Research articles for the 2019-03-11

A Refined Measure of Conditional Maximum Drawdown
Rossello, Damiano
Risks associated to maximum drawdown have been recently formalized as the tail mean of maximum drawdown distributions, called Conditional Expected Drawdown (CED). In fact, the special case of average maximum drawdown is widely used in the fund management industry also in association to performance management. As a path-dependent deviation measure, it lacks relevant information on worst case scenarios over a fixed horizon, mostly represented by the all time minimum of cumulative returns. Formulating a refined version of CED, we are able to add this piece of information to the risk measurement of drawdown, and then we get a new path-dependent risk measure that preserves all the good properties of the CED but following more prudential regulatory and management assessments, also in term of marginal risk contribution attributed to factors.

A fractional-order difference Cournot duopoly game with long memory
Baogui Xin,Wei Peng,Yekyung Kwon

We reconsider the Cournot duopoly problem in light of the theory for long memory. We introduce the Caputo fractional-order difference calculus to classical duopoly theory to propose a fractional-order discrete Cournot duopoly game model, which allows participants to make decisions while making full use of their historical information. Then we discuss Nash equilibria and local stability by using linear approximation. Finally, we detect the chaos of the model by employing a 0-1 test algorithm.

Advances in Incremental Valuation of Financial Contracts and Definition of the Economic Meaning of the Capital Value Adjustment (KVA)
Castagna, Antonio
We extend the analysis we sketched in Castagna [5] and we provide an application of the framework we introduced to incrementally evaluate financial contracts within a financial institution’s balance sheet.

Affine term structure models : a time-changed approach with perfect fit to market curves
Cheikh Mbaye,Frédéric Vrins

We address the so-called calibration problem which consists of fitting in a tractable way a given model to a specified term structure like, e.g., yield or default probability curves. Time-homogeneous jump-diffusions like Vasicek or Cox-Ingersoll-Ross (possibly coupled with compounded Poisson jumps, JCIR), are tractable processes but have limited flexibility; they fail to replicate actual market curves. The deterministic shift extension of the latter (Hull-White or JCIR++) is a simple but yet efficient solution that is widely used by both academics and practitioners. However, the shift approach is often not appropriate when positivity is required, which is a common constraint when dealing with credit spreads or default intensities. In this paper, we tackle this problem by adopting a time change approach. On the top of providing an elegant solution to the calibration problem under positivity constraint, our model features additional interesting properties in terms of implied volatilities. It is compared to the shift extension on various credit risk applications such as credit default swap, credit default swaption and credit valuation adjustment under wrong-way risk. The time change approach is able to generate much larger volatility and covariance effects under the positivity constraint. Our model offers an appealing alternative to the shift in such cases.

Aircraft Financing and Leasing in India Challenges & Opportunities: An Exploratory Study of Developing Aircraft Financing and Leasing in India
Shah, Dipesh,Chugan, Pawan K.
Aircraft leasing industry is a significant industry in the world today. Activities of the leasing firms have increased drastically over the last few decades. Indian aviation industry has seen an unprecedented growth in air passenger traffic both international and domestic over the past decade. Over the past few years it has been observed that the geography of the operations for aircraft leasing industry have been moving fast from western nations to eastern nations due to presence of a strong and a stable financial market and active involvements of state. Today five out of the twelve biggest lessors belong to Asia. They have grown in size because of frequent acquisitions, collaborations and partnerships, China being the most prominent example of such development. The synergies from inorganic growth have been pivotal in the drastic growth of aircraft leasing companies in China. India is a laggard in this segment of aviation industry and must soon explore and derive strategies to develop a robust aircraft leasing industry in the country. Having experienced a surge in aircraft demand, many Indian airlines are meeting this demand through offshore aircraft lessors and paying them in dollars. An attempt has been made in this paper to identify the challenges in air craft leasing and financing which present good opportunities for India to develop this industry. For that, the paper first discusses the global scenario of aircraft leasing industry which is followed by the aircraft leasing industry in India. To draw some lessons from the Chinese experience it then covers in brief the Chinese aircraft leasing industry. This is followed by details covering challenges and opportunities for this sector and suggests the ways to make India a favourable destination for aircraft leasing business.

