Research articles for the 2020-11-13

A Ripple in the Muddy Waters: The Luckin Coffee Scandal and Short Selling Attacks
Peng, Zhe
Luckin Coffee was extolled as the Chinese challenger of Starbucks. However, nine months after its IPO on NASDAQ, Luckin was accused of accounting fraud but did not confessed to the allegations until two months later. This scandal caused wide concerns, not only on Luckin but also two related firms. We found evidence that the two related firms suffered from panic-selling not upon the release of the allegations, but after Luckin's own confession. We found evidence of short squeeze in the short selling attacks before Luckin's confession, pointing to non-negligible shorting selling risks. Our results also indicate the difficulty for non-stakeholders to impound negative corporate information into the stock price.

Building Global Finance Back Better: Using the Coronavirus Pandemic as a Platform to Redesign the Global Financial Architecture
Scott Cato, Molly
While the global coronavirus pandemic has put great strain on public finances across the world, it is those countries with weaker national currencies that will feel this pressure more strongly. There is a very real risk of national defaults and of a mutually reinforcing downward spiral of reduced trade and competitive currency devaluations. To prevent the health crisis becoming a financial crisis we need a renegotiation of the global financial architecture to create new institutions that can uphold stability, equity and sustainability between the world’s economies. Next year marks 50 years since the ending of the Bretton Woods arrangements and provides an ideal platform for such a negotiation.

Can a Not-for-Profit Minority Institutional Shareholder Make a Big Difference in Corporate Governance? A Quasi-Natural Experiment on Its Effect on Earnings Management
chen, zhanliao,Ge, Wenxia,Ouyang, Caiyue,Shi, Zhenyang
In this study, we examine the effectiveness of the China Securities Investor Service Center (CSISC), a new minority shareholder protection mechanism promoted by the China Securities Regulatory Commission, in constraining earnings management. Employing a difference-in-differences analysis for a sample of Chinese listed companies during 2015-2017, we find that CSISC shareholding reduces earnings management. We also find that this effect exists when the internal and external corporate governance mechanisms of listed companies are weaker. Furthermore, our empirical evidence indicates that restraining tunneling is a channel through which the CSISC affects earnings management. The additional analyses show that the CSISC-holding firms (i.e., treatment firms) exhibit higher cumulative abnormal returns around the announcement of the CSISC shareholding pilot program than the control firms, and the difference in earnings management between the treatment and control firms is diminishing after the pilot program was promoted nationwide. Our findings have important policy implications for emerging markets that attempt to improve minority shareholder protection.

Deep Learning and Financial Stability
Gensler, Gary,Bailey, Lily
The financial sector is entering a new era of rapidly advancing data analytics as deep learning models are adopted into its technology stack. A subset of Artificial Intelligence, deep learning represents a fundamental discontinuity from prior analytical techniques, providing previously unseen predictive powers enabling significant opportunities for efficiency, financial inclusion, and risk mitigation. Broad adoption of deep learning, though, may over time increase uniformity, interconnectedness, and regulatory gaps. This paper maps deep learning’s key characteristics across five possible transmission pathways exploring how, as it moves to a mature stage of broad adoption, it may lead to financial system fragility and economy-wide risks. Existing financial sector regulatory regimes - built in an earlier era of data analytics technology - are likely to fall short in addressing the systemic risks posed by broad adoption of deep learning in finance. The authors close by considering policy tools that might mitigate these systemic risks.

Distance in Reward based Crowdfunding
Vigneron, Ludovic
In this paper, we ask the question of the impact of the distance between backers and entrepreneurs on success of reward based crowdfunding campaigns and provide a framework to understand the association. Using a unique data set provided by the French leading platform Ulule that allows us to work on a sample of 4861 campaigns, we find that the ones attracting more distant backers succeed more frequently and more intensively. This result is attributed to the fact that campaigns that succeed are those launched by entrepreneurs with the most important social capital , a social capital that includes the most of weak ties. The way that supports articulates themselves is in line with this. We find that successful campaigns attracting the most distant backers are also those for which the amount of the average individual support is the lowest. They also attract more numerous supports from more numerous backers. Successful campaigns attracting less distant backers (more local ones) collect more important average supports, but less numerous ones from less numerous backers.

