Research articles for the 2019-07-12

Asset Pricing vs Asset Expected Returning in Factor Models
Favero, Carlo A.,Melone, Alessandro
This paper proposes a new approach to factor modeling based on the long-run equilibrium relation between prices and related drivers of risk (integrated factors). We show that such relationship reveals an omitted variable in standard factor models for returns that we label as Equilibrium Correction Term (ECT). Omission of this term implies misspecification of every factor model for which the equilibrium (cointegrating) relation holds. The existence of this term implies short-run mispricing that disappears in the long-run. Such evidence of persistent but stationary idiosyncratic risk in prices is consistent with deviations from rational expectations. Its inclusion in a traditional factor model improves remarkably the performance of the model along several dimensions. Furthermore, the ECT â€" being predictive â€" has strong implications for risk measurement and portfolio allocation. A zero-cost investment strategy that consistently exploits temporary idiosyncratic mispricing earns an average annual excess return of 6.21%, mostly unspanned by existing factors.

CEO Duality And Firm Performance Under Endogeneity
Liu, Ruinan
This paper intends to lay out a framework to identify self-selection bias and how it can be used practically to analyze CEO duality in the field of corporate governance. Prior literature about agency theory and stewardship theory have argued extensively in this topic yet most of them treat duality as an exogenous variable. The model identifies whether this leadership structure is self-selected to maximize firm’s profit. Also, it gives a correct estimate of duality effect after the bias is corrected. Because of different measurement of firm performance, the author uses four measures, including Tobin’s q, return on assets (ROA), return on equity (ROE) and earnings per share (EPS) to represent firms’ ability to make profit. The results are mixed. For Tobin’s q and earnings per share, the author finds strong evidence that self-selection bias exists, that is, there is evidence that firms choose the structure to perform better. After controlling for bias, both Tobin’s q and EPS show negative effect of duality on performance which means non-duality provides better performance than duality. However, for ROA and ROE, there is no evidence that firms do so to improve performance. Specifically, for ROE, the model has low predictability and thus, is not likely to provide meaningful and reliable results. We also compare the model with traditional methods including dummy variable approach and two stage least square approach. Two stage least square method produces similar result for EPS but opposite result for Tobin’s q, while dummy variable approach shows there is no association for any measurement. The author also suggests not to use ROE as an approximation for profitability due to its unpredictability. Such results contradict the agency theory of corporate governance. These findings should be examined further by considering those firms that changed governance structure in sample period and more deeply the reasons such changes were made.

How to Gauge Investor Behavior? A Comparison of Online Investor Sentiment Measures
Ballinari, Daniele,Behrendt, Simon
Given the increasing interest in and the growing number of publicly available methods to estimate investor sentiment from social media platforms, researchers and practitioners alike are facing one important question - which is best to gauge investor sentiment? We compare the performance of daily investor sentiment measures estimated from Twitter and StockTwits short messages by publicly available dictionary and neural network based methods for a sample of 360 stocks over a seven years time period. To determine their relevance for financial applications, these investor sentiment measures are compared by (i) their effect on the cross-section of returns and (ii) their ability to forecast abnormal portfolio returns and trading volume. We provide a clear ranking of the considered online investor sentiment measures, elaborate on the reasons for the differences in performance across measures and add a note on the well-known reversal effect.

Le procedure esecutive immobiliari: il funzionamento e gli effetti delle recenti riforme (Real Estate Foreclosures: Their Functioning and the Effects of Recent Reforms)
Giacomelli, Silvia,Orlando, Tommaso,Rodano, Giacomo
Italian Abstract: Le lunghe procedure esecutive di recupero del debito possono incidere negativamente sul sistema economico e finanziario, ad esempio nella gestione dei crediti deteriorati. Questo lavoro analizza le caratteristiche dei pignoramenti immobiliari in Italia e le determinanti della loro lunghezza. Una scomposizione delle procedure in fasi mostra che le fasi precedenti e successive alla vendita effettiva contribuiscono in modo significativo alla durata totale della procedura. La lunghezza risulta influenzata anche dalle caratteristiche osservabili e non osservabili dei tribunali. Troviamo anche una riduzione della durata delle procedure in seguito alle recenti riforme: i nuovi regolamenti contribuiscono a ridurre la durata della fase di "pre-vendita" e, soprattutto, della fase di vendita.. English Abstract: Lengthy in-court debt recovery procedures may adversely affect the economic and financial system, for example in the management of non-performing loans. This paper analyses the characteristics of real estate foreclosures in Italy and the determinants of their length. A decomposition of procedures into phases shows that the phases preceding and following the actual sale also contribute significantly to the total length of the procedure. The length also turns out to be influenced by both observable and unobservable court characteristics. We also find a reduction in the length of the procedures following recent reforms: new regulations are helping to reduce the length of the ‘pre-sale’ phase and, above all, of the sale phase.