Anti-Takeover Provisions and Investment Timing
Guthrie, Graeme,Hobbs, Cameron
We show how directors can set the strength of a firm's anti-takeover provisions in order to influence the investment-timing decision of an empire-building CEO. The prospect of future takeovers, which terminate the CEO's control benefits, affects the CEO's willingness to invest in low-value projects. If takeover defenses are too strong then the market for corporate control imposes insufficient discipline on the CEO, who invests too soon. If they are too weak then shareholders incur too many costs due to managerial distraction and the CEO invests too late. The optimal strength of anti-takeover provisions depends on the volatility of the value added to the firm's assets by alternative management teams. Consistent with our theory, firms with market-book ratios that vary more widely from those for the industry as a whole have fewer anti-takeover provisions.

Does Risk Sorting Explain Bubbles?
Kiss, Hubert Janos,Koczy, Laszlo A.,Pintér, Ágnes,Sziklai, Balazs
A recent stream of experimental economics literature studies the factors that contribute to the emergence of financial bubbles. We consider a setting where participants sorted according to their degree of risk aversion trade in experimental asset markets. We show that risk sorting is able to explain bubbles partially: Markets with the most risk-tolerant traders exhibit larger bubbles than markets with the most risk averse traders. In our study risk aversion does not correlate with gender or cognitive abilities, so it is an additional factor that helps understand bubbles.

Earnings Manipulation Benchmark for Nonfinancial Listed Companies in Vietnamese Stock Market
Nguyen, Anh Huu,Linh, Nguyen Ha,Yoon, Sung Wook
The paper examines earnings management detection using the Beneish M-score benchmark model on a sample of 468 non-financial Vietnamese companies listed on the Hochiminh Stock Exchange (HOSE) and Hanoi Stock Exchange (HNX) during 2013-2014. The results show that 40 % of non-financial Vietnamese-listed companies were involved in earnings management, and the sampled observations do fit the Beneish M-score model. This study suggests that the M-score model is a useful technique to use to detect the earnings manipulation behaviors of companies in Vietnam. The M-score model is also a reliable tool for investors to make when making decisions and verifying the reliability of accounting information found in financial reports.

Fine Properties of the Optimal Skorokhod Embedding Problem
Mathias Beiglböck,Marcel Nutz,Florian Stebegg

We study the problem of stopping a Brownian motion at a given distribution $\nu$ while optimizing a reward function that depends on the (possibly randomized) stopping time and the Brownian motion. Our first result establishes that the set $\mathcal{T}(\nu)$ of stopping times embedding $\nu$ is weakly dense in the set $\mathcal{R}(\nu)$ of randomized embeddings. In particular, the optimal Skorokhod embedding problem over $\mathcal{T}(\nu)$ has the same value as the relaxed one over $\mathcal{R}(\nu)$ when the reward function is semicontinuous, which parallels a fundamental result about Monge maps and Kantorovich couplings in optimal transport. A second part studies the dual optimization in the sense of linear programming. While existence of a dual solution failed in previous formulations, we introduce a relaxation of the dual problem and establish existence of solutions as well as absence of a duality gap, even for irregular reward functions. This leads to a monotonicity principle which complements the key theorem of Beiglb\"ock, Cox and Huesmann [Optimal transport and Skorokhod embedding, Invent. Math., 208:327-400, 2017]. We show that these results can be applied to characterize the geometry of optimal embeddings through a variational condition.