ESG Equity Investing: A Short Survey
Coqueret, Guillaume
In this survey, we briefly sum up recent academic results on socially responsible investing (SRI). We split our survey into six thematic parts: data, investors, performance, portfolio integration, climate change risk, and theoretical models.

Effect of Corporate Characteristics on Voluntary Disclosure of Listed Financial Service Firms in Nigeria
Sanni, Olawale
This study assessed the effect of corporate characteristics on voluntary disclosure of listed financial service firms in Nigeria for the period of 2014-2018. The study used correlational research design. Data for the study was extracted from yearly-published financial report of listed financial service firms in Nigeria. All the listed financial service firms were considered for the population of this study, while the sample was adjusted population of thirteen (13) listed financial service firms in Nigeria. The data collected were analyzed using paneled regression technique. The result of the regression revealed that profitability and leverage have a negative and significant effect on the voluntary disclosure of financial service firms in Nigeria. However, a positive and significant relationship exists between firm size and voluntary disclosure. In line with the findings, the study recommended that listed financial service firms in Nigeria should incorporate voluntary disclosure to the compulsory disclosure of financial report required by the governing body. This has become necessary in view of the fact that any increase in the profitability and leverage will reduce the level of voluntary disclosure of the financial reports of the firms as evidenced that leverage confines the firms from voluntary disclose information in annual report to posit superior performance based on lesser requirements of transparency and lesser chance of loss of control. In addition, due to self-interest, managers may decide towards voluntary disclosure. However, the Nigeria Financial Reporting Council and other governing body are to guarantee complete conformity with pertinent national accounting disclosure necessities. Since an increase in the excellence of disclosed information will assist the users to make informed predictions, aid the assessment of the firm’s advancement, and lessen the predicament of information asymmetry for investors.

Expected Loss Model and the Cyclicality of Bank Credit Losses and Capital Ratios
Fatouh, Mahmoud,Giansante, Simone
We simulate the evolution of stylised loan portfolios to assess the impact of IFRS 9 and US-GAAP expected loss model (ECL) on the pro-cyclicality of realised losses and capital ratios of banks, relative to the incurred loss model of IAS 39. We focus on the interaction between the changes in loan loss provisions (LLPs) charges (flow channel) and stocks (stock channel) under ECL. Our results show that ECL model smooths the impact of credit losses on profits and capital resources, reducing the pro-cyclicality of capital and leverage ratios, especially under US GAAP. However, when GDP is highly volatile, the large differences in lifetime probabilities of defaults (PDs) between booms and bust cause sharp increases in LLPs in deep downturns, as seen for US banks during the COVID-19 crisis. Volatile GDP makes capital and leverage ratios more pro-cyclical and cause sharper falls in both ratios in deep downturns under US GAAP, compared to IAS 39. IFRS 9 ECL shows less sensitivity to lifetime PDs fluctuations due to the existence of loan stages, and hence reduces the pro-cyclicality of capital and leverage ratios even when GDP is highly volatile.

Financial Literacy and Security-based Crowdfunding
Meoli, Michele,Rossi, Alice,Vismara, Silvio
Security-based crowdfunding has recently emerged as a novel market that allows small investors to engage directly in financing entrepreneurial ventures. However, a certain level of financial literacy is required to understand and manage these digital finance tools. A better understanding of the impact of financial literacy is therefore central to the development of these markets and the achievement of their inclusive potential. Using data on the population of 432 investment crowdfunding platforms in 37 OECD countries between 2007 and 2019, we find higher platforms’ survival profiles where the level of financial literacy is higher. Financial literacy, however, needs to combine with specific platform characteristics to take full effect, as it matters more for those platforms that deliver voting rights and for those that provide poorer value-added services to crowdfunding investors.

