Research articles for the 2021-04-13

A Bayesian analysis of gain-loss asymmetry
Andrea Giuseppe Di Iura,Giulia Terenzi

We perform a quantitative analysis of the gain/loss asymmetry for financial time series by using a Bayesian approach. In particular, we focus on some selected indices and analyze the statistical significance of the asymmetry amount through a Bayesian generalization of the t-Test, which relaxes the normality assumption on the underlying distribution. We propose two different models for data distribution, we study the convergence of our method and we provide several graphical representations of our numerical results. Finally, we perform a sensitivity analysis with respect to model parameters in order to study the reliability and robustness of our results.

A Maximum Principle approach to deterministic Mean Field Games of Control with Absorption
Paulwin Graewe,Ulrich Horst,Ronnie Sircar

We study a class of deterministic mean field games on finite and infinite time horizons arising in models of optimal exploitation of exhaustible resources. The main characteristic of our game is an absorption constraint on the players' state process. As a result of the state constraint the optimal time of absorption becomes part of the equilibrium. This requires a novel approach when applying Pontyagin's maximum principle. We prove the existence and uniqueness of equilibria and solve the infinite horizon models in closed form. As players may drop out of the game over time, equilibrium production rates need not be monotone nor smooth.

A change of variable formula with applications to multi-dimensional optimal stopping problems
Cheng Cai,Tiziano De Angelis

We derive a change of variable formula for $C^1$ functions $U:\mathbb{R}_+\times\mathbb{R}^m\to\mathbb{R}$ whose second order spatial derivatives may explode and not be integrable in the neighbourhood of a surface $b:\mathbb{R}_+\times\mathbb{R}^{m-1}\to \mathbb{R}$ that splits the state space into two sets $\mathcal{C}$ and $\mathcal{D}$. The formula is tailored for applications in problems of optimal stopping where it is generally very hard to control the second derivatives of the value function near the optimal stopping boundary. Differently to other existing papers on similar topics we only require that the surface $b$ be monotonic in each variable and we formally obtain the same expression as the classical It\^o's formula.

Analysis of optimal portfolio on finite and small time horizons for a stochastic volatility market model
Minglian Lin,Indranil SenGupta

In this paper, we consider the portfolio optimization problem in a financial market under a general utility function. Empirical results suggest that if a significant market fluctuation occurs, invested wealth tends to have a notable change from its current value. We consider an incomplete stochastic volatility market model, that is driven by both a Brownian motion and a jump process. At first, we obtain a closed-form formula for an approximation to the optimal portfolio in a small-time horizon. This is obtained by finding the associated Hamilton-Jacobi-Bellman integro-differential equation and then approximating the value function by constructing appropriate super-solution and sub-solution. It is shown that the true value function can be obtained by sandwiching the constructed super-solution and sub-solution. We also prove the accuracy of the approximation formulas. Finally, we provide a procedure for generating a close-to-optimal portfolio for a finite time horizon.

Analysis of the tradeoff between health and economic impacts of the Covid-19 epidemic
Samson Lasaulce,Chao Zhang,Vineeth Varma,Irinel Constantin Morarescu

Various measures have been taken in different countries to mitigate the Covid-19 epidemic. But, throughout the world, many citizens don't understand well how these measures are taken and even question the decisions taken by their government. Should the measures be more (or less) restrictive? Are they taken for a too long (or too short) period of time? To provide some quantitative elements of response to these questions, we consider the well-known SEIR model for the Covid-19 epidemic propagation and propose a pragmatic model of the government decision-making operation. Although simple and obviously improvable, the proposed model allows us to study the tradeoff between health and economic aspects in a pragmatic and insightful way. Assuming a given number of phases for the epidemic and a desired tradeoff between health and economic aspects, it is then possible to determine the optimal duration of each phase and the optimal severity level for each of them. The numerical analysis is performed for the case of France but the adopted approach can be applied to any country. One of the takeaway messages of this analysis is that being able to implement the optimal 4-phase epidemic management strategy in France would have led to 1.05 million infected people and a GDP loss of 231 billion euro instead of 6.88 million of infected and a loss of 241 billion euro. This indicates that, seen from the proposed model perspective, the effectively implemented epidemic management strategy is good economically, whereas substantial improvements might have been obtained in terms of health impact. Our analysis indicates that the lockdown/severe phase should have been more severe but shorter, and the adjustment phase occurred earlier. Due to the natural tendency of people to deviate from the official rules, updating measures every month over the whole epidemic episode seems to be more appropriate.

Application of maximal monotone operator method for solving Hamilton-Jacobi-Bellman equation arising from optimal portfolio selection problem
Daniel Sevcovic,Cyril Izuchukwu Udeani

In this paper, we investigate a fully nonlinear evolutionary Hamilton-Jacobi-Bellman (HJB) parabolic equation utilizing the monotone operator technique. We consider the HJB equation arising from portfolio optimization selection, where the goal is to maximize the conditional expected value of the terminal utility of the portfolio. The fully nonlinear HJB equation is transformed into a quasilinear parabolic equation using the so-called Riccati transformation method. The transformed parabolic equation can be viewed as the porous media type of equation with source term. Under some assumptions, we obtain that the diffusion function to the quasilinear parabolic equation is globally Lipschitz continuous, which is a crucial requirement for solving the Cauchy problem. We employ Banach's fixed point theorem to obtain the existence and uniqueness of a solution to the general form of the transformed parabolic equation in a suitable Sobolev space in an abstract setting. Some financial applications of the proposed result are presented in one-dimensional space.

