Research articles for the 2021-01-09

A Benchmark for Collateralized Loan Obligations
Elkamhi, Redouane,Li, Ruicong,Nozawa, Yoshio
We build a benchmark for AAA-rated tranches of Collateralized Loan Obligations (CLOs) using Business Development Companies (BDCs), which hold a diversified portfolio of loans as CLOs do. However, BDCs are publicly listed, and their share price, equity volatility and borrowing cost are observable. Furthermore, BDCs' debt is not rated as AAA. Applying a structural model to BDCs, we extract market-implied correlation in their loan portfolio, compare spreads on CLO tranches and BDC-implied benchmark, and find that observed large credit spreads on CLO senior tranches after the financial crisis are a fair reflection of the systematic risk of correlated loan defaults.

A Replicating Portfolio Approach to Valuing American Options in Closed-Form
Khan, Muhammad
I derive closed-form expressions for the value of American call and put options (on an asset with continuous yield) using the Feynman-Kac formula, modelling the size of early exercise premium as a function of the strike, dividend yield and time to maturity. Strategies involving European options and binary options on forwards on the asset replicate an American option exactly. Violations of Put-Call parity for American options is also explored in this framework.

Analysts’ Disagreement, Self-Selection, and Stock Returns
Wu, Liang,li, wenyue,Long, Yunshen
Two ex-ante variables are introduced to characterize the analysts’ biased behavior, namely the analysts’ disagreement and self-selection in analysts’ coverage. The study investigates the impact of the analysts’ disagreement and self-selection on the stock returns. A theoretical analysis derives how the stock returns are correlated with the two variables. There are two channels through which the stocks are priced according to the analysts’ disagreements. The first one is the risk channel as the analysts’ disagreement is associated with earning uncertainty. The stock price will be discounted before the actual earnings announcement. The second one is the optimistic bias channel. The optimistic bias channel means that the stock is overpriced if the investors do not correct the analysts’ bias. The self-selection is negatively correlated with the stock return through the optimistic bias channel as more self-selection means more optimistic bias as low forecasting values are not revealed. The empirical analysis using data from the Chinese stock market supports the theoretical conclusion.

Analysts’ Estimates of the Cost of Equity Capital
Balakrishnan, Karthik,Shivakumar, Lakshmanan,Taori, Peeyush
We explore a large sample of analysts’ estimates of the cost of equity capital (CoE) to evaluate their usefulness as expected return proxies (ERP). We find that the CoE estimates are significantly related to a firm’s beta, size, book-to-market ratio, leverage, and idiosyncratic volatility but not other risk proxies. Even after controlling for the popular return predictors, the CoE estimates incrementally predict future stock returns. This predictive ability is better explained as the CoE estimates containing ERP information rather than reflecting stock mispricing. When evaluated against traditional ERPs, including the implied costs of capital, the CoE estimates are found to be the least noisy. Finally, we document CoE responses around earnings announcements, demonstrating their usefulness to study discount-rate reactions of market participants. We conclude that analysts’ CoE estimates are meaningful ERPs that can be fruitfully employed in a variety of asset pricing contexts.

Bank Regulation, Supervision and Liquidity Creation
Kladakis, George,Chen, Lei,Bellos, Sotirios K.
The exposures of the banking system during the financial crisis of 2007-2009 alerted regulators who strengthened their supervision on banks to prevent future problems. Yet, banks need to perform their main function in the economy by creating liquidity and promoting economic growth. Does greater regulation and supervision of banks enhance or impede bank liquidity creation? We use the 2019 Bank Regulation and Supervision Survey published by the World Bank to update five regulation indexes and examine the relationship between regulation and liquidity creation. Our results show that liquidity creation is differentially associated with four regulatory indexes. More specifically, we find that banks create more liquidity in countries with greater official supervisory power and more actions taken against moral hazard associated with deposit insurance, while they create less liquidity in countries with tighter capital regulations and more activities restrictions.

