Research articles for the 2021-06-03
A Quantitative Analysis of the Countercyclical Capital Buffer
SSRN
What are the quantitative macroeconomic effects of the countercyclical capital buffer (CCyB)? I study this question in a nonlinear DSGE model with occasional financial crises, which is calibrated and combined with US data to estimate sequences of structural shocks. Raising capital buffers during leverage expansions can reduce the frequency of crises by more than half. A quantitative application to the 2007-08 financial crisis shows that the CCyB in the 2:5% range (as in the Federal Reserve's current framework) could have greatly mitigated the financial panic of 2008, for a cumulative gain of 29% in aggregate consumption. The threat of raising capital requirements is effective even if this tool is not used in equilibrium.
SSRN
What are the quantitative macroeconomic effects of the countercyclical capital buffer (CCyB)? I study this question in a nonlinear DSGE model with occasional financial crises, which is calibrated and combined with US data to estimate sequences of structural shocks. Raising capital buffers during leverage expansions can reduce the frequency of crises by more than half. A quantitative application to the 2007-08 financial crisis shows that the CCyB in the 2:5% range (as in the Federal Reserve's current framework) could have greatly mitigated the financial panic of 2008, for a cumulative gain of 29% in aggregate consumption. The threat of raising capital requirements is effective even if this tool is not used in equilibrium.
Adding fuel to human capital: Exploring the educational effects of cooking fuel choice from rural India
arXiv
arXiv
The study examines the effect of cooking fuel choice on educational outcomes of adolescent children in rural India. Using multiple large-scale nationally representative datasets, we observe household solid fuel usage to adversely impact school attendance, years of schooling and age-appropriate grade progression among children. This inference is robust to alternative ways of measuring educational outcomes, other datasets, specifications and estimation techniques. Importantly, the effect is found to be more pronounced for females in comparison to the males highlighting the gendered nature of the impact. On exploring possible pathways, we find that the direct time substitution on account of solid fuel collection and preparation can explain the detrimental educational outcomes that include learning outcomes as well, even though we are unable to reject the health channel. In the light of the micro and macro level vulnerabilities posed by the COVID-19 outbreak, the paper recommends interventions that have the potential to fasten the household energy transition towards clean fuel in the post-covid world.
Assessing Gains from Primary Market Allocations in Corporate Bonds
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Different market characteristics and investor behavior render the use of underpricing, widely used for equity IPOs, inadequate as a measure of gains from primary market allocations in corporate bonds. We propose a measure that reflects the illiquidity costs that investors save by avoiding acquiring the new bonds in secondary market and show that it can far exceed underpricing. We validate the measure by linking it to changes in secondary market liquidity arising from bond characteristics or induced by regulatory changes. We illustrate the value of the new measure by using it to document that “favoritism†in primary market allocations increases when secondary market liquidity is low.
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Different market characteristics and investor behavior render the use of underpricing, widely used for equity IPOs, inadequate as a measure of gains from primary market allocations in corporate bonds. We propose a measure that reflects the illiquidity costs that investors save by avoiding acquiring the new bonds in secondary market and show that it can far exceed underpricing. We validate the measure by linking it to changes in secondary market liquidity arising from bond characteristics or induced by regulatory changes. We illustrate the value of the new measure by using it to document that “favoritism†in primary market allocations increases when secondary market liquidity is low.
Banks Fearing the Drought? Liquidity Hoarding as a Response to Idiosyncratic Interbank Funding Dry-Ups
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We investigate whether idiosyncratic interbank funding shocks affecting a bank headquarters can trigger a liquidity hoarding reaction by their regional branches. Shock-affected branches of Brazilian banks increase liquid assets and cut lending in the shocks' aftermath compared to non-affected branches within the same municipality, even in absence of a market-wide freeze. These effects increase in branches' reliance on internal funding and vary depending on banks' access to central bank emergency liquidity. Our findings suggest that the geographical fragmentation of branches' funding limits their ability to offset idiosyncratic funding shocks.
