Research articles for the 2020-11-16

'Another One Bites The Dust': Peer Effects and Motivation in High Level Performers
Bilen, Eren,Pettis, Robert
In this paper we investigate whether a corner assignment itself can change the odds of wins and losses. We gather information on fight statistics, bets, and fight purses for more than 4,000 fights that took place as part of Ultimate Fighting Championship (UFC) between 1993 and 2020. By generating a panel database of fighter rankings, we find that “underdog” fighters win at a higher rate if they are assigned to Red Corner on fights they should have been assigned to Blue Corner.

Ambient heat and human sleep
Kelton Minor,Andreas Bjerre-Nielsen,Sigga Svala Jonasdottir,Sune Lehmann,Nick Obradovich

Ambient temperatures are rising globally, with the greatest increases recorded at night. Concurrently, the prevalence of insufficient sleep is increasing in many populations, with substantial costs to human health and well-being. Even though nearly a third of the human lifespan is spent asleep, it remains unknown whether temperature and weather impact objective measures of sleep in real-world settings, globally. Here we link billions of sleep measurements from wearable devices comprising over 7 million nighttime sleep records across 68 countries to local daily meteorological data from 2015 to 2017. Rising nighttime temperatures shorten within-person sleep duration primarily through delayed onset, increasing the probability of insufficient sleep. The effect of temperature on sleep loss is substantially larger for residents from lower income countries and older adults, and females are affected more than are males. Nighttime temperature increases inflict the greatest sleep loss during summer and fall months, and we do not find evidence of short-term acclimatization. Coupling historical behavioral measurements with output from climate models, we project that climate change will further erode human sleep, producing substantial geographic inequalities. Our findings have significant implications for adaptation planning and illuminate a pathway through which rising temperatures may globally impact public health.

Analysis and Forecasting of Financial Time Series Using CNN and LSTM-Based Deep Learning Models
Sidra Mehtab,Jaydip Sen,Subhasis Dasgupta

Prediction of stock price and stock price movement patterns has always been a critical area of research. While the well-known efficient market hypothesis rules out any possibility of accurate prediction of stock prices, there are formal propositions in the literature demonstrating accurate modeling of the predictive systems can enable us to predict stock prices with a very high level of accuracy. In this paper, we present a suite of deep learning-based regression models that yields a very high level of accuracy in stock price prediction. To build our predictive models, we use the historical stock price data of a well-known company listed in the National Stock Exchange (NSE) of India during the period December 31, 2012 to January 9, 2015. The stock prices are recorded at five minutes interval of time during each working day in a week. Using these extremely granular stock price data, we build four convolutional neural network (CNN) and five long- and short-term memory (LSTM)-based deep learning models for accurate forecasting of future stock prices. We provide detailed results on the forecasting accuracies of all our proposed models based on their execution time and their root mean square error (RMSE) values.

Aplica\c{c}\~ao do Movimento Browniano Geom\'etrico para Simula\c{c}\~ao de Pre\c{c}os de A\c{c}\~oes do \'Indice Brasileiro de Small Caps
Marcos Vinícius dos Santos Araújo

This work addressed the use of the geometric Brownian motion to simulate the prices of shares listed in the Small Caps index of the Brazilian stock exchange B3 (Brazil, Bolsa, Balc\~ao). The data used refer to the price history from January 2016 to December 2018. The price history of 2019 was used to be compared with the simulated prices. The data was imported from the Yahoo Finance database using the Python programming language, and the simulations were performed for each stock individually, and for portfolios formed based on expected returns, risk and the Sharpe Index. The results were better for portfolios with higher returns, lower risks and higher Sharpe Indexes.

Application of deep quantum neural networks to finance
Takayuki Sakuma

Use of the deep quantum neural network proposed by Beer et al. (2020) could grant new perspectives on solving numerical problems arising in the field of finance. We discuss this potential in the context of simple experiments such as learning implied volatilites and differential machine proposed by Huge and Savine (2020). The deep quantum neural network is considered to be a promising candidate for developing highly powerful methods in finance.

Associating Ridesourcing with Road Safety Outcomes: Insights from Austin Texas
Eleftheria Kontou,Noreen C. McDonald

Improving road safety and setting targets for reducing traffic-related crashes and deaths are highlighted as part of the United Nation's sustainable development goals and vision zero efforts around the globe. The advent of transportation network companies, such as ridesourcing, expands mobility options in cities and may impact road safety outcomes. In this study, we analyze the effects of ridesourcing use on road crashes, injuries, fatalities, and driving while intoxicated (DWI) offenses in Travis County Texas. Our approach leverages real-time ridesourcing volume to explain variation in road safety outcomes. Spatial panel data models with fixed effects are deployed to examine whether the use of ridesourcing is significantly associated with road crashes and other safety metrics. Our results suggest that for a 10% increase in ridesourcing trips, we expect a 0.12% decrease in road crashes (p<0.05), a 0.25% decrease in road injuries (p<0.001), and a 0.36% decrease in DWI offenses (p<0.0001) in Travis County. Ridesourcing use is not associated with road fatalities at a 0.05 significance level. This study augments existing work because it moves beyond binary indicators of ridesourcing presence or absence and analyzes patterns within an urbanized area rather than metropolitan-level variation. Contributions include developing a data-rich approach for assessing the impacts of ridesourcing use on our transportation system's safety, which may serve as a template for future analyses of other US cities. Our findings provide feedback to policymakers by clarifying associations between ridesourcing use and traffic safety, while helping identify sets of actions to achieve safer and more efficient shared mobility systems.

CSR Disclosure, Dividends and Firm Value â€" Relations and Mediating Effects
de Villiers, Charl,Ma, Diandian,Marques, Ana Cristina
Managers use corporate social responsibility (CSR) disclosures to signal future financial prospects. Prior literature documents a positive relation between CSR disclosure and financial consequences, such as higher firm value. Dividends play a similar signaling role with similar financial consequences. This paper provides evidence regarding the interplay among CSR disclosure, dividends and firm value, relying on a large multi-country sample. First, we find that firms with higher levels of unexpected CSR disclosure are likely to pay higher dividends, and that this result is attributable to firms where CSR disclosure is aligned with CSR performance (both CSR disclosure and performance are high or both are low). Second, we assess whether the positive relation between CSR disclosures and firms’ share price persists after introducing dividends as a control. We find that unexpected CSR disclosure are associated with higher share prices, but not after controlling for dividends, i.e. dividends fully mediate unexpected CSR disclosure. Sub-sample analyses show that full mediation occurs when firms’ CSR disclosures are aligned with CSR performance, while in the unaligned sample unexpected CSR disclosure is still informative. Our findings are consistent with the view that managers use both CSR disclosure and dividends to signal future prospects, which are therefore both positively associated with share prices, but where CSR disclosure and performance are aligned, CSR disclosure loses its information value to market participants. The mediation effect we document implies that prior firm value study results should be interpreted with caution, and future studies should control for dividends.

