Case 9: Horniman Horticulture Essay

1. Strengths: – Profitability Ratios: Constant growth from 2002-05, particularly year 2004 and 2005 with impressive growth in revenue with12.5% and 15.5% respectively, much higher than the benchmark just -1.8%. Gross, operating and net profit margin were all performing better than the benchmarks. – Management: Co-owner Bob Brown has been brought up to value a strong work ethic, which he has obtained through his father since at young age by working for his father at the mill. After finishing his study, he returned to the mill and excelled at his job (supervisor) and was highly respected. Bob was a â€Å"people person†, his warm personality made beloved by all customers and employees. Weaknesses: – Activity Ratios: takes increasingly time to receive payments from sales – 51 days year 2005 (far exceeded the benchmark – 22 days). Days of inventory on hand (476 days) has been increased gradually much higher than the benchmark (386 days). Payables turnover (10 days) is too short compared with the benchmark (27 days) and slowly declined as years pass by. – Liquidity problems seen through cash on hand kept decreasing since 2002 and sharply reduced in 2005 probably resulted from the issue that quick payables and slow receivables happened simultaneously every year. Since 2005, they had not reach their target balance of 8% cash over total revenue (fell to 0.9% – 2005) 2. Free cash flow to the owners of the firm (FCFE) for 2005: FCFE = Operating Cash Flow – Change in Net Working Capital – Change in Investments |Operating profit | |100.0 | | − Taxes | |39.2 | | + Depreciation | |40.9 | |Operating cash flow |101.7 | | − Capital expenditure | | (4.5) | | − Increase in NWC | |(156.3) | | Increase in CA |803.3 – 642.9 = 160.4 | | |- Increase in CL |47.3 – 43.2 = (4.1) | | |Free cash flow | |(59.10) | Cash cycle of the business for 2005: CCC = Days Inventory Outstanding (DIO) + Days Sales Outstanding (DSO) – Days Payables Outstanding (DPO) = 476 + 51 – 10 = 517 (days) Using cash: Even though HH had rapidly increased gross profit, operating profit and net profit since 2002, the firm’s cash balance had massively declined from $120,100 (2002) to $9,400 (2005). Increasing in inventory as extending property by 12-acres, with an expected capital expenditure of $75,000 in 2006, HH has also increased their product range by 40%. Therefore cash has been used a lot in this period. The firm’s credit terms have been improved as HH offers longer payment periods for customer (DSO of 51 days), firm’s payment of purchases within 10 days (DPO) to receive a 2% discount, this shows that HH is making payments five times faster than receiving them. DIO is also a concern that HH has a hand in, HH is choosing to focus on more maturing plants, therefore its inventory will naturally be longer than the benchmark, in fact, HH’s lowest end was still 10% over the benchmark. 3. The growth trend would be expected to be stronger in 2006. However the cash deficit is still a significant issue due to both capital expenditure and working capital would be further increased in order to maintain the business expansion. Therefore, they need to work out some financial leverage to solve this problem. |Projected Horniman Horticulture Financial Summary (in thousands of dollars) | | | | | | | | | | |2002 |2003 |2004 |2005 |2006E |20% | |Profit and loss statement | | | | | | | |Revenue |788.50 |807.60 |908.20 |1048.80 |1258.56 | | | Cost of goods sold |402.90 |428.80 |437.70 |503.40 |630.49 | | | |51.10% |53.10% |48.19% |48.00% |50.10% |Percentage of Sales | |Gross profit |385.60 |378.80 |470.50 |545.40 |628.07 | | |SG&A expense |301.20 |302.00 |356.00 |404.50 |482.53 | | | |38.20% |37.39% |39.20% |38.57% |38.34% |Percentage of Sales | |Depreciation |34.20 |38.40 |36.30 |40.90 |37.45 |Average over 4 years | | Operating profit |50.20 |38.40 |78.20 |100.00 |108.09 | | |Taxes |17.60 |13.10 |26.20 |39.20 |42.37 | | | |35.06% |34.11% |33.50% |39.20% |39.20% |Similar as year 2005 | | Net profit |32.60 |25.30 |52.00 |60.80 |65.72 | | | | | | | | | | |Balance sheet | | | | | | | |Cash |120.10 |105.20 |66.80 |9.40 |13.43 | | |Accounts receivable |90.60 |99.50 |119.50 |146.40 |160.24 | | | |11.49% |12.32% |13.16% |13.96% |12.73% |Percentage of Sales | |Inventory |468.30 |507.60 |523.40 |656.90 |763.03 | | | |59.39% |62.85% |57.63% |62.63% |60.63% |Percentage of Sales | |Other current assets |20.90 |19.30 |22.60 |20.90 |20.93 |Average over 4 years | | Current assets |699.90 |731.60 |732.30 |833.60 |957.62 | | |Net fixed assets |332.10 |332.50 |384.30 |347.90 |300.10 | | | Total assets |1032.00 |1064.10 |1116.60 |1181.50 |1257.72 | | | | | | | | | | |Accounts payable |6.00 |5.30 |4.50 |5.00 |5.20 |Average over 4 years | |Wages payable |19.70 |22.00 |22.10 |24.40 |31.41 | | | |2.50% |2.72% |2.43% |2.33% |2.50% |Percentage of Sales | |Other payables |10.20 |15.40 |16.60 |17.90 |21.19 | | | |1.29% |1.91% |1.83% |1.71% |1.68% |Percentage of Sales | | Current liabilities |35.90 |42.70 |43.20 |47.30 |57.80 | | | Net worth |996.10 |1021.40 |1073.40 |1134.20 |1199.92 | | | | | | | | | | |Capital expendit ure |22.00 |38.80 |88.10 |4.50 |75.00 | | |Purchases |140.80 |145.20 |161.20 |185.10 |224.13 | | | |17.86% |17.98% |17.75% |17.65% |17.81% |Percentage of Sales | 4. The company’s accounts-payable policy: Currently the firm’s DSO was 10 days (in order to receive a 2% discount), approx. 2.7 times as fast as the benchmark of 27 days. This policy is not suitable as their current credit terms offered to customer up to 51 days, which is double the benchmark. The firm’s net profit margin was 5.8% (the benchmark is just 2.8% – 2005), so HH does not need to continuously make payment to suppliers early (adversely, HH should take advantage of the offered credit terms allowing firm 30 days to payback for purchased goods), and also HH will also reduce the credit terms even though the sales probably drops, which would leave more cash available for firm as well as the cash cycle will be shorter so that the business will avoid the insufficient liquidity of the cash. If HH does not change the policy, in the long run, the shortage of cash may adversely influence the purchasing power and operating capacity of the business and further business’s profitability. 5. What can the company do to solve its cash problem? – Offers discount payment terms (i.e. 2% discount if payments are received within 10 days): enable HH to collect cash immediately. – Takes advantage of the offered credit terms (allow firm 30 days to payback the purchased goods): keeps more cash for operating activities in long-term period. – Slows down the expansion pace to decrease the capital expenditure. Starts selling product ranges that are not â€Å"instant landscape† plants (as these take a long time to mature and also can eliminate some risks for keeping the plants for longer periods of time – feature of this industry: rely heavily on weather that is unpredictable) – Raising funds: starts financing through debt, also can receive the tax shield benefit on interest payments. Transforms business from sole proprietorship into partnership in effort of not only increasing cash available for business but also receiving contributions of property, labor and skills form partners. 6. Calculate the sustainable growth of the company in 2005: |Sustainable growth = ROA x Leverage x Retention | | |5.36% | |ROA (Net profit / Total assets) | | | |5.15% | |Leverage (Total Assets/Net Worth) | | | |1.04 | |Retention (1- Dividend Payout ratio) | | | |1.00 | |Economic profit = (ROA – Cost of capital) x Total Assets | |-57.35 | |Cost of capital | | | |10.00% | |Total Assets | | | |1181.50 | |Net Worth | | | |1134.20 | The negative economic profit shows that the firm does not earn a sufficient return on capital. The firm is facing their dismissing level of cash and as a result, the negative cash level in the forthcoming years will be clearly observed. As shown above, the majority of the firm’s cash expenditure is held up in inventory (with cash cycle being 517 days compared with the benchmark of 381 days) and account receivables (due to the collection policy). The trade-off that company has to face is an increase in their credit terms. Even though this may reduce the sales volume, the company will probably avoid the risk involved with having a more mature product range.

Anti-Globalization different

â€Å"Globalization† means different things to many people.   Some think of it positively, while others don’t.   Some view it with hope and confidence, others with fear, sometimes with hostility.Globalization, according to the definition of the International Monetary Fund (IMF), is a historical process, the result of human innovation and technological process.   It refers to the increasing integration of economies around the world, particularly trade and financial flows.The term sometimes also refers to the movement of people (labor) and knowledge (technology) across international borders† (IMF Staff, 2002).  Ã‚  Ã‚  Ã‚  Ã‚  Ã‚   A more simplistic definition of globalization refers to it as the â€Å"process of increasing the connectivity and interdependence of the world's markets and businesses† (Investor Words, 2007).   Such a process has sped up dramatically in the last two decades as technological advances make it easier for people to travel, communicate, and do business globally.Globalization is not entirely a new concept.   Analysts argued that the world economy became global as early as during the height of the rivalry between Spain and Portugal for world supremacy in the 15th Century.   Commerce and financial services are just far more developed and deeply entrenched now than they were at that time because of the availability of modern electronic communication.Moreover, commerce and trade among countries have been simplified with the establishment in 1995 of the World Trade Organization, a powerful international body composed of 150 countries, mandated to mediate trade disputes among member nations.While the WTO is relatively young, its trading system is over half a century old because its predecessor was the General Agreement on Tariff and Tax (GATT) which was founded in 1948.   The old GATT evolved through several rounds of negotiation until it was renamed into the present WTO with expanded powers and respons ibilities that now cover trade in services and traded inventions, creations, and designs – collectively known as intellectual property.Officials of   IMF, World Bank and WTO have high hopes for globalization to improve the impoverished lives of people across the globe, particularly those from Africa.  They take credit for the improvement of Third World economies, including that of India, in recent years.   Developed countries such as the United States, EU, Japan, and Canada have bonded together to collectively endorse trade globalization through the WTO as a means to liberalize trade   (IMF Staff, 2000).Unfortunately not everyone is happy with globalization, particularly developing countries.   Some view the WTO with distrust and have rejected it altogether.   Others with suspicion and misgiving, but joined it nevertheless as a necessary evil.   They feel globalization is the handiwork of multinational companies out to dictate their terms to the hapless Third Wo rld.In general, those who oppose globalization as institutionalized by the WTO, World Bank, and other similar institutions, believe that it undermines the sovereign will of poor and developing countries in favor of multinational corporations from developed countries. They claim that corporations are given too much privilege to move freely across borders, extracting desired natural resources from poor countries and claiming them as their â€Å"intellectual property.†For example, a multinational company could secure a certain plant or organism with medicinal value endemic to a particular country and claim to own it under the rules of intellectual property.Because of the stringent, or rather lopsided, rules on intellectual property rights by the WTO in favor of multinational companies, countries are becoming more and more subservient to multinational pharmaceutical companies for the treatment of dreaded diseases like AIDs.Despite the availability of cheaper generic drugs, many c ountries in Africa stricken with the AIDS pandemic are unable to secure them â€Å"because countries must jump through multiple hoops to prove they are truly in need, unable to afford patented drugs and incapable of producing the medicines domestically. Meanwhile, there is no guarantee that there will be a sufficient supply of drugs for them to buy, since the deal also puts up hurdles for countries wanting to export† (Klein, 2001).Poor agricultural countries are likewise at the losing end of the bargain in so far as globalization is concerned.   Aside from their access to cheap agricultural inputs, including mechanized equipment, developed countries provide heavy subsidies not just in terms in farm inputs but also in terms export subsidies that make their agricultural products more attractive on the international market.Farm products such as vegetables, beef, and poultry are practically being dumped in poorer countries at prices that cause declines in the agricultural secto r of many developing nations.â€Å"The current inequities of the global trading system are being perpetuated rather than resolved under the WTO, given the unequal balance of power between member countries, according to Jean Ziegler, UN Special rapporteur on the Right to Food† (Wikipedia, 2007).   Such inequality is evident in the refusal of the United States to sign and honor the Tokyo Protocol, which compels countries to reduce the use of fossil fuel to reduce global warming, and still get away with it.Using their rights as WTO members and drawing support from the academe and non-government organizations, insider critics of the International Property Rights have openly criticized trade liberation as a bad policy that â€Å"move money from people in developing countries† (Intellectual Property Rights, Wikipedia).  Ã‚   They have demonstrated their opposition to many WTO policies in various fora, including mass rallies and demonstrations during important WTO meeting s.The first international anti-globalization protest was organized simultaneously in many cities around the world on June 18, 1999.   The movement was called the Carnival Against Capitalism, or J18 for short.  Ã‚   The day was marked by organizers as an international of protest to coincide with the 25th G8 Summit in Koln, Germany.   The protest in Eugene, Oregon turned into a riot when rallyists drove the police out of a small park.The second major mobilization of the anti-globalization movement was held on November 30, 1999, and was known as N30.   It is by far the most unsettling protest action against globalization, with protesters blocking delegates’ entrance to the WTO meetings in Seattle, USA.The protesters and Seattle riot police clashed in the streets after police fired tear gas at demonstrators who blocked the streets and refused to disperse. Over 600 protesters were arrested and thousands were injured.The protest movement was inextricably anti-globalization and anti-multinational corporation (MNC), but was unclear over the alternatives and new directions it wished to offer.   Nevertheless, the movement,   including the less eventful A16 Movement in Washington D.C., cannot be ignored as it spelled out in no uncertain terms the widespread anguish about the direction that globalization has taken and a sense of loss of democratic control by developing countries over their options.The protest also demonstrated lack of faith in the legitimacy of international institutions to objectively mediate trade disputes among nations because of a perceived notion that rules are loaded in favor developed countries.The protest movement debunks First World perception that it has the answers to problems being encountered by their Third World neighbors over issues of trade, health, food supply, poverty, environment, etc.  Ã‚   It does not, especially given our global history of abuse by wealthy nations to amass wealth and power at the expenses of poor er nations.BIBLIOGRAPHYBarnet, Richard J. & Ronald E. Muller. 1974. Global Reach: The Power of the Multinational Corporations. New York: Simon and Schuster.Berry, Jeffrey M. 1999. The New Liberalism: The Rising Power of Citizen Groups.Washington: The Brookings Institution.Gill, Stephen. 2000. Towards a Postmodern Prince? The Battle in Seattle as a Moment in the New Politics of Globalization. Millennium, 29(1): 131-40.IMF Staff. 2000.   Globalization:   Threat or Opportunity?Investor Words. 2007.   Globalization.Kanbur, Ravi. 2001. Economic Policy, Distribution and Poverty: The Nature of Disagreements. Ithaca, N.Y.: Cornell University.Keohane, Robert. O and Joseph S. Nye. 1977 Power and Interdependence: WorldPolitics in Transition. Boston: Little Brown.Klein, Naomi. 2001. No Logo. New York: Picador.Lichbach, Mark I and Paul Almeida. 2001 â€Å"Global Order and Local Resistance: TheNeoliberal Institutional Trilemma and the Battle of Seattle.† Working Paper: Universityof C alifornia, Riverside, February 26.   

