Research articles for the 2020-05-01
Anti-Fraud in International Supply Chain Finance: Focusing on Moneual Case
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Purpose â€" This study analyzes the scope of due diligence and risks of banks and K-Sure in trade finance covered by EFF focusing on Moneual case, one of the latest and biggest trade finance fraud cases in Korea. Also, we suggest anti-fraud measures in trade finance on the part of banks and K-Sure in order to give them a desirable way of due diligence and reasonable risk management of export insurance. Design/methodology â€" Based on Moneual case of trade finance fraud, this study employs the methodology of an extended literature review and analysis of court decisions. Findings â€" Seoul High Court of Korea failed to decide whether K-Sure was wholly obliged to pay the insurance against the banks’ EFF claims, but issued a compulsory mediation order, judging that both the banks and K-Sure were responsible by 50:50. The court may have judged that both the parties had lacked their due diligence in the trade finance. It is quite difficult for trade finance providers to manually investigate whether the transaction is suspected of trade finance fraud, so digitalization of trade finance which can facilitate the prevention and detection of trade fraud needs to be realized quickly. Since there has been no international rule available for open account trade finance up till now, clearly stipulated EFF terms on the exporter’s genuine export obligation might have protected K-Sure from the disaster. Originality/value â€" This study investigates the due diligence of the banks and K-Sure in Moneual case which few researchers have considered, to the best of our knowledge. This study also suggests several practical methods (including block chain) to prevent complicating trade finance fraud amid increasing use of an open account, and further offers reasonable risk management of EFF employing international factoring rule which is also related to problematic open account trade finance.
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Purpose â€" This study analyzes the scope of due diligence and risks of banks and K-Sure in trade finance covered by EFF focusing on Moneual case, one of the latest and biggest trade finance fraud cases in Korea. Also, we suggest anti-fraud measures in trade finance on the part of banks and K-Sure in order to give them a desirable way of due diligence and reasonable risk management of export insurance. Design/methodology â€" Based on Moneual case of trade finance fraud, this study employs the methodology of an extended literature review and analysis of court decisions. Findings â€" Seoul High Court of Korea failed to decide whether K-Sure was wholly obliged to pay the insurance against the banks’ EFF claims, but issued a compulsory mediation order, judging that both the banks and K-Sure were responsible by 50:50. The court may have judged that both the parties had lacked their due diligence in the trade finance. It is quite difficult for trade finance providers to manually investigate whether the transaction is suspected of trade finance fraud, so digitalization of trade finance which can facilitate the prevention and detection of trade fraud needs to be realized quickly. Since there has been no international rule available for open account trade finance up till now, clearly stipulated EFF terms on the exporter’s genuine export obligation might have protected K-Sure from the disaster. Originality/value â€" This study investigates the due diligence of the banks and K-Sure in Moneual case which few researchers have considered, to the best of our knowledge. This study also suggests several practical methods (including block chain) to prevent complicating trade finance fraud amid increasing use of an open account, and further offers reasonable risk management of EFF employing international factoring rule which is also related to problematic open account trade finance.
Collateralized Networks
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This paper studies the spread of losses and defaults in financial networks with two interrelated features: collateral requirements and alternative contract termination rules, which control access to collateral. When collateral is committed to a firm's counter-parties, a solvent firm may default if it lacks sufficient liquid assets to meet its payment obligations. Collateral requirements can thus increase defaults and payment shortfalls. Moreover, one firm may benefit from the failure of another if the failure frees collateral committed by the surviving firm, giving it additional resources to make other payments. Contract termination at default may also improve the ability of other firms to meet their obligations through access to collateral. As a consequence of these features, the timing of payments and collateral liquidation must be carefully specified to establish the existence of payments that clear the network. Using this framework, we contrast pooled and dedicated collateral; we study the consequences of illiquid collateral for the spread of losses through fire sales; we compare networks with and without selective contract termination; and we analyze the impact of alternative bankruptcy stay rules that limit the seizure of collateral at default. Under an upper bound on derivatives leverage, full termination reduces payment shortfalls compared with selective termination.
