Research articles for the 2019-12-30

A Partial Jubilee Proposal: Deleveraging Authorities Financed by Zero-Coupon Perpetual Bonds
Oncu, T. Sabri,Oncu, Ahmet
Debt overhang of the non-financial private sector has been one of the main reasons for the ongoing global stagnation that started in 2007, and recent data released by the Bank of International Settlements, International Monetary Fund, International Institute of Finance, United Nations Conference on Trade and Development, McKinsey and others indicate that debt overhang of the non-financial private sector is worse in 2019 than it was in 2007. Given this, and inspired by the German Currency Reform of 1948 and its equalization claims, we focus on the non-financial private sector comprising households and non-financial firms, and propose a one-off non-financial debt deleveraging mechanism. Since our deleveraging mechanism is a partial Jubilee financed by government-issued zero-coupon perpetual bonds, it is not a substitution of public for private debt. Furthermore, because of our focus not only on the households but also on the non-financial corporate sector, our proposed deleveraging mechanism is more comprehensive than other proposed mechanisms that operate either only at the household level or only at the corporate level. We also discuss how our proposed deleveraging mechanism may be extended to include all debts including sovereign debts and coordinated globally.

Application of Nigerian Value Added Tax on Services: Judicial Interpretations
Okoro, Nnachi Dickson
The study examined the Nigerian Value Added Tax (VAT) on services with the view of unveiling the classification of services under the Value Added Tax Act Cap V1 Laws of Federation of Nigeria 2004 (as amended) and application of VAT on them. The study also looks at the views of the Nigerian Courts and Tax Appeal Tribunal on imported and exported services in Nigeria. The study reviews the progressive nature of “provision of service” and how much the Laws are positioned to cover such services, especially were one party in the transactions is a non-resident. The study takes a peep into the ongoing Finance Bill 2019 currently undergoing Legislative processes before it is passed into Law. After analysing the Nigerian VAT on services and the attendant judicial reaction, the study recommends that VAT laws should not be drafted or construed to give extra-territorial powers to the Law. The study also recommends that the Nigerian VAT Act and relevant tax authorities should focus more on capturing services carried out in Nigeria whether the services are carried out physically in Nigeria or without physical presence but supplied within the Nigerian space (virtual or physical).

Breach of the Mandatory Bid Rule. Italy in the Public vs. Private Enforcement Debate
Agstner, Peter,Marchesini Mascheroni, Davide
The mandatory takeover bid has been broadly investigated in the literature. The economics of such control acquisition and the pros and cons of the mandatory bid rule are nowadays well-established. Uncertainty still reigns with respect to the fundamental question whether private law remedies are available to minority shareholders in the case of a breach of the statutory duty to make a takeover bid. Statutory law is silent on this matter, and at a supranational level the CJEU’s case law does not offer valid precedents. European policymakers rely on public enforcement mechanisms, while an action for damages against the bidder is not made available or only reluctantly accepted by the courts. Italy is an exception in the comparative landscape and its leading case Fondiaria-SAI represents an ideal benchmark for the assessment of the functional efficiency of public vs. private enforcement remedies. This article shows that, for the purpose of good functioning and competitiveness of capital markets, private enforcement plays an important role against violations of the mandatory bid rules. Thus, public enforcement, which often proved to be ineffective or bypassed especially in cases of acting in concert, should be complemented by the recognition of civil liability of the bidder for breach of the duty to launch a takeover bid. Furthermore, the legal regime of such liability is outlined, thereby investigating the (contractual or tort) nature of the bidder’s liability and the operativeness of such a regime (e.g., amount of damages, application of compensatio lucro cum damno rule).

Distortion Riskmetrics on General Spaces
Wang, Qiuqi,Wang, Ruodu,Wei, Yunran
We study distortion riskmetrics on general model spaces, which are defined through signed Choquet integrals. Distortion riskmetrics include many classic risk measures, deviation measures, and other functionals in the literature of finance and actuarial science. We obtain characterization, finiteness, convexity, and continuity results on general model spaces, extending various results in the existing literature on distortion risk measures and signed Choquet integrals. This paper offers a comprehensive toolkit of theoretical results on distortion riskmetrics which are ready for use in applications.

