Research articles for the 2019-09-10

Age of Firms and the Value of Analyst Recommendation
, Hassanudin Mohd Thas Thaker,Mohamad, Azhar
Objective - This paper assesses the value of information disclosure in Malaysian analyst reports by examining three categories of firms, according to their age (young, medium and old).Methodology/Technique - The study uses a market-adjusted method to calculate the cumulative abnormal return and panel regression to test the research objective. The results from the unbalanced panel data reveals that not all information contained in the analyst reports is able to detect the movement in stock returns.Finding - Younger firms recorded two significant results (ROE and SPR) whereas among medium aged firms, TP, CFP, SPR, and MC all had an impact on CAR. The older firms showed that TP, EF, ROE and SPKLCI had an impact on CAR.Novelty â€" This qualitative inquiry reveals that Malaysian analyst reports tend to disclose information based on simple statistical analyses to formulate recommendations whilst ignoring other significant qualitative information.Type of Paper - Empirical.

Arbitrage-free modeling under Knightian Uncertainty
Matteo Burzoni,Marco Maggis

We study the Fundamental Theorem of Asset Pricing for a general financial market under Knightian Uncertainty. We adopt a functional analytic approach which require neither specific assumptions on the class of priors $\mathcal{P}$ nor on the structure of the state space. Several aspects of modeling under Knightian Uncertainty are considered and analyzed. We show the need for a suitable adaptation of the notion of No Free Lunch with Vanishing Risk and discuss its relation to the choice of an appropriate filtration. In an abstract setup, we show that absence of arbitrage is equivalent to the existence of \emph{approximate} martingale measures sharing the same polar set of $\mathcal{P}$. We then specialize the results to a discrete-time framework in order to obtain true martingale measures.

Classifying Markets up to Isomorphism
John Armstrong

We define a notion of isomorphism for financial markets in both discrete and continuous time. We classify complete one-period markets. We define an invariant of continuous time complete markets which we call the absolute market price of risk. This invariant plays a role analogous to the curvature in Riemannian geometry. We classify markets when this invariant takes a simple form. We show that in general markets with non-trivial automorphism groups admit mutual fund theorems and prove a number of such theorems.

Direct Lending: The Determinants, Characteristics and Performance of Direct Loans
Loumioti, Maria
I explore the determinants, characteristics and performance of direct corporate loans, that is, loans originated by nonbank institutional investors without banks’ intermediation. In the aftermath of the financial crisis, direct lending has been the most rapidly growing credit market segment. I document that direct lending activity increases when commercial banks face greater regulatory pressure and during periods of weak bank loan and securitized debt issuance. Direct lenders are particularly active in geographic regions that experience more bank mergers and primarily focus on informationally opaque borrowers with limited credit history and few financing alternatives. Moreover, direct loans have higher interest rate, more flexible covenant structures and are more likely to be secured by borrower’s capital stock compared to institutional loans issued by banks. I further show that direct loans experience similar or somewhat better post-issuance performance compared to bank-originated institutional loans. Overall, I provide evidence consistent with the view that direct lending expanded the credit space without giving rise to adverse selection costs.

Diversification Benefits of Shari’ah Compliant Equity ETFs in Emerging Markets
Andrikopoulos, Panagiotis,Gad, Samar
Previous studies on the performance of Islamic finance and banking have been more comparative than experimental when it comes to the role and effect of Islamic (Shari'ah compliant) assets in a conventional setting. This paper investigates whether Shari'ah compliant exchange-traded funds (ETFs) have potential diversification benefits to a volatile portfolio of conventional investments in emerging markets. The results suggest that such assets not only improve the risk-adjusted returns of portfolios but also receive proportionally higher weight during crisis periods. Hence, institutional investors should consider the ‘religion effect’ when they manage their assets, given the evidence regarding the out performance of Shari'ah compliant equity relative to their conventional peers.

