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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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Previous Papers/Archive

Newly Accepted Papers

Using Accounting-based and Loan-related Information to Estimate the Cure Probability of a Defaulted Company


The cure of a defaulted company has important implications for the estimation of the loss given default (LGD). In this study, we estimate the probability of a defaulted company being cured using data on a large international sample of defaulted companies. More specifically, we examine whether historic accounting information on a defaulted company and loan-related information are associated with that company’s probability of being cured. The main finding of our analysis is that both accounting-based and loan-related independent variables increase the validity of cure prediction models.

Keywords: accounting information, company cure, collateralization, cure probability, defaulted company, Global Credit Data

JEL Classification: C53, D81, G24, G33

Do Bond Yields Follow the Hierarchy of Risk Post-BRRD?

Doriana Cucinelli, Lorenzo Gai, Federica Ielasi

With a sample of 4,065 bonds issued by 63 banks from 12 euro area countries during 2013–2017, the study investigates how introducing bail-in regulation has influenced bond yields in secondary markets, by distinguishing between non–bail-inable- and different classes of bail-inable bonds. The bail-in risk premium does not follow the hierarchy of risk: it is stronger for less risky bonds. The effect on the spread between senior unsecured and non–bail-inable bonds is much higher than for subordinated bonds. Regarding subordinated bonds, the impact is higher for securities excluded from regulatory capital than for those included

Keywords: bail-in regulation; difference-in-difference; subordinated unsecured bonds; senior unsecured bonds; market discipline

JEL Classification: G20; G21

Do Firms Lease to Hedge? CEO Risk Taking and Operating Lease Intensity


Operating leases are used extensively for financing, but their ability to separate ownership and use also creates hedging opportunities. We investigate whether firms recognize such opportunities by examining the relation between CEO risk-taking incentives and the use of operating leases. Consistent with firms using operating leases to hedge, we find higher CEO risk-taking incentives lower operating lease intensity. To address endogeneity, we use the adoption of Statement of Financial Accounting Standards 123R as an exogenous shock to option compensation, dynamic panel generalized method of moments, simultaneous equations, and change regressions. Our results are robust to placebo and alternative tests.

Keywords: Corporate leasing, corporate hedging, executive compensation, risk-taking incentives, option pricing theory

JEL Classification: G32; G34

Insider Trading in Rumored Takeover Targets


We examine insider trading surrounding takeover rumors in a sample of 1,642 publicly traded U.S. firms. Using difference-in-differences regressions, we find that insider net purchases increase within the year prior to the first publication of a takeover rumor, particularly when rumor articles are either accurate (lead to a takeover announcement) or informative (provide substantial justification for the rumor’s publication). Moreover, we find abnormal insider trading to be a significant predictor of takeover announcements occurring within the following year. Finally, passive net purchasing (i.e., selling less rather than buying more) is more pronounced among managing insiders than among non-managing insiders.

Keywords: Insider trading, takeover rumors, information asymmetry, takeover announcements, mergers and acquisitions.

JEL Classification: G14; G18; G34; K22

Hiring Retirement-age CEOs


More than 10% of the S&P 1500 companies have hired a CEO who starts the job near or above the conventional retirement age of 65 years old. This phenomenon exists among all industries and persists over time. Firms are more likely to hire retiring CEOs when the CEO job risk is high and when the firm is in distress. Retiring CEOs receive lower total compensation, the compensation structure puts a higher weight on nonequity-based compensation, and have a shorter tenure. Retiring CEOs can be beneficial to shareholders when they are hired for the right purpose..

Keywords: CEO, Retirement Age, Distress

JEL Classification: G30, G32, J24, J26

Fama–French factor timing: The long-only integrated approach


There is ample evidence that factor momentum exists in the standard long–short mixed approach to factor investing. However, the excess returns are put under scrutiny due to the high implementation costs. We present a novel real-life approach that relies on the long-only integrated approach to factor investing. Instead of exploiting the potential momentum in factor portfolios, our strategy builds on the momentum of the optimal factor score weights in the integrated approach, which allows us to additionally profit from the serial dependence in the factors’ interaction effects. One limitation of short-term timing strategies is their high turnover. By including the information of the covariance matrix and minimizing the strategy’s risk to the market portfolio, we can substantially reduce turnover. The resulting timing alpha remains significant even after transaction costs in a robust statistical test framework across the major stock markets.

Keywords: Factor timing, equity style timing, integrated approach, momentum

JEL Classification: G1, G11, G14, G17

The evolving relation between dividends and flexible payouts: a different evolution


We study payout by U.K. listed companies during 1993-2018. Regular dividends remain the dominant channel, but flexible payouts (special dividends and repurchases) have grown, and they make total payout more responsive to earnings. Flexible payouts are used to augment regular dividends: few companies pay out by flexible means only, and tests indicate that they augment rather than replace regular dividends. Comparison with U.S. evidence shows that U.K. companies make greater use of dividends (including specials) in relation to repurchases, and have a greater willingness to change regular dividend per share.

Keywords: TBA

JEL Classification: TBA

Time-Series and Cross-Sectional Momentum in Anomaly Returns


We find strong evidence of time-series and cross-sectional momentum in the long-short returns of a comprehensive sample of anomalies. Strategies that exploit such persistence deliver significant abnormal returns that are robust to the stock momentum effect, cannot be explained by traditional asset-pricing models, and are more pronounced when arbitrage capital is scarcer or market liquidity is lower. Momentum in anomaly returns dissipates, but doesn’t reverse, in the long-run. Our findings are consistent with limits-to-arbitrage and slow-moving capital causing mispricing to persist. Supporting this explanation, we find that both the level and persistence of anomaly returns are positively related to idiosyncratic-volatility.

Keywords: momentum, anomalies, limits to arbitrage, idiosyncratic volatility

JEL Classification: G10, G11, G14

Data Breaches and Corporate Liquidity Management


This paper investigates the effects of data breach disclosure laws and the subsequent disclosure of data breaches on the cash policies of corporations in the United States. Exploiting a series of natural experiments regarding staggered state-level data breach disclosure laws, we find that the passage of mandatory disclosure laws leads to an increase in cash holdings. Our finding suggests that mandatory data breach disclosure laws increase the risks related to data breaches. Further, we find firms that suffer data breaches adjust their financial policies by holding more cash as well as decreasing external finance and investment.

Keywords: Data Breach, Disclosure Laws, Cash Holdings

JEL Classification: G32.

Excess corporate payouts and financial distress risk


Firms that follow excessive payout policies (over-payers) are higher on the financial distress spectrum and have lower survival rates than under-payers. In addition, over-payers endure lower future sales and asset growth than under-payers and experience negative abnormal returns in the bond and stock markets. Exogenous import tariff reductions and commodity price jumps reduce the likelihood of overpayment. We interpret this as evidence consistent with financial flexibility considerations, rather than risk-shifting, explaining the decision to overpay. We also find that CEO overconfidence and catering incentives affect overpayment

Keywords: payout policy, financial distress, firm survival, over-payers, financial flexibility.

JEL Classification: G32, G33, G35.

Institutional investor sentiment and aggregate stock returns


This paper examines the equity market return predictability of institutional investor sentiment, in comparison to individual investor sentiment. Our findings suggest that institutional traders are informed and that their sentiment helps to tilt stock prices towards the intrinsic value. This is because the sentiment of institutions encompasses news regarding expectations on future cash flows of underlying firms that impounds itself into future price expectations. In this research, we add to the large number of studies that investigate the role and implications of investor sentiment, which has long been viewed as a pure behavioral phenomenon, on market efficiency and price discovery.

Keywords: sentiment, retail traders, institutional investors, cash flows, return predictability

JEL Classification: G14; G40; G41

Dividend commitment in firm bylaws and capital structure change


Dividend policies can predict changes in capital structure. We focus on a unique setting, namely, dividend commitment emerging from a new dividend policy in China, and explore its relation to leverage. We find a commitment to increase dividends is associated with a subsequent reduction in leverage, and this negative relation is enhanced in firms without preliminary conditions specified for their commitments or with greater dividend smoothing in previous periods. Robustness tests support the main findings. Further analysis addresses four internal mechanisms that play essential roles in the above link, and we provide further details about how leverage is reduced.

Keywords: dividend commitment; dividend policy; capital structure; leverage; China

JEL Classification: G32; G35

Stock price synchronicity, cognitive biases, and momentum


The momentum anomaly is widely attributed to investor cognitive biases, but the trigger of cognitive biases is largely unexplored. In this study, inspired by psychology studies linking cognitive biases to the noisiness of information, we examine whether momentum returns are associated with high stock price synchronicity, a manifestation of noisy firm-specific information. Our results demonstrate that momentum is more pronounced in the presence of high stock price synchronicity. This finding is robust to other explanations and firm characteristics. We also find that stock price synchronicity boosts the profitability of momentum by amplifying investor underreaction to new information.

