Research articles for the 2020-07-24

Acquisition Experience and Director Remuneration
Birhanu, Addis,Geiler, Philipp,Renneboog, Luc,Zhao, Yang
We investigate whether acquisition experience of executive and non-executive directors is priced in their remuneration. We find that acquisition experience generates a contractual premium, and the relative size of this premium is higher for non-executive directors than for executives. Only a director’s track record related to past successful acquisitions is priced. Acquisition experience at the individual director is not remunerated if this type of experience is already abundantly present in the firm through the firm’s past acquisition record or via the experience of the other board members. We verify the results by examining potential endogeneity concerns, by analyzing a broad set of different views on acquisition experience (such as industry-specific, broad or international experience, experience on a target’s board), and by ruling out alternative explanations (such as a director’s general skills level or reputation).

Bankers’ Remuneration Reforms and Future Challenges
Zalewska, Anna (Ania)
The desire to structure the remuneration of top banking executives and other material risk takers (MRTs), particularly the elements that are risk sensitive and aligned with longâ€"term incentives of their institutions, is at the centre of the regulatory debate. This discussion is part of the wider debate on the creation of crossâ€"country banking regulation that is aimed at reducing systemic risk in the banking industry whilst maintaining its competitive and innovative elements. Following the introduction of the Capital Requirements Directives (CRD) III and IV the academic literature has shed some light on the benefits and costs of restrictions on variable pay, malus and clawbacks, and group behaviour of MRTs. Yet, we are still far from understanding the real costs and benefits of these reforms and the forthcoming CRD V, and how these will support the demands of fintech transformation of the banking industry and the need to promote sustainable finance.

Broadcast Media and Asset Prices: The Effect of an Anti-Corruption Message in China
Conyon, Martin J.,Fu, Xi,He, Meng,Zhang, Zhifang
Does entertainment broadcast media affect equity stock prices? We exploit an exogenous event to identify such media effects, namely, the broadcasting in China of the highly popular TV drama ‘In the Name of People’ on March 28th, 2017. The TV show contained a robust State-approved anti-corruption message and is expected to alter investor perceptions. We find that stock prices fall in reaction to the broadcast. Importantly, the negative effect on asset prices is higher in magnitude for firms with political connections. Also, privately-owned politically connected firms exhibit more substantial adverse price effects compared to state-owned firms. The reduction in investors’ valuation of politically connected firms persists over the long run. Our empirical findings support the notion that traditional mass-media (i.e., TV) modifies the information set of investors and has significant educational value. In our case, an anti-corruption TV drama raises investors’ awareness of the potentially high costs of a firm’s political connections when the State is actively pursuing an anti-corruption strategy.

CEO Employment Contract Horizon and Financial Reporting Discretion
Gong, Guojin,Wang, Juan,Lee, Hyun Jung
We examine the effect of employment contract horizon on managers’ discretion in financial reporting. During the contract horizon, the board learns about a new CEO’s ability from realized firm performance and uses this information to determine whether to renew or terminate the CEO’s contract. Economic theory suggests that the informational value of firm performance to the board’s learning declines over time as the board’s estimate of the CEO’s ability becomes more precise; this motivates a CEO to overstate earnings more aggressively during the earlier stage of the contract horizon. Using a sample of initial employment contracts for the CEOs of S&P 500 firms, we find more (less) aggressive earnings overstatement during the earlier (later) stage of the first contract horizon. This finding is stronger for CEOs who have greater concerns over contract termination and for CEOs who have greater flexibility to manipulate earnings. This finding is robust after we account for alternative explanations. Firms that employ their CEOs without a contract horizon do not exhibit a similar trend in earning overstatement. Our evidence suggests that the CEO employment contract horizon has a significant impact on managerial discretion in financial reporting.

Can Composite Stock Index by Sector and Region Explain the Impact of Novel Coronavirus Disease (COVID-19) on the Economies of Major Cities?
Kanno, Masayasu
This study assesses the Japanese government's response to the novel coronavirus disease (COVID-19). As of July 10, 2020, the number of new cases in Japan was over twenty thousand. COVID-19 has significantly affected both lifestyle and economy in Japan. In recent domestic economy, the interdependence between municipal governments and companies is required to cope with this new threat. This study develops a composite stock index by sector and prefecture from the standpoint of what effects the increase in infections have had on industries and companies in the core municipalities. Finally, it can contribute to a strategy for coexistence with COVID-19.

