The Impact of Foreign Ownership on Stock Return Volatility of the Financial,

Industrial, Holding Firms, Property, Service, Mining & Oil Industry for the Years
2008-2012

A Thesis Draft Presented to
the Financial Management Department,
Ramon V. Del Rosario College of Business
De La Salle University


In Partial Fulfilment of
THSMAFI
Bachelor of Science Management of Financial Institutions
1
st
Trimester, AY:2014-2015


Submitted by:
Barroso, Frances Angelie T.
Co, John Kevin O.
Icaranom, Danica G.
Jaranilla, Jan Keith H.

2
Table of Contents

1. Introduction
1.1 Background of the Problem 4
1.2 Statement of the Problem 6
1.3 Objectives of the Study 7
1.4 Hypothesis 7
1.5 Significance of the Study 8
1.6 Scope and Limitation 9
2. Review of Related Literature
2.1 Financial Liberalization in Emerging Markets 10
2.1.1 Philippine Laws on Large Foreign Ownership 10
2.2 Corporate Governance, Corporate Operational Efficiency, and Firm Performance 17
2.3 Foreign Ownership, Stock Return Volatility, and Firm Performance 19
2.4 Other Sources of Stock Return Volatility 21
2.5 Research Gap 23
2.6 Literature Map 25
3. Framework
3.1 Theoretical Framework 26
3.1.1 Efficiency 22
3.1.2 Technical Efficiency 27
3.1.3 Technology Spillover Effect 28
3.1.4 Efficient Market Hypothesis 28 24
3.3 Conceptual Framework 29
3.4 Operational Framework 31
4. Research Methodology
3
4.1 Research Design 41
4.2 Data Description and Collection Method 42
4.3 Method of Data Analysis
4.3.1 Preliminary Test 46
4.3.2 Test for Corporate Operational Efficiency
4.3.2.1 Data Envelopment Analysis 46
4.3.2.2 Vector Auto-Regression Model 48
4.3.3 Test for Firm Performance
4.3.3.1 Regression 48
4.3.4 Test for Stock Return Volatility
4.3.4.1 Regression 49
4.4 Methodological Limitations 51














4
CHAPTER 1
INTRODUCTION
1.1 Background of the Study

Globalization became a buzzword in the 21
st
century. In order to participate in the
global competitiveness, and perceiving the possible advancement that this may bring to
the engaging nations, Philippines acquiesced with the World Trade Organization in 1995
and entered the global economic arena. However, despite its great anticipation in its
enlistment, the country was far behind the economic performance of its neighboring
Southeast Asian nations. Penetrating the global realm without a strengthened domestic
political economy, Philippines gravely failed giving it the epithet Sick Man of Asia
(Banlaoi, 2004).

However, with the dynamic growth of the Philippine economy in the more recent
years, it has emerged as a bright spot among emerging markets in the world. For the
fourth quarter of 2013, Philippines capped its strongest two years of growth since the
1950s. According to a poll conducted by the Philippine Statistics Authority, Gross
Domestic Product rose to 7.2% in 2013 after gaining 6.8% in 2012. From being the Sick
Man of Asia, the country is slowly becoming a rising tiger with its robust domestic
spending, sound fiscal management, and resilient remittance inflows (Yap, et. al, 2014).

The Philippines is already recognized by the leading credit rating agencies such
as Fitch Ratings, Standard & Poors and Moodys, awarding it with its first investment
grade in 2013 (Lucas, 2013). Although its credit rating of BBB- is the lowest in the
investment grade spectrum, it still depicts an immense potential, given that the first credit
rating awarded did not fall on the speculative grade. This suggests that the countrys
5
debt has a low risk of default. Being granted an investment grade signals the attainment
of international respect and recognition that it is a solvent country that has the capacity
to repay its debt.

The emerging market index launched by Morgan Stanley Capital International
(MSCI) discloses that the Philippines is the worlds best performer out of the 45
emerging and developed markets being tracked. Among the 45 emerging and developed
markets are: India, Indonesia, Malaysia, Sri Lanka, Taiwan, and Thailand to name a few
(Mellor, 2013). The countrys ascent to investment grade status is ratification of the
countrys emerging status and of the significant increase in overseas funds coming in
from foreign investors eager to capitalize on the opportunity. This will result to a larger
percentage of foreign ownership in the economy. With this, the countrys stock market
will be further exposed to foreign investors in order for it to go with the flow of stock
market liberalization.

However, the stock market cannot be completely liberated because of the 1991
Foreign Investment Act. The act cites foreign investment restrictions known as the
Foreign Investment Negative List. This defines the foreign investments that are limited or
restricted by the Constitution of the Philippines and other specific laws. The list is divided
into two, Negative List A and Negative List B. Under these lists, the maximum
percentage of foreign ownership is about 60% of the equity. However, it goes as low as
restricting the company to a zero for foreign investors.

Nonetheless, it is still quite debatable whether the stock market should be
completely liberated, with the controversial stands on what foreign investors bring to the
market and to the economy.
6
Foreign investors allegedly come and go quickly, making foreign capital flows a
source of domestic stock market volatility and even financial crises (Chen et. al, 2006).
The 1997 Asian Financial Crisis for instance, although it cannot be blamed on foreign
investors alone, they were criticized for playing a big hand in the crisis. In 1996, while
Koreans invested $2.4 billion in foreign equity and debt securities, foreigners invested
$16.8 billion in Koreas securities. Foreign investors held more of Koreas securities than
the Koreans themselves, not considering that these investors can easily come and go. In
October 1997, for example, as trouble developed in the Hong Kong and other stock
markets, foreign investors began to flee the Korean equity markets. Over the weekend of
October 25 following the fall in the Hong Kong stock market, foreign investors sold $22
million worth of Korean stocks. This started a rush out of Korean securities that sent the
composite index of stock values on the Seoul exchange to a ten-year low of 450.6 on
November 24, 1997, down by 30% for the year (Nanto, 1998). The severity of capital
flight out of crisis countries amplifies financial asset volatility and heightens the crisis. In
addition to this, when domestic firms become highly accessible to foreign investors, the
local firms stock trading also becomes vulnerable to world market risk. (Bae et. al,
2004). Domestic firms can no longer just consider its own market, but has to take into
consideration the economic implications and risks brought by its foreign investors.

On the contrary, other studies have shown that foreign ownership produces a
stabilization effect on the volatility of stock returns. The heterogeneity among foreign
investors has been recognized as beneficial in emerging stock markets for they do not
only supply monetary aid but also technological resources, business relations,
development of human capital, and demand transparency and higher accountability of
management. These result to the significant positive effect of foreign ownership to
7
corporate operational efficiency, which then triggers higher corporate performance. In
return, higher corporate performance leads to the stabilization of the volatility of stock
returns. The stabilizing effect can be best defined as the minimization of the volatility of
stock returns at the median level due to the percentage of foreign ownership. The
stabilizing effect of foreign investors documents a significantly negative relationship
between foreign ownership and stock return volatility. In addition to the stabilization
effect, foreign investors finance economic growth, further develops domestic stock
markets, and reduces cost of capital through risk sharing between domestic and foreign
investors (Li et. al, 2010).

However, with the percentage restrictions in foreign ownership in the Philippines,
the country may not be able to benefit from this stabilizing effect. Philippines, Ethiopia,
and Thailand are amongst the worlds most restricted economies. Some of the sectors
for the countries mentioned completely restrict the participation of foreign investors. This
raises the question on whether Philippine industries and firms would yield greater
performance and a more stable stock market with foreign ownership.
.

1.2 Statement of the Problem

The study will focus on the impact of the presence of foreign ownership to stock
return volatility among domestic listed firms in the Financial, Industrial, Holding Firms,
Property, Service, and lastly the Mining & Oil Industry under the Philippine Stock
Exchange (PSE). Particularly it would like to address the following questions:
a) Does foreign ownership stabilize stock return volatility?
b) If there is a stabilization effect, which among the six sectors under the PSE is
8
most and least stabilized by foreign ownership?

1.3 Objectives

Considering the percentage of foreign ownership in the Financial, Industrial,
Holding Firms, Property & Service, and lastly the Mining & Oil Industry under the PSE,
the researchers intend:
a. To determine whether foreign ownership has an impact on the stock return
volatility of firms listed under the Philippines Stock Exchange
b. To determine whether foreign ownership stabilizes the stock return volatility of
firms listed under the Philippine Stock Exchange
c. To determine which among the six sectors is most and least affected by the
stabilization effect of foreign ownership.

1.4 Statement of Hypothesis

H
0
: Foreign ownership has no impact on stock return volatility.
H
1
: Foreign ownership has an impact on stock return volatility.
H
0
: There is no stabilization effect on the volatility of stock returns due to
foreign ownership.
H
1
: There is a stabilization effect on the volatility of stock returns due to
foreign ownership.

1.5 Significance of the Study

As empirical evidences regarding the relationship between foreign ownership and
9
stock return volatility are mixed and contrasting, it is important to measure the potential
impact of the former to the latter in financial liberalization processes and decisions by
policymakers. The main purpose of the study is to prove if the presence of foreign
ownership has a significant impact on the volatility of stock returns under PSE. This will
be further broken down between the six industries under the PSE. These industries are
Financial, Industrial, Holding Firms, Property & Service, and lastly the Mining & Oil
Industry. By doing so, we can magnify to which industry does foreign ownership produce
the greatest stabilizing effect. Specifically, the studys results are intended to be
beneficial for the following: (1) domestic firms this study may support their decision
making on whether foreign ownership limit must be more restricted or loosened, (2)
economic policymakers this study may aid their research in identifying the rules and
regulations that must be implemented with respect to foreign investors, and (3) future
researchers this study may be used as a comparison to their future studies regarding
the same topic.

1.6 Scope and Limitations of the Study

The study will be limited to the determination of the impact of the presence of
foreign ownership to stock return volatility among domestic listed firms in the Financial,
Industrial, Holding Firms, Property & Service, and lastly the Mining & Oil Industry under
PSE for the years 2008 until 2012 only. Results will be presented in an industry basis
due to the fact that they may behave in different ways depending on their industry.
Moreover, the law has imposed sector-specific regulations which may include certain
restrictions. The firms to be included in the study must be listed under PSE since
January 2008 and must still be actively trading in the present. On the possibility that data
of particular firms will not be available on any of the sources (Bloomberg, PSE, Osiris) to
10
be utilized, the following firms will no longer be included in the study. Also, only the stock
that was listed first under PSE will be included for firms that are trading under two stock
symbols (e.g. FYN, FYNB). Given that this study involves stocks, there could be
significant factors or other variables, which are not accounted for in the model. The
volatility is to be determined through the returns of the stocks published in Bloomberg.
Any shareholder whose country listing in Bloomberg is not Philippines is considered as
a foreign shareholder in this study.


11
CHAPTER 2
REVIEW OF RELATED LITERATURE

2.1 Financial Liberalization in Emerging Markets

Financial liberalization in emerging markets has been continuously gaining
attention as the International Monetary Fund and World Bank have been encouraging
developing countries in opening its financial market for purposes of achieving economic
growth and financial stability (Chen & Lu, 2007)as their study found that such move is
beneficial to these types of countries. As a definition of Li et. al (2010), equity market
liberalization refers to the policy wherein the government of a country allows foreign
investors to purchase shares in the financial equity market of that domestic country.
Moreover, domestic investors are given the right to transact in foreign shares. This
allows domestic economic growth to be financed by foreign investors due to their
accessibility (Aimipichaimongkol & Padungsaksawasdi, 2013). This is further supported
by Levin and Zervos (1998) as they find that there is a positive significant relationship
between stock market openings and long run economic growth. Moreover, they have
concluded that it results to an improvement in market efficiency, global diversification,
internationally risk-sharing and steady-state welfare gains. As emerging markets
become globally influenced (Bae and Chan, 2001), the development of domestic equity
markets are hastened by (Kim & Singal, 2000).

However, such benefits remain a concern as it is a characteristic of an emerging
market to have a high volatility as compared to developed markets (Wang, 2007). This
researcher also states that high volatility entails increasing cost of capital, deterring
12
investments, and impeding long-run stock market development. Similar to Levine and
Zervos (1998) findings, volatility has surged after opening the market in 16 countries. If
a country becomes an integrated market from being a segmented market, prices tend to
rise while expected returns decrease (Bekaert and Harvey, 2000). However, the
reaction of the market may still depend on the policies implemented by a domestic
market (Nyangoro, 2013)

2.2 Philippine Stock Exchange

Similar to the studies of Hammoudeh et. al (2010) on the US Sectors, they find
that stock return volatility in different sector varies. In the Philippine setting, according to
the listing in Philippine Stock Exchange, we have six industries in total: Financial,
Industrial, Holdings, Mining & Oil, Property, and Service Industry. Although the 60-40
percent local-foreign ownership limit has been set to be uniformly adopted by the
publicly listed companies, certain firms have stated in their most recent (September
2013) public ownership reports that they set no limit for foreign ownerships. The firms
listed under the PSE have classified common share into two: Class A and Class B. The
former are stocks that can be exclusively traded by Filipino investors, while the latter
are stocks that can be bought or sold by both Filipino and foreign investors (PSE
Academy, 2011). These ordinary shares have only been divided in order to have a better
monitor of ownership levels of domestic and foreign investors; therefore, the same
amounts of dividends are received by these classes. These types of shares, as defined
in the website, are often purchased for profits and ownership control and management.
Generally, they may be able to exercise their control through voting rights.

2.3 Roles of Foreign Investors to Domestic Firms
13

Several researchers have already conducted studies with respect to the
relationship between foreign ownership and domestic stock return volatility. They have
mostly focused on emerging markets either individually or in aggregate. Wang (2006)
has stated that, as compared to developed markets, there is higher stock market
volatility in emerging markets. With different sets of data, some result to a negative
relationship between the said variables while some conclude otherwise.
As evidenced in studies of emerging markets, capital market liberalizations
results to reduction in volatilities of individual stock returns. This is confirmed and implied
by Umutlu et. al (2009) where results have shown that the increasing degree of financial
liberalization has a decreasing impact on aggregated total volatility. Such implication is
supported by the view that volatility is reduced as the accuracy of public information
enhances due to the said liberalization.

Despite controlling for potential endogeneity and taking into account other
significant variables, consistent results were seen wherein having a large foreign
ownership drives a reduction in volatility (Li et. al, 2010). Such finding is also true for the
firms listed in the stock exchange of Thailand which were entirely focused on the
industrial sector as Aimpichaimongkol & Padungsaksawasdi (2013) take into account the
heterogeneity among foreign investors. Existing evidence was reinforced from the study
that large foreign investors play a stabilizing role in equity markets.

