Research articles for the 2020-03-27

50 Shades of Green Part I: Carbon
Hache, Frederic
Beyond the well-known excess allowances and cases of fraud, carbon markets also have major conceptual issues, some of which are unresolvable such as the in-existence of a price signal. Carbon taxes suffer from some of the same flaws and are therefore only marginally better. As carbon becomes an asset class, carbon markets are also likely to be more vulnerable than traditional markets to market failures and abrupt losses of confidence from investors, with a high risk of contagion to other asset classes and the wider economy. The unresolvable nature of some of the issues seriously questions the idea that carbon markets can ever meet their environmental and social objectives. This calls into question the current push to create new offset markets linked to the Paris Agreement at the COP25 and offsets for aviation emissions. The logical conclusion should be to abandon carbon markets for more robust alternatives, such as traditional binding regulations.

A Theory of the Proxy Advice Market when Investors have Social Goals
Matsusaka, John G.,Shu, Chong
This paper develops a theory of the proxy advice market when some investors have non-pecuniary goals such as environmental sustainability and protection of human rights. We develop a model in which advisory firms choose their production technologies and compete for the business of investors with heterogenous preferences over returns and social goals. When the market for advice is small, the industry equilibrium consists of small “boutique” firms that provide customized advice to each investment fund, and voting outcomes reflect the distribution of investor preferences. When the market is large, the industry reduces to a single advisory firm using a platform technology, the firm’s advice is slanted toward the preferences of funds with non-value-maximizing goals, and voting outcomes overrepresent the preferences of activist funds. We discuss normative principles for assessing proxy advice when value maximization is not the sole objective of investors.

Aggregate Implications of Credit Relationship Flows: A Tale of Two Margins
Boualam, Yasser,Mazet-Sonilhac, Clément
This paper documents the aggregate properties of credit relationship flows within the commercial loan market in France between 1998 and 2018. Using detailed bank-firm level data from the French Credit Register, we show that banks actively and continuously adjust their credit supply along both intensive and extensive margins. We particularly highlight the importance of gross flows associated with credit relationships and show that they are (i) volatile and pervasive throughout the cycle, and (ii) can account for up to 48 percent of the cyclical and 90 percent of the long-run variations in aggregate bank credit.

Aggregate and Firm-Level Stock Returns During Pandemics
Alfaro, Laura,Chari, Anusha,Greenland, Andrew,Schott, Peter
We model investor beliefs about the severity of a pandemic in real time using standard models of infectious disease. We show that changes in these models' predicted infections as a crises unfolds explain day-to-day aggregate market returns, even after controlling for the most recent change in reported infections. Our analysis currently is confined to four countries battling COVID-19. Future drafts will extend our investigation to additional countries and other pandemics, and examine the relationship between firms' returns and their exposure to pandemics along domestic and international input-output channels, as well as the demographics and occupations of their workforce.

Aye Corona! The Contagion Effects of Being Named Corona during the COVID-19 Pandemic
Corbet, Shaen,Hu, Yang,Lucey, Brian M.,Oxley, Les
In the midst of the 2020 global COVID-2019 pandemic and subsequent financial market collapse, corporate entities have to navigate a number of truly unforeseen contagion risks. However, one such group included those who shared their corporate identity with aspects of the rapidly evolving coronavirus. Our results indicate the existence of sharp, dynamic and new correlations between companies related to the term `corona', outside of pre-existing interrelationships. We provide a number of observations as to why this situation occurred.

Bearish Analysts and the Issuance of 'Unbeatable' Earnings Forecasts
Call, Andrew C.,Sharp, Nathan Y.,Snow, Mason
We examine whether bearish analysts issue unusually optimistic earnings forecasts (i.e., “unbeatable forecasts”) at the end of the year in an effort to increase the likelihood that a firm misses earnings expectations. We identify a sample of analysts with unfavorable stock recommendations whose final earnings forecast prior to the earnings announcement exceeds even the most optimistic earnings forecast issued by any other analyst covering the stock. For the period 2004 through 2018, we find that 11.7% of all firm-year observations are subject to at least one such unbeatable forecast. Bearish analysts are more likely to issue these forecasts when they have greater pressure to defend their negative view of the stock and when the strategy is more likely to revise investor beliefs. Although unbeatable forecasts are upward revisions, stock returns associated with these optimistic forecasts are relatively unfavorable. While these forecasts are often excluded from the consensus earnings forecast published by Thomson Reuters, they nevertheless increase the likelihood that the firm misses the consensus earnings estimate by about 21%. Finally, we find that the market reaction to a negative (positive) earnings surprise is muted for firms when an analyst has issued an unbeatable forecast.

