Research articles for the 2021-03-26
Alpha Investments
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Alpha investments private limited was set up in 1988 as a small sub broking unit, with just 3people running the concern. Having a focus on customer-first attitude, professionalism,research-based value investing has enabled Alpha Investments to blossom as a leading playerin the Indian investment services industry. Ayisha, one of the young and promising investmentadvisors of Alpha Inv. encounters a valuable client Samlinson E (Sam), who wants to decidewhich shares have to be increased in his investment portfolio. The impact of the presentCOVID-19 pandemic has hit the economy and markets heavily. The projected gross domesticproduct of India as reported by the Asian Development Bank is - 11.8 % for the year 2020. Pastfew months, markets are highly volatile, and the benchmark indices like Sensex and Niftyhave lost almost 40%, which in turn affected Sam's portfolio as well. He has holdings in threecompanies [Exhibit 1] which operates in industries like Commercial vehicles, Housing finance& Cement. The industry outlook of commercial vehicles and housing finance is found to bepromising because of the economic revival measures taken by the Government of India. Butthe future of the cement industry stands unpredictable, due to the drastic fall in real estateand constructions.The case is written as a dialogue between Ayisha with Sam and Bala, which is focused on thefundamental analysis of Sam's stocks and volatility forecasting in brief. The case gives exposureto management students who are specializing in finance, regarding forecasting proceduresand make them familiar with the usage of volatility forecasting in real-time share pricemovements.
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Alpha investments private limited was set up in 1988 as a small sub broking unit, with just 3people running the concern. Having a focus on customer-first attitude, professionalism,research-based value investing has enabled Alpha Investments to blossom as a leading playerin the Indian investment services industry. Ayisha, one of the young and promising investmentadvisors of Alpha Inv. encounters a valuable client Samlinson E (Sam), who wants to decidewhich shares have to be increased in his investment portfolio. The impact of the presentCOVID-19 pandemic has hit the economy and markets heavily. The projected gross domesticproduct of India as reported by the Asian Development Bank is - 11.8 % for the year 2020. Pastfew months, markets are highly volatile, and the benchmark indices like Sensex and Niftyhave lost almost 40%, which in turn affected Sam's portfolio as well. He has holdings in threecompanies [Exhibit 1] which operates in industries like Commercial vehicles, Housing finance& Cement. The industry outlook of commercial vehicles and housing finance is found to bepromising because of the economic revival measures taken by the Government of India. Butthe future of the cement industry stands unpredictable, due to the drastic fall in real estateand constructions.The case is written as a dialogue between Ayisha with Sam and Bala, which is focused on thefundamental analysis of Sam's stocks and volatility forecasting in brief. The case gives exposureto management students who are specializing in finance, regarding forecasting proceduresand make them familiar with the usage of volatility forecasting in real-time share pricemovements.
Ambiguity, Prudence and Optimal Portfolio
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This paper extends the robust mean-variance analysis of Maccheroni et al. (2013) by investigating the contribution of ambiguity prudence to the optimal stock allocation when the investor evaluates portfolio compositions as described by the smooth model under ambiguity criterion. Ambiguity prudence captures an aversion towards model uncertainty that increases the more the investor believes that unfavourable events are likely to realise. I derive a higher-order approximation of the certainty equivalent to disentangle the contribution of preferences and beliefs. I analyse two relevant portfolio problems to show that ambiguity prudence puts non-linearities into the investor's valuation that induce sizeable variations from the robust mean-variance solution.
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This paper extends the robust mean-variance analysis of Maccheroni et al. (2013) by investigating the contribution of ambiguity prudence to the optimal stock allocation when the investor evaluates portfolio compositions as described by the smooth model under ambiguity criterion. Ambiguity prudence captures an aversion towards model uncertainty that increases the more the investor believes that unfavourable events are likely to realise. I derive a higher-order approximation of the certainty equivalent to disentangle the contribution of preferences and beliefs. I analyse two relevant portfolio problems to show that ambiguity prudence puts non-linearities into the investor's valuation that induce sizeable variations from the robust mean-variance solution.
DETERMINANTS OF CREDIT RISK
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This study aims to empirically examine the impact of managerial effectiveness on the creditrisk of the Indian public and private sector banks. We consider the return on assets as aproxy for managerial effectiveness and gross non-performing assets (GNPA) to totaladvances as a proxy for credit risk. The study uses fixed effects and dynamic panel datamodels to examine the impact. The econometric model estimations suggest a negative impactof return on assets on credit risk. Further, we analyze the impact of return on assets by theinformation of microeconomic and macro-economic variables in dynamic generalizedmethods of moments (GMM) approach. The results remain the same after using dynamicGMM modeled with lagged credit risk and lagged return on assets. Further, the effect ofmacroeconomic variables such as repo rate and reverse repo rate confirms the theory.Heterogeneity checks at regions and sector levels substantiate the robustness of results.
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This study aims to empirically examine the impact of managerial effectiveness on the creditrisk of the Indian public and private sector banks. We consider the return on assets as aproxy for managerial effectiveness and gross non-performing assets (GNPA) to totaladvances as a proxy for credit risk. The study uses fixed effects and dynamic panel datamodels to examine the impact. The econometric model estimations suggest a negative impactof return on assets on credit risk. Further, we analyze the impact of return on assets by theinformation of microeconomic and macro-economic variables in dynamic generalizedmethods of moments (GMM) approach. The results remain the same after using dynamicGMM modeled with lagged credit risk and lagged return on assets. Further, the effect ofmacroeconomic variables such as repo rate and reverse repo rate confirms the theory.Heterogeneity checks at regions and sector levels substantiate the robustness of results.
Do Banks Underprice IPOs to Satisfy Early Investors?