SSRN
We investigate whether idiosyncratic interbank funding shocks affecting a bank headquarters can trigger a liquidity hoarding reaction by their regional branches. Shock-affected branches of Brazilian banks increase liquid assets and cut lending in the shocks' aftermath compared to non-affected branches within the same municipality, even in absence of a market-wide freeze. These effects increase in branches' reliance on internal funding and vary depending on banks' access to central bank emergency liquidity. Our findings suggest that the geographical fragmentation of branches' funding limits their ability to offset idiosyncratic funding shocks.
Boosting International Investment: The Role of Expert Assessments of Corporate Governance
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Global investors often demand independent assessments of firms’ governance mechanisms. However, the supply of such evaluations is subject to two important limitations: assessment error and lack of coverage in certain regions. This paper studies a recent initiative that addresses these limitations; the ASEAN Capital Markets Forum and its partners periodically publish a short list of companies based on a systematic, peer-reviewed assessment of corporate governance practices conducted by independent national experts. Using a regression discontinuity design, we document that being included in this “Top List†attracts significant foreign investment. Consistent with the notion that firms make governance changes to be included on the list, we observe substantial increases in governance scores among the firms around the cut-off point, increases that are particularly pronounced among firms more likely to benefit from new funding. The documented increase in foreign investment is associated with higher profitability and higher capital expenditures, but not with higher leverage and higher shareholder payouts. Overall, the evidence points to expert assessments of corporate governance practices as a powerful tool to boost international investment and induce governance changes.
SSRN
Global investors often demand independent assessments of firms’ governance mechanisms. However, the supply of such evaluations is subject to two important limitations: assessment error and lack of coverage in certain regions. This paper studies a recent initiative that addresses these limitations; the ASEAN Capital Markets Forum and its partners periodically publish a short list of companies based on a systematic, peer-reviewed assessment of corporate governance practices conducted by independent national experts. Using a regression discontinuity design, we document that being included in this “Top List†attracts significant foreign investment. Consistent with the notion that firms make governance changes to be included on the list, we observe substantial increases in governance scores among the firms around the cut-off point, increases that are particularly pronounced among firms more likely to benefit from new funding. The documented increase in foreign investment is associated with higher profitability and higher capital expenditures, but not with higher leverage and higher shareholder payouts. Overall, the evidence points to expert assessments of corporate governance practices as a powerful tool to boost international investment and induce governance changes.
CEO Hometown Favoritism in Corporate Environmental Policies
SSRN
Exploiting within-firm variations in plant-level toxic releases, we find evidence that firms pollute significantly less in plants near their CEOs' hometowns, suggesting that managerial hometown attachment affects corporate environmental policies. Plants near CEOs' hometowns achieve lower toxic release by investing more in abatement and waste management activities. Analyses using CEO turnover events provide supportive evidence. Hometown emission reduction is stronger for poorly-governed firms, and is significantly weakened following an exogenous reduction in agency conflicts. These findings suggest that CEOs' personal motives affect corporate pollution when agency issue is severe.
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Exploiting within-firm variations in plant-level toxic releases, we find evidence that firms pollute significantly less in plants near their CEOs' hometowns, suggesting that managerial hometown attachment affects corporate environmental policies. Plants near CEOs' hometowns achieve lower toxic release by investing more in abatement and waste management activities. Analyses using CEO turnover events provide supportive evidence. Hometown emission reduction is stronger for poorly-governed firms, and is significantly weakened following an exogenous reduction in agency conflicts. These findings suggest that CEOs' personal motives affect corporate pollution when agency issue is severe.
CSR Reporting and Firm Value: International Evidence on Management Discussion and Analysis
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This study examines whether and how the practice of providing CSR information in the management discussion and analysis (MD&A) section of annual reports affects the relation between CSR performance and firm value in an international context. Based on a large sample from 42 countries, our results indicate that while providing CSR information in the MD&A section does not increase the price investors are willing to pay for the stock of a firm with high CSR performance, it does decrease the price they will pay for the stock of firms with high CSR concerns. Further analyses show that this finding is more likely to be observed when the perceived CSR reporting quality is greater, the level of investors’ CSR awareness is higher, and the development of a country’s institutional environment is better. Finally, consistent with the conjecture that the CSR disclosure channel matters to investors, our evidence shows that firms with high CSR concerns are less likely to provide environmental and social information in their annual reports.
