Research articles for the 2019-12-20
A Study Of Dividend Policy And Its Effect On Market Value Of Shares Of Selected Banks In India
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Dividend policy is a strategy used by a company to determine the amount and timing of dividend payments. The dividend policy framed by an organization is one of the crucial issues in corporate finance since it may have an impact on the firm’s value and shareholder wealth. The research study is an attempt to analyze the effect of dividend policy on shareholder wealth of thirty selected Indian banks listed and traded in Bombay Stock Exchange (BSE).For the purpose of study the financial data from the period 2003-04 to 2012-13 of selected Indian banks (15 Public and 15 Private) would be used. The data would be analyzed using statistical tools like multiple regression technique, t test, the coefficient of determination (R2) and F-Value. The results of the data analysis might reveal that that there is a significant effect of dividend policy on the share price of selected Indian Banks. The study is limited to a time period of 10 years and only selected Indian Banks. The result might change if the time period and number of banks are extended
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Dividend policy is a strategy used by a company to determine the amount and timing of dividend payments. The dividend policy framed by an organization is one of the crucial issues in corporate finance since it may have an impact on the firm’s value and shareholder wealth. The research study is an attempt to analyze the effect of dividend policy on shareholder wealth of thirty selected Indian banks listed and traded in Bombay Stock Exchange (BSE).For the purpose of study the financial data from the period 2003-04 to 2012-13 of selected Indian banks (15 Public and 15 Private) would be used. The data would be analyzed using statistical tools like multiple regression technique, t test, the coefficient of determination (R2) and F-Value. The results of the data analysis might reveal that that there is a significant effect of dividend policy on the share price of selected Indian Banks. The study is limited to a time period of 10 years and only selected Indian Banks. The result might change if the time period and number of banks are extended
CEO Social Capital and IPO Performance
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Initial Public Offering (IPO) outcomes are affected by the social capital of the firm’s chief executive officer (CEO), proxied by the CEO’s network centrality that identifies the position of CEO within the hierarchy of all worldwide business executives. IPO firms with CEOs possessing higher social capital are associated with higher underpricing, lower likelihood of offer price increases from the initial filing range, and lower likelihood of positive overall net wealth effects for the pre-IPO investors. CEO social capital remains a significant determinant of IPO outcomes even after controlling for CEO personal characteristics, firm determinants of CEO social capital, and direct relationships between the IPO firm managers and the underwriters. In addition, the post-IPO insider sale trades initiated by CEOs with higher social capital are followed by significantly lower abnormal returns to firm equity, and those CEOs are also less likely to be replaced in case of poor post-IPO long term performance. All these results suggest that the influence and power derived from high social capital due to superior network centrality allows CEOs to insulate themselves from monitoring of their activities and to achieve greater entrenchment and personal benefits, which leads to increased risk of the IPO.
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Initial Public Offering (IPO) outcomes are affected by the social capital of the firm’s chief executive officer (CEO), proxied by the CEO’s network centrality that identifies the position of CEO within the hierarchy of all worldwide business executives. IPO firms with CEOs possessing higher social capital are associated with higher underpricing, lower likelihood of offer price increases from the initial filing range, and lower likelihood of positive overall net wealth effects for the pre-IPO investors. CEO social capital remains a significant determinant of IPO outcomes even after controlling for CEO personal characteristics, firm determinants of CEO social capital, and direct relationships between the IPO firm managers and the underwriters. In addition, the post-IPO insider sale trades initiated by CEOs with higher social capital are followed by significantly lower abnormal returns to firm equity, and those CEOs are also less likely to be replaced in case of poor post-IPO long term performance. All these results suggest that the influence and power derived from high social capital due to superior network centrality allows CEOs to insulate themselves from monitoring of their activities and to achieve greater entrenchment and personal benefits, which leads to increased risk of the IPO.
Cross-country Differences in Homeownership: A Cultural Phenomenon?
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Cross-country differences in homeownership rates are large and persistent over time, with homeownership rates ranging from 40% in Switzerland to 80% in Spain. This paper investigates whether culture is a driving factor of the homeownership decision, and could thus explain part of the cross-country differences in homeownership rates. To isolate the effect of cultural references regarding homeownership from the impact of institutions and economic factors, we investigate the homeownership decisions of second-generation immigrants in the United States between 1994 and 2017. Our findings indicate that cultural preferences for homeownership are persistent, transmitted between generations, and substantially influence the rent-versus-buy decision.
