Research articles for the 2021-02-12
Are Women Underpriced? Board Diversity and IPO Performance
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Over the last decade, practitioners have used economic arguments to claim that gender diversity has a positive impact on firm value. If we focus on the initial returns to U.S. firms going public over this period with bulge bracket investment bank advisors, we find evidence that investors value diversity, but this does not translate into an effect on valuation beyond the issue date. There is no difference in economic fundamentals such as higher profitability or abnormal stock market performance of gender-diverse firms following the IPO. The underpricing appears to reflect recent institutional investor demand for diverse firm boards during the IPO process, possibly as a result of social pressure, an increased focus on corporate social responsibility, and the improved qualifications and experience of female board members over this period.
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Over the last decade, practitioners have used economic arguments to claim that gender diversity has a positive impact on firm value. If we focus on the initial returns to U.S. firms going public over this period with bulge bracket investment bank advisors, we find evidence that investors value diversity, but this does not translate into an effect on valuation beyond the issue date. There is no difference in economic fundamentals such as higher profitability or abnormal stock market performance of gender-diverse firms following the IPO. The underpricing appears to reflect recent institutional investor demand for diverse firm boards during the IPO process, possibly as a result of social pressure, an increased focus on corporate social responsibility, and the improved qualifications and experience of female board members over this period.
Asymmetric information and the securitization of SME loans
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Using all loans granted to firms recorded in the Italian credit register, we estimate correlations between risk-transfer and default probabilities to gauge the severity of informational asymmetries in the loan securitization market. First, the analysis confirms the presence of information frictions in the SME loan securitisation market. Second, the unconditional quality of securitized loans remains significantly better than that of non-securitized ones, in line with the notion that markets anticipate the presence of information frictions and lead to a selection of loans which offsets the detrimental effects of asymmetric information. Third, using data for firms that maintain multiple bank relationships, we obtain indications of the relative importance played by two forms of information friction, adverse selection and moral hazard. While the former is widespread, the latter is present in weak relationships only, in line with the notion that such loans are characterised by a limited commitment to exert costly monitoring by the bank.
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Using all loans granted to firms recorded in the Italian credit register, we estimate correlations between risk-transfer and default probabilities to gauge the severity of informational asymmetries in the loan securitization market. First, the analysis confirms the presence of information frictions in the SME loan securitisation market. Second, the unconditional quality of securitized loans remains significantly better than that of non-securitized ones, in line with the notion that markets anticipate the presence of information frictions and lead to a selection of loans which offsets the detrimental effects of asymmetric information. Third, using data for firms that maintain multiple bank relationships, we obtain indications of the relative importance played by two forms of information friction, adverse selection and moral hazard. While the former is widespread, the latter is present in weak relationships only, in line with the notion that such loans are characterised by a limited commitment to exert costly monitoring by the bank.
COVID-19: Fear of Pandemic and Short-Term IPO Performance
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This study analyzes the relationship between COVID-19 related fear and short-term IPO performance. Though the average market-adjusted initial return of IPOs in the year 2020 is higher than that of the last four decades, it decreases if fear of pandemic increases. The evidence is robust when we use matching firm-adjusted initial returns. Next, we analyze the persistence of performance after the IPO date. The results show that the performance of IPO firms is more sensitive to the fear of the pandemic than the performance of similar existing firms.
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This study analyzes the relationship between COVID-19 related fear and short-term IPO performance. Though the average market-adjusted initial return of IPOs in the year 2020 is higher than that of the last four decades, it decreases if fear of pandemic increases. The evidence is robust when we use matching firm-adjusted initial returns. Next, we analyze the persistence of performance after the IPO date. The results show that the performance of IPO firms is more sensitive to the fear of the pandemic than the performance of similar existing firms.
Central Bank Communication Choices: Adverse Selection, Volatility and Liquidity in a Market With Fast and Slow Traders
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We study the impact of different central bank communication practices on the trading behavior and profitability of fast and slow traders in the foreign exchange market. We focus, in particular, on how the Bank of Japan's practice of introducing some randomness to the time at which it releases its monetary policy statement affects the behavior and profitability of high-frequency traders, and how that differs from the impact of the fixed release time used by the Federal Reserve and the European Central Bank. We also analyze the relative impact on fast and slow trader behavior of central bank press conferences and statement releases. We relate our findings to the broader discussion of how information asymmetry affects fast and slow traders in a market in which they coexist, and how market quality is affected by their interaction.