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This study examines whether and how the practice of providing CSR information in the management discussion and analysis (MD&A) section of annual reports affects the relation between CSR performance and firm value in an international context. Based on a large sample from 42 countries, our results indicate that while providing CSR information in the MD&A section does not increase the price investors are willing to pay for the stock of a firm with high CSR performance, it does decrease the price they will pay for the stock of firms with high CSR concerns. Further analyses show that this finding is more likely to be observed when the perceived CSR reporting quality is greater, the level of investors’ CSR awareness is higher, and the development of a country’s institutional environment is better. Finally, consistent with the conjecture that the CSR disclosure channel matters to investors, our evidence shows that firms with high CSR concerns are less likely to provide environmental and social information in their annual reports.
Calling All Issuers: The Market for Debt Monitoring
SSRN
Almost 95% of long-term municipal bonds have callable features, and despite low interest rates, we find that a substantial fraction of local governments exercise these options with significant delays. Using data from 2001 to 2018, we estimate that U.S. municipals lost over $31 billion from delayed refinancing, whereas U.S. corporates lost only a comparative $1.4 billion. We present evidence that these delays are related to gaps in localized debt monitoring of issuers by their underwriters. For instance, when a bond’s call unlocks in the fiscal year-end calendar month of a local government â€" a particularly busy time for finance departments â€" the decision to call is delayed significantly longer. A significantly longer delay also occurs when a municipality is faced with an abnormally large number of calls all coming due at once. These effects are magnified in smaller municipalities, staffed with smaller finance departments. Moreover the market for underwriters (outside monitors), is a dispersed one exhibiting substantial variation in local specialization. While the municipality-underwriter relationship is quite sticky over time - with 87% of a municipality’s bonds being issued with the same underwriter over our sample period â€" it is the locally specialized underwriters who are in particular associated with the least amount of delays. This positive local specialization impact is accentuated especially for the smallest issuers.
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Almost 95% of long-term municipal bonds have callable features, and despite low interest rates, we find that a substantial fraction of local governments exercise these options with significant delays. Using data from 2001 to 2018, we estimate that U.S. municipals lost over $31 billion from delayed refinancing, whereas U.S. corporates lost only a comparative $1.4 billion. We present evidence that these delays are related to gaps in localized debt monitoring of issuers by their underwriters. For instance, when a bond’s call unlocks in the fiscal year-end calendar month of a local government â€" a particularly busy time for finance departments â€" the decision to call is delayed significantly longer. A significantly longer delay also occurs when a municipality is faced with an abnormally large number of calls all coming due at once. These effects are magnified in smaller municipalities, staffed with smaller finance departments. Moreover the market for underwriters (outside monitors), is a dispersed one exhibiting substantial variation in local specialization. While the municipality-underwriter relationship is quite sticky over time - with 87% of a municipality’s bonds being issued with the same underwriter over our sample period â€" it is the locally specialized underwriters who are in particular associated with the least amount of delays. This positive local specialization impact is accentuated especially for the smallest issuers.
Climate Default Swap â€" Disentangling the Exposure to Transition Risk Through CDS
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The substantial economic transformation required to mitigate and adapt to climate change will lower the value of certain businesses as well as some firms' assets in the not-too-distant future. Firms will need to transition to a less carbon-intensive business model, but may do so at different times and at different speeds, incurring different costs and risks in the process. We propose and implement a novel market-based measure of exposure to transition risk (transition risk factor) and examine how this risk affects firms' creditworthiness. We discipline the exercise by using Credit Default Swap (CDS) spreads to capture differential exposure to transition risk across economic sectors. We show that the transition risk factor is a relevant determinant of CDS spreads and provide evidence of the relationship between the differential exposure to transition risk and firms' cost of default protection. This effect is particularly pronounced during deteriorating credit market movements. However, effects vary substantially across industries, reflecting the fact that transition risk impacts firms' valuation differently depending on their sector. Our findings also suggest that investors seek greater protection against transition risks in the shortâ€" to medium-term, indicating an expectation of a swift transformation of the entire economic structure.
