Research articles for the 2019-02-16
Estimating the Value of Tycoon: Evidence from Criminal Justice Process Events on Controlling Shareholders in Large Business Groups
SSRN
This paper estimates the impact of criminal justice process, mainly the conviction of controlling shareholders, on the market value of entire business group as well as its subsidiary. The court conviction of controlling shareholders in Korean large business groups, chaebols, provides meaningful circumstances to estimate the value of controlling shareholders. Our main findings are as follows. First, the criminal justice process events relating to controlling shareholders generally do not have significant group level effects on the value of firms. Second, even in the case of imprisonment, we are not able to find significant group-wide and individual firm level effects. However, for individual firm level, we find some negative effects on the value of firms. For instance, prosecutors’ raiding the company, which is generally the first media exposure for the crime, does not have a significant effect, but that event conditional on ex-post pre-trial detention does have a negative effect. Also, pretrial custody, controlling shareholders being jailed, at the early stage of criminal justice process, has a negative effect. Finally, the effect of conviction on affiliated firms within the same business group is heterogeneous. The portion of affiliated firms that receive a positive impact and a negative impact from having a controlling shareholder being sentenced guilty almost equivalent (43% versus 57%, respectively). Such decisions have a positive effect on affiliates where a controlling shareholder holds a large proportion of the shares and a positive effect at the firms with better corporate governance; however, they have a negative impact on affiliates thought to be more likely to grow at faster rates in the future. For this reason, sentencing of the controlling shareholder itself induces unintentional and coincidental value transference between the different affiliated firms in a given business group. There are winners and losers within the same business group.
SSRN
This paper estimates the impact of criminal justice process, mainly the conviction of controlling shareholders, on the market value of entire business group as well as its subsidiary. The court conviction of controlling shareholders in Korean large business groups, chaebols, provides meaningful circumstances to estimate the value of controlling shareholders. Our main findings are as follows. First, the criminal justice process events relating to controlling shareholders generally do not have significant group level effects on the value of firms. Second, even in the case of imprisonment, we are not able to find significant group-wide and individual firm level effects. However, for individual firm level, we find some negative effects on the value of firms. For instance, prosecutors’ raiding the company, which is generally the first media exposure for the crime, does not have a significant effect, but that event conditional on ex-post pre-trial detention does have a negative effect. Also, pretrial custody, controlling shareholders being jailed, at the early stage of criminal justice process, has a negative effect. Finally, the effect of conviction on affiliated firms within the same business group is heterogeneous. The portion of affiliated firms that receive a positive impact and a negative impact from having a controlling shareholder being sentenced guilty almost equivalent (43% versus 57%, respectively). Such decisions have a positive effect on affiliates where a controlling shareholder holds a large proportion of the shares and a positive effect at the firms with better corporate governance; however, they have a negative impact on affiliates thought to be more likely to grow at faster rates in the future. For this reason, sentencing of the controlling shareholder itself induces unintentional and coincidental value transference between the different affiliated firms in a given business group. There are winners and losers within the same business group.
Factors Affecting Profitability of the Jordanian Banking Sector
SSRN
This paper attempts to identify determinants of the profitability of the banking sector in Jordan. To achieve this purpose, yearly data over the period 1993-2014 and Ordinary Least Square (OLS) method are used to investigate the impact of capital, size, tangible assets, and economic growth on the profitability of the Jordanian banking sector represented by return on asset (ROA). While the profitability of Jordanian commercial banks or Jordanian Islamic banks has been examined by previous research, this study is the first to address the determinants of the profitability of the banking sector in Jordan. This paper has shown strong evidence that internal characteristics and external factor have a strong influence on the profitability. The first internal variable represented by capital and external factor represented by real GDP are positively and statistically significant effect on the Jordanian banking sector profitability, while internal variable represented by size affects negatively and statistically significant on the profitability of the Jordanian banking sector. Finally, ROA is economically and negatively affected by tangible assets. These results are useful to both academics and policy makers.
