Always do your best. What you plant now, you will harvest later.
This paper empirically examines the relationship among ﬁnancial reporting and tax reporting aggressiveness, and the adoption of the International Financial Reporting Standards (IFRS). Theoretical and empirical evidence provides mixed results on the relationship between ﬁnancial reporting aggressiveness and tax reporting aggressiveness. Few studies to date have examined the impact of the mandatory adoption of IFRS on such a relationship. Using a sample of all ﬁrms listed on the Toronto Stock Exchange from 2000 to 2014, our study ﬁnds that the adoption of IFRS signiﬁcantly reduced Canadian ﬁrms’ level of ﬁnancial reporting aggressiveness. Furthermore, we show that IFRS also has an impact on a ﬁrm’s tax reporting aggressiveness via the channel of reduced information asymmetry. Our study ﬁnds a positive relationship between ﬁnancial and tax reporting aggressiveness, and the relationship is much weaker after the mandatory adoption of IFRS.
This paper investigates the eﬀect of the adoption of FSAP directives on market eﬃciency. Speciﬁcally, we study the change in stock market herding after the adoption of two FSAP directives namely, Market Abuse Directive (MAD) and Transparency Directive (TPD). The study is conducted on 10 European countries using a staggered adoption approach that alleviate concerns of endogeneity. Results show that Market Abuse Directive (MAD) reduces market ineﬃciency that is represented in the pre-MAD period with a positive herding coeﬃcient (known as negative herding). This result propose preliminary evidence on the eﬀectiveness of FSAP from a behavioral lens, namely stock market herding.
We investigate how two major events aﬀected dividend payout behavior of ﬁrms around the world. First, the mandatory adoption of the International Financial Reporting Standards (IFRS), and second, the recent Global Financial Crisis (GFC). While IFRS is likely to reduce information asymmetries, the GFC potentially decreases the ﬁrms’ cash ﬂows and cash distributions as well as the availability of external ﬁnancing. We investigate how ﬁrms responded to these two exogenous shocks, how they adjusted their dividend policy, and how shareholder and creditor legal rights aﬀected these responses. We analyze two possible eﬀects that result from the IFRS information shock and the subsequent reduction in information asymmetry. Dividends could either decrease due to a decline in the agency cost of free cash ﬂows (indirect eﬀect) or increase through a reduction in the need to retain cash ﬂows in the ﬁrm (direct eﬀect). We extend our analysis to the recent global ﬁnancial crisis to test whether both of these explanations play a role in determining payout policy. For the 1996 to 2015 period, we observe signiﬁcant changes in the relationships between the level of shareholder and creditor legal protection and the likelihood and amount of dividend payments.
This paper documents the links between risk appetite and adverse economic and ﬁnancial outcomes using a deep panel spanning over 200 years and 70 countries. Increased risk appetite has positive short-term and negative long-term impact, both of which in turn feedback on risk appetite, providing yet another manifestation of the relationship between the economic and ﬁnancial cycles. These results have consequences for both economic and macroprudential policymaking.
We show that the state of investor sentiment strongly aﬀects the transmission of conventional and non- convectional monetary policy to the stock market. During sentiment-correction periods, the excess stock market return is 2% (1%) on the day of an unexpected 25 basis points cut in the FFR (interest rate path). Also, the stock market responds signiﬁcantly to announcements of central bank liquidity swaps. Furthermore, the industrial portfolios’ response is consistent with the implications of the CAPM, which suggests that during such periods investors process information more systematically. In contrast, during periods of optimism build-up, the stock market response is statistically insigniﬁcant.
A fundamental limitation of structural models for the estimation of the probability of default is that their most important parameters, the value of assets and volatility, are not observed in the market. In this paper we develop a methodology where the unobserved parameters are viewed as generalized functions. Using a nonparametric approach for their estimation, we obtain improved parameter values which enter the parametric model, yielding a semi-parametric model. In this context, the Black-Scholes-Merton model is used as a paradigm. Results show substantial improvement in the out-of-sample performance when comparing our semi- parametric model with other alternative speciﬁcations of the Black-Scholes-Merton model in terms of discriminatory power, information content and economic impact.
Using a spatial econometric method to address endogeneity arising from interdependence between geographically-proximate ﬁrms, we ﬁnd robust evidence of a spatial eﬀect in CEO compensation. The spatial eﬀect in CEO compensation is concentrated among ﬁrms where the CEOs are socially connected, and among weak-governance ﬁrms. Irrespective of the presence of a social network, we ﬁnd little evidence of spatial correlation in pay-performance sensitivity. Overall, the results suggest that socially connected CEOs keep up with the Joneses when negotiating their compensation, but such peer eﬀects are not present when it comes to accountability.
This study documents a strong positive relationship between three-month changes in ﬁrms’ distress risk and the occurrence of one-month ahead stock price crashes. Interestingly, these changes in distress risk can predict stock price crashes as far as three months ahead in the future. The results also support that the crash- distress relationship is more pronounced when ﬁrms’ information asymmetry is higher, as captured by ﬁrms’ accounting opacity and stock liquidity. The ﬁndings of this study are of interest to investors who wish to take long-run positions in the stock market because stock price crash risk cannot be easily diversiﬁed away. In this vein, investors should be cautious of a ﬁrm’s distress risk as temporal increases could be an early warning sign for forthcoming crash risk problems.
This study investigates the association between Chief Financial Oﬃcer (CFO) tournament incentives and ﬁrm cash holdings. Prior research ﬁnds that the option-like character of intra-organizational CEO promotion tournaments motivates senior executives to engage in projects with higher risk. Given the primary responsibility that CFOs have in decisions on cash holding, we hypothesize and ﬁnd a positive relationship between CFOs tournament incentives and ﬁrms’ levels of cash holdings. However, we ﬁnd that equityholders’ valuation of ﬁrm cash holdings is negatively associated with CFOs’ tournament incentives. These two eﬀects are attenuated for ﬁrms with a stronger governance structure but enhanced for ﬁrms with a higher leverage ratio. Further analysis on CFO career horizon and ratio of internally promoted CEOs in the negative relationship reinforce the causal inference drew from our ﬁndings. Our study adds to the growing literature that examines the impact of tournament incentives on managerial risk-taking behaviour. It also advances the study of CFOs’ independent inﬂuence on corporate ﬁnancial decisions. The evidence aﬃrms a positive side of the SEC’s disclosure requirement on CFOs compensation.