Keywords: momentum; stock price synchronicity; cognitive biases; capital markets

JEL Classification: : G10; G12; G14; G41

Does Sustainable Investing Reduce Portfolio Risk? A Multilevel Analysis

Sylvia Maxfield and Liu Wang

This study complements and extends prior research on the risk mitigation role of sustainable investing. We use a continuous measure of funds’ sustainability traits, rather than a categorical approach, and assess impact on risk directly rather than by looking at fund performance in up versus down markets. We find that sustainable investing plays a significant role in mitigating total, systematic, and idiosyncratic risk of equity funds, even after controlling for other fund characteristics. Further evidence indicates that the explanation for the risk reduction role of sustainable funds largely runs through traits of the firms held in the funds.

Keywords: Sustainable Investing, Portfolio Risk, Mutual Funds, Corporate Social Responsibility

JEL Classification: G11

The Cost of Anonymous Lemons

Amarnath Bhide

Rules that restrict information required in negotiated private transactions have spurred a vast increase in the scope of anonymous financial markets, particularly in the US. The subtle costs of the information-restricting rules raise questions about the social value of “completing” anonymous markets that would not naturally survive and did not historically exist.

Keywords: TBA

JEL Classification: TBA

Further Evidence on Calendar Anomalies

Yuan-Teng Hsu, Kees Koedijk* Hung-Chun Liu and Jying-Nan Wang

This study aims to investigate the day-of-the-week (DoW) effect of cross-market leveraged exchange-traded funds (LETFs) in the Taiwanese stock market. We find that Wednesday’s overnight returns are significantly positive for bull 2X LETFs tracking major stock indices of the Chinese market, whereas no such an effect is found for ETFs tracking local or other international stock markets. The “T+1” trading rule and a lagged Monday effect potentially explain this anomaly. Finally, simulation analysis of various simple trading rules further shows that there exist exploitable profit opportunities in cross-market bull 2X LETF markets.

Keywords: Cross-market ETF; leveraged ETF; LETF; day-of-the-week effect; “T+1” trading rule

JEL Classification: C14; C22; G14; G15

Dividend commitment in firm bylaws and capital structure change

Linyin Cheng, Guojun Wang* Yuetang Wang and Dan Yang

Dividend policies can predict changes in capital structure. We focus on a unique setting, namely, dividend commitment emerging from a new dividend policy in China, and explore its relation to leverage. We find a commitment to increase dividends is associated with a subsequent reduction in leverage, and this negative relation is enhanced in firms without preliminary conditions specified for their commitments or with greater dividend smoothing in previous periods. Robustness tests support the main findings. Further analysis addresses four internal mechanisms that play essential roles in the above link, and we provide further details about how leverage is reduced.

Keywords: dividend commitment; dividend policy; capital structure; leverage; China

JEL Classification: G32; G35

How to Build a Factor Portfolio: Does the Allocation Strategy Matter?

Florian Eugster, Jenni Kallunki, Henrik Nilsson and Hanna Setterberg

We examine how corporate insiders’ cognitive ability (IQ) affects their decisions to time insider and outsider trading before abnormal stock price changes. Our analysis of archival data on male corporate insiders in Sweden shows they are less prone to time their insider selling, and to sell in larger amounts, prior to abnormal stock price declines as IQ increases. We also find that insiders with a higher IQ are better at timing their outsider buying. Taken together, our results show that corporate insiders’ IQ affects their trading decisions differently, depending on whether they are trading in their insider or outsider stocks.

Keywords: Insider trading, IQ, abnormal returns, reputational risk

JEL Classification: G14; G30; G40; K42

Optimal Reinsurance and Portfolio Selection: Comparison between Partial and Complete Information Models

: Bong Gyu Jang*, Kyeong Ta Kim and Hyun-Tak Lee

We consider partial and complete information models to investigate how partial information has unique quality over complete information for insurers . We find that optimal reinsurance and investment strategies for the partially informed insurer depend on prior beliefs, whereas those for the completely informed insurer do not. In addition, information quality can affect insurer’ behavior, mainly through the relative difference between risk-adjusted market premium and risk-adjusted insurance premium projected on the financial markets. Numerical results indicate that partial information increases the conservativeness of insurer’ strategies.

Keywords: partial information, information quality, risk-adjusted premium, certainty equivalent wealth

JEL Classification: C61, G11, G22.

Earnouts: The real value of disagreement in mergers and acquisitions


Earnout agreements link part of the payment for an acquired company to its future performance. Despite their option-like features, they cannot be valued using vanilla option pricing methods. Two peculiar sources of risk a§ect these contracts: bidder default before the earnout expiration (default risk) and potential litigation associated with earnouts (litigation risk). We developed an option pricing model that encompasses these sources of risk, showing that counterparty and litigation risk can have a remarkable impact on earnout values. Our modelís relevance is further enhanced by recent accounting standards that require contingent payments to be valued at fair value.

Keywords: Earnout, real options, M&A, default risk, default, litigation.

JEL Classification: G12; G13; G33; G34; K41

Short-Termism, Shareholder Payouts, and Investment in the EU


Investor-driven “short-termism” is said to harm EU public firms’ ability to invest for the long term, prompting calls for the EU to better insulate managers from shareholder pressure. But the evidence offered—rising levels of repurchases and dividends—is incomplete and misleading: it ignores large offsetting equity issuances that move capital from investors to EU firms. We show that, over the last 30 years and the last decade, net shareholder payouts have been moderate, and investment and cash balances have increased. In sum, the data provide little basis for the view that short-termism in the EU warrants corporate governance reforms

Keywords: short-termism; EU; payout policy; investment; innovation

JEL Classification: G15, G32, G35, G38, O52

The Evolution of Financial Constraints

Demetris Christodoulou*, Shawn Ho, and Artem Prokhorov

We demonstrate that the severity of financial constraints has declined over time for two reasons: (i) improved access to external funds as evidenced by a decreased reliance on internal cash flows, and (ii) an inward shifting investment frontier with reduced investment opportunities. The decline in financial constraints coincides with the documented diminishing sensitivity of investment to cash flows, yet we show that cash flows remain a determining factor in helping constrained firms overcome restricted access to external capital. There is a flight-to-quality during economic shocks, where the adverse effects following periods of tightened credit are particularly pronounced for smaller firms, with larger firms appearing largely unaffected.

Keywords: Capital investment, financial constraints, investment-cash flow sensitivity, stochastic frontier analysis.

JEL Classification: G01, G31, G32

Structural Transmissions among Investor Attention, Stock Market Volatility and Trading Volumes

Helmut Herwartz and Fang Xu

We employ data-based approaches to identify the transmissions of structural shocks among investor attention measured by Google search queries, realized volatilities and trading volumes in the US, UK and German stock market. The two identification approaches adopted for the structural VAR analysis are based on independent component analysis and the informational content of disproportional variance changes. Our results show robust evidence that search queries affect both volatilities and trading volumes contemporaneously, whereas the latter two variables lack immediate impacts on search queries.

Keywords: Search engine data, realised volatility, structural VAR.

JEL Classification: G10, G14

Earnings Management around Founder CEO Re-appointments and Successions in Family Firms

Iram Fatima Ansari, Marc Goergen and Svetlana Mira

This paper studies CEO re-appointment and succession events in listed family firms with an incumbent family CEO. We explore whether family firms with a founder CEO are more likely to engage in earnings management pre-event than other family firms. We find evidence of pre-event upward earnings management for firms that re-appoint their founder CEO but no for other family firms. These findings suggest that the costs and benefits from earnings management change around founder CEO re-appointments in family firms. Investors, auditors, policy makers and regulators should be aware of the temptation of founder CEOs to inflate earnings preceding their re-appointment.

Keywords: Earnings management, family firms, founders, socio-emotional wealth, CEO turnover, CEO successions.

JEL Classification: G32, G34, M41

Competitive Pressure and Firm Investment Efficiency: Evidence from Corporate Employment Decisions

Sabri Boubaker, Viet A. Dang* and Syrine Sassi

This study examines the link between product market competition and labor investment efficiency. We find that competitive pressure distorts the efficiency of corporate employment decisions by creating an underinvestment problem. This finding withstands a battery of robustness checks and remains unchanged after accounting for endogeneity concerns. Additional analysis shows that the relation between product market competition and labor investment efficiency is stronger for firms facing higher competitive threats, greater financial constraints, higher information asymmetry, and higher labor adjustment costs. Our results suggest that since competition increases bankruptcy risk, it leads managers to underinvest in labor to avoid incurring labor-related costs

Keywords: : product market competition, risk exposure, labor investment, investment efficiency, import tariffs

JEL Classification: G31, G34, G38, M51

Target Insiders' Preferences when Trading before Takeover Announcements: Deal Completion Probability, Premium and Deal Characteristics

Jana Fidrmuc and Chunling Xia

We contribute to the M&A literature by characterizing the information available to target insiders during the pre-public takeover negotiations. We analyze insider trading in target firms in the US between 2005 and 2018. First, we show that signing confidentiality agreements is an important information threshold. Second, insiders have a good grasp of deal success. They increase their net purchases only in deals with higher completion probability. Third, insiders guess the final offer price well, but their trading strategies additionally reflect their knowledge of deal characteristics. They prefer bidder-initiated, cash, privately negotiated, and strategic deals. Insiders combine several sources of information.