Finding the Value of Financial Advice - A Dual Structure Approach & Analysis
Fraser, Steve P.,Payne, Brian C.
This paper introduces and examines a composite, dual fee structure (CDFS) for financial planners that may provide greater transparency to clients and help quantify the value of financial advice. Our structure specifically separates financial planning (advice) fees from IM fees, and may reduce or perhaps limit perceived potential conflicts of interest by providing a mechanism where financial planners can be compensated for planning efforts whether or not the client moves invest-able funds to the planner for the planner to manage.

Has Idiosyncratic Volatility Increased? Not in Recent Times
Chiah, Mardy,Gharghori, Philip,Zhong, Angel
This study successfully replicates the key findings of Campbell, Lettau, Malkiel, and Xu (2001). We document that aggregate idiosyncratic volatility increases over their sample period from 1962 to 1997. In out-of-sample analysis from 1926 to 1962 and 1998 to 2017, we find that idiosyncratic volatility (IV) decreases, suggesting that their finding is sample-specific. We compare their measure of IV with those obtained from models such as the Fama and French (1993) three-factor model and find that they are very similar. The Campbell et al. (2001) volatility measures can only be estimated at the aggregate level. An advantage of asset pricing model-based IVs is that they can be estimated at the stock level. Employing these stock-level IV measures, we examine trends in a variety of IV series and how IV relates to commonly analyzed firm characteristics. In doing so, we provide further insight into IV and its time-series trends.

Intrinsic Real Option Value: Empirical Evidence from Commercial Real Estate Investors
Buechler, Simon,Van de Minne, Alex,Schöni, Olivier
We investigate how local information externalities affect investments in tangible durable assets via real options. Using geocoded transaction-level data on US commercial properties from 2000 to 2018, we find that investors have a higher propensity to invest in a property for immediate redevelopment when its capital intensity and type of commercial activity differ from those of recently built nearby properties. Information externalities affect 'buy-to-redevelop' investment strategies as much as the asset capital depreciation - a main determinant of real option exercise highlighted in the literature - and can increase up to 30 percent the investors' willingness to pay to invest in the property.

Investment and financing perspectives for a solar photovoltaic project
Marchioni, Andrea,Magni, Carlo Alberto,Baschieri, Davide
In this work we illustrate a simple logical framework serving the purpose of measuring value creation in a real-life solar photovoltaic project, funded with a lease contract, a loan contract and internal financing (i.e., withdrawal from liquid assets). We use the projected accounting data to compute the value created. We assess the project from both an investment perspective (operating assets and liquid assets) and a financing perspective (debt and equity). Furthermore, focusing on value creation for equity-holders, we calculate the expected contribution on shareholders wealth increase of operating and financing activity. In particular, we highlight the role of the distribution policy in financial modeling, by underlining the strict logical connections between estimated data and financial decisions.

Mutual Fund Fragility, Dealer Liquidity Provisions, and the Pricing of Municipal Bonds
Li, Yi,O'Hara, Maureen,Zhou, Xing (Alex)
We study the period around the COVID-19 crisis to examine the potential fragility risks posed by mutual funds to the municipal bond market. Induced by unprecedented outflows from muni mutual funds, we show that bonds held by these funds trade substantially more and suffer greater price depressions than bonds not in muni funds. Dealer liquidity provision declines more in these bonds, exacerbating their market conditions. Importantly, such destabilizing effects have reshaped market perceptions on the fragility risks posed by mutual funds even after the normalization of muni fund flows. In the aftermath of the muni crisis, dealers reduce their inventories in bonds held by mutual funds and yield spreads widen notably in these bonds, especially when they are held by mutual funds with greater COVID-19 exposure and less liquid portfolios.

