8f30d032dc1f7f0eb95796db2a07c PDF Text Text 1. International Symposium on Sustainable Development, June 9-10 2009, Sarajevo Impact of Macroeconomic Factors on Stock Market: Evidence from Istanbul Stock Exchange Kadir KARAGÖZ Inonu University – FEAS, Malatya – TURKEY kkaragoz@inonu.edu.tr Suzan ERGÜN Inonu University – FEAS, Malatya - TURKEY sergun@inonu.edu.tr Murat KARAGÖZ Inonu University – FEAS, Malatya - TURKEY mkaragoz@inonu.edu.tr Abstract: In contemporary economic world, financial markets in general and stock markets in particular play a vital role in financing the investments and to extent credit to the entrepreneurs. This fact has opened a new avenue of research into the relationship between stock market and macroeconomic structure that is development/reaction/impact of stock market across macroeconomic fluctuations. This paper analyzes long-term equilibrium relationship between macroeconomic factors and Istanbul Stock Exchange (ISE) Index. The macroeconomic factors are represented by a set of variables which include interest rate, inflation (consumer price index), industrial production index, money supply (M1), growth (GDP) and real exchange rate. We employ Johansen co-integration method to explore the above mentioned relationship among these variables in a span of time between 1998:1 and 2008:12. Keywords: Macroeconomic factors, Stock market, Istanbul Stock Exchange, VECM. 1. Introduction The issue of finance has gained considerable importance around the world in last few decades. So the finance and banking sectors have developed rapidly and finance literature as well, both in theoretically and empirically. Causal relationship between economic growth and financial development, and impact of macroeconomic as well as catastrophic shocks on financial institutions has been investigated for the samples of developed and developing countries. Stock markets are one of the most important components of modern economic structure. Macroeconomic condition may have significant impacts on both prices of stocks and volume traded. With this respect, understanding the interaction between stock prices and macroeconomic variables gains importance. By knowing these relationship, investors can earn profits by exploiting past information of the variables. In addition, they may be used as indicator to formulate current economic stabilization policies. Therefore, the issue of whether stock prices and macroeconomic variables are related or not have received considerable attention. Many works have been done in past few decades to examine the relationship between stock prices and financial futures as well as the currency exchange (Hen et al., 2006). However, there is no empirical or theoretical consensus on the issue of whether these variables are related and the direction of causation if they are related or, at least, different studies which have been conducted for different markets may give diverse findings. In the finance literature, asset pricing models have been developed from 1960s, such as Capital Assets Pricing Model (CAPM), multi-factors models and Arbitrage Pricing Model (APM), in order to explain the movements in prices of financial assets and hence to determine the effective factors on their returns. Factor models and APM has been developed as alternatives to CAPM which considers only one risk factor (β). Despite the its some theoretical deficiencies, it is accepted that APM is superior to CAPM due to its more realistic assumptions and taking into consideration more variables those may affect asset returns. The APT literature suggests that macroeconomic variables may proxy for pervasive risk factors. This paper aims to shed some light on interrelation between macroeconomic variables and stock market performance through time series methods, i.e. co-integration and error correction model. The paper proceeds as follows. The next section provides an overview of the stock market development in Turkey. The 122 �1. International Symposium on Sustainable Development, June 9-10 2009, Sarajevo subsequent section presents the variables and data used, and empirical evidence. The final section contains concluding remarks 2. Stock Market Development in Turkey Financial markets in Turkey were strictly regulated until a financial liberalization program which was introduced at the beginning of 1980. The program included the liberalization of the foreign exchange regime, deregulation of interest rates, and establishment of financial markets including the Istanbul Stock Exchange (ISE) which was established in 1986. ISE has gained large momentum since then and its development became highly representative of an emerging market with rapid growth in terms of market capitalization, trade volume and number of listed companies as well as high volatility in returns (Odabaşı et al. 2004, 510). In 1986, there were 80 listed companies in ISE and annual volume of trade was only $ 13 million. Up to 2000 the number of listed companies steadily increased as well as the trade volume, at a great pace. Due to the consecutive financial crises on November 2000 and February 2001, general performance of the ISE halted (Tab. 1a, below). Table 1a. Development of Istanbul Stock Exchange (in numbers). Volume of Trade Number of companies Total market capitalization (Million $) Year (End of Year) (Total) (Daily) (Million $) 1986 80 13 0.05 938 1990 110 5,854 23.70 18,737 1995 205 52,357 208.59 20,782 2000 315 181,934 739.57 69,507 2001 310 80,400 323.78 47,189 2002 288 70,756 281.22 33,773 2003 285 100,165 406.89 68,624 2004 297 147,755 593.03 97,354 2005 304 201,763 794.33 161,630 Source: Odabaşı et al. (2004), TSI (2006). As is seen in Tab. 1b, ISE has realized important and rapid improvements since its commencement. Table 1b. Development of Istanbul Stock Exchange (main events). 1980 – 1990 – Launch of liberalization program, deregulation in financial structure – Inauguration of Istanbul Stock Exchange – Commencement of stock trading – Commencement of daily calculation of ISE Indices which had so far been calculated on a weekly basis – Establishment of Settlement and Custody Center 1991 – 1995 – Commencement of the calculation of Financials and Industrial Indices in addition to the ISE Composite Index – Initiation of the Repo/Reverse Repo Market – Extending daily trading hours to 4 hours and the commencement of stock trading in two sessions – Launch of the Regional Markets and the Wholesale Market – Establishment of the Federation of Euro-Asian Stock Exchanges with 12 members, which ISE was one of the founder members 1996 – 2000 – Launch of the Watch List Companies Market – ISE International Bonds and Bills Market started its operations – ISE became the project leader of Southeast European Cooperation Initiative 2001 – – ISE Derivatives market was introduced – ISE Corporate Governance Index was launched – The ISE International Market and its submarkets were closed Source: www.ise.org 123 �1. International Symposium on Sustainable Development, June 9-10 2009, Sarajevo Ample of empirical studies are implemented on various aspects of ISE hitherto. Odabaşı et al. (2004) has analyzed the evolution of prices on the ISE for the period of 1988-1999 and concluded that, as an emerging market, the ISE has shown some differences from other emerging markets. In the sample period, they found that expected returns, as approximated by sample means, have not declined and no significant change in volatility is observed during the decade. The move towards normality also seems to be more pronounced than in other countries. Odabaşı et al. attribute this to the unique characteristics of the ISE. 60000 50000 40000 30000 20000 10000 0 98 99 00 01 02 03 04 05 06 07 08 ISE-100 Figure 1. Development of ISE-100 index over the time. Müslümov et al. (2003) tested weak-form market efficiency hypothesis in ISE using time series covering 19902002 years. Their findings reveal that the stock returns of the individual stocks that constitute 65% of the sample space do not show random walk behavior whilst remaining part exhibit significant random walk behavior. The findings for the ISE-100 national index provide support the evolving market efficiency hypothesis. They also found that there was no discrimination between stocks those whose returns do follow and do not follow random walk behavior. In another study, Taş and Dursunoğlu (2005) also tested the weak form efficiency of ISE using Dickey-Fuller and runs test procedures, and found out that ISE was not efficient over the period from 1995:1 to 2004:1. Turkey has experienced severe financial crises in last two decades. In 1994 due to heavy appreciation of the currency current account a balance presented a significant deficit which created financial distress in the economy. In the year 2001, the financial crisis stemmed from the banking sector and high domestic repayment of the treasury. Political instability also contributed to deepening the crisis. Doğan and Salman (2004) examined the behavior of ISE during these financial crises using dummy variables. They found that dummies for year 2001, all for 5, 15 and 30 days before the shock, observed to be highly significant where dummies for year 1994 are not. This result implies that the 1994 crisis was unexpected. When they further examined the coefficient of year 2001 dummy, realized that coefficient gets smaller over longer horizons. Tüzüntürk (2009) aimed to find out empirically whether there was any insider trading on ISE in 2003 using the panel data method. His estimations show that the average trade size sign is negative and the trade frequency sign is positive, the result which can be interpreted as an evidence of insider trading occurred at the ISE in 2003. 3. Review of Related Literature A significant literature exist which investigates the relationship between stock market and a range of macroeconomic and financial variables, across a number of different markets and over a range of different time horizons. Existing financial economic theory provides various models to test this relationship. Most of the research has focused on the developed countries (see for example, Poon and Taylor, 1991; Mukherjee and Naka, 1995; Gjerde and Saettem, 1999; Hondroyiannis and Papapetrou, 2001; Chen, 2008; Bordo et al., 2008). 124 �1. International Symposium on Sustainable Development, June 9-10 2009, Sarajevo In last decade, researchers have begun to turn their attention to examining similar relationship in developing countries. Chen et al. (1986) is one of the pioneering papers to empirically investigate the impact of macroeconomic variables on stock price returns. They concluded that interest rates, inflation rates, bound yield spreads, and industrial production level have risk that is priced in the stock market. Campbell and Ammer (1991) focus on the relationship between changes in expectations of future stock dividends, short-term real interest rate, inflation, and excess returns on stock and bonds. Using a log-linear asset pricing framework and a vector autoregression (VAR) model approach, they found that in monthly post-war U.S. data, excess returns are to be driven by news about future excess stock returns, while excess 10-year bond returns are driven largely by news about future inflation. Real interest rate changes seem have little impact on either stock or 10-year bond returns, although they do affect the short-term nominal interest rate and slope of the term structure. Hamilton and Lin (1996) investigate the joint time series behavior of monthly stock returns and growth in industrial production and find that stock returns are well characterized by year-long episodes of high volatility separated by longer quite periods. Real output growth, on the other hand, is subject to abrupt change in the mean associated with economic recessions. They employ a bivariate model in which these two changes are driven by related unobserved variables, and conclude that economic recessions are the primary factor that derives fluctuations in the volatility of stock returns. Sadorsky (2003) uses monthly data from July 1986 to April 1999 to investigate the macroeconomic determinants of the US technology stock price volatility. Te empirical results indicate that the conditional volatilities of industrial production, oil prices, the federal funds rate, the default premium, the consumer price index, and the foreign exchange rate each have a significant effect on the conditional volatility of technology stock prices. Industrial production and the consumer price index each have the largest direct impact. Gunasekarage et al. (2004) estimates an error correction model with monthly data to study the relationship between macroeconomic variables and stock market equity values, in Sri Lanka. In their analysis VECM provide some support for the argument that the lagged values of macroeconomic variables such as the consumer price index, the money supply and the treasury bill rate have a significant influence on the stock market. It was found that treasury bill rate play most important roles in affecting stock returns compared to other variables. Maysami et al. (2004) investigate the relationship between macroeconomic variable s and sector stock market returns, using Johansen’ VECM, in the case of Singapore. They conclude that the Singapore stock market and the SES All-S Equities Property Index formed significant relationships with all macroeconomic variables identified, while the SES All-S Equities Finance Index and SES All-S Equities Hotel Index form significant relationship only with selected variables. Nishat and Shaheen (2005) analyze long-term equilibrium relationships between a group of macroeconomic variables and the Karachi Stock Exchange Index. The macroeconomic variables are represented by the industrial production index, the consumer price index, money supply (M1), and the value of an investment earning the money market size. By employing a VECM, they examined the relationship during 1973:1 to 2004:4, and they found that these five variables are co-integrated and two long-term equilibrium relationships exist among them. Results of the analysis indicate that industrial production is the largest positive determinant of stock prices, while inflation is the largest negative determinant. They also found that while macroeconomic variables Granger-caused stock movements, the reverse causality was observed in case of industrial production and stock prices. Padhan (2007) aims at to find out the causal linkages between stock market and economic activity in India. To this end he applies recently developed Granger non-causality tests by Toda-Yamamota, Dolado and Lutkephol (TYDL model). The notable finding of the paper is that both the stock price and economic activity are integrated of order one and the Johansen-Juselius co-integration tests confirm the existence of one long-run relationship. The TYDL model suggests that there is bi-directional causality between stock price and economic activity during the post-liberalization period. Kyereboah-Coleman and Agyire-Tettey (2008) aims at examining how macroeconomic indicators affect the performance of stock markets by using the Ghana Stock Exchange as a case study. Using the quarterly time series data covering the period 1991-2005, they ascertain both short- and long-run relationships via co-integration and the error correction model techniques. Findings of the study reveal that lending rates from deposit money banks have an adverse effect on stock market performance and particularly serve as major hindrance to business growth in Ghana. Again, while inflation rate is found to have a negative effect on stock market performance, the results indicate that it takes time for this to take effect due to the presence of a lag period; and that investors benefit from exchange-rate losses as a result of domestic currency depreciation. Osei (2006) also examined the case of Ghana Stock Exchange somewhat different variable set and concluded that in terms of Efficient Market Hypothesis (EMH), the Ghana stock market is informationally inefficient particularly with respect to inflation, treasury bill rate and world gold price. 125 �1. International Symposium on Sustainable Development, June 9-10 2009, Sarajevo Al-Sharkas (2004) researches the impact of selected macroeconomic variables on Amman Stock Exchange. The variables are the real economic activity, money supply, inflation, and interest rate. His empirical findings reveal that the stock prices and macroeconomic variables have a long-term equilibrium relationship. 