Research articles for the 2020-10-24
A Toolkit for Robust Risk Assessment Using F-Divergences
SSRN
This paper assembles a toolkit for the assessment of model risk when model uncertainty sets are defined in terms of an F-divergence ball around a reference model. We propose a new family of F-divergences that are easy to implement and flexible enough to imply convincing uncertainty sets for broad classes of reference models. We use our theoretical results to construct concrete examples of divergences which allow for significant amounts of uncertainty about log-normal or heavy-tailed Weibull reference models without implying that the worst case is necessarily infinitely bad. We implement our tools in an open-source software package and apply them to three risk management problems from operations management, insurance and finance.
SSRN
This paper assembles a toolkit for the assessment of model risk when model uncertainty sets are defined in terms of an F-divergence ball around a reference model. We propose a new family of F-divergences that are easy to implement and flexible enough to imply convincing uncertainty sets for broad classes of reference models. We use our theoretical results to construct concrete examples of divergences which allow for significant amounts of uncertainty about log-normal or heavy-tailed Weibull reference models without implying that the worst case is necessarily infinitely bad. We implement our tools in an open-source software package and apply them to three risk management problems from operations management, insurance and finance.
Adding Value Through Cross-Border M&A: Evidence from the Netherlands
SSRN
Purpose: The aim of this thesis is to research corporate geographic diversification to determine if cross-border M&A involving Dutch acquirers and a selection of countries are value-enhancing for Dutch acquirers. Moreover we will aim to identify variables which influence value-creation in Dutch cross-border M&A.Methodology: This paper applies a deductive approach using theories and previous studies to form hypotheses for the purpose of the study. Event study and multiple linear regression analyses are used to test the hypotheses.Empirical Foundation: Cross-Border M&A between Dutch-based acquiring firms with target firms from a selection of countries were empirically studied between 01-01-1980 till 30-04-2014.Conclusion: Our findings show that cross-border acquisitions by acquirers from the Netherlands generally create value. Looking at the source of value-creation from a country level perspective, we found evidence that value is mainly created in acquisitions of targets based in Germany, United Kingdom and the United States. Furthermore we found positive value creation for acquisitions of targets based in North America and Western Europe. Our results are in line with an existing study on Dutch cross-border acquisitions which found evidence of value creation in acquisitions of target firms from North America and Western Europe. Determinants found to influence value-creation were relative deal size and the legal status of the target firm (public vs. non-public). We did not find significant evidence for other determinants examined in this study.
SSRN
Purpose: The aim of this thesis is to research corporate geographic diversification to determine if cross-border M&A involving Dutch acquirers and a selection of countries are value-enhancing for Dutch acquirers. Moreover we will aim to identify variables which influence value-creation in Dutch cross-border M&A.Methodology: This paper applies a deductive approach using theories and previous studies to form hypotheses for the purpose of the study. Event study and multiple linear regression analyses are used to test the hypotheses.Empirical Foundation: Cross-Border M&A between Dutch-based acquiring firms with target firms from a selection of countries were empirically studied between 01-01-1980 till 30-04-2014.Conclusion: Our findings show that cross-border acquisitions by acquirers from the Netherlands generally create value. Looking at the source of value-creation from a country level perspective, we found evidence that value is mainly created in acquisitions of targets based in Germany, United Kingdom and the United States. Furthermore we found positive value creation for acquisitions of targets based in North America and Western Europe. Our results are in line with an existing study on Dutch cross-border acquisitions which found evidence of value creation in acquisitions of target firms from North America and Western Europe. Determinants found to influence value-creation were relative deal size and the legal status of the target firm (public vs. non-public). We did not find significant evidence for other determinants examined in this study.
Finding the Narrative in the Numbers: Long-Term Investors’ Demand for Accounting Information
SSRN
I study the MD&A section of 10-K filings and use disclosed numbers within the text of corporate narratives to proxy for the qualities of information that are demanded by long-term investors. I hypothesize and show that the prevalence of quantitative information in firms’ written communication is strongly and positively linked to long-term institutional ownership. Numbers capture a dimension of business communication that is opposite in direction to a short-term disclosure horizon. Exploiting language that surrounds numbers, I study topical narratives that are directly related to firm value and confirm the importance of numeric information to long-term shareholders in the relevant contexts of investment and forward-looking sentences.
SSRN
I study the MD&A section of 10-K filings and use disclosed numbers within the text of corporate narratives to proxy for the qualities of information that are demanded by long-term investors. I hypothesize and show that the prevalence of quantitative information in firms’ written communication is strongly and positively linked to long-term institutional ownership. Numbers capture a dimension of business communication that is opposite in direction to a short-term disclosure horizon. Exploiting language that surrounds numbers, I study topical narratives that are directly related to firm value and confirm the importance of numeric information to long-term shareholders in the relevant contexts of investment and forward-looking sentences.