Benefit or Burden? A Comparison of CFO and CEO Outside Directorships
Khan, Sarfraz,Mauldin, Elaine
We study the association between chief financial officer (CFO), compared to chief executive officer (CEO), outside board directorships and their home firm strategic investments, capital management, and overall performance. Using a sample of firms from 2003-2014, we find only about nine percent of CFOs sit on outside boards, while about 24 percent of CEOs sit on outside boards. We find robust evidence that CFO outside directorships are associated with fewer underinvestment problems, lower sensitivity between cash holdings and cash flows, and higher long-term performance at their home firm, consistent with positive knowledge transfer by the CFO. On the other hand, we find little evidence of knowledge transfer for CEO outside board directorships, consistent with concerns that executives are too busy to hold outside directorships. Our findings support a need to recognize that outside directorships could provide benefits for some, but not all, executives. For CFOs our findings support the argument that outside directorships provide CFOs an opportunity to network with and learn from other executives and directors, enabling these CFOs to improve practices in their home firm.

Contract Features and the Informativeness of Insider Trades
Cadman, Brian D.,Széles, Máté
Economic theory predicts that insiders reveal private information when they trade equity in their firm. However, insider purchases to meet equity holding requirements or sales to satisfy liquidity needs do not reveal private information. We predict that contract terms stipulating CEO equity holdings and vesting conditions help market participants unravel the private information revealed by an insider trade. In support of our predictions, we document that the market reaction to a CEO equity trade is greater when the CEO holds a large portfolio of unconstrained equity in the firm. We also find that the one-year abnormal return following a CEO equity sale is significantly more negative when the CEO holds a large portfolio of unconstrained equity. Collectively, we show that publicly disclosed contract features provide context that help investors interpret the information revealed by insider trades and unravel private information.

Convex Combinations in Optimal Judgment Aggregation
Jaspersen, Johannes Gerd
Judgments are the basis for almost all decisions. They often come from different models and multiple experts. This information is typically aggregated using simple averages, which leads to the well-known shared information problem. A weighted average of the individual judgments based on empirically estimated sophisticated weights is typically discarded in practice, because the sophisticated weights have large estimation errors. In this paper, we explore mixture weights, which are convex combinations of sophisticated and naïve weights. We show analytically that if the data generation process is stable, there always exists a mixture weight which aggregates judgments better than the naïve weights. We thus offer a path to alleviate the shared information problem. In contrast to other proposed solutions, we do not require any control over the judgment process. We demonstrate the utility of mixture weights in numerical analyses and in two empirical applications.

Corporate Loan Spreads and Economic Activity
Saunders, Anthony ,Spina, Alessandro,Steffen, Sascha,Streitz, Daniel
We study the predictive power of loan versus bond spreads for business cycle fluctuations. Using a novel credit spread measure derived from the secondary loan market, we show that loan market-based credit spreads have additional predictive power for macroeconomic outcomes (such as employment and industrial production) compared to bond spreads as well as other credit spreads and equity returns, both in the U.S. and Europe. Differences in the composition of firms borrowing in loan or bond markets are important in understanding the differential predictive power of both credit spreads. Industry specific loan spreads predict different industry cycles and can be used to construct alternative weighting schemes which further improve the predictive power of loan spreads.

Creditor Monitoring and Corporate Social Responsibility: Evidence from Covenant Violations
He, Luo,Zhang, Jingjing,Zhong, Ligang
We examine whether and how creditor monitoring affects corporate social responsibility (CSR) activities through the observable event of debt covenant violations. Covenant violations shift the control rights to creditors, allowing creditors to strengthen monitoring on firm policies. Employing a quasi-regression discontinuity design, we document differential effects of creditor monitoring on various components of CSR activities: firms tend to reduce CSR activities related to employee and community welfare, while leaving activities largely intact on the components that can have long-term adverse reputational effects on the firm. We also find that the reduction in CSR activities occurs primarily in situations where managerial agency problems in CSR activities tend to be more severe. Our findings provide evidence that creditors play a role in shaping CSR.

