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FINANCIAL INSTITUTIONS AND SERVICES

FINANCIAL MANAGEMENT

METHODS, OUTCOMES

AND CHALLENGES

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FINANCIAL INSTITUTIONS

AND SERVICES

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FINANCIAL INSTITUTIONS AND SERVICES

FINANCIAL MANAGEMENT

METHODS, OUTCOMES

AND CHALLENGES

EMILY RAMIREZ

EDITOR

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CONTENTS

Preface vii

Chapter 1 The Effects of Personal Financial

Knowledge on Financial Behavior 1

Selda Coskuner and Arzu Sener

Chapter 2 Lost in Translation? 37

Ron P. McIver, Damien Wallace

and Vikash Ramiah

Chapter 3 The Challenges and Innovations

of Event Study Methodology 65

Vikash Ramiah, Damien Wallace

and Ron P. McIver

Chapter 4 The Challenges of ETFs and

Their Underlying Constituents 91

Damien Wallace, Ron P. McIver

and Vikash Ramiah

Chapter 5 Financial and Living Satisfaction

in the Elderly Population 113

Ayfer Aydiner Boylu and Gulay Gunay

Index 143

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PREFACE

Financial knowledge is crucial to helping individuals make better

financial decisions as well as the financial markets to function well. What

is neglected in these popular analyses is that the observed USD metrics are

also impacted by changes in exchange rates. Thus, this book examines the

extent to which exchange rate changes have potentially impacted

perceptions of the rate of change in the global financial influence of the

United States and Europe. Event study methodology has been extensively

used in the finance literature to capture how stock markets react to certain

information events such as mergers and acquisitions, financial crises,

terrorist activities, changes to financial and environmental regulations,

natural catastrophes, and many other events. Also, exchange Traded Funds

(ETFs) have become one of the most innovative and popular financial

instruments, with their diversification benefits at the core of their success.

Nonetheless, the inherent link between ETFs and their underlying

securities has cast doubts on their usage. Most people approach their later

years without financial preparation. This book will look at a study which

was carried out to determine older people financial distress, financial

management behavior and financial satisfaction on their satisfaction with

life.

Chapter 1 - Financial knowledge helps individuals to make better

financial decisions as much as it helps financial markets to function well.

Co py ri gh t © 2 01 7. N ov a Sc ie nc e Pu bl is he rs , In c. A ll r ig ht s re se

rv ed . Ma y no t be r ep ro du ce d in a ny f or m wi th ou t pe rm is si on f ro m th e pu bl is he r, e xc ep t fa ir u se s

pe rm it te d un de r U. S. o r ap pl ic ab le c op yr ig ht l aw .

Emily Ramirez viii

This study aims to explore the effects of financial knowledge and selected

demographics on financial behavior using a Turkish sample. Three

dimensions of financial knowledge and financial behavior, which are credit

management, saving and investment, have been highlighted in the present

study. The regression analysis results have showed that financial

knowledge has a significant effect on all dimensions of financial behavior -

credit management, saving and investment- this study included. Education

and household income are the demographics have an influence on financial

behavior in the regression model. The correlation between financial

knowledge and financial behavior has also been found statistically

significant. Implications for future research have been discussed.

Chapter 2 - Purpose: Globalization is frequently linked to the growth

of large, and effectively, multinational companies, a majority of which are

listed corporations. These large companies are important in a number of

contexts: their role in determining global FDI patterns and trade flows of

goods and services; their (perceived) potential to exert political influence

as a result of their economic power; and that the ‘success’ of these

companies brings bragging rights to both their management and country of

domicile. It is this last aspect that is highlighted in lists like the Fortune

Global 500. Such publications focus on the implication of changes in the

composition of the Top 500, based on current U.S. dollar (USD) metrics,

for the global economic and financial landscapes (including geographic

differences in the impact of the global financial crisis (GFC) and

aftermath). What is neglected in these popular analyses is that the observed

USD metrics are also impacted by changes in exchange rates. Thus, this

chapter examines the extent to which exchange rate changes have

potentially impacted perceptions of the rate of change in the global

financial influence of the United States and Europe. In doing so it fills a

gap in the literature.

Design/methodology/approach: This chapter summarizes established

views in the international political economy literature (often expressed in

the media) that we are entering an Asian (particularly Chinese) era in

which the West, largely seen as the United States and European Union,

faces relative economic and financial decline. It then presents stylized facts

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Preface ix

on changes in the geographic origin (control) and industry distribution of

large (Top 500) listed companies over the periods immediately preceding,

covering, and following the GFC (2005 to 2011). Measures are based on

both current USD values and those derived from use of 2005 currency

values. This is done against measures of the relative economic and

financial positions of major regions and countries over the 1999 to 2011

period. This latter analysis establishes trends in relative financial and

economic importance against which more recent changes associated with

the periods immediately preceding, covering, and following the GFC may

be evaluated.

Findings: The East Asian/Pacific region’s share of global equity

market capitalization has grown significantly over the 2000s. However,

China’s gains remain relatively minor given the significant outperformance

of its stock market relative to major Western equity markets. This is also

despite significant listings of large state-owned enterprises (particularly

banks), and relatively rapid growth in China’s economy. Additionally,

rather than accelerating an economic and financial shift from

North America, the data suggests that the GFC may have stabilized or

improved its relative position, having also impacted heavily on other

regions/countries. This is especially with respect to the relative decline in

value of equity in major markets that occurred during 2008.

Research implications: This chapter contributes to the debate on the

relative decline of the North Atlantic’s Western economies financial

influence and the rapidity of China’s rise in global financial power.

Research limitations: Limitations in the analysis exist due to the Top

500 being drawn from annual data on the largest 1000 listed companies as

measured by the USD values of total assets and market capitalization. Use

of end-of-year exchange rates leads to some mismatch between report

dates for company data and conversion for comparison purposes.

Survivorship bias is present in a number of the metrics, in the Top 1000

source data and for equity market index data presented in the chapter.

Chapter 3 - Event study methodology has been extensively used in the

finance literature to capture how stock markets react to certain information

events such as mergers and acquisitions, financial crises, terrorist activities,

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rv ed . Ma y no t be r ep ro du ce d in a ny f or m wi th ou t pe rm is si on f ro m th e pu bl is he r, e xc ep t fa ir u se s

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Emily Ramirez x

changes to financial and environmental regulations, natural catastrophes,

and many other events. Nonetheless, this methodology has been criticised

on several grounds, including: the choice of an asset pricing model to

determine normal returns; that abnormal returns are not normally

distributed; the undue influence of firm-specific information events; and

failure to account for the asynchronicity of market returns, stock market

integration and spillover effects. In this book chapter, we: (1) Provide a

brief history of the event study methodology; (2) show its various recent

applications; and (3) identify the innovations that have occurred in this

field.

Chapter 4 - Exchange Traded Funds (ETFs) have become one

of the most innovative and popular financial instruments, with their

diversification benefits at the core of their success. Nonetheless, the

inherent link between ETFs and their underlying securities has cast doubts

on their usage. In particular, volatility of both the physical asset and the

derivative has been the subject of discussion in the academic literature. In

this chapter, we: (1) Identify potential challenges and weaknesses

associated with the trading and operation of ETFs; (2) discuss the debate

surrounding ETF effects on the underlying constituents’ volatility; and (3)

criticise certain structures around this product. ETFs are an important

financial innovation; even so, the challenges identified warrant further

regulators and academic scrutiny.

Chapter 5 - Much of the literature on aging has concentrated on

adjustment problems to later life, aging process, isolation, social

interactions etc. However, there is little research on financial behavior of

older people. Most people approach their later years without financial

preparation. Lack of financial preparation also makes it difficult to meet

the needs of older people. Moreover, satisfaction with life, which refers to

a subjective aspect of the quality of life, is an important factor influencing

the preservation of the quality of life and is affected by financial conditions

and behaviors. This study was carried out to determine older people

financial distress, financial management behavior and financial satisfaction

on their satisfaction with life. 516 older people who live in Ankara, Turkey

at different socio-economic levels were chosen based on the “systematic

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Preface xi

sampling method.” Data were collected through a demographic

information form, financial satisfaction form, In Charge Financial Distress/

Financial Well-Being Scale (IFDFW), Financial Management Behavior

Scale (FMBS), and The Satisfaction with Life Scale (SWLS). To

determine the factors affecting satisfaction with life hierarchical regression

analyses were used. The results displaying that some demographic

variables (perceive income, physical health status), financial distress,

financial management behavior and financial satisfaction were important

predictors of satisfaction with life of elderly.

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In: Financial Management ISBN: 978-1-53611-827-8

Chapter 1

THE EFFECTS OF PERSONAL FINANCIAL

KNOWLEDGE ON FINANCIAL BEHAVIOR

Selda Coskuner, PhD and Arzu Sener, PhD Department of Family and Consumer Sciences, Hacettepe University,

Ankara, Turkey

ABSTRACT

Financial knowledge helps individuals to make better financial

decisions as much as it helps financial markets to function well. This

study aims to explore the effects of financial knowledge and selected

demographics on financial behavior using a Turkish sample. Three

dimensions of financial knowledge and financial behavior, which are

credit management, saving and investment, have been highlighted in the

present study. The regression analysis results have showed that financial

knowledge has a significant effect on all dimensions of financial behavior

-credit management, saving and investment- this study included.

Education and household income are the demographics have an influence

on financial behavior in the regression model. The correlation between

financial knowledge and financial behavior has also been found

 Corresponding author: Selda Coskuner, Department of Family and Consumer Sciences,

Hacettepe University, Beytepe-Ankara/Turkey. Email: [email protected]. Co py ri gh t © 2 01 7. N ov a Sc ie nc e Pu bl is he rs , In c. A ll r ig ht s re se

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pe rm it te d un de r U. S. o r ap pl ic ab le c op yr ig ht l aw .

Selda Coskuner and Arzu Sener 2

statistically significant. Implications for future research have been

discussed.

Keywords: financial knowledge, financial literacy, financial behavior,

financial management, saving, investment, credit management,

demographics

INTRODUCTION

Personal financial knowledge is the ability to understand basic

financial concepts, manage financial resources, prepare budget, plan ahead

and use money rationally to make informed financial choices and achieve

financial goals (Lusardi, 2008a). This ability has the greatest importance of

financial wellbeing and the quality of life for individuals and families. It is

commonly observed in Europe, the United States, Australia and other

countries in which the level of financial knowledge and capability is low

among average households (Atkinson & Messy, 2012; Lusardi & Mitchell,

2014; OCED, 2005; Van Els, Van Rooij, & Schuit, 2007). The economic

effect of this kind of shortcomings has attracted a growing attention in

public policy areas. The determinants of individual financial decision-

making have been examined in many studies for to look for a remedy for

the inefficiency of individual financial behaviors (Lusardi & Mitchell,

2014; Tang and Baker 2016). The financial knowledge affects the

individual and his/her family in taking more risky and important economic

decisions from participation in capital markets to individual pension

planning, as well as their daily simple economic decisions (Lusardi,

2008a). Therefore, financial education has been observed to gain more

significance for community groups, businesses, policymakers, educators

and government since 1990s (Barmaki, 2015). The growing complexity of

financial products along with the individuals’ growing responsibility for

their own financial security has promoted this enhanced interest in

financial education (Hilgert et al. 2003).

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The Effects of Personal Financial Knowledge on Financial Behavior 3

In this context, since the variety and complexity of financial services

provided have increased as a result of innovation and globalization, the

importance of informing an individual about financial issues has also

increased day by day. Technological advances, new electronic distribution

channels and financial market integration have changed and increased the

level of the services provided and the methods and tools of service delivery

to consumers (EBF, 2009). Nowadays, financial markets have become

more sophisticated and new and complex financial products have become

available to consumers first-hand. Developments in information

technologies and telecommunications have resulted in the liberalization of

financial markets and the dissemination of new financial products to meet

specific market needs. Even simple products like savings accounts are now

offered to consumers with a wide variety of channels and different

features. This increase in the sophistication of the products and

opportunities offered complicates the issues that are relatively simpler such

as the date of debt, interest and payment options along with the other

financial instruments and makes them difficult to understand for average

consumers. On the other hand, in developed and developing economies,

easy access to credit options provided by official and unofficial institutions

has led to an increase in the indebtedness levels of some segments of the

population and therefore concerns about the repayment of high loan debts

(Russia’s G20 and OECD, 2013). It has become difficult to understand and

manage the financial markets, compare the products offered, and

understand the benefits and risks they provide. In addition to the increase

in the number and complexity of financial products and services,

individuals have had to take on more personal responsibilities in financial

issues such as making an investment for their retirement and creating an

individual retirement plan (Miller et al., 2009; EBF, 2009).