Foreign Direct Investment Co-Movement and Home Country Institutions
SSRN
We use a hand-collected data set of firm-level foreign direct investment in China to examine the impact of home countries' institutional elements on the investment co-movement between foreign and domestic firms. We find that foreign firms from countries with well-developed financial markets or a strong rule of law experience less co-movement with Chinese domestic firms. Our evidence also suggests a contingency impact between the two channels of home country institutions; the capital markets effect exists only for foreign firms from countries with strong rule of law, whereas the rule-of-law effect holds only for firms from countries with well-developed financial markets. Finally, we show that firms from countries with better institutional quality exhibit greater investment efficiency than firms from countries with weaker institutions.
SSRN
We use a hand-collected data set of firm-level foreign direct investment in China to examine the impact of home countries' institutional elements on the investment co-movement between foreign and domestic firms. We find that foreign firms from countries with well-developed financial markets or a strong rule of law experience less co-movement with Chinese domestic firms. Our evidence also suggests a contingency impact between the two channels of home country institutions; the capital markets effect exists only for foreign firms from countries with strong rule of law, whereas the rule-of-law effect holds only for firms from countries with well-developed financial markets. Finally, we show that firms from countries with better institutional quality exhibit greater investment efficiency than firms from countries with weaker institutions.
Patent Enforcement, Shareholder Value, and Firm Innovations: Evidence from the Supreme Court Ruling on TC Heartland (2017)
SSRN
This paper studies the impact of patent enforcement on shareholder value and firms’ innovation patterns. Using the landmark U.S. Supreme Court case TC Heartland LLC vs. Kraft Foods Group Brands LLC (2017), which significantly constrained the forum shopping practices in patent litigation, we find that the weakening of patent holders’ ability to enforce intellectual property protection leads to more negative stock return reactions for firms that are more innovation-intensive before the ruling. We further find that weakened enforcement of patent protection shifted firms’ innovation patterns. While innovation-intensive firms do not reduce the overall R&D investment, they choose to keep their innovation outputs as trade secrets and apply for patents significantly less frequently. Our findings shed new light on the current debate on intellectual property protection.
SSRN
This paper studies the impact of patent enforcement on shareholder value and firms’ innovation patterns. Using the landmark U.S. Supreme Court case TC Heartland LLC vs. Kraft Foods Group Brands LLC (2017), which significantly constrained the forum shopping practices in patent litigation, we find that the weakening of patent holders’ ability to enforce intellectual property protection leads to more negative stock return reactions for firms that are more innovation-intensive before the ruling. We further find that weakened enforcement of patent protection shifted firms’ innovation patterns. While innovation-intensive firms do not reduce the overall R&D investment, they choose to keep their innovation outputs as trade secrets and apply for patents significantly less frequently. Our findings shed new light on the current debate on intellectual property protection.
Real Effects of Governmental Accounting Standards: Evidence from GASB Statement No. 53 - Accounting and Financial Reporting for Derivative Instruments
SSRN
GASB Statement No. 53, Accounting and Financial Reporting for Derivative Instruments, (GASB 53) significantly altered U.S. governmental sector accounting of derivative instruments by mandating the recognition of hitherto off-balance sheet derivative instruments in the government-wide statement of net assets and requiring that ineffective hedges be clearly identified. These requirements have an unfavorable financial statement impact for municipalities with net negative fair value derivative positions and municipalities holding ineffective hedges. Using a hand-collected, comprehensive dataset of municipal derivatives, we examine whether the level of U.S. municipal derivative holdings changed following the adoption of GASB 53. Consistent with GASB 53 affecting municipal officials’ derivative decisions, we find a significant post-GASB 53 reduction in derivative holdings for municipalities with net negative fair value derivative positions and ineffective hedges. Our findings suggest that governmental accounting regulations could affect real decisions of municipal officials and therefore could potentially have public policy implications beyond the provision of information to stakeholders.
SSRN
GASB Statement No. 53, Accounting and Financial Reporting for Derivative Instruments, (GASB 53) significantly altered U.S. governmental sector accounting of derivative instruments by mandating the recognition of hitherto off-balance sheet derivative instruments in the government-wide statement of net assets and requiring that ineffective hedges be clearly identified. These requirements have an unfavorable financial statement impact for municipalities with net negative fair value derivative positions and municipalities holding ineffective hedges. Using a hand-collected, comprehensive dataset of municipal derivatives, we examine whether the level of U.S. municipal derivative holdings changed following the adoption of GASB 53. Consistent with GASB 53 affecting municipal officials’ derivative decisions, we find a significant post-GASB 53 reduction in derivative holdings for municipalities with net negative fair value derivative positions and ineffective hedges. Our findings suggest that governmental accounting regulations could affect real decisions of municipal officials and therefore could potentially have public policy implications beyond the provision of information to stakeholders.
