Research articles for the 2021-05-28

Accounting Measurement Intensity
Andreicovici, Ionela,van Lent, Laurence,Nikolaev , Valeri V.,Zhang, Ruisheng
We propose an empirical measure of metering problems, i.e., the difficulties of measuring productivity and rewards in firms. We build on the insight that these metering problems are reflected in the intensity with which firms apply Generally Accepted Accounting Principles when preparing their financial statements to capture economic transactions. We adapt a simple computational linguistics algorithm to identify textual patterns that uniquely signify heightened use of accounting measurement in preparation of accounting reports. We validate the output of this algorithm before computing time-varying, firm-level scores of accounting measurement intensity (AMI). We then show that AMI is associated with the decisions of professional users of accounting information. We also document that AMI is correlated with the cross-section of expected equity returns and with the cost of debt and non-price terms in the private loan market. In CEO compensation contracts, we see lower pay-performance sensitivity to accounting performance metrics as AMI increases. Finally, we report that AMI correlates with investment and hiring decisions in firms; factor productivity, as well as the efficiency of resource allocation. Together, these findings are consistent with the predictions in Alchian and Demsetz (1972) about how metering problems affect the boundary of the firm.

Cash Holdings and Relationship Lending
Dahiya, Sandeep,Hallak, Issam,Matthys, Thomas
We examine the effect of relationship lending on a firm's cash-holding levels. Relationship lending allows a lender to generate private information about its borrowers at a lower cost compared to an arm's-length lender. This advantage of relationship lending can mitigate financial constraints of the borrower. We find that the level of cash holding for firms with a relationship lender is significantly lower compared to firms that borrow from non-relationship lenders. We show that access to a relationship lender is associated with significantly lower levels of cash holding for firms which operate in industries that have high cash flow volatility. Our finding is consistent with lending relationships reducing the cash holding need for precautionary purposes. Finally, we show that relationship lending is not associated with the market value of firms' cash holdings. Our results provide empirical evidence that relationship lending is related to the composition of short-term assets chosen by firms.

Central Bank Digital Currency Can Lead to the Collapse of Cryptocurrency
Ozili, Peterson K
Cryptocurrencies have become popular. Economic agents use cryptocurrencies such as bitcoins to make payments. They pose a threat to fiat currency. Central banks have begun to respond to this threat. They realize that they need to join the race to offer a digital currency and dominate the digital currency landscape which can lead to the collapse of most digital currencies that are not issued by a central bank or monetary authority. In this paper, I show how the creation of a central bank digital currency can lead to the collapse of digital currencies including cryptocurrencies and bitcoins. Central banks will leverage on their monetary powers, and the trust that citizens have in government-backed money. This will give central banks strong incentives to issue a central bank digital currency. The issuance of a central bank digital currency can lead to the collapse of cryptocurrencies although not immediately.

Competition in the Project Finance Loan Industry in Europe
Delgado, Juan,Morón, Violeta,Otero, Héctor
The market for project finance loans has a special feature: banks do not only compete individually but also through coalitions or “syndicates”. Traditional concentration indicators summarise industry structure based on individual market shares but they fail to capture the dynamics of competition between coalitions. For the same level of concentration, competition will be fiercer if there exist different competing coalitions than if all loans are granted by a single syndicate of banks. We develop a metric of “similarity” between syndicates to assess how similar syndicate composition is in the European project finance loan industry. We find that syndicates are more similar within Spain and Portugal than within Germany and the UK, which might indicate a lower degree of competition in the former. We also find that syndicates are significantly more similar within countries than between countries, which might reflect the lack of market integration and the existence of home bias in the European project finance loan industry.

Constitutions and Crises: Balancing Insolvency and Social Policy through the Lens of Comparative Legal History
Gant, Jennifer L. L.
The economic and financial crises of the last decade have led to massive changes in economic, social, banking, and employment policies throughout the world. However, both the United States and the United Kingdom have generally maintained more static in relation to their overall status quo regarding insolvency and social policy, in stark contrast to the reactions of most continental European nations. Taken together with the sovereign debt crisis that plagued many continental European nations beginning in 2010, it may be somewhat surprising that the United Kingdom has not adjusted its policies to any greater degree than it has. Rather, it is continental Europe that has moved more or less en masse toward the lower common denominator of the United Kingdom, at least in terms of social and employment protection. In addition, many peripheral or less economically developed European nations have achieved some inadvertent legal benefits from the crises of the last decade in the reform or creation of more robust insolvency and corporate rescue systems.The purpose of this paper is to explore the historical and constitutional underpinnings of the US and the UK, within the context of the European Union when required, in order to identify important differences in legal development and divergence from a common legal ancestry in approaches to insolvency, in particular corporate rescue procedures such as Chapter 11 and administration under the Insolvency Act 1986, and the social policy issues related to it. By identifying points of divergence situated within the historical context in which it arose, a more detailed, path dependent observation may reveal deeply seated differences that can explain why the US and the UK have often relied upon different foundational philosophies in the development of legal systems in insolvency and social policy. While the UK and the US are often compared in a positive light, as being more closely aligned than other European nations and the UK, their differences continue to persist, despite EU influence, and indeed, at times, in spite of it.