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IPOs increasingly involve early investors who commit to buying shares before the offering is launched. Using a European sample, we examine whether banks underprice strongly-demanded IPOs to satisfy the limit prices of early investors, and whether such investors salvage weakly- demanded IPOs in equilibrium. We find early investors are associated with a 52-percentage point increase in underpricing in IPOs where their limit prices are likely to have been binding. However, we find no evidence that they salvage weakly-demanded IPOs, reduce gross spreads or IPO withdrawals, or provide value-added or informational services. Instead, we find support for agency-based explanations for the underpricing.
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IPOs increasingly involve early investors who commit to buying shares before the offering is launched. Using a European sample, we examine whether banks underprice strongly-demanded IPOs to satisfy the limit prices of early investors, and whether such investors salvage weakly- demanded IPOs in equilibrium. We find early investors are associated with a 52-percentage point increase in underpricing in IPOs where their limit prices are likely to have been binding. However, we find no evidence that they salvage weakly-demanded IPOs, reduce gross spreads or IPO withdrawals, or provide value-added or informational services. Instead, we find support for agency-based explanations for the underpricing.
Do CDS Maturities Matter in the Evaluation of the Information Content of Regulatory Banking Stress Tests? Evidence from European and Us Stress Tests.
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This paper questions the relevance of using only the 5-year maturity CDS spreads to examine the CDS market response to the disclosure of a regulatory stress test results. Since the stress testing exercises are performed on short-term forward-looking stressed scenarios (1 to 3 years), we assume that short-term CDS maturities (from 6-month to 3-year) should better reflect the CDS market response compared to the 5-year maturity. Based on ten regulatory stress tests carried out in Europe and in the US in the time period from 2009 to 2017, we analyze the CDS market response by investigating its reaction through all the different CDS maturities. Our results show that after the results’ disclosure, the CDS market reacts by correcting the CDS spreads of tested banks (upward or downward correction), at the level of all maturities. More precisely, we evidence that for a given stress test, the nature of the correction (upward or downward) is the same for all CDS maturities while the extent of the correction differs between short-term maturities (from 6-month to 3-year) and the 5-year maturity or more. Indeed, we find that the extent is higher on short-term maturities and in most cases, the lower the maturity of the CDS, the higher the extent of the correction (i.e. the stronger the market reaction). We therefore argue that the only use of the 5-year maturity is not suitable. Short-term CDS maturities matter since they better reflect the CDS market response. Also, the use of these short-term maturities show that the information content of the different stress tests is more diverse than what is highlighted in the existing literature.
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This paper questions the relevance of using only the 5-year maturity CDS spreads to examine the CDS market response to the disclosure of a regulatory stress test results. Since the stress testing exercises are performed on short-term forward-looking stressed scenarios (1 to 3 years), we assume that short-term CDS maturities (from 6-month to 3-year) should better reflect the CDS market response compared to the 5-year maturity. Based on ten regulatory stress tests carried out in Europe and in the US in the time period from 2009 to 2017, we analyze the CDS market response by investigating its reaction through all the different CDS maturities. Our results show that after the results’ disclosure, the CDS market reacts by correcting the CDS spreads of tested banks (upward or downward correction), at the level of all maturities. More precisely, we evidence that for a given stress test, the nature of the correction (upward or downward) is the same for all CDS maturities while the extent of the correction differs between short-term maturities (from 6-month to 3-year) and the 5-year maturity or more. Indeed, we find that the extent is higher on short-term maturities and in most cases, the lower the maturity of the CDS, the higher the extent of the correction (i.e. the stronger the market reaction). We therefore argue that the only use of the 5-year maturity is not suitable. Short-term CDS maturities matter since they better reflect the CDS market response. Also, the use of these short-term maturities show that the information content of the different stress tests is more diverse than what is highlighted in the existing literature.
Do Firms Exploit Mispricing of Their Stock in Their Financing Decisions? Evidence from the Share Lending Market
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Short sale constrained stocks are overpriced on average. I use borrowing fees, utilization, and IHS Markit’s DCBS measure as proxies for overpricing. I show that the likelihood that a firm conducts an SEO increases with measures of short sale constraints associated with overpricing even after adjusting for firm identity, excess cash, firm age, and past stock returns. Stocks underperform after an SEO if but only if they were short sale constrained. Firms are far more likely to repurchase shares if the stock is not hard-to-borrow. When firms repurchase hard-to-borrow shares, the firm is usually right and shorts are usually wrong.
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Short sale constrained stocks are overpriced on average. I use borrowing fees, utilization, and IHS Markit’s DCBS measure as proxies for overpricing. I show that the likelihood that a firm conducts an SEO increases with measures of short sale constraints associated with overpricing even after adjusting for firm identity, excess cash, firm age, and past stock returns. Stocks underperform after an SEO if but only if they were short sale constrained. Firms are far more likely to repurchase shares if the stock is not hard-to-borrow. When firms repurchase hard-to-borrow shares, the firm is usually right and shorts are usually wrong.
Do Intangible Assets Foster Corporate Tax Avoidance?
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Although existing studies have documented ample evidence that intangible assets can foster corporate tax avoidance, they mainly focus on the scale of intangible assets, whereas the productivity of intangible assets is not accounted. Using intangible intensity to measure both the scale and productivity of intangible assets, we find that intangible intensity is actually negatively associated with corporate tax avoidance for the U.S. listed firms from 1985 to 2017. The decomposition of intangible intensity identifies goodwill as the driving force in this negative relationship. Moreover, we find firm productivity is the mediating channel in the relationship between intangible assets and corporate tax avoidance. The negative association is more pronounced in firms with low CEO pay-performance sensitivity, less corporate diversification, and a lack of foreign revenues. Overall, our findings suggest that intangible asset productivity plays a critical role in corporate tax policies.
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Although existing studies have documented ample evidence that intangible assets can foster corporate tax avoidance, they mainly focus on the scale of intangible assets, whereas the productivity of intangible assets is not accounted. Using intangible intensity to measure both the scale and productivity of intangible assets, we find that intangible intensity is actually negatively associated with corporate tax avoidance for the U.S. listed firms from 1985 to 2017. The decomposition of intangible intensity identifies goodwill as the driving force in this negative relationship. Moreover, we find firm productivity is the mediating channel in the relationship between intangible assets and corporate tax avoidance. The negative association is more pronounced in firms with low CEO pay-performance sensitivity, less corporate diversification, and a lack of foreign revenues. Overall, our findings suggest that intangible asset productivity plays a critical role in corporate tax policies.