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Cross-country differences in homeownership rates are large and persistent over time, with homeownership rates ranging from 40% in Switzerland to 80% in Spain. This paper investigates whether culture is a driving factor of the homeownership decision, and could thus explain part of the cross-country differences in homeownership rates. To isolate the effect of cultural references regarding homeownership from the impact of institutions and economic factors, we investigate the homeownership decisions of second-generation immigrants in the United States between 1994 and 2017. Our findings indicate that cultural preferences for homeownership are persistent, transmitted between generations, and substantially influence the rent-versus-buy decision.
ESG Performance and Disclosure: A Cross-Country Analysis
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We use a unique dataset to examine the link between ESG disclosure and quality through a cross-country comparison of disclosure requirements and stewardship codes. We find a strong relationship between the extent of ESG disclosure and the quality of a firm’s disclosure. Furthermore, we find that ESG is correlated with decreased risk. This result suggests that firms with good ESG scores are simply disclosing more information. Finally, we show that ESG scores have little or no impact on risk-adjusted financial performance.
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We use a unique dataset to examine the link between ESG disclosure and quality through a cross-country comparison of disclosure requirements and stewardship codes. We find a strong relationship between the extent of ESG disclosure and the quality of a firm’s disclosure. Furthermore, we find that ESG is correlated with decreased risk. This result suggests that firms with good ESG scores are simply disclosing more information. Finally, we show that ESG scores have little or no impact on risk-adjusted financial performance.
Investors' Trading Behaviour and Stock Market Volatility During Crisis Periods: A Dual Long-Memory Model for the Korean Stock Exchange
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This study examines the impact of investors’ buy and sell trades on Korean stock market volatility across two crisis events, the Asian crisis of 1997 and the 2008 global financial crash. We investigate the trading behaviour of domestic vs. foreign and institutional vs. individual investors. Our results suggest that the buy and sell trades have an asymmetric effect on volatility that depends on the type of investor trading and on the phase of the business cycle. Buy orders appear to be more informative than sell orders since they mostly lower volatility in the pre-crisis periods, while sell and post-crisis buy trades affect volatility positively regardless of who trades (institutional or individual investors) and on what information (member, non-member). Most importantly, decomposing total buy and sell trades into trader-type categories reveals that some institutional investors are more informed traders that stabilize the market compared to individuals that always increase volatility. Foreign investors reduce volatility with their purchases and total trading activity in the whole Asian crisis sample, but only in the pre-crisis period before the recent global financial turmoil.
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This study examines the impact of investors’ buy and sell trades on Korean stock market volatility across two crisis events, the Asian crisis of 1997 and the 2008 global financial crash. We investigate the trading behaviour of domestic vs. foreign and institutional vs. individual investors. Our results suggest that the buy and sell trades have an asymmetric effect on volatility that depends on the type of investor trading and on the phase of the business cycle. Buy orders appear to be more informative than sell orders since they mostly lower volatility in the pre-crisis periods, while sell and post-crisis buy trades affect volatility positively regardless of who trades (institutional or individual investors) and on what information (member, non-member). Most importantly, decomposing total buy and sell trades into trader-type categories reveals that some institutional investors are more informed traders that stabilize the market compared to individuals that always increase volatility. Foreign investors reduce volatility with their purchases and total trading activity in the whole Asian crisis sample, but only in the pre-crisis period before the recent global financial turmoil.
OTC Discount
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We study price dispersion and venue choice in the interdealer market for German sovereign bonds, where an exchange and over-the-counter segments coexist. We show that 85% of OTC traded prices are favorable with respect to exchange quotes, indicating the prevalence of an OTC discount. This discount is sizeable and driven by both search and information frictions. More than 75% of volume is transacted via interdealer brokers in trades that are larger, have less price impact, and less discount than comparable bilateral OTC trades. Dealers trade on the exchange for immediacy, highlighting the complementary roles played by the different segments.
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We study price dispersion and venue choice in the interdealer market for German sovereign bonds, where an exchange and over-the-counter segments coexist. We show that 85% of OTC traded prices are favorable with respect to exchange quotes, indicating the prevalence of an OTC discount. This discount is sizeable and driven by both search and information frictions. More than 75% of volume is transacted via interdealer brokers in trades that are larger, have less price impact, and less discount than comparable bilateral OTC trades. Dealers trade on the exchange for immediacy, highlighting the complementary roles played by the different segments.