Dark Triad Personality Traits and Selective Hedging
Pelster, Matthias,Hofmann, Annette,Klocke, Nina,Warkulat, Sonja
We study the relationship between risk managers' dark triad personality traits (Machiavellianism, narcissism, and psychopathy) and their selective hedging activities. Using a primary survey of 412 professional risk managers, we find that managers with dark personality traits are more likely to engage in selective hedging than those without. This effect is particularly pronounced for older, male, and less experienced risk managers. The effect is also stronger in smaller firms, less centralized risk management departments, and family-owned firms, and it cannot be explained by managerial (over)confidence.

Do Cognitive Biases Impact M&A Performance in Emerging Markets? Evidence from Russian Firms
Skvortsova, Irina,Vershinina, Anna
In this paper we investigate cognitive biases as a potential reason for the varied results of M&A in emerging capital markets. We focus on two cognitive biases, CEO overconfidence and availability bias, which significantly influence CEO behavior, encouraging them to be irrational in M&A deals. Based on 237 M&A deals closed by Russian firms during the period 2005â€"2019 we empirically prove that CEO overconfidence destroys value, and availability bias creates value in M&A deals in the Russian market. We show that due to the low level of corporate governance in emerging capital markets, all corporate governance mechanisms can mitigate CEO irrationalities in M&A.

Does Import Competition from China Discipline Overconfident CEOs in U.S. Firms?
Chen, Sheng‐Syan,Peng, Shu-Cing,Yeh, Chia-Wei
We examine how the trade shock from China influences the behavior and investment performance of overconfident CEOs in U.S. firms. We show that the rise of Chinese import competition curbs investments and improves investment value and acquisition performance for firms with overconfident CEOs. Intensified Chinese product competition also reduces the incentives for these firms to expand assets, invest out of cash flows, pursue aggressive financial policies, and increase risk exposure, and enhances their incentives to buy back shares. Overall, the evidence suggests that product market competition is an effective external governance mechanism for curbing the adverse effects of managerial overconfidence.

Does U.S. Sentiment Attract Foreign Investors?
Montone, Maurizio,Potì, Valerio,Zwinkels, Remco C. J.
Previous research shows that high sentiment among U.S. investors increases real investment both domestically and abroad. In this paper, we show that high U.S. sentiment also prompts financially developed countries to invest more in the United States, especially if they exhibit a high level of educational attainment. The results suggest that the real effects of sentiment are larger than previously thought.

Does a financial crisis change a bank's exposure to risk? A difference-in-differences approach
Mäkinen, Mikko
Can a major financial crisis trigger changes in a bank's risk-taking behavior? Using the 2008 Global Financial Crisis as a quasi-natural experiment and a difference-in-differences approach, I examine whether the worst crisis-hit Russian banks – the banks that have strong incentives to behavior-altering changes – can decrease their post-crisis exposure to risk. A shift in risk-taking behavior by these banks indicates the learning hypothesis. The findings are mixed. The evidence concerning credit risk is inconsistent with the learning hypothesis. On the other hand, the evidence concerning solvency risk is consistent with the learning hypothesis and corroborates evidence from the Nordic countries (Berglund and Mäkinen, 2019). As such, bank learning from a financial crisis may not depend on the institutional context and the level of development of national financial market. Several robustness checks with alternative regression specifications are provided.

Economic Policy Uncertainty in Banking: A Literature Review
Ozili, Peterson K
This paper is a survey of the most important research in the economic policy uncertainty literature. Economic policy uncertainty, although still under-researched relative to mainstream topics in economics and finance, has recently received increased scholarly attention. Through synthesizing common themes in the literature, the paper highlights the progress made so far and suggest some avenues for future research which allows future researchers to position their research and differentiate themselves from other studies in the literature. The paper finds that economic policy uncertainty affects banks through a reduction in credit supply and loan re-pricing. High economic policy uncertainty compel bank managers to discretionary distort bank financial reporting in ways that help them to mitigate the depressing effect of economic policy uncertainty on their profitability.

