Research articles for the 2020-01-17

A Quantum Walk Model of Financial Options
Orrell, David
Financial markets are often modeled using a random walk, for example in the binomial option pricing model which is a discrete version of the Black-Scholes formula. This paper presents an alternative approach to option pricing based on a quantum walk model. The quantum walk, which incorporates superposition states and allows for effects such as interference, was originally developed in physics, but has also seen application in areas such as cognitive psychology, where it is used to model dynamic decision-making processes. It is shown here that the quantum walk model captures key aspects of investor behavior, while the collapsed state captures the observed behavior of markets. The resulting option price model agrees quite closely with the classical random walk model, but helps to explain features such as the observed dependence of price on time to maturity. The method also has the advantage that it can be run directly on a quantum computer.

Audit Committee and Value Relevance of Accounting Information of Listed Hotels and Travels in Sri Lanka
Balagobei, Saseela
The audit committee (AC) is the potential mechanism that reduces the agency problems in organizations and investigating this mechanism separate from alternate corporate governance mechanisms may have led to different results in the literature. The aim of this study is to examine the impact of audit committee on value relevance of accounting information of listed hotels and travels in Sri Lanka. Value relevance of accounting information is measured by earning per share (EPS) and book value per share (BVPS) while Audit committee consists of AC size, AC independence, AC experts and AC meetings. The sample consists of 15 hotels and travels listed in Colombo Stock Exchange. In this study, data was collected from secondary sources and hypotheses are examined by using Pearson’s correlation and regression analysis. The results reveal that audit committee attributes such as AC size, AC experts and AC meetings have a significant impact on book value per share of listed hotels and travels in Sri Lanka. Further only AC experts influence earnings per share. AC independence is not found to have a significant impact on the value relevance of accounting information. The findings could be useful to regulators in other jurisdiction who are looking at ways to enhance the effectiveness of audit committee, overall firm governance.

Bitcoin and Global Political Uncertainty - Evidence from the U.S. Election Cycle
Burggraf, Tobias
In this study, we investigate the impact of political uncertainty on Bitcoin. Introducing the U.S. federal election cycle as a proxy for political uncertainty, we find that (i) an increase in political uncertainty leads to a decrease in Bitcoin return, (ii) political uncertainty has the strongest impact on Bitcoin six and three months prior the election and decreases as the election date approaches, and (iii) the effect is more pronounced in the left and right tail of the distribution. The results shed a new light on the property of Bitcoin being a safe haven asset and provide important information for investors and policymakers.

Board Leadership Structure and Firm Performance: Evidence from Listed Companies in Sri Lanka
Balagobei, Saseela
Corporate Governance as a mechanism helps to align management's goals with those of thestakeholders that are to increase firm performance. The aim of this study is to identify therelationship between board leadership structure and firm performance of listed companies inSri Lanka during the period of 2014-2016. The data was collected from the secondary datasources and board leadership structure is measured by CEO duality. The sample of this studyconsists of 100 firms listed in Colombo Stock Exchange based on market capitalization. Forthe purpose of data analysis, Pearson‟s correlation analysis and independent sample t-testwere used to examine the hypotheses of this study. The findings reveal that board leadershipstructure is positively correlated with firm performance in terms of Tobin‟s Q and there is nosignificant difference in firm performance between CEO duality firms & non-duality firms.

Capital Leakage, House Prices, and Consumer Spending: Quasi-Experimental Evidence from House Purchase Restriction Spillovers
Deng, Yinglu,Liao, Li,Yu, Jiaheng,Zhang, Yu
Employing a unique quasi-experiment -- spillovers caused by the imposition of local house purchase restrictions to nearby non-regulated cities, we study the effects of out-of-town housing demand and policy spillovers. This quasi-experiment induces sharp increases in house prices but not local fundamentals in nearby non-regulated cities, providing plausibly exogenous house price booms. The estimated spending response is positive in the aggregate, and echoing Favilukis and Van Nieuwerburgh (2017), strongly redistributive across demographic groups, and is negative for renters, around zero for single-home owners, but positive for multi-property owners. Our results suggest that "pure" housing wealth effect can engineer powerful real consequences.

