European Financial Management 2025 Archive
European Financial Management, VOL 31:1, January 2025
ESG, corporate piracy and Coasian contracting efficiency
Harry DeAngelo.
Abstract:
Environmental, Social and Governance activism entails a subtle form of corporate piracy. It manifests in opportunistic backdoor attempts to convert firms that were incorporated to advance shareholders' pecuniary interests into firms that sacrifice pecuniary benefits to advance a social/political agenda favoured by a subset of activist shareholders. These surreptitious property rights encroachments raise an important issue: How should governance architecture (laws and charters) be structured and enforced to deal with shareholder disagreements and the resource dissipation (losses) that results therefrom? I address this issue using basic contracting efficiency principles of property rights economics traceable to Coase and to Alchian and Demsetz.
Keywords:corporate piracy, ESG, Fisher Separation failure, governance architecture, shareholder disagreement, shareholder‐value maximization
JEL Classification: G30, G34, K22
Geopolitical risk and global green bond market growth
Charilaos Mertzanis, Imen Tebourbi.
Abstract:
Using individual transaction data, we investigate how geopolitical risk influences green bond issuance across 73 countries during 2008–2021. We consider deal characteristics, as well as economic and institutional factors. We find a positive association between geopolitical risk and green bond issuance. The effect shows nonlinearity and time delays. Our findings remain robust after conducting sensitivity and endogeneity analysis. After decomposing the geopolitical risk index, we discover that all its components have positive correlations with green bond issuance. Lastly, our study highlights the crucial role of the underwriters' network and specific geopolitical jurisdictions as drivers for global green bond market expansion.
Keywords:geopolitical risk, global, Green bonds, institutions, sustainability
JEL Classification: G15, G32, Q56, F34, G18, F52
‘Take Back Control’: The implications of Brexit uncertainty on investor perception of ESG reputational events
Erdinc Akyildirim, Thomas Conlon, Shaen Corbet, Les Oxley.
Abstract:
This study examines the impact of Brexit on investor reactions to Environmental, Social and Governance (ESG) events in UK companies. Post-Brexit, investors show reduced sensitivity to ESG incidents, suggesting relaxed corporate accountability for ESG disasters. We observe varied investor responses to different ESG events, with most having less financial influence after Brexit. This research informs regulators, stakeholders and policymakers in the post-Brexit era, emphasising the need for strong ESG regulations and communication in influencing investor behaviour. It contributes to understanding the relationship between regulatory changes, corporate reputation and investor reactions post-Brexit.
Keywords: Brexit, corporate accountability, environment, ESG, governance,reputational events, society
JEL Classification: F36, G14, G32, G38, M14
Retail motor gasoline prices and the interest rate on mortgage loans
Balbinder Singh Gill.
Abstract:
A significant negative relationship exists between the price of retail motor gasoline and the interest rate on mortgage loans. Prospective homeowners avoid purchasing a mortgage-financed home in areas where gasoline prices are rising to avoid endangering their future mortgage payments due to the greater cost of motor fuel consumption. The passage of government regulations and incentives aimed at increasing either the demand for or supply of alternative fuels, lowering the cost for gasoline customers to switch to alternative fuels, lessens the negative impact of gasoline prices on the cost of mortgage credit. Public transit mitigates the negative gasoline price impact.
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Corporate social responsibility and bank liquidity creation during financial crises
Wei-Da Chen, Yehning Chen.
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Using a sample of US banks, this paper investigates how corporate social responsibility (CSR) performance affects bank liquidity creation in financial crises. It shows that banks with better CSR performance reduce more liquidity creation in crises. This effect is stronger for banks with lower Z-scores or higher earnings volatility. In addition, the results are driven by bank CSR performance related to community, employee relations and diversity. These results are consistent with the notion that banks with good CSR performance reduce liquidity creation to avoid financial distress, which would hurt their employees and the communities they serve.
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Short-selling restriction and return predictability: Evidence from China
Ying Jiang, Jiayan Qiu, Qian Sun.
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We examine how the ban on t+0 short selling affects the return predictability of short sellers in China. If the ban drives out mostly less informed short sellers, then the return predictive power should be enhanced. However, if the ban drives out more informed short sellers instead of less informed short sellers, then the return predictability should worsen. We find that in China, where the stock market is dominated by retail investors, and short-selling activities are not active, the ban is likely to drive out more informed short sellers, and thus, worsen the predictive power of short selling.
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Industrial heterogeneity, governance structure and firm value
Qazi Awais Amin, Douglas Cumming.