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This paper studies the spread of losses and defaults in financial networks with two interrelated features: collateral requirements and alternative contract termination rules, which control access to collateral. When collateral is committed to a firm's counter-parties, a solvent firm may default if it lacks sufficient liquid assets to meet its payment obligations. Collateral requirements can thus increase defaults and payment shortfalls. Moreover, one firm may benefit from the failure of another if the failure frees collateral committed by the surviving firm, giving it additional resources to make other payments. Contract termination at default may also improve the ability of other firms to meet their obligations through access to collateral. As a consequence of these features, the timing of payments and collateral liquidation must be carefully specified to establish the existence of payments that clear the network. Using this framework, we contrast pooled and dedicated collateral; we study the consequences of illiquid collateral for the spread of losses through fire sales; we compare networks with and without selective contract termination; and we analyze the impact of alternative bankruptcy stay rules that limit the seizure of collateral at default. Under an upper bound on derivatives leverage, full termination reduces payment shortfalls compared with selective termination.
Determinants of Hedging and their Impact on Firm Value and Risk: After Controlling for Endogeneity Using a Two-stage Analysis
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Purpose â€" In this study, we investigate determinants of hedging with derivatives and its effect on firm value and firm risk for Korean firms. Design/methodology â€" To avoid the endogeneity problem pointed out in previous studies, we use a two-stage analysis by using gains and losses from derivatives as instrument variable for hedging with derivatives. Findings â€" Our analysis on the determinants of hedging shows that firms that are more leveraged and less profitable, and with more growth opportunities are likely to hedge through derivatives. Additionally, large firms, firms less diversified into industry, and firms more diversified geographically are likely to use derivatives. Our two-stage analysis shows that indicators of hedging with derivatives have an insignificant effect on firm value, and the indicator of futures/forwards use and of swaps use have significant negative effect on firm value. Whereas, the extent of hedging with derivatives has positive effect on firm value for all types of foreign currency derivatives, which suggests that moderately low hedgers use derivatives inefficiently, but extensive hedgers use derivatives properly. With regard to firm risk, hedging with derivatives increases market-based risk, but decreases accounting-based risk. Thus, we conclude that Korean firms use derivatives to manage operational volatility rather than to manage market risk, and accounting-based risk reduction through hedging is not directly translated into higher firm value. Originality/value â€" This is not the first study to investigate hedging behavior of Korean firms, but the sample period that that this study analyzed is the longest and various method are used to control the endogeneity problem. We investigate not only total foreign currency derivatives but also by types of derivatives, including futures/forwards, options, and swaps.
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Purpose â€" In this study, we investigate determinants of hedging with derivatives and its effect on firm value and firm risk for Korean firms. Design/methodology â€" To avoid the endogeneity problem pointed out in previous studies, we use a two-stage analysis by using gains and losses from derivatives as instrument variable for hedging with derivatives. Findings â€" Our analysis on the determinants of hedging shows that firms that are more leveraged and less profitable, and with more growth opportunities are likely to hedge through derivatives. Additionally, large firms, firms less diversified into industry, and firms more diversified geographically are likely to use derivatives. Our two-stage analysis shows that indicators of hedging with derivatives have an insignificant effect on firm value, and the indicator of futures/forwards use and of swaps use have significant negative effect on firm value. Whereas, the extent of hedging with derivatives has positive effect on firm value for all types of foreign currency derivatives, which suggests that moderately low hedgers use derivatives inefficiently, but extensive hedgers use derivatives properly. With regard to firm risk, hedging with derivatives increases market-based risk, but decreases accounting-based risk. Thus, we conclude that Korean firms use derivatives to manage operational volatility rather than to manage market risk, and accounting-based risk reduction through hedging is not directly translated into higher firm value. Originality/value â€" This is not the first study to investigate hedging behavior of Korean firms, but the sample period that that this study analyzed is the longest and various method are used to control the endogeneity problem. We investigate not only total foreign currency derivatives but also by types of derivatives, including futures/forwards, options, and swaps.
Does Stock Pledging by Controlling Shareholder Affect Systematic Tail Risk?