3. Empirical Analysis and Results 3.1. Variables, Data and Methodology Engle and Granger (1987) and Johansen (1988) proposed to determine the existence of long-run equilibrium among selected variables through co-integration analysis, paving the way for a preferred approach to examining the economic variables-stock market relationship. A set of time series variables are co-integrated if they are integrated of the same order and a linear combination of them is stationary. Such linear combinations would then point to the existence of a long-term relationship between the variables. An advantage of cointegration analysis is that through building an error correction model (ECM), the dynamic co-movement among variables and the adjustment process toward long-term equilibrium can be examined (Maysami et al. 2004; 49). Variables: We selected six macroeconomic variables based on their hypothesized effect on either the cash flows or the required rate of return (or both) in the basic valuation model. These variables are: stock index (represented by monthly average of daily closing value of ISE-100 index; ISE), exchange rate (represented by real TL/ 19 foreign currencies basket; RDK), inflation (represented by consumer price index; CPI), money supply (represented by M1; MS), real economic activity (represented by industrial production index; IPI), interest rate (represented by three month term weighted deposit interest rate; INT). Inflation: A negative relation between inflation and stock prices has been hypothesized. Although real stock returns and inflation have been negatively correlated historically, the correlation is widely seen as an anomaly resulting from the simultaneous impacts of real economic activity on inflation and stock returns (Fama, 1981; Fama and Schwert, 1977). This negative relationship between stock returns and inflation is called as the proxy hypothesis. The proxy hypothesis refers to the fact that the negative relationship between stock returns and inflation is not direct; but rather inflation negatively impacts the real economic activity, which in turn directly impacts equity returns. In other words, real economic activity is the channel by which inflation influences stock returns in most countries. The investigation of the proxy hypothesis for emerging market economies may be especially crucial in light of high past inflation rates that most economies of that region have experienced (Adrangi et al., 1999). Exchange rate: The interaction between the exchange rate and stock prices is uncertain. When the Turkish Lira (TL) depreciates against the foreign currencies, Turkish products become cheaper in the external markets. As a result, if the demand for these goods is elastic, the volume of Turkish exports should increase, causing higher TL-denominated cash flows to Turkish companies. The opposite should hold when the TL appreciates against the foreign currencies. On the other hand, as an alternative investment instrument for Turkish investors, any depreciation in TL against foreign currencies may cause a withdrawal in stock markets. Money supply: The effect of money supply on stock prices is an empirical question. Since the rate of inflation is positively related to money growth rates, an increase in the money supply may lead to an increase in the discount rate. The negative effects on stock prices, however, may be countered by the economic stimulus provided by money growth. Such stimulus, often referred to as a corporate earnings effect, would likely result in increased future cash flows and stock prices (Mukherjee and Naka, 1995). Real economic activity: The level of real economic activity (proxied in this study by the Industrial Production Index), through its effect on expected future cash flows, will likely affect stock prices in the same direction. Fama (1981), Chen, Roll, and Ross (1986), and Geske and Roll (1983), among others, suggest a positive relation between stock returns and real activity. Interest rate: Finally, changes in interest rate are expected to affect the discount rate in the same direction via their effect on the nominal risk-free rate. Therefore, we hypothesize a negative relation between these rates and stock prices. Required data have been compiled from Central Bank of the Republic of Turkey on-line database (EDDS). The sample period consist of 132 monthly observations for each variable, from January 1998 to December 2008. All variables have been expressed in their logarithms. Prior to the analysis all variables have been seasonally adjusted through the ratio to moving average method. 3.2. Examination for Stationarity Properties of the Variables As is well known, most of the macroeconomic variables have a nonstationary nature and hence a regression relation set on them will not be far away from spuriousness. So, to ensure that the variables are stationary, and that shocks are only has temporary impact and revert to their long-run mean level, it is a standard exercise to apply an unit root test procedure. 126 �1. International Symposium on Sustainable Development, June 9-10 2009, Sarajevo The Augmented Dickey – Fuller (ADF) and the Phillips – Perron (PP) test are employed to determine the presence of a unit root in the series. Results of ADF and PP unit root tests show all six of the variables are nonstationary in their levels but become stationary after one time differenced (Tab. 3). ISE IPI INF INT MS RER 1 c+t 2c 1c 3c 2c 1c Table 3. Results of ADF and PP unit root tests. ADF Type P τ(ρ) int. + trend 0.4741 − 2.2203 int. 0.7554 − 0.9906 int. 0.8986 − 0.4348 int. 0.3524 − 1.8554 int. 0.7556 − 1.6777 int. 0.4731 − 1.6128 ∆ISE ∆IPI ∆INF ∆INT ∆MS ∆RER 0c 1c 0 c+t 2 c+t 1 c+t 1c int. int. int. + trend int. + trend int. + trend int. lags (k) − 8.2771 − 12.1605 − 6.6728 − 6.1104 − 11.2684 − 8.3180 0.0000 0.0000 0.0000 0.0000 0.0000 0.0000 PP z(tα) p − 1.7656 − 1.6948 − 1.3362 − 1.9825 − 1.7119 − 1.7382 0.3961 0.4315 0.8744 0.2943 0.7407 0.4097 − 8.3247 − 19.4055 − 67822 − 13.4762 − 15.2475 − 7.1460 0.0000 0.0000 0.0000 0.0000 0.0000 0.0000 3.3. Research for Co-integrating Relationships In this part of the paper, co-integration relationships among variables are investigated through Johansen VAR framework. Co-integration refers to the possibility that non-stationary variables may have a linear combination that is stationary. Such a linear combination, the co-integrating vector, implies that there is a long-run equilibrium relationship among variables, i.e., variables will not wander off apart from one another over extended periods of time. Therefore, co-integration between the stock index and the macroeconomic variables implies a long-run relationship between these variables. To analyze the long-term equilibrium relationships between stock market index and macroeconomic variables, co-integration analysis is more appropriately compared to the VAR model because the co-integration method can explore the dynamic comovements among the variables (Mukherjee and Naka, 1995). In order to use the Johansen test, a VAR representation of a set of n variables (n ≥ 2) which are under consideration that are I(1), needs to be turned into a vector error correction model (VECM) of the form, ∆y t = Π y t − k + Γ1 ∆y t −1 + Γ2 ∆y t − 2 + K + Γk −1 ∆y t −( k −1) + u t where Π= (∑ β )− I k i =1 i n and Γ= (∑ i j =1 ) β j − In This VAR contains n variables in first differenced form and k – 1 lags of the dependent variables (differences), each with a Γ coefficient matrix attached to it. The test procedure centers around the examination of Π matrix. Π can be interpreted as a long-run coefficient matrix, since in equilibrium, all the ∆yt-i will be zero, and setting the error terms (ut) to their expected value of zero will leave Πyt-k = 0. The test for co-integration between the ys is calculated by looking at the rank of the Π matrix via its eigenvalues (denoted λi). The rank of a matrix is equal to the number of its characteristic roots (eigenvalues) that are different form zero. There are two test statistics for co-integration under the Johansen approach, which formulated as λtrace (r ) = −T ∑i =r +1 ln(1 − λˆi ) n and λmax (r , r + 1) = −T ln(1 − λˆr +1 ) where r is the number of co-integrating vectors under the null hypothesis and λi is the estimated value for the ith ordered eigenvalue from the Π matrix. λtrace is a joint test where the null is that the number of cointegrating vectors is less than or equal to r against an unspecified or general alternative that are more than r. λmax conducts separate tests on each eigenvalue, and has as its null hypothesis that the number of co-integrating vectors is r against an alternative of r + 1 (Brooks, 2008; 350,351). 127 �1. International Symposium on Sustainable Development, June 9-10 2009, Sarajevo The results of the tests which conducted based on both the λtrace and λmax are reported below. Examining the trace test, the test statistic exceeds the critical value (of 95) up to the second row which shows that there is at least two co-integration equations among the variables. The λmax test, shown in the second panel, confirms that there are at least two co-integrating relationships. 128 observations are included after adjustments and quadratic deterministic trend is assumed in co-integration relations. Table 4. Results of Johansen co-integration test. Unrestricted Cointegration Rank Test (Trace) Hypothesized No. of CE(s) Eigenvalue r=0* r≤1* r≤2 r≤3 r≤4 r≤5 0.862516 0.332972 0.134915 0.049591 0.034704 0.003285 Trace Statistic 0.05 Critical Value Prob. 343.6881 83.75142 30.70646 11.72096 5.057933 0.431005 83.93712 60.06141 40.17493 24.27596 12.32090 4.129906 0.0000 0.0002 0.3186 0.7281 0.5595 0.5749 Unrestricted Cointegration Rank Test (Maximum Eigenvalue) Hypothesized Max-Eigen 0.05 No. of CE(s) Eigenvalue Statistic Critical Value Prob.** r=0* r≤1* r≤2 r≤3 r≤4 r≤5 0.862516 0.332972 0.134915 0.049591 0.034704 0.003285 259.9367 53.04496 18.98550 6.663026 4.626927 0.431005 36.63019 30.43961 24.15921 17.79730 11.22480 4.129906 0.0001 0.0000 0.2152 0.8424 0.5314 0.5749 * denotes rejection of the hypothesis at the 0.05 level Normalized co-integrating coefficients for the ISE index (INDX) are (standard errors in parentheses): ISE INF INT IPI MS RER -5.436 1.000 - 3.604 2.638 - 1.019 2.126 (1.176) (0.345) (1.732) (0.981) (1.507) These values represent long-term elasticity at the same time, due to logarithmic transformation of the series. So, the long-run equilibrium relationship can be expressed as: ISEt = t – statistic 3.604 INFt – 2.638 INTt (3.065) (– 7.646) + 1.019 IPIt (0.588) – 2.126 MSt (– 2.167) + 5.436 RERt (3.607) It appears from the results that all variables have a statistically meaningful impact on the stock index except the real economic activity (IPI). The empirical results suggest that the Turkish stock market prices do not rationally signal changes in the macroeconomic activity in terms of industrial production index. It also seems that inflation has a positive effect on stock prices. This result is not in line with the theoretical expectation and general finding of related literature and can be attributed to distinctive feature of the Turkish stock market which Ceylan and Başçı (2005) pointed out. The results show that interest rates (INT) have a negative relationship with stock prices. Money supply has also same effect on stock prices, indicating that any extending in money supply did not cause to an increase in stock prices through its demand enhancing effect. This result coincides with the finding of Akkum and Vuran (2003). The relationship between exchange rate and stock prices is expected to be positive in the literature. We have found evidences of this positive relationship, that is, real exchange rates affect the ISE index positively which means that a depreciation of the currency leads to higher real stock market returns. 128 �1. International Symposium on Sustainable Development, June 9-10 2009, Sarajevo 4. Conclusion Stock prices are generally believed to be determined by some fundamental macroeconomic factors. Several studies have attempted to investigate the interrelationship between economic factors and stock returns in different countries. Two methods which have been used for this purpose were capital asset pricing model and arbitrage pricing model. The development of co-integration analysis provided another tool as to examine the relationship between the macroeconomic variables and stock returns. In this paper, we aim to shed some light on the relationship between a group of macroeconomic variables and stock market performance. To this end we have employed the index of Istanbul Stock Exchange (ISE) and macroeconomic aggregates such as CPI, interest rate, industrial production index, money supply, and real effective exchange rates. Using the Johansen VAR method, the empirical evidence we found shows that these macroeconomic variables are co-integrated i.e. there exist a long-run relationship between these variables. Further, the results reveal that all variables have a statistically meaningful impact on the stock index except the real economic activity (IPI). It seems that consumer prices (INF) has a positive effect on stock prices. The results show that interest rates (INT) have a negative relationship with stock prices. Money supply (MS) has also same effect on stock prices. Real exchange rates also affect the ISE index positively which means that a depreciation of the currency leads to higher real stock market returns. References Adrangi, B., Chatrath, A. and Raffiee, K. (1999). Inflation, output, and stock prices: Evidence from two major emerging markets. Journal of Economics and Finance, 23 (3), 266-278. Akkum, T. and Vuran, B. (2003). Analysis od macroeconomic factors by arbitrage pricing model which affect stock returns in Turkish capital market. Malî Çözüm Dergisi, 65, 65-90. Al-Sharkas, A. (2004). The dynamic relationship between macroeconomic factors and the Jordanian stock market. International Journal of Applied Econometrics and Quantitative Studies, 1 (1), 97-114. Bordo, M. D., Dueker, M. J. and D.C. Wheelock, (2009). Inflation, monetary policy and stock market conditions: quantitative evidence from a hybrid latent-variable VAR, Federal Bank of St. Louis, Working Paper No. 2008-012B, available at http://ideas.repec.org/p/fip/fedlwp/2007-020.html Brooks, C. (2008). Introductory Econometrics for Finance, 2nd ed., Cambridge University Press, NY. Campbell, J.Y. and Ammer, J. (1991). What moves the stock and bond markets? A variance decomposition for long-term asset returns, NBER Working Paper No. 3760, Cambridge, MA. Ceylan, N. B. and Başçı, S. (2005). Effects of crises on the relationship between macroeconomic variables and the stock market: a case for Turkey, International Conference on Business, Management and Economics, Yasar University, 16-19 June, 2005. Chen, N. F., Roll, R. and Ross, R. A. (1986). Economic forces and the stock market. Journal of Business, 59, 383 – 403. Chen, S. S. (2008). Predicting the bear stock market: macroeconomic variables as leading indicators, National Taiwan University, March 2008, Available at SSRN: http://ssrn.com/abstract=1106100 Doğan, D. and Salman, F. (2004). Structural breaks and stock market behavior: Evidence from Istanbul Stock Exchange. unpublished paper, http://fsalman.googlepages. com/structuralbreaks.pdf Engle, R. F. and Granger, C. W. J. (1987). Co-integration and error correction: representation, estimation and testing. Econometrica, 55, 251-276. Fama, E. F. (1981). Stock returns, real activity, inflation, and money. American Economic Review, 71 (4), 545-565. Fama, E. F. and Schwert, G.W. (1977). Asset returns and inflation. Journal of Financial Economics, 5, 115-146. Geske, R. and Roll, R. (1983). The fiscal and monetary linkage between stock returns and inflation. Journal of Finance, 38, 7-33. Gjerde, O. and Saettem,F. (1999). Causal relations among stock returns and macroeconomic variables in a small, open economy, Journal of International Financial Markets Institutions and Money, 9, 61-74. Gunasekarage, A., Pisedtasalasai, A. and Power, D.M. (2004). Macroeconomic influence on the stock market: evidence from an emerging market in South Asia. Journal of Emerging Market Finance, 3 (3), 285-304. Hamilton, J.D., and Lin, G. (1996). Stock market volatility and the business cycle, Journal of Applied Econometrics, 11 (5), 573-593. 129 �1. International Symposium on Sustainable Development, June 9-10 2009, Sarajevo Hen, C.L., Arzad, Z., and Hasan, H. (2006). Causal relationship between stock price and macroeconomic variables in Malaysia. Proceedings of the 2nd IMT-GT Regional Conference on Mathematics, Statistics and Applications, Universiti Sains Malaysia, Penang, June 13-15, 2006. Johansen, S. (1988). Statistical analysis of co-integrating vectors. Journal of Economic Dynamics and Control, 12, 231-254. Kyereboah-Coleman, A. and Agyire-Tettey, K. F. (2008). Impact of macroeconomic indicators on stock market performance: the case of the Ghana Stock Exchange, Journal of Risk Finance, 9 (4), 365-378. Maysami, R.C., Howe, L.C. and Hamzah, M.A. (2004). Relationship between macroeconomic variables and stock market indices: co-integration evidence from stock exchange of Singapore’s ALL-S Sector Indices, Jurnal Pengurusan, 24, 47-77. Mukherjee, T. K. and Naka, A. (1995). Dynamic relations between macroeconomic variables and the Japanese stock market: an application of a vector error correction model, Journal of Financial Research, 18 (2), 223-237. Muradoğlu, G., Metin, K. and Argae, R. (2001). Is there a long-run relationship between stock returns and monetary variables: evidence from an emerging market, Applied Financial Economics, 7 (6), 641-649. Müslümov, A., Aras, G., and Kurtuluş, B. (2003). Evolving market efficiency in Istanbul Stock Exchange. Istanbul Technical University Selected Articles, 271 – 291. Nishat, M. and Shaheen, R. (2005). Macroeconomic Factors and Pakistani Equity Market, The 20th Annual General Meeting and Conference, 10-12 January, 2005, Pakistan Society of Development Economics. Odabaşı, A., Aksu, C. and Akgiray, V. (2004). The statistical evolution of prices on the Istanbul Stock Exchange. The European Journal of Finance, 10, 510 – 525. Osei, K. A. (2006). Macroeconomic factors and the Ghana stock market. African Finance Journal, 8 (1), 26-38. Padhan, P.C., (2007). The nexus between stock market amd economic activity: an empirical analysis for India, International Journal of Social Economics, 34 (10), 741-753. Poon, S., and Taylor, S.J. (1991). Macroeconomic factors and the U.K. stock market, Journal of Business Finance and Accounting, 18, 619-636. Sadorsky, P. (2003). The macroeconomic determinants of technology stock price volatility. Review of Financial Economics, 12, 191 – 205. Taş, O. and Dursunoğlu, S. (2005). Testing random walk hypothesis for Istanbul Stock Exchange. 15th International Conference of International Trade and Finance Association, Đstanbul. TSI – Turkish Statistical Institute (2006), Statistical Indicators, 1923 – 2005, Ankara. Tüzüntürk, S. (2009), “The relationship between volatility and volume on the Istanbul Stock Exchange”, International Journal of Sustainable Economy, 1 (3), 289 – 304. 130 � Dublin Core The Dublin Core metadata element set is common to all Omeka records, including items, files, and collections. For more information see, http://dublincore.org/documents/dces/. Extent The size or duration of the resource. 