Does Financial Behavior Influence Financial Well-being?
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Financial behavior and financial well-being are two closely related aspects of an individual’s financial decision-making. This study attempts to investigate the extent to which financial behavior influences financial well-being in the Indian scenario. The data is collected using a structured questionnaire from a sample of 150 respondents. The study employs Financial Management Behaviour Scale (FMBS) (Dew & Xiao, 2012) to measure financial behavior. Factor analysis and multiple regression are performed to find the influence of financial behavior on financial well-being. The findings of the study suggest that except for credit commitment all the other behavioral factors like future security, savings and investments, credit indiscipline, and financial consciousness have a significant impact on the financial well-being of an individual in the Indian scenario. The regression coefficients of financial well-being are strongly determined by financial consciousness. The study is a contribution to the existing behavioral studies literature and the model used identifies the factors that influence the financial well-being in the Indian scenario. The study is conducted during the year 2020, so the results could have been influenced by the economic scenario of the period. The results of the study can be used by financial advisors to understand the financial well-being in the Indian scenario.
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Financial behavior and financial well-being are two closely related aspects of an individual’s financial decision-making. This study attempts to investigate the extent to which financial behavior influences financial well-being in the Indian scenario. The data is collected using a structured questionnaire from a sample of 150 respondents. The study employs Financial Management Behaviour Scale (FMBS) (Dew & Xiao, 2012) to measure financial behavior. Factor analysis and multiple regression are performed to find the influence of financial behavior on financial well-being. The findings of the study suggest that except for credit commitment all the other behavioral factors like future security, savings and investments, credit indiscipline, and financial consciousness have a significant impact on the financial well-being of an individual in the Indian scenario. The regression coefficients of financial well-being are strongly determined by financial consciousness. The study is a contribution to the existing behavioral studies literature and the model used identifies the factors that influence the financial well-being in the Indian scenario. The study is conducted during the year 2020, so the results could have been influenced by the economic scenario of the period. The results of the study can be used by financial advisors to understand the financial well-being in the Indian scenario.
Employment Mobility and the Belated Emergence of the Black Middle Class
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As the Covid-19 pandemic takes its disproportionate toll on African Americans, the historical perspective in this working paper provides insight into the socioeconomic conditions under which President-elect Joe Biden’s campaign promise to “build back better†might actually begin to deliver the equal employment opportunity that was promised by Title VII of the Civil Rights Act of 1964. Far from becoming the Great Society that President Lyndon Johnson promised, the United States has devolved into a greedy society in which economic inequality has run rampant, leaving most African Americans behind. In this installment of our “Fifty Years After†project, we sketch a long-term historical perspective on the Black employment experience from the last decades of the nineteenth century into the 1970s. We follow the transition from the cotton economy of the post-slavery South to the migration that accelerated during World War I as large numbers of Blacks sought employment in mass-production industries in Northern cities such as Detroit, Pittsburgh, and Chicago. For the interwar decades, we focus in particular on the Black employment experience in the Detroit automobile industry. During World War II, especially under pressure from President Roosevelt’s Fair Employment Practices Committee, Blacks experienced tangible upward employment mobility, only to see much of it disappear with demobilization. In the 1960s and into the 1970s, however, supported by the Civil Rights Act and the Equal Employment Opportunity Commission, Blacks made significant advances in employment opportunity, especially by moving up the blue-collar occupational hierarchy into semiskilled and skilled unionized jobs. These employment gains for Blacks occurred within a specific historical context that included a) strong demand for blue-collar and clerical labor in the U.S. mass-production industries, which still dominated in global competition; b) the unquestioned employment norm within major U.S. business corporations of a career with one company, supported at the blue-collar level by mass-production unions that had become accepted institutions in the U.S. business system; c) the upward intergenerational mobility of white households from blue-collar employment requiring no more than a high-school education to white-collar employment requiring a higher education, creating space for Blacks to fill the blue-collar void; and d) a relative absence of an influx of immigrants as labor-market competition to Black employment. As we will document in the remaining papers in this series, from the 1980s these conditions changed dramatically, resulting in erosion of the blue-collar gains that Blacks had achieved in the 1960s and 1970s as the Great Society promise of equal employment opportunity for all Americans disappeared.
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As the Covid-19 pandemic takes its disproportionate toll on African Americans, the historical perspective in this working paper provides insight into the socioeconomic conditions under which President-elect Joe Biden’s campaign promise to “build back better†might actually begin to deliver the equal employment opportunity that was promised by Title VII of the Civil Rights Act of 1964. Far from becoming the Great Society that President Lyndon Johnson promised, the United States has devolved into a greedy society in which economic inequality has run rampant, leaving most African Americans behind. In this installment of our “Fifty Years After†project, we sketch a long-term historical perspective on the Black employment experience from the last decades of the nineteenth century into the 1970s. We follow the transition from the cotton economy of the post-slavery South to the migration that accelerated during World War I as large numbers of Blacks sought employment in mass-production industries in Northern cities such as Detroit, Pittsburgh, and Chicago. For the interwar decades, we focus in particular on the Black employment experience in the Detroit automobile industry. During World War II, especially under pressure from President Roosevelt’s Fair Employment Practices Committee, Blacks experienced tangible upward employment mobility, only to see much of it disappear with demobilization. In the 1960s and into the 1970s, however, supported by the Civil Rights Act and the Equal Employment Opportunity Commission, Blacks made significant advances in employment opportunity, especially by moving up the blue-collar occupational hierarchy into semiskilled and skilled unionized jobs. These employment gains for Blacks occurred within a specific historical context that included a) strong demand for blue-collar and clerical labor in the U.S. mass-production industries, which still dominated in global competition; b) the unquestioned employment norm within major U.S. business corporations of a career with one company, supported at the blue-collar level by mass-production unions that had become accepted institutions in the U.S. business system; c) the upward intergenerational mobility of white households from blue-collar employment requiring no more than a high-school education to white-collar employment requiring a higher education, creating space for Blacks to fill the blue-collar void; and d) a relative absence of an influx of immigrants as labor-market competition to Black employment. As we will document in the remaining papers in this series, from the 1980s these conditions changed dramatically, resulting in erosion of the blue-collar gains that Blacks had achieved in the 1960s and 1970s as the Great Society promise of equal employment opportunity for all Americans disappeared.