CEO Employee Approval and Firm Value: Evidence from Employees' Choice Awards
Barnes, Spencer
This study examines the impact of employees' opinions of chief executive officers (CEO) on firm value. Leveraging close employee vote shares in event study and regression discontinuity specifications from Glassdoor's "Top CEOs Employees' Choice" award list suggest a causal link of the relationship. Narrowly winning an employees' choice CEO award results in a negative one percent cumulative abnormal stock return around the award release but a four percent increase in firm value in following years. The findings imply that CEO and employee relationships are an important intangible good for corporate governance.

CSR as a Socially Constructed Phenomenon: Simulating the Interplay between Public Expectations and Firms' Choices
Kotzian, Peter
Compliance in the domain of CSR differs from financial compliance in that mere abidance to legal rules is insufficient. By its very nature, CSR compliance is a socially constructed phenomenon. Public expectations regarding CSR evolve over time but are also driven by how the majority of firms behave. CSR non-compliance is constituted by not meeting these expectations. Firms meeting or exceeding public expectations receive a bonus in terms of public support, firms not meeting public expectations get punished, and firms respond to this by choosing their CSR engagement.Using an agent-based-model, we simulate this interaction. For firms, we presume simple decision rationales based on benefits and costs. We vary model parameters, like CSR-related costs, but also the public’s ability to perceive CSR-related out-/under-performance and the magnitude of the punishment and rewards associated with this. Of interest are CSR levels in the firm population, how firms adapt their CSR engagement, depending on the parameters chosen but also, which parameter constellations correspond to observations of CSR levels in reality. Looking at differences between a setting in which the public predominantly punishes under-performance as opposed to a setting in which the public predominantly rewards out-performance we see different implications. For constellations with a high malus for under-performance, firms which substantially lag in terms of CSR quickly catch up to avoid reputational costs. In the long run, in particular after the laggards caught up, the CSR development responds to the bonus associated with outperforming the average in terms of CSR. For constellations with a substantial bonus for CSR out-performance, firms with very low costs of CSR engagement specialize in CSR, set high initial levels of CSR engagement and constantly out-perform the rest of the population and pull the CSR average upwards. Comparing constellations with empirical data, we see that the catching-up effect can be found in the development of the CSR engagement of firms as measured by data from the Thomson-Reuters-Eikon Database, while there is no corresponding CSR escalation of high performers.

Comparative Analysis of Underpricing and Subscription of SME IPOs and Main Board IPOs in India
Sharma, Sudesh Kumar,Wazal, Makarand S.
SME (Small & Medium Enterprises) IPOs formally debuted in India in 2012 when BSE and NSE introduced SME Platform on their exchanges along with Main Board Platform (for non-SMEs). SEBI has eased the listing criteria for SMEs to make it more attractive. The focus of this study is to assess and compare efficiency of SME IPOs with respect to Main Board IPOs in terms of price discovery using underpricing analysis. The study is based on sample of 1110 IPOs which comprises 526 SME IPOs and 584 Main Board IPOs that got listed on BSE, NSE and on their SME Platform during the period 2000 to 2019. Outcome of this analysis suggests that SME IPOs are more efficient in terms of underpricing. Further, the demand levels in case of SMEIPOs are lower compared with their counterparts, even though the probability of listing day gains is high. This study will provide insight to the policymakers, investing community, issuers and also add to the body of the knowledge on SME IPOs which is still at the nascent stage amongst the research community.