141 Title A name given to the resource Impact of Macroeconomic Factors on Stock Market: Evidence from Istanbul Stock Exchange Author Author KARAGÖZ, Kadir ERGÜN, Suzan KARAGÖZ, Murat Abstract A summary of the resource. In contemporary economic world, financial markets in general and stock markets in particular play a vital role in financing the investments and to extent credit to the entrepreneurs. This fact has opened a new avenue of research into the relationship between stock market and macroeconomic structure that is development/reaction/impact of stock market across macroeconomic fluctuations. This paper analyzes long-term equilibrium relationship between macroeconomic factors and Istanbul Stock Exchange (ISE) Index. The macroeconomic factors are represented by a set of variables which include interest rate, inflation (consumer price index), industrial production index, money supply (M1), growth (GDP) and real exchange rate. We employ Johansen co-integration method to explore the above mentioned relationship among these variables in a span of time between 1998:1 and 2008:12. Date A point or period of time associated with an event in the lifecycle of the resource 2009-06 Keywords Keywords. Conference or Workshop Item PeerReviewed HB Economic Theory https://omeka.ibu.edu.ba/files/original/e97aff6321d29b9b07a725a2252d1cb1.pdf 53339481f6d666d021bfd6f00526bb46 PDF Text Text Journal of Economic and Social Studies Birol Çetin Gökyay, O. Ş. (1988). “Risale-i Mimariyye-Mimar Mehmet Ağa Eserleri”, T.T.K. yayınları, İsmail Hakkı Uzunçarşılı’ya Armağan Sayısı, Ankara. Güçer, L. (1987). “16. ve 18. Asırlarda Osmanlı İmparatorluğu’nun Ticaret Politikası”, Türk İktisat Tarihi Yıllığı, İ.Ü. İktisat Fakültesi Türk İktisat ve İctimaiyat Tarihi Araştırmaları Merkezi , S.1, İstanbul. Güran, T. (1997). “Osmanlı devleti’nin İlk İstatistik Yıllığı 1897”, Tarihi İstatistikler Dizisi C.5, D.İ.E Yayınları Ankara. Süleyman, U. (2009). Ibn-i Haldun “Mukaddime” Cilt II. Dergah Yayınları İstanbul. Hülagü, M. M. (1994). “Topal Osman Nuri Paşa Hayatı ve Faaliyetleri 1840-1898”, Ankara Üniversitesi Osmanlı Tarihi Araştırma ve Uygulama Merkezi Dergisi OTAM. Ankara. İlgürel, M. (1991)., “Vakanüvislerin Taltiflerine Dair”, İ.Ü. Edebiyat Fakültesi Tarih Araştırma Merkezi Prof. Dr. Bekir Kütükoğlu’na Armağan Sayısı, İstanbul. İnalcık, H. (1993). “15. Asır Sanayi ve Ticaret Tarihine Dair Vesikalar, Osmanlı İmparatorluğu içinde”, Eren Yayıncılık, İstanbul. Karal, E. Z. (1999). “Selim III’ün Hatt-ı Hümayunları”, T.T.K. Basımevi, Ankara. Kazgan, H. (1995). “Tarih Boyunca İstanbul Borsası”, İ.M.K.B. yayınları, İstanbul. Koraltürk, M. (1999). “Osmanlı Devleti’nde Şirketleşme, İlk Anonim Şirket ve Borsanın Kuruluşu”, Osmanlı, C.3, Yeni Türkiye Yayınları, Ankara. Mustafa, N. P. (1987). “Netayic ül-Vukuat Kurumları ve Örgütleriyle Osmanlı Tarihi”, (sadeleştiren Neşet Çağatay), Türk Tarih Kurumu Basımevi, Ankara, 1987. Öztürk, M. (1987). “Tokat’ta Fiyatlar 1772-1823, Türk Kültüründe ve Tarihinde Tokat Sempozyumu 1986”,Tokat Valiliği Şeyhülislam İbn Kemal Araştırma Merkezi, Ankara . Impact of Military Expenditure and Economic Growth on External Debt: New Evidence from a Panel of SAARC Countries Khalid Zaman, Department of Management Sciences, COMSATS Institute of Information Technology / Abbottabad, Pakistan khalidzaman@ciit.net.pk Iqtidar Ali Shah Department of Management Sciences, COMSATS Institute of Information Technology / Abbottabad, Pakistan iqtidar@ciit.net.pk Muhammad Mushtaq Khan Department of Humanities, COMSATS Institute of Information Technology / Abbottabad, Pakistan Mehboob Ahmad Department of Management Sciences, Bahria University / Islamabad, Pakistan Pakalın. M. Z. (2004). “Osmanlı Tarih Deyimleri ve Terimleri Sözlüğü”, MEB yayınları, İstanbul. Pamukciyan, K. (1958) “İstanbul Ansiklopedisi”, Tan Matbaası, İstanbul. Pamuk, Ş. (1994). “Osmanlı Ekonomisinde Bağımlılık ve Büyüme (1820-1913)”,Tarih Vakfı Yurt Yayınları.İstanbul. Ricaut, (1686). “Türklerin Siyasi Düsturları”, Tercüman 1001 temel eser serisi, (This book was written by Ricaut, Secretary of English Embassy, and its originally published in Amsterdam in 1686). Şekerci, O. (1981). “İslam Şirketler Hukuku Emek Sermaye Şirketi”, Marifet Yayınları, İstanbul. Tabakoğlu, A. (1994), “Türk İktisat Tarihi”, Dergah Yay. İstanbul. Tezel, Y. S. (1986). “Cumhuriyet Döneminin İktisadi Tarihi”, Yurt Yayınları, Ankara. Toprak, Z. (1997). “İktisat Tarihi, Osmanlı Devleti 1600-1908( Türkiye Tarihi C.3)”, Cem Yayınevi, İstanbul. Yücel A. S. www.cumhuriyet.edu.tr/akademik/fak_ilahiyat/makaleler/fusul.htm, (23.4.2003). A A This paper examines the impact of military expenditure and economic growth on external debt for a panel of five selected AA countries including Bangladesh, India, epal, Pakistan and rilanka, over the period of 1988-2008. sing Pedroni’s (2004) test for panel cointegration, it was found that there is a long-run relationship between external debt, economic growth and military expenditure. The study finds that external debt is elastic with respect to military expenditure in the long run and inelastic in the short run. In the long run, 1% increase in military expenditure increase external debt between 1.18 % and 1.24%, while 1% increases in economic growth reduce external debt between 0.64% and 0.79%, by employed and M estimator respectively. In the short run, 1% increase in military expenditure increases external debt by 0.15%, while 1% increase in economic growth reduces external debt by 0.47 %. KEYWO D xternal ebt, conomic Growth, Military xpenditure, Panel ointegration, AA ountries. A I LE HI O Y ubmitted: 2 April 2012 esubmitted: 28. ebruary2013 Accepted: 25. March 2013 JEL odes: 1, 4, 5 and H5 130 Journal of Economic and Social Studies Volume 3 Number 2 Fall 2013 131 �Impact of Military Expenditure and Economic Growth on External Debt: New Evidence from a Panel of SAARC Countries Khalid Zaman / Iqtidar Ali Shah / Muhammad Mushtaq Khan / Mehboob Ahmad Introduction and Literature Review The relationship between military expenditure and economic growth has been examined extensively in the literature. However, the effect of military expenditure on external debt has received less attention. In countries with large military expenditure, the role of military spending in contributing to external debt is important because of the potential adverse economic effects of external debt as excessive foreign debt accumulation can cause deterioration in the terms of trade, an overvaluation of the domestic currency and slower economic growth. Benoit (1973, 1978) in his pioneered study examined the relationship between military expenditure and economic growth in 44 less developed countries and found that there is a positive correlation between military expenditure and economic growth. Dakurah et al. (2000) studied 62 LDCs and found 13 countries showing unidirectional causality from military expenditure to growth; 10 countries from economic growth to military expenditure; 7 countries suggest bidirectional causality and the rest 18 countries displaying no meaningful relationship. Yildirim, Sezgin & Ocal (2005) examined the effect of military expenditure on economic growth for 12 Middle Eastern countries and Turkey using cross-sectional and dynamic panel data estimation techniques from 1989 to 1999 and found that military expenditure enhances economic growth in the Middle Eastern countries and Turkey as a whole. So for as the South Asian Regional Cooperation Council (SAARC) countries are concerned, a study was carried out by Hassan et al. (2003) to show the relationship between military expenditure and economic growth. They examined the impact of the military expenditure on economic growth and FDI covering five out of seven SAARC nations using panel data over the 1980-1999 periods. Interestingly the result suggests positive relationship between military expenditure and economic growth, and thus supporting the view that military expenditure can bring positive impact on growth. Other studies which have also found a positive relationship between military expenditure and economic growth include Mueller and Atesoglu (1993); MacNair et al. (1995), Chlestos and Kollias (1995), Sezgin (1999b, 2000) and Yildirim and Sezgin (2002). countries citing that defense expenditure takes resources away from productive investments and fails to mobilize and create additional savings. Other empirical studies that found significant adverse effect of defense spending on the economy include studies by Deger and Smith (1983), Deger and Sen (1983) and Faini et al. (1984), Antonakis (1997), Heo (1998), Linden (1992), Dunne and Mohammed (1995), Sezgin (1999a) and Dunne, Nikolaidou & Smith (2002). Aizenman and Glick (2006) studied the long-run impact of military expenditure on growth and suggested that military expenditure induced by external threats should increase growth, while military expenditure induced by rent seeking and corruption should reduce growth. Abu- Bader et al. (2003) found that military expenditure had a negative effect on economic growth in Egypt, Israel and Syria over the period 1972 to 2001 within a Granger causality framework. DeRouen (2000) reaches the same findings in a single country study of Israel. Smyth and Narayan (2009) have examined the relationship between external debt and military expenditure nexus in the six Middle Eastern countries and found that external debt is elastic with respect to military expenditure in the long-run while inelastic in the short-run. In this paper an analysis has been carried out to find a panel cointegration between external debt and military expenditure along with economic growth in SAARC countries, using secondary data from 1988 to 2008. This paper does not include all dimensions and factors of the external debt and military expenditure problem from an econometric perspective, the small panel (T=19, N=5) is only sufficient to accommodate two explanatory variables without a substantial loss in power. The objectives of this paper are: 1. To empirically investigate the relationship between external debt, economic growth and military expenditure using a panel unit root and panel cointegration framework in selected SAARC countries. 2. To empirically investigate, whether there is a long-run or short-term relationship between the external debt, economic growth, and military expenditure. Equally military spending may have a negative effect on economic growth through reducing the availability of public funds for spending in the supposedly more productive civilian sector and creating inflationary pressures. Deger (1986) found negative relationship between military expenditure and growth in the less developed This paper is organized as: after introduction and literature review above, a brief overview of external debt, economic growth and military expenditure of the selected SAARC countries is given followed by data source and methodological framework. Next results and discussion has been carried out and conclusion of the study is given at the end. 132 Volume 3 Journal of Economic and Social Studies Number 2 Fall 2013 133 �Impact of Military Expenditure and Economic Growth on External Debt: New Evidence from a Panel of SAARC Countries Khalid Zaman / Iqtidar Ali Shah / Muhammad Mushtaq Khan / Mehboob Ahmad Overview of External Debt, Economic Growth, and Military Expenditure in the Selected SAARC Countries External Debt: Debt service liability as percentage of export of goods and services has decreased considerably in all the Member States of SAARC countries. In Bangladesh and India debt service liability has been reduced from 25.8 percent and 31.9 percent in 1990 to 3.7 percent and 7.7 percent in 2006 respectively. Pakistan and Sri Lanka have witnessed decline from 22.9 percent and 13.8 percent in 1990 to 8.6 percent and 12.7 percent in 2006 respectively. Figure 1 below shows the trend. Figure 1. External Debt in SAARC Region (1988-2008) EDBAN Economic Growth: SAARC member states have maintained GDP growth rate in 2006 at 8.9%. GDP growth in South Asia is significantly higher compared with other developing regions. However, trickle down effects of growth would take time to effect the population of the region. Real GDP growth rate has increased in almost all the countries. Country-wise analysis shows that Bangladesh’s real GDP growth at 6.2 percent in 1990 increased to 6.6 percent in 2006. Bhutan during the period 1990-2006 witnessed sharp increase from 5.6 percent to 7.8 percent. India maintained its growth momentum from 5.6 percent in 1990 to 9.6 percent in 2006. Nepal economy has witnessed low and high GDP growth from 2.3 percent in 2005 to 2.8 percent in 2006. Pakistan was maintaining its growth but has witnessed a low growth rate of 5.8 percent in 2006. Sri Lankan economy has showed an increase 7.7 percent in 2006 (see, SHRDC, 2008). Figure 2 below shows the trend. EDIND 320 Figure 2. Economic Growth of SAARC Countries (1988-2008) 150000 140000 280 130000 240 120000 200 GDPBAN 110000 160 120 80 40 0 1000000 100000 22000 900000 90000 20000 80000 18000 70000 16000 60000 88 90 92 94 96 98 00 02 04 06 GDPIND 24000 88 08 90 92 94 96 98 00 02 04 06 08 800000 700000 600000 500000 14000 400000 12000 300000 10000 EDPAK EDNEP 4000 40000 3500 36000 2500 2000 92 94 96 98 00 02 04 06 08 98 00 02 04 06 08 88 90 92 94 96 98 00 02 04 06 08 02 04 06 08 GDPPAK 160000 9000 28000 8000 24000 6000 120000 7000 80000 5000 4000 40000 3000 0 88 12000 90 96 200000 2000 88 94 GDPNEP 16000 1000 92 10000 20000 1500 90 11000 32000 3000 200000 88 88 90 92 94 96 98 00 02 04 06 90 92 94 96 98 00 02 04 06 08 02 04 06 08 88 90 92 94 96 98 00 08 GDPSRI 40000 EDSRI 35000 16000 30000 14000 25000 12000 20000 15000 10000 10000 8000 5000 88 6000 90 92 94 96 98 00 4000 Source: Human Development Report 2007-08; UNDP, 2008. 2000 88 90 92 94 96 98 00 02 04 06 08 Sources: Asian Development Bank, 2008; World Banks, 2008. 134 Journal of Economic and Social Studies Volume 3 Number 2 Fall 2013 135 �Impact of Military Expenditure and Economic Growth on External Debt: New Evidence from a Panel of SAARC Countries Khalid Zaman / Iqtidar Ali Shah / Muhammad Mushtaq Khan / Mehboob Ahmad Military Expenditure: An increasing trend has been noticed in military expenditures over the time period. Pakistan and India are in the competitive zone, therefore, both have increased their military expenditure. In terms of military expenditure as percentage of GDP, Sri Lanka spent 4.1%, Pakistan 3.5%, India and Nepal 2.5%, Bangladesh 1.5%. Figure 3 shows individual country assessment of military expenditures over a time period. Figure 3. Military Expenditure in SAARC Region (1988-2008) MEIND MEBAN The data set for five SAARC countries is collected from International Financial Statistics (IFS, 2008), World Bank (2008), SHRDC report, (SHRDC, 2008); Stockholm International Peace Research Institute (SIPRI, 2008) and Economic Survey of Pakistan (2008-09). The dependent and independent variables used in this study are listed in Table 1. External Debt is used as a dependent variable for the study. Independent variables are Economic Growth (GDP) and Military Expenditures (ME). Table 1. Variables used for the External debt-Military expenditure Model 26000 70000 Data Source and Methodological Framework 24000 60000 22000 Variables 50000 20000 40000 16000 Dependent Variable: External Debt Independent Variable: Economic Growth Military Expenditure 18000 14000 30000 12000 10000 20000 88 90 92 94 96 98 00 02 04 06 88 08 90 92 94 MENEP 96 98 00 02 04 06 08 4800 140 4400 120 4000 100 80 3600 60 20 ED GDP ME Negative Positive ln(ED) = f ln(GDP, ME) 3200 40 Expected Sign Panel Econometric Model: There is lack of panel cointegration to explain the relationship between external debt and military expenditure in the SAARC context. This paper uses panel cointegration analysis to test this relationship in Bangladesh, India, Nepal, Pakistan and Sri Lanka during 1988-2008. The model used to test the relationship between external debt and military expenditure is as follows: MEPAK 160 Symbol 2800 88 90 92 94 96 98 00 02 04 06 08 88 90 92 94 96 98 00 02 04 06 08 The general representation of the equation mentioned above is as follows: Log (Yt ) = C + β 1t log( X 1t ) + β 2t log( X 2t ) + ε t MESRI 1000 (1) 900 Where: 800 700 Yt 600 C 500 400 βt 300 Xt 200 100 88 90 92 94 96 98 00 02 04 06 T i 08 εt β1 β2 Source: UNDP, 2008 and Human Development Report 2007-08. 136 Journal of Economic and Social Studies Volume 3 = = = = = = = = = dependent variable; intercept; slope of the independent variables; independent variables (GDP and ME) 1, 2…21 periods; 1, 2…5 countries; error term; coefficient of economic growth; coefficient of military expenditure; Number 2 Fall 2013 137 �Impact of Military Expenditure and Economic Growth on External Debt: New Evidence from a Panel of SAARC Countries Khalid Zaman / Iqtidar Ali Shah / Muhammad Mushtaq Khan / Mehboob Ahmad In the above model, the sign of β1 is expected to be negative as it is argued that SAARC countries might have a capacity to repay external debt. Similarly, β 2 is hypothesized to be positive as it is argued that large military expenditure can result in large external debt. This paper uses a panel cointegration method to examine the long-run relationship between external debt and military expenditure in the selected SAARC countries. Thus, three different panel unit roots tests [(i.e. Levin-Lin- Chu (LLC) test, ImPesaran-Shin (IPS) test and Maddala-Wu (MW) test)] have been used in this study. Panel Unit oot ests: Panel unit root tests could be considered as an extension of the univariate unit root test. The LLC test is based on the pooled panel data as follows (Levin & Lin, 1992); Dy it = ρy it −1 + α 0 + σ t + σ i + θ t + ε it (2) Where ρ , α 0 , σ are coefficients, α i is individual specific effect, θ t is time specific effect. According to Levin & Lin (1992), the LLC test could be conducted by the following steps. In step1, subtract the cross-section average from data; Levin & Lin (1992) suggest the following normalization to control the Heteroskedasticity in error. σˆ 2 ei = eˆi ,t ~ e= σˆ ei v~i ,t −1 v~i ,t −1 = σˆ ei In the next step, the LLC test statistic could be obtained from the following regression; ~ ei ,t = ρv~i ,t −1 + ε~i ,t ~ = 0 is given by The t-statistic for testing o tδ = δˆ STD (δˆ ) Where N y = 1 / N ∑ y it (3) N i =1 In step 2, an ADF test is applied to each individual series and normalizes the disturbance. The ADF model could be expressed as; Pi Dy it = ρ i y it −1 + ∑ δ ij Dy i ,t − j + α i + ε it j =1 eˆi ,t = ρ iVˆi ,t −1 + ε it δˆ = T ∑ ∑ vˆ i =1 t = 2 + p (4) eˆ t −1 it N ∑ ∑ vˆ i =1 t = 2 + p Maddala and Wu (1999) argued that this is equivalent to perform two auxiliary regressions of Dy it and y i ,t −1 on the remaining variable n equation (3). Let the residuals from these two regression be eˆi ,t and Vˆi ,t −1 respectively. The, regress eˆi ,t on Vˆi ,t −1 . 