European Financial Management 2024 Archive
European Financial Management, VOL 30:1, January 2024
Lead independent director and earnings management
Yuan-Teng Hsu, Cheng-Few Lee, Chih-Yung Lin, Ning Tang.
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In this study, we examine the effects of lead independent directors (LIDs) on firms' earnings management. On the basis of US firms from 2000 to 2018, those with LIDs managed earnings less, as reflected by the absolute value of discretionary accruals. Specifically, we find the effect is likely to be more prominent among firms with less disclosure transparency, weaker corporate governance and higher risk. In addition, we find that firms with LIDs tend to increase R&D and capital expenditures, reduce leverages and enhance firm values. Overall, the findings indicate the monitoring of LIDs can effectively reduce firms' earnings management and enhance firm values.
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Do fund managers time momentum? Evidence from mutual fund and hedge fund returns
Feifei Wang, Lingling Zheng.
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By examining fund returns we find strong evidence that both hedge funds and mutual funds trade on momentum. Moreover, the average hedge fund has modest momentum timing skill, trading more aggressively when momentum profits are higher, while the average mutual fund does not. Momentum trading alone does not translate into superior performance. However, funds with momentum timing ability significantly outperform and the risk-adjusted-return-difference between the top and the bottom timers is around 1.7% (1.3%) per year for hedge (mutual) funds. We provide further evidence that dynamic momentum strategies enhance fund performance, and momentum timing skills vary considerably with fund investment styles.
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Bank ownership concentration and stock price informativeness: International evidence
Anh-Tuan Doan, Kun-Li Lin, Chung-Hua Shen.
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This paper examines the relation between ownership concentration and stock price informativeness around the world. Using a sample of banks from 59 countries between 2002 and 2019, we find robust evidence from a linear model supporting the entrenchment effect. However, the nonlinear model shows that the effect of control rights on the informativeness of stock prices forms a U-shaped curve. We also document that banks with controlling shareholders have more volatility in the information content of bank stock prices in a poor regulatory environment or developing countries.
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Ordeal by innocence in the big-data era: Intended data breach disclosure, unintended real activities manipulation
Jinyu Liu, Xiaoran Ni.
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We demonstrate an unintended consequence of mandatory disclosure of data breaches: the distortion of firms' real business activities. Employing the staggered adoption of data breach disclosure laws across various US states, we show that mandatory disclosure exacerbates CEOs' real earnings manipulation through production and operation management, which is more pronounced for firms of which the outbreak of data breaches is more of a concern and under stronger short-term market pressure. The law adoption is associated with higher stock price crash risk and fewer patenting activities. Our findings reveal side effects of certain customer-protection regulations in view of dampened information quality.
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Option-implied information and quality of patents
Wei-Hsien Li, Jiahang Liang, Zih-Ying Lin.
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This research explores how option-implied information predicts quality of patents. Using several measures of option-implied information, we find that only the option to stock volume (O/S) ratio positively and significantly predicts quality of patents around patent grant announcements. The findings are not entirely driven by information from the stock market and the probability of informed trading. Further investigations show that the predictability of O/S on patent quality is stronger when market sentiment is high, firms have a higher short-sale cost, and the quality of patents is relatively high.
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CEO marital status and corporate cash holdings
Ahmed Elnahas, Md. Noman Hossain, Siamak Javadi.
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We examine the effect of CEO marital status on corporate cash holdings. Consistent with the classical agency framework, we find that firms with single CEOs hold more cash compared to otherwise similar firms with married CEOs and that the excess cash held by single CEOs is significantly discounted by shareholders. Our findings survive a battery of tests to ease endogeneity and selection bias, confirming that results are not simply reflecting innate heterogeneity in preferences. Overall, our findings indicate that a variable outside the common firm- and macro-level determinants, CEO marital status, can significantly influence corporate policies.
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Do new CEOs really care about innovation?
Wasim Ahmad, Hisham Farag, Yaopeng Wang.
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This study asks whether new chief executive officers (CEOs) care about innovation postturnover. Using a large sample of Chinese listed firms between 2008 and 2019, our identification strategy relies on the exogenous variation in CEO turnovers. Our difference-in-difference estimates indicate that new CEOs improve R&D efficiency and generate more and higher quality patents. We further show that this positive effect is more pronounced when CEOs have longer career horizons and overseas experience. Overall, our findings indicate that CEO turnover represents an effective mechanism for fostering innovation and new CEOs indeed care about innovation. Our results could benefit several groups of stakeholders with respect to CEO selection process.
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Debt structure, economic stimulus and firm investment efficiency
Miao Han, Wei Huang, Yun Shen.
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We demonstrate that, in China, firm investment efficiency gains are associated with the use of short-term debt, especially its trade credit component. During the 2009–2010 economic stimulus plan, such effects were heightened and generally remained persistent in the 2011–2013 poststimulus period. Our findings support the view that the rollover pressure of short-maturity debt and the information advantage of supply chain financing are both effective mechanisms for enhancing firm governance in an environment more susceptible to financial market incompleteness. Consequently, the enormous credit boost during the stimulus plan was more efficiently invested when channelled through firms' supply chains.
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Insider trading in multinational firms
Dallin M. Alldredge, D. Brian Blank.
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We explore insider trading at multinational firms and find multinational firm insiders make larger trades followed by larger abnormal returns relative to those at domestic firms. Multinational firm insiders profitably purchase underpriced, value stocks with low past returns. They trade more profitably, not only because of market pricing opportunities, but also because of the advantageous timing of informed trades before earnings announcements. Insider trading profits are highest at multinational firms with foreign sales in regions culturally and linguistically distinct from the United States. These findings are consistent with opportunistic insiders strategically profiting from difficult to process foreign information.
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The influence of cultural tightness–looseness, religiosity, and the institutional environment on tax evasion behaviour: A cross-country study
Hakim Ben Othman, Khaled Hussainey, Nejia Moumen.
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We examine whether the strength of norms and tolerance for deviations play a role in explaining cross-country differences in tax evasion (TEVA). We also investigate the effects of religiosity, legal enforcement, voice and accountability, and the stability of political systems on TEVA across 48 countries over the period 1997–2018. Results show that the higher the voice and accountability and the lower the degree of cultural tightness–looseness, the rule of law, and political stability, the higher the degree of TEVA across nations. The results are important for policymakers to assess the likelihood of TEVA from a holistic perspective.
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Institutional shareholder services' proxy voting guidelines and ROE management
Souhei Ishida, Takuma Kochiyama.
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We examine the impact of the Institutional Shareholder Services (ISS) proxy voting guidelines on managers' opportunistic reporting behaviours. In February 2015, the ISS introduced a new advisory policy based on firms' return on equity (ROE) and started to issue negative recommendations for top executive election in firms whose past average and most recent ROE are lower than 5%. We find that managers are more likely to achieve the 5% ROE after implementing the policy, and they do so by discretionary activities. Our findings imply that accounting-based guidelines issued by a proxy voting advisor can generate managers' incentives for opportunistic reporting.
