Research articles for the 2020-11-20

Bank Efficiency and Stock Returns in the Turkish Stock Market: A Two-stage Analysis Approach
Kale, Süleyman,Eken, Mehmet Hasan,Kaya, Gokce
This study researches the effects of bank efficiency changes of returns in Turkish stock markets using a two-stage model for the period of 2002-2017. First, Malmquist Productive Index is employed to measure the different dimensions of efficiency; then, static and dynamic panel data models are used to investigate the effects of efficiency changes. First stage indicates that efficiency increased until 2010, and then a considerable decrease was observed. Second stage proves that together with market itself efficiency change has explanatory power on stock return. Effect of increase in profitability efficiency is positive in the long run while effect of inter-mediation is positive in the short but negative in the long run. This may be explained with the side effects of increasing inter-mediation in the short run as the increasing non-performing loans and decreasing profitability in the long run.

Closing Auctions: Information Content and Timeliness of Price Reaction
Wu, Yanbin,Jegadeesh, Narasimhan
Closing auction volume currently accounts for about 11% of the total trading volume. ETF arbitrage trades significantly contribute to this growth, but these trades likely constitute less than 15% of the closing auction volume. The to-close return for the decile of stocks with the largest buy order imbalances in closing auctions is 32 basis points greater than that for the decile with the largest sell order imbalances. About 83% of the return difference reverses over the next 3â€"5 days. Trading strategies that exploit this phenomenon are significantly profitable.

Corporate Stakeholders, Corporate Valuation, and ESG
Cornell, Bradford
In an article published in 1987, we explained how corporate stakeholders, including customers, employees, suppliers, and distributors, influence financial policy and corporate behavior and why corporations have an incentive to treat these non-investor stakeholders fairly. At the heart of this explanation is the recognition that there are two fundamentally different classes of claims on a corporation. The first and most familiar are explicit contractual claims. These include employment contracts, bond indentures, product warranties, and the like. The second are implicit claims. Examples include fair treatment of employees, promise of continuing service to customers, and honest dealing with suppliers and distributors. Corporate stakeholders, all of whom have business relationships with the companies whose implicit claims they hold, value these implicit claims and are therefore prepared to pay for them. Corporate value is created by selling these implicit claims for more than it costs to honor them. More recently, a new class of non-investor stakeholders has arisen, related to Environmental, Social, and Governance (ESG) issues, but with no business relationships with the companies they are making demands on. Although many ESG advocates stress their role in creating shareholder value, they provide no explanation for how this value creation occurs. In this paper, we show that implicit claims provide a critical link that ties non-investor stakeholders and ESG to shareholder value. We show why many of the demands placed on corporations by ESG advocates, in the name of corporate social responsibility, interfere with the sale of implicit claims to corporate stakeholders and may thereby destroy shareholder value.

Deep Learning for Digital Asset Limit Order Books
Jha, Rakshit,De Paepe, Mattijs,Holt, Samuel,West, James,Ng, Shaun
This paper shows that temporal CNNs accurately predict bitcoin spot price movements from limit order book data. On a 2 second prediction time horizon we achieve 71% walk-forward accuracy on the popular cryptocurrency exchange coin-base. Our model can be trained in less than a day on commodity GPUs which could be installed into co-location centers allowing for model sync with existing faster order-book prediction models. We provide source code and data at

Due Diligence
Daley, Brendan,Geelen, Thomas,Green, Brett
Due diligence is common practice prior to the execution of corporate transactions. We propose a model of the due diligence process and analyze its effect on prices, the division of surplus, and efficiency. In our model, if the seller accepts an offer, the winning buyer (the acquirer) has the right to gather information and chooses when (if ever) to execute the transaction. Our main result is that the acquirer engages in “too much” due diligence relative to the social optimum. Nevertheless, allowing for due diligence can improve both total surplus and the seller’s payoff compared to a setting with no due diligence. The optimal contract involves both a price contingent on execution and a non-contingent transfer, resembling features such as earnest money or break-up fees that are commonly observed in transactions involving due diligence.