Impact of Financial Development on Merchandise Trade in Nigeria: A Disaggregate Analysis
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This paper conducts an empirical investigation of the relationship between financial development and merchandise trade in Nigeria. Our study focused on the effects of financial development on the components of merchandise trade: exports and imports. While theory predicts that well-developed financial systems help firms in overcoming liquidity challenges, thus, increasing their output, which, in turn, leads to an increase in trade, the empirical evidence suggests otherwise as mixed findings pervade the literature. Using Autoregressive Distributed Lag (ARDL) Model, our findings show that financial development has positive and significant effect on export both in the long-run and in the short-run. While the effect of financial development on import is positive but insignificant in the short-run, in the long-run, its effect on import is negative and significant. Our findings thus support the need for well-developed financial systems beyond its positive impact on economic growth.
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This paper conducts an empirical investigation of the relationship between financial development and merchandise trade in Nigeria. Our study focused on the effects of financial development on the components of merchandise trade: exports and imports. While theory predicts that well-developed financial systems help firms in overcoming liquidity challenges, thus, increasing their output, which, in turn, leads to an increase in trade, the empirical evidence suggests otherwise as mixed findings pervade the literature. Using Autoregressive Distributed Lag (ARDL) Model, our findings show that financial development has positive and significant effect on export both in the long-run and in the short-run. While the effect of financial development on import is positive but insignificant in the short-run, in the long-run, its effect on import is negative and significant. Our findings thus support the need for well-developed financial systems beyond its positive impact on economic growth.
India’s housing vacancy paradox: How rent control and weak contract enforcement produce unoccupied units and a housing shortage at the same time
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One housing paradox in many markets is the simultaneous presence of high costs and high vacancy. For example, India has expensive housing relative to incomes and an urban housing vacancy rate of 12.4%. We look at three possible explanations:pro-tenant rent control laws, poor contract enforcement, and under-provision of public goods. We find that pro-tenant laws are positively related to vacancy rates. A one standard deviation move towards pro-tenant rent control variables increases vacancy by 4.1 percentage points. Contract enforcement measured by density of judges is negatively related to vacancy and under-provision of public goods has no relationship.
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One housing paradox in many markets is the simultaneous presence of high costs and high vacancy. For example, India has expensive housing relative to incomes and an urban housing vacancy rate of 12.4%. We look at three possible explanations:pro-tenant rent control laws, poor contract enforcement, and under-provision of public goods. We find that pro-tenant laws are positively related to vacancy rates. A one standard deviation move towards pro-tenant rent control variables increases vacancy by 4.1 percentage points. Contract enforcement measured by density of judges is negatively related to vacancy and under-provision of public goods has no relationship.
Internal Investigations, Whistleblowing and External Monitoring, Comparative Experiences, Economic Insights, Findings from Corporate Practice
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Internal investigations, whistleblowing and external monitoring, are three information and enforcement channels and part of the corporate compliance system. As they relate to corporate management’s core area, they are a task of the general management or the (management) board. Internationally, some of these practices are already considered to be good corporate governance. Unsurprisingly, there is extensive experience in many countries, although little empirical evidence of their effectiveness exists.Nonetheless, prominent cases have shown that national requirements, especially from the U.K. and U.S., tend to have extraterritorial effects. Therefore, the topic is of current importance for scholarship, legislation and corporate practice.This article offers a comparative analysis of the situation in different countries, thereby considering many insights from economic knowledge and corporate practice as well as particularities and path dependencies. It focuses on the U.S., the U.K. and Switzerland, but also refers to other countries and recent developments in the European Union.
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Internal investigations, whistleblowing and external monitoring, are three information and enforcement channels and part of the corporate compliance system. As they relate to corporate management’s core area, they are a task of the general management or the (management) board. Internationally, some of these practices are already considered to be good corporate governance. Unsurprisingly, there is extensive experience in many countries, although little empirical evidence of their effectiveness exists.Nonetheless, prominent cases have shown that national requirements, especially from the U.K. and U.S., tend to have extraterritorial effects. Therefore, the topic is of current importance for scholarship, legislation and corporate practice.This article offers a comparative analysis of the situation in different countries, thereby considering many insights from economic knowledge and corporate practice as well as particularities and path dependencies. It focuses on the U.S., the U.K. and Switzerland, but also refers to other countries and recent developments in the European Union.
Is Squatting a Good Business for the Security Industry? A Case Analysis from Spain
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The aim of this paper is to analyze the relation between the rise of the squatter movement in Spain and the evolution of firms involved into the security and surveillance business. We hypothesize that the upsurge of this phenomenon might benefit the evolution of these companies. Using Google searches to measure the citizens’ attention and concerns to the squatter movement, we analyze their impact on the evolution of the unique security company listed in the Spanish stock market: Prosegur. The empirical analysis points out to a positive and significant relationship, which is robust to the inclusion of other market variables. Moreover, we find out that this relationship disappears or turns negative for other types of firms and for the stock market in general, suggesting that our measure of attention to the squatter movement might actually be a proxy for an impairment of the rule of law in Spain.