The lack of financial knowledge may affect individual’s or family’s

planning and saving abilities for long-term targets such as purchasing a

house, education or retirement planning, as well as the issues such as daily

money management. The lack of knowledge about money management

may also decrease consumers’ resistance against tough financial crises

(Mason and Wilson, 2000). In emerging economies, the new middle class

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Selda Coskuner and Arzu Sener 4

often gets their first experience as investors and needs knowledge about

managing the financial markets and products (Russia’s G20 and OECD,

2013) because in developing countries, a large number of new consumers

have entered financial markets not only because of the increase in income

but also due to the fact that new technologies and new financial services

such as branch-free banking have facilitated consumers’ participation in

financial markets (Miller et al., 2009; EBF, 2009). Therefore, the need for

financial knowledge may start with the basic concepts related to the

features and use of financial products and reach a higher level with the

financial concepts related to the development of skills and attitudes for

personal finance management in the short and long term (Russia’s G20 and

OECD, 2013). In association with all of these, financial literacy has

become a concept with central importance in the today’s complex financial

market because it is possible for individuals to be able to take effective and

accurate financial decisions, to have the right financial products and to

develop a correct financial behavior only when they have sufficient

knowledge of the basic financial concepts at least (EBF, 2009).

Indeed, Hogarth (2006) states that financial literacy is important since

consumers who are financially informed and well-educated take better

decisions for themselves and their families, have high economic security

and welfare, contribute to the formation of strong societies and support

social and economic development since individuals with a high level of

financial knowledge will act more consciously in financial issues, use the

limited resources more rationally and be able to develop a more positive

behavior. Thus, their satisfaction with the use of resources will be higher.

This situation will contribute to both an increase in their individual welfare

and the functioning of financial markets and the general economic system.

Educated consumers will support the development of the financial

industry, thus making a contribution to a higher economic growth. They

will also tend to be more active and accurate financial service users

(Kosicki, 2008; Hilgert et al. 2003). Individuals’ taking effective and

efficient decisions on financial issues is important for the stability of the

economic and financial system (Gökmen, 2012; Hilgert et al. 2003).

Co py ri gh t © 2 01 7. N ov a Sc ie nc e Pu bl is he rs , In c. A ll r ig ht s re se

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pe rm it te d un de r U. S. o r ap pl ic ab le c op yr ig ht l aw .

The Effects of Personal Financial Knowledge on Financial Behavior 5

Therefore, financial education is essential for not only individual

households and families but also their communities (Hilgert et al. 2003).

Studies carried out in many countries show that financial knowledge is

at a low level in a large portion of the population (Danes and Hira, 1987;

Chen and Volpe, 1998; Lusardi and Mitchell, 2006; Jorgensen, 2007;

Lusardi et al., 2009,2010; Stanculescu, 2010; Lusardi and Mitchell, 2011;

Russia’s G20 and OECD, 2013; OECD, 2014) and that there is a positive

relationship between the financial knowledge and positive financial

behaviors, that is, financial behaviors improve positively as the level of

financial literacy increases (Hilgert et al. 2003; Allgood and Walstad,

2013; Barmaki, 2015).

Financial literacy is a broad concept involving both knowledge and

behavior and it concerns all consumers regardless of richness or income

(Miller et al., 2009). Indeed, financial literacy has been defined by

Atkinson and Messy (2012) as “a combination of awareness, knowledge,

skill, attitude and behavior necessary to make sound financial decisions

and ultimately achieve individual well-being.” Financial literacy can be

formulated as a link from knowledge to skill, from skill to attitudes and

from attitudes to behaviors. This link is extremely important because

knowledge affects the attitudes, then attitudes emerge in the form of

various behaviors (Alkaya and Yağlı, 2015). In this study, the direct

relationship between knowledge and behavior, in other words, what

consumers know and what they do, is examined by highlighting four

financial management activities, which are credit management, saving, and

investment.

Financial Knowledge and Financial Behavior

In the most basic sense, financial behavior can be considered as the

follow-up of individuals’ personal financial situations, their doing

shopping carefully, managing their savings and investments, personal debts

and loans and evaluating their investments in the short and long term. Xiao

(2008) examined the concept of financial behavior as result-oriented and

Co py ri gh t © 2 01 7. N ov a Sc ie nc e Pu bl is he rs , In c. A ll r ig ht s re se

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Selda Coskuner and Arzu Sener 6

defined it as “making plan on how to spend money, keeping the written

account of the money spent, reviewing fixed expenses and creating a

written budget.” Dew and Xiao (2011) divided financial behavior tendency

into three basic sub-factors and defined them as saving and investment,

cash management and credit management. Certain forms of positive

financial behavior are supported by financial knowledge and literacy. The

connection between financial literacy and good financial behavior should

be established in order to clarify the benefits of consumers who are

financially literate (Monticone, 2010).

The relationship between financial literacy and financial behavior has

been indicated in some studies. The establishment of a relationship

between financial knowledge and financial behavior was pioneered by

Lusardi and Mitchell (2007b), and they used the questions in surveys

demonstrating this kind of behavior concerning knowledge. In a sense, the

questions were not just about an evaluation of the knowledge itself but

about the economic outputs of knowledge.

The assumption “financial knowledge is positively associated with

consumer financial behavior and causality runs from knowledge to

behavior” is affirmed by several empirical studies (Hathaway and

Khatiwada, 2008; Meier and Sprenger, 2008; Willis, 2008). A significant

interrelationship between financial knowledge and financial behavior was

found by Hilgert, Hogarth and Beverly (2003), and also Martin (2007). A

relationship has also been built between housing counseling (which

involves suggestion about the management of mortgage repayments,

budgeting and other skills related to purchasing a house) and lower

delinquency and default rates (Lyons, White and Howard, 2008).

Nevertheless, the fact that a confusing interrelation with causality is

observed in the study carried out by the Federal Reserve Bank of

Cleveland is a critical defect. It is possible that causality runs both ways

despite the presence of an explicit interrelation between knowledge and

behavior in personal finance (Hathaway and Khatiwada, 2008).

The causal bond from financial knowledge to positive financial

attitudes regarding money, which affects the behavior, is supported by

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pe rm it te d un de r U. S. o r ap pl ic ab le c op yr ig ht l aw .

The Effects of Personal Financial Knowledge on Financial Behavior 7

empirical studies (Borden et al., 2008). The advancement of credit

counseling clients was monitored by Elliehausen, Lundquist and Staten

(2007), and they determined that the people who received counseling were

‘capable of reducing their debts, developing their credit card management

and further reducing their delinquency rates’ compared to people who did

not receive counseling. It was determined by Hartaska and Gonzalez-Vega

(2005) that people who took financial counseling possessed a lower default

hazard despite the fact that the repayment frequency was not highly

affected. There are also significant findings in the study of Courchane and

Zorn (2005) that demonstrate a casual bond from financial knowledge to

financial behavior and associate this behavior with credit outcomes. What

variables were the most significant in certain forms of behavior was

examined by the researchers via a three-stage process. For instance, at the

second stage, knowledge was the most significant determining factor of the

dependent variable of financial self-control (budgeting, saving and the

ability to control finances) (Courchane and Zorn, 2005).

METHOD

Data Collection

In this study, the relationship between financial knowledge and

financial behavior was analyzed in a Turkish sample. The participants

consisted of people living in Ankara, Cebeci district, Turkey. Data

collection was performed in 2015. The random sampling method was used

in the present study to determine the total number of participants, and the

survey was completed with 500 participants. The answers to the survey

were entered into an SPSS 15 file without the personal identifiers of the

respondents.

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Selda Coskuner and Arzu Sener 8

Characteristics of the Sample

While 40.6% of the study participants were females, 59.4% of them

were males. 66.8% of the participants were from families consisting of

three or four members. Considering the age of the participants, the age of

52.0% of the participants was between 30 and 49 years, and 68.9% of them

were married. When the participants’ education levels were taken into

account, 51.7% of them graduated up to high school, 48.7% of them had a

college or graduate degree. Regarding the family income of the

participants, the income of 37.1% of them was below 3000 TL, the income

of 42.9% of them was between 3000-4999 TL, and the income of 20.0% of

them was 5000 TL and more. While the percentage of those who thought

that the income was sufficient to meet their needs was 54.6%, the

percentage of those who thought that it was insufficient was 35.7%. While

73.4% of the participants were employed, 9.7% of them were retired.

Measurement of the Variables

Dependent Variable

Financial Practices

Nine financial management behaviors varied from basic money

management skills (e.g., review credit reports) to more complex ones (e.g.,

diversifying investments) were reported by the households in this study.

Furthermore, information about their use of eight financial products was

provided by them. These varied from savings and checking accounts to

credit cards and investments. The measures regarding the financial

behaviors and financial product ownership were united in order to examine

various forms of financial practices. It is possible to consider the decision

to have a financial product as a financial behavior on its own. Financial

practices were classified as credit management, saving and investment by

benefiting from the study carried out by Hilgerth et al. (2003). The

behaviors and products were used in this study are presented in Table 1.

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The Effects of Personal Financial Knowledge on Financial Behavior 9

Table 1. Financial Practices Index

Financial behavior or financial product Responses (%)

(n = 350)

Credit management

Have credit card 70,6

Pay credit card balances in full each month 48,3

Review credit reports 61,1

Review credit rating/follow it 35,1

Compare offers before applying for a credit card 41,7

Mean 2,57

Saving

Have savings account 30,3

Have emergency fund 73,1

Save or invest money out of each paycheck 47,7

Save for long-term goals such as education, car, or home 52,9

Mean 2,04

Investment

Have money spread over different types of investments 21,4

Have any retirement plan/account 54,0

Have any investment account 20,9

Have mutual funds 11,7

Have individual retirement account 22,0

Calculated net worth in past two years 27,7

Have public stock 7,7

Have bonds 3,7

Mean 2,79

Overall Financial Practice Mean 7.39

Financial Knowledge

This study has examined the relationship between particular financial

behaviors and knowledge about particular financial issues although the

majority of the studies have analyzed financial knowledge at the aggregate

level. In this study, financial knowledge was measured by 29 information

sentences that were answered in the form of true-false. The “Financial IQ”

quiz questions used in the study conducted by Hilgert et al. (2003) were

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Selda Coskuner and Arzu Sener 10

used in the preparation of these items used in the measurement of financial

knowledge, and the items were adapted into Turkish (Table 2). The quiz

comprised the general credit management, saving and investment.

Demographic and Socio-Economic Variables

The collection of the data regarding the variable factors including age,

marital status, gender, education level and income level was done. Gender

was measured as either male or female in the present study. The responses

regarding marital status were ‘married’ and ‘never married.’ Those aged

18-29 years, 30-39 years, 40-49 years, 50-59 years, and 60 years and above

constituted five different age groups. The level of education was classified

as less than high school, high school, and undergraduate and graduate. The

total amount of money which family members earned from all sources

constituted income, and the possible answers given for income were as

following: less than 3000 TL, 3000-4999 TL, 5000 TL and above.

Statistical Procedure

Pearson Correlation Analysis was performed to determine the

correlations between financial practices and knowledge financial. To

explore the relationships between the dependent and independent variables,

the current study used Binary Logistic Regression. The dependent

(outcome) variable (i.e., financial practices) was coded as “0” meaning low

financial practices that is the scores below the average (7.3943) and as “1”

meaning high financial practices, that is, the scores above the average

(7.3943). The independent (explanatory) variables in the analysis were sex,

education, household income and financial knowledge. Financial

knowledge was treated as a continuous variable while the categorical

variables were education and household income in the analysis. Sex was

dummy coded.