Complexity-Robust Regulation
Østbye, Peder
Complex systems are characterized by complex interactions among agents and emergence of complex phenomena that are more or less surprising ex-ante. These emergent phenomena entail harm to individuals and pose risks to the system as such â€" so-called systemic risk. Complexity poses challenges to regulation. Complex interaction is a challenge for determining causal responsibility and an adequate allocation of legal liabilities, and surprise is a challenge for designing ex-ante regulations to avoid emergent phenomena when they are harmful. This paper explores principles for complexity-robust regulations that proactively can address complexity. Complexity-robust regulation entails complexity-robust legal duties, complexity-robust liability for joint activity, complexity-robust causal concepts, and complexity-robust enforcement. The principles of complexity-robust regulation outlined in this paper can be used in combination and independently.

Credit Ratings Quality in Uncertain Times
Attig, Najah,Driss, Hamdi,El Ghoul, Sadok
We investigate ratings quality across uncertain and normal times proxied by variations in economic policy uncertainty. We find that increased policy uncertainty is associated with weaker rating standards. This finding is unrelated to variations in macroeconomic conditions and holds when we use an instrumental variable approach. The effect is more pronounced for firms with which rating agencies have more conflicts of interest. We also find that ratings are less informative about firm credit quality in times of heightened policy uncertainty. These findings suggest that increased policy uncertainty distorts ratings quality through a conflicts of interest channel.

Decoding the Source of Value: Evidence from Listed Companies in India
Mishra, Sanjay Kumar
Based on the sample of S&P BSE 500 companies for a period of data from year 1999 to 2019, this study investigates the source of value for a sample if listed Indian companies. Specifically, the study investigates how companies that creates long term value for their shareholders acts differently from the companies that destroys value. The findings of the study suggest that, (i) listed Indian companies mostly creates value for shareholder through capital appreciation rather than cash transfer through dividend payout, (ii) even though no significant difference was found in the stated capital management policy of high performing companies and low performing companies, significant difference was found in the ability of those companies in efficient utilization of their capital, specifically, high performing companies were consistently able to utilize their capital more efficiently when compared to low performing companies, (iii) no such difference was found in the ability of these two group of companies to raise those capital at reasonable costs, (iv) the strategy adopted by high performing companies were mainly profitable growth through investing capital, simultaneous fix, grow and sell strategy on ongoing basis and focused acquisitions whereas among low performing companies, there was some evidence of aggressive growth strategy adopted by these companies, which was subsequently followed by liquidation and consolidation of business.

Deploying Narrative Economics to Understand Financial Market Dynamics: An Analysis of Activist Short Sellers’ Rhetoric
Paugam, Luc,Stolowy, Hervé,Gendron, Yves
We investigate how Activist Short Sellers (AShSs) expose publicly listed firms in an increasingly popular form of “research reports” openly denouncing alleged frauds, flawed business models, accounting irregularities, and wrongdoings. We focus on six AShSs that issued research reports that often led to a strong negative market reaction. Our empirical analysis exploits both qualitative and quantitative methods for a comprehensive dataset of 383 research reports targeting 171 unique firms, and three first-hand interviews with AShSs. Drawing on Aristotle’s rhetoric, we first examine how AShSs use narratives in striving to convince other investors that the target firms are overvalued. Specifically, we search the documents produced by AShSs for stylized narratives related to credibility-based (ethos), emotions-based (pathos), and logic-based (logos) rhetorical strategies. To assess the impact of these strategies, we examine the extent to which the AShSs’ rhetorical strategies resonate in 3,665 press articles. As expected, the press often refers to logos-based arguments. Interestingly, the press also brings up frequently pathos-based and ethos-based statements. Considering the importance of the press in shaping investors’ opinions, our study points to AShSs’ narratives playing a major role in policing financial markets. Theoretically, we show that AShSs, as dissenting market participants, produce narratives that go beyond the language of formal rationality â€" as they strive to reveal new information and frame it persuasively, in order to destabilize the extent of trustworthiness surrounding target firms.

Detecting and explaining changes in various assets' relationships in financial markets
Makoto Naraoka,Teruaki Hayashi,Takaaki Yoshino,Toshiaki Sugie,Kota Takano,Yukio Ohsawa

We study the method for detecting relationship changes in financial markets and providing human-interpretable network visualization to support the decision-making of fund managers dealing with multi-assets. First, we construct co-occurrence networks with each asset as a node and a pair with a strong relationship in price change as an edge at each time step. Second, we calculate Graph-Based Entropy to represent the variety of price changes based on the network. Third, we apply the Differential Network to finance, which is traditionally used in the field of bioinformatics. By the method described above, we can visualize when and what kind of changes are occurring in the financial market, and which assets play a central role in changes in financial markets. Experiments with multi-asset time-series data showed results that were well fit with actual events while maintaining high interpretability. It is suggested that this approach is useful for fund managers to use as a new option for decision making.

Diagnostic Uncertainty and Insurance Coverage in Credence Goods Markets
Balafoutas, Loukas,Fornwagner, Helena,Kerschbamer, Rudolf,Sutter, Matthias,Tverdostup, Maryna
Credence goods markets â€" like for health care or repair services â€" with their informational asymmetries between sellers and customers are prone to fraudulent behavior of sellers and resulting market inefficiencies. We present the first model that considers both diagnostic uncertainty of sellers and the effects of insurance coverage of consumers in a unified framework. We test the model's predictions in a laboratory experiment. Both in theory and in the experiment diagnostic uncertainty decreases the rate of efficient service provision and leads to less trade. In theory, insurance also decreases the rate of efficient service provision, but at the same time it also increases the volume of trade, leading to an ambiguous net effect on welfare. In the experiment, the net effect of insurance coverage on efficiency turns out to be positive. We also uncover an important interaction effect: if consumers are insured, experts invest less in diagnostic precision. We discuss policy implications of our results.