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The aim of this paper is to analyze the relation between the rise of the squatter movement in Spain and the evolution of firms involved into the security and surveillance business. We hypothesize that the upsurge of this phenomenon might benefit the evolution of these companies. Using Google searches to measure the citizens’ attention and concerns to the squatter movement, we analyze their impact on the evolution of the unique security company listed in the Spanish stock market: Prosegur. The empirical analysis points out to a positive and significant relationship, which is robust to the inclusion of other market variables. Moreover, we find out that this relationship disappears or turns negative for other types of firms and for the stock market in general, suggesting that our measure of attention to the squatter movement might actually be a proxy for an impairment of the rule of law in Spain.
Issuance and Valuation of Corporate Bonds with Quantitative Easing
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After the announcement of the European Central Bank’s corporate quantitative easing program, non-financial corporations timed the bond market by shifting their issuance toward bonds eligible for the program. However, issuers of eligible bonds did not increase total issuance compared to other issuers; nor did they experience different economic outcomes. Instead, the announcement produced substantial spillover effects on risk premia. Credit risk premia declined, both in the corporate bond market and in the default swap market, whereas the valuation of eligible bonds did not change relative to comparable ineligible bonds. Firms took advantage of reduced risk premia by issuing riskier bond types. Using a novel and comprehensive dataset of corporate bonds in the euro area, we document how firms substituted across bond characteristics, and we find evidence of their intention to time the market. Our model indicates corporate market timing is instrumental in allowing quantitative easing to produce spillover effects.
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After the announcement of the European Central Bank’s corporate quantitative easing program, non-financial corporations timed the bond market by shifting their issuance toward bonds eligible for the program. However, issuers of eligible bonds did not increase total issuance compared to other issuers; nor did they experience different economic outcomes. Instead, the announcement produced substantial spillover effects on risk premia. Credit risk premia declined, both in the corporate bond market and in the default swap market, whereas the valuation of eligible bonds did not change relative to comparable ineligible bonds. Firms took advantage of reduced risk premia by issuing riskier bond types. Using a novel and comprehensive dataset of corporate bonds in the euro area, we document how firms substituted across bond characteristics, and we find evidence of their intention to time the market. Our model indicates corporate market timing is instrumental in allowing quantitative easing to produce spillover effects.
Leverage Constraints, Arbitrage Capital, and Investor Under-reaction
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We analyze a hand-collected sample of earnings announcements over the period, 1934 â€" 1975, when the Fed changed margin requirements 22 times. We find that higher margin requirements are associated with greater under-reaction to earnings surprises. These results are stronger when investors face greater arbitrage risk or limited attention. They are robust when we control for macroeconomic conditions, financial market conditions, sentiment, or risk, and when we analyze several indirect measures of leverage constraints using more recent data. Our findings suggest that leverage constraints limit capital available to arbitrageurs, and thereby prevent the timely incorporation of earnings information into prices.
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We analyze a hand-collected sample of earnings announcements over the period, 1934 â€" 1975, when the Fed changed margin requirements 22 times. We find that higher margin requirements are associated with greater under-reaction to earnings surprises. These results are stronger when investors face greater arbitrage risk or limited attention. They are robust when we control for macroeconomic conditions, financial market conditions, sentiment, or risk, and when we analyze several indirect measures of leverage constraints using more recent data. Our findings suggest that leverage constraints limit capital available to arbitrageurs, and thereby prevent the timely incorporation of earnings information into prices.
Monetary Policy and Banking System Distress in Nigeria
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This paper investigated the extent, to which monetary policy influences the possibilityof bank distress in Nigeria, and whether monetary policy adjustments havecomplimentary short- and long-run effects on banking industry stability, using timeseries data from 1989 to 2018. The study employed the Z-Score to measure theprobability of banking system distress, hence, overall stability of the banking system,with the inclusion of institutional and macroeconomic indicators, as control variables.Findings from the study showed that, MPR, a measure of monetary policy, had mixedresults: it was negative and significant in the long run (inter-temporal OLS) model,suggesting that, raising policy rate reduces the likelihood of banking system distress.However, MPR coefficient was positive and significant in the short run (ECM)differenced equation, which suggests that, a higher regime of MPR beyond athreshold distorts banking system stability due to elevated risk-taking behaviours ofeconomic agents that may cause higher NPLs accumulation. The extent of economicopenness showed mixed results, suggesting that openness to external environmentcan be a blessing or curse. In this regard, the study recommends the need formonetary authorities to develop effective framework for the conduct of monetarypolicy in Nigeria to support the banking system development, as well as for policymakers to urgently undertake economic and institutional reforms to generate a non-declining contribution of monetary policy instruments to the development of aninclusive financial system in Nigeria.
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This paper investigated the extent, to which monetary policy influences the possibilityof bank distress in Nigeria, and whether monetary policy adjustments havecomplimentary short- and long-run effects on banking industry stability, using timeseries data from 1989 to 2018. The study employed the Z-Score to measure theprobability of banking system distress, hence, overall stability of the banking system,with the inclusion of institutional and macroeconomic indicators, as control variables.Findings from the study showed that, MPR, a measure of monetary policy, had mixedresults: it was negative and significant in the long run (inter-temporal OLS) model,suggesting that, raising policy rate reduces the likelihood of banking system distress.However, MPR coefficient was positive and significant in the short run (ECM)differenced equation, which suggests that, a higher regime of MPR beyond athreshold distorts banking system stability due to elevated risk-taking behaviours ofeconomic agents that may cause higher NPLs accumulation. The extent of economicopenness showed mixed results, suggesting that openness to external environmentcan be a blessing or curse. In this regard, the study recommends the need formonetary authorities to develop effective framework for the conduct of monetarypolicy in Nigeria to support the banking system development, as well as for policymakers to urgently undertake economic and institutional reforms to generate a non-declining contribution of monetary policy instruments to the development of aninclusive financial system in Nigeria.