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The Effects of Personal Financial Knowledge on Financial Behavior 11

RESULTS

Financial Management Practices (Financial Behavior)

Participants’ financial behaviors were evaluated with the statuses of

having 8 financial products and performing 9 financial behaviors. When

the results regarding the participants’ financial behaviors in the areas of

credit management, savings and investment were evaluated in general, it

was seen that credit management was the area in which participants

exhibited the most positive financial behavior, and that investment was the

area in which participants exhibited the most negative financial behavior

(Table 1).

Credit Management

When the results are examined, it can be said that individuals’

practices on credit management are moderately good. Regarding the credit

card management practices, the majority of the respondents (70.6%) have

credit cards but less than half of them (41.7%) performed a comparison of

offers prior to applying for a card. Approximately half of them pay credit

card balances in full each month, 61.1% of them review credit reports

(Table 1).

Saving

In the matter of saving practices, the data indicates that although

73,1% and 52,9% had an emergency fund and saving for long-term

objectives, for example, for education, a car or a house, respectively, only

39% had a saving account and 47,7% were saving or investing money out

of each paycheck (Table 1).

Investment

Households reported a great number of investment practices. For

instance, more than half of the respondents (54%) reported that they had

retirement accounts—pensions. Among the participants, the ratio of those

who have any investment account is only 20.9%, and the ratio of those

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Selda Coskuner and Arzu Sener 12

with individual retirement accounts is 22%. The ratio of those with

investment instruments such as mutual funds (11,7%), public stock (7,7%)

and bonds (3,7%) is quite low (Table 1).

Financial Knowledge

Credit Management

The area in which the participants’ knowledge level is the highest is

credit; the average score is 6.89 out of 11. The subjects about which they

have the most knowledge are “Creditors are required to tell you the interest

rate (APR) that you will pay when you get a loan” (96%), “If you expect to

carry a balance on your credit card, the interest rate (APR) is the most

important thing to look at when comparing credit card offers” (84%),

“Your credit report includes employment data, your payment history, any

inquiries made by creditors, and any public record information” (78%),

respectively. The subjects about which they have the least knowledge are

“if you have any negative information on your credit report, a credit repair

agency can help you remove that information” with 22.3% correct answer,

and “Credit card interest rates of banks is below 2%” with 30.9% correct

answer.

Saving

Seven statements were directed to the participants to measure their

levels of knowledge about saving, and they were asked to express opinions

about the correctness and incorrectness of the statement given. The general

average score of the participants related to 7 statements on savings directed

to them is 3.68. Saving is the second area about which they have

knowledge after credit. While 88.3% of the participants and 69.7% of them

expressed opinions for the statements of “you should have an emergency

fund that covers two to six months of your expenses” and “if inflation is

expected to fall long-term accounts, if inflation is expected to rise short-

term accounts should be preferred,” respectively, in the correct direction.

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The Effects of Personal Financial Knowledge on Financial Behavior 13

“Whole life insurance has a savings feature while term life insurance does not”

was the statement for which the participants expressed opinions in the correct

direction at the lowest level.

Investment

The participants’ average score for 7 statements given concerning

investment is 3.26, and it can be said that the level of knowledge about this

subject is below the medium level. The statements for which the

participants expressed opinions whether they are correct or incorrect in the

correct direction at the highest level are “diversification of investment

areas reduces the risk of losing money” (70,9%), “the earlier you start

saving for retirement, the more money you will have because the effects of

compounding interest increase over time” (70.6%), “employers are

responsible for providing the majority of funds that you will need for

retirement.” The statements responded in the correct direction at the lowest

level in the investment area are “all investment products bought at your

bank are covered by the “Savings Deposit Investment Fund” insurance” by

8.3%, and “mutual funds pay a guaranteed rate of return” by 8.6%.

Table 2. Financial Knowledge (Financial IQ) Quiz

Financial knowledge questions Correct

responses (%)

Credit

Creditors are required to tell you the interest rate (APR) that you will

pay when you get a loan.

96,0

If you expect to carry a balance on your credit card, the interest rate

(APR) is the most important thing to look at when comparing credit

card offers.

84,0

Your credit report includes employment data, your payment history,

any inquiries made by creditors, and any public record information.

78,3

The finance charge on your credit card statement is what you pay to

use credit.

56,3

Using extra money in a bank savings account to pay off high interest

rate credit card debt is a good idea.

71,4

Your credit rating is not affected by how much you charge on your

credit cards.

59,1

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Selda Coskuner and Arzu Sener 14

Table 2. (Continued)

Financial knowledge questions Correct

responses (%)

If your credit card is stolen and someone uses it before you report it

missing, you are only responsible for no matter how much they charge

on it.

66,3

If you have any negative information on your credit report, a credit

repair agency can help you remove that information.

22,3

Credit card interest rates of banks are below 2%. 30,9

Delaying payment of bills, reducing credit notes and making it

difficult to get loans.

61,1

In 14 days without any justification and paying a penalty consumer

may withdraw from the credit.

64,0

Mean 6.89

Saving

You should have an emergency fund that covers two to six months of

your expenses.

88,3

If you have a savings account at a bank, you may have to pay taxes on

the interest you earn.

44,9

If you buy certificates of deposit, savings bonds, or Treasury bills, you

can earn higher returns than on a savings account, with little or no

added risk.

40,3

With compound interest, you earn interest on your interest, as well as

on your principal.

51,1

Financial knowledge questions Correct

responses (%)

Whole life insurance has a savings feature while term life insurance

does not.

26,0

If inflation is expected to fall long-term accounts, if inflation is

expected to rise short-term accounts should be preferred.

69,7

In case of bankruptcy of the bank individuals all of the money in the

bank under the state guarantee.

48,6

Mean 3.68

Investment

The earlier you start saving for retirement, the more money you will

have because the effects of compounding interest increase over time.

70,6

A stock mutual fund combines the money of many investors to buy a

variety of stocks.

47,1

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The Effects of Personal Financial Knowledge on Financial Behavior 15

Financial knowledge questions Correct

responses (%)

Employers are responsible for providing the majority of funds that

you will need for retirement.

70,0

Diversification of investment areas reduces the risk of losing money. 70,9

Over the long term, stocks have the highest rate of return on money

invested.

51,4

Mutual funds pay a guaranteed rate of return. 8,6

All investment products bought at your bank are covered by the

“Savings Deposit Investment Fund” insurance.

8,3

Mean 3.26

Overall Financial Education Mean 13.85

Correlations between Financial Behavior

and Financial Knowledge

The correlation between financial knowledge and financial behavior

was identified by performing Pearson Correlation Analysis. The

correlation between the participants’ financial knowledge level and

financial practices was examined generally and also in terms of credit,

savings and investment behavior and practices. Table 3, 4 and 5 show the

results of the Pearson correlation analysis performed for the current study.

The Pearson coefficient (r) value for the total financial knowledge total

score and financial practices total score was .435, financial knowledge

about credit management and credit management practices score was .452,

financial knowledge about savings and savings practices score was .145,

and financial knowledge about investment and investment practices score

was .320 with the value of significant r (2-tailed), p< .01. Therefore, it was

found out as a result of the analysis that there was a positive significant

relationship between the participants’ general financial knowledge and

financial practices. Furthermore, the relationship between the participants’

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Selda Coskuner and Arzu Sener 16

knowledge about credit and their credit management practices, their

knowledge about savings and their savings practices, and their knowledge

about investment and their investment practices is statistically significant

(p< 0.05).

Table 3. Correlation Analysis Results of the Relationship between

the Credit Management Practices and the Knowledge Level

about Credit Management

Financial

Knowledge

(Credit

Management)

Financial Practices

Index (Credit

Management)

Financial

Knowledge (Credit

Management)

Pearson

Correlation

1 .452**

N 350 350

Financial Practices

Index (Credit

Management)

Pearson

Correlation

.452** 1

N 350 350 ** p < 0.01.

Table 4. Correlation Analysis Results of the Relationship

between Saving Practices and Knowledge Level about Saving

Financial

Knowledge

(Saving)

Financial

Management

Practices (Saving)

Financial Knowledge

(Saving)

Pearson

Correlation

1 .145**

N 350 350

Financial Management

Practices (Saving)

Pearson

Correlation

.145** 1

N 350 350 ** p < 0.01.

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The Effects of Personal Financial Knowledge on Financial Behavior 17

Table 5. Correlation Analysis Results of the Relationship

between Investment Practices and Knowledge Level about Investment

Financial

Knowledge

(Investment)

Financial

Management

Practices

(Investment)

Financial Knowledge

(Investment)

Pearson

Correlation

1 .320**

N 350 350

Financial Management

Practices (Investment)

Pearson

Correlation

.320** 1

N 350 350 ** p < 0.01.

Regression Analysis Results

Table 6 shows that the coefficients of independent variables (i.e., sex,

education, household income, financial knowledge) that were not included

in the model significantly were far from zero, meaning adding one or more

independent variables in the equation was expected to improve the

predictive power of the model.

Table 6. Variables Not in the Equation

Step 0 Variables Score df Sig.

Sex (female) .163 1 .686

Education (less than high school) 42.285 2 .000

Education (high school) 8.115 1 .004

Education (undergraduate and graduate) 39.617 1 .000

Household income (less than 3000 TL) 44.096 2 .000

Household income (3000-4999 TL) 3.772 1 .052

Household income (5000 TL and above) 23.844 1 .000

Financial knowledge 28.780 1 .000

Overall Statistics 68.710 6 .000

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Selda Coskuner and Arzu Sener 18

The changes in -2 Log Likelihood (-2LL) value of the baseline model

showed an improvement in model fit. When all independent variables

entered the model, the constant reduced -2LL from 474.866 to -2LL

400.510. The Cox and Snell R2 and Nagelkerke R2 values of the model

were .191 and .258 orderly suggesting that the model explains roughly

26% of the variation in financial practices index.

The result of Hosmer and Lemeshow chi-square test wasn’t significant

(p > 0.05) that shows the model fits better than the baseline model without

independent variables. When the independent variables entered the model,

the correct classification was increased from 58.6% to 71.4%.

The table “Variables in the Equation” showed that education,

household income, and financial knowledge had significant associations

with financial practices index. Accordingly, education had a significant

overall effect on financial management practices index (Wald = 11.406, df

= 2, p < 0.01). The participants holding undergraduate and graduate

degrees were almost three times (2.813) better at financial practices index

than those who held less than high school degree. The overall effect of

household income was highly significant as indicated by the overall Wald

statistic (Wald = 14.948, df = 2, p < 0.01). The b coefficients for all

household income levels were significant and positive indicating that

increasing household income was associated with increased odds of

financial practices index. Specifically, 5000TL and above income group

was almost four times (3.701) better at financial practices index while

3000-4999TL income group was more than two times (2.596) better than

the reference income group who had the household income less than

3000TL. The effect of financial knowledge on financial management

practices index was also significant, meaning the more financial

knowledge, the better financial practices. Finally, the effect of sex on

financial practices index was not significant (Table 7).

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The Effects of Personal Financial Knowledge on Financial Behavior 19

Table 7. Variables in the Equation

Step 1 B S.E. Wald df Sig. Exp (B)

Sex (female) -.019 .251 .005 1 .941 .982

Education (less than high

school)

11.406 2 .003

Education (high school) .221 .398 .308 1 .579 1.247

Education (undergraduate

and graduate)

1.034 .385 7.221 1 .007 2.813

Household income (less than

3000 TL)

14.948 2 .001

Household income (3000-

4999 TL)

.954 .293 10.611 1 .001 2.596

Household income (5000 TL

and above)

1.309 .375 12.202 1 .000 3.701

Financial IQ .085 .026 10.869 1 .001 1.089

Constant -2.881 .502 32.957 1 .000 .056

DISCUSSION AND CONCLUSION

It is necessary to take financial decisions using complex financial

instruments in the daily life. The need for becoming a financial literate is

observed to be in increase to be able to make many financial decisions

effectively from comparing credit card usage alternatives to developing

preference among payment methods, from how much will be saved

to where to invest, and to from where the loan is gained under best

conditions (Lusardi, 2008b; Mercan et al., 2012). Financial literacy

involves individuals’ having knowledge about financial issues such as

budget, insurance, savings, investment and credit, making the right

decisions in financial issues and showing correct behaviors. The growing

international interest in increasing individuals’ financial awareness levels

has raised the importance of financial literacy (Alkaya and Yağlı, 2015).