138 1 (eˆi ,t − ρˆ i − Vˆi ,t −1 ) 2 ∑ T − Pi − 1 t = p + 2 2 it −1 Next, the paper also employs the IPS test which is based on the mean value of individual ADF statistics or t-bar (Im, Pesaran and Shin, 2003). The IPS test provides separate estimation for each i section, allowing different specifications of the parametric values, the residual variance and the lag lengths. Their model is given by: n DYi ,t = α i + ρ i Yi ,t −1 + ∑ φ k DYi ,t − k + δ i t + u it (6) k =1 (5) Journal of Economic and Social Studies Volume 3 Number 2 Fall 2013 139 �Impact of Military Expenditure and Economic Growth on External Debt: New Evidence from a Panel of SAARC Countries Khalid Zaman / Iqtidar Ali Shah / Muhammad Mushtaq Khan / Mehboob Ahmad The null hypothesis and the alternative hypothesis are formulated as: s NT is the contempoWhere eˆi ,t represents the residuals from the ADF estimation, ~ raneous panel variance estimator, and ŝ i is the standard contemporaneous variance of the residuals from the ADF regression. The asymptotic distribution of panel and group mean statistics can be expressed in: H 0 : ρi = 0 H A : ρi < 0 K N ,T − µ N for at least one i Thus, the null hypothesis of this test is that all series are non-stationary process under the alternative that fraction of the series in the panel are assumed to be stationary. IPS also suggested a group mean Lagrange multiplier test for testing panel unit roots. Maddala & Wu (1999) attempted to improve to the same degree the drawbacks of all previous tests by proposing a model that could also be estimates with unbalanced panels. Basically, Maddala and Wu are in line with the assumptions that a heterogeneous alternative is preferable, but they disagree with the use of the average ADF statistics by arguing that it is not the most effective way of evaluating stationary. Panel ointegration ests: Finally, this paper employs Pedroni’s (1999, 2004) panel-co integration method in order to examine the long-run relationship between external debt and military expenditure. If the independent and dependent variables are co-integrated or have a long-run relationship, the residual eit will be integrated of order zero, denoted I(0). Pedroni used two types of panel cointegration tests. The first is the “panel statistic” that is equivalent to a unit root statistic against the homogenous alternative; the second is the “group mean statistic” that is analogous to the panel unit root test against the heterogeneous alternative. Pedroni (2004) argued that the “panel statistic” can be constructed by taking the ratio of the sum of the numerators and the sum of the denominators of the analogous conventional time series statistics. The “group mean statistic” can be constructed by first computing the ratio corresponding to the conventional time series statistics, and then computing the standardized sum of the entire ratio over the N dimension of the panel. This paper uses two panel co-integration tests as suggested by Pedroni (1999, 2004), namely the “panel ADF statistic” and “group mean ADF statistic”. The two versions of the ADF statistics could be defined as: Panel (7) Group Mean (8) 140 Journal of Economic and Social Studies ⇒ N (0,1) v Where K N ,T is the appropriately standardized form for each of statistics, µ m ADF regression is the mean term and v is the variance adjustment term. Pedroni provides Monte Carlo estimates of µ and v (Pedroni, 1999). These statistics are based on the estimated residuals from the following regression: Where ξ it = η i ξ i ( t −1) + µ it are the estimated residuals from the panel regression. The null hypothesis tested is whether η i unity is. The finite sample distribution for the test statistics have been tabulated in Pedroni (2004) using Monte Carlo simulations, if the test statistic exceeds the critical values in Pedroni (2004), the null hypothesis of no cointegration is rejected, implying the variables are cointegrated. Panel Long-run elationship: If long-run relationship among the variables were found then the long-run and short-run coefficients of economic growth and military expenditure on external debt will be estimated. To estimate the long-run effect of economic growth and military expenditure, the panel FMOLS, proposed by Pedroni (2000) and DOLS developed by Stock and Watson (1993) have been used. Results and Discussion To test whether each of ED, GDP and ME contain a panel unit root, the panel unit root tests proposed by Levin, Lin and Chu Test (2002), Im, Pesaran & Shin (2003) and Maddala & Wu (1999) have been applied. The results are reported in Table 2 where they are divided into three panels. Panel A consists of results from the Levin, Lin and Chu (2002); panel B consists of the results from the Im, Pesaran & Shin (2003) test and panel C consists of results from the Maddala and Wu (1999) test. For each of these tests, *, ** and *** indicates the statistical significance at 1 Volume 3 Number 2 Fall 2013 141 �Impact of Military Expenditure and Economic Growth on External Debt: New Evidence from a Panel of SAARC Countries Khalid Zaman / Iqtidar Ali Shah / Muhammad Mushtaq Khan / Mehboob Ahmad percent; 5 percent and 10 percent respectively. The results from all three tests, with or without linear trends; suggest that ED, GDP and ME contain a panel unit root as mentioned in Table 2. Table 3. Panel Long-run Elasticity Panel Methods ln(ME) 1.182 (8.337)* 1.243 (3.210)* DOLS Table 2. Panel Unit Root Test FMOLS Levels Individual Effects Panel A: Levin, Lin, Chu Test (2002) Variables (in logs) ln(ED) 2.807 ln(GDP) 2.448 ln(ME) -0.432 Panel B: Im, Pesaran, Shin Test (2003) Variables (in logs) ln(ED) 3.664 ln(GDP) -0.846 ln(ME) -0.071 Panel C: Maddala and Wu (1999) Variables (in logs) ln(ED) 0.015 ln(GDP) 12.285 ln(ME) 10.234 First Differences Individual Effects Individual Effects and Linear Trends Individual Effects and Linear Trends 2.118 1.725 0.022 -1.400*** -1.621** -4.294* -1.580*** -1.812** -3.827* 2.712 0.356 0.352 -1.815** -3.586* -3.256* -2.495* -3.201* -2.665* 1.985 8.253 6.213 20.712** 38.361* 29.665* 21.321** 32.170* 27.424* * indicates significance at the 0.01 level. ** Indicates significance at the 0.05 level. To examine whether there is a long run relationship between the three variables for the panel of five selected SAARC countries, Pedroni’s (2004) panel Phillips-Perron (1988) type rho-statistic and group Phillips-Perron (1988) type rho-statistic have been employed. The panel rho-statistic and group rho-statistic are 2.2 and 2.7, respectively and the associated one-sided p-value is less than 0.01. Thus, both test statistics suggest that there is panel cointegration between ED, GDP and ME at the 1% level of significance. After finding that a long-run relationship exists between ED, GDP and ME, the long-run effect of GDP and ME on ED have been estimated using the panel FMOLS estimator suggested by Pedroni (2000) and panel DOLS estimator proposed by Kao & Chiang (2000). The results are reported in Table 3. 142 Journal of Economic and Social Studies ln(GDP) -0.638 (-11.783)* -0.796 (-3.974)* Note: Figures in parenthesis are t-statistics. * denote statistical significance at the 1 % level. For the DOLS estimator, 1% increase in economic growth decreases external debt by 0.638 %, while a 1% increase in military expenditure increases external debt by 1.18%. Both results are statistically significant at the 1% level. On the other hand, for the FMOLS estimator the coefficient on GDP is 0.796, suggesting that a 1% increase in growth (GDP) decreases external debt by 0.80%. The coefficient of military expenditure (ME) is 1.243, which implies that a 1% increase in military expenditure increases external debt by almost 1.24%. The results for the short-run impact of economic growth and military expenditure on external debt for the panel of five selected SAARC countries are reported in Table 4. Table 4. Panel Short-run Elasticities Variables Constant Coefficient 9.452 t-statistics 19.528* D ln(ME) 0.149 6.102* D ln(GDP) -0.471 -3.761* ECTt −1 -0.092 -2.183** Goodness of fit: R2 = 0.84; R 2 = 0.81 Note: *, ** and *** denotes statistical significance at 1, 5 and 10 % level. Table 4 indicates that economic growth has a negative impact on external debt while military expenditure has a statistically significant positive impact on external debt in the short-run. The coefficient of the military expenditure is 0.149, suggesting that a 1% increase in military expenditure increases external debt by 0.15% respectively. On the other hand, GDP decreases external debt by almost 0.47%. The one period lagged error correction term, which measures the speed of adjustment to equilibri- Volume 3 Number 2 Fall 2013 143 �Impact of Military Expenditure and Economic Growth on External Debt: New Evidence from a Panel of SAARC Countries Khalid Zaman / Iqtidar Ali Shah / Muhammad Mushtaq Khan / Mehboob Ahmad um following a shock to the system, has a negative sign and is statistically significant at the 5% level. Its sign and significance level suggests that external debt is able to revert to its equilibrium following a shock to growth and military expenditure. But, the magnitude of the coefficient, because it is very small, suggests that the speed of adjustment to equilibrium is very slow. Overall military expenditure has a positive and significant impact on SAARC external debt in the short and long-run. The relationship is elastic in the long-run, but inelastic in the short-run. Conclusion In this paper a short term and long term impact of military expenditure and economic growth the external debt for five selected SAARC countries; namely, Bangladesh, India, Nepal, Pakistan and Sri Lanka has been examined using data for the period 1988-2008 by applying panel unit root and panel cointegration framework. It was found that the external debt, economic growth and military expenditure were cointegrated for the panel of five SAARC countries. In the long-run, both estimators (DOLS and FMOLS) suggest that economics growth has a statistically significant negative effect on external debt, while military expenditure has a statistically significant positive effect on external debt. Using DOLS estimator, it was found that 1% increase in economic growth decreases external debt by 0.638 %, while a 1% increase in military expenditure increases external debt by 1.18%. Both results are statistically significant at the 1% level. On the other hand, using FMOLS estimator, it was found that 1% increase in growth (GDP) decreases external debt by 0.796%. While 1% increase in military expenditure increases external debt by almost 1.24%. In the short-run it was found that economic growth and military expenditures have a statistically significant negative and positive effect on external debt. In short run it was found that 1% increase in military expenditure increases external debt by 0.15% while 1% increases growth (GDP) decreases external debt by almost 0.47%. One important limitation on our finding is that, from an econometric perspective, the small panel (T=21, N=5) is only sufficient to accommodate two explanatory variables without a substantial loss in power. Future studies for the South Asia as well as other regions in the world could include more potential determinants of external debt within a panel cointegration framework subject to an increase in data availability. 144 Journal of Economic and Social Studies References Asian Development Bank (2008). Asian Development Outlook, Asian Development Bank. Available Online at: http://www.adb.org/Documents/Books/ADO/2008/ Update/default.asp accessed on May 2, 2010 Abu-Badar, S. & Aamer S. Abu-Qarn, (2003). Government expenditures, military spending and economic growth: causality evidence from Egypt, Israel, and Syria, Journal of Policy Modeling, 25(6-7): 567-583. Aizenman, J. and Glick, R. (2006). Military expenditure, threats and growth, Journal of International rade and conomic evelopment, 15(2), 129-155. Antonakis, N. (1997). Military expenditure and economic growth in Greece, 1960-1990, Journal of Peace esearch, 34(1): 89-100. Benoit, E. (1973.). Defense and Economic Growth in Developing Countries. Lexington: Lexington Books. Benoit, E. (1978). Growth and defense in developing countries, conomic evelopment and ultural hange, 26(2): 271-280. Chletsos, M. & Kollias, C. (1995). The demand for Turkish military expenditure 1960-1992’, yprus Journal of conomics, 8(1): 64-74. Dakurah, A.H., Davies, S.P. and Sampath, R.K. (2000). Defense spending and economic growth in developing countries: a causality analysis, Journal of Policy Modeling, 23, 651-658. Deger, S. (1986). Economic development and defense expenditure, conomic evelopment and ulture hange, 35,179-196. Deger, S. and Smith, R. (1983). Military expenditure and growth in LDCs, Journal of onflict esolution, 27(2),335-353. Deger, S. and Sen, S. (1983). Military expenditure, spin-off and economic development, Journal of evelopment conomics, 13, 67-83. DeRouen, K. (2000). The Guns-Growth relationship in Israel, Journal of Peace esearch, 37(1): 69-83. Dunne, J. Paul & Mohammed, Nadir A. L. (1995). Military spending in Sub-Saharan Africa: some evidence for 1967-1985, Journal of Peace esearch, 32(3): 331-343. Dunne, J. Paul; Nikolaidou, E & Smith, R.P. (2002). Military spending, investment and economic growth in small industrializing economies, The outh African Journal of conomics, 70(5): 1-27. Economic Survey of Pakistan (2008-09). Finance division, economic advisor’s wing, Government of Pakistan, Islamabad. Faini, R., Annez, P. and Taylor, L. (1984). Defense spending, economic structure and growth: evidence among countries and over time, conomic evelopment and ulture hange, 32, 487-498. Hassan, M.K., Waheeduzzaman, M. and Rahman. A. (2003). Defense expenditure and economic growth in the SAARC countries, The Journal of Political, ocial and conomic tudies, 28(3), 275293. Heo, Uk, (1998). Modeling the defence-growth relationship around the globe, Journal of onflict esolution, 42(5): 637-657. IFS (2008). International Financial Statistics 2008, International Monetary Fund, Washington, available at: http://www.imfstatistics.org/imf. Accessed on April 30, 2010 Im, K. S., M. H. Pesaran and Y. Shin (2003). Testing for unit roots in heterogeneous panels. Journal of conometrics 115, 53-74. Kao, Chihwa and Min-Hsien Chiang (2000). On the estimation and inference of a cointegrated regression in panel data, Advances in conometrics, 15: 179-222. Volume 3 Number 2 Fall 2013 145 �Khalid Zaman / Iqtidar Ali Shah / Muhammad Mushtaq Khan / Mehboob Ahmad Levin, A. & Lin, C. F. (1992). Unit root tests in panel data: asymptotic and finite-sample properties, mimeo, University of California, San Diego. Levin, Andrew; Chien-Fu Lin and Chia-Shang James Chu, (2002). Unit root tests in panel data: asymptotic and finite sample properties, Journal of conometrics, 108(1): 1-24. Linden, M. (1992). Military expenditure, government size and economic growth in the Middle East in the period 1973-1985, Journal of Peace esearch, 29(3): 265-270. MacNair, E.S.; James C. Murdoch; Chung-Ron Pi & Todd Sandler, (1995). Growth and defense: pooled estimates for the NATO Alliance, 1951-1988, outhern conomic Journal, 61(3): 846-860. Maddala G, Wu, S. (1999). A comparative study of unit root tests with panel data and a new simple test. xford Bulletin of conomics and tatistics 61: 631–652. Mueller, Michael J. & Atesoglu, H.S. (1993). Defense spending, technological change and economic growth in the United States, efence conomics, 4: 259-269. Pedroni, P. (2004). Panel cointegration: asymptotic and finite sample properties of pooled time series tests with an application to the PPP hypothesis. conometric Theory 20: 597–625. Pedroni, P. (1999). Critical values for cointegration tests in heterogeneous panels with multiple regressors, xford Bulletin of conomics and tatistics, pecial issue, ovember, 61, pp. 653-70. Pedroni, P. (2000). Fully modified OLS for heterogeneous cointegrated Panels, Advances in conometrics, 15: 93-130. Phillips P. and Perron, P. (1988); Testing for a unit root in time series regression, Biometrica, Vol. 75, o. 3, pp.335-346. Sezgin, S. (1999a). A causal analysis of Turkish defense growth relationships: 1924-1996, Ankara niversity Journal of Political ciences, 55(2): 113-123. Sezgin, S. (1999b). Defence expenditure and economic growth in Turkey and Greece: a disaggregated analysis, Paper Presented at a The Arms Trade, Security, and Conflict conference at Middlesex University Business School, London, 11-12 June. Sezgin, S. (2000). An empirical analysis of Turkey’s defence-growth relationships with a multi-equation model (1956-1994), efence and Peace conomics, 11(1): 63-80. SHRDC (2008). SAARC Human Resource Development Centre, 2008, Database Profile on Macroeconomic and HRD Indicators in the SAARC Region (1990-2006). Online available at: www. shrdc-isb.org.pk accessed on May 2, 2010. SIPRI (2008). Stockholm International Peace Research Institute, Oxford, Oxford University