SSRN
The substantial economic transformation required to mitigate and adapt to climate change will lower the value of certain businesses as well as some firms' assets in the not-too-distant future. Firms will need to transition to a less carbon-intensive business model, but may do so at different times and at different speeds, incurring different costs and risks in the process. We propose and implement a novel market-based measure of exposure to transition risk (transition risk factor) and examine how this risk affects firms' creditworthiness. We discipline the exercise by using Credit Default Swap (CDS) spreads to capture differential exposure to transition risk across economic sectors. We show that the transition risk factor is a relevant determinant of CDS spreads and provide evidence of the relationship between the differential exposure to transition risk and firms' cost of default protection. This effect is particularly pronounced during deteriorating credit market movements. However, effects vary substantially across industries, reflecting the fact that transition risk impacts firms' valuation differently depending on their sector. Our findings also suggest that investors seek greater protection against transition risks in the shortâ€" to medium-term, indicating an expectation of a swift transformation of the entire economic structure.
Combinatorial Algorithms for Matching Markets via Nash Bargaining: One-Sided, Two-Sided and Non-Bipartite
arXiv
arXiv
This paper is an attempt to deal with the recent realization (Vazirani, Yannakakis 2021) that the Hylland-Zeckhauser mechanism, which has remained a classic in economics for one-sided matching markets, is likely to be highly intractable. HZ uses the power of a pricing mechanism, which has endowed it with nice game-theoretic properties.
Hosseini and Vazirani (2021) define a rich collection of Nash-bargaining-based models for one-sided and two-sided matching markets, in both Fisher and Arrow-Debreu settings, together with implementations using available solvers, and very encouraging experimental results. This naturally raises the question of finding efficient combinatorial algorithms for these models.
In this paper, we give efficient combinatorial algorithms based on the techniques of multiplicative weights update (MWU) and conditional gradient descent (CGD) for several one-sided and two-sided models defined in HV 2021. Additionally, we define for the first time a Nash-bargaining-based model for non-bipartite matching markets and solve it using CGD. Furthermore, in every case, we study not only the Fisher but also the Arrow-Debreu version; the latter is also called the exchange version. We give natural applications for each model studied. These models inherit the game-theoretic and computational properties of Nash bargaining.
We also establish a deep connection between HZ and the Nash-bargaining-based models, thereby confirming that the alternative to HZ proposed in HV 2021 is a principled one.
Contagious Zombies
SSRN
Does banks' zombie lending induced by unconventional monetary policy also allow zombie firms to leverage their trade credit borrowing? We first provide evidence suggesting that - even in Germany - particularly weak banks used the European Central Bank's very long-term refinancing operations (VLTROs) to evergreen exposures to zombie firms, which in turn elevated credit risk. Second, we show that zombie firms, which obtained additional funding from banks relying to a larger extent on VLTRO funding, also increased their accounts payable and advance payments received from downstream and upstream firms. And third, zombie firms that obtained further bank funding and such trade credit after the VLTROs had an elevated expected default probability even compared to average zombie firms. This suggests that suppliers relying on banks' lending decisions as a signal about borrowers' credit quality might be misled by banks' zombie lending to extend more trade credit to zombie firms exposing suppliers to elevated contagion risk.
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Does banks' zombie lending induced by unconventional monetary policy also allow zombie firms to leverage their trade credit borrowing? We first provide evidence suggesting that - even in Germany - particularly weak banks used the European Central Bank's very long-term refinancing operations (VLTROs) to evergreen exposures to zombie firms, which in turn elevated credit risk. Second, we show that zombie firms, which obtained additional funding from banks relying to a larger extent on VLTRO funding, also increased their accounts payable and advance payments received from downstream and upstream firms. And third, zombie firms that obtained further bank funding and such trade credit after the VLTROs had an elevated expected default probability even compared to average zombie firms. This suggests that suppliers relying on banks' lending decisions as a signal about borrowers' credit quality might be misled by banks' zombie lending to extend more trade credit to zombie firms exposing suppliers to elevated contagion risk.