Do Contented Customers Make Shareholders Wealthy? - Implications of Intangibles for Security Pricing
Theissen, Erik,Zimmermann, Lukas
We explore the relation between customer satisfaction and security returns. Firms with high customer satisfaction levels earn significant abnormal returns. This result is robust to variations of model specification and test methodology. Additional tests do not reveal evidence of systematic mispricing. Our results rather suggest that there are, consistent with the model of Eisfeldt and Papanikolaou (2013), sources of risk not covered by standard risk factors. We identify firm characteristics, such as the Hoberg et al. (2014) product market fluidity measure, and macro variables, such as patenting activity and aggregate R&D spending, that are related to these sources of risk.

Does Algorithmic Trading Mean Predictable Prices? Short-Run Weak-Form Efficiency of Indian Stocks
Curran, Edward
This paper examines the short-run weak form efficiency of stocks. We use a proprietary data set and unique orderbook analysis to measure short term price predictability within the spot securities. The results show that high levels of algorithmic trader activity in a stock lowers the level of short run predictability. We also show that within algorithmic traders, proprietary algorithms provide most pricing information.

Does Writing Down Goodwill Imperil a CEO’s Job?
Cowan, Arnold R.,Jeffrey, Cynthia,Wang, Qian
We find that accounting charges for goodwill impairment, which imply a deterioration in the capabilities of acquired assets to generate expected cash flows, provide useful indicators of CEO underperformance. We examine 5,990 firms that completed acquisitions and investigate the relation between CEO turnover and goodwill impairment during 2002â€"2016. The results show that the size of a goodwill impairment charge is positively associated with forced, but not voluntary, CEO turnovers. This implies that goodwill impairment provides information before CEO changes occur. We also find that unexpected goodwill impairment is more informative than expected good-will impairment and is associated with forced CEO turnover. The association between goodwill impairment and forced CEO turnover varies with audit quality, suggesting the perceived reliability of accounting information influences CEO retention decisions. Given that the FASB may eliminate annual goodwill impairment testing (FASB, 2019a), research addressing the informativeness of goodwill impairment charges is timely.

Does the Nationally Recognized Statistical Rating Organization Certification Matter for Japanese Credit Rating Agencies?
Byoun, Soku,Han, Seung Hun,Shin, Yoon S.
The SEC’s NRSRO designation for Japanese credit rating agencies is suitable for examining certification and monitoring effects, as Japanese domestic bond markets are not subject to SEC regulations. We find that the certification increased the market share of new NRSROs (R&I and JCR) compared to that of incumbent NRSROs (S&P and Moody’s). Moreover, bond issues rated by newly certified NRSROs obtained lower yields and their ratings became relatively more informative for predicting the yield spread after the NRSRO designation. Our findings suggest that the NRSRO designation enhances the reputation of newly certified NRSROs and the value of their ratings information.

Equity Factor Investing: Historical Perspective of Recent Performance
Bellone, Benoit,Heckel, Thomas,Soupé, François,Carvalho, Raul Leote de
We investigate the possible sources of the recent underperformance of multi-factor equity strategies reported by many equity quant managers. We considered the value, quality, low risk and momentum factor styles in mid to large-capitalisation World, USA and European stock universes. When looking at the historical performance of the factors and multi-factor combinations, we find that this is not the first time factor strategies have experienced a period of poor performance. The tech bubble of the late 90s and the great financial crisis of 2008 were other difficult periods for some of the factors and multi-factor combinations. What is different this time around is that poor performance can be mainly attributed to the underperformance of value factors. We also find that long-only portfolios, which tend to be exposed to smaller-capitalisation stocks in their construction, have suffered additionally from that exposure. Not only did the size factor fail to generate a premium in mid to large-capitalisation universes in the long term, but also the recent underperformance of smaller-capitalisation stocks and the consequent increase in the concentration of benchmarks was an additional source of difficulty in long-only benchmarked portfolios. Finally, we discuss the impact of a number of choices available to managers of factor strategies and show that the neutralisation of sectors, neutralisation of beta, control of tracking error and diversification of factors in styles play an important role in improving the performance of equity factor strategies.