The OECD (2012) lists the elements that constitute financial literacy as

financial knowledge, financial attitude and financial behavior. The level of

financial knowledge is one of the key components in determining financial

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Selda Coskuner and Arzu Sener 20

literacy. Individuals need financial knowledge to make better economic

choices. A person named as “financially literate” is required to have basic

financial knowledge such as budget, insurance, savings, investment, credit,

inflation, risk and return. In the most basic sense, financial behavior can be

considered as the follow-up of individuals’ personal financial situations,

their doing shopping carefully, managing their savings and investments,

personal debts and loans and evaluating their investments in the short and

long term (Alkaya and Yağlı, 2015).

In this study, individuals’ financial behaviors were measured by

examining the three financial management practices they engage, such as

credit management, saving and investment. In parallel with financial

behavior, the participants’ financial knowledge level was measured by

three dimensions of financial knowledge (i.e., credit management, saving

and investment).

When the participants’ financial behaviors determined by examining

their financial practices related to these 3 areas and their financial products

are evaluated in general, it is seen that credit is the area in which

participants exhibit the most positive financial behavior and that

investment is the area in which participants exhibit the most negative

financial behavior.

The consumers’ average score regarding credit management (the

average score was 2.57 with 1.87 standard deviation) was 2.57, and it can

be said that the consumers’ financial behaviors regarding credit

management are moderately positive. 3 general determinants of credit

management are the household’s debt-payment-to- income ratio, the

timeliness of credit card payments, and payment in full of credit card

balances. When the indicators related to the household debt in Turkey are

examined, it is seen that the ratio of the household debt to disposable

income is approximately 50% as of the year 2015 (TCMB, 2016).

According to the data of the Banks Association of Turkey Risk Center for

2016, the number of individuals who cannot pay the personal credit card

debt is about 2 million (TBB Risk Center, 2016). The ratio of those who

pay the entire credit card debt is only 27.4% in the study carried out by

Babaoğul et al. (2016). It was found out that the ratio of those who paid the

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The Effects of Personal Financial Knowledge on Financial Behavior 21

entire debt was only 27.4% even though the level of consciousness of

consumers increased. In this study, as it is shown in Table 1, 70.6% of

consumers have a credit card and less than half of consumers (48.3%) can

pay the entire credit card debt.

The examination of credit card reports and the comparison of

conditions by performing an examination between the banks before

applying for a credit card are also important behaviors in credit

management. More than 1/3 of the consumers (38.9%) stated that they did

not review credit reports. 58.3% of them do not compare offers before

applying for a credit card. The fact that consumers do not make a

comparison regarding the issues such as the interest rates of credit cards,

etc. may be an ordinary situation since there is no payment of interest in

the case of the full payment of credit card debts. However, in Turkey,

when the fact that less than half of the participants in this study can pay the

entire credit card debt every month, and the data presented above by the

official authorities and studies are taken into account, it is thought that this

situation should be explained by the consumer’s financial knowledge and

consciousness level. Indeed, in this study, there is a positive relationship

between consumers’ knowledge level about credit and their credit

practices. In other words, positive behaviors related to credit increase as

the knowledge levels about credit management increase. The studies that

reveal the relationship between borrowing and financial literacy also reveal

the importance of financial literacy in taking rational financial decisions,

understanding the financial system, financial planning and a successful

money management, and of the financial knowledge, which is an important

component of financial literacy (Gathergood, 2012; Mckenzie, 2009;

Norvilitis et al., 2006).

In many countries along with Turkey, the data shows that the

household debt is at a significant level (Kinsey Global Institute, 2015;

IMF, 2015). The dynamics of this increasing debt of households are very

important because the unsustainable household debt in the great economies

of the world, especially in the US, was considered as the reason for the

2008 financial crisis. Therefore, especially after the 2008 economic crisis,

financial literacy, which is an important component of financial well-

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pe rm it te d un de r U. S. o r ap pl ic ab le c op yr ig ht l aw .

Selda Coskuner and Arzu Sener 22

being, has been overemphasized for the healthy functioning of markets as

well as raising the quality of individual life by reducing borrowing.

(Capuano and Ramsay, 2011). While the high level of financial literacy

helps individuals to be successful in understanding the basic concepts of

borrowing and paying their credit card debts on time and to take conscious

and positive financial decisions, people with the low level of financial

literacy take more costly financial decisions (Lusardi and Tufano, 2009:1-

49). Individuals’ behaviors regarding borrowing and credit management

will also change positively with the increase in financial literacy.

Therefore, it is necessary to improve consumers’ financial management

skills by increasing their financial knowledge levels both formally and

informally. This will not only increase individual wellfare but also

contribute to the healthy functioning of financial markets.

The average score (the average score was 2.04 with 1.34 standard

deviation) of the consumers’ financial behavior regarding savings is 2.04,

and it can be said that consumers exhibit a positive behavior below the

medium level concerning savings. One of the most widely accepted

financial management principles is to save money on a regular basis by

allocating some money for the costs that will arise later or for the expenses

that will emerge in unexpected situations (unemployment, bankruptcy,

death, etc.) (Hilgerth and Hogarth, 2003). In the study, while nearly half of

the consumers stated that they saved regularly out of each paycheck, only

1/3 of them had a savings account. A significant number of people in many

developed countries, especially in the US, unfortunately, do not make any

savings. Therefore, as a result of the inadequacies experienced in natural

sources in our world with an increasing population day by day, to increase

the financial literacy levels of societies and to ensure the spread of saving

consciousness are at the forefront of economic and social policies of all

countries. Turkey is in the lower rank in terms of the saving rate in the

world. On the other hand, the internal saving rates should increase for a

high-rate sustainable growth (TEB, 2015). An attempt to increase saving

rates is made by limiting the use of loans and credit cards together

with some economic measures and practices taken to promote an increase

in savings (limiting the number of installments made on credit cards,

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rv ed . Ma y no t be r ep ro du ce d in a ny f or m wi th ou t pe rm is si on f ro m th e pu bl is he r, e xc ep t fa ir u se s

pe rm it te d un de r U. S. o r ap pl ic ab le c op yr ig ht l aw .

The Effects of Personal Financial Knowledge on Financial Behavior 23

removing credit sales in some goods and service groups, shortening the

maturity date of consumer loans, increasing consumers’ knowledge level

about financial management practices, etc.). Among these measures and

practices, importance is also attached to the increase in consumers’

financial knowledge level. For instance, the realization of serious actions

for the promotion and dissemination of financial knowledge has been set

forth within the frame of the policy of the “Action Plan for Increasing

Domestic Savings and Preventing Waste Program” (2015-2018),

“Increasing financial awareness and disseminating financial education”

within the scope of the 1st component of the “Promotion of Savings with

Financial Market Instruments” carried out by the Ministry of

Development of Turkey. Many studies carried out show that there are

positive significant relationships between financial education and saving

tendency (Lusardi 2008b; Cole, Paulson, and Shastry, 2012). Indeed, in

this study, it has been found out that there is a positive statistically

significant relationship between the consumers’ financial knowledge level

and saving behaviors. It was found out that consumers exhibited more

positive behaviors in terms of saving as their knowledge level increased. In

this study, it was found out that about half of the participants (47.7%)

saved regularly; this ratio is well above the average when it is compared

with the results of other studies. According to the results of the study

conducted regularly by ING Bank (2016) throughout Turkey, the saving

rate in our country is 16.7%. The difference between the studies may be

due to the nature of the sample group and regional differences.

To own an emergency fund (cover two to six months of living costs) to

cushion against economic shocks that vary from paying for car or

appliance repairs to covering expenses during an unemployment period is

considered to be another saving practice recommended by financial

planners (Chang, Hanna and, Fan, 1997). Among the consumers, the ratio

of those who have an emergency fund to be used in emergencies is 73.1%.

The fact that a significant portion of consumers have funds for

emergencies although they cannot save for the moment can be considered

as an extremely positive behavior. Although the indicators of economic

growth in Turkey have been positive especially in recent years, the fact

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pe rm it te d un de r U. S. o r ap pl ic ab le c op yr ig ht l aw .

Selda Coskuner and Arzu Sener 24

that the growth is mainly based on borrowing and that the economic

indicators in the country show a trend in the negative direction require

people to be cautious for emergencies. The results of the correlation

analysis performed show that there is a positive significant relationship

between the investment average score and the level of knowledge about

investment. In other words, consumers with a high level of knowledge

about saving exhibit more positive behaviors in regard to consumption. A

large number of studies have also revealed results supporting this result.

For instance, in the study carried out by Bernheim, Garrett, and Maki

(2001), the exposure to financial education along with their saving rates

was increased by the personal finance mandate. How people’s saving rates

are affected by working place financial education is examined by

Bernheim and Garrett (2003). According to the results obtained from this

study, saving behaviors of a person are positively affected by the

availability of financial education.

Investing for short to mid-term goals (e.g., a vacation) as well as for

longer-term goals (houses, college education of children, and retirement) is

recommended as the next step by numerous personal finance texts and

financial planners after the establishment of an emergency fund by

households. The average score of consumers’ behaviors about investment

is 2.79 out of 8. Based on this result, it can be said that the consumer’s

positive behaviors about investment are extremely low. Employees in

Turkey are compulsorily included in the retirement system within the

scope of Social Security, with the premiums deducted from their wages

and state contributions. Indeed, more than half of the consumers (54%)

have stated that they have retirement funds. The ratio of those who are

included in the individual retirement system is 22%, and this ratio is

consistent with the recent data of the study conducted by ING Bank. The

ratio of those who have any investment account is 20.9%, the ratio of those

who have an investment fund is 11.7%, the ratio of those who have stocks

is 7.7%, and the ratio of those who have a bill of exchange is 3.7%.

According to the 3rd Quarter Results of Ing Bank Turkey’s Saving Trends

Survey (2016), the ratio of people investing in stocks was determined to be

3%, and the ratio of people investing in bills of exchange was determined

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rv ed . Ma y no t be r ep ro du ce d in a ny f or m wi th ou t pe rm is si on f ro m th e pu bl is he r, e xc ep t fa ir u se s

pe rm it te d un de r U. S. o r ap pl ic ab le c op yr ig ht l aw .

The Effects of Personal Financial Knowledge on Financial Behavior 25

to be 1%. The results of the study carried out by Babaoğul et al. support

these results and also show that the ratios of people investing in stocks

(9.7%) and bills of exchange (5.2%) are low. This may be due to the fact

that consumers do not have knowledge about stocks and bill of exchange

because numerous studies show that the consumers’ levels of financial

knowledge about stocks and bill of exchange are low. For instance, it was

found out in the study carried out by the OECD (2008) that 71.1% of the

participants did not have knowledge about stocks and bill of exchange. In

addition, consumers with a low financial knowledge level make fewer

investments in stocks (Rooij, Lusardi and Alessie, 2011). Similarly, in the

study carried out by Tamini and Kalli (2009), it was found out that there

was a positive relationship between financial literacy and a positive

investment behavior. Indeed, in this study, the results of the correlation

analysis reveal that there is a positive significant relationship between the

consumer’s average investment score and knowledge level about

investment. Consumers with a high knowledge level about investment

exhibit more positive behaviors regarding investment. When the fact that

the money saved by working for years or the resources provided by

borrowing may suddenly disappear because of wrong investment decisions

is taken into account, what a critical role the investor education has in

determining the individuals’ level of welfare that they will sustain

throughout their lives is seen more explicitly.

According to the results of this study, having knowledge about credit,

saving and investment was associated with the possession of higher index

scores for credit management, saving and investment practices,

respectively. It may be pointed out by this pattern that increases in

knowledge and experience can provide advancements in financial practices

despite the possibility of causality flowing in the other direction or even

both directions. Gaining experience is considered to be one of the ways to

increase knowledge. Learning from the experiences of other people is

considered to be another way to gain extra education, and this can

take place in classes and seminars and by means of conversations with

family members and friends. There is a distinction between presenting

information and providing education. A combination of information, skill-

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Selda Coskuner and Arzu Sener 26

building and motivation may be required by education in order to make the

intended changes in behavior. The difference between information and

education is a particularly significant issue for policymakers and program

leaders who take decisions regarding the resource allocation. All financial

education awareness campaigns and learning tools (for instance, websites

or brochures) are significant in their own right, and it may be necessary

to associate them with audience-targeted motivational and educational

strategies for the purpose of revealing the intended behavioral changes in

financial management practices (Hilgerth and Hogarth, 2003).

