Research articles for the 2019-06-21
Agency Costs, Ownership, and Internal Governance Mechanisms: Evidence From Chinese Listed Companies
SSRN
In recent years, there has been an increasing interest in assessing the effectiveness of corporate governance in China. This paper examines the impact of internal governance mechanisms such as ownership structure and board characteristics and debt financing on agency costs making use of a large panel of Chinese listed firms. We find that managerial ownership and debt financing work as effective corporate governance mechanisms for Chinese listed firms to mitigate agency conflicts and the resultant agency costs.
SSRN
In recent years, there has been an increasing interest in assessing the effectiveness of corporate governance in China. This paper examines the impact of internal governance mechanisms such as ownership structure and board characteristics and debt financing on agency costs making use of a large panel of Chinese listed firms. We find that managerial ownership and debt financing work as effective corporate governance mechanisms for Chinese listed firms to mitigate agency conflicts and the resultant agency costs.
Aggregate Implied Cost of Capital, Option Implied Information and Equity Premium Predictability
SSRN
The aggregate implied cost of capital (ICC) from analyst estimates finds a variety of applications in finance and is documented to predict the equity premium. Yet, the construction of the analyst-based ICC is data intensive and imposes restrictions on the employed analyst estimates. We suggest a new way to obtain a market-wide ICC using implied information from index options. We show that the resulting ICC predicts the equity premium in- and out-of-sample. At the same time, we find that the predictive power of the aggregate ICC from analyst estimates is not prevalent in our sample once we control for the persistence of the variable.
SSRN
The aggregate implied cost of capital (ICC) from analyst estimates finds a variety of applications in finance and is documented to predict the equity premium. Yet, the construction of the analyst-based ICC is data intensive and imposes restrictions on the employed analyst estimates. We suggest a new way to obtain a market-wide ICC using implied information from index options. We show that the resulting ICC predicts the equity premium in- and out-of-sample. At the same time, we find that the predictive power of the aggregate ICC from analyst estimates is not prevalent in our sample once we control for the persistence of the variable.
Breaking VIX at Open: Evidence of Uncertainty Creation and Resolution
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We decompose daily (close-to-close) changes of VIX into overnight (close-to-open) and trading-hour (open-to-close) changes. Consistent with the notion that non-trading creates uncertainty and trading resolves uncertainty, we find that there is generally an increase in VIX overnight and decrease in VIX during trading hours. More importantly, we document an important seasonality in VIX, i.e., the non-trading day effect. Overnight increase of VIX involving weekends or holidays is significantly higher than that over two consecutive trading days. We also document that VIX exhibits different patterns around pre-scheduled macroeconomic news announcements, unexpected economic events, and government policy actions. In particular, we observe an increase of VIX prior to pre-scheduled macroeconomic news announcements such as the FOMC announcements, followed by a sharp drop-off post the announcements. Finally, we show that breaking daily VIX changes into overnight and trading-hour components and incorporating the non-trading day effect and the effects of informational events in the modeling of VIX dynamics lead to not only significant improvements in in-sample fitting but also superior performance of out-of-sample-forecasting and active trading strategies on VIX.
SSRN
We decompose daily (close-to-close) changes of VIX into overnight (close-to-open) and trading-hour (open-to-close) changes. Consistent with the notion that non-trading creates uncertainty and trading resolves uncertainty, we find that there is generally an increase in VIX overnight and decrease in VIX during trading hours. More importantly, we document an important seasonality in VIX, i.e., the non-trading day effect. Overnight increase of VIX involving weekends or holidays is significantly higher than that over two consecutive trading days. We also document that VIX exhibits different patterns around pre-scheduled macroeconomic news announcements, unexpected economic events, and government policy actions. In particular, we observe an increase of VIX prior to pre-scheduled macroeconomic news announcements such as the FOMC announcements, followed by a sharp drop-off post the announcements. Finally, we show that breaking daily VIX changes into overnight and trading-hour components and incorporating the non-trading day effect and the effects of informational events in the modeling of VIX dynamics lead to not only significant improvements in in-sample fitting but also superior performance of out-of-sample-forecasting and active trading strategies on VIX.
CAC40 Index Options' Market Efficiency
SSRN
Nowadays, index options’ markets have become very important for both financial and economic spheres thanks to the roles that they ensure. The purpose of this paper is to investigate the efficiency of the CAC40 index options’ market using no-arbitrage principle tests. Three relations are tested: call/put spread, box spread, and convexity spread. Ex post, as well as ex ante tests, reveal the importance of transactions costs. The efficiency becomes better as the estimation of transaction costs increase and especially as the bid/ask spread is taken into account. Thus, the market can be considered as efficient according to the Jensen’s (1978) definition of efficiency. The results also suggest that the CAC40 options’ market is highly efficient according to the weak form of efficiency and for market participants who support the lower costs (third case) as the options market valuations are generally consistent with the theoretical predictions. However, the percentage of ex ante persisting deviations is high which means that the market quotes need more time to adjust to their theoretical value.
SSRN
Nowadays, index options’ markets have become very important for both financial and economic spheres thanks to the roles that they ensure. The purpose of this paper is to investigate the efficiency of the CAC40 index options’ market using no-arbitrage principle tests. Three relations are tested: call/put spread, box spread, and convexity spread. Ex post, as well as ex ante tests, reveal the importance of transactions costs. The efficiency becomes better as the estimation of transaction costs increase and especially as the bid/ask spread is taken into account. Thus, the market can be considered as efficient according to the Jensen’s (1978) definition of efficiency. The results also suggest that the CAC40 options’ market is highly efficient according to the weak form of efficiency and for market participants who support the lower costs (third case) as the options market valuations are generally consistent with the theoretical predictions. However, the percentage of ex ante persisting deviations is high which means that the market quotes need more time to adjust to their theoretical value.
Commodity Convexity
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We propose a more precise measure for the convenience yield on commodity markets by taking the difference between the short-term basis and a similarly defined long-term basis. We label this measure “convexity,†as it captures the curvature of the commodity futures curve. We show that our convexity measure is more closely related to the scarcity of the inventories of individual commodities than basis. In both Fama-MacBeth regression and portfolio sorting analysis, convexity completely subsumes basis in forecasting commodity futures returns. In terms of economic magnitudes, commodities in the top tercile ranked by convexity outperform those in the bottom tercile by 76 bps per month, with a Sharpe Ratio of 0.61. Interestingly, for financial futures contracts, which are not subject to physical inventory constraints, convexity is no longer a significant predictor of subsequent futures returns, whereas the return predictability from the basis measure becomes more significant and important.