The Capital Asset Pricing Model (CAPM) is only a statement about the conditional mean of asset returns and does not say anything about other levels (quantiles) of the conditional distribution of returns. This paper examines whether the Euler equation deﬁned by a consumption-based stochastic discount factor can be expressed in terms of conditional quantiles rather than the conditional mean. We show that replacing the standard expected utility optimization problem (expressed in terms of conditional expectation) with a quantile utility optimization problem (using quantile utility function) leads to an Euler equation in which asset price is a function of the quantile of the payoﬀ and stochastic discount factor. Under the assumption that consumption growth rate process is log-elliptically distributed, we show that asset return quantiles are functions of consumption volatility. Using US and UK data on stock market indexes, the empirical evidence validates our theoretical results and conﬁrms that consumption volatility is a driving factor of the distribution of stock market returns. The results also show that the sign of the coeﬃcient of consumption volatility is heterogeneous across quantiles. A negative sign is obtained for the lower quantiles while the upper quantiles report a positive sign. These results are consistent with the literature on time-varying risk premium.
In this paper we derive suﬃcient conditions for the existence of a positive hedging demand under the presence of predictability of the carry trade return using single and multiple state variables. The main driver of the hedging demand is the presence of positive correlation between the state variables and the next period return on the carry trade strategy. We also ﬁnd conditions under which the hedging demand is increasing with the investment horizon. These theoretical insights are empirically assessed in an optimal asset allocation exercise for diﬀerent levels of investor’s risk aversion and investment horizons. Suitable state variables driving the allocation to the currency carry trade strategy are those that predict the risk premium on the carry trade strategy, namely, the currency volatility momentum, the level and three-month change of the U.S. Ted spread and the three-month change of the CRB commodity index. The magnitude of the hedging demand decreases linearly as the relative risk aversion coeﬃcient increases, however, the relationship between the hedging demand and the investment horizon is highly nonlinear and varies signiﬁcantly depending on whether there is a single state variable for predicting the carry trade return or more than one. These results are robust across diﬀerent choices of carry trade strategies and risk aversion coeﬃcients.
During the last decades, the Chinese stock market has experienced great turbulence, with periods of rapid price increases followed by severe market crashes. An explanation for this volatile behaviour is that of speculative bubbles. Although popular, this hypothesis is diﬃcult to examine. The reason is that most econometric tests for bubbles actually examine a composite hypothesis: bubbles and a correctly speciﬁed model for market fundamentals. Because rejection of the null may be solely due to model misspeciﬁcation, these tests may lead to false inference. We propose a novel approach that utilizes information incorporated in the prices of cross-listed companies to alleviate this problem. The basic idea is that cross-listed stocks that trade both in mainland China and in Hong Kong have the same underlying fundamentals and, therefore, divergence of their share prices reﬂects speculative dynamics. By applying the recently developed recursive unit root test of Phillips et al (2015) to the Hang Seng AH Premium Index and 26 of its constituents, we ﬁnd strong evidence in favour of bubbles in the Chinese stock market. This evidence is further supported by results of rolling IVX predictive regressions that indicate that price diﬀerentials of cross-listed stocks can predict movements in Chinese mainland stock prices in sample.
The purpose of this study is to assess the market valuation of sell-side analysts’ recommendation revisions under an Integrated Reporting (IR) approach. The advocates of this new corporate reporting approach opine that IR will have favorable consequences in capital markets’ information environment and recent studies corroborate this argument by documenting that IR adoption has important market valuation implications.
Nevertheless, the consequences of IR cannot be fully understood without examining how market reacts on information provided by important intermediaries such as ﬁnancial analysts. We focus on the South African capital market as it is the only setting in which ﬁrms are mandated to prepare an integrated report annually. Utilizing a sample of 2,636 recommendation revisions, we ﬁnd strong evidence that analysts’ revisions exhibit lower information content during the ﬁrst three years of IR adoption than they had in the last three years before the adoption. These results hold after controlling for analyst, ﬁrm and information environment characteristics and are robust to a number of sensitivity analyses.
This study investigates the drivers of the forecast horizon of analyst reports and how this horizon is associated with the analyst earnings’ forecast bias. It uses multiple forecast periods to unveil the evolution of bias as the forecast horizon decreases and how it is inﬂuenced by the report’s horizon. The dataset comprises the period from 1993Q1 until 2016Q1 and consists of quarterly and annual analyst earnings’ forecasts for the current and the following year. It provides evidence that: a) analysts cater to the needs of institutional investors by adjusting the horizon and the bias of their reports, b) analysts develop a specialty, with diﬀerent types of analyst reports catering to the needs of diﬀerent investors and c) the earnings’ forecast bias depends on the horizon of the forecast.
Stock recommendations are considered the most inﬂuential output that ﬁnancial analysts produce. However, extant evidence shows that stock recommendations are optimistically biased due to misaligned incentives that analysts face. We propose a novel measure to ex-ante rank analyst stock recommendations based on their credibility. Our measure is the “target price expected return” i.e. the expected return of the 12 month horizon target price reported by the analyst and the actual price of the stock one day before the analyst report announcement. We premise that, when target prices are closer to current prices but the recommendation is optimistic, that recommendation will exhibit inferior returns and thus in not as credible. Using a dataset of 29,850 optimistic recommendations, i.e. “Buy” and “Strong Buy” recommendations, over the period 2003 to 2015, results show that when the target price expected return is higher and the analysts’ recommendation is optimistic the abnormal returns (BHARs or CARs) up to a year after the event (report announcement) are higher. Our regression results also conﬁrm that our measure is positively related to abnormal returns and it is highly statistically signiﬁcant. Results are stronger when the recommendation is an upgrade.
This paper examines the likelihood of CEO gender selection using ﬁrm’s lifecycle, board critical mass (at least 30%), and innovation theory. Using Instrument variable and ﬁxed eﬀect model result ascertains that the mean eﬀect of all lifecycle phases (mature) have negative (incremental) impact on likelihood of female CEO appointment. Growth phase have positive incremental eﬀect on probability of hiring young female CEO. Firm’s with female critical mass board, innovation attributes (i.e., greater bargaining power and lower patents (acquired), research and development, brand quality and joint eﬀect of lifecycle with intangible attributes) mostly improve the likelihood of hiring female CEO. Overall, female skills are unique and; thus, could substitute ﬁrm risk culture, values and change board dynamics. The results are robust after using Generalised Method of Moments framework. The ﬁndings have important implication for practitioners and policymakers with respect to gender quota eﬀectiveness on breaking glass cliﬀ phenomenon. In particular, ﬁrm should focus on sustainable innovation motive (success (good news) or failure (bad news)) should translate in CEOs reward and reputation horizon since ﬁrm lifecycle inﬂuences selection process of CEOs gender and age.