Catching Green Swans
Haas, Armin
This paper argues that in order to be better prepared for future emergent crises, we need to move beyond the current scenarios based on frequentist statistical evidence, and adopt an approach that:1. assumes a complex systems perspective to fully understand socio-environmental dynamics; 2. adopts an “ex ante” perspective on the trajectories of a system, looking for the emergence of novelty as the observer follows the arrow of time, rather than the currently used “ex post” perspective that aims to explain the origins of phenomena observed in the present, going against the arrow of time; 3. views unanticipated events as endogenously created, whenever an individual or group’s information processing is insufficient to understand, and deal with, such events. A Bayesian learning approach is proposed to reduce uncertainty. Uncertainty is viewed as the uncertainty of the observer, rather than the uncertainty of the data. This has the advantage that such learning, as an attempt to increase understanding, can be initiated when insufficient data are available to use the frequentist statistical approach. The paper makes the argument for this in both a general and a mathematical language, and then gives an example how this approach can elicit thus far insufficiently understood dynamics, in the case of temperature statistics. To conclude, it proposes a Financial Investment and Decision Tool that is based on this approach.

Corona Virus (COVID-19) Pandemic and Nigerian Financial Market
Ayodele, Thomas,Akinyede, Oyınlola M.,, Mofoluwaso Iyabode
The study empirically analyses the effect of the Coronavirus outbreak on the performance and effectiveness of the Nigerian money market, the Nigerian capital market, and the Nigerian foreign exchange market. The study made use of time-series data for 60 working days after the first COVID-19 confirmed case in Nigeria and used exploratory analysis, signal estimation and simple regression analysis to evaluate the effect of COVID-19 on the Nigerian financial market. Open buyback rate (OBRR), all share index volume (ASIV) and parallel foreign exchange rate (PFER) were used as variables for money market, capital market and foreign exchange market respectively. Research findings show that there is a low positive correlation between COVID-19 pandemic and the money market rate. This is also applicable to the capital market. There is a moderately positive correlation between COVID-19 pandemic and the foreign exchange rate. In conclusion, the pandemic has impacted on the Nigeria financial market. It is therefore suggested that the Federal Government should always get prepared against future financial risk by taking proactive action against any diseases that may affect the whole system in order to ensure stability in the performance of our financial market.

Designing a Main Street Lending Facility
Vardoulakis, Alexandros
Banks add value by monitoring borrowers. High funding costs make banks reluctant to lend. A central bank can ease funding by purchasing loans, but cannot distinguish which loans require more or less monitoring, exposing it to adverse selection. A multi-tier loan pricing facility arises as the optimal institutional design setting both the purchase price and banks' risk retention for given loan characteristics. This design dominates uniform (flat) structure for loan purchases, provides the right incentives to banks and achieves maximum lending at lower rates to businesses. Both the multi-tier and flat structures deliver welfare gains compared to no intervention, but the relative gain between the two depends on three sufficient statistics: the share of loans requiring monitoring, the risk-retention ratio, and the liquidity premium. For plausible values in the data, the welfare loss from a flat structure ranges from 0.02% to 0.31% of the size of central bank's loan purchases

Do market-wide circuit breakers calm markets or panic them? Evidence from the COVID-19 pandemic
Li, Xiaoyang,Yao, Wenying
Market-wide circuit breakers (MWCBs), which halt trading for 15 minutes across allU.S. stock markets, have been triggered four times in March 2020 amid the COVID-19pandemic. This paper provides one of the first evidence on the efficacy of MWCBs withtick-by-tick stock trading data. Using a difference-in-differences approach, we find thatMWCBs significantly increase stocks’ realized volatility, bid-ask spread, and trading volume.Moreover, the market opening and reopening mechanisms of different stock exchangescomplicate the operation of MWCBs. Our results suggest that MWCBs can havethe unintended consequences of panicking the markets for a prolonged period of time,especially by aggravating market volatility and liquidity conditions.

