Research articles for the 2020-05-08

A Wrong Valuation Using WACC and the Right Solution
Fernandez, Pablo
This paper presents a real valuation performed by a well-known investment bank, with two common errors and with two very different values for the equity of a firm:a) €6,9 million calculating the Present Value of expected free cash flows (FCF) discounted with the WACC rate and then, subtracting the value of debt;b) €4,2 million calculating the Present Value of expected equity cash flows (ECF) discounted with the Ke rate (required return to equity). We identify the two main errors of the valuation of the investment bank and calculate the “right solution”: €5,9 million.The paper also contains 210 answers and 56 comments from readers to the questions of the previous paper (The Most Common Error in Valuations using WACC that did not contain the “right solution”.)

Are All Heuristics Created Equal? Evidence from P2P Investments
Hu, Maggie Rong,Li, Xiaoyang,Shi, Yang,Zhang, Xiaoquan (Michael)
Heuristics have a ubiquitous influence on decision-making. Despite a large strand of literature on various heuristics, scant research addresses the concurrent applications of different heuristics or the interplay amongst them. Using detailed peer-to-peer (P2P) investment data from Renrendai, a leading Chinese P2P lending platform, we make the first attempt to uncover the relationship between two important numerological heuristics: the round-number heuristic and the lucky-number heuristic. We document a substitution relationroship between these two heuristics. The selection of round numbers versus lucky numbers for the loan amount reveals borrowers’ credit quality and affects the loan funding success rate, though the ex post performance of funded loans is similar. Lenders also apply heuristics in setting the bid amount, which potentially reveals information about their activeness and risk preference. As lenders become more experienced, they form more sophisticated judgments about the loan quality from borrowers’ use of heuristics. Overall, our paper reveals the heterogeneities and interlacing of heuristics by establishing a framework to extract information about individuals’ characteristics and preferences from the heuristics they use. Our findings are generalizable to many other real-life situations.

Bank of Japan as a Contrarian Stock Investor: Large-Scale ETF Purchases
Hattori, Takahiro,Yoshida, Jiro
This study unveils the Bank of Japan’s behavior of purchasing exchange-traded funds (ETFs) on the Tokyo Stock Exchange. The Bank purchases ETFs after observing a significantly negative stock return over the previous night and during the morning market. The Bank stops purchasing ETFs when an overnight and morning stock return becomes positive. This unique counter-cyclical purchase behavior is consistent with its objective of decreasing equity risk premia and stimulating spending. Our study sheds light on a central bank’s program to purchase equity when the interest-rate policy is ineffective.

Bitcoin-Energy Markets Interrelationships - New Evidence
Corbet, Shaen,Lucey, Brian M.,Yarovaya, Larisa
The annual electricity consumption of cryptocurrency transactions has grown substantially in recent years, partially driven by the increasing difficulty in mining, but also driven by the large number of new market participants that have been attracted by the elevated prices of this developing financial asset. Total carbon production from mining now likely exceeds that generated by individual developed nations. This is now a prevailing and accepted feature in cryptocurrency markets, however unsustainable it may be. This paper investigates as to how Bitcoin's price volatility and the underlying dynamics of cryptocurrency mining characteristics affect underlying energy markets and utilities companies. Further analysis of potential side-effects within the market for Exchange Traded Funds are considered. The results show a sustained and significant influence of cryptocurrency energy-usage on the performance of some companies in the energy sector as separated by jurisdiction, emphasising the importance of further assessment of environmental impacts of cryptocurrency growth. Robustness testing presents evidence that dynamic correlations peaked during the sharp Bitcoin price appreciation of late-2017 as investors re-evaluated how this increased energy usage would influence the profitability of utility companies.

Call Me by Your Name: The Effect of Analyst-CEO First Name Commonality on Analyst Forecast Accuracy
Even-Tov, Omri,Huang, Kanyuan (Kevin),Trueman, Brett
In this paper we document that the earnings forecasts of security analysts who share a first name with the CEO of a covered firm (referred to as ‘matched’ analysts) are more accurate, on average, than those of analysts who do not share a first name (referred to as ‘unmatched’ analysts). This result is consistent with findings in psychology which show that individuals have an affinity for those who share first names and suggests that the CEO is more likely to share private information with a matched analyst. We find this phenomenon to be concentrated among those matched analysts with less common first names, perhaps because the salience of sharing a first name is lower for analysts with more common names. It is also stronger in situations where there is greater information asymmetry between management and analysts.

Can the Covid Bailouts Save the Economy?
Elenev, Vadim,Landvoigt, Tim,Van Nieuwerburgh, Stijn
The covid-19 crisis has led to a sharp deterioration in firm and bank balance sheets. The government has responded with a massive intervention in corporate credit markets. We study equilibrium dynamics of macroeconomic quantities and prices, and how they are affected by government intervention in the corporate debt markets. We find that the policies should be highly effective at preventing a much deeper crisis by reducing corporate bankruptcies by about half, and short-circuiting the doom loop between corporate and financial sector fragility. The fiscal costs are high and will lead to rising interest rates on government debt. We propose a more effective intervention with lower fiscal cost. Finally, we study longer-run consequences for firm leverage and intermediary health when pandemics become the new normal.

