European Financial Management 2023 Archive
European Financial Management, VOL 29:1, January 2023
Menu simplification for portfolio selection under short‐sales constraints
Farid AitSahlia, Thomas Doellman and Sabuhi Sardarli.
Abstract:
We introduce a risk‐reduction‐based procedure to identify a subset of funds with a resulting opportunity set that is at least as good as the original menu when short‐sales are imposed. Relying on Wald tests for mean‐variancespanning, we show that the better results for the subset can be explained by a higher concentration of covariance entries between its assets, ultimately leading to smaller Frobenius norms of the associated matrices. With data on US‐defined contribution plans, where participants have limited financial literacy, tend to be overwhelmed and prefer to make decisions among fewer choices, we obtain a 75% average reduction.
Keywords: asset allocation, defined contribution plans, mean‐variance spanning, short sales, Wald test
JEL Classification:
G11, G20, G23
Forecasting high-frequency excess stock returns via data analytics and machine learning
Erdinc Akyildirim, Duc Khuong Nguyen, Ahmet Sensoy, Mario Šikić.
Abstract:
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 semistrong market efficiency.
Keywords: big data, data analytics, efficient market hypothesis, forecasting, machine learning.
JEL Classification:
C52, C53, D81, G14, G17.
Time series reversal in trend-following strategies.
Jiadong Liu, Fotis Papailias
Abstract:
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: market timing, return signal momentum, reversal, time series momentum, trend‐following strategies.
JEL Classification:
Impact of MiFID II tick-size regime on equity markets—Evidence from the LSE
Eros Favaretto, Andrew Lepone, Grace Lepone.
Abstract:
This study investigates the impact of MiFID II on the London Stock Exchange. We find that a tick-size reduction leads to lower bid–ask spreads, lower trade values, reduced cost of trading at and beyond the best bid-offer, 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: MiFID II, resiliency, tick size, trading cost
JEL Classification:
Are cryptocurrencies homogeneous?
Elias Bengtsson, Frida Gustafsson.
Abstract:
This article investigates if cryptocurrencies returns' are similarly affected by a selection of demand- and supply-side determinants. Homogeneity among cryptocurrencies is tested via a least absolute shrinkage and selection operator (LASSO) model where determinants of Bitcoin returns are applied to a sample of 12 cryptocurrencies. The analysis goes beyond existing research by simultaneously covering different periods and design choices of cryptocurrencies. The results show that cryptocurrencies are heterogeneous, apart from some similarities in the impact of technical determinants and cybercrime. The cryptocurrency market displays evidence of substitution effects, and design choices related explain the impact of the determinants of return.
Keywords: bitcoin, cryptocurrencies, decentralised virtual currencies,homogeneity, LASSO
JEL Classification: E42, G12
Flexibility in share repurchases: Evidence from UK
Manoj Kulchania, Rohit Sonika.
Abstract:
Although 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 United Kingdom 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 earnings per share 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: flexibility, market timing, payout, repurchases, UK
JEL Classification: G35
Orderbook demand for corporate bonds.
Arthur Krebbers, Andrew Marshall, Patrick McColgan, Biwesh Neupane
Abstract:
We examine the determinants of investor demand for corporate bond offerings using novel data on the primary market orderbook size. We find that credit risk and bond market presence are significant in explaining investor demand. These effects are more pronounced during the crisis periods including the global financial crisis and eurozone crisis as well as during the postcrisis periods. Our results also highlight the size of the bond investor order depends on information asymmetry costs and the benefit of diversifications, as investor demand is lower for new issuers as well as very frequent issuers. The levels of investor demand have important economic consequences for bond issuers as high investor demand shortens the time to subsequent bond issues and potentially reduces the firm's cost of capital at issuance.
Keywords:bond pricing, investor demand, orderbook size, oversubscription.
JEL Classification:
G11, G12, G24.
Unravelling the JPMorgan spoofing case using particle physics visualization methods.
Philippe Debie, Cornelis Gardebroek, Stephan Hageboeck, Paul van Leeuwen, Lorenzo Moneta, Axel Naumann, Joost M. E. Pennings, Andres A. Trujillo-Barrera, Marjolein E. Verhulst.
Abstract:
On 29 September 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:high‐frequency trading, limit order book, particle physics, spoofing, visualization.