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We study the impact of different central bank communication practices on the trading behavior and profitability of fast and slow traders in the foreign exchange market. We focus, in particular, on how the Bank of Japan's practice of introducing some randomness to the time at which it releases its monetary policy statement affects the behavior and profitability of high-frequency traders, and how that differs from the impact of the fixed release time used by the Federal Reserve and the European Central Bank. We also analyze the relative impact on fast and slow trader behavior of central bank press conferences and statement releases. We relate our findings to the broader discussion of how information asymmetry affects fast and slow traders in a market in which they coexist, and how market quality is affected by their interaction.
Financial Contagion During Stock Market Bubbles
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We investigate the role of bubbles on financial contagion using a set of developed economies. First, using the recursive flexible window right-tailed ADF-based procedure, we date stamp bubble periods in stock index series. Second, we capture contagion with a DCC multivariate GARCH framework. In a third step, we construct a panel by pooling across the time-series dynamic conditional correlations and bubbles to estimate various dynamic panel specifications that consider the endogenous nature of bubbles. We find statistically significant decreases in the dynamic correlations during periods of bubbles, which shows that the financial contagion between pair of countries diminishes when any of the two countries in the pair is going through a bubble period. This implies that during bubble periods investors are looking for an investment opportunity within their economy and rely less on international diversification. However, decrease in contagion between two economies could provide ample diversification opportunities for portfolio managers.
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We investigate the role of bubbles on financial contagion using a set of developed economies. First, using the recursive flexible window right-tailed ADF-based procedure, we date stamp bubble periods in stock index series. Second, we capture contagion with a DCC multivariate GARCH framework. In a third step, we construct a panel by pooling across the time-series dynamic conditional correlations and bubbles to estimate various dynamic panel specifications that consider the endogenous nature of bubbles. We find statistically significant decreases in the dynamic correlations during periods of bubbles, which shows that the financial contagion between pair of countries diminishes when any of the two countries in the pair is going through a bubble period. This implies that during bubble periods investors are looking for an investment opportunity within their economy and rely less on international diversification. However, decrease in contagion between two economies could provide ample diversification opportunities for portfolio managers.
Financial Reporting Comparability in US Firms Issuing Debt in the US Primary Market
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We propose a novel method of measuring the comparability of reported accounting numbers from the perspective of creditors. We demonstrate the validity of the measure and show that new bond issues of firms with superior comparability have better credit ratings and reduced bond yields, ceteris paribus. This is commensurate with comparability reducing the information uncertainty surrounding credit risk assessments derived from a firm’s financial information. Comparison of the impact of comparability on public and private bond issues suggests that the impact of comparability is greater in the public market, which we suggest is due to the presence of uninformed investors and higher reputation costs for the rating agencies.
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We propose a novel method of measuring the comparability of reported accounting numbers from the perspective of creditors. We demonstrate the validity of the measure and show that new bond issues of firms with superior comparability have better credit ratings and reduced bond yields, ceteris paribus. This is commensurate with comparability reducing the information uncertainty surrounding credit risk assessments derived from a firm’s financial information. Comparison of the impact of comparability on public and private bond issues suggests that the impact of comparability is greater in the public market, which we suggest is due to the presence of uninformed investors and higher reputation costs for the rating agencies.
Investor monitoring, money-likeness and stability of money market funds
RePEC
An asset is money-like if investors have no incentives to acquire costly private information on the underlying collateral. However, privately provided money-like assets—like prime money market fund (MMF) shares—are prone to runs if investors suddenly start to question the value of the collateral. Therefore, for risky assets, lack of money-likeness is a necessary condition for lack of run incentives. But is it a sufficient one? This paper studies the effect of the U.S. money market fund reform of 2014–2016 on investor monitoring, money-likeness and stability of institutional prime MMFs. Using the number of distinct IP addresses accessing MMFs' regulatory reports as a proxy for investor monitoring, we find that the reform increased monitoring and thus decreased money-likeness of institutional prime funds. However, we also show that after the reform, institutional prime funds that are more likely to impose the newly introduced redemption restrictions are more monitored, suggesting that investors may monitor in order to avoid being hit by the restrictions. Overall, our results indicate that increased monitoring, or decreased money-likeness, has not made institutional prime MMFs run-free, and it may have actually created a new source of fragility for MMFs.