SSRN
This paper attempts to identify determinants of the profitability of the banking sector in Jordan. To achieve this purpose, yearly data over the period 1993-2014 and Ordinary Least Square (OLS) method are used to investigate the impact of capital, size, tangible assets, and economic growth on the profitability of the Jordanian banking sector represented by return on asset (ROA). While the profitability of Jordanian commercial banks or Jordanian Islamic banks has been examined by previous research, this study is the first to address the determinants of the profitability of the banking sector in Jordan. This paper has shown strong evidence that internal characteristics and external factor have a strong influence on the profitability. The first internal variable represented by capital and external factor represented by real GDP are positively and statistically significant effect on the Jordanian banking sector profitability, while internal variable represented by size affects negatively and statistically significant on the profitability of the Jordanian banking sector. Finally, ROA is economically and negatively affected by tangible assets. These results are useful to both academics and policy makers.
In Building Optimal Portfolios, Do Not Ignore Investors’ Emotions
SSRN
The field of behavioural finance points out various investor biases and heuristics which inhibit optimal investment choices and are sometimes deemed irrational. Although emotions are often viewed as anathema to sound financial decisions, there is a big emotional component that has to be taken into consideration when holistically defining financial goals. Investors have differing goals for investing. Portfolio theory should therefore not overlook these goals and its horizon should be expanded to offer investors with the best possible achievable solution by incorporating financially efficient anxiety reduction. A rational solution should therefore take investors’ behavioural shortcoming into account because investors do not simply care about risk-adjusted returns but the best returns that can be achieved for the level of stress they are going to have to endure over the volatile investment journey.
SSRN
The field of behavioural finance points out various investor biases and heuristics which inhibit optimal investment choices and are sometimes deemed irrational. Although emotions are often viewed as anathema to sound financial decisions, there is a big emotional component that has to be taken into consideration when holistically defining financial goals. Investors have differing goals for investing. Portfolio theory should therefore not overlook these goals and its horizon should be expanded to offer investors with the best possible achievable solution by incorporating financially efficient anxiety reduction. A rational solution should therefore take investors’ behavioural shortcoming into account because investors do not simply care about risk-adjusted returns but the best returns that can be achieved for the level of stress they are going to have to endure over the volatile investment journey.
Shareholder Wealth Effects of Cultural Diversity Among Blockholders: Evidence From Cross-Border Acquisitions by US Listed Companies
SSRN
Manuscript Type: EmpiricalResearch Question/Issue: This paper studies whether and how diversity among blockholders in their cultural preferences may affect short-term shareholder wealth. Blockholders often hold diverse objectives, leading to principal-principal (PP) conflicts in cross-border acquisitions (CBAs). The literature, however, is unclear on whether they have diverse cultural preferences when it comes to the location choice in CBAs and, if so, how such diversity affects short-term shareholder wealth surrounding the announcement of a CBA. Integrating agency and resource dependence perspectives, this paper argues that such diversity has an inverted U-shaped relationship with shareholder wealth. Research Findings/Insights: The theory is tested using a sample of 2,571 nonfinancial CBAs made by US listed companies between 2002 and 2014. Results suggest an inverted U-shaped relationship between diversity in host-market cultural distance propensities among five types of blockholders (family, corporations, bank and insurance companies, resistant financial institutions, and government) and the cumulative abnormal returns (CARs) attributable to CBA announcements. Theoretical/Academic Implications: First, international corporate governance scholars should understand the nonfinancial motivations of shareholders when evaluating potential conflicts in internationalization strategy and performance. Second, future studies should recognize that PP issues in the multinational firm are a multidimensional construct, comprised of multiple sources of conflicts beyond the traditional focus on controlling-versus-minority shareholders. Lastly, the PP literature should shift its rhetoric from conflicts to a good balance between benefits and conflicts, depending on the degree of heterogeneity among principals.Practitioner/Policy Implications: An optimal ownership structure may involve moderate diversity among blockholders in their nonfinancial preferences. This optimal level should bring in diverse resources and perspectives from different blockholders, while keeping coordinating costs moderate for aligning different goals of these blockholders.