Long-Term Care Insurance Purchase under Time-Inconsistent Risk Attitudes
Schernberg, Hélène
Can behavioral biases explain why individuals purchase little long-term care insurance, and do so late in life? I consider individuals whose propensity to take risks decreases when old. Unaware of their changing taste for risk, naifs delay the purchase of long-term care insurance, although this is a dominated strategy. Sophisticates, on the other hand, purchase insurance when young and, provided the elasticity of intertemporal substitution is below unity, end up better insured than naives.

Market Closures and Cross-Sectional Stock Returns
Miwa, Kotaro
By analyzing not only an overnight return but also a midday-recess return, namely, a stock return during midday-recess, I analyze whether and why market closures affect cross-sectional stock returns. I find strong persistence in overnight and midday-recess returns, with both returns positively associated with each other. Moreover, these out-of-trading-hours returns are negatively associated with returns during trading hours. I analyze whether these associations are explained by a different investor clientele outside trading hours (the open of the trading session) compared to during trading hours (intraday and closing of the trading session). I find that institutional ownership increases more with returns during trading hours; the finding indicates that those returns are mainly determined by institutional investors, while midday-recess and overnight returns, that is, returns outside trading hours, are not. Overall, my results support the view that market closures do affect cross-sectional returns and the influence is attributable to differences in the investor clientele.

Overconfidence Test in Cryptocurrencies Markets Using VAR Analysis
Tran, Hai Yen
The rapid technological development in finance in general, and in BTC in particular, has continued to gain traction worldwide since its emergence in the last decade. Initially, this growth was largely due to the work of tech enthusiasts; however, this changed in 2017, when BTC and various other CCs became main selling points in the financial world. Since the early peak of these electronic-cash developments in 2018, Google searches for ‘Bitcoin’ and ‘cryptocurrencies’ have continued to reach record highs. Most recently, on the 2nd of April, 2019, this trend in Google searches for cryptocurrencies, particularly ‘BTC, reached 90 percent of the peak observed on the 19th of November, 2018.This market for cryptocurrencies (hereinafter referred to as ‘crypto-market’) has gained substantial attention from theorists and empirical researchers, but the inherent complexities in this phenomenon are yet to be fully explored. Motivated by overconfidence theory, in the current study, we question whether the recent degree of volatility and trading activity in cryptocurrency behaviour shares any overlap with the momentum of the Dot-Com bubble in the 1980s, where tech-based infrastructure gained power and became overconfident very quickly, yielding spurious share prices for these firms and their products.Following this, it is expected that an identifiable pattern in price behaviour will emerge after correction to such significant growth (Caporale and Plastun, 2018). Moreover, it is worth noticing that the majority of crypto-participants are overwhelmingly male (Coindesk, 2018) and psychological research has established that, in the area of finance, men are more overconfident compared with women (Barber and Odean, 2001).Despite studies on overconfidence originating in the field of psychology, such investigation has migrated into the literature on economics and finance. Particularly, overconfidence is considered as the key behavioural factors needed to understanding the trading puzzle (De Bondt and Thaler, 1995). Indeed, overconfidence theory had taken its place in the growing list of behavioural studies which were used to be on the fringes, but are now occupying mainstream research in relevant fields. Accordingly, although our analysis was initially motivated by the overconfidence hypothesis, the findings related to the dependence of trading volume and overconfidence are considered an essential empirical principle which should be duly acknowledged by both theorists and empirical researchers.This thesis investigates the lead-lag relationship between the turnover and return of the crypto-market in general, and the three largest market cap coins (BTC, ETH and XRP) in particular. Alternatively stated, we attempt to support notions of the existence of overconfidence bias in this market. The study utilised the Vector Autoregression (VAR) technique, as well as the Granger-causality and Impulse Response Function (IRF) to produce the three key findings of this study. The first key finding is that the activity in the crypto-market suggests the explanatory power of overconfidence during its tremendous volatility in 2018 is statistically significant but economically subtle. Accordingly, this study found evidence of overconfidence bias in Bitcoin and Ripple investments, as well as in the crypto-market, wherein the trading activities were responsive to lagged-market returns. The relatively pronounced dependence of ETH turnover on its lagged-return presents our second finding, which suggests ETH 3 participants trade under the disposition effect. We also perceive that BTC, ETH and XRP differ in terms of fundamental drivers and investment intentions, which may account for the economically nonsignificant findings when performing joint interpretations.In addition, we illustrate a high degree of similarity in price movement between BTC and the Dot-Com bubble, as they follow the same psychologically-based market cycle. Therefore, theoretically speaking, it is predicted the significant movement in the price of BTC, as well as the performance of cryptocurrencies will track the market crash of the 1980s due to the overconfidence bias. The conclusion is consistent with a working paper by Obryan (2018). Practically speaking, however, we more consider differences in fundamental underlie cryptocurrencies and its specific long-term use case, which make the price momentum should be interpreted differently. The level of adoption of these tech-integrations then should become the central focus of market participants.