Corporate Social Bonds: A Legal Analysis
Lenzi, Diletta
The article focuses on corporate social bonds, which are commonly defined as debt securities where proceeds are used to finance projects or ventures at favourable conditions, in order to achieve positive social outcomes or to address specific social issues.Social bonds belong to the family of sustainable finance currently developing on international financial markets, especially in the EU, and where interest has also recently emerged at the political level. Although in March 2018 the European Commission published its Action Plan on Financing Sustainable Growth, at the moment of writing there is no specific EU legal framework for social bonds. The absence of a precise definition of social bonds and the uncertainty around the remedies for non-compliance of promised ‘social’ obligations entail serious risks of ‘socialwashing’ (i.e., the misappropriation of an increasingly attractive label). Through an analysis of the contractual design of social bonds, and the identification of different types of social bonds, the article identifies potential legal ‘Achilles heels’ of social bonds and suggests possible contractual remedies to ensure that both issuers and beneficiaries comply with their duties in terms of social impact achievement. Finally, the article suggests a European Union intervention in developing a ‘goal-oriented’ definition for social bonds.

Do Key Audit Matters Communicate Uncertainty Information in Earnings to Investors?
Pan, Hunghua,Liao, Yi-Ping
International Standards on Auditing 701 specifies that key audit matters (KAMs) refer to those matters that, in the auditor’s professional judgment, were of most significance in the audited financial statements. We propose that KAMs facilitate the auditor’s communication with investors by delivering uncertainty information, as reflected in earnings response coefficients (ERCs) varying with KAM characteristics. Our empirical analyses indicate that firms with fewer KAMs or with the majority of KAMs being firm-specific are associated with greater ERCs. Additionally, for firms that undergo substantial operational changes, a higher percentage of recurring KAMs significantly decreases ERCs, suggesting that investors expect the KAM reporting to correspond with the changes in operations. Collectively, the evidence shows that the standard’s objective, directing investors’ attention to areas of significance, is preliminarily achieved. Besides, auditors should provide more firm-specific, rather than generic KAMs in order to enhance the communicative value of the auditor’s report.

Estimating the COVID-19 Cash Crunch: Global Evidence and Policy
De Vito, Antonio,Gomez, Juan-Pedro
In this paper, we investigate how the COVID-19 health crisis could affect the short-term liquidity of listed firms across 26 countries. We stress-test two liquidity ratios for each firm in three simulated distress scenarios, which correspond to a drop in sales of 25%, 50%, and 75%, respectively. In the most adverse scenario, the average firm would exhaust its cash holdings in about one year. Further, its current liabilities would, on average, triple relative to the level in 2018. Moreover, about one-third of all sample firms would become illiquid within six months. Finally, we study two different fiscal policies, i.e. tax deferrals and bridge loans, which governments could implement to mitigate the liquidity risk. Our analysis suggests that bridge loans are more cost-effective to prevent a massive cash crunch.

Estimating the DJI Series by Multifractional Brownian Motion
Park, Jungjun
This paper estimates the stock market and its price dynamics in terms of the multifractional Brownian motion. In our analysis, we use the financial dataset of the Dow Jones Industrial Average (DJI) time series from March 2009 to June 2015. First, we briefly introduce the definitions and properties of the Brownian motion (Bm), fractional Brownian motion (fBm) and multifractional Brownian motion (mBm). Then we model price processes as exponential of the sum of a regular process and a stochastic process. Finally, we estimate the Holder exponent and show how mBm can capture the fluctuations of the price dynamics.

Financial Fragility in Retail-NBFCs
Anshuman, V. Ravi,Sharma, Rajdeep
This study examines the financial fragility of the Retail Non-Banking Financial Companies (Retail-NBFCs) sector. We show that the liquidity crunch in Retail-NBFCs stemmed from their over-dependence on short-term wholesale funding from Liquid Debt Mutual Funds (LDMFs) and the low level of high-quality liquid investments in the LDMF sector. While such reliance worked well in good times, it generated significant short-term debt rollover problems for Retail-NBFCs during times of stress. The key reason for the inability of Retail-NBFCs to roll over commercial paper was the transmission of systemic risk from Retail-NBFCs to the LDMF sector. Anticipating defaults by Retail-NBFCs, mutual fund investors exited from the LDMF sector. The low levels of high-quality liquid assets in the LDMF sector were insufficient to withstand the concerted redemption pressure by investors and made the LDMF sector reluctant to roll over short-term debt of Retail-NBFCs. We develop a robust tool (Health Score) to estimate financial fragility in a Retail-NBFCs and find that it can predict the constraints on external financing (or rollover risk) faced by these firms.