SSRN
Manuscript Type: EmpiricalResearch Question/Issue: This paper studies whether and how diversity among blockholders in their cultural preferences may affect short-term shareholder wealth. Blockholders often hold diverse objectives, leading to principal-principal (PP) conflicts in cross-border acquisitions (CBAs). The literature, however, is unclear on whether they have diverse cultural preferences when it comes to the location choice in CBAs and, if so, how such diversity affects short-term shareholder wealth surrounding the announcement of a CBA. Integrating agency and resource dependence perspectives, this paper argues that such diversity has an inverted U-shaped relationship with shareholder wealth. Research Findings/Insights: The theory is tested using a sample of 2,571 nonfinancial CBAs made by US listed companies between 2002 and 2014. Results suggest an inverted U-shaped relationship between diversity in host-market cultural distance propensities among five types of blockholders (family, corporations, bank and insurance companies, resistant financial institutions, and government) and the cumulative abnormal returns (CARs) attributable to CBA announcements. Theoretical/Academic Implications: First, international corporate governance scholars should understand the nonfinancial motivations of shareholders when evaluating potential conflicts in internationalization strategy and performance. Second, future studies should recognize that PP issues in the multinational firm are a multidimensional construct, comprised of multiple sources of conflicts beyond the traditional focus on controlling-versus-minority shareholders. Lastly, the PP literature should shift its rhetoric from conflicts to a good balance between benefits and conflicts, depending on the degree of heterogeneity among principals.Practitioner/Policy Implications: An optimal ownership structure may involve moderate diversity among blockholders in their nonfinancial preferences. This optimal level should bring in diverse resources and perspectives from different blockholders, while keeping coordinating costs moderate for aligning different goals of these blockholders.
Skupina G20 jako nové fórum pro koherenci a multilateralizaci mezinárodnÃho investiÄnÃho práva (The Group of G20 as a New Forum for Coherence and Multilateralization of International Investment Law)
SSRN
Czech Abstract: Skupina zemà G20 ve své krátké historii nikdy nevÄ›novala zvláštnà pozornost investiÄnà politice a úpravÄ› investiÄnÃho prostÅ™edÃ. BÄ›hem ÄÃnského pÅ™edsednictvà G20 v roce 2016 vÅ¡ak doÅ¡lo ke zmÄ›nÄ›, kdy byla založena pracovnà skupina pro obchod a investice a jejÃm nejvýraznÄ›jÅ¡Ãm Výstupem byly ŘÃdicà principy pro tvorbu globálnÃch investiÄnÃch politik. NabÃzà se tak otázka, zda G20 se svým globálnÃm dopadem ve spojenà s tÃmto novÄ› objeveným zájmem nepÅ™edstavuje do budoucna potenciál k hlubÅ¡Ãm diskuzÃm nad systémem mezinárodnÃho investiÄnÃho práva a jeho reformou, zvláštÄ› co se týÄe jeho multilateralizace a zajiÅ¡tÄ›nà koherence. Tento pÅ™ÃspÄ›vek se snažà za pomoci analýzy souÄasných trendů v investiÄnÃch politikách i samotných ŘÃdicÃch principů nalézt odpovÄ›Ä.English Abstract: The group of G20 has never been previously so much involved in investment policy issues and regulation of investment environment in its short history as of now. The recent Chinese presidency of the group in 2016 nevertheless marked a change by establishment of trade and investment working group whose the most important achievement was the Guiding Principles for Global Investment Policymaking. This brings a question whether the G20 with its global impact and in connection with the recently found interest does not constitute a potential for future comprehensive debates on the system of international investment law and its reform, especially in the context of multilateralization and coherence. This contribution attempts to find an answer through an analysis of current trends in investment policies and the Guiding principles as such.
SSRN
Czech Abstract: Skupina zemà G20 ve své krátké historii nikdy nevÄ›novala zvláštnà pozornost investiÄnà politice a úpravÄ› investiÄnÃho prostÅ™edÃ. BÄ›hem ÄÃnského pÅ™edsednictvà G20 v roce 2016 vÅ¡ak doÅ¡lo ke zmÄ›nÄ›, kdy byla založena pracovnà skupina pro obchod a investice a jejÃm nejvýraznÄ›jÅ¡Ãm Výstupem byly ŘÃdicà principy pro tvorbu globálnÃch investiÄnÃch politik. NabÃzà se tak otázka, zda G20 se svým globálnÃm dopadem ve spojenà s tÃmto novÄ› objeveným zájmem nepÅ™edstavuje do budoucna potenciál k hlubÅ¡Ãm diskuzÃm nad systémem mezinárodnÃho investiÄnÃho práva a jeho reformou, zvláštÄ› co se týÄe jeho multilateralizace a zajiÅ¡tÄ›nà koherence. Tento pÅ™ÃspÄ›vek se snažà za pomoci analýzy souÄasných trendů v investiÄnÃch politikách i samotných ŘÃdicÃch principů nalézt odpovÄ›Ä.English Abstract: The group of G20 has never been previously so much involved in investment policy issues and regulation of investment environment in its short history as of now. The recent Chinese presidency of the group in 2016 nevertheless marked a change by establishment of trade and investment working group whose the most important achievement was the Guiding Principles for Global Investment Policymaking. This brings a question whether the G20 with its global impact and in connection with the recently found interest does not constitute a potential for future comprehensive debates on the system of international investment law and its reform, especially in the context of multilateralization and coherence. This contribution attempts to find an answer through an analysis of current trends in investment policies and the Guiding principles as such.