Common Shocks in Stocks and Bonds
Cieslak, Anna,Pang, Hao
We propose a new approach to identify economic shocks (monetary, growth, and risk-premium news) from stock returns and Treasury yields. The method allows us to study the drivers of asset prices at a daily frequency over the last three-and-a-half decades. We analyze the content of news from the Fed, major macro announcements, and sources of time-varying stock-bond comovement. The results emphasize the importance of two risk-premium shocks-compensation for discount-rate and cash-flow news-which have different effects on stocks and bonds. The impact of the Fed on both risk premiums explains why stocks but not bonds earn high FOMC-day returns.

Corporate Social Responsibility, Foreign Direct Investment, and Shareholder Value
Liu, Mei,Marshall, Andrew P.,McColgan, Patrick
We investigate the impact CSR on the shareholder wealth effects of FDI announcements during 2003-2014 using a sample of 2,488 firms from 48 home countries investing into 121 host countries. We find that firms with superior CSR performance do not experience a significant stock market reaction to FDI announcements. Hence, we do not find empirical support for either the stakeholder value maximization view or the shareholder expense view of CSR. We propose explanations for the lack of a significant share price reaction.

Credit Risk Sensitivity to Carbon Price
Bouchet, Vincent,Le Guenedal, Théo
In order to meet the objectives set by the Paris Climate Agreement, global greenhouse gas emissions must be drastically reduced. One way to achieve this goal is to set an effective carbon price. Although beneficial for the climate, a rapid increase in this price can have a significant financial impact on corporate firms. Based on the 2018 Intergovernmental Panel on Climate Change (IPCC) scenarios, we study the credit risk sensitivity of 795 international companies. We develop a bottom-up approach and analyze how probabilities of default within each sector might evolve in both the medium (2023) and long term (2060). We find that energy, materials and utilities sectors would be the most affected. Moreover, the risk materializes earlier and is more heterogeneous for utilities. From a policy perspective, the prices associated with a scenario limiting global warming to 2°C have a limited impact on global credit risk. Such a scenario therefore seems achievable without generating substantial financial losses. From these results, we propose a new indicator, the carbon price threshold, that takes the economic and capital structure of the firm into account in measuring carbon risk.

Credit Spreads, Leverage and Volatility: a Cointegration Approach
Maglione, Federico
This work documents the existence of a cointegration relationship between credit spreads, leverage and equity volatility for a large set of US companies. It is shown that accounting for the long-run equilibrium dynamic between these variables is essential to correctly explain credit spread changes. Using a novel structural model in which equity is modelled as a compound option on the firm's assets, a new methodology for estimating the unobservable market value of the firm's assets and volatility is developed. The proposed model allows to significantly reduce the pricing errors in predicting credit spreads when compared with several structural models. In terms of correlation analysis, it is shown that not accounting for the long-run equilibrium equation embedded in an Error Correction Mechanism (ECM) results into a misspesification problem when regressing a set of explanatory variables onto the spread changes. Once credit spreads, leverage and volatility are correctly modelled, thus allowing for a long-run equilibrium, the fit of the regressions sensibly increases if compared to the results of previous research. It is further shown that most of the cross-sectional variation of the spreads appears to be more driven by firm-specific characteristics rather than systematic factors.

Dealers’ Insurance, Market Structure, and Liquidity
Carapella, Francesca,Monnet, Cyril
We develop a parsimonious model to study the effect of regulations aimed at reducing counterparty risk on the structure of over-the-counter securities markets. We find that such regulations promote entry of dealers, thus fostering competition and lowering spreads. Greater competition, however, has an indirect negative effect on market-making profitability. General equilibrium effects imply that more competition can distort incentives of all dealers to invest in efficient technologies ex ante, and so can cause a social welfare loss. Our results are consistent with empirical findings on the effects of post-crisis regulations and with the opposition of some market participants to those regulations.

Does Forecasting Price Efficiency (FPE) Affect Revelatory Price Efficiency (RPE)?
Parajuli, Bharat Raj
This paper shows how FPE affects RPE. It offers evidence that stock under- and over-valuation signaled by corporate events change stock RPE by changing the information collection behavior of informed investors. Corporate events, performed not only by a firm but also by its peers, that signal over-valuation (Over-Value events) predict RPE negatively, whereas those signal under-valuation (Under-Value events) predict RPE positively. After Over-Value events, RPE decreases more for firms with worse investment opportunities, poor corporate governance, more entrenched managers, and higher short sale constraints. After Under-Value events, RPE increases more for firms with better investment opportunities and managers who listen to prices and during boom times. Results are stronger when Over-Value events are performed when a firm has high Q or high Price-to-Value (P/V), and Under-Value events when the firm has low Q or low P/V. The Broader implication of these findings is that market under-valuations are corrected more quickly than over-valuations, implying that market over-valuations are stickier and more prevalent in the economy.