Fund Family Matters: How Index Funds Improve Corporate Governance
Lakkis, Emil
How do index funds affect corporate governance? In this paper, I propose a novel mechanism that explains why index funds have a beneficial effect on governance. Mutual fund families centralize voting decisions, effectively reallocating voting rights from index funds to active funds in the same family. As a result, index funds strengthen the voice mechanism of corporate governance. I show that increased index fund holdings facilitate the coordination between funds from the same fund family. All else equal, an increase in index fund holdings in a firm is associated with lower levels of disagreement on proxy votes among funds in that family when voting on the firm's proposals. Additionally, higher index fund holdings lead to fewer proxy votes cast in support of the management by active funds in the same family. The results hold across several proposal types and are especially pronounced for proposals related to the allocation of voting rights between the management and the shareholders. My results demonstrate that as long as index funds are offered by families that have active funds, the increasing size of index funds does not lead to less monitoring of the management. The paper highlights the importance of taking the organizational structure of fund families into account when studying the corporate governance implications of indexing.

Hayek, Deflation, Gold, and Nihilism
Glasner, David
Abstract: In Hayek’s early writings on business cycle theory and the Great Depression he argued that business cycle downturns including the steep downturn of 1929-31 were caused by unsustainable elongations of capital structure of the economy resulting from bank-financed investment in excess of voluntary saving. Because monetary expansion was the cause of the crisis, Hayek argued that monetary expansion was an inappropriate remedy to cure the deflation and high unemployment caused by the crisis. He therefore recommended allowing the Depression to take its course until the distortions that led to the downturn could be corrected by market forces. However, this view of the Depression was at odds with Hayek’s own neutral money criterion which implied that prices should fall during expansions and rise during contractions so that nominal spending would remain more or less constant over the cycle. Although Hayek strongly favored allowing prices to fall in the expansion, he did not follow the logic of his own theory in favoring generally increasing prices during the contraction. This paper explores the reasons for Hayek’s reluctance to follow the logic of his own theory in his early policy recommendations. The key factors responsible for his early policy recommendations seem to be his attachment to the gold standard and the seeming necessity for countries to accept deflation to maintain convertibility and his hope or expectation that deflation would overwhelm the price rigidities that he believed were obstructing the price mechanism from speeding a recovery. By 1935 Hayek’s attachment to the gold standard was starting to weaken, and in later years he openly acknowledged that he had been mistaken not to favor policy measures, including monetary expansion, designed to stabilize total spending.

Informational Foundations for the Macroeconomic Role of Aggregated Accounting Disclosures
Lind, Gary
I show that, consistent with theory, the volume of business transactions increases during good economic states relative to bad (Veldkamp 2005). As more transactions are aggregated in financial reports, the precision of the macroeconomic signal in aggregated accounting information increases, so that accounting reports contain more precise macroeconomic information during good states of the economy when transaction volume is high than bad states when the volume is low (Van Nieuwerburgh and Veldkamp 2006). Lastly, the macroeconomic information dynamics of aggregate earnings follow economic theory: macro content grows throughout good states as agents become more confident and the information environment improves.

Is There Valuable Private Information in Credit Ratings?
Alanis, Emmanuel
Credit rating agencies (CRAs) contend their ratings contain a quantitative assessment based on hard information, and a qualitative adjustment based on private information. We study if the qualitative portion of ratings, generated with the companies' own private information, contain valuable information for equity investors. We generate predicted ratings based on hard information alone and form portfolios of stocks based on the difference between observed and predicted rating. Over a sample from 1998 to 2018, we find that stock portfolios formed on the basis of private information generate 2% to 4% in annual risk-adjusted returns. We also find that companies with positive private information have better future accounting performance. Our results suggest that CRAs bring to market valuable information and investors could benefit from it.