Does a Skew-Normal Return Find Better Bayesian Optimal Portfolios?
Park, Jungjun
In optimal asset allocation, Black and Litterman (1990) were able to construct stable mean-variance efficient portfolios under the assumption of normal returns. However, many studies show that the normality assumption is not empirically supported and turns out to be inappropriate in many cases because of the asymmetry in asset returns. This paper extends the Black-Litterman (BL) asset allocation model by assuming hidden truncation skew-normal returns. Most of the well-known skew-normal models can be viewed as being products of such a hidden truncation construction. This paper presents a new theoretical construction of the multivariate hidden truncation skew-normal distribution for mean-vaiance-skewness portfolio optimization. Our results suggest that, using the skew-normal returns, the skew-normal BL model provides optimal portfolios with the same expected return but less risk compared to an optimal portfolio of the classical BL model. For example, the skew-normal BL allocation provides a less monthly volatility of 0.36%. The portfolios become more negatively skewed as the expected returns of portfolios increase for given N, which suggest that the investors trade a negative skewness for a higher expected return. This paper also finds that the negative relation between portfolio volatility and portfolio skewness. In other words, the investors trade a lower volatility for a higher skewness or vice versa reflecting that stocks with big drops in price are more volatile.

Exchange Traded Funds and the Liquidity of the Component Stocks
Adamu, Abdul,Wada, Friday,Ogwuche Iduh, Peter
This study examined the liquidity of Exchange Traded Fund and its component stocks on the Nigerian Stock Exchange (NSE). The data for this study was the daily opening price, day price, and volume traded for the ETF and the first 10 most capitalized stocks of NSE 30. The data were analyzed using descriptive statistics and Amihud’s measure of illiquidity. The results show that the component stocks are more liquid than the ETFs and it was recommended that the regulators should educate the investors and their agents on the likely benefits of investing in ETFs rather than the individual component stocks.

Has Regulatory Capital Made Banks Safer? Skin in the Game vs Moral Hazard
Dautović, Ernest
The paper evaluates the impact of a phased-in introduction of capital requirements on equity, risk-taking, and probability of default for a sample of European systemically important banks. Contrary to the case of a one-off introduction of capital requirements, this study does not find evidence of deleveraging through asset sales. A phased-in tightening promotes adjustment to lower leverage via an increase in equity thereby improving resilience and loss absorption capacity. The higher resilience comes at the cost of a portfolio reallocation towards riskier assets. Consistently with models on agency costs and gambling for resurrection, the risk-taking is driven by large and less profitable banks. The net impact on bank probabilities of default is positive albeit statistically insignificant, suggesting that risk-taking may crowd-out solvency.

How do House Prices Respond to Mortgage Supply?
Barone, Guglielmo,David, Francesco,de Blasio, Guido,Mocetti, Sauro
We examine the impact of household mortgages on house prices. Using biannual data on Italian cities for the years 2003-2015, we build an exogenous and fully data-driven indicator of mortgage supply stances and use it as an instrument for actual extended mortgages. Our results indicate that mortgages have a positive and significant causal effect on house prices, with an estimated elasticity of around 0.1. The estimated effect is larger during the expansionary phase of the housing cycle. We also find evidence of significant spatial heterogeneity: mortgages push real estate values higher in cities where the housing supply curve is less elastic or households are more dependent on external finance.

Mind the gap! Machine Learning, ESG Metrics and Sustainable Investment
Lanza, Ariel,Bernardini, Enrico,Faiella, Ivan
This work proposes a novel approach for overcoming the current inconsistencies in ESG scores by using Machine Learning (ML) techniques to identify those indicators that better contribute to the construction of efficient portfolios. ML can achieve this result without needing a model-based methodology, typical of the modern portfolio theory approaches. The ESG indicators identified by our approach show a discriminatory power that also holds after accounting for the contribution of the style factors identified by the Fama-French five-factor model and the macroeconomic factors of the BIRR model. The novelty of the paper is threefold: a) the large array of ESG metrics analysed, b) the model-free methodology ensured by ML and c) the disentangling of the contribution of ESG-specific metrics to the portfolio performance from both the traditional style and macroeconomic factors. According to our results, more information content may be extracted from the available raw ESG data for portfolio construction purposes and half of the ESG indicators identified using our approach are environmental. Among the environmental indicators, some refer to companies' exposure and ability to manage climate change risk, namely the transition risk.