First, this could be supported by an interpretation by Wang (2007) and Li et. al
(2010) that the power of having a monitoring role is used by some large foreign
shareholders. Since emerging markets are generally characterized to have information
14
asymmetry, the entrance of foreign investors becomes favorable to such firms (Wang,
2007). Greater transparencies are demanded and less risk are taken by these investors
(Li et. al, 2010).

Second, as the investor base increases due to foreign ownership, it results to
higher return and greater risk sharing (Merton, 1987) which leads to volatility reduction
(Wang, 2007). A possible specific example would be having less reliance on debt
financing (may induce stock return volatility) as there is more support from foreign
investors (Mitton, 2006). In addition, due to accurate forecasts by foreign analysts
(Bacmann and Bolliger, 2001), there may be greater investor confidence on a stock as
reported by Huang and Shiu (2009).

Finally, it is argued that foreigners who are capturing a proportion in the shares of
a firm imply that their purpose for such investment do not solely direct to providing
monetary capital but also resources, technology, and training of human capital. Similar
to Stulz (2005) discussion, this could be attributed to an improvement in corporate
governance as foreign shareholders offer tools and incentives in doing so. This is further
supported and emphasized by Mitton (2006) and Lee and Huang (2013) that when
domestic firms become accessible to foreign investors, profitability as represented by
operating results tend to improve as well. Moreover, according to Ferreira and Matos
(2008), there is a positive relationship between performance measures and
shareholdings by foreign institutional investors.

Many of the sources we have gathered stated that according to Vishny (1997)
corporate governance refers to the way in which suppliers of finance assure themselves
15
of investment. Firms with relatively strong corporate governance tend to have a
significantly lower volatility (Li et. al, 2010). Foreign investors make certain
arrangements in the company where they invested in to ensure the companys growth to
gain returns on their investments. Due to the changes in behavior in arrangements and
operation markets, corporate governance has been playing a big role in an investors
investments.
According to Bebchuk and Weisbac (2010), when investors become
shareholders of a company, an investor may either implement their knowledge on
financial basics or gather information about the company. As an example, according to
Aggarwal et als (2011) study, there is greater corporate governance when CEOs are
terminated due to a poor performance. Moreover, foreign investors can make changes in
the companys operation by increasing the operational efficiency of the firm the foreign
investor invested in. As described by Lee and Huang (2013), due to monitoring
effectiveness and disciplinary roles, agency problems are resolved between investors
and managers. This may specifically include playing a disciplinary role which may affect
corporate and investment decision making (Choi et. al, 2012). This may affect the
operational efficiency of the firm.
As operational efficiency increases, performance is positively triggered (Lee and
Huang, 2013). Companies with foreign ownership and greater operational efficiency
have high return on assets (ROA), which translates to higher firm performance (Lee and
Huang, 2013). Another study that focused on operational performance of Japanese firms
and their corporate governance states that corporate governance is linked performance
of a firm. Sueyoshi et. al (2010) argues that using an effective governance system,
[Japanese manufacturing firms] are directed toward improving their performance and
maximizing the corporate value of their firms."
16
Similar to the 1997 Asian financial crisis, capital flows from foreign ownership are
often blamed as they come and go which leads to volatility (Chen et. al, 2007). It is an
inherent matter in the opening of the market to foreign investors brought about by
financial liberalization, the incidence of deregulation leads to an increase in the volatility
levels of firms (Comin & Philippon, 2005). The previous statement is said to be
consistent with findings that an increase in the number of foreign investor results to
greater volatility in the market as it is evidenced by several studies.

First, a different study by Bailey et. al (2008) made an analysis in foreign
investors focusing on their potential speculative characteristics when participating in the
stock market. The participation of these foreign speculators was found to have used
foreign securities for speculation. Their speculation is referred to as short-term capital
movements which are reversible (Nyangoro, 2013). It implies that they tend to leave as
fast as they come in an economy (Bekaert et al., 2012). Thus, this leads to a drastic
impact on the economy subsequently affecting companies share value as the
productivity of its capital stock is lowered (Gazioglu, 2008); in turn, the aggregate
stability of the stock market (Bekaert et al., 2012). Kim and Wei (1999) also defines this
as a kind of positive feedback trading wherein foreign investors sell when prices have
decreased and buy when increased. According to Bailey, et. al (2008), holding foreign
equity makes a diversification benefit as their stock returns among different countries
appear to have a low correlation. This is similar with Conover et al. (2002) and Allen et.
al (2011) wherein they find that foreign investors are able to hedge against risk together
with getting higher returns as correlation between emerging markets and developed
markets are not perfectly correlated.

17
Second, as domestic firms become more integrated into the world economy (Li
and Wei, 2006); thus, having stock prices of such firms are affected through international
market information. As argued by (Ross S. , 1989), market volatility is related to the
information flows which implies that information from one stock market can be
incorporated in another stock market; thus affecting movement of prices and
subsequently, its volatility. This results to domestic investors hedging against
international stock market risk. According to Li and Weis (2006) study on Chinas stock
market, firms which have issued shares for foreign ownership (B-shares and/or H-shares
tend to have a larger stock return volatility ) as compared to those with only A-shares
(shares only traded domestically). Moreover, as foreign investors drive up domestic
prices though their demands while assuming superior information, later on, prices are
forced to be corrected. Immediately after such changes, these investors tend to move
out of the market (Nyangoro, 2013).

These claims can be further emphasized through the study of the relationship
between investability (measures how accessible the stocks are to foreign investor) and
return volatility in emerging equity markets by Bae and Chan (2001). It is similarly
argued by Tesar and Werner (1995) that there is higher turn-over rate on shares held by
foreigners or non-residents as compared to the domestic market. According to these
researchers, there is more volatility in highly investable stocks than non-investable stock
even after controlling certain variables (country, industry, size, and turnover).

2.4 Other Sources of Stock Return Volatility

It could be said that it is undisputable that there are several sources of stock
return volatility in the market. The movement of stocks prices, which in effect directs to
18
the returns, can also be attributed to the ownership structure of firms. As mentioned in
the preceding statements, there are evidences of the significance of foreign ownership.
This entails that domestic ownership may affect the value of its own stocks.

Although Li et. al (2010) has only accounted large domestic shareholders who
may defined to be controlling shareholders, their study states that such shareholders
may avoid active stock market trading since they are long-term investors; thus, free-float
shares may reduce which leads to lower stock return volatility. Sarkar and Sarkar (2000
has also provided evidence that large shareholders has the role to monitor company
value. Such statement could imply that domestic shareholders could be accountable to
the changes of their stock prices through their influences on their companys
performance. In return, firms performance could be reflected on the market values of
their shares. Local controlling shareholders, according to Sun and Tong (2003), tend to
incline into making sound business decisions because such investors have the
resources, mechanisms and business knowledge that are necessary to ensure effective
monitoring management. Consequently, domestic ownership concentration may result
to high firm volatility due to potential expropriation (Bae, et. al, 2000). Moreover, there is
lack of credibility as domestic institution rarely engage in firm research (Huang and Shiu,
2009) which could be an implication that such domestic investors may trigger volatility of
publicly listed firms.

Aside from the ownership structure and identities of shareholders, Li, et. al
(2010) has mentioned that firms with great market capitalizations follows lower volatility
on the movement of its stocks. This is confirmed in Bae & Chan (2001)s research where
it has been indicated in their results that there is a significant and negative relationship
between firm size and return volatility implying that larger firms are less volatile as
19
compared to smaller firms; thus, consistent with the small company effect (Zou &
Adams, 2008). Firms with low market capitalization tend to have greater impacts of
shocks in volatility as Cheung and Ng (1992) have stated. Thus, in such situation, small
firms are more susceptible to uncertainty in stock prices. However, this is contradicted
by Nyangoro (2013) as it is stated in his study that the higher proportion of market
capitalization comes from foreign participation when domestic stock market are opened
for them.

Several studies (Li, et. al (2010), Wei and Zhang (2006), Aimpichaimongkol and
Padungsaksawasdi (2013)) have included leverage as one of the important determinants
of volatility. Using the ratio of total liabilities to total assets, results have shown that stock
returns are more volatile in firms where there is high leverage. Zou and Adams (2008)s
results also suggest that there is lower equity risk in companies having low-leverage due
to a low debt financing. A concept called Leverage Effect stated by Black (1976)
explained that leverage can induce future stock volatility to vary inversely with the stock
price: a fall in a firm's stock value relative to the market value of its debt causes a rise in
its debt-equity ratio and increases its stock volatility. Furthermore, as studied by Bhatti
et. al (2010) on 8 industries in Pakistan, a high level of leverage leads to a high
systematic risk, this, in turn, results to higher volatility of stock prices and its returns.

The lags of volatility in the market are also considered to be factors on the
changes of stock return volatility as is known that the said variable is auto-correlated
with the latter (Li, et. al, 2010). As Lo and MacKinlay (1988) exploits the return variances
scale, they find that there is positive serial correlation in weekly returns due to increasing
variances as holding period increase.

20
High volatility is also generated through an active traded trading turnover (Li, et.
al, 2010). This is supported by Wang and Huangs (2012) findings that when a private
information provokes jumps (sudden changes in price), there is greater positive
relationship between turnover and stock return volatility as this type of information
needs large trading volume to reveal itself. On the other hand, Giot et al. (2010) and
Wang and Huang (2012) finds that there is a negative relationship between trading
volume (which is a component of turnover) and movements of stock prices. Andersen et.
al (2007) believes that this could be due to the public information (such as
macroeconomic information) that lies behind such stock. This could be supported by
Wang and Huangs (2012) example that there is a quick and sharp price change without
much trade when traders have the same view on the stock valuation. Moreover, when
the same information consistently spreads in the market, there is lower volatility as
investors may just buy (or sell) the stock in which price movements will be in the same
direction. The same researchers have also said than another reason would be investors
who might have temporarily stopped trading in the middle of the day to revaluate their
portfolios. However, Bae et. al (2004) finds that the return volatility of stocks which are
open to foreign investors is not completely due to trading activity or turnover.

2.5 Research Gap

As an emerging country, foreign investors become attracted to the Philippine
stock market leading to their acquisition of shares of domestic firms. Aside from
theoretical and empirical evidences that such stock market liberalization lead to
economic growth (Li, et.al, 2010), it is important to note that there could be a bottom-to-
top effect wherein these foreign investors directly impact the stock and firm-level
performance first before they aggregately affect the countrys economy.
21

Li, et. al (2010) has also stated that in the process of liberalization, the impact of
foreign investment on domestic stock return volatility is a primary concern. As
previously mentioned in the literatures preceding this section, there have been a number
of confirmations that foreign ownership leads to reduction in volatility of stock returns as
it makes a stabilization effect while other studies suggest otherwise.

Many have already conducted studies relating the relationship between foreign
ownership and stock return volatility. However, they have either estimated analysed
certain specific emerging countries individually or aggregately (which includes the
Philippines. In line with this, this paper will show an examination of the significance and
relationship of such investments in the stock return volatilities while taking into account
the firms industry sectors in the Philippines.

22
2.6 Literature Map
Financial Liberalization
(Aimipichaimongkol & Padungsaksawasdi, 2013);
(Bae and Chan, 2001); (Chen & Lu, 2007); (Kim &
Singal, 2000); (Levin and Zervos, 1998);
(Nyangoro, 2013)
Foreign Investors and Stock Return Volatility
(Li et. al, 2007); (Umutlu et. al, 2009);
(Wang, 2006); (Wang, 2007)
Foreign Investors with Monitoring Role
(Aimipichaimongkol & Padungsaksawasdi, 2013);
(Bacmann and Bolliger, 2001); (Ferreira and
Matos, 2008); (Huang and Shiu, 2009); (Lee and
Huang, 2013); (Li et. al, 2007); (Merton, 1987);
(Mitton, 2006); (Stulz, 2005)
Foreign Investors as Speculators
(Allen et. al, 2011); (Bailey et. al, 2008); (Bae and
Chan, 2001); (Bekaert et. al, 2012); (Chen et. al,
2007); (Comin & Philippon, 2005); (Conover et. al,
2012); (Gazioglu, 2008); (Kim and Wei, 1999); (Li
and Wei, 2006); (Nyangoro, 2013); (Ross, 1989);
(Tesar and Werner, 1995)
23
CHAPTER 3
FRAMEWORK
3.1 Theoretical Framework

3.1.1 Efficient Market Hypothesis

The efficient market hypothesis (EMH) states that a market is efficient if security
prices immediately reflect the available data as developed by Paul A. Samuelson and
Eugene F. Fama in the 1960s. This entails that price changes are random and
unpredictable in a strongly efficient market as all information and expectations of all
market participants (Lo, The New Palgrave: A Dictionary of Economics, 2007) have
been already incorporated. According to Fama (1965), such markets is not an accident
of nature but a result of the attempt of market participants to profit given their
information. In a world where there is no cost of trading, profit opportunities may quickly
eliminate through the information incorporated as this occurs instantaneously. It is one of
the most common fundamentals of financial theories.

There are three categories of the EMH; the weak, semi strong and strong EMH.
The weak form of EMH suggests that stock prices can be determined by examining
trading data. In the weak form, data is generally readily available and if the weak form
holds, stock prices should be composed of three components. These components are
previous stock prices, expected return on stock and a random error term. There is a
random error term for there is still unexpected information released during the period.
This form of efficiency suggests that patterns in past data cannot be used to predict
prices. This emerged as a response to empirical evidences that there exists a random
walk effect on stock market prices (Hayes, 2012) wherein investors cannot make use of
24
the technical analysis strategy which refers to the use of geometric patterns in price and
volume charts to forecast future price movements of a security (Lo, 2007).

The semistrong form of EMH asserts that stock price reflects all publicly available
information of the firm. The information needed is information such as annual reports
and investment advisory data that are readily available for the public. In this type of
efficiency, prices reflect fundamental value (Hayes, 2012) - which may include the
present value of the future cash flows of the share. This means that the information
reflected on the prices are based on rational expectations. Such statements are against
the strategy of fundamental analysis where they primarily expect to get a return through
their observation on market interest rates and/or yield of assets (Hayes, 2012) which
they may view as not being reflected on the prices yet.

The last category is the strong form and it holds that current prices reflect all true
information, which is only known by company insiders. For a strong-form efficiency to
hold, the weak and the semi-strong should have to hold first. In summary, the efficiency
market hypothesis holds that the market quickly responds to information on both
individual and the economy.