Option-Implied Price of Risk
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I use index prices and options to estimate the pricing kernel's elasticity, which equals the market price of risk. I show that my estimate predicts future market returns, is priced in a cross-sectional analysis, and that it is highly correlated to business cycle variables. Building on the external habits model of Campbell and Cochrane (1999), I rationalize my results by assuming a time-varying relationship between consumption growth and market returns, and therefore introduce a new way of estimating the latent surplus consumption ratio without using problematic consumption data. My results provide novel empirical support for consumption-based asset pricing models.
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I use index prices and options to estimate the pricing kernel's elasticity, which equals the market price of risk. I show that my estimate predicts future market returns, is priced in a cross-sectional analysis, and that it is highly correlated to business cycle variables. Building on the external habits model of Campbell and Cochrane (1999), I rationalize my results by assuming a time-varying relationship between consumption growth and market returns, and therefore introduce a new way of estimating the latent surplus consumption ratio without using problematic consumption data. My results provide novel empirical support for consumption-based asset pricing models.
Perceived Wealth, Cognitive Sophistication and Behavioral Inattention
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By means of a laboratory experiment, we show that, contrary to standard consumer theory, financially equivalent balance sheet profiles may be perceived as non fungible in a controlled frictionless environment with no probabilistic attributes. A large majority of subjects indeed have a bias in the perception of wealth, such that balance sheet composition matters: for a given net worth with values of assets and debt that are financially certain and risk-free, a greater asset-debt ratio implies greater perceived wealth. The predominance of this bias is explained by low cognitive sophistication and great inattention. Moreover, biased subjects are less patient, less debt averse, more likely to increase spending out of unexpected gains and report greater propensities to consume. A standard optimal consumption choice model, enriched with a rational but inattentive agent àla Gabaix (2014, 2019), aligns our key experimental findings.
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By means of a laboratory experiment, we show that, contrary to standard consumer theory, financially equivalent balance sheet profiles may be perceived as non fungible in a controlled frictionless environment with no probabilistic attributes. A large majority of subjects indeed have a bias in the perception of wealth, such that balance sheet composition matters: for a given net worth with values of assets and debt that are financially certain and risk-free, a greater asset-debt ratio implies greater perceived wealth. The predominance of this bias is explained by low cognitive sophistication and great inattention. Moreover, biased subjects are less patient, less debt averse, more likely to increase spending out of unexpected gains and report greater propensities to consume. A standard optimal consumption choice model, enriched with a rational but inattentive agent àla Gabaix (2014, 2019), aligns our key experimental findings.
Rural Transformation, Inequality, and the Origins of Microfinance
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What determines the development of rural financial markets? Starting from a simple theoretical framework, we derive the factors shaping the market entry of rural microfinance institutions across time and space. We provide empirical evidence for these determinants using the expansion of credit cooperatives in the 236 eastern counties of Prussia between 1852 and 1913. This setting is attractive as it provides a free market benchmark scenario without public ownership, subsidization, or direct regulatory intervention. Furthermore, we exploit features of our historical set-up to identify causal effects. The results show that declining agricultural staple prices, as a feature of structural transformation, leads to the emergence of credit cooperatives. Similarly, declining bank lending rates contribute to their rise. Low asset sizes and land inequality inhibit the regional spread of cooperatives, while ethnic heterogeneity has ambiguous effects. We also offer empirical evidence suggesting that credit cooperatives accelerated rural transformation by diversifying farm outputs.
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What determines the development of rural financial markets? Starting from a simple theoretical framework, we derive the factors shaping the market entry of rural microfinance institutions across time and space. We provide empirical evidence for these determinants using the expansion of credit cooperatives in the 236 eastern counties of Prussia between 1852 and 1913. This setting is attractive as it provides a free market benchmark scenario without public ownership, subsidization, or direct regulatory intervention. Furthermore, we exploit features of our historical set-up to identify causal effects. The results show that declining agricultural staple prices, as a feature of structural transformation, leads to the emergence of credit cooperatives. Similarly, declining bank lending rates contribute to their rise. Low asset sizes and land inequality inhibit the regional spread of cooperatives, while ethnic heterogeneity has ambiguous effects. We also offer empirical evidence suggesting that credit cooperatives accelerated rural transformation by diversifying farm outputs.