In the study, when the effect of gender, education, income and general

financial knowledge on consumers’ general financial behaviors including

credit management, savings and investment was examined, all other

variables except for gender were found to be effective on them.

Consumers exhibit more positive financial behaviors as education

and income increase. Financial behaviors are affected by education as

expected, i.e., it is more possible that people having higher education have

better money and credit management behaviors. People with more money

should not have cash-flow problems and would be better in the

management of their money and credit. In addition, the level of education

and income also affects the financial behaviors positively by increasing the

level of financial knowledge. It is found out by Lusardi, Mitchell, and

Curto (2010) that people with college education are more financially

literate compared to people having only a high school education even after

checking for demographic and family features. Furthermore, it is

concluded by Monticone (2010) that the possibility of people having

higher incomes to be financially knowledgeable is higher.

Financial knowledge also affects financial behaviors positively.

Financial knowledge has been found to have a positive effect on general

financial behaviors including the whole of the behaviors regarding credit,

savings and investment. Financial education has two effects: it increases

the level of financial literacy and develops the financial behaviors of

individuals (Wagner, 2015). In the literature, the connection between

financial literacy and economic behavior has been well recorded. For

example, more particularly, it is shown that whether consumers own

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rv ed . Ma y no t be r ep ro du ce d in a ny f or m wi th ou t pe rm is si on f ro m th e pu bl is he r, e xc ep t fa ir u se s

pe rm it te d un de r U. S. o r ap pl ic ab le c op yr ig ht l aw .

The Effects of Personal Financial Knowledge on Financial Behavior 27

transaction accounts (Hogarth, Anguelov, and Lee, 2005), whether

individuals at the age of 50 and above have considered retirement (Lusardi

and Mitchell, 2007a) and whether households examine comparatively risky

assets in their investment portfolios (Calvert, Cambell, and Sodini, 2005)

are affected by the level of financial education. Furthermore, Bernheim

Garret and Maki (2001) conclude that people in the middle age group

having taken a course of financial management at high school are likely to

save a larger proportion of their incomes compared to the individuals who

have not. It is shown by Cole, Paulson, and Shastry (2012) that investment

income and retirement savings are considerably increased by education. It

is also shown by them that educated people have higher credit scores and it

is less possible that they become delinquent or bankrupt. It was concluded

by them that increasing education acquisition in the US could strikingly

promote financial management, decrease bankruptcy and default and may

assist the progress of a more stable financial system.

The behaviors of an individual can also be changed by financial

literacy or vice versa. Individuals can become more financially literate by

means of their financial experiences. In the review of financial education

research of Lusardi and Mitchell (2014), they conclude that financial

behaviors are affected by financial literacy and that the causality proceeds

from knowledge to behavior. For instance, in the study carried out by

Wagner (2015), it was found that financially educated consumers exhibited

more positive behaviors concerning paying their bills and credit card debts

in full. In the study carried out by Lusardi (2008b), financial education was

found to have a positive effect on saving behavior. Therefore, the effect of

financial knowledge on financial behaviors is remarkable.

When the study results are evaluated in general, the effect of financial

education on financial behaviors is clearly visible. The results of this study

provide important clues to policy makers and financial institutions. It is

inevitable to carry out studies to increase consumers’ financial knowledge

level in terms of increasing the quality of life of consumers without

ignoring the results, and in terms of the healthy functioning of the general

economic system and markets. In this context, it is necessary to provide

financial education within the framework of formal and informal education

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Selda Coskuner and Arzu Sener 28

in accordance with the consumers’ features (age, education, etc.) and to

provide this education with appropriate techniques, tools and content.

Although this study presents significant results based on the results

obtained, it has limitations in terms of the sample group with which the

study was carried out, and the financial management practices and

behaviors measured.

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In: Financial Management ISBN: 978-1-53611-827-8

Chapter 2

LOST IN TRANSLATION?

Ron P. McIver1, Damien Wallace and Vikash Ramiah School of Commerce,

University of South Australia,

Adelaide, South Australia, Australia

ABSTRACT

Purpose: Globalization is frequently linked to the growth of large,

and effectively, multinational companies, a majority of which are listed

corporations. These large companies are important in a number of

contexts: their role in determining global FDI patterns and trade flows of

goods and services; their (perceived) potential to exert political influence

as a result of their economic power; and that the ‘success’ of these

companies brings bragging rights to both their management and country

of domicile. It is this last aspect that is highlighted in lists like the

Fortune Global 500. Such publications focus on the implication of

changes in the composition of the Top 500, based on current U.S. dollar

(USD) metrics, for the global economic and financial landscapes

(including geographic differences in the impact of the global financial

crisis (GFC) and aftermath). What is neglected in these popular analyses

is that the observed USD metrics are also impacted by changes in

1 Corresponding Author: [email protected]. Co py ri gh t © 2 01 7. N ov a Sc ie nc e Pu bl is he rs , In c. A ll r ig ht s re se

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Ron P. McIver, Damien Wallace and Vikash Ramiah 38

exchange rates. Thus, this chapter examines the extent to which exchange

rate changes have potentially impacted perceptions of the rate of change

in the global financial influence of the United States and Europe. In doing

so it fills a gap in the literature.

Design/methodology/approach: This chapter summarizes established

views in the international political economy literature (often expressed in

the media) that we are entering an Asian (particularly Chinese) era in

which the West, largely seen as the United States and European Union,

faces relative economic and financial decline. It then presents stylized

facts on changes in the geographic origin (control) and industry

distribution of large (Top 500) listed companies over the periods

immediately preceding, covering, and following the GFC (2005 to 2011).

Measures are based on both current USD values and those derived from

use of 2005 currency values. This is done against measures of the relative

economic and financial positions of major regions and countries over the

1999 to 2011 period. This latter analysis establishes trends in relative

financial and economic importance against which more recent changes

associated with the periods immediately preceding, covering, and

following the GFC may be evaluated.

Findings: The East Asian/Pacific region’s share of global

equity market capitalization has grown significantly over the 2000s.

However, China’s gains remain relatively minor given the significant

outperformance of its stock market relative to major Western equity

markets. This is also despite significant listings of large state-owned

enterprises (particularly banks), and relatively rapid growth in China’s

economy. Additionally, rather than accelerating an economic and

financial shift from North America, the data suggests that the GFC may

have stabilized or improved its relative position, having also impacted

heavily on other regions/countries. This is especially with respect to the

relative decline in value of equity in major markets that occurred during

2008.

Research implications: This chapter contributes to the debate on the

relative decline of the North Atlantic’s Western economies financial

influence and the rapidity of China’s rise in global financial power.

Research limitations: Limitations in the analysis exist due to the Top

500 being drawn from annual data on the largest 1000 listed companies as

measured by the USD values of total assets and market capitalization.

Use of end-of-year exchange rates leads to some mismatch between

report dates for company data and conversion for comparison purposes.

Survivorship bias is present in a number of the metrics, in the Top 1000

source data and for equity market index data presented in the chapter.

Keywords: globalization; global financial crisis (GFC); exchange rates;

multinational corporations; large listed companies

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pe rm it te d un de r U. S. o r ap pl ic ab le c op yr ig ht l aw .

Lost in Translation? 39

1. INTRODUCTION

The objectives of this chapter are to question the extent to which

perceived changes in the global economic and financial landscapes may

have been influenced by changes in exchanges rates. This includes those

changes associated with the global financial crisis (GFC). Examples of

analyses of shifts in the geographical distribution of financial and

economic power include those reported in publications such as Fortune

(e.g., Guyon, 2005; Murphy, 2012) and also in the economics and political

economy literature (e.g., Henderson, 2008; Nesvetailova and Palan, 2008;

Breslin, 2009; Nye, 2010; Overholt, 2010; Xingbo, 2010). While the

growth in East Asia’s (and China’s) economic and financial resources and

influence are well documented in the academic literature, the focus on East

Asian control of large corporations as a result of globalization has received

greater attention from the media. These large enterprises are, frequently,

multinational in terms of either their activities or economic and financial

impacts, and are important due to their global dominance in determining

both foreign direct investment (FDI) and trade flows. A majority of these

large companies are publicly listed.2 However, the media discussion of

shifts in the geographic concentration of these large enterprises rarely

considers (if ever) the implications of exchange rate changes for observed

outcomes. This provides motivation for more detailed exploration of the

sources of change in the number and relative value of these enterprises by

geographic location.3

To achieve its objectives this chapter presents data and discussion on

changes in the geographic origin (control) and industry distribution of large

(Top 500) listed companies over the period from 2005 to 2011. That is, the

time period immediately preceding the GFC, the time period often

associated with the GFC, and the period to 2011 over which the European

2 Examination of the ORBIS database which provides information on private and public

companies suggests that of the Top 500 companies by value of assets, 70.4 per cent are

public companies. 3 This chapter complements earlier research on the area in McIver (2012), which was based on

the U.S. dollar value of total assets and market capitalization of the Top 1,000 listed

companies derived from the Bureau van Dijk OSIRIS database. Co py ri gh t © 2 01 7. N ov a Sc ie nc e Pu bl is he rs , In c. A ll r ig ht s re se

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Ron P. McIver, Damien Wallace and Vikash Ramiah 40

credit crisis and the great recession have continued to impact global

financial markets and economic activity. To explore the potential impact of

exchange rate changes the chapter uses data based on both current USD

values and on values derived using 2005 values of exchange rates. This is

done against a backdrop of measures of the relative economic and financial

position (being GDP and total market capitalization, respectively) of major

regions and countries. Presentation and discussion of this data, which

covers the 1999 to 2011 time period, begins the discussion and establishes

the bases on which more recent trends are built.4

2. CHANGES IN THE GLOBAL ECONOMIC LANDSCAPE

Figure 1 draws on data from the World Bank’s World Development

Indicators to provide evidence on the shifting global shares of GDP for a

number of major regions (as measured in current U.S. dollars). The share

of global GDP sourced out of North America (and thus largely the U.S.)

declined considerably from the early 2000s (by around 11 per cent).

However, rather than fall more rapidly as a result of the GFC, the North

American share of GDP appears to have temporarily stabilized around the

time of the GFC before continuing its downwards trend. Also highlighted

in Figure 1 is the presence of a significant (and even accelerating) shift of

global economic power to the East Asia and Pacific region in the period

coinciding with and immediately following the GFC. This follows a

decline in the East Asia and Pacific region’s share of global GDP between

2001 and 2007 (largely due to the significant fall in Japan’s share of global

GDP). Finally, Figure 1 illustrates that much of the overall decline in the

value of North America’s (and thus the U.S.’s) share of global output over

the 2000s can be explained by rises in output in the rest of the world (Latin

America and the Caribbean, Middle East and North Africa, South Asia,

and Sub-Saharan Africa). Particularly significant in this case is an increase

in the share of global GDP provided by Europe and Central Asia over the

4 See Appendix A for discussion of the sources of data. Co py ri gh t © 2 01 7. N ov a Sc ie nc e Pu bl is he rs , In c. A ll r ig ht s re se

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Lost in Translation? 41

period from 2000 until the 2007–2008 GFC. However, over much of the

period following the GFC the global share of GDP of Europe and Central

Asia fell, while that of regions in the rest of the world grew or stabilized.

Source: World Bank, World Development Indicators; author’s calculations.

Figure 1. Regional Shares of GDP (% of World total, current U.S. dollars).

The relative decline of the East Asian-Pacific share of world GDP over

the early-to-mid 2000s identified in Figure 1 hides a substantial shift in

relative economic position of number of major economies and groups of

economies within the region. Figure 2 provides a more detailed breakdown

of shares in world GDP sourced within the East Asia and Pacific region,

and highlighting the rapid and at times accelerating share of global GDP

provided by China. Figure 2 illustrates that there has been considerable

growth in the share of global GDP produced by China and a significant

decline in the share of world income provided by Japan, a set of features

that have been followed relatively consistently throughout the 2000s.