Press. Smyth, R and Narayan, K, P. (2009). A panel data analysis of the military expenditure-external debt nexus: evidence from six Middle Eastern countries. Journal of Peace esearch, Vol. 46, o. 2, 235-250.. Stock, J. and Watson, M.W. (1993). A simple estimator of cointegrating vectors in higher Order integrated systems, conometrica , 61(4) :783-820. UNDP (2008); Human Development Report 2007-2008, Washington D.C Human Development Report (2007-2008). United Nation Development Program. Available online at: http://hdr.undp.org/en/reports/global/hdr2007-2008/ accessed on May 5, 2010. World Bank (2008). World Development Indicators 2008. Washington D. C. Yildirim, J. and Sezgin, S. (2002). Defense, education and health expenditures in Turkey, 1924-1996, Journal of Peace esearch, 39(5): 569-580. Yildirim, J., Sezgin, S. & Ocal, N. (2005). Military expenditure and economic growth in Middle Eastern countries: a dynamic panel data analysis, efence and Peace conomics, 16(4): 283-295. Journal of Economic and Social Studies Government Expenditure on Nomadic Education in Nigeria: Implications for Achieving the Millennium Development Goals AKIGHIR David Terfa Department of Economics, Benue State University, Makurdi, Nigeria. akighirdavidterfa@ yahoo.com OKPE. I Department of Economics, Benue State University, Makurdi, Nigeria. A A The paper examines government expenditure on nomadic education in KEYWO D igeria and the implications for achieving the M Gs. econdary data ducation, Government were used and the data were analyzed with the aid of descriptive statistics. xpenditure, Millennium The study revealed that government expenditure on nomadic education evelopment Goals, omads, in igeria over time has been on the increase which has necessitated the igeria. increase in the number of nomadic schools and teachers in the country. The study further found out that there is a wide gap between male and A I LE HI O Y female enrolments in nomadic schools in igeria; factors such as early ubmitted: 20 ctober 2011 marriages and teenage pregnancies, cultural and religious biases as well esubmitted: 10 ebruary 2012 as economic issues were believed to be responsible for the gap. Also, it esubmitted: 12 March 2012 was discovered that the total increase in nomads’ enrolments in nomadic esubmitted: 24 April 2012 schools in the country is not proportionate with the increase in government Accepted: 21 May 2012 expenditure on nomadic education. The study attributed this low school attendance by the nomads to the problems of under-funding, dearth of teachers, constant migration of nomads, the involvement of the children of nomads in the productive system, corruption, among others. The study concluded that the present form of implementation of the nomadic education would make it difficult for it to be a panacea for achieving the M Gs in the country. ecommendations were made on how to improve on the nomadic education system in the country. JEL odes: H5, 015 146 Journal of Economic and Social Studies Volume 3 Number 2 Fall 2013 147 � Dublin Core The Dublin Core metadata element set is common to all Omeka records, including items, files, and collections. For more information see, http://dublincore.org/documents/dces/. Extent The size or duration of the resource. 2391 Title A name given to the resource Impact of Military Expenditure and Economic Growth on External Debt: New Evidence from a Panel of SAARC Countries Author Author Zaman, Khalid Iqtidar, Ali Shah Khan, Muhammad Mushtaq Ahmad, Mehboob Abstract A summary of the resource. This paper examines the impact of military expenditure and economic growth on external debt for a panel of five selected AA countries including Bangladesh, India, epal, Pakistan and rilanka, over the period of 1988-2008. sing Pedroni’s (2004) test for panel cointegration, it was found that there is a long-run relationship between external debt, economic growth and military expenditure. The study finds that external debt is elastic with respect to military expenditure in the long run and inelastic in the short run. In the long run, 1% increase in military expenditure increase external debt between 1.18 % and 1.24%, while 1% increases in economic growth reduce external debt between 0.64% and 0.79%, by employed and M estimator respectively. In the short run, 1% increase in military expenditure increases external debt by 0.15%, while 1% increase in economic growth reduces external debt by 0.47 %. Publisher An entity responsible for making the resource available International Burch University Date A point or period of time associated with an event in the lifecycle of the resource 2013-12-19 Keywords Keywords. Article PeerReviewed H Social Sciences (General) https://omeka.ibu.edu.ba/files/original/ec01ff84370c332e832002493de91626.docx 0dc4caa5ab882a638f5d1cff607914a7 https://omeka.ibu.edu.ba/files/original/cdf3256caccaa6ee66a9e19a2f9e0ac4.pdf 8f9113d611c37b71086192210ccf5a8a PDF Text Text Impact of Regulatory Reforms on the Banking System in Bosnia and Herzegovina Medina Prašović International Burch University Bosnia and Herzegovina mismedina@yahoo.com Abstract: In the last two decades, we have witnessed great changes and growth in the financial sector worldwide. While some countries have experienced economic development, others experienced banking crisis which sometimes lead to costly bank failures and overall disruption in economic activity. The extent to which the financial system can support economic growth depends mostly on the stability and efficiency of the banking sector due to the fact that banks are still the main financial intermediaries. This comparative study will be conducted by applying a discriminate analysis about the implementation of set of common rules for regulating the banking system (Basel II) in Bosnia and Herzegovina, Croatia, Serbia and Slovenia, as well as preparation of these countries for implementation of Basel III. The main goal of the paper is to analyze how and why the new global financial regulations in the banking sector are applied differently in different countries and regions. These questions are answered by analyzing the implementation of Basel II, results of appliance of this rules as well as expectations from Basel III. Keywords: Banking system, Economic development, Basel Committee on Banking Supervision, Risk, Implementation, EU, Standards. 24 � Dublin Core The Dublin Core metadata element set is common to all Omeka records, including items, files, and collections. For more information see, http://dublincore.org/documents/dces/. Extent The size or duration of the resource. 2454 Title A name given to the resource Impact of Regulatory Reforms on the Banking System in Bosnia and Herzegovina Author Author PRAŠOVIĆ, Medina Abstract A summary of the resource. In the last two decades, we have witnessed great changes and growth in the financial sector worldwide. While some countries have experienced economic development, others experienced banking crisis which sometimes lead to costly bank failures and overall disruption in economic activity. The extent to which the financial system can support economic growth depends mostly on the stability and efficiency of the banking sector due to the fact that banks are still the main financial intermediaries. This comparative study will be conducted by applying a discriminate analysis about the implementation of set of common rules for regulating the banking system (Basel II) in Bosnia and Herzegovina, Croatia, Serbia and Slovenia, as well as preparation of these countries for implementation of Basel III. The main goal of the paper is to analyze how and why the new global financial regulations in the banking sector are applied differently in different countries and regions. These questions are answered by analyzing the implementation of Basel II, results of appliance of this rules as well as expectations from Basel III. Keywords: Banking system, Economic development, Basel Committee on Banking Supervision, Risk, Implementation, EU, Standards. Publisher An entity responsible for making the resource available International Burch University Date A point or period of time associated with an event in the lifecycle of the resource 2014-04-24 Keywords Keywords. Article PeerReviewed Identifier An unambiguous reference to the resource within a given context ISSN 2303-4564 H Social Sciences (General) https://omeka.ibu.edu.ba/files/original/72676f27111c243c67dac9e53f956aac.pdf f4eed375923f668a72087dbe4fda61b4 PDF Text Text Journal of Economic and Social Studies Impact of Related Acquisition Strategy on Bidding Company Performance Mirna Koričan Zagreb School of Economics and Management Zagreb, Croatia mirna.korican@zsem.hr Zoran Barac Zagreb School of Economics and Management Zagreb, Croatia zoran.barac@zsem.hr Ivija Jelavić Zagreb School of Economics and Management Zagreb, Croatia ivija.jelavic@zsem.hr Abstract: Strategy researchers believe that the better the Keywords: Merger, strategic fit or relatedness between the bidding and acquired firms, the greater should be the economic gain from the merger. Although merger performance has been widely researched we recognized that empirical results on merger performance are inconclusive and that there are research gaps related to geographical settings, time frame and methodological approach. Thus, the research question examined in our study was to find out if acquisition strategy or relatedness of merging companies increases performance of the bidding company. Also we considered moderating effect of premerger bidder profitability on the performance of the merger. Our study predicts that relatedness between merging companies has a positive impact on the merger’s performance. Results of 49 mergers completed in 2008 in EU member countries and Switzerland show that related mergers have better merger scores than unrelated mergers. We also predict that the impact of the related acquisition strategy becomes more positive as bidder premerger performance decreases. Acquisition, Acquisition strategy, Company performance JEL Classification: M10, M16, G34 Article History Submitted: 17 December 2012 Resubmitted: 24 October 2013 Resubmitted: 23 January 2014 Accepted: 27 January 2014 http://dx.doi.org/10.14706/JE COSS11422 31 �Mirna Koričan, Zoran Barac, Ivija Jelavić Introduction According to the Thompson One Banker database, in 2010, the total value of merger and acquisition transactions amounted to 555 Mil USD which encompassed more than 11 thousand deals worldwide. Because of such practical relevance, mergers and acquisitions have been studied from multidisciplinary perspectives. This field attracted interest of practitioners and academics within a broad range of management disciplines taking into account its financial, strategic, behavioral, operational and cross-cultural aspects. Mergers and acquisitions could be explained as strategically planned transactions in which the target company and the bidding company jointly create a new entity to gain competitive advantage in the market place. This term describes either the purchase or sale of corporate assets and shares (an acquisition), or the act of combining two or more companies in a single corporate entity (a merger; Ernst and Häcker, 2007). On the surface, the distinction in meaning of “merger” and “acquisition” may not really matter, since the net result is often the same: two companies (or more) that had separate ownership are now operating under the same roof, usually to obtain some strategic or financial objective. According to Marks and Mirvis (2001), less than one quarter of mergers and acquisitions achieve their financial objectives, as measured by share value, return on investment and post combination profitability. Gugler et al. (2003) compared the performance of merging companies with a control group of non-merging firms, focusing on profitability and sales. The results show that 43% of all merged companies worldwide reported lower profits than comparable non-merged firms. Likewise, more than 50% of U.S. mergers earned negative cumulative abnormal returns (Agrawal et al., 1992). Given these outcomes, it is not surprising that more than half of the merged companies end up being divested (Porter, 1987). Because of the negative financial results in post-mergers special emphasis in different research has been put on successes and failures of merger and acquisition activities. According to Straub (2007) and Larsson and Finkelstein (1999) mergers and acquisitions have been studied on the basis of several theories. First, there are studies on mergers and acquisitions as a method of diversification, from the strategic perspective, focusing on both the motives for different types of combinations and the performance effects of those combinations. Second, finance scholars have studied mergers and acquisitions by focusing on factors such as economies of scale and 32 Journal of Economic and Social Studies �Impact of Related Acquisition Strategy on Bidding Company Performance market power as the motives and on the acquisition performance, based on stockmarket measures. Third, mergers and acquisitions have been studied from the viewpoint of organizational behavior as well. Furthermore there is also ‘process’ literature which focuses on the important role of the choice of integration strategy and the acquisition process itself. This approach emphasizes that the acquisition process itself is a factor, in addition to the strategic and organizational fit, that affects the outcome. In our research, we assumed the last mentioned approach also called the strategic perspective. The research question in this paper was to find out if acquisition strategy of relatedness of merging companies increases the performance of bidding companies. Our hypothesis was that relatedness between merging and bidding company will have an impact on the merger performance. Literature Review In the literature it is often found that the primary purpose of merging and acquiring new companies is to improve overall performance by achieving synergy (Lubatkin, 1983). Synergy is thus, the main motive and the source of value creation in mergers. Synergies can be used to explain performance differences among the various merger types (Lubatkin, 1983). There are various typologies of synergies that exist in the literature. For example, according to Lubatkin's typology, (1983) there are three basic kinds of synergies, i.e. technical economies, pecuniary economies and diversification economies. Technical economies occur when the same amounts of inputs, or factors of production, produce a higher quantity of outputs. Pecuniary economies are achieved by the firm's ability to dictate prices by exerting market power, achieved primarily through size and diversification economies, are achieved by improving a firm's performance relative to its risk attributes. Furthermore, Chatterjee (1986) uses broader categories of synergies. First, collusive synergy represents the class of scarce resources leading to market power. Second, operational synergy represents the class of scarce resources that leads to production and/or administrative efficiencies. Lastly, financial synergy represents the class of scarce resources that leads to reductions in the cost of capital. 33 �Mirna Koričan, Zoran Barac, Ivija Jelavić Finally, Seth (1990) emphasizes that according to the value-maximizing hypotheses, positive synergy, or value creation, may be evidenced and value is created on the basis of market power, economies of scale and economies of scope, coinsurance and financial diversification. Market power is the ability of a market participant or group of participants to control the price, the quantity or the nature of the products sold, thereby generating extra profits. Economies of scale can be production-linked or functional. Product linked economies of scale may be achieved in the areas of purchasing or inventory management in the case of mergers involving companies using common raw materials or components. Functional economies of scale may be present in other functional areas of a business such as advertising, distribution, service networks and research and development. Economies of scope are said to exist when the cost of joint production of two goods by a multiproduct company is less than the combined costs of production of these goods by two single-product firms. A Coinsurance effect appears in a merger between companies whose earning streams are less than perfectly correlated. Financial diversification is created when a company acquires another with a different business cycle to its own, resulting in its income stream being stabilized and the variance of the firm's returns reduced. Regardless of the description of particular synergies and details in their typologies, the mutual feature is that all those synergies provide the basis for value creation measured by financial indicators. Companies with better company performance in post-merger period are considered to have had better synergy effects. Acquisition Strategy Companies are able to create better synergies by implementing acquisition strategy. Several researches showed that acquisition strategy had an impact on the company performance in the post-merger period (Rumelt, 1947, Ramaswamy, 1997, Altunbas and Ibanez, 2004). Acquisition strategies have been usually classified by the US Federal Trade Commission (FTC) of merger classification. According to FTC classification, mergers can be horizontal, vertical, product and market concentric or conglomerate mergers. A horizontal merger or related diversification takes place between companies in the same industry, where the two combining companies produce identical products and/or are competitors. Vertical mergers are transactions that take place between companies at different levels of the industry value chain and occur when two companies combine, each working at different stages in the production and distribution of the same good (e.g. buyer-seller, client-supplier). Product