JEL Classification:
G10, G18, G23, G28, K22, K23.
Trade credit in Europe: Financial constraint and substitution effect in crisis times.
Candida Bussoli, Claudio Giannotti, Francesca Marino, Antonello Maruotti.
Abstract:
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 by 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:accounts payable, accounts receivable, crisis, financial rationing, trade credit
JEL Classification:
D22, G30, G32.
Institutional investor distraction and innovation
Xiaoling Pu, Hua-Hsin Tsai, M. Tony Via.
Abstract:
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 labour mobility and high peer firm innovation (technology spillovers).
Keywords:innovation, institutional ownership, investor distraction, monitoring.
JEL Classification:
G23, G30, O30.
European Financial Management, VOL 29:2, March 2023
The attack on share buybacks
Harry DeAngelo.
Abstract:
Corporate share buybacks are under attack, mainly from the political left, but also to some degree from the right. Critics advocate increasing the tax on buybacks in the hope of inducing firms to invest more and in ways that benefit workers. This attack on buybacks reflects a misunderstanding of basic (textbook-level) finance principles. The approach advocated by critics will backfire at growth-stage firms, which will invest less, not more, because a payout-tax increase will reduce the supply of equity infusions. At mature firms that are generating ample free cash flow, managers can easily evade the (unattractive-for-shareholders) real investments that critics desire by investing retained cash in financial assets. Buyback critics should recognise that punishing cash payouts per se would be counterproductive, and should focus instead on making a case for legislation that creates incentives that directly promote the specific behaviours they desire.
Keywords: capital infusions, corporate value creation, payout policy, share buybacks
JEL Classification:
G32, G35, G38.
SPAC merger announcement returns and subsequent performance.
Florian Kiesel, Nico Klingelhöfer, Dirk Schiereck, Silvio Vismara.
Abstract:
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 1-year abnormal return of −14.1% (−18.0% over 2 years) for public investors beginning from the merger announcement. Short-term returns decrease with longer times from initial public offering until announcement.
Keywords: deSPACs, IPO, performance, special purpose acquisition companies (SPACs)
JEL Classification:
G14, G30, G34, G24.
Influence of endogenous reference points on the selling decisions of retail investors.
Avijit Bansal, Joshy Jacob, Ajay Pandey.
Abstract:
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: behavioural finance, investment experience, investor behaviour, reference points.
JEL Classification:
G11, G40, G41.
Interbank contagion risk in China under an ABM approach for network formation
Shiqiang Lin, Hairui Zhang.
Abstract:
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: agent‐based modelling, Chinese banking sector, contagion risk, interbank network, simulation.
JEL Classification:
C63, G17, G21
Unnatural selection of outside directors: Consequences of Japanese corporate governance reforms.
Souhei Ishida, Takuma Kochiyama.
Abstract:
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 noncompliant 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: board structure, corporate governance code, corporate governance reform, institutional theory, outside director.
JEL Classification:
G34, G38, M10.
Big data, artificial intelligence and machine learning: A transformative symbiosis in favour of financial technology.
Duc Khuong Nguyen, Georgios Sermpinis, Charalampos Stasinakis.
Abstract:
This paper uses a multidimensional descriptive analysis to familiarize the reader with the extent of penetration of big data, artificial intelligence (AI) and machine learning (ML) techniques in the financial technology roadmap. We propose a clear framework for the symbiotic nature of these data science themes towards fintech empowerment. The framework is validated through their impact on 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 technology and the smart data utilization.
Keywords: artificial intelligence, big data, digital finance, fintech, machine learning.
JEL Classification:
G10, G20, L51.
US macroeconomic surprises and the emerging-market sovereign CDS market.
Junmao Chiu, Wei-Che Tsai, Chi Yin.
Abstract:
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:emerging markets, sovereign credit default swaps, spillover effects.
JEL Classification:
F30, G15.
Productivity and payout policy
Manoj Kulchania.
Abstract:
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 analyses, 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: dividends, payout, productivity, repurchases.
JEL Classification:
G35.
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
Abstract:
We investigate whether the regulatory improvements made in the aftermath of the global financial crisis have been effective in limiting bank downward window dressing by means of repos in the United States. 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: bank holding companies, deposit insurance premium, leverage tier 1 ratio, repurchase agreements, window dressing.
