Research articles for the 2019-10-24

Audit Fees under Alternative Goodwill Accounting Approaches: Evidence from the Adoption of the Impairment-Only Approach in Australia
Kabir, Humayun,Rahman, Asheq
The International Accounting Standards Board (IASB) constituents expressed concerns about the cost of the impairment-only approach for goodwill accounting under International Financial Reporting Standards (IFRSs). Considering these concerns, the IASB is now reviewing the approach. Motivated by this debate, we examine the association between goodwill and audit fee under two alternative goodwill accounting approaches in Australia â€" the dual approach under pre-IFRSs Australian Generally Accepted Accounting Principles and the impairment-only approach under IFRSs. We find that goodwill does not have an audit fee-increasing impact under the impairment-only approach than under the dual approach. This result is robust across alternative variable measurements, alternative samples and alternative models. The result is of potential interest to the IASB and its constituents.

Blockchain: An Unorthodox Solution to Reduce Global Warming
Taskinsoy, John
Global warming is likely to have unimaginable disruptions in every aspect of human life by 2050 if some actions are not taken immediately to reduce its fast acceleration. Since the Industrial Revolution (1900s), the global mean surface temperature has warmed up approximately +0.8 °C (1.4 °F) due to past and ongoing human-induced emissions of greenhouse gasses as a result of burning of fossil fuels. Scientists and environmentalists warn that if nothing is done in the next decade to deal with climate changes, the global warming may accelerate to around 1.5 °C by 2050, which may lead to climate changes with catastrophic consequences. Blockchain is not confined to cryptocurrencies and can help reduce current levels of human-produced carbon dioxide, methane, and nitrous oxide resulting from activities involving factory farming, livestock farming, and deforestation which are releasing huge amounts of greenhouse gases that suffocate the atmosphere. This paper looks at blockchain and the planet by examining how a wide range of opportunities offered by this revolutionary technology could be harnessed to address global warming challenges.

Changes in the Behavior of Stocks Returns during the Turn-of-the-Quarter
Dumitriu, Ramona,Stefanescu, Razvan
Some calendar anomalies are not persistent in time. They experience various changes, including the modifications on their specific time intervals. This paper approaches the persistence in time of the abnormal returns of stock returns from United States capital market during the turn-of-the-quarter interval. We employed the data from three major indexes (Standard & Poor's 500, Dow Jones Industrial Average and NASDAQ Composite) during two periods: a relative quiet period from January 1990 to December 2006 and a more turbulent period from January 2007 to July 2019. For the first period we found, for two of the three indexes, that, comparing with the average, the returns from the last trading day of a quarter were significant lower, while the returns from the first trading day of a quarter were significant higher. In the case of second period the results indicate that, for all three indexes, comparing with the average, the returns from the last fifth and fourth trading day of a quarter were significant lower, while the returns from the first trading day of a quarter were significant higher.

Climate Regulation and Emissions Abatement: Theory and Evidence from Firms’ Disclosures
Ramadorai, Tarun,Zeni, Federica
We use data from the Carbon Disclosure project (CDP) to measure firms’ beliefs about climate regulation, their plans for future abatement, and their current actions on mitigating carbon emissions. These measures vary both across firms and time in a manner that is especially pronounced around the Paris climate change agremeent announcement. A simple dynamic model of carbon abatement with a firm exposed to a certain future carbon levy, facing a trade-off between emissions reduction and capital growth, and convex emissions abatement adjustment costs cannot explain the data. A more complex two-firm dynamic model with both information asymmetry across firms and reputational concerns fits the data far better. Our findings imply that firms’ abatement actions depend greatly on their beliefs about climate regulation, and that both informational frictions and reputational concerns can amplify responses to climate regulation, increasing its effectiveness.

Cross-Asset Market Order Flow, Liquidity, and Price Discovery
Garrison, Robert,Jain, Pankaj K.,Paddrik, Mark E.
Cross-asset market activity can be a channel through which illiquidity risks originating in one market can propagate to others. This paper examines the complex intra-day linkages between the U.S. equity securities market and the equity derivatives market using high-frequency data on S&P 500 index exchange-traded funds and E-mini futures contracts. The paper finds a positive, but short-lived, relationship between the two markets' order flow activities, which relates to the supply, demand, and withdrawal of liquidity between the two markets. The paper also finds that cross-asset market order flow is a key component of liquidity and price discovery, particularly during periods of market volatility.

