Research articles for the 2020-01-11
Corporate Spin-Offs, Product Market Competition, and Innovation
SSRN
We develop a theory of the interaction between product market competition, corporate spin-offs, and innovation. In our model, a conglomerate firm operates a profitable existing technology, but has access to a new technology into which it must invest to develop a commercially viable product. While new technology development has synergies with the existing firm, the new technology will cannibalize profits from the firm's existing technology if successfully developed into a viable product. We show that, in the absence of competition, the conglomerate firm has an incentive to underinvest in the new technology. The entry of a competing firm, however, defeats the above incentive, forcing the conglomerate firm to spin off its new technology division, after which the spun-off firm invests optimally in developing and commercializing the innovation. In our two-stage model, we endogenize new technology development, analyzing the interaction between competition, corporate spin-offs, and the development and commercialization of innovations.
SSRN
We develop a theory of the interaction between product market competition, corporate spin-offs, and innovation. In our model, a conglomerate firm operates a profitable existing technology, but has access to a new technology into which it must invest to develop a commercially viable product. While new technology development has synergies with the existing firm, the new technology will cannibalize profits from the firm's existing technology if successfully developed into a viable product. We show that, in the absence of competition, the conglomerate firm has an incentive to underinvest in the new technology. The entry of a competing firm, however, defeats the above incentive, forcing the conglomerate firm to spin off its new technology division, after which the spun-off firm invests optimally in developing and commercializing the innovation. In our two-stage model, we endogenize new technology development, analyzing the interaction between competition, corporate spin-offs, and the development and commercialization of innovations.
Designating the Endogeneity in the Cryptocurrency Market Using an Intensity-based Hawkes Process
SSRN
We study the self-excitability and price clustering properties of the cryptocurrency market using an intensity-based Hawkes process. The branching ratio, which is the average ratio of the number of price moves caused by endogenous interactions to the total number of all price changes, is used as a proxy for market "reflexivity" or the endogeneity in the cryptocurrency market. We find that the price process for Bitcoin has the highest endogeneity among the processes for other cryptocurrencies and other financial markets including SP500, Gold, and VIX.
SSRN
We study the self-excitability and price clustering properties of the cryptocurrency market using an intensity-based Hawkes process. The branching ratio, which is the average ratio of the number of price moves caused by endogenous interactions to the total number of all price changes, is used as a proxy for market "reflexivity" or the endogeneity in the cryptocurrency market. We find that the price process for Bitcoin has the highest endogeneity among the processes for other cryptocurrencies and other financial markets including SP500, Gold, and VIX.
Recovering Investor Expectations from Demand for Index Funds
SSRN
We use a revealed-preference approach to estimate investor expectations of stock market returns. Using data on demand for index funds that follow the S&P 500, we develop and estimate a model of investor choice to flexibly recover the time-varying distribution of expected returns. Despite the fact that they are generated from a different method (realized choices) and a different population, our quarterly estimates of investor expectations are positively and significantly correlated with the leading surveys used to measure stock market expectations. Our estimates suggest that investor expectations are heterogeneous, extrapolative, and persistent. Following a downturn, investors become more pessimistic on average, but there is also an increase in disagreement among participating investors. Our analysis is facilitated by the prevalence of “leveraged†funds, i.e., funds that provide the investor with a menu over leverage. The menu of choices allows us to separately estimate expectations and risk aversion. We estimate that the availability of these funds provides investors with significant (ex ante) consumer surplus.
SSRN
We use a revealed-preference approach to estimate investor expectations of stock market returns. Using data on demand for index funds that follow the S&P 500, we develop and estimate a model of investor choice to flexibly recover the time-varying distribution of expected returns. Despite the fact that they are generated from a different method (realized choices) and a different population, our quarterly estimates of investor expectations are positively and significantly correlated with the leading surveys used to measure stock market expectations. Our estimates suggest that investor expectations are heterogeneous, extrapolative, and persistent. Following a downturn, investors become more pessimistic on average, but there is also an increase in disagreement among participating investors. Our analysis is facilitated by the prevalence of “leveraged†funds, i.e., funds that provide the investor with a menu over leverage. The menu of choices allows us to separately estimate expectations and risk aversion. We estimate that the availability of these funds provides investors with significant (ex ante) consumer surplus.
