Research articles for the 2020-05-27

A New Perspective on Post‐Earnings‐Announcement‐Drift: Using a Relative Drift Measure
Clement, Michael,Lee, Joonho,Yong, Kevin Ow
Prior research finds that there is a delayed reaction to both analyst‐based earnings surprises and random‐walk‐based earnings surprises. Focusing on the market reaction from the post‐announcement window, prior studies show that analyst‐based drift is larger than random walk‐based drift. This finding is counter‐intuitive if we believe large, sophisticated investors tend to trade on analysts' forecast earnings news and thus react faster and more completely than smaller and less sophisticated investors react to random walk earnings news. In this study, we construct a relative measure of post‐earnings‐announcement drift (PEAD) (i.e., drift as a proportion of total market reaction to earnings news) which we refer to as the 'drift ratio', and we provide evidence, consistent with our intuition, that analyst‐based drift ratio is smaller (not greater) than random‐walk‐based drift ratio. We find that this difference is more pronounced in more recent periods and for firms with more sophisticated investors. Our approach to measure the PEAD is more intuitive than that in traditional PEAD literature. Our results thus complement existing research findings by utilizing the drift ratio measure to generate new insights about the drift phenomenon.

A Side Effect of Financial Innovation
Selezneva, Veronika
Financial innovation often involves the creation of new instruments that bundle existing securities such as mutual funds or exchange traded funds. In this paper we argue that while the creation of such assets has advantages such as lowering transaction costs, there can also be negative side effects. Investment in the new instrument may reveal information about future demand for the underlying securities, as the fund managing the instrument often needs to mechanically re-balance its position. Informed arbitrageurs may trade, exploiting their knowledge of this re-balancing. In general equilibrium, this trading activity can make the price of the underlying securities less informative and more sensitive to re-balancing shocks. We show that this loss of information may outweigh the direct gains from lower transaction costs that uninformed investors achieve. So welfare of uninformed investors may be lower. We argue that the potential effect on the market for the underlying securities may be substantial. To illustrate our mechanism, we analyze two episodes of financial innovations in the oil and volatility markets. The magnitude of the effect can be gauged by the fact that introduction of the new instrument in the oil market led to a temporary violation of a no-physical arbitrage condition.

An arbitrage-free interpolation of class $C^2$ for option prices
Fabien Le Floc'h

This paper presents simple formulae for the local variance gamma model of Carr and Nadtochiy, extended with a piecewise-linear local variance function. The new formulae allow to calibrate the model efficiently to market option quotes. On a small set of quotes, exact calibration is achieved under one millisecond. This effectively results in an arbitrage-free interpolation of class $C^2$. The paper proposes a good regularization when the quotes are noisy. Finally, it puts in evidence an issue of the model at-the-money, which is also present in the related one-step finite difference technique of Andreasen and Huge, and gives two solutions for it.

Blockholder Leverage and Payout Policy: Evidence from French Holding Companies
Anantavrasilp, Sereeparp,de Jong, Abe,DeJong, Douglas V.,Hege, Ulrich
This paper focuses on dominant owners' use of leverage to finance their blockholdings and its relationship to dividend policy. We postulate that blockholder leverage may impact payout policy, in particular when earnings are hit by a negative shock. We use panel data for France where blockholders have tax incentives to structure their leverage in pyramidal holding companies and study the effect of the financial crisis in 2008/2009. We find no difference in payout policy and financial behavior during the 1999 to 2008 period between firms with levered owners and other firms. However, in the years 2009 to 2011 following the crisis, dividend payouts increase in proportion to pyramidal debt of dominant owners. We inspect pyramidal entities individually and find that on average only 60% of dividends are passed through to the ultimate owners, with the rest predominantly used to meet debt service obligations of the pyramidal entities.

Board Directors with Foreign Experience and Stock Price Crash Risk: Evidence from China
Cao, Feng,Sun, Jian,Yuan, Rongli
This study examines the impact of board directors with foreign experience (BDFEs) on stock price crash risk. We find that BDFEs help reduce crash risk. This association is robust to a series of robustness checks, including a firm fixed effects model, controlling for possibly omitted variables, and instrumental variable estimations. Moreover, we find that the negative association between BDFEs and crash risk is more pronounced for firms with more agency problems, weaker corporate governance, and less overall transparency. Our findings suggest that the characteristics of board directors matter in determining stock price crash risk.

CEO Investment of Deferred Compensation Plans and Firm Performance
Cambrea, Domenico Rocco,Colonnello, Stefano,Curatola, Giuliano,Fantini, Giulia
We study how US chief executive officers (CEOs) invest their deferred compensation plans depending on the firm's profitability. By looking at the correlation between the CEO's return on these plans and the firm's stock return, we show that deferred compensation is to a large extent invested in the company equity in good times and divested from it in bad times. The divestment from company equity in bad times arguably reflects CEOs' incentive to abandon the firm and to invest in alternative instruments to preserve the value of their deferred compensation plans. This result suggests that the incentive alignment effects of deferred compensation crucially depend on the firm's health status.

Can Tail Risk Explain Size, Book‐To‐Market, Momentum, and Idiosyncratic Volatility Anomalies?
Aboura, Sofiane,Arisoy, Y. Eser
We examine the impact of tail risk on the return dynamics of size, book‐to‐market ratio, momentum and idiosyncratic volatility sorted portfolios. Our time‐series analyses document significant portfolio return exposures to aggregate tail risk. In particular, portfolios that contain small, value, high idiosyncratic volatility and low momentum stocks exhibit negative and statistically significant tail risk betas. Our cross‐sectional analyses at the individual stock level suggest that tail risk helps in explaining the four pricing anomalies, particularly size and idiosyncratic volatility anomalies.