Doctrina Social de la Iglesia Católica y performance empresarial: la sostenibilidad como constructo ético y económico (Social Doctrine of the Catholic Church and Business Performance: Sustainability as an Ethical and Economic Concept)
Gómez-Bezares, Ana,Gómez-Bezares, Fernando
Spanish Abstract: En esta investigación vemos que la sostenibilidad empresarial tiene una lógica ética y económica, por lo que puede ser un modelo a impulsar para lograr un verdadero desarrollo. Desde un punto de vista ético puede apoyarse en los derechos humanos y en la ética cívica; pero en este trabajo nos hemos centrado principalmente en sustentar y enriquecer la sostenibilidad empresarial en base a la Doctrina Social de la Iglesia Católica, rico acervo de sabiduría que, además, puede ser compartido en sus exhortaciones por muchas personas no católicas. También hemos trabajado sobre su lógica económica: viendo por qué es razonable que las empresas sostenibles obtengan buenos resultados, formulando el modelo para superar el problema de agencia (lo que le da ventaja sobre el tradicional modelo de los stakeholders), estudiando contrastes empíricos que demuestran la buena performance de las empresas sostenibles, y realizando un nuevo contraste que nos confirma lo anterior. English Abstract: In this research we see that business sustainability has an ethical and economic logic, so it can be a model to promote in order to reach real development. From an ethical point of view you can rely on human rights and civic ethics; but in this work we have focused mainly on sustaining and enriching business sustainability based on the Social Doctrine of the Catholic Church, rich wealth of wisdom that, in addition, can be shared in its exhortations by many non-Catholic people. We have also worked on its economic logic: seeing why it is reasonable for sustainable companies to obtain good results, formulating the model to overcome the agency problem (which gives it an advantage over the traditional stakeholder model), studying empirical analysis that demonstrate the good performance of sustainable companies, and making a new analysis that confirms the above.

Economically rational sample-size choice and irreproducibility
Oliver Braganza

Several systematic studies have suggested that a large fraction of published research is not reproducible. One probable reason for low reproducibility is insufficient sample size, resulting in low power and low positive predictive value. It has been suggested that insufficient sample-size choice is driven by a combination of scientific competition and 'positive publication bias'. Here we formalize this intuition in a simple model, in which scientists choose economically rational sample sizes, balancing the cost of experimentation with income from publication. Specifically, assuming that a scientist's income derives only from 'positive' findings (positive publication bias) and that individual samples cost a fixed amount, allows to leverage basic statistical formulas into an economic optimality prediction. We find that if effects have i) low base probability, ii) small effect size or iii) low grant income per publication, then the rational (economically optimal) sample size is small. Furthermore, for plausible distributions of these parameters we find a robust emergence of a bimodal distribution of obtained statistical power and low overall reproducibility rates, matching empirical findings. Overall, the model describes a simple mechanism explaining both the prevalence and the persistence of small sample sizes. It suggests economic rationality, or economic pressures, as a principal driver of irreproducibility.

Empirical investigation of state-of-the-art mean reversion strategies for equity markets
Seung-Hyun Moon,Yong-Hyuk Kim,Byung-Ro Moon

Recent studies have shown that online portfolio selection strategies that exploit the mean reversion property can achieve excess return from equity markets. This paper empirically investigates the performance of state-of-the-art mean reversion strategies on real market data. The aims of the study are twofold. The first is to find out why the mean reversion strategies perform extremely well on well-known benchmark datasets, and the second is to test whether or not the mean reversion strategies work well on recent market data. The mean reversion strategies used in this study are the passive aggressive mean reversion (PAMR) strategy, the on-line moving average reversion (OLMAR) strategy, and the transaction cost optimization (TCO) strategies. To test the strategies, we use the historical prices of the stocks that constitute S\&P 500 index over the period from 2000 to 2017 as well as well-known benchmark datasets. Our findings are that the well-known benchmark datasets favor mean reversion strategies, and mean reversion strategies may fail even in favorable market conditions, especially when there exist explicit or implicit transaction costs.

