EFM Forthcoming Papers

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The European Financial Management was founded in 1994 by Dr. John Doukas to serve as a high quality refereed publication outlet that publishes significant new research as it relates to European corporations, financial institutions and capital markets. The EFM journal is published in five issues per year [January, March, June, September and November ] and its acceptance rate is about 3%. The June issue is based on the Keynote Address and a small set of articles selected from the papers presented at the Annual Meetings of the European Financial Management Association. The articles published in the EFM journal are indexed and abstracted in the Social Science Citation Index.

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Newly Accepted Papers

Ownership Ties, Conflict of Interest, and the Tone of News

Emanuele Bajo, Marco Bigelli, Carlo Raimondo

This paper investigates the tone newspapers use in reporting information on a company that is linked with through an ownership tie. Our empirical setting is Italy, a country characterized by dominant national industrial groups’ high ownership of newspapers. Based on a sample of about 123,000 articles, we document that newspapers’ coverage of firms in conflict of interest is greater, with significantly fewer negative and uncertain words. We also document that the slant increases with ownership stakes and decreases with the newspaper’s reputation.

Keywords: Media; ownership structure; conflict of interest.

JEL Classification: G32; L26

Idiosyncratic Momentum and the Cross-Section of Stock Returns: New Evidence

Qi Lin

In this paper, we evaluate the profitability and economic source of the predictive power of the idiosyncratic momentum effect, by using five popular factor models to construct idiosyncratic momentum. We show that all five idiosyncratic momentum strategies produce similar return predictability and consistently outperform the conventional momentum strategy in the cross-sectional pricing of equity portfolios and individual stocks. This positive effect of idiosyncratic momentum on returns is consistent with the investment capital asset pricing model (CAPM). Further analysis reveals that the firm-level idiosyncratic momentum effect cannot extend to the aggregate stock market.

Keywords:Idiosyncratic momentum, Asset pricing, The investment CAPM, Market return predictability

JEL Classification:

G11, G12, G17

Credit Risk, Owner Liability and Bank Loan Maturities During the Global Financial Crisis

Fabio Dias Duarte, Ana Paula Matias Gama and Mohamed Azzim Gulamhussen

We relate credit risk and owners’ personal guarantees to bank loan maturities during the global financial crisis. The findings, which remain robust to reverse causality, show that firms rated as low risk, with a strong relationship with the bank, whose owners provided personal guarantees and with large loan sizes obtained longer maturities. Banks with larger nonperforming loans provided loans with shorter maturities. Firms with low and high risk ratings that provided owners’ personal guarantees obtained longer maturities. These findings shed additional light on the relationship between risk and loan maturities and the role of personal guarantees in reducing information asymmetries.

Keywords: : Small firm financing; Financial crisis; Government policy and regulation; Banks

JEL Classification: D82; G01; G18; G20

Do Bankers on the Board Reduce Crash Risk?

Min Jung Kang, Y. Han (Andy) Kim and Qunfeng Liao

Commercial banker-directors (CBDs) bring both financial expertise in risk management and conflicts of interest between shareholders and debtholders. The burgeoning literature on stock price crash risk generates important questions of whether CBDs reduce crash risk. Using BoardEx data from 1999 to 2009, we find supporting evidence that the firms with CBDs experience lower stock price crash risk. Moreover, the reduction of crash risk is more pronounced for high-risk firms under the monitoring of affiliated banker-directors (ABDs). The results of this study are robust to the Heckman selection model, propensity score matching, and alternative measures of crash risk.

Keywords: banker-directors, crash risk, agency cost, corporate governance, firm risk

JEL Classification: G14, G30, M40

Forecasting Recoveries in Debt Collection: Debt Collectors and Information Production

Johannes Kriebel and Kevin Yam

Recent theoretical work suggests that debt collection agencies play an important role in gathering and processing debt or information. We study a comprehensive data set with information provided by original creditors and information gathered in third-party debt collection. In line with the theoretical results, the initial information is sparse and the gathered information is essential for better-informed predictions.

Keywords: Loss given default, recovery rate, debt collection.

JEL Classification: G21, G22, G29, G3

Does Market Power Discipline CEO Power? An Agency Perspective

Anutchanat Jaroenjitrkam, Chia-Feng (Jeffrey) Yu, and Ralf Zurbruegg.