Economic profitability and (non)additivity of residual income
Magni, Carlo Alberto
We show that the standard notion of residual income (RI) does not fulfill additive coherence. This gives rise to ambiguities and inconsistencies. The pitfall resides in the capital charge, which blends a non-market value with a market rate. We solve the problem by using a capital charge based on economic return, obtained as the product of a market value and a market rate. The resultant economic RI enjoys additivity. The economic RI is naturally associated to the average Return on Investment (ratio of total income to total invested capital). Subtracting the respective cost of capital (ratio of total economic return to total invested capital) the marginal economic efficiency of the capital is correctly captured. Economic RI guarantees consistency among the various sets of incomes, book values, economic values, accounting rates, and costs of capital, underan investment perspective as well as a financing one, both at a period level and at an aggregate level, either assuming time-invariant or time-varying costs of capital. Therefore, the economic RI offers a coherent tool for the assessment of a project's or firm's economic efficiency.This is a preprint of an article forthcoming in Annals of Finance

Employees As Stakeholders in Restructuring and Insolvency: Acquired Rights and Business Transfers
Gant, Jennifer L. L.
Employees seem to be late to the party when it comes to considering their position in a restructuring procedure, particularly given the focus that the EU has had on employee protection over the years. While insolvency has shifted from liquidation and creditor wealth maximisation to a focus on the rescue of viable businesses and providing procedures to resolve financial distress further and further from actual insolvency, the treatment of employees during an employer’s insolvency has remained static over the last two decades in terms of the EU Directives that provide protection at such times. Debates around preventive restructuring continue to revolve around the rights of stakeholders who have legal interests in a financially distressed company and while the Preventive Restructuring Directive 1023/2019 introduced Article 13, which appears to provide protection to workers, it really merely refers to those Directives that are already in place and that have changed little in parallel with the shift in insolvency and restructuring policy. The aim of this Chapter is to discuss a key regulatory mechanism that protects employees and employment in the context of restructuring procedures. As the nature of restructuring, preventive or otherwise, will often lead to asset sales, sometimes taking the form of business or going concern sales, a key practical consideration must be the fate of associated employees who are covered by the protections of the ARD and the impact of such protections on the potential success of a restructuring plan. This Chapter will focus on the treatment of employees in the context of business sales in Europe with an emphasis on the UK as a key restructuring destination that has had to deal with the ARD in great detail in its domestic courts. Although the cases generally deal with restructuring under the UK’s Administration procedure or the pre-pack, the reasoning employed in determining the application of the ARD will be relevant to whether the application of the Directive in new preventive restructuring procedures as the PRD throws this determination into the realm of applicable national law. This will then be contrasted with the approach in the Netherlands to the same issue, and the impact the Court of Justice of the European Union’s findings have had on the use of the Dutch and Belgian pre-pack. Finally, there will be some analysis as to what this approach may mean for incoming preventive restructuring procedures implemented subsequent to the Preventive Restructuring Directive.

Explaining Greenium in a Macro-Finance Integrated Assessment Model
Yang, Biao
I investigate how firms' environmental responsibilities affect expected stock returns. Using the environmental pillar score from the ASSET4 ESG dataset, I find that greener stocks have lower expected returns. This greenium remains significant after controlling for systemic and idiosyncratic risks. I explain the greenium through event studies showing that green stocks hedge physical climate-change risks. A macro-finance integrated assessment model (MFIAM) featuring time-varying climate damage intensity, recursive preferences, and investment frictions supports the empirical findings. The model implies that climate damages are pro-cyclical, leading to a high discount rate and a relatively low social cost of carbon.

Firm-level Climate Change Exposure
Sautner, Zacharias,van Lent, Laurence,Vilkov, Grigory,Zhang, Ruisheng
We introduce a method that identifies firm-level climate change exposures from conversation in earnings conference calls of more than 10,000 firms from 34 countries between 2002 and 2019. The method captures exposures related to opportunity, physical, and regulatory shocks associated with climate change. The exposure measures exhibit cross-sectional and time-series variations which align with reasonable priors, and are better in capturing firm-level variation than carbon intensities or ratings. The exposure measures relate to economic factors that prior work has identified as important correlates of climate change exposure (e.g., public climate attention). Exposure to regulatory shocks negatively correlates with firm valuations, but only in recent years.

Global Evidence on Unspanned Macro Risks in Dynamic Term Structure Models
van der Wel, Michel,Zhang, Yaoyuan
There are mixed results on whether macro risks are spanned by the yield curve. This paper reviews the major arguments and takes a global perspective to obtain comprehensive evidence. We study a large cross-section of 22 countries, including both developed and emerging markets. Our regression evidence confirms that macro information provides explanatory power for bond excess returns on top of yield factors. This finding is particularly strong in emerging markets. However, from a mechanical perspective, discriminating between spanned and unspanned models when considering in-sample fit and term premium predictions makes no difference.