Feedback Trading and the Ramadan Effect in Frontier Markets
Andrikopoulos, Panagiotis,Cui, Yuetin,Gad, Samar,Kallinterakis, Vasileios
We examine the presence of the Ramadan effect in feedback trading drawing on a sample of eleven majority Muslim markets for the period of 29/6/2001 to 1/8/2016. Feedback trading is significant in several of these markets, appearing stronger outside, rather than within, Ramadan. These results hold for the full sample period, including before and after the global financial crisis raising the possibility that Ramadan’s widely documented lower volatility is related to the reduced presence of feedback trading during that month. We attribute our findings to Ramadan’s traditionally documented low volumes rendering feedback trading less feasible during that month.

How Impactful Is Telecom Efficiency to Company Stock Value?
Hendrawan, Riko,Nugroho, Kristian W.A.,Permana, Gayuh T.
d and analyzed using Stochastic Frontier Approach (SFA) method. By using same method, the impact of efficiency to stock value will be measured, as well as the significance level.Finding - The results of this research show that from 14 telecom operators observed, TLKM (Indonesia) obtained the highest efficiency score (0.984) whereas StarHub (Malaysia) had the lowest efficiency score (0.405). TLKM (Indonesia) and AIS (Thailand) had a similar efficiency score given the fact that the behaviour of the subscribers is similar and they have the same country characteristic.Novelty - All of the input and output variables have a positive impact on the efficiency parameter except Total Asset which has negative impact on the efficiency score. By using further analysis of the t-Ratio between the variables and efficiency, it can be seen that stock value is impacted by the efficiency parameters but this impact is not significant (t-Ratio 1.35).Type of Paper - Empirical.

Integrating Capital Structure, Financial and Non-Financial Performance: Distress Prediction of SMEs
Kristanti, Farida Titik,Rahayu, Sri,Isynuwardhana, Deannes
Objective - The growth of SMEs in Indonesia is rising from year to year. As an anticipation of bankruptcy, predictions can be made in an integrated means from the perspective of capital structure, financial, and non-financial performance.Methodology/Technique - A sample of 39 companies were selected using purposive sampling during the research period of 2013-2017. The results of the statistical logistic regression show that profitability is an important factor in predicting financial distress of the SMEs in Indonesia.Finding - The operating income to total assets has a negative and significant effect on SMEs financial distress. Meanwhile, retained earnings to total assets have a positive impact. Indonesian SMEs must be efficient in their operational costs to avoid financial distress.Novelty - In addition, sales are also important. If the company's sales are high, and the operational cost efficiency is maintained, the retained earnings will increase. This means that the company will be safe and able to avoid financial distress.Type of Paper - Empirical.

Investment Losses and Inequality
Wenzel, Maximilian,Koenig, Johannes
Systematic differences along the wealth distribution in investment performance will potentially have large consequences for the level and persistence of wealth inequality. These differences in performance are hard to measure except in a few, select countries with detailed information on household portfolios. In this paper we use a modified version of the Global Capital Asset Pricing Model (GCAPM), which relies on classed household portfolio data to measure investment performance in five European countries, where previously no measure of investment performance could be computed. We verify the accuracy of the modified GCAPM using Dutch survey data, which contains unclassed portfolio data enabling direct comparison with the regular GCAPM. In all countries households with less wealth exhibit lower investment performance, even after risk-adjustment. Further, we show that raising investment performance creates large efficiency gains, however, households below the median do not benefit from them.

Is culture a contributing factor of strong science?
Mahmood Khosrowjerdi,Lutz Bornmann

Many factors such as economy size, capital resources, and size of national publication market seem to be related to the scientific performance of nations. In this paper we link the national culture values with scientific performance of 53 nations. We focus on the year 2010. Our study uses three datasets: 1) Hofstede's data on national culture, 2) data on migration share of societies, and 3) citation impact data. We found that four dimensions of culture (i.e. individualism, power distance, uncertainty avoidance, and indulgence) correlate practically and statistically significantly with scientific impact of nations. The findings are discussed in mirror of cultural theories.

