Research articles for the 2019-03-19

A theory for combinations of risk measures
Marcelo Brutti Righi

We study combinations of risk measures under no restrictive assumption on the set of alternatives. The main result is the representation for resulting risk measures from the properties of both alternative functionals and combination functions. To that, we develop a representation for a mixture of convex risk measures. As an application, we address the context of probability-based risk measurements based on a functional on the set of distribution functions. We develop results related to this specific context. We also explore features of individual interest generated by our framework, such as the preservation of continuity properties, the representation of worst-case risk measures, stochastic dominance and elicitability.

Are Short Selling Restrictions Effective?
Barardehi, Yashar H.,Bird, Andrew,Karolyi, Stephen A.,Ruchti, Thomas
In 2010 the SEC enacted Rule 201 (the "alternative uptick rule"), which triggers a temporary short selling restriction once a stock's intraday return falls below -10%. We exploit this threshold-based regulation using a regression discontinuity design to study the impacts on prices and trading. We find that short selling restrictions reduce seller-initiated and on-exchange volume, and in contrast to prior work, that they increase daily returns by 31 bps, with stronger effects in down markets. Although these findings align with policymaker objectives, we also find significant offsetting spillover effects on peer stocks, consistent with cross-stock exposure substitution by short sellers.

Bond Risk Premia and the Exchange Rate
Hofmann, Boris,Shim, Ilhyock,Shin, Hyun Song
In emerging market economies, currency appreciation goes hand in hand with compressed sovereign bond spreads, even for local currency sovereign bonds. This yield compression comes from a reduction in the credit risk premium. Crucially, the relevant exchange rate involved in yield compression is the bilateral US dollar exchange rate, not the trade-weighted exchange rate. Our findings highlight endogenous co-movement of bond risk premia and exchange rates through the portfolio choice of global investors who evaluate returns in dollar terms.

Conditional nonlinear expectations
Daniel Bartl

Let $\Omega$ be a Polish space with Borel $\sigma$-field $\mathcal{F}$ and countably generated sub $\sigma$-field $\mathcal{G}\subset\mathcal{F}$. Denote by $\mathcal{L}(\mathcal{F})$ the set of all bounded $\mathcal{F}$-upper semianalytic functions from $\Omega$ to the reals and by $\mathcal{L}(\mathcal{G})$ the subset of $\mathcal{G}$-upper semianalytic functions. Let $\mathcal{E}(\cdot|\mathcal{G})\colon\mathcal{L}(\mathcal{F})\to\mathcal{L}(\mathcal{G})$ be a sublinear increasing functional which leaves $\mathcal{L}(\mathcal{G})$ invariant. It is shown that there exists a $\mathcal{G}$-analytic set-valued mapping $\mathcal{P}_{\mathcal{G}}$ from $\Omega$ to the set of probabilities which are concentrated on atoms of $\mathcal{G}$ with compact convex values such that $\mathcal{E}(X|\mathcal{G})(\omega)=$ $\sup_{P\in\mathcal{P}_{\mathcal{G}}(\omega)} E_P[X]$ if and only if $\mathcal{E}(\cdot |\mathcal{G})$ is pointwise continuous from below and continuous from above on the continuous functions. Further, given another sublinear increasing functional $\mathcal{E}(\cdot)\colon\mathcal{L}(\mathcal{F})\to\mathbb{R}$ which leaves the constants invariant, the tower property $\mathcal{E}(\cdot)=\mathcal{E}(\mathcal{E}(\cdot|\mathcal{G}))$ is characterized via a pasting property of the representing sets of probabilities, and the importance of analytic functions is explained. Finally, it is characterized when a nonlinear version of Fubini's theorem holds true and when the product of a set of probabilities and a set of kernels is compact.