Capital Inflow Surges and Corporate Debt Maturity Structure
Li, Xiang,Su, Dan
This paper studies the impact of capital inflow surges on corporate debt maturity structure. We first document that surges are associated with cheaper short-term borrowing and larger term spread. Using firm-bank matched data, we then find that there is a significant shortened corporate debt maturity during surges. Specifically, the maturity shortening effect is significantly stronger for firms with higher redeployability, foreign bank relationships, and related to banks that are more dependent on short-term funding. Moreover, the effect is stronger during surges of the bank sector inflows than surges of non-bank sector inflows. Through the change in rollover risk and the maturity structure of credit allocation, capital inflow surges impose financial instability in the economy.

Climate Finance Intermediation: Interest Spread Effects in a Climate Policy Model
Lessmann, Kai,Kalkuhl, Matthias
Interest rates are central determinants of saving and investment decisions. Costly financial intermediation distort these price signals by creating a spread between the interest rates on deposits and loans with substantial effects on the supply of funds and the demand for credit. This study investigates how interest rate spreads affect climate policy in its ambition to shift capital from polluting to low-carbon sectors of the economy. To this end, we introduce financial intermediation costs in a dynamic general equilibrium climate policy model. We find that costly financial intermediation affects carbon emissions in various ways through a number of different channels. For low to moderate interest rate spreads, carbon emissions increase by up to 7 percent, in particular, because of lower investments into the capital intensive clean energy sector. For very high interest rate spreads, emissions fall because lower economic growth reduces carbon emissions. If a certain temperature target should be met, carbon prices have to be adjusted upwards by up to one third under the presence of capital market frictions.

Cost of Capital and Valuation in the Public and Private Sectors: Tax, Risk and Debt Capacity
Brealey, Richard A.,Cooper, Ian A.,Habib, Michel A.
Cost of capital and valuation differ in the private and public sectors, because taxes are a cost to the private sector but are only a transfer to the public sector. We show how to transform the after‐tax private sector cost of capital into its pre‐tax equivalent, for comparison with the public sector cost of capital. We establish the existence of a tax induced wedge between these two costs of capital. The wedge introduces a preference on the part of the private sector for assets with rapid tax depreciation, high debt capacity and low risk. We show that, in circumstances where an asset has identical public and private sector valuation in the absence of taxes, the tax induced difference in valuation is identical to the change in government tax receipts that results from having the asset owned by the private rather than the public sector. We provide some examples of distortions that result from failure to adjust for changes in tax revenues, and show how to effect such adjustment.

Daily Middle-Term Probabilistic Forecasting of Power Consumption in North-East England
Roberto Baviera,Giuseppe Messuti

Probabilistic forecasting of power consumption in a middle-term horizon (months to a year) is a main challenge in the energy sector. It plays a key role in planning future generation plants and transmission grid. We propose a new model that incorporates trend and seasonality features as in traditional time-series analysis and weather conditions as explicative variables in a parsimonious machine learning approach, known as Gaussian Process. Applying to a daily power consumption dataset in North East England provided by one of the largest energy suppliers, we obtain promising results in Out-of-Sample density forecasts up to one year, even using a small dataset, with only a two-year In-Sample data. In order to verify the quality of the achieved power consumption probabilistic forecast we consider measures that are common in the energy sector as pinball loss and Winkler score and backtesting conditional and unconditional tests, standard in the banking sector after the introduction of Basel II Accords.

Debt Contract Strictness and Auditor Specialization
Callahan, Carolyn M.,Peters, Gary F.,Zhang, Joseph
The conflicts of interest among managers, shareholders and creditors resulting in agency costs, can be mitigated by restricting managers' adverse behavior, through financial covenants to better align the various stakeholder interests. Thus, debt contract strictness represents an important aspect of agency costs between creditors, shareholders, and management that is not always captured by interest rates. The contract setting provides a unique opportunity to investigate how creditors may rely on auditors to alleviate information uncertainty stemming from reliance on management's financial reporting and thus alleviate the creditor's potential loss of invested capital. After controlling for borrower risks, loan characteristics, and audit factors, we show that auditor industry specialization is significantly associated with a reduction in the strictness of debt contracts, consistent with creditors viewing certain industry expert auditors as effective monitors against financial reporting manipulation aimed at the avoidance of debt covenant triggers that protect creditors against potential loss. Further, we find that the association between loan strictness and auditor specialization is attenuated by stronger corporate governance systems, external monitors, and prior lender relationships.

Decomposing the Accrual Premium: The Evidence from Two Markets
Chichernea, Doina,Holder, Anthony,Petkevich, Alex
We decompose the accrual premium and study its components in the debt and equity markets. We show that the importance of each accrual component depends on the sample and the type of market considered. The short‐term accruals component is primarily observed in equity markets, among small and young companies, which is consistent with mispricing arguments. The long‐term accruals premium is consistently positive and significant in different samples and markets. This component reflects growth in capital expenditures, and it is counter‐cyclical and predictable, which is in line with investment‐based explanations. Finally, the financial accruals component does not generate predictability.

Do Bureaucratic Checks Improve Firm Value? Evidence from a Natural Experiment
An, Jiafu,Armitage, Seth,Hou, Wenxuan,Liu, Xianda
This paper studies the impact of bureaucratic checks on firm value using the revision of the regulations on disciplinary actions of the Communist Party of China (CPC) in 2015 as a natural experiment. We document a positive and substantial market reaction following this unexpected policy change that tightens and formalizes the constraints on bureaucrats’ misconduct. The impact is less pronounced for firms with state controlling shareholders or state ownership, firms having CEOs or directors with CPC memberships, and these operate in regions with better institutional quality. The subsequent revision in 2018 that emphasized political obedience is not associated with positive market reactions. Our results have policy implications for the design of the incentive structure within bureaucratic organizations.

