Research articles for the 2019-10-11

Attention, Psychological Bias, and Social Interactions (Presentation Slides, for Finance Theory Group Wharton Summer School (Long Version))
Hirshleifer, David A.
This is the long version of presentation slides on "Attention, Psychological Bias, and Social Interactions." Many of the psychological biases studied in behavioral finance derive from limited cognitive processing power. I will discuss a general framework for modeling limited attention and economic decisions, and applications to financial issues. I will then turn to how limited attention and other psychological factors bias the transmission of information and behaviors between financial decision makers. I will describe applications of these ideas to the evolution of agents’ beliefs, trading or project decisions, asset pricing and return anomalies, and consumption/saving decisions.

Attention, Psychological Bias, and Social Interactions (Presentation Slides, for Finance Theory Group Wharton Summer School)
Hirshleifer, David A.
Many of the psychological biases studied in behavioral finance derive from limited cognitive processing power. I will discuss a general framework for modeling limited attention and economic decisions, and applications to financial issues. I will then turn to how limited attention and other psychological factors bias the transmission of information and behaviors between financial decision makers. I will describe applications of these ideas to the evolution of agents’ beliefs, trading or project decisions, asset pricing and return anomalies, and consumption/saving decisions.

Beyond the Zero Lower Bound: Negative Policy Rates and Bank Lending
Tan, Garyn
How do banks operate in a negative policy rate environment? Bank profitability is threatened by policy rate cuts in negative territory because the zero lower bound on retail deposit rates prevents banks from benefiting from cheaper deposit funding costs. Contrary to some earlier research, this paper finds that banks most affected by negative rates through this retail deposits channel increase their lending relative to less affected banks. The response is limited to mortgage lending, and is driven by banks with high household deposit ratios and banks with high overnight deposit ratios. Overall, net interest margins are unaffected, which implies that the volume effect is large enough to offset the adverse impact on bank profitability. However, the positive effect on lending dissipates as negative rates persist. This suggests that although the "reversal rate" has not been breached, it may creep up over time as banks become more limited in their options to maintain profit margins. The results also point to an important role for bank capitalisation â€" net interest margins of relatively highly capitalised banks are squeezed, whereas the net interest margins of less capitalised banks are unaffected. This can be explained by differences in capacity for shock absorbency.

Bohai Industrial Investment Fund Management Company: From Start Up To Maturity â€" An Assessment
Dutta, Amitabh S.,Lai, Kun Peng,Su, Roger
This paper records the life of Bohai Industrial Investment Fund Management Company, the first private equity fund in China specifically created to help develop industrial manufacturing in a region in China. Bohai started up in 2006 and in the last twelve years moved from a slow start up through to a fast developing scale up and has finally arrived at a stable and mature phase in its life cycle. After documenting Bohai’s ups and downs, the authors conclude with a list of recommendations for other developing Chinese industrial PE firms.

Commercial Real Estate as an Asset Class
Ghent, Andra C.,Torous, Walter,Valkanov, Rossen I.
We survey the properties of commercial real estate (CRE) as an asset class. We first illustrate its importance relative to the US economy and to other asset classes. We then discuss CRE ownership patterns over time. While the academic literature has emphasized Real Estate Investment Trusts (REITs), about two thirds of CRE is owner-occupied. We next study the return properties of CRE indices, indices on particular property types, and discuss what is known about the returns to individual properties. We briefly discuss CRE debt before turning to property derivatives. Finally, we consider how including CRE in a portfolio affects the portfolio's performance.

Core Earnings: New Data and Evidence
Rouen, Ethan,So, Eric C.,Wang, Charles C. Y.
Using a novel dataset that comprehensively classifies the quantitative financial disclosures in firms' 10-Ks, including those hidden in the footnotes and the MD&A, we show that disclosures of non-operating and less persistent income-statement items are both frequent and economically significant, and increasingly so over time. Adjusting GAAP earnings to exclude these items creates a measure of core earnings that is highly persistent and that forecasts future performance. Analysts and market participants are slow to impound the implications of transitory earnings. Trading strategies that exploit cross-sectional differences in firms' transitory earnings produce abnormal returns of 7-to-10% per year.