De-Risking or Re-Contracting the Way around Money Laundering Risks
Rose, Kalle Johannes
Recent research and market effects within the European Union show a rising concern towards the derisking of certain sectors/actors due to the increased anti-money laundering regulation. Because of the enhanced due diligence and monitoring costs related to anti-money laundering and counter-terrorist financing regulation by the AMLD4, several financial institutions now turn to de-risking their corporate client base in order to minimize not only costs from monitoring and onboarding but also the risks of sanctions and reputation. The purpose of this paper is to analyze the incentives behind de-risking as well as the relevant solution models to the de-risking “crisis”. Overall, to find, to what extend de-risking is efficient and when it is not and how to mitigate the concept. The paper applies a functional approach to law and economics with the aim of reaching a higher level of efficiency in combatting money laundering through analyzing present regulatory and economic conditions. It is found that de-risking within the European Union opposes the aim of the present regulatory scheme regarding anti-money laundering. The paper finds that it is needed to divide the analysis of de-risking to a national and regional level. Additionally, the paper establishes that the present strategy of de-risking at national level eventually will result in enhanced regulation to fulfill the aim of the present regulatory framework, which is why a proactive approach by recontracting the client base is recommended. At a regional level, it is found that de-risking is valid, why a solution needs to come from the EU enhancing control, monitoring and sanctions to establish trust and the possibility for financial inclusion.

Detecting a Structural Change in Functional Time Series Using Local Wilcoxon Statistic
Daniel Kosiorowski,Jerzy P. Rydlewski,Małgorzata Snarska

Functional data analysis (FDA) is a part of modern multivariate statistics that analyses data providing information about curves, surfaces or anything else varying over a certain continuum. In economics and empirical finance we often have to deal with time series of functional data, where we cannot easily decide, whether they are to be considered as homogeneous or heterogeneous. At present a discussion on adequate tests of homogenity for functional data is carried. We propose a novel statistic for detetecting a structural change in functional time series based on a local Wilcoxon statistic induced by a local depth function proposed by Paindaveine and Van Bever (2013).

Does Independent Advice to The Board Affect CEO Compensation?
Bakke, Tor-Erik,Mahmudi, Hamed
This paper investigates the role external advice plays in the board’s determination of CEO compensation. We show that CEO incentive pay increases with the degree of compensation consultant independence using a quasi-natural experiment provided by the creation of an independent consultant after separation from an affiliated consultant. Specifically, switching to an independent consultant significantly increases Pay-Performance Sensitivity and Relative Performance Evaluation of CEO contracts. Despite the benefits of independent advice, independent consultants may not be hired due to the influence of powerful CEOs or because boards already possess adequate expertise.

Does Mutual Fund Family Size Matter? International Evidence
Miguel, Antonio F.,Xiayue, Liu
We use data from 33 countries to study how a fund’s affiliation with large families impacts the shape of the flow-performance relationship. Our results show that family size affects the response of fund flows to performance differently depending on the sophistication of the investors. While less sophisticated investors are swayed by the visibility of funds affiliated with large and established families, more sophisticated investors are not. Affiliation with a large family increases the convexity of the flow-performance relationship in countries where investors are less sophisticated, but it decreases the convexity of the flow-performance relationship in countries with more sophisticated investors.

Does Sensationalism Affect Executive Compensation? Evidence from Pay Ratio Disclosure Reform
Chang, Wonjae,Dambra, Michael,Schonberger, Bryce,Suk, Inho
Beginning in 2018, U.S. public firms were required to report the ratio of the chief executive officer’s (CEO) compensation to their median employee’s compensation in the annual proxy statement. We find that this pay ratio disclosure leads to declines in both total compensation and pay-for-performance sensitivity for CEOs relative to chief financial officers. Our results are stronger for firms that are more sensitive to populist political pressure. Consistent with popular press coverage playing a role in influencing firm responses to the standard, firms disclosing higher pay ratios garner more compensation-related media coverage around the filing of their annual proxy statements and display negative abnormal returns around proxy filings in the presence of elevated media coverage.