RePEC
An asset is money-like if investors have no incentives to acquire costly private information on the underlying collateral. However, privately provided money-like assets—like prime money market fund (MMF) shares—are prone to runs if investors suddenly start to question the value of the collateral. Therefore, for risky assets, lack of money-likeness is a necessary condition for lack of run incentives. But is it a sufficient one? This paper studies the effect of the U.S. money market fund reform of 2014–2016 on investor monitoring, money-likeness and stability of institutional prime MMFs. Using the number of distinct IP addresses accessing MMFs' regulatory reports as a proxy for investor monitoring, we find that the reform increased monitoring and thus decreased money-likeness of institutional prime funds. However, we also show that after the reform, institutional prime funds that are more likely to impose the newly introduced redemption restrictions are more monitored, suggesting that investors may monitor in order to avoid being hit by the restrictions. Overall, our results indicate that increased monitoring, or decreased money-likeness, has not made institutional prime MMFs run-free, and it may have actually created a new source of fragility for MMFs.
Tax Treatment of Block Rewards: A Primer
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• An unsettled issue of immense practical and economic importance: how to tax the new “reward tokens†created in public cryptocurrency networks.• The wrong policy would drive innovation elsewhere. Fortunately, the correct policy is mandated by existing law: these new tokens â€" like all forms of new property â€" do not give rise to income until they are sold.• Informal, seven-year-old IRS guidance â€" not law â€" geared to Bitcoin and proof of work suggests reward tokens are immediate income at their fair market value on the date “received.â€â€¢ For the newer proof-of-stake technology, this would create a compliance nightmare and punitive overtaxation.• Ethereum, Tezos, Cosmos, and many other proof-of-stake cryptocurrencies: compliance would be a daunting task â€" for the IRS as well as taxpayers. New taxable events would occur every few seconds.• “Income†under such a policy would overstate taxpayers’ actual economic gain â€" significantly, in many cases â€" resulting in demonstrable, systematic overtaxation.• The overtaxation is equivalent to taxing a 21 for 20 stock split by counting the “new†share â€" that is, 1/21 the value of an old share â€" as taxable income. • Like any property, cryptocurrency tokens can indeed be “income†â€" when received as payment or as compensation.• But new property â€" property created or discovered by a taxpayer, not received as payment or compensation from someone else â€" is never income, and never has been.• Cattle, corn, gold, widgets, wild truffles, artworks, novels â€" think of any new property created or discovered by the taxpayer: It’s no one else’s expense, and it’s not income until sold.• As a factual matter, new reward tokens are indeed created by stakers.• Understanding how tokens are created is complicated; resorting to flawed financial analogies is easy.• Block rewards are nothing like “stock dividends.†They are not “compensation for services†â€" try to imagine taxable “compensation†that doesn’t come from another person.• Reward tokens cannot be taxed as immediate income under section 61 of the Internal Revenue Code. But not to worry: they’ll be fairly taxed when sold.• Policy problems remain for cryptocurrency taxation â€" fortunately, new reward tokens are not among them.• It’s not too late to clarify this issue before the effects of a wrong or uncertain policy are felt by millions of taxpayers and the IRS alike.Related scholarship: Cryptocurrency Economics and the Taxation of Block Rewards, https://ssrn.com/abstract=3466796.Dilution and True Economic Gain From Cryptocurrency Block Rewards, https://ssrn.com/abstract=36724616.
