Research articles for the 2019-03-08
Corporate Risk Disclosure: A Review
SSRN
This paper reviews empirical studies and professional literature on corporate risk disclosures. Empirical studies done from the perspective of economic theory with application of statistical techniques have been growing over the years in the field of corporate disclosures. The very concept of risk and significance of corporate risk disclosures have been discussed in various studies and reports of professional bodies. Studies of corporate risk disclosures from the perspective of information asymmetry, utility as well as the perspective of economic theories of corporate governance have been steadily increasing over the last two decades or so. Associations between various firm characteristics and market behaviour have been sought to be studied by scholars in order to study the possible motivations behind risk disclosures as well as their usefulness to the end users of corporate disclosures viz. the shareholders, current and prospective investors, as well as the regulators. Methodologies from various disciplines like communications studies, econometrics, statistics, computer science etc. have been employed to study the phenomenon of corporate risk disclosure and its interaction with factors within and without the firm. Studies have been conducted for some jurisdictions in North America, Europe, Asia and Africa and scope exists for further study in more jurisdictions. The findings of empirical studies and discussions in professional literature are key aids for law and policy makers and researchers while formulating or proposing regulatory frameworks. This review paper aims to stimulate further research and debate on regulatory approach, policy and frameworks towards corporate risk disclosure based upon the conclusions drawn from empirical studies on corporate risk disclosure.
SSRN
This paper reviews empirical studies and professional literature on corporate risk disclosures. Empirical studies done from the perspective of economic theory with application of statistical techniques have been growing over the years in the field of corporate disclosures. The very concept of risk and significance of corporate risk disclosures have been discussed in various studies and reports of professional bodies. Studies of corporate risk disclosures from the perspective of information asymmetry, utility as well as the perspective of economic theories of corporate governance have been steadily increasing over the last two decades or so. Associations between various firm characteristics and market behaviour have been sought to be studied by scholars in order to study the possible motivations behind risk disclosures as well as their usefulness to the end users of corporate disclosures viz. the shareholders, current and prospective investors, as well as the regulators. Methodologies from various disciplines like communications studies, econometrics, statistics, computer science etc. have been employed to study the phenomenon of corporate risk disclosure and its interaction with factors within and without the firm. Studies have been conducted for some jurisdictions in North America, Europe, Asia and Africa and scope exists for further study in more jurisdictions. The findings of empirical studies and discussions in professional literature are key aids for law and policy makers and researchers while formulating or proposing regulatory frameworks. This review paper aims to stimulate further research and debate on regulatory approach, policy and frameworks towards corporate risk disclosure based upon the conclusions drawn from empirical studies on corporate risk disclosure.
Crowdsourcing Financial Information to Change Spending Behavior
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We document five effects of providing individuals with crowdsourced spending information about their peers (individuals with similar characteristics) through a FinTech app. First, users who spend more than their peers reduce their spending significantly, whereas users who spend less keep constant or increase their spending. Second, users' distance from their peers' spend-ing affects the reaction monotonically in both directions. Third, users' reaction is asymmetric - spending cuts are three times as large as increases. Fourth, lower-income users react more than others. Fifth, discretionary spending drives the reaction in both directions and especially cash withdrawals, which are commonly used for incidental expenses and anonymous transactions. We argue Bayesian updating, peer pressure, or the fact that bad news looms more than (equally-sized) good news cannot alone explain all these facts.
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We document five effects of providing individuals with crowdsourced spending information about their peers (individuals with similar characteristics) through a FinTech app. First, users who spend more than their peers reduce their spending significantly, whereas users who spend less keep constant or increase their spending. Second, users' distance from their peers' spend-ing affects the reaction monotonically in both directions. Third, users' reaction is asymmetric - spending cuts are three times as large as increases. Fourth, lower-income users react more than others. Fifth, discretionary spending drives the reaction in both directions and especially cash withdrawals, which are commonly used for incidental expenses and anonymous transactions. We argue Bayesian updating, peer pressure, or the fact that bad news looms more than (equally-sized) good news cannot alone explain all these facts.
Currencies and Stock Returns: An Example of Market Inattention
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Currency shocks affect future corporate earnings: Companies exporting in countries with an appreciating currency see their earnings increase. This reflects the fact that currency hedging is only partial. Using company-level data on geographic sales, we document that analysts fail to fully integrate currency shocks into their forecasts: Their forecast errors can therefore be predicted by past currency shocks. This is particularly true for small to medium size shocks, in line with a bounded rationality interpretation. Stock prices reflect currency shocks but with a lag of about two weeks.