Djibouti: A Hub for Expanding Islamic Finance Across ‘Horn of Africa’
Pasha, Azam
Islamic Finance is a growing rapidly across Africa, where around 40% of the population is Muslims and is now offered across 21 African countries, with one country leading the pack â€" Djibouti. Djibouti can be referred as ‘logistical and financial hub for East Africa’ due to its fast-growing port access and availability, progressive banking regulations and strong intra-regional connectivity with Ethiopia and other landlocked countries which have no or poor port access. Besides logistics, other sectors that continue to show significant growth in Djibouti include financial services, tourism, and hospitality, education and telecommunications. This article presents the status of Islamic finance in Djibouti, challenges it faces and its future in the region.

Enhancing Innovation in Germany by Strengthening the Growth Finance Ecosystem
Achleitner, Ann‐Kristin,Braun, Reiner,Behrens, Jan Henning,Lange, Thomas
Insufficient access to capital for high-tech growth companies is one of the key weaknesses of Germany’s innovation system. This weakness is becoming a serious competitive disadvantage, especially in the context of the radical technological innovation, new business models and rapid growth demanded by the digital transformation. In a joint project with KfW and Deutsche Börse, acatech brought together a range of actors from the financial sector with high-tech growth companies and representatives of academia and industry in order to carry out a detailed analysis of the status quo and formulate recommendations for government, academia and industry. The study’s recommendations are not confined to the mobilisation of traditional venture capital. They also highlight alternative forms of financing and in particular the interfaces between high-tech growth companies, established businesses and academic institutions. These interfaces are one important key to build a strong competitive position in Germany with regard to industrial digitalisation.

Extrapolative Expectations and the Equity Premium
Choi, James J.,Mertens, Thomas M.
Many stockholders irrationally believe that high recent stock market returns predict high future stock market returns. The presence of these extrapolators can help resolve the equity premium puzzle if the elasticity of intertemporal substitution (EIS) is greater than one. In our model, extrapolators’ overreaction to dividend news generates countercyclical expected returns while attenuating their consumption response. The equity premium is high because extrapolators believe stocks are a bad hedge and rational investors’ limited risk-bearing capacity prevents them from fully compensating for extrapolators’ reluctance to hold stocks. We match the U.S. data with a relative risk aversion of 4 and an EIS of 2.

Financial Constraints and Entrepreneurship: Evidence from Unemployment Insurance
Ferreira, Miguel A.,Lopes, Marta,Queiro, Francisco,Reis, Hugo
We study the effect of financial constraints on entrepreneurship using administrative data on a public program that allows Portuguese unemployed workers to collect the full amount of their unemployment benefits upfront in order to start a business. Exploiting age-based discontinuities in the amount of benefits, we find that an extra one thousand euros of funding increases entrepreneurship by 0.16 percentage points. The effect is stronger for incorporated entrepreneurs, especially for those in the top decile of the income distribution before unemployment. In addition, we find that the effect is more pronounced in the top quintile of the size distribution across all businesses and in the middle of the size, growth and profitability distributions among incorporated businesses. Our findings suggest that financial constraints hamper growth-oriented entrepreneurship.

Fundamental Factors Affecting The Moex Russia Index: Structural Break Detection In A Long-Term Time Series
Lozinskaia, Agata,Saltykova, Anastasiia
This paper studies how the influence of the fundamental factors on the Russian stock market changes retrospectively. We empirically test the impact of daily values of fundamental factors (indexes of foreign stock markets, oil price, exchange rate and interest rates in Russia and the USA) on the MOEX Russia Index over long time interval from 2003 to 2018. The analysis of the ARIMA-GARCH (1,1) model with a rolling window reveals the changes in the power and direction of the influence of the fundamental factors which are probably caused by the structural instability revealed earlier in Russia and other stock markets. The Quandt-Andrews breakpoint test and Bai-Perron test identify the number and likely location of the structural breaks. We find multiple breaks probably associated with dramatic falls in the stock market index, for example with the significant falls of the then MICEX index in the spring of 2006 and the global financial crisis of 2008-2009. The results of the regression models over the different regimes, defined by the structural breaks, can vary markedly over time.