Keywords: Mergers and acquisitions; Insider trading; Target firms

JEL Classification: G34; G14

A Game of Thrones – Dynamics of Internal CEO Succession and Outcome

Brian Blank, Brandy Hadley, Kristina Minnick* and Mia L. Rivolta

We examine the implications of CEO succession methods for firm outcomes and executive incentives. Focusing on internal CEO successions, we find that the largest U.S. firms typically rely on two types of succession methods, namely, heir apparent and horse race successions. Although heir apparent and horse race CEO candidates have similar qualifications, the consequences of these two succession methods differ significantly. We find that horse race successions induce conflict and are detrimental to firm performance but not necessarily to the newly appointed CEOs. Our findings suggest succession method influences firm performance, executive incentives, and CEO labor markets.

Keywords: CEO Turnover; Executive Compensation; Succession; Board of Directors

JEL Classification: G30; J33; M52

Manacled Short Sellers and Return Premium: New Evidence

: Xiaoming Li

Investigating the short-selling regulation of the Honk Kong market, we document that shortable stocks, on average, earn significantly higher returns than non-shortable stocks. However, loadings of stocks/portfolios on the shortable minus non-shortable misvaluation factor SMN predict a significant negative return premium in the cross section of returns. We measure SMN by applying both value- and return-weighted methods with various time lags. We propose a behavioural model to rationalize our results. The model shows that, if investors are overconfident regarding short-selling regulatory factor signals, it is possible to detect a positive average/abnormal return but a negative future return premium on SMN.

Keywords: Short-sale regulation, overconfidence bias, mispricing, Hong Kong market

JEL Classification: : G02; G10; G12; G28

PhD CEOs and Firm Performance

: Andrew Urquhart and Hanxiong Zhang

This paper investigates the relationship between the education of a CEO and firm performance and provides robust evidence that firms led by CEOs with PhDs outperform their peers. We find that CEOs with PhDs increase firm performance by 3.03% while CEOs with a PhD from a highly ranked university increase firm performance by 4.65%. Our results are robust to endogenous CEO selection, transition firms, alternative rankings, unobserved firm characteristics and the network of the CEO. We also show that the increase in firm performance is due to a tighter control of costs and superior cash flow management.

Keywords: CEO characteristics, Education, PhD, firm performance

JEL Classification: G00; G03

Unconventional Monetary Policy and International Equity Flows to Emerging Markets

Christoforos Andreou, Nebojsa Dimic , Vanja Piljak* and Andreas Savvides

This paper examines the relationship between monetary policies pursued by three major central banks (U.S. Federal Reserve, European Central Bank, and Bank of Japan) and net equity capital flows to emerging markets (EMs) by global investment funds. We focus on two aspects of central bank policy: the growth of central bank assets and the surprise element of asset growth. We find, first, positive, economically large, and statistically significant spillovers from the U.S. Federal Reserve asset growth to EM equity inflows following the adoption of unconventional monetary policies. Second, U.S. Federal Reserve and (to a lesser extent) European Central Bank asset growth surprises are negatively related to EM capital flows.

Keywords: Emerging markets; International capital flows; Unconventional monetary policy

JEL Classification: : E44; F30; G15

Net Asset Value discounts and premiums in the maritime shipping industry

Andreas Andrikopoulos, Anna Merikas and Christos Sigalas

This paper examines Net Asset Value (NAV) discounts and premiums in the setting of the maritime shipping industry. We employ a qualitative study with equity analysts as well as a quantitative study with a unique panel data, to explore and empirically investigate, respectively, the reasons underpinning NAV discounts and premiums. Our findings suggest that deviations of market capitalization from NAV are associated with firm-specific factors, such as public maritime shipping companies’ capital structure, stock liquidity, fleet acquisition cost, operating performance, institutional ownership, cost of capital, corporate governance, dividend policy, and related party transactions.

Keywords: Net Asset Value, Net Asset Value discount, Net Asset Value premium, Equity valuation, Public maritime shipping companies.

JEL Classification: : G12, G14, G32

The Determinants of Banks’ AT1 CoCo Spreads

Axel Kind, Philippe Oster and Franziska J. Peter

We conduct a comprehensive pricing study of Additional Tier 1 (AT1) Contingent Convertible (CoCo) bonds issued by Eurozone banks. By accounting for an extensive set of pricing determinants related to the regulatory framework, the security design, and key market variables, we show that the regulatory concept of the Maximum Distributable Amount (MDA) introduced in 2016 has a significant and economically meaningful impact on CoCo spreads. Furthermore, we examine whether the market stress induced by the COVID-19 pandemic influences the determinants of CoCo spreads. Our results show that the pricing factors remain stable throughout tranquil and volatile periods.

Keywords: : Additional Tier 1 (AT1), Contingent Convertible (CoCo), COVID-19 Pandemic, Maximum Distributable Amount (MDA), Systemically Important Banks (SIB), Point of Non-Viability (PoNV), Security Design, Regulation

JEL Classification: : G12, G13, G21, G28

Does Idiosyncratic Volatility Proxy for a Missing Risk factor? Evidence Using Portfolios as Test Assets

David Gempesaw, Haimanot Kassa and Blerina Zykaj

One of the main explanations for the idiosyncratic volatility (IVOL) puzzle (i.e., the negative relation between lagged IVOL and returns) is a missing risk factor. We show analytically that if IVOL proxies for a missing risk factor, then the negative relation between IVOL and returns should persist at the portfolio level. Empirically, we find that the IVOL puzzle disappears when we use well-diversified portfolios as test assets. The IVOL puzzle also weakens after controlling for additional risk factors. Overall, our results suggest that both diversifiable (i.e., true idiosyncratic risk) and non-diversifiable risk play a role in explaining the IVOL puzzle.

Keywords: : Idiosyncratic volatility, IVOL puzzle, missing risk factor.

JEL Classification: : G10, G11, and G12

The Bias of Growth Opportunity

Cynthia Miao Gong, Xindan Li, Di Luo and Huainan Zhao

The bias of growth opportunity (BGO), measured as the difference between market and fundamental values of a firm’s growth opportunity, has an ability to predict future stock returns. In the portfolio sort, downward-biased BGO firms earn higher returns than upward-biased BGO firms, which is unexplained by the common asset pricing models. Cross-sectional regression results also confirm BGO’s power in predicting stock returns. To explain the anomaly, we show that the BGO premium is more pronounced when investor sentiment is high or when limits-to-arbitrage is severe, which suggests that the BGO is more likely to capture behavioral biases than systematic risk.

Keywords: : Bias of growth opportunity; Behavioral Finance; Asset Pricing; Anomaly.

JEL Classification: : G12; G14; G30.

Leading Indicators for US House Prices: New Evidence and Implications for EU Financial Risk Managers

Miguel Rodriguez Gonzalez, Tobias Basse, Danilo Saft and Frederik Kunze

This study draws on machine learning as a means to causal inference for econometric investigation. We utilize the concept of transfer entropy to examine the relationship between the US National Association of Home Builders Index (NAHB) and the S&P CoreLogic Case-Shiller 20 City Composite Home Price Index (SPCS20). The empirical evidence implies that the survey data can help to predict US house prices. This finding extends the results of Granger causality tests performed by Rodriguez Gonzalez et al. (2018) using a new machine learning approach that methodologically differs from traditional methods in empirical financial research.

Keywords: : Machine Learning, US House Prices, Leading Indicators, Transfer Entropy, Financial Risk.

JEL Classification: : C58, G01, G11, R30.

Machine Learning in Finance: A Topic Modeling Approach

Saqib Aziz, Michael Dowling, Helmi Hammami and Anke Piepenbrink

We identify the core topics of research applying machine learning to finance. We use a probabilistic topic modeling approach to make sense of this diverse body of research spanning across multiple disciplines. Through a Latent Dirichlet Allocation topic modeling technique we extract 15 coherent research topics that are the focus of 5,942 academic studies from 1990 to 2020. We find that these topics can be grouped into four categories: price forecasting techniques, financial markets analysis, risk forecasting, and financial perspectives. We first describe and structure these topics, and then further show how the topic focus has evolved over the last three decades. A notable trend we find is the emergence of text-based machine learning, for example, for sentiment analysis, in recent years. Our study thus provides a structured topography for finance researchers seeking to integrate machine learning research approaches in their exploration of finance phenomena. We also showcase the benefits to finance researchers of the method of probabilistic modeling of topics for deep comprehension of a body of literature.

Keywords: : Topic modeling, machine learning, textual analysis, finance, Latent Dirichlet Allocation.

JEL Classification: : G00, C45.