CDS Trading Initiation, Information Asymmetry, and Dividend Payout
Landsman, Wayne R.,Li, Chao Kevin,Zhao, Jianxin (Donny)
This study uses the information asymmetry framework of DeAngelo, DeAngelo, and Skinner (2008) to examine the effect of initiation of credit default swaps (CDS) trading on firm dividend payout policy. This leads us to consider three channels through which CDS initiation can affect dividends. We find evidence that CDS initiation is associated with increasing dividends, which is consistent with two channels: firms distributing excess free cash flow to mitigate exacerbated manager-equityholder agency conflicts resulting from reduced monitoring by banks following CDS initiation, and firms having a higher incentive to pay out free cash flow because external financing costs are lower as a result of information provided by CDS trading to the equity market. Additional findings corroborate the first channel by showing that the dividend increases are concentrated among borrowing firms whose lead arranger banks have a relatively less strong reputation in the loan syndication market, and firms whose loans are subject to less intense monitoring features, i.e., less restrictive loan covenants, following CDS initiation. Additional analyses suggest that dividend increases following CDS initiation are not attributable to a wealth transfer from debtholders to equityholders, and that inferences are robust to controlling for the potential effects of CDS initiation on capital structure.

Cash Is Not King: Evidence from the Commercial Paper Market
Klingler, Sven,Syrstad, Olav,Vuillemey, Guillaume
Using new transaction-level data for non-financial commercial paper (CP) in the U.S., we show that companies systematically reduce their outstanding short-term debt on quarterly and annual disclosure dates. Constraints on CP lending supply cannot explain this pattern. Instead, firms prefer repaying short-term debt over disclosing high cash holdings to signal that their cash is readily available and not trapped in foreign subsidiaries. Consistent with this interpretation, we show that firms with higher cash holdings, more sales in regions with tight capital controls, or with higher debt-equity ratios compared to industry peers reduce their short-term debt more aggressively at disclosure dates.

Compañía de Adquisición de Propósito Especial (Special Purpose Acquisition Company- SPAC)
Mascareñas, Juan
Esta monografía trata sobre las Compañías de Adquisición de Propósito Especial (SPAC), que son empresas que se forman estrictamente con el objetivo de obtener financiación, mediante una oferta pública inicial (OPI) para poder adquirir una empresa privada ya existente pero, que se desconoce en el momento de la OPI. La monografía compara las OPI con las SPAC, las características de las SPAC, su estructura de capital, el proceso de fusión con la empresa privada, y las críticas recibidas.This monograph deals with Special Purpose Acquisition Companies (SPAC), which are companies that are formed strictly with the target of obtaining financing, through an initial public offering (IPO) in order to acquire an existing private company but, which is unknown at the time of the IPO. The monograph compares the IPOs with the SPACs, the characteristics of the SPACs, their capital structure, the merger process with the private company, and the criticisms received.

Concurrent Earnings Announcements and the Allocation of Investor Attention
Ferracuti, Elia,Lind, Gary
We study how investors allocate attention between firm-specific and aggregate information in earnings announcements using the number of concurrent earnings announcements as an observable proxy for the marginal net benefit of processing aggregate over idiosyncratic information. We show that the idiosyncratic uncertainty of announcing firms increases, while aggregate uncertainty declines, on busier earnings announcement days. We further show that investors increase their trades of securities with higher exposure to aggregate uncertainty and perform more Google searches for macro-related terms on busier earnings announcement days, i.e., they behave consistently with processing aggregate information. Jointly, these results suggest that investors reallocate their attention away from idiosyncratic and toward aggregate information on busier earnings announcement days. Overall, the evidence is consistent with predictions from recent information choice models and suggest that investors rationally allocate their limited attention between different types of information.

Does Increased Visibility to the IRS Cause Public Firms to Go Private? Evidence from FIN 48
Yost, Benjamin
This study investigates whether the introduction of a mandatory disclosure requirement (FIN 48), which had the effect of increasing public firms’ visibility to the tax authority, incentivized going-private transactions. Building on analytical work suggesting that disclosures required under FIN 48 act as a signal to the government regarding the uncertainty of the taxpayer’s position (Mills, Robinson, and Sansing 2010), I hypothesize and find evidence of an increased propensity to go private among aggressive tax planning firms following the enactment of the new disclosure rule but prior to its adoption. The effect is concentrated in firms with high CEO ownership, consistent with CEOs of tax aggressive firms viewing the mandated disclosures as damaging to the firm’s prospects and seeking to escape the anticipated effects to their personal wealth. Furthermore, I find that the spike in going-private transactions among tax aggressive firms is driven primarily by private equity-led buyouts. Overall, my findings suggest that mandatory disclosures giving rise to increased visibility to the tax authority may have the unintended consequence of discouraging some firms from operating as public entities.