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It is a ubiquitous corporate governance phenomenon in many countries that shareholders pledge their ownership as collateral to obtain personal loans, while Chinese market provides a specific institutional background to study controlling shareholders. With a sample consisted of 21,921 firm-year observations from 2007 to 2018, we find a significant casual negative impact that dominant stockholder’s share pledging has on both systematic right-tail risk and left-tail risk. Furthermore, we examine two mechanisms to explain the casual association respectively. First, we find a negative signal to the market, caused by share pledges, will reduce the systematic right-tail risk. Second, the controlling shareholder who pledges their own holdings will bring down the systematic left-tail risk through the earnings management channel. Additionally, we conduct several robustness checks like PSM, IV, alternative subsamples and an alternative independent variable to support our results are consistent.
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It is a ubiquitous corporate governance phenomenon in many countries that shareholders pledge their ownership as collateral to obtain personal loans, while Chinese market provides a specific institutional background to study controlling shareholders. With a sample consisted of 21,921 firm-year observations from 2007 to 2018, we find a significant casual negative impact that dominant stockholder’s share pledging has on both systematic right-tail risk and left-tail risk. Furthermore, we examine two mechanisms to explain the casual association respectively. First, we find a negative signal to the market, caused by share pledges, will reduce the systematic right-tail risk. Second, the controlling shareholder who pledges their own holdings will bring down the systematic left-tail risk through the earnings management channel. Additionally, we conduct several robustness checks like PSM, IV, alternative subsamples and an alternative independent variable to support our results are consistent.
Financial Development and Economic Growth an Empirical Analysis for Syria
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Recently, Syria startup a remarkable economic and financial revolution, which raised many positive expectations regarding development and growth in all sectors and on many levels. This research is evidence for an individual case study, although it is common to study regression across countries to judge the effects of financial development, but it is also important to study the evidence for each country at least at the simple level. Through this research we will highlight the impact of previous Syrian reforms, and analyze their role to reach this important stage, by explaining the relationship between financial development and economic growth in Syria, over a period of twenty years, in addition to examines whether the exogenous component of financial intermediary development influences economic growth, by using the direction of causality between financial development and economic growth in Syria is investigated for the period 1970-2009. In order to see the impact of different aspects of financial development . The results were obtained using statistical methods, and further provided panel results supported with evidence involve the legal, regulatory, and policy determinants of financial development.
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Recently, Syria startup a remarkable economic and financial revolution, which raised many positive expectations regarding development and growth in all sectors and on many levels. This research is evidence for an individual case study, although it is common to study regression across countries to judge the effects of financial development, but it is also important to study the evidence for each country at least at the simple level. Through this research we will highlight the impact of previous Syrian reforms, and analyze their role to reach this important stage, by explaining the relationship between financial development and economic growth in Syria, over a period of twenty years, in addition to examines whether the exogenous component of financial intermediary development influences economic growth, by using the direction of causality between financial development and economic growth in Syria is investigated for the period 1970-2009. In order to see the impact of different aspects of financial development . The results were obtained using statistical methods, and further provided panel results supported with evidence involve the legal, regulatory, and policy determinants of financial development.
Firm Life Cycle and the Disclosure of Estimates and Judgments in Goodwill Impairment Tests: Evidence from Australia
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The goodwill impairment disclosure literature examines the association between firm-and country-level factors and the disclosure of estimates and judgments used in the goodwill impairment test under International Accounting Standard 36. Although the accounting literature provides competing predictions between firm life cycle and these disclosures, prior studies did not explore the role of firm life cycle in these disclosures. This paper fills in this gap in the literature, and documents that, in Australia, these disclosures vary by life cycle stages and that firm size moderates this association. We, however, find that the differences are more pronounced for some disclosure items than for others.
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The goodwill impairment disclosure literature examines the association between firm-and country-level factors and the disclosure of estimates and judgments used in the goodwill impairment test under International Accounting Standard 36. Although the accounting literature provides competing predictions between firm life cycle and these disclosures, prior studies did not explore the role of firm life cycle in these disclosures. This paper fills in this gap in the literature, and documents that, in Australia, these disclosures vary by life cycle stages and that firm size moderates this association. We, however, find that the differences are more pronounced for some disclosure items than for others.