Risk and Equity Release Mortgages in the UK
SSRN
Accessing elderly housing wealth through equity release mortgages (ERMs) continue to be the focus of policy debates about how to pay for social care and how to support retirement incomes in the UK. We demonstrate in this paper that the spatial concentration of this market in just a few regions is not due to demand but to the risks faced by suppliers. We show that by ignoring regional variations in No Negative Equity Guarantee risk in national pricing models providers cannot profitably supply these products outside areas of high house price growth. We also show that EU Solvency II capital requirements provide a further disincentive to supply ERMs in these areas. Government subsidies to product provision are also modelled and shown to be infeasibly high. We therefore conclude that the government policy focus on equity release as a means of tackling the challenges of an ageing population is misplaced.
SSRN
Accessing elderly housing wealth through equity release mortgages (ERMs) continue to be the focus of policy debates about how to pay for social care and how to support retirement incomes in the UK. We demonstrate in this paper that the spatial concentration of this market in just a few regions is not due to demand but to the risks faced by suppliers. We show that by ignoring regional variations in No Negative Equity Guarantee risk in national pricing models providers cannot profitably supply these products outside areas of high house price growth. We also show that EU Solvency II capital requirements provide a further disincentive to supply ERMs in these areas. Government subsidies to product provision are also modelled and shown to be infeasibly high. We therefore conclude that the government policy focus on equity release as a means of tackling the challenges of an ageing population is misplaced.
Risk of Financial Distress in Secondary Buyouts
SSRN
Secondary buyouts (SBOs) represent more than 50 percent of all buyouts in 2018. Even though general partners argue that SBOs are less attractive investment targets for buyouts and some empirical indication against an outperformance of SBOs exists, the share of SBOs continuously increases. However, SBOs might be a favourable target with regard to its investment risk. Using a unique dataset of 295 PBOs and their consecutive SBOs in the UK, we analyse the risk level of financial distress of the buyout rounds considering the Altman Z-Score. We find that SBOs reduce this risk of portfolio companies more than PBOs during the holding period. Therefore, SBOs, in general, cannot be seen as riskier investments. However, risk of financial distress is driven differently between PBOs and SBOs. The risk development in distressed companies is not different in PBOs and SBOs. However, SBOs perform better at risk management if the portfolio company is not distressed. This risk-adjusted view identifies SBOs as attractive investment targets. It also contributes to rectify investments in SBOs as rational and promising decisions.
SSRN
Secondary buyouts (SBOs) represent more than 50 percent of all buyouts in 2018. Even though general partners argue that SBOs are less attractive investment targets for buyouts and some empirical indication against an outperformance of SBOs exists, the share of SBOs continuously increases. However, SBOs might be a favourable target with regard to its investment risk. Using a unique dataset of 295 PBOs and their consecutive SBOs in the UK, we analyse the risk level of financial distress of the buyout rounds considering the Altman Z-Score. We find that SBOs reduce this risk of portfolio companies more than PBOs during the holding period. Therefore, SBOs, in general, cannot be seen as riskier investments. However, risk of financial distress is driven differently between PBOs and SBOs. The risk development in distressed companies is not different in PBOs and SBOs. However, SBOs perform better at risk management if the portfolio company is not distressed. This risk-adjusted view identifies SBOs as attractive investment targets. It also contributes to rectify investments in SBOs as rational and promising decisions.