Marilyn Manson and His Impact on Sub-culture Essay

Marilyn Manson has been pushing the envelope of the right to freedom of expression since his controversial â€Å"shock rock† antics began in the early 1990’s. His methods are strange and rejected by most of society, as it cannot understand what he is trying to achieve. Many people believe that Marilyn Manson is bizarre, seeing him wearing women’s clothing, applying heavy facial makeup, and covering himself with jewelry. His success can be attributed not only to his entertainment abilities, but even more so to the incredible marketing campaign organized to promote himself and his crazy actions. His actions give the media a scapegoat to fall back on and a figure which they can blame all of society’s problems. He has amassed a large following throughout the 1990’s and even today as the self-proclaimed Anti-Christ Marilyn Manson. His fans understand where he has come from, what he has been through and are familiar with rejection from society. The Marilyn Manson’s following is normally associated with the Gothic or â€Å"Goth† subculture. At first examination, this seems to be the case as Manson followers and those of the Goth community share remarkable similarities; although true Goths label Manson follows as merely â€Å"Spooks† or â€Å"Mall Goths†, and not real members of the Gothic following. The similarities have been exploited by the media and have linked his music to violent acts against society. â€Å"It was following the Columbine incident that the media began routinely tagging Marilyn Manson as ‘goth rock’ despite the fact that Manson’s music had little relation to gothic music or sub-culture.† (Marilyn, Wikipedia) This essay will explore the reasons why Marilyn Manson is who he is today, why he has such an influence over a particular subculture, and if these followers are actually part of the Gothic community. Who Is Marilyn Manson? Marilyn Manson, the alias and alter-ego of Brian Warner, was created using Marilyn Monroe and serial killer Charles Manson – two opposites in society. (Marilyn, MTVe.com) â€Å"Brian Warner, who formed the band in 1989 and whose apparent business savvy and flair for controversy turned them into a success. Using androgyny, satanic images and themes of rebellion and death, Manson irked bystanders and proved that outrageous rock was still a viable form of entertainment.† (Marilyn, Answers.com) The band originally started in South Florida as a small industrial Goth band, and by 1990, Marilyn Manson, along with four other musicians became Marilyn Manson and the Spooky Kids. They opened for Nine Inch Nails (NIN), and Trent Reznor was very impressed with them and would help them in the future in many different ways. They got a contract from Trent Reznor’s new label â€Å"Nothing† and got a spot on Nine Inch Nails’ 94 tours. Manson got to meet Dr. Anton Szandor LaVey. He is the founder of the Church of Satan. Dr. LaVey named Manson as a priest of the Church of Satan. Hence, the title Reverend was given to Manson. (Stanton, Bizarre) Manson’s interest in Satanism began when he as a young boy. He spent most of his childhood at his grandparent’s home. Manson and his friend didn’t have anything to do except explore his grandfather’s (Jack Warner) basement. They find out that his grandfather is a cross-dresser and a user of explicit pornographic material such as bestiality. This is where Manson was first introduced to perversity. He attended a Christian school and had Christian beliefs forced upon him even though he was Episcopalian. He was teased and ridiculed because of this. This aside, he always knew that their was something different about him. After being detested by his peers, he gradually began to hate his school and take exception to everything that he was told. He turned to music to free him of the troubles that exist in his life, and instead finds out who he really is. He becomes the exact kind of person that he was once scared of as a youth. (Long, Manson and Strauss) Manson began his teenage years in public school where sex, drugs, rock, and the occult were laid in front of him and he began embrace them. Here he meets many people with the same interests as he has. Manson also begins to experience his sexuality with women. From his school experiences to his  involvement with sexuality, Manson begins terrorizing the people who have mistreated him. He started to experiment with black magic, began an enduring drug habit, and displayed his disgust for mainstream citizens by stealing from stores. All of this is what Brian Warner was, and who Marilyn Manson was to become. (Long, Manson and Strauss) As Manson’s reputation developed, so did the disturbance surrounding him and his actions. His concerts were regularly protested by civil rights groups, and his music was the target attacks from religious and more specifically, Christian groups. This image was created using Manson’s genius for marketing. At the peak of this controversy, Manson had a cover story in Rolling Stone Magazine as well as a best selling autobiography: The Long Hard Road Out of Hell. Why Does He Have Such A Following? â€Å"Congress shall make no law respecting an establishment of religion, or prohibiting the free exercise thereof; or abridging the freedom of speech, or of the press; or the right of the people peaceably to assemble, and to petition the government for a redress of grievances.† (Bill of Rights) Manson, along with many other artists, fully embraces their first amendment right to free speech to get their message across. This message mainly appeals to younger generations who can relate to Manson’s songs. Younger audiences are more accepting of his attitude and beliefs, partly due to the fact that teens are more susceptible to mass influence and are easily confused. His communication and identification through music allowed him to amass a loyal following of discontented teens, also know as â€Å"Mansonites.† â€Å"Mansonite can also be used to refer to anyone who has chosen to identify with the Goth subculture without having any idea of its actual nature or composition. Generally, an overnight Goth, or Spooky Kid, will adopt certain aspects of the Goth aesthetic (predominantly black clothing, copious amounts of eyeliner) and loudly proclaim themselves Goth.† (Mansonite, Wikipedia.com) Older generations are quick to assume that it is Manson’s antics which appeals to his followers. But, if no attention was paid to Manson, and his songs and actions didn’t receive the attention that they do, there wouldn’t be such controversy over his religious beliefs or whether he is actually influencing delinquent teens. Teens that are labeled as outcasts can identify with Manson because the media portrays him as an outcast. He dresses differently, often in women’s clothing and he pretends to be a homosexual – something which is a hot topic of acceptance in today’s society. Teenagers these days have very short attention spans and turn to someone like Manson to entertain them by doing extreme things. The Emergence of â€Å"Spooky Kids† goth (g th) n. A style of rock music that often evokes bleak, lugubrious imagery. A performer or follower of this style of music – Courtesy of Dictionary.com â€Å"Mall Goth or Spooky Kid is a disparaging term for someone not supposed to be a real Goth, whose commitment to the Gothic is seen as shallow, pretentious, or dependent on shopping mall-purchased Goth clothes. Their taste is narrowly subjective to mallcore/nu-metal. There have been accusations that (some of, at least) those who listen to the music of Marilyn Manson, Korn, and Slipknot are mall goths. Many mall goths shop at the popular clothing store Hot Topic.† (Mall Goths, Wikipedia.com) Real Gothists would refer to Mansonites as â€Å"posers†, who pretend to know about a particular subculture, but in reality only know a few choice buzz-words and what style of clothes to wear. The Real Goth Subculture How do you define Goth? Goth is short for Gothic, and we typically associate Goth with people that wear black or blood-red coloured clothing . These clothes are often made of leather, lace, and fishnet, and are adorned with spikes, studs, or other shiny metal objects. Sometimes metallic, black, or dark makeup is worn by both the male and females. Some go so far as  permanent body modifications such as full body tattoos, tongue splitting, or vampire teeth implants. â€Å"Those in the Goth scene tend to view the Goth concept rather as an expression of individuality, something they take part in because it seems comfortable and natural for them to do so, rather than because it’s something they want to be. And as such, Goth is a state of mind. Goth is not about being cool-hip, up-to-date. Goth is more about being cool-chilly as in unemotional, detached, unmoved†¦ at least on the surface. There’s an inner calmness, tranquility to it. A need for being given and giving the others space to be at one with themselves. Respect towards the individual – at least as long as it is a fellow Goth.† (Goth, BBC) After conducting a thorough research of the particular subculture, it really is difficult to define Goth. It is ambiguous and open for interpretation. If Marilyn Manson followers acts or dresses a certain way because of their expression for individuality, then they could be considered Goth. If a Marilyn Manson follower acts or dresses a certain way just to follow the crowd or fit in with this subculture, then, based on the quote above, they would not be considered Goth. Works Cited: The Long Hard Road Out of Hell: Marilyn Manson & Neil Strauss Regan Books (April 1, 1999) Goth – A Lifestyle, BBC Available via HTTP: http://www.bbc.co.uk/dna/h2g2/A473924 Marilyn Manson, Wikipedia.com, the free encyclopedia. Available via HTTP: http://en.wikipedia.org/wiki/Marilyn_Manson Mall Goth Wikipedia.com, the free encyclopedia. Available via HTTP: http://en.wikipedia.org/wiki/Mall_Goth Mansonite, Wikipedia.com, the free encyclopedia. Available via HTTP: http://en.wikipedia.org/wiki/Mansonite Marilyn Manson, MTVe.com Available via HTTP: http://www.mtve.com/artist.php?ArtistId=276 Marilyn Manson, Answers.com Available via HTTP: http://www.answers.com/topic/marilyn-manson Stanton Lavey, Bizarre Magazine Available via HTTP: http://www.bizarremag.com/bizarre_lives.php?id=1809 The Bill of Rights, US Department of State Available via HTTP: http://usinfo.state.gov/usa/infousa/facts/funddocs/billeng.htm

Electronic Documentation in Health Sector Research Paper

Electronic Documentation in Health Sector - Research Paper Example In a study to investigate the barriers to adoption of a standard language in the nursing field, data were collected through surveys, which were administered to a random respondent group established by a computerized mechanism of the practitioners who practice within the ambulatory health systems in the US. The descriptive statistics was evaluated through SPSS through which the correlation indices to the factors under analysis were sought and later interpreted. The outcome of the analysis has revealed the perception of the interviewees that nursing care information is often omitted from the records mostly because of three reasons: no easy documentation method, a failure to reimburse the nursing documentation as well as little time to document. The basic tool to overcome the constraint was seen to be the adoption of electronic mechanisms of documentation, which equally relied on availability of technology and its adoption. Therefore, the relevance of the research study by Conrad and th e team to my capstone project is that it affirms the need to embrace technology in documentation of nursing practices for the ease and efficiency of retrieval of the health records (Conrad et al. 2011). Information technology has been seen to be a critical component in the modern day communication between practicing medical staff and the patients. Besides the necessity of the effective communication to bring about satisfaction to patients in the medical procedure, the lack of it results in great failures within the field. In a study to analyze the role of information technology and the assisted communication within the medical field Angst and colleagues adopted the mode of structure and process as well as outcome, to carry out the analysis. The research was informed by the limited literature that existed on the role of information technology when integrated in communication-based transactions within the medical field. It adopted a SPO framework (structure-process-outcome) to test te chnical as well as interpersonal care processes within the medical field. IT was found to serve in both interpersonal as well as technical processes in the medical field. This is because clinical IT affects the technical dimension while the administrative IT impacts the interpersonal patient care dimension. Measures of hospitals performance are often based on the technical competence as well as the patient’s satisfaction. The structure, according to this research, was found to imply not only the physical organizational structures, but also the incorporation of IT into the management practices. The research, therefore, served to affirm the necessity of health practitioners to embrace technological changes for the purpose of efficiencies in processes and practices (Angst et al, 2012). This study, therefore, has concluded that medical health managers should be aware that underutilization as well as the overutilization of IT in the field would be disastrous to the overall outcome of the institutions. Stored medical and clinical data have many uses among which are clinical care as well as purposes of research. Jensen, Jensen and Brunak (2012) sought to study the critical necessity of proper data storage for the clinical data to be used for research studies as well as for better clinical care. Phenotype information as well as patient information within this field stands to have a great significance though it is often little utilized. Information technology has greatly revolutionized the practices of capturing, storing as well as retrieval of information regarding medical and clini

Patient Teaching Plan Assignment Example | Topics and Well Written Essays - 750 words

Patient Teaching Plan - Assignment Example Diabetes is a chronic disease which necessitates changes in lifestyle, particularly in the field of nutrition and exercise. The overall objective of this lesson is to assist the patient i.e. Mr. Don Jones with a proper course of action to deal with diabetes and to make self-governed behavioral changes. The study materials for understanding the basic information about diabetes can be found in several websites (Northshore University, 2009). Fundamental and complex thoughts about diabetes are identified and explained completely. Furthermore, connection between different perceptions of diabetes are recognized. 2. Understand the symptoms of diabetes Identification of indications and symptoms which helps to recognize the existence of diabetes among individuals. This lesson requires providing education on the aspects of monitoring blood glucose as well as urine. The patient i.e. Mr. Jones will be reminded about recording information with proper date and time so that he can understand any si gns and symptoms such as urinary band and renal disease among others (Northshore University, 2009). Learning objectives are identified and are fulfilled appropriately. 3. ... He needs to understand how different food products can have a harmful effect on his health as they might increase his blood sugar level. Thus, the patient will be taught about the direction of gathering proper blood samples. Researches have depicted that patients having proper education on comprehending the information about blood sugar level can make better analysis of information (Nadeau, Koski, Strychar & Yale, 2001). The teaching materials are prearranged with brief explanations and finalized in a proper manner. 4. Prepare, combine and vaccinate insulin when required Demonstration of drawing up and injecting insulin to the patients The diabetes patient i.e. Mr. Jones must be prompted about different treatments so that he can manage diabetes as well as can maintain proper diet. Several patients with diabetes frequently become disheartened or despondent while taking medications or insulin. Thus, the teaching session would comprise an appraisal of different types of insulin and the process of blending insulin. This session would also help to clarify the patients regarding management of insulin and medications, and also about the significance of taking therapies as recommended with proper dosage. He will be provided books on diabetes as a part of education material. However, keeping in view that Mr. Jones has a 6th grade reading level and poor eyesight, his diabetes education material would comprise a number of images related to Do’s and Don’ts so that it is easier for him to understand (Northshore University, 2009). The patient is capable of implementing the knowledge appropriately for managing diabetes. 5. Understand risk of side effects from food or medicines Recognition of possible known risks with respect to side effects for medicine and foods