We provide causal evidence that firms located near terrorism-stricken areas are less likely to receive a takeover bid and attract lower acquisition premium. The latter finding is reflected in lower target firm stock abnormal returns and synergy gains. Additionally, in such areas, withdrawn deals rise, and acquirers increase cross-border and cross-MSA acquisitions, indicating that terrorism-afflicted target firms become less attractive. We attribute our results, among others, to human capital being influenced by safety uncertainty and fear. They both affect target firm’s labor productivity, which decreases in terrorism-affected areas. They also induce acquirer CEOs’ reluctance for acquisitions of terrorism-afflicted target firms.
This study seeks to shed more light on our understanding of when boards dismiss the CEO by considering the inherent conﬂict created by the board’s advisory role when the ﬁrm underperforms. Using a sample of US ﬁrms listed in Standard and Poor’s ExecuComp for the period 2000-2012 we ﬁnd that, when a ﬁrm underperforms, extreme resource reallocation increases the likelihood of CEO dismissal. This relationship is positively moderated by the board’s industry and CEO experience. The study contributes to the literature on corporate governance by identifying the conditions that trigger dismissal of the CEO in light of boards’ motive to protect their reputation.
We examine if quarterly earnings guidance causes managerial short-termism, in the form of real earnings management. Quarterly guidance may induce myopic behavior and ineﬃcient decision-making, when managers became overly concerned with setting, and subsequently beating, short-term earnings targets. However, our evidence suggests not all guidance has identical consequences. We identify diﬀerent consequences associated with informative versus strategic earnings guidance. Our results show that only strategic guidance is associated with increased real earnings management. This is consistent with underlying managerial incentives driving guidance eﬀects. Our results are robust to a number of sensitivity analyses.
We study a ﬁrm with investment options borrowing using a credit line (loan commitment) and analyze the impact of heterogeneous beliefs between equity and debt holders about the risk of assets. The model explains the role of heterogeneous beliefs on underinvestment, debt capacity and their impact on agency costs. It shows that ﬁrms facing high costs for alternative sources of ﬁnancing rely more heavily on bank credit lines and are more signiﬁcantly aﬀected by diﬀerential equity-debt beliefs. Our framework accommodates loan commitment fees, presents a multistage extension with partial drawdowns of staged investments.
Why do some ﬁrms increase R&D investments in the face of uncertainty, while others do not? Contrary to common wisdom, this study posits that uncertainty prompts ﬁrms to invest in R&D. The value to invest under uncertainty is, however, bounded by a ﬁrm’s learning conditions (i.e., human capital, relatedness of innovation activities, and industry maturity). An empirical test on a cross-industry panel of 551 business divisions of manufacturing ﬁrms reveals how organization-environment interactions determine the ﬁrm-speciﬁc value to invest in learning prior to full-scale commercialization. The insights help to bridge real options theory and the learning literature.
The insights also have managerial implications. Uncertainty about the market environment makes investment decisions in R&D and the commercialization of new products a challenge: should ﬁrms “wait and see” until uncertainty resolves to avoid the risk of betting on the wrong product or commit further resources regardless? Our analysis suggests that manufacturing ﬁrms often take a mixed approach (“act and see”). While deferring investments in the commercialization of new products, they undertake further R&D to inform decision making by insights that would otherwise be unavailable. However, we ﬁnd that the beneﬁt of such practice depends on the learning conditions of the individual ﬁrm. What is risky for ﬁrms with disadvantages in human capital and technology development is value enhancing for ﬁrms with good foundations for learning through R&D.
Mergers and acquisitions (M&As) comprise the most important form of corporate investment. Their capital intensiveness makes deal ﬁnancing decisions central to the M&A process. Building on the well-documented relationship between corporate ﬁnancial hedging and ﬁrms’ borrowing costs, this study examines the impact of utilizing ﬁnancial derivatives instruments on M&A ﬁnancing choices and the likelihood of undertaking acquisition investments. Our results show that engaging in ﬁnancial hedging enables ﬁrms to pursue inorganic growth opportunities in the form of M&As. Acquiring ﬁrms with ﬁnancial hedging programs are more likely to pay for their deals with cash and use external borrowing which appears to be largely driven by the impact of ﬁnancial hedging on their borrowing cost. Our study contributes to existing literature by establishing that ﬁnancial hedging could serve as an eﬀective vehicle for ﬁrms to bring their inorganic investment plans to fruition by facilitating their ﬁnancing.
We conducted an online experiment with 96 participants to examine the eﬀect of separation of time horizons on investment decisions. We ﬁnd that when asked to invest in short and long time horizons separately rather than simultaneously, participants tend to invest more in risky assets, especially for the long time horizon. They also tend to regret less and are hence less likely to revise their initial decisions. The treatment eﬀect is particularly strong for participants with more education and lower degree of loss-aversion. The ﬁndings oﬀer ﬁnancial advisers practical suggestions to help clients to improve their investment decisions.
This paper considers the appropriateness of the home as the primary locus for personal accounting and ﬁnancial education and appraises the school as a complementary locus. Using social constructivist theory and drawing on interviews with teachers and a survey of students in four Scottish schools, the complementary role of ﬁnancial discussions at home and school in shaping personal ﬁnancial planning and management among teenagers is discussed. Areas in which the two components substitute each other are identiﬁed. The home may possess some deﬁciencies in relation to personal ﬁnancial education. Schools can provide a more neutral location but current school provision is variable and uncoordinated. Accounting and ﬁnance discussions at home appear to be pivotal for optimal personal ﬁnancial planning, inducing practices including budgeting and increasing ﬁnancial knowledge self-eﬃcacy. School discussions relate to optimal behaviour on diﬀerent aspects of ﬁnancial conduct, and appear to be related to a more critical stance towards the ﬁnancial advisory role of banks and ﬁnancial institutions. Overall, the home remains an important location of personal accounting and ﬁnancial education but schools can play a strong complementary role.