Does Bank Credit Affect Innovation? Evidence from Collateral Law Reform
Ding, Wenzhi,Wei, Lai,Xie, Wensi
Exploiting legal reforms that facilitate the use of movable assets as collateral in secured debt transactions, we examine the impact of access to bank credit on corporate innovation. We create a firm-level panel data set on patenting activities for 45,325 firms across 30 European countries from 1992 through 2015. We find that following the legal reforms, firms operating in sectors with more movable assets conduct more innovation activities and with higher quality, as measured by the number of patents, citations, and the number of impactful patents. The effects are stronger among firms that are more financially constrained, and belong to innovative-intensive industries, suggesting that the legal reforms spur innovation by improving access to credit.

Does Board Gender Diversity Affect Corporate Cash Holdings?
Atif, Muhammad,Liu, Benjamin,Huang, Allen
This paper examines whether board gender diversity affects corporate cash holdings using S&P 1500 index firms in the US for the period 2006–2015. We document a significantly negative relationship between board gender diversity and cash holdings. We also find a strong negative effect of female independent directors consistent with monitoring function. Moreover, in accordance with the critical mass theory, we find a negative effect of female directors' presence and voice on cash holdings. Our findings are robust to alternative econometric specifications, alternative measures of cash holdings and corporate governance, difference‐in‐differences, propensity score matching, and two‐stage least squares. This study offers useful insights into the current global debate on gender diversity and its implications for firms.

Does Stardom Affect the Informativeness of a CEO'S Insider Trades?
Sabherwal, Sanjiv,Uddin, Mohammad Riaz
This study examines whether the celebrity or star status of a chief executive officer (CEO) affects the informativeness of his insider trades. Using three different measures to identify star CEOs in a sample of S&P 1500 firms, we find that trades of non‐star CEOs predict future abnormal returns and earnings innovations and that trades of star CEOs do not. The predictive power of non‐star CEO trades is mostly attributable to opportunistic trades, not routine trades. We also find evidence suggesting that the abnormal returns associated with non‐star CEO insider trades are due to the lower visibility and consequently less scrutiny of non‐star CEOs compared with star CEOs.

Effective Enforcement of a Data Protection: A Model for Risk-Based Supervision Using Responsive Regulatory Tools
Raghavan, Malavika,Chugh, Beni,Kumar, Nishanth
This paper presents ideas for a new approach to enforcement of a data protection regime, based on risk-based supervision and the use of a range of responsive enforcement tools that could be deployed in advance of a breach to prevent it, or after a breach to mitigate the effects. Building on the risk-based approach to supervision, the model proposes a methodology to identify those entities that potentially pose more risk (to individuals and the system) when the personal data they hold is compromised.Part 2 of this paper proposes a risk-based framework to identify and classify entities based on the risk they pose when the personal data they hold is compromised, using both qualitative and quantitative components. Part 3 sets out an enforcement toolkit for data protection, guided by the paradigm of responsive regulation (that also employs ex ante tools) to prevent and mitigate the effects of a compromise of personal data. This approach is a departure from the post-data breach sanctions that currently dominate data protection regimes worldwide. Part 4 sets out the features of institutional design and inter-sectoral coordination required for effective implementation of such a model approach for risk-based supervision and enforcement of data protection rights.

Employee Treatment and Firm Innovation
Mao, Connie X.,Weathers, Jamie
We identify firm innovation as a channel through which the treatment of employees affects firm value. Long‐term incentive theory supports positive effects of 'good' employee treatment on innovation. Alternatively, entrenchment theory suggests such treatment will lead to complacency and shirking, hence deterring innovation. These opposing views merit investigation since human capital is increasingly essential to the growth and success of a firm. Using the KLD database and patent/citation data, we find a significant positive relationship between favorable employee treatment and the innovation quantity and quality of a firm. Furthermore, we find that the positive treatment of employees improves innovation focus – more innovation related to firms' core business, leading to greater firm value via the increased economic value of patents. These findings, robust to endogeneity concerns, provide support for the long‐term incentive hypothesis, suggesting that well‐treated employees increase firm innovation. Thus, firm innovation represents a channel through which positive employee treatment enhances firm value.

Financial Reporting and Trade Credit: Evidence from Mandatory IFRS Adoption
Li, Xiao,Ng, Jeffrey,Saffar, Walid
We investigate the effect of mandatory international financial reporting standards (IFRS) adoption on trade credit. We document that firms in countries that adopt IFRS receive more trade credit from their suppliers, consistent with improved financial reporting quality and comparability playing a role in facilitating informal financing. This increase is larger for countries with a low level of societal trust, a poor pre-IFRS-adoption information environment, and stronger legal enforcement. These cross-sectional results suggest that the conditions under which higher quality information is made publicly available affect suppliers’ decisions to provide trade credit. This increase is also larger for firms with greater exposure to foreign markets, a finding that highlights the importance of more comparable international financial reporting standards in facilitating cross-country trade credit. We also find that IFRS adoption has a stronger positive effect on trade credit for firms with greater liquidity needs. Finally, we find that firms in countries that adopt IFRS also extend more trade credit to their customers. Overall, our results support the notion that financial reporting can have a causal effect on trade credit.

From Tether to Libra: Stablecoins, Digital Currency and the Future of Money
Alexander Lipton,Aetienne Sardon,Fabian Schär,Christian Schüpbach

This paper provides an overview on stablecoins and introduces a novel terminology to help better identify stablecoins with truly disruptive potential. It provides a compact definition for stablecoins, identifying the unique features that make them distinct from previously known payment systems. Furthermore, it surveys the different use cases for stablecoins as well as the underlying economic incentives for creating them. Finally, it outlines critical regulatory considerations that constrain stablecoins and summarizes key factors that are driving their rapid development.