Going by the Book: Valuation Ratios and Stock Returns
Choi, Ki-Soon,So, Eric C.,Wang, Charles C. Y.
We study the use of firms' book-to-market ratios (B/M) in value investing and itsimplications for comovements in firms’ stock returns and trading volumes. We showB/M has become increasingly detached from common alternative valuation ratios overtime while also becoming worse at forecasting future returns and growth in both anabsolute and relative sense. Despite these trends, some major U.S. stock indexes andinstitutional funds continue relying on B/M when identifying value stocks and selectingindex weights. Consistent with this reliance shaping market outcomes, we find firms'stock returns and trading volumes comove with B/M-peers (i.e., firms with similar B/M)in excess of their fundamentals, particularly among stocks held by value-oriented funds.A shift in the economy toward firms investing in knowledge and organizational capitaland increasing shareholder payouts contribute to these trends. Finally, we highlightsimple adjustments to B/M that mitigate these issues.

How Does Local Economy Affect Commercial Property Performance?
Feng, Zifeng
Local economy should be an important determinant of commercial real estate (CRE) performance. This paper empirically examines how the economic conditions of a metropolitan area drive the performance of CRE in the area. This paper shows that areas with better economic conditions provide a higher total return on commercial properties than those with worse economic conditions. Further analysis indicates that both the income return and capital appreciation of CRE are significantly affected by the size of the economy (proxied as GDP level), while the capital return (but not income return) is significantly affected by the growth of the economy (proxied as GDP growth). The results are largely consistent in the Fama-MacBeth regression, the portfolio analysis, and the propensity score matching model, providing solid evidence on the important effects of local economy on CRE.

Inefficient Regulation: Mortgages versus Total Credit
Karapetyan, Artashes,Kvaerner, Jens,Rohrer, Maximilian
We study the impact of loan-to-value (LTV) regulation on supply and demand for unregulated debt that is used for home acquisition. In our setting, part of the home acquisition price is in the form of pre-existing debt exempt from regulation. Due to variation in the latter, the introduction of the LTV cap generated exogenous variation in unregulated home financing. Our main finding is that households, especially constrained ones, start paying more for houses financed with more unregulated debt. Our difference-in-difference estimates suggest an implied price of equity of 8.6 percent, which is 6.2 percentage points higher than the prevailing mortgage rate. In the longer run, developers increase the supply of unregulated debt by about 50 percent. Our results are consistent with evidence from other countries and indicate that too narrowly defined LTV regulation may lead to higher borrowing costs and can in principle increase default risk rather than reduce it.

Investing during a Fintech Revolution: Ambiguity and Return Risk in Cryptocurrencies
Luo, Di,Mishra, Tapas,Yarovaya, Larisa,Zhang, Zhuang
Rationally justifying Bitcoin's immense price fluctuations has remained a persistent challenge for both investors and researchers in this field. A primary reason is our potential weakness toward robustly quantifying unquantifiable risks or ambiguity in Bitcoin returns. This paper introduces a behavioral channel to argue that the degree of ambiguity aversion is a prominent source of abnormal returns from investment in Bitcoin markets. Using data over a ten-year period, we show that Bitcoin investors exhibit, on average, an increasing aversion to ambiguity. Furthermore, investors are found to earn abnormal returns only when ambiguity is low. Robustness exercises reassure the validity of our results.

Investments (Planning, Process, Concepts, Avenues, and Risk-return in modern times)
Kapadia, Sunil
Economic well-being of a person would depend on how wisely he/she invests particularly in long run. Every investment decision will have three aspects, namely: Time horizon, Rate expectation and attendant Risk. While investing we should all seek to manage our wealth effectively, obtaining the most therefrom. Also, it's exciting to review your investment returns and to see how they are multiplying?

Investor Sentiment and the Market Reaction to Macroeconomic News
Gu, Chen,Chen, Denghui,Stan, Raluca
We provide evidence that the stock market response to macroeconomic news weakens in times of high investor sentiment. The reaction to macroeconomic information is 50 percent weaker in times of elevated bullish investor sentiment, relative to periods of low sentiment. This dampening effect holds for both good and bad macroeconomic news. Investor sentiment seems to hinder the incorporation of public information into asset prices. Our findings shed new light on how investor sentiment affects the link between fundamentals and security prices.

Italia 1 Trim 2021: Pil, Debito & Co (Italy 1Q 2021: GDP, Debt & Co.)
Mazziero, Maurizio,Lawford, Andrew,Serafini, Gabriele
Italian Abstract: Ricerca sulla situazione economica italiana basata sui dati economici ufficiali; vengono analizzati e confrontati con il passato il debito pubblico, le riserve ufficiali, il PIL, l'inflazione e la disoccupazione. English Abstract: Research into the state of the Italian economy based on official economic data; the current Sovereign Debt, Official Reserves, GDP, Inflation and Unemployment situation is presented and and compared with the past.Note: Downloadable document is in Italian.