Islamic (Participation) Banking and Economic Growth: Empirical Focus on Turkey
Atici, Gonca
The purpose of this study is to analyze the causal relationship between Islamic (participation) banking and economic growth in Turkey. A quarterly time-series data is employed from 2008:1 to 2018:1. Vector Error Correction Model (VECM) based Granger causality test is conducted to find evidence in support of "supply-leading" or "demand-following" hypothesis. Empirical results of the study suggest a significant uni-directional long-run causality from Islamic (participation) banking to economic growth that confirms the "supply-leading" hypothesis. This finding is noteworthy as it emphasizes the crucial complementary role of Islamic (participation) banking besides conventional banking in Turkey. Findings draw attention to the fact that, efforts to improve the underlying regulatory system of Islamic (participation) banking will have positive contributions on growth. Besides, new business models/ Islamic banking window and diversified instruments are expected to position Turkey in a well-deserved place in the international Islamic banking industry.

Online Appendix to 'Liquidity, Information Production, and Debt-Equity Choice'
Cheung, William M.,Im, Hyun Joong,Noe, Thomas H. ,Zhang, Bohui
This appendix comprises three parts. The first part develops a simple debt-equity choice model that verifies that the effect of information production on debt-equity choice depends on the sort of informational uncertainty resolved by information production: common uncertainty vs. the information gap. The second part presents some additional robustness tests. The third part reports the results of analyses designed to reconcile our results with a prior study on the same issue.

Optimal portfolio with insider information on the stochastic interest rate
Bernardo D'Auria,José Antonio Salmerón

We consider the optimal portfolio problem where the interest rate is stochastic and the agent has insider information on its value at a finite terminal time. The agent's objective is to optimize the terminal value of her portfolio under a logarithmic utility function. Using techniques of initial enlargement of filtration, we identify the optimal strategy and compute the value of the information. The interest rate is first assumed to be an affine diffusion, then more explicit formulas are computed for the Vasicek interest rate model where the interest rate moves according to an Ornstein-Uhlenbeck process. Incidentally we show that an affine process conditioned to its future value is still an affine process. When the interest rate process is correlated with the price process of the risky asset, the value of the information is proved to be infinite, as is usually the case for initial-enlargement-type problems. However, weakening the information own by the agent and assuming that she only knows a lower-bound or both, a lower and an upper bound, for the terminal value of the interest rate process, we show that the value of the information is finite. This solves by an analytical proof a conjecture stated in Pikovsky and Karatzas (1996).

Ownership Structure and Earnings Management
Alexander, Nico
Objective - The purpose of this research is to analyze the effect of ownership structure toward earnings management.Methodology/Technique - The population of this research consist of manufacturing companies listed on the Indonesian Stock Exchange (IDX) from 2014 to 2016. This research uses 3 recent years and adds variables that have not been used in prior research. The sample of this research is chosen using a purposive sampling method.Finding - The hypothesis is tested by multiple regressions using an Eviews program to investigate the influence between each independent variable to earnings management.Novelty - The hypothesis is tested by multiple regressions using an Eviews program to investigate the influence between each independent variable to earnings management.Type of Paper - Empirical.

Semimartingale theory of monotone mean--variance portfolio allocation
Aleš Černý

We study dynamic optimal portfolio allocation for monotone mean--variance preferences in a general semimartingale model. Armed with new results in this area we revisit the work of Cui, Li, Wang and Zhu (2012, MAFI) and fully characterize the circumstances under which one can set aside a non-negative cash flow while simultaneously improving the mean--variance efficiency of the left-over wealth. The paper analyzes, for the first time, the monotone hull of the Sharpe ratio and highlights its relevance to the problem at hand.