Corporate Governance and Non â€" Performing Loans: Evidence From Listed Banks in Sri Lanka
Balagobei, Saseela
Non-performing loans (NPLs) plays a significant role as they reflect the credit quality of the loan portfolio of banks, and in aggregate terms, reflect the credit quality of the loan portfolio of the banking sector in a country. The study aims to examine the influence of corporate governance on non-performing loans of listed banks in Sri Lanka for the period from 2013 to 2017. In this study, listed banks are selected as sample for the purpose of data analysis with help of Pearson’s correlation and multiple regressions. Secondary data from the annual reports of banks and journals was used for the analysis purpose. The findings show that board activities have a significant influence on non-performing loans of listed banks in Sri Lanka whereas other corporate governance variables such as board size, board independence and CEO duality have no significant influence on non-performing loans. This study would hopefully benefit to the academicians, researchers, policy-makers and practitioners of Sri Lanka and other similar countries.

Corporate Law for Good People
Feldman, Yuval,Libson, Adi,Parchomovsky, Gideon
This article offers a novel analysis of the field of corporate governance by viewing it through the lens of behavioral ethics. It calls for both shifting the focus of corporate governance to a new set of loci of potential corporate wrongdoing and adding new tools to the corporate governance arsenal. The behavioral ethics scholarship emphasizes the large share of wrongdoing generated by "good people" whose intention is to act ethically. Their wrongdoing stems from "bounded ethicality" -- various cognitive and motivational processes that lead to biased decisions that seem legitimate. In the legal domain, corporate law provides the most fertile ground for the application of behavioral ethics since it encapsulates many of the features that the behavioral ethics literature found to confound the ethical judgment of good people, such as agency, group decisions, victim remoteness, vague directives and subtle conflict of interests.Bounded ethicality suggests a view of corporate law that is dramatically different than that portrayed by traditional legal and economic theorists. Not only does it suggest that wrongdoing can be committed by well-intentioned people who wish to do right, but also that the biases they display call for a radically different set of legal interventions than those advocated by standard economic theory. If standard theorizing views corporate agents as self-interest maximizers, bounded rationality perceives them as actors with varied and nuanced motivations that could benefit from subtle legal reforms.This Article's assessment of corporate governance through the behavioral ethical lens proceeds in three stages. First, it exposes potential wrongdoing by good people that conventional corporate governance does not address. Second, it suggests novel corporate governance interventions supported by behavioral ethics to address wrongdoing by good people. Third, it identifies existing interventions that according to behavioral ethics analysis may generate unintended adverse effects on the behavior of well-meaning corporate officers and exacerbate wrongdoing instead of mitigating it. As we will show bounded ethicality has important implications for a wide range of topics in corporate governance, such as board structure, independent directors, regulation of institutional investors and proxy advisory firms, the business judgment rule, and corporate and intra-board liability.

Corporate Social Responsibility and Firm Performance of Licensed Commercial Banks in Sri Lanka
Balagobei, Saseela,Anandasayanan, Saratha
Corporate social responsibility (CSR) is a business approach that contributes to sustainable development by delivering economic, social and environmental benefits for all stakeholders. This concept has emerged over the past thirty years to occupy a significant role in certain aspects of the organizational theory. The purpose of this study is to examine the impact of CSR on firm performance from a developing country’s environment. This study considered only 12 licensed commercial banks as sample and obtained secondary data from the financial statements of the licensed commercial banks in Sri Lanka for the period of 2012-2016. Consequently, the quantitative data were employed in the panel data regression model using E-Views software to scientifically analyse the data to identify the significant relationship between these two variables. The control variable is firm size, to be consistent with the previous studies in the literature review. The finding shows that there is no significant impact of social, economic and environmental variables on firm performance. Further the results reveal that there is a significant positive association between CSR and firm performance (ROA) whereas firm size has a negative association with firm performance (Tobin’s Q). The study illustrates and provides some insights and builds on the literature in the area of CSR in a developing country’s environment.

Credit Growth, the Yield Curve and Financial Crisis Prediction: Evidence from a Machine Learning Approach
Bluwstein, Kristina,Buckmann, Marcus,Joseph, Andreas,Kang, Miao,Kapadia, Sujit,Simsek, Özgür
We develop early warning models for financial crisis prediction using machine learning techniques on macrofinancial data for 17 countries over 1870â€"2016. Machine learning models mostly outperform logistic regression in out-of-sample predictions and forecasting. We identify economic drivers of our machine learning models using a novel framework based on Shapley values, uncovering non-linear relationships between the predictors and crisis risk. Throughout, the most important predictors are credit growth and the slope of the yield curve, both domestically and globally. A flat or inverted yield curve is of most concern when nominal interest rates are low and credit growth is high.