Based on the notion that women cooperate more with women than with men, we investigate the cooperation eﬀect among women at the top hierarchy of Chinese ﬁrms. We show that the stock market responds negatively to the cooperation between female leaders and female directors, although the cooperation produces higher accounting returns. The opposite eﬀects are a result of earnings management, which leads to overstated accounting numbers but unfavourable stock market reactions. We further ﬁnd that only the newly appointed female leaders engage in this earnings management. The results suggest that the pressure on women to perform leads to ‘women helping women’, which is detrimental to shareholder value.
We examine the association between accounting conservatism, expressed in the form of asymmetric timeliness of recognition of economic gains and losses, and Corporate Social Responsibility (CSR). Our aim is to assess whether a conservative stance in ﬁnancial reporting, expected to be beneﬁcial for capital providers, is associated with a social responsibility orientation taken towards an extended group of stakeholders. Our evidence overall suggests that higher levels of conservatism are negatively associated with a CSR orientation by ﬁrms. We ﬁnd this negative association to be more prominent in the post-2008-09 crisis period; we interpret this evidence as an indication that economic cycles can impact on managerial choices over CSR and catering for capital providers, with the latter choice being a priority during an economic slowdown. We also ﬁnd the negative association between conservatism and CSR to be more pronounced for higher levels of outside pressure by debt and equity holders, and for more ﬁnancially constrained ﬁrms. Thus, our ﬁndings indicate that under pressure from ﬁnancial stakeholders, ﬁrms appear to prioritize commitment to conservative reporting, over the needs of non-ﬁnancial stakeholders and other interest groups.
This paper develops a measure of a ﬁrm’s thrust to compete, that is, its focus on achieving superior ﬁnancial performance by being responsive to external environment information and emphasizing organizational eﬀectiveness, fast response, and enhanced competitiveness. Using this measure, we provide evidence regarding institutional investors’ preferences and behind‐the‐scenes interventions, particularly that transient institutional ownership intensiﬁes ﬁrms’ thrust to compete, while dedicated institutional ownership lessens it. Further, we demonstrate that as ﬁrms intensify their thrust to compete, they also become more susceptible to future stock price crash risk, a phenomenon observed solely among such ﬁrms with a high proportion of transient, and a low proportion of dedicated, institutional ownership. These ﬁndings have policy implications, since they identify ﬁrms’ thrust to compete as a channel through which transient institutional investors inﬂuence ﬁrms’ decision-making and economic outcomes, albeit at the expense of shareholder value creation.
In order to investigate how a ﬁnancial system is resilient, our empirical analysis uses a unique panel database of 180 European banks continuously listed, over the period 2005:4 – 2016:4, to analyse the use of accounting discretion and disclosure by the management of banks during economic downturns. Our study tests three diﬀerent research question: RQ#1) Do the diﬀerent ﬁnancial crises periods push banks managers to pursue both income smoothing and regulatory capital management via LLPs increased?; RQ#2) Do the impact of EBA Stress Tests results aﬀect banks management behaviour in set up the level of LLPs?; RQ#3) Do banks under EBA Stress Tests undertake income smoothing and regulatory capital management via LLPs increased more than for non-treated banks? Our empirical results show that bank banks tend to smooth income but not to inﬂuence regulatory capital via LLPs. In particular, smoothing income hypothesis is emphasised during the subprime crisis “early crisis”: 2007:3 to 2008:3 and during the great ﬁnancial depression “late crisis”: 2008:4 (Lehman & Brothers collapse) to 2010:2. This evidence can be explained by the peculiar features of the recent ﬁnancial turmoil, originated by a toxic assets contagion in the ﬁnancial markets and the growing recourse to market-based funding by listed banks. However, regarding the behaviour of banks that underwent the EBA stress tests, we do not observe that the disclosure of the stress tests results together with the release of a detailed set of sensitive information is neither associated with more income smoothing nor regulatory capital management by tested banks via an increased discretionary use of LLPs. Robustness check are provided.
Conventional wisdom leads to assert that good governance may underpin bank performance while bad governance destroys stability and soundness. Using the banks in the Eurostoxx index, we run a factor analysis to synthesize 23 bank board characteristics into seven key features: independence, size, dedication, tenure, corporate governance quality, external perspective, competence and diversity. We then use a multiple regression and ﬁnd that indeed Corporate Governance curbs risk taking – measured by multiple speciﬁcations of Z-Score – by banks in our sample. Our ﬁndings try to assess which governance variables are most relevant for regulators in containing bank risk taking.
In this paper, we investigate the relationship between corporate governance structures and ﬁnancial ﬂexibility for conventional and Islamic banks in the Middle East and North Africa region (MENA). We construct a novel ﬁnancial ﬂexibility index for the banking sector and show the eﬀect of banks’ risk-taking and monitoring governance structures on their ﬁnancial ﬂexibility. We show that corporate governance has a signiﬁcant eﬀect on banks’ ﬁnancial ﬂexibility. However, Islamic governance rules determine how that relationship is manifested in Islamic banks. Overall, our results show that Western corporate governance structures and one-size-ﬁts-all approaches to corporate governance may lead to suboptimal ﬁnancial ﬂexibility positions. Importantly, we show that “soft policies” to banking regulation are value enhancing for the banking sector.
We propose a stochastic spanning approach to assess whether a trading strategy constitutes an APT violation. Compared with the traditional exact pricing testing procedure that assumes arbitrageurs acting as mean-variance optimizers, our framework allows arbitrageurs to have general sets of prefer- ences provided those are characterized by increasing, concave utility functions. As a result, trading strategies that were previously categorised as stock mar- ket anomalies under the traditional empirical framework, may fail to pass the more plausible framework we propose. We demonstrate the proposed method- ology on 4 anomalies: Beta anomaly (BaB ’Betting against beta’- Frazzini and Pedersen, 2014), Quality-minus-Junk (QmJ – Asness, Frazzini and Pedersen, 2013) and their realized risk-scaled versions (Moreira and Muir, 2018). Both our in- sample and out-of-sample results conﬁrm this intuition, as they present a more robust benchmark for evaluating trading strategies of this sort. Our approach contributes to the eﬀort that is undertaken in the literature to re- evaluate published anomalies and discern those with real economic content from those that may be the result of biases and data-snooping.