Does Zakat Signal the Firm Value? An Additional Inference of Mining and Manufacturing Zakatnomics
Abbas, Ahmad
Mining and manufacturing industries are two contributive sectors having high economic value. Optimalization of their zakat potential should be estimated not only addressed to provide the gain for public welfare, but firms should also obtain the economic value on their performance. This research aims to provide an empirical inference on mining and manufacturing zakatnomics. The effect of corporate zakat potential on the firm value is tested in this research. The sample comprises 47 mining companies and 180 manufacturing companies listed in Indonesia Stock Exchange by utilizing financial statements of 2018 period. The result of this research finds that zakat potential was found positive on the firm value. This research also finds that zakat has a positive impact on profitability. Therefore, the finding in this research draws an inference that zakat empirically signals firm value and profitability.

Don't throw efficiency out with the bathwater: A reply to Jeffery and Verheijen (2020)
Bartosz Bartkowski

In this paper, I reply to the recent article by Jeffery and Verheijen (2020) 'A new soil health policy paradigm: Pay for practice not performance!'. While expressing support for their call for a more pronounced role of soil protection in agri-environmental policy, I critically discuss the two main elements of their specific proposal: its emphasis of the concept of soil health and the recommendation to use action-based payments as the main policy instrument. I argue for using soil functions as a more established concept (and thus more adequate for policy purposes), which is also informationally richer than soil health. Furthermore, I provide a more differentiated discussion of the relative advantages and disadvantages of result-based and action-based payments, while addressing the specific criticisms towards the former that Jeffery and Verheijen voice. Also, I suggest an alternative approach (a hybrid model-based scheme) that addresses the limitations of both Jeffery and Verheijen's own proposal and the valid criticisms they direct at result-based payments.

Enhancing User' s Income Estimation with Super-App Alternative Data
Gabriel Suarez,Juan Raful,Maria A. Luque,Carlos F. Valencia,Alejandro Correa-Bahnsen

This paper presents the advantages of alternative data from Super-Apps to enhance user' s income estimation models. It compares the performance of these alternative data sources with the performance of industry-accepted bureau income estimators that takes into account only financial system information; successfully showing that the alternative data manage to capture information that bureau income estimators do not. By implementing the TreeSHAP method for Stochastic Gradient Boosting Interpretation, this paper highlights which of the customer' s behavioral and transactional patterns within a Super-App have a stronger predictive power when estimating user' s income. Ultimately, this paper shows the incentive for financial institutions to seek to incorporate alternative data into constructing their risk profiles.

Euro Area Equity Risk Premia and Monetary Policy: A Longer-Term Perspective
Kapp, Daniel,Kristiansen, Kristian
This study analyses the effects of euro area monetary policy on equity risk premia (ERP). We find that changes in equity prices during periods of accommodative monetary policy mainly reflected adjustments in the discount factor and economic activity â€" rather than fluctuations in investors’ required risk compensation. Furthermore, the ERP appears to not have declined much since the introduction of unconventional monetary policy and stands higher than prior to the GFC. Use of identified monetary policy shocks points to insignificant effects of monetary policy on the ERP. Further breakdown of these shocks reveals that monetary policy has a significant upwards impact on the ERP if it is perceived as a negative information surprise, while the opposite prevails in the case of a genuine accommodative monetary policy surprise. Accumulating these effects over time suggests that the two might have largely offset each other since the introduction of unconventional monetary policy.

Explainable Machine Learning-driven Strategy for Automated Trading Pattern Extraction
Artur Sokolovsky,Luca Arnaboldi,Jaume Bacardit,Thomas Gross

Financial markets are a source of non-stationary multidimensional time series which has been drawing attention for decades. Each financial instrument has its specific changing over time properties, making their analysis a complex task. Improvement of understanding and development of methods for financial time series analysis is essential for successful operation on financial markets. In this study we propose a volume-based data pre-processing method for making financial time series more suitable for machine learning pipelines. We use a statistical approach for assessing the performance of the method. Namely, we formally state the hypotheses, set up associated classification tasks, compute effect sizes with confidence intervals, and run statistical tests to validate the hypotheses. We additionally assess the trading performance of the proposed method on historical data and compare it to a previously published approach. Our analysis shows that the proposed volume-based method allows successful classification of the financial time series patterns, and also leads to better classification performance than a price action-based method, excelling specifically on more liquid financial instruments. Finally, we propose an approach for obtaining feature interactions directly from tree-based models on example of CatBoost estimator, as well as formally assess the relatedness of the proposed approach and SHAP feature interactions with a positive outcome.

Forecasting Bond Risk Premia using Stationary Yield Factors
Hoogteijling, Tobias,Martens, Martin,van der Wel, Michel
The standard way to summarize the yield curve is to use the first three principal components of the yield curve, resulting in level, slope and curvature factors. Yields, however, are non-stationary. We analyze the first three principal components of yield changes, which correspond to changes in level, slope and curvature. The new factors based on changes in yields have strong predictive power for bond risk premia, in contrast to the factors based on yield levels. We also provide insights into the impact this has on the added value of macro data for bond risk premia predictions and the recent conclusion that machine learning provides better forecasts than linear regression.