JEL Classification:
G14, G21, G28, M41, M48.
European Financial Management, VOL 29:3, June 2023
CSR activity in response to the Paris Agreement exit.
J. Philipp Klaus, Hirofumi Nishi, S. Drew Peabody, Carolyn Reichert.
Abstract:
In 2017, U.S. President Donald Trump announced his intention to withdraw the United States 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 United States' departure from the agreement as an opportunity to credibly signal their commitment to combating global climate change.
Keywords: corporate social responsibility, environment, Paris Agreement, signalling.
JEL Classification:
G14, G18, G30, M14.
The wealth effects of takeover bids regulation in the European Union.
Gilberto Loureiro, Sónia Silva.
Abstract:
We investigate the wealth effects of the Takeover Bids Directive, enacted by the European Union (EU), on mergers and acquisitions. The directive aims at protecting target minority shareholders by restricting antitakeovers 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 postregulation that could otherwise be too costly. The regulation also increases the likelihood of firms becoming targets and raises market value.
Keywords: acquisition synergies, European Union, mergers & acquisitions, M&A announcement returns, securities eegulation.
JEL Classification:
F30, G15, G30, G34, G38.
Modelling failure rates with machine-learning models: Evidence from a panel of UK firms.
Georgios Sermpinis, Serafeim Tsoukas, Yiqun Zhang.
Abstract:
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 of 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: business closures, finance, 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.
Abstract:
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, China, internal control, perks.
JEL Classification:
G34, G38, M40.
Does social capital foster sustainable investment?
Siu Kai Choy, Iva Koci, Mingzhu Wang.
Abstract:
How do country-level societal norms affect financial investments? We provide evidence that mutual funds managed in high social capital countries are inclined to consider environmental, social and governance filters in their portfolios, especially when acquiring new stocks and investing abroad. We argue that social capital nurtures the investment preferences of retail investors, whose demand incentivizes fund managers to respond in kind. Such impact is more pronounced in individualistic and high–power distance societies, suggesting that the social cohesion benefit of social capital complements altruistic inclinations in the former and provides mechanisms to punish unsustainable investment behaviour in the latter.
Keywords: ESG, mutual funds, social capital, sustainable investment.
JEL Classification:
G15, G41, M14, Z13.
Are covered bonds different from securitization bonds? A comparative analysis of credit spreads.
Mafalda C. Correia, João M. Pinto.
Abstract:
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 asset-backed securities (ABS) and mortgage-backed securities (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: cost of borrowing, covered bonds, credit spreads, mispricing,securitization
JEL Classification:
F34, G01, G12, G24.
The term structure of mutual fund herding.
Xiaolin Huo, Xin Liu, Weinan Zheng.
Abstract:
This paper investigates institutional herding behaviours 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 a shorter investment horizon. These patterns remain strong for Treasury Inflation-Protected Securities 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, mutual funds, short‐termism, time to maturity,treasuries.
JEL Classification:
G11, G12, G14, G23.
Idiosyncratic risk and debt maturity dispersion.
Pyung Kun Chu, Einar C. Kjenstad.
Abstract:
We investigate the relation between idiosyncratic asset risk and debt maturity dispersion. Idiosyncratic asset volatility represents significant risk, which can impede the ability to obtain or maintain external debt financing necessary for business operations, and is difficult to control given its unpredictable nature. We find that this risk is managed through the maturity structure of debt: firms with higher idiosyncratic asset volatility also have more dispersed maturity structures. Consistent with active management of rollover risk, this relation is weaker for younger firms and stronger for firms without significant credit lines.
Keywords: debt maturity dispersion, idiosyncratic asset volatility,rollover risk.
JEL Classification:
G10, G32.
Twitter investor sentiment and corporate earnings announcements.
Nikolaos Karampatsas, Soheila Malekpour, Andrew Mason, Christos P. Mavis.
Abstract:
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 FSIS around earnings announcements.
Keywords: earnings surprises, investor sentiment, social media, StockTwits,Twitter.
JEL Classification:
G02, G11, G12, G14.
Company name fluency and acquisition target analysis.
Ching-Yu Hsu, Chia-Wei Huang, Chih-Yen Lin.