or market concentric mergers are transactions involving businesses that 34 Journal of Economic and Social Studies �Impact of Related Acquisition Strategy on Bidding Company Performance share similar in production or marketing technologies. Conglomerate takes place when the two combining companies operate in unrelated businesses (unrelated diversification). From the theoretical strategic perspective, researchers believe that the better the strategic fit between the bidding and acquired firms, the greater should be the economic gain from the merger. Strategic fit is described as the level of relatedness of merged companies. According to Rumelt (1974) merging companies may be considered related 'when a common skill, resource, market or purpose applies to each', i.e. if they employ similar production techniques, serve similar markets, use similar distribution systems, and employ similar science-based research. Lubatkin (1988) outlines the advantages of related mergers. First, related mergers provide opportunities to reduce cost and/or enhance differentiation through exploiting the economies of scale and scope in various operational areas such as manufacturing, distribution, and administration. Second, related mergers provide the potential for power gains and, by becoming larger, can influence the price of its outputs or inputs. Furthermore in his paper Lubatkin (1988) argues that unrelated mergers involve the combination of noncompeting products that utilize different product and market technologies, thus offering fewer advantages than related mergers. Therefore, while they may provide allocation efficiencies, they will be less able to provide tangible and intangible efficiencies and power gains than related mergers. In other words, according to Lubatkin (1988), related mergers have greater potential to create shareholder value than unrelated mergers. In studying the impacts of related and unrelated diversification effects on the shareholder wealth, two approaches have been used. One stream of research has examined the accounting performance of companies following different diversification strategies. A second research stream has used market based measures and the event study methodology. An event study is a statistical method to assess the impact of an event on the value of a firm. For example, the announcement of a merger between two business entities can be analyzed to see whether investors believe that the merger will create or destroy value. The basic idea is to find the abnormal return attributable to the event being studied by adjusting for the return that stems from the price fluctuation of the 35 �Mirna Koričan, Zoran Barac, Ivija Jelavić market as a whole. The market-based measures intrinsically differ from the accounting-based measures as they focus on the present value of future streams of income, i.e. on expected value, whereas the latter focus on the past performance. Most of the research on takeover performance has focused on the use of marketbased measures. One reason for this is the susceptibility of accounting information to managerial manipulation through earnings management and changing accounting policies (Stanton, 1987). Also, because of different accounting standards, accounting performance measures are harder to compare. Generally, literature of strategy has argued that companies following related diversification strategies should outperform the unrelated diversifiers (Salter and Weinhoid, 1979; Rumelt, 1974). Likewise, Walker (2000) investigated strategic objectives and stock performance of bidding firms. His analysis shows that bidding firm’s shareholders earn positive returns following related acquisitions and negative returns following unrelated takeovers. Relatedness in his definition encompass geographic expansion (bidding company seeks economies of scale by expanding its operations geographically), product line extensions (bidding company seeks economies of scope by expanding its product line), and market share increase (bidding company buys its competitor). However, broader empirical evidence is mixed (Lubatkin and O’Neill 1988; Seth, 1990). For instance, Chatterjee (1986) found that unrelated targets significantly outperformed related, non-horizontal targets. On the other hand Lubatkin (1987) found no significant difference in the performance levels of related and unrelated bidders and targets and concluded that related mergers do not create more value than unrelated mergers. So, strategic fit does not have an important effect on success of acquisitions. Many mergers are consummated on the premise that the two companies have a natural "fit." In reality, this fit is often illusive (Lubatkin and O’Neall, 1988). Because of the inconclusive results, we considered that it would be interested to test the effect of acquisition strategy on merger performance. Research gaps Understanding merger performance on the basis on current review on merger research is complex and inconclusive task (Tuch and O’Sullivan, 2007). Since researchers are employing both, market-based and accounting metric, covering a range of time periods, and using different sample sizes, it is not easy to make generalizations on this phenomenon. 36 Journal of Economic and Social Studies �Impact of Related Acquisition Strategy on Bidding Company Performance On the basis on our identification of before mentioned inconclusive evidence in current empirical research in mergers’ performance, we recognized certain gaps related to geographical settings, time frame and methodological approach (Table 1). Table 1. Gaps in Previous Researches of Mergers Geographical gap Time-frame gap Methodological gap Most of the research was done on US and UK companies. Research mostly covers mergers in 1980s and 1990s with few of them at the beginning of 2000. Analysis of mergers mostly done by event studies, with focus on market based measures. Most empirical research in the leading academic research journals has been done in Anglo-Saxon geographical settings. For example, in their paper, Tuch and Sullivan (2007) present a review of empirical research on the impact of acquisitions on company performance. Out of 78 presented empirical studies 51 merger studies are from the US market, 24 mergers are from the UK market, and the remaining 3 merger studies are from the other EU countries. To cover the geographical gap that exists in previous research, which encompasses mainly companies in Anglo Saxon countries, we selected companies involved in mergers and acquisitions activities within EU countries and Switzerland. Switzerland was chosen because of the highest number of multinational companies per capita. Furthermore, research on mergers and acquisitions has been done extensively in 1980s and 1990s and a relatively low number of studies have been done recently. It is believed that mergers performed prior to 1990’s are quite different than those done later because of the different economic and other factors outside of the company (Kukalis, 2007). For mentioned reasons, and to be able to look at the results of two years before and after the merger, we selected mergers that have been completed between January 1st and December 31st 2008. Also the majority of these empirical studies are using event study methodology with market based measures. In order to measure mergers’ success, we decided to use accounting metrics. As an argument for accounting metrics Ramaswamy (1997) emphasizes that some surveys of merger decisions have indicated that managers primarily seek to improve profitability through mergers (Ingham, Kran, and Lovestam, 1992; Rose, 1989). As profitability measure we used Return on Assets (ROA). 37 �Mirna Koričan, Zoran Barac, Ivija Jelavić Model, Data Set and Measures Model Our research was developed on studies of Ramaswamy (1997) and Altunbas and Ibanez (2004). Ramaswamy (1997) analyzed the impact of relatedness between US banks on their performance after the mergers. Altunbas and Ibanez (2004) examined the impact of strategic similarities between bidders and targets on post-merger financial performance. Our model proposes that merger performance is in function of acquisition strategy, premerger bidder performance and relative size. Research model was as following: Merger performance = F (Acquisition strategy, premerger bidder performance, relative size). The research question examined in our study was to find out if acquisition strategy or relatedness of merging companies increases the performance of bidding companies. The main hypothesis was the following: H1: Relatedness between merging companies has a positive impact on merger performance. Given the results of previous researches, that included acquisition strategy and premerger bidder performance, we assumed that those two variables will have a positive effect on merger results. In other words, we expected that the best merger results will be presented by companies that had related acquisition strategies and lower premerger bidder performance. H2: Premerger bidder performance moderates the impact of related acquisition strategy on merger performance. The impact of related acquisition strategy becomes more positive as bidder premerger performance decreases. Data set To find relevant mergers and conduct the analysis, the Thompson One Banker database on mergers was used. Following criteria were used to screen merging companies: 38 Journal of Economic and Social Studies �Impact of Related Acquisition Strategy on Bidding Company Performance (1) Merging companies should be from the EU member countries and Switzerland and mergers should be effective in the period between January 1st and December 31, 2008. (2) Mergers in which the bidding companies had between 50 and 100% of ownership have been selected. According to International Accounting Standards, control is presumed when the parent acquires more than half of the voting rights of the entity (Mackenzie et al., 2011). Also, control is the power to govern the financial and operating policies of an entity so as to obtain benefits from its activities (Mackenzie et al., 2011). Consequently it is reasonable to expect that control over subsidiary should impact performance of bidding firm. (3) In order to obtain financial data, only publicly listed companies had been selected. (4) We limited the sample with the requirement for market capitalization of bidding company above 5 Mill USD. The resulting sample comprised of 81 mergers. Out of 81 mergers, only 49 mergers had full set of required financial data. So a final sample of 49 mergers as a unit of analysis (comprising 98 companies) meeting the above conditions was identified. Measures As dependent variable, we measured merger performance as the difference between the bidding firm's two-year average return on assets (ROA) after the acquisition and the average of the ROA of the bidding company two years before the acquisition. We considered two years time window to avoid the effect of other economic factors or other mergers which could distort the results if we would take longer time span. According to the Meeks and Meeks (1981) when using accounting measures in assessing impact of merger on efficiency, the problem of extracting the effect of efficiency changes on profit from that of changes in bargaining power resulting from the merger arises. In their paper, among other profitability measures, ROA is the least sensitive in the case of enhancement of leverage or bargaining power resulting from a merger. Acquisition strategy, as an independent variable, was measured by a dummy variable. If an acquisition was categorized as a 'horizontal merger' (i.e., related acquisition; meaning in the same industry), the variable 'related acquisition' was coded '1'. All other mergers (i.e., unrelated acquisition meaning from different industries), were 39 �Mirna Koričan, Zoran Barac, Ivija Jelavić coded '0'. Horizontal or related mergers in our sample encompass all mergers in which bidder and target are operating in the same macro industry defined within the Thompson One banker database. This approach was used in several other researches (e.g. Gerbauld and York, 2007) Two control variables, namely, average premerger ROA of the bidder for two years prior to merger (premerger bidder performance) and the size of a target vis-a-vis the bidder (relative size) were used in the analysis. The level of the bidder’s premerger performance, measured as its return on assets, is likely to influence post-merger performance. Altunbas and Ibanez (2004) argue that if a bidder already possesses a high-level of profitability before the merging process, it is more likely that the profitability of the new institution will decrease in the short term due to the process itself. Alternatively, it is probable that bidders with a lower level of performance will manage to increase their profitability after merging with a target. As a consequence, a negative relationship between bidders’ premerger performance and post merger performance is expected initially. This effect is also known as a “floor-ceiling” effect (Ramaswamy, 1997). Relative size was used as a control variable since various studies show that it may impact post merger bidder performance. Some researchers show that larger companies might acquire smaller companies to realize scale-related synergies that would otherwise be difficult to obtain (Datta et al., 1991; Kusewitt, 1985). Chaterjee (1986) states that the smaller the acquired firm, relative to the bidding firm, the greater the potential for synergy. Tuch and O’Sullivan (2007) state that there are a number of reasons why acquiring larger targets might result in better post-acquisition performance. First, larger targets are more difficult to assimilate into a combined organization, so the pool of potential acquirers is expected to be smaller. This may result in acquirers being able to acquire large targets on more advantageous terms (Roll, 1986). Secondly, the economic impact of acquiring a larger target is likely to have a stronger impact on the post-bid performance of the combined company (Bruner 2002). Finally, Moeller et al. (2004) argue that the contrasting findings from some studies examining the impact of size arise as a result of the different levels of care exercised by smaller bidders in the acquisition process. Small acquirers need to be more careful when making a potentially risky bid, as there will be a relatively larger economic impact on their company. The authors therefore argue that the size effect is due to smaller acquirers rather than to larger targets. Since data is not conclusive on the direction of the effect, but research shows impact of relative size on the merger performance, this variable is used as control variable. 40 Journal of Economic and Social Studies �Impact of Related Acquisition Strategy on Bidding Company Performance Relative size was calculated as a relative number representing difference in sales between target and bidder. In order to give better understanding to variables and their Operationalization but also to connect them with the hypotheses formed, latter table has been prepared (Table 2). Table 2. Operationalization of the Variables and Hypotheses Variables Control variables Operationalization Hypothesis premerger bidder performance Average premerger ROA of the bidder for two years prior to merger. relative size Relative number representing difference in sales between target and bidder. H2: Premerger bidder performance moderates the impact of related acquisition strategy on merger performance. The impact of related acquisition strategy becomes more positive as bidder premerger performance decreases. Independent variable acquisition strategy Dependent variable merger performance If an acquisition was categorized as a 'horizontal merger' (i.e., related acquisition; meaning in the same industry), the variable 'related acquisition' was coded '1'. All other mergers (i.e., unrelated acquisition meaning from different industries), were coded '0'. H1: Relatedness between merging companies has a positive impact on merger performance. Difference between the bidding firm's two-year average return on assets (ROA) after the acquisition and the average of the ROA of the bidding company two years before the acquisition. 41 �Mirna Koričan, Zoran Barac, Ivija Jelavić Results Prior to testing of hypotheses, we performed correlation analysis which is shown with descriptive statistics in Table 3. Generally, we can conclude that after the merger performance results are on average lower (x=-4,38) than before the merger (x=5,70). Table 3. Univariate Statistics and Correlation Matrix for Explanatory Variables 1. Merger performance 2. Acquisition strategy 3. Premerger bidder performance 4. Relative size Mean s.d. -4.38 0.65 5.70 1.38 6.19 0.48 8.36 6.57 1 2 .14 -.32* .15 -.33 .12 3 -.12 *p< .05 To test our model we decided to calculate hierarchical regression analysis which is usually used when variables are determined by past research and analysis (Field, 2009; Cohen and Cohen, 1984). Some other researchers also used this hierarchical regression analysis to show how an additional set of variables are affecting independent variables, besides used control variables (Altunbas and Marques Ibanes, 2004; Ramaswamy, 1997). Even though data shows respectful standard deviation, the OLS regression was run for both models to generate variance inflation factors (VIF’s). Average VIF’s for the first model were below 1.014 which is considered acceptable. Second model primarily included two control variables, one independent and 3 interaction effect but VIF’s and eigenvalues proved that there is a presence of multicollinearity. Since there is proof that, in the case of multicollinearity, the dropping of the highly collinear variable can often make other variables statistically significant (Gujarati, 2002; Allison, 1998), we decided to drop out the relative size which had high correlations with other variables and had no predictive effect in the first model. Thus the second model was calculated with one control variable, one independent variable, and 3 interaction effects. The results of the two regression models are showed in the Table 4. 