Flotation Costs of Seasoned Equity Offerings: Does Corporate Sicial Responsibility Matter?

Zhe Li and Ping Wang

This paper investigates the effect of corporate social responsibility (CSR) on flotation costs in seasoned equity offerings (SEOs). Based on an international sample covering 38 countries during the period 2002-2018, we find that CSR performance is negatively associated with SEO flotation costs, and this negative impact is mainly attributable to issuers’ engagement in CSR, particularly in environmental and social activities. We further reveal that the CSR strategies of SEO issuers are successful in reducing market-based costs as well. Overall, this paper offers critical insights for understanding the role of stakeholder-oriented practices in adding value to shareholders through equity offerings.

Keywords: : Corporate social responsibility, seasoned equity offerings, flotation costs, marketbased costs.

JEL Classification: : D82, G15, G24, M14.

Me, Myself and I: CEO Narcissism and Selective Hedging

Emanuele Bajo, Hakan jankensgard, Nicoletta Marinelli

In this paper we test the hypothesis that CEO narcissism influences firms’ hedging behaviour. Our empirical evidence, based on hand-collected data on derivative positions in the U.S. oil and gas industry, suggests that firms with a narcissistic CEO hedge more selectively. Furthermore, we find that these firms reduce selective hedging comparatively more following a sharp price collapse that sent the industry into a state of distress. This result is in line with the ‘narcissistic paradox’: while scoring high on self-esteem and grandiosity in the normal case, such individuals are also inherently fragile and liable to crumble when faced with adversity.

Keywords: : Risk management, derivatives, selective hedging, narcissism.

JEL Classification: : G30, G32.

Investment Transparency and the Disposition Effect

Jo Danbolt, Arman Eshraghi and Marcel Lukas

The disposition effect is lower in a trading environment with salient information on current holdings. Using proprietary data from a European fintech platform for social trading, we analyze variation in trading behavior within and between private and publicly-visible portfolios. The disposition effect diminishes by about 35% when trades and holdings become public. We find the level of transparency and the way financial information is illustrated can influence trading decisions. Our results suggests that requiring greater transparency from portfolio managers can reduce trading bias.

Keywords: : Disposition Effect, Transparency, Social Trading, Fund Management.

JEL Classification: : G11, G41.

Enhanced Indexing and Selectivity theory

Andrei Bolshakov, Ludwig B.Chincarini and Christopher Lewis

Investment managers that believe to have skill must choose some fraction of stocks in a benchmark to hold. Recent theory predicts that the optimal percentage of holdings for a manager with skill is between 50 and 80 percent of the benchmark. This theory requires a number of assumptions. Using simulations, we relax some of the assumptions to examine if the theory still holds. We find that, for the most part, the theory holds when the assumptions are relaxed. We also extend the analysis from a one-period horizon to a multi-period horizon using the actual returns of stocks in the S&P 500.

Keywords: : enhanced indexing, information ratio, portfolio management, active management, simulations.

JEL Classification: : G0, G13.

Whom (and For When) is the Firm Governed? The effect of Changes in Corporate Fiduciary Duties on Tax Strategies and Earnings management

Douglas Cumming, Bryce C.Tingle QC and Feng Zhan

The proper object of the fiduciary duties of corporate directors and officers is frequently described as the central question in all corporate law. We use the adoption of constituency statutes, which shift the loci of corporate managers’ duties from shareholders to a wide range of stakeholders, as a quasi-natural experiment to determine the actual impact of fiduciary duties. We find that while the adoption of constituency statutes has no significant effect on measures of earnings management, it has a robust effect on firms’ effective tax rate, which increases in a range between 0.570% and 1.903%. These results are robust in terms of various measures of the firm’s effective tax rate. We provide explanations for why fiduciary duties apparently do not influence manager behaviors in relation to shareholders, but do affect their behaviors in relation to the taxing authority. We argue that a change to fiduciary duties doesn’t appear to alter the motivation of managers to maximize shareholder welfare outcomes, but rather it allows them to eschew short-term strategies that often impair long-term outcomes.

Keywords: : Tax aggressiveness, fiduciary duties.

JEL Classification: : H26, G34.

Discounting and the Market Valuation of Defined Benefit Pensions

Francis Breedon and Luca Larcher

We investigate how defned benefit pension schemes of FTSE frms are valued by the equity market, focusing on how future liabilities are discounted (since UK data allows us to estimate the duration of pension liabilities fairly accurately). Our primary sample of FTSE 100 constituents includes mostly large DB sponsors with mature schemes, primarily closed to new entrants but still active for current employees. We found that equity market valuation of pension liabilities is consistent with discounting without allowing for credit risk, thus incorporating a valuation closer to their settlement value. This differs from the approach used in published accounts for which IAS 19 (and SFAS No. 158, its US equivalent) allows for discounting with a corporate bond yield. The difference is significant, as credit risk free discounting would decrease the reported value of FTSE 100 firms by about 7%.

Keywords: : Defined benefit pensions, IAS 19, Valuation, UK companies

JEL Classification: : M41, G32.

Automated Investment Management: Comparing the Design and Performance of International Robo-managers

Nils Helms, Reinhold Holscher and Matthias Nelde

Robo-managers offer automated asset management, their overall performance, however, is highly debated. We analyze 15 Robo-managers from Germany, USA and the UK by conducting a comprehensive qualitative and quantitative study. The qualitative comparison shows considerable differences between the various Robo-managers; not only across but also within countries. The quantitative evaluation utilizes different measures to evaluate the performance of the Robo-manager sample. Our results indicate that each country has one particularly favorable Robo-manager. Furthermore, it was found that the costs and the characteristics of the applied rebalancing measures have only a small effect on the performance.

Keywords: : Robo-advisory, Robo-manager, Digitalization, Automated asset management, Performance, qualitative and quantitative study.

JEL Classification: : G 2, G11, G 29 .

Whose Speeches Impact European Markets: ECBs' or the National Central Banks'?

Abhinav Anand, Sankarshan Basu, Jalaj Pathak and Ashok Thampy

We quantify the tone from the speeches of the European Central Bank as well as that from the national central banks of six leading European nations, and analyze their role in explaining the returns of their respective stock market indices. Using innovations in text analysis and tone quantification introduced in Anand et al. (2021), we find evidence that the ECB and the national central bank speeches exert significant influence on their respective national stock market index returns—both individually and jointly—and have near-equal significance in impacting their respective national market indices.

Keywords: : Central Bank Communication, Tone Analysis, Text Analysis, Central Bank speech, European Central Bank.

JEL Classification: : G14, G18, G28, G41.

Has European Corporatism Delivered? A Survey with Preliminary Evidence

Shiva Rajgopal

I ask whether European firms’ investments in stakeholder welfare come at the cost of lower shareholder value. Focusing on the largest 50 public firms in four European countries, I find a valuation discount in the Tobin’s Q of continental European firms relative to matched U.S. firms. The valuation discount is correlated with presence of large block holders in European firms but not with the poorer disclosure record of U.S. firms on the environmental (E) and social (S) dimensions. In sum, poorer G (governance) in continental Europe appears to destroy more shareholder value than better E and S disclosure can add.

Keywords: : ESG, Europe, stakeholder, shareholder, valuation.

JEL Classification: : M14, G23, G34.

Competitive pressure and firm investment efficiency: Evidence from corporate employment decisions

Sabri Boubaker, Viet A. Dang and Syrine Sassi

This study examines the link between product market competition and labour investment efficiency. We find that competitive pressure distorts the efficiency of corporate employment decisions by creating an un- derinvestment problem. This finding withstands a battery of robustness checks and remains unchanged after accounting for endogeneity concerns. Additional analysis shows that the relationship between product market competition and labour investment efficiency is stronger for firms facing higher competitive threats, greater financial constraints, higher information asymmetry and higher labour adjustment costs. Our results suggest that as competition increases bankruptcy risk, it leads managers to underinvest in labour to avoid incurring labour‐related costs.

Keywords: : import tariffs, investment efficiency, labour investment, product market competition, risk exposure.

JEL Classification: : G31, G34, G38, M51.

Hedge Inflation Risk of Specific Purpose Guarantee Funds.

Bingzheng Chen,Ze Chen,Yi Hu,Hai Zhang.

Specific purpose guarantee funds (SPGFs) such as pension guarantee funds are popular among investors with both specific investment purpose and guaranteed return requirement, but receive little academic attention. We propose a practical purpose-oriented constant proportion portfolio insurance (PO-CPPI) strategy that optimally allocates its assets into a risk-free fund (floor) and a purpose-related portfolio (cushion) to maximize prospect theory investors’ utility with consideration of their purpose-related inflation risk. Our closed-form solution of optimal PO-CPPI allocation derived in the continuous time case and Monte-Carlo simulations in the discrete-time and dynamic cases prove the superiority of PO-CPPI over general portfolio insurance strategies.

Keywords: : CPPI; Portfolio insurance; Prospect theory; Specific purpose guarantee funds.