Concepts and methods are introduced for analyzing whether a given portfolio possibility set contains some element which dominates all portfolios in another possibility set for all risk-averse investors. A general hypothesis structure and assumption framework are employed and feasible approaches to statistical inference and numerical optimization are developed. Various applications are explored in asset pricing and portfolio analysis: (1) testing the eciency of a latent market portfolio; (2) analyzing investment returns which are hedged for systematic risk; (3) engineering an active enhanced indexing portfolio in the face of sampling error.
A methodology is developed for constructing robust combinations of time-series forecast models which improve upon a given benchmark speciﬁcation for all symmetric and convex loss functions. The optimal forecast combination asymptotically almost surely dominates the benchmark and, in addition, optimizes the chosen goal function, under standard regularity conditions. The optimum in a given sample can be found by solving a Convex Optimization problem. An application to forecasting of changes of the S&P 500 Volatility Index shows that robust optimized combinations improve signiﬁcantly upon the out-of-sample forecasting accuracy of simple averaging and unrestricted optimization.
We analyze how incentives to allocate effort towards management of firm-specific and macroeconomic shocks are affected by CEO compensation schemes. To formulate hypotheses we develop a model that shows how managerial effort is divided optimally between management of two types of shocks with different volatilities, serial correlations and performance-effects of managerial effort. Sources of non-linearity and asymmetry in compensation and performance in terms of shocks are identified. One is due to performance effects of effort in response to positive and negative shocks as shown in the model. Another is a non-linear or asymmetric compensation schemes in terms of performance.
We analyze empirically how changes in CEOs’ firm-related wealth in the US during the period 1993-2014 depend on firm-specific and macroeconomic shocks. We find non-linearity in the relationship between compensation and performance as well as between shocks and performance. The hypothesis with respect to performance effects of effort is partially supported while the hypothesis that short-term performance measures in compensation schemes generates
excessive incentives from shareholders point of view to devote effort macroeconomic shocks is supported. Compensation contracts linked to a short term performance measure (like sales) create stronger incentives to exert effort to manage macroeconomic shocks than compensation contracts linked to shareholder wealth alone.
This paper provides evidence on the diﬀerential impacts of corporate social responsibility (CSR) initiatives, targeted at diﬀerent stakeholder groups, on stock price crash risk. Prior research shows that the CSR performance collectively reduces the likelihood of future price crashes. However, our results reveal that the managerial bad news hoarding and its resultant stock crashes are determined largely by the social CSR dimension. The easy availability of broad-based governance information, and contrastingly obscure nature of environmental initiatives make the corresponding governance and environmental dimensions trivial to managerial bad news hoarding. Lastly, those social CSR subcategories that are aimed at speciﬁc stakeholder groups (such as the community, employees or customers) tend to mitigate future crashes, whereas those that target society at large, either increase the crash likelihood or do not have a bearing on the same. Applying dynamic panel regressions and a quasi-natural experiment, our analyses conﬁrm that these eﬀects on crash risk are likely to be causal.
This study examines whether the interrelationships among top executives’ compensation incentives aﬀect ﬁrm- level stock price crash risk. We ﬁnd that the average of top ﬁve executives’ equity-based incentive ratios is positively related to future crash risk. More importantly, our results show that the positive relation is moderated by the dispersion in top ﬁve executives’ equity-based incentive ratios. The impact of management team incentive heterogeneity on crash risk is more pronounced when the ﬁrms have weaker internal corporate governance, less institutional investor monitoring, less market competition, and higher ﬁnancial leverage.
Overall, our ﬁndings highlight the important role of management team incentive heterogeneity in aligning managers’ incentives to shareholder interests.
In this paper, we investigate whether indicators of the mood for shipping investments (sentiment) may account for the observed volatility spillovers across shipping sub-segments in a contemporaneous and lagged fashion. Instead of utilising the aggregate shipping sentiment indicators as proposed by Papapostolou et al., (2014, 2016), we rely on speciﬁc components used in the calculation of the aggregate shipping sentiment. In this way, we can reveal which speciﬁc components of shipping sentiment may explain investors’ repositioning between and within the dry bulk and tankers segments and sub-segments.
The latter components that are derived by Papapostolou et al. (2014), contain variables (proxies) that encapsulate three diﬀerent aspects of the shipping market which project the intentions of investors (either to buy or sell in a speciﬁc sub-segment of the market) in monthly observations. Three broad categories are used in accordance with the literature that project the latter, namely: 1) market’s expectations, captured by the net (money) contracting in a speciﬁc segment; 2) valuation, captured by the ratios of the price per earnings and the diﬀerence between the second-hand vessels and the newbuildings; 3) the market’s liquidity, captured by the year’s average sales of vessels over the total ﬂeet size. Thus, by establishing if a relation exists between the proxies and the volatility spillovers, we can draw conclusions on how the speciﬁc preferences of investors for speciﬁc sub-segments can further aﬀect the volatility of freight rates in other sub-segments.
This paper disentangles for the ﬁrst time demand and supply shocks driving shipping freight markets and assess their impact on net contracting activity; a key measure of shipping investments. In the process, we construct novel indices of demand for shipping transportation. It is shown that demand shocks impose a greater eﬀect on real freight rates when compared to supply (ﬂeet) shocks both historically and on impact. By contrast, supply shocks exhibit a larger eﬀect on net contracting activity when compared to demand shocks. The response of real freight rates to unexpected demand and supply changes is quantiﬁed through drawing forecast scenarios.
Transportation is an integral part of economic sustainability and national development, with diﬀerent modes of transportation to allow the movement of cargoes around the world, connecting countries. Unsurprisingly, investments in the transportation industry have aroused policymakers’ interest as the expected outcomes of transport development are trade improvements, fostering globalisation and improving global social welfare.
Previous studies focus on public funding for transportation infrastructures, as well as the impact of transportation investments on operational eﬃciency and the local economy. However, no study compares ﬁrm- level investments across diﬀerent transport sectors with an international sample. There is also a lack of empirical evidence concerning investment eﬃciency in the transportation industry. Given the capital-driven nature of the transportation industry, this paper is the ﬁrst to investigate investment eﬃciency in the transportation industry at an aggregate level, using an international hand-collected sample. A novel accounting-based framework and a general investment model are used in this paper. Empirical results uncover new evidence on the allocations of transportation investments. Our results show the existence of investment ineﬃciency in the major transport segments. The ﬁndings help investors and ﬁnanciers to perform more eﬀective investment appraisals and contribute to the sustainable development of the international transportation industry.