Soft-Hard Data Fusion Using Uncertainty Balance Principle â€" Evidence from Corporate Credit Risk Assessment in Commercial Banking
Brkic, Sabina,Hodzic, Migdat,Dzanic, Enis
This study introduces Uncertainty Balance Principle (UBP) as a new concept/method for incorporating additional soft data into probabilistic credit risk assessment models. It shows that soft banking data, used for credit risk assessment, can be expressed and decomposed using UBP and thus enabling more uncertainty to be handled with a precise mathematical methodology. The results show that this approach has relevance to credit risk assessment models in the sense that it proved its usefulness for the purpose of soft-hard data fusion, it modified Probability of Default with soft data modeled using possibilistic (fuzzy) distributions and fused with hard probabilistic data via UBP and it obtained better classification prediction results on the overall sample. This was demonstrated on a simple example of one soft variable, two experts and a small sample and thus this is an approach/method that requires further research, enhancements and rigorous statistical testing for the application to a complete scoring and/or rating system.

Spillovers of Funding Dry-Ups
Aldasoro, Iñaki,Balke, Florian,Barth, Andreas,Eren, Egemen
We uncover a new channel for spillovers of funding dry-ups. The 2016 US money market fund (MMF) reform exogenously reduced unsecured MMF funding for some banks. We use novel data to trace those banks to a platform for corporate deposit funding. We show that intensified competition for corporate deposits spilled the funding squeeze over to other banks with no MMF exposure. These banks paid more for deposits, and their pool of funding providers deteriorated. Moreover, their lending volumes and margins declined, and their stocks underperformed. Our results suggest that banks' competitiveness in funding markets affect their competitiveness in lending markets.

Taxing dissent: The impact of a social media tax in Uganda
Levi Boxell,Zachary Steinert-Threlkeld

We examine the impact of a new tool for suppressing the expression of dissent---a daily tax on social media use. Using a synthetic control framework, we estimate that the tax reduced the number of georeferenced Twitter users in Uganda by 13 percent. The estimated treatment effects are larger for poorer and less frequent users. Despite the overall decline in Twitter use, tweets referencing collective action increased by 31 percent and observed protests increased by 47 percent. These results suggest that taxing social media use may not be an effective tool for reducing political dissent.

The Danske Bank Money Laundering Scandal: A Case Study
Bjerregaard, Elisabetta,Kirchmaier, Tom
The case discusses the money laundering scandal at the Estonian branch of Danske Bank, the largest financial institution in Denmark. Danske Bank money laundering scandal is one of the largest money laundering scandal in European history. It began in 2007 following the acquisition from Danske Bank of Finnish Sampo Bank, which also had an Estonian branch. Between 2007 and 2015 over €200bn of suspicious transactions originating from Russia, former Soviet states and elsewhere flowed through its Estonian branch non-resident portfolio. Danske Bank stock price has been declining since March 2017 when the newspaper Berlingske first issued a series of articles on money laundering claims resulting in a significant destruction of shareholder value. Media reports widely misinterpreted the €200bn figure as representing entirely money laundering rather than a combination of legal and illicit transactions.In September 2018, Danske Bank admitted that its procedures for oversight failed completely in this case and that its money laundering controls in Estonia has been insufficient. As a result, the CEO and the Chairman of the Board of Directors stepped down and a number of employees both at the Estonian branch and at Group level were found not in compliance with legal obligations forming part of their employment with the bank and therefore dismissed. On February 2019 the Estonian Financial Supervisory Authority (FSA) intimated Danske Bank to cease its activities in Estonia. At the same time, independently of the notification from the Estonian FSA, Danske Bank decided to cease its activities in Latvia, Lithuania and Russia in line with its strategy of focusing on its Nordic core market.Danske Bank is currently under investigation from a range of authorities and it is expected that Danish, Estonian, European and US regulators will impose penalties. Moreover, twelve former employees in Estonia are under investigation by the Estonian State Prosecutor. Furthermore, in May 2019 the former CEO and other nine group senior managers were preliminarily charged in the case by the State Prosecutor for Serious Economic and International Crime (SØIK).Other European banks (Deutsche Bank, Swedbank, Raffeisen Bank) are being drawn into the case for allegedly helping transfer illicit funds from Danske Bank. It is unclear at this time how long the Danske Bank money laundering case will last or how many entities it will draw in.