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We examine the impact of corporate governance on firm value by using a unique research approach ‘sector-wise analyses’ by employing a data set of listed firms in Taiwan. We investigate whether the unique dynamics of each industrial sector could differently affect internal corporate governance (CG) practice. In addition, we investigate the moderating effect of block ownership on the relationships between CG and firm value. Our results show that CG and firm value relationships significantly differ across industrial sectors and conclude that the CG model is not one-size-fits-all for industrial sectors—while observed a significant impact of block ownership as a moderating variable.
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The brown side of firm flexibility
Sadok El Ghoul, Omrane Guedhami, Samir Saadi, Syrine Sassi.
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Using a sample of 24,321 firm-year observations from 25 countries over the 2006–2021 period, we show that operating flexibility increases carbon emissions. This increase is due to to the efficiency and instability channels. The relation is stronger for firms where expansion flexibility outweighs contraction flexibility, and for focused and financially unconstrained firms. Cross-country analyses indicate that the effect of flexibility on carbon emissions is more prominent in developed economies with superior institutional quality. In contrast to prior studies that highlight the beneficial consequences of operating flexibility, our findings expose its adverse effect on environmental performance.
Keywords:firm flexibility, GHG emissions, ESG
JEL Classification: G31, M14
Short selling bans and price responses in a multimarket setting
Yu Hu, Pankaj K. Jain, Suchismita Mishra, Robinson Reyes-Peña.
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We evaluate the role of short sale bans in muting the price response to negative earnings surprises for stocks cross-listed in foreign unbanned markets. We update the global timeline of short sale restrictions up to the COVID-19 crisis. Given low dispersion of beliefs, we observe that the effects of a stock's home market bans extend to unbanned markets, as manifested in lagged price responses, reduced short interest, and failures to deliver. In contrast, large profit opportunities created by high dispersion of beliefs trigger cross-border short selling (regulatory arbitrage) and a leading price response in foreign unbanned markets vis-à-vis the home market.
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Heterogeneous impact of cost of carry on corporate money demand
Hadi Movaghari, Georgios Sermpinis.
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Transaction cost model predicts opportunity costs should negatively affect money demand. Examining the effect of cost of carry (CC) on cash holdings at the firm-level, rather the average effect for entire population, we find that such a pervasive negative relation does not hold in times of low interest rate with about a 10% chance of observing positive effects. Firm size emerges as the primary driver of this heterogeneity, demonstrating a hump-shaped effect on the cash-CC link. Our findings suggest that policymakers should track the distributional impacts of opportunity cost of money demand over time to better evaluation of monetary policy.
Keywords: cash holdings, causal forest, cost of carry, heterogeneous effect
JEL Classification: E41, E43, G30, G32
Identifying greenwashing in corporate-social responsibility reports using natural-language processing
Nina Gorovaia, Michalis Makrominas.
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A textual analysis of corporate-social responsibility (CSR) reports reveals that companies engaged in environmental violations report differently from firms with a clean record. The violators issue longer, more positive and more frequent reports to relay environmental content that is more copious but less readable. The violator firms appear to modify their reporting practices right after committing a violation. The findings suggest that culpable firms exploit the current unregulated–unaudited state of CSR reporting as a means of greenwashing and call for institutional change. Our results are robust to a number of industry-firm characteristics, including board composition, ownership dispersion and international presence.
Keywords:corporate‐social responsibility, greenwashing, natural‐languageprocessing, sustainability reporting
JEL Classification: G30, G32, M14
Gender inequality, institutional quality and economic outcomes in the European Union
Hyun-Jung Nam, Doojin Ryu, Peter G. Szilagyi.
Abstract:
Our model, which analyses multi-decade annual data from the European Union, suggests that gender inequality mediates the relationship between institutional quality and economic outcomes. We find that institutional quality significantly influences these outcomes, with positive associations with trade and per capita GDP, and negative associations with innovation. Institutional quality positively (negatively) impacts labour force (educational) inequality. Institutions prioritize reducing labour force inequality to boost trade and per capita GDP but struggle to address educational inequality, which does not similarly contribute to economic growth. Whereas labour force inequality negligibly impacts innovation, educational inequality significantly impedes it.
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Foreign versus domestic SPACs in the US Market
Yao-Min Chiang, Bokyung Park, S. Ghon Rhee, Hui-Ju Tsai.
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This study compares domestic and foreign special purpose acquisition companies (SPACs) listed in the US market. Compared with domestic SPACs, we find that foreign SPACs raise lower proceeds from initial public offerings and private investments in public equity funding. Additionally, redemption rates of foreign SPACs are higher than those of domestic SPACs. Our findings suggest that foreign SPACs face a competitive disadvantage due to their limited networks in the US market.