The concept of behavioral finance sets a critique on the Efficient Market
Hypothesis. It state that smart money (i.e. investors with rational expectation) offsets
noise traders (i.e. investors who trade on the basis of non-news or pricing models with
no rational foundation) (Hayes, 2012) as they make irrational trading. Investors may
have behaviors of under- (conservatism) and over-reaction (representativeness) to
news. (Shleifer A. , 2000). When investors are slow in changing or revising their
expectations as they await the news to confirmed, they adopt the concept of
25
conservatism. Event studies have shown that this leads to excess returns for a certain
period (i.e. 60 days) after the announcement. On the other hand, when investors
categorize stocks either under winners or losers as they may have good or bad return,
respectively, this implies representativeness. This is referred as over-reaction since their
views may result to being much deviated from the fair or rational market value (Lo, 2007)
or what EMH would warrant (Shleifer, 2000). These two concepts may be summarized
as positive feedback trading.

Additionally, Grossman and Stiglitz (1980) argue that a perfectly efficient market
is impossible since such hypothesis entail that there will be no profits in gathering
information; thus, leading to a collapse as there would be less reason to trade. Given
these still existing arguments, the current state of the EMH is seen to be unresolved as
each side of the debate are continuously supported by other theoretical models and
statistical analysis (Lo, 2007).

3.1.2 Agency Theory
As stated by Eisenhardt (1989), economists have been exploring the risk
sharing among individuals or groups. This particularly relates to their different risk
preferences agency theory broadens this risk-sharing literature. The theory of agency
has always been controversial especially when applied in practicality. In simple terms,
the problem arises between two (or more) parties when one, designated as the agent
(i.e. managers), acts for, on behalf of, or as representative for the other, designated the
principal (i.e. shareholders), in a particular domain of decision problems (Ross S. ,
1973). It should be noted, however, that there may also be differences among the
principals or shareholders wherein some may have different strategies in monitoring or
26
better knowledge of the market which may induce greater firm performance (Kumar,
2005). The concern of this theory is resolving the problem of risk sharing. In relation this,
studies were conducted in identifying ownership structure device in reducing agency
costs (separation of ownership and management). It is argued that large shareholders
have the tool in collecting information and monitoring management which helps in
reducing such agency costs (Shleifer & Vishny, 1986).

27
3.2 Conceptual Framework

In an emerging economy, stock market liberalization is a factor to be considered
in policy decisions given that the attractiveness of the economy is slowly becoming
evident to foreign investors. Stock market liberalization increases the exposure of
domestic stock markets to foreign investors and benefits through the attraction of foreign
capital for economic growth, development of local stock markets, and risk distribution,
which reduces the cost of capital. Aside from cross-border capital flows, foreign
ownerships are reported to institute a stabilizing role in emerging stock markets due to
greater corporate efficiency and higher firm performance brought by the shareholders.

Li et. al (2010), argues that the stabilizing effect brought by foreign investors is
beyond its risk sharing and monetary capital broadening. Foreign investors also offer
technological resources, business relationships, access to new export markets, and
human capital training. Their investments go beyond the monetary spectrum and
translate into operational support for the firm. Due to operational support, foreign
Large Foreign
Ownership
Corporate
Operational
Efficiency
Firm Performance
Stabilization
of Stock
Return
Volatility
28
investors demand greater transparency and higher accountability of management. They
now play a monitoring role, which results to greater corporate efficiency.

Due to corporate efficiency brought about by foreign shareholders, higher firm
performance is obtained which triggers a stabilizing effect that impacts the volatility of
stock returns. The stabilizing effect can be best defined as the minimization of the
volatility of stock returns due to the percentage of foreign ownership. The stabilizing
effect of foreign investors documents a significantly negative relationship between large
foreign ownership and stock return volatility. It is able to minimize the fluctuations of
stock returns because foreign shareholders invest in domestic stock markets for the
long-term return. Aside from monetary capital, these foreign shareholders invest their
resources such as technological advancement, business connections, and the further
development of human capital. In return for the operational and financial resources,
foreign shareholders demand as well greater transparency and higher accountability
management, which entices firms to improving their corporate operational efficiency and
leads to higher firm performance. These resources and the improvement of corporate
efficiency and firm performance translate to operational support allowing firms to
extinguish external risks. The existence of the stabilizing effect in the Philippine Stock
Market may highlight the importance of recognizing heterogeneity among investors.

As the economy of emerging markets become more and more integrated in the
world economy through the opening of the stock market, information become much more
available. Opening the financial market tends to result to either further volatility or
stabilization as the sensibility of volatility to news increases. The movement of the value
of shares may depend on the strength of the information the participants may have and
whether such information has already been incorporated or reflected on the market.
29

Foreign investors may adopt the positive feedback trading wherein they may buy
or sell when their perspective on certain stock are either good or bad, respectively,
depending on their returns. This may result to movements of stock prices (and their
returns) beyond their rational prices. On the other hand, as it has been discussed in
previous studies, foreign investors tend to move the prices initially as they make use of
the information they have on a certain firm. Eventually, these may be finally incorporated
on the stocks value; however, resulting to drastic changes surfacing as excess volatility.

3.3 Operational Framework

In this study, the models to be used in testing for the foreign ownerships impact
on stock return volatility of local firms are presented below. Moreover, the variables to be
used, which are deemed necessary to be included, as evidenced by previous
researchers can be seen in the proceeding parts.

= -

where:

, represents the stock return volatility of firm in industry

represents foreign ownership (%):

represents dummy variables of each sector

represents all control variables

represents the error term of firm in industry

30
FO denotes foreign ownership with foreign shareholders who each have a
percentage of the domestic firms issued shares. Foreign investors or corporations
holding such shares refer to those citizens of another country or firms registered and
listed under the laws outside the Philippines.

This studys independent variable, stock return volatility, will be calculated using
the formula below:

In the statistical context, the mean of the quarterly stock return volatility will be
calculated using the daily stock return of each firm in the same quarter.

The independent variable, FO, and control variables which are denoted by

include the following:

(1) Foreign Ownership (FO) which refers to the aggregate block shareholdings held
by non-Filipino individual or corporations or those not established under the
Philippine laws; calculated as follows:





(2) domestic ownership (DOM) which refers to the aggregate shareholdings held by
local (established under the laws of the Philippines) corporations or individuals;
calculated as follows:
31





(3) natural logarithms of quarter-end market capitalization (LnMKTCAP) of domestic
firms

(4) leverage (LEV) of domestic firms; calculated as follows:





(5) lag of the stock volatility (srvlag) of domestic firms

(6) trading turnover (TO) of domestic firm shares; calculated as follows:





These are purposely categorized to be controlled due to empirical evidences that such
variables significantly affect stock return volatility of firms.

Variables
A-priori
Expectation
Variable Description
Independent
Variable
Foreign Ownership
(FO)
(-)
FO is to be measured using a
percentage equivalent of the
32
shares owned over the total
outstanding shares. Firms with
shareholdings of foreigners
lowers stock return volatility of
local firms by stabilizing such
movements of stocks
Dummy
Variables
(Sector)
Financial Sector
(FIN)
(+)
A dummy variable representing
firms in the financial sector; zero
otherwise
Industrial Sector
(IND)
(+)
A dummy variable representing
firms in the industrial sector; zero
otherwise
Holding Firms Sector
(HOLD)
(+)
A dummy variable representing
firms in the holding firms sector;
zero otherwise
Service Sector
(SER)
(+)
A dummy variable representing
firms in the service sector; zero
otherwise
Mining and Oil Sector
(MIN)
(+)
A dummy variable representing
firms in the mining and oil sector;
zero otherwise
Property Sector
(PRO)
(+)
A dummy variable representing
firms in the property sector; zero
otherwise
Control Domestic Ownership (-) DOM is to be measured in
33
Variables (DOM) percentage value using the
formula in the preceding
sections. With more shares held
by domestic corporations and
individuals , the movement of
stock returns reduces as they
seem to take part on the control
of the firm
Natural logarithm of market
capitalization
(LnMKTCAP)
(-)
Market capitalizations of local
firms will be under a logarithmic
transformation. Firms with
greater MKTCAP are expected to
have lower stock return volatility.
Leverage
(LEV)
(+)
As leverage of firm increases, the
uncertainties of stock return rises
as well which could be attributed
to its high equity risk.
Lag of volatility
(srvlag)
(+)
The existent autocorrelation
indicated that the lags of volatility
in the market positively induces
stock return volatility
Trading turnover
(TURNOVER)
(+)
Excessive trading results to
further movements in the stock
returns of local firms

34
CHAPTER 4
METHODOLOGY
4.1 Research Design

This research shall assess the impact of foreign ownership to stock return
volatility as a result of market liberalization. Moreover, the research shall cover a time
span of five years. As this is a quantitative study, the hypothesis about the impact of
foreign ownership on volatility of stock return in the Financial, Industrial, Holding Firms,
Property, Service, and Mining & Oil Industry will be either rejected or not through
statistical results; specifically, it will be done through a panel regression analysis.

4.2 Data Description and Collection Method

The data for this study will be sourced from several reliable databases.
Particularly, this includes Philippine Stock Exchange (PSE), Securities and Exchange
Commission, Bloomberg, and Osiris. A summary of such method of collection can be
seen in the table below. Moreover, some variables, such as the Stock Return Volatility,
Market Capitalization (LnMKTCAP), Leverage (LEV, and Lag of Stock Volatility (srvlag),
will be subsequently computed once the values needed are completed.

The sample will have to be on a quarterly basis for years 2008, 2009, 2010,
2011, and 2012.

Variables Data Source
Independent Foreign Ownership Bloomberg
35
Variable (FO)
Dummy
Variables
(Sector)
Financial Sector
(FIN)
Philippine Stock Exchange (PSE)
Industrial Sector
(IND)
Holding Firms Sector
(HOLD)
Service Sector
(SER)
Mining and Oil Sector
(MIN)
Property Sector
(PRO)
Control
Variables
Domestic financial institution ownership
(DOMFIN)
Bloomberg Domestic non-financial institution
ownership
(DOMNONFIN)
Natural logarithm of market capitalization
(LnMKTCAP)
Osiris (natural logarithm will be
generated through Stata)
Leverage
(LEV) Bloomberg (subsequently
calculated by authors) Lag of volatility
(srvlag)

36
4.3 Method of Data Analysis

4.3.1 Regression
As previously stated, this study consists of both time-series (on monthly basis)
and cross sectional data (different firms across all industries). Panel data, although seen
to be an advantage, may show less significant and reliable estimates as the slopes and
intercepts are held constant when the ordinary least square (OLS) estimation is used;
thus, may lead to being a nave model. Moreover, it fails to account for heterogeneity
among firms to be tested.

Fixed Effects Model (FEM) and Random Effects Model (REM) are two general
regression techniques which can be used in order to avoid the preceding stated
problems. In the results of the former model, it provides different intercepts but has a
fixed slope entailing that the impact of one variable is the same for all. There are three
least square dummy variable (LSDV) models under FEM: (1) LSDV1 capturing the
unobserved heterogeneity in cross-sectional units as it presents the effects of time
invariant variables, (2) LSDV2 capturing the unobserved heterogeneity in time periods
as it presents the effects that are the same for all cross-sectional unit but different
through time, and (3) LSDV3 which is a combination of LSDV1 and LSDV2 capturing the
unobserved heterogeneity in both time and space. This information implies that LSDV1
and LSDV2 is a one-way fixed effects model, while LSDV3 is a two-way fixed effect
model.

Conversely, REM accounts for unobserved heterogeneity using the error terms in
both the cross-sectional units and time-periods. As an advantage, it allows for more
37
degrees of freedom since it does not demean the data. Moreover, it is fit to be used for a
data with a large sample ratio to its population. Hausman test will be used to assess
which between FEM and REM is the best model for this study. It tests for the relationship
of the regressors to the error terms; its null hypothesis states that REM is better, FEM
otherwise.

4.3.2.1 Test for Stock Return Volatility

The relationship between foreign ownership and stock return volatility in the six
major industries are examined through a regression framework. The dependent variable,
in this case the stock return volatility for years 2008 to 2012, is computed by taking the
standard deviation of the quarterly stock returns for each year.

The main variable FO is valued as a percentage calculated as the number of
foreign owned shares divided by the total issued shares.

Depending on the previous test between FEM and REM, a regression will be run
to test the relationship between the stock return volatility and Foreign Ownership (FO)
while controlling variables which include domestic financial institution ownership
(DOMFIN), domestic non-financial institution ownership (DOMNONFIN), natural
logarithm of market capitalization (LnMKTCAP), leverage (LEV), lag of volatility
(LagVOL), and trading turnover (TURNOVER). Dummy variables of each industry will
also be included in the model.

The model will be utilized in a set of firms with foreign ownership and firms with
no foreign ownership at all. Results from both will be compared to further emphasize the
38
impact of foreign shareholding on firms. The research will make use of the data analysis
and statistical software Stata to test the volatility of stock returns.

4.3.3 Post Tests

Since the data of this research paper is pooled, it implies that it consists of time-
series data. In relation to this, it is essential to test for the stationarity of each variable
(excluding dummy variables) due to a potential random walk characteristic often found in
the said type of data. There are several types of panel unit root test, and in this paper,
Fisher-type will be used. Its null hypothesis states that the tested variable is non-
stationary and stationary otherwise.

Non-stationarity, on the other hand means that there are periods where the data
is interrupted by a single event. The common non-stationary stochastic process in
finance is the random walk model. It has a feature of a random walk wherein it
incorporates all past shocks and has infinite memory. It tends to be unpredictable
because the mean and variance are not constant; thus, it is needed to be corrected or
adjusted.
In the testing process, there are a few violations that should be noted so that the
data set may be corrected. The violations are the following: heteroscedasticity,
autocorrelation and multicollinearity of data.

Often found in cross-sectional unites, heteroscedasticity happens when the
variances of the error terms are not constant and are unequal because of the different
characteristics of the units/sample and in data collection. A data can be tested for
39
heteroscedasticity using the Brusch-Pagan test wherein the null hypothesis states that it
is homoscedastic; otherwise, it is heteroscedastic.

Autocorrelation is endemic in time series data wherein there is an existing
relationship among the residuals or error terms. Any of the following may be done to test
if such violation exists: find whether error terms are related over time using the Breusch-
Godfrey test. In order to correct, you may find the missing variables such as lags or
control variable or use Pearsons correlation coefficient.