Dual representations for systemic risk measures based on acceptance sets
Maria Arduca,Pablo Koch-Medina,Cosimo Munari

We establish dual representations for systemic risk measures based on acceptance sets in a general setting. We deal with systemic risk measures of both "first allocate, then aggregate" and "first aggregate, then allocate" type. In both cases, we provide a detailed analysis of the corresponding systemic acceptance sets and their support functions. The same approach delivers a simple and self-contained proof of the dual representation of utility-based risk measures for univariate positions.

Financial Literacy and Self-Control in FinTech: Evidence from a Field Experiment on Online Consumer Borrowing
Bu, Di,Hanspal, Tobin,Liao, Yin,Liu, Yong
We report the results of a longitudinal intervention with students across five universities in China designed to reduce online consumer debt. Our research design allocates individuals to either a financial literacy treatment, a self-control training program, or a zero-touch control group. Financial education interventions improve test scores on general financial literacy but only marginally affect future online borrowing. Our self-control treatment features detailed tracking of spending and borrowing activity with a third-party app and introspection about individuals' consumption with a counselor. These sessions reduce future online borrowing, delinquency charges, and borrowing for entertainment reasons - and are driven by the male subjects in the sample. Our results suggest that self-regulation can affect financial behavior in e-commerce platforms.

Fragmentation of Distributed Exchanges
Zoican Marius,Zoican Sorin

Distributed securities exchanges may become de facto fragmented if they span geographical regions with asymmetric computer infrastructure. First, we build an economic model of a decentralized exchange with two miner clusters, standing in for compact areas of economic activity (e.g., cities). "Local" miners in the area with relatively higher trading activity only join a decentralized exchange if they enjoy a large speed advantage over "long-distance" competitors. This is due to a transfer of economic value across miners, specifically from high- to low-activity clusters. Second, we estimate the speed advantage of "local" over "long-distance" miners in a series of Monte Carlo experiments over a two-cluster, unstructured peer-to-peer network simulated in C. We find that the speed advantage increases in the level of infrastructure asymmetry between clusters. Cross-region DEX blockchains are feasible as long as the asymmetry levels in trading activity and infrastructure availability across regions are positively correlated.

Global Financial Inclusion Environment: The Nexus to India
C, Viswanatha Reedy
Financial inclusion can really pick up the financial conditions and standards of living of the disadvantaged groups. Various countries are promoting financial inclusion across the world. The list includes Peru, Colombia, Philippines, Pakistan, Chile, Tanzania, Bolivia, Mexico, Bangladesh, South Africa, Kenya and Brazil. Particularly, Brazil has succeeded in financial inclusion using Business Correspondent Model. India also has a similar demographic profile can emulate the policies as successfully as implemented by Brazil. Financial inclusion has been accorded high importance by the Reserve Bank to aid the inclusive growth process of the economy. There have been formidable challenges in this area such as bringing sections of society that are financially excluded within the ambit of the formal financial system, providing financial literacy and strengthening credit delivery mechanisms. The present paper explains the Financial Inclusion: Global Scenario, Financial Inclusion Environment Ranking Methodology, Region-wise trend analysis of Average Financial Inclusion Index, Current Scenario of Financial Inclusion in India, Key Parameters of Financial Inclusion in India, Trends in India’s overall Financial Inclusion Index Score, Challenges of Financial Inclusion in India and the measures to overcome such challenges.

Go Active or Stay Passive: Investment Trusts, Financial Innovation and Diversification in Belgium’s Early Days
Annaert, Jan,Verdickt, Gertjan
In 1836, Société Générale created the world’s first closed-end equity fund. Banque de Belgique immediately followed. Both trusts were marketed as cheap diversification tools for less-wealthy investors, who were generally underdiversified in the pre-World War I period. We study to what extent these trusts kept their promise. On average, they outperform randomly created portfolios with little diversification, at least when investors select stocks either from the entire stock market universe or from the set of low-priced stocks, suggesting that the trusts upheld their informal mandate. In contrast, when we compare with portfolios of high-priced stocks, which are less accessible to small investors, the trusts underperformed. These conclusions hold for a wide set of performance measures. We conclude that the trusts did not offer the diversification benefits that were mainly attainable for wealthy investors. In fact, this could potentially explain why investors held underdiversified portfolios.