JEL Classification: : G11 G22.

Are Enhanced Index Funds Enhanced?

Edwin J. Elton, Martin J. Gruber, Andre de Souza .

One of the major trends in the mutual fund industry is the rising importance of passive investing. One of the responses of the investment community to this challenge has been the creation of enhanced return index funds. In this paper, we examine the performance of enhanced index funds and find that they outperform index funds when we analyze both pre-expense performance (management ability) and post-expense performance (investor returns). However, when we use any of several criteria that have been proposed for picking the best fund from among those following some index, index funds outperform enhanced index funds.

Keywords: : enhanced index funds, index funds.

JEL Classification: : G11.

Systemic Risk and Centrality: The Role of Interactions

Hossein Asgharian , Dominika Krygier , and Anders Vilhelmsson.

We analyze to what extent the contribution of banks to systemic risk depends on their centrality in financial networks. We find that centrality is an important determinant of systemic risk, but not primarily by its direct effect. Its main influence is to make other risk measures, such as probability of default, more important for highly connected banks. Neglecting the indirect effect of centrality may severely underestimate or overestimate the systemic risk of banks. We also show that, even though size and centrality are related, the inclusion of centrality provides valuable information when assessing the systemic importance of banks.

Keywords: : systemic risk; network centrality; loan syndication; CoVaR.

JEL Classification: : : G21; G18.

Settling Down: T+2 Settlement Cycle and Liquidity

Todd Griffith, Ahmed Baig, Stephen Breeze, Justin Cox.

We examine the effects of a shortened settlement cycle on liquidity. Our difference-in-difference results show that securities listed on U.S. stock exchanges become more liquid, relative to similarly matched securities listed on the London Stock Exchange, after the standard settlement cycle in the U.S. was reduced from T+3 to T+2. These results hold across various low- and high-frequency measures of liquidity and empirical model specifications. Furthermore, we find that securities that are more difficult-to-borrow experience the greatest gains in liquidity. Our findings might provide insights to regulators and exchange officials considering the adoption of a shortened settlement cycle.

Keywords: : Trade settlement; liquidity; borrowing constraints; failures-to-deliver

JEL Classification: : : D47, G10, G14, G20.

Dynamic optimal restructuring policies under debt renegotiation with positive externalities

Yingxian Tan, Pengfei Luo, Jinqiang Yang.

This paper develops a debt renegotiation model with positive externalities using the Nash bargaining game and explores dynamic optimal downward debt restructuring policies in times of financial distress. A novel feature of our model is its positive externalities, which imply that the liquidation threat offered by shareholders for renegotiation does not bring about any losses for both creditors and shareholders, and that both parties always benefit from debt renegotiation. We derive closed-form expressions for the optimal restructuring policies. Moreover, we provide theoretical support for the advantages of debt renegotiation with positive externalities since it not only increases firm value but also dramatically alleviates and even eliminates inefficiency arising from asset substitution. In addition, our model could explain the violation of the absolute priority rule for firms in financial distress. Finally, we find that debt renegotiation is facilitate among firms with relatively low risk and a high leverage ratio, as documented by empirical evidence.

Keywords: : Debt renegotiation, Positive externalities, Dynamic capital structure, Asset substitution.

JEL Classification: : : G13, G31, G32.

Married CEOs and Stock Price Crash Risk.

JeongBon Kim,Shushu Liao, Yangke Liu.

This study examines whether marriage, as a social construct and cultural norm, could affect firm-level stock price crash risk. We find that firms managed by married CEOs are associated with lower future stock price crash risk, after controlling for a set of firm characteristics and CEO traits. We document that CEO marriage reduces crash risk by curbing bad news hoarding and formation activities. Moreover, the attenuating impact of CEO marriage on crash risk is more pronounced among firms with weaker corporate governance and those run by less prominent, higher delta, and lower-paid CEOs.

Keywords: : CEO; Crash risk; Bad news hoarding; Corporate governance; Compensation.

JEL Classification: : : G12; G30; M52; M12.

Forecasting High-Frequency Excess Stock Returns via Data Analytics and Machine Learning.

Erdinc Akyildirim,Duc Khuong Nguyen,Ahmet Sensoy,Mario Šikić.

Borsa Istanbul introduced data analytics to present additional information about its market conditions. We examine whether this product can be utilized via various machine learning methods to predict intraday excess returns. Accordingly, these analytics provide significant prediction ratios above 50% with ideal profit ratios that can reach up to 33%. Among all the methods considered, XGBoost (logistic regression) performs better in predicting excess returns in the long-term analysis (short-term analysis). Results provide evidence for the benefits of both the analytics and the machine learning methods and raise further discussion on the semi-strong market efficiency.

Keywords: : Bigdata,dataanalytics,machinelearning,forecasting,efficientmarkethypothesis.

JEL Classification: : : C52, C53, D81, G14, G17.

Misconduct Risks, Legal Enforcement, and Venture Capital Networks.

Douglas Cumming,Ali Mohammadi,Simona Zambelli.

This study investigates the differing role of enforcement on the formation of venture capital (VC) syndication networks. We conjecture that public enforcement, with strong investigative powers against any syndicate member, discourages the formation of denser syndication networks due to misconduct risk by a member. By contrast, private enforcement, with strong disclosure and liability standards, enables denser syndication networks, through clear liability rules, standardized securities contracts, and cost sharing amongst syndicate members. Our VC data from 31 countries show a negative impact of public enforcement on VC networks, and partially support the positive impact of private enforcement depending on cultural conditions.

Keywords: : Networks, Venture Capital, Syndication, Legal Enforcement, Culture.

JEL Classification: : : G24, G32.

Influence of endogenous reference points on the selling decisions of retail investors.

Avijit Bansal,Joshy Jacob,Ajay Pandey.

Using trader-level data, we examine the impact of the stock-specific endogenous reference points, the ‘realized-return’, and the ‘peak-return’ of the prior round on the selling propensity in a subsequent investment round in the same asset. The selling propensity rises significantly near the endogenous reference points. The significance is greater when the holding period is relatively shorter and when the time gap between the consecutive rounds is lower, implying a recency effect. Finally, the impact is more substantial on traders holding fewer stocks. The results imply that traders’ prior stock-specific experience plays a significant role in the reference point formation.

Keywords: : Investment Experience, Investor Behaviour, Behavioural Finance, Reference Points.

JEL Classification: : : G11, G40, G41.

Pricing Art and the Art of Pricing:On Returns and Risk in Art Auction Markets

Yuexin Li, Marshall X. Ma, and Luc Renneboog.

We study the price determinants and investment performance of art using a vast sample of transactions worldwide over the past 60 years. We focus on paintings and drawings which have appreciated at a real (nominal) annual return of 2.49% (6.24%). Higher art returns are reached for paintings at the high end of the price distribution, oil paintings, more recent art movements, and transactions by reputable auction houses. The risk–return trade-off of paintings underperforms that of other passion investments. Paintings’ Sharpe ratios are below those of stocks, bonds, and gold but outperform those of commodities and real estate. Investments in paintings enter the optimal investment portfolio.

Keywords: : Auction; art investment; cultural economics; hedonic pricing model; repeat sales model.

JEL Classification: : : D44, G20, G11, Z11.

Time Series Reversal in Trend-Following Strategies

Jiadong Liu,Fotis Papailias.

This paper empirically studies the reversal pattern following the formation of trend- following signals in the time series context. This reversal pattern is statistically significant and usually occurs between 12 and 24 months after the formation of trend- following signals. Employing a universe of 55 liquid futures, we find that instruments with sell signals in the trend-following portfolio (“losers”) contribute to this type of reversal, even if their profits are not realised. The instruments with buy signals in the trend-following portfolio (“winners”) contribute much less. A double-sorted investment strategy based on both return continuation and reversal yields to portfolio gains which are significantly higher than that of the corresponding trend-following strategy.

Keywords: : Reversal, Trend-following Strategies, Market Timing, Time Series Momentum, Return Signal Momentum.

JEL Classification: : :

Investing for retirement: Terminal wealth constraints or a desired wealth target?

William Lim,Gaurav Khemka,Catherine Donnelly,

We investigate how well different investment strategies can give pre-retirees more certainty about their income in retirement, whilst allowing them to benefit from taking investment risk. Under an expected utility-maximizing framework, we find that a loss aversion utility function gives a high degree of certainty about its desired target income level and is robust to different market models. Imposing terminal wealth constraints does not improve the certainty of achieving the desired target income level enough to counter-balance the increased chance of obtaining a lower income. The power utility function is not robust to changing the market model and becomes too risk-averse when terminal wealth constraints are added.

Keywords: : Asset allocation; Constrained optimization; Numerical dynamic programming; Loss aver- sion utility; Retirement outcomes.

JEL Classification: : : G11; G22; G51.

The Banking Union and evidence on bail-ins and bailouts.

Ricardo Cabral.