Estimation of 10-year JGB yields: From 1961 to 1984
Hattori, Takahiro
For historical reasons, 10-year Japanese government bond (JGB) yields, which are often used as the risk-free rate, are not available consistently. This paper estimates 10-year JGB yields from 1961 to 1984. Then, by merging our estimated yields with the official yield data provided by the Japanese government, a 10-year yield series is available for economists from 1961 to the present, which is the same period as the seminal paper presented by Gürkaynak et al. (2007). The yield estimates from this paper are available at:

How Much Are We Willing To Lose in Cyberspace? On the Tail Risk of Scam in the Market for Initial Coin Offerings
Sapkota, Niranjan,Grobys, Klaus,Dufitinema, Josephine
From an entrepreneurial perspective, Initial Coin Offering (ICO) has become an alternative way for attaining funding for business projects using the new evolving digital financial market for tokens. Unfortunately, the majority of all ICOs are subject to scam which casts doubt on this new innovative tool for acquiring funding. Using a unique intensively hand-collected data set covering more than 5000 ICOs which have been launched in the August 2014â€"December 2019 period, we could identify 1014 ICOs exhibiting data on raised funding whereof 576 turned out to be scams projects. The cumulative losses due to scam in the ICO market correspond to $10.12 billion which is 66% of our identified overall market capitalization and highlights the enormous societal impact of this criminal activity. One novel aspect of our study is that it employs a recently proposed methodology based on ‘plug-in estimation’ to quantitatively computing the risk associated with scam in the market for ICOs. Our results suggest that employing naïve statistics in risk management dramatically underestimates this risk. We argue that our findings have important implications for policy makers as they call for an urgent need for ICO market regulations from governments and regulatory agencies to protect investors.

Information Arrival, News Sentiment, Volatilities and Jumps of Intraday Returns
Qian, Ya,Tu, Jun,Petukhina, Alla,Chen, Zilin
This work aims to investigate the (inter)relations of information arrival, news sentiment, volatility and jump dynamics of intraday returns. Two parametric GARCHtype jump models which explicitly incorporate both news arrival and news sentiment variables are proposed, among which one assumes news affecting financial markets through the jump component while the other postulating the GARCH component channel. In order to give the most-likely format of the interactions between news arrival and stock market behaviours, these two models are compared with several other widely used versions of GARCH-type models based on the calibration results on DJIA 30 stocks. The necessity to include news processes in intraday stock volatility modelling is justified in our specific calibration samples (2008 and 2013, respectively). However, our results reject higher profitability of separate jump process modelling compared to a simple GARCH process with error distribution capable of capturing fat tail behaviours of financial time series, what allows to avoid the complicatedness of modelling. Thus, our empirical results suggest GARCH-news model with skew-t innovation distribution as the best candidate for intraday returns of large stocks in the US market.

Intraday Volume Curve Prediction
Dang, Ngoc-Minh
We review some methodologies used to predict the intraday volume percentage curve, the intraday volumes as well as the closing auction volume. The methods can be very simple (average of historical curves), parametric (cubic function) or very sophisticated (linear model with real-time indicators). We use intraday data of CAC40 stocks from 01 April, 2014 to 31 December, 2014 to back-test these methods. We found that the best method to forecast the intraday percentage curve is the cubic method, justifying by volume-based metrics like Mean of Absolute Error (MAE) or Mean of Squared Error (MSE). However, when replacing the metric by the tracking error (TE), the non-linear model, fitting a regression tree with real time indicators, performs better than the others. It reduces the mean and median of TE 2%, compared with the historical median method. Concerning the prediction of raw volumes, the polynomial with correction outperforms the others in reduction the MAE 25% in mean and 31% in standard deviation compared to the historical method. The same method also provides the best forecast for closing volume. Evidence confirming the robustness of the improvement is also discussed and provided.