Is Fin-Tech the New Panacea for Poverty Alleviation and Local Development? Contesting Suri and Jack’s M-Pesa Findings Published in Science
Bateman, Milford,Duvendack, Maren,loubere, nicholas
Financial technology, or simply ‘fin-tech’, is increasingly seen as one of the key tools to facilitate poverty reduction and local economic development. One article in particular by Tavneet Suri and William Jack published in the leading publication Science has played a hugely influential role in promoting the fin-tech model in the global South using the example of Kenya’s iconic M-Pesa money transfer platform. The authors’ central claim is that M-Pesa has been instrumental in facilitating a major episode of poverty reduction. Our analysis shows that their analysis and claims are extremely problematic.

Measurement of Extreme Market Risks: An Empirical Analysis Across Asset Classes and Financial Markets
Sharma, Nitish
Financial Risk Management (FRM) crucially relies on the distributional assumptions of asset returns. In this paper, we apply methods from extreme value theory (EVT) to examine the limiting distribution of large returns across asset classes viz equities, bonds, foreign exchange, and commodities selected from mature, emerging and frontier markets across geographies namely Americas, Europe, Asia, and Middle East and Africa (MEA). Our initial findings suggest that the much heralded generalized extreme value (GEV) and generalized pareto (GP) distribution may not most precisely represent the distribution of extreme gains and losses; rather the generalized logistic (GL) distribution may be a superior candidate distribution owing to its improved fit with tail returns. We try to add to the robustness checks of our empirical findings by highlighting the time-varying characteristics of our distributional parameters. Furthermore, we argue that the empirical results may have substantive inferences for risk modeling, especially that for tail risk measures viz Value-at-Risk (VaR) and Expected Shortfall (ES). This is important since the market risk models that cannot accurately estimate the fat tails of asset returns’ distribution can severely underestimate (downside) tail risk to possible catastrophic detriment of investors.

Mimicking Tax Strategies: Evidence from IPOs
Chyz, James,Henry, Erin,Omer, Thomas C.,Wu, Biyu
We examine whether incumbent firms react to significant IPOs in the same industry by adjusting their tax policy to align with the tax outcomes of the IPO firm. We find that incumbent firms adjust their effective tax rate in response to the difference between it and the effective tax rate of the IPO. Our results are strongest when incumbent firms have greater incentive and ability to mimic the IPO firm’s effective tax rate. We also document that the response of incumbent firms to an IPO is more pronounced for GAAP effective tax rates in some subsets of firms. We contribute to an IPO literature that focuses almost exclusively on the IPO firm itself by showing that an IPO firm can affect the tax policies of incumbent firms within its industry, and to the literature examining the effect of peers on firms’ tax policy.