Gender‐Diverse Boards and Audit Fees: What Difference Does Gender Quota Legislation Make?
Nekhili, Mehdi,GULL, Ammar Ali,Chtioui, Tawhid,Radhouane, Ikram
We investigate the effect of board (audit committee) gender diversity on audit fees in the French context. We also examine whether the relationship between the proportion of female directors and audit fees is moderated by the enactment of the gender quota law in 2011. We use the system GMM estimation approach on a matched sample of French firms listed in the SBF 120 index between 2002 and 2017. Consistent with the supply‐side perspective, we contend that female independent directors and female audit committee members, by improving board monitoring effectiveness, affect the auditor's assessment of audit risk, resulting in lower audit fees. Our findings also document that, by breaking the glass ceiling, the effectiveness of the gender quota law lies not in increasing the proportion of female insider directors, but in boosting the appointment of female independent directors and female audit committee members. Using the difference‐in‐difference approach, our results reveal that female independent directors and female audit committee members are more willing to assert their monitoring skills after the quota law, leading to lower audit fees. Moving beyond tokenism, we show that, after the quota law, the negative impact on non‐audit fees is strengthened only for female independent directors.

Goodwill Valuations Certified by Independent Experts: Bigger and Cleaner Impairments?
Gietzmann, Miles B.,Wang, Ye
If firms disclose the use of independent valuation experts to assess the magnitude of goodwill impairments, should investors rationally condition their values on that disclosure? This research shows that firms that disclose the use of an independent valuation expert are more likely to report a higher impairment charge in an impairment year but, critically, after controlling for other determinants, the disclosing firms are less likely to have impairments in following years. Thus, when the use of an independent expert is disclosed, while it is rational for investors to downgrade firm value on the basis of the disclosed (higher) impairment charge in that year, there is simultaneously a reduced need to add an additional discount to anticipate further (strategically) delayed impairment charges. The investors need to consider the likely multi‐period time series properties of impairments, and firms may benefit from using an expert if in anticipation of future related impairments, investors significantly reduce the discount applied.

Growing through Spinoffs. Corporate Governance, Entry, and Innovation
Iacopetta, Maurizio,Minetti, Raoul,Murro, Pierluigi
New firms are often based on ideas that the founders developed while working for incumbent firms. We study the macroeconomic effects of spinoffs through a growth model of product variety expansion, driven by firm entry, and product innovation. Spinoffs stem from conflicts of interest between incumbent firms' shareholders and employees. The analysis suggests that incumbents invest more in product innovation when knowledge protection is stronger. An inverted-U shape relationship emerges, however, between the intensity of spinoff activities and the strength of the rule of law. A calibration experiment indicates that, with a good rule of law, loosening knowledge protection by 5% reduces product innovation by one fifth in the short run and one seventh in the long run, but boosts the spinoff rate by one tenth and one sixth in the short and long run, respectively. Nevertheless, per capita income growth drops and welfare deteriorates. The trade-offs are broadly consistent with evidence from Italian firms.

Impact of the State of Emergency Declaration for COVID-19 on Preventive Behaviors and Mental Conditions in Japan: Difference in Difference Analysis using Panel Data
Eiji Yamamura.,Yoshiro Tsutsui

During the COVID-19 epidemic in Japan between March and April 2020, Internet surveys were conducted to construct panel data to investigate changes at the individual level regarding preventive behaviors and mental conditions by surveying the same respondents at different times. Specifically, the difference-in-difference (DID) method was used to explore the impact of the COVID-19 state of emergency declared by the government. Key findings were: (1) the declaration led people to stay home, while also generating anger, fear, and anxiety. (2) The effect of the declaration on the promotion of preventive behaviors was larger than the detrimental effect on mental conditions. (3) Overall, the effect on women was larger than that on men.

Insolvency of Significant Non-Financial Enterprises: Lessons from Bank Failures and Bank Resolution
Kokorin, Ilya
In the aftermath of the global financial crisis the EU bank resolution regime went through fundamental changes that seek to preserve financial stability and ensure continuity of critical functions. The same cannot be said of insolvency rules applicable to non-financial enterprises. Unlike bank resolution with its macroprudential and proactive focus, insolvency law has largely remained microprudential and reactive.Admittedly, unlike bank failures, corporate insolvencies usually do not pose systemic risk. However, in practice this may not hold true for significant non-financial enterprises (SNFEs). Such enterprises oftentimes play a major role in national economies and serve important public functions. Their failure may trigger contagion and cause disruptive consequences. Insofar as insolvency of SNFEs raises concerns common to bank failures, the question arises whether certain strategies and tools embraced within the EU bank recovery and resolution framework should be extended to regulate SNFE insolvency. This article explores the feasibility of such an extension.

Integration of Macroeconomic Data into Multi-Asset Allocation with Machine Learning Techniques
Abouseir, Amine,Le Manach, Arthur,El Mennaoui, Mohamed,Zheng, Ban
In this paper, we propose a new way to predict market returns for multi-assets (equity, fixed-income and commodity) by extracting features from macroeconomic data and performing machine learning algorithms for both regression and classification. Our approach aims to select robust models to build alternative risk premia portfolio. We apply machine learning algorithms to our investment universe and then apply different portfolio allocation methods. We discover the importance of integrating macroeconomic data to build portfolio, especially with classification techniques which enhance the Sharpe ratios of strategies.

Large and moderate deviations for stochastic Volterra systems
Antoine Jacquier,Alexandre Pannier

We provide a unified treatment of pathwise Large and Moderate deviations principles for a general class of multidimensional stochastic Volterra equations with singular kernels, not necessarily of convolution form. Our methodology is based on the weak convergence approach by Budhijara, Dupuis and Ellis. We show in particular how this framework encompasses most rough volatility models used in mathematical finance and generalises many recent results in the literature.