Justice in Arbitration: The Consumer Perspective
Ghodoosi, Farshad,Sharif, Monica
Purpose: Arbitrationâ€"a binding private third-party adjudicationâ€"has been the primary legalway for resolution of consumer disputes. Consumers, however, rarely use arbitration to resolvetheir disputes while evidence suggests that their disputes remain unresolved. Contrary to thecurrent prevailing emphasis on who’s winning in arbitration, our study establishes thatconsumers believe that the court is more just than arbitration, regardless of the outcome. Ourstudy further establishes that consumers’ perceived poor legitimacy and lack of familiarity, notcost calculation, are what drive their justice perception.Methodology: In three experimental studies, participants were presented with scenarios in whichthey were to envision themselves amidst a consumer dispute. The scenarios were followed bysurvey questions that examined individuals’ perceptions of justice. Three mediating variables oflegitimacy, cost and familiarity were also examined.Findings: The results suggest that consumers hold a high perception of justice for court asopposed to arbitration. Even though a favorable outcome increases consumers’ perception ofjustice, the results suggest that consumers find courts to be fairer regardless of the outcome.Familiarity and legitimacy mediate this relationship, not cost.Originality: Current research does not provide an adequate explanation for consumers’ underutilization of arbitration nor does it focus on correct factors. Studies in psychology and law primarily focus on ex post feelings of individuals after dispute resolution, ex post favorableoutcomes, and ex ante cost-benefit analysis. The present study for the first time analyzes ex anteconsumer perception of justice.

Learning about latent dynamic trading demand
Chen, Xiao,Choi, Jin Hyuk,Larsen, Kasper,Seppi, Duane J.
This paper presents an equilibrium model of dynamic trading, learning, and pricing by strategic investors with trading targets and price impact. Since trading targets are private, rebalancers and liquidity providers filter the child order flow over time to estimate the latent underlying parent trading demand imbalance and its expected impact on subsequent price pressure dynamics. We prove existence of the equilibrium and solve for equilibrium trading strategies and prices in terms of the solution to a system of coupled ODEs. We show that trading strategies are combinations of trading towards investor targets, liquidity provision for other investors’ demands, and front-running based on learning about latent underlying trading demand imbalances and future price pressure.

Leverage is a Double-Edged Sword
Subrahmanyam, Avanidhar,Tang, Ke,Wang, Jingyuan,Yang, Xuewei
We use proprietary futures brokerage data to study the impact of leverage on investors' trading performance. We find that leverage is a double-edged sword. For the bulk of investors, even though high leverage increases the risk (volatility) of their portfolio, it actually decreases performance. Specifically, a one unit increase in leverage implies an 11% increase in the annualized volatility of portfolio returns and reduces investment returns by 5.3 bps per day (13% annualized). Leveraged losses occur due to forced liquidation (margin calls) as well as additional trading costs due to enlarged leverage-induced positions. High leverage amplifies unskilled investors' losses stemming from the disposition effect and gambling preferences. On the other hand, a few skilled investors do take advantage of leverage by actively timing the market and conducting arbitrage trades; these traders on average earn a 19.3 bps daily (47% annualized) return per additional unit of leverage.

Liquidity Provision and the Cross-Section of Night-minus-day Stock Returns
Lu, Zhongjin,Qin, Zhongling
We link liquidity provision to the large predictabilities in the cross-section of night-minus-day stock returns. Across three distinct sets of existing predictive signals, we consistently find that the associated night-minus-day return predictabilities are mispricings that concentrate near the market open, market makers are the most likely arbitrageurs exploiting these predictabilities, and a single liquidity provision factor explains up to 95% (35%) of the cross-sectional difference (time-series variation) in these returns. Our findings, combined with our new evidence on the underlying retail and institutional trading demand, suggest that a liquidity provision perspective is needed to understand these night-minus-day return predictabilities.

Litigation Risk Management Through Corporate Payout Policy
Arena, Matteo P.,Julio, Brandon
Firms significantly modify their payout policy in anticipation of future litigation costs. We examine a comprehensive sample of U.S. corporate lawsuits and find that firms facing significant litigation risk pay lower dividends, and in some cases omit dividends while distributing more cash through share repurchases. Litigation risk changes the distribution of payouts but not the total payout yield as the increase in share repurchases offsets the decrease in dividends. Cash-poor firms cut share repurchases when settlement costs are incurred. The results suggest that firms at higher risk of litigation increase their payout flexibility.

Market Power and Systematic Risk
Hollstein, Fabian,Prokopczuk, Marcel,Wuersig, Christoph
We investigate the impact of product market competition on firms' systematic risk. Using a measure of total product market similarity, we document a strong negative link between market power and market betas. There is a more than threefold increase in the effect during the most recent low-competition period. Announcements of anti-competitive mergers lead to a significant reduction in market betas, underlining the causality of the market power--systematic risk relationship. Firms that face less competition appear to be partly insulated from systematic discount-rate shocks. Lower equity costs therefore mean that market power is in part self-reinforcing.