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Gender, workplace preferences and firm performance: Looking through the glass door
Jie Chen, Chenxing Jing, Kevin Keasey, Ivan Lim, Bin Xu.
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Using Glassdoor data we show that women are less satisfied at work than men and that female employees care more about work-life balance. Further analysis shows that this gender difference in workplace preference vanishes at the manager level, suggesting that women who care less about work-life balance self-select into career paths that ultimately lead to management positions. Exploring the performance implications, we show that family-friendly workplaces with smaller gender gaps in work-life balance satisfaction are associated with better firm performance. Overall, our study implies that policies that aim to narrow the gender satisfaction gap can be socially and economically desirable.
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Lending quality and contracts enforcement reforms
Vincenzo D'Apice, Franco Fiordelisi, Giovanni W. Puopolo
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We investigate the causal relationship between the efficiency of country's judicial system and the quality of bank lending, using the contracts enforcement reforms implemented in four European countries as a quasi-natural experiment. We find that strengthening contracts enforcement determines large, significant and persistent reductions in banks' nonperforming loans. Our results have important policy implications: they point at judicial efficiency as a critical determinant of the stability of the banking sector and its resilience to adverse shocks such as the recent Covid-19 pandemic.
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Corporate culture and IPOs
Douglas J. Cumming, Antonio Meles, Gabriele Sampagnaro, Vincenzo Verdoliva
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This study documents corporate culture at the time of initial public offering (IPO) and the relationship between corporate culture at the time of IPO and firm financial performance. Based on a sample of 1157 US firms that went public between 1996 and 2011 and performance information through 2016, the data provide strong evidence that regional culture, industry characteristics, and pre-IPO financing play key roles in explaining a firm's cultural orientation. Moreover, the data indicate that IPO firms with a highly competition- and creation-oriented culture experience higher profitability and less risk of financial distress than other IPO firms.
Keywords: corporate culture, IPOs, regional culture
JEL Classification: G23, G24, G32, G33, M14
Investor sentiment and the risk–return relation: A two-in-one approach
Darren Duxbury, Wenzhao Wang
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Traditional finance theory posits a positive risk–return relation, but empirical evidence is inconclusive. Retail investor sentiment has long been viewed as a distorting factor, while more recently institutional investor sentiment is thought to play a role. We examine the separate and joint impacts of retail and institutional investor sentiments on the risk-return relation. We find, at both market and firm levels, the risk-return relation is more likely to be distorted by the two investor-type sentiments jointly, rather than separately. We further find a cross-sectional pattern, with the risk-return relation being more sensitive to investor sentiment for stocks with specific characteristics.
Keywords: beta‐return relation, institutional investor sentiment,mean–variance relation, retail investor sentiment, risk‐returnrelation
JEL Classification: G12, G14, G41
Equity market and the transmission channels of monetary policy: Before and after the zero lower bound
Amadeu DaSilva, Mira Farka
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We examine the effectiveness of the interest rate channel and the credit channel of monetary policy before and after the zero lower bound (ZLB), using intraday stock returns. We construct a number of industry-specific and firm-specific indicators to capture the sensitivity of firms' demand to interest rates (interest rate channel) and firms' financial constraints (credit channel). We find that the transmission of monetary policy has shifted across both periods. Conventional monetary policy works through both the neoclassical interest rate channel and the credit channel, while unconventional policy is propagated primarily via the credit channel which became even more effective at the ZLB. Before the ZLB the transmission channels operate primarily through target rate shocks rather than forward guidance announcements, whereas both forward guidance and large scale asset purchases were equally important for the credit channel at the ZLB. We also find strong evidence that transmission channels are asymmetric depending on the state of the stock market (bull/bear, tighter/easier credit conditions, high/low volatility), and the type of policy surprises (positive/negative). Our findings are robust with respect to a number of model extensions and alternative specifications.
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Social networks and managerial rent-seeking: Evidence from executive trading profitability
Xiaohua Fang, Xi Rao, Wenjun Zhang
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This study examines whether board social networks are associated with executive trading profitability. Using a sample of US public firms with a history of executive trading from years 2000 to 2015, we find robust evidence that the profitability of executive trading is significantly lower in firms with higher levels of board social networks. The evidence is consistent with our view that board social networks effectively curb executives' private information advantage over outsiders, thus leading to a lower level of managerial rent-seeking. Our research has policy implications for regulators concerned about the role of corporate board in capital markets.
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Do boutique investment banks have the Midas touch? Evidence from M&As
George Alexandridis, Nikolaos Antypas, Vicky Y. Lee.
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We study whether the meteoric rise of boutique advisors in mergers and acquisitions (M&As) is justified by their buy-side performance. We find that acquiring firms represented by boutique advisors generate superior short- and long-run abnormal returns over those employing full-service advisors. This effect is mainly prominent in private deals, interindustry mergers, and deals involving inexperienced acquirers, where valuation uncertainty tends to be higher. Overall, our results reflect that acquirer shareholders benefit from boutique investment banks' high level of industry expertise and independent advice, supporting the rising demand for their financial advisory services.
Keywords:boutique advisors, mergers and acquisitions, value creation
JEL Classification: G24, G34
European Financial Management, VOL 30:2, March 2024
Sustainability, climate change and financial innovation: Future research directions
Douglas Cumming, Hisham Farag, Sofia Johan.
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Is bitcoin ESG-compliant? A sober look.
Juliane Proelss, Denis Schweizer, Stéphane Sévigny.
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Much of the media focus surrounding Bitcoin (BTC) has been on the ‘E’ (environmental) element of the ESG investing approach. Given the amount of electricity consumed by BTC mining, and the resulting large carbon emissions, BTC has faced substantial criticism of its overly negative environmental impact, which is critically reviewed in this article. This one-sided discussion, however, ignores the ‘S’ (social) and ‘G’ (governance) elements entirely. To remedy that, we explore BTC's positive impact on the ‘S’ (user satisfaction, data protection and privacy, human rights, and criminal activity), and ‘G’ (accounting integrity and transparency, compensation, and principles of good governance) components.
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Institutional investors and corporate environmental costs: The roles of investment horizon and investor origin.
Wolfgang Drobetz, Sadok El Ghoul, Zhengwei Fu, Omrane Guedhami.
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Using an international data set that quantifies corporate environmental costs, we analyze the influence of institutional investor ownership, particularly investment horizon and investor origin, on the monetized environmental impact generated by their investee firms. Institutional investor ownership is negatively related to corporate environmental costs. This effect is driven by long-term foreign institutional investors, especially investors from advanced economies. Corporate environmental costs are negatively correlated with firm valuation and positively correlated with the cost of equity. Since corporate environmental costs are not reflected in environmental, social and governance ratings, our results shed new light on the role of institutional investors in shaping corporate environmental impact.
Keywords: corporate environmental costs, cost of equity, foreign investors,institutional investors, investment horizon, sustainability
JEL Classification:G32
Green SPACs.