Product Market Strategy and Corporate Policies
Hajda, Jakub
I study how product market strategy influences corporate investment and financing policy. Using data on firms' product portfolio structure, I show that product portfolio age is negatively related to firm value, investment and leverage, consistent with the product life cycle channel. An estimated dynamic model of firms' financing, investment, and product portfolio decisions shows that the negative relationships exist because capital investment and product introductions act as complements, leading to a stronger precautionary savings motive when the firm's product portfolio ages. The structural estimates imply large effects of the product life cycle channel, with firms acting as if new products were twice as profitable as old ones, and document that firms are more exposed to product-level economic forces when they supply fewer products and compete more intensely. Counterfactual analysis implies that alleviating product life cycle effects can increase firm value by up to 3.5%.

Religion and Ownership
Hofmann, Christian,van Lent, Laurence,Schwaiger, Nina
This study examines the effect of religion on ownership structures. In particular, we expect that the local strength of Protestantism will reduce ownership concentration and insider ownership. Protestantism is less hierarchical than Catholicism, which suggests that adherents of the Protestant faith will have a strong preference for autonomy. Moreover, they rely strongly on horizontal ties between fellow citizens, which encourages trust and reduces a shareholders’ need to monitor a firms’ employees. Our identification is based on a panel regression, a geographical regression discontinuity design, a difference design, and an instrumental variable approach. In line with our predictions, we find that the local strength of Protestantism reduces ownership concentration and insider ownership. A subsequent channel analysis suggests that the local strength of Protestantism has a negative direct effect on blockholder ownership and a negative indirect effect on the size of shareholding and insider ownership through developing trust. Overall, our results underline the role of the demographic features of firms’ geographic environments in explaining ownership structures.

Stakeholders and Shareholders: Are Executives Really 'Penny Wise and Pound Foolish' About ESG?
Larcker, David F.,Tayan, Brian,, Vinay Trivedi,Wurzbacher, Owen
Currently, there is much debate about the role that non-investor stakeholder interests play in the governance of public companies. Critics argue that greater attention should be paid to the interest of stakeholders and that by investing in initiatives and programs to promote their interests, companies will create long-term value that is greater, more sustainable, and more equitably shared among investors and society. However, advocacy for a more stakeholder-centric governance model is based on assumptions about managerial behavior that are relatively untested. In this Closer Look, we examine survey data of the CEOs and CFOs of companies in the S&P 1500 Index to understand the extent to which they incorporate stakeholder needs into the business planning and long-term strategy, and their view of the costs and benefits of ESG-related programs. We ask:• What are the real costs and benefits of ESG? • How do companies signal to constituents that they take ESG activities seriously? • How accurate are the ratings of third-party providers that rate companies on ESG factors?• Do boards understand the short- and long-term impact of ESG activities? • Do boards believe this investment is beneficial for the company?

Statistical Identification in Svars - Monte Carlo Experiments and a Comparative Assessment of the Role of Economic Uncertainties for the US Business Cycle
Herwartz, Helmut,Lange, Alexander,Maxand, Simone
Structural vector autoregressive analysis aims to trace the contemporaneous linkages among (macroeconomic) variables back to underlying orthogonal structural shocks. In homoskedastic Gaussian models the identification of these linkages deserves external and typically notdata-based information. Statistical data characteristics (e.g, heteroskedasticity or non-Gaussian independent components) allow for unique identification. Studying distinct covariance changes and distributional frameworks, we compare alternative data-driven identification procedures and identification by means of sign restrictions. The application of sign restrictions results in estimation biases as a reflection of censored sampling from a space of covariance decompositions. Statistical identification schemes are robust under distinct data structures to some extent. The detection of independent components appears most flexible unless the underlying shocks are (close to) Gaussianity. For analyzing linkages among the US business cycle and distinct sources of uncertainty we benefit from simulation-based evidence to point at two most suitable identification schemes. We detect a unidirectional effect of financial uncertainty on real economic activity and mutual causality between macroeconomic uncertainty and business cycles.