Using institutional holdings data over the period 1993-2015, we investigate the impact of analyst recommendation revisions and sentiment on herding. In addition to examining their eﬀect on herd behaviour separately, we investigate the impact of their interaction.
We utilise the Sias method, which distinguishes between own-trade herding and true herding, to develop competing hypotheses concerning spurious and intentional herding, an issue of direct interest to fund investors, given the principal-agent relationship inherent in fund management.
Results strongly support the view that herding is spurious and analysis of the relationship between herding and subsequent returns, together with ﬁndings from robustness tests adds further support.
We provide the ﬁrst investigation of herding among closed-end fund investors, drawing on the US closed-end fund market for the 1992-2016 period. Results suggest closed-end fund investors herd signiﬁcantly, with their herding being mainly driven by non-fundamentals. Closed-end fund herding rises in economic/market uncertainty, with its signiﬁcance being mainly concentrated in the post-2007 period. Herding among closed- end funds is strongly motivated by discounts, is more pronounced than that among their net asset values and tends to grow inversely with fund-size. The fact that closed-end fund herding is noise-driven and linked to their discounts raises the possibility that it is related to the noise trader risk attributed to closed-end funds by investor sentiment theory.
While investor sentiment has been shown to have a robust, direct impact on stock returns, we know little about how it impacts returns through an indirect channel from conditional volatility. We conduct a global study of investor sentiment across 48 international stock markets to examine the impact of investor sentiment on stock returns via both direct and indirect channels, and examine how the impact varies across diﬀerent market regimes. Employing the turnover ratio as the sentiment proxy and applying GARCH-type models, we conﬁrm the impact of investor sentiment on stock returns via both channels. Notably, such impact is regime- varying—in bull regimes, optimistic (pessimistic) shifts in investor sentiment tend to increase (decrease) stock returns, while in bear regimes, optimistic (pessimistic) shifts tend to decrease (increase) stock returns.
We exploit a natural experiment arising from the government-forced changes to the assets under management and investment policy of the Polish pension funds. We test whether this new regulation, and its resultant demand shock on the investors’ side, leads to changes in the IPO pricing and subsequent stock’s performance. We report a material and statistically signiﬁcant decrease in the IPO proceeds (IPO size) in the post-treatment period equal to over 100 million PLN. We ﬁnd no empirical evidence that the treatment had a signiﬁcant eﬀect on the ﬁrst-day IPO underpricing or on the long-term underperformance. We conclude that demand shock resulting from the pension fund reform eﬀectively eliminates the so-called ‘pension premium’ of higher IPO valuations.
This paper examines the extent to which fundraising pressure on private equity (PE) ﬁrms leads to earnings management in IPOs. We create an index to proxy for the degree of the fundraising pressure. Our results suggest a positive association of the fundraising pressure and upward earnings management in a sample of UK IPOs. We also show that that PE ﬁrms’ reputation does not moderate the relation between fundraising pressure and earnings management in the IPO year.
We extend prior studies on IPO underpricing by developing a theoretical model where underpricing is decomposed into underwriter error and market error, based on the optimum price. In our model, the optimum price hinges on the overallotment option feature of the IPO that allows us to distinguish the IPOs with the best long-run performance. Using a U.S. dataset of 1,128 IPO ﬁrms over the period 2001-2015, ﬁrst we demonstrate that a trading strategy based on underwriter error leads to 38.9% buy and hold abnormal returns over the three-year period while the same strategy using underpricing generates only 4.6%. Second, we show that underwriter error explains the aftermarket IPO performance while underpricing and market error do not. This novel decomposition developed in this study enables us to ﬁnd a robust signiﬁcant predictor of future returns which is hidden in underpricing.
This paper examines the relationship between CEO conﬁdence level and the probability of corporate bankruptcy. The main objective is to investigate the impact of CEO overconﬁdence, a behavioural bias, on the survival of ﬁrms. However, in doing so, we also incorporate two further conﬁdence levels, i.e. moderate and diﬃdent. The main predictions are that the overconﬁdence (moderate conﬁdence) increases (decreases) the likelihood of corporate failure and the eﬀects of CEO attributes are moderated by board characteristics. We employ a discrete time hazard model and measure conﬁdence levels by using information on managerial ownership and directors share dealings. We ﬁnd that overconﬁdent CEOs increase the likelihood of bankruptcy, while ﬁrms managed by moderately conﬁdent CEOs are less likely to go bankrupt. Further, diﬃdent CEOs do not exert any meaningful impact. Moreover, we ﬁnd that while larger boards alleviate the unfavourable impact of overconﬁdence, moderately conﬁdent CEOs are more eﬀective in reducing the risk of bankruptcy in ﬁrms with smaller boards.
This study provides a comprehensive overview of the use of credit default swaps (CDS) by U.S. corporate bond funds and analyzes in detail whether certain manager characteristics, in addition to the fundamentals of a fund, determine their use of credit derivatives. Results suggest that a manager’s education, age and experience are positively correlated with a fund’s CDS holdings and are economically as meaningful as fund characteristics. After addressing self-selection concerns, it turns out that funds with older managers, more experienced managers or managers keeping higher assets under management are more likely to take on credit risk via selling CDS protection and keep signiﬁcantly higher net short CDS positions during and around the 2007-2009 ﬁnancial crisis. This leads to a higher risk exposure and worse fund performance. Thus, monitoring remains an important issue and new monthly SEC reporting requirements will make it easier to recognize any types of inconsistencies early on.
A uniﬁed probabilistic framework is developed to analyze and compare the impact of the psychological biases of overconﬁdence, optimism, underconﬁdence and pessimism on managerial perceptions about the expected value, overall risk, downside risk, value-at-risk (VaR) and expected shortfall (ES) of decision-making variables. The results depict that overconﬁdent and optimistic managers overestimate and underconﬁdent and pessimistic underestimate their expected values. Overall risk is underestimated by the overconﬁdent managers but overestimated by the other three conﬁgurations. Downside risk, VaR and ES measures are severely underestimated by the overconﬁdent and optimistic managers and overestimated by the underconﬁdent and pessimistic managers.