Differential Performance Impacts of Outsider and Insider Interim CEO Successions
Bae, Jihun,Joo, Jeong Hwan,Park, Chul W.
This study finds differential performance impacts of outsider and insider interim CEO successions. Stock markets react incrementally positively to interim CEO successions when the interim CEOs are from outside rather than inside firms. Relative to insider interim CEOs, outsider interim CEOs produce worse earnings performance and greater restructuring charges during their services but lead more frequently to outsider permanent CEO appointments followed by better long-term earnings performance. Our findings suggest that market reactions to interim CEO successions rationally impound the investors’ expectation that outsider relative to insider interim CEO successions will generate greater short-term disruption but pave the way for greater long-term performance improvement.

Diffusion of new renewable power in Brazil: A Real Options Approach
Nouicer, Athir
A major problem in the expansion of renewable energies sources is finding the most adequate way to support them. The design of a suitable support scheme is necessary for an efficient development of renewable energies sources (RES). In Brazil, Many projects are delayed after getting the construction license due to financing problems. Some of them are even abandoned. Experiences of two European countries (Germany and UK) were analyzed in order to find efficient alternatives for RES expansion in Brazil. These countries are currently implementing new RES support schemes in order to increase electric systems’ efficiency; Contract for differences for UK and a tendering scheme in Germany. The recent results show mitigated outcomes. They are however encouraging considering investors caution against new regulatory policies. Brazil has already adopted a similar scheme, the auction mechanism, since 2004. Still, its share from RES apart from hydro and biofuels is very small, 4% for wind energy and less than 1% for solar energy. It has, nevertheless, an attracting potential. To investigate on this problem, we applied a Real Options approach to value the investment opportunities in a wind farm project. Compared to the traditional NPV calculation, The Real Options method excels in terms of covering the managerial flexibility for delaying the investment decision.The considered project is subject to a multistage investment strategy consisting of design, construction and operation phases. A binomial approach through a decision tree was elaborated to model the investment opportunity. Two scenarios were adopted for wind farms that will participate in the 2017 A-3 auction. The results suggest that the option of delaying the project has significant value, since the investor can wait until the uncertainties get revealed.This study can serve as a guide to ANEEL, the Brazilian electricity regulatory agency, and to RES investors for the type of strategy to undertake in order to increase RES generation in Brazil.

Do tar roads bring tourism? Growth corridor policy and tourism development in the Zambezi region, Namibia
Linus Kalvelage,Javier Revilla Diez,Michael Bollig

There are high aspirations to foster growth in Namibia's Zambezi region via the development of tourism. The Zambezi region is a core element of the Kavango-Zambezi Transfrontier Conservation Area (KAZA), a mosaic of areas with varying degrees of protection, which is designed to combine nature conservation and rural development. These conservation areas serve as a resource base for wildlife tourism, and growth corridor policy aims to integrate the region into tourism global production networks (GPNs) by means of infrastructure development. Despite the increasing popularity of growth corridors, little is known about the effectiveness of this development strategy at local level. The mixed-methods approach reveals that the improvement of infrastructure has led to increased tourism in the region. However, the establishment of a territorial conservation imaginary that results in the designation of conservation areas is a necessary precondition for such a development. Despite the far-reaching territorial claims associated with tourism, the benefits for rural residents are limited.

Does Financial Literacy Reduce Money Stress?
West, Tracey,Cull, Michelle,Johnson, Di
As advocates of financial literacy education, it is a hard pill to swallow when data show little impact on financial behaviours. Unfortunately, our expectations that university students with higher levels of financial literacy have reduced money management stress and good behaviours, leading to higher levels of financial wellbeing, were expunged. We did find, however, that being older and having higher levels of income contributed most significantly and consistently to explaining financial wellbeing. Proponents of financial literacy education should not lose hope but recognise limits to transferring knowledge and set goals based on evidence of what works.

Earnings Management Strategies for Meeting or Beating Expectations
Ronen, Joshua ,Fogel-Yaari, Hila
In this study, we dispel several popular notions regarding the meeting or beating expectations/thresholds (MBE) phenomenon that permeates the research design of many empirical papers. First, MBE is not unequivocally associated with aggressive earnings management. Second, MBE does not necessarily obfuscate the truth. Third, MBE may be consistent with the well-documented reporting strategy of smoothing. Specifically, we characterize the reporting strategy of firms that engage in MBE in a two-period game. Some firms value MBE in the first period more than in the second (short-run firms), and other firms are less concerned with missing a threshold in the first period but must meet or beat expectations in the second (long-run firms). The analysis yields additional insights: we also show that MBE, by a small amount, is driven by the demand for a truth-revealing report, since the extremely small margin is designed to vary with the truth. In addition, MBE explains the richness of the menu of reporting strategies (“taking a bath,” “cookie-jar reserve,” and marginal threshold beating). Moreover, MBE is good news when the firm is a long-run MBE firm because it signals that the firm will also meet or beat expectations in the future. Finally, MBE has a favorable economic effect, as it induces boards of directors to incentivize managers to expend more effort.

Estimation and Testing of a Smooth Transition Simultaneous Equation Model
Kadilli, Anjeza,Krishnakumar, Jaya
This paper proposes a generalization of the nonlinear simultaneous equation model of Pesaran and Pick (2007) by modelling the comovement between the two endogenous variables as a smooth function of the magnitude of the endogenous variable rather than a step function. The threshold and the speed at which a shock is transmitted are estimated with the other parameters of the model. We investigate the properties of an accurate estimation method which takes into account endogeneity, and a testing procedure for simultaneity in the presence of nuisance parameters under the null hypothesis. We study the conditions on the parameters that ensure the uniqueness of the implicit reduced form of the model. We apply this methodology to the comovement between the sovereign and banking sectors of nine developed countries.

Exact Multivariate Amplitude Distributions for Non-Stationary Gaussian or Algebraic Fluctuations of Covariances or Correlations
Thomas Guhr,Andreas Schell

Complex systems are often non-stationary, typical indicators are continuously changing statistical properties of time series. In particular, the correlations between different time series fluctuate. Models that describe the multivariate amplitude distributions of such systems are of considerable interest. Extending previous work, we view a set of measured, non-stationary correlation matrices as an ensemble for which we set up a random matrix model. We use this ensemble to average the stationary multivariate amplitude distributions measured on short time scales and thus obtain for large time scales multivariate amplitude distributions which feature heavy tails. We explicitly work out four cases, combining Gaussian and algebraic distributions. The results are either of closed forms or single integrals. We thus provide, first, explicit multivariate distributions for such non-stationary systems and, second, a tool that quantitatively captures the degree of non-stationarity in the correlations.