In multicollinearity, violates the assumption that regressors are not related with
each other. This tends to have two or more regressors which are linearly dependent.
There are 4 types of MC; namely, complete absence (regressors are not linearly related
at all), tolerable (a very small proportion of the regressand is jointly explained by both/all
of the regressors), dangerous (a large proportion of the regressand is jointly explained
by both/all regressors), and perfect multicollinearity (the regressors cannot explain the
regressand individually).It can be detected using the Variance Inflation Factor (VIF)
through Auxiliary regression which is a regression among the regressors. To correct this,
data may be changed using the instrumental variable (estimated the average of the
regressor using inputs of the average of instruments which are highly correlated with the
regressor) or transformed or the sample size be increased.

For all regression models, Stata will be used in choosing which between FEM
and REM will be fit, testing and correcting for violations, and evaluating the relationship
among the variables.

4.4 Methodological Limitations
40

Although previous studies have estimated their model using monthly data,
the researchers will incorporate data on a quarterly basis due to its unavailability.
Additionally, instead of using two separate years and comparing them, in this study, we
will be using 5 continuous years from 2008 to 2012 to increase the number of
observations.

Even though the hausman test will be done which can be a ground for selecting
between FEM or REM, the researchers may opt to choose latter over former because of
the dummy variables (industries) which may be dropped as the latter demeans the data;
thus removing such variables.

In cases where there may be an existence of omitted variable bias (OVB), the
researchers will not include or add more variables which are originally not in the model
since it can be argued that there are many other factors affecting the stock market and
they cannot be all captured.

41
CHAPTER 5
Results and Discussion
5.1 Profile Description
INDUSTRY DESCRIPTION
Financial
Includes firms engaged in banking, investments, and
finance. More specifically, these firms generate profit
through investing, lending, insurance, securities trading,
and securities issuance activities.
Industrial
Includes firms involved in manufacturing of products
from raw materials, and is treated as the goods
producing sector of the economy; more specifically,
these firms generate profit through electricity, energy,
power, water, food, beverage, tobacco, construction,
infrastructure, allied services, chemicals, and diversified
industrials.
Holdings
Includes firms that control or manager partial or
complete interest in another firm or firms. Usually
Holding Firms do not produce the goods or service itself;
rather. Its purpose is to own shares of other companies.
These firms have great influence and control on the
other firms decision-making team due to the voting
stock they hold.
Property
Includes firms involved in land and property
development. More specifically, these firms generate
profit through selling or leasing real estate, which
includes the land and anything permanently fixed to it
such as houses, condominiums, townhouses, and retail
store buildings.
Mining & Oil
Includes companies engaged in mineral extraction, oil
exploration, extraction and production. More specifically,
these firms generate profit through, extraction and
production of gold, silver, copper, lead, crude oil, natural
gas, coal, other precious metals and stones, interests in
petroleum contracts.
Service
Includes firms engaged in providing intangible products
or services such as retail, transport, distribution, and
food services, and is treated as the tertiary sector of the
economy. More specifically, these firms generate profit
through media, telecommunications, information
technology, transportation services, hotel and leisure,
education, and diversified services.
Source: Philippine Stock Exchange
42
Several models (Nave, LSDV1, LSDV2, LSDV3, and REM) can be applied in a
pooled data. However, statistical tests must be done in order to identify which among
them fits the specific model of the study. Although using OLS may present unreliable
results as it reject unobserved heterogeneity, it must still be tested whether we should
use the nave model. This has been compared with both the fixed effects model (FEM)
and random effects model (REM).
TABLE 2: NAVE, LSDV1, LSDV2, LSDV3, REM
P-VALUE SUMMARY
Nave VS LSDV1 0.000 LSDV1
Nave VS LSDV2 0.050 Nave
Nave VS LSDV3 0.000 LSDV3
LSDV1 VS LSDV3 F = .100594591 <
1.56827614
LSDV1
Nave VS REM 0.000 REM
FEM (LSDV3) VS REM 0.000 FEM
For actual statistical results, see appendices.
Based on the results, it is better to use the LSDV1 and LSDV3 model rather than
the nave model. On the other hand, as an OLS regression is compared to LSDV2, it
prefers the former. In order to clarify which between LSDV1 and LSDV3 must be
applied, a Walds test has been done where it shows that the latter is more appropriate
for the model of the study. This implies that the unobserved heterogeneity for both time
and space must be accounted. Between nave model and REM, the Breusch-Pagan test
result shows that REM must be used. Finally, under the Hausman test where the least
square dummy variable and random effects model are compared, LSDV3 (FEM) is
preferred. However, as previously stated in the methodological limitation, the
researchers opt to use the REM. Such choice is due to the fact that FEM demeans the
data. This entails that the model will drop this studys dummy variables (six industries
under the PSE) which are important to be estimated in answering the studys objectives.
See appendices.
43
Including time-invariant variables, or variables which does not change over time,
allows us to identify and confirm that the differences among the entities has an influence
on the dependent variable. In addition, REM allows for the inferences in the model to be
generalized. The researchers believe that this is beneficial to the model given that our
sample of 87 firms out of the firms listed in the Philippines Stock Exchange is large
enough. Moreover, with an unbalanced panel where N (i.e. firms) is large and t (i.e.
quarterly period) is small, REM is a more efficient estimator given the present data.
TABLE 3: INITIAL PANEL REGRESSION
VARIABLE COEFFICIENT P-VALUE
fo 2.598091 0.025
dom -.4413675 0.408
hold -2.017236 0.074
ind -0.9399406 0.364
min -1.346806 0.305
prop -2.080375 0.077
ser 0.1879904 0.858
lnmktcap 0.1328918 0.143
lev 0.3186419 0.373
to -0.001875 0.906
srvlag 0.6781421 0.000
cons (fin) -1.25437 0.594

R-squared = 0.5164
For actual statistical results, see appendices.
The result in above shows the coefficients and significance of each variable
using the random effects model. As it can be inferred from Table 3, foreign ownership
(fo) is significant with respect to stock return volatility (srv). However, it is against our a-
priori expectation that there is a negative relationship between this particular
independent variable and dependent variable. The possible reason behind such result
will be discussed in the succeeding pages. Although domestic foreign ownership (dom),
based on its p-value, is insignificant, its coefficient is in line with our a-priori expectation
that as it increases (decreases), stock return volatility decreases (increases).
44
In order to avoid the dummy variable trap, we had to omit one of the dummy
variables. In this caase, we have omitted financial (fin) industry. Consequently, it now
represents the constant (cons) which allows us to be able to compare the other
industries. In this initial panel regression, we find that the financial (fin), holdings (hold),
industrial (ind), mining & oil (min), and property (prop) industry are negatively
insignificant as seen in its coefficients and p-values. Only the service industry showed a
positive relationship with stock return volatility although it is insignificant as well.
With respect to the models control variables, all are insignificant except the lag
of stock return volatility (srvlag) which showed a positive relationship with the dependent
variable. Moreover, the coefficients natural logarithm of market capitalization (lnmktcap)
and turnover (to) were both against our a-priori expectation. On the other hand,
leverages (lev) coefficient affirmed our expectation that the volatility of stock returns
increases as the leverage ratio increases; thus, entailing their direct relationship.
R-squared, which explains the goodness of fit, shows that 51.64% of the stock
return volatility in this data (srv) is explained by the independent variables included in the
model. The latter half which could explain the changes in stock return volatility could be
a varying set of variables since this study touches the stock market wherein changes in
this environment are affected by several factors.
Given that this study has a panel data (total of 87 firms on a quarterly period)
which typically includes the characteristics of a time-series data, a test for stationarity for
each variable (excluding dummy variables) must be done in order to assure reliability of
results from the final panel regression. Using the Fisher-type unit root tests, results for
the stationarity of variables can be seen below.
TABLE 1: TEST FOR STATIONARITY
45
VARIABLE P-VALUE SUMMARY
srv 0.000 Stationary
fo 0.000 Stationary
dom 0.000 Stationary
lnmktcap 0.3361 Non-stationary
lev 0.000 Stationary
to 0.000 Stationary
srvlag 0.000 Stationary
For actual statistical results, see appendices.
As shown in Table 1, the dependent variable, stock return volatility (srv), and
independent variables, foreign ownership (fo), domestic ownership (dom), leverage (lev),
turnover (to), and lag of stock return volatility (srvlag) are stationary except for the
natural logarithm of market capitalization (lnmktcap). In order to correct this and to
ascertain that the regression is not spurious, its first difference has been taken which
has undergone the Fisher-type unit root test as well. Its results show that lnmktcap first
difference is stationary with a p-value of 0.000 (see appendices).
Similar to other studies, our data may violate certain assumptions. This implies
that it is essential to test whether this studys variables are multicollinear,
heteroscedastic, and autocorrelated. These may help to clarify as to why the previous
initial panel regression presented such results.
TABLE 4: Test for Violations
VIOLATION RESULTS
Multicollinearity VIF Mean = 1.49 Not multicollinear
Heteroscedasticity Prob>F = 0.0000 Heteroscedastic
Autocorrelation Prob>F = 0.0000 Autocorrelated
For actual statistical results, see appendices.
As seen in Table 4, there exists tolerable multicollinearity in our model. This
implies that the explanatory variables remain exogenous; thus, they are not severely
related to each other. Given this, we may be able to interpret that each regressors
independently explains the dependent variable. As it is inherent in a data containing
several cross-sectional entities, the Breusch-Pagan test shows that the data is
46
heteroscedastic. This means that its variances are not constant. This simply states that
the firms in the sample, aside from being under different industries, have different
characteristics. Lastly, the model is said to be autocorrelated according to the
Woolridges Test implying that the errors are related with each other. Since error terms
account for variables which are not in the model, this may subsequently mean that that
there is an omitted variable bias (OVB).
TABLE 5: FINAL PANEL REGRESSION (corrected)
VARIABLE COEFFICIENT P-VALUE
fo 2.734031 0.006
dom -0.4093937 0.085
hold -2.146453 0.007
ind -1.076224 0.217
min -1.494903 0.026
prop -2.453876 0.004
ser -0.0291087 0.965
dlnmktcap 2.26601 0.300
lev 0.3213557 0.016
to -0.0038741 0.090
srvlag 0.6819802 0.000
cons (fin) 1.699844 0.017

R-squared = 0.5186
For actual statistical results, see appendices.
In order to have a more robust analysis, we corrected the violations which
existed in the model, namely, heteroscedasticity and autocorrelation. Moreover, we
incorporated the first-differences natural logarithm of market capitalization (lnmktcap) as
the Fisher-type test concludes that the actual lnmktcap is non-stationary. It can be
observed from this corrected panel regression that certain variables which have been
insignificant initially are now significant.
As it can be seen in Table 5, the relationship of foreign ownership (fo) to stock
return volatility (srv) remained significant with a positive coefficient of 2.734031. This
implies that a percentage increase in foreign ownership may lead to a 2.734031 increase
in stock return volatility. It means that the direct relationship between these two variables
47
states foreign ownership tend to intensify the volatility of stock return of domestic firms.
Although significant, this result is against our a-priori expectation that financial
liberalization, which allows foreign investors to enter the markets, has a decreasing
impact on aggregated total volatility (Aimpichaimongkol & Padungsaksawasdi, 2013). As
previous studies have confirmed, these foreign investors becomes a benefit to domestic
firms due to their demand of transparencies leading to less information asymmetry; thus,
taking less risk (Wang, 2007 and Li et. al, 2010). Moreover, there is less reliance on debt
financing as there is risk sharing with greater investor base. Lastly, they provide not only
monetary capital but also technology and training of human capital which improves
operational efficiency and performance of firms (Stilz, 2005, Mitton 2006, Lee and
Huang, 2013, and Li et. al, 2010). These explanations imply that the impact of foreign
investors on stock return and its volatility come from their intentions of getting returns
from their investments by making changes internally.
Consequently, based on the results, these cannot be applied in the case of the
firms listed under the Philippine Stock Exchange. According to Bae and Chan (2001),
when domestic stocks of emerging markets become available and accessible to the
ownership of foreign investors, the return volatility of these investible stock become more
volatile. As other studies have concluded, foreign investors may potentially speculate in
the domestic market (Bailey et. al, 2008). Instead of long-term investments, foreign
shareholders may only want to earn and gain by immediately buying and selling stocks
once they view them to be at their lowest and highest price or when decreasing and
increasing, respectively. It was defined by Kim and Wei (1999) as positive feedback
trading. This may imply that foreign investors tend to acquire domestic stocks in order
diversify their portfolio. This means that they are able to pool stocks from different
countries where there is low correlation among the shares especially when it is put
48
together in a portfolio with stocks from developed markets (Conover et. al, 2002 and
Allen et. al, 2011). Such strategy may help them to have higher stock returns. However,
as they immediately come and go from the market, it affects the value of companies
shares since the aggregate stability of the market is shaken (Bekaert et. al, 2012).
As foreign investors enter the domestic stock market, world market information
are also absorbed and incorporated by the stock market (Ross, 1989) which affects its
volatility; consequentially affecting the stock return volatility as well. These foreign
investors who acquire or buy shareholdings from different firms increase the price of
such stock as the demand drives up. Once information is completely reflected on the
stock price, the shares held by these foreign investors may be sold by the same. This
would lead to a drastic decrease on the stock price and the returns which may be gained
from such share (Nyangoro, 2013).
Since these are domestic firms, the aggregate domestic shareholders, may
include controlling shareholders or those who may actually be the
owners/directors/managers or simply those with high positions in the company. As it was
done in the study of Li et. al (2010), they have concluded that these type of shareholders
are long-term investors which may imply that they avoid excessive trading. Aside from
this possible external role in the changes in stock return volatility, their influences in the
management result to either high or low performance which may be reflected on the
values of the shares. In a more positive note, Sun and Tong (2003) views those local
controlling shareholders who have resources business knowledge lead them into making
sound business decisions. With respect to public shareholders who do not have internal
or management influence, theyre relationship with stock return volatility may be related
to the interpretation of the other control variable, turnover. Despite these supporting
statements to results of the regression and its affirmation on our a-priori expectation that
49
domestic ownership is inversely related to stock return volatility with a coefficient of -
0.4093937, it is seen to be insignificant with a p-value of 0.085.
TABLE 6: SUMMARY STATISTICS
Industry SRV FO MKTCAP LEV TO
FIN 5.50 0.17 105,024,759,314.93 0.76 0.0099
HOLD 0.16 0.14 61,133,362,567.63 0.79 0.0130
IND 7.51 0.17 51,548,315,509.97 0.45 0.0145
MIN 0.93 0.12 22,958,685,159.47 0.21 4.157106
PROP 0.36 0.21 121,887,343,515.48 0.56 0.0168
SER 6.19 0.33 35,661,542,188.29 0.44 0.0089