Margins: Estimating the Influence of the Big Three on Shareholder Proposals
Griffin, Caleb N.
This Article contributes to the growing literature on the influence of index funds on corporate governance by providing new data on index funds’ ownership, voting control, and impact on shareholder proposal outcomes. The Article first presents data on the firm ownership and voting control of the three largest index funds (the “Big Three”) at Fortune 250 companies. It finds that the Big Three combined are the largest shareholder in 96% of Fortune 250 companies, that Vanguard and BlackRock combined (the “Big Two”) are the largest shareholder in 94.4% of such companies, and that Vanguard alone (the “Big One”) is the largest shareholder in 65.6% of such companies. The Article next analyzes the power of the Big Three index funds to decide the outcome of shareholder proposals. It presents data on the voting margins for all shareholder proposals at Fortune 250 companies in calendar years 2018 and 2019. It then pairs the voting margin data with the voting control data to provide a market-wide picture of which shareholder proposals are likely within the Big Three’s influence. The findings suggest that the Big Three already possess sufficient voting power to determine the outcome of a majority of shareholder proposals. Additionally, the Article provides data on the Big Three’s influence over specific categories of shareholder proposals. It finds that the Big Three have the power to determine approximately half of environmental and social proposals (with low error rates) and approximately 65% of governance proposals (with somewhat higher error rates). In light of these findings, the Article explores the profound implications of this proxy voting power and proposes methods for investors to reclaim their autonomy.

Market Return Around the Clock: A Puzzle
Bondarenko, Oleg,Muravyev, Dmitriy
We study how the excess market return depends on the time of the day using E-mini S&P 500 futures that are actively traded for almost 24 hours. Strikingly, four hours around Asian markets’ close and European open account for the entire average market return. This period’s Sharpe ratio is extremely high as overnight volatility is low. Its returns are positive in every year and survive transaction costs. Remarkably, average returns are zero during the remaining 20 hours and almost all sub-intervals. We attribute high returns around European open to the uncertainty resolution as European investors help process information accumulated during Asian trading hours. Consistent with this hypothesis, VIX future returns are positive during the Asian session and highly negative around European open.

Modern Currency Exchange Rate Behaviour and Proposed Trend-Like Forecasting Model
Tweneboah Senzu, Emmanuel
The study examined high volatile assets, specifically the currency exchange rate of the open financial market. Takes into consideration the five most traded paired currencies of the global financial market. And observed, generally, the data set of the unit currency exchange rate exhibit homoscedastic qualities making it appropriate for the use of auto-regression integrated moving average as a reliable model forecast for future pricing of the volatile assets. However, the current model prediction addresses only the magnitude of asset price ignoring its direction, which is the paramount challenge of forecasters. Hence the paper resolves such weakness of the model by introducing a momentum model as a complementary tool to the ARIMA model to determine not only price magnitude but the vector direction of volatile asset pricing relative to the market, dependent on its lagged values.

More Robust Pricing of European Options Based on Fourier Cosine Series Expansions
Fabien Le Floc'h

We present an alternative formula to price European options through cosine series expansions, under models with a known characteristic function such as the Heston stochastic volatility model. It is more robust across strikes and as fast as the original COS method.

Notes on the SWIFT method based on Shannon Wavelets for Option Pricing
Fabien Le Floc'h

This note shows that the cosine expansion based on the Vieta formula is equivalent to a discretization of the Parseval identity. We then evaluate the use of simple direct algorithms to compute the Shannon coefficients for the payoff. Finally, we explore the efficiency of a Filon quadrature instead of the Vieta formula for the coefficients related to the probability density function.

Part 1: Training Sets & ASG Transforms
Rilwan Adewoyin

In this paper, I discuss a method to tackle the issues arising from the small data-sets available to data-scientists when building price predictive algorithms that use monthly/quarterly macro-financial indicators. I approach this by training separate classifiers on the equivalent dataset from a range of countries. Using these classifiers, a three level meta learning algorithm (MLA) is developed. I develop a transform, ASG, to create a country agnostic proxy for the macro-financial indicators. Using these proposed methods, I investigate the degree to which a predictive algorithm for the US 5Y bond price, predominantly using macro-financial indicators, can outperform an identical algorithm which only uses statistics deriving from previous price.

This was an undergraduate project, subsequently the research was not exhaustive.

Paving the Way for Children: Family Firm Succession and Corporate Philanthropy in China
He, Wen,Yu, Xin
We investigate whether internal succession in family firms motivates founders to engage in corporate philanthropy. We argue that founders who intend to pass control of the firm to their children are likely to prepare for the internal succession by building up family assets such as reputation and political connections through corporate philanthropy. Supporting our argument, we find that both the likelihood and the amount of philanthropic donations increase when listed family firms in China are in the internal succession process. The effect of successions on philanthropic donations is stronger for family firms that have political connections or are located in areas with stronger government influence in the local economy. The effect concentrates on family firms when heirs are young and inexperienced. When heirs are established, family firms actually make fewer philanthropic donations. Our results remain robust after addressing endogeneity issues.

Payout Policy, Financial Flexibility, and Agency Costs of Free Cash Flow
Oded, Jacob
This paper explains how firms choose between dividends and open‐market repurchase programs, the prevailing method that firms use to disburse cash today. While earlier theories about payout policy are motivated by signaling, the motivation for payout in this paper is to prevent the waste of free cash by self‐interested insiders. In the model, dividends prevent free cash waste by forcing cash out, but result in underinvestment if the cash paid out is later needed for operations. Open‐market programs stimulate payout by providing personal gains to informed insiders that are associated with the firm's repurchase trade. Yet, they also avoid the underinvestment problem by leaving insiders the option to cancel the payout. Because their execution is optional, however, open‐market programs only partially prevent the waste of free cash. The model provides testable predictions that are generally consistent with the empirical evidence.