Dispersion-Constrained Martingale Schrödinger Problems and the Exact Joint S&P 500/VIX Smile Calibration Puzzle
SSRN
We solve for the first time (*) a longstanding puzzle of quantitative finance that has often been described as the Holy Grail of volatility modeling: build a model that jointly and exactly calibrates to the prices of S&P 500 (SPX) options, VIX futures, and VIX options. So far the best attempts, which used parametric continuous-time (jump-)diffusion models on the SPX, only produced approximate fits. We use a very different, nonparametric and discrete-time approach. Given a VIX future maturity T1, we consider the set P of all joint probability measures on the SPX at T1 the VIX at T1, and the SPX at T2 = T1 + 30 days which are perfectly calibrated to the full SPX smiles at T1 and T2, and the full VIX smile at T1, and which also satisfy the martingality constraint on the SPX as well as the requirement that the VIX is the implied volatility of the 30-day log-contract on the SPX.We first consider robust hedging in this setting. By casting the superreplication problem as what we call a dispersion-constrained martingale optimal transport problem, we establish a strong duality theorem and, as a result, prove that the absence of joint SPX/VIX arbitrage is equivalent to the set P of jointly calibrating models being nonempty. Should they arise, joint arbitrages are identified using classical linear programming. In the absence of joint arbitrage, we then provide a solution to the joint calibration puzzle by solving what we call a dispersion-constrained martingale Schrödinger problem: we choose a reference measure and build the unique jointly calibrating model that minimizes the relative entropy. We establish several dual versions of the problem, one of which has a natural financial interpretation in terms of exponential utility indifference pricing, and prove absence of duality gaps. The minimum entropy jointly calibrating model is explicit in terms of what we call the dual Schrödinger portfolio, i.e., the maximizer of the dual problems, should it exist. We numerically compute this Schrödinger portfolio using an extension of the Sinkhorn algorithm, in the spirit of De March and Henry-Labordère (2019). Our numerical experiments show that the algorithm performs very well in both low and high volatility regimes.Along the way, we provide new variants, as well as a new proof, of strong duality theorems for the classical Schrödinger problem and for a mixed Schrödinger-Monge-Kantorovich problem (also known as entropic optimal transport problem) that has recently attracted a lot of attention in the optimal transport community, which are interesting in themselves. Our methodology applies not only to the VIX, but also to any index computed as a function of the price of an option on some underlying asset.(*) A first, much shorter version of this article was published in Risk in April 2020. This version includes new theorems, proofs, analysis, and numerical tests. In particular it develops a theory of dispersion-constrained martingale Schrödinger problems and proves strong duality results for them.
SSRN
We solve for the first time (*) a longstanding puzzle of quantitative finance that has often been described as the Holy Grail of volatility modeling: build a model that jointly and exactly calibrates to the prices of S&P 500 (SPX) options, VIX futures, and VIX options. So far the best attempts, which used parametric continuous-time (jump-)diffusion models on the SPX, only produced approximate fits. We use a very different, nonparametric and discrete-time approach. Given a VIX future maturity T1, we consider the set P of all joint probability measures on the SPX at T1 the VIX at T1, and the SPX at T2 = T1 + 30 days which are perfectly calibrated to the full SPX smiles at T1 and T2, and the full VIX smile at T1, and which also satisfy the martingality constraint on the SPX as well as the requirement that the VIX is the implied volatility of the 30-day log-contract on the SPX.We first consider robust hedging in this setting. By casting the superreplication problem as what we call a dispersion-constrained martingale optimal transport problem, we establish a strong duality theorem and, as a result, prove that the absence of joint SPX/VIX arbitrage is equivalent to the set P of jointly calibrating models being nonempty. Should they arise, joint arbitrages are identified using classical linear programming. In the absence of joint arbitrage, we then provide a solution to the joint calibration puzzle by solving what we call a dispersion-constrained martingale Schrödinger problem: we choose a reference measure and build the unique jointly calibrating model that minimizes the relative entropy. We establish several dual versions of the problem, one of which has a natural financial interpretation in terms of exponential utility indifference pricing, and prove absence of duality gaps. The minimum entropy jointly calibrating model is explicit in terms of what we call the dual Schrödinger portfolio, i.e., the maximizer of the dual problems, should it exist. We numerically compute this Schrödinger portfolio using an extension of the Sinkhorn algorithm, in the spirit of De March and Henry-Labordère (2019). Our numerical experiments show that the algorithm performs very well in both low and high volatility regimes.Along the way, we provide new variants, as well as a new proof, of strong duality theorems for the classical Schrödinger problem and for a mixed Schrödinger-Monge-Kantorovich problem (also known as entropic optimal transport problem) that has recently attracted a lot of attention in the optimal transport community, which are interesting in themselves. Our methodology applies not only to the VIX, but also to any index computed as a function of the price of an option on some underlying asset.(*) A first, much shorter version of this article was published in Risk in April 2020. This version includes new theorems, proofs, analysis, and numerical tests. In particular it develops a theory of dispersion-constrained martingale Schrödinger problems and proves strong duality results for them.