Tax Avoidance - Are Banks Any Different?
Gawehn, Vanessa,Mueller, Jens
While the public has noticed the need for the detection of potential tax loopholes and demand further improvement in the taxation of banks, there is scarce empirical evidence of whether banks’ degree of tax avoidance actually differs from that of non-banks. We try to close this gap by investigating U.S. banks’ tax avoidance behavior for a sample period from 2004 to 2016. To anchor banks’ tax avoidance, we use annual Cash ETRs and GAAP ETRs and compare them to the tax avoidance behavior of non-banks. As there are various channels of tax avoidance, we account for differences in several areas such as corporate fundamentals, the degree of multinationality and regulatory scrutiny. We provide cautious evidence that banks have significantly larger Cash ETRs than non-banks. Via the use of quantile regression we find evidence that the assocation between banks and ETRs is not constant over the whole tax avoidance distribution, but shows a positive association for lower parts of the tax avoidance distribution and a negative association for higher parts. In line with recent research, we provide some evidence that the difference in Cash ETRs between banks and non-banks is more pronounced for worse-capitalized, than for better-capitalized banks.

The Overnight Return Puzzle and the 'T+1' Trading Rule in Chinese Stock Markets
Qiao, Kenan,Dam, Lammertjan
We document a puzzling phenomenon, namely that overnight returns in Chinese stock markets are on average statistically and economically significantly negative. This finding seems to violate conventional asset pricing theory, yet the anomaly is robust to the choice of stock exchange, type of shares, and sample period, present in different market regimes (bull or bear markets), and persists across assets of small, medium, and large market capitalization. Moreover, this overnight return puzzle appears to be unique to Chinese markets. We hypothesize that a particular arrangement in Chinese stock markets explains the puzzle: the so-called "T+1" trading rule. The T+1 trading rule prohibits traders to sell shares they bought on the same the day. This asymmetric trading restriction should lead to a discount on daily opening prices. We find empirical support that the T+1 induced discount can indeed explain the overnight return puzzle, and we rule out other explanations. We estimate the average T+1 discount at 14 basis points. In addition, we establish that the T+1 discount contributes significantly to overnight risk. While the T+1 trading rule was introduced with the belief it would reduce volatility, we propose that the rule has had unintentional consequences, namely a substantial discount for opening prices and the adverse effect of increasing volatility.

The Woeful Inadequacy of Section 13(D): Time for a Paradigm Shift?
Passador, Maria Lucia
Disclosure is a crucial aspect of the corporate landscape and has been the subject of in-depth scholarly discussion in recent years.This Article aims to advance this lively debate by carefully analyzing the argument that the beneficial ownership reporting requirements adopted under Section 13(d) of the Securities Exchange Act of 1934 â€" requiring “a purchaser that beneficially owns 5 percent or more of a class of a Public Target Company’s equity securities . . . to promptly disclose its ‘plans or proposals’ to acquire additional securities of the Public Target Company or merge with the Public Target Company” no later than 10 days following such 5 percent acquisition â€" should be amended.

Why Is the Cash-Flow Sensitivity of Cash Increasing?
Machokoto, Michael,Ibrahim, Boulis Maher,Sahota, Amandeep
The few studies that examine the cash-flow sensitivity of cash (CFSC) report mixed and conflicting results. However, we note a marked increase in the CFSC of US firms from 1971 to 2015 that is pervasive and robust to standard controls used in the literature. On average, this sensitivity has doubled over the past four decades. We use an augmented model that incorporates the asymmetry arising from investments in Research and Development (R&D) to examine time variation in the CFSC. The results, which are robust to measurement errors in Tobin’s q, show that the increase in the CFSC is attributable to firms that invest in R&D and not to firms that do not report R&D. This suggests that the accumulation of cash holdings is important to the former type of firm, as it is often used to smoothen or hedge likely future shortfalls. The results further show that the CFSC is negative only for firms that do not report R&D, while it increases and changes from negative to positive for firms that report R&D. Thus, significant time variation and asymmetry in the CFSC help explain the mixed results in the literature.