Pricing and Hedging Performance on Pegged FX Markets Based on a Regime Switching Model
Samuel Drapeau,Yunbo Zhang

This paper investigates the hedging performance of pegged foreign exchange market in a regime switching (RS) model introduced in a recent paper by Drapeau, Wang and Wang (2019). We compare two prices, an exact solution and first order approximation and provide the bounds for the error. We provide exact RS delta, approximated RS delta as well as mean variance hedging strategies for this specific model and compare their performance. To improve the efficiency of the pricing and calibration procedure, the Fourier approach of this regime-switching model is developed in our work. It turns out that: 1 -- the calibration of the volatility surface with this regime switching model outperforms on real data the classical SABR model; 2 -- the Fourier approach is significantly faster than the direct approach; 3 -- in terms of hedging, the approximated RS delta hedge is a viable alternative to the exact RS delta hedge while significantly faster.

Probabilistic multivariate electricity price forecasting using implicit generative ensemble post-processing
Tim Janke,Florian Steinke

The reliable estimation of forecast uncertainties is crucial for risk-sensitive optimal decision making. In this paper, we propose implicit generative ensemble post-processing, a novel framework for multivariate probabilistic electricity price forecasting. We use a likelihood-free implicit generative model based on an ensemble of point forecasting models to generate multivariate electricity price scenarios with a coherent dependency structure as a representation of the joint predictive distribution. Our ensemble post-processing method outperforms well-established model combination benchmarks. This is demonstrated on a data set from the German day-ahead market. As our method works on top of an ensemble of domain-specific expert models, it can readily be deployed to other forecasting tasks.

Product Market Competition, Labor Mobility, and the Cross-Section of Stock Returns
Ahmed, Shamim,Bu, Ziwen,Ye, Xiaoxia
This paper explores the impact of product market competition on the positive relation between labor mobility (LM) and future stock returns. We develop a production-based model, which predicts a stronger positive relation between LM and expected returns for firms in highly competitive industries. Consistent with the model's prediction, empirical results from double-sorted portfolios and cross-sectional regressions suggest that LM predicts returns only among firms in competitive industries. This evidence suggests that the intensity of competition in firms' product market potentially drives the positive LM-return relation.

Recursos TIC y supervivencia empresarial: una revisión de la noción de ventaja competitiva (IT Resources and Business Survival: Competitive Advantage Revisited)
Piñeiro-Sánchez, Carlos
Spanish abstract: El estudio de las disfunciones financieras de las empresas ha sido un tópico común en la investigación a lo largo de las últimas décadas; no obstante, algunos aspectos de los procesos de fracaso han recibido relativamente poca atención. Este trabajo profundiza en su dimensión temporal. Exploramos la forma en que una categoría concreta de recursos, los activos y capacidades vinculados a las tecnologías de la información, altera la probabilidad de sobrevivir durante diferentes horizontes arbitrarios. Diseñamos y ajustamos una regresión de Cox, partiendo de la fundamentación teórica aportada por el enfoque de recursos y capacidades. Hallamos evidencia indicativa de que las expectativas de su-pervivencia están influidas por el uso de recursos TIC orientados a la gestión comercial, por la experiencia de gestión en materia de TIC y por la habilidad para desplegar estrategias de colaboración interna y externa. Los resultados son robustos incluso cuando se consideran las particularidades de la actividad y las características financieras específicas de cada empresa.English abstract: The study of firms’ financial imbalances has been a common topic in research over the last decades; however, some aspects of the failure processes have received little attention. This research deepens into the temporal dimension of bankruptcy, and explores whether IT resources affect the expected lifetime of a firm. Drawing on the resource-based view of the firm, we design and adjust a Cox regression. We found evidence that the average lifetime and the odds of surviving beyond any arbitrary time t are modified by the availability and the pattern of use of marketing-oriented IT resources, by IT management experience, and by the ability to deploy internal and external collaboration strategies. The results are robust when considering the industry and the financial situation of each company.

Return Predictability in Federal Funds Futures: Is it There?
Steffensen, Sigurd
This paper studies return predictability in federal funds futures. I show that over the period 1990 to 2018, predictor variables from the literature do not consistently outperform the expectations hypothesis when evaluated out-of-sample. Further, while forecasts from advanced forecasting methods such as Dynamic Model Averaging and Complete Subset Regressions are considerably more accurate than those from simple linear prediction models, they do not generate systematic economic value to investors. These results suggest that federal funds futures do not need adjustment for time-varying risk premia.

Returns to Scale and Asset Prices
Chen, Hung‐Kun,Chan, Konan,Wang, Yanzhi
The q‐theory of investment is proposed to explain firm growth effects, where previous papers identify a negative effect of firm growth, including asset growth, real investment and net share issuance, on future stock returns. This paper uses returns to scale from the production function to test the dynamic q‐theory, which predicts that the firm growth effect is theoretically weaker for firms with decreasing returns to scale (DRS) than for non‐DRS firms. Our empirical results generally support the prediction of dynamic q‐theory. However, we find that the dynamic q‐theory explains little of the value, momentum and ROE effects from the standpoint of returns to scale.

Robust Pricing under Strategic Trading
Gong, Aibo,Ke, Shaowei,Qiu, Yawen,Shen, Rui
We study strategic trading with a market maker who does not know the joint distribution of public information and an asset's value, and hence cannot interpret information properly. Following a public event, a probabilistic-ally informed trader who knows the distribution and liquidity traders trade. The market maker adopts a robust linear pricing strategy that has the best worst-case payoff guarantee. We show that such a strategy is equivalent to a two-step learning procedure, and characterize the unique linear equilibrium. Expected equilibrium prices exhibit under-reaction to public information. If the trading frequency is arbitrarily high, the market maker fully reveals the distribution in the price eventually.