Does Real-Time Macroeconomic Information Help to Predict Interest Rates?
Coroneo, Laura,Caruso, Alberto
We analyse the predictive ability of real-time macroeconomic information for the yield curve of interest rates. We specify a mixed-frequency macro-yields model in real-time that incorporates interest rate surveys and treats macroeconomic factors as unobservable components. Results indicate that real-time macroeconomic information is helpful to predict interest rates, and that data revisions drive a superior predictive ability of revised macro data over real-time macro data. We also find that interest rate surveys can have significant predictive power over and above real-time macro variables.

Does the Delay in Firm-Specific Information Cause Momentum?
Parajuli, Bharat Raj
In this paper, I develop a medium-horizon firm-specific information delay (FSID) measure using the methodology introduced by Hou and Moskowitz (2005) (hereafter HM). Unlike the HM measure of the speed of diffusion of US market-specific information in the short horizon (four weeks), FSID measures the speed of diffusion of firm-specific information in the medium horizon (six months). Whereas previous studies including HM found no significant relation between momentum premium and the HM measure, I find that momentum ceases to exist in the cross section of firms after controlling for FSID. FSID has a symmetrical effect on both loser and winner firms: high-FSID loser firms lose more than low-FSID loser firms, while high-FSID winner firms win more than low-FSID winner firms. High-FSID firms are firms with greater uncertainties related to their fundamentals; these are slightly larger growth firms, have higher dispersion among analysts about their future earnings, pay low dividends, have higher costs of goods, have higher volatility around their profitability, and actively perform major corporate events.

Dual State-Space Model of Market Liquidity: The Chinese Experience 2009-2010
Lerner , Peter
This paper proposes and motivates a dynamical model of the Chinese stock market based on a linear regression in a dual state space connected to the original state space of correlations between the volume-at-price buckets by a Fourier transform. We apply our model to the price migration of executed orders by the Chinese brokerages in 2009-2010. We use our brokerage tapes to conduct a natural experiment assuming that tapes correspond to randomly assigned, informed and uninformed traders. Our analysis demonstrates that customers’ orders were tightly correlated â€" in a highly nonlinear sense of neural networks â€" with the Chinese market sentiment, significantly correlated with the returns of the Chinese stock market and exhibited no correlations with the yield on bellwether bond of the Bank of China. We did not notice any spike of illiquidity transmitting from the US Flash Crash in May 2010 to trading in China.

Dynamic Volatility Modelling of Bitcoin Using Time-Varying Transition Probability Markov-Switching GARCH Model
Tan, Chia Yen,koh, you beng,Ng, Kok Haur,Ng, Kooi Huat
Bitcoin (BTC), as the dominant cryptocurrency, has attracted tremendous attention lately due to its excessive volatility. This paper proposes the time-varying transition probability Markov-switching GARCH (TV-MSGARCH) models incorporated BTC logarithmic daily trading volume or Google daily searches as exogenous factors to model the volatility dynamics of BTC return series. Extensive comparisons were carried out to evaluate the modelling and forecasting performances of TV-MSGARCH models with the benchmark models such as GARCH, GJRGARCH, threshold GARCH and constant transition probability MSGARCH. Results reveal that the TV-MSGARCH models predominate other models for the in-sample model fitting based on log-likelihood function and other benchmark criteria. Furthermore, the TV-MSGARCH model with Google daily searches offers the best out-of-sample forecast evaluated based on quasi-likelihood loss function and also using Hansen’s model confidence set. In addition, the Filardo’s weighted transition probabilities is computed and the results show the existence of time-varying effect on transition probabilities. Lastly, new approach for computing different levels of long and short positions of value-at-risk forecasts based on TV-MSGARCH models are also provided and tested.

Economic Benefits of Firms' Government Sale Dependency
Parajuli, Bharat Raj
In this paper, using a new channel of political connections, firm dependency on government sales, I study the value of political connections for firms. I find an economically and statistically significant relation between firm dependency on government entities in terms of revenues and the cross-section of future stock returns. Firms experience significantly higher profit margins post government dependency. In addition, past government sales significantly predict future government sales. The atypical features of government contracts and the information asymmetry between the contractor and contractee are likely to be behind the firms' higher profit margins. Further tests based on attention and uncertainty proxies suggest that investors' limited attention and greater valuation uncertainty contribute to abnormal returns. Furthermore, I find evidence suggesting that firms gain the wealth effects of political connections found by Cooper, Gulen, and Ovtchinnikov (2010) by winning material government contracts; however, the wealth effects of government dependency stay strong even after controlling for such connections.

External Governance and Capital Structure: Evidence from Media Coverage
Martin-Flores, Jose M.,Petit-Romec, Arthur
This paper examines how external governance pressure from the media affects capital structure. Using a comprehensive set of corporate news, we find a negative relation between media coverage and financial leverage. An instrumental variable approach suggests that the effect is causal. Cross-sectional tests indicate that the results are more pronounced when board or shareholder monitoring is weaker. We further find that the effect of media coverage is more pronounced for news related to executives (i.e., the news that are more likely to impose reputational costs on managers). Our findings are consistent with a substitution effect between the external governance imposed by the media and the discipline provided by debt financing.