From Mandates to Governance: Restructuring the Employment Relationship
McDonnell, Brett,Bodie, Matthew T.
Employers are saddled with a dizzying array of responsibilities to their employees. Meant to advance a wide array of workplace policies, these demands have saddled employment with the burden of numerous social ends. However, that system has increasingly come under strain, as companies seek to shed employment relationships and workers lose important protections when terminated. In this Article, we propose that employers and employees should be given greater flexibility with a move from mandates to governance. Many of the employment protections required from employers stem from employees’ lack of organizational power. The imbalance is best addressed by providing workers with governance rights within the firm. In exchange for these governance rights, governments can lift or relax many employment mandates. In addition, certain responsibilities currently assigned to employers will be lifted and placed on the larger societyâ€"where they would be more appropriately carried. This rebalancing of the employment relationship will lead to a more economically secure and empowered populace while at the same time freeing businesses to better pursue their entrepreneurial endeavors.

Gender Equality and Educational System in Nigeria
Enyioko, Newman
The aim of this paper is to consider approaches to understanding and evaluating gender equality in Nigeria educational system from the perspective of concerns for gender discrimination. This task has a number of facets and complexities, because ‘gender’ is not one simple set of relationships, and the notion of gender equality in education can be read in a number of different ways. The study reviewed extant literature and deductively explored distinctively the issues in gender equality in Nigeria educational system. This paper adopted the radical feminist theory and secondary source of data collection. It sought to place in proper perspective the Nigerian national gender policy as it affects women. The study revealed that literacy rate among young women and men age 15-24 years was 59.3 per cent and 70.9 per cent in 2016 respectively. Female enrolment in Nigerian Colleges of Education was 46.1, 47.3 and 46.4 per cent (2014/2015, 2015/2016, 2016/2017 academic session). The paper also found that enrolment in Nigerian universities was 43.1 and 56.9 per cent for Female and Male (2017). The percentage of women lecturers in federal Colleges of education was 33.8 per cent for 2016/2017 academic sessions. The percentage of Female professors in Nigerian Universities was 15.43 per cent in 2017. It posited that a clear understanding of the issues raised may open new vistas for an enhanced role of the female gender in the socio-economic and educational development of Nigeria. It must be ensured that women who dropped out of school because of family responsibilities are provided with opportunity to complete their education. The integration of gender issues into all aspects of policy and planning and a mix of legislative change, advocacy and community mobilization is needed.

How did the asset markets change after the Global Financial Crisis?
Leung, Charles K.,Chang, Kuang-Liang
The Global Financial Crisis (GFC) changes the relative economic riskiness and risk-adjusted-performance of different asset markets. While the empirical distribution for stock return shifted to the right and became more concentrated around the mean after the GFC, the real estate market counterparts moved to the left and became more spread out. The economic risk of the OFHEO and Case-Shiller housing indices was smaller than the counterpart of the equity REIT (EREITs) market before the financial crisis, it substantially increased. Also, the economic performance of the OFHEO and Case-Shiller housing indices decreased after the financial crisis. They are below the performance indices of the stock and EREITs markets. The ex-post real estate premium vanishes. If we presume the "best model" to be the same before and after the GFC, we could severely misestimate the risk after the GFC.

Informed Options Trading Before Fda Drug Advisory Committee Meetings
Wu, Zekun,Borochin, Paul,Golec, Joseph H.
The Food and Drug Administration uses committees of experts to evaluate potential new drugs. Weeks before they meet, the experts receive nonpublic reports from drug firms and FDA staff. We find significant abnormal options trading before meeting dates and report creation dates, particularly for small firms. Abnormal volume significantly predicts post-meeting stock returns. Informed traders prefer out-of-the-money options, and choose maturities to cover the dates when reports are publicly released. They prefer to sell options close to the meeting date, perhaps to capture returns from both expected stock price changes and the sharp drop in implied volatility following the meetings.

Innovation Performance and the Signal Effect: Evidence from a European Program
Levratto, Nadine,Quignon, Aurelien
This paper seeks to estimate the effect of a European policy that subsidizes innovation investments. By carefully selecting observables, we compare recipients of the program with non-recipient firms to overcome the endogeneity of R&D grants. We conduct a difference-in-differences design on the universe of a unique firm-level dataset of European SMEs between 2008 and 2017. We find a significant effect of proof of concept grants, which implies an increase in the number of patent applications and the probability of patenting. There are positive impacts on credit financing, which suggest a signal effect to investors about the project quality of young firms.

Loss of structural balance in stock markets
E. Ferreira,S.Orbe,J. Ascorbebeitia,B. Álvarez Pereira,E. Estrada

We use rank correlations as distance functions to establish the interconnectivity between stock returns, building weighted signed networks for the stocks of seven European countries, the US and Japan. We establish the theoretical relationship between the level of balance in a network and stock predictability, studying its evolution from 2005 to the third quarter of 2020. We find a clear balance-unbalance transition for six of the nine countries, following the August 2011 Black Monday in the US, when the Economic Policy Uncertainty index for this country reached its highest monthly level before the COVID-19 crisis. This sudden loss of balance is mainly caused by a reorganization of the market networks triggered by a group of low capitalization stocks belonging to the non-financial sector. After the transition, the stocks of companies in these groups become all negatively correlated between them and with most of the rest of the stocks in the market. The implied change in the network topology is directly related to a decrease in stocks predictability, a finding with novel important implications for asset allocation and portfolio hedging strategies.