Novos Índices Contábeis Para Avaliar a Qualidade de Demonstrativos Financeiros ('New Accounting Indices to Evaluate the Quality of Financial Statements')
Henriques-de-Brito, Marcelo,Gomes de Mello Moraes, Ana Beatriz,Ulysses Ferreira Coelho, Claudio,Guerra Ramos, Bruno
Portuguese Abstract: Este artigo propõe um novo método para medir a qualidade dos resultados de demonstrativos financeiros após desenvolver um procedimento descrito por Ciesielski (2017). Trata-se de uma metodologia modificada e ampliada visto que acrescenta à proposta original dois índices adicionais, além de propor acrônimos para os indicadores, parâmetros e índices, os quais facilitam o manuseio de dados e a interpretação dos resultados. A aplicação do novo método considerou dados trimestrais entre 2012 a 2018 para as empresas Petrobras, Vale,Usiminas, Eternit e OGX. O método exposto neste artigo e que foi denominado CFAM baseia-se na avaliação quantitativa da extensão do descasamento entre os fluxos de caixa eos registros dos lançamentos contábeis por competência. A identificada tendência de regressão à média (valor zero) do índice ARAD proposto neste artigo possibilita constatar a utilidade deste índice como uma ferramenta para avaliar a qualidade de demonstrativos financeiros. Os resultados apresentados de longas séries históricas de diversas empresas revelam que o Método CFAM de análise contábil parece ser uma ferramenta eficaz para avaliar a credibilidade de resultados de demonstrativos financeiros e até para detectar antecipadamente eventuais problemas ou mesmo possíveis manipulações.English Abstract: This paper introduces a new method for measuring the quality of financial statements after developing a procedure that is described by Ciesielski (2017). There is a modified and expanded method, since it adds to the original procedure two additional indices, besides proposing acronyms for the indicators, parameters and indices, which facilitate both data handling and the interpretation of the results. The application of the new method employed quarterly data from 2012 to 2018 for the companies: Petrobras, Vale, Usiminas, Eternit and OGX. The method described in this article, which was called CFAM, is based on the quantitative assessment of the extent of mismatch between cash flows and accrual accounting entries. The identified trend of regression to the mean (zero value) of the ARAD index introduced in this paper makes it possible to verify the usefulness of this index as a tool to evaluate the quality of financial statements. The presented results using long historical series of several companies reveal that the CFAM Method for accounting analysis seems to be an effective tool to evaluate the credibility of financial statement results and even to detect in advance possible problems or even possible manipulations.The procedure exemplified by CIESIELSKI (2017) that inspired this article is amid a required reading in the CFA Program Curriculum Level II (offered by CFA Institute), noting that the CIESIELSKI procedure (2017) is illustrated with data from Nestlé annual financial statements in the context of a case study "without anomalies”. On the other hand, this article presented at EnANPAD 2019 adds to the original proposal two additional indices, suggests acronyms for the indicators, parameters and indices, and illustrates the denominated “CFAM Method” ("Cash Flow Accruals Method", with data from quarterly financial statements of “controversial” companies listed on the Brazilian stock exchange B3, being hence more than that a simple application of the procedure applied by CIESIELSKI (2017), because there is an additional creative process.

On the Equivalence of Private and Public Money
Brunnermeier, Markus K.,Niepelt, Dirk
When does a swap between private and public money leave the equilibrium allocation and price system unchanged? To answer this question, the paper sets up a generic model of money and liquidity which identifies sources of seignorage rents and liquidity bubbles. We derive sufficient conditions for equivalence and apply them in the context of the "Chicago Plan", cryptocurrencies, the Indian de-monetization experiment, and Central Bank Digital Currency (CBDC). Our results imply that CBDC coupled with central bank pass-through funding need not imply a credit crunch nor undermine financial stability.

On the Link between the Volatility and Skewness of Growth
Bekaert, Geert,Popov, Alexander A.
In a sample of 110 countries over the period 1960-2009, we document a positive relation between the volatility and skewness of growth in the cross-section. This novel stylized fact is related to two distinct mechanisms: sudden growth spurts in emerging markets, and sharp financial crises-driven recessions in developed economies. The former phenomenon is driven by industrialization, macroeconomic stabilization, and the exploitation of natural resources. The latter is consistent with recent theories of financial frictions. The cross-sectional pattern contrasts with a negative relation between volatility and skewness in panel data with country fixed effects in the top quartile of countries in terms of beginning-of-period GDP per capita.

Optimization of the post-crisis recovery plans in scale-free networks
Mohammad Bahrami,Narges Chinichian,Ali Hosseiny,Gholamreza Jafari,Marcel Ausloos

General Motors or a local business, which one is better to be stimulated in post-crisis recessions, where government stimulation is meant to overcome recessions? Due to the budget constraints, it is quite relevant to ask how one can increase the chance of economic recovery. One of the key elements to answer this question is to understand metastable features of the economic networks. Ising model has been suggested for studying such features in the literature. In the homogenous networks one needs at least a minimum activation, forcing an Ising network to switch its local equilibria, where such minimum is independent of the nodes characteristics. In the scale free networks however, when one aims to push the network to switch its vacuum, she faces the question of which nodes are better to be stimulated to minimize the cost. In the paper it has been shown that stimulation of the high degree nodes costs less in general. Despite regular networks, in the scale free networks, the stimulation cost depends on the networks features such as assortativity. Though we have utilized the Ising model to tackle a problem in economics, our analysis shed lights on many other problems concerning stimulations of socio-economic systems.