Cryptocurrencies and the Low Volatility Anomaly
Burggraf, Tobias,Spörer, Jan
This study examines the low volatility anomaly in the cryptocurrency market. Constructing long-short portfolios for a sample of 1,000 cryptocurrencies for the period April 28, 2013 - November 1, 2019, we find no evidence of a significant low volatility premium. This result is in contrast to the empirical findings from the equity, bond, and commodity markets and contributes to the debate on the efficiency of cryptocurrencies. In contrast to earlier studies, we find that the cryptocurrency market is far more efficient than expected, even after controlling for different sample sizes, rebalancing periods and/or portfolio construction methodologies.

Decoupling Management Inefficiency: Myopia, Hyperopia and Takeover Likelihood
Tunyi, Abongeh A.,Ntim, Collins G.,Danbolt, Jo
Using combinations of accounting and stock market performance measures, we advance a comprehensive multidimensional framework for modelling management performance. This framework proposes “poor” management, “myopia”, “hyperopia” and “efficient” management, as four distinct attributes of performance. We show that these new attributes align with, and extend, existing frameworks for modelling management short-termism. We apply this framework to test the management inefficiency hypothesis using UK data over the period 1988 to 2017. We find that takeover likelihood increases with “poor” management and “myopia”, but declines with “hyperopia” and “efficient” management. Our results suggest that managers who focus on sustaining long-term shareholders' value, even at the expense of current profitability, are less likely to be disciplined through takeovers. By contrast, managers who pursue profitability at the expense of long-term shareholder value creation are more likely to face takeovers. Finally, we document the role of bidders as enforcers of market discipline.

Do Political Connection Disruptions Increase Labor Costs in a Government-Dominated Market? Evidence from Publicly Listed Companies in China
Wei, Chunyan,Hu, Shiyang,Chen, Feng
This paper investigates whether the disruption of political connections increases labor costs among Chinese listed firms. Using the Communist Party of China’s Rule No. 18 as an exogenous shock that forces firms to lose their politically connected independent directors, we find that the disruption of political connections is associated with an increase in labor costs (both in terms of aggregate labor costs per firm and average labor costs per employee) and an increase in employee turnover. Such increases do not lead to labor productivity improvements, and cannot be attributed to changes in corporate policies or the composition of labor forces after Rule No. 18. We also find that firms with higher unemployment risk and skilled labor risk increase their labor costs to a larger extent. Our results are robust to alternative labor cost measures, controlling for potential confounding events, and alternative political connection channels. Our study shows an unintended labor market consequence â€" increases in labor costs â€" of political connection disruptions for firms that are adversely affected by such disruptions.

Does Network Economics Allow to Enlighten Banking Organization?
Levratto, Nadine,Pierre, Emmanuel
Free banking theory aims at showing that competition is the most efficient system as far as compensation between banking institutions is concerned. Private moneys could then exist simultaneously. Such a point of view seems to be at variance with a general tendency consisting in concentrating payment systems under the authority of a Central Bank. It also contrasts with the creation and development of centralized electronic payment systems resting upon new communication means in order to prevent systemic risk. Four main aspects are thus developed to understand the way monetary systems are organized. The first one consists in examining in what extent central money has to be considered as a specific good, whose existence rests upon the security of transfer mechanisms in which irrevocability appears to be an important element. We demonstrate how the technical organization of inter-bank payment system may limit the potentially disruptive contagion effect of an individual failure leading to collapse of other banks when nothing is done to prevent it. The second section gives a presentation of compensation mechanism resting upon network economics. From the typology established by Katz and Shapiro (1985) we demonstrate that talking about externalities is pertinent whenever a quite small number of agents are involved in the same payment system. We then wonder if one compensation system is preferable or not to several ones. The third section presents a model resting upon the so-called club-goods, i.e. intermediate goods that are neither public goods, nor private goods. We then focus on the club's or network's size owing to the idea according to the utility that an agent receives from its consumption depends on the number of other persons with whom he must share its benefits. We show that pure competition is not an optimal solution but that monopoly can be sub-optimal too for reasons dealing with congestion more than with cost. In the last and conclusive section we present normative considerations concerning compensation systems and the way to regulate them using technical means. We thus demonstrate the need for monetary authorities to have at their disposal several means of action in order to grant the security and durability of the payment systems.