The Effect of Related Party Transactions Through Opportunistic Behaviour Management to Increase Firm Value
, Arna Suryani,, Atikah,Putri, Hana Tamara
Objective - This research aims to determine and analyze related party transactions to increase firm value through opportunistic behaviour management by conducting earnings management on manufacturing companies listed on the Indonesian Stock Exchange between 2015 and 2018.Methodology/Technique â€" There are 34 companies that fulfill the requirements to become the sample of this study. The method applied in analyzing the data is verification using path analysis.Findings â€" The results of the research show that related party transactions do not have any significant effect on firm value however it indicates a positive impact. Moreover, related party transactions do not have any significant impact on earning management yet it gives a negative impact on earning management.Novelty â€" The influence of earnings management shows a positive impact on firm value while it shows no signs of positive impact on firm value. The analysis shows that the value of the indirect impact of related party transactions through earnings management towards firm value is negative being 0.022 smaller than the direct impact of related party transaction toward firm value which is 0.053. This indicates that related party transactions through earnings management have no significant impact on firm value.Type of Paper - Empirical.

The Optimal Extraction Rate Versus the Expected Real Return of a Sovereign Wealth Fund
Aase, Knut K.,Bjerksund, Petter
With reference to funds established for the benefits of the public at large, a university endowment, or other similar sovereign wealth fund, we demonstrate that the optimal extraction rate from the fund is significantly smaller than the expected real rate of return on the underlying fund. We consider the situation where the influx to the fund has stopped, it is in a steady state, and is invested broadly in the international financial markets. The optimal spending rate secures that the fund is a perpetuity, i.e., it will last 'forever', where the real value of the fund after payments is stationary, while spending according to the expected rate of return will deplete the fund with probability 1. Optimal portfolio choice and spending are then inconsistent. Our conclusions are contrary to the recommendations of an expert panel to the Norwegian Government Pension Fund Global, as well as at odds with part of the extant literature on the management of endowments of universities.

Value adjustments and dynamic hedging of reinsurance counterparty risk
Claudia Ceci,Katia Colaneri,Rdiger Frey,Verena Köck

Reinsurance counterparty credit risk (RCCR) is the risk of a loss arising from the fact that a reinsurance company is unable to fulfill her contractual obligations towards the ceding insurer. RCCR is an important risk category for insurance companies which, so far, has been addressed mostly via qualitative approaches. In this paper we therefore study value adjustments and dynamic hedging for RCCR. We propose a novel model that accounts for contagion effects between the default of the reinsurer and the price of the reinsurance contract. We characterize the value adjustment in a reinsurance contract via a partial integro-differential equation (PIDE) and derive the hedging strategies using a quadratic method. The paper closes with a simulation study which shows that dynamic hedging strategies have the potential to significantly reduce RCCR.

Vietnamese Commercial Banks and Corporate Governance
, Edward Bace
Objective - Corporate governance is a focus of bank managers and stakeholders, especially after the financial crisis. Contributing to firm and bank difficulties is weakness in managing internally and externally, making governance critical; even more so for banks which play a central role in the economy, allocating capital, lowering risk for businesses and individuals, and ensuring stability and sustainability. Bank failures in the crisis (2008-2016) highlighted governance and risk in developed nations and in developing ones, such as Vietnam. This paper studies governance in bank performance and risk, using theoretical frameworks and empirical study.Methodology â€" Fundamental governance is reviewed, for banks in particular, in two widely used frameworks. Prior research relates bank performance (share return and return on assets, ROA), risk (capital adequacy ratio, CAR) and governance (board size, BS; number of committees, NC; independent directors to total, NID).Findings â€" As our models show, NC and NID relate positively to bank performance. CAR has a positive link to governance.Novelty â€" Our recommendation is that banks in Vietnam must have effective boards to boost performance.Type of Paper - Empirical.