Patent Trolls and the Market for Acquisition
Dayani, Arash
Frivolous patent-infringement claims increase the cost of innovation for small businesses and thus force them to exit via premature and/or discounted acquisitions. This study investigates the effect of abusive patent-infringement claims by patent trolls on acquisitions of small firms. I exploit the staggered adoption of anti-patent troll laws in 35 states as a quasi-natural experiment and find that the adoption of state laws that hamper the activities of patent trolls has two effects. First, the acquisition rate of small businesses by large firms declines after these laws are passed. Second, the anti-troll laws increase the cost of acquisition for large firms. I find that the market reflects the increased cost of acquisition following the passage of anti-troll laws as reflected in the lower acquisition announcement returns. Using a sample of subsidiary acquisitions, I disentangle alternative explanations of local economic shocks, industry-wide changes and merger waves. Overall, the findings suggest that the state laws increase the value of small innovative firms.

Relative Net Utility and the Saint Petersburg Paradox
Daniel Muller,Tshilidzi Marwala

The famous St Petersburg Paradox shows that the theory of expected value does not capture the real-world economics of decision-making problem. Over the years, many economic theories were developed to resolve the paradox and explain the subjective utility of the expected outcomes and risk aversion. In this paper, we use the concept of the net utility to resolve the St Petersburg paradox. The reason why the principle of absolute instead of net utility does not work is because it is a first order approximation of some unknown utility function. Because the net utility concept is able to explain both behavioral economics and the St Petersburg paradox it is deemed a universal approach to handling utility. Finally, this paper explored how artificial intelligent (AI) agent will make choices and observed that if AI agent uses the nominal utility approach it will see infinite reward while if it uses the net utility approach it will see the limited reward that human beings see.

Skewness, Cryptocurrency, and Peer-To-Peer Loans: An Asset Allocation Exercise for a Unique Student-Managed Fund
Livingston, Lynda S.
We incorporate skewness and kurtosis into an optimization process for a unique student-managed fund. Unlike the vast majority of such funds, which hold only equity, our fund includes REITs, cryptocurrency, and peer-to-peer loans. Adding these unusual asset classes allows our students to explore portfolio management concepts more generalizable than just picking stocks. While most of our assets cannot be recommended based solely on traditional mean-variance analysis, they nonetheless offer beneficial contributions. Using polynomial goal programming to incorporate higher moments in our optimization, we find that asset classes dominated in mean-variance space can make meaningful contributions to the full risk-return profile of the portfolio. In particular, we find that including cryptocurrency and peer-to-peer loans can increase the skewness and decrease the kurtosis of our portfolio.

Stakeholder Salience, Positive Csr News and the Market Value of Banks
Perez, Andrea,Lopez-Gutiérrez, Carlos ,García de los Salmones, Mª del Mar,San-Martin, Paula
This research explores the effects that media coverage of corporate social responsibility (CSR) news related to investor, customer, employee and community issues has on the market value of Spanish banks, measured as the impact generated in abnormal returns for these companies. We use an event study with a sample of 190 positive CSR articles published online between 2015 and 2018 in the most important Spanish business newspaper according to its diffusion rate. The findings demonstrate that positive CSR news related to investor, customer, employee and community issues generates positive abnormal returns for listed banks. In the [-1,+1] window, positive investor news has notably larger effects on the abnormal returns for these companies than positive news related to customer, employee and community issues, which have similar effects.

