Research articles for the 2020-11-08

Agent-based Computational Economics in Management Accounting Research: Opportunities and Difficulties
Friederike Wall,Stephan Leitner

Agent-based computational economics (ACE) - while adopted comparably widely in other domains of managerial science - is a rather novel paradigm for management accounting research (MAR). This paper provides an overview of opportunities and difficulties that ACE may have for research in management accounting and, in particular, introduces a framework that researchers in management accounting may employ when considering ACE as a paradigm for their particular research endeavor. The framework builds on the two interrelated paradigmatic elements of ACE: a set of theoretical assumptions on economic agents and the approach of agent-based modeling. Particular focus is put on contrasting opportunities and difficulties of ACE in comparison to other research methods employed in MAR.

Balancing the Payment System
Tomaž Fleischman,Paolo Dini

The increasingly complex economic and financial environment in which we live makes the management of liquidity in payment systems and the economy in general a persistent challenge. New technologies are making it possible to address this challenge through alternative solutions that complement and strengthen existing payment systems. For example, the interbank balancing method can also be applied to private payment systems, complementary currencies, and trade credit clearing systems to provide better liquidity and risk management. In this paper we introduce the concept of a balanced payment system and demonstrate the effects of balancing on a small example. We show how to construct a balanced payment subsystem that can be settled in full and, therefore, that can be removed from the payment system to achieve liquidity-saving and payments gridlock resolution. We also briefly introduce a generalization of a payment system and of the method to balance it in the form of a specific application (Tetris Core Technologies), whose wider adoption could contribute to the financial stability of and better management of liquidity and risk for the whole economy.

Corporate Bond Market Dysfunction During COVID-19 and Lessons from the Fed's Responses
Liang, Nellie
Changes in the financial sector since the global financial crisis appear to have increased dramatically the demand for liquidity by holders of corporate bonds beyond the ability of the markets to provide it in stress events. The March market turmoil revealed the costs of liquidity mismatch in open-end bond mutual funds. The surprisingly large redemptions of investment-grade corporate bond funds added to stresses in both the corporate bond and Treasury markets. These conditions led to unprecedented Fed interventions, which significantly reduced risk spreads and improved market functioning, with much of the improvements occurring right after the initial announcement. The improved conditions allowed companies to issue bonds, which helped them to maintain employees and investment spending. The episode suggests several areas for further study and possible reforms.

Did Hurricane Katrina Reduce Mortality?
Robert Kaestner

The surprising finding reported in Deyugina and Molitor (2020) that a hurricane as devastating as Katrina reduced the mortality of residents of New Orleans merits close scrutiny because it is inconsistent with intuition, theory and prior evidence (e.g., Laditka et al. 2010; Rhodes et al. 2010; Fussel and Lowe 2014; Calvo et al. 2015). In this article, I provided a thorough review and critical assessment of the evidence provided by DM to support their conclusions. I find the evidence wanting.

Effect of Short-Term Debt on Financial Growth of Non-Financial Firms Listed at Nairobi Securities Exchange
David Haritone Shikumo,Oluoch Oluoch,Joshua Matanda Wepukhulu

A significant number of the non-financial firms listed at Nairobi Securities Exchange (NSE) have been experiencing declining financial performance which deter investors from investing in such firms. The lenders are also not willing to lend to such firms. As such, the firms struggle to raise funds for their operations. Prudent financing decisions can lead to financial growth of the firm. The purpose of this study is to assess the effect of short-term debt on financial growth of non-financial firms listed at Nairobi Securities Exchange for a period of ten years from 2008 to 2017. Financial firms were excluded because of their specific sector characteristics and stringent regulatory framework. The study is guided by Agency Theory and Theory of Growth of the Firm. Explanatory research design was adopted. The target population of the study comprised of 45 non-financial firms listed at the NSE for a period of ten years from 2008 to 2017. The study conducted both descriptive statistics analysis and panel data analysis. The result indicates that, short term debt explains 45.99% and 25.6% of variations in financial growth as measured by growth in earnings per share and growth in market capitalization respectively. Short term debt positively and significantly influences financial growth measured using both growth in earnings per share and growth in market capitalization. The study recommends that, the management of non-financial firms listed at Nairobi Securities Exchange to employ financing means that can improve the earnings per share, market capitalization and enhance the value of the firm for the benefit of its stakeholders.

How the Availability of Higher Education Affects Incentives? Evidence from Federal University Openings in Brazil
Guilherme Jardim

This paper studies the impact of an university opening on incentives for human capital accumulation of high school students in its neighborhood. The opening causes an exogenous fall on the cost to attend university, through the decrease in distance, leading to an incentive to increase effort $-$ shown by the positive effect on students' grades. I use an event study approach with two-way fixed effects to retrieve a causal estimate, exploiting the variation across groups of students that receive treatment at different times $-$ mitigating the bias created by the decision of governments on the location of new universities. Results show an increase of $0.028$ standard deviations in test grades, one year after the opening, and are robust to a series of potential problems, including some of the usual concerns in event study models.