David cole interviews Dr. Franciszek Piper + David cole on the Phil Essay

David cole interviews Dr. Franciszek Piper + David cole on the Phil Donahue Show - Essay Example However, Anne and Margot (her sister) changed course to Bergen-Belsen as they were young individuals and had a lot of energy necessary for labor duties in the context of Gestapo (Hanna 56). After the arrival of Eli Wiesel and his father to Birkenau Camp, they received orders of assignment to a barrack located the Gypsy Camp. They were miraculously spared death just as they were about to step into the flaming fires that would eventually kill them. The Germans were afraid of the Soviet Union troops and they could not stand a chance against them and they could not also have the time to organize the captives. So it was up to the individual to make up his or her own mind. The design of the gas chamber was very distinct and it shows that its sole intention was to ferry something on a stretcher into the raving fire ignited by the gas. It is impossible to define what really went into the chamber and the lower section of the chamber there is a slot for adding firewood. The Nazis as we know them were a brutal community that did not feel mercy and it is obvious that they designed the machine to deal with the traitors. It was a permanent structure due to the heaviness of the material used in the construction mainly metal. I think the chimney was meant to let the smoke into the air as burning human remains have a really bad and awful smell. The interview was an interesting revelation into the past lives of those that found themselves caught in the crossfire of the warring countries. The interview shed a lot of light on the experiences that the people had to go through and bear with the harsh and brutal tyrannies of the Nazis and it provided some form of clarity into the issues that were somehow controversial. I think the interview was indeed educative and promoted comparative studies into documented historical and chronological data into events that unfolded during these

Animal Experimentation Essay Example | Topics and Well Written Essays - 750 words

Animal Experimentation - Essay Example Others say that animal testing has been proved worthwhile and therefore should continue, but that new laws should be made in order to prevent cruelty to laboratory animals. This debate about the pros and cons of animal testing is one that elicits strong feelings often resulting in violence, threats, and hunger strikes. I personally believe that animal testing is wrong and that alternate ways should be devised for experimentation. (Mattingly, 1990) No doubt animals have played a vital role in almost all advancements in medicine. Treatments for heart diseases are one example, including open-heart surgery. Perfection of kidney dialysis also occurred through animal experimentation. Recently, animals are being used to determine treatments for major diseases like Alzheimer's disease and AIDS; and if a cure were found, it would be a milestone in medical history. But there is a limit to everything, and there should be a limit to this. Several medical historians claim that clinical research, examination, and human autopsy were the main components in the chief discoveries of heart pathology, cancer, immunology, and psychology. We cannot say assuredly as to what really lead to treatments for the above-mentioned diseases. But we have proof that laboratory animals are treated in an extremely cruel way with having to undergo excruciating pain. It high time people consider them as living beings too. (Anderegg, 2006), (King, 2007) Regarding the credibility of animal testing, it has not always shown promise in every aspect, often leading to a series of unfortunate events. For example, in 1963, a relation had been formed between lung cancer and cigarette smoking, but every method to cause lung cancer in animals had failed. Due to the long span of fifty years spent on this research, the lung cancer-smoking theory lost its validity and health warnings on cigarette packs appeared much later than they should have been, causing a lot of deaths by lung cancer. Another example is the relation of asbestos with cancer, and yet another one is the relation of alcohol with cirrhosis. Many other advancements were prolonged due to misleading information from animal testing. An extremely important one is the vaccine for polio, which was developed wrongly in a monkey cell culture and then later corrected in human cell culture. (Anderegg, 2006) Furthermore, due to differences in animal and human models, experts only tested parts that resembled those of humans without paying any heed to the overall anatomical, physiological and pathological variations. Because diseases usually have body-wide effects, these tests did not always appear to be reliable. (Anderegg, 2006) In addition, animal experimentation has uncovered a large range of lethal nonhuman viruses, which have caused several deaths in the laboratory along with a few outbreaks. Moreover, gene therapy in animals to produce human proteins, and their transfer into humans exposes them to dangerous pathogens. (Anderegg, 2006) Taking an ethical view of this subject, I consider animal testing immoral, cruel, and unnecessary. Animals are no lesser creatures when it comes to emotions, especially suffering pain. Hence, even the idea of subjecting helpless animals to extreme pain and unnecessary death is inappropriate. (King, 2007). The reason that

Constructing Gender through Body Customization Essay - 1

Constructing Gender through Body Customization - Essay Example The same goes for me as I try to combine different styles of clothing along with different accessories. The way we dress portrays our self-identity and thus when we choose a dressing style we have control over the way we want to present our personality. Moreover, my dressing style has impact on my emotions. For instance, I prefer to wear light color clothes as they keep me calm while tight-fitting clothes make me uncomfortable and impatient. 1. It is a fact that the way a person dresses and adorns their body reflects the personal beliefs of that person. In society, the personality of a person is manifested in their dressing sense and it helps other people to characterize them by interpreting their behavior and attitude, and this becomes significant in the context of social gatherings. It has become a practice to stereotype people according to their dress like those who are well-dressed are considered as happy, optimistic, outgoing, and financially affluent (Sanders, 2009, p.1). When I reflect on my personal beliefs I realize that they get reflected in the way I dress. My casual attitude consists of leggings and cool t-shirts along with natural makeup that indicates my belief that everyone looks best with physical features with which they were born. Therefore I refrain from coloring my hair or having tattoos on my body. I also do not generally apply heavy makeup on my eyes with bright colors of eyeshadow as I believe that takes away the natural look of my facial features. A stranger will most probably consider me as a laid-back person with a casual sense of fashion. 2. The core beliefs and values of my family lay in their broad minded perspective of modern day fashion. The elder members of my family are aware of changing trends in fashion and they do not usually provide unsolicited advice to the younger generation. However, the young people of my family do not indulge in vulgar dressing styles and try to

Economic Essay Example | Topics and Well Written Essays - 1000 words - 1

Economic - Essay Example e affected by the cyclone 1 Introduction Farm market like the market for Australia’s bananas is an example of market where the forces of supply and demand work. And just like any industry, Australia’s banana industry has already faced severe short-run problems like shortage in supply and the high price of banana. These were the main issues presented by the media reports that were used in this case study. This report will try to present an economic analysis of the problems encountered by both the consumers and producers of bananas in Australia as they were the key stakeholders impacted by the issues in this case. The concepts of supply, demand, price elasticity of demand and supply, and price instability of farm products were used to analyze this case. 2 Market Demand and Supply A market is an institution or mechanism that brings together the buyers and sellers of a particular good or product (McConnell and Stanley 2005, 47). The Australia’s banana market is an ex ample of a farm market where buyers and sellers are both considered stakeholders. Buyers or consumers of bananas represent the demand side while the supply side is represented by the growers or producers of banana. 2.1 Demand Australians consume around 20 million cartons of bananas a year, which equates to one box per person per annum or 13kgs of bananas each (Drucker 2006, par.7). This means that this amount of bananas is also the amount that consumers or buyers are willing and able to buy at any price during a specific period of time or the demand (Mankiw 1997, 89). Price and the quantity demanded are inversely related as described by the Law of Demand. In this case, banana consumers who are willing and able to exchange their money to have their bananas, will buy more bananas at lower prices and tend to buy less when price is increased. This relationship is shown in Figure 1. Aside from price, there are other determinants of demand. The price and availability of related products i s one that is applicable in this case study. With the shortage in banana caused by Cyclone Larry, consumers’ demand was unchanged as they failed to look for substitute for banana. In effect, they still buy bananas despite its high price. Figure 1. Demand curve D shows the inverse relationship between price P and quantity demanded Qd. 2.2 Supply Supply is the amount of particular goods or services that producers or sellers are willing to produce and make available for sale at a given price during a specified period of time (Mankiw 1997, 91). Law of Supply explains the direct relationship of price and quantity supplied. Industry group such as Growcom and the banana growers like Naomi King (Australian Broadcasting Corporation 2006, 1) will be willing to produce and sell more bananas when price in the market is high. For them, price is also another term for income. The normal or positive relationship between price and quantity supplied is shown in a supply curve like the one belo w. Figure 2. Supply curve S shows the direct relat

From Failure to success Essay Example for Free

From Failure to success Essay Robert Kennedys statement that Only those who dare to fail greatly can ever achieve greatly has been painfully evident in my life. Until recently, I had never dared to fail greatly at anything, and as a result, I never achieved greatly at anything either. Luckily, I have learned the importance of attempting something when theres a looming possibility of failure. At Boys State this summer, I spent a week living with 300 other young men while learning about how North Carolinas government works. To give us a firm grasp of the governmental process, each floor elected town officials, each dorm elected county officials, and the three dorms together elected the state officials. The Boys State program also had its own moot court program from which Supreme Court Justices were elected. At Boys State, I ran for positions in the town and county government, and for Supreme Court Justice. Of the seven positions I competed for, I only won two elections. I count this as a failure because the only positions I won were positions that had no candidates to oppose me. The loss that affected me the most was Supreme Court Justice. This was the position I had wanted to win even before I arrived at Boys State, and I gave up all of my afternoon activity time so that I could participate in the moot court program and remain an eligible candidate for Supreme Court Justice. Unfortunately, the elections for justices were the last of all the voting, and by midnight, everybody wanted to get back to their dorms so the time for our speeches was cut from one minute to ten seconds. Needless to say, I was so unprepared for the sudden change of events, that I barely had time to say my name and one reason I was running before I ran out of time. I lost the election, but the loss taught me that I needed to become more visible so that I would not have to depend on a speech for people to realize that I was a person they should vote for. However, if I had the chance to go back and change anything I had done there, I probably wouldnt change a thing. The reasons for this are not as difficult to understand as they probably should be. Firstly, if I went back and changed anything I had done then, I would not have learned that lesson, and would now be lacking a very important experience in my life. Secondly, good things also came from my loss of the election for Supreme Court Justice. In my failure, I brought the  attention of the gubernatorial candidate onto me. The next morning, he asked me if I would like to be his Secretary of Crime Control and Public Safety which is one of the highest positions at Boys State. After a moment of shock, I immediately accepted the position. Thus, as a result of my own great failure, I achieved grea tly.