Nebojsa Dimic, John W. Goodell, Vanja Piljak, Milos Vulanovic.
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We examine the structural characteristics of special purpose acquisition companies (SPACs) focused on green causes. We explain their ecosystem, primary determinants of initial public offering (IPO) size, and speed of going public, and we calculate their returns around merger announcements and subsequent acquisition. Green SPAC size depends on CEO characteristics, choice of exchange and specialisation of respective stakeholders. The speed to IPO is related to the respective concentration of legal counsel. Green SPACs exhibit cumulative market-adjusted returns in the range 6%–12% around the merger announcement. Merger returns are positive at the merger date but quickly become negative (−1% to −9%) and decline further with time.
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Environmental tax incentives and corporate environmental behaviour: An unintended consequence from a natural experiment in China.
Sabri Boubaker, Feiyang Cheng, Jing Liao, Shuai Yue.
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Using the implementation of the Environmental Protection Tax (EPT) Law in China as a natural experiment, we explore the impact of environmental tax incentives on corporate environmental engagement. Evidence shows that, after the implementation of the EPT Law, there exists a significant improvement in the environmental performance of firms located in regions with increased EPT rates. However, our results reveal an unintended consequence that this effect is more salient for nonheavy-polluting companies rather than for heavy polluters that are more targeted by the EPT Law.
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Does ESG reputational risk affect the efficiency and speed of adjustment of corporate investment?.
Ioannis Chasiotis, Dimitrios Gounopoulos, Dimitrios Konstantios, Vasilios-Christos Naoum, Victoria Patsika.
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This study explores the relationship between environmental, social, and governance (ESG) reputational risk and investment efficiency. We provide evidence that ESG reputational risk relates to higher corporate suboptimal investment (underinvestment) and a lower speed of adjustment back to the optimal investment level. Our findings hold for parametric and nonparametric estimations of underinvestment and are robust to several techniques that address endogeneity and self-selection. Overall, our study highlights the important role of ESG reputational risk in determining corporate investment efficiency.
Keywords: agency costs, capital investment, ESG reputational risk, financialconstraints, overinvestment, speed of adjustment, underinvestment.
JEL Classification: G10, G32, G34
National culture and green bond issuance around the world.
Charilaos Mertzanis, Imen Tebourbi.
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We analyze the impact of Hofstede's culture dimensions on green bond issuance in 84 countries during 1991–2021, using novel International Monetary Fund data. We control for environmental, macroeconomic and institutional factors. Our results show that countries that score higher on individualism, masculinity and indulgence are associated with lower green bond issuance, whilst countries that score high on long-term orientation and uncertainty avoidance are associated with higher green bond issuance. Culture appears to play a role in green bond market development. The culture effect remains broadly robust after applying sensitivity and endogeneity tests, adding new controls and performing coefficient stability and dominance analysis.
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Extreme risk dependence between green bonds and financial markets.
Sitara Karim, Brian M. Lucey, Muhammad A. Naeem, Larisa Yarovaya.
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The current study investigates the extreme risk dependence between green bonds and financial markets by employing the dual approaches of time-varying optimal copula and extreme risk spillover analysis of dynamic conditional Value-at-Risk. We report significant symmetric (asymmetric) tail-dependent copulas in the upper (lower) tails characterizing independent regimes. Green bonds offer sufficient diversification, safe-haven, and hedging opportunities during stable and distressing times to financial markets. The extreme risk spillovers revealed that COVID-19 transformed the spillovers between green bonds and financial markets except Bitcoin. We proposed insightful implications for policymakers, governments, investors, and portfolio managers to relish the findings for their investment avenues.
Keywords: CoVaR, COVID‐19, financial markets, green bonds, TVOC
JEL Classification: C18, G11, G18
ESG disclosure, CEO power and incentives and corporate risk-taking.
Faek Menla Ali, Yuanyuan Wu, Xiaoxiang Zhang.
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This paper investigates the impact of environmental, social and governance (ESG) disclosure on corporate risk-taking and how this impact is further affected by chief executive officer (CEO) power and incentives within US companies. We find that ESG disclosure decreases corporate risk-taking based on both accounting-based and market-based returns. Further, we find that ESG disclosure is more effective in mitigating market-based risk-taking than accounting-based risk-taking in a firm with a powerful CEO. In contrast, CEO's ESG-incentivized engagement bonuses weaken ESG disclosure impacts in reducing both types of risk-taking. Our analysis helps understanding of different trade-offs of ESG disclosure in aligning all stakeholders' benefits under different managerial-related factors.
Keywords: CEO, corporate policy, ESG disclosure, risk‐taking
JEL Classification: G10, G30, G32
The performance of socially responsible investments: A meta-analysis.
Lars Hornuf, Gül Yüksel.
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In this article, we use a meta-analysis to examine the performance of socially responsible investing (SRI). We find that, on average, SRI neither outperforms nor underperforms the market portfolio. However, in line with modern portfolio theory, we find that global SRI portfolios outperform regional subportfolios. Moreover, high-quality publications, publications in finance journals and authors who publish more frequently on SRI are all less likely to report SRI outperformance. In particular, we find that including more factors in a capital market model reduces the likelihood that a study will find SRI outperformance.
Keywords: environmental social governance, ESG, meta‐analysis, sociallyresponsible investment, SRI
JEL Classification: G11, G12, M14
European Financial Management, VOL 30:3, June 2024
How valuable is FinTech adoption for traditional banks?
Wenlong Bian, Shihui Wang, Xuanli Xie.
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This study examines the effect of FinTech adoption on traditional banks. We employ machine learning and textual analysis to count the number of mentions of FinTech-related terms in annual reports, and collect the number of FinTech-related patent applications. Based on a sample of 181 Chinese commercial banks, the results indicate that FinTech adoption has a positive and significant effect on bank performance. The ‘FinTech adoption effect’ appear to be heterogeneous among technology categories and is more pronounced in banks with more tech managers. Last, we examine the impacts of FinTech adoption on bank risk, business transformation and banks' market share.
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Costs and benefits of trading with stock dealers: The case of systematic internalizers.
Fatemeh Aramian, Lars L. Nordén.
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Systematic internalizers are single-dealer platforms run by investment firms that trade out of their own inventories by internalizing the trades off exchanges. We analyze the determinants of dealers' market shares and trading costs. We find that dealer trades have lower price impacts than exchange trades, consistent with uninformed traders seeking out dealers. Due to their ability to avoid trading with informed investors, dealers often undercut the exchange bid–ask spread when the spread is wide and the tick size is not binding. Dealers can therefore offer lower trading costs and gain a higher market share relative to exchanges.
Keywords: dealers, equity markets, exchanges, systematic internalizers,trading costs.
JEL Classification:
G10, G14, G15.
On the (almost) stochastic dominance of cryptocurrency factor portfolios and implications for cryptocurrency asset pricing.
Weihao Han, David Newton, Emmanouil Platanakis, Charles Sutcliffe, Xiaoxia Ye.