Strategic Decisions in Takeover Auctions
Eckbo, B. Espen,Malenko, Andrey,Thorburn, Karin S.
This essay reviews selected theories and empirical evidence describing how bidders and targets navigate four complex decisions involved in any corporate takeover attempt: (1) deal initiation, (2) pre-offer toehold acquisition, (3) offer price and revisions, and (4) the method of payment. We focus in particular on how first-price or English (ascending price) auctions with two competing bidders and a single (pivotal) seller help understand bidder and target incentives in each of these strategic decisions. While largely descriptive of tender offers for control, the auction framework also helps explain choices made in takeover negotiations where the outside option is the outcome of an open auction. Empirical findings include the following key observations: (1) A large fraction of control bids for public targets - about 50% - are initiated by the target and not the bidder. (2) Notwithstanding takeover premiums averaging 40+%, only a small fraction (less than 5%) of bidders acquire a partial ownership position (a toehold) in the target prior to bidding. However, when they do acquire a toehold, it is large (on average 20%). (3) Rival bids are observed in less than 10% of the contests, suggesting that the initial public bid deters further competition. When rival bidder do enter the auction, they do so surprisingly quickly - within two weeks of the initial bid on average - suggesting that bidder valuations are correlated. Bid jumps are large (around 30%), consistent with significant bidding costs. The evidence also supports the hypothesis that the pre-offer runup in the target's stock price includes an element of rational deal anticipation by the market, and that the runup is understood as such by the two parties in merger negotiations. (4) Contrary to theories of bidder opportunistic behavior, the likelihood that a given deal is paid in bidder stock is higher when the target is highly informed about the bidder's operations and so able to value the bidder shares more precisely. This evidence supports the (nested) alternative theory that the bidder's preference to pay in stock rather than in cash is driven by concerns with adverse selection on the target side of the deal. Also, the initial market reaction to the stock payment decision is such that there is no evidence of subsequent abnormal long-run performance for long-short portfolios sorted on cash- versus stock as the payment method.

Textual Analysis in Finance
Loughran, Tim ,McDonald, Bill
We begin this paper by updating recent reviews of textual analysis in finance while focusing on a few broad topics â€" social media and detecting fraud â€" and then discuss a central methodological issue of how lexicons should be constructed. We next center the discussion on readability as an attribute frequently incorporated in contemporaneous research, arguing that its usage begs the question of what we are measuring. Finally, we discuss how the literature might build on the intent of readability to measure something more appropriate and more broadly relevant â€" complexity.

The Case for Individual Audit Partner Accountability
Honigsberg, Colleen
Despite repeated regulatory interventions, accounting failures continue to persist in companies around the world. In this Article, I explain why current law, private enforcement, and firm-level reputational sanctions are unlikely to induce accountants to take optimal levels of care when auditing corporate financials. Instead, our best chance for improving audit quality lies in establishing a market for individual audit partners’ brands â€" a market that can hold individual auditors responsible for their mistakes.The Article begins by identifying four key benefits to this approach. First, forcing auditors to be publicly associated with any audit failures occurring on their watch will induce them to increase their effort in order to avoid the stigma of failure. Second, now that a significant portion â€" frequently more than halfâ€"of audit hours are performed overseas, holding a single individual publicly accountable for any audit failures will improve monitoring of auditors in other jurisdictions. Third, in light of significant evidence of variation in the quality of audit partners â€" even partners within the same firm â€" exposing that heterogeneity will empower members of audit committees and investors to choose auditors more carefully. Finally, commoditizing individual auditors could increase industry competition without the need for aggressive regulatory action.The Article then argues that, in order to spur the development of a market in auditor reputation, lawmakers should encourage the development of Auditor Scorecards. To do so, regulators should require the disclosure of additional auditor-level information, and should ensure useful information is provided through enforcement actions. Although there are costs to these changes, those costs are likely to be outweighed by giving investors the information they need to develop a common Scorecard for auditor quality. Such Scorecards will help boards and investors make better use of the legal tools already at their disposal to hold auditors accountable when they fail in their gatekeeping function.

The Impact of Fund and Managerial Heterogeneities on Mutual Fund Performance
Wang, Diamond
Recent studies on the mutual fund industry have examined the influence of attributes of mutual funds and individual mutual fund managers on fund outcomes. However, few studies focus on the impact of the unobservable fund and managerial attributes. In this study, I use estimated fund manager and family fixed effects to investigate the impact of unobservable attributes of fund managers on future fund performance. Using U.S. mutual fund and manager information obtained from Morningstar Direct, I find that future investor fund flows respond positively to manager and family performance fixed effects. Also, I find some evidence that funds with higher alpha-based manager and family effect estimates are associated with superior fund performance.