Control-stopping Games for Market Microstructure and Beyond
Roman Gayduk,Sergey Nadtochiy

In this paper, we present a family of a control-stopping games which arise naturally in equilibrium-based models of market microstructure, as well as in other models with strategic buyers and sellers. A distinctive feature of this family of games is the fact that the agents do not have any exogenously given fundamental value for the asset, and they deduce the value of their position from the bid and ask prices posted by other agents (i.e. they are pure speculators). As a result, in such a game, the reward function of each agent, at the time of stopping, depends directly on the controls of other players. The equilibrium problem leads naturally to a system of coupled control-stopping problems (or, equivalently, Reflected Backward Stochastic Differential Equations (RBSDEs)), in which the individual reward functions (or, reflecting barriers) depend on the value functions (or, solution components) of other agents. The resulting system, in general, presents multiple mathematical challenges due to the non-standard form of coupling (or, reflection). In the present case, this system is also complicated by the fact that the continuous controls of the agents, describing their posted bid and ask prices, are constrained to take values in a discrete grid. The latter feature reflects the presence of a positive tick size in the market, and it creates additional discontinuities in the agents reward functions (or, reflecting barriers). Herein, we prove the existence of a solution to the associated system in a special Markovian framework, provide numerical examples, and discuss the potential applications.

Dynamic Hurst Exponent in Time Series
Carlos Arturo Soto Campos,Leopoldo Sánchez Cantú,Zeus Hernández Veleros

The market efficiency hypothesis has been proposed to explain the behavior of time series of stock markets. The Black-Scholes model (B-S) for example, is based on the assumption that markets are efficient. As a consequence, it is impossible, at least in principle, to "predict" how a market behaves, whatever the circumstances. Recently we have found evidence which shows that it is possible to find self-organized behavior in the prices of assets in financial markets during deep falls of those prices. Through a kurtosis analysis we have identified a critical point that separates time series from stock markets in two different regimes: the mesokurtic segment compatible with a random walk regime and the leptokurtic one that allegedly follows a power law behavior. In this paper we provide some evidence, showing that the Hurst exponent is a good estimator of the regime in which the market is operating. Finally, we propose that the Hurst exponent can be considered as a critical variable in just the same way as magnetization, for example, can be used to distinguish the phase of a magnetic system in physics.

Enhanced Scrutiny on the Buy-Side
Afsharipour, Afra,Laster, J. Travis
Empirical studies of acquisitions consistently find that public company bidders often overpay for targets, imposing significant losses on bidder shareholders. Numerous studies have connected bidder overpayment with managerial agency costs and behavioral biases that reflect management self-interest. For purposes of corporate law, these concerns implicate the behavior of fiduciariesâ€"the officers and directors of the acquiring entityâ€"and raise questions about whether those fiduciaries are fulfilling their duty of loyalty. To address comparable sell-side concerns, the Delaware courts developed an intermediate standard of review known as enhanced scrutiny. There has been little exploration, however, of whether the rationales for applying enhanced scrutiny to the actions of sell-side fiduciaries extend to comparable fiduciaries on the buy-side. This Article addresses this long-neglected question. Drawing upon the history of Delaware jurisprudence on enhanced scrutiny, it argues that enhanced scrutiny should extend to the decisions of buy-side fiduciaries. The Article also recognizes that, although doctrinally coherent, applying enhanced scrutiny to buy-side decisions would open the door to well-documented stockholder litigation pathologies that have undermined the effectiveness of enhanced scrutiny for sell-side decisions. To address these pathologies, the Delaware courts have recently encouraged the use of a fully informed stockholder vote on the sell-side to lessen litigation risk. This Article reasons that a primary argument in favor of extending enhanced scrutiny to buy-side decisions rests not on the ability of the litigation itself to generate superior outcomes, rather as an inducement to more frequent buy-side votes. This argument builds on recent empirical literature which finds that stockholder voting can provide an important counterbalance against the self-interest and biases that lead to bidder overpayment.

FX Intervention and Domestic Credit: Evidence from High-Frequency Micro Data
Hofmann, Boris,Shin, Hyun Song,Villamizar‐Villegas, Mauricio
We employ a rarely available high-frequency micro dataset to study the impact of foreign exchange intervention on domestic credit growth. We find that sterilised purchases of dollars by the central bank dampens the flow of new domestic corporate loans in Colombia. Slowing the pace of currency appreciation plays a key role in dampening credit expansion. Our analysis sheds light on the role of FX intervention as part of the financial stability-oriented policy response to credit booms associated with capital inflow surges.