SSRN
We propose a more precise measure for the convenience yield on commodity markets by taking the difference between the short-term basis and a similarly defined long-term basis. We label this measure “convexity,†as it captures the curvature of the commodity futures curve. We show that our convexity measure is more closely related to the scarcity of the inventories of individual commodities than basis. In both Fama-MacBeth regression and portfolio sorting analysis, convexity completely subsumes basis in forecasting commodity futures returns. In terms of economic magnitudes, commodities in the top tercile ranked by convexity outperform those in the bottom tercile by 76 bps per month, with a Sharpe Ratio of 0.61. Interestingly, for financial futures contracts, which are not subject to physical inventory constraints, convexity is no longer a significant predictor of subsequent futures returns, whereas the return predictability from the basis measure becomes more significant and important.
Corporate Control across the World
SSRN
We provide an anatomy of corporate control around the world after tracing controlling shareholders for thousands listed firms from 127 countries between 2004 and 2012. The analysis reveals considerable and persistent differences across and within regions, as well as across legal families. Government and family control is pervasive in civil-law countries. Equity blocks in widely-held corporations are commonplace, but less so in common-law countries. These patterns apply to large, medium, and small listed firms. In contrast, the association between income and corporate control is highly heterogeneous; the correlation is strong among big and especially very large firms, but absent for medium and small listed firms. We then examine the association between corporate control and various institutional features. Shareholder rights against insiders' self-dealing activities correlate strongly with corporate control, though legal formalism and creditor rights less so. Corporate control is strongly related to labor market regulations, concerning, among others, the stringency of employment contracts, the power and extent of unions. The large sample correlations, thus, offer support to both legal origin and political-development theories of financial development.
SSRN
We provide an anatomy of corporate control around the world after tracing controlling shareholders for thousands listed firms from 127 countries between 2004 and 2012. The analysis reveals considerable and persistent differences across and within regions, as well as across legal families. Government and family control is pervasive in civil-law countries. Equity blocks in widely-held corporations are commonplace, but less so in common-law countries. These patterns apply to large, medium, and small listed firms. In contrast, the association between income and corporate control is highly heterogeneous; the correlation is strong among big and especially very large firms, but absent for medium and small listed firms. We then examine the association between corporate control and various institutional features. Shareholder rights against insiders' self-dealing activities correlate strongly with corporate control, though legal formalism and creditor rights less so. Corporate control is strongly related to labor market regulations, concerning, among others, the stringency of employment contracts, the power and extent of unions. The large sample correlations, thus, offer support to both legal origin and political-development theories of financial development.
Credit Default Swap Regulation in Experimental Bond Markets
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Credit default swaps (CDS) played an important role in the financial crisis of 2008. While CDS can be used to hedge risks, they can also be used for speculative purposes (as occurred during the financial crisis) and regulations have been proposed to limit such speculative use. Here, we provide the first controlled experiment analyzing the pricing of credit default swaps in a bond market subject to default risk. We further use the laboratory as a testbed to analyze CDS regulation. Our results show that the regulation achieves the goal of increasing the use of CDS for hedging purposes while reducing the use of CDS for speculation. This success does not come at the expense of lower bond IPO revenues and does not negatively affect CDS prices or bond prices in the secondary market.
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Credit default swaps (CDS) played an important role in the financial crisis of 2008. While CDS can be used to hedge risks, they can also be used for speculative purposes (as occurred during the financial crisis) and regulations have been proposed to limit such speculative use. Here, we provide the first controlled experiment analyzing the pricing of credit default swaps in a bond market subject to default risk. We further use the laboratory as a testbed to analyze CDS regulation. Our results show that the regulation achieves the goal of increasing the use of CDS for hedging purposes while reducing the use of CDS for speculation. This success does not come at the expense of lower bond IPO revenues and does not negatively affect CDS prices or bond prices in the secondary market.
Disney, Marvel and the Value of 'Hidden Assets'
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Purpose: This paper discusses the concept of hidden assets in the context of Disney’s 2009 acquisition of the Marvel Entertainment Group (Marvel), and its value realization activities post-acquisition.Design/methodology/approach: The paper presents a hidden assets-based value realization analysis of the 2009 acquisition of Marvel by Disney. It draws on a previously published case study of that acquisition as well as further research conducted by the author.Findings: The Disney-Marvel acquisition supports the view that hidden assets-based analysis can be a powerful M&A tool and an equally powerful value realization tool when managed strategically over time. Practical and research implications: The Disney acquisition of Marvel is a dramatic example of how knowledge of hidden assets can be used to do a deal in a competitive marketplace and how the disciplined management of those assets over time can realize a “blue ocean†of value post-acquisition. Originality and value: This is the first paper we are aware that evaluates the hidden assets of the Disney-Marvel acquisition. It follows another paper that evaluated the acquisition (Joseph Calandro, Jr., “Disney’s Marvel Acquisition: A Strategic Financial Analysis,†Strategy & Leadership, Vol. 38, No. 2 (2010), pp. 42-51), which followed a paper that evaluated Marvel’s 1996 bankruptcy filing (Joseph Calandro, Jr., “Distressed M&A and Corporate Strategy: Lessons from Marvel Entertainment Group's Bankruptcy,†Strategy & Leadership, Vol. 37, No. 4 (2009), pp. 23-32).
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Purpose: This paper discusses the concept of hidden assets in the context of Disney’s 2009 acquisition of the Marvel Entertainment Group (Marvel), and its value realization activities post-acquisition.Design/methodology/approach: The paper presents a hidden assets-based value realization analysis of the 2009 acquisition of Marvel by Disney. It draws on a previously published case study of that acquisition as well as further research conducted by the author.Findings: The Disney-Marvel acquisition supports the view that hidden assets-based analysis can be a powerful M&A tool and an equally powerful value realization tool when managed strategically over time. Practical and research implications: The Disney acquisition of Marvel is a dramatic example of how knowledge of hidden assets can be used to do a deal in a competitive marketplace and how the disciplined management of those assets over time can realize a “blue ocean†of value post-acquisition. Originality and value: This is the first paper we are aware that evaluates the hidden assets of the Disney-Marvel acquisition. It follows another paper that evaluated the acquisition (Joseph Calandro, Jr., “Disney’s Marvel Acquisition: A Strategic Financial Analysis,†Strategy & Leadership, Vol. 38, No. 2 (2010), pp. 42-51), which followed a paper that evaluated Marvel’s 1996 bankruptcy filing (Joseph Calandro, Jr., “Distressed M&A and Corporate Strategy: Lessons from Marvel Entertainment Group's Bankruptcy,†Strategy & Leadership, Vol. 37, No. 4 (2009), pp. 23-32).