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• An unsettled issue of immense practical and economic importance: how to tax the new “reward tokens†created in public cryptocurrency networks.• The wrong policy would drive innovation elsewhere. Fortunately, the correct policy is mandated by existing law: these new tokens â€" like all forms of new property â€" do not give rise to income until they are sold.• Informal, seven-year-old IRS guidance â€" not law â€" geared to Bitcoin and proof of work suggests reward tokens are immediate income at their fair market value on the date “received.â€â€¢ For the newer proof-of-stake technology, this would create a compliance nightmare and punitive overtaxation.• Ethereum, Tezos, Cosmos, and many other proof-of-stake cryptocurrencies: compliance would be a daunting task â€" for the IRS as well as taxpayers. New taxable events would occur every few seconds.• “Income†under such a policy would overstate taxpayers’ actual economic gain â€" significantly, in many cases â€" resulting in demonstrable, systematic overtaxation.• The overtaxation is equivalent to taxing a 21 for 20 stock split by counting the “new†share â€" that is, 1/21 the value of an old share â€" as taxable income. • Like any property, cryptocurrency tokens can indeed be “income†â€" when received as payment or as compensation.• But new property â€" property created or discovered by a taxpayer, not received as payment or compensation from someone else â€" is never income, and never has been.• Cattle, corn, gold, widgets, wild truffles, artworks, novels â€" think of any new property created or discovered by the taxpayer: It’s no one else’s expense, and it’s not income until sold.• As a factual matter, new reward tokens are indeed created by stakers.• Understanding how tokens are created is complicated; resorting to flawed financial analogies is easy.• Block rewards are nothing like “stock dividends.†They are not “compensation for services†â€" try to imagine taxable “compensation†that doesn’t come from another person.• Reward tokens cannot be taxed as immediate income under section 61 of the Internal Revenue Code. But not to worry: they’ll be fairly taxed when sold.• Policy problems remain for cryptocurrency taxation â€" fortunately, new reward tokens are not among them.• It’s not too late to clarify this issue before the effects of a wrong or uncertain policy are felt by millions of taxpayers and the IRS alike.Related scholarship: Cryptocurrency Economics and the Taxation of Block Rewards, https://ssrn.com/abstract=3466796.Dilution and True Economic Gain From Cryptocurrency Block Rewards, https://ssrn.com/abstract=36724616.
The Unholy Trinity: Regulatory Forbearance, Stressed Banks and Zombie Firms
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During the global financial crisis, the Reserve Bank of India enacted forbearance measures that lowered capital provisioning rates for loans under temporary liquidity stress. Matched bank-firm data reveal that troubled banks took advantage of the policy to also shield firms facing serious solvency issues. Perversely, in industries and bank portfolios with high proportions of failing firms, credit to healthy firms declined and was reallocated to the weakest firms. By incentivizing banks to hide true asset quality, the forbearance policy provided a license for regulatory arbitrage. The buildup of stressed assets in India’s predominantly state-owned banking system is consistent with accounting subterfuge.
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During the global financial crisis, the Reserve Bank of India enacted forbearance measures that lowered capital provisioning rates for loans under temporary liquidity stress. Matched bank-firm data reveal that troubled banks took advantage of the policy to also shield firms facing serious solvency issues. Perversely, in industries and bank portfolios with high proportions of failing firms, credit to healthy firms declined and was reallocated to the weakest firms. By incentivizing banks to hide true asset quality, the forbearance policy provided a license for regulatory arbitrage. The buildup of stressed assets in India’s predominantly state-owned banking system is consistent with accounting subterfuge.
Trade Sentiment and the Stock Market: New Evidence Based on Big Data Textual Analysis of Chinese Media
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Trade tensions between China and US have played an important role in swinging global stock markets but effects are difficult to quantify. We develop a novel trade sentiment index (TSI) based on textual analysis and machine learning applied on a big data pool that assesses the positive or negative tone of the Chinese media coverage, and evaluates its capacity to explain the behaviour of 60 global equity markets. We find the TSI to contribute around 10% of model capacity to explain the stock price variability from January 2018 to June 2019 in countries that are more exposed to the China-US value chain. Most of the contribution is given by the tone extracted from social media (9%), while that obtained from traditional media explains only a modest part of stock price variability (1%). No equity market benefits from the China-US trade war, and Asian markets tend to be more negatively affected. In particular, we find that sectors most affected by tariffs such as information technology related ones are particularly sensitive to the tone in trade tension.