Managing China's Stock Markets: The Economics of the National Team
Dang, Tri Vi,Li, Wei,Wang, Yongqin
Though government interventions in the form of direct purchase of stocks in financial crises are common around the world, empirical evidence on their effects has been scant. This paper exploits a wide range government intervention in China to address the question. In the great stock market crash in 2015, Chinese government directly purchased stocks to stabilize the market on a large scale, through state-owned financial institutions collectively called the “National Team”. Using a difference-in-difference methodology, the paper finds that the revelation of intervention not only leads to reduced volatility and trading volume, but also reduces price informativeness. These results are consistent with the heterogeneous beliefs and global game literature, where more consensus reduces trading and more precise public information undermines information production. The paper suggests some fundamental rationales and trade-offs of government interventions in a second-best world.

Modelling EA Banks Default Rates With Jointly Spanned and Unspanned Interest Rates and Unspanned BEI Rates
Ticciati, Marco
The paper quantifies the influence of interest rates and inflation rates on default rates of banks. By expanding the work of Duffee (1998), with the unspanned risks as in the work of Joslin, Priebsch, and Singleton (2014), we estimate a multifactor model with unspanned interest rates and inflation rates to test the performance of unspanned variables in the default rate term structure of banks. The model is trained in samples of positive interest rates and evaluated in samples of negative interest rates. we check the robustness of the model by comparing the results with the performance of alternative model specifications. The model reveals that unspanned variables have worse performance than alternative models specifications. The negative effect of interest rates on default rates over longer maturities may lead the EA banks to decrease the loan supply to the real economy. As a consequence EA banks will have a lower net interest margin as the return of assets is lower. This may increase the future probability of default. Thus, the solution for EA banks is on the reach to yield behavior as described by Bruno and Shin (2015). This means that EA banks have to modify the allocation of assets more in favour of riskier and longer maturity securities to obtain higher profitability.

Multiple Regression Analysis for Dynamics of Patient Volumes
Duran, Ahmet,Farrukh, Mohammed
We study a real data set of 7,894,947 patients who received service from the University of Michigan Health System (UMHS) from January 1, 2003 to December 31, 2008 using regression analysis to understand the dynamics of patient volume. Our objective is to find out patterns from time series of patient volume during economic crisis. We propose a contribution adjusted formula to understand the dynamics of a heterogeneous customer population. We find that the trend of patient volume for a health system is positively correlated to the trend of the underlying adjusted resident population and to the GDP rates and negatively correlated to annual unemployment rate. We also find that the percent change of patient volume in a health system depends on the threshold level curves of resident population and unemployment rate with nonlinear behavior. Our multiple regression model with quadratic response surface explains 98.9% of the variation. Moreover, the multiple regression model having lag 1 with interaction term explains 96.5% of the variation. Furthermore, we propose several models having dummy variables using localities for patient groups. Overall, our results suggest that people use more health services when they have enough income, job and health insurance.

On Adjusting the One-Sided Hodrick-Prescott Filter
Wolf, Elias,Mokinski, Frieder,Schüler, Yves Stephan
We show that one should not use the one-sided Hodrick-Prescott filter (HP-1s) as the real-time version of the two-sided Hodrick-Prescott filter (HP-2s): First, in terms of the extracted cyclical component, HP-1s fails to remove low-frequency fluctuations to the same extent as HP-2s. Second, HP-1s dampens fluctuations at all frequencies -- even those it is meant to extract. As a remedy, we propose two small adjustments to HP-1s, aligning its properties closely with HP-2s: (1) a lower value for the smoothing parameter and (2) a multiplicative rescaling of the extracted cyclical component. For example, for HP-2s with lambda = 1,600 (value of smoothing parameter), the adjusted one-sided HP filter uses lambda_star = 650 and rescales the extracted cyclical component by a factor of 1.1513. Using simulated and empirical data, we illustrate the relevance of the adjustments. For instance, financial cycles may appear 1.7 times more volatile than business cycles, where in fact volatilities differ only marginally.

On Bond Returns in a Time of Climate Change
Ravina, Alessandro
The study of the financial repercussions of low-carbon policy has focused mainly on stocks, leaving bonds out of the picture. The objective of this paper is to assess the impact of low-carbon policy upon European bond returns. This is done by extending the Fama and French (1993) two factor model for bonds with an EU-ETS compliance factor. The paper provides a highly statistically significant proxy for the risk factor in bond returns related to EU-ETS compliance, the GMC factor, and shows the presence of a statistically significant green premium in the European bond market. Furthermore, evidence is found that the addition of an environmental factor improves the performance of the original model in Europe. Lastly, the carbon stress test put forward is able to indicate the effects of a plausible but more severe average EU-ETS carbon price on bond returns.