We examine how product market competition (PMC) shapes CEO power. Using various measures to capture both PMC and CEO power, our analyses, which includes a quasi-natural experiment, finds evidence that CEOs have less power when the product market is more competitive. Furthermore, the impact of PMC on CEO power is more pronounced for firms where management are entrenched, where there is lower CEO ownership and lower analyst coverage, and for firms experiencing good “luck” (windfall performance). Our results suggest that market power can act as a substitute for corporate governance in disciplining CEO power, particularly when prone to agency problems.

Keywords: CEO power, market competition, corporate governance, luck

JEL Classification: D22, G34, M52

Social Media Bots and Stock Markets

Rui Fan, Oleksandr Talavera, and Vu Tran

This study examines the link between information spread by social media bots and stock trading. Based on a large sample of tweets mentioning 55 companies in the FTSE 100 composites, we find significant relations between bot tweets and stock returns, volatility, and trading volume at both daily and intraday levels. These results are also confirmed by an event study of stock response following abnormal increases in tweets volume. The findings are robust to various specifications including controlling for traditional news channel, alternative measures of volatility, information flows in pre-trading hours, and different measures of sentiment.

Keywords: Social media bots, investor sentiment, noise traders, text classification, computational linguistics

JEL Classification: G12, G14, L86

Consumption, Asset Wealth, Equity Premium, Term Spread and Flight to Quality

Mauro Costantini and Ricardo Sousa

We link transitory deviations of consumption from its equilibrium relationship with aggregate wealth and labor income and: i) equity returns; and two characteristics of bond investors, ii) the premium demanded to hold long-term assets; and iii) the “flight to quality” behavior. Using a panel of 10 euro area countries over the period 1984Q1-2017Q4, we show that a rise in the consumption-wealth ratio predicts both higher equity returns and the future term spread, while a fall in the consumption-wealth ratio explains a large fraction of the rise in the spread between the “risky” and the “safe-haven” bond.

Keywords: consumption, asset wealth, labor income, term premium, flight to quality, panel data

JEL Classification: C33, E21, E44, D12.

Does Individualistic Culture Impact Operational Risk?

Zhe (Andrew) An, Zhe Cao, Zhian Chen and Donghui Li

Employing a sample of 2957 operational-risk events across 31 countries from 1990 to 2011, we find that financial institutions located in countries with higher individualism tend to have higher operational risk. This positive relation is achieved through the risk-taking channel and the earnings-management channel. In addition, the magnitude of operational losses is higher in more individualistic countries. The results suggest that individualism serves as an important informal institutional determinant of operational risk in an international context. Endogeneity tests and various robustness checks confirm our findings.

Keywords: Operational Risk, Individualism, National Culture

JEL Classification: G20, G32, G15

Managerial Incentives for Attracting Attention

María Gutiérrez, Nino Papiashvilia, Josep A. Tribó Gine

This paper studies the mechanisms which motivate managers to engage in cheap talk and attract market’s attention in a credible way. We consider stock splits announcements, voluntary earnings forecasts and press releases issued by firms to the media as proxies for managerial cheap talk. We show that: (i) managerial performance-related pay contracts incentivize executives to attract attention; (ii) analysts increase their coverage of firms following cheap talk; (iii) chief executive officers are punished for attracting attention when market prices do not increase following cheap talk. The results are stronger for firms which are most in need for attention.

Keywords: Voluntary Disclosures, Attracting Attention, Cheap Talk, CEO Compensation, Managerial Incentives.

JEL Classification: G30, G32, G34

Keeping it Real or Keeping it Simple? Ownership Concentration Measures Compared

Taylan Mavruk,Conny Overland,Stefan Sjogren.

We analyze the distributional properties of ownership concentration measures and find that measures come from different underlying statistical distributions. Consistent with theory, some measures that are classified to represent a monitoring dimension have a positive influence on firm performance; other measures that are interpreted to represent a shareholder conflict dimension are negatively related to firm performance. However, other measures deviate from this pattern, and therefore, we cannot conclude that simple measures can replace complicated measures. Some measures are more suitable for analyzing the relationship between management and owners, whereas other measures are more suitable for analyzing the relationships among owners.

Keywords: Ownership concentration measures, distributional properties, monitoring dimension, shareholder conflict dimension.

JEL Classification: C18, C46, C81, D74, G34, L25

Why Do Stock Repurchases Change Over Time?