Leverage Dynamics under Managerial Discretion
Wong, Tak-Yuen
This paper studies leverage dynamics when managers cannot commit to future financing and default policies ex-ante. Private benefits of control reduce managers' incentives to gradually increase debt over time. In the no-commitment equilibrium, agency conflicts limit the debt tax shields dissipated by excessive future leverage and impose negative trading externalities on shareholders. Shorter debt maturity reduces the costs of leverage ratcheting by disciplining the managers but increases default risks. Firms with strong governance and concentrated managerial ownership favor short-term debt, have low debt capacity, maintain high target leverage, and adjust debt level faster towards the target. Finally, firms with high agency costs remain unlevered persistently, suggesting a potential resolution for the zero leverage puzzle.

Modal, Tingkat Likuiditas Bank, NPL dan Pertumbuhan Kredit Perbankan Indonesia (Capital, Level of Liquidity, Npland Credit Growth of Indonesian Banks)
Setiawan, Rahmat,Pratama, Ahmad Aziz Putra
Indonesian Abstract: Tujuan dari penelitian ini adalah untuk menguji pengaruh modal bank terhadap pertumbuhan kredit dengan moderasi tingkat likuiditas dan kualitas kredit perusahaan perbankan yang terdaftar di Bursa Efek Indonesia (BEI). Penelitian ini menggunakan model regresi linier berganda dan Moderated Regression Analysis (MRA). Data diperoleh dari laporan keuangan perusahaan yang diterbitkan pada periode 2010-2016. Variabel dependen dalam penelitian ini adalah pertumbuhan kredit yang diproksi dengan Pertumbuhan Kredit Bersih. Variabel independen menggunakan modal bank diproksi dengan Capital Adequacy Ratio (CAR). Variabel moderasi dalam penelitian ini menggunakan tingkat likuiditas yang diproksi dengan rasio likuiditas dan kualitas kredit yang diproksi dengan Non Performing Loan (NPL). Selain itu, variabel pengendali dalam penelitian ini adalah ukuran perusahaan yang diproksikan dengan logaritma total aset. Hasil penelitian menunjukkan bahwa modal bank berpengaruh positif signifikan terhadap pertumbuhan kredit, sedangkan rasio likuiditas memperkuat pengaruh positif modal bank terhadap pertumbuhan kredit dan kredit macet memitigasi dampak positif modal bank terhadap pertumbuhan kreditEnglish Abstract: The purpose of this research is to examine the effect of bank capital on lending growth with moderation of liquidity level and credit quality of banking companies listed in Indonesia Stock Exchange (IDX). This study used multiple linear regression model and Moderated Regression Analysis (MRA). Data obtained from the company’s financial report published in 2010-2016 period. Dependent variable in this research is lending growth proxied with Net Loans Growth. Independent variable used bank capital proxied with Capital Adequacy Ratio (CAR). Moderating variables in this research used liquidity level proxied with liquidity ratio and credit quality proxied with non performing loan (NPL). In addition, controlling variable in this study is firm size proxied with logarithm of total assets. The results showed that bank capital has significant positive effect on lending growth, while the liquidity ratio strengthens positive effect of bank capital on lending growth and non performing loan mitigates positive effect of bank capital on lending growth.

Private Policies and Public Power: When Banks Act as Regulators within a Regime of Privilege
Knight, Brian,Mitchell, Trace
An emerging trend in financial services is banks’ increasingly common refusal to do business with industries for political reasons rather than for traditional business justifications. Banks’ refusals are often explained by a desire to make a difference or send a message. While this desire may not raise a concern in most cases, banks are not like most other businesses. Banks enjoy an extensive regime of privilege provided by federal and state governments that includes barriers to market entry and exit, more favorable regulatory treatment than nonbank competitors in some areas, and direct and privileged access to services provided by the government. This paper asks whether this public power, granted to banks for the purposes of facilitating lawful commerce, is being misused when banks try to regulate downstream markets through withholding services and what, if anything, should be done to address these actions by banks.