Voluntary Disclosure of Accounting Ratios and Firm-Specific Characteristics: The Case of GCC
SSRN
This study investigates the voluntary disclosure of accounting ratios in the corporate annual reports of manufacturing firms in the Gulf Cooperation Council (GCC) and determines whether an association exists between voluntary disclosure and firm-specific characteristics namely, size, profitability, leverage, liquidity and efficiency.A sample of 53 GCC listed manufacturing firms and 263 firm-year observations were observed over the period 2011 to 2015. A count data regression (Poisson) with incident rate ratios (IRR) was used to identify the relationship between firms’ voluntary disclosures of accounting ratios and other firm-specific characteristics.During the period under review, the voluntary disclosure of accounting ratios provided in annual reports of GCC firms were found to be exceedingly low. On average, a GCC company discloses at most two accounting ratios in its annual reports. The results also show that the profitability ratios are the most popularly reported ones. Controlling for family board domination, the results also reveal that structure-related variables (firm size and leverage) are positively associated with accounting ratio disclosures. However, performance-related variables (profitability, liquidity and efficiency) have no significant effect on disclosures. We conclude that signaling theory as implied in the performance-related variables is not strongly supported in the GCC region.This is the first known study to investigate the disclosure of accounting ratios and its determinants within the context of GCC. The findings of this study could be beneficial to both agents and principals in assessing the associated risks. The study provides regulators and market participants an understanding of the corporate reporting activities of manufacturing firms in the GCC and who accordingly will be able to consider associated policy implementation.
SSRN
This study investigates the voluntary disclosure of accounting ratios in the corporate annual reports of manufacturing firms in the Gulf Cooperation Council (GCC) and determines whether an association exists between voluntary disclosure and firm-specific characteristics namely, size, profitability, leverage, liquidity and efficiency.A sample of 53 GCC listed manufacturing firms and 263 firm-year observations were observed over the period 2011 to 2015. A count data regression (Poisson) with incident rate ratios (IRR) was used to identify the relationship between firms’ voluntary disclosures of accounting ratios and other firm-specific characteristics.During the period under review, the voluntary disclosure of accounting ratios provided in annual reports of GCC firms were found to be exceedingly low. On average, a GCC company discloses at most two accounting ratios in its annual reports. The results also show that the profitability ratios are the most popularly reported ones. Controlling for family board domination, the results also reveal that structure-related variables (firm size and leverage) are positively associated with accounting ratio disclosures. However, performance-related variables (profitability, liquidity and efficiency) have no significant effect on disclosures. We conclude that signaling theory as implied in the performance-related variables is not strongly supported in the GCC region.This is the first known study to investigate the disclosure of accounting ratios and its determinants within the context of GCC. The findings of this study could be beneficial to both agents and principals in assessing the associated risks. The study provides regulators and market participants an understanding of the corporate reporting activities of manufacturing firms in the GCC and who accordingly will be able to consider associated policy implementation.
Why Do Stock Repurchases Change Over Time?
SSRN
Recent studies have shown the time trends of firm stock repurchase behavior. We examine these time changes for stock repurchase through the lens of real activities earnings management. Managers appear more likely to manipulate earnings through stock repurchases since the passage of the Sarbanesâ€"Oxley Act (SOX) in 2002. Furthermore, suspect firms that just missed analyst earnings per share forecasts have higher incentives to manipulate earnings through stock repurchases. The results are not driven by changes in corporate governance associated with the passage of SOX. Overall, our results suggest earnings management can be a significant determinant of the dynamics of stock repurchases.
SSRN
Recent studies have shown the time trends of firm stock repurchase behavior. We examine these time changes for stock repurchase through the lens of real activities earnings management. Managers appear more likely to manipulate earnings through stock repurchases since the passage of the Sarbanesâ€"Oxley Act (SOX) in 2002. Furthermore, suspect firms that just missed analyst earnings per share forecasts have higher incentives to manipulate earnings through stock repurchases. The results are not driven by changes in corporate governance associated with the passage of SOX. Overall, our results suggest earnings management can be a significant determinant of the dynamics of stock repurchases.