Investors Behavior Under Growing Financial Market Uncertainty.
Milovidov, Vladimir
The author analyzes the statistics of words and phrases related to financial market trading practices in millions of volumes from Google's book collection and available at Google Ngram Viewer. In recent almost 30 years, as the analyzed data shows, the scholars and practitioners' interest in the specific market strategies and technique shifted toward those more automotive, aggressive, speculative, but less dependent on fundamental analysis, information and data processing, and investors' reasoning and research. This shift may indicate the increasing share of unsophisticated investors trying to cover the lack of experience and professional knowledge through extensive use of technology-supported strategies. In a long-run perspective, this may generate the growth of market instability, risks, and uncertainty.

Is Literacy a Multi-dimensional Concept? Some Empirical Evidence
Panos, Georgios A.,Kromydas, Theocharis,Osborne, Michael,Wright, Robert E.
Literacy is a multi-dimensional concept. In this chapter, seven potential dimensions of literacy are considered: (1) Mathematical literacy, (2) Foreign language literacy, (3) Digital literacy, (4) Financial literacy, (5) Political literacy, (6) Environmental literacy, and (7) Health literacy. Data from the Glasgow-based Integrated Multimedia City Data (iMCD) project included information that allows for the operationalization of these dimensions. Multiple-regression analysis is used to explore the correlates of these dimensions of literacy. One key finding is that there are gender differences in all the dimensions of literacy. There are large advantages in favour of males with respect to political, digital, financial, and environmental literacy, health and mathematical literacy. The only advantage in the favour of females is foreign language literacy.

Lend Me a Hand - Bank Market Power and Firm Creation in Innovative Industries
Core, Fabrizio
This paper studies how bank market power affects firm creation in innovative industries. Theoretically, I show that the effect of bank market power is ambiguous. I exploit a 2012 policy intervention in Italy, designed to foster firm creation in innovative industries through public bank guarantees. The policy increased firm creation in innovative industries by 50%, but the increase is more than halved in provinces where banking competition is weaker. I propose a new way to parsimoniously measure bank market power and competition at the local level, and I use both a difference-in-difference-in-differences (DDD) design and an Instrumental Variables (IV) approach on a dataset of newly incorporated firms in Italy between 2010 and 2015. I document that what drives the result is a weaker increase in the amount of guaranteed credit extended to innovative industries by banks. I conclude that banking competition is an important factor for the design of policies to foster innovative firm creation.

Local Boy Does Good: CEO Birthplace Bias and Corporate Social Responsibility
Lei, Zicheng,Petmezas, Dimitris,Rau, P. Raghavendra,Yang, Chen
We examine the effect of CEO birthplace bias on firm corporate social responsibility (CSR) activities. CEOs with strong place identities, heading firms located in their home birth counties, are associated with higher levels of CSR at their firms. The relation is more pronounced for CEOs with deeper home connections. CSR activities by home CEOs are associated with significant increases in firm value. The effect persists after controlling for corporate governance metrics. Additionally, home CEOs do not appear to extract private benefits, either directly or indirectly, from these activities. Overall, non-monetary emotional place identity channels appear to affect CSR.

Modeling Tail Risk in Portfolio Selection: Selected Iranian Food Industry Companies
Mojtahedi, Fatemeh,Mojaverian, Seyed Mojtaba
This study extends the extreme downside hedge (EDH) methodology to model the tail risk co-movement of financial assets in terms of systemic risk as constraint to select an optimal portfolio among the Food Industry Companies of Tehran Stock Exchange (TSE). The empirical application investigates: 1) is the optimal portfolio by considering tail risk different from the model without risk in terms of diversification. 2) Is the optimal portfolio by considering tail risk better the model without risk in covering the risk? At the end, the efficiency of the models was examined by a short-term forecast based on the real data of the stock market. We sampled the time series of 11 manufacturing companies in the food industry which are publicly listed on the Tehran Stock Exchange (TSE). The data covers daily close prices from October, 2015 to April, 2020. The result shows in all periods and for all degrees of risk aversion coefficient, portfolio by considering the downside risk has less risk than Markowitz model and which can indicate the superiority of this model over Markowitz model.