Modular structure in labour networks reveals skill basins
Neave O'Clery,Eoin Flaherty,Stephen Kinsella

There is an emerging consensus in the literature that locally embedded capabilities and industrial know-how are key determinants of growth and diversification processes. In order to model these dynamics as a branching process, whereby industries grow as a function of the availability of related or relevant skills, industry networks are typically employed. These networks, sometimes referred to as industry spaces, describe the complex structure of the capability or skill overlap between industry pairs, measured here via inter-industry labour flows. Existing models typically deploy a local or 'nearest neighbour' approach to capture the size of the labour pool available to an industry in related sectors. This approach, however, ignores higher order interactions in the network, and the presence of industry clusters or groups of industries which exhibit high internal skill overlap. We argue that these clusters represent skill basins in which workers circulate and diffuse knowledge, and delineate the size of the skilled labour force available to an industry. By applying a multi-scale community detection algorithm to this network of flows, we identify industry clusters on a range of scales, from many small clusters to few large agglomerations. We construct a new variable, cluster employment, which captures the workforce available to an industry within its own cluster. Using a new dataset from Ireland, we show that this variable is predictive of industry employment growth, particularly in services. Furthermore, exploiting the multi-scale nature of the industrial clusters detected, we propose a methodology to uncover the optimal scale at which labour pooling operates.

Multilevel Monte-Carlo for computing the SCR with the standard formula and other stress tests
Aurélien Alfonsi,Adel Cherchali,Jose Arturo Infante Acevedo

This paper studies the multilevel Monte-Carlo estimator for the expectation of a maximum of conditional expectations. This problem arises naturally when considering many stress tests and appears in the calculation of the interest rate module of the standard formula for the SCR. We obtain theoretical convergence results that complements the recent work of Giles and Goda and gives some additional tractability through a parameter that somehow describes regularity properties around the maximum. We then apply the MLMC estimator to the calculation of the SCR at future dates with the standard formula for an ALM savings business on life insurance. We compare it with estimators obtained with Least Square Monte-Carlo or Neural Networks. We find that the MLMC estimator is computationally more efficient and has the main advantage to avoid regression issues, which is particularly significant in the context of projection of a balance sheet by an insurer due to the path dependency. Last, we discuss the potentiality of this numerical method and analyze in particular the effect of the portfolio allocation on the SCR at future~dates.

On the effect of social norms on performance in teams with distributed decision makers
Ravshanbek Khodzhimatov,Stephan Leitner,Friederike Wall

Social norms are rules and standards of expected behavior that emerge in societies as a result of information exchange between agents. This paper studies the effects of emergent social norms on the performance of teams. We use the $N\!K$-framework to build an agent-based model, in which agents work on a set of interdependent tasks and exchange information regarding their past behavior with their peers. Social norms emerge from these interactions. We find that social norms come at a cost for the overall performance, unless tasks assigned to the team members are highly correlated, and the effect is stronger when agents share information regarding more tasks, but is unchanged when agents communicate with more peers. Finally, we find that the established finding that the team-based incentive schemes improve performance for highly complex tasks still holds in presence of social norms.

Payout Policy Reform and Investor Horizons
Kroen, Thomas
In this paper, I study how investor horizons affect corporate payout and investment policies using the 1982 share repurchase liberalization in the US as a natural experiment. Following the reform, firms with greater pre-reform short-termist ownership increase payouts by .85% of total assets relative to firms with a more long-term investor base. This is entirely driven by net share repurchases while dividends do not fall after the event. These results soundly reject perfect substitutability of dividends and share repurchases. The increase in payouts is mirrored by an equally sized decline in investment, showing that share repurchase liberalization has sizable real effects on firm behavior. Tests exploiting newly digitized insider trading behavior support that the results are driven by myopic considerations, rather than efficient down-sizing of firms following the reform.

Powerful CEOs and Their Legacy: Evidence from Credit Risk around CEO Turnovers
Braga-Alves, Marcus V.,Ismailescu, Iuliana,Sen, Kaustav
In this study, we examine how changes in credit risk around CEO turnover announcements are affected by the nature of the succession (forced vs. voluntary), outgoing CEO’s legacy, and concentration of job titles. We find that firms whose incumbent is forced out experience a greater increase in credit default swap (CDS) spreads than firms with voluntary departures, especially when the influence of the outgoing CEO lingers or the CEO is powerful. These results provide new insights into sources of uncertainty around CEO turnovers and extend the literature on the determinants of CDS spreads around this corporate event.

Profitability Analysis in Stock Investment Using an LSTM-Based Deep Learning Model
Jaydip Sen,Abhishek Dutta,Sidra Mehtab

Designing robust systems for precise prediction of future prices of stocks has always been considered a very challenging research problem. Even more challenging is to build a system for constructing an optimum portfolio of stocks based on the forecasted future stock prices. We present a deep learning-based regression model built on a long-and-short-term memory network (LSTM) network that automatically scraps the web and extracts historical stock prices based on a stock's ticker name for a specified pair of start and end dates, and forecasts the future stock prices. We deploy the model on 75 significant stocks chosen from 15 critical sectors of the Indian stock market. For each of the stocks, the model is evaluated for its forecast accuracy. Moreover, the predicted values of the stock prices are used as the basis for investment decisions, and the returns on the investments are computed. Extensive results are presented on the performance of the model. The analysis of the results demonstrates the efficacy and effectiveness of the system and enables us to compare the profitability of the sectors from the point of view of the investors in the stock market.

