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Management International Review
Published in: Management International Review 4/2015

01-08-2015 | Research Article

What Motivates Financial Innovation Across Countries? The Influences of Performance Aspiration and Economic Freedom

Authors: Yiyi Su, Steven Si

Published in: Management International Review | Issue 4/2015

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Abstract

Examining behavioral explanations for financial innovation, this paper focuses on the performance aspiration effects on financial innovation in nations with different levels of economic freedom. We empirically test our ideas by employing a dataset of financial innovation by derivative exchanges across 40 countries from 1995 to 2010. Our results show that, for the economically free nations, financial innovation increases as performance deviates from aspiration. In contrast, for the least economically free nations, financial innovation decreases as performance deviates from aspiration. These findings are largely consistent with our predictions and also demonstrate the importance of national context for understanding firm behavioral motivations for financial innovation.
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Footnotes
1
Cyert and March (1963) emphasize the problemistic search as one major concept in their book. But subsequent research (Chen 2008; Greve 2003) has identified slack, as well as problem, as one critical motivation for firm search.
 
2
Such a financial instrument is named a derivative because its value is derived from the underlying assets. Usually, a derivative contract specifies the underlying product, trading hours, contract unit, price quotation, minimum and maximum price fluctuation, settlement type, position limits, etc. Through derivative contracts, two parties can exchange a specified asset of standardized quantity and quality for a price agreed at present, with delivery occurring at a specified future date.
 
4
Because a number of exchanges ceased their trading during our timeframe, we were unable to locate their websites; we therefore resorted to Wikipedia or other sources for related information.
 
5
Due to the typos and format mismatch in the raw data, we checked the product list one by one and made several corrections to the FIA data. In total, 1,027 contract names (4.65 % of 22,092 products) were revised.
 
6
Derivative contract innovations include (1) contracts on new underlying assets (e.g., foreign currency futures, firstly introduced by the CME), (2) significant contract modifications (e.g., changing trading units), (3) contracts via new distribution channels (e.g., E Mini S&P in the CME), and (4) contracts that were previously listed on another exchange, but were then introduced to the focal exchange. In our dataset, we cannot separate out the four different types of innovation.
 
7
The niche markets include equity, individual equity, currency, interest, agriculture, energy, precious metal, non-precious metal and other futures or options, respectively.
 
8
Demutualization has been identified as a critical legal form of stock and futures exchanges that affects exchange’s strategy and performance (e.g., Aggarwal 2002).
 
9
Regional aspiration is the mean/medium value of all other firms in the same regions (North America, Latin America, Asia Pacific, Europe and Africa). We adopted two cut-offs for judging niche similarity, i.e., firms’ market domain that overlaps that of the focal firm is larger than 0.5 or 0.75. Niche aspiration is the mean/medium value of all other firms operating in similar market niches (Baum and Korn 1996).
 
10
A grid search gives weights to different aspiration variables in increments of 0.1 and takes the combination giving the best model fit (Greene 1993, p. 344).
 
11
The two dummies have high correlations with GDP growth and industrial sales growth since the 2008 global financial crisis resulted in the decline in GDP growth and slowdown of the derivative market growth. In addition, they are positively correlated with industrial search because, as the year passes, the derivative exchanges across countries become increasingly innovative.
 
12
The analysis was suggested by one of our reviewers.
 
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Metadata
Title
What Motivates Financial Innovation Across Countries? The Influences of Performance Aspiration and Economic Freedom
Authors
Yiyi Su
Steven Si
Publication date
01-08-2015
Publisher
Springer Berlin Heidelberg
Published in
Management International Review / Issue 4/2015
Print ISSN: 0938-8249
Electronic ISSN: 1861-8901
DOI
https://doi.org/10.1007/s11575-014-0237-0

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