Distribution Shifts in Predictive Panels
SSRN
In this article, we link the realized accuracy of predictive panels to changes in distributions that occur between the training (in-sample) phase and the testing (out-of-sample) phase. We obtain polynomial upper bounds for the loss of accuracy between training and testing. We model covariate shift and concept drift as positive autoregressive processes and predict future variations in changes (improvement versus deterioration in accuracy). Based on two different datasets, our empirical results show that our indicators for distribution turbulence are contrarian, but have a strong explanatory power over realized portfolio returns.
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In this article, we link the realized accuracy of predictive panels to changes in distributions that occur between the training (in-sample) phase and the testing (out-of-sample) phase. We obtain polynomial upper bounds for the loss of accuracy between training and testing. We model covariate shift and concept drift as positive autoregressive processes and predict future variations in changes (improvement versus deterioration in accuracy). Based on two different datasets, our empirical results show that our indicators for distribution turbulence are contrarian, but have a strong explanatory power over realized portfolio returns.
Do Capital Structure Models Square with the Dynamics of Payout?
SSRN
We explore whether theoretically the target leverage and pecking order models can be reconciled with payout smoothing. Investment absorbs a significant part of income and asset volatility if the firm follows both a payout target and a net debt ratio (NDR) target. A positive (negative) NDR amplifies (dampens) shocks in assets. Slow adjustment towards the NDR target facilitates payout smoothing. Under strict pecking order financing, income shocks are absorbed primarily by changes in net debt. More payout smoothing implies a stronger negative relation between debt and net income. Shocks to assets in place need not affect current payout.
SSRN
We explore whether theoretically the target leverage and pecking order models can be reconciled with payout smoothing. Investment absorbs a significant part of income and asset volatility if the firm follows both a payout target and a net debt ratio (NDR) target. A positive (negative) NDR amplifies (dampens) shocks in assets. Slow adjustment towards the NDR target facilitates payout smoothing. Under strict pecking order financing, income shocks are absorbed primarily by changes in net debt. More payout smoothing implies a stronger negative relation between debt and net income. Shocks to assets in place need not affect current payout.
Does Active Fee Predict Mutual Fund Flow? - Price Sensitivity of Demand for Active Management
SSRN
Active fee is the ratio between the excess cost of active management over the index alternative and the fund's activity level. We suggest a simple model that explains active capital allocations in the presence of time-varying active fee. We show that investors respond in accordance with the model's prediction of a negative relationship between active fee and subsequent flows. Our findings can be interpreted as negative price elasticity of demand for active management, where one standard deviation change in active fee translates into a shift in net flow of 83.4 bps. This effect implies a 42% change in the unconditional expected yearly flow. The time-series relation is driven by both the activity level and the excess cost of active management. The result also holds after controlling for Morningstar Ratings.
SSRN
Active fee is the ratio between the excess cost of active management over the index alternative and the fund's activity level. We suggest a simple model that explains active capital allocations in the presence of time-varying active fee. We show that investors respond in accordance with the model's prediction of a negative relationship between active fee and subsequent flows. Our findings can be interpreted as negative price elasticity of demand for active management, where one standard deviation change in active fee translates into a shift in net flow of 83.4 bps. This effect implies a 42% change in the unconditional expected yearly flow. The time-series relation is driven by both the activity level and the excess cost of active management. The result also holds after controlling for Morningstar Ratings.