Abstract:
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 company's acquisition probability. After correcting for endogeneity, company name fluency is positively associated with both the probability of being an acquisition target and an acquisition premium. Reasons for a 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.
European Financial Management, VOL 29:4, September 2023
Optimal equity valuation using multiples: The number of comparable firms.
Ian Cooper, Neophytos Lambertides.
Abstract:
We examine how the accuracy of a multiples‐based valuation changes as the number of comparable firms used to estimate the valuation multiple increases. Our research is motivated by a contrast between the approach followed by practitioners, who typically use a small number of closely comparable firms, and the academic literature which often uses all firms in an industry. Using a simple selection rule based on growth rates, we find that using 10 closely comparable firms is as accurate on average as using the entire cross‐section of firms in an industry. The loss of accuracy from using five comparable firms rather than 10 firms or the entire industry is not great.
Keywords: equity valuation, multiples valuation, valuation.
JEL Classification:
G11, G24, D81.
Work-from-home and the risk of securities misconduct.
Douglas Cumming, Chris Firth, John Gathergood, Neil Stewart.
Abstract:
In the wake of the global pandemic, a challenge for CEOs and boards is to set a stakeholder-acceptable organizational balance between remote and traditional office working. However, the risks of work-from-home are not yet fully understood. We describe competing theories that predict the effect on misconduct of a corporate shift to work-from-home. Using internal bank data on securities traders we exploit lockdown variation induced by emergency regulation of the Covid-19 pandemic. Our difference-in-differences analysis reveals that working from home lowers the likelihood of securities misconduct; ultimately those working from home exhibit fewer misconduct alerts. The economic significance of these changes is large. Our study makes an important step toward understanding the link between the balance of work locations and the risk that comes with this tradeoff.
Keywords: fraud, risk management, securities misconduct, surveillance,work‐from‐home.
JEL Classification:
G12, G14, G18, K22.
Russia–Ukraine crisis: The effects on the European stock market.
Shaker Ahmed, Mostafa M. Hasan, Md Rajib Kamal
Abstract:
We examine the effect of the Russia–Ukraine crisis on the European stock markets. Because of increased political uncertainty, geographic proximity and the ramifications of the fresh sanctions imposed on Russia, the European stock markets tended to react negatively to this crisis. We find that on 21 February 2022, when Russia recognized two Ukrainian states as autonomous regions, European stocks incurred a significant negative abnormal return. Moreover, the negative stock price reactions continued in the post-event period. The magnitude of the stock price reactions to this crisis exhibits considerable variation across industries, countries and size of the company.
Keywords: event study, political uncertainty, Russia–Ukraine crisis, stockreturns.
JEL Classification:
G01, G21, G30, G32.
Zero leverage puzzle: Do labour laws matter?
Hamid Boustanifar, Arnt Verriest.
Abstract:
Exploiting the staggered passage of labour protection laws in the United States, we find that higher labour 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 labour 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 labour markets by highlighting the role of labour laws in explaining the zero-leverage puzzle..
Keywords:
JEL Classification:
Technical analysis: Novel insights on contrarian trading
Patrick Eugster, Matthias W. Uhl
Abstract:
We analyze the predictive power of technical analysis with a novel data set based on news sentiment that allows to systematically examine a set of technical analysis indicators over an extensive time period. We do not find much statistically significant relationships with the examined indicators and future asset returns, and we almost do not find any alphas in trading strategies based on technical analysis sentiment. We find evidence for a contrarian-based hypothesis: past market returns and technical analysis sentiment are able to predict future technical analysis sentiment with a negative relationship.
Keywords:behavioural finance, news sentiment, NLP, technical analysis
JEL Classification:
G11, G40.
Information asymmetry, east–west cultural differences, and divergence in investor reactions.
Seungho Lee, Thomas Walker, Aoran Zhang, Yunfei Zhao.
Abstract:
This paper investigates the divergence in investor behaviour between the United States 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 US investors was considerably more pessimistic. Accordingly, we find that Chinese companies listed in the United States 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 US-listed Chinese firms.
Keywords: China, equity market, political connections, presidential termlimit abolition, United States
JEL Classification:
G14, G15, G18.
Institutional investors and corporate environmental and financial performance.
Steve M. Miller, Bin Qiu, Bin Wang, Tina Yang.