Yuan-Teng Hsu*, Chia-Wei Huang**

Recent studies have shown the time trends of firm stock repurchase behavior. We examine these time changes for stock repurchase through the lens of real activities earnings management. Managers appear more likely to manipulate earnings through stock repurchases since the passage of the Sarbanes–Oxley Act (SOX) in 2002. Furthermore, suspect firms that just missed analyst earnings per share forecasts have higher incentives to manipulate earnings through stock repurchases. The results are not driven by changes in corporate governance associated with the passage of SOX. Overall, our results suggest earnings management can be a significant determinant of the dynamics of stock repurchases.

Keywords: Stock repurchase, earnings management, Sarbanes–Oxley Act

JEL Classification: G18; G31; G35; G38

Investment and asset securitization with an option-for-guarantee swap

Zhaojun Yang

Thispaperaddressestheinvestmentandfinancingdecisionsofentrepreneursenteringintooptionfor-guaranteeswaps(OGSs). OGSssignificantlyincreaseinvestmentoptionvalue. Entrepreneurs initially accelerate their investments and then postpone them as funding gaps grow. Guarantee costs increase with project risks when the funding gap is sufficiently small or large, but the opposite holds true otherwise. Investments are postponed when project risks, effective tax rates, or bankruptcy costs increase. Surprisingly, the higher the project risk, the more the entrepreneur will borrow, with a much higher leverage than predicted by classic models. Entrepreneurs can use OGSs to securitize their assets.

Keywords: Credit default swap, real options, capital structure, asset securitization.

JEL Classification: G12, G23

Trust, Regulation, and Contracting Institutions

Brandon N. Cline John “Nutie” and Edie Dowdle

This paper demonstrates that trust directly influences contracting efficiency. We document that trust reduces demand for contract regulation and positively relates to a high-quality contracting environment, supporting a substitution hypothesis. Furthermore, contract regulation no longer leads to poor contracting outcomes. These findings suggest that lack of trust significantly explains inefficient contracting institutions. Based on interaction effects, we note that trust could complement formal enforcement in countries with weak regulation. As regulation increases, trust substitutes for contract regulation. Overall, trust positively promotes efficient contracting by reducing burdensome regulation and providing an alternative to formal contract enforcement.

Keywords: Contract enforcement, efficiency, trust, regulation

JEL Classification: F2; O17; K2

Estimating Portfolio Risk for Tail Risk Protection Strategies

David Happersberger, Harald Lohre, Ingmar Nolte

We forecast portfolio risk for managing dynamic tail risk protection strategies, based on extreme value theory, expectile regression, Copula-GARCH and dynamic GAS models. Utilizing a loss function that overcomes the lack of elicitability for Expected Shortfall, we propose a novel Expected Shortfall (and Value-at-Risk) forecast combination approach, which dominates simple and sophisticated standalone models as well as a simple average combination approach in modelling the tail of the portfolio return distribution. While the associated dynamic risk targeting or portfolio insurance strategies provide effective downside protection, the latter strategies suffer less from inferior risk forecasts given the defensive portfolio insurance mechanics.

Keywords: Tail Risk Protection, CPPI, DPPI, Risk Modelling, Value-at-Risk, Expected Shortfall, Forecast Combination, Return Synchronization.

JEL Classification: C13, C14, C22, C53, G11.

Innovations in Financing: The Impact of Anchor Investors in Indian IPOs

Arnab Bhattacharya, Binay Bhushan Chakrabarti, Chinmoy Ghosh, Milena Petrova

In 2009, the Securities Exchange Board of India allowed qualified institutional investors to anchor initial public offerings (IPOs) by participating in the issue at a price and allocation publicly disclosed preceding the issue. We study anchor investor (AI) in Indian IPOs during 2009–2017. We find the share allotment and the number of AIs separately have significant impacts on valuation and underpricing; however, the net effect is non-significant. Further, AIs significantly influence other institutional investors’ participation in the IPO, and induce lower aftermarket volatility. Overall, our evidence suggests that AIs boost demand for and mitigate ex-ante information uncertainty of IPOs.

Keywords: IPOs, anchor investors, certification, information uncertainty

JEL Classification: G14, G24


Onur Kemal Tosun

I examine the influence of large and small institutional investors on different components of chief executive officer (CEO) compensation, using U.S. data for 2006–2015. An increase in large institutional ownership reduces total pay and current incentive compensation (i.e. options, stocks, bonus pay), whereas small institutional investors lower long-term incentive pay (i.e. pension, deferred pay, stock incentive pay). These findings are consistent with managerial agency theory and the substitution of incentive pay by institutional monitoring. The effects are stronger for higher ownership levels and firms with weak governance, less financial distress, long-tenured CEOs, multiple segments, and more free cash flow.