SSRN
Trade tensions between China and US have played an important role in swinging global stock markets but effects are difficult to quantify. We develop a novel trade sentiment index (TSI) based on textual analysis and machine learning applied on a big data pool that assesses the positive or negative tone of the Chinese media coverage, and evaluates its capacity to explain the behaviour of 60 global equity markets. We find the TSI to contribute around 10% of model capacity to explain the stock price variability from January 2018 to June 2019 in countries that are more exposed to the China-US value chain. Most of the contribution is given by the tone extracted from social media (9%), while that obtained from traditional media explains only a modest part of stock price variability (1%). No equity market benefits from the China-US trade war, and Asian markets tend to be more negatively affected. In particular, we find that sectors most affected by tariffs such as information technology related ones are particularly sensitive to the tone in trade tension.
Value Investing: Requiem, Rebirth or Reincarnation?
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For much of the last century, value investors considered themselves to be the winners in the investment world, a result they attributed to their patience, maturity and good sense. That view, at least on the surface, was backed up by evidence that “value†stocks, defined as stocks that trade at low multiples of earnings and book value, earned higher returns than “growth†stocks, defined loosely as companies that trade at high multiples of earnings or book value. It was reinforced by the mythology of great value investors, with Warren Buffett and Charlie Munger taking center stage, as deep thinkers, with profound insights on how markets work. In the last two decades, value investing lost its edge, and a debate has revolved around whether this is a temporary phase, and the result of an unusual macro environment, or a reflection of a permanent change in economies and markets. In this paper, we argue that value investing, at least as practiced today, has become rigid and ritualistic, and that while some of its failures can be attributed to external factors, many can be traced back to practices and rules of thumb that have outlived their usefulness. We argue that if value investing is to be successful in the future, it needs to develop a more dynamic view of value and a greater willingness to live with and invest in the face of uncertainty.
SSRN
For much of the last century, value investors considered themselves to be the winners in the investment world, a result they attributed to their patience, maturity and good sense. That view, at least on the surface, was backed up by evidence that “value†stocks, defined as stocks that trade at low multiples of earnings and book value, earned higher returns than “growth†stocks, defined loosely as companies that trade at high multiples of earnings or book value. It was reinforced by the mythology of great value investors, with Warren Buffett and Charlie Munger taking center stage, as deep thinkers, with profound insights on how markets work. In the last two decades, value investing lost its edge, and a debate has revolved around whether this is a temporary phase, and the result of an unusual macro environment, or a reflection of a permanent change in economies and markets. In this paper, we argue that value investing, at least as practiced today, has become rigid and ritualistic, and that while some of its failures can be attributed to external factors, many can be traced back to practices and rules of thumb that have outlived their usefulness. We argue that if value investing is to be successful in the future, it needs to develop a more dynamic view of value and a greater willingness to live with and invest in the face of uncertainty.
Watch Me Go Big: CEO Narcissism and Corporate Acquisitions
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Purpose â€" The purpose of this paper is to investigate the role of CEO narcissism in corporate acquisitions with a focus on frequency and size and furthermore to examine the subsequent stock market reaction.Design/methodology/design â€" The authors investigate 751 acquisitions made by 158 UK nonfinancial firms and 202 CEOs in the 10-year period 2007-2016. The authors use the ratio of first-person singular pronouns to total first-person pronouns in CEO speech as the main proxy for CEO narcissism but the results are robust to the use of signature size and picture as alternative measures.Findings â€" The authors find that increased CEO narcissism is associated with an increase in M&A expenditures, an increase in deal size, and a decrease in deal frequency. Thus, the authors find that narcissistic CEOs favor size over frequency (“go bigâ€). Furthermore, the authors find that the stock market reacts less favorably to acquisitions announced by firms run by narcissistic CEOs. Originality â€" The paper contributes to upper echelon research by investigating the association between CEO narcissism and corporate decisions in a UK setting. More specifically, the paper contributes to the existing literature by investigating how CEO narcissism is associated with corporate acquisitions in terms of the size and frequency of deals and how such irrational behavior is penalized by the stock market. Previous literature has focused on the more broad association between CEO narcissism and M&A expenditures.
