European Financial Management 2022 Archive

January 2022, VOL 28:1 March 2022, VoL 28:2

European Financial Management, VOL 28:1, January 2022

Has European corporatism delivered? A survey with preliminary evidence

Shiva Rajgopal

I ask whether European firms' investments in stake- holder 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 US firms. The valuation discount is correlated with presence of large block holders in European firms but not with the poorer disclosure record of US firms on the environmental (E) and social (S) dimensions. In sum, poorer governance (G) in continental Europe appears to destroy more shareholder value than better E and S disclosure can add.

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

JEL Classification:

M14, G23, G34.

Stock price synchronicity, cognitive biases, and momentum

Chen Chen,John A. Doukas.

The momentum anomaly is widely attributed to in- vestor cognitive biases, but the trigger of cognitive biases is largely unexplored. In this study, inspired by psychology studies linking cognitive biases to the noi- siness of information, we examine whether momentum returns are associated with high stock price synchro- nicity, a manifestation of noisy firm‐specific informa- tion. Our results demonstrate that momentum is more pronounced in the presence of high stock price syn- chronicity. 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: capital markets, cognitive biases, momentum, stock price synchronicity.

JEL Classification:

G10; G12; G14; G41.

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

Sabri Boubaker,Viet A. Dang,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.

Target insiders' preferences when trading before takeover announcements: Deal completion probability, premium and deal characteristics.

Jana P. Fidrmuc,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 char- acteristics. They prefer bidder‐initiated, cash, pri- vately negotiated, and strategic deals. Insiders combine several sources of information.

Keywords: insider trading, mergers and acquisitions, target firms.

JEL Classification:

Optimal reinsurance and portfolio selection: Comparison between partial and complete information models.

Bong‐Gyu Jang,Kyeong Tae Kim,Hyun‐Tak Lee.

We consider partial and complete information models to investigate how partial information has a 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 behaviour, mainly through the relative difference be- tween 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: certainty equivalent wealth, information quality, partial information, risk‐adjusted premium.

JEL Classification:

C61; G11; G22.

The evolution of financial constraints.

Demetris Christodoulou,Shawn Ho,Artem Prokhorov.

We demonstrate that the severity of financial con- straints 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 in- vestment opportunities. The decline in financial con- straints 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 ex- ternal capital. There is a flight‐to‐quality during eco- nomic 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.

Helmut Herwartz,Fang Xu.

We employ data‐based approaches to identify the transmissions of structural shocks among investor at- tention measured by Google search queries, realised volatilities and trading volumes in the United States, the United Kingdom and the German stock market. The two identification approaches adopted for the structural vector autoregressive analysis are based on independent component analysis and the informa- tional content of disproportional variance changes. Our results show robust evidence that investors' attention affects both volatilities and trading volumes con- temporaneously, whereas the latter two variables lack immediate impacts on investors' attention. Some movements in investors' attention can be traced back to market sentiment.

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

JEL Classification:

G10, G14.

A game of thrones—Dynamics of internal CEO succession and outcome.

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

We examine the implications of chief executive offi- cer (CEO) succession methods for firm outcomes and executive incentives. Focusing on internal CEO suc- cessions, 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 succes- sion 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 in- centives and CEO labour markets.

Keywords:board of directors, CEO turnover, executive compensation, succession.

JEL Classification:

G30, J33, M52.

European Financial Management, VOL 28:2, March 2022

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:


Does corruption distance affect cross-border acquisitions? Different tales from developed and emerging markets

Chinmoy Ghosh,P.C. Narayan,R. Shyaam Prasadh,M. Thenmozhi.

Using a large sample of cross-border deals, we find an inverted U-shaped relationship between corruption distance and cross-border acquisition (CBA) volume. CBAs involving higher corruption distance show negative post-acquisition performance. However, MNEs with larger equity stake deliver superior gains. We find that the ownership strategy varies with levels of corruption distance. MNEs mitigate adverse selection and moral hazard problems by acquiring targets from a related industry and targets with a foothold. We demonstrate that CBA activity and ownership strategy vary between developed and emerging economies, and both ‘level’ and ‘direction’ of corruption distance are important in its effect on CBAs.

Keywords: Cross border acquisitions; Corruption distance; Ownership structure; Emerging markets; post-acquisition performance.

JEL Classification:

G34, D73, F23, L25.

Manacled short sellers and return premium: New evidence.

Xiao-Ming Li.

Investigating the short-selling regulation of the Hong 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 capital flows to emerging markets.

Christoforos K. Andreou,Nebojsa Dimic,Vanja Piljak,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, unconventionalmonetary policy.

JEL Classification:

E44, F30, G15.

Net asset value discounts and premiums in the maritime shipping industry.

Andreas Andrikopoulos,Anna Merika,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 capitalisation 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.

Further evidence on calendar anomalies.

Yuan-Teng Hsu,Kees G. Koedijk,Hung-Chun Liu,Jying-Nan Wang.

This study aims to investigate the day‐of‐the‐week effect of cross‐market leveraged exchange‐tradedfunds (LETFs) in the Taiwanese stock market. We findthat Wednesday's overnight returns are significantlypositive for bull 2X LETFs tracking major stock indicesof the Chinese market, whereas no such an effect isfound for ETFs tracking local or other internationalstock markets. The“T+1”trading rule and a laggedMonday effect potentially explain this anomaly. Fi-nally, simulation analysis of various simple tradingrules further shows that there exist exploitable profitopportunities in cross-market bull 2X LETF markets.

Keywords:“T+1”trading rule, cross‐market ETF, day‐of‐the‐week effect,LETF, leveraged ETF.

JEL Classification:

C14; C22; G14; G15.

The determinants of banks' AT1 CoCo spreads.

Axel Kind,Philippe Oster,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.