Grey matters

The birth of the petroyuan, Sino-American currency contestation and the international monetary system: An institutional perspective on the political economy of currency choice in international energy markets.

Flynt Leverett and Hillary Mann Leverett

Available at http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2503269

Abstract:

This paper focuses on the rise of the “petroyuan” – the use of China’s currency (renminbi, denominated in yuan) to pay for a growing share of its hydrocarbon imports. The advent of the petroyuan holds potentially profound ramifications for both transactional practice in international energy markets and the future of the international monetary system.

For the last four decades, the dollar has been the overwhelmingly dominant currency in which oil and gas volumes are priced and in which international oil and gas sales are invoiced and settled. In turn, the dollar’s role in the international energy trade has, for 40 years, been a pillar for its standing as the world’s leading transactional and reserve currency.

The birth of the petroyuan is the most significant challenge yet to the indefinite prolongation of dollar dominance in international oil and gas transactions – and thus, by extension, to the dollar’s global primacy.

The paper examines the birth of the petroyuan, considers its current and prospective challenge to the petrodollar, assesses the long-term implications of these developments for transactional practice in international energy markets and for the future of the international monetary system. In doing so, the paper highlights deficiencies in conventional economic explanations for patterns of currency use in cross-border oil and gas transactions and underscores the analytic value-added of alternative approaches drawn from institutional and neo-institutional economics.

In particular, the paper emphasizes how powerful state actors work through international political and economic structures to limit and influence market participants’ options for currency choice in cross-border hydrocarbon sales.

They do so for explicitly strategic reasons, including shaping the institutional environment for international monetary relations. In this regard, taking account of American and, more recently, Chinese state preferences and actions is essential to explaining evolving patterns of currency choice in international oil and gas markets.

Looking ahead, it seems highly likely that use of renminbi as a settlement currency for cross-border hydrocarbon transactions will increase. As Sino-American currency contestation unfolds in coming years, it is important for scholars, practitioners and policymakers to understand that currency choice in international energy markets is framed at least as much by political forces – in particular, by great power competition – as by economic considerations.

CFR comment:

This paper provides a useful survey of China’s ambitions with respect to internationalization of its currency generally and the role it is likely to play in future energy markets.

Measuring corporate political sensitivity

Brian Roberts and Timothy Werner

Available at http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2503058

Abstract:

The sensitivity of U.S. firms to domestic political uncertainty is an under-conceptualized yet critical component of nonmarket strategy. Using financial and political prediction market data, we develop a panel measure of domestic political sensitivity at the industry level for the period of 2000-2012.

We validate this measure in two ways. First, we model how covariates related to financial performance and industrial organization explain across-time and industry variation in sensitivity to the political status quo.

Second, we demonstrate that our measure is associated with strategic political activity at the firm level: Consistent with the literature on corporate political activity, higher levels of sensitivity correlate with a greater propensity to lobby and larger lobbying expenditures but do not significantly correlate with making campaign contributions.

The most critical issue facing tax administration today – and what to do about it

George K. Yin

Available at http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2459592

Abstract:

The text of a keynote address from a June 2014 research seminar which describes how the IRS might stabilize its reputation with Congress and the public in light of the agency’s recent difficulties. The speech proposes a greater emphasis on promoting transparency in exempt organization decisions as a means of improving confidence without sacrificing privacy rights of individuals or interfering with enforcement.

CFR comment:

Prof. Yin is an important voice in U.S. tax policy, having served as chief of staff for the Joint Committee on Taxation from 2003-05 as well as adviser to many key players in tax policy, from the U.S. Treasury to Congressional committees. His views on tax matters are always interesting.

The law and finance of anti-takeover statutes

Emiliano Catan and Marcel Kahan

Available at http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2517594

Abstract:

Lawyers and financial economists have fundamentally different views of anti-takeover statutes. While corporate lawyers and academics generally dismiss these statutes as irrelevant, economists study them empirically and find that they – and hence the threat of a takeover – affect firm and managerial behavior. This article seeks to bridge the divide between the law and the finance approach to anti-takeover statutes.

We first explain why these statutes, as used by financial economists, are not a proper metric of the takeover threat facing a firm. We then review three empirical studies published in leading finance journals.

For each study, we show that the results are affected by omitted variables, large-scale coding errors or improper specifications. When corrected for these problems, the association between anti-takeover statutes and the hypothesized effect disappeared. Our paper calls into doubt most of the understanding of the effect of takeover threat, which is based to a large extent on studies of anti-takeover statutes.

CFR comment:

The always-interesting Prof. Kahan and coauthor show some serious errors in the literature on anti-takeover statutes. They show why the finance literature has misidentified the existence of these statutes as a measure of takeover threats and how correcting the measurement problems in some recent papers eliminates the effect of the statutes.

This is a valuable addition to the literature and a helpful guide to the consumer of empirical work in law and economics. It addresses an important issue for investors and for assessing the impact of hedge funds.

 

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Andrew P. Morriss

Andrew P. Morriss, Chairman, is the D. Paul Jones, Jr. & Charlene Angelich Jones – Compass Bank Endowed Chair of Law at the University of Alabama School of Law. He was formerly the H. Ross & Helen Workman Professor of Law and Business at the University of Illinois,Urbana-Champaign. He received his A.B. from Princeton University, his J.D. and M.Pub.Aff. from the University of Texas at Austin, and his Ph.D. (Economics) from the Massachusetts Institute of Technology. He is a Research Fellow of the N.Y.U. Center for Labor and Employment Law,and a Senior Fellow of the Institute for Energy Research, Washington,D.C., as well as a regular visiting faculty memberat the Universidad Francisco Marroquín,Guatemala. He is the author or coauthor of more than 50 scholarly articles, books, and bookchapters, including Regulation by Litigation (Yale Univ. Press 2008) (with Bruce Yandle and Andrew Dorchak), and is the editor of Offshore Financial Centers and Regulatory Competition (American Enterprise Institute Press 2010).

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