Failure of Smooth Pasting Principle and Nonexistence of Equilibrium Stopping Rules under Time-Inconsistency
Ken Seng Tan,Wei Wei,Xun Yu Zhou

This paper considers a time-inconsistent stopping problem in which the inconsistency arises from non-constant time preference rates. We show that the smooth pasting principle, the main approach that has been used to construct explicit solutions for conventional time-consistent optimal stopping problems, may fail under time-inconsistency. Specifically, we prove that the smooth pasting principle solves a time-inconsistent problem within the intra-personal game theoretic framework if and only if a certain inequality on the model primitives is satisfied. We show that the violation of this inequality can happen even for very simple non-exponential discount functions. Moreover, we demonstrate that the stopping problem does not admit any intra-personal equilibrium whenever the smooth pasting principle fails. The "negative" results in this paper caution blindly extending the classical approaches for time-consistent stopping problems to their time-inconsistent counterparts.

Heads I Win, Tails You Lose: Asymmetric Taxes, Risk Taking, and Innovation
Albertus, James F.,Glover, Brent,Levine, Oliver
When multinationals face lower tax rates abroad than in the US, transfer pricing strategies generate an asymmetry in the tax rates on a project's profits and losses. We show that the tax savings from transfer pricing can be expressed as a long position in a call option. We use a model to show that this transfer pricing call option leads a firm to choose riskier and larger projects than it would otherwise. Thus, transfer pricing strategies do not simply reduce a firm's taxes, they can influence the scale and types of projects undertaken.

How Global is Your Mutual Fund? International Diversification from Multinationals
Demirci, Irem,Ferreira, Miguel A.,Matos, Pedro,Sialm, Clemens
We show that mutual funds worldwide have substantial indirect international exposure through their stock holdings of multinational corporations based in the fund domicile country. Mutual funds' international exposure increases from 47% to 66% when we take into account international corporate diversification. We find that funds with higher indirect international exposure perform significantly better in both the cross section and time series. This overperformance is more pronounced among small fund families, and funds that invest in small stocks, growth stocks, and less developed capital markets. We identify the effects by exploiting exogenous variation in indirect international exposure due to cross-border mergers and acquisitions. Our findings support the hypothesis that international portfolio diversification from home-based multinationals reduces the transaction and information costs of investing abroad.

How Institutional Development News Moves an Emerging Market
Guzmán, Alexander,Mehrotra, Vikas,Morck, Randall,Trujillo, Maria-Andrea
Major moves in Colombia’s stock market in the 2000s correspond to major news of progress or setbacks in rebuilding the country’s institutions, shattered by widespread guerrilla insurgencies in the 1990s. This contrasts with prior work reporting no news on major market moves in the US, a country with comparatively stable institutions. Colombian economy-level news during the institutional rebuilding phase may have been exceptionally economically significant. This suggests that stock market moves might usefully gauge the importance of institutional changes in other developing economies.

How Much Would It Take? Achieving Retirement Income Equivalency Between Final-Average-Pay Defined Benefit Plan Accruals and Automatic Enrollment 401(k) Plans in the Private Sector
VanDerhei, Jack
A rapidly growing public policy concern facing the United States is whether future generations of retired Americans, particularly those in the Baby Boomer and Gen X cohorts, will have adequate retirement incomes. There have been several policy studies in recent years that suggest that the decreasing relevance of defined benefit (DB) plans relative to defined contribution plans (such as 401(k) plans) since the 1980s will have a negative impact on the percentage of future retirees who will achieve a specified level of retirement income adequacy.Previous EBRI research reported on a comparative analysis of future benefits from private-sector, voluntary enrollment (VE) 401(k) plans and stylized, final-average-pay defined benefit plans.The current research expands the previous research by computing the actual final-average DB accrual that would be required to provide an equal amount of retirement income at age 65 as would be produced by the annuitized value of the projected sum of the 401(k) and IRA rollover balances under automatic enrollment (AE) 401(k) plans.Assuming historical rates of return as well as annuity purchase prices reflecting average bond rates over the period from 1986 to 2013, the analysis shows that:For males, defined benefit “break-even” rates â€" or the percentage accrual rate that would be required in order for a DB plan to generate the same retirement income that is projected to come from 401(k) plan participation for a given worker cohort â€" are rarely less than 1.5 percent of final pay: in only 2 of the 16 combinations of wage quartiles and years of plan eligibility for males are defined benefit “break-even” rates less than 1.5 percent of final pay per years of service. In the case of females, only 5 of the 16 combinations have “break-even” rates under 1.5 percent. When these findings are subjected to the scrutiny of various “stress tests” both by reducing the rate of return assumptions by 200 basis points as well as utilizing current annuity purchase prices, results show that in many cases the AE 401(k) plans lose their comparative advantage to the stylized, final-average DB plans, especially for lower-paid employees as demonstrated by the lower “break-even” accrual rates.