Eight Centuries of Global Real Interest Rates, R-G, and the ‘Suprasecular’ Decline, 1311â€"2018
Schmelzing, Paul
With recourse to archival, printed primary, and secondary sources, this paper reconstructs global real interest rates on an annual basis going back to the 14th century, covering 78% of advanced economy GDP over time. I show that across successive monetary and fiscal regimes, and a variety of asset classes, real interest rates have not been ‘stable’, and that since the major monetary upheavals of the late middle ages, a trend decline between 0.6â€"1.6 basis points per annum has prevailed. A gradual increase in real negative-yielding rates in advanced economies over the same horizon is identified, despite important temporary reversals such as the 17th Century Crisis. Against their long-term context, currently depressedbsovereign real rates are in fact converging ‘back to historical trend’ â€" a trend that makes narratives about a ‘secular stagnation’ environment entirely misleading, and suggests that â€" irrespective of particular monetary and fiscal responses â€" real rates could soon enter permanently negative territory. I also posit that the return data here reflects a substantial share of ‘non-human wealth’ over time: the resulting R-G series derived from this data show a downward trend over the same timeframe: suggestions about the ‘virtual stability’ of capital returns, and the policy implications advanced by Piketty (2014) are in consequence equally unsubstantiated by the historical record.

Forecasting of India VIX As Measure of Sentiment
Banerjee, Arindam
The India VIX represents the sentiment of traders in the Indian market, so by forecasting the future value of India VIX, we get a feel for investor sentiment in future. The objective of this study is to fit a forecasting model on India VIX using auto regressive integrated moving average (ARIMA). The model would be useful in having a glimpse of investor mood in near future. This is probably the first of its kind study based on Indian market. The motivation of this study lies not only on the pervasive agreement that the VIX is a barograph of the general marketplace sentiment as to what concerns investors’ risk appetite, but also on the fact that there are many trading strategies that depend on the VIX index for speculative and hedging determinations. The study found ARIMA (1-0-2) forecasting model on VIX produces better forecasting result. We also validated the model with an out-of-sample dataset and found the model reliable.

Green Gold - A Gold Mining Perspective
Baur, Dirk G.,Trench, Allan,Ulrich, Sam
Gold is a long-lasting, durable and thus sustainable metal and asset. However, mining for gold often adversely affects the environment. This study proposes an alternative to mitigate these negative externalities and costs of gold mining. Instead of digging out gold for investment purposes we propose to leave it in the ground and let nature act as a natural vault and custodian legally protected by gold firms and the government. Empirically, we analyse whether portfolios of gold exploration companies with access to such "green" gold also provide exposure to the world price of gold. The results demonstrate that gold mining is not necessary to give investors access to gold.

How Do Financial Contracts Evolve for New Ventures
Jenkinson, Tim,Rauch, Christian,Fu, Danying
While previous papers have characterized various features of the financial contracts between entrepreneurs and venture capitalists, little is known about how the equity contracts evolve over the life of new ventures. Using the novel data set containing financial contract terms applying to different classes of stock, this paper is the first to focus on exploring the how the equity contract terms granted by the same investee private firms may vary across time, and determining the possible influencing factors. We find that there exists a default contract, for the terms adopt by different companies or used by the same companies in different funding rounds are surprisingly similar. Further, we notice, by analyzing the evolution patterns, that equity contracts change asymmetrically across different terms and at different stages of the investee firms. We also provide insights into the discussion on whether employing post-money valuation will definitely result in the over-valuation of start-ups. Our preliminary regression results show that the headroom, the new measure we developed as a proxy for the company’s financial flexibility, be negatively related to the dilution of common stockholders’ ownership of the company.