The Innovation Consequences of Mandatory Patent Disclosures
Kim, Jinhwan,Valentine, Kristen
We investigate the effect of patent disclosures on corporate innovation. Using the American Inventor’s Protection Act (AIPA) as a shock that increased patent disclosures, we find an increase in innovation for firms whose rivals reveal more information after the AIPA and a decrease in innovation for firms whose own disclosures are divulged to competitors as a result of the law. These findings suggest patent disclosures generate both spillover benefits and proprietary costs. Further, we find that firms use strategic disclosure choices allowed by patent law in an attempt to mitigate proprietary costs. Our findings provide justification for patent disclosure requirements by demonstrating positive externalities: rivals’ disclosures facilitate a firm’s innovation. However, we also highlight that mandatory patent disclosure can impose proprietary costs on firms that are not fully mitigated by strategic disclosure responses.

The Life of the Counterparty: Shock Propagation in Hedge Fund-Prime Broker Credit Networks
Kruttli, Mathias S.,Monin, Phillip,Watugala, Sumudu W.
The collapse of Lehman Brothers illustrated the importance of managing prime broker counterparty risks for hedge funds. Liquidity shocks to prime brokers can lead to cycles of deleveraging that produce losses at funds and potentially have harmful effects on financial market function and credit provision. While the hedge fund-prime broker credit network is highly concentrated, the average hedge fund in our sample borrows from three prime brokers and has a total credit exposure of $2.15 billion. We show that hedge fund borrowing tends to be overcollateralized and most of the collateral is allowed to be rehypothecated. Using a within fund-quarter empirical strategy, we identify the effects of an idiosyncratic liquidity shock to a major creditor. Such a shock results in significantly reduced borrowing due to the prime broker reducing credit supply instead of a precautionary reduction in credit demand from connected hedge funds. Borrowing by funds with more rehypothecable collateral is less affected because such collateral improves the constrained creditor's liquidity situation. Even large hedge funds simultaneously borrowing from multiple creditors see a significant reduction in their aggregate borrowing following the shock. Larger, more connected and better-performing hedge funds and those that do less OTC trading are better able to compensate for this loss.

The Other Side of the Coin: Risks of the Libra Blockchain
Abraham, Louis,Guegan, Dominique
Libra was presented as a cryptocurrency on June 18, 2019 by Facebook. On the same day, Facebook announced plans for Calibra, a subsidiary in charge of the development of an electronic wallet and financial services. In view of the primary risk of sovereignty posed by the creation of Libra, the Central Banks quickly took very clear positions against the project and adressed a lot of questions to the responsible of the project focusing on regulation aspects and national sovereignty. The purpose of this paper is to provide a holistic analysis of the project to encompass several aspects of its implementation and the issues it raises. We address a set of questions that are part of the cryptocurrency environment and blockchain technology that supports the Libra project. We identify the main risks considering at the same time: political risks, financial risks, economical risks, technological risks and ethics focusing on the governance of the project based on two levels: one for the Association and the other for the Libra Blockchain. We emphazise the difficulty to regulate such a project as soon as it will depend on several countries whose legislations are very different. The future of this kind of project is discussed through the emergence of the Central Bank Digital Currencies.

The Spillover Effects of MD&A Disclosures for Real Investment: The Role of Industry Competition
Durnev, Art,Mangen, Claudine
We explore whether disclosures in the Management Discussion & Analysis (MD&A) have spillover effects for investment and investment efficiency, and whether spillover effects vary with competition. We focus on the tone of MD&A disclosures and document that the association between a ompany’s investments and the tone of its rivals’ MD&A disclosures is positive. Moreover, this association is stronger when firms operate in industries that have lower entry costs, are larger, and have less substitutable products. We obtain similar results for investment efficiency. Overall, our evidence suggests that MD&A disclosures have spillover effects for investment that can improve investment efficiency, and that spillover effects are moderated by industry competition.