Dividend Performance in the United Arab Emirates Banking Sector
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The purpose of this study was to analyze the dividend performance of eight UAE based banks between the years 2001 and 2005. The analysis was undertaken by examining three sets of financial ratios that are routinely used to measure bank dividend performance. The main ratios that were employed put a particular focus on the banks’ ability to pay dividends in relation to market value of its share, earnings and ability to cover the payments. Descriptive statistical analysis was used to rank the performance, measuring the dispersion and the stability-variability of the indicators. Conclusions were then drawn from the computation of the descriptive analysis of ratios that allowed the author to make an effective comparison of said banks. This type of analysis was used to summarize the performance of each bank based on three criteria, mean, standard deviation and coefficient of variation of each banks performance. The findings showed that eight banks performed reasonably well during the period studied, but have different strategies in paying their dividends across the years under study. The analysis reveals that these banks have been affected by both internal and external factors.
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The purpose of this study was to analyze the dividend performance of eight UAE based banks between the years 2001 and 2005. The analysis was undertaken by examining three sets of financial ratios that are routinely used to measure bank dividend performance. The main ratios that were employed put a particular focus on the banks’ ability to pay dividends in relation to market value of its share, earnings and ability to cover the payments. Descriptive statistical analysis was used to rank the performance, measuring the dispersion and the stability-variability of the indicators. Conclusions were then drawn from the computation of the descriptive analysis of ratios that allowed the author to make an effective comparison of said banks. This type of analysis was used to summarize the performance of each bank based on three criteria, mean, standard deviation and coefficient of variation of each banks performance. The findings showed that eight banks performed reasonably well during the period studied, but have different strategies in paying their dividends across the years under study. The analysis reveals that these banks have been affected by both internal and external factors.
Do Analysts and Investors Efficiently Respond to Managerial Linguistic Complexity on Conference Calls?
SSRN
This paper examines whether analysts and investors efficiently incorporate the informational cues from managerial linguistic complexity (e.g. Fog) on conference calls into their forecasts and trading decisions. We predict that managers use linguistic complexity to obfuscate before poor future earnings growth, but use linguistic complexity to provide informative disclosure before good future earnings growth. We find that the obfuscation (information) component of managerial Fog on a conference call is negatively (positively) associated with future earnings growth, and that the relations are generally stronger when there is a higher potential for earnings management during the period. We find that analyst forecast revisions efficiently respond to these informational signals in managerial Fog. However, while stock returns around the call are negatively associated with obfuscatory Fog, they are unrelated to informative Fog, which leads to a delayed positive return reaction to informative Fog after the call. Thus, while both analysts and investors appear to process the negative signal of managerial obfuscation, only analysts correctly interpret the positive signal of greater linguistic complexity due to more informative disclosure.
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This paper examines whether analysts and investors efficiently incorporate the informational cues from managerial linguistic complexity (e.g. Fog) on conference calls into their forecasts and trading decisions. We predict that managers use linguistic complexity to obfuscate before poor future earnings growth, but use linguistic complexity to provide informative disclosure before good future earnings growth. We find that the obfuscation (information) component of managerial Fog on a conference call is negatively (positively) associated with future earnings growth, and that the relations are generally stronger when there is a higher potential for earnings management during the period. We find that analyst forecast revisions efficiently respond to these informational signals in managerial Fog. However, while stock returns around the call are negatively associated with obfuscatory Fog, they are unrelated to informative Fog, which leads to a delayed positive return reaction to informative Fog after the call. Thus, while both analysts and investors appear to process the negative signal of managerial obfuscation, only analysts correctly interpret the positive signal of greater linguistic complexity due to more informative disclosure.
Does Litigation Risk Deter Insider Trading? Evidence from Universal Demand Laws
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We exploit US states’ staggered adoption of Universal Demand (UD) laws to study how the risk of shareholder-initiated lawsuits affects opportunistic insider trading. UD laws lead to significantly more profitable insider trades, especially sales. Our difference-in-differences estimates suggest that after UD laws, insiders avoid an additional abnormal loss of about 2% (or $24,000) per month on their sales. This effect is greater in firms where information asymmetry is high or monitoring by institutional blockholders is low. Our findings suggest that a decrease in litigation threat emboldens insiders to trade more opportunistically and with riskier timing to achieve greater profitability.
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We exploit US states’ staggered adoption of Universal Demand (UD) laws to study how the risk of shareholder-initiated lawsuits affects opportunistic insider trading. UD laws lead to significantly more profitable insider trades, especially sales. Our difference-in-differences estimates suggest that after UD laws, insiders avoid an additional abnormal loss of about 2% (or $24,000) per month on their sales. This effect is greater in firms where information asymmetry is high or monitoring by institutional blockholders is low. Our findings suggest that a decrease in litigation threat emboldens insiders to trade more opportunistically and with riskier timing to achieve greater profitability.
Federal Reserve Structure, Economic Ideas, and Monetary and Financial Policy
RePEC
The decentralized structure of the Federal Reserve System is evaluated as a mechanism for generating and processing new ideas on monetary and financial policy. The role of the Reserve Banks starting in the 1960s is emphasized. The introduction of monetarism in the 1960s, rational expectations in the 1970s, credibility in the 1980s, transparency, and other monetary policy ideas by Reserve Banks into the Federal Reserve System is documented. Contributions by Reserve Banks to policy on bank structure, bank regulation, and lender of last resort are also discussed. We argue that the Reserve Banks were willing to support and develop new ideas due to internal reforms to the FOMC that Chairman William McChesney Martin implemented in the 1950s. Furthermore, the Reserve Banks were able to succeed at this because of their private-public governance structure, a structure set up in 1913 for a highly decentralized Federal Reserve System, but which survived the centralization of the System in the Banking Act of 1935. We argue that this role of the Reserve Banks is an important benefit of the Federal Reserve's decentralized structure and contributes to better policy by allowing for more competition in ideas and reducing groupthink.
RePEC
The decentralized structure of the Federal Reserve System is evaluated as a mechanism for generating and processing new ideas on monetary and financial policy. The role of the Reserve Banks starting in the 1960s is emphasized. The introduction of monetarism in the 1960s, rational expectations in the 1970s, credibility in the 1980s, transparency, and other monetary policy ideas by Reserve Banks into the Federal Reserve System is documented. Contributions by Reserve Banks to policy on bank structure, bank regulation, and lender of last resort are also discussed. We argue that the Reserve Banks were willing to support and develop new ideas due to internal reforms to the FOMC that Chairman William McChesney Martin implemented in the 1950s. Furthermore, the Reserve Banks were able to succeed at this because of their private-public governance structure, a structure set up in 1913 for a highly decentralized Federal Reserve System, but which survived the centralization of the System in the Banking Act of 1935. We argue that this role of the Reserve Banks is an important benefit of the Federal Reserve's decentralized structure and contributes to better policy by allowing for more competition in ideas and reducing groupthink.