Equity crowdfunding (ECF) provides outside equity to unlisted and mainly early stage entrepreneurial ﬁrms and the UK is the leading ECF market. This paper investigates the determinants of ﬁrst follow-on campaigns and of their probability of success for a sample of 790 ﬁrms that conducted an initial campaign on one of the three major UK platforms – Crowdcube, Seedrs, and SyndicateRoom – over the 2011-2017 period. Among these, some 106 sample ﬁrms conducted a ﬁrst follow-on campaign. Our two stage Heckman results show that the probability of conducting a ﬁrst follow-on campaign is positively impacted by novel platform and campaign characteristics such as overfunding on the initial campaign, campaigns with a lead investor, and those with a nominee account structure protecting all crowdfunding shareholder rights. The paper investigates for the ﬁrst time the determinants of a successful ﬁrst follow-on campaign. The probability of success is positively impacted by the degree of overfunding on the initial campaign and by the related social capital that initial campaign success garners. The probability of success also increases with the ratio of the initial capital raised relative to the follow-on target capital. The implication is that the capital raised in the initial campaign acts as a reference point for the follow-on target capital
We examine factors that aﬀect borrowing and lending when borrowers have experienced one or more failed funding applications. Using a unique dataset from a peer-to-peer (P2P) loan platform in China, we track applicants up to ﬁve consecutive failed applications and show that discouraged borrowers have better education, are not prepared to pay high interest rates on a loan and provide less information in their loan narratives. We also ﬁnd that females are discouraged early on compared to mail. Furthermore, lender do take into account previous negative experience loan application experience of borrowers. Our results are generally consistent for both consumer and business loans.
This paper investigates herding behaviour in peer-to-peer (P2P) loan auctions on Renrendai.com, one of the most popular Chinese P2P web-sites. This platform allows both manual and automated bidding and publishes new lists at three distinct times on week days. Our investigation yields evidence of non-linearities in herding behaviour, whose impact varies depending on the time of day. Herding is observed during the week as lists are posted. Our data suggest evidence for rational herding specially during the evening hours during which investors can make informed decisions. Yet, there is weak evidence of herding during the weekends as viable loan lists are mostly funded during the week. On platforms where worthy listings are ﬁlled quickly, less attention is given to the remaining listings during the weekend
We investigate and provide evidence that ﬁnancial statement comparability facilitates improving the prediction accuracy of bankruptcy models including the theoretical BSM model, the Altman z-score and the Ohlson o- score. We provide a direct link between ﬁnancial statement comparability and credit rating by showing that bankruptcy prediction models (i.e., KMV-Merton, Altman z-score and Ohlson o-score) act as an intermediate step between accounting comparability and credit rating agencies. We subsequently update the coeﬃcients of z- and o-scores for the years 2017 to 2017, which leads to more accurate bankruptcy prediction z- and o- scores, that are more able to correctly predict bankruptcies in the next period, especially the updated o-score. We additionally incorporate ﬁnancial statement comparability in our updated and new z- and o-scores and report that our updated and new measures have higher predictive ability to correctly forecast default compared to the scores without accounting comparability, especially when the updated o-score is used. Our updated coeﬃcients scores can be widely used by the academic community when using the z- and o-scores, with or without the inclusion of comparability.
We examine the consequences of R&D capitalisation on the extent to which share prices reﬂect information about future earnings pre- and post-IFRS adoption in the UK. The UK provides a natural experiment upon the impact of changing levels of management discretion: the capitalisation criteria under IFRS and UK GAAP are similar, but while IFRS require ﬁrms to capitalise R&D meeting the criteria, previously such capitalisation was permitted but not required. We show not only that the transition to IFRS results in a reduction in the market’s ability to anticipate future earnings of R&D-capitalising ﬁrms, but also that under IFRS, capitalisation of R&D, relative to expensing, does not enhance the market’s ability to anticipate earnings at all. We argue this is a consequence of IFRS requiring the adoption of an uncertainty threshold which is less conservative than that which would otherwise be adopted by management; and show that R&D capitalised under IFRS is signiﬁcantly associated with earnings uncertainty, whereas that capitalised under UK GAAP is not. Our ﬁndings support contentions of loss of information and reliability arising from constraining reporting discretion, warn against assumptions of ubiquitous beneﬁt in the transition to IFRS, and have implications for standard setting and market eﬃciency.
Using hand-collected data on the level of pension mandatory disclosures required under International Accounting Standard 19 Employee Beneﬁts, we test whether compliance with pension mandatory disclosures conveys information that aﬀects ﬁrms’ access to public instead of private debt as well as the cost of their new debt issues. On reﬂection of the diﬀerences in the characteristics of public and private lenders and the role of mandatory pension disclosures in reducing information risk, we document a higher tendency to access the public debt market for ﬁrms with higher levels of pension disclosure. Furthermore, we ﬁnd that ﬁrms with higher levels of pension disclosures enjoy a lower cost in terms of issuance of public debt, but not a lower cost for private debt issues.
Thus, higher compliance levels of pension mandatory disclosures reduce information risk and enhance creditors’ ability to assess the risk of pension liabilities. However, these beneﬁts are only realisable when creditors rely heavily on ﬁnancial statements in their decision-making due to the limited access to private information. The ﬁndings of the current study provide new evidence in the extant literature on the role of mandatory and in particular pension-related disclosures in ﬁrms’ debt ﬁnancing.
Using the universe of Business Development Companies (BDCs) for the period 1998-2007 we examine their performance and risk adjusted characteristics and analyze the relationship between BDC price returns and the traditional Private Equity Fund (PEF) returns. We ﬁnd that a BDC traded factor signiﬁcantly explains the PE cash ﬂow based indices of Ang et al. (2018) over and above their traded factors, suggesting a signiﬁcant relationship between the returns of BDCs and the time varying private equity premium. Our BDC traded factor does not explain the industry appraisal-based PE indices, thus highlighting the limitations of these indices relative to a market-based PE index. An analysis of the BDC NAV returns and a comparison with the appraisal- based indices reveals the presence of similar, albeit weaker, problems of low volatility and serial dependence as well as evidence that BDC NAV excess return signiﬁcantly explains the return of appraisal-based indices over and above other traded factors. Finally, an event study analysis reveals a signiﬁcant positive market reaction to positive changes in reported BDC NAV and a signiﬁcant negative market reaction to negative NAV changes.