Keywords: Large institutional ownership, small institutional ownership, short-term incentive pay, long term incentive pay, CEO compensation.

JEL Classification: C33, C36, G32, J33, M12

Forecasting the Volatility of Bitcoin: The Importance of Jumps and Structural Breaks

Dehua Shen, Andrew Urquhart, Pengfei Wang

This paper studies the volatility of Bitcoin and determines the importance of jumps and structural breaks in forecasting volatility. We show the importance of the decomposition of realized variance in the in-sample regressions using eighteen competing heterogeneous autoregressive (HAR) models. In the out-of-sample setting, we find that the HARQ-F-J model is the superior model, indicating the importance of the temporal variation and squared jump components at different time horizons. We also show that the HAR models with structural breaks outperform models without structural breaks across all forecasting horizons. Our results are robust to an alternative jump estimator and estimation method.

Keywords: Volatility Forecasting; Bitcoin; Realized Volatility; Jumps; Structural Breaks

JEL Classification: C53; G15; G17.

Bank Credit Constraints for Women-Led SMEs: Self-Restraint or Lender Bias?

Emma Galli, Danilo V. Mascia, Stefania P.S. Rossi

We test the existence of possible gender biases affecting the firm behaviour in demanding and obtaining bank credit using a cross-country sample of European SMEs. We show consistent evidence that female-led firms are more likely than their male counterparts to refrain from applying for loans. When they apply, apparently female-led enterprises do not seem to face gender discrimination from the lender. Interestingly, however, signs of gender bias appear to arise during the upside phase of the economy. Overall, our study provides support for policy actions aimed at reducing the frictions faced by women-led SMEs when accessing credit markets.

Keywords: Access to finance, Bank lending, SMEs, self-restraint, gender discrimination

JEL Classification: D22, G21, G32, J16.

Banks’ Home-Bias in Government Bonds Holdings. Will Banks in Low-Rated Countries Invest in European Safe Bonds (ESBies)?

Jean Dermine

This paper offers two new explanations for banks’ home bias in government bond holdings: a sovereign-based rating cap on corporates and the existence of a ‘bank tax’. These are complementary to the four explanations offered in the literature: risk shifting, gambling for resurrection, moral suasion, and a means to store liquidity for financing future investment. Collectively, they cast doubt on the European Union’s demand-led approach to investment in European safe bonds (ESBies) by banks in low-rated countries. Bank regulations such as constraints on large exposure or risk-based capital on credit risk concentration will be needed if the objective is to break the so-called “deadly embrace”.

Keywords: European banking, Bank regulation, Basel capital, Banks’ home-bias.

JEL Classification: F34, G21, G28

CEO Influence on the Board of Directors: Evidence from Corporate Spinoffs

Duong T. Pham

We utilize a sample of spinoff firms that need to form a new board of directors, to shed light on the chief executive officer (CEO) influence hypothesis. We find spinoff boards with a CEO who was the parent firm CEO to be similarly structured to the boards of industry and size-matched peers, whereas spinoff boards with non-parent CEOs are structured for greater monitoring. Consistent with our board structure results, the CEO compensation and replacement decisions of parent CEO spinoff boards are more lenient toward spinoff CEOs, whereas those of non-parent CEO spinoff boards are more consistent with protecting shareholder benefits.

Keywords: Spinoff, CEO influence, board of directors, CEO compensation, CEO turnover

JEL Classification: G34

Economies or Diseconomies of Scope in the EU Banking Industry?

Elena Beccallia, Ludovico Rossib

Banks’ business models are assumed to affect efficiency, as documented in the banking supervisory priorities of the European Union (EU) for 2016–2018 and the 2014 structural reform proposal for the EU banking sector. We investigate evidence of economies and diseconomies of scope for EU. We find cost economies of scope and revenue diseconomies of scope, resulting in profit diseconomies of scope. Separating commercial from investment activities generates economic inefficiencies on costs but efficiencies on revenues and profits. Economies of scope are affected by bank size, liquidity, competition in the banking industry, and the European sovereign debt crisis.

Keywords: Economies of scope; economies of scale; bank business model; stochastic frontier analysis; European banking industry; banking regulation

JEL Classification: