Firms with strong political connections are more likely to get preferential access to capital, especially in emerging markets and corrupt countries (Johnson and Mitton 2003; Khwaja and Mian 2005; Charumilind et al. 2004; Claessens et al. 2008). Nevertheless, Chaney et al. (2010) find that politically connected firms have lower accounting quality. Low accounting quality can result in a number of negative consequences, including a higher cost of capital (Francis et al. 2005).
Small businesses are more predominant in New Zealand than in many other countries (Ministry of Economic Development Statistics, 2001). This makes it important to accurately capture small business statistics for policy reasons. As suggested by Bannock & Doran (1980), the worst gap in British statistics, and indeed in virtually all other countries, is in statistics on new enterprise formations (births) and failures (deaths).
The “death” or failure of a small business does not generally become public knowledge and this can result in ambiguity as to whether a small business has actually failed or not. As information is not made readily available, researchers generally use one of several proxy events of failure. Confusion has stemmed from the existence of more than one failure proxy in literature. This has been exacerbated by confusion over how the estimated failure rates should be interpreted.
As Eugene Fama points out, tests of classical asset pricing models such as the CAPM, CCAPM, or ICAPM implicitly rely on an assumption of market efficiency which permits the substitution of realized returns for expected returns. However, there is increasing evidence that common stocks are mispriced relative to these models, although the reasons for the pricing discrepancies remain in dispute. For example, de Bondt and Thaler (1985, 1987) find long run reversals of prior stock price changes which they interpret as corrections of prior over-reactions to news, while Jegadeesh and Titman (1993) among others find positive autocorrelation of individual stock returns at the 6-12 month horizon, which is consistent with the slow adjustment to firm specific news documented in a large number of studies.
Jegadeesh and Titman (1995) also find evidence that stock prices tend to over-react to firm specific information. Lee and Swaminathan (2000) find that low (high) trading volume stocks tend to be under (over-) valued by the market. Pastor and Stambaugh (2003), Acharya and Pedersen (2005) and Sadka (2006) show stock returns are affected by (or at least covary with) the state of stock market liquidity, while Amihud (2002) shows that unanticipated increases in market illiquidity reduce the level of stock prices. Lee et al. (1991) and Swaminathan (1996) (more circumspectly) argue that stock prices are affected by the state of ‘sentiment’.