Impact of Corporate Governance on Capital Investment

Impact of Corporate Governance on Capital Investment Introduction Overview Through various studies over the years, different scholars and financial analysts have been able to establish a relationship of cash flow on firmsÃÆ' ¢Ãƒ ¢Ã¢â‚¬Å¡Ã‚ ¬Ãƒ ¢Ã¢â‚¬Å¾Ã‚ ¢ investment spending. It was significantly proven by (Modigliani Miller, 1958) that a firmâ„ ¢ financial status is irrelevant for real investment decisions in a world of perfect and complete capital markets, after controlling for the cost of capital. In case of managerial discretion, based on (Jensen, 1986) free cash flow theory, firms increase investment (including projects with negative present value) based on the availability of cash flows with incentive of increasing firmsâ„ ¢ value beyond level of optimal investment. Moreover, an agency costs also appreciate the borrower net worth by charging a premium on the external financing. The discussion above explains that the firmsâ„ ¢ investment decisions are dependent on the availability of internal funds, as cost advantage over external fund is evident. While choosing an appropriate capital structure, there are certain trade-offs which affects the decision. These trade-offs include tax advantage through acquiring debt against the bankruptcy cost which advocates the use of equity. Keeping this in view, various different models have been supported to explain this corporate capital structure behavior. Pecking Order Theory, initially mitigated by (Donaldson, 1961) describes the financing practice as prioritizing the means of financing, which is necessary for the management to counter against asymmetric information. Either they should generate the funds internally or acquire funds externally through debt rather than equity. Implications to the pecking order theory involves the positive impact of leveraging on the market price, which means, financing through debt sends a positive signal into the market about the firmâ„ ¢ future prospects. Furthermore, intermediaries also undermine the role of management as the financial intermediaries such as investment banks function as the insider to the firm. Consequently, keeping an eye on the firms operations and influencing the firmâ„ ¢ capital financing decision. However, Pecking order theory of (Myers, 1984) argues that the firms operating in imperfect or incomplete capital markets where the cost of external capital exceeds that of internal funds, the financial structure may be appropriate to the investment decisions of companies facing uncertain prospects. Gauging the level of corporate investment in any firm is based on the corporate governance; market position of a firmâ„ ¢ asset against its book value can be termed as Tobinâ„ ¢ q ratio. Identified by (Chung Pruitt, 1994), Tobinâ„ ¢ q as the ratio of a market value of a firm to the replacement cost of its assets. Tobinâ„ ¢ q can be considered an effective tool for determining financial performance as the data can be collected readily from a balance sheet. When calculating Tobinâ„ ¢ q ratio, the replacement cost can be determined approximately by the book value of firmâ„ ¢ plant and equipment. Approximate q can be replaced with the actual Tobinâ„ ¢ q to make the calculations unproblematic and data can be readily available without any discrepancies. Problem Statement To study the impact of corporate governance on the capital investment decision through cash flow and Tobinâ„ ¢ q interaction in relation with Capital Investment HypothesEs H0: Firms with investment spending that is influenced by cash flow will be associated with high Q values. In fact, the equilibrium level of Q for these firms will be larger than one. (FCF Theory) HA: Firms indicating a liquidity constraint by not paying dividends will have the most significant cash flow/investment relationship, and will be associated with high Q values in the market. (PO Theory) Outline of the study The report contains the contemplation of research data that will study the phenomenon of cash flows and investment discussed earlier in this paragraph. The study categorizes firms according to characteristics (such as dividend payout, size) which will help measure the level of constraints faced by firms. The study will help readers to understand the complexities of Pecking order theory and Free Cash Flows concept with regard to asymmetric information available and corporate governance which influences decision of the firms. To measure the effect that cash flow-financed capital spending and Q has on firmsÃÆ' ¢Ãƒ ¢Ã¢â‚¬Å¡Ã‚ ¬Ãƒ ¢Ã¢â‚¬Å¾Ã‚ ¢ investment, Ordinary Least Square Regression model will be used to estimate the function. To compute the influence on the Investment, instruments used are: (1) Cash Flow, (2) Approximate q, and (3) an interaction of both variables are created. Through studying the parameter estimates of interaction variable, positive influence on investment will support the Pecking Order hypothesis and negative influence will govern the Free Cash Flow hypothesis. The equation hypothesized in the next part is linear. Definitions Pecking Order Theory: (Myers, 1984): A firm is said to follow a pecking order if it prefers internal to external financing and debt to equity if external financing is used. Free Cash Flow Theory According to (Jensen, 1986) free cash flow theory, high cash flow and low debt create agency costs associated with conflicts between manager and share holder over the payout of this free cash, which is the cash left after the firm has invested in all available positive net present value projects. Capital Structure A careful and systematic analysis of how claims against a corporations assets can or should be determined, assessed, and accounted for. (Riahi-Belkaoui, 1999) Capital Investment Decision Capital Investment decisions are those decisions that involve current outlay in return for a stream of benefit in future years. (Drury, 2006) Tobinâ„ ¢ q Tobins q is a measure of investors expectations concerning a firms future profit potential. It is defined as the ratio of the market value of a firm to the replacement cost of its assets. (Strecker, 2009) Literature Review (Vogt, 1994) explained the capital spending behavior of companies with respect to change in dividend cash paid, cash flows, sales, and market value of assets. The regression equation models the variables to proportion of fixed assets, and distributes the firmsÃÆ' ¢Ãƒ ¢Ã¢â‚¬Å¡Ã‚ ¬Ãƒ ¢Ã¢â‚¬Å¾Ã‚ ¢ data in segments of Dividend Payout Groups and Asset Groups. Primarily, Dividend Cash has a strong negative impact on capital spending; it explains that in order to finance additional fixed investment firm needs to sock cash by reducing their dividend. Cash flow, Sales, and Q Ratio having a positive coefficient demonstrates that with an increase in future cash flows, the firm will improve its capital spending. (Cleary, 1999) has developed a relationship between the firmsÃÆ' ¢Ãƒ ¢Ã¢â‚¬Å¡Ã‚ ¬Ãƒ ¢Ã¢â‚¬Å¾Ã‚ ¢ investment decision and the firmâ„ ¢ financial status. Financial status has been studied with respect to the liquidity constraints. The data is classified into groups through a discriminant analysis on basis of dividend payout policy. These groups helped identify which firms are more prone to be financially constrained and the results showed that firms having high credit worthiness are significantly more sensitive to the availability of internal funds than that are less credit worthy. It has been proposed that the various ownership structures make managerial decision based on the interaction between investment and the firmsÃÆ' ¢Ãƒ ¢Ã¢â‚¬Å¡Ã‚ ¬Ãƒ ¢Ã¢â‚¬Å¾Ã‚ ¢ liquidity constraints. The study conducted by (Dedoussis Papadaki, 2010) mentioned that the management can be held separate from its ownership, even on basis of the nationality of the company. On the other hand, it also explained that the relative shareholding of CEO and the controlling shareholders can also be the basis of separation. Findings support that the Low Q, small, and new firms under the generalized model are facing asymmetric information problems. Indeed these firms are expected a priori to face financing problems that affect the cost of their external financing. On the other hand, low Q, old and low dividend firms are more likely to face managerial discretion problems that result to over-investment. The impact of Tobinâ„ ¢ Q is mainly used to determine the investment opportunity of the firm. In this article, marginal Tobinâ„ ¢ Q has been taken to evaluate the firmsÃÆ' ¢Ãƒ ¢Ã¢â‚¬Å¡Ã‚ ¬Ãƒ ¢Ã¢â‚¬Å¾Ã‚ ¢ investment and Research Development expenditures. Under the asymmetric information (AI) hypothesis firms with attractive investment opportunities may be unable to finance them because of inadequate internal cash flows and because the cost of external funds is too high due to the capital markets ignorance of the firms investment opportunities. The agency or managerial discretion (MD) hypothesis links investment to cash flows by assuming that managers obtain financial and psychological gains from managing a large and growing firm and thus invest beyond the point that maximizes shareholder wealth. (Gugler, Mueller, Yurtoglu, 2004) Taking in viewpoint the impact of capital structure on the capital investment decision, firmsÃÆ' ¢Ãƒ ¢Ã¢â‚¬Å¡Ã‚ ¬Ãƒ ¢Ã¢â‚¬Å¾Ã‚ ¢ investment demands is the more susceptible towards cost-of-capital or tax-based capital incentive. Whereas, capital structure seems irrelevant as against internal sources of funds can be effectively substituted with sources of funds generated externally. (Fazzari, Hubbard, Peterson, Blinder, Poterba, 1988) explicates that cash flow/investment relationship is more sensitive when taken in reference with firmsÃÆ' ¢Ãƒ ¢Ã¢â‚¬Å¡Ã‚ ¬Ãƒ ¢Ã¢â‚¬Å¾Ã‚ ¢ dividend behavior. Comparison based on firms having more or less liquidity constraints can be further improved when compared on a division based on the scale of the firms, i.e. young or small firms versus large ones. This way the researchers can address the problem of firms lacking the asymmetric information. Research Methods The chapter explains the model used in the given research study. The study focuses on analyzing the influence of Cash Flows and Tobinâ„ ¢ q on Corporate Investment. The equation representation consists of the proportion of capital spending to the beginning-of-periods net fixed asset (I/K) as a function of: (1) cash flow divided by beginning-of-period gross fixed asset (CF/K), and (2) beginning-of-period Tobins q (Q). Method of Data Collection Main source of collecting the required data is from secondary sources. It includes the Balance Sheet Analysis of Joint Stock Company listed in Karachi Stock Exchange provided by State Bank of Pakistan consisting of data of our relevant variables. The data was taken in annual terms to conduct this research. Sampling Technique The Convenience sampling or grab or opportunity sampling would be use in this research. Sample population selected because it is readily available and convenient. Sample Size The sample period taken under study covers 8-years period beginning at the start of 2000 and ending at the close of 2008. The data was taken from a sample of 70 (non-banking and non-financial) companies which are listed on Karachi Stock Exchange and included in KSE-100 index. Research Model Statistical technique Ordinary Least Square Regression technique is used to study the impact of variables included in the study. It helps studies the relationship between a dependent variable and several independent variable. It also assumes the relationship to be linear or ÃÆ' ¢Ãƒ ¢Ã¢â‚¬Å¡Ã‚ ¬Ãƒâ€¦Ã¢â‚¬Å"straight line,ÃÆ' ¢Ãƒ ¢Ã¢â‚¬Å¡Ã‚ ¬Ãƒâ€š? where the values of predictors lies directly proportional to Criterion variable. SPSS Software is used to develop the regression model and evaluate the influence of predictors on dependent variable. Results Findings and interpretation of results Aggregate Sample: Table : Represents the model summary of regression estimates for the full sample of 69 firms The predictors, i.e. main effects of Cash Flow and Tobinâ„ ¢ q and an interaction term of both, included in the model helps explain 78.5% of Investment (Table 1) shown mentioned as R Square. Least variation in Adjusted R Square suggests that the variable to observation ratio in the given model is sufficient. Casewise diagnostic was also conducted to eliminate the outliers in the data to improve the results. Table : Studies the F-statistics to test whether the model predicts the dependent variable significantly The F-statistics (Table 2) is significant and it determines the regression model with the given predictors can significantly predict the outcomes at a 0.05 significance level. Table : The parameter estimation for full sample of 69 firms with respect to dependent variable, t-statistics is used to test the null hypothesis ÃÆ'Ã…Â ½Ãƒâ€šÃ‚ ²1 = ÃÆ'Ã…Â ½Ãƒâ€šÃ‚ ²2 = ÃÆ'Ã…Â ½Ãƒâ€šÃ‚ ²3 = 0 The coefficient values of all predators included in the test are significant at a 0.05 significant level (Table 3), which shows that they have a strong influence on the investment of the firm. The standard coefficient shows that Cash Flows have a much greater impact on Investment than market value on the firm, which is exemplified through Tobinâ„ ¢ q. Dividend Payout groups: Table : Presents the sample statistics for 69 KSE listed (non-banking and non-financial) companies which are included in the KSE-100 index. The three rows distribute the statistics into High, Medium, and Low payout policies. Average dividend-to-income ratios of greater than 0.35, between 0.35 and 0.10, and less than 0.10 define High, Low, and Medium dividend-payout firms, respectively. While studying the dividend-payout groups (Table 4), the descriptive helps to identify characteristics to confirm whether the data being studied has the authenticity and the behavior pattern which commonly related to the groups assigned. The values of Investment, Cash Flow, and Tobinâ„ ¢ q associated with the groups are in complete correspondence with the hypothetical occurrence. Firms having a higher (lower) dividend payout have greater (lower) market value, and lower(higher) level of cash flows and investments. Table : Represents the model summary of regression estimates of 69 firms split by High, Medium, and Low dividend-payout policies. The model helps explains 81.9%, 66.7%, and 80% data in High, Medium, and Low dividend-payout firms (Table 5), shown in R Square. Least variation in Adjusted R Square suggests that the number of observations is sufficient with respect to variables in each group separately. Table : Studies the F-statistics to test the null hypothesis of ÃÆ'Ã…Â ½Ãƒâ€šÃ‚ ²1, H = ÃÆ'Ã…Â ½Ãƒâ€šÃ‚ ²1, M = ÃÆ'Ã…Â ½Ãƒâ€šÃ‚ ²1, L The F-statistics (Table 6) in each dividend payout group is significant and it determines that each regression model with the given predictors can significantly predict the outcomes at a 0.05 significance level. Table : Shows the parameter estimation for each payout groups with respect to dependent variable, t-statistics is used to test the null hypothesis ÃÆ'Ã…Â ½Ãƒâ€šÃ‚ ²1 = ÃÆ'Ã…Â ½Ãƒâ€šÃ‚ ²2 = ÃÆ'Ã…Â ½Ãƒâ€šÃ‚ ²3 = 0 The coefficient values of predators in High and Low dividend payout groups are all significant at a 0.05 significant level (Table 7), which shows that they have a strong influence on the investment of the firm. Except for Medium dividend payout group, which has insignificant coefficient values of Tobinâ„ ¢ q, showing no impact on the investment. The standard coefficient shows that Cash Flows have a much greater impact on Investment than market value on the firm, which is exemplified through Tobinâ„ ¢ q. Hypothesis Assessment Summary Hypothesis Independent Variables B t Sig. Comments Firms with investment spending that is influenced by cash flow will be associated with high Q values. In fact, the equilibrium level of Q for these firms will be larger than one. (FCF Theory) Cash Flow ÃÆ'Æ’Ã ¢Ã¢â€š ¬Ã¢â‚¬  Q H0= ÃÆ'Ã…Â ½Ãƒâ€šÃ‚ ²3 ÃÆ'Ã…Â ½Ãƒâ€šÃ‚ ²3,H = .135 5.295 .000 Rejected ÃÆ'Ã…Â ½Ãƒâ€šÃ‚ ² 3,M = .072 .991 .324 ÃÆ'Ã…Â ½Ãƒâ€šÃ‚ ² 3,L = .140 5.482 .000 Firms indicating a liquidity constraint by not paying dividends will have the most significant cash flow/investment relationship, and will be associated with high Q values in the market. (PO Theory) Cash Flow ÃÆ'Æ’Ã ¢Ã¢â€š ¬Ã¢â‚¬  Q HA= ÃÆ'Ã…Â ½Ãƒâ€šÃ‚ ²3 >0 ÃÆ'Ã…Â ½Ãƒâ€šÃ‚ ² 3,H = .135 5.295 .000 Accepted ÃÆ'Ã…Â ½Ãƒâ€šÃ‚ ² 3,M = .072 .991 .324 ÃÆ'Ã…Â ½Ãƒâ€šÃ‚ ² 3,L = .140 5.482 .000 Dependent Variable: Investment Table : Summarizes the results and explains that the hypothesis accepted is directly in correspondence with the aggregate hypothesis. As illustrated (Table 8) capital spending of low payout firms is positively and strongly influenced by the interaction term, consistent with the PO hypothesis, the parameter estimate for the high payout firms are also positive but marginally significant. Conclusion, Discussions, Implications And Future Research Conclusion The results illustrated above demonstrates that the positive relationship between the degree of the CF/I relationship and Q found latter in the aggregate data (Table 3) is concentrated in low or no dividend paying firms. This finding is in further support with the PO hypothesis. Discussions The objective was to study and test the causes of universal relationship between Cash Flow and Investment Spending. Hence, two hypotheses were included in the research to study the source of this relationship: the free cash flow hypothesis (FCF) hypothesis, which works on the assumption that managers prefer investing its free cash flow excessively into investment projects that are not profitable, and the pecking order hypothesis (PO) purports that managers are prone to investment comparatively less than the opportunity provided due asymmetric information-induced liquidity constraint. As advocated in favor of Pecking Order Theory by (Fazzari, Hubbard, Peterson, Blinder, Poterba, 1988) and many others, for groups which consists of small firms with low-dividend payout to fund capital spending, exhibits heavy reliance on cash flow and cash changes. The relationship can be more significantly studied when the impact of larger q value is associated with this group. Evaluating the impact of corporate governance on investment-cash flow relation requires a critical judgment as to how do the firmsÃÆ' ¢Ãƒ ¢Ã¢â‚¬Å¡Ã‚ ¬Ãƒ ¢Ã¢â‚¬Å¾Ã‚ ¢ cash flow and the existing market value influence the investment decision. Financially constraint firms may have a larger impact on liquidity associated matters and managers might take discretion in choosing the right sources to tap. Agency cost may be involved in making such a decision where managers may consider paying dividend as a higher opportunity cost as it reduces the firmsÃÆ' ¢Ãƒ ¢Ã¢â‚¬Å¡Ã‚ ¬Ãƒ ¢Ã¢â‚¬Å¾Ã‚ ¢ free cash flow to exploit new profitable investment projects. Implications and Recommendations In the current market situation where external pressures existing can also be taken into proxy. When managers making a capital investment decision they need to take in view other non-financial aspects that also influences the decisions to a certain extent. Furthermore, financial intermediaries having a certain level of involvement and sharing information sensitive to the market can also be a major factor that might be giving a varying result against Investment. Investing in profitable-investment projects can bring in greater resources to the firm in future and it entails a huge decision burden upon the shoulders of the managers. Shareholders expecting to earn a greater return through investing in them can also be undermined when manager decided to have a low payout policy. Funds generated internally is a possibility where there is a healthy cash flow, but it is also preferable if this free cash is invested into marketable security for allocating the resources into a profitable venture for a time being to make it a positive impression. Future Research In future studies there may be more aspects of cash flow-investment relationship which can be studied for assessing the degree impact it has on this relationship, i.e. sales, debt performance, capital structure, firm size, etc. The research study may also be improved if the observation of firms are increased that will in turn reflect a more clear picture about the relationship in the current scenario.