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The impact of blockchain on firms' environmental and social performance
Carole Bernard, Rebecca Cardot, Jamil Jaballah.
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This paper studies the relationship between blockchain patents and firms' environmental and social performance. Using data from USPTO, we assess the effect of these patents on subcategories and aggregate grades for social and environmental dimensions. Our results show a negative main effect of blockchain-related patents on social and environmental grades. However, this effect is moderated by company size and focus on R&D. We exploit the first legislation favorable to blockchain in the United States and find a positive effect of blockchain patents on environmental grades, showing a change in corporate behavior regarding the use of blockchain.
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European Financial Management, VOL 31:2, March 2025
Social networks and reputation incentives: Does directorship prestige influence effort?
Vincent J. Intintoli, Reda M. Moursli.
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Using social network theory, we measure the reputation of boards and directors based on the centrality of their respective networks. Directors commit greater effort, as measured by actual director attendance rates, to directorships they consider more prestigious. Results are robust to controlling for standard proxies of reputation as well as using alternative measures of centrality to identify prestigious directorships. We find similar results when examining exogenous shocks to relative directorship rankings; effort improves for directorships that increase in ranking following the shock. Our findings outline the importance directors place on the perceived reputational value of their directorships.
Keywords:centrality; director connectedness; firm and director reputation;independent directors; social networks, director incentives
JEL Classification: G32, G34, L14
How to green the European auto ABS market? A literature survey
Carmelo Latino, Loriana Pelizzon, Max Riedel.
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This literature survey explores the potential avenues for the design of a green auto asset-backed security (Green Auto ABS) by focusing on the European auto securitization market. In this context, we examine the entire value chain of the securitization process to understand the incentives and interests involved at various stages of the transaction. We review recent regulatory developments, feasibility concerns, and potential designs of a sustainable securitization framework. Our study suggests that a Green Auto ABS could be based on both a green use of proceeds and a green collateral-based methodology.
Keywords: car loans, low‐emission vehicles, regulation, securitization,sustainable finance
JEL Classification: G12, G23, G28
An announcement effect in reverse? Evidence from cash-settled convertible bonds
Stefano Gatti, Ulrich Sperl.
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We analyze the trading activity of underlying shares at the maturity of convertible bonds with cash-settlement provisions. Our findings indicate that arbitrageurs and option dealers engage in systematic trading that leads to an increase in trading volumes and changes in the level of short interest in the affected underlying equities. We find significantly positive abnormal returns for the affected stocks if convertible bond-related trading is not contaminated by opposing option-related flows. This finding supports the notion that arbitrageurs can create a substantial market impact on shares underlying convertible bonds even without any relevant news dissemination.
Keywords: announcement effect, convertible bond, event study, securitydesign, short selling
JEL Classification: G14, G32
Pricing dynamics and herding behaviour of NFTs
Gilbert Fridgen, Roman Kräussl, Orestis Papageorgiou, Alessandro Tugnetti.
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This paper analyzes the sales of 875,389 art nonfungible tokens (NFTs) on the Ethereum blockchain to identify the key determinants influencing NFT pricing and market dynamics. We find that market liquidity and trade volume are strong predictors of NFT prices. Contrarily, social media activity negatively correlates with prices. Introducing an artist ranking system, our study reveals a “superstar effect”, with a few artists dominating sales, and herding behaviour within the NFT market.
Keywords: art market, cryptocurrency, Ethereum blockchain, herding,liquidity, network, nonfungible tokens, price index, socialmedia, speculation
JEL Classification: C55, G11, Z11
Like a moth to a flame: Do stock market bubbles exacerbate credit risks of peer-to-peer lending?
Xin Liu, Xiaoran Ni, Zhigang Qiu, Wang Xiang, Kailun Zhang.
Abstract:
We establish a causal link between stock market bubbles and credit risks from peer-to-peer lending. Employing a fuzzy regression discontinuity design based on retail investors' disproportional increase in stock market participation when the Shanghai Stock Exchange composite index exceeds 3500, we find that both the default rate and the degree of delinquency rise disproportionately for loans borrowed above the 3500 threshold. This effect is more pronounced among loans of lower quality and when borrowers are more overconfident and less risk averse. Overall, our results suggest that FinTech developments could amplify financial risks and induce contagion across markets.
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The impact of social media influencers on the financial market performance of firms
Kevin Keasey, Costas Lambrinoudakis, Danilo V. Mascia, Zhengfa Zhang.