Integrated Global Asset Management: Quantitative Country ETF Trading Strategy
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This paper unveils the processes for building a country’s trading strategy that can outperform the MSCI Indexes and on the factor basis. By exploring the belief and experimenting with the structure in place, there seems to be enough room to build a quantitative investment strategy that generates high-quality predictive signals (alphas) considering each countries’ expected equity and currency performances. We created, developed and deployed a set of systematic strategies which produces impressive returns using country Exchange-Traded Funds (ETFs) with the objective to generate returns, risk profiles, automations, modernizations, and optimizations to outperform the iShares MSCI ACWI ETF (ACWI) and the iShares MSCI ACWI ex US ETF (ACWX) and similar benchmarks and evidences within the industry based on extensive data, mathematical, market, and statistical analysis that we used in:1) risk and scoring metrics such as technical, fundamental, economic, market sentiment and alternative descriptors and 2) factor modeling paradigms and developments could reveal the weighted market exposure for the dynamic multi-step asset allocation by country in a world of multi-period electronic trading and information.
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This paper unveils the processes for building a country’s trading strategy that can outperform the MSCI Indexes and on the factor basis. By exploring the belief and experimenting with the structure in place, there seems to be enough room to build a quantitative investment strategy that generates high-quality predictive signals (alphas) considering each countries’ expected equity and currency performances. We created, developed and deployed a set of systematic strategies which produces impressive returns using country Exchange-Traded Funds (ETFs) with the objective to generate returns, risk profiles, automations, modernizations, and optimizations to outperform the iShares MSCI ACWI ETF (ACWI) and the iShares MSCI ACWI ex US ETF (ACWX) and similar benchmarks and evidences within the industry based on extensive data, mathematical, market, and statistical analysis that we used in:1) risk and scoring metrics such as technical, fundamental, economic, market sentiment and alternative descriptors and 2) factor modeling paradigms and developments could reveal the weighted market exposure for the dynamic multi-step asset allocation by country in a world of multi-period electronic trading and information.
Price Index Insurances in the Agriculture Markets
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In this paper, we introduce price index insurances on agricultural goods. Seemingly similar to derivatives, there are significant differences between price index insurances and derivatives. First, unlike derivatives, there are no entrance barriers for purchasing insurances, making them the risk management tools that are accessible to almost all farmers. Second, since insurances are issued at a certain number for any individual farm, unlike futures, for example, they cannot be used for speculation and are used solely for hedging price risk. Third, unlike forwards, they are heavily regulated and do not default and cause counterparty risk. Besides all differences (or benefits), such products have just recently been introduced in the agricultural insurance market. In this paper, we investigate if there could have been a financially viable market where these products are traded. More precisely, we investigate if an insurance company can design a portfolio of optimal contracts that gives a higher Sharpe ratio than the financial market index prices (in our paper FTSE 100 and other three major indexes). To reach the paper's objective we take three steps, by considering theoretical, practical and corporation standpoints. In the first step, we will see how an optimal contract would look like from the demand side in a theoretical setup and we obtain the optimal contract from the farmers' standpoint. In the second step, by adopting a more practical approach, by meeting the Key Performance Indicators (KPI) requirements set by the market participants (both demand and supply side), we find the optimal policy specifications from the first step, in the market equilibrium. This step also helps to find some unobservable market parameters like volatility. Finally, by adopting a corporation standpoint we encounter our model to the UK farm index prices and find an optimal portfolio of the products on products from 10 commodities. We find out that investing in such a business is financially viable, as the optimal insurance portfolio produces a Sharpe ratio that outperforms FTSE 100 and other major market indexes.