Financial Constraints and Product Market Decisions: The Role of Production Cycles
Mendes, Diogo
This paper studies how financial frictions affect product market decisions. As different products have different production cycles and generate cash-flow at different maturities, companies may adjust product mix in order to alleviate financial constraints. I use the wine sector in Portugal as a laboratory because product mix decisions can be identified and linked to cash-flow maturity. I exploit a banking regulatory shock which impacted negatively on credit availability, and I find that credit constrained firms change their product mix in response to the shock. Firms shift from long cash-flow maturity products to shorter ones. My results suggest that the adverse impact of financial constraints on product markets may be exacerbated with longer, less-flexible, production cycles.

Firm Heterogeneity in Production-Based Asset Pricing: The Role of Habit Sensitivity and Lumpy Investment
Wu, Zhiting
I examine the role of habit sensitivity and fixed capital adjustment costs in determining macro quantities and asset prices through proposing a new sensitivity function that is robust in matching investment dynamics. I find that a General Equilibrium model of heterogeneous firms requires low logarithm steady-state surplus-consumption ratio and thresholds of fixed costs to reproduce: (i) high and volatile risk premia, (ii) a low and smooth risk-free rate, (iii) the unconditional Sharpe ratio, (iv) realistic business cycle variations of consumption, investment and output, (v) the predictability of market excess returns, and (vi) the crucial moments of investment rate distribution.

Fixed and Variable Tax Expense and the Cost of Equity Capital
Fan, Qintao,Guenther, David A.,Wu, Kaishu
We incorporate fixed and variable costs into a cash flow based CAPM to investigate how each type of cost affects the cost of equity capital. A decrease in fixed costs always reduces cost of capital. With positive fixed costs, a decrease in the variable cost rate reduces cost of capital despite also increasing covariance risk. We then model income tax expense as containing both a fixed component (like a tax credit) and a variable component (a tax rate). Unlike other costs, the fixed tax component may be negative. Any decrease in the fixed tax component always reduces cost of capital. The effect of a decrease in the tax rate depends on the sign of the fixed tax component. With a negative fixed tax component, such as a tax credit, a decrease in the tax rate increases cost of capital. Results of empirical tests are generally consistent with our predictions.

How Does Chinese Stock Market React to COVID-19?
Huo, Xiaolin,Qiu, Zhigang
In this paper, we study how Chinese stock market reacts to the sudden outbreak of COVID-19 in 2020. In general, we observe reversals both at industry level and at firm level due investors' overreactions to COVID-19. For industries and firm level stocks with positive cumulative abnormal returns in the event window when Wuhan was locked down, reversals are stronger. Thus, the reversals effects are mostly driven by industries and stocks that positively overreact to COVID-19. Further investigation shows that overreactions are stronger for stocks with lower institutional ownership, which means that retail investors react more strongly to COVID-19. Among stocks with positive cumulative abnormal returns in the event window, those with higher idiosyncratic volatilities and lower book to market ratios tend to have worse performance after a month.

Interest Rate Uncertainty as a Policy Tool
Ghironi, Fabio Pietro,Ozhan, Galip
We study a novel policy tool-interest rate uncertainty-that can be used to discourage inefficient capital inflows and to adjust the composition of external accounts between short-term securities and foreign direct investment (FDI). We identify the trade-offs faced in navigating between external balance and price stability. The interest rate uncertainty policy discourages short-term inflows mainly through portfolio risk and precautionary saving channels. A markup channel generates net FDI inflows under imperfect exchange rate pass-through. We further investigate new channels under different assumptions about the irreversibility of FDI, the currency of export invoicing, risk aversion of outside agents, and effective lower bound in the rest of the world. Under every scenario, uncertainty policy is inflationary.

Internet Appendix for 'How Rigged Are Stock Markets? Evidence from Microsecond Timestamps'
Bartlett, Robert P.,McCrary, Justin
This document contains supporting materials for the article "How Rigged Are Stock Markets? Evidence from Microsecond Timestamps" by Robert P. Bartlett, III and Justin McCrary.The paper to which this Appendix applies is available at the following URL:

Investor Tax Credits and Entrepreneurship: Evidence from U.S. States
Denes, Matthew,Howell, Sabrina,Mezzanotti, Filippo,Wang, Xinxin,Xu, Ting
Previous versions are available at: and investor tax credits are commonly used around the world to spur entrepreneurship. Exploiting the staggered implementation of these tax credits in 31 U.S. states, we find that while they increase angel investment, marginal investments flow to relatively low-growth firms. Tax credits induce entry by non-professional, inexperienced investors, and are often received by firm insiders. Consistent with these findings, we show that angel tax credits have no significant effect on state-level entrepreneurial activity or on beneficiary firm outcomes relative to failed applicants. Overall, the results raise concerns about whether investor tax credits achieve their stated goal of promoting high-growth entrepreneurship.