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Despite the huge growth in the number of influencers and their use by firms, there is a lack of analysis of how social media influencers affect the financial market performance of firms. Anecdotal evidence suggests mega influencers can impact the stock prices of firms via social media. We ask whether such an effect is generalizable to all mega influencers and other financial market characteristics of firms. Using a hand-collected data set of 16,156,419 mega influencer posts on Instagram, we find that mega influencers affect investors' attention, volatility and trading volume but not stock returns. It takes top influencers with extreme sentiment posts to affect returns and, even here, the effect is short-lived.
Keywords: financial market performance, firms, influencers, investors,mega influencers, sentiment
JEL Classification: G1, G12
The role of inventory in firm resilience to the Covid-19 pandemic
Olga Dodd, Shushu Liao.
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We study the role of inventory in corporate resilience to Covid-19 in 2020, which triggered exogenous shocks to consumer demand, commodity prices and supply chains. Unexpected drops in consumer demand and commodity prices increase the costs of inventory. Conversely, inventory holdings can buffer against supply disruptions. Empirically, US firms with higher inventory experienced more negative stock market responses early in the crisis due to falling consumer demand. However, since May 2020, inventory has become valuable as a hedge against supply disruptions, improving firm performance. During Covid-19, unlike other crises, inventory played a unique role as a hedge against supply disruptions.
Keywords:commodity price shock, consumer demand shock, Covid‐19,inventory, supply chain disruption
JEL Classification: G31, G32, G01
Gender gap in investment performance revisited: The role of attention
Denis Davydov, Karl Eskner, Jarkko Peltomäki.
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This paper revisits the effect of gender on portfolio performance, exploring the hypothesis that investors may derive fewer benefits from increased financial attention due to disparities in financial confidence. Using data from trading accounts of over 745,000 investors, we find that the difference in investment performance between men and women depends on the level of attention that they pay to their portfolios. Furthermore, our results indicate that the positive effects of investor attention are primarily attributable to young men, who appear to benefit the most from heightened attentiveness.
Keywords: gender, investor attention, portfolio performance
JEL Classification: G11, G40
Managerial incentives and earnings management: Insights from union certification elections
Yue Zhang.
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This study examines how unionization affects firms' financial reporting. Using a regression discontinuity design, we compare practices of firms narrowly winning and losing union certification elections. We find that winning firms depress earnings significantly more by inflating discretionary expenses, particularly research and development expenses, to strengthen their bargaining positions with workers. We further show that this manipulation aligns with managers' financial incentives, career motives, and entrenchment levels. The paper highlights managers' strategic use of real earnings management in worker negotiations and provides causal evidence on how the dynamic relationships among managers, shareholders, and workers shapes firms' financial reporting.
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Climate policy shocks and crowdfunding success of renewable technology campaigns
Sirui Cheng, Xiuping Hua, Jiadong Peng, Huayi Zhang.
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This study uses Trump's withdrawal from the Paris Accord as an exogenous policy shock and investigates its impact on crowdfunding outcomes. We find that this major policy change negatively affects the funding success of renewable technology campaigns. Mechanism tests suggest that social trust and availability bias transmit the influence of climate policy shock on crowd backers' decisions. Further analyses indicate that Biden's consequential policy reversal recovers the investors' support towards renewable technology. Overall, the Trump administration's climate policy shock induces significant shifts in the consumption preferences of small investors and incurs negative externalities upon renewable technology in crowdfunding markets.
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Brand capital and corporate investment efficiency
Kam C. Chan, Kevin Li, Tongxia Li, Weining Zhang.
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Using a sample of US firms from 1975 to 2021, we show that brand capital improves investment efficiency, which is robust to various measures of brand capital and investment efficiency. To mitigate endogeneity concerns, we exploit the passage of the Federal Trademark Dilution Act as an exogenous shock to brand capital and find that it strengthens the positive effect of brand capital. Our cross-sectional analyses show that this positive relationship is more pronounced for firms with greater financial constraints and higher information asymmetry. These results suggest that brand capital reduces over- and under-investment through alleviating financial constraints and information asymmetry.
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European Financial Management, VOL 31:3, June 2025
CEO Connectedness and Firm Transparency
Hoa Luong, Kristina Minnick, Mia L. Rivolta, Syed Shams.
Abstract:Our research reveals that CEO connections with Audit Committee directors, established through past employment, education, or social organization memberships, significantly impact firm transparency. These connections increase the likelihood of firms issuing less transparent and readable financial reports. Furthermore, these connections are linked to decreased long-term firm value and increased crash risk. Our findings underscore the crucial role of CEO connectedness in corporate disclosure transparency and firm value. We employed multiple methodologies to address endogeneity concerns. Our results remain robust.
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Robots, Labour Market Frictions and Corporate Financial Policy
Yanguang (Alice) Liu.