Impact of IFRS 9 on the Cost of Funding of Banks in Europe
Fatouh, Mahmoud,Bock, Robert,Ouenniche, Jamal
On implementation, IFRS 9 increases credit loss (impairment) charges and reduces after-tax profits of banks. This makes retained earnings and hence capital resources lower than what they would be under IAS 39. To maintain their capital ratios under IFRS 9, banks could elect to hold higher levels of equity capital. This paper uses a modified version of CAPM, which accounts for the low-risk anomaly (as suggested by Baker and Wurgler (2015)), to estimate the impact of this potential increase in capital levels on the cost of funding of banks in six European countries, the UK, Germany, France, Italy, Spain and Switzerland. We confirm the existence of low-risk anomaly for banks’ equity in the six countries, except France. The magnitude of the anomaly varies across countries, but is generally low relative to the long-run cost of equity for banks. Our results show that, on day 1, the implementation of IFRS 9 has minor impact on the cost of funding of banks in the six countries.

Innovation Futures, The Nature of Speculation, and Stock Valuations
Obrimah, Oghenovo A.
This study provides formal theoretical evidence that, in of itself, and subsequent to the first day of trading, applications of the Gordon Growth Model to pricing of publicly traded equity incorporate informational 'noise' and/or 'shading of information' that, theoretically, are unbounded. Introduction of pricing of 'innovation futures' of publicly traded firms mitigates unboundedness of pricing effects of either of noise or shading of information, for arrival at stock prices that are less prone to extreme swings in value. Pricing of innovation futures of publicly traded firms induces speculation on innovation futures of said firms. The formal theoretical model demonstrates that speculation on innovation futures does not coincide with either of speculation that derives from heterogeneity of information (noise), or speculation that derives from heterogeneity of risk preferences (demand for insurance). In presence of interest for improvement of workings of stock markets, development of models for pricing of innovation futures of publicly traded firms is an important frontier for new research activity.

International Portfolio Allocation: The Role of Conditional Higher Moments
Le, Trung
I explore the benefits of incorporating conditional higher moments in the international portfolio allocation. The quantile-based conditional higher moments are robust to the outliers and exhibit considerable time-variation and heterogeneity across countries. My empirical evidence shows that emerging market returns have favourable conditional skewness but are more exposed to extreme returns with higher kurtosis. In the international portfolio, the investor tilts her portfolio towards countries with higher skewness and less kurtosis, consistent with her moment preference in theory. An investor with moderate risk aversion would be willing to pay 210 basis points per year to switch from a three-moment portfolio to the portfolio that employs both conditional skewness and kurtosis. The results are robust to real-time investing strategy, transaction costs and alternative model specifications.

Is Monetary Policy Gender Neutral? Evidence from the Stock Market
Forti Grazzini, Caterina,Kim, Chi Hyun
We use US household survey data from 2001-2017 to investigate whether monetary policy has heterogeneous effects on women's and men's financial portfolio decisions by analyzing their equity investment. On the one hand, monetary policy significantly affects the entry decisions of women, but not of men: after a contractionary shock, the probability of women entering the stock market decreases. On the other hand, monetary policy is gender-neutral for stock market participants: there are no significant differences in exit or in portfolio rebalancing decisions between women and men. Our results suggest that monetary policy does not have a heterogeneous effect on portfolio decisions across genders once women participate in the stock market.

Le Pont De Londres: Interactions between Monetary and Prudential Policies in Cross-Border Lending
Bussière, Matthieu,Hills, Bob,Lloyd, Simon,Meunier, Baptiste,Pedrono, Justine,Reinhardt, Dennis,Sowerbutts, Rhiannon
By combining analysis of two unique confidential datasets, we examine how euro-area (EA) monetary policy and recipient-country prudential policy interact to influence the cross-border lending of French banks from France and the UK. We find that monetary spillovers via cross-border lending can be partially offset by prudential measures in receiving countries. We then explore heterogeneities in that interaction, specifically the difference made by bank size and location of the affiliate (French headquarters vs. affiliates based in the UK, an international financial centre). Focusing on lending from France, we find that the response of GSIBs’ lending to EA monetary policy is less sensitive to recipient-country prudential policy than non-GSIBs’. In contrast, the response of lending to EA monetary policy from French-owned GSIB affiliates in the UK is sensitive to recipient-country prudential policy. We also find evidence that French GSIBs channel funds towards the UK in response to EA monetary policy, in a manner that is dampened by the global prudential policy setting. Together, these findings suggest the existence of a ‘London Bridge’: conditional on EA monetary policy, French GSIBs adjust their funds in the UK in response to global prudential policies and, from there, lend to third countries, responding to local prudential policies. French GSIBs’ cross-border lending from their headquarters to EA monetary policy responds differently to foreign prudential policies than their lending from international financial centres. Finally, we find evidence of a similar pattern for all EA-owned bank affiliates in the UK, suggesting a broader relevance of the London Bridge.