Financial Crises and International Law
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Ten years after the global financial crisis (“GFCâ€) that started in 2007, the time has come to take stock of the international regulation of finance. This report assesses the causes and consequences of the GFC and the broader context of the changes in the international financial system since the collapse of the Bretton Woods system of fixed exchange rates (Section 2); and then turns to the status and evolution of international financial law (Section 3). It contends that the growth of international financial markets has outpaced the development of international financial law. Section 4 concludes with a brief comparison between the first golden age of capital in the late 19th century and the contemporary second age of global capital â€" both characterised by recurrent financial crises, rising inequality within countries and backlashes against globalization.
SSRN
Ten years after the global financial crisis (“GFCâ€) that started in 2007, the time has come to take stock of the international regulation of finance. This report assesses the causes and consequences of the GFC and the broader context of the changes in the international financial system since the collapse of the Bretton Woods system of fixed exchange rates (Section 2); and then turns to the status and evolution of international financial law (Section 3). It contends that the growth of international financial markets has outpaced the development of international financial law. Section 4 concludes with a brief comparison between the first golden age of capital in the late 19th century and the contemporary second age of global capital â€" both characterised by recurrent financial crises, rising inequality within countries and backlashes against globalization.
Foreign Direct Investment in 2018: Record-High Outflow
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Judging from the year-end results of 2018, the RF Central Bank pointed out the highest (relative to the entire statistical observation period) outflow of foreign direct investment (FDI) from the capital of Russian companies, amounting to $ 6.46bn. The plunge in the inflow of foreign investment in Russia is in line with the worldwide downward trend of capital investment (by 19%)1. The stimuli for FDI inflow into Russia are on the decline due to the presence of political risks, including those associated with economic sanctions.
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Judging from the year-end results of 2018, the RF Central Bank pointed out the highest (relative to the entire statistical observation period) outflow of foreign direct investment (FDI) from the capital of Russian companies, amounting to $ 6.46bn. The plunge in the inflow of foreign investment in Russia is in line with the worldwide downward trend of capital investment (by 19%)1. The stimuli for FDI inflow into Russia are on the decline due to the presence of political risks, including those associated with economic sanctions.
Haircut Cycles
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This paper contributes to the literature on the effect of financial frictions on business cycle activity. We follow the "leverage cycles" approach in the spirit of Geanakoplos (2010) which argues that equilibrium fluctuations in collateral rates (equivalently haircuts, margins, or leverage), rather than just in interest rates, are a key driver of persistent fluctuations in economic activity. In particular, we focus on how adverse economic shocks can be amplified and prolonged by endogenous variations in haircuts in the standard macrofinance framework à la Kiyotaki and Moore (1997). In our model, collateral constraints are motivated by no-recourse loans, and the interest rate and the haircut are jointly determined as general equilibrium objects. We highlight the difference between the risk and the illiquidity of the collateral in determining the credit market equilibrium: an increase in risk increases both the interest rate and the haircut, while an increase in illiquidity increases the haircut but decreases the interest rate. Compared with the previous literature, our model allows us to decompose the transmission of adverse shocks through the credit market into the interest rate channel and the haircut channel, and evaluate their relative importance. The numerical exercises illustrate that risk shocks can generate sizable business cycle fluctuations through the credit market, and the haircut channel is dominant in times of low market liquidity.
SSRN
This paper contributes to the literature on the effect of financial frictions on business cycle activity. We follow the "leverage cycles" approach in the spirit of Geanakoplos (2010) which argues that equilibrium fluctuations in collateral rates (equivalently haircuts, margins, or leverage), rather than just in interest rates, are a key driver of persistent fluctuations in economic activity. In particular, we focus on how adverse economic shocks can be amplified and prolonged by endogenous variations in haircuts in the standard macrofinance framework à la Kiyotaki and Moore (1997). In our model, collateral constraints are motivated by no-recourse loans, and the interest rate and the haircut are jointly determined as general equilibrium objects. We highlight the difference between the risk and the illiquidity of the collateral in determining the credit market equilibrium: an increase in risk increases both the interest rate and the haircut, while an increase in illiquidity increases the haircut but decreases the interest rate. Compared with the previous literature, our model allows us to decompose the transmission of adverse shocks through the credit market into the interest rate channel and the haircut channel, and evaluate their relative importance. The numerical exercises illustrate that risk shocks can generate sizable business cycle fluctuations through the credit market, and the haircut channel is dominant in times of low market liquidity.
Hedge Fund Performance Persistence: Do the Country of Domicile and the Investment Strategy Matter?
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In this paper, we investigate the performance persistence of 5619 Alternative Investment Funds (AIFs) between 1995-2016. We focus on the world’s four most saturated domiciles (United States of America - USA, Cayman Islands - CAYI, Luxemburg - LUX and Ireland - IRL) and the four most commonly employed strategies (Long-Short-Equity - LSE, Fixed-Income - FIX, Commodity-Trading-Advisors - CTA and Multi-Strategy - MLTI). We investigate a feature of AIFs that is overlooked in the academic and professional literature: the combined impact of geolocation and investment style. We report performance persistence in almost all cases when analysing the individual domicile or strategy. However, the combination of domiciles and strategies reveals weak persistence in some cases and no persistence or complete reversal in others. The results of our cross-comparison show that the sole reliance on the individual domicile/investment strategy focused clusters can be grossly misleading and lead to capital losses.
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In this paper, we investigate the performance persistence of 5619 Alternative Investment Funds (AIFs) between 1995-2016. We focus on the world’s four most saturated domiciles (United States of America - USA, Cayman Islands - CAYI, Luxemburg - LUX and Ireland - IRL) and the four most commonly employed strategies (Long-Short-Equity - LSE, Fixed-Income - FIX, Commodity-Trading-Advisors - CTA and Multi-Strategy - MLTI). We investigate a feature of AIFs that is overlooked in the academic and professional literature: the combined impact of geolocation and investment style. We report performance persistence in almost all cases when analysing the individual domicile or strategy. However, the combination of domiciles and strategies reveals weak persistence in some cases and no persistence or complete reversal in others. The results of our cross-comparison show that the sole reliance on the individual domicile/investment strategy focused clusters can be grossly misleading and lead to capital losses.
How Does Economic Policy Uncertainty Affect Corporate Debt Maturity?