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We construct a novel firm-level measure of robot exposure using the International Federation of Robotics (IFR) data set and new robot patent data. We find that the use of robots leads to higher leverage and lower cash holdings. Using an instrumental variable based on the comparative advantage of robots in specific tasks, we find that the effect is likely to be causal and driven by the reduced operating leverage. The effect is stronger when firms are hit by negative shocks including minimum wage hikes and foreign competition. Firms with more robots pay out more and use fewer corporate hedging contracts.
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Voting in the Stock Market–Retail Investor Preferences During COVID-19
Anil Gautam, Grace Lepone PhD.
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Using data from Robinhood, this study investigates retail investors' movement towards/from securities with different environmental, social and governance scores during the COVID-19 pandemic. Although the number of retail investors holding securities with low environmental scores declined, the number holding high-score securities remained steady. We also find heterogeneity in investors' reactions to different subcategory scores. The equal-weighted buy-and-hold portfolio of high-score securities did not outperform that of low-score securities in either volatility or return, suggesting neither financial return nor risk drove retail investors' preference for high environmental score securities. Thus, such ‘voting’ by investment choice is independent of pecuniary indicators.
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Executive Equity-Based Compensation and Tournament Incentives
Meziane Lasfer, Xiaoke Ye.
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We find that the losers in CEO promotion tournaments sell their equity holdings profitably to mitigate the reductions in the promotion-based component of their contracts. They avoid selling before losing the contest to maximize their promotion probabilities. Those who are more likely to compete in the tournament and to face a greater forgone tournament prize trade more aggressively. Our results suggest that tournament losers consider their trading opportunities as outside options to compensate themselves ex-post. This strategy weakens the relationship between tournament incentives and firm performance and highlights new implications for tournament incentives models, compensation committees, and insider trading regulations.
Keywords: career outcome | executive compensation | insider trading | tournament incentives
JEL Classification: G14, G11, G12, G40, G41
Financial Market Misconduct: A Bibliometric Perspective
Rosella Carè, Rabia Fatima.
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This article provides a bibliometric analysis of financial market misconduct (FMM) research. It maps the intellectual structure of FMM studies, visualizes the field's scientific literature, and uncovers its intellectual backbone, emergent ‘hot topics’, key journals, and influential authors. The study contributes to both academia and industry by elucidating the main components and evolutionary trends in FMM research. Additionally, it highlights future research directions by identifying potential underestimated risks and unexplored areas.
Keywords:bibliometric analysis | corporate misconduct | financial market misconduct
JEL Classification: G14, G18, G28, G32, G38, G39
Financial Regulators on Boards: Evidence From Earnings Information Quality
Ching-Hung Chang, Yung-Ling Chi, Qingqing Wu.
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We find that directors with a financial regulatory background are associated with lower earnings quality. The influence of financial regulatory directors (FRDs) is more substantial for firms with higher proprietary costs and FRDs with greater expertise and experience. FRD firms do not have a greater likelihood of financial misconduct or meeting or beating analysts' forecasts. The stock market reacts more positively to FRD appointments than to the appointments of other directors. Our findings suggest that FRDs certify firm discipline, with lower earnings quality reflecting strategic choices rather than opportunistic manipulation, highlighting the impact of postemployment restrictions in financial regulatory agencies.
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Bank Financial Distress and Stock Price Crashes: A Quasi-Experimental Approach
Priti Biswas, Debasish Maitra, Sayantan Mukherjee.
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Using 118,292 US bank-month observations, we examine the effects of short-term changes in bank's financial distress on stock price crash risk. There is a significant positive association between short-term changes in distress on stock price crash risk. The results remain consistent across alternative measures of distress and crash risk. We confirm robustness by employing additional tests for reverse causality and propensity score matching. We find opacity, proxied by discretionary loan-loss provisions to be a potential channel through which increase in distress affects future crash risk. Our study underscores the critical association between increasing financial distress, loan-loss reporting, and crash risk.
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Venture Capital and Vulnerability: Navigating Natural Disasters and Investment Resilience
Chen Huang, Aoran Zhang, Mengyu Zhang, Yunfei Zhao.
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This study examines the impact of natural disasters on venture capital (VC) investment decisions. Using 47 catastrophic natural disasters occurred in the United States from 1990 to 2019, our empirical analysis reveals a significant reduction in VC investments in disaster zones. Additionally, natural disasters negatively influence VC exit strategies, reducing the likelihood and extending the time to successful exits via IPOs. However, we find that green VCs are more likely to invest in disaster-affected areas, indicating potential resilience through green technological innovation. Our findings emphasize sustainability and disaster mitigation, and offer valuable insights for policymakers and investors amidst rising climate uncertainties.