Moral Hazard During the Housing Boom: Evidence from Private Mortgage Insurance
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Was the mortgage boom fueled by optimism around house prices, or did misaligned incentives in the mortgage industry also play a role? In this paper, we provide novel evidence of a role for misaligned incentives. We document that private mortgage insurance (PMI) companies dramatically expanded insurance issuance on high-risk mortgages purchased by Fannie Mae and Freddie Mac at the tail-end of the housing boom, without changing pricing and despite knowledge of heightened housing risk. The PMI expansion facilitated an unprecedented increase in Fannie Mae's and Freddie Mac's purchases of high-risk mortgages, extending the mortgage boom into 2007 and precipitating their collapse as well as that of the PMI industry. We argue that this unraveling reflects a general moral hazard problem associated with insurance providers coupled with misaligned incentives in the government-backed portion of the mortgage market.
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Was the mortgage boom fueled by optimism around house prices, or did misaligned incentives in the mortgage industry also play a role? In this paper, we provide novel evidence of a role for misaligned incentives. We document that private mortgage insurance (PMI) companies dramatically expanded insurance issuance on high-risk mortgages purchased by Fannie Mae and Freddie Mac at the tail-end of the housing boom, without changing pricing and despite knowledge of heightened housing risk. The PMI expansion facilitated an unprecedented increase in Fannie Mae's and Freddie Mac's purchases of high-risk mortgages, extending the mortgage boom into 2007 and precipitating their collapse as well as that of the PMI industry. We argue that this unraveling reflects a general moral hazard problem associated with insurance providers coupled with misaligned incentives in the government-backed portion of the mortgage market.
New Lessons from Market History: Sometimes Bonds Win
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When Jeremy Siegel published his Stocks for the Long Run thesis, little information was available on stocks before 1871 or bonds before 1926. But today, digital archives have made it possible to compute real total return on stock and bond indexes back to 1793. This paper presents that new market history and compares it to Siegel’s narrative. The new historical record shows that over multi-decade periods, sometimes stocks outperformed bonds, sometimes bonds outperformed stocks, and sometimes they performed about the same. More generally, the pattern of asset returns in the modern era, as seen in the Ibbotson SBBI and other datasets that begin in 1926, emerges as distinctly different from what came before. Contrary to Siegel, the pattern of asset returns seen in the 20th century does not generalize to the 19th century. A regime perspective is introduced to make sense of the augmented historical record. It argues that both common stocks and long bonds are risk assets, capable of outperforming or underperforming over any human time horizon.
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When Jeremy Siegel published his Stocks for the Long Run thesis, little information was available on stocks before 1871 or bonds before 1926. But today, digital archives have made it possible to compute real total return on stock and bond indexes back to 1793. This paper presents that new market history and compares it to Siegel’s narrative. The new historical record shows that over multi-decade periods, sometimes stocks outperformed bonds, sometimes bonds outperformed stocks, and sometimes they performed about the same. More generally, the pattern of asset returns in the modern era, as seen in the Ibbotson SBBI and other datasets that begin in 1926, emerges as distinctly different from what came before. Contrary to Siegel, the pattern of asset returns seen in the 20th century does not generalize to the 19th century. A regime perspective is introduced to make sense of the augmented historical record. It argues that both common stocks and long bonds are risk assets, capable of outperforming or underperforming over any human time horizon.
Road Safety for Fleets of Vehicles
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Road safety for fleets of vehicles has been neglected in the insurance literature, mainly because appropriate data is not available. This paper makes a threefold contribution: 1) Produce statistics on current fleets’ road safety offences using a panel of 20 years of data on truck fleets; 2) relate these offences to fleets’ accidents; and 3) identify and classify the riskiest fleets for insurance ratemaking based on past experience in managing road safety. Our results show a substantial heterogeneity between fleets in terms of road safety.
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Road safety for fleets of vehicles has been neglected in the insurance literature, mainly because appropriate data is not available. This paper makes a threefold contribution: 1) Produce statistics on current fleets’ road safety offences using a panel of 20 years of data on truck fleets; 2) relate these offences to fleets’ accidents; and 3) identify and classify the riskiest fleets for insurance ratemaking based on past experience in managing road safety. Our results show a substantial heterogeneity between fleets in terms of road safety.
SEC Workload, IPO Filing Reviews, and IPO Pricing
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We analyze the interaction between high workload of the Securities and Exchange Commission (SEC) staff and the information production stimulated by their review process of initial public offerings (IPOs). We find that high workload is associated with more generic comments in the first letter, with fewer overall comments for later letters, and that the SEC answers quicker while being busy. Using a measure of initial SEC concerns based on comment counts, we find, for instance, a positive relation with absolute price revisions from the initial estimate to the final price. If we additionally consider an interaction with high workload, such effects become weaker for high workload IPOs and stronger for non-high workload IPOs. Partly but not entirely, generic comments mediate this effect. Consistent with the view that our findings indicate fewer SEC induced information production under high workload, we find that underpricing is significantly larger for high workload IPOs. This is in line with theories, where investors are compensated for their information production via bookbuilding.
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We analyze the interaction between high workload of the Securities and Exchange Commission (SEC) staff and the information production stimulated by their review process of initial public offerings (IPOs). We find that high workload is associated with more generic comments in the first letter, with fewer overall comments for later letters, and that the SEC answers quicker while being busy. Using a measure of initial SEC concerns based on comment counts, we find, for instance, a positive relation with absolute price revisions from the initial estimate to the final price. If we additionally consider an interaction with high workload, such effects become weaker for high workload IPOs and stronger for non-high workload IPOs. Partly but not entirely, generic comments mediate this effect. Consistent with the view that our findings indicate fewer SEC induced information production under high workload, we find that underpricing is significantly larger for high workload IPOs. This is in line with theories, where investors are compensated for their information production via bookbuilding.