Excursion Risk
Ananova, Anna,Cont, Rama,Xu, Renyuan
The risk and return profiles of a broad class of dynamic trading strategies, including pairs trading and other statistical arbitrage strategies, may be characterized in terms of excursions of the market price of a portfolio away from a reference level. We propose a mathematical framework for the risk analysis of such strategies, based on a description in terms of price excursions, first in a pathwise setting, without probabilistic assumptions, then in a Markovian setting.We introduce the notion of δ-excursion, defined as a path which deviates by δ from a reference level before returning to this level. We show that every continuous path has a unique decomposition into δ-excursions, which is useful for scenario analysis of dynamic trading strategies, leading to simple expressions for the number of trades, realized profit, maximum loss and drawdown. As δ is decreased to zero, properties of this decomposition relate to the local time of the path.When the underlying asset follows a Markov process, we combine these results with Ito's excursion theory to obtain a tractable decomposition of the process as a concatenation of independent δ-excursions, whose distribution is described in terms of Ito's excursion measure. We provide analytical results for linear diffusions and give new examples of stochastic processes for flexible and tractable modeling of excursions. Finally, we describe a non-parametric scenario simulation method for generating paths whose excursion properties match those observed in empirical data.

Exploring Breaks in the Distribution of Stock Returns: Empirical Evidence from Apple Inc.
Lleo, Sebastien,Ziemba, William T.,Li, Jessica
We implement and test four leading families of unsupervised learning changepoint detection models to investigate the incidence, origins, and effects of breaks in the mean and variance of Apple’s stock returns distribution. These models reveal a sustained incidence of breaks, mainly in the variance. Empirical asset pricing models do not explain this result, even allowing for time-varying coefficients. The breaks occur in response to corporate events, particularly earnings releases and stock-related news. These findings have general implications beyond Apple. Estimation procedures for asset pricing models must address these breaks. Our findings also open event studies to new types of inquiry.

Finance, Gender, and Entrepreneurship: India's Informal Sector Firms
Gang, Ira N.,Khangembam, Indira,Sen, Kunal
How does informal economic activity respond to increased financial inclusion? Does it become more entrepreneurial? Does access to new financing options change the gender configuration of informal economic activity and, if so, in what ways and what directions? We take advantage of nationwide data collected in 2010/11 and 2015/16 by India's National Sample Survey Office on unorganized (informal) enterprises. This period was one of rapid expansion of banking availability aimed particularly at the unbanked, under-banked, and women. We find strong empirical evidence supporting the crucial role of financial access in promoting entrepreneurship among informal sector firms in India. Our results are robust to alternative specifications and alternative measures of financial constraints using an approach combining propensity score matching and difference-in-differences. However, we do not find conclusive evidence that increased financial inclusion leads to a higher likelihood of women becoming entrepreneurs than men in the informal sector.

First exit-time analysis for an approximate Barndorff-Nielsen and Shephard model with stationary self-decomposable variance process
Shantanu Awasthi,Indranil SenGupta

In this paper, an approximate version of the Barndorff-Nielsen and Shephard model, driven by a Brownian motion and a L\'evy subordinator, is formulated. The first-exit time of the log-return process for this model is analyzed. It is shown that with certain probability, the first-exit time process of the log-return is decomposable into the sum of the first exit time of the Brownian motion with drift, and the first exit time of a L\'evy subordinator with drift. Subsequently, the probability density functions of the first exit time of some specific L\'evy subordinators, connected to stationary, self-decomposable variance processes, are studied. Analytical expressions of the probability density function of the first-exit time of three such L\'evy subordinators are obtained in terms of various special functions. The results are implemented to empirical S&P 500 dataset.

Forecasting Probability of Default for Consumer Loan Management with Gaussian Mixture Models
Hamidreza Arian,Seyed Mohammad Sina Seyfi,Azin Sharifi

Credit scoring is an essential tool used by global financial institutions and credit lenders for financial decision making. In this paper, we introduce a new method based on Gaussian Mixture Model (GMM) to forecast the probability of default for individual loan applicants. Clustering similar customers with each other, our model associates a probability of being healthy to each group. In addition, our GMM-based model probabilistically associates individual samples to clusters, and then estimates the probability of default for each individual based on how it relates to GMM clusters. We provide applications for risk managers and decision makers in banks and non-bank financial institutions to maximize profit and mitigate the expected loss by giving loans to those who have a probability of default below a decision threshold. Our model has a number of advantages. First, it gives a probabilistic view of credit standing for each individual applicant instead of a binary classification and therefore provides more information for financial decision makers. Second, the expected loss on the train set calculated by our GMM-based default probabilities is very close to the actual loss, and third, our approach is computationally efficient.

Growing Pains: The Effect of Labor Mobility on Corporate Investment over the Business Cycle
Bai, John (Jianqiu),Eldemire, Ashleigh,Serfling, Matthew
We show that firms located in states with greater labor mobility, captured by variation in state courts’ enforcement of covenants not to compete, increase investment more during economic expansions. This effect is stronger for firms in more labor- and skill-intensive industries. During expansions, higher investment rates in more mobile labor markets are associated with higher sales growth rates, profits, and valuations. Firms appear to finance this additional investment by raising debt and equity. Overall, our results highlight an important friction that dampens growth by constraining firm investment and performance during economic expansions.

Growth Forecasts and News About Monetary Policy
Karnaukh, Nina
I find that 30-minute changes in bond yields around scheduled Federal Open Market Committee (FOMC) announcements are predictable with the pre-FOMC Blue Chip professionals’ revisions in GDP growth forecasts. A positive pre-FOMC GDP growth revision predicts a contractionary policy news shock (positive change in bond yields), a negative GDP growth revision predicts an expansionary policy news shock (negative change in bond yields). Failing to account for this predictability biases the estimates of monetary policy effects on the economy. First, the Fed’s information effect dissipates as the truly unpredictable policy news shock does not affect professionals’ beliefs about the economy. Second, net policy shock has a more negative impact on future actual GDP, than the raw policy shock.

Household Financial Distress and the Burden of 'Aggregate' Shocks
Athreya, Kartik,Mather, Ryan,Mustre-del-Rio, Jose,Sánchez, Juan M.
The goal of this paper is to show that household-level financial distress (FD) varies greatly, meaning there is unequal exposure to macroeconomic risk, and that FD can increase macroeconomic vulnerability. To do this, we first establish three facts: (i) regions in the U.S. vary significantly in their “FD-intensity,” measured either by how much additional credit households therein can access, or in how delinquent they typically are on debts, (ii) shocks that are typically viewed as “aggregate” in nature hit geographic areas quite differently, and (iii) FD is an economic “pre-existing condition”: the share of an aggregate shock borne by a region is positively correlated with the level of FD present at the time of the shock. Using an empirically disciplined and institutionally rich model of consumer debt and default, we show that in the shocks dealt by the Great Recession and in the initial months in the COVID-19 pandemic, FD mattered. Our model implies that the uneven distribution of FD creates widely varying consumption responses to shocks. This is true even when subjecting regions (with differing levels of FD) to the same shocks, which highlights the importance of FD independently of its correlation with shocks.