Abstract:
We propose a conceptual framework to illustrate that when three conditions hold, institutional investors moderate a positive relation between corporate financial performance and corporate environmental performance. 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 assets.
Keywords:
JEL Classification:
The influence of incoming CEOs.
Anwar Boumosleh, Brandon N. Cline.
Abstract:
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:
JEL Classification:
Credit variance risk premiums.
Manuel Ammann, Mathis Moerke.
Abstract:
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 macroeconomic conditions.
Keywords: CDS implied volatility, CDS variance swap, variance risk premium.
JEL Classification:
G12, G13.
Value premium and macroeconomic variables.
Elena Beccalli, Nicola Doninelli, Cesare Orsini.
Abstract:
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' macroexpectations on the firm fundamental value of Rhodes-Kropf, Robinson, and Viswanathan. 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: macroeconomic risk, market‐to‐book decomposition, valuepremium.
JEL Classification:
G12, G14.
European Financial Management, VOL 29:5, November 2023
Crisis risk and risk management.
René M. Stulz.
Abstract:
We assess the state of knowledge about crisis risk and its implications for risk management. Data that became available after the global financial crisis show that some types of crises are predictable when accounting for interactions between risks. However, other types of crises do not seem predictable. There is no evidence that the frequency of economic and financial crises is increasing. While data show that an economic crisis is more likely following a political crisis, there is no comparable evidence for climate events. Strategies that increase firm operational and financial flexibility reduce the adverse impact of crises on firms.
Keywords: crisis risk, financial crisis, risk management.
JEL Classification:
G01 Financial Crises: G. Financial Economics, G21 Banks,
Depository Institutions, Micro Finance Institutions, Mortgages:
G2 Financial Institutions and Services: G. Financial Economics,
G32 Financing Policy, Financial Risk and Risk Management,
Capital and Ownership Structure, Value of Firms, Goodwill:
G3 Corporate Finance and Governance: G. Financial Economics
The market impact of systemic risk capital surcharges.
Yalin Gündüz.
Abstract:
This paper tests the ‘Too-Big-to-Fail’ hypothesis that whether being designated as a global systemically important bank (G-SIB) has an impact on the credit default swap (CDS) price of the bank, thereby reducing its credit risk. We find surprising evidence that the CDS spreads of a bank increase (decrease) after the announcement of a higher (lower) capital surcharge. However, this effect is temporary, as the mean CDS spreads revert to preannouncement level, dropping sharply after the initial rise. These findings create a puzzle by implying that a higher capital surcharge requirement and more stringent regulation could outweigh the implicit subsidy advantages of being too-big-to-fail.
Keywords: CDS spreads, G‐SIB capital surcharges, G‐SIBs, systemicallyimportant banks, too‐big‐to‐fail.
JEL Classification:
G21, G28.
Labor unemployment risk and firm risk.
Erik Devos, Shofiqur Rahman.
Abstract:
This paper examines the effect of labor unemployment risk on firm risk. Using unemployment insurance benefits as a proxy for unemployment risk, we find an economically significant positive relation between unemployment risk and firm risk. This positive relation is more pronounced for firms that are more labor-intensive, have a higher layoff propensity and are more financially constrained. While existing literature that employs corporate policy measures such as debt and cash holdings suggests an opposite relationship, our paper presents evidence that the effects stemming from earnings management, earnings quality and reporting quality appear to dominate.
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Mergers and acquisitions research in finance and accounting: Past, present, and future.
Douglas Cumming, Varun Jindal, Satish Kumar, Nitesh Pandey.
Abstract:
This study presents an analysis of publication patterns and major themes in research on mergers and acquisitions in finance and accounting. We find that takeovers as mechanisms of governance, drivers of mergers, mechanisms of mergers, bank mergers, cross-border mergers, shareholder wealth effects of mergers and related events, and the role of financial experts and ownership structure form major themes of research in the finance area, while in accounting area major themes are corporate governance and accounting outcomes, predicting takeovers and their outcomes, valuation, financial reporting and takeover decisions, and financial reporting and performance.
Keywords: bibliometric analysis, market for corporate control, mergers andacquisitions, review
JEL Classification:
G34, G38.
Are financial derivatives related to intra-entities' tax aggressiveness? UK evidence.
Ahmed Boussaidi, Imed Chkir, Khaled Hussainey, Mounira Sidhom-Hamed.