Stewardship Code, Institutional Investors, and Firm Value: International Evidence
Shiraishi, Yutaro,Ikeda, Naoshi,Arikawa, Yasuhiro,Inoue, Kotaro
This study investigates whether the stewardship code mitigates the free-rider problem of institutional investors. We construct panel data of listed firms in 56 countries and examine the effects of the introduction of stewardship codes in 13 countries using a difference-in-differences approach. Our results show that the introduction of the stewardship code in a country increases the value of firms with high institutional ownership. It also mitigates the free cash flow problem of the portfolio firms with low investment opportunities. To the best of our knowledge, this is the first study that provides international evidence that stewardship codes are effective in enhancing monitoring by institutional investors.

The Index Effect in the Corporate Bond Market
Franz, Friedrich-Carl
I find large and statistically significant abnormal returns of USD-denominated corporate bonds, which got up- or downgraded to or from the Bloomberg Barclays Investment Grade and High Yield Index from 2012 to 2018. Downgrades face a strong negative pre-announcement drift with a subsequent reversal. For upgrades, the drift is smaller in magnitude and the reversal non-existent. In contrast to the pre-announcement drift, the reversal seems to be related to price pressure, which is caused by index-linked trading. This hypothesis is supported by an analysis of actual ETF trading behavior with respect to credit rating changes.

Toward Fair and Sustainable Capitalism: A Comprehensive Proposal to Help American Workers, Restore Fair Gainsharing Between Employees and Shareholders, and Increase American Competitiveness by Reorienting Our Corporate Governance System Toward Sustainable Long-Term Growth and Encouraging Investments in America’s Future
Strine Jr. , Leo E.
To promote fair and sustainable capitalism and help business and labor work together to build an American economy that works for all, this paper presents a comprehensive proposal to reform the American corporate governance system by aligning the incentives of those who control large U.S. corporations with the interests of working Americans who must put their hard-earned savings in mutual funds in their 401(k) and 529 plans. The proposal would achieve this through a series of measured, coherent changes to current laws and regulations, including: requiring not just operating companies, but institutional investors, to give appropriate consideration to and make fair disclosure of their policies regarding EESG issues, emphasizing “Employees” and not just Environmental, Social, and Governance” factors; giving workers more leverage by requiring all societally-important companies to have board level committees charged with ensuring fair treatment of employees, authorizing companies to use European-style works’ councils to increase employee voice, and reforming labor laws to make it easier for workers to join a union and bargain for fair wages and working conditions; reforming the corporate election system so that voting occurs on a more rational, periodic, and thoughtful basis supportive of sustainable business practices and long-term investment; improving the tax system to encourage sustainable, long-term investment and discourage speculation, with the resulting proceeds being used to revitalize and green America’s infrastructure, tackle climate change, invest in American workers’ skills, transition workers from carbon-intensive industries to jobs in the clean energy sector; and taking other measures, such as reform of corporate political spending and forced arbitration, to level the playing field for workers, consumers, and ordinary investors.

Varying Levels of Difficulty in L2 Reading Materials in the EFL Classroom: Impact on Comprehension and Motivation
Namaziandost, Ehsan
In this project, 54 Iranian pre-intermediate EFL learners (16 to 21 years)participated in 15 sessions in which they were asked to read and study books from a structured series of L2 reading materials. Half the students studied with relatively easy materials (‘i âˆ' 1’), that is, materials rated as being below their competency level. The others studied with reading materials rated at slightly above their competency level at the outset (‘i + 1’). Using a before and after design, students were retested after 15 weeks. On a test of L2 reading comprehension, means testing revealed both groups showed marked increases, but the ‘i + 1’ group was higher than the other group (effect size 1.1). On an assessment of reading motivation, the ‘i+ 1’ group increased significantly, whereas the other group showed no change(effect size 1.58). We suggest that, under supporting conditions, there can be clear benefits for EFL learners to spend time mastering L2 materials above their level of competency

What Matters to Individual Investors? Evidence from the Horse’s Mouth
Choi, James J.,Robertson, Adriana
We survey a representative sample of U.S. individuals about how well leading academic theories describe their financial beliefs and decisions. We find substantial support for many factors hypothesized to affect portfolio equity share, particularly background risk, investment horizon, rare disasters, transactional factors, and fixed costs of stock market participation. Individuals tend to believe that past mutual fund performance is a good signal of stock-picking skill, actively managed funds do not suffer from diseconomies of scale, value stocks are safer and do not have higher expected returns, and high-momentum stocks are riskier and do have higher expected returns.