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Cryptocurrency returns are highly nonnormal, casting doubt on the standard performance metrics. We apply almost stochastic dominance, which does not require any assumption about the return distribution or degree of risk aversion. From 29 long–short cryptocurrency factor portfolios, we find eight that dominate our four benchmarks. Their returns cannot be fully explained by the three-factor coin model of Liu et al. So we develop a new three-factor model where momentum is replaced by a mispricing factor based on size and risk-adjusted momentum, which significantly improves pricing performance.
Keywords: almost stochastic dominance, asset pricing, cryptocurrencies,mispricing.
JEL Classification:
G11, G12.
Tracing environmental sustainability footprints in cross-border M&A activity.
Muhammad F. Ahmad, Saqib Aziz, Yannick Michiels, Duc Khuong Nguyen.
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This study documents the first large-scale empirical evidence on the effects of differences in countries' environmental sustainability (ES) on cross-border merger and acquisition (M&A) activity. Using 34,088 cross-border mergers across 44 countries, we find that greater ES differences between acquirer and target countries stimulate the intensity of cross-border mergers. The acquirer firms experience higher cumulative abnormal returns around merger announcements and pay higher merger premiums. Consistent with the pollution haven hypothesis, results on value effect are more pronounced for M&A deals in highly polluting industries such as petroleum, transportation and mining. The results are robust to a battery of robustness tests.
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Catering and cash savings.
Hsuan-Chi Chen, Robin K. Chou, Chien-Lin Lu.
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We examine the catering of managers to investors' preference for cash holdings. We find that cash is positively related to the cash-holding premium as represented by the difference in the market-to-book ratios between cash-rich and noncash-rich firms. This positive effect can be attributed to different sources such as internal and external financing, and firms may switch their sources for holding cash when catering to investors' preference. Issuing firms benefit from catering to cash holdings by obtaining higher valuations from the stock market. The catering theory helps explain cash savings especially for firms without a good timing window or financing need.
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Does innovation drive mergers and acquisitions in the financial sector?
Tram H. Dang.
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Does innovation drive mergers and acquisitions in the financial sector? This issue is challenging because classical measures of innovation are unavailable in the financial sector. Thus, we introduce an innovation measure that can be used for financial firms. Considering US financial deals, we highlight the impact of a financial firm's innovative activities on the likelihood of becoming an acquirer or a target. We detect a ‘like buys like’ effect, implying that financial mergers and acquisitions are more likely when firms are at a similar level of innovation. We further show that this effect is associated with greater synergistic value.
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Build, buy or partner? The relative performance of an acquisitive strategy.
Olubunmi Faleye.
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We conceptualize mergers as one of several strategies for creating value and study merger performance by evaluating the performance of firms employing an acquisitive strategy. Relative to other firms, acquisitive firms are valued lower, exhibit lower employee and total factor productivity, and innovate less. These effects are concentrated among firms whose workforce is vulnerable to acquisition-related personnel disruptions and/or those that are more dependent on employee relationship-specific investments. We therefore propose that an acquisitive strategy diminishes firm value and performance by fostering disruptive conditions that undermine employee effectiveness and weaken their incentives.
Keywords: corporate strategies, employee incentives, firm value, mergersand acquisitions.
JEL Classification:
G34.
Survival and value: The conglomerate case.
Michela Altieri, Giovanna Nicodano.
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This paper investigates the relationship between default probability and value when there is a selection bias due to missing controls for firm heterogeneous likelihood to survive in the sample. Our model delivers the following implications for the conglomerate case: (a) the sample conglomerate value increases in their default probability, (b) the sample conglomerate discount falls together with their excess default probability with respect to focused companies, (c) both effects disappear when the analyst controls for survival probability. The data support the presence of a selection bias distorting downwards the relative value of sample firms with higher survival probability.
Keywords: coinsurance, conglomerate, default probability, firm value,survivorship bias.
JEL Classification:
G34, G14.
Multiple large shareholders, blockholder trading and stock price crash risk.
Jiao Ji, Hanwen Sun, Haofeng Xu.
Abstract:
We show that in a setting with a strong concern for controlling shareholder entrenchment, firms with multiple large shareholders (MLS) are more likely to experience stock price crashes. As a result, when anticipating future revelations of bad news concerning corporate misconduct on information disclosure, large shareholders can exploit their information advantage and initiate their sales ex ante as far as eight quarters ahead. The positive association between MLS and crashes is more pronounced in the presence of noncontrolling shareholders' sales. Also, the positive predictive power of MLS on crash risk is more potent in firms with weak internal or external governance.
Keywords: blockholder trading, controlling shareholder entrenchment,multiple large shareholders, stock price crash risk.
JEL Classification:
G32, G34, G14.
Determinants and effects of trade credit financing: Evidence from the maritime shipping industry.
Elisavet Mantzari, Anna Merika, Christos Sigalas.
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This paper investigates the factors and effects of trade credit, as an alternative source of capital, by employing a generalized method of moments instrumenting for endogeneity based on a panel data set of public maritime shipping companies and compatible companies in other industries. Our study shows that the magnitude of trade credit is affected by profitability, financial leverage, company size, cost of capital, financial distress, institutional ownership, corporate power, corporate liquidity, asset intensity, and corporate growth. It also suggests that trade credit affects financial performance, equity value, and risk. These empirical findings yield important implications for principal financial officers, as discussed herein.
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Coordinated monitoring and mergers and acquisitions.
Ettore Croci, Mieszko Mazur, Galla Salganik-Shoshan.
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This paper shows that coordinated monitoring by institutional investors affects how firms behave in the M&A market. We employ the spatial dimension of geographic links between major institutions as a proxy for interaction and information exchange—a process that determines the effectiveness of investor monitoring over firm management. Using data over the last 30 years, we show that the returns to acquiring shareholders are significantly higher, and M&A activity is significantly more intense when institutions coordinate better their monitoring efforts. Our results are robust to series of tests to gauge their sensitivity to different model specifications and estimation procedures.
Keywords: institutional investor, M&A, monitoring.
JEL Classification:
G34 Mergers • Acquisitions • Restructuring • CorporateGovernance, G3 Corporate Finance and Governance,G. Financial Economics.
Can ESG activities stabilise IPO prices? Evidence from the Hong Kong stock market.
Yaopeng Wang, Morong Xu.
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This study explores the relationship between economic, social, and governance (ESG) activities and initial public offering (IPO) price stabilisation actions using IPOs listed on the Hong Kong stock exchange between 2004 and 2021 as samples. We find that IPO issuers that actively conduct ESG activities have higher ESG scores, which enhances price stabilisation. Furthermore, ex-ante volatility serves as a potential channel through which ESG activities affect price stabilisation. Providing ethical and economic implications for companies, policymakers, and investors, our findings suggest that ESG activities are vital drivers of price stabilisation.
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Cost-effectiveness, fairness and adverse selection in mutual aid.
Ze Chen, Runhuan Feng, Li Wei, Jiaqi Zhao.