Monetary Policy and Firm Dynamics
Matthew Read

Do firm dynamics matter for the transmission of monetary policy? Empirically, the startup rate declines following a monetary contraction, while the exit rate increases, both of which reduce aggregate employment. I present a model that combines firm dynamics in the spirit of Hopenhayn (1992) with New-Keynesian frictions and calibrate it to match cross-sectional evidence. The model can qualitatively account for the responses of entry and exit rates to a monetary policy shock. However, the responses of macroeconomic variables closely resemble those in a representative-firm model. I discuss the equilibrium forces underlying this approximate equivalence, and what may overturn this result.

Socio-demographic goals within digitalization environment: a gender aspect
Olga A. Zolotareva,Aleksandr V. Bezrukov

The article pays close attention to obtaining gender assessments in the world of work, which made it possible to characterize the effectiveness of social policy aimed at achieving gender equality.

The importance of dynamic risk constraints for limited liability operators
John Armstrong,Damiano Brigo,Alex S.L. Tse

Previous literature shows that prevalent risk measures such as Value at Risk or Expected Shortfall are ineffective to curb excessive risk-taking by a tail-risk-seeking trader with S-shaped utility function in the context of portfolio optimisation. However, these conclusions hold only when the constraints are static in the sense that the risk measure is just applied to the terminal portfolio value. In this paper, we consider a portfolio optimisation problem featuring S-shaped utility and a dynamic risk constraint which is imposed throughout the entire trading horizon. Provided that the risk control policy is sufficiently strict relative to the asset performance, the trader's portfolio strategies and the resulting maximal expected utility can be effectively constrained by a dynamic risk measure. Finally, we argue that dynamic risk constraints might still be ineffective if the trader has access to a derivatives market.

Valuing Celgene's CVR
Esty, Benjamin,Fisher, Daniel
When Bristol-Myers Squibb (BMS) acquired Celgene Corporation in November 2019, the consideration paid to Celgene shareholders included a contingent value right (CVRs) that would pay $9 if the U.S. Food and Drug Administration (FDA) approved three of Celgene’s late stage drugs by March 31, 2021. Akari Tanaka, a portfolio manager Kendall Square Advisors, held 400,000 CVRs in her $1.2 billion Health Science Opportunities Fund, and must decide what to do with this holding given the rising concerns about the coronavirus pandemic in early 2020. The tradable CVR’s peaked at $3.70 in mid-February, fell to a low of $2.15 in mid-March, and were currently trading at just under $3.00 in late March. As part of her decision, Tanaka must value the CVRs using discounted cash flow (DCF) analysis which required an estimate of the expected cash flow and a risk-adjusted discount rate. She then must decide what to do with her holdingâ€"should she sell the CVRs, hold them, or buy more?This short case has four objectives. First, it is designed to teach basic concepts underlying DCF valuation: calculating expected cash flows and discounting them with a risk-adjusted discount rate. Second, it teaches students how to identify and incorporate two kinds of risk (systematic and unsystematic) in DCF analysis. Third, there is an opportunity to estimate a beta using regression analysis and to discuss the implications for the valuation analysis. Fourth, the case can be used to analyze the structure of and motivations for using a CVR in the acquisition of a public company. The various CVR structures discussed in the case illustrate the potential for valuation errors due to cognitive biases in assessing the probability of conjunctive events

What Kind of Firm is more Responsive to the Unconventional Monetary Policy? A Theoretical Approach
Galindo Gil, Hamilton
The Unconventional Monetary Policy (UMP) of purchasing corporate bonds by the Federal Reserve has been one of the main policy responses to the COVID-19 crisis. An important question for policy design is whether this policy has been effective in boosting the firm's production and investment. While answering this question is challenging from a theoretical and empirical perspective, I provide a step forward in understanding the possible effects of this policy on firms' decisions using a theoretical and \emph{analytical} model. The model suggests that the firm's default probability plays a key role in transmitting the effects of COVID-19 shock and the UMP. Using the model to evaluate two kinds of heterogeneities (size and initial credit risk), I show that large firms and high-risk firms are more affected by COVID-19 shock and are more responsive to the UMP. I then use a cross-sectional regression to evaluate the model’s prediction on the heterogeneity effects of UMP across firm size and to study the role of firms' characteristics in the effects of UMP. The estimation results support the size-firm hypothesis and suggest that firm's characteristics such as assets and operating income are relevant to understand the effects of the UMP.