Table 5 shows that only the financial, holdings, mining & oil, and property
industries which have foreign ownership are significantly related with stock return
volatility. The firms which have foreign ownership under the financial industry,
representing the constant or intercept variable, has a positive relationship with stock
return volatility with a coefficient of 1.699844 and p-value of 0.017. Therefore, if there is
an increase of firms with foreign ownership in this industry, the aggregate stock return
volatility of this sector will increase as well.
Although it can be seen that the mining & oil industrys coefficient is negative (-
1.494903), using financial industry as a benchmark, the same with the latter, the former
has a positive relationship with stock return volatility; thus, an increase of firms with
foreign shareholders under the mining & oil industry leads to more volatility in their stock
returns. These are the same with the industrial and service industry with coefficients of -
1.076224 and -0.0291087, respectively (but insignificant).
The holdings industry has a -2.146453 relationship with stock return volatility as
compared to the financial industry (since it is set as a benchmark). Looking at the
comparison of their coefficients, in this industry, as firms with foreign shareholders
50
increase, their stock return volatility decreases; thus, there is a potential stabilization
effect. This interpretation is similar with property industry given their coefficient of -
2.453876 (but insignificant).
Market capitalization (first differenced natural logarithm), which represents the
size of firms, was seen to be playing a role in stock return volatility. Based on our results,
although insignificant, this control variable is positively related to the dependent variable.
It is against our a-priori expectation that firms which are relatively large tend to have less
impact from volatility shocks (Cheung and Ng, 1992). The result implies that for every
unit increase in market capitalization, stock return volatility may increase by 2.26601.
This can be supported by the Nyangoro (2013) that when the domestic market is
opened, foreign investors tend to have a higher proportion on the market capitalization.
Another control variable, leverage, which is identified as one of the determinants
of volatility, showed results where it confirmed this studys a-priori expectation. The
significantly positive relationship implies that a percentage increase in leverage will lead
to a 0.3213557 increase in stock return volatility. Highly leverage firm may entail that the
firm is more inclined in debt financing (Zou and Adams, 2008); therefore, increasing
equity risk. This is further clarified by Bhatti et. al (2010) wherein he finds that stock
return volatility increases as systematic risk increases due to high leverage.
As the nave view of the market (Brailsford, 1994), trading volume or turnover is
seen to be positively related to stock return volatility as evidenced by Li et. al (2010).
However, our results, though against our a-priori expectation, can be supported by Giot
et.al (2010), Wang and Huang (2012), and Andersen et. als (2007) findings that there is
higher return volatility but less turnover when investors view on a stock is the same
given an information that sepreads throughout the market. Even when there might be a
51
great number of shares bought or sold, given information, they may be in the same
position; thus, stock prices and returns move in the same direction. Despite these
evidences, turnover, in this data, is insignificant at the 95% confidence level in which
Bailey et. al (2004) have tested that stock return volatility is not necessarily and
completely affected by trading turnover.
Finally, the lag of stock return volatility is positively significant with a coefficient of
0.681902. As Li et. al (2010) have stated, the lag of this studys dependent variable
must be controlled as it is well known to be autocorrelated. This means that observations
are likely to be correlated with its past observations.
By correcting fore heteroscedasticity and autocorrelation, there was a slight
increase of R-squared with a value of 0.5168. Similar to the preceding explanation, this
panel regression has a satisfactory goodness of fit as it explains 51.86% of stock return
volatility.

52
CHAPTER 6
Conclusion and Recommendation
6.1 Conclusion
As an emerging market, it is a concern on whether the Philippines must
maximize potential benefits by completely opening its financial market to the world
market or to put more restrictions with respect to financial liberalization. Due to mixed
conclusions on the issues concerning the impact of foreign investors on stock return
volatility, the paper mainly aims to identify the formers destabilizing or stabilizing
relationship with latter using the listed firms in the Financial, Industrial, Holding Firms,
Property, Service, and lastly the Mining & Oil Industry under the PSE from year 2008
until 2012.
Out of the 296 firms listed under PSE, only 87 domestic listed firms have foreign
shareholders (with complete and available data) and are therefore included in the study.
Taking out the firms without foreign ownership enabled the researchers to assess the
effect of foreign shareholders to the volatility of stock returns. As discussed in the
preceding chapter, after certain variables have been controlled (i.e. domestic ownership,
natural logarithm of market capitalization, leverage, turnover, and lag of stock return
volatility), a percentage increase in foreign ownership may lead to an increase in stock
return volatility, holding all other variables constant; thus, a positive relationship.
Although contrary to the a-priori expectation that foreign shareholders stabilizes the
volatility of stock returns, these type of investors do affect the volatility of stock returns
but in a positive effect implying that it escalates and intensifies the volatility of domestic
firms stock return. Rather than lessening information asymmetry, risk, and heightening
efficiency and performance of the domestic firms through a monitoring role, foreign
investors may only be investing in Philippine firms for speculation and in order for them
53
to diversify their portfolio. These foreign shareholders may not be long-term investors
and are only taking advantage of the rises and dips of the market to gain profit. Portfolio
diversification may also be their goal as investing in different stock markets (i.e.
developed markets and developing markets) can both lessen the risk and intensify the
reward, depending on the economy and on the speculative strategies.
6.2 Recommendation
The researchers recommend that further studies concerning an in depth analysis
of the investing behavior of foreign shareholders in the Philippine setting be done. By
being able to assess whether these shareholders do fail to play a monitoring role in the
firms that they invest in and instead merely play a speculators role, such a research can
further prove the effect of foreign shareholders in the volatility of stock returns. However,
it should be noted that the improvements in investment grades have only been recently
received by the country; thus, further research is recommended using a different time
period (i.e. future). Others may opt to choose a particular industry rather than all of the
six in order for them to further scrutinize what foreign investors do in domestic firms. It is
also recommended that the results of the effect of foreign shareholders in the Philippine
stock market be compared with a country that has already been proved to receive a
stabilizing effect from foreign shareholders. This would aim to answer and contrast the
differences between the two countries to receive an opposite effect on the volatility of
stock returns. Currently, given these results, it may be recommended that the entrance
of foreign equity investors be monitored.



54

55
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59
APPENDICES:
Test for Stationarity
1) Stock return volatility
. xtfisher srv


Fisher Test for panel unit root using an augmented Dickey-Fuller test (0 lags)

Ho: unit root

chi2(174) = 1048.8696
Prob > chi2 = 0.0000

2) Foreign ownership
. xtfisher fo


Fisher Test for panel unit root using an augmented Dickey-Fuller test (0 lags)

Ho: unit root

chi2(174) = 437.0433
Prob > chi2 = 0.0000

3) Domestic ownership
. xtfisher dom


Fisher Test for panel unit root using an augmented Dickey-Fuller test (0 lags)

Ho: unit root

chi2(174) = 316.7924
Prob > chi2 = 0.0000

4) Natural logarithm of market capitalization
. xtfisher lnmktcap


Fisher Test for panel unit root using an augmented Dickey-Fuller test (0 lags)

Ho: unit root

chi2(174) = 181.3301
Prob > chi2 = 0.3361


. gen dlnmktcap = d.lnmktcap
(388 missing values generated)


. xtfisher dlnmktcap (corrected)


Fisher Test for panel unit root using an augmented Dickey-Fuller test (0 lags)

Ho: unit root

chi2(174) = 1629.2059
Prob > chi2 = 0.0000

60
5) Leverage
. xtfisher lev


Fisher Test for panel unit root using an augmented Dickey-Fuller test (0 lags)

Ho: unit root

chi2(174) = 395.1150
Prob > chi2 = 0.0000

6) Turnover
. xtfisher to


Fisher Test for panel unit root using an augmented Dickey-Fuller test (0 lags)

Ho: unit root

chi2(174) = 987.5710
Prob > chi2 = 0.0000

7) Lag of stock return volatility
. xtfisher srvlag


Fisher Test for panel unit root using an augmented Dickey-Fuller test (0 lags)

Ho: unit root

chi2(174) = 987.5064
Prob > chi2 = 0.0000

Finding the best model
Nave/OLS Regression

. reg srv fo dom hold ind min prop ser lev to srvlag

Source | SS df MS Number of obs = 1653
-------------+------------------------------ F( 10, 1642) = 174.89
Model | 261063.21 10 26106.321 Prob > F = 0.0000
Residual | 245110.692 1642 149.275696 R-squared = 0.5158
-------------+------------------------------ Adj R-squared = 0.5128
Total | 506173.902 1652 306.400667 Root MSE = 12.218

------------------------------------------------------------------------------
srv | Coef. Std. Err. t P>|t| [95% Conf. Interval]
-------------+----------------------------------------------------------------
fo | 2.720544 1.155688 2.35 0.019 .4537658 4.987322
dom | -.4171132 .5337622 -0.78 0.435 -1.46404 .6298133
hold | -2.129033 1.126004 -1.89 0.059 -4.337589 .0795227
ind | -1.04618 1.033578 -1.01 0.312 -3.07345 .981089
min | -1.514801 1.307648 -1.16 0.247 -4.079634 1.050032
prop | -2.386451 1.159076 -2.06 0.040 -4.659874 -.113027
ser | .0036791 1.042578 0.00 0.997 -2.041244 2.048603
lev | .2924403 .3577185 0.82 0.414 -.4091923 .9940728
to | -.002096 .0159301 -0.13 0.895 -.0333414 .0291494
srvlag | .6800261 .0177043 38.41 0.000 .6453007 .7147515
_cons | 1.820708 1.06347 1.71 0.087 -.265192 3.906608
------------------------------------------------------------------------------

Nave VS LSDV1
61
. xi: reg srv fo dom hold ind min prop ser lev to srvlag i.firm
i.firm _Ifirm_1-88 (naturally coded; _Ifirm_1 omitted)
note: _Ifirm_21 omitted because of collinearity
note: _Ifirm_29 omitted because of collinearity
note: _Ifirm_51 omitted because of collinearity
note: _Ifirm_68 omitted because of collinearity
note: _Ifirm_76 omitted because of collinearity
note: _Ifirm_88 omitted because of collinearity

Source | SS df MS Number of obs = 1653
-------------+------------------------------ F( 91, 1561) = 36.30
Model | 343724.011 91 3777.18693 Prob > F = 0.0000
Residual | 162449.891 1561 104.067835 R-squared = 0.6791
-------------+------------------------------ Adj R-squared = 0.6604
Total | 506173.902 1652 306.400667 Root MSE = 10.201