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Currency shocks affect future corporate earnings: Companies exporting in countries with an appreciating currency see their earnings increase. This reflects the fact that currency hedging is only partial. Using company-level data on geographic sales, we document that analysts fail to fully integrate currency shocks into their forecasts: Their forecast errors can therefore be predicted by past currency shocks. This is particularly true for small to medium size shocks, in line with a bounded rationality interpretation. Stock prices reflect currency shocks but with a lag of about two weeks.
Does Industry Timing Ability of Hedge Funds Predict Their Future Performance, Survival, and Fund Flows?
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This paper investigates hedge funds' ability to time market-orthogonalized industry-specific returns and shows that funds' timing ability in the manufacturing industry improves their future performance, probability of survival, and ability to attract more capital. The results also indicate that best industry-timing hedge funds in the manufacturing sector have the highest return exposure to earnings surprises. This link, together with persistently sticky earnings surprises and the strong predictive power of business cycle indicators over future earnings surprises in the manufacturing sector, explain to a great extent why it is beneficial for smart hedge fund managers to time the manufacturing industry-specific returns.
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This paper investigates hedge funds' ability to time market-orthogonalized industry-specific returns and shows that funds' timing ability in the manufacturing industry improves their future performance, probability of survival, and ability to attract more capital. The results also indicate that best industry-timing hedge funds in the manufacturing sector have the highest return exposure to earnings surprises. This link, together with persistently sticky earnings surprises and the strong predictive power of business cycle indicators over future earnings surprises in the manufacturing sector, explain to a great extent why it is beneficial for smart hedge fund managers to time the manufacturing industry-specific returns.
Five Facts About Beliefs and Portfolios
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We administer a newly-designed survey to a large panel of individual investors who have substantial wealth invested in financial markets. The survey elicits beliefs that are crucial for macroeconomics and finance, and matches respondents with administrative data on their portfolio composition and their trading activity. We establish five facts in this data:(1) Beliefs are reflected in portfolio allocations. The sensitivity of portfolios to beliefs is small on average, but varies significantly with investor wealth, attention, trading frequency, and confidence. (2) It is hard to predict when investors trade, but conditional on trading, belief changes affect both the direction and the magnitude of trades. (3) Beliefs are mostly characterized by large and persistent individual heterogeneity; demographic characteristics struggle to explain why some individuals are optimistic and some are pessimistic. (4) Investors disagree about both expected cash flows and discount rates. At the investor level, higher expected cash flows are associated with higher discount rates. (5) Expected returns and the probability of rare disasters are negatively related. Our results challenge the rational expectation framework for macro-finance, and provide important guidance for the design of behavioral models.
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We administer a newly-designed survey to a large panel of individual investors who have substantial wealth invested in financial markets. The survey elicits beliefs that are crucial for macroeconomics and finance, and matches respondents with administrative data on their portfolio composition and their trading activity. We establish five facts in this data:(1) Beliefs are reflected in portfolio allocations. The sensitivity of portfolios to beliefs is small on average, but varies significantly with investor wealth, attention, trading frequency, and confidence. (2) It is hard to predict when investors trade, but conditional on trading, belief changes affect both the direction and the magnitude of trades. (3) Beliefs are mostly characterized by large and persistent individual heterogeneity; demographic characteristics struggle to explain why some individuals are optimistic and some are pessimistic. (4) Investors disagree about both expected cash flows and discount rates. At the investor level, higher expected cash flows are associated with higher discount rates. (5) Expected returns and the probability of rare disasters are negatively related. Our results challenge the rational expectation framework for macro-finance, and provide important guidance for the design of behavioral models.
How Does Analyst Coverage Affect Media Coverage?
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We use exogenous variation in analyst coverage due to brokerage mergers and closures to examine how firm-specific analyst coverage affects media coverage. Decreases in analyst coverage likely affect the media through two countervailing forces. On the one hand, the loss of analyst information, on which journalists rely, raises the costs of developing a news article. On the other hand, the loss reduces competition in the market for public firms’ information, thus raising the benefits of publishing a news article. Consistent with the added costs outweighing the added benefits, our difference-in-differences evidence suggests brokerage mergers and closures decrease affected firms’ media coverage, on average. Cross-sectional analyses suggest the effect is concentrated where information and competition are more scarce; namely, in firms with low initial analyst coverage, non-S&P 500 firms, less prominent journalists, and firms with less disclosure or more complex disclosure.
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We use exogenous variation in analyst coverage due to brokerage mergers and closures to examine how firm-specific analyst coverage affects media coverage. Decreases in analyst coverage likely affect the media through two countervailing forces. On the one hand, the loss of analyst information, on which journalists rely, raises the costs of developing a news article. On the other hand, the loss reduces competition in the market for public firms’ information, thus raising the benefits of publishing a news article. Consistent with the added costs outweighing the added benefits, our difference-in-differences evidence suggests brokerage mergers and closures decrease affected firms’ media coverage, on average. Cross-sectional analyses suggest the effect is concentrated where information and competition are more scarce; namely, in firms with low initial analyst coverage, non-S&P 500 firms, less prominent journalists, and firms with less disclosure or more complex disclosure.