Keywords:climate risk | entrepreneurial companies | Natural disasters | venture capital
JEL Classification: G1, G20, G24, M13, Q54
Sustainable Portfolio Construction via Machine Learning: ESG, SDG and Sentiment
Xin Feng, Hans-Jörg von Mettenheim, Georgios Sermpinis, Charalampos Stasinakis.
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This study proposes portfolio construction strategies based on novel sentiment, ESG and SDG scores. We utilize natural language processing to establish a novel daily score system that mitigates concerns of different rating standards. The portfolios constructed are optimized via machine learning algorithms on a monthly basis using daily historical returns. Utilizing the equal-weighted portfolios as benchmarks, we empirically show that our optimized portfolios exhibit better trading performance in both the SPX500 and STOXX600 indices. The findings demonstrate that nonlinear models such as random forests, neural networks, and genetic algorithms can perform better than other machine learning models in portfolio management.
Keywords:ESG | machine learning | portfolio construction | SDG | sentiment indicators
JEL Classification: F3, G11
Tests of Global Flights to Safety With US Financial Firm Bankruptcy Announcements
Theodosis L. Kallenos, Panayiotis Papakyriakou, Athanasios Sakkas, Zenon Taoushianis.
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This paper investigates whether bankruptcy announcements by large US financial institutions can induce flights to safety, leading investors to seek safer investments. To test this relationship, we employ a short-horizon event study methodology and show that low-risk investments—such as the US dollar, sovereign bonds and gold—exhibit significant appreciation following such announcements. This result is more pronounced when the local country-level investor sentiment declines in the postannouncement period. We also analyze the transmission mechanism through which bankruptcy announcements cause flights to safety and empirically identify a global information contagion channel via negative shocks to the cash flows of stocks.
Keywords:bankruptcy announcements | financial firms | global information contagion | low‐risk investments | sentiment
JEL Classification: G14, G15, F31, G33
Lending Relationships of Firms for a Just Transition
Mohammed Saharti, Asif Saeed, Sajid M. Chaudhry, Muhammad Ali Nasir.
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This paper examines lending dynamics for firms aiming for a “just transition”. Analyzing 37,426 firm-year observations from DealScan and Refinitiv's environmental, social and governance (ESG) transition data (2002–2021), we find that lenders offer lower interest rates to firms with prior relationships and strong ESG commitments, particularly environmental ones. While environmental factors receive favourable treatment, economic and governance transitions are less prioritized. Lenders tend to form more dispersed syndicates when supporting firms focused on ESG transitions, especially environmental ones. This research highlights the uneven focus within ESG transitions and emphasizes the underexamined area of governance, providing insights into lending relationships.
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Entrepreneurial Firms and Bank Financing: Do Business Angels Play a Role?
Vincenzo Capizzi, Nicola Carta, Elisa Cavezzali, Ugo Rigoni.
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This paper investigates the contribution provided by business angels' (BAs) post-investment intervention to the interaction between young entrepreneurial firms and bank lending decisions within the entrepreneurial finance ecosystem. The analysis relies on a data set comprising 114 Italian BA-backed firms over the 2010–2018 period, alongside 498 matched firms. We find evidence that BAs' support makes it easier for entrepreneurial firms to raise follow-on bank financing. Additionally, we document the positive effects of both BAs' entrepreneurial experience and soft monitoring. These effects can be attributed to BAs' value-added contributions and their role in mitigating information asymmetries perceived by debt providers.
Keywords:bank debt | business angels | entrepreneurial finance | new firms | value‐added
JEL Classification: G24, G32, M13
Co-Investments in Private Equity: Do Investor Types Matter?
Christian Riis Flor, Emil Tilgaard Jensen, Alexander Schandlbauer.
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This paper utilizes detailed data from a Northern European private equity fund-of-funds to examine the determinants of co-investments. Unlike prior studies, we differentiate between two distinct types of co-investors: sidecar co-investors and direct co-investors. This distinction matters. Both types are more likely to participate in larger deals, but the effect is notably stronger for sidecar co-investments. Furthermore, if the internal funds available to a general partner (GP) are less than the initial capital used for the acquisition, a GP is more inclined to seek sidecar co-investors, while lower uncalled capital reduces the likelihood of co-investment offers.
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European Financial Management, VOL 31:4, September 2025
When Do Optimistic CEOs Enhance Firm Value?
Sanjay Deshmukh, Anand Goel.