Leverage Risk and Investment: The Case of Gold Clauses in the 1930s
Gomes, Joao F.,Kilic, Mete,Plante, Sebastien
We study the role of the 1933 gold clause abrogation in the slow recovery of corporate investment from the Great Depression. The risk of reinstated gold clauses exposed large firms with outstanding corporate bonds to a 69% increase in payments to bondholders. We show that firms with higher exposure to this risk exhibit larger reduction in investment in 1933 and 1934. For these firms, investment recovered following the 1935 Supreme Court decision that eliminated the risk of higher debt payments by upholding the abrogation of gold clauses. In the cross-section of firms, the decrease in investment in 1933 and 1934 coincides with an increase in equity payouts. Taken together, our results show that the risk of higher financial leverage decreases demand for investment. This channel complements existing explanations of the slow recovery based on bank credit supply which large firms did not rely on.

Mortgage Loss Severities: What Keeps Them so High?
An, Xudong,Cordell, Lawrence
Mortgage loss-given-default (LGD) increased significantly when house prices plummeted and delinquencies rose during the financial crisis, but it has remained over 40 percent in recent years despite a strong housing recovery. Our results indicate that the sustained high LGDs post-crisis are due to a combination of an overhang of crisis-era foreclosures and prolonged foreclosure timelines, which have offset higher sales recoveries. Simulations show that cutting foreclosure timelines by one year would cause LGD to decrease by 5–8 percentage points, depending on the trade-off between lower liquidation expenses and lower sales recoveries. Using difference-in-differences tests, we also find that recent consumer protection programs have extended foreclosure timelines and increased loss severities in spite of their benefits of increasing loan modifications and enhancing consumer protections.

Non-traded call's volatility smiles
Marek Capinski

Real life hedging in the Black-Scholes model must be imperfect and if the stock's drift is higher than the risk free rate, leads to a profit on average. Hence the option price is examined as a fair game agreement between the parties, based on expected payoffs and a simple measure of risk. The resulting prices result in the volatility smile.

On Carr and Lee's correlation immunization strategy
Jimin Lin,Matthew Lorig

In their seminal work Carr and Lee (2008) show how to robustly price and replicate a variety of claims written on the quadratic variation of a risky asset under the assumption that the asset's volatility process is independent of the Brownian motion that drives the asset's price. Additionally, they propose a correlation immunization strategy that minimizes the pricing and hedging error that results when the correlation between the risky asset's price and volatility is nonzero. In this paper, we show that the correlation immunization strategy is the only strategy among the class of strategies discussed in Carr and Lee (2008) that results in real-valued hedging portfolios when the correlation between the asset's price and volatility is nonzero. Additionally, we perform a number of Monte Carlo experiments to test the effectiveness of Carr and Lee's immunization strategy. Our results indicate that the correlation immunization method is an effective means of reducing pricing and hedging errors that result from nonzero correlation.

On expansions for the Black-Scholes prices and hedge parameters
Jean-Philippe Aguilar

We derive new formulas for the price of the European call and put options in the Black-Scholes model, under the form of uniformly convergent series generalizing previously known approximations. We also provide precise boundaries for the convergence speed and apply the results to the calculation of hedge parameters (Greeks).