Kill Zone
Kamepalli, Sai Krishna,Rajan, Raghuram G.,Zingales, Luigi
We study why high-priced acquisitions of entrants by an incumbent do not necessarily stimulate more innovation and entry in an industry (like that of digital platforms) where customers face switching costs and enjoy network externalities. The prospect of an acquisition by the incumbent platform undermines early adoption by customers, reducing prospective payoffs to new entrants. This creates a "kill zone" in the space of startups, as described by venture capitalists, where new ventures are not worth funding. Evidence from changes in investment in startups by venture capitalists after major acquisitions by Facebook and Google suggests this is more than a mere theoretical possibility.

La Gestión del Riesgo Normativo en el Sistema Financiero (The Management of Regulatory Risk in the Financial System )
Quintás-Seoane, Juan-Ramón
Spanish abstract: El artículo analiza, en primer lugar, el entorno normativo actual como un entorno de riesgo, haciendo hincapié en la preocupación que despierta su gestión (teniendo en cuenta su creciente impacto en la estructura de costes de las entidades) e indagando en las causas que explican sus actuales niveles de complejidad y exigencia. A continuación, se aportan las claves básicas para una adecuada gestión del riesgo normativo, distinguiendo dos niveles: la gestión colectiva, a través de las asociaciones patronales (a las que cabe reservar un papel destacado, sobre todo de cara a la optimización de esfuerzos colectivos), y la gestión individual, que deberá girar en torno a la articulación de una función de cumplimiento ágil y eficiente. Por último, el autor revisa el caso español y reflexiona sobre la necesidad de racionalizar el proceso regulador en dicho país a través de instrumentos tales como las valoraciones de impactos, el fomento de la transparencia o la implantación de principios de "mejor regulación".English Abstract: The article analyzes, in the first place, the current regulatory environment as a risk environment, emphasizing the concern raised by its management (taking into account its increasing impact on the cost structure of entities) and investigating the causes that explain its current levels of complexity and demand. Next, provide the basic keys for proper regulatory risk management, distinguishing between two levels: collective management, through employers' associations (to which a prominent role can be reserved, especially to optimize collective efforts ), and individual management, which should revolve around the articulation of an agile and efficient compliance function. Lastly, the author reviews the Spanish case and reflects on the need to streamline the regulatory process in that country through instruments such as impact ratings, promoting transparency or implementing "better regulation" principles.

Liquidity Provision During a Pandemic
Kahn , Charles,Wagner, Wolf
We examine how public liquidity should be distributed to firms when immediate production entails externalities, such as by spreading a virus. Direct provision of liquidity can address externalities, but traditional distribution of liquidity (through banks) has informational advantages. We show that which mode is preferred is determined by the variance (but not the level) of firm characteristics in the economy. Traditional provision is always part of the optimal policy when liquidity modes can be combined, and involves promising low interest rates for when the pandemic is over in order to incentivize temporary production shutdowns at firms.

Market for 33 Percent Interest Loans. Financial Inclusion and Microfinance in India
Pauli, Markus
Financial inclusion is the process of building viable institutions that provide financial services to those hitherto excluded. These may include savings, insurances, remittances, and credit. Microfinance became the most dominant method for achieving financial inclusion. However, different microfinance schools of thought recommend opposite ways for attaining financial integration. India is a particularly insightful case study due to the sheer number of people excluded from formal financial services, as well as the spectrum of actors and approaches. The aim of this article is threefold. First, defining financial inclusion, depicting its status quo in India and comparing it to its South Asian and BRICS peers using recently released data from the Global Findex database. Second, focusing on microfinance as the dominant vehicle for achieving financial inclusion by scrutinizing its definitions, contrasting its two leading "schools of thought" and analyzing the central role of its dominant group-based approach. Third, the article will examine why people opt to take micro-credit at 33 percent interest rates.

Nonlinear Dynamics in Conditional Volatility
Lorenz, Friedrich,Schmedders, Karl,Schumacher, Malte
Investors pay a substantial premium to hedge against fluctuations in volatilityâ€"the variance risk premium (VRP). The asset-pricing literature has presented numerous models with jumps in economic fundamentals to reproduce the properties and the time variation of the VRP. This paper shows that these quantitative results are almost exclusively driven by an inaccurate measure of conditional volatility. Solved accurately, conditional volatility exhibitsâ€"counterfactuallyâ€"a strong procyclical pattern and the models do not deliver a sizeable VRP in response to jumps in state variables. The notion that the VRP is purely a compensation for fluctuations in macroeconomic uncertainty does not hold.