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We predict how the effect of CEO optimism on firm value varies across firms and model how industry competition impacts the relation between CEO optimism and firm value. Estimating optimism from option-exercise behaviour, we find that CEO optimism increases firm value by about 17% on average. Consistent with theoretical predictions, CEO optimism is more value-enhancing in firms that are riskier, engage in greater innovation and investment, have more internal resources and operate in industries that are more competitive or have a larger fraction of optimistic CEOs. Various endogeneity checks support a causal impact of CEO optimism on firm value.
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Pilot CEOs and Corporate Cash Holdings
Lili Chen, Lingwei Li, Marvin Wee.
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This study examines the effect of a personality trait exhibited by pilot chief executive officers (CEOs), that is, situation awareness, on corporate cash policies. Our results show that firms led by pilot CEOs are more likely to hold higher levels of cash for firms with higher growth opportunities and greater firm risks. The findings suggest that pilot CEOs have greater situation awareness and are more likely to plan ahead to cope with future liquidity needs. We also find that the strength of their situation awareness is associated with pilot certification levels but does not change between the pre- and post-certification periods.
Keywords: cash holdings | CEOs | corporate policies | managerial styles | situation awareness
JEL Classification: G32, G30
The Role of Intangible Assets in Shaping Firm Value
Feng Dong, John Doukas.
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This study introduces a new metric to evaluate a firm's intangible asset intensity, focusing on its ability to generate revenue from nonphysical assets. It finds a strong positive correlation between firm performance and both internally generated and externally acquired intangible assets. Firms with high intangible intensity outperform peers by 3% annually. The oversight of intangible assets is identified as a factor in value stocks' underperformance. Rigorous tests, including endogeneity checks, confirm these firms exhibit superior accounting quality, labour investment efficiency and acquisition returns. A framework highlights how managerial attributes enhance firm value through decision-making.
Keywords: data envelopment analysis | firm performance | intangible assets | labour investment efficiency
JEL Classification: G11, G32, O30, O34
Time Zone Difference and Equity Market Price Efficiency Post-Earnings Announcements
Anil Gautam, Grace Lepone.
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This study investigates whether differences in investors' time zones affect stocks' price efficiency post-earnings announcements on the Australian Securities Exchange. We examine how stocks heavily held by investors in a time zone significantly behind the exchange time zone respond to earnings announcements, compared to stocks that are not. This study finds that stocks associated with a later time zone are less price-efficient post announcement. The pricing efficiency difference is pronounced for early announcements and announcements with a positive tone. Our results are robust to alternative price efficiency measures, post announcement time frames, and benchmark periods.
Keywords: price efficiency | retail investor | stock market | time zone
JEL Classification: G4, G14
The Economic Consequences of Social Unrest: Evidence from Initial Public Offerings
Philip Barrett, Thomas J. Boulton, Terry D. Nixon.
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Prior research attributes negative stock market performance following episodes of social unrest to elevated uncertainty. However, social unrest does not solely increase uncertainty but separately acts to decrease investor sentiment. To determine which effect dominates, we study initial public offering (IPO) underpricing, which responds differently to changes to uncertainty and investor sentiment. Consistent with the notion that social unrest dampens investor sentiment, we find that first-day returns are lower during times of greater social unrest. Limits to arbitrage and elevated home-country bias (strong institutional frameworks) intensify (mitigate) the impact of social unrest on underpricing.
Keywords: Initial public offerings | investor sentiment | social unrest | underpricing
JEL Classification: G12, G15, G24, G28
Embracing the Future or Buying Into the Bubble: Do Sophisticated Institutions Invest in Crypto Assets?
Luke DeVault, H. J. Turtle, Kainan Wang.
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We document that early institutional investors in cryptocurrencies exhibit innovation and adaptability in financial markets, despite the asset class's inherent ambiguity and risk. Investing in crypto assets signals a managerial willingness to undertake reputational and career risks. We compare the performance of institutions that engage in crypto investments with that of their non-crypto-investing peers. Our results indicate that institutional crypto investors outperform their peers by about 2.8% per year. Using propensity score matching, we find that early crypto investors outperform both followers and non-holders as crypto investments become increasingly prevalent in markets.
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Understanding Wealth-Tax Rates: An Investor-Utility Mapping to Capital-Gains Taxes
Adam Farago, Erik Hjalmarsson, Tamás Kiss.
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Wealth-tax rates are formulated as fractions of a capital stock, rather than fractions of income from capital, which makes them difficult to compare with other (income-based) tax rates. We derive investor-utility comparisons between wealth-tax rates and realized capital-gains tax rates, capturing two crucial features absent in naive comparisons: Risk-aversion and investment horizon, both of which magnify the effect of wealth taxes vis- à-vis capital-gains taxes. In numerical calibrations, we show that whereas a 1-percent wealth tax might naively be judged equivalent to a 10% capital-gains tax, a more accurate figure for a long-run risk-averse investor is 25%.