Regulating Financial Misconduct: ‘Should the Existing Law Be Administered or Enforced Differently?’
SSRN
This paper reviews the efficacy of the Australian government’s initiatives to counter misconduct identified by its Royal Commission into misconduct in the banking, superannuation and financial services industries. We answer the Commission’s Interim report question as to whether existing law should be administered differently. We propose the formation of stakeholder associations for each financial service firm for each of its stakeholder constituencies to appoint an advocate to become a co-regulator. Firm advocates would advise financial firm shareholders on Key Performance Indicators for directors to protect stakeholder interests on who their revenues depend, and for Parliament to evaluate government Regulators.
SSRN
This paper reviews the efficacy of the Australian government’s initiatives to counter misconduct identified by its Royal Commission into misconduct in the banking, superannuation and financial services industries. We answer the Commission’s Interim report question as to whether existing law should be administered differently. We propose the formation of stakeholder associations for each financial service firm for each of its stakeholder constituencies to appoint an advocate to become a co-regulator. Firm advocates would advise financial firm shareholders on Key Performance Indicators for directors to protect stakeholder interests on who their revenues depend, and for Parliament to evaluate government Regulators.
The Mediating Effect of Research and Development and Financial Resource on Corporate Social Performance in Asian Countries Companies
SSRN
The aim of the paper is to find out the relational effect between Corporate Financial Performance (CFP) and Corporate Social Performance (CSP). This paper could facilitate a better understanding of the relationship between CFP and CSP. The mediating effect between CFP and CSP, by applying was examined regression and mediation analysis. The study found that innovation was a critical factor in the relationship between CFP and Corporate Social Performance (CSP). Therefore, the investment of financial resources in innovation initiatives is one of the most important factors, which would help increase CSP.
SSRN
The aim of the paper is to find out the relational effect between Corporate Financial Performance (CFP) and Corporate Social Performance (CSP). This paper could facilitate a better understanding of the relationship between CFP and CSP. The mediating effect between CFP and CSP, by applying was examined regression and mediation analysis. The study found that innovation was a critical factor in the relationship between CFP and Corporate Social Performance (CSP). Therefore, the investment of financial resources in innovation initiatives is one of the most important factors, which would help increase CSP.
The Spillover Effect of Financial Information in Mergers and Acquisitions
SSRN
In this study we investigate whether and how a firm's investment activities are affected by the financial information of peer firms on merger and acquisition (M&A) efficiency. Using changes in M&A accounting performance to measure efficiency, we find a positive association between the post-M&A accounting performance of an acquiring firm and that of previous peer acquirers. We show that this spillover effect is derived from peer firms with improved rather than poorer post-M&A accounting performance. We also find that the spillover effect varies with the characteristics of both the acquiring and the peer firms. The effect is stronger when the peer firms are larger, are non-SOEs (vs. SOEs), have improved accounting performance after M&As and undertake M&As with unrelated (vs. related) entities, and when the acquiring firms are smaller, non-SOEs (vs. SOEs) and have poorer accounting performance before M&As.
SSRN
In this study we investigate whether and how a firm's investment activities are affected by the financial information of peer firms on merger and acquisition (M&A) efficiency. Using changes in M&A accounting performance to measure efficiency, we find a positive association between the post-M&A accounting performance of an acquiring firm and that of previous peer acquirers. We show that this spillover effect is derived from peer firms with improved rather than poorer post-M&A accounting performance. We also find that the spillover effect varies with the characteristics of both the acquiring and the peer firms. The effect is stronger when the peer firms are larger, are non-SOEs (vs. SOEs), have improved accounting performance after M&As and undertake M&As with unrelated (vs. related) entities, and when the acquiring firms are smaller, non-SOEs (vs. SOEs) and have poorer accounting performance before M&As.
The Value of Political Ties for Firms Experiencing Enforcement Actions: Evidence From China
SSRN
We study the value of political ties for firms experiencing enforcement actions. We find that stronger corporate political ties alleviate the negative market shocks caused by enforcement action announcements of listed firms in China, and the relationship between political ties and market reaction is more pronounced for enforcement actions that signal loss of market credibility than for enforcement actions that signal loss of political ties and in regions with greater government intervention. We further find that firms with stronger political ties experience larger increases in long-term debt after enforcement actions, suggesting that it is the investors’ expectation of government support to connected firms that mitigates the negative market reaction.
SSRN
We study the value of political ties for firms experiencing enforcement actions. We find that stronger corporate political ties alleviate the negative market shocks caused by enforcement action announcements of listed firms in China, and the relationship between political ties and market reaction is more pronounced for enforcement actions that signal loss of market credibility than for enforcement actions that signal loss of political ties and in regions with greater government intervention. We further find that firms with stronger political ties experience larger increases in long-term debt after enforcement actions, suggesting that it is the investors’ expectation of government support to connected firms that mitigates the negative market reaction.