Enhancing CSR Disclosure through Foreign Ownership, Foreign Board Members, and Cross-Listing: Does It Work in Russian Context?
Garanina, Tatiana,Aray, Yulia
This paper examines whether foreign shareholders, foreign board members, and cross-listing, are related to corporate social responsibility (CSR) disclosure in Russia. A sample of 223 Russian listed companies is analyzed for the period 2012â€"2015. In line with legitimacy theory and agency theory, our empirical results demonstrate that foreign board members and cross-listing help companies to raise their accountability through increased CSR disclosure. At the same time we report that foreign ownership does not enhance CSR disclosure, as the majority of foreign shareholders of Russian companies are registered in offshore domiciles that are used for more efficient tax allocation.

Financial Capacity and the Demand for Audit Quality
Lim, Chee Yeow,Lobo, Gerald J.,Rao, Pingui,Yue, Heng
Prior research documents that financial capacity could be positively or negatively associated with the demand for audit quality. We re-examine this relation using changes in local real estate prices as exogenous shocks to corporate financial capacity. Using auditor size, auditor industry specialization, and auditor fees as measures of audit quality, we find robust evidence that an increase (decrease) in financial capacity significantly reduces (increases) the demand for audit quality, and that this relation is more pronounced when firms are more financially constrained, when external monitoring by institutional investors and financial analysts is weaker, and when there is more negative news about real estate price changes. Our study enriches the related literature by describing a more complete and dynamic relationship between audit quality and financial capacity.

Hedging, Liquidity, and Productivity
Chen, Guojun,Lu, Zhongjin,Vij, Siddharth
We study the effects of liquidity and productivity on corporate hedging decisions using a comprehensive dataset of oil and gas producers. Over a longer sample period than prior literature, we discover that hedging intensity is positively correlated with unrealized hedging gains and output prices, but negatively with operating cash flows. These new empirical patterns together challenge existing risk management models as unrealized hedging gains represent an unexpected shock to internal liquidity, while both operating cash flows and output prices are positively related to productivity. Incorporating procyclical collateral capacity and production-dependent depreciation into existing models can explain our empirical findings.

How Venture Capitalists Bet: Evidence from Two Randomized Controlled Trials
Zhang, Ye
Understanding the importance of both human and non-human assets in firms' early-stage financing process is crucial to examining theories of the firm. However, it is difficult to empirically generate causal evidence due to data limitations and the lack of exogenous variations. This paper uses two randomized controlled trials with real venture capitalists mainly from the U.S. to identify characteristics of both the project and their teams that causally affect venture capitalist funding. Specifically, I also check their relative importance on investors' decisions. I find that multiple team characteristics (i.e. founder's educational background and previous entrepreneurial experiences) and project characteristics (i.e. traction, business model, location, comparative advantages, etc.) causally affect investors’ contact and investment interests by influencing their evaluation of startups' potential financial returns, risk, and loyalty. Although project traction matters the most in my experimental setting, it is fundamentally the investors' belief in the startup’s profitability that matters the most. I also find the traditional correspondence test method, to an extent, inappropriate in testing the significance of project characteristics in virtue of the different "signal-to-noise ratio" problem.

In Sickness and in Wealth: The Impact of Leaders' Health on Markets
Manuel, Manuel R,Hernandez-Lagos, Pablo,Reyes, Tomas
We study the effect of head of states' health on markets. We collect data on unexpected exits from office to determine whether these exits affect stock market returns across countries between 1923 and 2015. Health problems precede almost all unexpected exits. Unexpected exits lead to about 1% abnormal return, due mainly to extreme positive jumps following exits of autocrats and non-college leaders. To identify citizens' awareness of a leader's health problems, we collect data on rumors about health issues emerging prior to the leader's exit. The start of rumors generates about 1% negative abnormal returns. The health of leaders matters.

Inflation, Investment and Valuation
Cornell, Bradford ,Gerger, Richard,Jarrell, Gregg A.,Canessa, James
In any context where a discounted cash flow valuation is required, there is the issue of estimating the continuing value. The most common way to do that is to assume that by the terminal horizon the company is in a steady state and is growing at a constant rate. The issue is how to handle inflation. The problem is that it is often done wrong and the impact is typically material. Because there remains significant confusion, in this paper we simplify the analysis by isolating the two key issues and providing example calculations. We show that even at the current 2% level proper treatment of inflation has a size-able impact on valuation. If inflation were to accelerate as a result of current monetary and fiscal policies, the significance of this issue will increase.