Sovereign Debt in the 21st Century: Looking Backward, Looking Forward
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How will sovereign debt markets evolve in the 21st century? We survey how the literature has responded to the eurozone debt crisis, placing “lessons learned†in historical perspective. The crisis featured: (i) the return of debt problems to advanced economies; (ii) a bank-sovereign “doom-loop†and the propagation of sovereign risk to households and firms; (iii) roll-over problems and self-fulfilling crisis dynamics; (iv) severe debt distress without outright sovereign defaults; (v) large-scale “sovereign bailouts†from abroad; and (vi) creditor threats to litigate and hold out in a debt restructuring. Many of these characteristics were already present in historical debt crises and are likely to remain relevant in the future. Looking forward, our survey points to a growing role of sovereign-bank linkages, legal risks, domestic debt and default, and of official creditors, due to new lenders such as China as well as the increasing dominance of central banks in global debt markets. Questions of debt sustainability and default will remain acute in both developing and advanced economies.
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How will sovereign debt markets evolve in the 21st century? We survey how the literature has responded to the eurozone debt crisis, placing “lessons learned†in historical perspective. The crisis featured: (i) the return of debt problems to advanced economies; (ii) a bank-sovereign “doom-loop†and the propagation of sovereign risk to households and firms; (iii) roll-over problems and self-fulfilling crisis dynamics; (iv) severe debt distress without outright sovereign defaults; (v) large-scale “sovereign bailouts†from abroad; and (vi) creditor threats to litigate and hold out in a debt restructuring. Many of these characteristics were already present in historical debt crises and are likely to remain relevant in the future. Looking forward, our survey points to a growing role of sovereign-bank linkages, legal risks, domestic debt and default, and of official creditors, due to new lenders such as China as well as the increasing dominance of central banks in global debt markets. Questions of debt sustainability and default will remain acute in both developing and advanced economies.
Sustainability Integration for Sovereign Debt Investors: Engaging with Countries on the Sustainable Development Goals (SDGs)
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Investors recently adopted a novel approach to sustainable investing: engaging with countries to advance sustainable development. But engaging with sovereign entities on sustainability challenges â€" such as those defined by the Sustainable Development Goals (SDGs) - is a complex endeavor. To guide sovereign debt investors in operationalizing this new sustainable investing strategy, this paper creates a framework that navigates the sovereign engagement process in a systematic manner. The framework answers three questions (i) who to engage with; (ii) what to engage on; and (iii) how to engage. First, relevant countries are identified based on the investor’s (public and private) investment exposure and the country’s progress on the SDGs. Second, using public data, SDGs and sub-targets are identified that face slow progress, thus being priorities to engage on. Third, a detailed roadmap is provided for orchestrating the engagement trajectory with the defined country on the selected SDG(s).
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Investors recently adopted a novel approach to sustainable investing: engaging with countries to advance sustainable development. But engaging with sovereign entities on sustainability challenges â€" such as those defined by the Sustainable Development Goals (SDGs) - is a complex endeavor. To guide sovereign debt investors in operationalizing this new sustainable investing strategy, this paper creates a framework that navigates the sovereign engagement process in a systematic manner. The framework answers three questions (i) who to engage with; (ii) what to engage on; and (iii) how to engage. First, relevant countries are identified based on the investor’s (public and private) investment exposure and the country’s progress on the SDGs. Second, using public data, SDGs and sub-targets are identified that face slow progress, thus being priorities to engage on. Third, a detailed roadmap is provided for orchestrating the engagement trajectory with the defined country on the selected SDG(s).
The Impact of Shareholder Intervention on Overinvestment of Free Cash Flow by Overconfident CEOs
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This paper examines the impact of shareholder intervention on investment distortions, which we capture using overinvestment of free cash flow by overconfident CEOs. Using this definition and U.S. data for 1996â€"2014, our fixed effects and difference-in-difference matching estimation results provide consistent evidence that the threat of potential intervention of shareholders can curb overinvestment by overconfident CEOs. Specifically, firms with greater voting premium and hedge fund activism experience less overinvestment and exhibit lower sensitivity of free cash flow to investment. Such disciplining effects are stronger for firms managed by overconfident CEOs. Overall, our results suggest that shareholder intervention is particularly effective at mitigating overinvestment that is more likely to be distorted.
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This paper examines the impact of shareholder intervention on investment distortions, which we capture using overinvestment of free cash flow by overconfident CEOs. Using this definition and U.S. data for 1996â€"2014, our fixed effects and difference-in-difference matching estimation results provide consistent evidence that the threat of potential intervention of shareholders can curb overinvestment by overconfident CEOs. Specifically, firms with greater voting premium and hedge fund activism experience less overinvestment and exhibit lower sensitivity of free cash flow to investment. Such disciplining effects are stronger for firms managed by overconfident CEOs. Overall, our results suggest that shareholder intervention is particularly effective at mitigating overinvestment that is more likely to be distorted.
The Relationship between the Charter and General Principles: Looking Back and Looking Forward
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Article 6 TEU sets out two sources of fundamental rights in the EUâ€"the Charter and the general principles of EU lawâ€"without specifying a hierarchy between them. Even though the Charter became binding over a decade ago, the Court of Justice of the European Union (‘CJEU’) is yet to clarify unequivocally how these two sources interact. In this article I argue based upon the relevant legal framework that the Charter ought to replace the general principles it enshrines. This leaves a role for general principles in the incorporation of new and additional rights into the EU legal framework. Such an approach is necessary to ensure that the Charter achieves its aims in enhancing the visibility of the rights protected by EU law, while also providing the impetus for more coherent rights protection within the EU. What an extensive survey of CJEU case law in the field of non-discrimination shows, however, is that the CJEU has struggled to let its general principles case law go, potentially hampering the transformative potential of the Charter.
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Article 6 TEU sets out two sources of fundamental rights in the EUâ€"the Charter and the general principles of EU lawâ€"without specifying a hierarchy between them. Even though the Charter became binding over a decade ago, the Court of Justice of the European Union (‘CJEU’) is yet to clarify unequivocally how these two sources interact. In this article I argue based upon the relevant legal framework that the Charter ought to replace the general principles it enshrines. This leaves a role for general principles in the incorporation of new and additional rights into the EU legal framework. Such an approach is necessary to ensure that the Charter achieves its aims in enhancing the visibility of the rights protected by EU law, while also providing the impetus for more coherent rights protection within the EU. What an extensive survey of CJEU case law in the field of non-discrimination shows, however, is that the CJEU has struggled to let its general principles case law go, potentially hampering the transformative potential of the Charter.