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Online mutual aid (MA) is a novel form of ex-post risk sharing empowered by InsurTech to provide critical illness coverage without involving an insurer. In this paper, we first provide a rigorous examination of the underpinning theory and analyze MA model's cost-effectiveness. In addition, we theoretically investigate the condition for MA's actuarial fairness among all participants. Our numerical illustration also shows that current MA plans lack the consideration of actuarial fairness as they differentiate members only by gender and age group of large bandwidths. Last, our empirical analysis confirms the existence of adverse selection due to the lack of actuarial fairness.
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CFO pay convexity, risk taking and corporate hedging.
Massimiliano Barbi, Valentina Febo, Irene Massimiliani.
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We study how a CFO's risk-taking incentives affect corporate hedging by utilising hand-collected data from 2009 to 2019 on corporate hedging and managerial compensation for a sample of US oil and gas firms. The relative convexity of CFO equity compensation negatively affects the likelihood and extent of hedging. When the CFO and CEO have diverging risk-taking incentives, the relative convexity of the CFO's equity payoff prevails over that of the CEO. This evidence underscores the primary role of the CFO in steering a firm's hedging strategy.
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News sentiment and investment efficiency: Evidence from China.
Yuan-Teng Hsu, Min Hua, Heng Liu, Qingren Wang.
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This study investigates the impact of media sentiment on firms' investment efficiency in the Chinese market during 2007–2017. We find that increased media sentiment can lead to overinvestment and thus distort investment efficiency, but it has no significant effect on underinvestment. Further, mediation analysis shows that financing constraints mediates the media sentiment effects on overinvestment. To mitigate potential endogenous problems, we employ instrumental variable approach and propensity score matching method. The main findings hold after a battery of robustness tests. Further tests show that corporate governance factors can ameliorate the adverse effect of news sentiment on corporate investment efficiency.
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Financial uncertainty and stock market volatility.
Ying Jiang, Xiaoquan Liu, Zhenyu Lu.
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This study explores the relation between financial uncertainty and volatility in China. The time variation in financial uncertainty shocks is theoretically closely related to stock return dynamics. Empirically, the financial uncertainty measure is based on a large set of economic and financial variables and captures its unpredictable component. Over the sample period from 2000 to 2021, we find that financial uncertainty positively impacts the trend component of market volatility and that it improves volatility predictions in both statistical and economic terms. Our study sheds new light on the sources driving volatility and the dynamic relation between uncertainty and volatility components.
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Born after the Volcker Rule: Regulatory change, managerial remuneration and hedge fund performance.
Michael Bowe, Olga Kolokolova, Lijie Yu.
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Substantial remunerative benefits accrue to managers of new hedge funds launched after the implementation of the Volcker Rule if their previous employer is a large US bank. After the rule, ex-bankers' funds charge higher management fees and receive more flows as compared with other new hedge funds established during the same period. This phenomenon is related to changes in investor perception of the distribution of skills of new fund managers rather than to the actual differences in skills. Ex-bankers' funds are indistinguishable from other funds in terms of performance, risk, and liquidation probability, both before and after the Volcker Rule.
Keywords: ex‐US LCFI bankers, fee structure, fund flows, hedge funds,Volcker Rule.
JEL Classification:
G23, G28.
Engaged ETFs and firm performance.
Izidin El Kalak, Robert Hudson, Onur K. Tosun.
Abstract:
Exchange Traded Funds (ETFs) have often tracked indices and charged low fees so their incentives to improve firm performance are questionable although little empirical work has investigated this issue. Theoretically, however, we expect firms to perform better when held by more engaged ETFs. We develop a new measure of engagement using a weighted-average concentration measure which captures the combined effect of the concentration of the portfolios of the ETFs investing in a firm and the ownership of the firm by those ETFs. Using ETFs' investment in US-listed firms for the period 2000–2019, we confirm our expectations that more engaged ETFs improve firm performance.
Keywords: corporate governance, Exchange Traded Funds (ETFs), firmperformance, monitoring, portfolio concentration.
JEL Classification:
C33, C36, G23, G32, G34, L25.
European Financial Management, VOL 30:4, September 2024
Research unbundling and market liquidity:Evidence from MiFID II
Anqi Fu, Tim Jenkinson, David Newton, Ru Xie1.
Abstract:
The second Markets in Financial Instruments Directive (MiFID II) mandated the unbundling of payments for research and trading. This research explores whether the impact of MiFID II differs between large and small firms in terms of analyst coverage and stock liquidity.Focusing on the UK stock markets we find a significant drop in analyst coverage on the Main Market, which leads to a deterioration in market liquidity. In contrast, the requirement of AIM firms to retain a Nominated Adviser, who often provides research coverage, has mitigated the impact of MiFID II.
Keywords: analyst coverage, MiFID II, stock liquidity, unbundling
JEL Classification:
D53, D82, G18.
Geographic income diversification of large European banks: Better or worse?
Caner Gerek, Ahmet M. Tuncez.
Abstract:
This study examines the impact of geographic income diversification of large European banks on performance and risk-taking by using unique data. By dividing the total operating income into three regions as the home country, the rest of Europe and the rest of the world, we find evidence that geographic income diversification reduces bank performance and increases risk-taking. Particularly, shifting operations from home countries to other European countries or the rest of the world reduces bank performance and enhances risk-taking unless the bank is highly concentrated in these areas. We also identify contributing channels, including the “follow-the-customer” hypothesis, new subsidiaries and board diversity, to explain the adverse effect.
Keywords: bank performance, bank risk‐taking, board diversity, Europeanbanking, geographic income diversification.
JEL Classification:
G21, G34.
Arbitrage asymmetry, mispricing and the illiquidity premium.
Feifei Wang, Lingling Zheng.
Abstract:
Illiquid assets require a return premium; illiquidity is also a limit-to-arbitrage. We find that Amihud's illiquidity premium is significantly higher among underpriced stocks than among overpriced stocks. Excluding the most mispriced stocks leads to a higher and more reliably estimated illiquidity premium. Amihud's illiquidity measure is positively correlated with overpricing, consistent with arbitrage asymmetry, while inconsistent with Lou and Shu's contention that the return premium associated with the Amihud measure reflects mispricing rather than compensation for illiquidity. Our results demonstrate that it is important to account for their role as limits-to-arbitrage when evaluating the pricing of illiquidity measures.
Keywords:
JEL Classification:
G10, G11, G14
Non-CEO executives intraorganizational competition incentives and corporate labour investment efficiency
Zhe Li, Bo Wang.
Abstract:
This study documents the first large-scale empirical evidence on the effects of differences in countries' environmental sustainability (ES) on cross-border merger and acquisition (M&A) activity. Using 34,088 cross-border mergers across 44 countries, we find that greater ES differences between acquirer and target countries stimulate the intensity of cross-border mergers. The acquirer firms experience higher cumulative abnormal returns around merger announcements and pay higher merger premiums. Consistent with the pollution haven hypothesis, results on value effect are more pronounced for M&A deals in highly polluting industries such as petroleum, transportation and mining. The results are robust to a battery of robustness tests.