------------------------------------------------------------------------------
srv | Coef. Std. Err. t P>|t| [95% Conf. Interval]
-------------+----------------------------------------------------------------
fo | -1.102639 2.874201 -0.38 0.701 -6.74034 4.535063
dom | .0005934 .7645644 0.00 0.999 -1.499088 1.500275
hold | -6.068119 4.268438 -1.42 0.155 -14.44059 2.304357
ind | -3.375017 5.118084 -0.66 0.510 -13.41406 6.664027
min | -3.698933 3.711184 -1.00 0.319 -10.97836 3.580498
prop | -9.313122 5.860933 -1.59 0.112 -20.80925 2.183009
ser | 89.16063 5.271893 16.91 0.000 78.81989 99.50137
lev | .699083 .7152727 0.98 0.329 -.7039135 2.10208
to | .0005827 .0173982 0.03 0.973 -.0335436 .0347091
srvlag | .0897814 .0257516 3.49 0.001 .0392701 .1402927
_Ifirm_2 | 6.37786 3.324909 1.92 0.055 -.1438995 12.89962
_Ifirm_3 | .4734329 3.387764 0.14 0.889 -6.171614 7.11848
_Ifirm_4 | -.7479904 3.407772 -0.22 0.826 -7.432284 5.936303
_Ifirm_5 | -.7636082 3.909595 -0.20 0.845 -8.43222 6.905004
_Ifirm_6 | -.7002946 3.604672 -0.19 0.846 -7.770805 6.370216
_Ifirm_7 | -.6868804 3.451771 -0.20 0.842 -7.457477 6.083716
_Ifirm_8 | -.7590245 3.336202 -0.23 0.820 -7.302934 5.784885
_Ifirm_9 | 1.655907 3.85764 0.43 0.668 -5.910796 9.22261
_Ifirm_10 | 2.369367 3.798363 0.62 0.533 -5.081064 9.819798
_Ifirm_11 | 1.613536 3.833799 0.42 0.674 -5.906402 9.133474
_Ifirm_12 | 2.0741 3.664985 0.57 0.572 -5.114712 9.262913
_Ifirm_13 | 1.428058 3.720792 0.38 0.701 -5.870219 8.726334
_Ifirm_14 | 1.31405 3.654107 0.36 0.719 -5.853425 8.481524
_Ifirm_15 | 1.465697 3.665217 0.40 0.689 -5.72357 8.654963
_Ifirm_16 | 1.890432 3.676834 0.51 0.607 -5.321622 9.102486
_Ifirm_17 | 1.754826 3.702913 0.47 0.636 -5.508382 9.018034
_Ifirm_18 | 1.914908 3.764759 0.51 0.611 -5.46961 9.299427
_Ifirm_19 | 1.597382 3.655596 0.44 0.662 -5.573015 8.767778
_Ifirm_20 | 1.708235 3.849085 0.44 0.657 -5.841686 9.258157
_Ifirm_21 | (omitted)
_Ifirm_22 | .5008703 3.356293 0.15 0.881 -6.082447 7.084188
_Ifirm_23 | -91.43354 4.563914 -20.03 0.000 -100.3856 -82.48149
_Ifirm_24 | -90.86732 4.508964 -20.15 0.000 -99.71158 -82.02305
_Ifirm_25 | -91.01411 4.526347 -20.11 0.000 -99.89247 -82.13575
_Ifirm_26 | -91.92876 4.365943 -21.06 0.000 -100.4925 -83.36503
_Ifirm_27 | -92.84834 4.33239 -21.43 0.000 -101.3463 -84.35043
_Ifirm_28 | -91.28718 4.408622 -20.71 0.000 -99.93462 -82.63973
_Ifirm_29 | (omitted)
_Ifirm_30 | -93.53328 4.80088 -19.48 0.000 -102.9501 -84.11643
_Ifirm_31 | -93.89423 4.616768 -20.34 0.000 -102.9499 -84.8385
_Ifirm_32 | -93.2448 4.385536 -21.26 0.000 -101.847 -84.64264
_Ifirm_33 | -93.25854 4.421503 -21.09 0.000 -101.9312 -84.58582
_Ifirm_34 | -93.1939 4.564354 -20.42 0.000 -102.1468 -84.24099
_Ifirm_35 | -.6829151 3.53005 -0.19 0.847 -7.607055 6.241225
62
_Ifirm_36 | -.9663225 3.803827 -0.25 0.799 -8.427471 6.494826
_Ifirm_37 | 1.821787 3.933128 0.46 0.643 -5.892984 9.536559
_Ifirm_38 | -.2058044 4.193263 -0.05 0.961 -8.430826 8.019218
_Ifirm_39 | 10.7416 4.106463 2.62 0.009 2.686838 18.79637
_Ifirm_40 | -1.065476 3.813249 -0.28 0.780 -8.545106 6.414154
_Ifirm_41 | -.7951857 4.084471 -0.19 0.846 -8.806813 7.216442
_Ifirm_42 | -.7511154 4.154743 -0.18 0.857 -8.900581 7.39835
_Ifirm_43 | -.5443584 3.382275 -0.16 0.872 -7.178639 6.089922
_Ifirm_44 | -.6574315 3.430432 -0.19 0.848 -7.386172 6.071309
_Ifirm_45 | -.1758907 3.610382 -0.05 0.961 -7.2576 6.905818
_Ifirm_46 | -.875898 3.708732 -0.24 0.813 -8.15052 6.398724
_Ifirm_47 | 5.420237 4.038958 1.34 0.180 -2.502118 13.34259
_Ifirm_48 | 1.150219 3.662346 0.31 0.754 -6.033417 8.333856
_Ifirm_49 | 5.780606 5.875906 0.98 0.325 -5.744894 17.30611
_Ifirm_50 | 5.821538 6.356575 0.92 0.360 -6.646788 18.28986
_Ifirm_51 | (omitted)
_Ifirm_52 | 4.723773 5.871228 0.80 0.421 -6.792551 16.2401
_Ifirm_53 | 5.626196 6.315514 0.89 0.373 -6.76159 18.01398
_Ifirm_54 | 4.846619 5.808159 0.83 0.404 -6.545997 16.23924
_Ifirm_55 | 4.182035 5.456823 0.77 0.444 -6.521441 14.88551
_Ifirm_56 | 5.60332 5.839213 0.96 0.337 -5.850207 17.05685
_Ifirm_57 | 5.237745 5.824006 0.90 0.369 -6.185954 16.66144
_Ifirm_58 | 5.326784 6.007152 0.89 0.375 -6.456155 17.10972
_Ifirm_59 | 5.103282 5.945482 0.86 0.391 -6.558692 16.76526
_Ifirm_60 | 4.898162 5.803636 0.84 0.399 -6.485581 16.28191
_Ifirm_61 | 2.39543 3.691396 0.65 0.516 -4.845186 9.636047
_Ifirm_62 | -1.077169 4.014116 -0.27 0.788 -8.950796 6.796458
_Ifirm_63 | -91.53371 4.333053 -21.12 0.000 -100.0329 -83.03449
_Ifirm_64 | -49.46648 3.648084 -13.56 0.000 -56.62214 -42.31082
_Ifirm_65 | -91.12324 4.316132 -21.11 0.000 -99.58926 -82.65721
_Ifirm_66 | -93.34581 4.575343 -20.40 0.000 -102.3203 -84.37135
_Ifirm_67 | -.8818068 4.232003 -0.21 0.835 -9.182816 7.419202
_Ifirm_68 | (omitted)
_Ifirm_69 | -93.61769 4.655779 -20.11 0.000 -102.7499 -84.48545
_Ifirm_70 | -94.05821 4.705057 -19.99 0.000 -103.2871 -84.82931
_Ifirm_71 | -92.95349 4.657455 -19.96 0.000 -102.089 -83.81796
_Ifirm_72 | -.9505185 3.642302 -0.26 0.794 -8.094839 6.193802
_Ifirm_73 | 31.23127 4.311209 7.24 0.000 22.7749 39.68764
_Ifirm_74 | .2478667 3.652238 0.07 0.946 -6.915942 7.411676
_Ifirm_75 | 57.96742 5.767064 10.05 0.000 46.65541 69.27943
_Ifirm_76 | (omitted)
_Ifirm_77 | -4.390115 3.930586 -1.12 0.264 -12.0999 3.319669
_Ifirm_78 | -2.179626 4.101189 -0.53 0.595 -10.22405 5.864795
_Ifirm_79 | -4.351114 3.958211 -1.10 0.272 -12.11508 3.412857
_Ifirm_80 | -2.194803 4.314912 -0.51 0.611 -10.65844 6.268832
_Ifirm_81 | -1.163778 4.243967 -0.27 0.784 -9.488255 7.160698
_Ifirm_82 | -3.119746 3.801761 -0.82 0.412 -10.57684 4.33735
_Ifirm_83 | 9.136812 3.848696 2.37 0.018 1.587653 16.68597
_Ifirm_84 | -1.627266 4.036486 -0.40 0.687 -9.544773 6.290241
_Ifirm_85 | -4.042914 3.868764 -1.05 0.296 -11.63144 3.545609
_Ifirm_86 | -3.016707 4.906171 -0.61 0.539 -12.64009 6.606673
_Ifirm_87 | -1.03104 4.034986 -0.26 0.798 -8.945603 6.883523
_Ifirm_88 | (omitted)
_cons | 4.434237 3.425795 1.29 0.196 -2.285408 11.15388


63
. test _Ifirm_2 _Ifirm_3 _Ifirm_4 _Ifirm_5 _Ifirm_6 _Ifirm_7 _Ifirm_8 _Ifirm_9
_Ifirm_10 _Ifirm_11 _Ifirm_12 _Ifirm_13 _Ifirm_14 _Ifirm_15 _Ifirm_16 _Ifirm_17
_Ifirm_18 _Ifirm_19 _Ifirm_20 _Ifirm_21 _Ifirm_22 _Ifirm_23 _Ifirm_24 _Ifirm_25
_Ifirm_26 _Ifirm_27 _Ifirm_28 _Ifirm_29 _Ifirm _30 _Ifirm_31 _Ifirm_32
_Ifirm_33 _Ifirm_34 _Ifirm_35 _Ifirm_36 _Ifirm_37 _Ifirm_38 _Ifirm_39 _Ifirm_40
_Ifirm_41 _Ifirm_42 _Ifirm_43 _Ifirm_44 _Ifirm_45 _Ifirm_46 _Ifirm_47 _Ifirm_48
_Ifirm_49 _Ifirm_50 _Ifirm_51 _Ifirm_52 _Ifirm_53 _Ifirm_54 _Ifirm_55 _Ifirm_56
_Ifirm_57 _Ifirm_58 _Ifirm_59 _Ifirm_60 _Ifirm_61 _Ifirm_62 _Ifirm_63 _Ifirm_64
_Ifirm_65 _Ifirm_66 _Ifirm_67 _Ifirm_68 _Ifirm_69 _Ifirm_70 _Ifirm_71 _Ifirm_72
_Ifirm_73 _Ifirm_74 _Ifirm_75 _Ifirm_76 _Ifirm_77 _Ifirm_78 _Ifirm_79 _Ifirm_80
_Ifirm_81 _Ifirm_82 _Ifirm_83 _Ifirm_84 _Ifirm_85 _Ifirm_86 _Ifirm_87 _Ifirm_88

( 1) _Ifirm_2 = 0
( 2) _Ifirm_3 = 0
( 3) _Ifirm_4 = 0
( 4) _Ifirm_5 = 0
( 5) _Ifirm_6 = 0
( 6) _Ifirm_7 = 0
( 7) _Ifirm_8 = 0
( 8) _Ifirm_9 = 0
( 9) _Ifirm_10 = 0
(10) _Ifirm_11 = 0
(11) _Ifirm_12 = 0
(12) _Ifirm_13 = 0
(13) _Ifirm_14 = 0
(14) _Ifirm_15 = 0
(15) _Ifirm_16 = 0
(16) _Ifirm_17 = 0
(17) _Ifirm_18 = 0
(18) _Ifirm_19 = 0
(19) _Ifirm_20 = 0
(20) o._Ifirm_21 = 0
(21) _Ifirm_22 = 0
(22) _Ifirm_23 = 0
(23) _Ifirm_24 = 0
(24) _Ifirm_25 = 0
(25) _Ifirm_26 = 0
(26) _Ifirm_27 = 0
(27) _Ifirm_28 = 0
(28) o._Ifirm_29 = 0
(29) _Ifirm_30 = 0
(30) _Ifirm_31 = 0
(31) _Ifirm_32 = 0
(32) _Ifirm_33 = 0
(33) _Ifirm_34 = 0
(34) _Ifirm_35 = 0
(35) _Ifirm_36 = 0
(36) _Ifirm_37 = 0
(37) _Ifirm_38 = 0
(38) _Ifirm_39 = 0
(39) _Ifirm_40 = 0
(40) _Ifirm_41 = 0
(41) _Ifirm_42 = 0
(42) _Ifirm_43 = 0
(43) _Ifirm_44 = 0
(44) _Ifirm_45 = 0
(45) _Ifirm_46 = 0
(46) _Ifirm_47 = 0
(47) _Ifirm_48 = 0
(48) _Ifirm_49 = 0
(49) _Ifirm_50 = 0
(50) o._Ifirm_51 = 0
(51) _Ifirm_52 = 0
64
(52) _Ifirm_53 = 0
(53) _Ifirm_54 = 0
(54) _Ifirm_55 = 0
(55) _Ifirm_56 = 0
(56) _Ifirm_57 = 0
(57) _Ifirm_58 = 0
(58) _Ifirm_59 = 0
(59) _Ifirm_60 = 0
(60) _Ifirm_61 = 0
(61) _Ifirm_62 = 0
(62) _Ifirm_63 = 0
(63) _Ifirm_64 = 0
(64) _Ifirm_65 = 0
(65) _Ifirm_66 = 0
(66) _Ifirm_67 = 0
(67) o._Ifirm_68 = 0
(68) _Ifirm_69 = 0
(69) _Ifirm_70 = 0
(70) _Ifirm_71 = 0
(71) _Ifirm_72 = 0
(72) _Ifirm_73 = 0
(73) _Ifirm_74 = 0
(74) _Ifirm_75 = 0
(75) o._Ifirm_76 = 0
(76) _Ifirm_77 = 0
(77) _Ifirm_78 = 0
(78) _Ifirm_79 = 0
(79) _Ifirm_80 = 0
(80) _Ifirm_81 = 0
(81) _Ifirm_82 = 0
(82) _Ifirm_83 = 0
(83) _Ifirm_84 = 0
(84) _Ifirm_85 = 0
(85) _Ifirm_86 = 0
(86) _Ifirm_87 = 0
(87) o._Ifirm_88 = 0
Constraint 20 dropped
Constraint 28 dropped
Constraint 50 dropped
Constraint 67 dropped
Constraint 75 dropped
Constraint 87 dropped

F( 81, 1561) = 9.81
Prob > F = 0.0000

.

Result: LSDV1 is better

65
Nave VS LSDV2

. xi: reg srv fo dom hold ind min prop ser lev to srvlag i.quarterly
i.quarterly _Iquarterly_192-211 (naturally coded; _Iquarterly_192
omitted)
note: _Iquarterly_193 omitted because of collinearity

Source | SS df MS Number of obs = 1653
-------------+------------------------------ F( 28, 1624) = 63.91
Model | 265361.485 28 9477.1959 Prob > F = 0.0000
Residual | 240812.417 1624 148.283508 R-squared = 0.5242
-------------+------------------------------ Adj R-squared = 0.5160
Total | 506173.902 1652 306.400667 Root MSE = 12.177

------------------------------------------------------------------------------
srv | Coef. Std. Err. t P>|t| [95% Conf. Interval]
-------------+----------------------------------------------------------------
fo | 2.602931 1.153651 2.26 0.024 .3401303 4.865732
dom | -.4335705 .535772 -0.81 0.418 -1.484448 .6173066
hold | -2.106786 1.122467 -1.88 0.061 -4.308422 .0948505
ind | -1.02806 1.030395 -1.00 0.319 -3.049103 .9929837
min | -1.465475 1.30385 -1.12 0.261 -4.022879 1.09193
prop | -2.353993 1.155296 -2.04 0.042 -4.620021 -.0879649
ser | .0110502 1.03914 0.01 0.992 -2.027146 2.049246
lev | .2924921 .3570443 0.82 0.413 -.4078238 .9928079
to | -.0040564 .0159495 -0.25 0.799 -.0353402 .0272273
srvlag | .6844163 .0177012 38.66 0.000 .6496967 .7191359
_Iquarte~193 | (omitted)
_Iquarte~194 | .051203 1.850166 0.03 0.978 -3.577761 3.680167
_Iquarte~195 | 2.316668 1.850982 1.25 0.211 -1.313896 5.947232
_Iquarte~196 | -4.232344 1.851349 -2.29 0.022 -7.863627 -.6010607
_Iquarte~197 | 1.493355 1.852045 0.81 0.420 -2.139293 5.126004
_Iquarte~198 | 3.666831 1.851527 1.98 0.048 .0351992 7.298464
_Iquarte~199 | -1.327544 1.852655 -0.72 0.474 -4.961389 2.306301
_Iquarte~200 | -1.676702 1.852283 -0.91 0.365 -5.309817 1.956414
_Iquarte~201 | -.601614 1.853342 -0.32 0.746 -4.236806 3.033578
_Iquarte~202 | .3733862 1.852916 0.20 0.840 -3.260972 4.007744
_Iquarte~203 | 1.427819 1.85235 0.77 0.441 -2.205428 5.061065
_Iquarte~204 | -.2159157 1.852204 -0.12 0.907 -3.848877 3.417045
_Iquarte~205 | .7066737 1.853521 0.38 0.703 -2.92887 4.342217
_Iquarte~206 | -.3917941 1.853453 -0.21 0.833 -4.027206 3.243617
_Iquarte~207 | -.4171999 1.852284 -0.23 0.822 -4.050317 3.215917
_Iquarte~208 | .4173521 1.85488 0.23 0.822 -3.220858 4.055562
_Iquarte~209 | -.2980522 1.855338 -0.16 0.872 -3.93716 3.341056
_Iquarte~210 | -1.16781 1.856044 -0.63 0.529 -4.808302 2.472682
_Iquarte~211 | 1.020282 1.857133 0.55 0.583 -2.622345 4.66291
_cons | 1.768659 1.717078 1.03 0.303 -1.599263 5.136581