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This paper investigates how does economic policy uncertainty affect corporate debt maturity. Using a cross-country firm-level dataset for France, Germany, Spain and Italy from 1996 to 2010, we find that the increase in economic policy uncertainty is significantly associated with shorter debt maturity. Specifically, a 1% increase in economic policy uncertainty is associated with a 0.33% decrease in the long-term debt to asset ratio and a 0.13% decrease in debt maturity. Moreover, the impact of economic policy uncertainty on shortened debt maturity is stronger for firms that are more innovation-intensive, and it has real consequence on firm employment, investment and total factor productivity.
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This paper investigates how does economic policy uncertainty affect corporate debt maturity. Using a cross-country firm-level dataset for France, Germany, Spain and Italy from 1996 to 2010, we find that the increase in economic policy uncertainty is significantly associated with shorter debt maturity. Specifically, a 1% increase in economic policy uncertainty is associated with a 0.33% decrease in the long-term debt to asset ratio and a 0.13% decrease in debt maturity. Moreover, the impact of economic policy uncertainty on shortened debt maturity is stronger for firms that are more innovation-intensive, and it has real consequence on firm employment, investment and total factor productivity.
Illiquidity and the Measurement of Stock Price Synchronicity
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This paper demonstrates that measures of stock price synchronicity based on market model R2s are predictably biased downwards as a result of stock illiquidity, and that previouslyâ€employed remedies to correct market model betas for measurement bias do not fix R2. Using a large international sample of firmâ€years, we find strong negative and nonlinear relations between illiquidity and R2 across countries, across firms, and over time. Because variables of interest frequently relate to illiquidity as well, we illustrate the consequences of not controlling for illiquidity in synchronicity research. More generally, we demonstrate the importance of using nonlinear control variable methods. Overall, we conclude that the illiquidityâ€driven measurement bias in R2 provides an explanation for why prior research finds lowâ€R2 firms to have weak information environments, and suggest future research carefully evaluate the sensitivity of its results to nonlinear controls for illiquidity.
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This paper demonstrates that measures of stock price synchronicity based on market model R2s are predictably biased downwards as a result of stock illiquidity, and that previouslyâ€employed remedies to correct market model betas for measurement bias do not fix R2. Using a large international sample of firmâ€years, we find strong negative and nonlinear relations between illiquidity and R2 across countries, across firms, and over time. Because variables of interest frequently relate to illiquidity as well, we illustrate the consequences of not controlling for illiquidity in synchronicity research. More generally, we demonstrate the importance of using nonlinear control variable methods. Overall, we conclude that the illiquidityâ€driven measurement bias in R2 provides an explanation for why prior research finds lowâ€R2 firms to have weak information environments, and suggest future research carefully evaluate the sensitivity of its results to nonlinear controls for illiquidity.
In Search of Systematic Risk and the Idiosyncratic Volatility Puzzle in the Corporate Bond Market
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We propose a comprehensive measure of systematic risk for corporate bonds as a nonlinear function of robust risk factors and find a significantly positive link between systematic risk and the time-series and cross-section of future bond returns. We also find a positive but insignificant relation between idiosyncratic risk and future bond returns, suggesting that institutional investors dominating the bond market hold well-diversified portfolios with a negligible exposure to bond-specific risk. The composite measure of systematic risk also predicts the distribution of future market returns, and the systematic risk factor earns a positive price of risk, consistent with Merton's (1973) ICAPM.
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We propose a comprehensive measure of systematic risk for corporate bonds as a nonlinear function of robust risk factors and find a significantly positive link between systematic risk and the time-series and cross-section of future bond returns. We also find a positive but insignificant relation between idiosyncratic risk and future bond returns, suggesting that institutional investors dominating the bond market hold well-diversified portfolios with a negligible exposure to bond-specific risk. The composite measure of systematic risk also predicts the distribution of future market returns, and the systematic risk factor earns a positive price of risk, consistent with Merton's (1973) ICAPM.
Investor Sentiment Around Buybacks in the Indian Stock Market
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This study aims to explain the relationship between share buybacks and market sentiment around these events. Using data on social media posts around the share buybacks, we examine how financial indicators exhibit changes before and after the share buybacks. A sample of BSE100-listed Indian firms which had exercised share buybacks in last five years were studied with the help of two alternative models in order to understand the association of price reactions and social media sentiment around the share buybacks. Based on the sentiment index which we calculated, we observe a general pattern for all the sample companies. The sentiment index is rising for all the companies from the level before buyback to a higher level after buyback and the magnitude of change is varying, which depends on the number of factors such as volume of shares that a company has bought back, investors' perception, and so on. We know that after a buyback earning per share increases, thereby boosting investor sentiment with respect to the company. The increasing levels of the sentiment among the Investors is one of the major factors which make the prices move differently from what predicted by the models. We find that the models can be pretty inaccurate sometimes and that is because they fail to incorporate the sentiment in their predictions and it also tells us how important is the sentiment as is can boost our model’s predictive power.
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This study aims to explain the relationship between share buybacks and market sentiment around these events. Using data on social media posts around the share buybacks, we examine how financial indicators exhibit changes before and after the share buybacks. A sample of BSE100-listed Indian firms which had exercised share buybacks in last five years were studied with the help of two alternative models in order to understand the association of price reactions and social media sentiment around the share buybacks. Based on the sentiment index which we calculated, we observe a general pattern for all the sample companies. The sentiment index is rising for all the companies from the level before buyback to a higher level after buyback and the magnitude of change is varying, which depends on the number of factors such as volume of shares that a company has bought back, investors' perception, and so on. We know that after a buyback earning per share increases, thereby boosting investor sentiment with respect to the company. The increasing levels of the sentiment among the Investors is one of the major factors which make the prices move differently from what predicted by the models. We find that the models can be pretty inaccurate sometimes and that is because they fail to incorporate the sentiment in their predictions and it also tells us how important is the sentiment as is can boost our model’s predictive power.
Irreducible Risks of Hedging a Bond with a Default Swap
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This paper analyzes the effectiveness of hedging a defaultable bond, that may not be at par, with a credit default swap (CDS) by quantifying the variance of the hedging errors and determining the optimal hedge ratio. The static hedging framework uses bond recovery and time to default, which are correlated, to calculate the variance of the hedging errors and the optimal hedge ratio for the bond-CDS trade. The results show that there are irreducible risks when hedging a defaultable bond with a CDS; these irreducible risks increase with the magnitude of the premium/discount of the bond and decrease as the correlation between default time and recovery increase. The results also show that the optimal hedging ratio was closer to the bond price than the par value of the bond. This paper provides a framework distinct from the risk neutral framework by transparently showing the residual risks and their drivers.