Impact of crop diversification on socio-economic life of tribal farmers: A case study from Eastern ghats of India
Sadasiba Tripathy,Sandhyarani Das

In this study we investigated impact of crop diversification on socio-economic life of tribal people from eastern ghats of India. We have adopted linear regression formalism to check impact of cross diversification. We observe a positive intercept for almost all factors. Coefficient of correlation is calculated to examine the inter dependence of CDI and our various individually measured dependent variables. A positive correlation is observed in almost all factors. This study shows that a positive change occurred in their social, economic life in the post diversification era.

Implicit Incentives for Fund Managers with Partial Information
Flavio Angelini,Katia Colaneri,Stefano Herzel,Marco Nicolosi

We study the optimal asset allocation problem for a fund manager whose compensation depends on the performance of her portfolio with respect to a benchmark. The objective of the manager is to maximise the expected utility of her final wealth. The manager observes the prices but not the values of the market price of risk that drives the expected returns. The estimates of the market price of risk get more precise as more observations are available. We formulate the problem as an optimization

under partial information. The particular structure of the incentives makes the objective function not concave. We solve the problem via the martingale method and, with a concavification procedure, we obtain the optimal wealth and the investment strategy. A numerical example shows the effect of learning on the optimal strategy.

Institutional Investors and Firm Performance: Evidence from IPOs
Michel, Allen,Oded, Jacob,Shaked, Israel
We investigate the post-IPO evolution of institutional investor holdings and the manner in which operating performance is related to these holdings. During the first year after the IPO, average institutional holdings increase from 24% to 36% of shares outstanding and stabilize at about 42% by the end of the second year. We document that post-IPO operating performance is positively related to institutional holdings, but this relation subsides in the third year after the IPO. Overall, our findings indicate that institutional ownership is a valid indicator of the firm's operating performance in its initial years as a public company.

Intra-Firm Hierarchies and Gender Gaps
Dalvit, Nicolò,Patel, Aseem,Tan, Joanne
We study how changes in female representation at the top of a firm’s organisation affect gender-specific outcomes across hierarchies within firms. We start by developing a theoretical model of a hierarchical firms, where gender representation in top organisational layers can affect gender-specific hiring and promotion probabilities at lower layers. We then exploit a recent French reform that imposed gender representation quotas in the boards of directors and test the model’s predictions in the data. Our empirical results show that the reform was successful in reducing gender wage and representation gaps at the upper layers of the firm, but not at lower firm layers. A Panel VAR analysis confirms that the trickle-down effect of this policy was limited and suggests that interventions targeting the managerial layer, rather than the board, might have a more generalised effect across the firm.

Investigating the Asymmetric Impact of Oil Prices on GCC Stock Markets
Ben Cheikh, Nidhaleddine,Ben Naceur, Sami,Kanaan, Oussama,Rault, Christophe
This paper investigates the presence of asymmetric relationship between oil price movements and Gulf Cooperation Council (GCC) stock markets. We propose the implementation of nonlinear vector smooth transition regression (VSTR) models which offer a greater flexibility when modelling the possible asymmetric reaction in equities. Contrary to conventional wisdom, our empirical results reveal that GCC stock markets do not have similar sensitivities to oil price changes. We document that oil price changes have asymmetric effects on stock returns in some GCC countries, but not for others. More specifically, we find four out of six GCC stock markets that are more sensitive to large oil deviations than to small ones. Our results highlight the importance of economic stabilization and reform policies that can potentially reduce the sensitivity of stock returns to oil price changes, especially with regard to the existence of asymmetric behavior.

Lack of Competition in the Financial Market in Israel: The Conflict between the Needs of P2P Lenders and the Platforms’ Intentions
Klein, Galit,Shtudiner, Ze'ev,Zwilling, Moti
Peer-to-peer (P2P) lending began as a kind of sharing economy within the field of finance. Using internet platforms, P2P lending attempts to offer an alternative to traditional financial institutions like banks. However, the P2P sector plays only a minor role in the finance industry in Israel, compared to the traditional banking system that suffers from an oligopoly structure. We conducted two studies in order to investigate this gap, comparing the dual connection between lenders and the platforms. In the first study, we conducted a conjoint analysis to examine the attributes that have higher utility for the lenders, and impact their decision to invest through the P2P platforms. In the second study, we shift the research prism toward the platforms, and examine the factors they use to determine the lending interest rate for loans, other than the borrowers’ financial condition. We found that although lenders wish to decrease their risk and guarantee their investment, P2P companies encourage borrowers, thereby increasing the risk inherit in lending to strangers. This contradiction between the priorities of the lenders and the platforms, may explain why the general public considers P2P lending highly risk, and avoids this financial tool. Based on our results, we offer a number of suggestions to increase the attractiveness of the industry.

Managerial Discretion to Delay the Recognition of Goodwill Impairment: The Role of Enforcement
Filip, Andrei,Lobo, Gerald J.,Paugam, Luc
Under IFRS, managers can use two approaches to increase the estimated fair value of goodwill in order to justify not recognizing impairment: (1) make overly optimistic valuation assumptions, and (2) increase future cash flow forecasts by inflating current cash flows. Because enforcement constrains the use of optimistic valuation assumptions, we hypothesize that enforcement influences the relative use of these two choices. We test this hypothesis by comparing a sample of 1,958 firms from 36 countries that are likely to delay recognizing goodwill impairment (suspect firms) to a sample of control firms. First, we find that firms in high enforcement countries use a higher discount rate to test goodwill for impairment than firms in low enforcement countries. We also find a more positive association between discount rate and upward cash flow management for suspect firms than for control firms. This result is consistent with suspect firms substituting optimistic valuation assumptions with inflated current cash flows. Second, we find that, relative to control firms, suspect firms exhibit higher upward cash flow management in high enforcement countries than in low enforcement countries. Third, we show that suspect firms in high enforcement countries are more likely to eventually impair goodwill.