Impact of Exchange Rate Misalignment on Capital Inflows

Impact of Exchange Rate Misalignment on Capital Inflows EXCHANGE RATE MISALIGNMENT AND CAPITAL INFLOWS: AN ENDOGENOUS THRESHOLD ANALYSIS FOR MALAYSIA ABSTRACT This study presents an attempt to investigate the impact of exchange rate misalignment on capital inflows in Malaysia. Specifically, a precise threshold value is estimated to examine when exchange rate misalignment suppresses capital inflows. To pursue these objectives, this study relies on the endogenous threshold analysis as of Hansen (1996, 2000). Results suggest that misalignment in terms of currency overvaluation, has a negative and significant effect when overvaluation is more than 15 percent. This estimate is consistent and robust despite the changes in the choice of explanatory variables. INTRODUCTION Foreign direct investment (FDI) has served as an important engine of growth via skills and technology transfer, creation of employment opportunities and expanding the capital stock in Malaysia. Since the 1997 Asian financial crisis, Malaysia is no longer the top 10 host for FDI. In fact, the rate of growth of FDI has dramatically decrease compared to that of the early 1990s. This is partly due to reverse investment (Mat Zin, 1999) and declining dependence on FDI to finance growth. However, this may also indicates the declining competitiveness of Malaysia in attracting FDI which warrants empirical research since it would be vital to investigate which factors that contributed to the deterioration of competitiveness. Since early 1980s, real exchange rate misalignment has become a standard concept in international macroeconomic theory and policy (Razin Collins, 1997). Hence, this study focuses on exchange rate misalignment as an indicator of capital inflow competitiveness in the case of Malaysia. Malaysia provides an interesting case as it is one of the largest recipients of FDI amongst its ASEAN counterparts. Another advantage of undertaking a single country study is the ability to delineate the assumption that countries are similar in terms of social, cultural, economic and political background (Sun et al., 2002). Therefore, only relevant economic determinants are accounted for to suit the Malaysian environment. The objective of this paper is to investigate the empirical relationship between capital inflows and exchange rate misalignment. Whilst existing literature focuses on the role of exchange rate, this study takes a step further to examine the impact of exchange rate misalignment on capital inflows. Specifically, we estimate a threshold value at which misalignment begins to significantly affect capital inflows. To the best of our knowledge, no published study has attempted to estimate a threshold value for exchange rate misalignment in Malaysia. Hence, this study intends to fill this gap. Based on the endogenous autoregressive threshold (TAR) model developed by Hansen (2000), we split the sample into high and low misalignment regimes. Results suggest that exchange rate misalignment due to overvaluation is detrimental to the influx of capital inflows. The next section provides a brief overview of FDI in Malaysia followed by a brief explication of the theoretical model and review of liter ature. The fourth section spells out the method pertaining to the objective. The penultimate section provides results and discussion and the final section concludes. CAPITAL INFLOWS IN MALAYSIA: RECENT TRENDS AND INCENTIVES The essence of export oriented-growth nexus somewhat depends on the inflow of foreign capital into the country. In the past, foreign direct investment has been the one of the major conduit for technology transfer, job creation and export-led growth to this country. To pursue this line of interest, the Malaysian government has designed various policies spanning the gamut of industrial specific incentives, taxation, and intellectual property protection to infrastructure support. The company tax rate for example has been reduced from 33 percent in 1987 to 27 percent in 2007 and 26 percent in 2008. Other tax incentives such as the investment tax allowance, tax relief for companies with pioneer status or high technology industries has continued until today with more industries be given the relevant status to reap the benefits of the incentives. Most recently, the government has liberalized bumiputera equity requirements for 27 sectors to further boost competitiveness. With reference to previous information, there was a surge in foreign direct investment (FDI) into Malaysia in the late 1980s and this trend continued until the onset of the 1997 Asian financial crisis. Another acute slump in the influx of FDI occured in 2001 when the economy was in a slight recession but picked up again in 2002 thereafter. With the recent burgeoning world recession following the American sub-mortgage crisis, it is expected that FDI will contract again (IMF, 2009). To capture a more vivid impact of misalignment on capital inflows, this study employs quarterly data from Bank Negara Malaysia (BNM – the central bank of Malaysia) instead of the UNCTAD data which are annual. Foreign capital inflows or investment inflows comprises three items: (i) equity investment, (ii) loans and (iii) real estate. Investment consists of equity investment in Malaysia by non-residents, loans obtained from non-residents and purchase of real estate in Malaysia by non-residents but excludes retained earnings (Source: Bank Negara Malaysia, Glossary, Monthly Bulletin Statistics January, 2009, p. 186-187). This study resorts to a specific measure of FDI, that is, foreign investment inflows. Data starts from 1991:Q1-2008:Q3, partly dictated by availability. THEORY AND REVIEW OF LITERATURE In this study, we rely on the portfolio balance approach to model the determinants of foreign capital inflows. This model has been successfully tested by Goh (2005) for Malaysia. Branson (1968) postulates that the proportion of foreign assets (Kf) in a given stock of wealth is a function of the domestic and foreign interest rates (i and i*), the measure of exchange rate expectation or risk (e) and the stock of wealth (w) expressed as: (1)Darby et al. (1999), augment this concept of exchange rate risk (e) into exchange rate volatility and exchange rate misalignment. Since this study focuses on the role of exchange rate misalignment, we substitute e with misalignment. Expressing the above equation at level yields, (2)Focusing on Z, the literature suggests a number of variables that determines capital flows. The enigmatic relationship between FDI and exchange rate nexus has been widely examined and most of the discussions root back to the work of Kohlhagen (1977), Cushman (1985), Froot and Stein (1991), Goldberg (1993) and Darby et al. (1999). The effect of exchange rate is less straightforward (Benassy-Quere et al., 2001). The mechanisms that exchange rate affects capital inflows can also be viewed via the wealth effect channel and the relative production cost channel (Xing, 2006). A devaluation of the currency of the host country makes local cost of production lower in terms of foreign currency, hence leading to higher returns from export-oriented industries. As for the wealth effect, a devaluation makes local asset cheaper which motivates investors to acquire more. Kohlhagen (1977) static model postulates that following depreciation in host countries, MNEs will increase their production capacity. In a two period dynamic model, Cushman (1985) suggests that adjusted expected real depreciation lowers the production cost which leads to increase in FDI flows. Similarly, Goldberg (1993) illustrates how sectoral profitability, location effects, and portfolio and wealth effects are important factors that determine investment an d their links with exchange rates. In her theoretical model, the direction of investment effects triggered by exchange rate movements is ambiguous, therefore, warrants empirical research. On contrary, in an imperfect information framework, Froot and Stein (1991) show that appreciation induces wealth effect of foreign investors, thus encouraging foreign investors to acquire more local assets. Empirically, there is quite a consensus that a depreciation of the exchange rate in the host country leads to a reduction of the FDI (Klein and Rosengren, 1994; Dewenter, 1995). There is however, a dearth of studies that empirically examine the relationship between FDI and exchange rate misalignment. Empirical attempts include Benassy-Quere et al. (2001) who advocate the benefits of depreciation may be offset by excessive volatility of the exchange rate. Blonigen (1997) illustrates how currency depreciation induces foreign firm to acquire firm-specific assets when markets are segmented. Hasnat (1999) study the impact of misalignment on FDI for five developed nations on annual data ranging from 1976-1995. All of these studies use misalignment as a control variable or a counterpart for exchange rate variability and is measured by a deviation from the purchasing power parity (PPP) values. Furthermore, most of these studies are based on the experiences of industrialized economies using panel data analysis framework. In short, a prolonged misalignment may affect long term business decisions as it affects costs. If the exchange rate is overvalued relative to the e stimated equilibrium level, investors may acquire more domestic assets for future capital gains in host country currency terms (Barrell and Pain, 1996). On the other hand, persistent overvaluation may reduce cost competitiveness of production in the host country, especially for export oriented products. Other traditional determinants of FDI can be demarcated into at least two categories – micro and macro determinants. The list of micro-determinants spans from market size, growth, labour costs, host government policies, tariffs to trade barriers. The macro-determinants include market size (Chakrabarti, 2001; Farrell et al., 2004; Kravis and Lipsey; 1992), openness (Edwards, 1990; Gastanaga et al. 1998; Hausmann and Fernandez-Arias, 2000; Aseidu, 2002), rate of inflation (Bajo-Rubia and Sosvilla-Rivero, 1994; Urata and Kawai, 2000), government budget, taxes (Gastanaga et al., 1998; Wei, 2000) and infrastructure (Wheeler and Mody, 1992; Urata and Kawai, 2000). Financial deepening is also another catalyst for FDI (Borensztein et al., 1998). Liquid liability, private credit and M3 serve as proxies. Increase in money supply fuels inflation which increases the cost of production in the host country rendering a negative relationship. However, increments in money supply supported by g rowth or higher productivity indicate increase in future purchasing power which can benefit market-seeking FDI. Finally, the degree of misalignment is computed based on the difference between the actual and the hypothetical equilibrium exchange rate. Accordingly, the estimation of the hypothetical equilibrium exchange rate relies on the theory advocated by Edwards (1994). This theory postulates that the real exchange rate is a function of several fundamental variables which includes the Balassa-Samuelson effect, trade openness, net foreign assets and government spending. Details are provided in Sidek and Yusoff (2009). METHODOLOGY AND DATA The question of when does misalignment begin to significantly affect capital inflows necessitate the existence of a non-linear relationship between these two variables. Thus, if such non-linear relationship exists, then it is possible to estimate an inflexion point, or a threshold value, at which the sign of misalignment may change or become significant. In the non-linear time series modelling, the threshold autoregressive model (TAR) is more popular since it offers a relatively simple specification, estimation and interpretation compared to other non-linear models. The origins of TAR models roots back to Tong (1980) where the main idea is to approximate a general non-linear autoregressive structure by a threshold autoregession with a small number of regimes. Hansen (1996, 2000) derives the asymptotic distribution of the ordinary least squares (OLS) estimates of the endogeneous threshold parameters which is used in this study. This section explains how equation (2) is estimated to incorporate threshold effect. According to Hansen (2000), threshold estimation is the act of splitting the sample into two regimes when the threshold value is unknown. One necessary precondition is that the threshold variable must be a continuous variable. In this study, the threshold estimation is carried out by splitting the sample into high misalignment and low misalignment regime. Since misalignment is a continuous variable, TAR model would be appropriate to engender the threshold value. Formally, the two-regime threshold regression model takes the form: where is the threshold variable which is used to split the sample into two regimes, is the threshold value which is unknown and must be estimated, denotes the dependent variable (capital inflow), represents a vector of explanatory variables and is the error term assumed to be white noise and i.i.d. Note that if the threshold value is greater than the threshold variable, equation (3) is estimated and vice versa. This allows the regression parameters to change with respect to . In order to write equations (3) and (4) in a single equation, a dummy variable is used which is defined as where {.