Diﬀerent from prior research that studies weather related factors on equity returns from a behavioral perspective, we investigate air quality on stock returns from a risk perspective using Chinese data. When air- quality risk increases, it not only depresses economic activities of ﬁrms but also alters investors’ preference for their stocks as well. In response to the increased pollution risk, current stock price will drop, but future return will increase. Using a unique measure of aggregate air quality change, we estimate air-quality risk for individual ﬁrms, and are able to explain future return diﬀerences with these beta estimate from a cross- sectional perspective. Moreover, we show that the cross-sectional diﬀerences in the pollution beta are related to ﬁrms’ future proﬁt margins, investment, and per capita output. In addition, we present a natural experiment suggesting that the air-quality is an independent risk factor.
This paper shows that the disappearance of the relationship between corporate governance indices and stock returns, documented in Bebchuk, Cohen, and Wang (2013), is not permanent. We ﬁnd that this relationship has reappeared in recent years with poor governance stocks outperforming the good governance ones, hence, indicating a directionally opposite relation to the one that existed in the past. To explain this puzzling reversal, we present a hypothesis that is characterized by the institutional investors understanding governance risk, which other market participants –and markets at large (as proxied by common risk factors)- do not yet seem to understand and appreciate. Using a natural experiment that is set around an exogenous shock to governance information ﬂow, we show that institutional investors (and more so, the short-term investors) did potentially beneﬁt through learning by better adjusting their returns expectations. Subsequent tests conﬁrm that learning via price and risk channels may have helped investors recognize the uncertainty surrounding poorly governed ﬁrms’ future earning powers, hence, making them demand risk premia to mitigate increased information asymmetry.
With the fact that corporate issuance has reached a record high in 2017, this paper examines an additional eﬀect of one-dollar increase in external capital raising on ﬁrm value. We ﬁnd that an extra dollar increase in debt sales magniﬁes overvaluation by 9.42% for overvalued ﬁrms, an eﬀect that is stronger than that resulting from a one-dollar increase in equity issuance. Undervalued ﬁrms prefer debt issues to equity issues in order to avoid the underpricing problem. We document that the eﬀect of increasing proceeds from debt sales on overvaluation becomes stronger with longer mispricing persistence. Our ﬁndings suggest that changes in debt sales signiﬁcantly amplify ﬁnancial markets’ expectations toward overvaluation.
We study whether Private Equity sponsors are long-term oriented with their Leveraged Buyout (LBO) European targets after the euro-crisis. Their reputational constraints could incentivize them to value capture rather than value creation. Since LBOs are highly levered and LBO sponsors intervene in the corporate governance (CG), their orientation is measured by looking at how CG mechanisms aﬀect portfolio companies’ Risk of Financial Distress (RFD). We ﬁnd that LBO sponsors make a better use of CG mechanisms to mitigate RFD than other forms of ownership; however, results do not allow to exclude value capture.
This paper studies the determinants of international mergers and acquisitions (M&As) in emerging and developing countries by integrating the predictions of the multi country knowledge capital model of multinational enterprise. This model allows taking into account both market seeking (horizontal) and eﬃciency seeking (vertical) reasons for international M&As. We use a dataset of country pairs covering 132 countries around the world over the period 1995 to 2015. We ﬁnd that when the target ﬁrm is from emerging market country the M&A activity is explained by both diﬀerences in relative factor endowments and in market size which conﬁrms the importance of both market seeking and eﬃciency seeking motives. However, when the target ﬁrm is from developed market country M&A activity is explained by the diﬀerences in market size that highlights the importance of market seeking motives.
Since the last decade, the European ro-pax and ferry market has been suﬀering a profound transformation process, which re-shaped the competitive structure of the industry, determined the strategic repositioning of major international players and severely aﬀected the price and quality of maritime transport services. These trends have determined a considerable industry consolidation. Relatedly, the intense M&A activity between 2006 and 2008 drove to a sharp increase in the number of transactions closed, the ﬁnancial value of the deals and the valuation multiples used to ﬁx assets’ value. After 2008, the generalized credit crunch and the severe market conditions reduced the number of both transactions closed and prices payed. Nonetheless, in recent years, M&A activity got back, with a rise in the average transactions values and assets valuations.
The paper addresses the value drivers of M&A activities in the European ro-pax and ferry industry, exploring the endogenous variables that are expected to shape the ﬁnancial multiples applied for pricing target ﬁrms. The manuscript investigates the determinants of the implied EV/Revenue ﬁnancial multiple and proposes an original conceptual model that paves on both strategic management and corporate ﬁnance as well as shipping literature. The theoretical framework includes four groups of variables: corporate strategies; corporate governance and shareholding structure; economic and ﬁnancial KPIs; technical and operational variables. For the aim of the study, 161 M&As taking place in the European market during the 2005-2018 timeframe are scrutinized, while research hypotheses are tested by performing an OLS regression analysis on 77 sample deals. Data are gathered from S&P Capital I-Q database, integrated through Amadeus database of Bureau Van Dijk, HIS Sea-web, specialised press and corporate reports. The ﬁndings shed lights on the determinants of the implied valuation multiples used to ﬁx ferry companies’ transaction value and provide valuable insights for both academics and practitioners.
We study the eﬀect of public-to-private buyout transactions on investments in innovation using an international sample from thirty-six countries over the 1997-2017 period. We use patent counts and citations to proxy for the quantity, quality, and economic importance of innovation. Our results are based on time analysis and matched sample regressions. The data indicate that buyouts are associated with a signiﬁcant reduction in patents and patent citations, including a reduction of radical (i.e., more scientiﬁc) patents. When we split the sample into institutional and management buyouts, the negative eﬀect of buyouts is conﬁrmed only for institutional buyouts, suggesting that highly leveraged transactions prevent target ﬁrms from adopting long-term investments. This ﬁnding is conﬁrmed by reductions in innovator employment and innovation eﬃciency subsequent to going private. Moreover, the data indicate that the negative eﬀect is mostly prevalent for transactions where the cost of the deal’s debt ﬁnancing is higher than the post-buyout cost of the debt. For deals ﬁnanced only with private equity, this eﬀect is aggravated in the post-2006 period, suggesting that the nature of deals has worsened innovation over time. We rule out alternative explanations for these ﬁndings, including but not limited to outliers, truncation bias, and endogeneity.