Mean-Variance Portfolio Management with Functional Optimization
Ka Wai Tsang,Zhaoyi He

This paper introduces a new functional optimization approach to portfolio optimization problems by treating the unknown weight vector as a function of past values instead of treating them as fixed unknown coefficients in the majority of studies. We first show that the optimal solution, in general, is not a constant function. We give the optimal conditions for a vector function to be the solution, and hence give the conditions for a plug-in solution (replacing the unknown mean and variance by certain estimates based on past values) to be optimal. After showing that the plug-in solutions are sub-optimal in general, we propose gradient-ascent algorithms to solve the functional optimization for mean-variance portfolio management with theorems for convergence provided. Simulations and empirical studies show that our approach can perform significantly better than the plug-in approach.

Monetary Policy Surprises and Corporate Credit Spreads
Huang, Difang,Wang, Xinjie,Zhong, Zhaodong
We study the effects of monetary policy surprises (MPSs) on corporate credit default swap (CDS) spreads. Using high-frequency surprises around Federal Open Market Committee (FOMC) announcements, we find a negative relation between changes in unexpected monetary policy and changes in CDS spreads using both panel regressions and time-series regressions. More importantly, we show that there is a strong cross-sectional effect of MPSs on CDS spreads. Unexpected monetary policy reduces the flight-to-safety and flight-to-liquidity phenomenon: The credit spread between investment-grade and high-yield CDSs narrows significantly following an unexpected monetary policy. Finally, we show that monetary policy affects CDS spreads through cash flow, financial constraints, and risk channels.

Multiple Directorships of Corporate Boards and Firm Performance in India
Hundal, Shab
The purpose of the paper is to investigate, first, the association between multiple directorship assignments (busyness) undertaken by corporate directors and firm performance, second, whether endogenously determined limits of multiple directorships, highlighting the ownership structure and other institutional settings, explain the above association better than those by exogenously mandated by regulators and third, the association between the nature of busyness and firm performance. The study develops measures of busyness in the light of the agency and resource dependence theories. The spline regression technique is applied in order to reflect institutional settings of a large sample and sub-samples of firms classified as local private, foreign and government firms in India. For local private firms, the association between the number of directorships and firm performance becomes negative before reaching the maximum number of directorships set by legislation, whereas, for foreign and government firms, the same continues to remain positive throughout. Endogenously determined cut-off points of busyness reflect institutional settings of firms, which may remain masked otherwise. The findings of the current paper can be useful to study the same phenomenon in other emerging markets having corporate governance, and ownership structures similar to that of India. The effect of busyness can be different on different firms; however, exogenously fixed regulatory limits do not reflect their institutional settings. The current paper is an attempt to fill in this research gap.

On the Risk of Using a Firm-Level Approach to Identify Relevant Markets
Autio, Timo,Padilla, Jorge,Piccolo, Salvatore,Sääskilahti, Pekka,Väänänen, Lotta
In a recent influential paper Coate et al. (2020) have criticized the standard firm-level approach to market definition in merger review. They argue why a market-level approach to critical loss is more appropriate than a firm-level critical loss analysis. Their conclusion is that under certain plausible demand scenarios --- i.e., non-linearity of demand functions --- a diversion-based firm-level analysis could easily reach the wrong answer on market definition. We extend their analysis by showing that in standard environments used by the most recent theoretical and empirical academic work on merger analysis (namely CES and logit demand functions), a firm level approach actually leads to an excessively narrow market definition as opposed to a market-level approach, thereby increasing the risk of type I errors.

Pay Transparency and Cracks in the Glass Ceiling
Emma Duchini,Stefania Simion,Arthur Turrell

This paper studies firms' and employees' responses to pay transparency requirements. Each year since 2018, more than 10,000 UK firms have been required to disclose publicly their gender pay gap and gender composition along the wage distribution. Theoretically, pay transparency is meant to act as an information shock that alters the bargaining power of male and female employees vis-\`a-vis the firm in opposite ways. Coupled with the potential negative effects of unequal pay on firms' reputation, this shock could improve women's relative occupational and pay outcomes. We test these theoretical predictions using a difference-in-differences strategy that exploits variations in the UK mandate across firm size and time. This analysis delivers four main findings. First, pay transparency increases women's probability of working in above-median-wage occupations by 5 percent compared to the pre-policy mean. Second, while this effect has not yet translated into a significant rise in women's pay, the policy leads to a 2.8 percent decrease in men's real hourly pay, reducing the pre-policy gender pay gap by 15 percent. Third, combining the difference-in-differences strategy with a text analysis of job listings, we find suggestive evidence that treated firms adopt female-friendly hiring practices in ads for high-gender-pay-gap occupations. Fourth, a reputation motive seems to drive employers' reactions, as firms publishing worse gender equality indicators score lower in YouGov Women's Rankings. Moreover, publicly listed firms experience a 35-basis-point average fall in cumulative abnormal returns in the days following their publication of gender equality data.

Portfolio Risk Measurement Using a Mixture Simulation Approach
Seyed Mohammad Sina Seyfi,Azin Sharifi,Hamidreza Arian

Monte Carlo Approaches for calculating Value-at-Risk (VaR) are powerful tools widely used by financial risk managers across the globe. However, they are time consuming and sometimes inaccurate. In this paper, a fast and accurate Monte Carlo algorithm for calculating VaR and ES based on Gaussian Mixture Models is introduced. Gaussian Mixture Models are able to cluster input data with respect to market's conditions and therefore no correlation matrices are needed for risk computation. Sampling from each cluster with respect to their weights and then calculating the volatility-adjusted stock returns leads to possible scenarios for prices of assets. Our results on a sample of US stocks show that the Gmm-based VaR model is computationally efficient and accurate. From a managerial perspective, our model can efficiently mimic the turbulent behavior of the market. As a result, our VaR measures before, during and after crisis periods realistically reflect the highly non-normal behavior and non-linear correlation structure of the market.

Predicting Disaggregated CPI Inflation Components via Hierarchical Recurrent Neural Networks
Oren Barkan,Itamar Caspi,Allon Hammer,Noam Koenigstein

We present a hierarchical architecture based on Recurrent Neural Networks (RNNs) for predicting disaggregated inflation components of the Consumer Price Index (CPI). While the majority of existing research is focused mainly on predicting the inflation headline, many economic and financial entities are more interested in its partial disaggregated components. To this end, we developed the novel Hierarchical Recurrent Neural Network (HRNN) model that utilizes information from higher levels in the CPI hierarchy to improve predictions at the more volatile lower levels. Our evaluations, based on a large data-set from the US CPI-U index, indicate that the HRNN model significantly outperforms a vast array of well-known inflation prediction baselines.