Timing CEO Turnovers: Evidence from Delegation in Mergers and Acquisitions
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We examine the role of delegation in predicting CEO successions. Using a novel proxy for delegation in mergers and acquisitions, we find that overall CEO turnover rates are about one third higher following deals where the CEO delegates to a senior manager versus deals with no observable delegation. The delegation-turnover relation is strongest when deals are delegated to heirs apparent, the CEO is older, or the delegation decision is unexpected. Voluntary turnovers are more frequent following delegated deals than non-delegated deals, consistent with delegation signaling an orderly succession. The delegation-turnover relation fades over time while other predictors of turnover such as profitability, CEO age, and the presence of an heir apparent in the corporate hierarchy continue to remain significant up to five years after the deal. Our findings suggest that delegation is unique among our predictors of turnover in the sense that it captures near term orderly successions.
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We examine the role of delegation in predicting CEO successions. Using a novel proxy for delegation in mergers and acquisitions, we find that overall CEO turnover rates are about one third higher following deals where the CEO delegates to a senior manager versus deals with no observable delegation. The delegation-turnover relation is strongest when deals are delegated to heirs apparent, the CEO is older, or the delegation decision is unexpected. Voluntary turnovers are more frequent following delegated deals than non-delegated deals, consistent with delegation signaling an orderly succession. The delegation-turnover relation fades over time while other predictors of turnover such as profitability, CEO age, and the presence of an heir apparent in the corporate hierarchy continue to remain significant up to five years after the deal. Our findings suggest that delegation is unique among our predictors of turnover in the sense that it captures near term orderly successions.
Up the Hill and Down Again: Dual-Class Stock and the UK Listing Review
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The final recommendations of Jonathan Hill’s UK Listing Review were published on 3 March 2021. The headline recommendation was that dual-class stock should be permitted on the premium-tier of the London Stock Exchange. The aspiration is to encourage more high-quality UK equity listings, particularly of high-growth tech-companies, for which dual-class stock is especially beneficial. Dual-class stock allows founders to list their firms, and retain majority-control, while holding significantly less of the cash-flow rights in the company. However, in an attempt to protect and placate institutional shareholders, who are generally sceptical of dual-class stock, various conditions have been recommended. This article finds that those conditions comprise a curious mix, some of which are too relaxed and do not substantially protect public shareholders, and some of which are too severe and could deter the very firms the proposals are intended to attract, resulting in dual-class stock in name but not in substance.
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The final recommendations of Jonathan Hill’s UK Listing Review were published on 3 March 2021. The headline recommendation was that dual-class stock should be permitted on the premium-tier of the London Stock Exchange. The aspiration is to encourage more high-quality UK equity listings, particularly of high-growth tech-companies, for which dual-class stock is especially beneficial. Dual-class stock allows founders to list their firms, and retain majority-control, while holding significantly less of the cash-flow rights in the company. However, in an attempt to protect and placate institutional shareholders, who are generally sceptical of dual-class stock, various conditions have been recommended. This article finds that those conditions comprise a curious mix, some of which are too relaxed and do not substantially protect public shareholders, and some of which are too severe and could deter the very firms the proposals are intended to attract, resulting in dual-class stock in name but not in substance.
What Drives Banks to Value Lending Relationships? The Role of the Chief Executive's Cultural Heritage
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We explore how bank CEOs' cultural heritage shapes the nexus between lending relationships and the cost of bank loans in the US syndicated loans market. We show that banks led by CEOs that trace their origin in more individualistic and masculine societies are less inclined to share with their borrowers the savings stemming from strong lending relationships. In contrast, banks led by CEOs that originate from societies where uncertainty avoidance and power distance are higher, exhibit a stronger propensity to reward their relationship borrowers with lower loan prices. These findings are consistent with the view that certain cultural attributes affect the degree to which relationships are valued in the societal and business contexts. Our study highlights the importance of considering lenders' culture when investigating the effects of lending relationships on the cost of bank loans.
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We explore how bank CEOs' cultural heritage shapes the nexus between lending relationships and the cost of bank loans in the US syndicated loans market. We show that banks led by CEOs that trace their origin in more individualistic and masculine societies are less inclined to share with their borrowers the savings stemming from strong lending relationships. In contrast, banks led by CEOs that originate from societies where uncertainty avoidance and power distance are higher, exhibit a stronger propensity to reward their relationship borrowers with lower loan prices. These findings are consistent with the view that certain cultural attributes affect the degree to which relationships are valued in the societal and business contexts. Our study highlights the importance of considering lenders' culture when investigating the effects of lending relationships on the cost of bank loans.
Will Nasdaq's Diversity Rules Harm Investors?
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In December 2020, Nasdaq asked the Securities and Exchange Commission to approve new diversity rules. The aim is for most Nasdaq-listed firms to have at least one director self-identifying as female and another self-identifying as an underrepresented minority or LGBTQ+. While Nasdaq claims these rules will benefit investors, the empirical evidence provides little support for the claim that gender or ethnic diversity in the boardroom increases shareholder value. In fact, rigorous scholarshipâ€"much of it by leading female economistsâ€"suggests that increasing board diversity can actually lead to lower share prices. Adoption of Nasdaq’s proposed rules would thus generate substantial risks for investors.
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In December 2020, Nasdaq asked the Securities and Exchange Commission to approve new diversity rules. The aim is for most Nasdaq-listed firms to have at least one director self-identifying as female and another self-identifying as an underrepresented minority or LGBTQ+. While Nasdaq claims these rules will benefit investors, the empirical evidence provides little support for the claim that gender or ethnic diversity in the boardroom increases shareholder value. In fact, rigorous scholarshipâ€"much of it by leading female economistsâ€"suggests that increasing board diversity can actually lead to lower share prices. Adoption of Nasdaq’s proposed rules would thus generate substantial risks for investors.