Abstract:
This study investigates the effect of hedged versus nonhedged financial derivative instruments on the intra-entities' tax aggressiveness. Our findings provide evidence that multinational enterprises manage derivatives instruments to avoid their tax expenses aggressively. Specifically, nonhedged derivatives are an excellent determinant of the tax aggressiveness practices of corporate groups. Besides, this study speaks to the central role of governance quality in mitigating this aspect of tax aggressiveness and provides practical guidance to tax authorities and regulators for establishing new policies for governing financial derivative instruments and preventing tax aggressiveness from negatively affecting firms and society.
Keywords:
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Unpredicted costly dividends and temporary short squeezes.
Xiaolin Huo, Xin Liu, Zhigang Qiu, Sijie Yang.
Abstract:
We argue that cash dividend is a type of arbitraging cost that short sellers tend to avoid. We find that dividend announcements lead to temporary short squeezes, causing the prices of highly shorted stocks to overshoot and fully revert over time. These stocks also experience excessive buy-initiated trades and abnormal trading volume in response to dividend announcements. These results are driven mainly by stocks with unpredicted dividends, low lending fees, and high dividend yields. Overall, results suggest that news of a dividend distribution is magnified by short squeezes due to increased short costs and generates excessive nonfundamentals-driven price fluctuations.
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De-branching, too-much-branching, and cost of debt of SMEs in Slovakia.
Oliver Rafaj, Maria Siranova.
Abstract:
We investigate nonlinear effects of bank branch saturation on SMEs' cost of debt at regional level in Slovakia over the period 2013–2019. We adopt the two-step approach by first constructing model of bank branch localization, and then analyzing effects of positive and negative deviations from the equilibrium level. We observe negative effect of debranching, but report no effect of positive increase in deviations from equilibrium level on SMEs' cost of debt. The most affected firms are middle-sized, domestically owned, operating in low-tech industries, and with better creditworthiness. Bank market characteristics also tend to matter for pricing of firm's debt.
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CEOs' general managerial skills and corporate risk taking subject to the moderator of CEO tenure
Tiecheng Leng, Luyao Pan.
Abstract:
In this study, we examine the relation between chief executive officers' (CEOs') general managerial skills and firms' risk-taking behaviour. We find that generalist CEOs are associated with significantly higher firm risk, with the association decreasing significantly with CEO tenure. We propose the following managerial skills transformation explanation: the longer a CEO stays with a firm, the less general and more firm specific the CEO's skills and knowledge become; therefore, any effect of the CEO's general managerial skills only appears in the early years of tenure.
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Machine learning methods in finance: Recent applications and prospects.
Daniel Hoang, Kevin Wiegratz.
Abstract:
We study how researchers can apply machine learning (ML) methods in finance. We first establish that the two major categories of ML (supervised and unsupervised learning) address fundamentally different problems than traditional econometric approaches. Then, we review the current state of research on ML in finance and identify three archetypes of applications: (i) the construction of superior and novel measures, (ii) the reduction of prediction error, and (iii) the extension of the standard econometric toolset. With this taxonomy, we give an outlook on potential future directions for both researchers and practitioners. Our results suggest many benefits of ML methods compared to traditional approaches and indicate that ML holds great potential for future research in finance.
Keywords: artificial intelligence, big data, machine learning.
JEL Classification:
C45, G00.
Economic uncertainty: Mispricing and ambiguity premium.
Charlie X. Cai, Xi Fu, Semih Kerestecioglu.
Abstract:
We uncover two channels of effect in the financial market when investors face macroeconomic uncertainty. Conditional on a common mispricing index, we find that economic uncertainty exposure (EUE) induces disagreement, which amplifies mispricing. The highest EUE quintile produces an annualised mispricing alpha of 9.96%, more than double the unconditional mispricing effect. An ambiguity premium of 3.84% alpha is documented in the “non-mispricing” quintile. The EUE-induced mispricing effect is different from the existing limits of arbitrage explanations. The ambiguity premium is predictably observed during the unfolding of shocks of COVID-19 to the market.
Keywords: ambiguity aversion, cross‐section of stock returns, economicuncertainty, mispricing, return predictability, risk premium.
JEL Classification:
G11, G12, E30, C13