Macroeconomic Content of Characteristics-Based Asset Pricing Models: A Machine Learning Analysis
Rytchkov, Oleg,Zhong, Xun
We consider five characteristics-based asset pricing models and study whether the non-market components of their stochastic discount factors (SDFs) are associated with macroeconomic shocks. Our analysis involves a comprehensive set of 127 macroeconomic variables and uses machine learning techniques to mitigate the overfitting problem caused by a large number of explanatory variables. We find that macroeconomic shocks are totally unrelated to the non-market components of the SDFs. This conclusion extends to several theory-motivated macroeconomic factors. Thus, our results suggest that the empirical success of characteristics-based asset pricing models is produced by their ability to identify behavioral factors in stock returns.

Monetary Policy, Redistribution, and Risk Premia
Kekre, Rohan,Lenel, Moritz
We study the transmission of monetary policy through risk premia in a heterogeneous agent New Keynesian environment. Heterogeneity in households' marginal propensity to take risk (MPR) summarizes differences in portfolio choice on the margin. An unexpected reduction in the nominal interest rate redistributes to households with high MPRs, lowering risk premia and amplifying the stimulus to the real economy. Quantitatively, this mechanism rationalizes the role of news about future excess returns in driving the stock market response to monetary policy shocks.

Moral Hazard and the Property Rights Approach to the Theory of the Firm
Schmitz, Patrick W.
In the Grossman-Hart-Moore property rights theory, there are no frictions ex post (i.e., after non-contractible investments have been sunk). In contrast, in transaction cost economics ex-post frictions play a central role. In this note, we bring the property rights theory closer to transaction cost economics by allowing for ex-post moral hazard. As a consequence, central conclusions of the Grossman-Hart-Moore theory may be overturned. In particular, even though only party A has to make an investment decision, B-ownership can yield higher investment incentives. Moreover, ownership matters even when investments are fully relationship-specific (i.e., when they have no impact on the parties' disagreement payoffs).

Networks, Linking Complexity, and Cross Predictability
Zhu, Wu
This paper provides evidence that network complexity limits investors' ability to process non-local information, through the lens of return cross predictability. Using firm-to-firm citation networks, we find that the non-local indirectly-linked firms can well predict the return of the focal firm, while the predictability of the local directly-linked firms is weak. A long-short strategy using the indirect links yields a risk-adjusted monthly alpha of 198 (164) basis points with equal (value) weights. We further find that (i) the indirect citation links are much more complex than direct ones, (ii) the magnitude of cross predictability increases with the degree of link complexity, (iii) institutional investors don't adjust their positions in a stock with complex links, but in one with simple links immediately, (iv) firms with more complex links receive more public attention, are much larger in size, and exhibit less idiosyncratic volatility than those with simple links, (v) there is little role of the usual proxies for limited investor attention and arbitrage cost in explaining our anomalies, once controlling for the linking complexity, and (vi) there are no differences in expected returns of stocks with various link complexity.

No-Arbitrage Pricing of GDP-Linked Bonds
Eguren Martin, Fernando,Meldrum, Andrew,Yan, Wen
We use a no-arbitrage term structure model of equity yields computed from the prices of dividend swaps to estimate the yields on hypothetical bonds with cash-flows indexed to the level of US GDP. This provides a novel approach for estimating the possible relative cost of conventional and GDP-linked bonds, which is likely to be of interest to sovereigns considering the case for issuing GDP-linked debt. Our model predicts that US GDP-linked bonds would typically have yields lower than those on conventional Treasury bonds with the same maturity in our sample from 2010 to 2017. Positive expected future GDP growth lowers the yield on GDP-linked bonds relative to conventional bonds, which typically more than offsets the estimated GDP risk premium demanded by investors for holding GDP risk. These risk premia decrease with maturity,with unconditional averages falling in absolute value from 7 percentage points at the short-end of the curve to 1 percentage points at the 10-year horizon.