Keywords: capital‐gains taxes | horizon effects | risk‐averse investors | wealth taxes
JEL Classification: G11, G18, H20, H24
Rising Tides, Sinking Approval Rates: Examining SLR Risk and Mortgage Credit Access
Chengbo Fu, Qiping Huang, Meimei Lin, Salman Tahsin.
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We measure sea-level rise (SLR) risk using two indicators: SLR Impact (whether a census tract would be inundated under a 1-ft SLR) and SLR Exposure (percentage of land inundated under a 1-ft SLR). SLR-impacted areas see 0.36%–1% lower mortgage approval rates, with a 10% increase in SLR Exposure reducing approvals by 14 basis points. These patterns reflect future SLR risk expectations rather than past flood or hurricane events. We also find higher denial rates in regions with stronger climate risk beliefs and greater SLR risk. Additionally, SLR-related mortgage denials disproportionately affect minority groups.
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Charity Experience of Directors and Corporate Social Responsibility: Global Evidence
Xianda Liu, Wenxuan Hou, Brian G. M. Main.
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This paper studies the role of directors with prior experience of working in the charity sector (here labelled ‘charity directors’) in determining the corporate social responsibility (CSR) activity of firms on whose boards they sit. We predict that these charity directors shape the ethical climate of their boards and influence their CSR policies. The findings on firms across 50 countries show that the presence of such directors on a board is positively associated with the firm's environmental and social (E&S) performance. Such charity directors exert more influence following disasters that exogenously increase societal demand for CSR, suggesting a causal interpretation of their role. We further show that charity directors play a more active role in those countries where societal norms stress the importance of E&S issues. This does not seem to be a manifestation of organizational slack, as the link between charity directors and CSR is stronger in the presence of good corporate governance. Furthermore, the death of a charity director leads to a negative market reaction, suggesting that their efforts are in line with shareholder interests.
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Digital Trade and Financial Development in European Transition Economies
Hyun-Jung Nam, Jonathan A. Batten, Doojin Ryu.
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Advancements in high-speed Internet and mobile technology in the 2000s accelerated global digital trade growth. However, financial development in European transition economies remains low, and its connection to digital trade remains largely unexplored. This study analyzes how digital trade influences financial development, focusing on Information and Communication Technology (ICT) services exports, goods trade, internet penetration, and key financial metrics, including development, institution, and market indices. The results reveal an inverted U-shaped relationship, where initially digital trade growth strengthens financial depth, access, and efficiency, but benefits decline beyond a threshold. Current digital trade levels remain below the optimal point for maximizing financial development, highlighting the need for further growth.
Keywords: cross‐country study | digital trade | economic growth | financial development | ICT
JEL Classification: B27, F14, F18, F31, F41, G01, G15
CEO's Culture and Firms' Leverage Decisions
Supun Chandrasena, Sijia Dai, Ranadeva Jayasekera, Tapas Mishra, Gazi Salah Uddin.
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Debt mitigates agency problems between managers and stockholders by reducing free cashflows; yet, why managers voluntarily adopt debt discipline remains unclear. This paper examines how chief executive officers' (CEOs') managerial traits, shaped by national culture, influence leverage decisions. Analysing 3338 CEOs from 41 nationalities in 2280 US firms in Bloomberg 3000 index (from 2007 to 2024), we find that cultural values impact CEOs' perceptions of debt's costs/benefits. High-mastery CEOs reduce debt regardless of current leverage, while highly embedded CEOs inadvertently pursue target capital structures. A non-US CEO sample shows that cultural values are portable. Our findings are robust to sensitivity and endogeneity tests.
Keywords: capital structure | CEO culture | cross‐cultural research | instrumental variables quantile regression for panel data
JEL Classification: G32, M14, F22, C31, C33
The Effects of CEO-Board Interpersonal Networks on Cross-Border Merger Outcomes
Md Nazmul Hasan Bhuyan, Luis García-Feijóo, David Javakhadze, Tijana Rajkovic.
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We demonstrate that interpersonal relationships between the CEO and outside directors of the firm, referred to as board friendliness, significantly influence cross-border merger outcomes. Analyzing deals across 34 countries, we find a positive investor reaction to merger announcements by firms with friendly boards. This effect is particularly strong for firms needing substantial advisory support and boards with better advising abilities. Acquirers with friendly boards are more likely to complete deals, contingent on strong institutional quality, robust regulatory standards, property rights protection, government integrity, accountability, economic and financial freedom, globalization and development status. Additionally, these acquirers experience superior postmerger financial performance.
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