Rich Men’s Hobby or Question of Personality: Who Considers Collectibles as Alternative Investment?
Kleine, Jens,Peschke, Thomas,Wagner, Niklas
Collecting is an inherent economic behavior that is neither characterized as pure consumption nor investment activity, while at the same time subject to various psychological aspects. Based on a unique survey sample of collectors and non-collectors, we study the Big Five personality traits of collectors who consider their activity as being linked to valid investment motives. Our results document that investor collectors are to about 70 percent represented by males and exhibit further demographics that include above average education, income and available financial assets, whereas age does not show a consistent pattern. Controlling for the dominating demographics, namely gender and income, we approach the underlying personality traits that relate to the possession of collectibles as a form of alternative investment. We find that high Openness and low Agreeableness significantly characterize investor collectors. They are open to new experience but distinct in the way they do business for potential profit.

Stochastic Valuation of Revenue-Collecting Tokens in Cryptoeconomic Organizations
Grau, Cyprien
Cryptoeconomic systems are an emerging type of complex systems that are viewed as a way to steer economic systems and organizations through agents coordination and incentives. However, very little is known about the inherent economic flows of such systems. In this paper, in order to provide intuition on the incentive structures, we draw a first sketch of financial streams in cryptoeconomic organizations. We then present a formal stochastic model of revenue-collecting tokens valuation. With the aim to account for the stochastic nature of this revenue, the financial input of such an organization is assumed to follow a geometric Brownian motion.

The Macroeconomics of Hedging Income Shares
Grasso, Adriana,Passadore, Juan,Piguillem, Facundo
The recent debate about the falling share of labor income has brought attention to the trends in income shares, but less attention has been devoted to their variability. In this paper, we analyze how their fluctuations can be insured against between workers and capitalists, and the corresponding implications for financial markets. We study a neoclassical growth model with aggregate shocks that affect income shares and financial frictions that prevent firms from fully insuring idiosyncratic risk. We examine theoretically how aggregate risk sharing is distorted by the combination of idiosyncratic risk and moving shares. Accumulation of safe assets by firms and risky assets by households emerges naturally as a tool to insure income shares’ risk. We calibrate the model to the U.S. economy and show that low interest rates, rising capital shares, and accumulation of safe assets by firms and risky assets by households can be rationalized by persistent shocks to the labor share.

The Role of Bank Supply in the Italian Credit Market: Evidence from a New Regional Survey
Orame, Andrea
The work analyses the characteristics of supply in the Italian credit market with a focus on the years 2009-2014. By using a new survey, I find that approximately 40 percent of the decline in business lending originates in the tightening of bank credit standards, with a significant decrease in supply after the first semester of 2011. The data also reveal a substantial supply-side heterogeneity: illiquid, profitable, efficient and group-member banks reduce their supply further, as do banks with a low dependence on interest income. Banks in larger groups also display a different supply pattern, with greater tightenings and easings. Capital and funding seem to play no significant role.

Trainspotting: Board Appointments in Private Firms
Baltrunaite, Audinga,Karmaziene, Egle
We examine how the size of the corporate directors’ labor market affects the quality of board appointments in Italian private firms. To establish the causality of the relationship, we exploit exogenous variations in firms’ access to non-local potential directors following the gradual introduction of a high-speed train, which improved rail connections between cities. Using administrative data on board members belonging to the universe of limited liability companies and a two-way fixed-effects model, we obtain time-invariant measures of firm and director quality. We demonstrate that a positive shock to the non-local director supply increases positive assortative matching between firms and directors. High-quality firms improve the quality of their boards, while lower-quality firms attract lower quality directors. The effect arises from a more active re-matching along the high-speed train line. Our results further suggest that the private firms’ boards with higher quality directors are associated with higher firm growth and productivity, and a lower probability of default.