On the Future of Securities Settlement
Bech, Morten L.,Hancock, Jenny,Rice, Tara,Wadsworth, Amber
Innovative technologies, such as distributed ledgers, allow securities to be issued or represented in a new form known as digital tokens. Such "tokenisation" of securities will alter post-trade clearing and settlement, and could improve efficiency in some dimensions. But the fundamental trade-offs involving credit risk and liquidity remain in a tokenised world. To succeed, tokens will need to interoperate with account-based systems, at least in the interim.

On the Global Retreat of Correspondent Banks
Rice, Tara,von Peter, Goetz,Boar, Codruta
Correspondent banks have been paring back their cross-border banking relationships for the past decade. The retreat is broad-based, but affects some countries more than others. Jurisdictions with weaker governance and deficient controls to prevent illicit financing have lost more relationships, while trade and growth were supportive. Technological developments, as well as private and public sector initiatives, could help to reduce frictions in cross-border payments. Further monitoring and action are warranted to ensure that all countries enjoy access to safe, low-cost cross-border payment channels.

Perceived vs Actual Financial Crisis and Bank Credit Standards: Is There Any Indication of Self-Fulfilling Prophecy?
Anastasiou, Dimitrios,Bragoudakis, Zacharias ,Giannoulakis, Stylianos
We link senior banks loan officers’ responses regarding their decisions for bank credit standards, from successive surveys from the European Bank Lending Survey to investigate two important issues. First, we examine the relationship between bank credit standards (CS) and perceived and actual financial crisis. Second, we investigate whether the notion of the self-fulfilling prophecy is applicable in the case of the 2008 global financial crisis. In particular, the second main research question that we try to answer is whether the perceived crisis (as implied by the Google search query “financial crisis”) contributed to the acceleration of the outburst of the actual crisis. We find that both perceived and actual financial crisis affect senior bank loan officers’ credit standards, with the actual crisis to be the one with the greatest impact. These results are consistent both in the short and in the long run. Finally, by putting forward a binary choice model we find sufficient evidence to support the Self-Fulfilling Prophecy notion.

Price Transparency in OTC Equity Lending Markets: Evidence From a Loan Fee Benchmark
Cereda, Fabio,Chague, Fernando,De-Losso, Rodrigo,Genaro, Alan,Giovannetti, Bruno
We study the effects of a price transparency shock in the Brazilian OTC equity lending market. A publicly available stock-specific loan fee benchmark used to be the average fee of the previous 15 trading days. On March 1st 2011, this interval was reduced to 3 days, significantly improving short-sellers' ability to predict current loan fees. We find that loan fees fell by 0.27 standard deviation after the benchmark change and that the reduction was two times larger for short-sellers who face high search costs. Only few countries benefit from loan fee benchmarks and our results may be relevant to regulators.

Residential Real Estate in a Mixed-Asset Portfolio
Bertrand, Philippe,Prigent, Jean-Luc
Mixed-asset portfolio optimization consists in determining the best allocation among standard financial assets such as money market accounts, bonds, stocks and real estate asset as well. For this latter kind of asset, computing the optimal weight can be challenging. First, there is the need to specify the kind of real estate included in the portfolio (commercial, industrial, residential, direct, REIT shares). Second, the prices used to calibrate real estate values need to be chosen from alternatives like: appraisal values, actual real estate transactions, repeated sales, indices. In this paper we focus on private residential real estate returns, investigating the optimal weight of the real asset with respect to standard financial assets. Using quarterly data on housing indices for four European countries, France, Germany, UK and Spain, we address the question of how investing in housing affects the composition of an investor’s portfolio. We show in particular under which conditions we recover the typical 15%-20% real asset allocation.

Safe Haven or Risky Hazard? Bitcoin during the Covid-19 Bear Market
Conlon, Thomas,McGee, Richard
The COVID-19 bear market presents the first acute market losses since active trading of Bitcoin began. This market downturn provides a timely test of the frequently expounded safe haven properties of Bitcoin. In this paper, we show that Bitcoin does not act as a safe haven, instead decreasing in price in lockstep with the S&P 500 as the crisis develops. When held alongside the S&P 500, even a small allocation to Bitcoin substantially increases portfolio downside risk. Our empirical findings cast doubt on the ability of Bitcoin to provide shelter from turbulence in traditional markets.