Do Lenders Influence Borrowers’ Mandatory Disclosures? Evidence From Redacted Credit Agreements
Saavedra, Daniel
I examine whether lender incentives are related to the redaction or non-disclosure of potentially material information from credit agreements of public firms. Using a novel dataset, I find evidence that when lenders invest more in screening and monitoring the borrower or when lenders earn abnormal profits from the loan, credit agreements are more likely to have potentially material information redacted. Furthermore, consistent with the notion that the withholding of information from credit agreements gives current lenders an information advantage, I find that borrowers with redacted credit agreements are more likely to issue subsequent loans with the same lead arranger. Finally, a detailed analysis of credit agreements suggests that firms often withhold potentially material information without the Security and Exchange Commission’s granting a request for confidential treatment.

Dual Markets & Optimal Collectibles Securitization
Vorsatz, Blair
I develop a model of collectibles securitization to understand how collectors and speculators trade-off transaction costs and convenience yields. Collectors dislike securitization because it destroys convenience yields while speculators dislike the high costs of transacting physical collectibles. The model predicts both types of agents strictly prefer “dual markets” in which speculators securitize collectibles to reduce transaction costs and collectors unsecuritize collectibles to enjoy convenience yields. I find empirical support for the prediction that dual markets are welfare-improving for buyers and sellers. In particular, speculators would pay a premium to securitize at least $5.4 trillion out of $21.1 trillion of collectibles.

How Legal and Institutional Environments Shape the Private Debt Renegotiation Process?
Godlewski, Christophe J.
I investigate how legal and institutional conditions around loan origination influence a private debt renegotiation process. Using a large sample of 15,000 loans on the European credit market, I apply a sequential logit model to consider the renegotiation likelihood, the conditional probability of multiple renegotiation rounds or multiple amended terms, and the renegotiation outcomes conditional on specific loan amendments. I find that legal systems with stronger protection of creditors control rights have a positive influence on renegotiation likelihood and favorable outcomes on amendments to amount or maturity. Stronger legal protection reduces renegotiation likelihood when creditors face potential strategic default by shareholders. The legal and institutional environment has a significant effect on how the initial design of the financial contract impacts the renegotiation process.

Integrating Practice into Accounting Research
Rajgopal, Shivaram
I argue that academic research in accounting has strayed from producing work that is useful to either practitioners or policy makers. I use three criteria to arrive at that assessment: (i) how many products and processes has accounting research produced in the last 50 years? (ii) how much overlap do we observe between issues that CFOs and CEOs worry about and our published research; and (iii) is the science or the knowhow in academe in a particular area ahead of that in practice? I conjecture that tuition-funded research drives this problem. I review several initiatives that have been tried at Columbia and elsewhere (i) to better integrate academic research and practice; and (ii) to disseminate our findings to practitioners. I suggest that Management Science set up a forum to encourage submissions of papers that use rigorous methods to address pressing applied problems.

Myopic Management Theory and R&D Investment Decisions
Oad Rajput, Suresh Kumar,Marwat, Jahanzeb,Wongchoti, Udomsak
This study attempts to asses firms’ financial conditions to explain why they use myopic R&D cuts. Contrary to prior literature, this study shows that the current financial indicators of firms are also significant determinants of R&D myopic management along with stock market. Financial indicators such as Leverage, cash holding, earned-to-capital ratio, market-to-book ratio, sales growth, dividend, tangibility, age, and size of firms significantly influence the probability of being myopic firms and R&D investment decisions. Further, we show that U-shaped and inverted U-shaped relationship of different determinants of R&D investments provide a better description for mix results of prior literature.