42 Journal of Economic and Social Studies �Impact of Related Acquisition Strategy on Bidding Company Performance Table 4. Results of Hierarchical Regression Analysis Model 1 Control variables premerger bidder performance relative size Independent variables acquisition strategy acquisition strategy x premerger bidder performance acquisition strategy x relative size premerger bidder performance x relative size Model R2 F *p< .05 -0.31* 0.11 Model 2 -1,09** -0.54** 1.12** -0.07 -0.30 0.12 3.05 0.54 10.25** **p< .001 The results of the hierarchical regression analysis provide support for the first study hypothesis. The first model shows that the control variable, named relative size as the difference in sales between target and bidder does not have a significant impact on merger performance. Premerger bidder performance, as the second control variable, negatively impacts mergers performance and explains 12% of the variance. The merger performance was calculated as the difference of post-merger and premerger ROA, thus capturing floor – ceiling effect mentioned earlier. In other words, companies that were performing better prior to merging cannot be expected to have results after the merger as high as the companies that were performing poorly (Figure 1). These results are similar to the results of other authors (Harrison et al, 1991; Ramaswamy, 1997; Altunbas and Ibanes, 2004). 43 �Mirna Koričan, Zoran Barac, Ivija Jelavić Figure 1. Effect of Premerger Bidder Performance on Merger Performance Merger performance -2.40 -6.28 low high premerger bidder performance The second model brings the same effect of the control variables and proves the effect of acquisition strategy, explaining additional 42% of the variance. Results also show that related mergers have better merger scores than unrelated mergers (Figure 2). Figure 2. Effect of Acquisition Strategy on Merger Performance Merger performance -3.77 -5.53 unrelated 44 acqusition strategy related Journal of Economic and Social Studies �Impact of Related Acquisition Strategy on Bidding Company Performance Hypothesis 1 predicts that relatedness between merging companies has a positive impact on merger performance. Model 2 tests this hypothesis and coefficient for the acquisition strategy is negative and strongly significant (b = -0.54; p < .001) which indicates support for Hypothesis 1. Hypothesis 2 in our research predicts a negative interaction between relatedness of merging companies and premerger bidder performance expecting that the most successful mergers will be among related companies with low premerger bidder performance. Results show positive interaction (b = 1.12; p < .001) and therefore hypothesis 2 is supported. Figure 3 graphically shows interaction among acquisition strategy and premerger bidder performance that was not predicted by the Hypothesis 2. Figure 3. Two-Way Interaction between Acquisition Strategy and Premerger Bidder Performance Merger performance 1.56 low premerger bidder performance -3.45 -4.24 high premerger bidder performance -8.49 unrelated related acqusition strategy Discussion and Conclusion One purpose of this research was to deal with found gaps in previous researches. Selection of mergers was geographically put in EU countries and Switzerland, only completed mergers in 2008 were included in the sample and premerger and post merger success was measured in a two year frame prior to and after the merger. 45 �Mirna Koričan, Zoran Barac, Ivija Jelavić Results of the hierarchical regression analysis show that independent variables in the second model can explain a significant variance in merger performance. Acquisition strategy has an impact on merger performance and generally the more successful are companies that are merging with target companies in the same industry. This can be explained by creation of collusive and operational synergies in related mergers (Chatterjee, 1986). Since related acquisition may involve utilization of economies of scale and/or scope both in production and distribution, this may lead to reduced costs (i.e. operational synergies), as well as achievement of collusive gains, i.e. advantages based on the market power. Our study also shows that related acquisition strategy and lower premerger performance has a positive effect on the merger’s performance as well. On the other hand, unrelated strategies combined with lower premerger performance have an even better impact on merger performance than related ones do. Our results provide the answer that the most successful companies in mergers are those that had lower premerger bidder performance and that had unrelated diversification strategy. These results can be explained by previous research which showed that in unrelated acquisitions, value creation occurs and is associated with the coinsurance effect (Seth, 1990). Some other empirical evidence shows coinsurance effect for conglomerate mergers (Kim and McConnell, 1977; Asquith and Kim, 1982; Choi and Philippatos, 1983; Shrieves and Pashley, 1984). Coinsurance effect appears in merger between companies whose earnings streams are less than perfectly correlated i.e. unrelated mergers. In effect, one company can supply funds following the merger to make up for the other's concurrent deficiency and thus creating higher cash flows (Seth, 1990). Also better performance of unrelated mergers combined with low premerger bidder profitability may be explained with exploiting more financial synergies in unrelated mergers than operational and collusive synergies in related acquisitions. According to Chatterjee (1986) unrelated mergers are likely to have one form of synergy present, i.e. financial synergy. That means that on average a large company has cheaper access to capital than a small company does. Unrelated mergers may create financial diversification when a company acquires another with a different business cycle to its own, its income stream will be stabilized and the variance of the firm's returns reduced (Steiner, 1975). 46 Journal of Economic and Social Studies �Impact of Related Acquisition Strategy on Bidding Company Performance Limitations There are certain limitations which have to be discussed. First problem we will mention is the problem of conceptualization and measurement of relatedness. In our paper we defined relatedness on the basis of the same macro industry in the Thompson One Banker data base because of the availability of this statistic. Also, although readily available and widely used, the Standard Industrial Classification (SIC) and Federal Trade Commission (FTC) classifications of mergers into groups such as horizontal, vertical, product, conglomerate, are limited in their ability to provide insights into the complex nature of relatedness (Lubatkin, 1983, 1987). Besides of standard product-based definitions of relatedness, it implies connectivity of critical organizational and strategic factors such as resource allocation patterns (Harrison et al., 1991), management philosophy (Datta, Grant, & Rajagopalan, 1991), and organizational culture (Chatterjee et al., 1992; Jemison & Sitkin, 1986; Nahavandi & Malekzadeh, 1993), but a problem arises when researchers have to decide on measurements of relatedness and availability of data. Also, as Meeks and Meeks (1981) also stressed in their research, limitation arise when using accounting measures as a metric of merger success. The central issue is distinguishing the effect of the profit of efficiency changes, resulting from a merger, from that of changes in bargaining power. For instance, if the participants' bargaining power is on average enhanced by a merger, then profitability could rise even though efficiency remained unchanged or actually fell. One of the limitations could be the number of mergers used. As noted earlier, in our research we only focused on 49 mergers out of 81 because for the remaining number of mergers we could not find the needed data. If we would have this data, maybe the results would show some other effects. Finally, limitation may be related to the measurement time frame. It can be argued that two years is not long enough for synergistic gains of merger to materialize, but we were forced to limit the time frame to two years to limit probability of further mergers in the sample. Therefore, adding additional years would have violated the "clean data" criterion suggested by Choi and Philipatos (1983) and Lubatkin (1987). Future research could compare different regions and countries during a longer period of time to give a more conclusive result. 47 �Mirna Koričan, Zoran Barac, Ivija Jelavić References Agrawal A. & Jaffe J. (2000). The post merger performance puzzle, Advances in Mergers and Acquisitions, 1, 119-156. Allison, P.D. (1998.) Multiple Regression: A Primer, 1st Edition, Pine Forge Press. Altunbas, Y. & Marques Ibanes, D., (2004). Mergers and Acquisitions and Bank Performance in Europe – The Role of Strategic Similarities, Working Paper Series, European Central Bank. Asquith, P. & Kim, E. H.. (1982). The impact of merger bids on the participating firms' security holders. Journal of Finance, 37, 1209-1228. Bruner, R. (2002). Does M&A Pay? A survey of evidence for the decision maker. Journal of Applied Finance, 12, 48–68. Chatterjee, S. (1986). Types of synergy and economic value: The impact of acquisitions on merging and rival firms. Strategic Management Journal, 7, 119-139. Chatterjee, S. (1986). Types of Synergy and Economic Value: The Impact of Acquisitions on Merging and Rival Firms. Strategic Management Journal, 7, 119139. Choi, D., & Philipatos, G. C. (1983). An examination of merger synergism. Journal of Financial Research, 6, 239-256. Cohen, J. & Cohen, P. (1984). Applied Multiple Regression/Correlation Analysis for the Behavioral Sciences, 2nd Edition, Lawrence Erlbaum Associates Inc, New Jersey. Datta, D. K., Grant, J. H., & Rajagopalan, N. (1991). Management incompatibility and post acquisition autonomy: Effects on acquisition performance. In P. Shrivatsava (Ed.), Advances in strategic management, 7, 157-182. Greenwich, CT: JAI Press. Ernst D. & Häcker J. (2007). Applied International Corporate Finance. Verlag Franz Vahlen GmbH. 48 Journal of Economic and Social Studies �Impact of Related Acquisition Strategy on Bidding Company Performance Field, A.P. (2009). Discovering statistics using SPSS: and sex and drugs and rock ‘n’ roll. 3rd edition. London: Sage. Gerbaud, R.R. & York, A.S. (2007). Stock Market Reactions to Knowledge - Motivated Acquisitions, Advances in Mergers and Acquisitions. 6. Elsevier. Gugler K., Mueller D., Yurtoglu B. & Zulehner C. (2003). The Effects of Mergers: An International Comparison. International Journal of Industrial Organization, 21, 625-653. Gujarati, D.N. (2002). Basic Econometrics; 4th edition, McGraw Hill, London. Harrison, J. S., Hitt, M. A., Hoskisson, R. E., & Ireland, R. D. (1991). Synergies and postacquisition performance: Differences versus similarities in resource allocations. Journal of Management, 17, 173-190. Ingham, H., Kran, I., & Lovestam, A. (1992). Mergers and Profitability: A managerial success story?, Journal of Management Studies, 29, 195-208. Jemison, D. B., & Sitkin, S. B. (1986). Corporate acquisitions: A process perspective. Academy of Management Review, 11, 145-163. Kim, E. H. & McConnell, J.J. (1977). Corporate mergers and the coinsurance of corporate debt. Journal of Finance, 32, 349-365. Kukalis, S (2007). Corporate Strategy and Company Performance - The Case of Post-Merger Performance, The International Journal of Finance, 19, 4475- 4489. Kusewitt, J. (1985). An exploratory study of strategic acquisition factors relating to performance. Strategic Management Journal, 6, 151-169. Larsson R. & Finkelstein S. (1999). Integrating strategic, organizational, and human resource perspectives on mergers and acquisitions: a case survey of synergy realization. Organization Science, 10(1), 1–26. Lubatkin, M. (1983). Mergers and the performance of the acquiring firm. Academy of Management Review, 8, 218-225. 49 �Mirna Koričan, Zoran Barac, Ivija Jelavić Lubatkin, M. (1987). Merger strategies and stockholder value. Strategic Management Journal, 8, 39-53. Lubatkin M, (1988). Value-Creating Mergers: Fact or Folklore?, The Academy of Management executive, 4, 295-302. Lubatkin M. & O’Neill H. (1988). Merger Strategies, Economic Cycles, and Stockholder Value. Interfaces, 18, 65-71. Mackenzie, B., Coetsee, D., Njikizana, T., Chamboko, R. & Colyvas, B. (2011). Wiley Interpretation and Application of International Financial Reporting Standards 2011, New Jersey: John Wiley and sons. Marks M. L. & Mirvis P. H. (2001). Making mergers and acquisitions work: Strategic and psychological preparation. Academy of Management Executive,15, 259275. Meeks, G. & Meeks, J.G. (1981). Profitability Measures as Indicators of PostMerger Efficiency, Journal of Industrial Economics, 29, 335-344. Moeller, S.B., Schlingemann, F.P. & Stulz, R.M. (2004). Firm size and the gains from acquisitions. Journal of Financial Economics, 73, 201–228. Nahavandi, A., & Malekzadeh, A. R. (1993). Organizational culture in the management of mergers. Westport, GT: Quorum. Porter M.E. (1980). Competitive Strategy. New York: The Free Press. Ramaswamy, K. (1997). The Performance Impact of Strategic Similarities in Horizontal Mergers: Evidence from the U.S. Banking Industry, Academy of Management Journal, 40, 697-715. Roll, R. (1986). The hubris hypothesis of corporate takeovers. Journal of Business, 59, 197–216. Rose, P.S. (1988). Characteristics of merging banks in the United States: Theory, empirical results, and implications for public policy. Review of Business and Economic Research, 24, 1-19. 50 Journal of Economic and Social Studies �Impact of Related Acquisition Strategy on Bidding Company Performance Rumelt, R. P. (1974). Strategy, Structure, and Economic Performance. Boston, Harvard University Press. Salter M.S. & Weinhold W.A. (1978). Diversification Through Acquisition: Creating Value. Harvard Business Review, 56, 166-176. Scanlon, K.P., Trifts, J. W. & Pettway, R.H. (1989). Impacts of relative size and industrial relatedness on returns to shareholders of acquiring firms, The Journal of Financial Research, 12, 103-112. Seth A. (1990). Sources of value creation in acquisitions: a reexamination of performance issues, Strategic Management Journal, 11, 99-115. Shrieves, R. E. & Pashley, M.M. (1984). Evidence on the association between mergers and capital structure. Financial Management, 20, 39-48. Stanton, R. L. (1987). Accounting rates of return as measures of post merger performance. Australian Journal of Business, 12, 293–394. Straub T. (2007). Reasons for Frequent Failure in Mergers and Acquisitions. Deutscher Universitäts- Verlag, Wiesbaden. Steiner P. O. (1975). Mergers, motives, effects, policies. Michigan: University of Michigan Press. Tuch, S. & O’Sullivan, N. (2007). The Impact of Acquisition on Firm’s Performance: A Review of the Evidence, International Journal of Management Reviews, 9, 141-170. Walker M. M. (2000). Corporate Takeovers, Strategic Objectives, and AcquiringFirm Shareholder Wealth. Financial Management, 29, 53-66. 51 � Dublin Core The Dublin Core metadata element set is common to all Omeka records, including items, files, and collections. For more information see, http://dublincore.org/documents/dces/. Extent The size or duration of the resource. 2405 Title A name given to the resource Impact of Related Acquisition Strategy on Bidding Company Performance Author Author KORICAN, MIRNA BARAC, ZORAN JELAVIC, IVIJA Abstract A summary of the resource. : Strategy researchers believe that the better the strategic fit or relatedness between the bidding and acquired firms, the greater should be the economic gain from the merger. Although merger performance has been widely researched we recognized that empirical results on merger performance are inconclusive and that there are research gaps related to geographical settings, time frame and methodological approach. Thus, the research question examined in our study was to find out if acquisition strategy or relatedness of merging companies increases performance of the bidding company. Also we considered moderating effect of premerger bidder profitability on the performance of the merger. Our study predicts that relatedness between merging companies has a positive impact on the merger’s performance. Results of 49 mergers completed in 2008 in EU member countries and Switzerland show that related mergers have better merger scores than unrelated mergers. We also predict that the impact of the related acquisition strategy becomes more positive as bidder premerger performance decreases. Publisher An entity responsible for making the resource available International Burch University Date A point or period of time associated with an event in the lifecycle of the resource 2014-07-15 Keywords Keywords. Article PeerReviewed HB Economic Theory Dublin Core The Dublin Core metadata element set is common to all Omeka records, including items, files, and collections. For more information see, http://dublincore.org/documents/dces/. Extent The size or duration of the resource. 