Profitable Restaurants Reporting Negative Equity: Causes and Implications for Investors
Workman, Zachary
While typically characteristic only of insolvent businesses, negative shareholders’ equity has become more common among healthy, profitable businesses. Many are large restaurant chains, including McDonald’s, Starbucks, Yum! Brands, and Papa John’s. Since none of the above reported negative equity a decade ago, a close study of each company’s financial statements over the period 2010-2019 revealed how these deficits came about. Each company was able to pay out, as dividends and share repurchases, well over 100% of its reported earnings during the period. Interestingly, this is not because earnings understated each company’s cash-generating capability; in fact, there is strong evidence that earnings overstated reality for McDonald’s and Yum! Brands. In general, the primary driver was massive debt issuance, followed by refranchising (selling company-operated restaurants to franchisees). Of the four companies, Starbucks has the highest ability to continue distributing over 100% of earnings, while Yum! Brands does not appear to have much more room to do so. Each company was able to push equity negative because of the wide spread between its return on assets and cost of liabilities. Each has negative net working capital, which is essentially a cost-free source of funding, and was able to issue massive amounts of debt at low single digits rates. Meanwhile, return on assets averaged between 15-30% (due to powerful unrecorded intangible assets like brand and supply chain capabilities). The extreme case is Yum! Brands, whose debt at the end of 2019 was around twice the level of total recorded assets, yet their interest coverage ratio was a fairly comfortable 4.0x. There are a few important implications for investors. First, negative equity is characteristic of companies on opposite ends of the business quality spectrum. Secondly, for many companies, metrics involving equity have lost their relevance and should be ignored. Next, issuing debt to repurchase shares can be a great strategy if cost of equity greatly exceeds cost of debt, but it carries substantial risk if done too aggressively (the primary risk being that interest rates are substantially higher in the future). Lastly, businesses that appear overvalued using traditional metrics like price-to-earnings may in fact by greatly undervalued, as is the case for one that can distribute well over 100% of reported earnings for an extended period of time.

Purpose in Business Association Statutes: Much Ado About Something (But Not Much)
McDonnell, Brett
In recent years much attention has focused on identifying or creating legal forms for business associations that enable and promote social enterprises and socially responsible behavior. One strategy in enterprise governance that has received renewed attention is formal legal definitions of the purpose of a business association. This chapter examines two questions. First, what do current legal rules and norms applicable to most business organizations say about the proper purpose of a company, and how much do those rules constrain businesses from pursuing social missions that do not prioritize, and may sometimes reduce, profit? The chapter considers statutory and case law for corporations and LLCs, and argues that Delaware corporate law does create a presumption that corporate purpose is to maximize shareholder wealth, but this does little to constrain corporate social responsibility or social enterprise. Second, how effectively can companies use statements of purpose to help them behave responsibly and pursue social missions? The chapter looks at four forms of business association that attempt to encourage social enterprise: L3Cs, benefit corporations, nonprofit corporations, and cooperatives. All four use purpose as a governance tool in some fashion, suggesting that purpose has some use in promoting social responsibility. However, the forms of association which use varied strategies beyond purpose achieve much stronger commitment to desired social goals.

Risk Retention in Securitization and Empty Creditors
Chouliara, Evgenia,Martino, Edoardo D.
The risk retention rule was introduced in the US and the EU as a mechanism to curb theoriginate-to-distribute model, associated with securitizations and the financial crisis of 2008.This paper argues that besides its original financial stability rationale, the rule has positivespillovers on debt governance and specifically on the incentives to monitor, the design ofcovenants and the lender’s stance during renegotiation and bankruptcy (the ‘empty creditor’problem). Risk retention in true sale securitizations makes the strongest case for debtgovernance, although the existence of various options of retention appears to be associatedwith varying incentives. The mechanism and effects of risk retention on syntheticsecuritizations remain ambivalent, given the perverse incentives associated with overinsurance(negative economic ownership). However, the upcoming restriction of doublehedging for synthetic STS transactions is a positive development.

Robo-Advising: Less AI and More XAI?
Bianchi, Milo,Briere, Marie
We start by considering some of the key reasons behind the academic and industry interest in robo-advisors. We discuss how robo-advice could potentially address some fundamental problems in investors’ decision making as well as in traditional financial advice. We then move on to some of the ongoing issues regarding the future of robo-advice. Firstly, the role Artificial Intelligence (AI) plays, and should play, in robo-advice. Secondly, how far should the personalisation of robo-advice recommendations go. Third, how trust in automated financial advice can be generated and maintained. Fourth, whether robots are perceived as complements or substitutes to human decision-making. Our conclusion outlines some thoughts on what the next generation of robo-advisors might look like. We highlight the importance of recent insights in Explainable AI and how new forms of AI applied to financial services would benefit from importing insights from economics and psychology to design effective human/robot interaction.