The Contributions of Betas versus Characteristics to the ESG Premium
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Firms that score low on environmental, social, and governance (ESG) indicators exhibit higher expected returns. This negative ESG premium might be driven by higher risk associated with low ESG scores, or it could signal investors’ preferences for firms with high ESG scores. The first driver implies an underlying, systematic ESG risk factor, such that ESG risk factor betas explain differences in expected returns. The second driver implies that firm-specific ESG characteristics explain the ESG premium. To identify the separate contributions of ESG betas and ESG characteristics for explaining variation in expected returns, this study uses two global data sets from 2004-2018 and reveals that ESG characteristics mainly explain variation in expected returns. A one standard deviation decrease in ESG scores is associated with an increase of 13 basis points in monthly expected returns. This study also
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Firms that score low on environmental, social, and governance (ESG) indicators exhibit higher expected returns. This negative ESG premium might be driven by higher risk associated with low ESG scores, or it could signal investors’ preferences for firms with high ESG scores. The first driver implies an underlying, systematic ESG risk factor, such that ESG risk factor betas explain differences in expected returns. The second driver implies that firm-specific ESG characteristics explain the ESG premium. To identify the separate contributions of ESG betas and ESG characteristics for explaining variation in expected returns, this study uses two global data sets from 2004-2018 and reveals that ESG characteristics mainly explain variation in expected returns. A one standard deviation decrease in ESG scores is associated with an increase of 13 basis points in monthly expected returns. This study also
The Fire-sale Channels of Universal Banks In the European Sovereign Debt Crisis
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We use a unique security-level data set to analyze correlations in bond trading of banks, their respective retail customers and their affiliated mutual funds. Matching banks' proprietary holdings with the holdings of their funds and their retail customers for the period 2009-2016 at the security level, we find evidence that banks sold off risky euro-area sovereign bonds to both their retail customers and their affiliated mutual funds (particularly their public funds) during the European sovereign debt crisis. Overall, this enabled banks with affiliated mutual funds to sell off larger amounts of their risky sovereign bond holdings, while bank-affiliated mutual funds acquired more risky sovereign bonds compared to their unaffiliated peers. The larger the risky sovereign bond position a fund acquired from its parent bank, the lower are the fund's short-term raw returns controlling for the risky bonds the fund overall acquired. Our findings show that banks use their customers portfolio and their affiliated funds as liquidity provider when they sell off their risk bonds without paying the funds the adequate liquidity premium. On the one hand, this points to a severe conflict of interest between banks' own account trading and their asset and wealth management services. On the other hand, it highlights that the severity of fire-sale contagion depends on the organizational structure of the financial sector.
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We use a unique security-level data set to analyze correlations in bond trading of banks, their respective retail customers and their affiliated mutual funds. Matching banks' proprietary holdings with the holdings of their funds and their retail customers for the period 2009-2016 at the security level, we find evidence that banks sold off risky euro-area sovereign bonds to both their retail customers and their affiliated mutual funds (particularly their public funds) during the European sovereign debt crisis. Overall, this enabled banks with affiliated mutual funds to sell off larger amounts of their risky sovereign bond holdings, while bank-affiliated mutual funds acquired more risky sovereign bonds compared to their unaffiliated peers. The larger the risky sovereign bond position a fund acquired from its parent bank, the lower are the fund's short-term raw returns controlling for the risky bonds the fund overall acquired. Our findings show that banks use their customers portfolio and their affiliated funds as liquidity provider when they sell off their risk bonds without paying the funds the adequate liquidity premium. On the one hand, this points to a severe conflict of interest between banks' own account trading and their asset and wealth management services. On the other hand, it highlights that the severity of fire-sale contagion depends on the organizational structure of the financial sector.
The Quicksands of the Poor Law: Poor Relief Legislation in a Growing Nation, 1790-1820
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This article reviews the development of American poor law from 1790 to 1820. Because poor law was primarily state based, the main focus is on the laws of ten states that joined the U.S. during this time: Vermont, Kentucky, Tennessee, Ohio, Louisiana, Indiana, Mississippi, Illinois, Alabama, and Maine. English poor law continued to impact the development of state poor relief law, but legislative experiences in other states began to exert significant influence as well. Work remained the cure for poverty. Poor people who could work were to do so. Poor children were expected to labor and were often apprenticed. Poor adults were put to work in workhouses and poorhouses, or jailed as vagrants. State laws of this period continue to reflect a strong theme that punishing and stigmatizing the non-working poor would prod them to work and thus cure their poverty.