Show Me the Money! Dividend Policy in Countries with Weak Institutions
Ellahie, Atif,Kaplan, Zachary
Controlling shareholders have greater ability to divert resources in countries with weak institutions. To mitigate this agency conflict, we hypothesize firms will return more of current earnings to investors as dividends, leaving fewer resources for controlling shareholders to ultimately divert. Specifically, we show that firms in weak institution countries (i) have higher speed of adjustment (SOA) to their target payout ratio, (ii) are more likely to disclose a dividend policy specifying a minimum payout ratio, and (iii) pay dividends earlier in their life-cycle. Tests examining earnings announcement returns are consistent with these dividend policy differences affecting the pricing of earnings. Finally, in within-country analysis, we find that controlling shareholders benefit from high SOA dividend policies through greater ability to raise equity and investors are less likely to view these equity raises as expropriation.

Stocks and Cryptocurrencies: Anti-fragile or Robust?
Darío Alatorre,Carlos Gershenson,José Mateos

Antifragility was recently defined as a property of complex systems that benefit from disorder. However, its original formal definition is difficult to apply. Our approach has been to define and test a much simpler measure of antifragility for complex systems. In this work we use our antifragility measure to analyze real data from the stock market and cryptocurrency prices. Results vary between different antifragility interpretations and for each system. Our results suggest that the stock market favors robustness rather than antifragility, as in most cases the highest and lowest antifragility values are reached either by young agents or constant ones. There are no clear correlations between antifragility and different good-performance measures, while the best performers seem to fall within a robust threshold. In the case of cryptocurrencies, there is an apparent correlation between high price and high antifragility.

Strengthening science, technology, and innovation-based incubators to help achieve Sustainable Development Goals: Lessons from India
Kavita Surana,Anuraag Singh,Ambuj D Sagar

Policymakers in developing countries increasingly see science, technology, and innovation (STI) as an avenue for meeting sustainable development goals (SDGs), with STI-based startups as a key part of these efforts. Market failures call for government interventions in supporting STI for SDGs and publicly-funded incubators can potentially fulfil this role. Using the specific case of India, we examine how publicly-funded incubators could contribute to strengthening STI-based entrepreneurship. India's STI policy and its links to societal goals span multiple decades -- but since 2015 these goals became formally organized around the SDGs. We examine why STI-based incubators were created under different policy priorities before 2015, the role of public agencies in implementing these policies, and how some incubators were particularly effective in addressing the societal challenges that can now be mapped to SDGs. We find that effective incubation for supporting STI-based entrepreneurship to meet societal goals extended beyond traditional incubation activities. For STI-based incubators to be effective, policymakers must strengthen the 'incubation system'. This involves incorporating targeted SDGs in specific incubator goals, promoting coordination between existing incubator programs, developing a performance monitoring system, and finally, extending extensive capacity building at multiple levels including for incubator managers and for broader STI in the country.

Switching From Incurred to Expected Loan Loss Provisioning: Early Evidence
López-Espinosa, Germán,Ormazabal, Gaizka,Sakasai, Yuki
This paper provides early evidence on the effect of global regulation mandating a switch from loan loss provisioning (LLP) based on incurred credit losses (ICL) to LLP based on expected credit losses (ECL). Using a sample of systemically important banks from 74 countries, we find that ECL provisions are more predictive of future bank risk than ICL provisions. To corroborate that the switch to ECL provisioning results in more information to assess bank risk, we analyze the market reaction to disclosures on the first-time impact of the accounting change; we find that a higher impact on loan loss allowances elicits lower stock returns, higher changes in CDS spreads, and higher changes in bid-ask spreads. Critically, these patterns are most pronounced when credit conditions deteriorate. Finally, we also find evidence that, as credit conditions worsen, the rule change induces an increase in provisions and a contraction of credit. Our study contributes to the debate on the effect of the ECL model on procyclicality, an especially pressing issue in the context of the current pandemic.

The Effects of Stricter Regulation on the Going Public Decision of Small and Knowledge‐Intensive Firms
Engelen, Peter‐Jan,Meoli, Michele,Signori, Andrea,Vismara, Silvio
This paper studies the impact of increased securities regulation on the IPOs of small and high‐tech, knowledge‐intensive firms. We take advantage of the adoption of European SOX‐like provisions, staggered at different dates across European countries, to test its influence on the going public decision. Starting from the population of European private firms during 1995–2012, we find that the likelihood of going public has decreased among small and high‐tech, knowledge‐intensive firms. Consistently, we document a 6% and 8.5% decrease in the industry‐adjusted Tobin's Q of small and knowledge‐intensive firms that go public after the regulatory change.

The High Cost of Electricity Price Uncertainty
Ostrovnaya, Anastasiya,Staffell, Iain,Donovan, Charles,Gross, Robert
The rapid worldwide growth of renewable energy has been largely underpinned by government support over the past decade. The need for subsidy is fading as the cost of electricity from renewables converges with that from fossil fuels, but the withdrawal of support schemes will also remove the revenue stability offered by auction schemes and contracts for differences. Exposure to market risk (fluctuating wholesale electricity prices) raises the cost of capital for merchant renewable generators. Here we quantify the extent to which increased volatility in future power prices affects revenues by combining electricity market and stochastic discounted cash flow models. Renewable projects relying purely on merchant pricing may see cost of capital rise by two percentage points (e.g. from 7% to 9%). Unless new private or government actors provide hedging solutions, fewer developers will undertake new renewable energy projects, slowing the energy transition and increasing its cost to society.

The Impacts of Strengthening Regulatory Surveillance on Bank Behavior: A Dynamic Analysis from Incomplete to Complete Enforcement of Capital Regulation in Microprudential Policy
Nakashima, Kiyotaka,Ogawa, Toshiaki
This study examines the impact of strengthening bank capital supervision on bank behavior in the incomplete and complete enforcement of regulations. In a dynamic model of banks facing idiosyncratic shocks, banks accumulate regulatory capital and decrease charter value and lending in the short run, while in the long run, the banking system achieves stability. To test the short-run implications, we utilize the introduction of the prompt corrective action program in Japan as a natural experiment. Using some empirical specifications with bank- and loan-level data, we find empirical evidence consistent with the theoretical predictions.

Tournament Incentives and Firm Credit Risk: Evidence from Credit Default Swap Referenced Firms
Du, Lijing,Huang, Jian,Jain, Bharat A.
In this paper, we evaluate the impact of managerial tournament incentives on firm credit risk in credit default swap (CDS) referenced firms. We find that intra‐firm tournament incentives are negatively related to credit risk. Our results suggest that tournament incentives reduce credit risk by alleviating the potential for underinvestment when managers are concerned about exacting empty creditors. Further, we find that tournament incentives decrease credit risk when internal governance is strong or product market competition is intense. Taken together, our results suggest that creditors perceive senior manager tournament incentives (SMTI) as a critical determinant of a firm's credit risk, particularly in settings where managerial risk aversion is high.

Utility Maximization and Dissipation Under Price Controls
Rouanet, Louis
This paper shows how basic micro-economics tools, and more specifically utility analysis, can be used to understand dissipating behavior in situations where prices alone cannot equate supply and demand. A few conclusions can be derived from our analysis: 1) the amount of dissipation depends on how clearly rights to buy are defined, 2) there is a crucial difference when analyzing non-price competition between average non-price costs and marginal non-price costs ; 3) When net suppliers do not have to compete on non-price margins, the cost of dissipation is fully borne by net demanders and net-demanders may sometimes gain by forcing net-suppliers to compete on non-priced margins ; 4) individuals have an incentive to minimize dissipation. If bargaining costs are zero, it will always be rational to establish institutions to get rid of wasteful non-price competition.

Value Creation Around Merger Waves: The Role of Managerial Compensation
Hillier, David,McColgan, Patrick,Tsekeris, Athanasios
This paper examines the relation between executive compensation and value creation in merger waves. The sensitivity of CEO wealth to firm risk increases the likelihood of out‐of‐wave merger transactions but has no influence on in‐wave merger frequency. CEOs with compensation linked to firm risk have better out‐of‐wave merger performance in comparison to in‐wave mergers. We also present evidence that cross‐sectional acquirer return dispersion is greater for in‐wave acquisitions. Our results suggest that the underperformance of acquiring firms during merger waves can be attributed in part to ineffective compensation incentives, and appropriate managerial incentives can create value, particularly in non‐wave periods.

Value at Risk and the Cross-Section of Expected Returns: Evidence from China
Gui, Pingshu,Zhu, Yifeng
We find a negative cross-sectional relation between value-at-risk (VaR) and expected returns in the Chinese stock market, similar to recent findings in the United States. However, this negative relation will disappear after controlling for idiosyncratic volatility. In addition, we observe that the VaR effect appears to be strong and cannot be explained by idiosyncratic volatility, momentum, short-term reversal, and maximum daily returns during a high consumer confidence period. In contrast, the relation between VaR and expected returns during a period of low consumer confidence is unclear.

What Factors Determine Dividend Smoothing by Us and EU Banks?
Koussis, Nicos,Makrominas, Michalis
Using a relatively large sample of European and US banks for the period 1998–2016, we investigate the determinants of bank dividend smoothing based on agency, asymmetric information and risk‐shifting theories. We show that dividend payout ratio smoothing practices were implemented on both continents before and after the crisis of 2007 and were more strongly pronounced for EU banks. Our findings mostly support agency‐based explanations of bank dividend behavior as evidenced by higher payout ratio smoothing for banks with higher (initial) dividend payouts, lower ownership concentration, public banks, and banks with lower growth opportunities and weaker investor protection. Evidence in favor of asymmetric information explanations is stronger for EU countries, where smaller (more opaque) banks appear to smooth more. In both continents, banks that rely more heavily on equity issuances are found to smooth dividend payout ratios more, suggesting that banks aim at improving access to equity markets. We also provide evidence in support of risk‐shifting, as evidenced by the persistence of dividend payout ratio smoothing in the crisis years and higher dividend smoothing for banks under greater regulatory pressure. Additional analysis using a time series partial adjustment model for dividend levels provides evidence supporting the prevalence of dividend smoothing and the suggested theoretical explanations.

Why understanding multiplex social network structuring processes will help us better understand the evolution of human behavior
Curtis Atkisson,Piotr J. Górski,Matthew O. Jackson,Janusz A. Hołyst,Raissa M. D'Souza

Social scientists have long appreciated that relationships between individuals cannot be described from observing a single domain, and that the structure across domains of interaction can have important effects on outcomes of interest (e.g., cooperation).1 One debate explicitly about this surrounds food sharing. Some argue that failing to find reciprocal food sharing means that some process other than reciprocity must be occurring, whereas others argue for models that allow reciprocity to span domains in the form of trade.2 Multilayer networks, high-dimensional networks that allow us to consider multiple sets of relationships at the same time, are ubiquitous and have consequences, so processes giving rise to them are important social phenomena. The analysis of multi-dimensional social networks has recently garnered the attention of the network science community.3 Recent models of these processes show how ignoring layer interdependencies can lead one to miss why a layer formed the way it did, and/or draw erroneous conclusions.6 Understanding the structuring processes that underlie multiplex networks will help understand increasingly rich datasets, giving more accurate and complete pictures of social interactions.