Multiscale Intertemporal Capital Asset Pricing Model
Sakemoto, Ryuta
This study investigates the multiscale intertemporal capital asset pricing model. We focus upon differences across timescales since they represent heterogeneities of investors in markets. This study employs a wavelet approach to decompose return data into multiple timescales. Furthermore, we impose a same risk-aversion parameter constraint into all portfolios, which is proposed by Engel and Bali (2010) who show that the constraint provides a reasonable equity risk premium at a daily frequency. We observe positive relations between the expected returns on portfolios and the covariance of the market at a daily frequency, while these relations change as timescales increase. We find that a negative risk-return relation, which might be related to a correction process of overreaction at an approximately weekly frequency (2 days to 16 days). The strongest positive relation is observed at an approximately monthly frequency (16 to 32 days). Monthly portfolio rebalances are widely used and might impact stock market return patterns. The equity risk premium in the longer frequency ranges from 8.64% to 11.10%. Our results are robust after controlling for macroeconomic variables, market implied volatility and test portfolios. Moreover, we investigate size and value factors and reveal that the risk premia disappear in the longer frequency, which suggests that Intertemporal CAPM is satisfied.

On the Tail Risk of Cyberattacks in the Bitcoin Market
Grobys, Klaus,Dufitinema, Josephine,Sapkota, Niranjan
In the era of digitalization, cryptocurrencies have become an alternative asset for both retail and institutional investors. While the new emerging digital ecosystem based on blockchain technology has been praised for offering plenty of advantages such as decentralization, discretion or increased efficiency in terms of faster settlements among others, investors need to be aware of new types of risks such as hacking incidents. In the 2011-2018 period, about 1.7 million unit of Bitcoin have been stolen corresponding to losses accumulating more than $655 million highlighting the societal impact of this criminal activity. The novel aspect of our study is that it employs a recently proposed approach related to Extreme-Value-Theory to compute the quantity of the risk of cyberattacks. Our results show that employing naïve statistics in risk management dramatically underestimates this risk. We argue that our findings have important implications for policy makers as they call for an urgent need for cryptocurrency market regulations from governments and regulatory agencies to protect investors.

Organization Capital and Executive Performance Incentives
Gao, Mingze,Leung, Henry,Qiu, Buhui
We conjecture that a firm’s organization capital (OC) has a substitution effect on its executive pay-for-performance sensitivity (PPS) and empirically document a robust and significant substitution effect of OC on executive PPS. We use state-level unemployment insurance benefits as an instrumental variable for OC and show that the documented OC-PPS substitution effect is likely causal. Results are also robust to a stacked difference-in-differences estimation approach based on a quasi-natural experiment of exogenous CEO turnovers due to health-related issues. Our findings strongly suggest that greater OC substitutes for costly executive incentive compensation to sustain firm productivity and increase shareholder wealth.

Partisan Professionals: Evidence from Credit Rating Analysts
Kempf, Elisabeth,Tsoutsoura, Margarita
Partisan perception affects the actions of professionals in the financial sector. Linking credit rating analysts to party affiliations from voter records, we show that analysts who are not affiliated with the U.S. president's party downward-adjust corporate credit ratings more frequently. Since we compare analysts with different party affiliations covering the same firm in the same quarter, differences in firm fundamentals cannot explain the results. We also find a sharp divergence in the rating actions of Democratic and Republican analysts around the 2016 presidential election. Our results show analysts' partisan perception has price effects and may influence firms' investment policies.

Persistent Crises and Levered Asset Prices
Kuehn, Lars-Alexander,Schreindorfer, David,Schulz, Florian
We rationalize the joint behavior of aggregate consumption, asset prices, and financial leverage by incorporating persistent macroeconomic crises into a structural credit risk model. As in the data, longer-lasting crises are associated with more severe macroeconomic contractions and larger increases in leverage ratios, credit risk, and return volatility. Leverage provides a strong propagation mechanism for fundamental shocks because it continues to rise while crises endure. The model replicates the firm-level implied volatility curve and its cross-sectional relation with observable proxies of default risk. Lastly, a structural estimation reveals that common idiosyncratic risk is an important driver of credit spreads.