Japan, in particular, suffered a significant decline in terms of its share of

world GDP, with this share falling from over 14 per cent in 2000 to just

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Ron P. McIver, Damien Wallace and Vikash Ramiah 42

over eight per cent by 2011. China, on the other hand, has enjoyed

significant growth in its share of world GDP, reaching a point where its

value of output is essentially on par with Japan, from just under four per

cent in 2000 to over ten per cent by 2011, thus raising its economic (and

potentially political) significance both within the region, as a direct

competitor with Japan, and globally. By conventional measures, China had

become the world’s sixth largest economy by 2003, fourth largest by 2005

(Costin, 2008), second largest by 2010 (Hout and Ghemawat, 2010), and is

expected to overtake the US this decade to become the world’s largest

economy (e.g., Giles, 2014). Measured under purchasing power parity

(PPP) assumptions, China’s economy was the second largest in the world

behind that of the United States by 2003 (Costin, 2008).

Source: World Bank, World Development Indicators; author’s calculations.

Figure 2. GDP within the East Asian-Pacific region, selected countries (% of World

total, current U.S. dollars).

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pe rm it te d un de r U. S. o r ap pl ic ab le c op yr ig ht l aw .

Lost in Translation? 43

Although appearing rapid to many, and frequently being viewed as part

of the process of globalization, China’s recent gains in global economic

position cannot be viewed as a sudden phenomenon. Rather they are a

longer-term consequence of a gradual process of modernization in China

and the internationalization of its economy. Thus these gains reflect

(amongst other factors): a rise in China’s industrial competitiveness

through the 1980s and 1990s associated with industrial reform (Zhao and

Zhang, 2007); the opening of competition against state-owned enterprises

(Imai, 2000); large inflows of foreign direct investment (FDI) (Huang,

2003); and commercialization of its banking system (McIver, 2009). At the

same time there is (perhaps incorrectly) acceptance of the decline of North

America in terms of its economic and political influence. This is

particularly the case in the East Asian region as a result of the decline in

the United States (U.S.) share of global GDP and the rise in the economic,

financial and political presence of China (Breslin, 2009; Xingbo, 2010).

3. CHANGES IN THE GLOBAL FINANCIAL LANDSCAPE

When considering financial development, a number of measures are,

potentially, available. These include: bank deposits to GDP, stock market

capitalization to GDP, and public bond market capitalization to GDP.

However, consistent with the later discussion of large listed companies, the

focus in this section will be on market capitalization.

With respect to the major economic regions identified initially in

Figure 1, Figure 3 highlights a significant decline in the global share of

equity assets held in the North American region to 2007 (as measured by

U.S. dollar values of market capitalization). However, unlike GDP, this

was not impacted as greatly by growth in the value and global share of

European and Central Asian equity markets, which had been relatively

stable and even declined over the period under consideration. Most

significant is the apparent rise in the share of market capitalization held

within the East Asian-Pacific region to 2007 and in the rest of the world

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Ron P. McIver, Damien Wallace and Vikash Ramiah 44

over the full time period (Latin America and the Caribbean, Middle East

and North Africa, South Asia, and Sub-Saharan Africa).

What is clear from the data presented in Figure 3 is the impact of the

GFC of 2007 to 2008 and the post-GFC credit crisis on North America’s

measured share of global equity market capitalization. Following partial

recovery in 2008, the pattern of gradual decline in the North American

share of global market capitalization appears to have been broken to some

extent by the GFC. The data of 2007 to 2009 suggest that the U.S. share of

global market capitalization stabilized rather than declining more rapidly

as a result of the GFC, while 2010 and 2011 have seen the U.S. share of

global market capitalization grow. This would be consistent with the

outperformance of the U.S. equity market as compared to those of Japan

and the major European economies over the 2008 to 2011 period (see

Figure 5).

Source: World Bank, World Development Indicators; author’s calculations.

Figure 3. Market capitalization of listed companies (% World total, current U.S.

dollars).

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pe rm it te d un de r U. S. o r ap pl ic ab le c op yr ig ht l aw .

Lost in Translation? 45

In following the country grouping of Figure 2, Figure 4 highlights that

within the Asian-Pacific region there have been greater changes in

financial asset shares than those observed for those of GDP. Japan's share

of global equity market capitalization declined, although not consistently in

level or rate, until 2007. More recently it has stabilized at around eight

per cent. More impressive than in the case of GDP, has been the rise in

China's share of global equity market capitalization, particularly in the

2005 to 2007 period. However, post 2007 China’s share of global market

capitalization has been highly volatile, similar to that of Japan.

4. EXCHANGE RATES AND SHIFTS IN GLOBAL SHARES

OF GDP AND MARKET CAPITALIZATION

Clearly some of the observed changes in shares of global output and

market capitalization captured in Figures 1 through 4 can be explained

through consideration of changes in the value of the U.S. dollar against

other major currencies, particularly the Euro, the Yen and the Remimbi

(Figure 5). Indeed, some of the changes in the global share of GDP

provided within Europe and Central Asia strongly reflect shifts in

exchange rates relative to the U.S. dollar (i.e., may largely reflect changes

in the value of the Euro against the U.S. dollar). This is particularly the

case for the fall in the Europe and Central Asia share during the early

2000s, at which time the Euro weakened considerably against the U.S.

dollar (Figure 5). The increase in the Euro-U.S. dollar rate by the end of

2009, to levels achieved around late 2007, would also explain some of the

decline in the Europe and Central Asian share of global GDP observed

during this latter period.

While influenced by currency movements, Japan’s share of global

output has declined despite a general strengthening of the Yen against the

U.S. dollar since the early 2000s. However, the relative stability of the

Chinese Remimbi-U.S. dollar in the period to 2005 and that from mid-

2008 to mid-2010 (Figure 5), following appreciation over the 2005 to 2008

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Ron P. McIver, Damien Wallace and Vikash Ramiah 46

period, suggests that much of China’s gain in global income share is due to

its relatively rapid real growth in GDP rather than simply the influence of

changes in the value of its currency. Thus real, rather than purely financial,

factors would appear to be the driving force behind the perceived rapid

growth in China’s economic significance.

As with the shifts in global shares of GDP, it is necessary to consider

the impact of exchange rate changes on regional and country shares of

global equity market capitalization. In the case of the Europe and Central

Asia region, consideration of changes in the value of major global stock

indices (Figure 6), suggests that shifts in overall market capitalization as

reflected in stock market index values are likely to dominate (e.g., as

reflected in the Euro STOXX). This is also apparent in the case of Japan

(TOPIX).

Source: World Bank, World Development Indicators; author’s calculations.

Figure 4. Market capitalization of listed companies within the East Asian-Pacific

region (% of World total, current U.S. dollars).

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pe rm it te d un de r U. S. o r ap pl ic ab le c op yr ig ht l aw .

Lost in Translation? 47

Source: Datastream; author’s calculations.

Figure 5. Major currencies against U.S. DOLLAR (Jan 1999 = 100).

Source: Underlying data derived from Datastream; author’s calculations.

Figure 6. Major share price indices (Jan 1999 = 100).

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Ron P. McIver, Damien Wallace and Vikash Ramiah 48

With respect to China, the relatively rapid increase in the value of the

Remimbi to the U.S. dollar over the 2005 to 2007 period must be credited

with some of the contemporaneously observed gain in the U.S. dollar value

of China’s global share of market capitalization. However, given the

significant (although not consistent) increase in the value of its major

market index since the late 1990s (Shanghai SE), and the relative

stagnation of the major Western markets, the increase in China’s global

share of equity valuation would appear to be based largely on the relatively

rapid growth of its equity markets. This relates to the significant financial

deepening that has occurred in the Chinese equity markets as a result of the

listing of former state-owned enterprises and strong growth in its GDP

over the GFC and post-GFC periods.

5. GLOBALIZATION, THE GEOGRAPHIC DISTRIBUTION OF

CONTROL OF LARGE LISTED COMPANIES, AND THE GFC

5.1. Globalization and the Rise of Large

Multinational Companies

The interest in large, listed multinational companies reflects a variety

of factors relating to their potential to exert political and economic power,

and that this may be to the detriment of the developing world. In terms of

economic and financial factors, the basis for this interest includes: the

growth in financial power of multinational companies relative to

governments (Farrell, 2008); that the shareholders of multinationals, and

therefore the primary beneficiaries of profits generated, predominantly

reside in high-income economies (Nolan, 2010); the dominance of

multinationals in terms of control of FDI flows (de la Dehesa, 2006); and

their dominance in the area of research and development and thus technical

progress (Nolan, 2010).

A link is often made between the process of globalization and the

growth of these large multinational corporations (de la Dehesa, 2006).

Co py ri gh t © 2 01 7. N ov a Sc ie nc e Pu bl is he rs , In c. A ll r ig ht s re se

rv ed . Ma y no t be r ep ro du ce d in a ny f or m wi th ou t pe rm is si on f ro m th e pu bl is he r, e xc ep t fa ir u se s

pe rm it te d un de r U. S. o r ap pl ic ab le c op yr ig ht l aw .

Lost in Translation? 49

China’s rise has also been asserted to be the beginning of a ‘new phase’ of

globalization (Henderson, 2008). Thus, it would be expected that China’s

(and, more generally, East Asia’s) growth in economic and financial power

would be associated with an increase in the proportion of large and, at least

through their economic impact, multinational companies resident within its

borders. For example, throughout its process of economic reform, China

has focused on establishing a set of large, internationally-competitive

enterprises.5 However, China’s success in achieving its objectives against

a moving (and improving) set of leading firms has previously been

questioned (Nolan, 2002), with few of the world’s top 1250 firms having

been identified as residing in China and other high growth emerging

markets (Nolan, 2010).

The recent shift of economic and (potentially) financial power towards

East Asia and the Pacific, especially towards China (as per Figures 1

through 4), is a trend that is expected to continue throughout the next two

decades, with the 21st century being the ‘China Century’.6 However, while

in China’s case this expected shift in influence includes the continued

movement of company headquarters to China (i.e., Hong Kong, Shanghai,

etc.) (Albrecht, 2005), inwards foreign direct investment (FDI) to China

may not be the major driving force. Given sizeable trade surpluses and a

high savings rate, China is itself playing an increasingly important role as a

source of finance both within the Asian region and globally (Breslin,

2009). China’s growing financial power is apparent in both the rise in

China’s role as an international creditor, particularly of U.S. dollar assets

(Chin and Helleiner, 2008), and the growth in its role as a source of FDI

(Zhang, 2009; Iksoo, 2009). It is also apparent from the growth in the

relative global importance of its equity markets (Figure 4).

5 This has recently included tying inwards FDI to its development policy (see Hout and

Ghemawat, 2010, on technology transfer). 6 The original concept of a ‘Pacific Century’ appears to have been derived in the 15th and 16th

Centuries in association with the European spice trade. Towards the end of the 20th Century

(the late 1980s) it was built around the emergence of a powerful, economically-dynamic

Japan. More recently the emphasis has shifted to a new ‘Pacific Century’, this time built

around China as a dominant global economy. Thus, it suggests a ‘Chinese Century’, with

China as the major economic power flanked by Malaysia, Vietnam, Indonesia, Thailand,

and an emerging India (Wilkins, 2010). Co py ri gh t © 2 01 7. N ov a Sc ie nc e Pu bl is he rs , In c. A ll r ig ht s re se

rv ed . Ma y no t be r ep ro du ce d in a ny f or m wi th ou t pe rm is si on f ro m th e pu bl is he r, e xc ep t fa ir u se s

pe rm it te d un de r U. S. o r ap pl ic ab le c op yr ig ht l aw .

Ron P. McIver, Damien Wallace and Vikash Ramiah 50

5.2. Globalization and the Impact of the GFC

The economic and financial processes of globalization are usually seen

as occurring gradually. However, there are concerns that the global

financial crisis (GFC) may have altered the pace at which each process

evolves (Burrows and Harris, 2009). This includes the rate at which

the progressive shift of economic and political power towards Asia,

particularly China, is occurring (Overholt, 2010). To some extent these

concerns reflect perceptions of the GFC as largely a ‘North Atlantic’

phenomenon. Thus the GFC is viewed as weakening both the United States

and Europe (particularly the United Kingdom) as global financial centers

(Nesvetailova and Palan, 2008; Nye, 2010). That this event may add to

China’s perceived gains from globalization is also reflected in the tensions

created by the large trade imbalances between the United States and China

(Bowles and Wang, 2008).