الخيارات المتاحة لتمويل إعادة الإعمار في سورية (Options for Financing Reconstruction in Syria)
Hammoud, Lina
Arabic Abstract: إنÙ'Ù‡ العام الثًامن للأزمة السورية (الحرب على سورية)ØŒ الذي ظهرت فيه بوادر انتهائها وأصبحنا بحاجة ماسة لتطبيق خطة تعافٍ وإنعاش على جميع الأصعدة، ليس فقط كي نعوض الأضرار والخسائر لجميع الأطراف المعنية؛ بل من أجل استدراك وتعويض جميع ما فاتنا من مسيرة الإصلاح والتطوير التي كنَا نخطوها خلال السنوات السابقة للأزمة.ولا شك في أنÙ' هذا يتطلب إعداد استراتيجية شاملة لإعادة إعمار سورية متضمنة البنى المعمارية والبنى الاقتصادية وحتى الاجتماعية من قبل إدارة متخصصة تعمل ضمن إطار بيئة تشريعية وقانونية سليمة، تتناسب وتنسجم مع دستور البلاد المتفق عليه، بحيث تستطيع مواجهة تحديات الفترة القادمة بكل أبعادها، وخصوصاً التحديات المالية المتمثلة بإيجاد المصادر التمويلية اللازمة لنجاح الاستراتيجية المنشودة. وتكمن خطورة هذه التحديات في القرارات المالية وأسلوب اختيار كل مصدر تمويلي، بحيث يجب أن ينسجم مع مشاريع استراتيجية إعادة الإعمار الشاملة لبناء سورية ذات الاكتفاء الذاتي من جديد، ويحافظ على ثقافتنا وهويتنا ويعمل على تقوية وبناء المجتمع، وتزيد من فاعليته وتكامله.تناول هذا البحث تحليل للأوضاع الاقتصادية والمالية الحالية بهدف الوصول إلى توصيف للواقع الاقتصادي والمالي في سورية. وتم تسليط الضوء على بعض الجوانب في سبيل تصويب السياسات الحالية واتخاذ القرارات المناسبة للمرحلة القادمة من إعادة الإعمار وإيجاد مصادر التمويل المثلى له، وذلك من خلال الاستفادة من تجارب دول عانت من أزمات مشابهة احتاجت لمصادر تمويل عمليات إعادة الإعمار فيها.خلصت نتائج البحث إلى أن النظام المالي في سورية، غير قادر على تمويل ما دمرته سنوات الأزمة في بلد نامٍ ØŒ وأنه لا بد من البحث عن مصادر تمويل خارجية إلى جانب مصادر التمويل المحلية التي تحتاج إلى إعادة هيكلة تتناسب مع المتطلبات المرحلية، بالإضافة لاتخاذ الإجراءات التي تدعم خطوات التحرير المالي والانفتاح على الأسواق العالمية، وجذب المستثمرين بشكل مدروس، ويمكن بدء هذه الخطوات من خلال إنشاء سوق OTC يتيح أدوات تمويلية جديدة، ومن ثم البدء ببناء علاقات متوازنة ومدروسة مبنية على أسس وقواعد اجتماعية وسياسية وتنموية شاملة، عمادها الاتفاقيات والشراكات ذات المصلحة المشتركة وعقود BOTØŒ تكون مؤطرة ضمن إطار من التشريعات المتطورة والمرنة، التي تتيح استخدام مختلف أدوات السياسة النقدية والمالية وغيرها من الأدوات بطريقة حكيمة وسليمة من قبل الحكومة، وكل هذا يحتاج لشرط أساسي وهو تحقيق الأمن والاستقرار في سورية.English Abstract: An “End” seems to be now reviled, after eight years of the Syrian crisis, a deep need for a comprehensive plan to heal the Syria’s wounds and to apply a full recovery to each and every aspect of life… more important is to catch up and accomplish a complete restitution of the lost effort during the crisis.One can say that; a comprehensive strategy is a vital key to reconstruct Syria also, to establish and raise the architectural, social and economic structure. A specialized committee should work hard to affirm and apply this strategy in a legislative and legal framework that fits the constitution and solidify the strategy to face all the coming challenges, especially when looking for the right resources to finance this plan in a way that guarantees preserving our national identity and a self-sufficient stable economy.This research was meant to study and analyze the economical and financial situation in Syria to bring a realistic accurate view. Which will lead to straight correction in the politics and procedures for the next phase of reconstructing; and will also help finding the best resources as well. (We can benefit the history of some countries in reconstructing after a hard-long war).The study shows that Syria will have to look for an external resources along with internal ones (which itself needs to be reconstructed so it fits the current situation and the upcoming challenges). A set of procedures to support the financial liberalization and openness to global markets is a must to attract huge massive investments in an invincible way. OTC is one good example of the tools we can use... it can be established on a balanced, stable relation that comes in an advanced and flexible legislation framework.All above will only be possible in one primary condition… Achieving security and stability in Syria.