How Monetary Policy Shaped the Housing Boom
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Between 2003 and 2006, the Federal Reserve raised rates by 4.25%. Yet it was precisely during this period that the housing boom accelerated, fueled by rapid growth in mortgage lending. There is deep disagreement about how, or even if, monetary policy impacted the boom. Using heterogeneity in banks' exposures to the deposits channel of monetary policy, we show that Fed tightening induced a large reduction in banks' deposit funding, leading them to contract new on-balance-sheet lending for home purchases by 26%. However, an unprecedented expansion in privately-securitized loans, led by nonbanks, largely offset this contraction. Since privately-securitized loans are neither GSE-insured nor deposit-funded, they are run-prone, which made the mortgage market fragile. Consistent with our theory, the re-emergence of privately-securitized mortgages has closely tracked the recent increase in rates.
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Between 2003 and 2006, the Federal Reserve raised rates by 4.25%. Yet it was precisely during this period that the housing boom accelerated, fueled by rapid growth in mortgage lending. There is deep disagreement about how, or even if, monetary policy impacted the boom. Using heterogeneity in banks' exposures to the deposits channel of monetary policy, we show that Fed tightening induced a large reduction in banks' deposit funding, leading them to contract new on-balance-sheet lending for home purchases by 26%. However, an unprecedented expansion in privately-securitized loans, led by nonbanks, largely offset this contraction. Since privately-securitized loans are neither GSE-insured nor deposit-funded, they are run-prone, which made the mortgage market fragile. Consistent with our theory, the re-emergence of privately-securitized mortgages has closely tracked the recent increase in rates.
How to Talk down Your Stock Returns
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We analyze how senior managements' willingness to orally convey information in earnings calls affects firms' stock returns. Using a novel metric for management blathering derived by textual analysis, we show that the market punishes blathering managers, i.e. a lack of factual content in answering to investors questions. Firms, in which managers blather more, experience significantly lower cumulative abnormal returns following their earnings calls. This result corresponds to the `Obfuscation Hypothesis', which postulates that blathering increases the perceived noise of a message and, in turn, uncertainty among investors. Further, we document that blathering is particularly pronounced when earnings management is more likely, which suggests that blathering might be used as an instrument to obfuscate earnings management.
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We analyze how senior managements' willingness to orally convey information in earnings calls affects firms' stock returns. Using a novel metric for management blathering derived by textual analysis, we show that the market punishes blathering managers, i.e. a lack of factual content in answering to investors questions. Firms, in which managers blather more, experience significantly lower cumulative abnormal returns following their earnings calls. This result corresponds to the `Obfuscation Hypothesis', which postulates that blathering increases the perceived noise of a message and, in turn, uncertainty among investors. Further, we document that blathering is particularly pronounced when earnings management is more likely, which suggests that blathering might be used as an instrument to obfuscate earnings management.
Private Bank Deposits and Macro/Fiscal Risk in the Euro-Area
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We examine the relationship between private bank deposits and macro/fiscal risk in the euro area. We test three hypotheses: First, private bank deposits relative to Germany are determined by macro/fiscal risk factors. Second, this relationship is time-varying. Third, time-variation is driven by the level of macro/fiscal risk. Our findings validate all three tested hypotheses. They also reveal persistent fragmentation between EMU core and periphery banking systems caused by a deficit of trust in periphery banking systems, unmitigated by the introduction of OMT and European Banking Union. Our findings have implications for the introduction of the European Deposits Insurance Scheme (EDIS), for which they offer tentative support.
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We examine the relationship between private bank deposits and macro/fiscal risk in the euro area. We test three hypotheses: First, private bank deposits relative to Germany are determined by macro/fiscal risk factors. Second, this relationship is time-varying. Third, time-variation is driven by the level of macro/fiscal risk. Our findings validate all three tested hypotheses. They also reveal persistent fragmentation between EMU core and periphery banking systems caused by a deficit of trust in periphery banking systems, unmitigated by the introduction of OMT and European Banking Union. Our findings have implications for the introduction of the European Deposits Insurance Scheme (EDIS), for which they offer tentative support.
Stock Market Linkages between the ASEAN Countries, China and the Us: A Fractional Cointegration Approach
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This paper examines stock market integration between the ASEAN five and the US and China, respectively, over the period from November 2002 to March 2018. The linkages between both aggregate and financial sector stock indices (both weekly and monthly) are analysed using fractional integration and fractional cointegration methods. Further, recursive cointegration analysis is carried out for the weekly series to study the impact of the 2007-8 global financial crisis and the 2015 China stock market crash on the pattern of stock market co-movement. The main findings are the following. All stock indices exhibit long memory. There is cointegration between the ASEAN five and the US but almost none between the former and China, except between Indonesia and China in the case of the financial sector. The 2007-8 global financial crisis and the 2015 Chinese stock market plunge weakened the linkages between the ASEAN five and both China and the US. The implications of these results for market participants and policy makers are discussed.