Keywords:
JEL Classification:
F21, G34, O13
Local government official competition and financial analyst forecasts
Like Jiang, Lei Liu, Yetaotao Qiu , Yu Wang, Shafu Zhang.
Abstract:
We examine how financial analyst forecasts could be influenced by local political forces. Using Chinese data, we find that financial analysts from brokerage houses controlled by provincial governments issue more optimistic forecasts for state-owned enterprises (SOEs) headquartered in the home province (i.e., home SOEs) than for nonhome SOEs, and this effect is more pronounced for nonhome SOEs located in competing provinces. Our results remain unchanged in a battery of robustness checks. Further, local officials are more likely to enjoy political career advancement when they pressure analysts to issue optimistic forecasts for home SOEs relative to nonhome SOEs from competing provinces.
Keywords:
JEL Classification:
G32, G38.
Funding constraints, financial crisis, and price discovery between the futures and spot markets
Yi-Wen Chen, Junmao Chiu , Robin K. Chou, Chu-Bin Lin.
Abstract:
We investigate the effect of funding constraints and the financial crisis on the pricing dynamics between the spot and futures markets. Tighter funding constraints and the presence of a financial crisis deter informed investors from utilizing their informational advantage in the futures market, reducing the leading role and information shares of futures prices. Funding constraints negatively affect the probability of informed trading and large trading in the futures markets. Our findings are in line with the recent theoretical perspective that indicates both factors significantly affect informed trading, the cross-market process of price discovery, and financial stability.
Keywords:
JEL Classification:
G01, G12, G14.
Aggregate volatility risk and momentum returns
Efdal Ulas Misirli.
Abstract:
Momentum stocks are exposed to aggregate volatility risk. This paper estimates an exponential generalized autoregressive conditional heteroskedastic model of market volatility to introduce a new volatility risk factor. Winners have negative loadings on this factor, whereas losers have positive loadings. Because volatility risk carries a negative price of risk, the new factor explains 73% of momentum profits. The paper rationalizes the volatility risks of momentum portfolios using growth option arguments and explains why momentum profits are short-lived, depend on market states, and concentrate among firms with high idiosyncratic volatility. Results are robust to controlling for other risk factors and using alternative estimation procedures.
Keywords:
JEL Classification:
G12, G14.
Buy the dip?
Stefano Bonini, Thomas Shohfi, Majeed Simaan.
Abstract:
We study the fundamental properties of the “Buy the dip” (BTD) investment heuristic. Looking into cash holdings versus a stock market exchange-traded fund, we find that BTD does not necessarily maximize investors' real terminal wealth and is sensitive to market conditions at the beginning year of investment. While under certain conditions, BTD may improve risk-adjusted performance over a passive investment policy or a classical dollar-cost averaging approach, its optimality is subject to estimation risk. Given the vast popularity of BTD, our results have important implications for asset managers and retail investors alike.
Keywords:
JEL Classification:
G10, G11, G17, G41.
Firm ESG reputation risk and debt choice
David P. Newton, Steven Ongena, Ru Xie, Binru Zhao.
Abstract:
Using a novel sample covering 3783 US public firms from 2007 to 2020, we examine how negative media coverage of firm-level environmental, social, and governance (ESG) practices affects a firm's debt choice. We find that firms with higher ESG reputation risk rely more on public bond than bank loan. The social and governance components, in particular, matter. Moreover, firms that receive more negative news coverage display a higher propensity to issue new bonds as opposed to securing new bank debt. Overall, our study presents empirical evidence on the relation between firm ESG reputation risk and debt financing.
Keywords:capital structure, debt choices, debt structure, ESG reputationrisk, information asymmetry.
JEL Classification:
G20, G21, G30, G32.
Is it a boy or a girl? Newborn gender and household portfolio decisions
Francesca Arnaboldi, Elena Beccalli, Francesca Gioia.
Abstract:
This paper analyzes the role of newborn gender in household investment decisions. Parenting a new baby is associated with a reduction of the share of financial wealth held as cash and an increase in risky investments. The reallocation is however gender-heterogeneous: the increase in the share of both total and financial wealth allocated to risky assets when parenting girls is reduced for households parenting boys. The effect is driven by the first child. Parents of newborn girls hold riskier portfolios because they make financial decisions influenced by their expectations on the autonomy and financial independence of newborns in adulthood.
Keywords:gender, household savings, investment choice, investmentdecision, newborns.
JEL Classification:
G11, D14.
Firm-level exposure to trade policy shocks: A multidimensional measurement approach
Giovanni Bruno, Felix Goltz, Ben Luyten
Abstract:
We propose a firm-level measure of exposure to trade policy shifts that combines characteristics (tradability of goods, share of output exported and corporate risk disclosures) with information from stock returns. We show that the measure reliably captures out-of-sample differences in price responses and sentiment related to trade tensions, both in US and international data. Differences across firms are economically important with return effects of 140 bp around tariff announcements. We argue that such a multidimensional measure is a useful tool for future research on trade policy risk.
Keywords:equities, exposure measurement, international trade, riskexposures, trade policy.
JEL Classification:
F13, G10.
I will trade, just not today: Individual investor trading activity around birthdays
Emanuele Bajo, Otto Randl, Giorgia Simion
Abstract:
In this paper we provide new evidence of investor inattention by showing that personal occurrences such as birthdays are able to drive attention away from the stock market. We document that individual investors significantly reduce their trading activity in the 3 days around their birthday. The reduction in the propensity to trade is larger for more active traders, in the event of a decade birthday and when this celebrative event falls on a Friday. Results are robust to analyses focusing only on days when investor attention should be at its peak, as expressed by excess news coverage and trading volumes.
Keywords:investor attention, personal occurrences, trading activity.
JEL Classification:
G30, G32.
The joint determination of the payment method and the bid premium in M&As: What is the role of firm opacity?
Pierpaolo Battigalli, Carlo Chiarella, Stefano Gatti, Tommaso Orlando
Abstract:
This paper investigates how private information affects the joint determination of the payment method and the bid premium in M&As. The focus is on the uncertainty of the stand-alone valuations of the firms involved in the transaction induced by their opacity. First, we model M&A negotiations as a signalling game with two-sided private information and derive correlations between firm opacity and bid characteristics from equilibrium analysis. Then, we analyze a sample of U.S. deals, using an index based on market measures of adverse selection to quantify firm opacity. We find that the likelihood of stock offers and the bid premium increase with the target's opacity, while more opaque bidders are associated with fewer stock offers and smaller bid premiums.
Keywords:asymmetric information, bid premium, mergers andacquisitions, method of payment, signalling games.
JEL Classification:
G34, G14.
When does CSR payoff?
John A. Doukas, Rongyao Zhang.