Insurance Pricing, Distortions, and Moral Hazard: Quasi-Experimental Evidence from Deposit Insurance
Shoukry, George
Risk-based insurance pricing is often used to address ex ante moral hazard. However, very few studies analyze the effects of differential pricing on insured firms’ behavior or evaluate whether risk-based pricing is effective at mitigating ex ante moral hazard in practice. I exploit a quasi experiment in which deposit insurance premiums were changed for all U.S. banks with staggered timing, generating differentials between banks in both the levels and the risk-based “steepness” of insurance premiums. I find evidence that differentials in premiums resulted in distortions, including regulatory arbitrage, but also provided strong incentives to curb moral hazard. In addition, I find that firms that faced stronger pricing incentives to become (or remain) safer were more likely to subsequently do so than similar firms that faced weaker pricing incentives. The results point to the effectiveness of risk-based pricing and the need that it be governed with robust laws and regulatory controls.

Interbank Networks in the Shadows of the Federal Reserve Act
Anderson, Haelim,Erol, Selman,Ordoñez, Guillermo
Central banks offer public liquidity to banks (through lending facilities and promises of bailouts) with the intention of stabilizing the financial system. However, shadow banks may receive access to that liquidity through an interbank system. We build a model that shows that the public liquidity provision of the Federal Reserve Act increased systemic risk through three channels: by reducing aggregate liquidity, by expanding the whole-sale funding market, and by crowding out the private insurance that had previously served to smooth cross-regional liquidity shocks. Then, using unique data on Virginia state banks that contain detailed disaggregated information on interbank deposits and short-term funds, we show that the introduction of the Federal Reserve System changed the structure and nature of the overall interbank network in ways that are consistent with the model.

Internet Appendix to `Forecasting Uncertainty of the Oil Future Prices via Machine Learning'
Kim, Byung-June,Kim, Taeyoon,Jang, Bong-Gyu
The Internet Appendix consists of three sections. Section A shows data sources and detailed data processing procedures. In Section B, we outline seven forecasting models. Last, Section C represents the empirical results.

Monitor Reputation and Transparency
Marinovic, Ivan,Szydlowski, Martin
We study the disclosure policy of a regulator overseeing a monitor with reputation concerns. The monitor faces a manager, who chooses how much to manipulate based on the monitor’s reputation. Reputational incentives are strongest for intermediate reputations. Instead of providing transparency, the regulator’s disclosure policy aims to keep the monitor’ s reputation intermediate, even at the cost of diminished incentives. Beneficial schemes feature random delay. Commonly used ones, which feature immediate disclosure or fixed time delay, destroy reputational incentives. Surprisingly, the regulator discloses more aggressively when she has better enforcement tools.

On the Purchasing Power of Money in an Exchange Economy
Radwanski, Juliusz F.
It is shown that completely unbacked fiat money issued by generic supplier implementing realistically specified monetary policy designed to obey certain sufficient conditions is endogenously accepted by rational individuals at uniquely determined price level. The model generalizes the asset-pricing framework of Lucas (1978) to economy with frictions and specialization in production, without imposing the cash-in-advance constraint. The uniqueness of equilibrium is the consequence of complete characterization of both the environment, and the equilibrium concept. In particular, rational consumers are allowed to perceive and exploit arbitrage opportunities associated with the existence of money as easily traded object. The results challenge the view that the value of money is inherently unstable absent active policy intervention, or that money can become worthless only by self-fulfilling expectations. Monetary policy canonically features two dimensions, one of which corresponds to nominal interest rate, and the other to continuous helicopter drop of net worth, which can be implemented as universal basic income.

Online Appendix for: 'Corporate Innovation in the Cyber Age'
Lattanzio, Gabriele,Ma, Yue
This document reports additional tables discussed in the paper “Corporate Innovation in the Cyber Age”. This tables complements those included in our study. In particular, Table OA.I extends Table I, in the paper, by reporting a long list of recent working paper investigating the financial and economic consequences of data breaches. Table OA.II documents that 10K disclosures based measures of cyber-security risk predicts data preaches using non-linear model and no fixed effects. Table OA.III confirms that our R&D results are robust to dropping observations with missing R&D, as well as to the use of the Koh and Reeb (2015) to predict the value of missing R&D values. Finally, Table OA.IV confirms that the successful cyber attacks targeting rivals cause a significant increase in a firm’s cyber-security risk level.