Policy Gradient Methods for the Noisy Linear Quadratic Regulator over a Finite Horizon
Hambly, Ben M.,Xu, Renyuan,Yang, Huining
We explore reinforcement learning methods for finding the optimal policy in the linear quadratic regulator (LQR) problem. In particular we consider the convergence of policy gradient methods in the setting of known and unknown parameters. We are able to produce a global linear convergence guarantee for this approach in the setting of finite time horizon and stochastic state dynamics under weak assumptions. The convergence of a projected policy gradient method is also established in order to handle problems with constraints. We illustrate the performance of the algorithm with two examples. The first example is the optimal liquidation of a holding in an asset. We show results for the case where we assume a model for the underlying dynamics and where we apply the method to the data directly. The empirical evidence suggests that the policy gradient method can learn the global optimal solution for a larger class of stochastic systems containing the LQR framework and that it is more robust with respect to model mis-specification when compared to a model-based approach. The second example is an LQR system in a higher dimensional setting with synthetic data.

Rich on Paper? Chinese Firms’ Academic Publications, Patents, and Market Value
Hsu, David H.,Hsu, Po-Hsuan,Zhao, Qifeng
By combining various databases of academic publications and patents of China’s publicly listed firms, we explore the effects of academic publications on firm values and possible mechanisms. We find that Chinese firms’ academic publications are positively associated with their market valuation; more importantly, such a positive relation is more pronounced when these firms have stronger patent records, highlighting a synergy between basic research and applied technologies. Mechanism tests indicate that firm’s academic publications promote their market values through enhancing their human capital and sending credible signals to professional investors and the general public. Additional tests show that publications in English-language journals are more value-relevant than in Chinese-language journals.

Social Networks and Corporate Social Responsibility
Alves, Rómulo
I show that corporate social responsibility (CSR) spreads through the social networks of firms' directors. This result is obtained using a novel identification strategy exploiting the imperfect overlap between industry, geographic and social peers, a diff-in-diff relying on directors' deaths, and a regression discontinuity design based on CSR proposals. Social network effects are concentrated in firms pursuing product differentiation strategies for which CSR is more likely to add value, firms strategically positioned in the social network to acquire valuable information, and firms in which the incentives of managers and shareholders are aligned. This suggests that some firms aim to create value by using social networks as a market for information exchange on CSR. I find little evidence for alternative explanations such as social norms.

The Effect of Top Management Team Turnover and Local Market Characteristics on Financial Reporting Risk
Bills, Kenneth L.,Harding, Michelle,Seidel, Timothy A.,Truelson, J. Mike
Upper echelon theory posits that defining, executing, and overseeing an organization’s strategy is a shared activity among top executives. Based upon this perspective, we expect turnover among the members of a firms’ top management team (TMT) other than the CEO and CFO to result in significant disruption to an organization’s operations, leading to greater uncertainty regarding its future performance, execution of operational strategies, and financial reporting decisions. In this study, we explore whether TMT turnover affects stakeholders’ perceptions of financial reporting risk. We find that TMT turnover is positively associated with audit fees which reflects auditors’ and audit committees’ assessments of financial reporting risk. Importantly, building upon labor economics literature, we find that TMT turnover’s effect on stakeholders’ perceptions of financial reporting risk is greater for companies headquartered where there are more limited local labor pools and companies that are market leaders in their local areas or industries. Further analyses suggest that increased audit fees offset deterioration in financial reporting quality as TMT turnover increases.