SSRN
In this paper, we introduce price index insurances on agricultural goods. Seemingly similar to derivatives, there are significant differences between price index insurances and derivatives. First, unlike derivatives, there are no entrance barriers for purchasing insurances, making them the risk management tools that are accessible to almost all farmers. Second, since insurances are issued at a certain number for any individual farm, unlike futures, for example, they cannot be used for speculation and are used solely for hedging price risk. Third, unlike forwards, they are heavily regulated and do not default and cause counterparty risk. Besides all differences (or benefits), such products have just recently been introduced in the agricultural insurance market. In this paper, we investigate if there could have been a financially viable market where these products are traded. More precisely, we investigate if an insurance company can design a portfolio of optimal contracts that gives a higher Sharpe ratio than the financial market index prices (in our paper FTSE 100 and other three major indexes). To reach the paper's objective we take three steps, by considering theoretical, practical and corporation standpoints. In the first step, we will see how an optimal contract would look like from the demand side in a theoretical setup and we obtain the optimal contract from the farmers' standpoint. In the second step, by adopting a more practical approach, by meeting the Key Performance Indicators (KPI) requirements set by the market participants (both demand and supply side), we find the optimal policy specifications from the first step, in the market equilibrium. This step also helps to find some unobservable market parameters like volatility. Finally, by adopting a corporation standpoint we encounter our model to the UK farm index prices and find an optimal portfolio of the products on products from 10 commodities. We find out that investing in such a business is financially viable, as the optimal insurance portfolio produces a Sharpe ratio that outperforms FTSE 100 and other major market indexes.
Some Reflections on the Self-insider and the Market Abuse Regulation â€" The Self-insider as a Monopoly-Square Insider
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This article deals with the self-insider, i.e. the possible creation of the inside information by a person and its (abusive) exploitation. It describes the situation in Italy and Germany and then provides a taxonomy of the several cases of self-insider. The article then analyzes the case law of the ECJ and the MAR regulatory provisions for justifying/neglecting the existence of the self-insider (Article 9.5 and 9.6 MAR). Given the unclear regulatory answer regarding its sanctionability, the article proposes, based on the economics of MAR, a law and economics reason of why the self-insider sometime should be sanctioned, by describing it as a peculiar monopolistic behavior able to distort investors’ confidence and market integrity. Finally, the article suggests that the European legislator should explicitly deal with the problem.
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This article deals with the self-insider, i.e. the possible creation of the inside information by a person and its (abusive) exploitation. It describes the situation in Italy and Germany and then provides a taxonomy of the several cases of self-insider. The article then analyzes the case law of the ECJ and the MAR regulatory provisions for justifying/neglecting the existence of the self-insider (Article 9.5 and 9.6 MAR). Given the unclear regulatory answer regarding its sanctionability, the article proposes, based on the economics of MAR, a law and economics reason of why the self-insider sometime should be sanctioned, by describing it as a peculiar monopolistic behavior able to distort investors’ confidence and market integrity. Finally, the article suggests that the European legislator should explicitly deal with the problem.
Supplier Financing and Stock Price Crash Risk: Monitoring versus Concession?
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Supplier financing, or trade credit, is an increasingly important source of financing for a company. This paper tests two alternative views on the relation between trade credit and future stock price crash risk: monitoring and concession. We present robust evidence that supplier financing is negatively associated with stock price crash risk, consistent with the former view that suppliers can effectively monitor buyers through the provision of trade credit and therefore constrain their bad-news-hoarding behavior. Further analyses reveal that the role of trade credit in mitigating stock price crash risk is more pronounced among buyers with weaker market power and those that require more monitoring, such as firms with higher distress risk or weaker governance due to limited monitoring by institutional investors and banks. Overall, our results shed light on how trade credit shapes managers’ disclosure incentives and firms’ extreme negative stock returns.
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Supplier financing, or trade credit, is an increasingly important source of financing for a company. This paper tests two alternative views on the relation between trade credit and future stock price crash risk: monitoring and concession. We present robust evidence that supplier financing is negatively associated with stock price crash risk, consistent with the former view that suppliers can effectively monitor buyers through the provision of trade credit and therefore constrain their bad-news-hoarding behavior. Further analyses reveal that the role of trade credit in mitigating stock price crash risk is more pronounced among buyers with weaker market power and those that require more monitoring, such as firms with higher distress risk or weaker governance due to limited monitoring by institutional investors and banks. Overall, our results shed light on how trade credit shapes managers’ disclosure incentives and firms’ extreme negative stock returns.
The Changing Economics of Knowledge Production
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Big data technologies change the way in which data and human labor combine to create knowledge. Is this a modest technological advance or a transformation of our basic economic processes? Using hiring and wage data from the financial sector, we estimate firms' data stocks and the shape of their knowledge production functions. Knowing how much production functions have changed informs us about the likely long-run changes in output, in factor shares, and in the distribution of income, due to the new, big data technologies. Using data from the investment management industry, our results suggest that the labor share of income in knowledge work may fall from 44% to 27% and we quantify the corresponding increase in the value of data.