Measure for measure: evidence on the relative performance of regulatory requirements for small and large banks
Sanders, Austen,Willison, Matthew
This paper compares the performance of regulatory thresholds as predictors of distress for large banks with their performance for small banks. Using a data set of capital and liquidity ratios for a sample of UK‑focused banks in 2007, we apply simple threshold-based rules to assess how regulatory thresholds might have identified banks that subsequently became distressed. We compare results for large banks with results for small banks, optimising thresholds separately for the two groups. Our results suggest that the regulatory ratios we use are better aligned with risks which cause distress of large banks than with those which cause distress of small banks. We find that when thresholds are set to correctly identify a high proportion of banks which subsequently became distressed, they generate materially lower false alarm rates for large banks than for small. This result is robust to definitional choices and to resampling. We also test whether supervisors' judgements about the quality of banks' governance have predictive power with regard to distress. We find that adding supervisors' judgements to regulatory ratios improves predictions for small banks but not for large banks.

Moral Hazard, Path Dependency, and Failing Franchisors: Mitigating Franchisee Risk through Participation
Gant, Jennifer L. L. ,Buchan, Jenny
Employment relations are well understood. Business format franchising is a newer and rapidlyevolving business expansion formula, also providing employment. This article compares the fatesof employees and franchisees in their employer/franchisor insolvency.Whereas employees enjoyprotection, franchisees continue to operate in conditions that have been described as Feudal.We identify the inherence of moral hazard, path dependency and optimism bias as reasons forthe failure of policies and corporations laws, globally, to adapt to the franchise relationship. Thisfailure comes into sharp focus during a franchisor’s insolvency. We demonstrate that the modelsof participation available to employees in the United States, Australia and the United Kingdomcould be used to inform a re-balancing of the franchisees’ relationship with administrators andliquidators during the insolvency of their franchisor, providing franchisees with rights andrestoring their dignity.

On the Determinants and Effects of Corporate Tax Transparency: Review of an Emerging Literature
Müller, Raphael,Spengel, Christoph,Vay, Heiko
In response to discussions about large multinational enterprises’ tax planning activities, legislators around the world have adopted numerous regulations to increase corporate tax transparency. New settings and datasets have spurred empirical research in recent years. Our paper presents a review of this emerging literature on corporate tax transparency. To this end, we first propose a framework to structure the diverse landscape of tax-related disclosures. Second, we elaborate on the conceptual underpinnings of tax transparency by drawing on established theories from financial accounting and CSR reporting research. Third, we survey empirical evidence on corporate tax transparency. We classify the findings into (i) determinants of firms’ tax disclosure decisions, (ii) informativeness of different kinds of tax-related disclosure, and (iii) effects of increased tax transparency on firms and their stakeholders. Finally, we synthesize the main inferences and offer suggestions for future research.

Prophesying Britain's Future in the Balance of Social Policy and the Rescue Culture - Challenges to Post-Brexit Harmonisation
Gant, Jennifer L. L.
The pending spectre of Brexit and its impact on Europe and the United Kingdom (UK) along with the political uncertainty of a major world power in turmoil following the 2016 United States elections, calls into question the path that many social and economic policies may take in the future. The balance of social policy and economic efficiency is nowhere more evident than in the treatment of employees during bankruptcy/insolvency procedures, which may provide a barometer of changes yet to come. As a member of the European Union (EU), the UK continues to be subject to Regulations and Directives that implement EU social policy objectives and influence the functioning of the rescue culture throughout the Member States. The EU has had a significant influence on the direction the UK has taken in matters of social policy since its accession in 1973. Arguably, this has forced the UK into a socially liberal and protective framework that it might not otherwise have adopted to such a degree had it not been within the EU’s sphere of influence. EU policy also had an influence on the UK’s adoption of the rescue culture, which is now the foundation for insolvency systems throughout the EU and in many modern world economies, though it is possible that the UK may have been a natural development on the legal path of the of the British insolvency system. Now that Article 50 of the Treaty of Lisbon has been invoked, the UK is making its way toward a deal or no deal Brexit scenario. If and when Brexit becomes a reality, and Britain begins to untangle itself from the influence of the EU, how will the rescue culture and the social protections present within it under the current legal regime be changed? In what direction is the UK likely to go? While difficult to predict, the direction that the UK may take in the event that the European Communities Act of 1972 is eventually repealed and the UK is once again left to its own legislative devices, current conversations in Parliament give a certain flavour of potential futures. In addition, a consideration of different jurisdictions, such as America, Canada and Australia, each having a similar English common law origin and historical links to the UK, can be instructive in relation to which direction the UK may have taken had it never joined the EU. An analysis of this counterfactual position may then also provide a clue as to the direction that the UK may take The UK has ever been the “odd man out” in the EU, springing as it does from a significantly different legal origin than the Franco/German model at the heart of the EU. By examining the developmental path of the United States, Australia and the UK in this area of law prior to EU accession, the behaviour and reactions of the UK during EU membership, and comparing this to similar developments in the comparator countries, it may be possible to forecast the eventual direction that the law of Post-Brexit Britain may take in relation to the social protections that may or may not be available during insolvency procedures in the future.