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This paper analyzes the effectiveness of hedging a defaultable bond, that may not be at par, with a credit default swap (CDS) by quantifying the variance of the hedging errors and determining the optimal hedge ratio. The static hedging framework uses bond recovery and time to default, which are correlated, to calculate the variance of the hedging errors and the optimal hedge ratio for the bond-CDS trade. The results show that there are irreducible risks when hedging a defaultable bond with a CDS; these irreducible risks increase with the magnitude of the premium/discount of the bond and decrease as the correlation between default time and recovery increase. The results also show that the optimal hedging ratio was closer to the bond price than the par value of the bond. This paper provides a framework distinct from the risk neutral framework by transparently showing the residual risks and their drivers.
Looking under the Hood of Active Credit Managers
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Extensive research has explored the style exposures of actively managed equity funds. We conduct an exhaustive set of returns- and holdings-based analyses to understand actively managed credit funds. We find that credit long/short managers tend to have high passive exposure to the credit risk premium. In contrast, we find that high-yield-focused long-only managers provide less exposure to the credit risk premium than their respective benchmarks. For both credit hedge funds and long-only credit mutual funds, we find that neither have economically meaningful exposures to well-compensated systematic factors; there is the potential for a powerful diversifier to be added to a typical credit allocation.
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Extensive research has explored the style exposures of actively managed equity funds. We conduct an exhaustive set of returns- and holdings-based analyses to understand actively managed credit funds. We find that credit long/short managers tend to have high passive exposure to the credit risk premium. In contrast, we find that high-yield-focused long-only managers provide less exposure to the credit risk premium than their respective benchmarks. For both credit hedge funds and long-only credit mutual funds, we find that neither have economically meaningful exposures to well-compensated systematic factors; there is the potential for a powerful diversifier to be added to a typical credit allocation.
Macro-Derivatives Nexus: New Drivers of Cross-Currency Basis Swap Spreads
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Over the last decade, the derivatives market has witnessed a collapse of covered interest parity (CIP) which has unlocked a stream of arbitrage opportunities across currencies for investment managers. In this paper, we introduce two new factors --- inflation differential and relative economic performance --- as potential drivers of CIP deviations. Employing data on G10 currencies, we document a striking new evidence that higher inflation differential and improvement in relative economic performance drive CIP deviations wider and hence arbitrage profits higher for dollar investors. Our results are largely robust to different controls, sampling frequency, and consideration of alternative empirical specifications.
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Over the last decade, the derivatives market has witnessed a collapse of covered interest parity (CIP) which has unlocked a stream of arbitrage opportunities across currencies for investment managers. In this paper, we introduce two new factors --- inflation differential and relative economic performance --- as potential drivers of CIP deviations. Employing data on G10 currencies, we document a striking new evidence that higher inflation differential and improvement in relative economic performance drive CIP deviations wider and hence arbitrage profits higher for dollar investors. Our results are largely robust to different controls, sampling frequency, and consideration of alternative empirical specifications.
Media Attention and the Volatility Effect
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Stocks with low return volatility have high risk-adjusted returns, which might be driven by low media attention for such stocks. Using news coverage data we formally test whether the ‘attention-grabbing’ hypothesis can explain the volatility effect for a sample of international stocks over the period 2001 to 2018. Among stocks with a similar amount of media attention, a low-volatility effect is still present. Among stocks with similar volatility, the amount of media attention is not associated with significantly different risk-adjusted returns. Based on these findings, we reject the hypothesis that media attention is the driving force behind the volatility effect.
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Stocks with low return volatility have high risk-adjusted returns, which might be driven by low media attention for such stocks. Using news coverage data we formally test whether the ‘attention-grabbing’ hypothesis can explain the volatility effect for a sample of international stocks over the period 2001 to 2018. Among stocks with a similar amount of media attention, a low-volatility effect is still present. Among stocks with similar volatility, the amount of media attention is not associated with significantly different risk-adjusted returns. Based on these findings, we reject the hypothesis that media attention is the driving force behind the volatility effect.
Modeling the Dynamic Process of the Forward Curve
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We introduce the adjusted forward curve (AFC) that models the update in the forward curve from one period to the next. A direct modeling of the dynamic process of the forward curve facilitates the specification of adjustment factors to the forward curve, and it underscores the role of mean reversion (stationarity) in the nexus between the forward rate and the future spot rate, The AFC also reveals that changes in the forward curve tend to have systematic biases and the sign of the bias changes overtime with economic conditions. The AFC model thus provides a viable tool to detect and monitor biases in the forward curve in the projection of the future spot rate across different economic environments.
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We introduce the adjusted forward curve (AFC) that models the update in the forward curve from one period to the next. A direct modeling of the dynamic process of the forward curve facilitates the specification of adjustment factors to the forward curve, and it underscores the role of mean reversion (stationarity) in the nexus between the forward rate and the future spot rate, The AFC also reveals that changes in the forward curve tend to have systematic biases and the sign of the bias changes overtime with economic conditions. The AFC model thus provides a viable tool to detect and monitor biases in the forward curve in the projection of the future spot rate across different economic environments.
Political Regimes, Investment and Electoral Uncertainty
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This study looks at firms’ investment spending in fixed and intangible assets around three types of national elections: presidential, joint presidential, and legislative and parliamentary elections. Investments in fixed assets decline by up to 2% during presidential elections, and 4.44% in joint presidential, and legislative elections. On the other hand, intangible investments decrease by 4.36% in parliamentary election years. Moreover, investment responses to electoral shocks differ markedly within political systems and countries’ institutional settings. Investment levels shift significantly downward in pre- and resume in post-election years. The electoral effect results in a net loss in investment over the election cycle.
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This study looks at firms’ investment spending in fixed and intangible assets around three types of national elections: presidential, joint presidential, and legislative and parliamentary elections. Investments in fixed assets decline by up to 2% during presidential elections, and 4.44% in joint presidential, and legislative elections. On the other hand, intangible investments decrease by 4.36% in parliamentary election years. Moreover, investment responses to electoral shocks differ markedly within political systems and countries’ institutional settings. Investment levels shift significantly downward in pre- and resume in post-election years. The electoral effect results in a net loss in investment over the election cycle.
Political Uncertainty and Finance: A Survey
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An emerging stream of literature investigates the impact of political uncertainty on financial markets. In this survey, we review this line of literature from four perspectives, namely, asset prices, corporate policies, financial intermediaries, and economy and households, suggesting that political uncertainty generally increases market friction and as a result changes corporate behavior and adversely affects the economy. At the end of the survey, we discuss a few future directions worth being explored in view of the relationship between political uncertainty and finance.
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An emerging stream of literature investigates the impact of political uncertainty on financial markets. In this survey, we review this line of literature from four perspectives, namely, asset prices, corporate policies, financial intermediaries, and economy and households, suggesting that political uncertainty generally increases market friction and as a result changes corporate behavior and adversely affects the economy. At the end of the survey, we discuss a few future directions worth being explored in view of the relationship between political uncertainty and finance.