66
. test _Iquarterly_193 _Iquarterly_194 _Iquarterly_195 _Iquarterly_196
_Iquarterly_197 _Iquarterly_198 _Iquarterly_199 _Iquarterly_200 _Iquarterly_201
_Iquarterly_202 _Iquarterly_203 _Iquarterly_204 _Iquarterly_205 _Iquarterly_206
_Iquarterly_207 _Iquarterly_208 _Iquarterly_209 _Iquarterly_210 _Iquarterly_211

( 1) o._Iquarterly_193 = 0
( 2) _Iquarterly_194 = 0
( 3) _Iquarterly_195 = 0
( 4) _Iquarterly_196 = 0
( 5) _Iquarterly_197 = 0
( 6) _Iquarterly_198 = 0
( 7) _Iquarterly_199 = 0
( 8) _Iquarterly_200 = 0
( 9) _Iquarterly_201 = 0
(10) _Iquarterly_202 = 0
(11) _Iquarterly_203 = 0
(12) _Iquarterly_204 = 0
(13) _Iquarterly_205 = 0
(14) _Iquarterly_206 = 0
(15) _Iquarterly_207 = 0
(16) _Iquarterly_208 = 0
(17) _Iquarterly_209 = 0
(18) _Iquarterly_210 = 0
(19) _Iquarterly_211 = 0
Constraint 1 dropped

F( 18, 1624) = 1.61
Prob > F = 0.0500

Result: Nave is better.
67
Nave VS LSDV3

. xi: reg srv fo dom hold ind min prop ser lev to srvlag i.firm i.quarterly
i.firm _Ifirm_1-88 (naturally coded; _Ifirm_1 omitted)
i.quarterly _Iquarterly_192-211 (naturally coded; _Iquarterly_192
omitted)
note: _Ifirm_21 omitted because of collinearity
note: _Ifirm_29 omitted because of collinearity
note: _Ifirm_51 omitted because of collinearity
note: _Ifirm_68 omitted because of collinearity
note: _Ifirm_76 omitted because of collinearity
note: _Ifirm_88 omitted because of collinearity
note: _Iquarterly_193 omitted because of collinearity

Source | SS df MS Number of obs = 1653
-------------+------------------------------ F(109, 1543) = 30.77
Model | 346669.677 109 3180.45575 Prob > F = 0.0000
Residual | 159504.225 1543 103.372797 R-squared = 0.6849
-------------+------------------------------ Adj R-squared = 0.6626
Total | 506173.902 1652 306.400667 Root MSE = 10.167

------------------------------------------------------------------------------
srv | Coef. Std. Err. t P>|t| [95% Conf. Interval]
-------------+----------------------------------------------------------------
fo | -1.48999 2.875117 -0.52 0.604 -7.129538 4.149559
dom | -.0739846 .7741698 -0.10 0.924 -1.592521 1.444552
hold | -6.176211 4.263767 -1.45 0.148 -14.5396 2.18718
ind | -3.299615 5.134948 -0.64 0.521 -13.37183 6.772599
min | -3.845566 3.712703 -1.04 0.300 -11.12804 3.436911
prop | -9.449305 5.848426 -1.62 0.106 -20.92101 2.022398
ser | 88.98083 5.280549 16.85 0.000 78.62302 99.33864
lev | .6929833 .7179061 0.97 0.335 -.7151915 2.101158
to | -.0030829 .0174758 -0.18 0.860 -.0373617 .0311959
srvlag | .091785 .0259067 3.54 0.000 .0409689 .142601
_Ifirm_2 | 6.364147 3.314095 1.92 0.055 -.1364582 12.86475
_Ifirm_3 | .5591573 3.377081 0.17 0.869 -6.064996 7.183311
_Ifirm_4 | -.8289467 3.400845 -0.24 0.807 -7.499714 5.84182
_Ifirm_5 | -.4308488 3.908895 -0.11 0.912 -8.098156 7.236459
_Ifirm_6 | -.4594218 3.600446 -0.13 0.898 -7.521705 6.602862
_Ifirm_7 | -.6603003 3.443355 -0.19 0.848 -7.414451 6.09385
_Ifirm_8 | -.7797444 3.32573 -0.23 0.815 -7.303172 5.743683
_Ifirm_9 | 1.672348 3.846781 0.43 0.664 -5.873123 9.217819
_Ifirm_10 | 2.475056 3.7916 0.65 0.514 -4.962178 9.91229
_Ifirm_11 | 1.544192 3.82595 0.40 0.687 -5.960419 9.048804
_Ifirm_12 | 2.056258 3.655896 0.56 0.574 -5.114792 9.227308
_Ifirm_13 | 1.383331 3.710408 0.37 0.709 -5.894644 8.661305
_Ifirm_14 | 1.256452 3.645253 0.34 0.730 -5.89372 8.406625
_Ifirm_15 | 1.43868 3.655917 0.39 0.694 -5.732411 8.609771
_Ifirm_16 | 1.925123 3.667554 0.52 0.600 -5.268793 9.119039
_Ifirm_17 | 1.81049 3.695001 0.49 0.624 -5.437264 9.058244
_Ifirm_18 | 1.954188 3.758072 0.52 0.603 -5.417279 9.325655
_Ifirm_19 | 1.564107 3.648209 0.43 0.668 -5.591865 8.720079
_Ifirm_20 | 1.640686 3.840613 0.43 0.669 -5.892687 9.174059
_Ifirm_21 | (omitted)
_Ifirm_22 | .478947 3.345637 0.14 0.886 -6.083528 7.041422
_Ifirm_23 | -91.42976 4.563983 -20.03 0.000 -100.382 -82.47749
_Ifirm_24 | -90.51753 4.51494 -20.05 0.000 -99.3736 -81.66147
_Ifirm_25 | -90.94357 4.526321 -20.09 0.000 -99.82196 -82.06517
_Ifirm_26 | -91.8237 4.367128 -21.03 0.000 -100.3898 -83.25756
_Ifirm_27 | -92.60733 4.336557 -21.36 0.000 -101.1135 -84.10116
_Ifirm_28 | -90.93879 4.411768 -20.61 0.000 -99.59249 -82.28509
_Ifirm_29 | (omitted)
_Ifirm_30 | -93.41476 4.801513 -19.46 0.000 -102.8329 -83.99657
68
_Ifirm_31 | -93.89863 4.617398 -20.34 0.000 -102.9557 -84.84159
_Ifirm_32 | -93.12305 4.386513 -21.23 0.000 -101.7272 -84.51889
_Ifirm_33 | -93.17175 4.422712 -21.07 0.000 -101.8469 -84.49658
_Ifirm_34 | -93.02466 4.564863 -20.38 0.000 -101.9787 -84.07067
_Ifirm_35 | -.8004009 3.520427 -0.23 0.820 -7.705728 6.104927
_Ifirm_36 | -1.138958 3.796674 -0.30 0.764 -8.586145 6.308228
_Ifirm_37 | 1.591792 3.925975 0.41 0.685 -6.109017 9.292602
_Ifirm_38 | -.452753 4.188128 -0.11 0.914 -8.667778 7.762272
_Ifirm_39 | 10.48908 4.101854 2.56 0.011 2.443279 18.53487
_Ifirm_40 | -1.262168 3.805346 -0.33 0.740 -8.726365 6.202029
_Ifirm_41 | -1.063072 4.077034 -0.26 0.794 -9.060185 6.934042
_Ifirm_42 | -.962269 4.150796 -0.23 0.817 -9.104067 7.179529
_Ifirm_43 | -.5661294 3.372722 -0.17 0.867 -7.181732 6.049474
_Ifirm_44 | -.7555199 3.419757 -0.22 0.825 -7.463381 5.952342
_Ifirm_45 | -.2252456 3.604438 -0.06 0.950 -7.29536 6.844869
_Ifirm_46 | -.9964126 3.702055 -0.27 0.788 -8.258003 6.265178
_Ifirm_47 | 5.120862 4.030855 1.27 0.204 -2.785669 13.02739
_Ifirm_48 | 1.019064 3.65446 0.28 0.780 -6.149169 8.187296
_Ifirm_49 | 5.876134 5.887172 1.00 0.318 -5.671568 17.42384
_Ifirm_50 | 6.081979 6.368479 0.96 0.340 -6.40981 18.57377
_Ifirm_51 | (omitted)
_Ifirm_52 | 4.717035 5.875166 0.80 0.422 -6.807119 16.24119
_Ifirm_53 | 5.787653 6.33277 0.91 0.361 -6.634092 18.2094
_Ifirm_54 | 4.801772 5.823793 0.82 0.410 -6.621613 16.22516
_Ifirm_55 | 4.1711 5.459177 0.76 0.445 -6.53709 14.87929
_Ifirm_56 | 5.66805 5.847351 0.97 0.333 -5.801544 17.13764
_Ifirm_57 | 5.366322 5.823634 0.92 0.357 -6.056751 16.7894
_Ifirm_58 | 5.367037 6.013093 0.89 0.372 -6.427661 17.16174
_Ifirm_59 | 5.149402 5.96271 0.86 0.388 -6.54647 16.84527
_Ifirm_60 | 4.880538 5.811134 0.84 0.401 -6.518017 16.27909
_Ifirm_61 | 2.261142 3.684065 0.61 0.539 -4.96516 9.487444
_Ifirm_62 | -1.217131 4.011244 -0.30 0.762 -9.085197 6.650936
_Ifirm_63 | -91.41996 4.333657 -21.10 0.000 -99.92044 -82.91948
_Ifirm_64 | -49.2948 3.642066 -13.53 0.000 -56.43872 -42.15088
_Ifirm_65 | -90.77809 4.317507 -21.03 0.000 -99.24689 -82.30929
_Ifirm_66 | -93.32985 4.576056 -20.40 0.000 -102.3058 -84.3539
_Ifirm_67 | -1.101992 4.227674 -0.26 0.794 -9.394587 7.190602
_Ifirm_68 | (omitted)
_Ifirm_69 | -93.53989 4.656111 -20.09 0.000 -102.6729 -84.40691
_Ifirm_70 | -94.04032 4.705397 -19.99 0.000 -103.27 -84.81068
_Ifirm_71 | -92.88483 4.657879 -19.94 0.000 -102.0213 -83.74839
_Ifirm_72 | -1.127822 3.632888 -0.31 0.756 -8.25374 5.998096
_Ifirm_73 | 30.94194 4.309446 7.18 0.000 22.48895 39.39493
_Ifirm_74 | .3775782 3.643408 0.10 0.917 -6.768975 7.524132
_Ifirm_75 | 57.98028 5.776351 10.04 0.000 46.64995 69.31061
_Ifirm_76 | (omitted)
_Ifirm_77 | -4.516475 3.937624 -1.15 0.252 -12.24013 3.207184
_Ifirm_78 | -2.188475 4.103657 -0.53 0.594 -10.23781 5.86086
_Ifirm_79 | -4.500329 3.96492 -1.14 0.257 -12.27753 3.276871
_Ifirm_80 | -2.18137 4.319777 -0.50 0.614 -10.65462 6.291885
_Ifirm_81 | -1.196009 4.249501 -0.28 0.778 -9.531417 7.139399
_Ifirm_82 | -3.291559 3.804085 -0.87 0.387 -10.75328 4.170164
_Ifirm_83 | 8.9565 3.854542 2.32 0.020 1.395806 16.51719
_Ifirm_84 | -1.820614 4.043941 -0.45 0.653 -9.752815 6.111588
_Ifirm_85 | -4.218972 3.874691 -1.09 0.276 -11.81919 3.381245
_Ifirm_86 | -2.857213 4.912145 -0.58 0.561 -12.4924 6.777973
_Ifirm_87 | -1.244839 4.028154 -0.31 0.757 -9.146074 6.656397
_Ifirm_88 | (omitted)
_Iquarte~193 | (omitted)
_Iquarte~194 | -.0330961 1.552649 -0.02 0.983 -3.078621 3.012429
_Iquarte~195 | 2.107619 1.553511 1.36 0.175 -.9395975 5.154836
_Iquarte~196 | -3.18141 1.554155 -2.05 0.041 -6.229889 -.1329312
_Iquarte~197 | -.4580313 1.556253 -0.29 0.769 -3.510625 2.594562
69
_Iquarte~198 | 3.065862 1.555614 1.97 0.049 .0145222 6.117202
_Iquarte~199 | .2192509 1.556727 0.14 0.888 -2.834273 3.272775
_Iquarte~200 | -1.603415 1.555314 -1.03 0.303 -4.654167 1.447337
_Iquarte~201 | -1.730821 1.557691 -1.11 0.267 -4.786236 1.324595
_Iquarte~202 | -.9104283 1.558104 -0.58 0.559 -3.966653 2.145796
_Iquarte~203 | .6251287 1.557454 0.40 0.688 -2.429822 3.680079
_Iquarte~204 | -.0440106 1.55828 -0.03 0.977 -3.100581 3.01256
_Iquarte~205 | .5304828 1.560267 0.34 0.734 -2.529985 3.590951
_Iquarte~206 | -.2672615 1.559687 -0.17 0.864 -3.326591 2.792068
_Iquarte~207 | -.6975711 1.557537 -0.45 0.654 -3.752684 2.357542
_Iquarte~208 | -.1351692 1.563904 -0.09 0.931 -3.20277 2.932432
_Iquarte~209 | -.6222537 1.562121 -0.40 0.690 -3.686358 2.44185
_Iquarte~210 | -1.741369 1.563177 -1.11 0.265 -4.807544 1.324807
_Iquarte~211 | -.2176765 1.566472 -0.14 0.890 -3.290315 2.854962
_cons | 4.937373 3.747516 1.32 0.188 -2.41339 12.28814
------------------------------------------------------------------------------