Does Bribery Pay? Evidence from Credit Ratings
SSRN
Using manually collected data associated with bribery in China, we find that firms receive higher credit ratings when their travel and entertainment expenses are abnormally high. Higher credit ratings help firms to expand their debt capacity, which incentivizes issuers to bribe rating firms for rating favor. We find no evidence that the results are driven by bribery of government officials or bond underwriters. Exploiting the exogenous shock from China’s unprecedented anti-corruption campaign, we show that the effect of entertainment on credit rating is causal. The results are more pronounced during credit crunches and for firms with limited access to external finance. Overall, we identify a specific, external financing channel for bribery to create value for issuers and our study is among the first to quantify the marginal effect of bribery on firm value.
SSRN
Using manually collected data associated with bribery in China, we find that firms receive higher credit ratings when their travel and entertainment expenses are abnormally high. Higher credit ratings help firms to expand their debt capacity, which incentivizes issuers to bribe rating firms for rating favor. We find no evidence that the results are driven by bribery of government officials or bond underwriters. Exploiting the exogenous shock from China’s unprecedented anti-corruption campaign, we show that the effect of entertainment on credit rating is causal. The results are more pronounced during credit crunches and for firms with limited access to external finance. Overall, we identify a specific, external financing channel for bribery to create value for issuers and our study is among the first to quantify the marginal effect of bribery on firm value.
Does the Threat of a PCAOB Inspection Mitigate US Institutional Investors’ Home Bias?
SSRN
We exploit the staggered introduction of the PCAOB’s international inspection program to examine the role that the stringency of public audit oversight plays in shaping US institutional investors’ home bias. Analyzing a sample of foreign firms listed in the United States, we evaluate whether US institutional investors hold larger equity stakes in these firms―a longstanding issue that reflects investor portfolio decisions―if their auditors are exposed to the threat of a PCAOB inspection. In a differences-in-differences framework, we find that US listed foreign firms enjoy an increase in US institutional investors’ equity positions after their auditors become subject to PCAOB inspection access. Cross-sectional analysis implies that the benefit of the PCAOB inspection threat in mitigating US institutional investors’ home bias is concentrated in: foreign countries without a strict local audit oversight system; active US institutional investors that are known to value accounting transparency; and firms from countries that grant PCAOB access later (after the onset of its international inspection program in 2005). Our evidence suggests that foreign firms become better known in the capital markets under the PCAOB inspection program, which induces US institutional investors to acquire larger equity stakes in US listed foreign firms given the lower information asymmetry that ensues under the PCAOB inspection threat.
SSRN
We exploit the staggered introduction of the PCAOB’s international inspection program to examine the role that the stringency of public audit oversight plays in shaping US institutional investors’ home bias. Analyzing a sample of foreign firms listed in the United States, we evaluate whether US institutional investors hold larger equity stakes in these firms―a longstanding issue that reflects investor portfolio decisions―if their auditors are exposed to the threat of a PCAOB inspection. In a differences-in-differences framework, we find that US listed foreign firms enjoy an increase in US institutional investors’ equity positions after their auditors become subject to PCAOB inspection access. Cross-sectional analysis implies that the benefit of the PCAOB inspection threat in mitigating US institutional investors’ home bias is concentrated in: foreign countries without a strict local audit oversight system; active US institutional investors that are known to value accounting transparency; and firms from countries that grant PCAOB access later (after the onset of its international inspection program in 2005). Our evidence suggests that foreign firms become better known in the capital markets under the PCAOB inspection program, which induces US institutional investors to acquire larger equity stakes in US listed foreign firms given the lower information asymmetry that ensues under the PCAOB inspection threat.
Enterprise Payments with Central Bank Digital Currency
SSRN
The paper proposes an architecture for implementing the Bank of England's basicprinciples for the design of a CBDC with a focus on real-time high value, often crossborder, enterprise transactions. The use of digital ledger technology makes innovative useof chaincode - smart contracts specifying how transactions are to be conducted - andtokens - providing a convenient mechanism for executing transactions and providing theCB monetary policy management. The proposed approach minimizes counterparty risk,eliminates settlement risk, and enhances transaction efficiency, thereby improving globalproductivity.