Portfolio Selection With Active Strategies: How Long Only Constraints Shape Convictions
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We explore in this paper the drivers of equity portfolio selection with an active strategy, to be understood as the combination of the use of a rewarded factor as an expected return, and a risk management made thanks to a risk model. The main message of the paper is that quantitative long only portfolios (built in a Markowitz-driven way) are high conviction portfolios, with few strong bets, and hence few effective (or non-zero) positions. In this respect, they share some similarity with discretionary stock pickers. This conclusion is valid either the objective of the fund is to follow the rewarded factor, either it is to target a risk strongly different from the risk of the market. We derive theoretical results and show that: (i) the long only constraint induce naturally a high concentration of the portfolio which becomes naturally parsimonious; (ii) closed-form formulas may be derived for the weights of the portfolio either for a Minimum Variance portfolio, either for a Managed Volatility portfolio with a rewarding factor; (iii) in the case of the Managed Volatility portfolio with a rewarded factor, the stocks that are selected are those that realize a trade-off between a low β and a high factor loading, both relatively to (respectively) a risk threshold and a factor threshold; (iv) those thresholds are endogenous in the sense that they depend on the risk structure and implicitly of the stocks finally kept in the portfolio, leading to a recursive procedure to select the stocks and the weights of the final portfolio. In particular, this means that the portfolio selection problem may be solved linearly instead of using an optimizer. A strong message following our results is also the essential role played by low β stocks, and by the interaction of the factor with the risk model, as the selectivity effect is higher for factors with a lower co-linearity with the risk model.
SSRN
We explore in this paper the drivers of equity portfolio selection with an active strategy, to be understood as the combination of the use of a rewarded factor as an expected return, and a risk management made thanks to a risk model. The main message of the paper is that quantitative long only portfolios (built in a Markowitz-driven way) are high conviction portfolios, with few strong bets, and hence few effective (or non-zero) positions. In this respect, they share some similarity with discretionary stock pickers. This conclusion is valid either the objective of the fund is to follow the rewarded factor, either it is to target a risk strongly different from the risk of the market. We derive theoretical results and show that: (i) the long only constraint induce naturally a high concentration of the portfolio which becomes naturally parsimonious; (ii) closed-form formulas may be derived for the weights of the portfolio either for a Minimum Variance portfolio, either for a Managed Volatility portfolio with a rewarding factor; (iii) in the case of the Managed Volatility portfolio with a rewarded factor, the stocks that are selected are those that realize a trade-off between a low β and a high factor loading, both relatively to (respectively) a risk threshold and a factor threshold; (iv) those thresholds are endogenous in the sense that they depend on the risk structure and implicitly of the stocks finally kept in the portfolio, leading to a recursive procedure to select the stocks and the weights of the final portfolio. In particular, this means that the portfolio selection problem may be solved linearly instead of using an optimizer. A strong message following our results is also the essential role played by low β stocks, and by the interaction of the factor with the risk model, as the selectivity effect is higher for factors with a lower co-linearity with the risk model.
The Cross-section of Return and Risk: New Evidence from an Emerging Market
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The economic theory suggests that expected returns should compensate for the risks undertaken by investors. This implies that investors are rewarded for taking risks while investing in assets with higher risk potentials. Theoretically, if they hold their investments, they receive higher returns, in long run. Over past few decades, this has been examined in the financial economics research extensively. However, some recent research works have suggested otherwise (see, Buffa, et al., 2014 and Agarwalla et al., 2014). In recent decades, low-risk stocks provide higher returns than riskier stocks. This contradicts a well-established market theory of higher risk-higher return. The distorted relationship between risk and return over last few years has been attributed to the factors such as the risk aversion tendency among investors and the steadily growing practices of index investing by fund managers. Motivated by the emerging theory of upended risk-return relationship, we argue that the positive risk-return relationship hypothesis is true to certain level of risk, however, beyond that threshold, the relationship between risk and return breaks down and they behave independently. We argue that for lower and moderate levels of risk, the returns are positively correlated and compensate for incremental risk undertaken by investors, however, when the risks tends to be substantially higher, the return behaves independently irrespective of changing risk levels.
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The economic theory suggests that expected returns should compensate for the risks undertaken by investors. This implies that investors are rewarded for taking risks while investing in assets with higher risk potentials. Theoretically, if they hold their investments, they receive higher returns, in long run. Over past few decades, this has been examined in the financial economics research extensively. However, some recent research works have suggested otherwise (see, Buffa, et al., 2014 and Agarwalla et al., 2014). In recent decades, low-risk stocks provide higher returns than riskier stocks. This contradicts a well-established market theory of higher risk-higher return. The distorted relationship between risk and return over last few years has been attributed to the factors such as the risk aversion tendency among investors and the steadily growing practices of index investing by fund managers. Motivated by the emerging theory of upended risk-return relationship, we argue that the positive risk-return relationship hypothesis is true to certain level of risk, however, beyond that threshold, the relationship between risk and return breaks down and they behave independently. We argue that for lower and moderate levels of risk, the returns are positively correlated and compensate for incremental risk undertaken by investors, however, when the risks tends to be substantially higher, the return behaves independently irrespective of changing risk levels.
The Turning Point of Indian Capital Market
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This paper highlights the phenomenal progress made by the Indian Capital Market in the financial year 2016-17 especially the exceptional progress made by the corporate bonds as a new financial instrument. This phenomenal progress has been termed as the turning point of Indian Capital Market and supported by various statistics and data reported by the Ministry of Corporate Affairs and the annual report of the Securities and Exchange Board of India for the financial year ending 2017.
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This paper highlights the phenomenal progress made by the Indian Capital Market in the financial year 2016-17 especially the exceptional progress made by the corporate bonds as a new financial instrument. This phenomenal progress has been termed as the turning point of Indian Capital Market and supported by various statistics and data reported by the Ministry of Corporate Affairs and the annual report of the Securities and Exchange Board of India for the financial year ending 2017.
Trans-Tasman Cooperation in Banking Supervision and Resolution
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Four major Australian banks span the Australian and New Zealand banking system. Applying the financial trilemma model, this article investigates possible approaches for cooperation in the supervision and resolution of these cross-border banks. The article first reviews the current arrangement in the Trans-Tasman Council of Banking Supervision, which is based on a soft law approach. Next, this article explores a trans-Tasman banking union, which would encompass joint supervision and joint resolution based on burden sharing. The challenge is political. Are the two countries willing to join forces in banking policies and thus give up part of their sovereignty in this field? And can New Zealand, as the smaller one of the two, ensure an effective voice in joint arrangements?