Pecking Order Model of Corporate Financing: Review of Literature
Abdullazade, Zaur
This paper reviews the literature on a firm’s capital structure that is driven by asymmetric information. One of the most popular models of firm’s financing decisions under an asymmetry in the literature is the pecking order theory (POT) of Myers (1984). It is based on the argument that firms have preference ranking over sources of funds for financing based on the corresponding information asymmetry costs (Myers et al. 1984, p.15). In recent studies, many interesting discussions have been generated about the POT. These studies attempt to detect the extent to which the POT describes the financing choices of firms. The results of relevant studies about the POT are presented here, in this literature review.

Reply to 'The Reg SHO Reanalysis Project: Reconsidering Fang, Huang and Karpoff (2016) on Reg SHO and Earnings Management' by Black et al. (2019)
Fang, Vivian W.,Huang, Allen,Karpoff, Jonathan M.
In a 2016 paper (Fang, Huang, and Karpoff, 2016), we report that firms exposed to an increase in the prospect of short selling during the Reg SHO pilot program have lower discretionary accruals during the pilot period. Black, Desai, Litvak, Yoo, and Yu (2019, hereafter, BDLYY) argue that this result is not replicable. We show that BDLYY’s claim is incorrect. The accruals result previously was replicated in papers by Massa, Zhang, and Zhang (2015) and Heath, Ringgenberg, Samadi, and Werner (2019), and is easily replicable using data and code that we have shared widely since 2014 â€" including with the BDLYY team in 2015 â€" and that we recently posted publicly. The accruals result also is robust to a wide range of specification changes, including those implied by the BDLYY paper, which include: various measures of performance-matched discretionary accruals and total accruals; using our original 2012 Compustat data or currently available 2019 Compustat data; including both firm and year fixed effects; including or excluding other covariates in the difference-in-differences (DiD) tests; and using unbalanced rather than balanced panels. We conjecture that BDLYY’s results are inconsistent with prior results because they rely partly on non-standard accruals measures and/or use samples that differ from those used by Fang et al. (2016), Massa et al. (2015), and Heath et al. (2019). We conclude by discussing two theoretical concerns. First, we reiterate that an observed increase in short selling during the Reg SHO period is neither necessary nor sufficient to establish that the prospect of short selling has a disciplinary effect on earnings management, as managers’ endogenous adjustments affect short sellers’ opportunities and observed short selling. Second, we discuss a concern that the Reg SHO change appears to be too small to explain a wide range of firm outcomes, as recent empirical findings suggest.

Strategic Switching of Governance Mechanisms
Orihara, Masanori
We find that firms appoint outside directors when the time of extending takeover defense measures at annual shareholders’ meetings arrives. In contrast, firms do not change their board structures when they need not extend defense measures. We observe this strategic switching among firms whose largest shareholder is an institutional investor after the introduction of the Japanese stewardship code. Our findings suggest that codes affect corporate governance, but they do not improve or impair the quality of governance.

The Effect of Use, Quality of Service, Trust and Satisfaction Loyalty M-Banking Users
Usman, Osly,Sulistyowati, Yuyun
This study aims to determine whether the effect of the quality of service, trust and satisfaction with the m-banking user loyalty. This research was conducted for 3 months starting in October to December 2019. The research method used was survey method with approach of causality. The population in this study were bank customers mbanking users totaling 200 respondents. Data collection techniques use technical literature and questionnaires. Data were analyzed using SmartPLS software version 3. PLS (Partial Least Square) with structural equation analysis (SEM). The results showed that each variable has a significant effect.