Abstract:
We investigate whether firms engaging in corporate social responsibility (CSR) can preserve firm value during normal and unprecedented exogenous adverse events. Our evidence shows, in regular times, a negative relation between CSR engagement and firm value, but under adverse economic conditions, CSR protects firm value by decreasing firm risks. We also find that firms with high managerial attributes engage in greater CSR activities that benefit shareholders in both normal and aberrant financial times. Despite the controversy surrounding CSR, our evidence points out that CSR can be viewed as a set of intangible assets that can improve firm value across good and bad economic states when firms are run by high-attribute managers.
Keywords:abnormal economic times, corporate social responsibility, firmvalue.
JEL Classification:
G14, G32, G34, M12, M14.
Retail ETF investing
David Gempesaw, Joseph J. Henry, Han Xiao.
Abstract:
Using marketable order flow data, we analyze key characteristics of aggregate retail exchange-traded fund (ETF) investing from 2010 to 2021, including allocations, holding period and investment performance. Retail traders allocate 12% more dollar volume to leveraged and inverse ETFs versus nonretail traders. Retail ETF trades distinctly increase with prior ETF returns, in contrast to contrarian stock trading. Estimated ETF holding periods are longer for retail investors versus nonretail. Finally, retail and nonretail ETF trades perform similarly over hypothetical holding periods up to one quarter. Overall, we provide policy-relevant insights into retail investing behaviours, which have been the subject of recent concern.
Keywords:ETF, exchange‐traded fund, net dollar volume, proportionaltrading model, retail investors.
JEL Classification:
G11, G12, G23.
Picking a thorny rose: Optimal trading with spread-based return predictability
Linjun Feng, Ya Li, Jing Xu.
Abstract:
Small stocks' time-varying spreads predict future return gap between small and large stocks. To optimally exploit such predictability, the investor captures current risk premium by purchasing at large spreads with substantially reduced turnover; uses an aim-in-front-of-the-target approach to trade-off between future risk premium and current transaction costs; and meets hedging demand at low costs. Strong interaction between transaction costs and return predictability leads to large losses from myopic trading. Greater variability of the spread is advantageous for investors who trade optimally but detrimental for investors who trade myopically. The spread-based return predictability significantly increases the investment value of small stocks.
Keywords:
JEL Classification:
Managing liquidity along the supply chain: Supplier-base concentration and corporate cash policy
Lulu Di, Wei Jiang, Ju Mao, Yeqin Zeng.
Abstract:
We find that customer firms with more concentrated supplier bases tend to hold higher levels of cash reserves. The positive relation between supplier-base concentration and cash holdings is more pronounced for firms with nonstate ownership, higher market competition, worse inventory efficiency, more relationship-specific investment, central positions in the production networks, and headquarters located in regions with lower levels of financial development. Furthermore, we show that debt issuance enhances firms' cash holdings when they have concentrated suppliers, and supplier-base concentration increases firms' cash spending on R&D investment. Our study highlights the importance of supplier structure in shaping corporate cash policy.
Keywords:
JEL Classification:
Option compensation, dynamic investment and capital structure
Liu Gan, Xin Xia, Hai Zhang.
Abstract:
We develop a dynamic trade-off model of managerial discretion to investigate how stock option compensation relates to managers' intertwined capital structure and dynamic investment decisions. Our model predicts that option grants provide managers with incentives to undertake both current and future investments, in sharp contrast to the effects of stock compensation. With an increase in option compensation, managers in low- (high-) risk firms tend to increase (decrease) firm leverage, while the opposite is true when stock pay increases. This result offers an innovative prospective on the empirical tests of the relationship between option compensation and capital structure.
Keywords:
JEL Classification:
European Financial Management, VOL 30:5, November 2024
The impact of credit reforms on bank loans and firm leverage around the world
Halit Gonenc, Floris Jansen, Mario Hernandez Tinoco, Milos Vulanovic.
Abstract:
This study examines how credit reforms impact commercial bank loans and nonfinancial firms' debt. Using two international samples for commercial banks and nonfinancial firms from 2004 to 2019, we find that global information-sharing reforms encourage banks to increase corporate loans, thus improving firm debt financing, particularly in countries with weak creditor rights. Legal rights reforms significantly boost corporate bank loans in emerging countries and enhance firms' debt financing in developed countries. Our findings suggest credit reforms positively impact firms' financing; however, their effects on debt financing supply and demand vary by economic development level and the strength of creditor rights.
Keywords: corporate governance reforms, creditor rights, emergingcountries, getting credit, legal rights, leverage, sharing creditinformation.
JEL Classification:
G15, G21, G30, G32.
The influence of initial sponsor backing on post-IPO acquisition activity
Mattheo Kaufmann, Sascha Kolaric, Lennart Walter.
Abstract:
We investigate the impact of financial sponsor backing [venture capital (VC) or private equity (PE)] on post-initial public offerings (IPO) acquisition strategies of newly public companies. We find that PE-backed newly public firms undertake nearly three times more acquisitions than VC-backed ones and almost twice as many as non-backed firms, indicating that acquisitions are a primary growth strategy for PEs. This result remains robust after addressing potential endogeneity concerns. Additionally, PE syndicate-backed firms engage in transformative acquisitions, proxied by size, while VC-backed firms prioritise organic growth through R&D spending. Moreover, PE-backed acquirers experience significant positive long-run post-IPO stock returns, unlike VC-backed acquirers.
Keywords:initial public offerings (IPOs), mergers and acquisitions (M&As),private equity (PE), venture capital (VC)
JEL Classification:
G14, G24, G32, G34.
Spillover in higher-order moments across carbon and energy markets: A portfolio view
Rizwan Ahmed, Elie Bouri, Seyedmehdi Hosseini, Syed J. Hussain Shahzad.
Abstract:
Motivated by the occurrence of extreme events and nonnormality of returns, we examine the spillovers among the conditional volatility, skewness and (excess) kurtosis of European Union allowances (EUA), Brent oil, natural gas, coal, electricity and clean energy markets. The jointly estimated spillover index in the system of the three higher-order moments is notably high, exceeding the spillover index estimated for each individual moment separately. This suggests that spillovers across moments in the carbon-energy system are important for the sake of completeness of the spillover analysis, and should not be ignored. The performance of the portfolio improves after considering higher-order moments.
Keywords:carbon and energy assets, COVID‐19 outbreak, EU ETS,spillovers of higher moments, war in Ukraine.
JEL Classification:
C10, O13, Q40.
Bond return predictability: Macro factors and machine learning methods
Ying Jiang, Xiaoquan Liu, Yirong Liu, Fumin Zhu.
Abstract:
We investigate the impact of macroeconomic variables on bond risk premia prediction via machine learning techniques. On the basis of Chinese treasury bonds from March 2006 to December 2022, we show that adding macroeconomic factors improves bond return forecasts and generates higher economic benefits to investors. This is achieved when the nonlinear relationship between macroeconomic variables and bond returns is modelled via machine learning methods. Furthermore, the importance of macroeconomic determinants changes along the yield curve. Our study sheds new light on the information contained in macroeconomic variables for treasury bond valuation and highlights the importance of utilizing appropriate machine learning methods.