Relative Performance Evaluation and the Peer Group Opportunity Set
Bloomfield, Matthew J.,Guay, Wayne R.,Timmermans, Oscar
We develop an algorithm that mimics the relative performance evaluation (“RPE”) peer selection process used for CEOs’ incentive plans. Our algorithm constructs the portfolio of peer firms that exhibits the highest in-sample stock performance correlation with the focal firm, which we then use as a counterfactual to better understand firms’ actual RPE choices. We find that most firms use RPE in a manner consistent with optimal risk-sharing; firms are more likely to use RPE when a viable peer group is available, and they construct peer groups that are about as effective as possible at shielding CEOs from outcome risk. However, some firms choose not to use RPE even when an effective peer group is available; non-reliance on RPE in these cases appears to be related to competitive sabotage concerns. Other firms choose to use RPE, but benchmark against a peer group that is not effective from a risk-sharing perspective; reliance on RPE in these cases appears to be related to rent-extraction. Collectively, our study improves the understanding of firms’ ex ante ability to construct an effective peer group, and thereby sheds new light on why firms doâ€"and perhaps more importantly, why some firms do notâ€"use relative performance evaluation in their CEOs’ incentive plans.

Risk Quantization by Magnitude and Propensity
Faugeras, Olivier,Pagès, Gilles
We propose a novel approach in the assessment of a random risk variable $X$ by introducing magnitude-propensity risk measures $(m_X,p_X)$. This bivariate measure intends to account for the dual aspect of risk, where the magnitudes $x$ of $X$ tell how hign are the losses incurred, whereas the probabilities $P(X=x)$ reveal how often one has to expect to suffer such losses. The basic idea is to simultaneously quantify both the severity $m_X$ and the propensity $p_X$ of the real-valued risk $X$. This is to be contrasted with traditional univariate risk measures, like VaR or Expected shortfall, which typically conflate both effects. In its simplest form, $(m_X,p_X)$ is obtained by mass transportation in Wasserstein metric of the law $P^X$ of $X$ to a two-points $\{0, m_X\}$ discrete distribution with mass $p_X$ at $m_X$. The approach can also be formulated as a constrained optimal quantization problem. This allows for an informative comparison of risks on both the magnitude and propensity scales. Several examples illustrate the proposed approach.

Role of Intermediation when Equity is placed with Select Investors
Fan, Siyuan,Floros, Ioannis V.,Singh, Ajai K.
We analyze the role of placement agents in non-underwritten equity deals placed with a limited investor base. We posit that stronger, better firms can place their unregistered shares directly with investors; whereas issuers’ reliance on agents to place relatively more liquid pre-registered shares is an indication of weakness. Indeed, direct placements of unregistered shares evoke a significantly positive response, while intermediated, best-effort deals of pre-registered shares are met with a significantly negative response. Drawing upon these insights, we create a new reputation measure for placement agents which, unlike traditional reputation measures, is consistently and positively associated with deal-announcement wealth effects.

Shariah Compliant Macaulay’s Duration Model Testing: Evidence from Islamic banks in Indonesia
Shah, Syed Alamdar Ali,Sukmana, Raditya,Fianto, Bayu Arie
The purpose of this research is to test Shariah compliant duration models on Islamic banks in Indonesia. This will be achieved using data of earning assets and risk bearing liabilities of Indonesian Islamic banks from 2009 to 2019. Using multiple regressions the results suggest that Shariah compliant duration models are robust to calculate duration of earning assets, return bearing liabilities and Islamic banks. This research adds to the previous research of testing Shariah compliant duration model. Ultimately, it will improve profitability, risk efficiency and Shariah efficiency by improved Shariah compliant measures of risk management. This will ultimately improve market capitalization and returns stability in the long run. A major limitation of the study is very short length of data of Islamic banks. Still another limitation is difference in commencement of business of various Islamic banks that makes length of data unequal.

Student Recommendations and Subsequent Stock Returns for Smif Investments
Ingram, Marcus Allan
This paper measures the predictive power of buy-sell-and-hold recommendations made by students engaged in the management of a student-managed investment fund (SMIF). In their roles as analysts and portfolio managers for the SMIF, undergraduate students were required to follow traditional security analytical techniques such as discounted cash flow analysis and comparative valuation that were taught in the introductory investment management class, which is a pre-requisite. We evaluated the stock price performance of the stocks which the students analyzed across multiple holding periods, following student recommendations to buy, sell, or hold. We also compared the recommendations of the student-analysts to the contemporaneous recommendations of sell-side equity analysts.