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Four major Australian banks span the Australian and New Zealand banking system. Applying the financial trilemma model, this article investigates possible approaches for cooperation in the supervision and resolution of these cross-border banks. The article first reviews the current arrangement in the Trans-Tasman Council of Banking Supervision, which is based on a soft law approach. Next, this article explores a trans-Tasman banking union, which would encompass joint supervision and joint resolution based on burden sharing. The challenge is political. Are the two countries willing to join forces in banking policies and thus give up part of their sovereignty in this field? And can New Zealand, as the smaller one of the two, ensure an effective voice in joint arrangements?
Under Pressure: Listing Status and Disinvestment in Japan
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We provide the first large sample comparisons of disinvestment by listed and unlisted firms. This study focuses on Japanese firms from 2001-2017, as this was a period of economic stagnation and financial reforms encouraging companies to restructure. We show that stock market listing is positively related to disinvestment. Listed firms disinvest 1.9% more than similar unlisted firms. Disinvestment activities of listed companies are also more sensitive to investment opportunities. Additionally, firms that disinvest show improvements in ROA and increases in future investment. Finally, we find that foreign (financial institution) ownership is positively (negatively) related to disinvestment.
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We provide the first large sample comparisons of disinvestment by listed and unlisted firms. This study focuses on Japanese firms from 2001-2017, as this was a period of economic stagnation and financial reforms encouraging companies to restructure. We show that stock market listing is positively related to disinvestment. Listed firms disinvest 1.9% more than similar unlisted firms. Disinvestment activities of listed companies are also more sensitive to investment opportunities. Additionally, firms that disinvest show improvements in ROA and increases in future investment. Finally, we find that foreign (financial institution) ownership is positively (negatively) related to disinvestment.
When Do Qualitative Risk Disclosures Backfire? The Effects of a Mismatch in Hedge Disclosure Formats on Investors’ Judgments
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Disclosure standards mandate the quantitative disclosure of hedging-instrument related risks but not the disclosure of hedged item related risks. We examine how a match (mismatch) in formats, caused by making quantitative (qualitative) hedged item disclosures alongside quantitative hedging instrument disclosures, affects investors’ integration of information from these two related disclosures. Our first experiment varies the hedged item disclosure format (quantitative or qualitative) and the portion of risk hedged (small or large). We find that when disclosure formats are mismatched, the less comparable nature of the two disclosures caused investors to neglect the offsetting relationship when assessing net risks. As a result, risk and investment judgments were influenced by the more prominent quantitative hedging instrument disclosures. Our second experiment finds that the use of a qualitative debiaser that clarifies the relationship between the two disclosures led to the integration of information and mitigated this effect.
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Disclosure standards mandate the quantitative disclosure of hedging-instrument related risks but not the disclosure of hedged item related risks. We examine how a match (mismatch) in formats, caused by making quantitative (qualitative) hedged item disclosures alongside quantitative hedging instrument disclosures, affects investors’ integration of information from these two related disclosures. Our first experiment varies the hedged item disclosure format (quantitative or qualitative) and the portion of risk hedged (small or large). We find that when disclosure formats are mismatched, the less comparable nature of the two disclosures caused investors to neglect the offsetting relationship when assessing net risks. As a result, risk and investment judgments were influenced by the more prominent quantitative hedging instrument disclosures. Our second experiment finds that the use of a qualitative debiaser that clarifies the relationship between the two disclosures led to the integration of information and mitigated this effect.
Where have Foreign Banks in Nigeria Gone? Market Structure, Competitive Intensity and the Capabilities of Nigeria Banks
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Privately-owned Nigerian banks hold 94% of Nigeria banking assets, the world's second largest share of local ownership. Theoretical explanations for the dominance of local firms related to liabilities of foreignness do not explain this phenomenon, suggesting that foreign banks do not experience additional costs compared to local Nigerian banks. In search for explanation for this puzzle, we focus on market structure and competitive intensity and their impact on capability development. In-depth exploratory study of Nigeria banking industry, based on interviews with industry experts and practitioners and supplemented by secondary data, suggests that the regulatory approach towards both foreign and Nigerian banks instilled market structure and competitive dynamics that were conducive for the development of competitive capabilities by Nigeria banks, whose strength arrested foreign entry. The study throws light on a regulatory approach that incentivizes capability development via discipline imposed by markets rather than by direct government intervention in the form of protectionism or favorable resource provision. It highlights the merits of studying phenomena that are inconsistent with existing theories for theory extension and development.
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Privately-owned Nigerian banks hold 94% of Nigeria banking assets, the world's second largest share of local ownership. Theoretical explanations for the dominance of local firms related to liabilities of foreignness do not explain this phenomenon, suggesting that foreign banks do not experience additional costs compared to local Nigerian banks. In search for explanation for this puzzle, we focus on market structure and competitive intensity and their impact on capability development. In-depth exploratory study of Nigeria banking industry, based on interviews with industry experts and practitioners and supplemented by secondary data, suggests that the regulatory approach towards both foreign and Nigerian banks instilled market structure and competitive dynamics that were conducive for the development of competitive capabilities by Nigeria banks, whose strength arrested foreign entry. The study throws light on a regulatory approach that incentivizes capability development via discipline imposed by markets rather than by direct government intervention in the form of protectionism or favorable resource provision. It highlights the merits of studying phenomena that are inconsistent with existing theories for theory extension and development.
Who Trusts Insurance? Empirical Evidence from Seven Industrialised Countries
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While the importance of trust in insurance is widely recognised, surprisingly, existing literature on the determinants of trust in insurance remains scarce. This paper investigates the determinants of trust in insurance in seven industrialised countries in Europe, North America and Asia using data from a recent insurance industry survey. We find that trust in insurance is higher among females, younger individuals, and less educated people. On the contrary, people who are more insurance literate have higher trust in insurance. Our findings also show that experiences with insurance are one of the most important determinants of trust in insurance, with the negative effect of a bad experience being more pronounced than the positive effect of a good experience. Finally, access to information related to insurance through the internet deters trust in insurance, while access to information through newspapers and magazines promotes it.
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While the importance of trust in insurance is widely recognised, surprisingly, existing literature on the determinants of trust in insurance remains scarce. This paper investigates the determinants of trust in insurance in seven industrialised countries in Europe, North America and Asia using data from a recent insurance industry survey. We find that trust in insurance is higher among females, younger individuals, and less educated people. On the contrary, people who are more insurance literate have higher trust in insurance. Our findings also show that experiences with insurance are one of the most important determinants of trust in insurance, with the negative effect of a bad experience being more pronounced than the positive effect of a good experience. Finally, access to information related to insurance through the internet deters trust in insurance, while access to information through newspapers and magazines promotes it.