Political Referenda and Investment: Evidence from Scotland
Azqueta-Gavaldon, Andres
We present evidence that referenda have a significant, detrimental outcome on investment. Employing an unsupervised machine learning algorithm over the period 2008-2017, we construct three important uncertainty indices underlying reports in the Scottish news media: Scottish independence (IndyRef)-related uncertainty; Brexit-related uncertainty; and Scottish policy-related uncertainty. Examining the relationship of these indices with investment on a longitudinal panel of 3,589 Scottish firms, the evidence suggests that Brexit-related uncertainty associates more strongly than IndyRef -related uncertainty to investment. Our preferred specification suggests that a one standard-deviation increase in Brexit uncertainty foreshadows a reduction in investment by 8% on average in the following year. Besides we find that the uncertainty associated with the Scottish referendum for independence while negligible at the aggregate level, relates more strongly with the investment of listed firms as well as those operating on the border with England. In addition, we present evidence of greater sensitivity to these indices among firms that are financially constrained or whose investment is to a greater degree irreversible.

Public Peers, Accounting Comparability, and Value Relevance of Private Firms’ Financial Reporting
Bourveau, Thomas,Chen, Jason V.,Elfers, Ferdinand,Pierk, Jochen
We examine whether higher accounting comparability between public and private firms facilitates the valuation of private firms and, in particular, impacts the value relevance of private firms’ financial reporting in M&A transactions. To help develop our hypotheses, we conduct a series of interviews with M&A valuation experts to obtain insights on the private firm valuation process. Using a large sample of private target firm M&As in the European Union, we predict and find that the financial reporting of private firms that follow the same accounting standards as public firms has higher value relevance. This relation is more pronounced for private firms in industries with more public companies. Furthermore, our analysis around the mandatory adoption of IFRS by public companies suggests that private firms that do not adopt the new public standard show a decrease in the value relevance of their reporting. These findings are consistent with higher accounting comparability facilitating a spillover of valuation information from public to private markets.

Quality Revealing Versus Overstating in Equity Crowdfunding
Johan, Sofia,Zhang, Yelin
This paper studies the impact of qualitative business information on mitigating information asymmetry between equity crowdfunding entrepreneurs and investors both before and after the implementation of the United States JOBS Act. Qualitative business information covers the entrepreneurs’ introduction for business models, competitive strategies, product markets, drivers and barriers for product/service adoption, and business milestones. We believe the extent to which such information matters may differ as a result of the inclusion of more retail investors post-JOBS Act. Empirical data reveal that while the JOBS Act results in a reduction of the percentage of completed fundraisings, the effect of the project description on the percentage of completed fundraisings is enhanced. We also find that entrepreneurs’ excessive use of promotional language, or self-praise regarding business quality without factual support, is not rewarded by investors.

Religion and Venture Investing: A Cross-Country Analysis
Maung, Min,Tang, Zhenyang,Xu, Xiaowei
Using a sample of 56 countries over the 2000-2016 period, we document lower levels of venture capital investments in more religious countries. These results are not specific to any primary religion. Furthermore, we show that the negative relation between religiosity and venture investing mainly stems from risk aversion inherent in religiosity. Our results are unlikely driven by economic clout, as we show more religious countries in fact have higher levels of domestic credit or non-financial investments, despite lower levels of venture investments. We also present several findings consistent with risk aversion. Venture investments in more religious countries are more likely to have successful exits and are less likely to be foreign or early-stage deals. Our results are robust to different measures of venture investments and religiosity, and to alternative specifications that account for endogeneity.

Retrospective Reserves and Bonus with Policyholder Behavior
Falden, Debbie,Nyegaard, Anna Kamille
Legislation imposes insurance companies to project their assets and liabilities. Within the setup of with-profit life insurance, we consider retrospective reserves and bonus, and we study projection of balances with and without policyholder behavior. The projection resides in a system of ordinary differential equations of the savings account and the surplus, and we include the policyholder behavior options surrender and conversion to free-policy. The inclusion results in a structure where a system of ordinary differential equations of the savings account and the surplus is non-trivial. We consider a case, where we are able to find accurate ordinary differential equation and suggest an approximation method to project the savings account and the surplus including policyholder behavior in general.

Reusing Natural Experiments
Heath, Davidson,Ringgenberg, Matthew,Samadi, Mehrdad,Werner, Ingrid M.
After a natural experiment is first used, other researchers often reuse the setting, examining different outcome variables. We examine the consequences of reusing an experimental setting using two extensively studied natural experiments, business combination laws and the Regulation SHO pilot. We apply multiple hypothesis corrections and our findings suggest many results in the existing literature are false positives. We provide guidelines for inference when an experiment is reused using simulation evidence for several popular empirical settings including difference-in-differences regressions, instrumental variables regressions, and regression discontinuity designs.

Snapshot Review of Financial Markets
Abramov, Alexander E.,Radygin, Alexander,Chernova, Maria,Kosyrev, Andrey
Over the past week (from April 3 to April 9), a ‘rebound’ was observed in the oil and gas markets that had to do with the expectations of an agreement being reached on oil production cut in the OPEC+ format, alongside hopes for passing negative peaks in coronavirus statistics in the USA. The adoption of massive financial relief programs worldwide helped sustain the bond markets and banks. The yield spreads even of risky sovereign and corporate bonds over government bonds have declined markedly. A certain euphoria could be felt on the markets. However, a lot of factors suggest that this respite for financial markets will be temporary. This week the market received a wave of alarming information related to a serious recession in the world’s biggest economies, expected for the most part to start from Q2 of this year. Obviously, this piece of news will be followed by negative information concerning the financial statements of corporations. All this is likely to produce yet another downturn in the financial asset markets. The risks of a massive capital flight from the debt market are still there. At this stage, the main support measures in many countries aim at preventing big companies’ defaults and maintaining the viability of small and medium-sized businesses.