OCVID-19 Lockdown and Market Reaction to Earnings News
Cahill, Daniel,Ho, Chloe CY,Yang, Joey (Wenling)
We examine the influence of mobility on the stock market reaction around earnings announcements during the COVID-19 pandemic. The pandemic has led to abrupt implementation of stay-at-home mandatory restrictions and social distancing requirements all around the world, resulting in the collapse of face-to-face interactions on a large scale. Using Google’s Community Mobility Reports to obtain daily, county-level mobility of U.S. residents, we find that firms located in counties with higher mobility experience stronger immediate price responses during earnings announcements and weaker post-announcement drift, suggesting that COVID-19 restrictions dampen price discovery in financial markets. We also show that investor attention is a potential mechanism by which mobility affects the market reaction. Together, our study finds empirical support for the importance of face-to-face interactions in facilitating stock market information.

On the Origin of Systemic Risk
Montagna, Mattia,Torri, Gabriele,Covi, Giovanni
Systemic risk in the banking sector is usually associated with long periods of economic downturns and very large social costs. On one hand, shocks coming from correlated exposures towards the real economy may induce correlation in banks’ default probabilities thereby increasing the likelihood for systemic-tail events like the 2008 Great Financial Crisis. On the other hand, financial contagion also play an important role in generating large-scale market failures, amplifying the initial shocks coming from the real economy. To study the sources of these rare phenomena, we propose a new definition of systemic risk (i.e. the probability to have a large number of banks going into distress simultaneously) and thus we develop a multilayer microstructural model to study empirically the determinants of systemic risk. The model is then calibrated on the most comprehensive granular dataset for the euro area banking sector, capturing roughly 96% or EUR 23.2 trillion of euro area banks’ total assets over the period 2014-2018. The outputs of the model decompose and quantify the sources of systemic risk showing that correlated economic shocks, financial contagion mechanisms, and their interaction are the main sources of systemic events. The results obtained with the simulation engine nicely resemble common market-based systemic risk indicators and empirically corroborate findings from the existing literature. This framework represents to regulators and central bankers a tool to study systemic risk and its developments, pointing out that systemic events and banks’ idiosyncratic defaults have different drivers, hence implying different policy responses.

Organizational Agility, Visionary Leadership in the Age of VUCA
Friedman, Hershey H.
We live in a VUCA world with an environment that is volatile, uncertain, complex, and ambiguous. The coronavirus pandemic illuminates what happens to a firm or industry that lacks organizational agility and responds slowly to threats. Even before COVID-19, thanks to globalization, the internet, and exponential technological growth, no business was immune from early obsolescence. Organizations need new kinds of leaders, those with vision who can see where technology is going, hire adaptable employees, and can quickly change direction when necessary. This paper provides numerous examples of blunders ranging from missed opportunities to unethical practices.

Peer Effects on Firm Dividend Policies in Taiwan
Lee, King Fuei
With the dividend-paying culture increasingly taking hold in corporate Taiwan, this paper investigates the effects of industry peers on the corporate dividend policies in the country. By employing the instrument variable technique, we find strong evidence that the payout policies of Taiwanese firms are positively influenced by the policies of their industry peers. This peer influence tends to be stronger for companies operating in industries with lower product competition and higher information uncertainty, indicating that firms imitate the dividend policies of their peers for information-based reasons. Younger, smaller and harder-to-value companies are also more likely to mimic their larger, older and easier-to-value peers. Our findings are robust to alternative definitions of control variables, instrument variable and industry classifications.

Retail Investors’ Trading and Stock Market Liquidity
Abudy, Menachem (Meni)
The paper investigates the relation between retail investors’ participation in trading and aggregate stock market liquidity. The findings show a positive and significant relation between retail investors’ trading and stock market liquidity. Examination of the determinants of retail investors’ trading reveals that, on average, retail investors with more diversified trading activity tend to trade when liquidity is higher, the frequency of their arrival to the market is not affected by the level of liquidity, and retail investors are willing to trade at a lower liquidity level as sellers than as buyers. Moreover, retail investors’ trading does not create price noise at the aggregate market level. Overall, the evidence suggests that retail investors contribute to market quality.