This article analyzes the Eurozone's banking sector regulatory framework, known as the Banking Union. It shows how distressed banks' non-compliance with supervisory, state aid, or central bank lending policies can trigger the application of resolution or liquidation measures. Further, it provides new evidence on large bank distress episodes in the European Union and the United States, suggesting that recapitalization is a more cost-effective policy instrument than resolution or liquidation. Finally, it argues that the Banking Union lacks an appropriate recapitalization instrument for borderline distressed banks and that a more nuanced and structured stance on regulatory forbearance is probably warranted.

Keywords: : Resolution, liquidation, financial stability, regulatory forbearance, Banking Union.

JEL Classification: : : E58, G00, G21, G28.

ETF Ownership and Corporate Cash Holdings.

Izidin El Kalak,Onur Kemal Tosun.

Do exchange traded funds (ETFs) influence corporate cash holding decisions? Consistent with reduced managerial learning from the stock market and increased uncertainty due to higher ETF ownership, we show that firms included in ETF baskets have higher cash holdings as a precautionary response. We address endogeneity concerns through different natural experiments, namely, the reconstitution of the Russell 1000/2000 index and BlackRock’s acquisition of iShares. We identify changes in revenue, external financing, share repurchases, and net working capital as potential channels through which cash holdings increase due to higher ETF ownership, with cash holdings increases having positive impact on firm value.

Keywords: : Exchange traded funds, Cash holdings, Share price informativeness, Cash value, Managerial learning.

JEL Classification: : : G14; G23; G32.

Unravelling the JPMorgan Spoofing Case Using Particle Physics Visualization Methods.

Marjolein Verhulst,Philippe Debie,Joost Pennings,Cornelis Gardebroek.

On September 29, 2020, JPMorgan was ordered to pay a settlement of $920.2 million for spoofing the metals and Treasury futures markets from 2008 to 2016. We examine these cases using a visualization method developed in particle physics (CERN) and the messages that the exchange receives about market activity rather than time-based snapshots. This approach allows to examine multiple indicators related to market manipulation and complement existing research methods, thereby enhancing the identification and understanding of, as well as the motivation for, market manipulation. In the JPMorgan cases, we offer an alternative motivation for spoofing than moving the price.

Keywords: : Spoofing, Limit Order Book, Visualization, Particle Physics, High-Frequency Trading.

JEL Classification: : :

Impact of MiFID II Tick-Size Regime on Equity Markets - Evidence from the LSE.

Andrew Lepone,Grace Lepone,Eros Favaretto.

This study investigates the impact of MiFID II on the LSE. We find that a tick-size reduction leads to lower bid–ask spreads, lower trade values, reduced cost of trading at and beyond the BBO, an acceleration of quote updates, an increase in aggressive trades and a reduction in price impact. Increased tick-size widens spreads and increases trading costs. Step functions reveal that liquidity adjusts opposite to the tick change. To determine if impacts are proportional, we identify potential functions that predict cost changes with tick updates, implying that traders adjust their trade sizes according to the new tick levels.

Keywords: : Tick size, Trading cost, Resiliency, MiFID II.

JEL Classification: : :

Is Money Really Left on the Table? The Role of Regular Investors in IPO Pricing.

Fabrizio Palmucci,Manuela Geranio,Camilla Mazzoli.

We study how ongoing relationships between lead underwriters and institutional investors affect initial public offering (IPO) pricing. By introducing a new approach, we find that stronger relationships reduce the partial adjustment of the offer price, leaving “excess underpricing” that favors regular investors, especially in hot IPOs, while generating an agency cost for issuers. At the same time, stronger relationships lead to higher offer prices, since they reduce information asymmetries and uncertainty in the primary market. This “excess price adjustment” creates value for issuers. Taken together, these two apparently contradictory results reveal a win-win outcome for issuers and regular investors.

Keywords: : Repeated interactions; initial public offerings; regular investors; underpricing; information asymmetries.

JEL Classification: : : G24; G31; G23.

Law enforcement spillover effects in the financial sector.

Shivam Agarwal,Cal Muckley.

Recipient firms but also comparable peer firms exhibit a sizeable negative capital market reaction to U.K. regulatory enforcement actions. This result is invariant to the identifica- tion of peer firms as belonging to the same industry classification or as having comparable propensity scores to attract a sanction. Indiscriminate regulatory contagion, however, is ruled out. As per expectation, enforcement actions which pierce the ‘corporate veil’, i.e. target an individual within a firm, are related to no significant firm-level market reac- tions. These findings, in the financial sector, indicate that sanctions are associated with a material spillover effect consistent with informed regulatory contagion.

Keywords: : Regulatory risk, Enforcement actions, Abnormal stock returns, Peer firm effects.

JEL Classification: : : G21, K42.

Institutional Investor Distraction and Innovation.

Xiaoling Pu,Hua-Hsin Tsai,M. Tony Via.

Prior studies suggest high institutional ownership provides stable funding for firm managers supporting long-term innovation. However, we hypothesize that the level of holdings can also proxy for institutional attention. We address this question and find that institutional distraction negatively impacts board monitoring and advisory support for management, reducing R&D, patent filings, citations, and creativity. Distraction is concentrated in 1) firms owned by institutions providing low attention before the shock and 2) industries facing low substitute monitoring through competition. Distraction also affects information flow in firms facing high labor mobility and high peer firm innovation (technology spillovers).

Keywords: : institutional ownership, innovation, monitoring, investor distraction.

JEL Classification: : : G23, G30, O30.

Are cryptocurrencies homogenous.

Frida Gustafsson,Elias Bengtsson.

This article investigates if returns of cryptocurrencies are affected in similar ways by a selection of demand and supply-side determinants. These determinants include both economic determinants, such as macroeconomic factors and uncertainty, and technical determinants, such as token supply, distribution and transaction validation. Homogeneity among cryptocurrencies is tested via a LASSO-model in which the determinants of Bitcoin returns are applied to a sample of 12 cryptocurrencies. The analysis goes beyond much existing research by simultaneously covering different time periods and design choices of cryptocurrencies.
The results show that cryptocurrencies are heterogenous, apart from some similarities in the impact of technical determinants and cybercrime. The cryptocurrency market is highly integrated with evidence of substitution effects. Further, design choices related to demand and supply among cryptocurrencies often explain the impact of determinants of return. It is important to consider heterogeneity among cryptocurrencies to enlighten the ongoing debates about the social contribution, economic advantages and risks, and potential regulation of cryptocurrencies.

Keywords: : Cryptocurrencies; decentralised virtual currencies; LASSO; homogeneity; Bitcoin.

JEL Classification: : :

Flexibility in Share Repurchases – Evidence from UK.

Manoj Kulchania,Rohit Sonika.

While firms cite flexibility as important when repurchasing shares, we know little about how or why firms vary repurchases. We use an extensive sample of daily repurchase transactions from the UK to investigate how the number of repurchase days and volumes of shares repurchased change based on several known motivations. We find that stock price changes, liquidity, leverage, takeover activity, and EPS targets impact share repurchasing patterns. Further, we compare actual repurchases to alternative share accumulation strategies and find that firms utilize flexibility without paying higher costs.

Keywords: : Payout, Repurchases, Market timing, Flexibility, UK.

JEL Classification: : : G35.

Interbank Contagion Risk in China under an ABM Approach for Network Formation.

Shiqiang Lin,Hairui Zhang.

This paper uses an agent-based model to construct an interbank network for the Chinese interbank market using a sample of 299 commercial banks from 2014 to 2019. We analyze the importance and vulnerability of banks using the DebtRank algorithm. Our results show that the Chinese interbank market bears a certain level of systemic risk, especially among lower-tiered banks. The results also show a bank is more vulnerable if it has a higher interbank lending ratio and greater financial connectivity. Meanwhile, a bank is more influential if it has a larger net worth and greater financial connectivity.

Keywords: : interbank network, contagion risk, agent-based modeling, Chinese banking sector, simulation.

JEL Classification: : : C63; G17; G21.

Unnatural selection of outside directors: Consequences of Japanese corporate governance reforms.

Souhei Ishida,Takuma Kochiyama.

We examine how Japanese listed companies increase the number of outside directors to comply with corporate governance reforms. We find that, after the reforms, there has been an increase in the number of cases in which former company auditors (kansayaku) become outside directors in the same company. This trend is more pronounced for hitherto non-compliant firms with insufficient outside directors before the reforms. Moreover, the firms appointing company auditors as outside directors tend to change their corporate structures to maintain existing practices and minimize compliance costs. Our findings imply that Japanese reforms have increased the unnatural selection of outside directors.

Keywords: : corporate governance reform, corporate governance code, outside director, board structure, institutional theory.

JEL Classification: : : G34, G38, M10.

Trade credit in Europe: financial constraint and substitution effect in crisis times.

Candida Bussoli,Claudio Giannotti,Francesca Marino,Antonello Maruotti.