Stock Return Comovement When Investors are Distracted: More, and More Homogeneous
Ehrmann , Michael,Jansen, David-Jan
This paper tests whether fluctuations in investors' attention affect stock return comovement with national and global markets, and which stocks are most affected. We measure fluctuations in investor attention using 59 high-profile soccer matches played during stock market trading hours at the three editions of the FIFA World Cup between 2010 and 2018. Using intraday data for more than 750 firms in 19 countries, we find that distracted investors shift attention away from firm-specific and from global news. When movements in global stock markets are large, the pricing of global news reverts back to normal, but firm-specific news keep being priced less, leading to increased comovement of stock returns with the national stock market. This increase is economically large, and particularly strong for those stocks that typically comove little with the national market, thereby leading to a convergence in betas across stocks.

The Dark Side of Unregulated Artificial Intelligence: Evidence from Online Marketplace Lending
Li, Xiaoyang,Lu, Haitian,Hasan, Iftekhar
Using a unique, order-level data set on artificial intelligence (AI) versus human bidding for a Chinese online market place lending platform, we uncover serious ethical challenges of the unregulated AI. We find AI “skims off the cream” through (1) strategic information provision, (2) fast trading, and (3) price manipulation. In a regression discontinuity design, we show individual investor returns decrease and borrowers pay more in financing costs due to AI cream-skimming. Further evidence reveals a misalignment of interest when a platform’s private interest in loan origination exceeds its expected loss in management fees. We also discuss the corresponding regulatory strategies.

The Dynamics of Commodity Return Comovements
Prokopczuk, Marcel,Wese Simen, Chardin,Wichmann, Robert
This paper studies comovements in commodity futures markets. We compare factor models with respect to their fit of commodity return comovements. A model based on traded long-short portfolio returns outperforms a macroeconomic model, and explains 96% of the realised comovement. Dissecting the evidence, we find that comovements are driven by the variation of factor covariances as opposed to sensitivities. Intersectoral correlations are more affected than intrasectoral correlations. Volatility comovements only react following the global financial crisis. Our results cast doubt on the persistence of the effects of financialization and emphasize the importance of the dynamics of factor covariances.

The Explosion of Cryptocurrencies: A Black Hole Analogy
Ballis, Antonis,Drakos, Konstantinos
This study wishes to investigate, through an analogy between finance and astrophysics, whether there is a mechanism that can describe the explosive increase in the number of traded cryptocurrencies. By analyzing data of weekly snapshots of all traded cryptocurrencies from 4 January 2009 to 12 May 2019, we find evidence that the above-mentioned mechanism does, in fact, exist. The results clearly indicate that there is a self-gravitational property in the cryptocurrency market, which is a direct evidence to the hypothesis that the change of the traded cryptocurrencies is a positive function of the previous period’s number of traded cryptocurrencies.

The Forced Registration of Hedge Funds in the United States
Lee, Steven,Kramer II, Edward W.
This article recounts the history of hedge fund regulation in the United States over the last century, including Congressional legislation as well as legal cases mounted both by and against the Securities and Exchange Commission. Traditional arguments for and against hedge fund regulation are discussed. The article argues that neither hedge funds nor their managers should be regulated—whether directly or indirectly. Rather, financial or trusted advisors who recommend these products to investors should bear the regulatory burden.

The Influence of Customer Relationship Management (CRM) Indicators on Customer Loyalty of Sharia Based Banking System
Lubis, Adelina ,Dalimunthe, Ritha ,Absah, Yeni ,Fawzeea, Beby Karina
Objective - The purpose of this research is to determine whether CRM (Customer Relationship Management) indicators, namely complaint resolution, customer orientation, customer empowerment and customer knowledge affect the loyalty of sharia bank customers in North Sumatra.Methodology/Technique - The sample of this study is 120 Islamic banking customers in North Sumatra, namely customers at PT. BNI Syariah Tbk, PT. Bank Syariah Mandiri Tbk and PT. BRI Syariah Tbk. The analytical method used is multiple linear regression analysis.Findings - The results of this study are as partial complaint resolution, customer orientation, customer empowerment and customer knowledge variables have a significant effect on customer loyalty in Islamic Banking in North Sumatra and the hypothesis is accepted. The better CRM that is owned and implemented by Islamic Banking in North Sumatra will have an effect on increasing customer loyalty. Simultaneously complaint resolution, customer orientation, customer empowerment and customer knowledge variables significantly influence customer loyalty in Islamic Banking in North Sumatra and the hypothesis is accepted.Type of Paper - Empirical

The Natural Gas Announcement Day Puzzle
Prokopczuk, Marcel,Wese Simen, Chardin,Wichmann, Robert
This paper studies natural gas futures returns on EIA storage announcement days. More than 50% of the annual return is earned on these days. We find a significant difference between announcement and non-announcement day returns, which cannot be explained by the announcement surprise or other control variables. At the intraday level, the return splits half into a pre- and post-announcement part. The pre-announcement return is entirely generated on days when storage levels exceed analysts’ expectations casting doubt on explanations based on informed trading. After transaction and funding cost, a simple trading strategy yields substantial returns.