Optimal Dividend Distribution Under Drawdown and Ratcheting Constraints on Dividend Rates
Bahman Angoshtari,Erhan Bayraktar,Virginia R. Young

We consider the optimal dividend problem under a habit formation constraint that prevents the dividend rate to fall below a certain proportion of its historical maximum, the so-called drawdown constraint. This is an extension of the optimal Duesenberry's ratcheting consumption problem, studied by Dybvig (1995) [Review of Economic Studies 62(2), 287-313], in which consumption is assumed to be nondecreasing. Our problem differs from Dybvig's also in that the time of ruin could be finite in our setting, whereas ruin was impossible in Dybvig's work. We formulate our problem as a stochastic control problem with the objective of maximizing the expected discounted utility of the dividend stream until bankruptcy, in which risk preferences are embodied by power utility. We semi-explicitly solve the corresponding Hamilton-Jacobi-Bellman variational inequality, which is a nonlinear free-boundary problem. The optimal (excess) dividend rate $c^*_t$ - as a function of the company's current surplus $X_t$ and its historical running maximum of the (excess) dividend rate $z_t$ - is as follows: There are constants $0 < w_{\alpha} < w_0 < w^*$ such that (1) for $0 < X_t \le w_{\alpha} z_t$, it is optimal to pay dividends at the lowest rate $\alpha z_t$, (2) for $w_{\alpha} z_t < X_t < w_0 z_t$, it is optimal to distribute dividends at an intermediate rate $c^*_t \in (\alpha z_t, z_t)$, (3) for $w_0 z_t < X_t < w^* z_t$, it is optimal to distribute dividends at the historical peak rate $z_t$, (4) for $X_t > w^* z_t$, it is optimal to increase the dividend rate above $z_t$, and (5) it is optimal to increase $z_t$ via singular control as needed to keep $X_t \le w^* z_t$. Because, the maximum (excess) dividend rate will eventually be proportional to the running maximum of the surplus, "mountains will have to move" before we increase the dividend rate beyond its historical maximum.

Predictable Forward Performance Processes: The Binomial Case
Bahman Angoshtari,Thaleia Zariphopoulou,Xun Yu Zhou

We introduce a new class of forward performance processes that are endogenous and predictable with regards to an underlying market information set and, furthermore, are updated at discrete times. We analyze in detail a binomial model whose parameters are random and updated dynamically as the market evolves. We show that the key step in the construction of the associated predictable forward performance process is to solve a single-period inverse investment problem, namely, to determine, period-by-period and conditionally on the current market information, the end-time utility function from a given initial-time value function. We reduce this inverse problem to solving a functional equation and establish conditions for the existence and uniqueness of its solutions in the class of inverse marginal functions.

Real Option Exercise: Empirical Evidence
H. Décaire, Paul ,Gilje, Erik,Taillard, Jérôme
We study when and why firms exercise real options. Using detailed project-level investment data, we find that the likelihood that a firm exercises a real option is strongly related to peer exercise behavior. Peer exercise decisions are as important in explaining exercise behavior as variables commonly associated with standard real option theories, such as volatility. We identify peer effects using localized exogenous variation in peer project exercise decisions and find evidence consistent with information externalities being important for exercise behavior.

Reinsurance Policies with Maximal Synergy
Jiang, Wenjun,Hong, Hanping,Ren, Jiandong
Optimal reinsurance policies have been studied extensively in the economics and insurance literature. Two types of optimality criteria are commonly used: maximizing the expected utility (EU) or minimizing risks. Understandably, applying the two types of criteria usually will result in different “optimal” policies. To strike a balance between maximizing utility and minimizing risk, Borch (1960b) assumed that the admissible reinsurance policies in maximizing EU are such that the reduction in variance of losses through the reinsurance transaction is maximized. This in fact implies that only quota-share policies are admissible and greatly simplify the problem. In this paper, we follow the approach in Borch (1960b). However, we assume that the two parties apply distortion risk measures instead of variance. We first identify a set of reinsurance policies that minimize the total risk shared by the two parties, then we take this set of policies as admissible and determine the Pareto-optimal policies that maximize the EU of the two parties. In contrast to the results in Borch (1960b), we show that applying risk measures such as VaR or TVaR results in multi-layered policies.