Public News and Market Liquidity: Evidence from the CDS Market
Pan, Wei-Fong,Wang, Xinjie,Yang, Shanxiang,Zhang, Jinfan,Zhong, Zhaodong
This paper examines the effects of public news releases on the market liquidity in one of the most important OTC derivatives markets â€" the CDS market. We document that, at the time of news releases, the bid-ask spread is wider, the number of quotes is larger, and the number of dealers is greater. Earnings announcements have particularly strong effects on liquidity while news related to credit ratings has no significant effects. Moreover, the bid-ask spread only increases on news release days and reverts to normal levels several days after news releases. Finally, the effect of news on liquidity is stronger for negative, fundamental, and unscheduled news, and is more pronounced among firms with higher information asymmetry. Our findings are consistent with models of rational trade in Kim and Verrecchia (1994).

Testimony Before the U.S. House of Representatives â€" Committee on Financial Services â€" Task Force on Artificial Intelligence
Lopez de Prado, Marcos
I have divided this testimony into four sections, which discuss: (1) several types of automation currently being deployed in capital markets and the financial sector, and how they affect decision-making; (2) how machine learning (ML) and automation can help and hurt workers by disruption of the current and future financial services workforce; (3) what “RegTech” is and how ML can be deployed to help regulators better supervise financial institutions; and (4) algorithmic bias.

The Capital Gains Lock-In Effect and Earnings Quality
Dimmock, Stephen G.,Feng, Fan,Zhang, Huai
The taxation of realized capital gains creates a lock-in effect, increasing an investor’s expected holding period. We show that the unrealized capital gains of mutual funds are positively associated with the earnings quality of their portfolio firms. Consistent with tax-induced lock-in, the effect of unrealized capital gains is more pronounced for mutual funds with tax-sensitive investors than for funds with tax-insensitive investors. Moreover, the positive effect of capital gains lock-in on earnings quality is stronger during periods when the capital gain tax rate is higher and for firms with highly concentrated mutual fund ownership. In sum, our findings suggest that locked-in mutual funds improve their portfolio firms’ earnings quality through more monitoring.

The Choice of SEO Method in Korea: Rights vs. Public Offers
Kim, Ju Hyun,Song, Kyojik
This study examines the factors in the flotation method choice, rights issues vs. public offers, in a firm’s seasoned equity offering process. Using Korean data during 2000~2015, we find that firms with less information asymmetry and larger issue size are more likely to choose rights over public offers and that control considerations also affect the flotation choice. Contrary to the majority of evidence in the literature, rights offers are met with more negative announcement returns than public offers in Korea. This seemingly atypical phenomenon can be linked to the heavy discounts of rights offers. We document that stockholders of rights issue firms seem to be compensated for the initial adverse market reaction by large issue-day returns. We contribute to the literature with an intra-market analysis of the SEO method choice, which cannot be done in markets with a dominant flotation type.

Unconventional Monetary Policy and Funding Liquidity Risk
d'Avernas, Adrien,Vandeweyer, Quentin,Darracq Paries, Matthieu
This paper investigates the efficiency of various monetary policy instruments to stabilize asset prices in a liquidity crisis. We propose a macro-finance model featuring both traditional and shadow banks subject to funding risk. When banks are well capitalized, they have access to money markets and efficiently mitigate funding shocks. When aggregate bank capital is low, a vicious cycle arises between declining asset prices and funding risks. The central bank can partially counter these dynamics. Increasing the supply of reserves reduces liquidity risk in the traditional banking sector, but fails to reach the shadow banking sector. When the shadow banking sector is large, as in the US in 2008, the central bank can further stabilize asset prices by directly purchasing illiquid securities.

Unemployment Risk and Accounting Conservatism
Chu, Yongqiang,Liu, Shiang,Qiu, Mingming
We examine the effect of labor unemployment risk on corporate accounting conservatism by exploring the relationship between unemployment insurance benefits and conservatism. We find that lower perceived unemployment risk (i.e. higher unemployment insurance benefits) is associated with lower conditional conservatism. The effect is more pronounced when employees are more exposed to unemployment risk and when the firms face higher bankruptcy or litigation risk.