The Giant Shadow of Corporate Gadflies
Nili, Yaron,Kastiel, Kobi
Modern-day shareholders exert their influence on corporate America more than ever before. From demanding greater accountability of executives to lobbying for a variety of social and environmental policies, shareholders today have the power to alter the way American companies are run. Amazingly, a small group of individual shareholders wields unprecedented power to set these agendas and stands at the epicenter of our contemporary corporate governance ecosystem. In fact, their power continues to rise. They are called the "corporate gadflies." Corporate gadflies present a puzzling reality. While public corporations in the United States are increasingly owned by large institutional investors, much of their corporate governance agenda has been dominated by a handful of individuals who own tiny slivers of most large companies. How does an economy with corporate equity in the trillions of dollars cede such governance power to corporate gadflies? More importantly, should it? Surprisingly, scholars have paid little attention to the role of corporate gadflies in this ever changing governance landscape. This Article is the first to address the giant shadow that corporate gadflies cast on the U.S. corporate governance landscape. The Article makes three contributions to the corporate governance literature. First, it provides a detailed empirical account both of the growing power and influence that corporate gadflies wield over major corporate issues and of their power to set governance agendas. It does so through a comprehensive dataset of all shareholder proposals submitted to the S&P 1500 companies from 2005 to 2018. Second, the Article uses the context of corporate gadflies to illuminate a key governance debate"the role of large institutional investors in corporate governance. Specifically, the Article underscores the potential concerns that corporate gadflies present and questions the current deference of institutional investors to these gadflies regarding the submission of shareholder proposals. Finally, the Article presents policy reforms aimed at reframing the current discourse on shareholder proposals to potentially spark a new line of inquiry regarding the role of investors in corporate governance.

The Global Impact of Brexit Uncertainty
Hassan, Tarek Alexander,van Lent, Laurence,Hollander, Stephan,Tahoun, Ahmed
Using tools from computational linguistics, we construct new measures of the impact of Brexit on listed firms in the United States and around the world; these measures are based on the proportion of discussions in quarterly earnings conference calls on the costs, benefits, and risks associated with the UK’s intention to leave the EU. We identify which firms expect to gain or lose from Brexit and which are most affected by Brexit uncertainty. We then estimate effects of the different types of Brexit exposure on firm-level outcomes. We find that the impact of Brexit- related uncertainty extends far beyond British or even European firms; US and international firms most exposed to Brexit uncertainty lost a substantial fraction of their market value and have also reduced hiring and investment. In addition to Brexit uncertainty (the second moment), we find that international firms overwhelmingly expect negative direct effects from Brexit (the first moment) should it come to pass. Most prominently, firms expect difficulties from regulatory divergence, reduced labor mobility, limited trade access, and the costs of post-Brexit operational adjustments. Consistent with the predictions of canonical theory, this negative sentiment is recognized and priced in stock markets but has not yet significantly affected firm actions.

The Granger Causality Study Between Exchange Rate And Stock Prices In The Indian Context
Rajamalla, Amarthya Prem,Kumar Reddy, Kushal
This paper identifies the dynamic linkage between stock rate indices and exchange rate in the Indian Market for the last 26 years. There has not been such a significant and detailed study on this in an Indian context, and we have extensively studied the granger causality between different industrial sector-wise stock market indices with the US Dollar - Indian Rupee exchange rate. The regression is split adequately into phases of economic significance, and daily data is studied. We do not find any bidirectional causality in most of the sectors during all periods of study except during 2014-2019, where many sectors including Auto, PSU, Metal and Manufacturing, show a bidirectional dependance. This paper further links the empirical findings to the possible scenario of the economy that may have caused the relation for the sector during that period. These results and discussions have few significant implications for policymakers, stock analysts and foreign investors.

The Real Effects of Loan-To-Value Limits: Empirical Evidence from Korea
Pontines, Victor
This study adds to a recent and growing literature that assesses the effects of macroprudential policy. We compare the effects of monetary policy and loan-to-value ratio shocks for Korea, an inflation targeting economy and an active user of loan-to-value limits. We identify shocks using sign-restricted structural VARs and rely on a recent approach within this method to conduct structural inference. This study finds that both monetary policy and loan-to-value ratio shocks have effects on different measures of credit, i.e., real bank credit, real total credit and real household credit. We also find that both shocks have non-negligible effects on real house prices, including effects on real output, real consumption and real investment. We do, however, find that loan-to-value ratio shocks have negligible effects on the price level. These findings indicate that for the period covered by this study, limits on loan-to-value achieved their financial stability objectives in Korea in terms of limiting credit and house price appreciation under an inflation targeting regime. Furthermore, it attained these objectives without posing any threat to its price stability objective. Overall, these findings suggest that limits on loan-to-value have important aggregate consequences despite it being a sectoral, targeted policy instrument.