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This article reviews the development of American poor law from 1790 to 1820. Because poor law was primarily state based, the main focus is on the laws of ten states that joined the U.S. during this time: Vermont, Kentucky, Tennessee, Ohio, Louisiana, Indiana, Mississippi, Illinois, Alabama, and Maine. English poor law continued to impact the development of state poor relief law, but legislative experiences in other states began to exert significant influence as well. Work remained the cure for poverty. Poor people who could work were to do so. Poor children were expected to labor and were often apprenticed. Poor adults were put to work in workhouses and poorhouses, or jailed as vagrants. State laws of this period continue to reflect a strong theme that punishing and stigmatizing the non-working poor would prod them to work and thus cure their poverty.
Using Machine Learning to Detect Misstatements
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Machine learning offers empirical methods to sift through accounting data sets with a large number of variables and limited a priori knowledge about functional forms. In this study, we show that these methods help detect and interpret patterns present in ongoing accounting misstatements. We use a wide set of variables from accounting, capital markets, governance, and auditing datasets to detect material misstatements. A primary insight of our analysis is that accounting variables, while they do not detect misstatements well on their own, become most important with suitable interactions with audit and market variables. We also analyze differences between misstatements and irregularities, compare algorithms, examine one-year and twoyear ahead predictions, and interpret groups at greater risk of misstatements.
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Machine learning offers empirical methods to sift through accounting data sets with a large number of variables and limited a priori knowledge about functional forms. In this study, we show that these methods help detect and interpret patterns present in ongoing accounting misstatements. We use a wide set of variables from accounting, capital markets, governance, and auditing datasets to detect material misstatements. A primary insight of our analysis is that accounting variables, while they do not detect misstatements well on their own, become most important with suitable interactions with audit and market variables. We also analyze differences between misstatements and irregularities, compare algorithms, examine one-year and twoyear ahead predictions, and interpret groups at greater risk of misstatements.
What About the Future of European Banks? Board Characteristics and ESG Impact
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In this article, in addition to understanding what are the elements and stages that have guided the formation of a corporate culture in the ESG area, we focus on two specificities: the distinctive traits of the board of directors, on the one hand, and the relationship between ESG performance and the financial performance/company value together with the number of M&A transactions undertaken in the banking sector, on the other hand. In light of the above, the study first investigates the size of the board of directors to identify the key players and the attributes that each board member must possess to optimize ESG performance. This aim was accomplished by screening all European listed company reports and documents published in 2018. Afterwards, on the basis of the results reached in the first round, the second stage scrutinises the banking sector to establish the extent to which ESG’s performance impacts on some key corporate factors (performance, firm value and M&A transactions). This leads to some recommendations regarding the optimal board structure, its internal structure and the features that a target should have if it were involved in an M&A deal. But not only that. In conclusion, we also wonder, ending in a doubtful way, whether pursuing such purposes belongs to the corporate purpose and which are their implications and their impacts with respect to the duties entrusted to directors.
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In this article, in addition to understanding what are the elements and stages that have guided the formation of a corporate culture in the ESG area, we focus on two specificities: the distinctive traits of the board of directors, on the one hand, and the relationship between ESG performance and the financial performance/company value together with the number of M&A transactions undertaken in the banking sector, on the other hand. In light of the above, the study first investigates the size of the board of directors to identify the key players and the attributes that each board member must possess to optimize ESG performance. This aim was accomplished by screening all European listed company reports and documents published in 2018. Afterwards, on the basis of the results reached in the first round, the second stage scrutinises the banking sector to establish the extent to which ESG’s performance impacts on some key corporate factors (performance, firm value and M&A transactions). This leads to some recommendations regarding the optimal board structure, its internal structure and the features that a target should have if it were involved in an M&A deal. But not only that. In conclusion, we also wonder, ending in a doubtful way, whether pursuing such purposes belongs to the corporate purpose and which are their implications and their impacts with respect to the duties entrusted to directors.