Stock Market Rumors and Credibility
SSRN
Stock prices occasionally move in response to unverified rumors. I propose a cheap talk model in which a rumormonger's incentives to tell the truth depend on the interaction between her investment horizon and the information acquisition decisions of message-receiving investors. The model's key prediction is that short investment horizons can facilitate credible information sharing between investors, thereby accelerating the information capitalization into market prices. Analyzing a dataset of takeover rumors covered by US newspapers, I find suggestive evidence in support of this prediction.
SSRN
Stock prices occasionally move in response to unverified rumors. I propose a cheap talk model in which a rumormonger's incentives to tell the truth depend on the interaction between her investment horizon and the information acquisition decisions of message-receiving investors. The model's key prediction is that short investment horizons can facilitate credible information sharing between investors, thereby accelerating the information capitalization into market prices. Analyzing a dataset of takeover rumors covered by US newspapers, I find suggestive evidence in support of this prediction.
Stock Price Cycles and Business Cycles
SSRN
We present a unified and quantitatively credible explanation for the joint behavior of stock prices and business cycles. We consider a frictionless production economy with time-separable consumption preferences and perfectly áexible labor supply. Investors extrapolate past stock price gains but are rational otherwise. The model replicates a standard set of asset pricing and business cycle moments, as well as moments capturing the interaction between business cycles and stock prices. The model generates belief-driven stock price booms that are associated with a corresponding boom in hours worked and investment. Once the boom turns into a bust, output, hours and investment remain persistently depressed. The model predicts that 75% of the observed áuctuations in the price-dividend ratio and 13% of observed output áuctuations are attributable to subjective price extrapolation by investors.
SSRN
We present a unified and quantitatively credible explanation for the joint behavior of stock prices and business cycles. We consider a frictionless production economy with time-separable consumption preferences and perfectly áexible labor supply. Investors extrapolate past stock price gains but are rational otherwise. The model replicates a standard set of asset pricing and business cycle moments, as well as moments capturing the interaction between business cycles and stock prices. The model generates belief-driven stock price booms that are associated with a corresponding boom in hours worked and investment. Once the boom turns into a bust, output, hours and investment remain persistently depressed. The model predicts that 75% of the observed áuctuations in the price-dividend ratio and 13% of observed output áuctuations are attributable to subjective price extrapolation by investors.
The Ownership Complaint Gap: Mutual vs. Stock Intermediaries
SSRN
We document a substantial customer complaint gap between stock and mutual financial firms. To assess whether this 21% per year complaint gap stems from complaint-prone customers in stock insurers, we examine state-adjudicated complaint success. To further delineate between customer selection or treatment explanations, we exploit within insurer complaints around random claims (natural disasters) and attention shocks (media scrutiny). Further tests reveal the complaint gap widens with greater competition, near insolvency thresholds, and with more price regulation. Overall, the results are inconsistent with the hypothesis that mutual financial firms exhibit low customer satisfaction, suggesting customers find this a beneficial organizational structure.
SSRN
We document a substantial customer complaint gap between stock and mutual financial firms. To assess whether this 21% per year complaint gap stems from complaint-prone customers in stock insurers, we examine state-adjudicated complaint success. To further delineate between customer selection or treatment explanations, we exploit within insurer complaints around random claims (natural disasters) and attention shocks (media scrutiny). Further tests reveal the complaint gap widens with greater competition, near insolvency thresholds, and with more price regulation. Overall, the results are inconsistent with the hypothesis that mutual financial firms exhibit low customer satisfaction, suggesting customers find this a beneficial organizational structure.