Should Corporations have a Purpose?
Fisch, Jill E.,Davidoff Solomon, Steven
The hot topic in corporate governance is the debate over corporate purpose and, in particular, whether corporations should shift their purpose from the pursuit of shareholder wealth to pursuing a broader conception of stakeholder or societal value. We argue that this debate has overlooked the critical predicate questions of whether a corporation should have a purpose at all and, if so, why. We address these questions by examining the historical, legal and theoretical justifications for corporate purpose. We find that none of the three provides a basis for requiring a corporation to articulate a particular purpose or for a given normative conception of what that purpose should be. We additionally challenge recent corporate commitments to stakeholder value as lacking both binding legal effect and operational significance.We nonetheless argue that articulating a corporate purpose can be valuable, and we justify a specification of corporate purpose on instrumental grounds. Because a corporation consists of a variety of constituencies with differing interests and objectives, an articulated corporate purpose enables those constituencies both to select those corporations with which they wish to identify and to navigate the terms of that association through contract or regulation. Our instrumental view of the corporation brings a new perspective to the purpose debate. Although we do not address competing normative claims about what a corporation’s purpose should be, our instrumental argument leads us to conclude that, at least as a default matter, the purpose of a corporation should be understood as maximizing the economic value of the firm.

The Association Between Bank Credit Terms and Conditions and the Business Cycle in the Euro-Area
Anastasiou, Dimitrios,Drakos, Konstantinos
We explore the trajectory of bank loan Terms and Conditions over the business cycle, where the latter is decomposed into its long-run (trend) and short-run (cyclical) components. We find that deterioration of each business cycle component leads to a significant tightening of credit terms and conditions. We found mixed results concerning the symmetry of impacts of the short and long run components. Symmetry was found between the terms and conditions on loans for small vs. large enterprises. Our findings provide very useful information to policy makers and thus they should be taken into consideration when monetary policies are designed.

The Complexity of Bank Holding Companies: A Topological Approach
Flood, Mark D.,Kenett, Dror Y.,Lumsdaine, Robin L.,Simon, Jonathan
We develop metrics to assess the complexity of a bank holding company (BHC), based on its ownership structure. Large BHCs have intricate ownership hierarchies involving hundreds or even thousands of legal entities that may contribute to increased operational risk and greater opacity. Our measures are mathematically grounded, intuitive, and easy to implement. They may be particularly useful in the context of resolution, where regulators often face significant time pressure and coordination challenges. We use regulatory filing data from the Federal Reserve to validate the measures, demonstrating that they provide a useful complement to balance sheet information in assessing BHC complexity. Notably, the proposed measures are highly correlated with existing complexity indicators that are not based on organizational structure and are less correlated with size than these existing complexity measures. We show that the proposed measures provide additional explanatory power for the regulatory indicators, even after controlling for size.