Tail concordance measures: A fair assessment of tail dependence
Takaaki Koike,Shogo Kato,Marius Hofert

A new class of measures of bivariate tail dependence called tail concordance measures (TCMs) is proposed, which is defined as the limit of a measure of concordance of the underlying copula restricted to the tail region of interest. TCMs captures the extremal relationship between random variables not only along the diagonal but also along all angles weighted by a tail generating measure. Axioms of tail dependence measures are introduced, and TCMs are shown to characterize linear tail dependence measures. The infimum and supremum of TCMs over all generating measures are considered to investigate the issue of under- and overestimation of the degree of extreme co-movements. The infimum is shown to be attained by the classical tail dependence coefficient, and thus the classical notion always underestimates the degree of tail dependence. A formula for the supremum TCM is derived and shown to overestimate the degree of extreme co-movements. Estimators of the proposed measures are studied, and their performance is demonstrated in numerical experiments. For a fair assessment of tail dependence and stability of the estimation under small sample sizes, TCMs weighted over all angles are suggested, with tail Spearman's rho and tail Gini's gamma being interesting novel special cases of TCMs.

The Corporate Governance Gap
Nili, Yaron,Kastiel, Kobi
A reliable system of corporate governance is considered an important requirement for the long-term success of public companies and for the good of society at large. After decades of research and policy advocacy, there is a growing sense that corporations are finally nearing the promised land: boards of public corporations seem more diverse, large investors seem more engaged, and directors seem more accountable than ever. But is this perception really accurate? While many large, high-profile companies tend to serve as role models of “good” governance practices, the picture of corporate governanceâ€"as this Article revealsâ€"is considerably different in the far corners of corporate America, away from the limelight of the Fortune 500 and within the universe of small-cap corporations. In these smaller, less scrutinized corporations, the adoption of governance arrangements is less organized or systematic, often representing a significant departure from the norms set by larger companies, resulting in what this article calls the “Corporate Governance Gap.”What prompts this governance gap? Corporate governance, we argue, is not self-driven. It requires engagement with agents and forces of change, which, as we detail theoretically and empirically, are less likely to be as prevalent or effective within smaller corporations. Corporate governance scholars have long debated the merits of contractual freedom in corporate law. Such debate cannot be resolved without a fuller understanding of how governance terms are disseminated in the marketplace and without recognition of the Corporate Governance Gap between large and small companies. This Article, the first to address the sharp divide in the governance of American corporations, makes three key contributions to the literature. First, using a comprehensive hand-collected dataset, it offers a novel and detailed empirical account of the differences in governance practices, shedding new light on the corporate governance of small-cap firms. Second, the Article develops a theoretical account of the forces that promote corporate governance, which help explain this stark divide in governance. Finally, the Article proposes policy reforms aimed at bridging the gap between large and small firms’ corporate governance norms, with the potential of prompting a new line of inquiry regarding the role of key governance agents in smaller public companies.

The Impact of Financial Inclusion on Minorities: Evidence from the Freedman's Savings Bank
Celerier, Claire,Tak, Purnoor
A recent study, Stein and Yannelis (2020), argues that the Freedman's Savings Bank, which collected deposits from recently freed enslaved people during the Reconstruction era, had large positive effects on its depositors' wealth and education. Using additional data, we empirically reject the assumptions of the study's identification strategy. Following an alternative methodology that addresses these concerns, we find no evidence of any positive effects. In contrast, our findings support a predatory view of the Freedman's Savings Bank: the negative effects of the large fraud and abuse of trust at the bank led to significant losses for Black depositors.

The Persistent Effect of Famine on Present-Day China: Evidence from the Billionaires
Pramod Kumar Sur,Masaru Sasaki

More than half a century has passed since the Great Chinese Famine (1959-1961), and China has transformed from a poor, underdeveloped country to the world's leading emerging economy. Does the effect of the famine persist today? To explore this question, we combine historical data on province-level famine exposure with contemporary data on individual wealth. To better understand if the relationship is causal, we simultaneously account for the well-known historical evidence on the selection effect arising for those who survive the famine and those born during this period, as well as the issue of endogeneity on the exposure of a province to the famine. We find robust evidence showing that famine exposure has had a considerable negative effect on the contemporary wealth of individuals born during this period. Together, the evidence suggests that the famine had an adverse effect on wealth, and it is even present among the wealthiest cohort of individuals in present-day China.

The Ruble Collapse in an Online Marketplace: Some Lessons for Market Designers
John Horton

The sharp devaluation of the ruble in 2014 increased the real returns to Russians from working in a global online labor marketplace, as con- tracts in this market are dollar-denominated. Russians clearly noticed the opportunity, with Russian hours-worked increasing substantially, primarily on the extensive margin -- incumbent Russians already active were fairly inelastic. Contrary to the predictions of bargaining models, there was little to no pass-through of the ruble price changes in to wages. There was also no evidence of a demand-side response, with buyers not posting more "Russian friendly" jobs, suggesting limited cross-side externalities. The key findings -- a high extensive margin elasticity but low intensive margin elasticity; little pass-through into wages; and little evidence of a cross-side externality -- have implications for market designers with respect to pricing and supply acquisition.