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Purpose â€" The purpose of this paper is to investigate the role of CEO narcissism in corporate acquisitions with a focus on frequency and size and furthermore to examine the subsequent stock market reaction.Design/methodology/design â€" The authors investigate 751 acquisitions made by 158 UK nonfinancial firms and 202 CEOs in the 10-year period 2007-2016. The authors use the ratio of first-person singular pronouns to total first-person pronouns in CEO speech as the main proxy for CEO narcissism but the results are robust to the use of signature size and picture as alternative measures.Findings â€" The authors find that increased CEO narcissism is associated with an increase in M&A expenditures, an increase in deal size, and a decrease in deal frequency. Thus, the authors find that narcissistic CEOs favor size over frequency (“go bigâ€). Furthermore, the authors find that the stock market reacts less favorably to acquisitions announced by firms run by narcissistic CEOs. Originality â€" The paper contributes to upper echelon research by investigating the association between CEO narcissism and corporate decisions in a UK setting. More specifically, the paper contributes to the existing literature by investigating how CEO narcissism is associated with corporate acquisitions in terms of the size and frequency of deals and how such irrational behavior is penalized by the stock market. Previous literature has focused on the more broad association between CEO narcissism and M&A expenditures.
الآثار الاقتصادية والاجتماعية للأزمة المالية العالمية 2008 دراسة تØليلية وتطبيقية على جمهورية مصر العربية (The Economic and Social Impacts of the Global Financial Crisis of 2008, an Analytical and Applied Study on Egypt)
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Arabic abstract: تأثر الاقتصاد المصري بالأزمة المالية العالمية نتيجة لاندماجه ÙÙŠ الاقتصاد العالمي، والذي جعله عرضة لعدوى الأزمة المالية، وكما هو الØال ÙÙŠ باقي الدول كان للأزمة العديد من الآثار الاقتصادية والاجتماعية السلبية على مصر. من خلال المنهج التØليلي التطبيقي، يتناول البØØ« آثار وتداعيات الأزمة المالية العالمية على الاقتصاد والمجتمع المصري، وذلك بتتبع المؤشرات الاقتصادية والاجتماعية ÙÙŠ Ùترة ما قبل الأزمة وما بعدها، مع تØليل لتأثير الأزمة المتÙاوت على القطاعات المختلÙØ©ØŒ مع الإشارة إلى تأثير الاضطرابات السياسية التي تعرضت لها مصر ÙÙŠ مرØلة ما بعد 25 يناير 2011 على التعاÙÙŠ الاقتصادي من آثار الأزمة. English abstract: The Egyptian economy was affected by the global financial crisis as a result of its integration into the global economy, which made it vulnerable to Financial Contagions, and as in other countries, the crisis has had many negative economic and social effects on Egypt. Through the applied analytical approach, the research will review the effects and repercussions of the global financial crisis on the Egyptian economy and society by following the economic and social indicators in the pre-crisis and post-crisis period, with an analysis of the impact of the crisis on different sectors, With reference to the impact of political unrest in Egypt Post-January 25, 2011 on Economic recovery from the effects of 2008 Financial crisis.
SSRN
Arabic abstract: تأثر الاقتصاد المصري بالأزمة المالية العالمية نتيجة لاندماجه ÙÙŠ الاقتصاد العالمي، والذي جعله عرضة لعدوى الأزمة المالية، وكما هو الØال ÙÙŠ باقي الدول كان للأزمة العديد من الآثار الاقتصادية والاجتماعية السلبية على مصر. من خلال المنهج التØليلي التطبيقي، يتناول البØØ« آثار وتداعيات الأزمة المالية العالمية على الاقتصاد والمجتمع المصري، وذلك بتتبع المؤشرات الاقتصادية والاجتماعية ÙÙŠ Ùترة ما قبل الأزمة وما بعدها، مع تØليل لتأثير الأزمة المتÙاوت على القطاعات المختلÙØ©ØŒ مع الإشارة إلى تأثير الاضطرابات السياسية التي تعرضت لها مصر ÙÙŠ مرØلة ما بعد 25 يناير 2011 على التعاÙÙŠ الاقتصادي من آثار الأزمة. English abstract: The Egyptian economy was affected by the global financial crisis as a result of its integration into the global economy, which made it vulnerable to Financial Contagions, and as in other countries, the crisis has had many negative economic and social effects on Egypt. Through the applied analytical approach, the research will review the effects and repercussions of the global financial crisis on the Egyptian economy and society by following the economic and social indicators in the pre-crisis and post-crisis period, with an analysis of the impact of the crisis on different sectors, With reference to the impact of political unrest in Egypt Post-January 25, 2011 on Economic recovery from the effects of 2008 Financial crisis.