The Compliance Mentorship Program: Improving Ethics and Compliance in Small Government Contractors
Tillipman, Jessica,Surampudi, Vijaya
Over the past decade, the anti-corruption, ethics, and compliance landscape has changed dramatically. This is a direct consequence of a global anti-corruption enforcement effort led by the United States through its enforcement of the Foreign Corrupt Practices Act. The increase in enforcement has also been spurred by the adoption of several multilateral anti-corruption agreements, such as the Organization for Economic Co-operation and Development (OECD) Anti-Bribery Convention and the United Nations Convention Against Corruption (UNCAC). These agreements have spurred several countries to enact anti-corruption laws, such as the U.K. Bribery Act, Brazil’s Clean Company Act, and France’s Loi Sapin II. The laws prohibit, among other things, the bribery of foreign government officials. They also encourage companies to dedicate resources to developing anti-corruption compliance programs and maintaining robust internal controls.The increase in anti-corruption enforcement has profoundly impacted large, multinational corporations. Many of these companies have responded to the enforcement increase by investing heavily in sophisticated compliance programs designed to prevent or mitigate liability for anti-corruption violations. The development of rigorous internal compliance programs has been particularly pronounced in the defense industry, especially among large, U.S. defense contractors.Unlike their large counterparts, many small government contractors are largely unable to keep up with the rapidly evolving trends and best practices in ethics and compliance. Their inattention to this critical area leaves them at risk for compliance failures, fraud, and corruption. As a result, small contractors are more likely than their large counterparts to be debarred from the U.S. procurement system.Despite the harsh consequences of compliance deficiencies, few small contractors are likely to dedicate resources to the development of vital compliance policies and internal controls because of the reality of limited resources. This has created a critical gap in the defense industry supply chain, as many large contractors may partner with small companies that lack the sophistication and resources necessary to ensure compliance with the many government contracts compliance requirements.One solution to this growing problem is to incentivize large government contractors to help their small subcontractors develop compliance programs. The incentives, of course, must be substantial enough to convince large contractors to share their confidential and proprietary compliance programs and best practices.Fortunately, a model for this type of arrangement exists in the U.S. procurement system. The “mentor-protégé” program is designed to help small businesses navigate the immense government contracts regulatory system.Under this program, generally a larger, more experienced contractor serves as a “mentor” to a smaller contractor (the “protégé”). The mentor, among other things, guides the protégé through the complex procurement regime by sharing expertise and resources. In return, the mentor is provided with contractual opportunities and incentives by the U.S. Government.This model could benefit companies in the compliance space by providing a mechanism for contracting parties to exchange information and ensure transparency throughout all levels of the procurement process.This article recommends incentivizing large businesses to utilize their vast resources to assist their small business partners with the development of internal ethics and compliance programs in order to improve the overall integrity of the government procurement system. It analyzes the development of global anti-corruption compliance standards through an overview of noteworthy changes in laws, regulations and enforcement, as well as the current compliance risks that large companies face when contracting with smaller companies who lack robust compliance systems and internal controls. The article concludes by recommending the adoption of a corporate mentor-protégé program that incentivizes larger companies to dedicate resources to helping smaller contractors develop anti-corruption compliance programs.

The Technology of Retail Central Bank Digital Currency
Auer, Raphael,Böhme, Rainer
Central bank digital currencies (CBDCs) promise to provide cash-like safety and convenience for peer-to-peer payments. To do so, they must be resilient and accessible. They should also safeguard the user's privacy, while allowing for effective law enforcement. Different technical designs satisfy these attributes to varying degrees, depending on whether they feature intermediaries, a conventional or distributed infrastructure, account- or token-based access, and retail interlinkages across borders. We set out the underlying trade-offs and the related hierarchy of design choices.

The War That Bond Markets Did not Perceive as Such The Prices of South African Bonds during the Second Anglo-Boer War: An Extreme Case of Resilience
Oosterlinck, Kim,Van Gansbeke, Marie
When a conflict breaks out, warring states’ bond prices generally experience sharp declines. As military defeat may prompt the winner to ask for reparations, bonds issued by the losing party are usually even more affected. By contrast, during the Second Anglo-Boer war (1899-1902) the prices of the bonds issued by the South African Republic never fell below 96% of par and this despite the fact that the public believed South African defeat could not be avoided. We attribute this observation to investors’ belief that a Britsih victory would lead to the assumption of the South African debt by the victor. Historical precedents and archival evidence show that this was by no means a foregone conclusion. Our analysis reveals the important role played by Rothschild, the underwriter. When the bond was first issued, Rothschild signalled that should a war break out the bond would be repaid. Once the war became reality Rothschild was instrumental in making sure Great Britain would take over the loan.

When in Rome: Local Social Norms and Tournament Incentives
Burns, Natasha,Minnick, Kristina,Rivolta, Mia L.
We investigate whether social capital influences the use and effectiveness of tournament structure of compensation. We find that pay differentials between the CEO and other executives, or tournament, are lower in U.S. counties with higher social capital. In addition, lower pay differentials are associated with better firm performance in regions with higher social capital. We use a variety of experiments which are shown to change social capital, such as legalization of medical and recreational use of marijuana or moving corporate headquarters. Our results remain robust. These findings suggest that social capital impact firms’ compensation setting decisions and firm performance.