Firm Performance and Managing Downside Business Risk
Pandher, Gurupdesh S.,Sun, Jerry Y.,Currie, Russell R.
This paper focuses on the ultimate impact of hedging on firm performance. Successful risk management based on derivatives or operational activities should lead to a lesser occurrence of lower business outcomes than higher outcomes (i.e., positive skewness in quarterly earnings per share) compared to identical firms that do not manage adverse business scenarios. The study based on 5,586 non-financial firms in Compustat empirically detects the hedging profile from the distribution of quarterly firm earnings per share and relates it to firm performance (Tobin’s Q, excess stock returns, ROE, ROA). We find a significant positive effect of the hedging profile on firm valuation and profitability. For example, Tobin’s Q, ROE and ROA rise by 0.035, 2.6% and 1.4%, respectively, when EPS skewness rises by one (14% of firms) and these findings are robust to the level of firm earnings, firm size, leverage, market risk, and earnings management and firm-industry fixed effects. These results support the shareholder maximization and signaling theories of risk management.

General Stopping Behaviors of Naive and Non-Committed Sophisticated Agents, with Application to Probability Distortion
Yu-Jui Huang,Adrien Nguyen-Huu,Xun Yu Zhou

We consider the problem of stopping a diffusion process with a payoff functional that renders the problem time-inconsistent. We study stopping decisions of naive agents who reoptimize continuously in time, as well as equilibrium strategies of sophisticated agents who anticipate but lack control over their future selves' behaviors. When the state process is one dimensional and the payoff functional satisfies some regularity conditions, we prove that any equilibrium can be obtained as a fixed point of an operator. This operator represents strategic reasoning that takes the future selves' behaviors into account. We then apply the general results to the case when the agents distort probability and the diffusion process is a geometric Brownian motion. The problem is inherently time-inconsistent as the level of distortion of a same event changes over time. We show how the strategic reasoning may turn a naive agent into a sophisticated one. Moreover, we derive stopping strategies of the two types of agent for various parameter specifications of the problem, illustrating rich behaviors beyond the extreme ones such as "never-stopping" or "never-starting".

Heterogeneous Impact of the Minimum Wage: Implications for Changes in Between- and Within-group Inequality
Tatsushi Oka,Ken Yamada

Workers who earn at or below the minimum wage in the United States are mostly either less educated, young, or female. This paper shows that changes in the real value of the minimum wage over recent decades have affected the relationship of hourly wages with education, experience, and gender. Changes in the real value of the minimum wage account in part for the patterns of changes in education, experience, and gender wage differentials and mostly for the patterns of changes in within-group wage differentials.

ICO vs IPO: Empirical Findings, Market Frictions and the Appropriate Regulatory Framework
Ofir, Moran,Sadeh, Ido
Initial coin offerings (ICOs) have been a prominent focus of legal and economic studies in recent years, which analyze their characteristics and determinants of their success. In this paper, we review these studies and identify key ICO success factors. We then compare the results with the empirical literature on initial public offerings (IPOs) and crowdfunding and offer theoretical explanations for the differences found. The results of this comparison are important for two reasons. Firstly, because there is no single formal data source, and there is evidence of inconsistencies across the different data sources available. Secondly, our results show in what circumstances ICO investors and initiators behave like IPO investors and initiators, and hence contribute to the literature on tokens as securities. Subsequently, we identify market frictions in ICOs, with a focus on information asymmetry and investor sentiment and biases. Finally, we discuss the regulatory implications of our findings.

Institutional Order Handling and Broker-Affiliated Trading Venues
Anand, Amber,Samadi, Mehrdad,Sokobin, Jonathan S.,Venkataraman, Kumar
Using detailed order handling data over the life of 330 million institutional orders, we study whether order routing by brokers to Alternative Trading Systems (ATSs) that they own affects execution quality. In a multivariate regression specification that controls for stock attributes, order characteristics and market conditions, orders handled by brokers with high affiliated ATS routing are associated with lower fill rates. Trading costs based on the implementation shortfall approach are higher when clients select a broker with high affiliated ATS routing. Broker outcomes are highly persistent suggesting that improved disclosures on order handling could help institutional clients with broker selection.