United Technologies: Are the Parts Worth More than the Whole?
Esty, Benjamin,Fisher, Daniel
After spending more than 50 years creating a diversified industrial conglomerate that Fortune Magazine described as “arguably the most profitable conglomerate in America” in 2014, UTC’s CEO Greg Hayes was under pressure from activist investors (Dan Loeb and Bill Ackman) to break the company into three standalone businesses in the spring of 2018. The activists claimed that a breakup would create at least $20 billion of incremental value (on top of a current market value of approximately $100 billion) and possibly considerably more. Hayes must decide whether a breakup makes sense â€" will it create significant incremental value and, if so, how much value and why? What factors explained why UTC currently traded at a discount to comparable single segment (pure play) firms? Was it an artifact of the valuation method, a reflection of mismanagement, or something else?This case has four objectives. First, to illustrate the mechanics and underlying logic of sum-of-the-parts (SOTP) valuation analysis. Second, to practice valuing a division using multiples and wrestling with the concept of comparability. Third, to assess the strategic logic of a diversified industrial conglomerate â€" does the structure create or destroy value? Is a conglomerate discount (or premium) as measured relative to a set of pure play firms a valid measure of value destruction (or creation)? Illustrate the cross-sectional (across analysts) and time-series (one analyst over time) properties of diversification discounts. And finally, explore the motives, tactics, and economic impact of activist investors. Is activist pressure likely to result in sustained value creation?

İç Denetim Bölümlerinin Organizasyonel Konumu: Ulusal ve Uluslararası Düzenlemeler Çerçevesinde Türk Bankacılık Sektörü Üzerine Karşılaştırmalı Bir İnceleme (Organizational Positioning of Internal Audit Departments: A Comparative Examination upon Turkish Banking Sector in the Context of National and International Regulations)
Kartal, Mustafa Tevfik,Çoban Çelikdemir, Neşe
Turkish Abstract: Bu çalışma bankalarda iç denetim bölümlerinin organizasyonel konumlandırılmalarının incelenmesi amacı ile hazırlanmıştır. Konu Bankacılık Kanunu, Bankacılık Düzenleme ve Denetleme Kurumu düzenlemeleri, Basel Bankacılık Komitesi ilkeleri ve uluslararası iç denetim standartları çerçevesinde ele alınmıştır. İnceleme sonucunda, Bankaların İç Sistemleri ve İçsel Sermaye Yeterliliği Değerlendirme Süreci Hakkında Yönetmelik’te yer verilen üst yönetici uygulamasının güncel durumda 7 bankada bulunduğu, 5 bankada ise daha önce uygulanmakla birlikte günümüzde bulunmadığı belirlenmiştir. Söz konusu uygulamanın, uluslararası uygulamalarla uyumsuz olduğu sonucuna ulaşılmıştır. Bu nedenle, Türk bankacılık mevzuatında iç denetimin organizasyonel konumunun uluslararası uygulamalar ile uyumlu olması için söz konusu Yönetmelik’te yer verilen üst yönetici düzenlemesinin kaldırılması önerilmektedir. English Abstract: This paper is prepared to examine organizational positioning of internal audit departments in banks. The subject deals with from aspects of Banking Law, Banking Regulation and Supervision Agency, Basel Banking Committee principles and international internal auditing standards. As a result of examination, it is defined that regulation which is about employing senior executive taking place in Banks’ Internal Systems and Internal Capital Adequacy Evaluation Process Charter, is practiced in 7 banks currently, 5 banks used to employ senior executive earlier and they do not have currently. It is concluded that this regulation is incompatible with international practices. For this reason, it is recommended that regulations about senior executive should be removed from the Charter in order to harmonize internal audit’s organizational status in Turkish banking legislations with international regulations.