Price formation and optimal trading in intraday electricity markets with a major player
Olivier Féron,Peter Tankov,Laura Tinsi

We study price formation in intraday electricity markets in the presence of intermittent renewable generation. We consider the setting where a major producer may interact strategically with a large number of small producers. Using stochastic control theory we identify the optimal strategies of agents with market impact and exhibit the Nash equilibrium in closed form in the asymptotic framework of mean field games with a major player. This is a companion paper to [F\'eron, Tankov, and Tinsi, Price formation and optimal trading in intraday electricity markets, arXiv:2009.04786, 2020], where a similar model is developed in the setting of identical agents.

Retrenchment of Euro Area Banks and International Banking Models
Argimón, Isabel,Ortiz, Elena,Rodriguez-Moreno, Maria
In this paper, we analyze the importance of international banking models, along the operational and the funding dimensions, for the decline in international positions of European banks since the crisis. Using BIS Consolidated Banking Statistics, we find that the multinational model (higher reliance on local activity) and the decentralized model (higher weight of local funding over local claims) is associated with lower retrenchment. We also find that more business synchronization between the home and the host economy is associated with higher declines in lending after the crisis and that the multinational and decentralized models mitigate such effect. On the other hand, lending to banks is not affected by the correlation of economic cycles between the home and the host country.

Revisiting Index Methodology for Thinly Traded Stock Market. Case: Helsinki Stock Exchange
Vaihekoski, Mika
Stock market indices play a central role in portfolio management and academic research. This paper reviews and discusses the main issues in index construction, especially on thinly traded stock markets and in a historical setting with deficiency of information. The main methods to deal with missing price observations are studied. As a case in point, a newly collected historical database for the Finnish stock market that covers the period from the establishment of the Helsinki Stock Exchange (HSE) in October 1912 forward is used. The HSE suffered from severe thin trading with only approximately 20% of the stocks having a daily transaction in the early part of the sample. Overall, the results show that index construction methodology have a major impact on the index as well as its statistical properties. The results also highlight the impact of corporate actions, the hardest information to obtain, on the market index performance.

Risk Dynamics of Sectoral Stocks in BRICS Countries
Dogah, Kingsley Etornam,Premaratne, Gamini
This study attempts to contribute to the literature on risk exposures by investigating the dynamic volatility spillover transmissions and volatility co-movements between oil-risk factors and sectoral stocks in BRICS countries. A spillover index and DCC-GARCH estimation techniques are applied to identify the volatility transmission mechanism and co-movement among the series using daily data from 5th May 2007 to December 31st, 2016. To provide practical implications of the volatility transmissions, the estimated results are in turn used to compute and analyze the optimal weights and hedge ratios for oil-stock portfolio holdings. Our findings indicate the existence of significant volatility spillover interdependences and a time-varying volatility co-movement between oil-risk factors and sectoral stocks. However, the direction of spillover is shown to be somewhat unidirectional mainly from some selected sectors to oil-risk factors. Thus, we show that although volatility spillovers from oil-risk factors to sectors exist, the effect is at best, marginal. Finally, the optimal weights and hedge ratios show that oil-risk factors would be better suited as instruments for portfolio diversification rather than hedging to minimize oil price and portfolio risks which is important for risk management and diversification benefits.

Simple is Simply not Enough â€" Features versus Labels of Complex Financial Securities
Hibbeln, Martin Thomas,Osterkamp, Werner,Rendchen, Fabian
Based on a unique data set of European residential mortgage backed security (RMBS) deals with 31 million quarterly loan observations, we examine how design features and la-bels of complex financial securities affect tranches’ spreads and loan performance. Exploit-ing the features required by the European Securitization Regulation and the STS (Simple, Transparent, Standardized) label, we find that the features of the security design and not the label are crucial for the loan performance. However, investors hardly consider the features but simply rely on the existence of the label.

Smart Close-out Netting
Akber Datoo,Christopher D. Clack

Smart Close-out Netting aims to standardise and automate specific operational aspects of the legal and regulatory processes of close-out netting for prudentially regulated financial institutions. This article provides a review, analysis and perspective of these operational processes, their benefits for prudentially regulated trading institutions, their current inefficiencies, and the extent to which they are amenable to standardisation and automation. The main concepts of Smart Close-out Netting are introduced, including the use of a controlled natural language in legal opinions and the use of a data-driven framework during netting determination.

Supplemental Notes to: ADHD Symptoms and Financial Distress
Liao, Chi
This note includes material accompanying "ADHD Symptoms and Financial Distress" eliminated from the final version. However, we find this material regarding the effects of help with living expenses and computer budgeting on the relationship between ADHD symptoms and financial outcomes interesting and would like to make it available. Liao (2020) is available here:

Supply of Credit and Corporate Bond Covenants
Akdogu, Evrim,Alp Paukowits, Aysun
We study whether shocks to the supply of capital affect bond covenant structures using the collapse of Drexel Burnham Lambert, Inc. and the subsequent regulatory changes as an exogenous contraction in the supply of speculative-grade credit around 1989. We find that speculative-grade firms significantly increase their covenant use compared to investment-grade firms in the post-1989 period. Consistent with a supply effect, the increase in covenant use is higher for firms with high costs of switching to alternative sources of funds and high dependence on external finance. Speculative-grade firms, particularly the riskier ones, are more likely to switch from bond financing to bank loans in this period. We also find spillover effects of the supply shock on other financially constrained firms. Overall, our results suggest that shifts in credit supply affect bond covenant structures and even firms with access to public debt markets are not immune to such fluctuations.

The Influence of Intellectual Capital on Corporate Performance of The Turkish Wholesale and Retail Trade Companies
Nassar, Sedeaq
This study aims to discuss the influence of intellectual capital on corporate performance of the Wholesale and Retail trade companies listed in Borsa Istanbul. The study utilized data collected from 26 listed companies for the period of 2010-2015. The Value Added Intellectual Coefficient (VAIC) model has been used to calculate Intellectual Capital Efficiency (ICE), while corporate performance has been measured using traditional accounting measures, such as; Market, Productivity, and Financial performance. Market performance is represented by market to book ratio (MB) and price to earnings ratio (PE), productivity performance is measured by assets turnover ratio (ATO), and financial performance is represented by return on assets (ROA), return on equity (ROE), and earning per share (EPS) ratios. Panel data regression model is utilized to find the relationship between IC and its components; Human capital Efficiency (HCE), Structural Capital Efficiency (SCE), and Capital Employed Efficiency (CEE), with company’s performance represented by Market, Productivity, and Financial performance. The findings indicated that Turkish wholesale and retail trade companies are paying good attention to the use of the VAIC components especially HCE in value creation.