The role of relatedness and strategic linkages between domestic and MNE sectors in regional branching and resilience
Mattie Landman,Sanna Ojanperä,Stephen Kinsella,Neave O'Clery

Despite the key role of multinational enterprises (MNEs) in both international markets and domestic economies, there is no consensus on whether or how they positively impact their host economy. In particular, do MNEs foster the creation of new domestic firms through knowledge spillovers? In this study, we look at the impact of the presence of related MNE industries on the entry and exit of domestic export industries in Irish regions before, during, and after the 2008 financial crisis. Specifically, we are interested in whether the presence of MNEs in a region results in knowledge spillovers and the creation of new domestic export activities in related sectors. To quantify how related an industry is to a region's current export basket we deploy an existing cohesion variable, closeness, that measures the relatedness of a new industry to existing industries within a region. We also introduce a new variable, strategic closeness, which captures not only the relatedness of industries within a region but their own connectivity or embeddedness. We use a dataset containing all government-supported export firms in Ireland between 2006-2018. We find that the presence of related MNE industries is associated with the entry of new domestic activity, suggesting that Irish regions benefited from domestic-MNE linkages. However this relationship was temporarily lost after the financial crisis and only recently re-established, with domestic entry dependent on the presence of highly embedded MNE sectors. Furthermore, we find that related MNEs help protect domestic industries against exit after the crisis and thereby play a role in enhancing regional resilience.

Time is Money: The Equilibrium Trading Horizon and Optimal Arrival Price
Kevin Patrick Darby

Executing even moderately large derivatives orders can be expensive and risky; it's hard to balance the uncertainty of working an order over time versus paying a liquidity premium for immediate execution. Here, we introduce the Time Is Money model, which calculates the Equilibrium Trading Horizon over which to execute an order within the adversarial forces of variance risk and liquidity premium. We construct a hypothetical at-the-money option within Arithmetic Brownian Motion and invert the Bachelier model to compute an inflection point between implied variance and liquidity cost as governed by a central limit order book, each in real time as they evolve. As a result, we demonstrate a novel, continuous-time Arrival Price framework. Further, we argue that traders should be indifferent to choosing between variance risk and liquidity cost, unless they have a predetermined bias or an exogenous position with a convex payoff. We, therefore, introduce half-life factor asymptotics to the model based on a convexity factor and compare results to existing models. We also describe a specialization of the model for trading a basket of correlated instruments, as exemplified by a futures calendar spread. Finally, we establish groundwork for microstructure optimizations as well as explore short term drift and conditional expected slippage within the Equilibrium Horizon framework.

Unleashing the full potential of the Turkish business sector
Dlugosch, Dennis,Gönenç, Rauf,Bağır, Yusuf Kenan,Torun, Hüzeyfe,Kim, Eun Jung
Productivity in Turkey has been growing stronger than in most peer countries since 2010 but has slowed down. Despite a remarkably entrepreneurial population, business dynamism has also been less vigorous in recent years. This working paper discusses the factors behind this slowdown and analyses a wide range of structural policies that would help to revive productivity growth and unleash the full potential of the Turkish business sector. The elevated number of informal, semi-formal and fully formal forms constitutes a key impediment to higher growth and more high-quality jobs. Structural reforms that allow more flexibility in labour markets, more competition in product markets and major progress with the quality of governance would foster productivity growth, job creation but also boost the digital transformation. Streamlining and simplifying the complex system of regulations and government support schemes would prevent firms from clustering around eligibility thresholds and thus remove obstacles to the upscaling of firms.

We Live in a Motorized Civilization: Robert Moses Replies to Robert Caro
Geoff Boeing

In 1974, Robert Caro published The Power Broker, a critical biography of Robert Moses's dictatorial tenure as the "master builder" of mid-century New York. Moses profoundly transformed New York's urban fabric and transportation system, producing the Brooklyn Battery Tunnel, the Verrazano Narrows Bridge, the Westside Highway, the Cross-Bronx Expressway, the Lincoln Center, the UN headquarters, Shea Stadium, Jones Beach State Park and many other projects. However, The Power Broker did lasting damage to his public image and today he remains one of the most controversial figures in city planning history. On August 26, 1974, Moses issued a turgid 23-page statement denouncing Caro's work as "full of mistakes, unsupported charges, nasty baseless personalities, and random haymakers." Moses's original typewritten statement survives today as a grainy photocopy in the New York City Parks Department archive. To better preserve and disseminate it, I have extracted and transcribed its text using optical character recognition and edited the result to correct errors. Here I compile my transcription of Moses's statement, alongside Caro's reply to it.

Christensen, Derek,Lynch, Dan,Partridge, Clay
Theory suggests mandated changes in accounting standards can lead to increases in investment efficiency through two mechanisms: (1) increases in internal information quality (IIQ), or (2) reductions in information asymmetry with external parties. We use the long transition period of the new lease accounting standard to isolate the effects of increases in IIQ on investment efficiency. Using a difference-in-differences design we find that firms affected by the new lease standard experience significant increases in investment efficiency in the year immediately preceding the standards implementation. The improvements in investment efficiency are largest for firms with high lease intensity and multiple operating segments. The increases in investment efficiency are driven by over-investing firms that reduce their capital expenditures and net acquisitions. We contribute to the investment efficiency literature by identifying the effect of IIQ on investment behavior. Further, we document that internal information gathering in anticipation of a new accounting standard can improve managerial decision-making, an explicit goal of the FASB’s post-implementation review of the lease standard.