FM302

Financial Management in the Pacific

Region
Week 4: Lecture 7 – Major Assignment
Some discussions and directions
OBJECTIVES
• To explain Concentration Ratio
• To explain HHI
• To compute descriptive statistics
• To compute correlation and prepare
correlation matrix
• To demonstrate multiple regression
CR – Concentration Ratio
•  where = market share of firm i in the market in
percent, and k is the number of firms in order of
highest to lowest item (in the case of banks, items
can be assets, loans, deposits etc.)
• Measures the total share of the market among k
firms dominated by a certain number of firms
• CR2 = market dominated by top 2 banks, CR4 =
market dominated by 4 banks, etc.
• Only focuses on the largest k firms.
Example: CR-Ratio
• Bank, and data is of the year 2010 and 2019
• Banks in 2010 = 7; Banks in 2019 = 9
Year Bank code Total Assets(000s) Total Deposits(000s) Total Loans(000s)
2010 A 1922437 927371 1466106
2010 B 437937 393771 158280
2010 C 730695 330044 507854
2010 D 93432 56825 82750
2010 E 168133 67812 146545
2010 F 119569 86110 84105
2010 G 1280133 626976 896019

Year Bank code Total Assets(000s) Total Deposits(000s) Total Loans(000s)

2019 A 2914489 2431000 2084797
2019 B 756823 681268 410021
2019 C 2428157 2000326 1887191
2019 D 193086 140610 159059
2019 E 1108363 874066 824621
2019 F 195724 149742 173536
2019 G 2251657 1843870 1626251
2019 H 521597 426585 400519
2019 I 188515 159376 131061
Example: CR-Ratio
• See Excel File
Herfindahl-Hirschman Index
(HHI)
•  , where n = total number of firms.
• An increase in HHI decline in market competition,
hence increase in market power of the large firms
in a specific product.
• An decrease in HHI increase in market competition
decrease in market power of the large firms in a
specific product.
Herfindahl-Hirschman Index
(HHI)
• Same dataset
Year Bank code Total Assets(000s) Total Deposits(000s) Total Loans(000s)
2010 A 1922437 927371 1466106
2010 B 437937 393771 158280
2010 C 730695 330044 507854
2010 D 93432 56825 82750
2010 E 168133 67812 146545
2010 F 119569 86110 84105
2010 G 1280133 626976 896019

Year Bank code Total Assets(000s) Total Deposits(000s) Total Loans(000s)

2019 A 2914489 2431000 2084797
2019 B 756823 681268 410021
2019 C 2428157 2000326 1887191
2019 D 193086 140610 159059
2019 E 1108363 874066 824621
2019 F 195724 149742 173536
2019 G 2251657 1843870 1626251
2019 H 521597 426585 400519
2019 I 188515 159376 131061
Example on HHI:
Demonstration in Excel
• Refer to Excel
Descriptive Statistics
• Hypothetical (anonymized data) for Country A
• Variables:
• GDP per capita (in US$)
• Personal Remittances inflow (%GDP)
• Domestic Credit (%GDP)

• Rename:
• Domestic Credit (%GDP)
• REM = Personal Remittances inflow (%GDP)
• CRED = Domestic Credit (%GDP)

• To convert variables in log-form, you can use the log or ln function in

excel, and redefine variable as:
• lnGDPCAP = log of Domestic Credit (%GDP)
• lnREM = log of Personal Remittances inflow (%GDP)
• lnCRED = log of Domestic Credit (%GDP)
Descriptive Statistics Cont’d
• Excel demonstration
• Data Data Analysis  Descriptive Statistics  …
GDPCAP REM CRED

Mean 2983.86 20.00 36.86

Standard Error 95.57 1.08 4.15
Median 2855.62 17.88 27.27
Standard Deviation 581.31 6.58 25.25
Sample Variance 337924.94 43.25 637.40
Kurtosis -1.74 1.77 -1.06
Skewness 0.15 0.19 0.70
Range 1576.47 33.98 78.11
Minimum 2270.72 0.21 9.20
Sample (n) 37 37 37
Correlation Matrix
Using Excel:
Data  Data Analysis  Correlation  …

  GDPCAP REM CRED

GDPCAP 1.00
REM -0.43 1.00
CRED 0.89 -0.25 1.00
Multiple Regression Analysis:
Example
• Use
  log-transformed variable.
• Sample model here is:

• Where the variables are as defined previously, t =

time in years, and is the error term (assumed to be
normally distributed with mean and variance .
• Method of Estimation: Ordinary Least Squares (OLS)
• Software used: Excel
 Multiple Regression Analysis:
Example cont’d
• In Excel:
• Data  Data Analysis  Regression
• Input Y Range
• Input X Range
SUMMARY OUTPUT

Regression Statistics
Multiple R 0.94
R Square 0.88
Adjusted R Square 0.87
Standard Error 0.07
Observations 37

ANOVA
  df SS MS F Significance F
Regression 2 1.2077 0.60 120.69 0.00
Residual 34 0.1701 0.01
Total 36 1.3778      

Coefficients Standard Error t Stat P-value Lower 95% Upper 95% Lower 95.0% Upper 95.0%
Intercept 7.26 0.08 96.80 0.00 7.11 7.42 7.11 7.42
lnREM -0.04 0.02 -2.65 0.01 -0.07 -0.01 -0.07 -0.01
lnCRED 0.25 0.02 14.95 0.00 0.21 0.28 0.21 0.28
Multiple Regression Analysis:
Example cont’d
Dependent variable: lnGDPCAP

 Independent Variable Coefficients   Standard Error t-Stat p-value

Intercept 7.26*** 0.08 96.80 0.00
lnREM -0.04*** 0.02 -2.65 0.01
lnCRED 0.25*** 0.02 14.95 0.00
Note: *** indicates statistical significance at 1% level
 Statistical Significance:
• 1% level means , denoted by ***
• 5% level means , denoted by **
• 10% level mean . denoted by *

• not statistically significant

• Negative coefficient of independent variable implies negative
association, and a positive coefficient of the independent variable
implies positive association with the dependent variable.
Group Assignment: Research
Based
• Group members 2-5.
• Flexible
• Can form group with students within the same tutorial groups or
different tutorial group, or with blended mode students, as long as
they are FM302 students.
• Do not exceed the limit per group (max. = 5 and min. = 2).
• Only one member per group should submit the assignment
files using Moodle Submission Box.
• NB: please work in group. This is not an individual
submission assignment.
• Start early so you can submit on or before 30 Sept. 2020
deadline.