Post COVID-19 SME Financing Constraints and the Credit Guarantee Scheme Solution in Spain: A Note
Corredera-Catalán, Felix,di Pietro, Filippo,Trujillo‐Ponce, Antonio
Countries around the world are working hard to fight against the economic crisis caused by the coronavirus pandemic, with special emphasis on small- and medium-sized enterprises (SMEs) due to their vulnerability and importance in the business ecosystem. This paper analyzes the Spanish guarantee model and the measures taken by the main mutual guarantee societies (MGSs) to mitigate the economic problems associated with the COVID-19 pandemic. We conclude that public administrations may use guarantee schemes as instruments to improve SME access to financing while limiting the burden on the public budget.

Real Effects of a Widespread CSR Reporting Mandate: Evidence from the European Union’s CSR Directive
Fiechter, Peter,Hitz, Joerg-Markus,Lehmann, Nico
In 2014, the European Union (EU) passed a corporate social responsibility (CSR) directive that mandates large listed firms to prepare annual non-financial reports, beginning from fiscal year 2017 onward. We examine whether firms within the scope of the directive (hereafter, “treated firms”), in line with the stated regulatory intent, increase their CSR activities in response to the disclosure mandate. Consistent with such real effects, our results from a difference-in-differences test document that treated firms on average increase their CSR activities in response to the regulation, and that they start doing so already before the disclosure mandate comes into force in 2018. We show that real effects are concentrated in firms that are more strongly affected by the disclosure mandate (i.e., firms with pre-directive low levels of CSR and CSR disclosures). Ensuing analyses reveal that affected firms also alter their CSR infrastructure, which is consistent with the regulatory intent of nudging firms’ business models towards CSR orientation. Finally, we show that our real effects cluster in firms from EU jurisdictions that had relatively weak CSR-related institutions in place at the time the directive was passed. This “catching up” effect speaks to the EU policymaker’s objective of harmonizing EU firms’ CSR disclosures. Taken together, our study demonstrates that widespread adoption of a CSR disclosure mandate creates real effects across industries and jurisdictions, and it does so even before the entry-into-force date.

Sample Size Determination for Credibility Estimation
Hong, Liang
The credibility estimator has been successfully and widely applied by practitioners in the insurance industry for decades. However, an important issue remains unresolved: what sample size should the actuary take when he/she applies the credibility estimator? In particular, is the size of a given claims data set large enough for the credibility estimator to be accurate? This paper aims to address this issue by first suggesting a sample size criterion for the credibility estimator and then proposing a sample size based upon that. The proposed sample size is easy to apply, and it guarantees provably accuracy for credibility estimation.

Shared Destinies? Small Banks and Small Business Consolidation
Brennecke, Claire,Jacewitz, Stefan,Pogach, Jonathan
The industrial and banking sectors have each seen consolidation over the past fifteen years, with small institutions representing an ever-shrinking share. Existing literature argues that small banks' comparative advantages lie in small-business finance. We argue that some of the consolidation in the banking sector is a consequence of changes to the industrial organization of the real economy. We use a Bartik instrument and variation in exposure to industries with different patterns of small-business growth to show that the real-side demand for small-business finance is partially responsible for the relative decline in the deposits, income, and loan growth at small banks. We do not find that small-business growth impacts large banks nor do we find that large-business growth affects small banks. The results are predominantly driven by the propensity of small banks to be acquired.

Stressed Banks? Evidence from the Largest-Ever Supervisory Review
Soto, Paul E.,Abbassi, Puriya,Iyer, Rajkamal,Peydró, José-Luis
Regulation needs effective supervision; but regulated entities may deviate with unobserved actions. For identification, we analyze banks, exploiting the European Central Bank’s asset-quality-review (AQR) and supervisory security and credit registers. After the announcement of the AQR, reviewed banks reduce riskier securities and credit (also overall securities and credit supply), with the largest impact on riskiest securities (rather than riskiest credit), and with immediate negative spillovers on asset prices and firm-level credit supply. Exposed (unregulated) nonbanks buy the risk that reviewed banks shed. The AQR drives the results, not end-of-year effects. After the AQR compliance, reviewed banks reload riskier securities, but not riskier credit, with medium-term negative firm-level real effects (costs of supervision/safe-assets increase).