Keywords:
JEL Classification:
G12, G17
Can quantitative investment improve market efficiency?—Evidence from China
Ruiqing Hu, Wang Xiang, Weinan Zheng, Keyu Zhou.
Abstract:
We investigate the impact of quantitative investment on market efficiency in China. We provide an illustrative model to show that quantitative investment enhances market efficiency. Empirically, we conduct both time-series and cross-sectional analysis. Regarding the time series dimension, we construct QuantDegree to measure the level of quantitative investment. We find that the performance of most anomalies decreases as QuantDegree increases. In the cross-sectional dimension, we sort stocks into portfolios based on quant fund holdings and traditional anomalies. We find the anomaly return is lower within the groups with higher quant fund holdings, a result further confirmed by Fama–MacBeth regressions.
Keywords:
JEL Classification:
G11, G12, G15, G23.
Mortgage rates and credit risk: Evidence from mortgage pools
Gaetano Antinolfi, Celso Brunetti, Jay Im.
Abstract:
In the 1990s, securitised subprime loans supported the growth of mortgage lending. We study the evolution of initial mortgage rates as a function of loan and borrower characteristics during 1992–2015. We compare the evolution of initial rates on securitised subprime mortgages with rates of prime privately securitised mortgages, mortgages securitised by government-sponsored enterprises, and nonsecuritised mortgages. Starting in 2003 the risk premium on subprime loans decreases until it disappears at the onset of the Global Financial Crisis. We find that loading factors on subprime rates are cointegrated with delinquencies and house price movements, providing evidence of the important role of the subprime market.
Keywords:
JEL Classification:
G12, G21, C21, C22.
A success dressed as a failure? Evidence from post-IPO withdrawal outcomes in Europe
Pia Helbing, Brian M. Lucey.
Abstract:
What happens to companies that file for an initial public offering (IPO), but withdraw and do not list? How long does the post-IPO outcome take? These questions are investigated by analysing market, firm and offer characteristics of 334 withdrawn IPOs in Europe between 2001 and 2015. The majority of withdrawn IPOs is engaged in M&A, only few file for a second time IPO. These post-IPO withdrawal outcomes happen shortly after the IPO filing. Private equity and venture capital-backed firms are more frequently engaging in M&A or trading. The evidence suggests that the IPO may be used as a marketing mechanism, being one of several alternatives of exit.
Keywords:Europe, IPO, M&A, probit, survival, withdrawal.
JEL Classification:
G14, G24, G32.
Spillovers of PE investments
Huynh S. Truong, Uwe Walz.
Abstract:
We investigate a potential primary effect of leveraged buyouts (LBOs) by private equity (PE) on peers in the same industry using data on US public-to-private LBO transactions between 1985 and 2016. We use a network-based instrumental variable approach to account for potential endogeneity concerns. Our findings indicate that the LBOs by PEs matter for peer firms' performance and corporate strategy relative to nonpeer firms. Our study supports a learning factor hypothesis, but we find no evidence to support the conjecture that peers lose due to the increased competitiveness of the LBO target.
Keywords:
JEL Classification:
D45, L43, O33
So different and yet so alike: A comparative analysis of firms' connectedness in the stock and corporate bond markets
Renaud Beaupain, Stephanie Heck.
Abstract:
We study firms' return and volatility connectedness in the stock and corporate bond markets. Our approach to capturing firm-specific return and volatility time series in the corporate bond market is based on a repeat-sales index at the firm level. Measuring the pairwise connectedness of firms, we show that the two markets share similar dynamics in the connectedness of their firms. Firms tend to cluster within their own sectors and ties between firms in the corporate bond market are proportionally weaker. Financial firms play a critical role in the propagation of shocks, but this role differs markedly in the two markets.
Keywords:connectedness, corporate bond market, financial networks,repeat‐sales methods, stock market
JEL Classification:
E4, G1, L14
Mandatory ESG disclosure, information asymmetry, and litigation risk: Evidence from initial public offerings
Thomas J. Boulton
Abstract:
I use the staggered adoption of mandatory environmental, social, and governance (ESG) disclosure regulations around the world to explore the impact of ESG disclosure on initial public offering (IPO) underpricing. I find robust evidence that underpricing is substantially lower in countries with ESG disclosure mandates. High-quality disclosure environments moderate and tougher liability standards amplify the negative association between ESG disclosure mandates and underpricing, which suggests that ESG disclosure mandates reduce information asymmetry and litigation risk. The impact of ESG disclosure mandates on underpricing is stronger in countries with more pronounced environmental, social, and governance concerns.
Keywords:disclosure, ESG, information asymmetry, IPO underpricing,litigation risk.
JEL Classification:
G12, G15, G18, M14
Do customers matter in currency hedging policies? Evidence from product warranties
Pinghsun Huang, Yan Zhang.
Abstract:
Using a data set of US manufacturing firms with sales from foreign operations, we find that firms' currency hedging activities vary with their warranty obligations. The positive link of warranty obligations to currency hedging policies prevails in financially more constrained firms, companies facing fiercer product market competition and corporations producing more unique products. Our results suggest that firms are likely to incorporate their contractual commitments to customers into their currency hedging activities, especially when their failures to honor these commitments are more likely or costly.
Keywords:
JEL Classification:
G31, G32, G34.
Benefit corporation certification and financial performance: Capital structure matters
Özlem Asma-Arikan, Onur Kemal Tosun.
Abstract:
We are examining the impact of benefit corporation certification on the profitability of UK companies, taking into account their capital structure. We contribute to the literature that scrutinizes the financial ramifications of Benefit Corporation Certification. Analyzing UK Certified Benefit Corporations (CBCs) and their noncertified counterparts using a difference-in-differences analysis, we find that the performance of CBCs with a capital structure heavily weighted towards debt declines in comparison to non-CBCs, using Return on Assets as a measure of financial performance. Conversely, the performance of CBCs with a capital structure primarily composed of equity is comparable to that of non-CBCs.
Keywords:capital structure, Certified Benefit Corporations, equityfinancing, firm performance.
JEL Classification:
C33, G32, M14.
Euro area banks' asset-liability dependency and unconventional monetary policy over the years 2013–2021: Does size matter?
Domenico Curcio, Stefano Dell'Atti, Igor Gianfrancesco, Stefania Sylos Labini.
Abstract:
Focusing on a sample of euro area commercial banks, we investigate the evolution of the asset-liability dependency over the years 2013–2021, characterized by the introduction of monetary, supervisory and institutional policy measures that shaped a business environment never experienced before. We find that large banks show a stronger asset-liability dependency than small banks, and that the linkages between the two sides of the balance sheet experience a general upward trend over time for both groups of intermediaries. We report evidence of the presence of two transmission channels of the unconventional monetary policy, namely, the direct pass-through and the portfolio rebalancing.
Keywords:
JEL Classification:
E51, E52, G21, G28.