Report on Corporate Governance of Italian Listed Companies - 2018 (Rapporto 2018 Sulla Corporate Governance Delle Società Quotate Italiane)
Linciano, Nadia,Ciavarella, Angela,Signoretti, Rossella,Pierantoni, Lucia,Della Libera, Eugenia
English Abstract: The Report is organized in four sections. The first section describes the main characteristics of the ownership and control structure of Italian listed companies. In the second part are reported data on the internal governance of listed firms, with particular reference to the composition and the functioning of the board of directors and its committees. Then the Report focuses on Annual General Meetings, with regard to shareholders attendance and the votes casted on the remuneration policy (so called “say on pay”). Finally, the last section describes Related Party Transactions entered into by Italian listed companies during the year. Italian Abstract: Il Report è articolato in quattro sezioni. Nella prima sono descritte le principali caratteristiche degli assetti proprietari e di controllo delle società italiane con azioni quotate. Nella seconda sono riportate evidenze relative alla governance interna delle società, ovvero alla composizione e al funzionamento del board e dei suoi comitati. Sono poi analizzate le assemblee annuali tenute dalle società, con particolare riferimento alla partecipazione degli azionisti e ai voti espressi in materia di say on pay. Infine, nell'ultima sezione del Report si descrivono le operazioni con parti correlate realizzate nel corso dell’anno dalle società quotate italiane.

Risk and Return models for Equity Markets and Implied Equity Risk Premium
Enzo Busseti

Equity risk premium is a central component of every risk and return model in finance and a key input to estimate costs of equity and capital in both corporate finance and valuation. An article by Damodaran examines three broad approaches for estimating the equity risk premium. The first is survey based, it consists in asking common investors or big players like pension fund managers what they require as a premium to invest in equity. The second is to look at the premia earned historically by investing in stocks, as opposed to risk-free investments. The third method tries to extrapolate a market-consensus on equity risk premium (Implied Equity Risk Premium) by analysing equity prices on the market today. After having introduced some basic concepts and models, I'll briefly explain the pluses and minuses of the first two methods, and analyse more deeply the third. In the end I'll show the results of my estimation of ERP on real data, using variants of the Implied ERP (third) method.

Semi-Device Independent Quantum Money
Karol Horodecki,Maciej Stankiewicz

The seminal idea of quantum money not forgeable due to laws of Quantum Mechanics proposed by Stephen Wiesner, has laid foundations for the Quantum Information Theory in early '70s. Recently, several other schemes for quantum currencies have been proposed, all however relying on the assumption that the mint does not cooperate with the counterfeiter. Drawing inspirations from the semi-device independent quantum key distribution protocol, we introduce the first scheme of quantum money with this assumption partially relaxed, along with the proof of its unforgeability. Significance of this protocol is supported by an impossibility result, which we prove, stating that there is no both fully device independent and secure money scheme. Finally, we formulate a quantum analogue of the Oresme-Copernicus-Gresham's law of economy.

State-Building through Public Land Disposal? An Application of Matrix Completion for Counterfactual Prediction
Jason Poulos

How would the frontier have evolved in the absence of homestead policies? I apply a matrix completion method to predict the counterfactual time-series of frontier state capacity had there been no homesteading. In placebo tests, the matrix completion method outperforms synthetic controls and other regression-based estimators in terms of minimizing prediction error. Causal estimates signify that homestead policies had significant and long-lasting negative impacts on state government expenditure and revenue. These results are similar to difference-in-difference estimates that exploit variation in the timing and intensity of homestead entries aggregated from 1.46 million individual land patent records.