} is the indicator function, with d=1 when and d = 0, if otherwise; and set , such that (3) and where and . Equation (5) allows all the regression parameters , and to be estimated and switch between the two regimes. The least square (LS) technique is used to estimate through minimization of the sum of squared errors function. To implement this, the model is expressed in matrix notation, hence, equat ion (5) is expressed as: (6) Define, (7) as the sum of squared error function. By definition the least squares estimators which is also the MLE when with i.i.d. , jointly minimize equation (7). This minimization process requires to be restricted to a bounded set . The concentrated sum of squared errors function is written as: (8) where is the value that minimizes . As takes values that is less than n, is uniquely described as: with (9) Focusing on the objective of this section, the first step is to examine whether there exist a threshold effect in the model. This requires the examination between the linear model vis-Ã  -vis the two-regime model, equation (5). The null hypothesis of no threshold effect is tested against an alternative hypothesis where threshold effect is present. Since TAR models have a non-standard distribution, Hansen (1997, 2000) develops a standard heteroscedasticity-consistent Langrange Multiplier (LM) bootstrap method to calculate the asymptotic critical value and the p-value. The second step is to examine whether the derived threshold value is statistically significant. This is done by differencing the confidence interval region based on the likelihood ratio statistic . Based on Hansen (2000), let C represent the desired asymptotic confidence interval (in this study at 95%) and be the C-level critical value and set . Assuming homoscedasticity, as , therefore, is the asymptotic C-level confidence region for . If the homoscedasticity condition is not fulfilled, then a scale likelihood ratio statistics of the residual sum of squared errors is defined as: (10)and the adjusted confidence region becomes such that is robust whether or not the heteroscedasticity condition holds. Simulation is set at 1000 replications as suggested by Hansen (2000). Also, is not normally distributed hence, the valid asymptotic confidence intervals of the estimated threshold values in the no-rejection areas defined as , where is a given asymptotic level; and the no- rejection region of the confidence interval is . If , than the null hypothesis of cannot be rejected. In addition, to examine the possibility of a second threshold value, the same exercise is repeated. Specifically, the empirical model to be tested which is based on equation (2) is defined as follows: (11) where K is capital inflows, Mis, R and M3 denote exchange rate misalignment, interest differentials and financial deepening, and Z represents the other control variables. Table 1 summarizes the description of data, measurement and sources used in this study. Table 1: Determinants of Capital Inflows (1991Q1-2008Q3) Variable Description Measurement Source I Foreign investment Total foreign investment inflow as a percentage of GDP BNM M3 Money supply M2 as a percentage of GDP IFS D Government deficit The difference between revenue and expenditure as a percentage of GDP BNM R Interest differential The difference between Malaysia and US 3-month T-Bill rates IFS T Taxation Government corporate tax revenue as a percentage of GDP BNM LL Liquid Liability Log International liquidity: banking institution liability, line. 7b.d IFS INFRA Infrastructure Log of spending on infrastructure as a percentage of GDP BNM IFS: International Financial Statistics, IMF, UNCTAD: United Nations Conference on Trade and Development, BNM: Bank Negara Malaysia Monthly Statistical BulletinDOS: Department of Statistics, Malaysia (various issues). RESULTS AND DISCUSSION Prior to time series analysis, we test for unit roots in order to avoid spurious regression. Three versions of unit root testing, namely the ADF, PP and KPSS tests are employed to examine whether the variables are stationary on level or otherwise. Table 3 indicates that the order of integration are mixed for a majority of variables. However, this study proceeds to examine the threshold effect by including lagged variables for I(1) variables in the OLS estimation. Moreover, equation (2) derived from the theory requires estimations at level. Table 2: Unit root test ADF PP KPSS Order of Integration Level 1st Diff Level 1st Diff Level 1st Diff I -3.7029* -7.9812* -3.5286* 14.00208 0.9008* 0.2305 I(0)/I(1) M3 -1.2741 -10.0951* -1.3334 -10.4699* 1.0229* 0.3588*** I(1) D -1.6297 -19.7087* -8.8219* -27.3774* 0.3649* 0.0894 I(0)/I(1) R -4.5405* -3.8179** -2.6509 -7.0649* 0.0711 0.0471 I(0)/I(1) INFRA -2.2527 -4.5270* -3.5053* -27.7776* 0.2234* 0.0813 I(0)/I(1) LL -3.0805 -6.5500* -2.4386 -6.7355* 0.1073 0.0607 I(0)/I(1) MIS -3.8075** -9.7442* -3.8076** -9.8483* 0.0662 0.0577 I(0) Note: *, ** and *** denote significance at 1%, 5% and 10% significant level. p-values are in parentheses. For ADF and PP test the null is no unit root (H0: Variable is stationary) whilst the null for the KPSS is the existence of unit root (H0: Variable is not stationary). The baseline regression constitutes the exchange rate misalignment, interest differential and a measure of financial development, M3. We present four additional models with different variables added to the baseline regression, namely liquid liability, government budget deficit, and infrastructure for sensitivity analysis. Hansen (2000) theoretical construct allows for two threshold effects, hence, the first step is to investigate the possible existence of such an effect. Prior to that, a threshold variable needs to be selected. Since the aim of this section is to examine at what percentage exchange rate misalignment actually hurts capital inflows, the appropriate threshold variable is the exchange rate misalignment. Upon choosing the appropriate threshold variable, the next step is to observe any evidence of a threshold effect and whether there exist one or more threshold by employing the heteroscedasticity-consistent Lagrange-multiplier (LM) test for a threshold based on Hansen (1996). To test under the null hypothesis of no threshold effect, p-values are calculated using a bootstrap analog which generates the dependent variable from the distribution , where is the OLS residuals from the estimated threshold model. With 1000 bootstrap replications, the p-values for the baseline threshold models (Table 3) using misalignment strongly suggest the existence of threshold effect at 0.000. Subsequently, this suggests that there is a sample split based on the effect of exchange rate misalignment. Table 3: Threshold Effects for the baseline model Model 1 First Sample Split F-Stats 51.4045 Bootstrap P-Value 0.000 Threshold Estimates -15.0260% 95% Confidence Interval -15.446% , -9.8360% Second Sample Split F-Stats 16.2171 Bootstrap P-Value 0.2890 Note: H0: No threshold effect. The threshold is based on the minimized sum of squared residuals. This illustrates the graph of the normalized likelihood ratio sequence as a function of the threshold in exchange rate misalignment. The estimated is the value which minimizes these graphs which range at =15.02-15.44%. The dotted lines on the graphs present the 95% critical values. For example, in model 1, the asymptotic 95% confidence interval set where crosses the dotted lines. The results suggest that there is ample evidence for a two-regime specification. Also, it is worth noting that 41 of the 71 observations fall into the 95% confidence interval, hence, requires an examination of the possible existence of a second sample split. Results in Table 3, show that second sample split renders insignificant bootstrap p-value thus, indicating no further regime split. Table 4 presents the results for baseline regression. For comparison purposes, this study provides the linear OLS model without the threshold effect and a two-regime model which accommodates the threshold effect. Basically, the variables confer the correct signs in line with the prediction of the theory. Misalignment has a negative and significant effect on capital inflows in regime 2. Interest differential is expected to confer a negative effect. Results indicate that interest differentials only affects capital inflows negatively in the regime 1 but is insignificant in the regime 2. Similarly, M3 has significant effect in both regime but is positive in the regime 1 but the sign switches in regime 2. Hence, splitting the sample gives a more indepth view of the effects of these basic variables on investment inflows. To reiterate, sample splitting allows the examination of whether the significant effect is present in both regimes or otherwise. The results show that below the threshold value of 15%, exchange rate misalignment may be negative but are not statistically significant. However, above the 15% threshold level, misalignment exerts both negative and significant impact on capital inflows. A 1% increase in misalignment (overvaluation) suppresses capital inflows by approximately 1.19%. The negative effect of exchange rate misalignment on capital inflows is consistent with the findings of Hasnat (1999). Barrel and Pain (1996) argue that an apparent currency misalignment persistent over some length of time may affect investment inflows decisions. A reasonable explanation is that the relative production costs may be higher as a result of such misalignment. If the ringgit is thought to be overvalued relative to its estimated equilibrium level, then foreign production may be discouraged by the prospect of future capital loss in home currency terms. Another issue which emerges after the 1997 financial crisis is that capital inflows must be managed since reversals are likely to cause severe damage to the economy. Reinhart and Reinhart (1998) calls for greater exchange rate flexibility which is meant to introduce two-way risks, therefore, discouraging speculative capital inflows. It is, however, only possible in the context of de facto peg or a tightly managed float. Furthermore, the effectiveness of this policy depends on how much policymakers are willing to allow the exchange rate to fluctuate. A large band denotes greater flexibility but risks having large nominal appreciation which connotes possible overvaluation of the currency. The result of this study suggests that overvaluation is detrimental to capital inflows if this band exceeds 15%. Hence, policymakers should keep exchange rate fluctuations well below this 15% threshold. Table 4: Baseline regression results on the effect of misalignment on capital inflows (1991:Q1-2008:Q3). Dependent variable is capital inflows. Model 1 Linear Model Threshold Model OLS without threshold Regime 1 Â £ 15.0259% Regime 2 > 15.0259% Misalignment -0.4267** (0.2115) -0.3186 (0.2573) -1.1955** (0.5712) Interest Differential -0.0250*** (0.0131) -0.0438* (0.01533) -0.0261 (0.0193) M3 0.2964* (0.0391) 0.2644* (0.0516) -0.5560* (0.1240) Constant 3.0468* (0.2779) 2.5394* (0.2593) 6.7313* (0.6099) No. of Observations 71 42 29 R2 0.3664 0.6484 0.4218 Notes: *, ** and *** denote 1%, 5% and 10% significance respectively. Standard errors in parentheses. Interest rate differential are consistently negative and significant in all specifications and in both regimes in majority of the threshold model. This stresses the role of interest rates in attracting capital inflows into Malaysia. Although the impact may be small, it is significant and the authorities should ensure that interest rates are kept at certain levels to maintain competitiveness of Malaysia as destination for capital investment. In this paper, the estimated impact of a 1% change in interest differential is expected to subdue foreign investment by 0.04 percentage point in the first regime and 0.03 percentage point in the second regime. The proxy for financial deepening, M3 is statistically significant in all models and in both regimes. Again, this signifies the importance of financial development in attracting capital investment into Malaysia. Interestingly, M3 is positive during the periods of low misalignment regime (regime 1) but becomes negative at higher misalignment regime (regime 2). During low misalignment, a 1% increase in M3 is expected to draw in 0.3 percentage point more investment inflow into Malaysia. This shows that in the lower regime, financial depth acts as an impetus to capital inflows. However, the situation reverse with 0.6 percentage point lower investment inflows is expected with a 1% increase in misalignment in the second threshold regime. Montiel (1999) explicitly explains this phenomenon where capital inflows increase reserves which then prompt an increase in the monetary base, M2 and M3. Such increases fuels further increments in domestic demand leading to real appreciation. Thus, any overvaluation of the currency may eventually have negative ramifications on capital inflows. Sensitivity analysis To check for the sensitivity of the estimated threshold value, Table 6 -7 and Figure 3 represents four other models which use different variables in addition to the baseline regression. The addition of taxes yields insignificant results without drastically changing the threshold value. Other additional variables such as government budget deficit and liquid liability are only significant in one of the two regimes . With the inclusion of additional variables, the estimated magnitude of each regressors differ slightly but maintains the same sign and significance level. For example a 1% increase in misalignment (overvaluation) suppresses capital inflows by 1.11-1.55 percentage point. The estimated impact of a 1% change in interest differential is expected to deter foreign investment by 0.04-0.05 percentage point in the first regime and 0.02-0.06 percentage point in the second regime. Similarly, during low misalignment, a 1% increase in M3 is expected to draw in 0.2-0.3 percentage point m ore investment inflow into Malaysia. An estimated 0.49-0.67 percentage point lower investment inflows is expected with a 1% increase in M3 in the second threshold regime. In view of the results, it seems evident that the exchange rate policy has important effect in attracting foreign capital inflows into Malaysia. Specifically, misalignment in terms of overvaluation should be kept lower than 15 percent to ensure that capital inflows remained unhurt. Table 5: Sensitivity Analysis: Threshold Effects Model 2 Model 3 Model 4 Model 5 First Sample Split F-Stats 71.1442 45.9364 53.3722 53.3722 Bootstrap P-Value 0.000 0.000 0.000 0.000 Threshold Estimates -15.4461% -15.0260% -15.0260% -15.0260% 95% Confidence Interval -15.446%, -15.025% -15.446%, -9.836% -15.446%, -0.0984% -15.446%, -0.0984% Second Sample Split F-Stats 16.4917 19.7585 22.9710 22.9710 Bootstrap P-Value 0.5310 0.3800 0.2420 0.2420 Note: H0: No threshold effect. The threshold is based on the minimized sum of squared residuals Table 6: Sensitivity Analysis for threshold estimates (1991:Q1-2008:Q3). Model 2 Linear Model Threshold Model OLS without threshold Regime 1 Â £ 15.4461% Regime 2 > 15.4461% Misalignment -0.4278*** (0.2216) -0.3497 (0.4143) -1.5593* (0.3135) Interest Differential -0.0250*** (0.0134) -0.0462* (0.0153) -0.0599* (0.0131) M3 0.2966* (0.0414) 0.2732* (0.0488) -0.5609* (0.0744) Liquid Liability -0.0029 (0.1709) -0.0634 (0.1932) 1.1843* (0.2615) Constant 2.9780* (0.2713) 2.5259* (0.2593) 6.1799* (0.3135) No. of Observations 71 41 30 R2 0.3842 0.6503 0.5986 Model 3 Linear Model Threshold Model OLS without threshold Regime 1 Â £ 15.0260% Regime 2 > 15.0260% Misalignment -0.4472** (0.2038) -0.3800 (0.2460) -1.1171*** (0.6229) Interest Differential -0.0254* (0.0126) -0.0505* (0.0140) -0.0237 (0.0221) M3 0.2844* (7.4922) 0.2521* (0.0472) -0.5391* (0.1477) Deficit -0.7655* (0.3059) -0.7380* (0.3099) -0.1841 (0.7174) Constant 3.0308* (0.2674) 2.5835* (0.2445) 6.6452* (0.7337) No. of Observations 71 42 29 R2 0.4285 0.6829 0.4230 Model 4 Linear Model Threshold Model OL S without threshold Regime 1 Â £ 15.0260% Regime 2 > 15.0260% Misalignment -0.2852 (0.2181) -0.2582 (0.2720) 1.2490** (0.5612) Interest Differential -0.0275** (0.0128) -0.0419* (0.0165) -0.0311 (0.0204) M3 0.3208* (0.0401) 0.2796* (0.0583) -0.5489* (0.1245) Tax 2.1899** (1.0761) 0.1283 (0.1457) 0.1260 (0.1720) Constant 3.0274* (0.4383) 2.2463* (0.4806) 6.5027* (0.7227) No. of Observations 71 42 29 R2 0.3665 0.6516 0.4300 Model 5 Linear Model Threshold Model OLS without threshold Regime 1 Â £ 15.0260% Regime 2 > 15.0260% Misalignment -0.3780*** (0.1977) -0.4495*** (0.2602) -1.3190** (0.6059) Interest Differential -0.0203 (0.0123) -0.0433* (0.0152) -0.0308 (0.0212) M3 0.2941* (0.0365) 0.2388* (0.0479) -0.6093* (0.1406) Infrastructure 3.0729* (3.3373) 0.0474** (0.0228) -0.0382 (0.0392) Constant 3.0709* (0.2569) 2.5698* (0.2346) 7.0433* (0.7173) No. of Observations 71 42 29 R2 0.4091 0.6815 0.4384 Notes: *, ** and *** denote 1%, 5% and 10% significance respectively. Standard errors in parentheses. CONCLUSION The objective of this chapter is to examine the impact of exchange rate misalignment on capital inflows. Results provide evidences of the negative impact of misalignment on capital inflows. To reiterate, overvaluation of the ringgit signals that Malaysia is less competitive vis-Ã  -vis other countries. In addition, this paper also estimates a specific threshold value; that is the degree of misalignment after which it begins to hurt capital inflows. By employing a recent technique by Hansen (1996, 2000), this study splits the sample into high misalignment and low misalignment regimes. This study shows that misalignments hurt capital inflows in the high misalignment regime or when misalignment is greater than 15 percent. This study also confirms the work of Goh (2005) who suggests that the portfolio balance model can capture the determinants of capital inflows in Malaysia. In particular, the results suggest that interest differential is an important determinant albeit, small, hence, p olicies should be direc