The Strength of Argumentation in European Management Revenue Forecasts During Times of Heightened Economic Uncertainty â€" Do Financial Analysts Care?
Hursti, Kristian
After the financial crisis of 2008â€"2009, accounting research has placed considerable focus on developing new methods for analyzing forward-looking narrative statements in corporate disclosures. This paper uses Toulmin’s (1958/2003) Claim-Data-Warrant argumentation scheme to develop a unique manual measure to overcome some of the challenges existing methods are yet to meet. It examines the relation between the strength of the management revenue forecast argument and three outcomes, 1) ex post forecast accuracy, 2) the incidence of analysts who revise their estimates, and 3) the rate of convergence in analyst estimates. Using a sample of 201 full-year revenue forecasts by 131 European companies during crisis years 2008 and 2009, it shows that the odds that management revenue forecasts meet their target increase as the strength of the forecast argument increases. This indicates that the contemporaneous warrant of the forecast argument can be used as an alternative to ex post verification of realized revenues when economic visibility is especially poor. Despite the connection, tests on a reduced sample of 161 observations show that unlike the traditional forecast characteristics of precision, news and horizon, the warrant is unrelated to the incidence of analysts who update their estimates. However, the percentage convergence in updated analyst estimates is significantly greater when the management forecast argument is strong. This implies that the multi-dimensional warrant carries information that updating analysts find value relevant. More importantly, due to the theoretical and empirical link between analyst dispersion and the bid-ask-spread, managers have the potential to reduce their firm’s cost of capital by providing convincing reasoning. Overall, this study takes Trueman's (1986) signaling theory a step forward by demonstrating that management do not signal their ability to predict their firm's future performance only by releasing guidance but also by releasing guidance that is argumentatively solid.

Value Creating Mergers â€" British Bank Consolidation, 1885-1925
Braggion, Fabio,Dwarkasing, Narly,Moore, Lyndon
The British banking sector had many small banks in the mid-nineteenth century. From around 1885 until the end of World War One there was a process of increasingly larger mergers between banks. By the end of the merger wave the English and Welsh market was highly concentrated, with only five major banks. News of a merger brought a persistent rise in the share prices of both the acquiring and the target bank (roughly 1% and 7%, respectively). Non-merging banks, especially those whose local market concentration rose as a result of the merger, saw their stock prices rise.

Value Creation in Private Equity
Biesinger, Markus,Bircan, Cagatay,Ljungqvist, Alexander
We open up the black box of value creation in private equity with the help of confidential information on value creation plans and their execution. Plans are tailored to each portfolio company's needs and circumstances, have become more hands-on, and vary with deal type, ownership, growth strategy, and geographic focus. Successful execution is subject to resource constraints, economies of specialization, and diminishing returns, and varies systematically across funds. Successful execution is a key driver of investor returns, especially in growth, buyout, and secondary deals. Company operations and profitability improve in ways consistent with successful execution, even beyond PE funds' exit.

Volatility Persistence as a New Channel for Global Impact on Local Volatility
Chen, Shuning,Wang, Jian-Xin
This study shows that global variables have strong impact on volatility persistence in individual markets. This effect represents a new channel for global impact on local volatility. Compared to the direct channel where local volatility is regressed on global variables, we find that (1) the new channel contributes more to local volatility than the direct channel; (2) global return contributes more to local volatility than global volatility; (3) global return impact comes mostly through the new volatility persistence channel; (4) cross-market correlation between the two channels has changed from positive to mildly negative over time. These findings shed new light on potential mechanisms for common volatility dynamics across global markets.

When the Markets Get Covid: Contagion, Viruses, and Information Diffusion
Croce, Mariano (Max) Massimiliano,Farroni, Paolo,Wolfskeil, Isabella
We quantify the exposure of major financial markets to news shocks about global contagion risk accounting for local epidemic conditions. For a wide cross section of countries, we construct a novel data set comprising (i) announcements related to COVID19, and (ii) high-frequency data on epidemic news diffused through Twitter. Across several classes of financial assets, we provide novel empirical evidence about {financial dynamics (i) around epidemic announcements, (ii) at a daily frequency, and (iii) at an intra-daily frequency.} Formal estimations based on both contagion data and social media activity about COVID19 confirm that the market price of contagion risk is very significant. We conclude that prudential policies aimed at mitigating either global contagion or local diffusion may be extremely valuable.