Stakeholder Value: A Convenient Excuse for Underperforming Managers?
Flugum, Ryan,Souther, Matthew E.
In 2019, the Business Roundtable issued a statement redefining the purpose of a corporation to promote the interests of all stakeholders, shifting from the shareholder-focused objective previously supported. The statement, signed by 181 CEOs, was seen by many as the beginning of a cultural shift in how businesses are governed. However, critics argue that these goals are difficult to measure and enforce. In this study, we find that firms falling short of earnings expectations are more likely to cite stakeholder-focused objectives in their public communications around the earnings announcement. This behavior suggests that managers push to be evaluated by subjective stakeholder-based performance criteria when falling short on objective shareholder-based measures. This relation between under-performance and stakeholder language becomes stronger after the Business Roundtable statement. We then document lower CEO turnover-performance sensitivity for managers citing stakeholder value. Collectively, our findings suggest that the push for stakeholder-focused objectives provides managers with a convenient excuse that reduces accountability for poor firm performance.

Stock Market Reactions to International Climate Negotiations
Schuetze, Franziska,Aleksovski, Darko,Mozetic, Igor
Several studies have shown that investors take environmental regulation into account in their investment decisions. We investigate if international climate negotiations are an effective signal to decarbonize the economy. For that purpose, we analyze short-term market reactions to the outcomes of international climate negotiations, through an event study. We compare the stock price effects on the largest "green“ companies with the largest "brown“ companies globally. We find that international climate negotiations have a signaling effect on global financial markets. Before 2013, climate negotiations mainly had effects on "green“ companies. Only starting in 2013, but especially in 2015 (Paris Agreement), we can find negative effects on "brown“ companies. This indicates that the focus has shifted to the risks for brown companies. Although the Paris Agreement was considered a political milestone, it was less effective as an investment signal. A possible explanation is the mismatch between international targets and national policies.

The Empirics of UK Gilts’ Yields
Akram, Tanweer,Li, Huiqing
This paper analyzes the nominal yields of UK gilt-edged securities (“gilts”) based on a Keynesian perspective, which holds that the short-term interest rate is the primary driver of the long-term interest rate. Quarterly data are used to model gilts’ nominal yields. These models bring to light the complex dynamics relating the nominal yields on gilts to the short-term interest rate, inflation, the growth of industrial production, and the government debt ratio. The results show that the short-term interest rate has a crucial influence on the nominal yields on gilts, even after controlling for various factors. Contrary to widely held views, a higher government debt ratio does not lead to higher nominal yields.

The Impact of Currency Devaluation on The Banking Sector of Azerbaijan
Aliyeva, Ulfat
This master thesis aims to examine an empirical investigation of the impact of Azerbaijan national currency devaluation on the banking sector of Azerbaijan. We will identify how currency devaluation affects the performance of the banks in Azerbaijan. In recent decades, several developing countries have confronted volatility in national currency requiring major reforms in the financial sector and economy. Devaluation is considered a tool of central banks to regulate the national currency. The monetary authorities apply for devaluation in terms of enhancing the trade balance of countries. Macroeconomic equilibrium, price stability, financial and banking stability, sustainable economic growth, or sustained economic growth reflect the uppermost targets of monetary policy.On the other hand, this study will determine the profitability of banks in Azerbaijan and analyze the devaluation impact for 2013-2018 years. However, the price shifts of oil-gas resources in 2014 sketched the financial institutions severely in Azerbaijan. In this thesis, the modification of the dependent and independent variables of the regression model will be tested by using the Panel Data Analysis Method. Moreover, I decided to research this topic for my thesis, as my further plans are to continue my PhD degree and improve my career in this area. In this thesis, I will introduce a brief overview of the banking sector in Azerbaijan, and the effects of two devaluations by the Central Bank of Azerbaijan Republic in 2015. This thesis will check the effects of exchange rate fluctuations in Azerbaijan banking sphere by running balanced panel data for the period 2013-2018 years. The empirical findings of this study suggest that the changes in a foreign exchange rate have a statistically significant and adverse impact on the profitability of Azerbaijan banks.