Against the view that the GFC is mainly a North Atlantic phenomenon,

is acknowledgement of the widespread impact of the GFC outside Western

Europe and North America (Wade, 2009). This includes the significant

economic impact on China of the GFC (Wang, 2009), with China’s real

economy having being particularly sensitive to global economic downturns

due to its then heavy reliance on exports (Palley, 2006; Breslin, 2009).

Additionally, as a major creditor, China has faced significant financial

costs throughout the GFC through the need to sterilize the impact of its

U.S. dollar accumulation and the subsequent capital losses on these U.S.

dollar holdings (Chin and Helleiner, 2008). However, as already noted,

China has still been able to make significant economic and financial

progress throughout the period associated with the GFC (Figures 2 and 4).

5.3. The Geographical Distribution of Large Listed Companies

As argued above, the growth in East Asia and the Pacific’s (and

China’s) economic and financial significance may be expected to be

reflected in the proportion of large listed companies resident in the East

Co py ri gh t © 2 01 7. N ov a Sc ie nc e Pu bl is he rs , In c. A ll r ig ht s re se

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pe rm it te d un de r U. S. o r ap pl ic ab le c op yr ig ht l aw .

Lost in Translation? 51

Asian-Pacific region generally (and China specifically, especially given the

size of many of the initial public offerings associated with the listing of its

large formerly state-owned enterprises). Tables 1 and 2 present data on

these large companies, as proxied by the global Top 500 listed companies

(based on their U.S. dollar market capitalization). Table 1 is based on the

percentage share by number within the Top 500. Table 2 is based on the

percentage share of the market capitalization of the Top 500 companies, a

measure that is more likely to capture the financial significance of these

companies.

Table 1. Region/Country distribution of Top 500 listed companies*

(% of Total Companies)

Region/Country 2005 2006 2007 2008 2009 2010 2011

East Asia & Pacific 22.6 21.2 18.4 21.0 20.8 20.8 22.6

Australia 2.0 2.0 2.0 3.4 2.4 2.2 3.0

China 0.2 1.8 2.0 1.8 3.0 2.8 2.8

Japan 15.0 11.8 8.6 9.4 8.8 7.8 8.2

Europe & Central Asia 29.4 33.6 34.8 30.6 30.8 30.8 26.8

Euro area 17.2 21.2 19.8 18.2 17.4 15.2 13.6

Latin America & Caribbean 1.0 1.6 1.8 2.0 3.0 3.0 2.8

Middle East & North Africa 3.6 1.0 2.2 2.4 2.2 2.2 1.6

North America 41.8 41.2 39.2 41.2 38.6 38.4 42.2

United States 37.4 36.6 34.0 35.6 32.8 32.6 36.4

South Asia (India) 0.8 0.8 2.4 1.8 3.6 3.4 2.6

Sub-Saharan Africa 0.8 0.6 1.2 1.0 1.0 1.4 1.4

Total 100.0 100.0 100.0 100.0 100.0 100.0 100.0

Source: OSIRIS; author’s calculations; * based on current U.S. dollar market

capitalization.

It is apparent that there has been growth in the proportion of large

companies domiciled in China (and to some extent East Asia) over the

period since 2005. Consistent with the view of Nolan (2010), China’s share

of these large companies is still well below its shares of world GDP and

equity market capitalization. Additionally, although China has made

greater gains than other regions/countries in share over the period

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pe rm it te d un de r U. S. o r ap pl ic ab le c op yr ig ht l aw .

Ron P. McIver, Damien Wallace and Vikash Ramiah 52

associated with the GFC, these gains are still broadly comparable to those

made by the Latin America and Caribbean region.

Table 2. Region/Country distribution of Top 500 listed companies

(% of Total Market Cap.*)

Region/Country 2005 2006 2007 2008 2009 2010 2011

East Asia & Pacific 17.6 17.1 15.1 16.4 17.7 17.3 18.5

Australia 1.6 1.6 1.9 3.2 2.4 2.3 3.1

China 0.1 1.2 2.0 1.8 3.0 2.5 2.3

Japan 12.2 10.1 6.2 6.5 6.8 6.1 6.5

Europe & Central Asia 30.8 35.0 37.7 32.8 34.0 32.0 27.6

Euro area 16.7 20.1 20.5 18.8 18.5 14.6 12.5

Latin America & Caribbean 0.5 0.8 1.3 1.2 2.7 2.5 2.0

Middle East & North Africa 3.2 0.9 1.6 1.7 1.6 1.5 1.1

North America 47.1 45.3 42.2 46.0 41.0 43.5 48.3

United States 44.2 42.3 38.4 42.3 36.9 38.7 43.7

South Asia (India) 0.4 0.5 1.5 1.2 2.5 2.5 1.7

Sub-Saharan Africa 0.3 0.3 0.6 0.7 0.6 0.8 0.7

Total 100.0 100.0 100.0 100.0 100.0 100.0 100.0

Source: OSIRIS; author’s calculations; * based on current U.S. dollar market

capitalization.

However, as revealed in Table 2, a focus on the growth of the

proportion of the Top 500 companies domiciled in China may be

misplaced. Although at a lower level, the trend in China’s share of the Top

500 companies’ market capitalization is over the 2005 to 2011 period is

broadly consistent with growth in its shares of global output (GDP), but is

more consistent with its global stock market capitalization in that it has

declined since 2009. The very large size of some of China’s listings of

former state-owned enterprises (e.g., the four large national state-owned

commercial banks) in the early-to-mid 2000s is evident in the gains in

share between 2005 and 2006. This is also consistent with the intent of its

industrial policy with its focus on creating large, globally competitive

companies. This is suggestive that China’s economic and financial

influence, or perceptions of this influence, may more likely be a result of

Co py ri gh t © 2 01 7. N ov a Sc ie nc e Pu bl is he rs , In c. A ll r ig ht s re se

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Lost in Translation? 53

the absolute size of each of its largest listed companies, rather than from

the number of the Top 500 listed companies domiciled within its borders.7

With respect to the U.S., the advent of the GFC and associated

corporate failures saw a significant decline in the share of U.S.-based

companies in the global Top 500, from 37.4 per cent in 2005 to 34 per cent

in 2007. Following some recovery in 2008 the U.S. share of Top 500

companies declined further in 2009 and 2010, before recovery to 36.4 per

cent by 2011. Again, a focus on the number of companies in the Top 500

may obscure from some important details, and in doing so exaggerate the

impact on the financial and economic power of U.S.-based listed

corporations. However, for the U.S. this is not the case, with the share of

Top 500 market capitalization of the 500 companies domiciled within its

borders following a similar pattern to that of their number, and declining

from 44.2 per cent in 2005 to 43.7 per cent in 2011.

5.4. Contribution of Exchange Rate Changes to the Observed

Geographical Distribution of Large Listed Companies

Of interest to note, is that the decline in the U.S. and Japanese shares

of the Top 500 preceded the fall in share of these large, listed companies

in, for example, the Euro area by one year. In the case of the U.S., this

reflects the earlier emergence of the credit crisis, and the early collapse and

acquisition of a number of U.S. controlled companies in the financial and

consumer durable industry sectors. Finally, while there has been recovery

of Top 500 share of market capitalization in the U.S., as of 2011 this had

not occurred for the Euro area.

7 McIver (2012) examines this issue for the Global Top 1,000 companies, based on the U.S.

dollar value of assets, and finds that that China’s share of the Top 500 companies’ total

assets is more consistent with its global share of GDP due to the size of its large listed

companies. However, this is based on current US dollar exchange rate values. Co py ri gh t © 2 01 7. N ov a Sc ie nc e Pu bl is he rs , In c. A ll r ig ht s re se

rv ed . Ma y no t be r ep ro du ce d in a ny f or m wi th ou t pe rm is si on f ro m th e pu bl is he r, e xc ep t fa ir u se s

pe rm it te d un de r U. S. o r ap pl ic ab le c op yr ig ht l aw .

Ron P. McIver, Damien Wallace and Vikash Ramiah 54

Table 3. Region/Country distribution of Top 500 listed companies

at 2005 exchange rate levels* (% of Total Companies)

Region/Country 2005 2006 2007 2008 2009 2010 2011

East Asia & Pacific 22.6 21.4 18.6 18.6 20.4 18.0 17.8

Australia 2.0 2.0 2.0 3.4 2.2 2.2 2.4

China 0.2 1.8 2.0 1.4 3.0 2.0 2.2

Japan 15.0 12.2 8.8 6.8 7.4 5.2 5.0

Europe & Central Asia 29.4 31.6 31.6 28.6 27.8 29.8 26.8

Euro area 17.2 19.6 17.8 16.2 14.0 13.8 13.2

Latin America & Caribbean 1.0 1.6 1.8 2.6 3.6 2.8 3.0

Middle East & North Africa 3.6 1.2 2.2 2.8 2.4 2.8 2.2

North America 41.8 42.4 42.2 42.8 40.0 41.6 44.8

United States 37.4 37.8 36.8 36.6 34.2 35.2 38.6

South Asia (India) 0.8 0.8 2.4 2.4 3.8 3.4 3.8

Sub-Saharan Africa 0.8 1.0 1.2 2.2 2.0 1.6 1.6

Total 100.0 100.0 100.0 100.0 100.0 100.0 100.0

Source: OSIRIS; author’s calculations; * based on U.S. dollar market capitalisation under

2005 exchange rates.

Table 4. Region/Country distribution of Top 500 listed companies

(% of Total Market Capitalization at 2005 exchange rate levels*)

Region/Country 2005 2006 2007 2008 2009 2010 2011

East Asia & Pacific 17.6 17.7 15.4 14.7 16.3 14.2 14.0

Australia 1.6 1.6 1.8 3.5 2.1 1.8 2.1

China 0.1 1.2 2.0 1.4 2.7 1.9 1.7

Japan 12.2 10.8 6.5 4.4 5.3 3.6 3.5

Europe & Central Asia 30.8 31.9 33.1 30.8 31.5 31.5 27.7

Euro area 16.7 18.2 17.4 15.8 15.1 13.2 11.7

Region/Country 2005 2006 2007 2008 2009 2010 2011

Latin America & Caribbean 0.5 0.8 1.1 1.5 2.5 2.0 1.9

Middle East & North Africa 3.2 1.0 1.7 1.9 1.7 1.8 1.4

North America 47.1 47.6 46.6 48.1 44.0 47.0 51.4

United States 44.2 44.4 42.9 43.8 39.8 42.2 46.6

South Asia (India) 0.4 0.5 1.4 1.5 2.9 2.6 2.6

Sub-Saharan Africa 0.3 0.5 0.7 1.5 1.1 0.9 1.1

Total 100.0 100.0 100.0 100.0 100.0 100.0 100.0

Source: OSIRIS; author’s calculations; * based on U.S. dollar market capitalization under

2005 exchange rates.

Co py ri gh t © 2 01 7. N ov a Sc ie nc e Pu bl is he rs , In c. A ll r ig ht s re se

rv ed . Ma y no t be r ep ro du ce d in a ny f or m wi th ou t pe rm is si on f ro m th e pu bl is he r, e xc ep t fa ir u se s

pe rm it te d un de r U. S. o r ap pl ic ab le c op yr ig ht l aw .

Lost in Translation? 55

As discussed in Section 1, common discussions of the shifting global

landscape of economic and financial power, such as that in forums such as

Fortune (e.g., Guyon, 2005; Murphy, 2012), frequently ignore the role of

exchange rates in determining observed outcomes. Tables 3 and 4 thus

present data on these large companies, derived from an unbalanced panel

data sample of the Top 1,000 companies by market capitalization. The data

has been adjusted to account for the relative shift (post 2005) in the value

of currencies relative to the U.S. dollar for each country of domicile of

these Top 1,000 companies.