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Big data technologies change the way in which data and human labor combine to create knowledge. Is this a modest technological advance or a transformation of our basic economic processes? Using hiring and wage data from the financial sector, we estimate firms' data stocks and the shape of their knowledge production functions. Knowing how much production functions have changed informs us about the likely long-run changes in output, in factor shares, and in the distribution of income, due to the new, big data technologies. Using data from the investment management industry, our results suggest that the labor share of income in knowledge work may fall from 44% to 27% and we quantify the corresponding increase in the value of data.
Underlying Bond Return Predictability by ETF Returns
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This paper investigates whether ETF returns lead the returns of underlying bonds and similar style bond funds. Bond prices are often stale due to their lack of liquidity, and price discovery may occur in ETFs and then in underlying bonds. As predicted, we find that ETF returns predict its own NAV returns and aggregated ETF returns for each bond also predict the underlying bond returns on a monthly basis. We show that bond liquidity is the determining factor of the predictability and the role of authorized participants is critical to the dissemination of information from ETFs to underlying bonds. Bond returns are more predictable for illiquid bonds and bonds with less ETF ownership and less absolute ETF flows. Next, we examine whether bond fund returns are also predictable. We find the predictability of bond fund returns by same style ETF returns and a bond fund portfolio strategy based on this predictability, which indicates that the bond fund market is potentially vulnerable. Our research adds to the discussion of the impact of ETFs on market efficiency.
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This paper investigates whether ETF returns lead the returns of underlying bonds and similar style bond funds. Bond prices are often stale due to their lack of liquidity, and price discovery may occur in ETFs and then in underlying bonds. As predicted, we find that ETF returns predict its own NAV returns and aggregated ETF returns for each bond also predict the underlying bond returns on a monthly basis. We show that bond liquidity is the determining factor of the predictability and the role of authorized participants is critical to the dissemination of information from ETFs to underlying bonds. Bond returns are more predictable for illiquid bonds and bonds with less ETF ownership and less absolute ETF flows. Next, we examine whether bond fund returns are also predictable. We find the predictability of bond fund returns by same style ETF returns and a bond fund portfolio strategy based on this predictability, which indicates that the bond fund market is potentially vulnerable. Our research adds to the discussion of the impact of ETFs on market efficiency.
Why Do Firms Use Compensation Peer Benchmarking?
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We develop a cost-benefit tradeoff model to explain corporate boards’ decision whether to use compensation peer benchmarking. Peer benchmarking helps a board retain a talented but risk-averse CEO, but it weakens CEO incentives to exert effort. Consistent with high retention needs, benchmarking firms have more peer citations, operate in general business domains with more similar firms, and their CEOs are at the most marketable age. Benchmarking firms also tend to be younger and have more volatile stock returns and earnings and higher leverage, where CEO performance is riskier. Consistent with high incentive costs, CEO pay-performance sensitivities are lower and CEO pay growth is higher at benchmarking firms. To mitigate such costs, benchmarking firms award their CEOs more equity annually and are more likely to dismiss them for poor performance. When retention needs are low, peer benchmarking is associated with lower firm value. Retention needs can also explain peer selection decisions.
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We develop a cost-benefit tradeoff model to explain corporate boards’ decision whether to use compensation peer benchmarking. Peer benchmarking helps a board retain a talented but risk-averse CEO, but it weakens CEO incentives to exert effort. Consistent with high retention needs, benchmarking firms have more peer citations, operate in general business domains with more similar firms, and their CEOs are at the most marketable age. Benchmarking firms also tend to be younger and have more volatile stock returns and earnings and higher leverage, where CEO performance is riskier. Consistent with high incentive costs, CEO pay-performance sensitivities are lower and CEO pay growth is higher at benchmarking firms. To mitigate such costs, benchmarking firms award their CEOs more equity annually and are more likely to dismiss them for poor performance. When retention needs are low, peer benchmarking is associated with lower firm value. Retention needs can also explain peer selection decisions.
