The New Zealand Institute for the Study of Competition and Regulation · ISCR

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Information on the Institute for the Study of Competition and Regulation

Founded in 1998 and closed in 2015, the Institute for the Study of Competition and Regulation (ISCR) was an independent, nonprofit research institute located at Victoria University of Wellington's Pipitea Campus. Funding of its activities was provided by members, project work, and research grants. The primary objectives of ISCR research were to assist in understanding:

how markets and organisations operate
how markets provide appropriate incentives and disciplines for organisations
the limitations of markets, and the role of regulation in addressing these limitations
the importance of property rights and institutional structures in facilitating effectiveness of markets, organisations, competition, and regulation in New Zealand

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Now showing 1 - 20 of 34

Open Access
Can Ex Post Rates of Return Detect Monopoly Profits?
(Te Herenga Waka—Victoria University of Wellington, 2002) Boyle, Glenn; Guthrie, Graeme
We review the ability of the ex post internal rate of return (IRR) to detect monopoly profits. When market values are used as entry and exit values the ex post IRR simply reveals whether the firm did better or worse than the market expected at the entry date. It says nothing about monopoly profits. When replacement costs are used as entry and exit values the ex post IRR can in principle reveal something about monopoly profits. However since the ex post IRR is a noisy measure of ex ante monopoly profits it will be very difficult to reject the hypothesis given the sample periods typically available. The benchmarks typically used are market-determined and therefore only comparable to IRRs calculated using market values - a situation when the ex post IRR reveals nothing about monopoly profits anyway. Furthermore there is ample empirical and theoretical evidence that these benchmarks do not even represent fair rates of return.
Open Access
Capital Market Integration: A Review of the Issues and an Assessment of New Zealand's Position.
(Te Herenga Waka—Victoria University of Wellington, 2009) Boyle, Glenn
Executive Summary1. In integrated capital markets assets are priced according to a common set of risks. By contrast prices reflect country-specific factors in segmented markets.2. Capital market integration offers the possibility of better capital allocation and greater economic growth improved country risk-sharing enhanced portfolio diversification and a lower cost of capital. However it also exposes a country to capital flight and imported credit crunches inefficient capital allocation if information problems are significant increased corruption incentives and a failure to work well when most needed.3. Recent microeconomic studies suggest that diversification and cost of capital improvements from integration may largely be exhausted in developed countries and hence are likely to be primarily confined to emerging countries. But longer-term macroeconomic evidence seems to indicate that the gains from capital market liberalisation have principally been enjoyed by developed countries.4. Financial economists have developed a number of methods for identifying and measuring the degree of integration both globally and for individual countries. These include: return correlations tests of formal asset pricing models constructed under the assumption of perfect integration cross-country equivalence of implied pricing factors convergence of valuation ratios and various foreign market participation metrics.5. The overall picture painted by the limited number of existing applications of these methods to New Zealand suggest (i) a high degree of integration with Australia (ii) greater integration with Asia-Pacific countries than those of Europe or North America and (iii) no compelling evidence of a general segmentation problem.6. However these conclusions must be treated with considerable caution given that most of the analysis on which they are based is often sourced from relatively old data or from studies that are either preliminary and/or are not focussed on New Zealand. Thus it remains possible that New Zealand could achieve and benefit from additional capital market integration. Further work - applying the most recently-available New Zealand data to the methods noted above - is required to determine whether or not this is the case.7. Existing studies suggest that the achievement of additional integration is largely driven by factors that are either beyond New Zealand's control or on which it already scores highly. However paying much closer attention to investor property rights may well be helpful in this regard.
Open Access
Catching-Up in Broadband Regressions: Does Local Loop Unbundling Policy Lead to Material Increases in OECD Broadband Uptake?
(Te Herenga Waka—Victoria University of Wellington, 2008) Zhang, Wei; Boyle, Glenn; Howell, Bronwyn
Local loop unbundling has been widely promulgated by policy-makers as a significant factor stimulating broadband uptake and therefore an essential component of a developing 'information economy'. Whilst empirical evidence is sparse and at best equivocal in respect of a consistent positive and statistically significant effect a recent study commissioned and published by the OECD does find evidence of such effects. When correcting for omitted variables correlated data and methodological inconsistencies our analysis using the models and data from this report instead support the contention that LLU's contribution to the level of national broadband uptake is materially very small and not statistically significant. Continued advocacy for the policy as a stimulant for broadband uptake on the basis of the OECD-published report is misguided.