3489 Title A name given to the resource IMPACT OF TEXTBOOK-BASED INPUT ON L2 LEARNERS’ PRAGMATIC COMPREHENSION Author Author Ruhi Athar, Mehdi Abstract A summary of the resource. Most studies on interlanguage pragmatics have been confined to the production aspect of L2 learners’ pragmatic development, losing sight of pragmatic comprehension and its relationship with listening comprehension and textbook-based pragmatic input. The present study aimed to fill the gap by investigating the relationship between the type of input provided by textbooks and L2 learners’ linguistic and pragmatic comprehension. It adopted a listening instrument that measured pragmatic comprehension and linguistic comprehension. Learners’ pragmatic and linguistic comprehension was compared across four groups of male and female advanced students with different textbook backgrounds. The results of ANOVAs and the follow-up Scheffe tests revealed significant differences among the groups in terms of pragmatic comprehension (PC) and linguistic comprehension (LC). In addition, Pearson correlation results suggested that the relationship between PC and LC subtasks in the two groups was not statistically meaningful and, accordingly, indicated construct differences between linguistic and pragmatic comprehension. Keywords: Interlanguage Pragmatics, Pragmatic Comprehension, Textbook-Based Input Date A point or period of time associated with an event in the lifecycle of the resource 2014 Keywords Keywords. Conference or Workshop Item PeerReviewed PE English https://omeka.ibu.edu.ba/files/original/292522e11436126acc27b58a3a8b1459.docx 7eb93ce11a4409eac521bd2d12a6e2f5 https://omeka.ibu.edu.ba/files/original/b6623b60a658f13d91ac54b1ad38899b.pdf 6d7041455e05cec32824f3d363ceb435 PDF Text Text Impact of the Information Technology on Business Processes Artir Maliqi Epoka University Albania maliqiartir@yahoo.com Abstract: This research project describes the impact of the information technology on business processes which are increasing rapidly during the last years. This is happening due to a high level of innovations in the field technology used in very efficient way toward economical development. So it is important to analyze its effects because it is directly related to the development and good organization of the financial markets. The methods that are used while making this research are based on questionnaires conducted by many successful business firms, professionals at the field of business administration and /or at the field of information technology, books and magazines, resources from internet and also from the opinions of public society. The final results obtained though these methods clarify that the impact of technology is directly influencing on the efficiency and well functioning of the business processes. Keywords: Business firms, Technology, Researches 147 � Dublin Core The Dublin Core metadata element set is common to all Omeka records, including items, files, and collections. For more information see, http://dublincore.org/documents/dces/. Extent The size or duration of the resource. 2610 Title A name given to the resource Impact of the Information Technology on Business Processes Author Author MALIQI, Artir Abstract A summary of the resource. This research project describes the impact of the information technology on business processes which are increasing rapidly during the last years. This is happening due to a high level of innovations in the field technology used in very efficient way toward economical development. So it is important to analyze its effects because it is directly related to the development and good organization of the financial markets. The methods that are used while making this research are based on questionnaires conducted by many successful business firms, professionals at the field of business administration and /or at the field of information technology, books and magazines, resources from internet and also from the opinions of public society. The final results obtained though these methods clarify that the impact of technology is directly influencing on the efficiency and well functioning of the business processes. Keywords: Business firms, Technology, Researches Publisher An entity responsible for making the resource available International Burch University Date A point or period of time associated with an event in the lifecycle of the resource 2014-04 Keywords Keywords. Article PeerReviewed Identifier An unambiguous reference to the resource within a given context ISSN 2303-4564 H Social Sciences (General) https://omeka.ibu.edu.ba/files/original/3319adeb14486963567ebb41bcdc12b6.pdf f695db7b7dd914115d9185cd9a9e1aa7 PDF Text Text International Conference on Economic and Social Studies, 10-11 May, 2013, Sarajevo Impact of Training and Development on Employees Performance in Bosnia and Herzegovina Serkan Bayraktaroğlu Süleyman Şah Üniversitesi, İstanbul, Turkey sbayraktaroglu@hotmail.com Emir Čičkušid International Burch University, Sarajevo, Bosnia and Herzegovina ecickusic@hotmail.com Companies today are forced to compete and to act professionally in those harsh times, so it is very important to have right employees for better company’s rating. It is crucial that staff needs to have better knowledge, skills and competencies. More and more companies are acknowledging Human Resources (training and development) as their main key for success and bigger focus is on employee – customer relation. Main objective of this study is to find out impact of training and development on employees performance in BiH. This study will be back grounded by the questionnaire and personal interviews which will be conducted in several companies which will show did employees gained positive or negative impact on employee’s performance. Keywords: Training, Development, Human Resource Management. 255 � Dublin Core The Dublin Core metadata element set is common to all Omeka records, including items, files, and collections. For more information see, http://dublincore.org/documents/dces/. Extent The size or duration of the resource. 1455 Title A name given to the resource Impact of Training and Development on Employees Performance in Bosnia and Herzegovina Author Author BAYRAKTAROGLU, Serkan CICKUSIC, Emir Abstract A summary of the resource. Companies today are forced to compete and to act professionally in those harsh times, so it is very important to have right employees for better company’s rating. It is crucial that staff needs to have better knowledge, skills and competencies. More and more companies are acknowledging Human Resources (training and development) as their main key for success and bigger focus is on employee – customer relation. Main objective of this study is to find out impact of training and development on employees performance in BiH. This study will be back grounded by the questionnaire and personal interviews which will be conducted in several companies which will show did employees gained positive or negative impact on employee’s performance. Keywords: Training, Development, Human Resource Management. Publisher An entity responsible for making the resource available International Burch University Date A point or period of time associated with an event in the lifecycle of the resource 2013-05-10 Keywords Keywords. Article PeerReviewed Identifier An unambiguous reference to the resource within a given context ISSN 2303-4564 Dublin Core The Dublin Core metadata element set is common to all Omeka records, including items, files, and collections. For more information see, http://dublincore.org/documents/dces/. Extent The size or duration of the resource. 2876 Title A name given to the resource IMPACT OF TRAINING AND DEVELOPMENT ON EMPLOYEES PERFORMANCE IN BOSNIA AND HERZEGOVINA Author Author CICKUSIC, Emir Abstract A summary of the resource. Companies today are forced to compete and to act professionally in those harsh times, so it is very important to have right employees for better company`s rating. It is crucial that staff needs to have better knowledge, skills and competencies. More and more companies are acknowledging Human Resources (training and development) as their main key for success and bigger focus is on employee – customer relation. Main objective of this study was to find out impact of training and development on employee‘s performance and Bosnia and Herzegovina was taken as an example. This study was back grounded by the two different questionnaires one for the employees and one for the managers or owners of the companies. Results revealed that there is a huge impact on employees performance when it comes to the training programs and employees are fully aware that training programs give them better knowledge, improved skills and ideas for future career paths. Keywords: training, development, human resource management Date A point or period of time associated with an event in the lifecycle of the resource 2013 Keywords Keywords. Thesis NonPeerReviewed L Education (General) https://omeka.ibu.edu.ba/files/original/3b252fb6491a975c8e44e1fd667cbf41.pdf fa9f31ec7a55c8793161e661f96235da PDF Text Text International Conference on Economic and Social Studies, 10-11 May, 2013, Sarajevo Impact of Using IFRS on Creating Successful Corporate Governance in Bosnia and Herzegovina Elif Öztürk International Burch University, Sarajevo, Bosnia and Herzegovina eozturk@ibu.edu.ba This study includes overview of implementation of international financial reporting standards in Bosnia and Herzegovina (BIH). The main purpose of the study is to state the importance of using IFRS in terms of successful corporate governance. Also it is aimed to contribute the literature with explanations of the general situation of IFRS in Bosnia. To analyze the effect of using this recent financial reporting system on decision making process of managers who are responsible to create efficient level of corporate governance is also one of the purposes. Also this study provides policy makers with valuable information by showing them the real situation and perception of companies regarding the IFRS and effect of using IFRS on corporate governance. This study provides researchers to look at the corporate governance from a different perspective in terms of decision making. Type of the research is survey study. Population includes the all companies in Federation of Bosnia and Herzegovina from each sector, but the sample includes companies from Sarajevo. Findings show that there is positive relation between level of using this recent financial reporting system (IFRS) and having strong and successful corporate governance. Keywords: Importance of Using IFRS, Decision Making, Perception of Companies, Corporate Governance. 91 � Dublin Core The Dublin Core metadata element set is common to all Omeka records, including items, files, and collections. For more information see, http://dublincore.org/documents/dces/. Extent The size or duration of the resource. 1533 Title A name given to the resource Impact of Using IFRS on Creating Successful Corporate Governance in Bosnia and Herzegovina Author Author ÖZTÜRK, Elif Abstract A summary of the resource. This study includes overview of implementation of international financial reporting standards in Bosnia and Herzegovina (BIH). The main purpose of the study is to state the importance of using IFRS in terms of successful corporate governance. Also it is aimed to contribute the literature with explanations of the general situation of IFRS in Bosnia. To analyze the effect of using this recent financial reporting system on decision making process of managers who are responsible to create efficient level of corporate governance is also one of the purposes. Also this study provides policy makers with valuable information by showing them the real situation and perception of companies regarding the IFRS and effect of using IFRS on corporate governance. This study provides researchers to look at the corporate governance from a different perspective in terms of decision making. Type of the research is survey study. Population includes the all companies in Federation of Bosnia and Herzegovina from each sector, but the sample includes companies from Sarajevo. Findings show that there is positive relation between level of using this recent financial reporting system (IFRS) and having strong and successful corporate governance. Keywords: Importance of Using IFRS, Decision Making, Perception of Companies, Corporate Governance. Publisher An entity responsible for making the resource available International Burch University Date A point or period of time associated with an event in the lifecycle of the resource 2013-05-10 Keywords Keywords. Article PeerReviewed Identifier An unambiguous reference to the resource within a given context ISSN 2303-4564 https://omeka.ibu.edu.ba/files/original/1d9658b355cc1684f34272897158f432.docx e68b741f3cc49d7fd6645c7b30bf2842 https://omeka.ibu.edu.ba/files/original/7384f8ed770c5e6fc990ba6da3835477.pdf 7871f8161d679f7634837f5b50a8953c PDF Text Text Impact of volatility and performance of major stock markets on Sarajevo Stock Exchange in 2008 – 2012 periods Enis Dzanić University in Bihać Bosnia and Herzegovina enis.dzanic@bih.net.ba Sead Omerbegović American University in Bosnia and Herzegovina Bosnia and Herzegovina enis.dzanic@bih.net.ba Abstract: Previous research indicates that performance and volatility of small and regional stock markets can be influenced by the performance of major world exchanges such as New York, Frankfurt or Tokyo stock exchange. This research analyses weekly composite index data for SASE (Sarajevo Stock Exchange), NYSE, NIKKEI, and DAX indices, for the period from 2008 until the end of 2012. This time period contains significant events in the US and the rest of the world, including the housing bubble, and a great recession which followed after. Significant volatility of SASE was noted in 2007 while later periods suggest lesser volatility after a significant drop in index value in middle of 2007. The data was analyzed in a side by side comparison, by the method of regression in order to establish a correlation of NYSE, NIKKEI and DAX indexes with Sarajevo Stock Exchange index. Furthermore the performance was visually represented, segmented into several dynamic and steady periods, whose regressions were separately calculated, in order to see the difference in steady and dynamic periods. Previous research suggests strong correlation between regional and major stock market indices at times of crisis, a so-called spillover effect, while low correlation at times of low volatility. With these results, we will be able to understand the impact of major world indices on volatility and performance movements of Sarajevo Stock Exchange in the long and short run, as well as at times of low and high volatility. The results of research suggest that when there is less dynamics in major world indices, the SASE market becomes less affected by their results and by the global market trends, thus its performance is then dictated to a higher degree by regional or country specific financial, economic and to some degree political factors. One such case this paper analyzed is evident in the ‘dynamic period’ of some 18 months, ranging from 01.01.200816.06.2009, where the impact of global recession on major world indexes spilled over to smaller regional exchanges; correlation between SASE and NYSE in that period is 0,92. Keywords: stock price volatility, fundamental analysis, Sarajevo Stock Exchange, regression analysis, correlation analysis. 115 � Dublin Core The Dublin Core metadata element set is common to all Omeka records, including items, files, and collections. For more information see, http://dublincore.org/documents/dces/. Extent The size or duration of the resource. 2575 Title A name given to the resource Impact of volatility and performance of major stock markets on Sarajevo Stock Exchange in 2008 – 2012 periods Author Author DZANIĆ, Enis OMERBEGOVIĆ, Sead Abstract A summary of the resource. Previous research indicates that performance and volatility of small and regional stock markets can be influenced by the performance of major world exchanges such as New York, Frankfurt or Tokyo stock exchange. This research analyses weekly composite index data for SASE (Sarajevo Stock Exchange), NYSE, NIKKEI, and DAX indices, for the period from 2008 until the end of 2012. This time period contains significant events in the US and the rest of the world, including the housing bubble, and a great recession which followed after. Significant volatility of SASE was noted in 2007 while later periods suggest lesser volatility after a significant drop in index value in middle of 2007. The data was analyzed in a side by side comparison, by the method of regression in order to establish a correlation of NYSE, NIKKEI and DAX indexes with Sarajevo Stock Exchange index. Furthermore the performance was visually represented, segmented into several dynamic and steady periods, whose regressions were separately calculated, in order to see the difference in steady and dynamic periods. Previous research suggests strong correlation between regional and major stock market indices at times of crisis, a so-called spillover effect, while low correlation at times of low volatility. With these results, we will be able to understand the impact of major world indices on volatility and performance movements of Sarajevo Stock Exchange in the long and short run, as well as at times of low and high volatility. The results of research suggest that when there is less dynamics in major world indices, the SASE market becomes less affected by their results and by the global market trends, thus its performance is then dictated to a higher degree by regional or country specific financial, economic and to some degree political factors. One such case this paper analyzed is evident in the ‘dynamic period’ of some 18 months, ranging from 01.01.2008-16.06.2009, where the impact of global recession on major world indexes spilled over to smaller regional exchanges; correlation between SASE and NYSE in that period is 0,92. Keywords: stock price volatility, fundamental analysis, Sarajevo Stock Exchange, regression analysis, correlation analysis. Publisher An entity responsible for making the resource available International Burch University Date A point or period of time associated with an event in the lifecycle of the resource 2014-04 Keywords Keywords. Article PeerReviewed Identifier An unambiguous reference to the resource within a given context ISSN 2303-4564 H Social Sciences (General)