Table 5. Changes in region/country distribution of Top 500 listed

companies due to post 2005 changes in exchange rates

(% of Total Companies)

Region/Country 2006 2007 2008 2009 2010 2011

East Asia & Pacific -0.2 -0.2 2.4 0.4 2.8 4.8

Europe & Central Asia 2.0 3.2 2.0 3.0 1.0 0.0

Latin America & Caribbean 0.0 0.0 -0.6 -0.6 0.2 -0.2

Middle East & North Africa -0.2 0.0 -0.4 -0.2 -0.6 -0.6

North America -1.2 -3.0 -1.6 -1.4 -3.2 -2.6

South Asia (India) 0.0 0.0 -0.6 -0.2 0.0 -1.2

Sub-Saharan Africa -0.4 0.0 -1.2 -1.0 -0.2 -0.2

Source: OSIRIS; author’s calculations based on Tables 1 and 3.

Table 6. Changes in region/country distribution of Top 500 listed

companies due to post 2005 changes in exchange rates

(% of Total Market Capitalization)

Region/Country 2006 2007 2008 2009 2010 2011

East Asia & Pacific -0.6 -0.3 1.7 1.4 3.1 4.5

Europe & Central Asia 3.1 4.6 2.0 2.5 0.5 -0.1

Latin America & Caribbean 0.0 0.2 -0.3 0.2 0.5 0.1

Middle East & North Africa -0.1 -0.1 -0.2 -0.1 -0.3 -0.3

North America -2.3 -4.4 -2.1 -3.0 -3.5 -3.1

South Asia (India) 0.0 0.1 -0.3 -0.4 -0.1 -0.9

Sub-Saharan Africa -0.2 -0.1 -0.8 -0.5 -0.1 -0.4

Source: OSIRIS; author’s calculations based on Tables 2 and 4.

Co py ri gh t © 2 01 7. N ov a Sc ie nc e Pu bl is he rs , In c. A ll r ig ht s re se

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pe rm it te d un de r U. S. o r ap pl ic ab le c op yr ig ht l aw .

Ron P. McIver, Damien Wallace and Vikash Ramiah 56

A comparison of the differences between estimated regional aggregates

in Tables 1 and 3 (Table 5) and Tables 2 and 4 (Table 6) highlights the

potential importance of exchange rate changes in determining measures

capturing the geographic distribution of the Top 500. In particular Tables 5

and 6 highlight the potential difference between the observed growth in

both number and market capitalization of companies included in the Top

500 due to exchange rate effects versus domestic currency factors. For

example, the data in Tables 5 and 6 suggest that East Asia and Pacific

region’s share of the Top 500 companies would not have been maintained

in terms of number or increased measured by market value in the absence

of gains generated by exchange rate appreciation. Furthermore, rather than

being driven by gains made by China post GFC, it is clear that stabilization

in the number and U.S. dollar market capitalization of Japanese companies

included in the Top 500 supported the East Asian and Pacific region’s

position.

With respect to the major Western economies of Europe and North

America, the results are more mixed. Clearly, both with and without

adjustment for the effect of shifts in exchange rates, the economies of the

Euro area experienced significant declines in both the number and market

capitalization of companies represented in the Top 500. This may be

expected due to the dominance of financial sector (particularly banking

companies) in Europe’s share of the Top 500 prior to the GFC, the impact

of the European credit crisis on this industry sector, and slow growth in the

Euro area post GFC (Overholt, 2010; McIver, 2012). In the case of North

America, and the U.S. in particular, in the absence of significant effects

due to exchange rate changes it is apparent that post GFC both the number

and market capitalization of its companies represented in the Top 500

would have increased. To the extent that observed shifts in exchange rates

are not permanent, this would suggest that suggestions of the declining

influence of the U.S. through its multinational enterprises may have been

oversold.

Co py ri gh t © 2 01 7. N ov a Sc ie nc e Pu bl is he rs , In c. A ll r ig ht s re se

rv ed . Ma y no t be r ep ro du ce d in a ny f or m wi th ou t pe rm is si on f ro m th e pu bl is he r, e xc ep t fa ir u se s

pe rm it te d un de r U. S. o r ap pl ic ab le c op yr ig ht l aw .

Lost in Translation? 57

CONCLUSION

As suggested at the start of this chapter, the intent has been to provide

an overview of selected economic and financial changes that have occurred

over the period immediately preceding, associated with, and post the

GFC. A motivating factor was to address the impact of exchange rate

changes on measures capturing regional and country economic and

financial performance. A popular measure used in the business media to

identify the growing economic and financial power of a country/region is

the number of its enterprises represented in measures of the global Top 500

companies. A subsidiary question addressed in this note is whether

perceptions of a weakening of the Western economies and rise of the East

Asia and Pacific region (particularly China, post GFC), as suggested in

strands of the politics and political economy literature, may also be

influenced by exchange rate changes.

To this end stylized facts on the relative position of countries and

regions has been presented capturing GDP and market capitalization,

including that of Top 500 listed companies has been presented. In the case

of this latter component of the data, market capitalization has been

measured at both current U.S. dollar values and at values based on the

2005 levels of exchange rates. This latter feature is intended to address

limitations of previous overviews that relied on current U.S. dollar values

of these variables to deduce changes in the relative economic and financial

positions of countries/regions based on their control of very large, Top

500, or Top 1,000 companies (e.g., Nolan, 2010; McIver, 2012). It is hoped

that the conclusions reached here will be of sufficient interest to motivate

more detailed research on the factors that have led to shifts in the

geographic distribution of these large companies.

The first issue raised was whether exchange rate changes have an

impact on measures of the global share of large, listed companies resident

in particular countries and regions, as expected as part of the ongoing

process of globalization. Consideration must be given to changes based on

both current U.S. dollar values and those derived from use of the 2005

values of exchange rates. The argument put forward in this chapter is that

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Ron P. McIver, Damien Wallace and Vikash Ramiah 58

recovery of the North American (especially U.S.) equity markets and in its

share of Top 500 companies has been ‘lost in translation’ due to changes in

exchange rates.

In the case of East Asia, and based on current U.S. dollar values, it is

apparent that East Asia did not make significant gains in the mid-2000s in

its share of the global Top 500 companies when measured by market

capitalization. Rather it initially lost then regained its share of the total

companies in the Top 500. This is even following the GFC and the North

Atlantic regions’ problems, and given that China would be expected to

have gained a greater share of the global Top 500 listed companies over

the second half of the 2000s. Such an expectation is a direct result of its

listing of large state owned enterprises (particularly banks), the relatively

rapid growth in its economy, and relative outperformance of its stock

markets. Indeed, a significant factor in stabilization of the East Asia and

Pacific share of Top 500 companies was the reduction in the decline of

Japan’s share of the Top 500.

When consideration is given to the impact of exchange rate changes on

the above conclusions, a different picture emerges. Rather than making

gains due to growth in the number and domestic currency value of its large

companies as captured in the Top 500, measures for the East Asia and

Pacific region and, especially, those of countries such as China, Japan and

Australia, have been bolstered due to favorable shifts in exchange rates. In

the absence of such exchange rate changes the share of the Top 500

companies would have declined between 2005 and 2011.

Much of the overall decline in the value of North American/U.S. share

of global output is part of a trend that has been present over the 2000s.

During this period the East Asian-Pacific share of world GDP can be

seen to have been relatively stable (and even declined until 2006–2007).

However, rather than accelerate the decline in the North American/U.S.

share of global output, as suggested in the political economy literature, the

GFC seems to have temporarily stabilized the share. Following the GFC,

the U.S. decline would appear to have moved back towards its previous

trend.

rv ed . Ma y no t be r ep ro du ce d in a ny f or m wi th ou t pe rm is si on f ro m th e pu bl is he r, e xc ep t fa ir u se s

pe rm it te d un de r U. S. o r ap pl ic ab le c op yr ig ht l aw .

Lost in Translation? 59

In the area of financial power, as approximated by the share of global

equity market capitalization, the picture is clearer. The East Asian/Pacific

region has grown significantly in terms of its importance over the 2000s.

However, in each case the data suggests that rather than accelerating the

economic and financial shift from North America, the GFC may have acted

to (at least temporarily) stabilize, or even to have increased, the relative

position of the U.S./North America. This reflects that, rather than being a

North Atlantic event, the GFC was a global event which impacted more

heavily on many regions outside North America than within the region,

especially with respect to the relative decline in value of equity in the

major economies that occurred during and post the GFC. Consideration of

data based on the 2005 value of exchange rates suggests that the

weakening of the U.S. dollar has been a major factor in this relative shift.

This is even more significant for the North American/U.S. share of the

global Top 500 companies by both number and market capitalization. In

fact, in the absence of this weakening in its currency, it is likely that the

U.S. would have seen an increase in its share of the Top 500 companies.

The above does not detract from China’s economic emergence. This is

part of a longer-term trend reflecting China’s relatively rapid growth in

GDP over the 2000s even if it is not an event associated strongly with the

GFC (although during the GFC China maintained a strong economic

performance). Indeed, it is China’s strong growth which has maintained the

Asian-Pacific region’s share of global output. This is in the presence of a

significant decline in the share of world income provided by Japan. Thus

we can see a shift of economic and financial power not, per se, to the

Asian-Pacific region, but within the region to China (and regionally and

globally away from Japan).

In the area of market capitalization, it is clear that China provided most

of the growth in the East Asian-Pacific region’s share (supported by less

spectacular, but relatively strong growth in countries such as Australia). It

is, however, not clear that the GFC has provided the greatest impetus for

this growth, with China gaining little in its share of equity market

capitalization over this period. This is despite significant outperformance

of its stock markets relative to major markets in the western world and a

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Ron P. McIver, Damien Wallace and Vikash Ramiah 60

significant appreciation/revaluation of its currency. Rather, it should most

likely be seen as a direct result of the emergence and growth in the Chinese

market oriented economy and financial system.

Presentation of the above results dealing with both total market

capitalization and the share of each region’s/country’s large companies

represented in the Top 500 by market capitalization, suffers from several

limitations. First, is the problem of survivorship bias, which is clearly

present in the major stock indices, but is also in the Top 1,000 panel set

from which the Top 500 are drawn. We are thus dealing with an

unbalanced panel data sample. Second, may be the need to better match

exchange rates to the reporting date of the company, to ensure greater

accuracy in adjustment of adjusted U.S. dollar values.

The above analysis leaves many questions to be answered, and in more

detail than is possible through the presentation of simple ‘stylized facts’.

Firstly, to what extent did the GFC affect the market capitalization of each

of the Top 500 large listed companies individually, as compared to its

impact on each company’s domestic stock market? Second, how important

are geographic (including regional) and industry factors in determining

changes in these companies’ market capitalization over the pre- and post-

GFC periods? Finally, what are the relative contributions of each of these

factors (geographic region, industry, local market and exchange rate) in

determining changes in the market capitalization of these large companies?

Analysis based on a balanced panel sample, and utilizing appropriate

econometric methods, is likely to provide the clearest insights into these

issues.

APPENDIX A: DATA SOURCES

GDP and total market capitalization data for countries and regions

are derived from the World Bank, World Development Indicators

(http://databank.worldbank.org/). These figures are based on current U.S.

dollar values.

rv ed . Ma y no t be r ep ro du ce d in a ny f or m wi th ou t pe rm is si on f ro m th e pu bl is he r, e xc ep t fa ir u se s

pe rm it te d un de r U. S. o r ap pl ic ab le c op yr ig ht l aw .

Lost in Translation? 61

Data on the value of assets, market capitalization, and country of

registration for the global Top 500 listed companies and Top 500 private

and listed companies is derived from the Bureau van Dijk OSIRIS and

ORBIS databases. The reference to listed indicates that the company is

either currently listed or was listed in the year for which data was

collected.

For consistency with the GDP and market capitalization data, the

global Top 500 (and 1,000) listed companies are identified based on either

the current U.S. dollar value of market capitalization in each year. This

means initial observations be treated with some caution.

Data on the level of major stock price indices and on the level of

exchange rates is sourced from Thomson Reuters Datastream (monthly

basis and end-of-year basis).

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In: Financial Management ISBN: 978-1-53611-827-8

Chapter 3

THE CHALLENGES AND INNOVATIONS OF

EVENT STUDY METHODOLOGY

Vikash Ramiah*, Damien Wallace and Ron P. McIver School of Commerce, University of South Australia, Australia

ABSTRACT

Event study methodology has been extensively used in the finance

literature to capture how stock markets react to certain information events

such as mergers and acquisitions, financial crises, terrorist activities,