The Invisible Portfolio
Ehsani, Sina,Linnainmaa, Juhani T.
A portfolio sorted on the intercepts of a multi-factor model--the invisible portfolio--is the optimal portfolio for improving the model's mean-variance efficiency. This portfolio, similar to the betting-against-beta (BAB) factor, benefits from the distortions in the security market (or factor) lines. Whereas the BAB factor adjusts for the atness in any one factor's security factor line, the invisible portfolio optimally adjusts for all such distortions. The invisible portfolio increases the five-factor model's out-of-sample maximum squared Sharpe ratio from 0.98 to 1.38. The invisible portfolio is an intuitive and theoretically founded method for improving all factor models.

The Role of Social Policy in Corporate Rescue and Restructuring: A Messy Business
Gant, Jennifer L. L.
The interplay between economic and social policies has ever been best by the tensions between competing values: capital versus labour. Insolvency law is an intersection between capital and labour, along with a number of other interests, which makes finding common ground between different jurisdictions difficult, which is evident in the challenges faced by harmonisation efforts in the EU. Despite this inherent mix between conflicting policy areas, little space has been devoted by insolvency theorists to better balance these matters, though some commentary is certainly present that suggests a balance is needed, such as the publications of Elizabeth Warren. As insolvency is designed to resolve a particular problem associated with social exigency, moral conflict, and political compromise as described by David Carlson, financial failure tends to be treated by the numbers. However, the result of over indebtedness and financial failure is messy, and it is the messiness that collective procedural frameworks have been created to control and improve for the benefit of all creditors and, more recently, stakeholders in the future of the company. Add to that the pull of social policy initiatives, and the regulatory entanglement becomes tortuous.The purpose of this chapter is to examine some of the competing insolvency theories or policies that contradict the creditors’ bargain and allow for a consideration of social policy matters; explore the interplay between social policy and insolvency and restructuring, focusing on the introduction of the new EU Preventive Restructuring Directive; consider and compare the approach to social policy as it intersects with insolvency and restructuring in the EU as well as two key restructuring destinations of both the UK and the USA; and finally to consider what the position may be given the crises of health and economies encountered in 2020 that affect both social and financial/economic issues globally.

The impact of product markets and gender on investment behavior
Bradley, Daniel,Lahtinen, Kyre,Shipe, Stephan
Gender has been shown to influence investment behavior and performance. We focus on firms who predominantly cater to one gender based on textual analysis of gender keywords in firms’ 10-Ks. We find that female (male) households significantly overweight female-focused (male-focused) firms. While we find some evidence that females outperform males in their investment performance, we find they significantly underperform in female-focused firms. Females trade significantly less than males overall, but they trade similarly to males in female-focused firms. We find weak evidence that institutional investors’ gender holdings exhibit patterns similar to individual investors. Overall, our evidence suggests that product market exposure influences investment behavior and gender is an important characteristic of such exposure.

To share or not to share? Financial analysts’ questioning in conference calls
Haag, Julia,Hofmann, Christian,Paulus, Alexander,Schwaiger, Nina,Sellhorn, Thorsten
We study whether superior financial analysts strategically reveal less information in earnings conference calls. To the extent that analysts’ relative information advantages translate into desirable professional outcomes, we expect superior analysts to be mindful of safeguarding their information advantages when interacting with peers. Consistent with expectations, we find that superior analysts (measured as analysts with higher ex-ante forecast accuracy) share relatively less information (measured as the cosine modification between analysts’ questions and the management presentation) in conference calls. Moreover, our findings imply that analysts’ information sharing increases in ex-ante information uncertainty and decreases in analysts’ competition. Finally, we show that superior analysts benefit marginally less from sharing information. Collectively, our results shed light on the role of analysts as information intermediaries in shaping firms’ information environments.

Transparency and Liquidity in a Multi-Market Setting
Ghazizadeh, Pouyan,Peek, Erik,Rösch, Dominik
This study examines the effect of firm-level transparency on liquidity and trading in a multi-market setting, using the market for American Depository Receipts (ADR) as an example. Theory predicts competing effects of transparency on liquidity differences between stocks trading domestically and stocks trading in a foreign market, depending on why the stock trades in multiple markets. We show that an increase in transparency shifts part of foreign trading to the domestic market, yet improves foreign liquidity more than domestic liquidity and reduces foreign liquidity comovement. Collectively, our results show that transparency benefits foreign investors more than domestic investors and, consequently, may foster multi-market trading.