The Linear Effect of Bank Liquidity on Profitability in Selected African Economies
Etudaiye-Muhtar, Oyebola Fatima,Bamigbade, Dayo,Olamide, Fagbemi Temitope,ABDURRAHEEM, ABDULAZEEZ
Given the importance attached to sound liquidity management in the banking industry, this paper investigates the effect of bank liquidity on profitability. The study employs the bankruptcy cost and risk-return hypotheses to examine the linear effect of bank liquidity on bank profit. Annual bank-specific data from commercial banks in Kenya, Nigeria and South Africa, for the period 2000-2014, are used in the study. The two-step system generalised method of moments technique of analysis, an instrumental variable technique that addresses issues such as endogeneity, reverse causality and auto-correlation, is used for the investigation. The results revealed a statistically significant and positive relationship between liquidity and bank profit indicating the applicability of the bankruptcy cost hypothesis. This implies that banks in the study benefit from reduced financial distress and funding costs thereby increasing profits. The study thus recommends that commercial banks in the selected countries hold higher levels of liquidity to mitigate the risk of failure and increase profit.

The Political Determinants of Executive Compensation: Evidence from an Emerging Economy
Liang, Hao,Renneboog, Luc,Sun, Sunny Li
In regulated economies, corporate governance mechanisms such as executive compensation are less driven by market-based forces but more subject to political influence. We study the political determinants of executive compensation for all listed Chinese firms in the context of an exogenous shock that removed market frictions in share-tradability. Under strong political constraints, state ownership reduced the managerial pay levels and increased pay-for-performance sensitivity (to asset-based benchmarks). Board independence and compensation committees do not curb managerial pay, and market-based factors do not have a significant influence. However, these effects reversed following the governance shock (removal of market frictions in share tradability).

The Role of 'Expert Reviewers' in Private Capital Markets
Aggarwal, Reena,Hanley , Kathleen Weiss,Zhao, Xiaofei
We study the role of “expert” reviewers in providing voluntary textual reviews in an unregulated private capital market for initial coin offerings. We show that reviewers are motivated to provide a narrative review as they gain experience and receive more positive feedback from the community. Textual reviews provide information not contained in the expert’s numerical rating. We find that the more positive the textual review the greater the proceeds raised even after controlling for both the reviewer’s and the third-party platform’s numerical rating. Finally, we provide evidence that experts with greater potential conflicts of interest write reviews that are more positive but investors appear to be able to identify these conflicts and discount the impact of their reviews.

The Solution of the Equity Premium Puzzle
Atilla Aras

In this paper, the solution of the equity premium puzzle was given. First, the Arrow-Pratt measure of relative risk aversion for detecting the risk behavior of investors was questioned, and then a new tool was developed to study the risk behavior of investors. This new tool in the new formulated model was tested for the equity premium puzzle for a solution. The results show that the calculated value of the coefficient of relative risk aversion is 2.201455 which is compatible with the empirical studies and as investors who invest in risk-free asset place disutility on the not sure wealth value, investors who invest in equity place utility on the not sure wealth value.

The effect of monetary incentives on sociality induced cooperation
Tatiana Kozitsina,Alexander Chaban,Evgeniya Lukinova,Mikhail Myagkov

This paper examines how the group membership fee influences the formation of groups and the cooperation rate within the socialized groups. We found that monetary transactions do not ruin the establishment of social ties and the formation of group relations.

The socio-economic determinants of the coronavirus disease (COVID-19) pandemic
Viktor Stojkoski,Zoran Utkovski,Petar Jolakoski,Dragan Tevdovski,Ljupco Kocarev

Besides the biological and epidemiological factors, a multitude of social and economic criteria also govern the extent of the coronavirus disease spread within a population. Consequently, there is an active debate regarding the critical socio-economic determinants that contribute to the impact of the resulting pandemic. Here, we leverage Bayesian model averaging techniques and country level data to investigate the potential of 31 determinants, describing a diverse set of socio-economic characteristics, in explaining the outcome of the first wave of the coronavirus pandemic. We show that the true empirical model behind the coronavirus outcome is constituted only of few determinants. To understand the relationship between the potential determinants in the specification of the true model, we develop the coronavirus determinants Jointness space. The extent to which each determinant is able to provide a credible explanation varies between countries due to their heterogeneous socio-economic characteristics. In this aspect, the obtained Jointness map acts as a bridge between theoretical investigations and empirical observations and offers an alternate view for the joint importance of the socio-economic determinants when used for developing policies aimed at preventing future epidemic crises.

What Determines Institutional Investors’ Holdings in IPO Firms?
Michel, Allen,Oded, Jacob,Shaked, Israel
We investigate the manner in which institutional investors' investments in IPO firms are related to IPO characteristics and pre-IPO operating performance. We find that institutions' initial holdings are strongly related to the public float (the fraction of shares floated to the public), but are unrelated to the ratio of primary-to-total shares issued. This suggests that institutions prefer IPOs that are associated with ownership structure change, and are indifferent to whether the motivation behind the IPO is fund raising or original owners' value liquidation. Moreover, initial institutional holdings are unrelated to commonly used measures of pre-IPO operating performance such as return on sales and return on assets. We also find that institutions are predisposed to invest in value firms rather than growth firms.

What Determines the Voluntary Disclosure of CEO Succession Planning?
Ahn, Min Kwan,Joo, Jeong Hwan
An established succession planning program for the identification and grooming of its next leader helps maintain the continuity of firm strategy and leadership style, which influences longterm firm performance and viability. Disclosure of succession planning information may alleviate investors’ doubts about whether the firm has a succession planning plan, while it may increase competition for CEO candidates, leading to increases in the cost of securing qualified candidates. This study explores what determines firms’ decisions to provide this disclosure using firms that initiate CEO succession planning disclosure in a given year and their control firms. We find that firms are more likely to initiate the disclosure of CEO succession planning when 1) segment concentration (negatively related to organizational complexity) becomes lower, 2) the board of directors becomes more independent, 3) the CEO has reached the retirement age of 64, 4) the CEO becomes more important relative to other executive officers in the industry labor market, 5) the number of analysts following (reflecting external monitoring) increases, and 6) CEO tenure (reflecting CEO entrenchment) declines. Overall, our findings suggest that the disclosure of CEO succession planning is motivated by investor demand for a smooth transition among top management and enhanced transparency in CEO succession planning.