The Changing Geopolitics in the Arab World: Implications of the 2017 Gulf Crisis for Business
Jamal Bouoiyour,Refk Selmi

The international community was caught by surprise on 5 June 2017 when Saudi Arabia, the United Arab Emirates (UAE), Bahrain and Egypt severed diplomatic ties with Qatar, accusing it of destabilizing the region. More than one year after this diplomatic rift, several questions remain unaddressed. This study focuses on the regional business costs of the year-long blockade on Qatar. We split the sample to compare the stock market performances of Qatar and its Middle Eastern neighbors before and after the Saudi-led Qatar boycott. We focus our attention on the conditional volatility process of stock market returns and risks related to financial interconnectedness. We show that the Gulf crisis had the most adverse impact on Qatar together with Saudi Arabia and the UAE. Although not to the same degree as these three countries, Bahrain and Egypt were also harmfully affected. But shocks to the volatility process tend to have short-lasting effects. Moreover, the total volatility spillovers to and from others increase but moderately after the blockade. Overall, the quartet lobbying efforts did not achieve the intended result. Our findings underscore Qatar's economic vulnerability but also the successful resilience strategy of this tiny state. The coordinated diplomatic efforts of Qatar have been able to fight the economic and political embargo.

The Employee is Always Right: Employee Satisfaction and Corporate Performance in Brazil
Di Miceli da Silveira, Alexandre
I investigate the effect of employee satisfaction on corporate performance based on an extensive dataset of 114,004 online reviews of Brazil’s 1,000 largest listed and unlisted firms from 2013 to 2018 posted at a local subsidiary of Glassdoor. I find that overall employee satisfaction is positively associated with firm performance and that this relationship is likely to be economically relevant. Among the four dimensions of employee well-being, the link with performance is most evident for the dimension on culture, followed by career opportunities. On the other hand, the dimension on compensation and benefits was the least connected with firm performance. Taken together, these results support the view that intrinsic motivators are more relevant for superior performance than extrinsic ones popularized by the “carrot and stick” approach to management. I also find that the influence of employee satisfaction on performance is likely to be asymmetrical, in the sense that workplaces characterized by low satisfaction among workers are more likely to lead to poor performance than best-in-class companies are likely to produce superior performance. To my knowledge, this is the first paper to document a positive link between firm value and employee satisfaction in an emerging economy using online reviews. Because employee well-being is typically one aspect considered in ESG assessments carried out by institutional investors for capital allocation decisions, this paper further contributes to the link between ESG standards and performance by showing that employees’ reviews are a value relevant source of information for investors.

The Impact of Venture Capital Screening
Abuzov, Rustam
I study the effect of limited attention on resource allocation by venture capitalists. Using engagement in the IPO process as a measure of distraction, I document that investments made by inattentive venture capitalists into new portfolio companies tend to underperform. Such companies are 7% less likely to go public or get acquired, and also exhibit lower exit multiples. The adverse effect of distraction is present only in the vicinity of the distracting IPO and manifests itself both for individual partners and venture capital funds. Overall, the results indicate that the scarcity of attention hypothesis holds in the context of deal sourcing and screening in venture capital, highlighting the presence of skill in the company selection process.

The Politics of CEOs
Cohen, Alma,Hazan, Moshe,Tallarita, Roberto,Weiss, David
CEOs of public companies have influence over the political spending of their firms, which has been attracting significant attention since the Supreme Court decision in Citizens United. Furthermore, the policy views expressed by CEOs receive substantial consideration from policymakers and the public. Therefore, we argue, the political preferences of CEOs are important for a full understanding of U.S. policy making and politics. To contribute to this understanding, we provide novel empirical evidence on the partisan leanings of public-company CEOs.We use Federal Election Commission (FEC) records to compile a comprehensive database of the political contributions made by more than 3,500 individuals who served as CEOs of S&P 1500 companies between 2000 and 2017. We find that these political contributions display substantial partisan preferences in support of Republican candidates. We identify how this pattern is related to the company’s industry, geographical region, and CEO gender. To highlight the significance of CEOs’ partisan preferences, we show that public companies led by Republican CEOs tend to be less transparent to investors with respect to their political spending. Finally, we conclude by discussing the important policy implications of our analysis.