This paper aims to prove whether financial rationing condition leads European enterprises to increase trade debt during the period 2008-2016 and whether companies offering deferred payments to customers obtain trade debt from suppliers. The work contributes to the existing literature finding new empirical evidence on the substitution and matching hypotheses in times of crises, measuring the specific rationing conditions for businesses and distinguishing large, medium, small and micro-sized companies. The results revealed that, in times of crisis, medium, small and micro firms, highly likely to be constrained, employ trade credit more extensively, as those granting deferred payment terms.

Keywords: : Trade credit, accounts payable, accounts receivable, financial rationing, crisis.

JEL Classification: : : D22; G30; G32.

US Macroeconomic Surprises and the Emerging-Market Sovereign CDS Market.

Junmao Chiu, Wei-Che Tsai, Chi Yin.

Our primary aim is to examine whether US macroeconomic surprises affect the slope of the term structure of “sovereign credit default swap” (SCDS) spreads in emerging markets. Our empirical results show that positive (negative) US macroeconomic surprises are likely to reduce (increase) the term structure slope of SCDS spreads in emerging countries. We find that the slope values in emerging markets are positively related to future market returns over 1- and 2-day horizons. Our results provide general support for the future informational role played by SCDS spreads for the national stock market within emerging markets.

Keywords: : Sovereign credit default swaps; Emerging markets; Spillover effects.

JEL Classification: : : F30; G15.

Productivity and Payout Policy.

Manoj Kulchania.

I investigate how a firm’s total factor productivity (TFP) is related to its payout policy. I find that firms with higher TFP are more likely to pay dividends and repurchase shares. Such firms also pay higher dividends and repurchase more shares, even after controlling for income and other factors known to affect payout policy. Results are robust to propensity score matching and other analysis, including adoption of productivity-enhancing technology. I find that firms with higher TFP earn higher future operating income; productive firms with higher agency concerns pay back more, thus draining resources that could potentially be misused.

Keywords: : Payout; Productivity; Dividends; Repurchases.

JEL Classification: : : G35.

Big Data, Artificial Intelligence, and Machine Learning: A Transformative Symbiosis in Favour of Financial Technology.

Duc Khuong Nguyen, Georgios Sermpinis, Charalampos Stasinakis.

This paper uses a multidimensional descriptive analysis to famil-iarize the reader with the extent of penetration of big data, artifi-cial intelligence (AI), and machine learning (ML) techniques in the financial technology roadmap. We propose a clear frame-work for the symbiotic nature of these data science themes to-wards fintech empowerment. The framework is validated through their impact in fintech, financial services’ profession and the shifting paradigm of the data scientist role. We also discuss the dark side of this symbiosis, while AI and ML techniques are tied with the future challenges of AI ethics, regulation technol-ogy and the smart data utilization.

Keywords: : FinTech, artificial intelligence, machine learning, big data, digi-tal finance.

JEL Classification: : : G10, G20, L51.

Persistency of Window Dressing Practices in the U.S. Repo Markets after the GFC: The Unexplored Role of the Deposit Insurance Premium.

Alessio Reghezza, Aziz Jaafar, Salvatore Polizzi.

We investigate whether the regulatory improvements made in the aftermath of the global financial crisis (GFC) have been effective in limiting bank downward window dressing by means of repos in the U.S. Using hand-collected data of U.S. bank holding companies (BHCs) over the period 2011Q2-2016Q1, we find that a strict application of the Basel III regulation wipes out incentives to engage in window dressing to bolster the level of leverage Tier 1 ratio at quarterend. We also uncover an unexplored channel that induces banks to window dress. Specifically, we show that the persistency of window dressing is related to the computation of the Federal Deposit Insurance Corporation assessment base, which motivates banks to engage in window dressing to reduce the deposit insurance premium. Our findings call for greater emphasis on supervision of banks’ window dressing practices.

Keywords: : Window Dressing; Leverage Tier 1 Ratio; Deposit Insurance Premium; Repurchase Agreements; Bank Holding Companies.

JEL Classification: : : G14, G21, G28, M41, M48.

SPAC Merger Announcement Returns and Subsequent Performance.

Florian Kiesel,Nico Klingelhöfer,Dirk Schiereck,Silvio Vismara.

Special Purpose Acquisition Companies (SPACs) are created to raise capital and then find non-listed operating companies with which to merge. While most of the extant research has focused on SPAC initial public offerings, we study what happens when SPACs announce business combinations. Our analysis of 236 “deSPACs” completed between January 2012 and June 2021 in the United States documents an average short-term announcement return of +7.4% and a one-year abnormal return of -14.1% (-18.0% over two years) for public investors beginning from the merger announcement. Short-term returns decrease with longer times from IPO until announcement.

Keywords: : Special Purpose Acquisition Companies (SPACs), deSPACs, IPO, Performance

JEL Classification: : : G14; G30; G34; G24

Persistency of Window Dressing Practices in the U.S. Repo Markets after the GFC: The Unexplored Role of the Deposit Insurance Premium.

Aziz Jaafar, Salvatore Polizzi, Alessio Reghezza

We investigate whether the regulatory improvements made in the aftermath of the global financial crisis (GFC) have been effective in limiting bank downward window dressing by means of repos in the U.S. We find that a strict application of the Basel III regulation wipes out incentives to engage in window dressing to bolster the level of leverage Tier 1 ratio at quarter- end. We also show that the persistency of window dressing is related to the computation of the Federal Deposit Insurance Corporation assessment base, which motivates banks to engage in window dressing to reduce the deposit insurance premium.

Keywords: : Window Dressing; Leverage Tier 1 Ratio; Deposit Insurance Premium; Repurchase Agreements; Bank Holding Companies.

JEL Classification: : : G14, G21, G28, M41, M48.

The Wealth Effects of Takeover Bids Regulation in the European Union.

Gilberto Loureiro,Sónia Silva.

We investigate the wealth effects of the Takeover Bids Directive, enacted by the European Union, on mergers and acquisitions. The directive aims at protecting target minority shareholders by restricting anti-takeovers provisions and preventing managerial entrenchment. We test the regulation impact using a treatment sample of EU public acquisitions and a control sample from outside the EU. Our results suggest diverse effects of the regulation across treatment countries: acquirers from countries with better shareholder protection engage in more value-enhancing acquisitions post-regulation that could otherwise be too costly. The regulation also increases the likelihood of firms becoming targets and raises market value.

Keywords: : Securities Regulation; Mergers & Acquisitions; European Union; Acquisition Synergies; M&A announcement returns.

JEL Classification: : : F30; G15; G30; G34; G38.

CSR Activity in Response to the Paris Agreement Exit.

J. Philipp Klaus, Hirofumi Nishi, S. Drew Peabody, Carolyn Reichert.

In 2017, United States President Donald Trump announced his intention to withdraw the U.S. from the Paris Agreement. Although there were concerns that the exit would impede the global effort to reduce greenhouse gas emissions, the environmental performance of U.S. firms in carbon-intensive sectors improved after the announcement at a significantly higher pace than firms in other sectors. Moreover, our findings are concentrated among firms exposed to higher public attention. One implication is that firms under greater public scrutiny used the U.S.’s departure from the agreement as an opportunity to credibly signal their commitment to combating global climate change.

Keywords: : Corporate social responsibility; signaling, environment; Paris Agreement.

JEL Classification: : : G14; G18; G30; M14.

Modelling failure rates with machine-learning models: Evidence from a panel of UK firms.

Georgios Sermpinis,Serafeim Tsoukas, Yiqun Zhang.

In this study we investigate the ability of machine-learning techniques to predict firm failures, and we compare them against alternatives. Using data on business and financial risks on UK firms over 1994-2019, we document that machine-learning models are systematically more accurate than a discrete hazard benchmark. We conclude that the random forest model outperforms other models in failure prediction. In addition, we show that the improved predictive power of the random forest model relative to its counterparts, persists when we consider extreme economic events as well as firm and industry heterogeneity. Finally, we find that financial factors affect failure probabilities.

Keywords: : Finance, Business closures, Financial ratios, Machine-learning models, Random forest.

JEL Classification: : : G17, G33, C25, E37.

Public governance and executive perks under a weak corporate governance environment.

Wei Huang,Zongyan Li, Yu Qin, Shuai Yuan.

We reveal state-led anti-corruption campaigns in China can mitigate excess executive perk consumption facilitated by firms’ weak internal control environment. Our findings suggest that public governance can substitute for firm-level governance mechanisms. Since these campaigns enhance the central government’s disciplinary power over local state-owned enterprises (SOEs), the above effects are heightened among SOEs controlled by provincial/municipal governments rather than the central government. Irrespective of political connections, non-SOEs are also affected, indicating policy effect spillover to China’s private sectors. We explore several underlining mechanisms for these effects, including Communist Party Committee governance, chief executive officer/chairperson dismissal, industry competition, and firm productivity.

Keywords: : Anti-corruption, Internal control, Perks, China.

JEL Classification: : : G34; G38; M40.