Open Access
CEO Presence on the Compensation Committee: A Puzzle
(Te Herenga Waka—Victoria University of Wellington, 2012) Boyle, Glenn; Roberts, Helen
Conventional wisdom suggests that CEO membership of the compensation committee is an open invitation to rent extraction by self-serving executives. However using data from New Zealand - where CEO compensation committee membership is relatively common - we find that annual pay increments for CEOs with this apparent advantage averaged six percentage points less than those enjoyed by other CEOs during the 1997-2005 period. After controlling for variation in firm performance the difference is a still-sizeable four percentage points. This puzzling result cannot be explained by risk-return tradeoff considerations interaction with other governance variables selection bias or variable mis-measurement.
Open Access
The Cost of Capital: A Sceptic's View
(Te Herenga Waka—Victoria University of Wellington, 2003) Boyle, Glenn
Professor Glenn Boyle presented, The Cost of Capital: A Sceptic's View at an ISCR forum in August 2003.
Open Access
Deposit Insurance and the Stock Market: Evidence from Denmark
(Te Herenga Waka—Victoria University of Wellington, 2004) Boyle, Glenn; Bartholdy, Jan; Stover, Roger
Previous studies of the relationship between deposit insurance and bank market values have usually been limited to consideration of minor changes in bank regulations but the 1987 initiation of deposit insurance in Denmark permits examination of a potentially major policy shift. We find that the market values of large Danish banks exhibited a modest positive reaction to the announcement of insurance but that small risky banks responded negatively. These results partially contrast with those previously found for the United States an outcome that seems likely to reflect the interaction of deposit insurance with the particular characteristics of the pre-existing Danish regulatory system.
Open Access
Do Financial Incentives Affect the Quality of Expert Performance? Evidence from the Racetrack
(Te Herenga Waka—Victoria University of Wellington, 2007) Boyle, Glenn
Does the quality of performance by experts respond to financial incentives? Or as some psychologists argue are experts primarily motivated by more intrinsic consideration such as professional pride? I provide some evidence on this question by examining the relationship between horse race outcomes and the level of race prize money. If financial incentives are important then races with low prize money are more likely to see some trainers exert less than full effort thereby upsetting the calculations of race bettors. By contrast races with high prize money are less likely to be affected by unobservable variation in trainer effort so bettor odds should then be a more reliable predictor of race outcomes. In a sample of 30426 horse races I find evidence consistent with this story: average bettor payoffs in a variety of betting pools are strongly negatively related to race prize money and the probability of a bettor-favourite horse succeeding is strictly increasing in the amount of prize money at stake. These results continue to hold when I exclude low-information races from the sample thereby suggesting that prize money is not acting as a proxy for the quantity of information publicly available to bettors. As a group horse trainers apparently tailor the quality of their performance to the potential size of their payout from clients.
Open Access
The Dog That Doesn't Bark: Animal Interests in Economics
(Te Herenga Waka—Victoria University of Wellington, 2008) Boyle, Glenn
Although animal welfare issues have become increasingly important to the economic fortunes of many producers the interests of animals themselves are absent from standard economic analysis. By contrast scholars from other disciplines such as philosophy and law have examined animal issues in considerable detail. This paper outlines a simple way of formally incorporating the insights of these discipines within a traditional economics framework. If animals have economic standing then current practice makes excessive use of animals as production inputs and is thus economically inefficient. However efficiency would not in general entail zero use. Optimal usage depends on the costs to animals and the benefits to humans and thus reflects the usual cost-benefit tradeoff inherent in economics. Even if animals are accorded no economic standing externalities imposed on human producers leads to similar qualitative conclusions.
Open Access
Emotion, Fear and Superstition in the New Zealand Stockmarket
(Te Herenga Waka—Victoria University of Wellington, 2004) Boyle, Glenn; Hagan, Andrew; O'Connor, R. Seini
We analyse the reaction of the New Zealand stock market to five economically-neutral events that psychology research indicates have varying degrees of influence on emotion and mood. Contrary to behavioural finance principles only one of these events is associated with mean or median returns that are statistically different from those on non-event days and even this disappears in the post-1984 period. However several events offer returns that differ from those on non-event days in an economically significant manner. Moreover the variance of returns for event days is typically much greater than the variance for non-event days. Contrary to what theory would suggest the market's propensity to react to economically-neutral events is largely independent of the mid-1980's market reforms.
Open Access
Estimating Implied Valuation Parameters: Extension and Application to Ground Lease Rentals
(Te Herenga Waka—Victoria University of Wellington, 2008) Quigley, Neil; Boyle, Glenn; Guthrie, Graeme
A problem that often arises in applied finance is one where decision-makers need to choose a value for some parameter that will affect the cash flows between two parties such as a rental rate or an exercise price. Because the values of the cash flows also depend on various unobservable parameters identifying the value of the policy parameter that achieves the desired allocation between the parties is no simple task often resulting in disputes and the invocation of ad-hoc approaches. We show how this problem can be solved using an extension of the well-known 'implied volatility' technique from option pricing and apply it to the determination of equilibrium rental rates on ground leases of commercial land.
Open Access
Estimating the WACC in a Regulatory Setting: An Assessment of Dr Martin Lally's paper 'The Weighted Average Cost of Capital for Electricity Lines Businesses' of 8 September 2005
(Te Herenga Waka—Victoria University of Wellington, 2006) Boyle, Glenn; Evans, Lewis; Guthrie, Graeme
In September 2005 the New Zealand Commerce Commission (NZCC) released a document (TheWeighted Average Cost of Capital for Electricity Lines Businesses by Dr Martin Lally referred to as LINES hereafter) that estimates a weighted average cost of capital (WACC) for New Zealand electricity lines businesses and proposes a means for detecting future excess earnings. At about the same time the NZCC also began seeking submissions on another document (Draft Guide- lines: The Commerce Commission's Approach to Estimating the Cost of Capital 2005) that addresses the topic of an appropriate framework for the WACC in the New Zealand regulatory environment. Although no specific author is attributed to the latter its material content is drawn from LINES. In this paper we undertake a detailed analysis of the approach followed in LINES. We do so from the perspective of a referee who has been asked to provide a review of that report in order to assess its suitability for publication in an edited book or journal that adheres to conventional academic standards. Although LINES has not of course been submitted for publication orreview of this kind its contents and recommendations should nevertheless meet minimum standards of accuracy thoroughness and consistency. It is these criteria we use to assess LINES. Our report is motivated by a simple but important concern: although the cost of capital is a critical element of the revenue and price settings that materially determine the social net-benefit of income-control regulation there are presently no institutional arrangements in New Zealand that allow for reports such as LINES to be thoroughly reviewed and debated. On the basis of our review we conclude that such institutional arrangements are sorely needed. Our assessment of LINES comprises two parts. In Section I we provide an overview of what we consider to be the critical areas of concern in LINES. Section II then discusses specific errors in detail.
Open Access
Executive Compensation in New Zealand: the Good, the Bad & the Ugly
(Te Herenga Waka—Victoria University of Wellington, 2004) Boyle, Glenn; Roberts, Helen
Professor Glenn Boyle and Helen Roberts presented Executive Compensation in New Zealand: the Good, the Bad & the Ugly. They report on some broad trends and features of New Zealand executive compensation in the period 1997-2002.
Open Access
Forest and Forest Land Valuation: How to Value Forests and Forest Land to Include Carbon Costs and Benefits
(Te Herenga Waka—Victoria University of Wellington, 2008) de Braganca, Gabriel Fiuza; Boyle, Glenn; Evans, Lewis
New Zealand has introduced legislation to implement the world's first 'all sectors all gases' emissions trading scheme (ETS) as a way of reducing the country's greenhouse gas emissions. The Scheme is to retrospectively introduce a price for carbon emissions in forestry from 1 January 2008 and will phase in other sectors over time (notably agriculture from 2013). This report develops a methodology for valuing the impact of this change on forest and forest land value.
Open Access
Hedging the Value of Waiting
(Te Herenga Waka—Victoria University of Wellington, 2006) Boyle, Glenn; Guthrie, Graeme
We analyze the optimal hedging policy of a firm that has flexibility in the timing of investment. Conventional wisdom suggests that hedging adds value by alleviating the underinvestment problem associated with capital market frictions. However our model shows that hedging also adds value by allowing investment to be delayed in circumstances where the same frictions would cause it to commence prematurely. Thus hedging can have the paradoxical effect of reducing investment. We also show that greater timing flexibility increases the optimal quantity of hedging but has a non-monotonic effect on the additional value created by hedging. These results may help explain the empirical findings that investment rates do not differ between hedgers and non-hedgers and that hedging propensities do not depend on standard measures of growth opportunities.
Open Access
Houses, Horses and Halls of Learning: Do Financial Incentives Matter?
(Te Herenga Waka—Victoria University of Wellington, 2007) Boyle, Glenn
Slides presented by Glenn Boyle as part of the Treasury Guest Lecture Series are available for download here.
Open Access
Human Capital and Popular Investment Advice
(Te Herenga Waka—Victoria University of Wellington, 2005) Boyle, Glenn; Guthrie, Graeme
Popular investment advice recommends that the stock/bond and stock/wealth ratios should rise with investor risk tolerance and investment horizon respectively prescriptions that are difficult to reconcile with the simple mean-variance model. Canner et al. (1997) point out that the first piece of advice can potentially be explained by human capital considerations but only by invalidating the second piece of advice. We show that extending the mean-variance model to include human capital without any other modifications can simultaneously justify both recommendations so long as the correlation between human capital returns and stock market returns lies within a range determined by market and investor-specific parameters. Historical data from 11 countries generally satisfy this requirement although the statistical precision of our estimates is fairly weak.
Open Access
Intra-Country Regulation of Share Markets: Does One Size Fit All?
(Te Herenga Waka—Victoria University of Wellington, 2005) Boyle, Glenn; Meade, Richard
A large body of evidence suggests that investor protection regulationassists the development of major stock exchanges but this leaves openthe question of whether or not the same level of regulation should beapplied to all centralised trading platforms. Allowing for regulatoryvariation permits a wider choice of investment opportunities for liquidity conscious investors lowers some firms' cost of capital and enhancesplatform competition while potentially negative spillover mechanismslack both theoretical credibility and empirical support. Overalluniformity in investor protection regulation seems designed to provide anexpensive solution to a doubtful problem.
Open Access
My Kingdom for a Horse: Resolving Conflicts of Interest in Asset Management
(Te Herenga Waka—Victoria University of Wellington, 2006) Boyle, Glenn; Guthrie, Graeme; Gorton, Luke
Racehorse trainers operate asset management businesses in which the assets owned by outside clients compete with those owned by managers for the latter's time care and attention. Although this potentially leads to serious conflicts of interest we find no evidence of an agency problem: in a sample of 8000 racehorses and their associated stables client-owned horses perform no worse than trainer-owned horses on average. However this outcome is not uniform across stables: the average performance advantage of client-owned horses over their trainer-owned counterparts is positive in big stables where client-owners provide much of the trainer's income but is negative in small stables with relatively few outside clients. Agents with more to lose apparently behave better.
Open Access
New Zealand Corporate Boards in Transition: Composition, Activity and Incentives Between 1995 and 2010
(Te Herenga Waka—Victoria University of Wellington, 2011) Ji, Xu (Jane); Boyle, Glenn
We document describe and interpret changes in New Zealand corporate board characteristics between 1995 and 2010 a period centred around the 2003 introduction of the NZX Corporate Governance Best Practice Code. Unsurprisingly the representation of non-executive independent and female directors on NZ boards rose during the period as did real chair and director fees and the importance of board committees while average board size fell. Perhaps more surprisingly much of this movement occurred before 2003. However the magnitude of these changes frequently varies according to firm size and there are some intriguing differences between New Zealand board characteristics and those prevailing in other larger countries. We use this information to identify an number of unanswered questions about New Zealand corporate boards.
Open Access
One Size Fit All? Investor Protection Regulation in Financial Markets
(Te Herenga Waka—Victoria University of Wellington, 2005) Boyle, Glenn; Meade, Richard
Professor Glenn Boyle presented One Size Fit All? Investor Protection Regulation in Financial Markets at this seminar in May 2005.