Italia Economia a Fine 2018 (Italy - At the Close of 2018)
Mazziero, Maurizio,Lawford, Andrew,Serafini, Gabriele
Italian Abstract: Ricerca sulla situazione economica italiana basata sui dati economici ufficiali; vengono analizzati e confrontati con il passato il debito pubblico, le riserve ufficiali, il PIL, l'inflazione e la disoccupazione. English Abstract: Research into the state of the Italian economy based on official economic data; the current Sovereign Debt, Official Reserves, GDP, Inflation and Unemployment situation is presented and and compared with the past.

On occupation times in the red of L\'evy risk models
David Landriault,Bin Li,Mohamed Amine Lkabous

In this paper, we complement the existing literature on the occupation time in the red (below level $0$) of a spectrally negative L\'evy process, and later extend the analysis to the refracted spectrally negative L\'evy process. For both classes of processes, we derive an explicit expression for the distribution of such occupation time up to an independent exponential time. As an application, we consider the \emph{inverse occupation time} (also known as the time of cumulative Parisian ruin in \cite{guerinrenaud2015}), where ruin is deemed to occur at the earliest time the risk process cumulatively stays below a critical level over a pre-determined time-threshold. Some particular examples of spectrally negative L\'evy processes are also examined in more detail.

On the Global Impact of Risk-off Shocks and Policy-put Frameworks
Caballero, Ricardo J.,Kamber, Güneş
Global risk-off shocks can be highly destabilizing for financial markets and, absent an adequate policy response, may trigger severe recessions. Policy responses were more complex for developed economies with very low interest rates after the Global Financial Crisis (GFC). We document, however, that the unconventional policies adopted by the main central banks were effective in containing asset price declines. These policies impacted long rates and inspired confidence in a policy-put framework that reduced the persistence of risk-off shocks. We also show that domestic macroeconomic and financial conditions play a key role in benefiting from the spillovers of these policies during risk-off episodes. Countries like Japan, which already had very low long rates, benefited less. However, Japan still benefited from the reduced persistence of risk-off shocks. In contrast, since one of the main channels through which emerging markets are historically affected by global risk-off shocks is through a sharp rise in long rates, the unconventional monetary policy phase has been relatively benign to emerging markets during these episodes, especially for those economies with solid macroeconomic fundamentals and deep domestic financial markets. We also show that unconventional monetary policy in the US had strong effects on long interest rates in most economies in the Asia-Pacific region (which helps during risk-off events but may be destabilizing otherwise we do not take a stand on this tradeoff).

Optimal Execution in a Multiplayer Model of Transient Price Impact
Elias Strehle

Trading algorithms that execute large orders are susceptible to exploitation by order anticipation strategies. This paper studies the influence of order anticipation strategies in a multi-investor model of optimal execution under transient price impact. Existence and uniqueness of a Nash equilibrium is established under the assumption that trading incurs quadratic transaction costs. A closed-form representation of the Nash equilibrium is derived for exponential decay kernels. With this representation, it is shown that while order anticipation strategies raise the execution costs of a large order significantly, they typically do not cause price overshooting in the sense of Brunnermeier and Pedersen.

Player-Compatible Equilibrium
Drew Fudenberg,Kevin He

Player-Compatible Equilibrium (PCE) imposes cross-player restrictions on the magnitudes of the players' "trembles" onto different strategies. These restrictions capture the idea that trembles correspond to deliberate experiments by agents who are unsure of the prevailing distribution of play. PCE selects intuitive equilibria in a number of examples where trembling-hand perfect equilibrium (Selten, 1975) and proper equilibrium (Myerson, 1978) have no bite. We show that rational learning and some near-optimal heuristics imply our compatibility restrictions in a steady-state setting.

Predicting Default Risk under Asymmetric Binary Link Functions
Dendramis, Yiannis,Tzavalis, Elias,Varthalitis, Petros,Athanasiou, Eleni
In this paper we propose the use of an asymmetric binary link function to extend the proportional hazard model for predicting loan default. The rationale behind this approach is that the symmetry assumption, that has been widely used in the literature, could be considered as quite restrictive, especially during periods of financial distress. In our approach we allow for a flexible level of asymmetry in the probability of default by the use of the skewed logit distribution. This enable us to estimate the actual level of asymmetry that is associated with the data at hand. We implement our approach to both simulated data and a rich micro dataset of consumer loan accounts. Our results provide clear cut evidence that ignoring the actual level of asymmetry leads to seriously biased estimates of the slope coefficients, inaccurate marginal effects of the covariates of the model, and overestimation of the probability of default. Regarding the predictive power of the covariates of the model, we have found that loan specific covariates, contain considerably more information about the loan default than macroeconomic covariates, which are often used in practice to carry out macroprudential stress testing.

Pricing Formulae of Power Binary and Normal Distribution Standard Options and Applications
Hyong-Chol O,Dae-Sung Choe

In this paper the Buchen's pricing formulae of (higher order) asset and bond binary options are incorporated into the pricing formula of power binary options and a pricing formula of "the normal distribution standard options" with the maturity payoff related to a power function and the density function of normal distribution is derived. And as their applications, pricing formulae of savings plans that provide a choice of indexing and discrete geometric average Asian options are derived and the fact that the price of discrete geometric average Asian option converges to the price of continuous geometric average Asian option when the largest distance between neighboring monitoring times goes to zero is proved.

Pro-Cyclicality of Traditional Risk Measurements: Quantifying and Highlighting Factors at its Source
Marcel Bräutigam,Michel Dacorogna,Marie Kratz

Since the introduction of risk-based solvency regulation, pro-cyclicality has been a subject of concerns from all market participants. Here, we lay down a methodology to evaluate the amount of pro-cyclicality in the way financial institutions measure risk, and identify factors explaining this pro-cyclical behavior. We introduce a new indicator based on the Sample Quantile Process (SQP, a dynamic generalization of Value-at-Risk), conditioned on realized volatility to quantify the pro-cyclicality, and evaluate its amount in the markets, considering 11 stock indices as realizations of the SQP. Then we determine two main factors explaining the pro-cyclicality: the clustering and return-to-the-mean of volatility, as it could have been anticipated but not quantified before, and, more surprisingly, the very way risk is measured, independently of this return-to-the-mean effect.

Risk-Adjusted Performance of Convertible Venture Investments: Failure and Valuation Risks & Search by Entrepreneurs
Pandher, Gurupdesh S.
The paper studies the risk-adjusted performance of convertible venture investments subject to venture failure risk and valuation uncertainty. The analysis uses a double-hazard agency framework where VCs maximize their expected investment return and entrepreneurs search for the best deal from VCs with unknown productivities. Results from the model and numerical study provide new insights on important venture finance outcomes. VCs with a diverse set of funding capabilities and productivities can coexist in the venture finance industry since their risk-adjusted return is similar, while venture failure risk and valuation uncertainty are the most salient determinants of the Sharpe ratio. On the venture funding cycle, the model predicts that VCs at later stages will experience higher risk-adjusted returns as valuation uncertainty declines and funding capacity enables them to wait till larger investments are required (although it does not impact the Sharpe ratio). When entrepreneurs search for the best deal, an equilibrium arises that reduces the disadvantage of lower productivity VCs (their expected return rises). Lastly, the model shows that the convertible contract largely mitigates against venture failure risk (as opposed to valuation risk) as it converges to the pure equity contract when the failure probability or recovery diminish to zero.

Social Justice in EU Financial Consumer Law
FejÅ's, Andrea
This paper considers how social justice influences EU financial consumer law. It provides a new way of looking at social justice in consumer law by showing that equality of status based social justice has increasingly come to the fore in modern EU financial consumer law. This emergent and complex set of private and regulatory rules on credit, insurance, investment and payment products has responded to the consequences of inequality between financial firms and consumers by engaging in product and rights regulation that balances the parties’ rights and duties and protects consumers from the consequences of status-based inequality. Looking forward the paper recommends that this social justice approach must be made transparent and become an express part of EU law and policy, both in order to raise consumer trust in the internal market and to more clearly set the future law and policy agenda.

Stackelberg Independence
Toomas Hinnosaar

The standard model of sequential capacity choices is the Stackelberg quantity leadership model with linear demand. I show that under the standard assumptions, leaders' actions are informative about market conditions and independent of leaders' beliefs about the arrivals of followers. However, this Stackelberg independence property relies on all standard assumptions being satisfied. It fails to hold whenever the demand function is non-linear, marginal cost is not constant, goods are differentiated, firms are non-identical, or there are any externalities. I show that small deviations from the linear demand assumption may make the leaders' choices completely uninformative.

The Benefits of Being Friends with the Boss
Balsam, Steven,Kwack, So Yean
We investigate whether connections with the CEO established outside the firm increase the likelihood of an individual being promoted to be on the top management team (TMT), i.e., become one of the firms’ top five executives, and whether those connections increase the likelihood of a member of the TMT being appointed to the board of directors. We find evidence consistent with a connection increasing the likelihood of an individual being appointed to the TMT and the likelihood of a member of the TMT being appointed to the board of directors. We also evidence consistent with connections between the executive and the CEO reducing that executives’ likelihood of turnover. In cross-sectional analysis we provide some evidence consistent with our turnover results being associated with CEO power, as well as firm complexity, and our board appointment results being associated with CEO power.

The Effect of Market Regimes on the Performance of Market Capitalization-Weighted and Smart Beta Shariah-Compliant Equity Portfolios
Raza, Muhammad Wajid,L’Huillier, Barbara,Ashraf, Dawood
Shariah-compliant investment guidelines, while explicit on screening criteria for stock selection, are silent on the weighting methods to be used in the construction of Shariah-compliant equity portfolios. The market capitalization-weighted strategy and smart beta strategies (fundamental value-weighted, equal-weighted, and low-risk weighted strategies) exhibit different risk and return characteristics. This paper investigates whether the choice of weighting strategy affects the performance of Shariah-compliant equity portfolios under different market conditions. The sample consists of active constituent data from S&P 500 for the period 1986-2016. By utilizing the Markov-regime switching model, it is possible to categorize market returns into two regimes â€" high regimes for bullish market conditions and low regimes for bearish market conditions. The empirical results indicate a significant difference between the performances of Shariah-compliant equity portfolios in high and low regimes following different weighting strategies. The evidence suggests that market capitalization and fundamental value-weighted strategies perform better during market rallies. On the other hand, a low-risk strategy can be used as a hedge during periods of maximum drawdown and is associated with relatively lower value-at-risk and expected shortfalls as compared to alternative strategies.

The Impact of Brexit on Francophone Africa
Kohnert, Dirk
Whereas the impact of Brexit on Anglophone Africa was a major issue in the controversial British discussions on the pros and cons of Brexit, possible repercussions on French-speaking Africa have been rarely mentioned up to now. If at all, mostly indirect general effects were declared, both concerning the former British Empire in Africa and a fortifori for the former French colonies as well. Yet, the range of possible Brexit effect is impressive. It spreads from direct influence on farm-gate cocoa-prices in the CFA-currency regions and subsequent percussions on the state budget of these countries, over more indirect effects, e.g. on the cooperation between CEMAC, WAEMU and the EU concerning EDF-programs of which Great Britain has been a major contributor so far, as well as enforced re-negotiation of controversial EPAs, to the revival of progressive social networks in Francophone Africa. The latter are already demanding more political and economic sovereignty, for example with respect to the increasingly anachronistic F CFA currency. Yet, in view of the lack of countervailing power of Britain within the EU in the case of Brexit, the murky network of Françafrique could be re-vitalized and consolidated as well. Besides, there could develop also direct effects of the Brexit. For example, on coca-farmers in Francophone West Africa, because their product is traditionally traded in Pound Sterling. Thus, any fall in the value of the Pound Sterling against the Euro once Britain leaves the EU would have damaging consequences, not only for the producers but also for public finances, because cocoa is priced in Sterling and the CFA franc is linked to the Euro. This impacts also on the revival of the long-standing controversy on the ill-adapted and increasingly anachronistic F CFA. African activists already demand a genuine African debate and a referendum on these issues similar to the Brexit vote. Last, but not least, British application for EU membership had been vetoed two times by France in 1963 and November 1967. Arguably, this veto has direct links to the British Brexit vote of 2016.

Trading Strategies Generated Pathwise by Functions of Market Weights
Ioannis Karatzas,Donghan Kim

Almost twenty years ago, E.R. Fernholz introduced portfolio generating functions which can be used to construct a variety of portfolios, solely in the terms of the individual companies' market weights. I. Karatzas and J. Ruf recently developed another methodology for the functional construction of portfolios, which leads to very simple conditions for strong relative arbitrage with respect to the market. In this paper, both of these notions of functional portfolio generation are generalized in a pathwise, probability-free setting; portfolio generating functions are substituted by path-dependent functionals, which involve the current market weights, as well as additional bounded-variation functions of past and present market weights. This generalization leads to a wider class of functionally-generated portfolios than was heretofore possible, and yields improved conditions for outperforming the market portfolio over suitable time-horizons.

WACC and CAPM According to Utilities Regulators: Confusions, Errors and Inconsistencies
Fernandez, Pablo
Regulators of many countries try to find the “true” WACC of Electricity, Gas, Water… activities. All their documents have in common a main confusion: they do not differentiate among expected, required, historical, and regulator allowed returns, which are 4 very different concepts. Most of the documents have several conceptual errors (they apply wrongly the CAPM and the WACC), several inconsistencies estimating parameters and multiply the WACC by the depreciated book value of assets. Another two common peculiarities of many regulators are a) their penchant for calculating averages and averages of averages, and b) their argument of doing strange calculations “because many other regulators do so.” We show how a European Regulator arrives to a “WACC before taxes of the electricity regulated activities” of 5,58%. We also show that using the same data and the same method, but criteria of other regulators for the calculation of the parameters you may justify any “WACC before taxes” in the interval 2,4% - 7,4%.After reading the mentioned documents of the regulators a question arises: Are they fiction or science fiction? We show some confusions, errors, inconsistencies and useless arguments of the documents of Regulators and propose solutions. Regulator reports (such as the one in Section 1) are very helpful to discover conceptual mistakes, valuation errors… and to think about the meaning of several concepts widely used in Corporate Finance and Financial Markets.

Which Related Party Transactions Should Be Subject to Ex Ante Review? Evidence from Germany
Engert, Andreas,Florstedt, Tim
The amended EU shareholder rights directive introduces a comprehensive regime of ex ante review for potentially conflicted transactions between listed companies and their major shareholders, downstream entities, and managers. Such ‘related party transactions’â€"if considered materialâ€"will have to be evaluated in advance by the board of directors, the shareholders meeting, or the stock market. The paper offers an empirical basis for implementation in Germany and other continental European jurisdictions that lack experience with an ex ante procedural approach to related party transactions. Besides documenting ownership in and shareholdings of German listed companies, we use hand-collected data based on IAS 24 reporting of related party transactions to estimate the number of companies affected by different materiality thresholds based on accounting assets, sales, market capitalisation, and other financials. The main recommendations derived from the analysis are to use more than one single quantitative criterion, to adopt a more generous standard for transactions with downstream entities, and to abstain from imposing a specialised threshold for transactions with managers.