Seven Myths of ESG.

David F. Larcker, Brian Tayan, Edward M. Watts.

Environmental, social, and governance (ESG) considerations have dominated the discussion of corporate purpose in recent years. We examine commonly accepted notions about ESG that are foundational to the discussion but receive little critical analysis. We conclude that decisions about ESG would improve if they were based on empirical evidence and theoretical research in this field.

Keywords: : ESG, corporate purpose, ratings, disclosure, greenwashing.

JEL Classification: : : G00; M00; M14.

The Term Structure of Mutual Fund Herding.

Xiaolin Huo, Xin Liu, Weinan Zheng.

This paper investigates institutional herding behaviors in the U.S. Treasury market. We find that the level of herding is higher for bonds with a longer time to maturity, and this pattern is significant only for buy herding, not sell herding. This term structure of herding is stronger for funds with shorter investment horizon. These patterns remain strong for Treasury Inflation-Protected Securities (TIPS) and for Treasuries with high coupon rates. Overall, our findings support investors’ short-termism as a channel for the term structure of herding and are inconsistent with other herding explanations, such as spurious herding, reputational concerns, and information cascades.

Keywords: : Herding; Treasuries; time to maturity; mutual funds; short-termism.

JEL Classification: : : G11; G12; G14; G23.

Idiosyncratic risk and debt maturity dispersion.

Pyung Kun Chu,Einar C. Kjenstad.

We investigate the relation between idiosyncratic asset risk and debt maturity dispersion. Idiosyncratic asset volatility represents signi􏰀cant risk, which can impede the ability to obtain or maintain external debt 􏰀nancing necessary for business operations, and is di􏰃cult to control given its unpredictable nature. We 􏰀nd that this risk is managed through the maturity structure of debt: 􏰀rms with higher idiosyncratic asset volatility also have more dispersed maturity structures. Consistent with active management of rollover risk, this relation is weaker for younger 􏰀rms and stronger for 􏰀rms without signi􏰀cant existing credit lines.

Keywords: : Idiosyncratic asset volatility, debt maturity dispersion, rollover risk.

JEL Classification: : : G10, G32.

Are covered bonds different from securitization bonds? A comparative analysis of credit spreads.

Mafalda C. Correia, João M. Pinto.

This study compares credit spreads and pricing determinants of securitization vis-à-vis covered bonds. Our analysis reveals that although ratings are the most important pricing determinant for ABS and MBS, investors place relatively more importance on contractual, macroeconomic, and banks’ characteristics rather than ratings in pricing covered bonds. We find evidence of a mispricing effect in structured finance markets: ABS and MBS have higher credit spreads than similarly rated public covered bonds and mortgage covered bonds, and security prices reflect information beyond credit ratings. We find no evidence of borrowing costs affecting banks’ choice between securitization and covered bonds.

Keywords: : credit spreads; securitization; covered bonds; mispricing; cost of borrowing.

JEL Classification: : : F34; G01; G12; G24.

Twitter Investor Sentiment and Corporate Earnings Announcements.

Nikolaos Karampatsas,Soheila Malekpour,Andrew Mason,Christos P. Mavis.

We examine the impact of firm-specific investor sentiment (FSIS) on stock returns for negative and positive earnings surprises. Using a measure constructed from firm-specific tweets, we find that FSIS has a greater impact on stock returns for negative relative to positive earnings surprises. We further show that the impact of FSIS is greater for firms whose valuation is uncertain and difficult to arbitrage. Moreover, we provide evidence of return reversals over post-announcement periods. Our results highlight the importance of firm-specific investor sentiment around earnings announcements.

Keywords: : Investor sentiment; Social media; Twitter; StockTwits; Earnings surprises.

JEL Classification: : : G02, G11, G12, G14.

Company Name Fluency and Acquisition Target Analysis.

Ching-Yu Hsu, Chia-Wei Huang, Chih-Yen Lin.

This paper investigates the impact of company name fluency on acquisitions. We hypothesize that a company’s name fluency, used by potential acquirers as a mental shortcut, influences not only its visibility to investors but also the level of interest from potential acquirers, increasing the probability of that company being acquired. After correcting for endogeneity, company name fluency is positively associated with both the probability of being an acquisition target and the acquisition premium. The reasons for the higher acquisition premium for targets with higher name fluency are identified as reduced need to hire top-tier investment banks and higher synergy.

Keywords: : Acquisitions; Company names; Fluency.

JEL Classification: : : G02; G34

Zero Leverage Puzzle: Do Labor Laws Matter?

Hamid Boustanifar, Arnt Verriest.

Exploiting the staggered passage of labor protection laws in the US, we find that higher labor adjustment costs increased the likelihood of observing zero leverage firms by 22%. This effect is significantly larger in states with stronger unionization, in industries with higher volatility and concentration, and in firms with higher labor intensity. Both within-firm changes in debt policies and higher propensity of newer firms to be debt-free are important in explaining these patterns. Overall, our work contributes to the literature on the relation between financial and labor markets by highlighting the role of labor laws in explaining the zero-leverage puzzle.

Keywords: : Zero leverage, Net debt, Employee protection, Labor Protection.

JEL Classification: : : G32, K31.

Information Asymmetry, East-West Cultural Differences, and Divergence in Investor Reactions.

Seungho Lee, Thomas Walker, Aoran Zhang, Yunfei Zhao.

This paper investigates the divergence in investor behavior between the U.S. and China following the abolition of the Chinese presidential term-limit in 2018, which may, in part, have reflected the heterogeneous opinions expressed in public online media regarding this event. Compared with Chinese investors, the sentiment among U.S. investors was considerably more pessimistic. Accordingly, we find that Chinese companies listed in the U.S. significantly underperformed relative to a sample of propensity score matched firms listed in China. Additionally, we find that the political connectedness of firms to the Chinese government strongly influenced the stock prices of U.S-listed Chinese firms.

Keywords: : Presidential Term Limit, Term Limit Abolition, China, United States, Political Connections, Equity Market.

JEL Classification: : : G14, G15, G18.

The Influence of Incoming CEOs.

Anwar Boumosleh, Brandon N. Cline.

We introduce a novel index capturing the power of an incoming CEO and explore the association between the appointment of a new CEO and turnover in the top management team (TMT). We document a statistically and economically significant relation between the level of new CEO power and the departure of senior executives. Specifically, we find that in addition to CEO origin, new CEO power is positively related to TMT turnover. We also find that in the post SOX period, CEO power is more significant in affecting TMT turnover and that directorship and ownership of senior executives reduce departure.

Keywords: : Top Management Turnover, CEO Power, Agency Problem, Firm Performance.

JEL Classification: : : G30; G32; G34.

Institutional Investors and Corporate Environmental and Financial Performance.

Steve Miller, Bin Qiu, Bin Wang, Tina Yang.

We propose a conceptual framework to illustrate that when three conditions hold, institutional investors moderate a positive relation between corporate financial performance (CFP) and corporate environmental performance (CEP). We explore heterogeneities across institution types to demonstrate the importance of each condition. The moderating effect works through the channels of expert consulting and effective monitoring. Our results have important policy and practical implications given the global trend of ownership concentration in institutional investors and the projection that by 2025, one out of three dollars under professional management will be invested in corporate social responsibility (CSR) assets.

Keywords: : Corporate environmental performance; Environmental, social, and governance; Institutional investors; Shareholder theory; Stakeholder theory; Delegated philanthropy theory.

JEL Classification: : : D22; G34; M14.

Credit Variance Risk Premiums.

Manuel Ammann, Mathis Moerke.

This paper studies variance risk premiums in the credit market using a novel data set of swaptions quotes on the CDX North America Investment Grade and High Yield indices. The returns of credit variance swaps are negative and economically large, irrespective of the credit rating class. They are robust to transaction costs and cannot be explained by established risk-factors and structural model variables. We also dissect the overall variance risk premium into receiver and payer variance risk premiums. We show that credit variance risk premiums are mainly driven by the payer corridor, which is associated with worsening macro-economic conditions.

Keywords: : Variance risk premium, CDS implied volatility, CDS variance swap.

JEL Classification: : : G12, G13.

Value Premium and Macroeconomic Variables.

Elena Beccalli1, Nicola Doninelli, Cesare Orsini.

This paper investigates the effect of macroeconomic expectations on the value premium. We introduce a two-pass estimation procedure to extrapolate the impact of investors’ macro expectations on the firm fundamental value of Rhodes-Kropf, Robinson, and Viswanathan (2005). We find that the level and slope of the term structure affect valuation, revealing a heavily industry-dependent effect. The portfolios sorted on metrics orthogonal to macroeconomic variables show a clear association between the misvaluation component of value premium and size risk. By removing the influence of the macroeconomic conditions and size, we separate the portion of the value premium that rewards macroeconomic expectations.

Keywords: : Value Premium, Market-to-Book Decomposition, Macroeconomic Risk.

JEL Classification: : : G12, G14.