The Prosumer Economy -- Being Like a Forest
Uygar Ozesmi

Planetary life support systems are collapsing due to climate change and the biodiversity crisis. The root cause is the existing consumer economy, coupled with profit maximisation based on ecological and social externalities. Trends can be reversed, civilisation may be saved by transforming the profit maximising consumer economy into an ecologically and socially just economy, which we call the prosumer economy. Prosumer economy is a macro scale circular economy with minimum negative or positive ecological and social impact, an ecosystem of producers and prosumers, who have synergistic and circular relationships with deepened circular supply chains, networks, where leakage of wealth out of the system is minimised. In a prosumer economy there is no waste, no lasting negative impacts on the ecology and no social exploitation. The prosumer economy is like a lake or a forest, an economic ecosystem that is productive and supportive of the planet. We are already planting this forest through, started in Turkey. Good4Trust is a community platform bringing together ecologically and socially just producers and prosumers. Prosumers come together around a basic ethical tenet the golden rule and share on the platform their good deeds. The relationship are already deepening and circularity is forming to create a prosumer economy. The platforms software to structure the economy is open source, and is available to be licenced to start Good4Trust anywhere on the planet. Complexity theory tells us that if enough agents in a given system adopt simple rules which they all follow, the system may shift. The shift from a consumer economy to a prosumer economy has already started, the future is either ecologically and socially just or bust.

The effects of institutional quality on formal and informal borrowing across high-, middle-, and low-income countries
Lan Chu Khanh

This paper examines the effects of institutional quality on financing choice of individual using a large dataset of 137,160 people from 131 countries. We classify borrowing activities into three categories, including formal, constructive informal, and underground borrowing. Although the result shows that better institutions aids the uses of formal borrowing, the impact of institutions on constructive informal and underground borrowing among three country sub-groups differs. Higher institutional quality improves constructive informal borrowing in middle-income countries but reduces the use of underground borrowing in high- and low-income countries.

Tracking finance flows towards assessing their consistency with climate objectives
Jachnik, Raphaël,Mirabile, Mariana,Dobrinevski, Alexander
Achieving a low-greenhouse gas (GHG) development requires making finance flows consistent with this objective. In order to measure progress to date as well as inform future public action in this area, this paper calls for further efforts to track gross primary investments flows in new infrastructure and equipment and the refurbishment of such assets, as well underlying sources of finance. The proposed scope focuses on tangible fixed assets with a direct and significant impact on GHG emissions.

Treasury Consultation Paper on ICOs in Australia: The Technology, The Market, and The Regulation of ICOs
McCullagh, Adrian,Flood, John
The Australian Treasury has identified a number of challenges in FinTech, especially around Initial Coin Offerings (ICOs). In this paper we examine four types of tokens within ICOs: pure utility tokens, security tokens, stored value tokens, and hybrid tokens. There is considerable confusion surrounding what each means and signifies, and how each should be treated by both consumers and regulators. We explore the differences, noting what promoters should do to avoid falling into regulatory traps, and the consequences for selecting particular types of token. Because of the confusion around ICO tokens, we suggest there should be a new asset class of token recognised in the Australian Corporations Act. It would have its own funding limits and regulatory framework. Finally, we outline a new code of conduct for ICOs.

Unexpected SEC Resource Constraints and Comment Letter Quality
Ege, Matthew,Glenn, Jennifer L.,Robinson, John R.
We investigate whether reviews of transactional filings by the SEC unexpectedly constrain SEC resources leading to lower quality comment letters for periodic reports. The Sarbanes Oxley Act requires the SEC to review periodic reports (e.g., 10-Ks) at least once every three years. However, the SEC also reviews transactional filings (e.g., IPOs and acquisitions), which are unpredictable and often occur in waves. We find comment letters for periodic reports are of lower quality (in terms of outputs, inputs, and firm responses) during periods of abnormally high transactional filings. We also find that comment letters issued during periods of abnormally high versus low transactional filings are associated with increased information asymmetry and lower earnings response coefficients in the quarter after the resolution of the comment letter. Overall, our results suggest that unexpected resource constraints affect the quality of SEC oversight of periodic reports.

Variety, Complexity and Economic Development
Alje van Dam,Koen Frenken

We propose a combinatorial model of economic development. An economy develops by acquiring new capabilities allowing for the production of an ever greater variety of products of increasingly complex products. Taking into account that economies abandon the least complex products as they develop over time, we show that variety first increases and then decreases in the course of economic development. This is consistent with the empirical pattern known as 'the hump'. Our results question the common association of variety with complexity. We further discuss the implications of our model for future research.