The Impact of the COVID-19 Confinement on the Financial Behavior of Individual Investors
Priem, Randy
This article explores the impact of the COVID-19 lockdown in Belgium on the financial behavior of individual investors. Specifically, the article is the first to examine whether exceptional market circumstances have induced individual investors to increase their equity positions. Using a proprietary database of almost 6,5 million individual investor transactions, this article shows that most individuals used a contrarian strategy thereby buying shares when stock prices are falling. Especially investors between 18 and 35 years old and those being less experienced are found to increase their equity positions compared to other age and experience categories. Male investors seem to dominate equity markets in Belgium, even during the COVID-19 confinement period, and they increased their equity positions more in comparison to women. The patterns documented in this article are robust for the shares being constituents of the main Belgian equity index (i.e. Bel 20), for all listed shares on Euronext Brussels, and for small caps.

The Political Duality: On the Advantages and Disadvantages of Ex-Politicians and Former Government Officials Serving on Boards of Directors
Fuller, Mark,Bart, Christopher K.
In this study, we examine two key issues situated at the intersection of corporate governance and corporate political activity literature. The first is whether the presence of ex-politicians or former government officials on a corporate board provides a competitive advantage for the firm. A second, related question is whether the presence of these outside directors on the board of directors is perceived as desirable by their fellow directors. While some have characterized the study of board processes as a black box (Leblanc, 2003; Pugliese et al., 2009) due to the difficulty in acquiring data, we circumvented this challenge by directly surveying 82 Canadian board members, then delved deeper with ten directors using supplemental qualitative interviews. The results were examined via the lens of strategic positioning theory in contrast to the well-worn use of agency and resource dependency theories in the literature. Our findings suggest that heterogeneous benefits may accrue depending upon the industry involved, and the political experience of the director(s) in question. However, a majority of current directors expressed significant reservations concerning the appointment of a political director. These findings, combined with the understudied Canadian context and the use of qualitative research methods, contribute to the extant literature.

The Role of Labels in Green Finance: Construction and Regulation of a Label Market in France
Crifo, Patricia,Durand, Rodolphe,Gond, Jean-Pascal
A dozen of green and sustainable labels have emerged on the financial markets of the Member States of the European Union since the creation of a first label in 1997 in France, allocated to nearly 1,360 financial products, demonstrating a quantitative success, especially in France. This article analyzes the development of such green and socially responsible labels in Europe over the past decades , their construction dynamics, and questions the real benefits of a proliferation of labels in this industry. Does the multiplicity of factors contributing to the development of labels achieve the desired end or does it encumber the market with loud but uncertain signals? While household savings are at their highest and there is a demand for financing the ecological transition, does the proliferation of labels not complicate the readability of the market ? We show that, instead of simplifying the choice of agents, the multiplication of labels tends to increase the noise provided by each of the quality signals and deteriorate confidence. Economic agents have less interest in benefiting from a generic label but are looking for less demanding labeling at a lower cost. The whole system can therefore play in a counterproductive way, each actor minimizing the intrinsic effort provided. As the number of labels grows, the information asymmetry grows and end investors may therefore turn away from labeled products. Only regulator can counter this trend.

The Role of National Culture in Financial Literacy: Cross-Country Evidence
De Beckker, Kenneth,De Witte, K.,Van Campenhout, Geert
This paper examines the effect of national culture on adult financial literacy levels in 12 countries. Contrary to earlier financial literacy studies, our results are directly comparable across countries given that we use the standardized OECD/INFE financial literacy survey data and Hofstede's, 2001, cultural dimensions to capture financial literacy and national culture. In line with the financial socialization theory, we find that uncertainty avoidance positively influences financial literacy, while individualism negatively influences financial literacy. We conclude that national culture affects financial literacy and that it is important to account for cultural dimensions in future international financial literacy research.