The Joint Effects of Economic Policy Uncertainty and Firm Characteristics on Capital Structure: Evidence From US Firms
Li, Xiaoming,Qiu, Mei
This study explores empirically how economic policy uncertainty (EPU) and firm characteristics jointly affect the capital structure decisions of US firms. Using the most comprehensive measure of EPU available, we conceive a research framework by allowing EPU to interact with firm characteristics in dynamic panel regression models, and control for general economic uncertainties and financial crises. Our results reveal that EPU and firm characteristics are jointly important in shaping companies’ debt-financing decisions. The marginal effects of a firm’s characteristics on debt ratios are not constant but change with EPU even in their signs. The marginal effect of EPU on debt ratios is not uniform in the cross-section due to firms having different characteristics and can be positive for some firms while negative for others. However, on average, a rise in EPU would cause economically significant declines in the debt ratios of firms.

The impacts of the global financial crisis on the real economy, economic policies and academic debates
Alfazema, Antonio
The years preceding the crisis were characterized by strong global growth and relatively stable and low inflation in most countries. Growth was driven by significant increases in productivity in many countries, which, combined with the further integration of developing countries into the global economy and a strong expansion of trade, allowed prices to remain relatively stable for several years. The Article presents a summary of the facts that guided the global financial crisis, affecting the growth of the economy as a whole. Academics are unanimous in stating that the contours of the crisis stem from several combined factors, in the failure to comply with some basic rules, as the crisis can be relatively manageable if assets and liabilities are denominated in the country's currency.

Von Reagan lernen â€" Wirtschaftsexperten misstrauen? (Learn from Reagan â€" Suspect Economists?)
Straus, Joseph
German Abstract: Unter dem Titel „Von Reagan lernen“ haben in der Wochenzeitung „Die Zeit“ vom 18. Dezember 2019 die Ökonomen Kai Konrad und Jörg Rocholl einen Vorschlag zur nachhaltigen Belebung der deutschen Wirtschaft unterbreitet. In Anlehnung an Reagan schlagen sie vor, Unternehmen zu erlauben, „Investitionen sofort oder zumindest deutlich beschleunigt gegen Gewinne zu verrechnen â€" und nicht erst dann, wenn die Investitionsgüter sich tatsächlich verbrauchen“. Reagan habe damit den USA einen gewaltigen Boom beschert. Der Vorschlag ist überzeugend begründet und wird hoffentlich bei den für die deutsche Wirtschaft Verantwortlichen die nötige Beachtung finden. Den eigentlichen Grund für den vorliegenden Beitrag liefert allerdings nicht der Inhalt, sondern der Titel des Zeit-Artikels, der nicht nur an Ronald Reagan und seine wirtschaftsrelevanten Positionen erinnert, sondern Anlass dazu bietet, auch an Reagans Einschätzung der Rolle der Ökonomen in der Politik zu erinnern und sich mit einigen aktuellen Fragen der Ökonomie, wie Negativzinsen und Abschaffung des Bargeldes, auseinanderzusetzen.English Abstract: Under the title “Learn from Reagan”, the economists Kai Konrad and Jörg Rocholl in the weekly newspaper “Die Zeit” of 18 December 2019 published a proposal for a sustainable stimulation of the German economy. Following Reagan, they proposed to allow companies “to offset their investments immediately, or at least significantly accelerated, against their profits â€" and not only then, when the capital goods are actually used up.” Thanks to Reagan’s move, the USA had experienced an enormous boom. The proposal is convincingly reasoned and will hopefully enjoy the necessary attention by those responsible for the German economy. The actual reason for this contribution, however, is not the substance of “Die Zeit” article, but its title. It does not only remind us of Ronald Reagan’s economy relevant positions, but gives reason to recall Reagan’s assessment of the role, economists play in the politics. Moreover, also to address some topical issues of the current economy, such as negative interest rates or ideas on abolition of cash.