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This paper examines stock market integration between the ASEAN five and the US and China, respectively, over the period from November 2002 to March 2018. The linkages between both aggregate and financial sector stock indices (both weekly and monthly) are analysed using fractional integration and fractional cointegration methods. Further, recursive cointegration analysis is carried out for the weekly series to study the impact of the 2007-8 global financial crisis and the 2015 China stock market crash on the pattern of stock market co-movement. The main findings are the following. All stock indices exhibit long memory. There is cointegration between the ASEAN five and the US but almost none between the former and China, except between Indonesia and China in the case of the financial sector. The 2007-8 global financial crisis and the 2015 Chinese stock market plunge weakened the linkages between the ASEAN five and both China and the US. The implications of these results for market participants and policy makers are discussed.
Stress Testing the Unknown - The Impact of Network Reconstruction on Systemic Risk Estimates
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Banks connect through a complex network of interbank credit exposures that determine contagion and hence the systemic stability of the network. Yet, the bilateral linkages of these institutions and thus the true structure of the network are typically unobservable, with leading reconstruction methods, such as maximum entropy or minimum density, potentially underestimating the true contagion risk of the network. Based on publicly available data from large European institutions, this paper analyses different network reconstruction techniques and the contagion risk impact of different network structures in a stress testing context. My findings suggest that uncertainty about the true interbank network leads to substantially varying risk assessments, where a Bayesian reconstruction approach can be used to identify contagion risk boundaries. In addition, network structure metrics that explain the variation in risk assessments are identified.
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Banks connect through a complex network of interbank credit exposures that determine contagion and hence the systemic stability of the network. Yet, the bilateral linkages of these institutions and thus the true structure of the network are typically unobservable, with leading reconstruction methods, such as maximum entropy or minimum density, potentially underestimating the true contagion risk of the network. Based on publicly available data from large European institutions, this paper analyses different network reconstruction techniques and the contagion risk impact of different network structures in a stress testing context. My findings suggest that uncertainty about the true interbank network leads to substantially varying risk assessments, where a Bayesian reconstruction approach can be used to identify contagion risk boundaries. In addition, network structure metrics that explain the variation in risk assessments are identified.
The Roots of Health Inequality and The Value of Intra-Family Expertise
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Mounting evidence documents a stark correlation between income and health, yet the causal mechanisms behind this gradient are poorly understood. This paper examines the impact of access to expertise on health, and whether unequal access to expertise contributes to the health-income gradient. Our empirical setting, Sweden, allows us to shut down inequality in formal access to health care; we ï¬rst document that strong socioeconomic gradients nonetheless persist. Second, we study the effect of access to health-related expertise â€" captured by the presence of a health professional in the extended family â€" on health. Exploiting “admissions lotteries†into medical schools and variation in the timing of degrees, we show that access to intra-family medical expertise has far-reaching health consequences, at all ages: It raises longevity, improves drug adherence and reduces the occurrence of lifestyle-related disease in adulthood, raises vaccination rates in adolescence, and reduces tobacco exposure in utero. Third, we show that the effects of expertise are larger at the lower end of the income distribution â€" precisely where access to expertise is scarcer. Unequal access to health-related expertise can account for as much as 18% of the health-SES gradient, and may thus play a signiï¬cant role in sustaining health inequality.
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Mounting evidence documents a stark correlation between income and health, yet the causal mechanisms behind this gradient are poorly understood. This paper examines the impact of access to expertise on health, and whether unequal access to expertise contributes to the health-income gradient. Our empirical setting, Sweden, allows us to shut down inequality in formal access to health care; we ï¬rst document that strong socioeconomic gradients nonetheless persist. Second, we study the effect of access to health-related expertise â€" captured by the presence of a health professional in the extended family â€" on health. Exploiting “admissions lotteries†into medical schools and variation in the timing of degrees, we show that access to intra-family medical expertise has far-reaching health consequences, at all ages: It raises longevity, improves drug adherence and reduces the occurrence of lifestyle-related disease in adulthood, raises vaccination rates in adolescence, and reduces tobacco exposure in utero. Third, we show that the effects of expertise are larger at the lower end of the income distribution â€" precisely where access to expertise is scarcer. Unequal access to health-related expertise can account for as much as 18% of the health-SES gradient, and may thus play a signiï¬cant role in sustaining health inequality.