. test _Ifirm_2 _Ifirm_3 _Ifirm_4 _Ifirm_5 _Ifirm_6 _Ifirm_7 _Ifirm_8 _Ifirm_9
_Ifirm_10 _Ifirm_11 _Ifirm_12 _Ifirm_13 _Ifirm_14 _Ifirm_15 _Ifirm_16 _Ifirm_17
_Ifirm_18 _Ifirm_19 _Ifirm_20 _Ifirm_21 _Ifirm_22 _Ifirm_23 _Ifirm_24 _Ifirm_25
_Ifirm_26 _Ifirm_27 _Ifirm_28 _Ifirm_29 _Ifirm_30 _Ifirm_31 _Ifirm_32 _Ifirm_33
_Ifirm_34 _Ifirm_35 _Ifirm_36 _Ifirm_37 _Ifirm_38 _Ifirm_39 _Ifirm_40 _Ifirm_41
_Ifirm_42 _Ifirm_43 _Ifirm_44 _Ifirm_45 _Ifirm_46 _Ifirm_47 _Ifirm_48 _Ifirm_49
_Ifirm_50 _Ifirm_51 _Ifirm_52 _Ifirm_53 _Ifirm_54 _Ifirm_55 _Ifirm_56 _Ifirm_57
_Ifirm_58 _Ifirm_59 _Ifirm_60 _Ifirm_61 _Ifirm_62 _Ifirm_63 _Ifirm_64 _Ifirm_65
_Ifirm_66 _Ifirm_67 _Ifirm_68 _Ifirm_69 _Ifirm_70 _Ifirm_71 _Ifirm_72 _Ifirm_73
_Ifirm_74 _Ifirm_75 _Ifirm_76 _Ifirm_77 _Ifirm_78 _Ifirm_79 _Ifirm_80 _Ifirm_81
_Ifirm_82 _Ifirm_83 _Ifirm_84 _Ifirm_85 _Ifirm_86 _Ifirm_87 _Ifirm_88
_Iquarterly_193 _Iquarterly_194 _Iquarterly_195 _Iquarterly_196 _Iquarterly_197
_Iquarterly_198 _Iquarterly_199 _Iquarterly_200 _Iquarterly_201 _Iquarterly_202
_Iquarterly_203 _Iquarterly_204 _Iquarterly_205 _Iquarterly_206 _Iquarterly_207
_Iquarterly_208 _Iquarterly_209 _Iquarterly_210 _Iquarterly_211

( 1) _Ifirm_2 = 0
( 2) _Ifirm_3 = 0
( 3) _Ifirm_4 = 0
( 4) _Ifirm_5 = 0
( 5) _Ifirm_6 = 0
( 6) _Ifirm_7 = 0
( 7) _Ifirm_8 = 0
( 8) _Ifirm_9 = 0
( 9) _Ifirm_10 = 0
(10) _Ifirm_11 = 0
(11) _Ifirm_12 = 0
(12) _Ifirm_13 = 0
(13) _Ifirm_14 = 0
(14) _Ifirm_15 = 0
(15) _Ifirm_16 = 0
(16) _Ifirm_17 = 0
(17) _Ifirm_18 = 0
(18) _Ifirm_19 = 0
(19) _Ifirm_20 = 0
(20) o._Ifirm_21 = 0
(21) _Ifirm_22 = 0
(22) _Ifirm_23 = 0
(23) _Ifirm_24 = 0
(24) _Ifirm_25 = 0
(25) _Ifirm_26 = 0
(26) _Ifirm_27 = 0
(27) _Ifirm_28 = 0
(28) o._Ifirm_29 = 0
(29) _Ifirm_30 = 0
(30) _Ifirm_31 = 0
70
(31) _Ifirm_32 = 0
(32) _Ifirm_33 = 0
(33) _Ifirm_34 = 0
(34) _Ifirm_35 = 0
(35) _Ifirm_36 = 0
(36) _Ifirm_37 = 0
(37) _Ifirm_38 = 0
(38) _Ifirm_39 = 0
(39) _Ifirm_40 = 0
(40) _Ifirm_41 = 0
(41) _Ifirm_42 = 0
(42) _Ifirm_43 = 0
(43) _Ifirm_44 = 0
(44) _Ifirm_45 = 0
(45) _Ifirm_46 = 0
(46) _Ifirm_47 = 0
(47) _Ifirm_48 = 0
(48) _Ifirm_49 = 0
(49) _Ifirm_50 = 0
(50) o._Ifirm_51 = 0
(51) _Ifirm_52 = 0
(52) _Ifirm_53 = 0
(53) _Ifirm_54 = 0
(54) _Ifirm_55 = 0
(55) _Ifirm_56 = 0
(56) _Ifirm_57 = 0
(57) _Ifirm_58 = 0
(58) _Ifirm_59 = 0
(59) _Ifirm_60 = 0
(60) _Ifirm_61 = 0
(61) _Ifirm_62 = 0
(62) _Ifirm_63 = 0
(63) _Ifirm_64 = 0
(64) _Ifirm_65 = 0
(65) _Ifirm_66 = 0
(66) _Ifirm_67 = 0
(67) o._Ifirm_68 = 0
(68) _Ifirm_69 = 0
(69) _Ifirm_70 = 0
(70) _Ifirm_71 = 0
(71) _Ifirm_72 = 0
(72) _Ifirm_73 = 0
(73) _Ifirm_74 = 0
(74) _Ifirm_75 = 0
(75) o._Ifirm_76 = 0
(76) _Ifirm_77 = 0
(77) _Ifirm_78 = 0
(78) _Ifirm_79 = 0
(79) _Ifirm_80 = 0
(80) _Ifirm_81 = 0
(81) _Ifirm_82 = 0
(82) _Ifirm_83 = 0
(83) _Ifirm_84 = 0
(84) _Ifirm_85 = 0
(85) _Ifirm_86 = 0
(86) _Ifirm_87 = 0
(87) o._Ifirm_88 = 0
(88) o._Iquarterly_193 = 0
(89) _Iquarterly_194 = 0
(90) _Iquarterly_195 = 0
(91) _Iquarterly_196 = 0
(92) _Iquarterly_197 = 0
(93) _Iquarterly_198 = 0
71
(94) _Iquarterly_199 = 0
(95) _Iquarterly_200 = 0
(96) _Iquarterly_201 = 0
(97) _Iquarterly_202 = 0
(98) _Iquarterly_203 = 0
(99) _Iquarterly_204 = 0
(100) _Iquarterly_205 = 0
(101) _Iquarterly_206 = 0
(102) _Iquarterly_207 = 0
(103) _Iquarterly_208 = 0
(104) _Iquarterly_209 = 0
(105) _Iquarterly_210 = 0
(106) _Iquarterly_211 = 0
Constraint 20 dropped
Constraint 28 dropped
Constraint 50 dropped
Constraint 67 dropped
Constraint 75 dropped
Constraint 87 dropped
Constraint 88 dropped

F( 99, 1543) = 8.36
Prob > F = 0.0000

Result: LSDV3 is better.

LSDV1 VS LSDV3

. display ((162449.891-159504.225)/19)/(159504.225/109)
.10594591

. display invFtail(19,109,0.05)
1.6827614

Since .100594591 < 1.56827614, we accept the null hypothesis.
Result: LSDV1 is better.


72
Nave VS REM

. xtreg srv fo dom hold ind min prop ser lnmktcap lev to srvlag, re

Random-effects GLS regression Number of obs = 1653
Group variable: firm Number of groups = 87

R-sq: within = 0.0082 Obs per group: min = 19
between = 0.9788 avg = 19.0
overall = 0.5164 max = 19

Random effects u_i ~ Gaussian Wald chi2(11) = 1752.24
corr(u_i, X) = 0 (assumed) Prob > chi2 = 0.0000

------------------------------------------------------------------------------
srv | Coef. Std. Err. z P>|z| [95% Conf. Interval]
-------------+----------------------------------------------------------------
fo | 2.598091 1.158298 2.24 0.025 .3278679 4.868313
dom | -.4413675 .5338317 -0.83 0.408 -1.487658 .6049235
hold | -2.017236 1.128189 -1.79 0.074 -4.228446 .1939745
ind | -.9399406 1.035753 -0.91 0.364 -2.969979 1.090098
min | -1.346806 1.312201 -1.03 0.305 -3.918673 1.225061
prop | -2.080375 1.177323 -1.77 0.077 -4.387885 .2271355
ser | .1879904 1.049766 0.18 0.858 -1.869513 2.245494
lnmktcap | .1328918 .0906295 1.47 0.143 -.0447386 .3105223
lev | .3186419 .3580395 0.89 0.373 -.3831026 1.020386
to | -.001875 .0159252 -0.12 0.906 -.0330878 .0293378
srvlag | .6781421 .0177447 38.22 0.000 .6433632 .7129211
_cons | -1.25437 2.351206 -0.53 0.594 -5.862648 3.353908
-------------+----------------------------------------------------------------
sigma_u | 0
sigma_e | 10.099474
rho | 0 (fraction of variance due to u_i)
------------------------------------------------------------------------------

. xttest0

Breusch and Pagan Lagrangian multiplier test for random effects

srv[firm,t] = Xb + u[firm] + e[firm,t]

Estimated results:
| Var sd = sqrt(Var)
---------+-----------------------------
srv | 306.4007 17.5043
e | 101.9994 10.09947
u | 0 0

Test: Var(u) = 0
chi2(1) = 64.07
Prob > chi2 = 0.0000

Result: REM is better.

73
FEM VS REM

. quietly xi: reg srv fo dom hold ind min prop ser lev to srvlag i.firm

. est store fixed

. quietly xtreg srv fo dom hold ind min prop ser lnmktcap lev to srvlag, re

. est store random

. hausman fixed random

---- Coefficients ----
| (b) (B) (b-B) sqrt(diag(V_b-V_B))
| fixed random Difference S.E.
-------------+----------------------------------------------------------------
fo | -1.102639 2.598091 -3.700729 2.630471
dom | .0005934 -.4413675 .4419609 .5473412
hold | -6.068119 -2.017236 -4.050883 4.116643
ind | -3.375017 -.9399406 -2.435076 5.012185
min | -3.698933 -1.346806 -2.352127 3.471457
prop | -9.313122 -2.080375 -7.232747 5.741467
ser | 89.16063 .1879904 88.97264 5.166319
lev | .699083 .3186419 .3804411 .6192114
to | .0005827 -.001875 .0024577 .0070062
srvlag | .0897814 .6781421 -.5883607 .018662
------------------------------------------------------------------------------
b = consistent under Ho and Ha; obtained from regress
B = inconsistent under Ha, efficient under Ho; obtained from xtreg

Test: Ho: difference in coefficients not systematic

chi2(10) = (b-B)'[(V_b-V_B)^(-1)](b-B)
= 1371.37
Prob>chi2 = 0.0000
(V_b-V_B is not positive definite)

Result: FEM is better.

Summary: LSDV2 < Nave < LSDV3 < REM < LSDV1

Therefore, the best model is FEM; specifically, LSDV1.



74
Test for Violations


1) Multicollinearity

. vif

Variable | VIF 1/VIF
-------------+----------------------
ind | 2.18 0.459383
ser | 2.08 0.479737
hold | 1.90 0.525092
prop | 1.83 0.547542
min | 1.77 0.565084
fo | 1.21 0.827429
to | 1.11 0.902691
srvlag | 1.10 0.906285
dom | 1.09 0.918662
lev | 1.07 0.935887
lnmktcap | 1.06 0.944447
-------------+----------------------
Mean VIF | 1.49

If >10, there is multicollinearity; thus, it is not multicollinear.

2) Heteroscedasticity

. hettest

Breusch-Pagan / Cook-Weisberg test for heteroskedasticity
Ho: Constant variance
Variables: fitted values of srv

chi2(1) = 14261.14
Prob > chi2 = 0.0000

Result: Heteroscedastic

3) Autocorrelation


. xtserial srv fo dom hold ind min prop ser lnmktcap lev to srvlag

Wooldridge test for autocorrelation in panel data
H0: no first-order autocorrelation
F( 1, 86) = 43.411
Prob > F = 0.0000

Result: Autocorrelated

75
FINAL PANEL REGRESSION (CORRECTED) - FEM


. xtreg srv fo dom hold ind min prop ser dlnmktcap lev to srvlag, fe cluster
(firm)
note: hold omitted because of collinearity
note: ind omitted because of collinearity
note: min omitted because of collinearity
note: prop omitted because of collinearity
note: ser omitted because of collinearity

Fixed-effects (within) regression Number of obs = 1653
Group variable: firm Number of groups = 87

R-sq: within = 0.0131 Obs per group: min = 19
between = 0.7459 avg = 19.0
overall = 0.3662 max = 19

F(6,86) = 7.43
corr(u_i, Xb) = 0.6637 Prob > F = 0.0000

(Std. Err. adjusted for 87 clusters in firm)
------------------------------------------------------------------------------
| Robust
srv | Coef. Std. Err. t P>|t| [95% Conf. Interval]
-------------+----------------------------------------------------------------
fo | -1.231636 1.210693 -1.02 0.312 -3.638414 1.175142
dom | .0319255 .1289042 0.25 0.805 -.2243275 .2881785
hold | (omitted)
ind | (omitted)
min | (omitted)
prop | (omitted)
ser | (omitted)
dlnmktcap | 1.635884 1.43612 1.14 0.258 -1.219029 4.490797
lev | .8240044 .9921211 0.83 0.409 -1.148267 2.796276
to | -.0024509 .0025922 -0.95 0.347 -.007604 .0027022
srvlag | .0930472 .0295188 3.15 0.002 .0343658 .1517287
_cons | 3.542648 .560494 6.32 0.000 2.428423 4.656874
-------------+----------------------------------------------------------------
sigma_u | 13.192152
sigma_e | 10.181377
rho | .62670891 (fraction of variance due to u_i)
------------------------------------------------------------------------------


76
FINAL PANEL REGRESSION (CORRECTED) - REM

. xtscc srv fo dom hold ind min prop ser dlnmktcap lev to srvlag

Regression with Driscoll-Kraay standard errors Number of obs = 1653
Method: Pooled OLS Number of groups = 87
Group variable (i): firm F( 11, 18) = 48.05
maximum lag: 2 Prob > F = 0.0000
R-squared = 0.5186
Root MSE = 12.1851

------------------------------------------------------------------------------
| Drisc/Kraay
srv | Coef. Std. Err. t P>|t| [95% Conf. Interval]
-------------+----------------------------------------------------------------
fo | 2.734031 .8729802 3.13 0.006 .8999675 4.568094
dom | -.4093937 .224549 -1.82 0.085 -.8811536 .0623662
hold | -2.146453 .7057992 -3.04 0.007 -3.629282 -.6636237
ind | -1.076224 .8405727 -1.28 0.217 -2.842202 .6897534
min | -1.494903 .6175937 -2.42 0.026 -2.792419 -.1973866
prop | -2.453876 .7415978 -3.31 0.004 -4.011915 -.895837
ser | -.0291087 .6541578 -0.04 0.965 -1.403443 1.345226
dlnmktcap | 2.26601 2.12265 1.07 0.300 -2.193512 6.725533
lev | .3213557 .1213208 2.65 0.016 .06647 .5762413
to | -.0038741 .0021642 -1.79 0.090 -.0084208 .0006727
srvlag | .6819802 .0759523 8.98 0.000 .5224104 .84155
_cons | 1.699844 .6460109 2.63 0.017 .3426253 3.057062
------------------------------------------------------------------------------