The Effects of Financial and Operational Hedging on Company Value: The Case of Malaysian Multinationals
Hadian, Azadeh,Adaoglu, Cahit
This study examines the value effects of financial and operational hedging in a managed floating exchange rate regime with strict limitations on the trading of Malaysian Ringgit for a sample of 109 Malaysian multinationals from 2004 to 2018. Using Tobin’s Q as a proxy for company value, the two-step system GMM estimation results show that, on average, derivatives hedging creates a value premium range of 7.88-8.21% in the short-run, and 18.81-19.80% in the long-run. This value premium emerged both after controlling for non-operational foreign exchange profits (losses), and its two components: transaction and translation profits (losses). In contrast, foreign debt hedging, on average, creates a value discount range of 8.19-8.54% in the short-run and 12.70-13.12% in the long-run. No evidence shows value effect for operational hedging though. The positive value effect of derivatives hedging should motivate managers of Malaysian multinationals to hedge foreign currency exposure through derivatives and encourage policymakers to take steps in developing derivatives market and products. However, the negative value effect of foreign debt hedging indicates that it destroys value. This negative effect might reflect two potential causes; higher company risk due to FC debt financing, and improper hedging practices including high costs of hedging in the underdeveloped derivatives market. These potential causes need further empirical evaluations.

The Hemispheres of Finance: GDP and Non-GDP Finance
Huber, Joseph
This paper examines the interplay between one hemisphere of the financial economy that contributes to financing real-economic output, while the other deals self-referentially with capital management and financial asset management, in short, GDP finance and non-GDP finance. Since around 1980, there has been a significant GDP-disproportionate expansion in non-GDP finances, based on the credit-borne expan¬sion of the money supply by banks, central banks and shadow banks, and resulting in problems of instabi¬lity and new disparities that cannot to be remedied by conventional measures alone.

Universal Banking, Optimal Financing Structure, and Banking Regulations
Chang, Chun,Li, Xiaoming,Wang, Yiyao
We study how universal banking, that is, allowing banks to take equity positions in firms to which they lend, affects optimal financing structure and social welfare. Financing a firm through equity holding can improve a bank’s risk-taking incentive in restructuring the firm in bad times, but it is costly due to information asymmetry about the firm payoff in good times. We show a small increase in firm quality or bank capital ratio can cause the financing contract to switch from too much equity holding to too much debt financing, resulting in substantial welfare loss. Therefore, an equity holding restriction aiming at limiting banks’ excessive risk-taking may reduce welfare by overcorrecting the problem, and the optimal capital ratio may inevitably induce too much risk-taking.

Using Simple Technical Analysis Indicators for Asset Allocation Decisions
Foltice, Bryan,Dolvin, Steven D.
This study analyzes the potential effectiveness of using simple technical analysis indicators to determine the overall riskiness of portfolio asset allocation. Using the 200-day simple moving average of the S&P500 as our technical indicator in two separate strategies, we employ a “risk-on” asset allocation strategy (more portfolio allocation in stocks as a percentage) when the S&P500 is above the indicator line and a “risk-off” strategy (less stock/more bond allocation) when below. We compare the “buy and hold” returns of various portfolio allocations in the U.S. stock and bond markets from 1962-2017. In the initial analysis, we find that following this rule with the 200-day simple moving average provides excess annual returns of up to 0.59%, with all analyzed allocation combinations posting both excess returns and a reduction in overall risk for all analyzed allocation combinations, with all 200-day strategies posting an increase in Sharpe ratios when compared to their baseline “buy-and-hold” strategy.

Weak Incentives for Audit Quality: Evidence from Broker-Dealers
Kowaleski, Zachary T
Much of the literature develops theory using audits of publicly owned companies with agency costs that create demand for audit quality. In contrast, I study auditor size and industry specialization in the broker-dealer (BD) industry, where entities have weak incentives to demand and supply high audit quality. Using proprietary data, I test whether larger firms and industry specialists provide better audit quality, as proxied by audit adjustments. Consistent with theory, I find that larger firms provide higher audit quality. In contrast, industry specialists perform worse than non-specialists; industry specialist partners in small firms drive this result. These findings suggest that clients with weak demand for auditing hire low quality auditors, who in turn gain market share in the industry. Overall, my findings illustrate the importance of considering clients’ demand for auditing when evaluating audit quality and industry specialization.