Impact of Exchange Rate Misalignment on Capital Inflows Impact of Exchange Rate Misalignment on Capital Inflows EXCHANGE RATE MISALIGNMENT AND CAPITAL INFLOWS: AN ENDOGENOUS THRESHOLD ANALYSIS FOR MALAYSIA ABSTRACT This study presents an attempt to investigate the impact of exchange rate misalignment on capital inflows in Malaysia. Specifically, a precise threshold value is estimated to examine when exchange rate misalignment suppresses capital inflows. To pursue these objectives, this study relies on the endogenous threshold analysis as of Hansen (1996, 2000). Results suggest that misalignment in terms of currency overvaluation, has a negative and significant effect when overvaluation is more than 15 percent. This estimate is consistent and robust despite the changes in the choice of explanatory variables. INTRODUCTION Foreign direct investment (FDI) has served as an important engine of growth via skills and technology transfer, creation of employment opportunities and expanding the capital stock in Malaysia. Since the 1997 Asian financial crisis, Malaysia is no longer the top 10 host for FDI. In fact, the rate of growth of FDI has dramatically decrease compared to that of the early 1990s. This is partly due to reverse investment (Mat Zin, 1999) and declining dependence on FDI to finance growth. However, this may also indicates the declining competitiveness of Malaysia in attracting FDI which warrants empirical research since it would be vital to investigate which factors that contributed to the deterioration of competitiveness. Since early 1980s, real exchange rate misalignment has become a standard concept in international macroeconomic theory and policy (Razin Collins, 1997). Hence, this study focuses on exchange rate misalignment as an indicator of capital inflow competitiveness in the case of Malaysia. Malaysia provides an interesting case as it is one of the largest recipients of FDI amongst its ASEAN counterparts. Another advantage of undertaking a single country study is the ability to delineate the assumption that countries are similar in terms of social, cultural, economic and political background (Sun et al., 2002). Therefore, only relevant economic determinants are accounted for to suit the Malaysian environment. The objective of this paper is to investigate the empirical relationship between capital inflows and exchange rate misalignment. Whilst existing literature focuses on the role of exchange rate, this study takes a step further to examine the impact of exchange rate misalignment on capital inflows. Specifically, we estimate a threshold value at which misalignment begins to significantly affect capital inflows. To the best of our knowledge, no published study has attempted to estimate a threshold value for exchange rate misalignment in Malaysia. Hence, this study intends to fill this gap. Based on the endogenous autoregressive threshold (TAR) model developed by Hansen (2000), we split the sample into high and low misalignment regimes. Results suggest that exchange rate misalignment due to overvaluation is detrimental to the influx of capital inflows. The next section provides a brief overview of FDI in Malaysia followed by a brief explication of the theoretical model and review of liter ature. The fourth section spells out the method pertaining to the objective. The penultimate section provides results and discussion and the final section concludes. CAPITAL INFLOWS IN MALAYSIA: RECENT TRENDS AND INCENTIVES The essence of export oriented-growth nexus somewhat depends on the inflow of foreign capital into the country. In the past, foreign direct investment has been the one of the major conduit for technology transfer, job creation and export-led growth to this country. To pursue this line of interest, the Malaysian government has designed various policies spanning the gamut of industrial specific incentives, taxation, and intellectual property protection to infrastructure support. The company tax rate for example has been reduced from 33 percent in 1987 to 27 percent in 2007 and 26 percent in 2008. Other tax incentives such as the investment tax allowance, tax relief for companies with pioneer status or high technology industries has continued until today with more industries be given the relevant status to reap the benefits of the incentives. Most recently, the government has liberalized bumiputera equity requirements for 27 sectors to further boost competitiveness. With reference to previous information, there was a surge in foreign direct investment (FDI) into Malaysia in the late 1980s and this trend continued until the onset of the 1997 Asian financial crisis. Another acute slump in the influx of FDI occured in 2001 when the economy was in a slight recession but picked up again in 2002 thereafter. With the recent burgeoning world recession following the American sub-mortgage crisis, it is expected that FDI will contract again (IMF, 2009). To capture a more vivid impact of misalignment on capital inflows, this study employs quarterly data from Bank Negara Malaysia (BNM – the central bank of Malaysia) instead of the UNCTAD data which are annual. Foreign capital inflows or investment inflows comprises three items: (i) equity investment, (ii) loans and (iii) real estate. Investment consists of equity investment in Malaysia by non-residents, loans obtained from non-residents and purchase of real estate in Malaysia by non-residents but excludes retained earnings (Source: Bank Negara Malaysia, Glossary, Monthly Bulletin Statistics January, 2009, p. 186-187). This study resorts to a specific measure of FDI, that is, foreign investment inflows. Data starts from 1991:Q1-2008:Q3, partly dictated by availability. THEORY AND REVIEW OF LITERATURE In this study, we rely on the portfolio balance approach to model the determinants of foreign capital inflows. This model has been successfully tested by Goh (2005) for Malaysia. Branson (1968) postulates that the proportion of foreign assets (Kf) in a given stock of wealth is a function of the domestic and foreign interest rates (i and i*), the measure of exchange rate expectation or risk (e) and the stock of wealth (w) expressed as: (1)Darby et al. (1999), augment this concept of exchange rate risk (e) into exchange rate volatility and exchange rate misalignment. Since this study focuses on the role of exchange rate misalignment, we substitute e with misalignment. Expressing the above equation at level yields, (2)Focusing on Z, the literature suggests a number of variables that determines capital flows. The enigmatic relationship between FDI and exchange rate nexus has been widely examined and most of the discussions root back to the work of Kohlhagen (1977), Cushman (1985), Froot and Stein (1991), Goldberg (1993) and Darby et al. (1999). The effect of exchange rate is less straightforward (Benassy-Quere et al., 2001). The mechanisms that exchange rate affects capital inflows can also be viewed via the wealth effect channel and the relative production cost channel (Xing, 2006). A devaluation of the currency of the host country makes local cost of production lower in terms of foreign currency, hence leading to higher returns from export-oriented industries. As for the wealth effect, a devaluation makes local asset cheaper which motivates investors to acquire more. Kohlhagen (1977) static model postulates that following depreciation in host countries, MNEs will increase their production capacity. In a two period dynamic model, Cushman (1985) suggests that adjusted expected real depreciation lowers the production cost which leads to increase in FDI flows. Similarly, Goldberg (1993) illustrates how sectoral profitability, location effects, and portfolio and wealth effects are important factors that determine investment an d their links with exchange rates. In her theoretical model, the direction of investment effects triggered by exchange rate movements is ambiguous, therefore, warrants empirical research. On contrary, in an imperfect information framework, Froot and Stein (1991) show that appreciation induces wealth effect of foreign investors, thus encouraging foreign investors to acquire more local assets. Empirically, there is quite a consensus that a depreciation of the exchange rate in the host country leads to a reduction of the FDI (Klein and Rosengren, 1994; Dewenter, 1995). There is however, a dearth of studies that empirically examine the relationship between FDI and exchange rate misalignment. Empirical attempts include Benassy-Quere et al. (2001) who advocate the benefits of depreciation may be offset by excessive volatility of the exchange rate. Blonigen (1997) illustrates how currency depreciation induces foreign firm to acquire firm-specific assets when markets are segmented. Hasnat (1999) study the impact of misalignment on FDI for five developed nations on annual data ranging from 1976-1995. All of these studies use misalignment as a control variable or a counterpart for exchange rate variability and is measured by a deviation from the purchasing power parity (PPP) values. Furthermore, most of these studies are based on the experiences of industrialized economies using panel data analysis framework. In short, a prolonged misalignment may affect long term business decisions as it affects costs. If the exchange rate is overvalued relative to the e stimated equilibrium level, investors may acquire more domestic assets for future capital gains in host country currency terms (Barrell and Pain, 1996). On the other hand, persistent overvaluation may reduce cost competitiveness of production in the host country, especially for export oriented products. Other traditional determinants of FDI can be demarcated into at least two categories – micro and macro determinants. The list of micro-determinants spans from market size, growth, labour costs, host government policies, tariffs to trade barriers. The macro-determinants include market size (Chakrabarti, 2001; Farrell et al., 2004; Kravis and Lipsey; 1992), openness (Edwards, 1990; Gastanaga et al. 1998; Hausmann and Fernandez-Arias, 2000; Aseidu, 2002), rate of inflation (Bajo-Rubia and Sosvilla-Rivero, 1994; Urata and Kawai, 2000), government budget, taxes (Gastanaga et al., 1998; Wei, 2000) and infrastructure (Wheeler and Mody, 1992; Urata and Kawai, 2000). Financial deepening is also another catalyst for FDI (Borensztein et al., 1998). Liquid liability, private credit and M3 serve as proxies. Increase in money supply fuels inflation which increases the cost of production in the host country rendering a negative relationship. However, increments in money supply supported by g rowth or higher productivity indicate increase in future purchasing power which can benefit market-seeking FDI. Finally, the degree of misalignment is computed based on the difference between the actual and the hypothetical equilibrium exchange rate. Accordingly, the estimation of the hypothetical equilibrium exchange rate relies on the theory advocated by Edwards (1994). This theory postulates that the real exchange rate is a function of several fundamental variables which includes the Balassa-Samuelson effect, trade openness, net foreign assets and government spending. Details are provided in Sidek and Yusoff (2009). METHODOLOGY AND DATA The question of when does misalignment begin to significantly affect capital inflows necessitate the existence of a non-linear relationship between these two variables. Thus, if such non-linear relationship exists, then it is possible to estimate an inflexion point, or a threshold value, at which the sign of misalignment may change or become significant. In the non-linear time series modelling, the threshold autoregressive model (TAR) is more popular since it offers a relatively simple specification, estimation and interpretation compared to other non-linear models. The origins of TAR models roots back to Tong (1980) where the main idea is to approximate a general non-linear autoregressive structure by a threshold autoregession with a small number of regimes. Hansen (1996, 2000) derives the asymptotic distribution of the ordinary least squares (OLS) estimates of the endogeneous threshold parameters which is used in this study. This section explains how equation (2) is estimated to incorporate threshold effect. According to Hansen (2000), threshold estimation is the act of splitting the sample into two regimes when the threshold value is unknown. One necessary precondition is that the threshold variable must be a continuous variable. In this study, the threshold estimation is carried out by splitting the sample into high misalignment and low misalignment regime. Since misalignment is a continuous variable, TAR model would be appropriate to engender the threshold value. Formally, the two-regime threshold regression model takes the form: where is the threshold variable which is used to split the sample into two regimes, is the threshold value which is unknown and must be estimated, denotes the dependent variable (capital inflow), represents a vector of explanatory variables and is the error term assumed to be white noise and i.i.d. Note that if the threshold value is greater than the threshold variable, equation (3) is estimated and vice versa. This allows the regression parameters to change with respect to . In order to write equations (3) and (4) in a single equation, a dummy variable is used which is defined as where {.} is the indicator function, with d=1 when and d = 0, if otherwise; and set , such that (3) and where and . Equation (5) allows all the regression parameters , and to be estimated and switch between the two regimes. The least square (LS) technique is used to estimate through minimization of the sum of squared errors function. To implement this, the model is expressed in matrix notation, hence, equat ion (5) is expressed as: (6) Define, (7) as the sum of squared error function. By definition the least squares estimators which is also the MLE when with i.i.d. , jointly minimize equation (7). This minimization process requires to be restricted to a bounded set . The concentrated sum of squared errors function is written as: (8) where is the value that minimizes . As takes values that is less than n, is uniquely described as: with (9) Focusing on the objective of this section, the first step is to examine whether there exist a threshold effect in the model. This requires the examination between the linear model vis-Ã  -vis the two-regime model, equation (5). The null hypothesis of no threshold effect is tested against an alternative hypothesis where threshold effect is present. Since TAR models have a non-standard distribution, Hansen (1997, 2000) develops a standard heteroscedasticity-consistent Langrange Multiplier (LM) bootstrap method to calculate the asymptotic critical value and the p-value. The second step is to examine whether the derived threshold value is statistically significant. This is done by differencing the confidence interval region based on the likelihood ratio statistic . Based on Hansen (2000), let C represent the desired asymptotic confidence interval (in this study at 95%) and be the C-level critical value and set . Assuming homoscedasticity, as , therefore, is the asymptotic C-level confidence region for . If the homoscedasticity condition is not fulfilled, then a scale likelihood ratio statistics of the residual sum of squared errors is defined as: (10)and the adjusted confidence region becomes such that is robust whether or not the heteroscedasticity condition holds. Simulation is set at 1000 replications as suggested by Hansen (2000). Also, is not normally distributed hence, the valid asymptotic confidence intervals of the estimated threshold values in the no-rejection areas defined as , where is a given asymptotic level; and the no- rejection region of the confidence interval is . If , than the null hypothesis of cannot be rejected. In addition, to examine the possibility of a second threshold value, the same exercise is repeated. Specifically, the empirical model to be tested which is based on equation (2) is defined as follows: (11) where K is capital inflows, Mis, R and M3 denote exchange rate misalignment, interest differentials and financial deepening, and Z represents the other control variables. Table 1 summarizes the description of data, measurement and sources used in this study. Table 1: Determinants of Capital Inflows (1991Q1-2008Q3) Variable Description Measurement Source I Foreign investment Total foreign investment inflow as a percentage of GDP BNM M3 Money supply M2 as a percentage of GDP IFS D Government deficit The difference between revenue and expenditure as a percentage of GDP BNM R Interest differential The difference between Malaysia and US 3-month T-Bill rates IFS T Taxation Government corporate tax revenue as a percentage of GDP BNM LL Liquid Liability Log International liquidity: banking institution liability, line. 7b.d IFS INFRA Infrastructure Log of spending on infrastructure as a percentage of GDP BNM IFS: International Financial Statistics, IMF, UNCTAD: United Nations Conference on Trade and Development, BNM: Bank Negara Malaysia Monthly Statistical BulletinDOS: Department of Statistics, Malaysia (various issues). RESULTS AND DISCUSSION Prior to time series analysis, we test for unit roots in order to avoid spurious regression. Three versions of unit root testing, namely the ADF, PP and KPSS tests are employed to examine whether the variables are stationary on level or otherwise. Table 3 indicates that the order of integration are mixed for a majority of variables. However, this study proceeds to examine the threshold effect by including lagged variables for I(1) variables in the OLS estimation. Moreover, equation (2) derived from the theory requires estimations at level. Table 2: Unit root test ADF PP KPSS Order of Integration Level 1st Diff Level 1st Diff Level 1st Diff I -3.7029* -7.9812* -3.5286* 14.00208 0.9008* 0.2305 I(0)/I(1) M3 -1.2741 -10.0951* -1.3334 -10.4699* 1.0229* 0.3588*** I(1) D -1.6297 -19.7087* -8.8219* -27.3774* 0.3649* 0.0894 I(0)/I(1) R -4.5405* -3.8179** -2.6509 -7.0649* 0.0711 0.0471 I(0)/I(1) INFRA -2.2527 -4.5270* -3.5053* -27.7776* 0.2234* 0.0813 I(0)/I(1) LL -3.0805 -6.5500* -2.4386 -6.7355* 0.1073 0.0607 I(0)/I(1) MIS -3.8075** -9.7442* -3.8076** -9.8483* 0.0662 0.0577 I(0) Note: *, ** and *** denote significance at 1%, 5% and 10% significant level. p-values are in parentheses. For ADF and PP test the null is no unit root (H0: Variable is stationary) whilst the null for the KPSS is the existence of unit root (H0: Variable is not stationary). The baseline regression constitutes the exchange rate misalignment, interest differential and a measure of financial development, M3. We present four additional models with different variables added to the baseline regression, namely liquid liability, government budget deficit, and infrastructure for sensitivity analysis. Hansen (2000) theoretical construct allows for two threshold effects, hence, the first step is to investigate the possible existence of such an effect. Prior to that, a threshold variable needs to be selected. Since the aim of this section is to examine at what percentage exchange rate misalignment actually hurts capital inflows, the appropriate threshold variable is the exchange rate misalignment. Upon choosing the appropriate threshold variable, the next step is to observe any evidence of a threshold effect and whether there exist one or more threshold by employing the heteroscedasticity-consistent Lagrange-multiplier (LM) test for a threshold based on Hansen (1996). To test under the null hypothesis of no threshold effect, p-values are calculated using a bootstrap analog which generates the dependent variable from the distribution , where is the OLS residuals from the estimated threshold model. With 1000 bootstrap replications, the p-values for the baseline threshold models (Table 3) using misalignment strongly suggest the existence of threshold effect at 0.000. Subsequently, this suggests that there is a sample split based on the effect of exchange rate misalignment. Table 3: Threshold Effects for the baseline model Model 1 First Sample Split F-Stats 51.4045 Bootstrap P-Value 0.000 Threshold Estimates -15.0260% 95% Confidence Interval -15.446% , -9.8360% Second Sample Split F-Stats 16.2171 Bootstrap P-Value 0.2890 Note: H0: No threshold effect. The threshold is based on the minimized sum of squared residuals. This illustrates the graph of the normalized likelihood ratio sequence as a function of the threshold in exchange rate misalignment. The estimated is the value which minimizes these graphs which range at =15.02-15.44%. The dotted lines on the graphs present the 95% critical values. For example, in model 1, the asymptotic 95% confidence interval set where crosses the dotted lines. The results suggest that there is ample evidence for a two-regime specification. Also, it is worth noting that 41 of the 71 observations fall into the 95% confidence interval, hence, requires an examination of the possible existence of a second sample split. Results in Table 3, show that second sample split renders insignificant bootstrap p-value thus, indicating no further regime split. Table 4 presents the results for baseline regression. For comparison purposes, this study provides the linear OLS model without the threshold effect and a two-regime model which accommodates the threshold effect. Basically, the variables confer the correct signs in line with the prediction of the theory. Misalignment has a negative and significant effect on capital inflows in regime 2. Interest differential is expected to confer a negative effect. Results indicate that interest differentials only affects capital inflows negatively in the regime 1 but is insignificant in the regime 2. Similarly, M3 has significant effect in both regime but is positive in the regime 1 but the sign switches in regime 2. Hence, splitting the sample gives a more indepth view of the effects of these basic variables on investment inflows. To reiterate, sample splitting allows the examination of whether the significant effect is present in both regimes or otherwise. The results show that below the threshold value of 15%, exchange rate misalignment may be negative but are not statistically significant. However, above the 15% threshold level, misalignment exerts both negative and significant impact on capital inflows. A 1% increase in misalignment (overvaluation) suppresses capital inflows by approximately 1.19%. The negative effect of exchange rate misalignment on capital inflows is consistent with the findings of Hasnat (1999). Barrel and Pain (1996) argue that an apparent currency misalignment persistent over some length of time may affect investment inflows decisions. A reasonable explanation is that the relative production costs may be higher as a result of such misalignment. If the ringgit is thought to be overvalued relative to its estimated equilibrium level, then foreign production may be discouraged by the prospect of future capital loss in home currency terms. Another issue which emerges after the 1997 financial crisis is that capital inflows must be managed since reversals are likely to cause severe damage to the economy. Reinhart and Reinhart (1998) calls for greater exchange rate flexibility which is meant to introduce two-way risks, therefore, discouraging speculative capital inflows. It is, however, only possible in the context of de facto peg or a tightly managed float. Furthermore, the effectiveness of this policy depends on how much policymakers are willing to allow the exchange rate to fluctuate. A large band denotes greater flexibility but risks having large nominal appreciation which connotes possible overvaluation of the currency. The result of this study suggests that overvaluation is detrimental to capital inflows if this band exceeds 15%. Hence, policymakers should keep exchange rate fluctuations well below this 15% threshold. Table 4: Baseline regression results on the effect of misalignment on capital inflows (1991:Q1-2008:Q3). Dependent variable is capital inflows. Model 1 Linear Model Threshold Model OLS without threshold Regime 1 Â £ 15.0259% Regime 2 > 15.0259% Misalignment -0.4267** (0.2115) -0.3186 (0.2573) -1.1955** (0.5712) Interest Differential -0.0250*** (0.0131) -0.0438* (0.01533) -0.0261 (0.0193) M3 0.2964* (0.0391) 0.2644* (0.0516) -0.5560* (0.1240) Constant 3.0468* (0.2779) 2.5394* (0.2593) 6.7313* (0.6099) No. of Observations 71 42 29 R2 0.3664 0.6484 0.4218 Notes: *, ** and *** denote 1%, 5% and 10% significance respectively. Standard errors in parentheses. Interest rate differential are consistently negative and significant in all specifications and in both regimes in majority of the threshold model. This stresses the role of interest rates in attracting capital inflows into Malaysia. Although the impact may be small, it is significant and the authorities should ensure that interest rates are kept at certain levels to maintain competitiveness of Malaysia as destination for capital investment. In this paper, the estimated impact of a 1% change in interest differential is expected to subdue foreign investment by 0.04 percentage point in the first regime and 0.03 percentage point in the second regime. The proxy for financial deepening, M3 is statistically significant in all models and in both regimes. Again, this signifies the importance of financial development in attracting capital investment into Malaysia. Interestingly, M3 is positive during the periods of low misalignment regime (regime 1) but becomes negative at higher misalignment regime (regime 2). During low misalignment, a 1% increase in M3 is expected to draw in 0.3 percentage point more investment inflow into Malaysia. This shows that in the lower regime, financial depth acts as an impetus to capital inflows. However, the situation reverse with 0.6 percentage point lower investment inflows is expected with a 1% increase in misalignment in the second threshold regime. Montiel (1999) explicitly explains this phenomenon where capital inflows increase reserves which then prompt an increase in the monetary base, M2 and M3. Such increases fuels further increments in domestic demand leading to real appreciation. Thus, any overvaluation of the currency may eventually have negative ramifications on capital inflows. Sensitivity analysis To check for the sensitivity of the estimated threshold value, Table 6 -7 and Figure 3 represents four other models which use different variables in addition to the baseline regression. The addition of taxes yields insignificant results without drastically changing the threshold value. Other additional variables such as government budget deficit and liquid liability are only significant in one of the two regimes . With the inclusion of additional variables, the estimated magnitude of each regressors differ slightly but maintains the same sign and significance level. For example a 1% increase in misalignment (overvaluation) suppresses capital inflows by 1.11-1.55 percentage point. The estimated impact of a 1% change in interest differential is expected to deter foreign investment by 0.04-0.05 percentage point in the first regime and 0.02-0.06 percentage point in the second regime. Similarly, during low misalignment, a 1% increase in M3 is expected to draw in 0.2-0.3 percentage point m ore investment inflow into Malaysia. An estimated 0.49-0.67 percentage point lower investment inflows is expected with a 1% increase in M3 in the second threshold regime. In view of the results, it seems evident that the exchange rate policy has important effect in attracting foreign capital inflows into Malaysia. Specifically, misalignment in terms of overvaluation should be kept lower than 15 percent to ensure that capital inflows remained unhurt. Table 5: Sensitivity Analysis: Threshold Effects Model 2 Model 3 Model 4 Model 5 First Sample Split F-Stats 71.1442 45.9364 53.3722 53.3722 Bootstrap P-Value 0.000 0.000 0.000 0.000 Threshold Estimates -15.4461% -15.0260% -15.0260% -15.0260% 95% Confidence Interval -15.446%, -15.025% -15.446%, -9.836% -15.446%, -0.0984% -15.446%, -0.0984% Second Sample Split F-Stats 16.4917 19.7585 22.9710 22.9710 Bootstrap P-Value 0.5310 0.3800 0.2420 0.2420 Note: H0: No threshold effect. The threshold is based on the minimized sum of squared residuals Table 6: Sensitivity Analysis for threshold estimates (1991:Q1-2008:Q3). Model 2 Linear Model Threshold Model OLS without threshold Regime 1 Â £ 15.4461% Regime 2 > 15.4461% Misalignment -0.4278*** (0.2216) -0.3497 (0.4143) -1.5593* (0.3135) Interest Differential -0.0250*** (0.0134) -0.0462* (0.0153) -0.0599* (0.0131) M3 0.2966* (0.0414) 0.2732* (0.0488) -0.5609* (0.0744) Liquid Liability -0.0029 (0.1709) -0.0634 (0.1932) 1.1843* (0.2615) Constant 2.9780* (0.2713) 2.5259* (0.2593) 6.1799* (0.3135) No. of Observations 71 41 30 R2 0.3842 0.6503 0.5986 Model 3 Linear Model Threshold Model OLS without threshold Regime 1 Â £ 15.0260% Regime 2 > 15.0260% Misalignment -0.4472** (0.2038) -0.3800 (0.2460) -1.1171*** (0.6229) Interest Differential -0.0254* (0.0126) -0.0505* (0.0140) -0.0237 (0.0221) M3 0.2844* (7.4922) 0.2521* (0.0472) -0.5391* (0.1477) Deficit -0.7655* (0.3059) -0.7380* (0.3099) -0.1841 (0.7174) Constant 3.0308* (0.2674) 2.5835* (0.2445) 6.6452* (0.7337) No. of Observations 71 42 29 R2 0.4285 0.6829 0.4230 Model 4 Linear Model Threshold Model OL S without threshold Regime 1 Â £ 15.0260% Regime 2 > 15.0260% Misalignment -0.2852 (0.2181) -0.2582 (0.2720) 1.2490** (0.5612) Interest Differential -0.0275** (0.0128) -0.0419* (0.0165) -0.0311 (0.0204) M3 0.3208* (0.0401) 0.2796* (0.0583) -0.5489* (0.1245) Tax 2.1899** (1.0761) 0.1283 (0.1457) 0.1260 (0.1720) Constant 3.0274* (0.4383) 2.2463* (0.4806) 6.5027* (0.7227) No. of Observations 71 42 29 R2 0.3665 0.6516 0.4300 Model 5 Linear Model Threshold Model OLS without threshold Regime 1 Â £ 15.0260% Regime 2 > 15.0260% Misalignment -0.3780*** (0.1977) -0.4495*** (0.2602) -1.3190** (0.6059) Interest Differential -0.0203 (0.0123) -0.0433* (0.0152) -0.0308 (0.0212) M3 0.2941* (0.0365) 0.2388* (0.0479) -0.6093* (0.1406) Infrastructure 3.0729* (3.3373) 0.0474** (0.0228) -0.0382 (0.0392) Constant 3.0709* (0.2569) 2.5698* (0.2346) 7.0433* (0.7173) No. of Observations 71 42 29 R2 0.4091 0.6815 0.4384 Notes: *, ** and *** denote 1%, 5% and 10% significance respectively. Standard errors in parentheses. CONCLUSION The objective of this chapter is to examine the impact of exchange rate misalignment on capital inflows. Results provide evidences of the negative impact of misalignment on capital inflows. To reiterate, overvaluation of the ringgit signals that Malaysia is less competitive vis-Ã  -vis other countries. In addition, this paper also estimates a specific threshold value; that is the degree of misalignment after which it begins to hurt capital inflows. By employing a recent technique by Hansen (1996, 2000), this study splits the sample into high misalignment and low misalignment regimes. This study shows that misalignments hurt capital inflows in the high misalignment regime or when misalignment is greater than 15 percent. This study also confirms the work of Goh (2005) who suggests that the portfolio balance model can capture the determinants of capital inflows in Malaysia. In particular, the results suggest that interest differential is an important determinant albeit, small, hence, p olicies should be direc