SSRN
The paper proposes an architecture for implementing the Bank of England's basicprinciples for the design of a CBDC with a focus on real-time high value, often crossborder, enterprise transactions. The use of digital ledger technology makes innovative useof chaincode - smart contracts specifying how transactions are to be conducted - andtokens - providing a convenient mechanism for executing transactions and providing theCB monetary policy management. The proposed approach minimizes counterparty risk,eliminates settlement risk, and enhances transaction efficiency, thereby improving globalproductivity.
Entropic measure unveils country competitiveness and product specialization in the World trade web
arXiv
arXiv
We show how the Shannon entropy function can be used as a basis to set up complexity measures weighting the economic efficiency of countries and the specialization of products beyond bare diversification. This entropy function guarantees the existence of a fixed point which is rapidly reached by an iterative scheme converging to our self-consistent measures. Our approach naturally allows to decompose into inter-sectorial and intra-sectorial contributions the country competitivity measure if products are partitioned into larger categories. Besides outlining the technical features and advantages of the method, we describe a wide range of results arising from the analysis of the obtained rankings and we benchmark these observations against those established with other economical parameters. These comparisons allow to partition countries and products into various main typologies, with well-revealed characterizing features. Our methods have wide applicability to general problems of ranking in bipartite networks.
Evaluating the Financial Market Function in Prewar Japan using a Time-Varying Parameter Model
arXiv
arXiv
This paper explores when the financial market lost the price formation function in prewar Japan in the sense of Fama's (1970) semi-strong form market efficiency using a new dataset. We particularly focus on the relationship between the prewar Japanese financial market and several government policy interventions to explore whether the semi-strong form market efficiency evolves over time. To capture the long-run impact of government policy interventions against the markets, we measure the time-varying joint degree of market efficiency and the time-varying impulse responses based on Ito et al.'s (2014; 2017) generalized least squares-based time-varying vector autoregressive model. The empirical results reveal that (1) the joint degree of market efficiency in the prewar Japanese financial market fluctuated over time because of external events such as policy changes and wars, (2) the semi-strong form EMH is almost supported in the prewar Japanese financial market, (3) Lo's (2004) adaptive market hypothesis is supported in the prewar Japanese financial market even if we consider that the public information affects the financial markets, and (4) the prewar Japanese financial markets lost the price formation function in 1932 and that was a turning point in the market.
Family Firms' Dividend Policies: Evidence from a Japanese Tax Reform
SSRN
We hypothesize that family firms’ dividend policies are in part determined by a consumption smoothing motive of family shareholders. Our paper tests this hypothesis using a Japanese dividend tax reform in 2011 which increased the dividend tax rate for only some groups of major family shareholders. In this quasi-experimental setting, we find that family firms with non-executive family shareholders, who were likely rentiers, counteracted the tax increase by increasing dividends. This behavior cannot be explained by standard theories of dividend policy, which predict a lower dividend payout, and highlights a unique governance problem in family firms.
SSRN
We hypothesize that family firms’ dividend policies are in part determined by a consumption smoothing motive of family shareholders. Our paper tests this hypothesis using a Japanese dividend tax reform in 2011 which increased the dividend tax rate for only some groups of major family shareholders. In this quasi-experimental setting, we find that family firms with non-executive family shareholders, who were likely rentiers, counteracted the tax increase by increasing dividends. This behavior cannot be explained by standard theories of dividend policy, which predict a lower dividend payout, and highlights a unique governance problem in family firms.
Financial Analysts' Career Concerns and the Cost of Private Debt
SSRN
Career-concerned analysts are averse to firm risk. Not only does higher firm risk require more effort to analyze the firm, thus constraining analysts’ ability to earn more remuneration through covering more firms, but it also jeopardizes their research quality and career advancement. As such, career concerns incentivize analysts to pressure firms to undertake risk-management activities, thus leading to a lower cost of debt. Consistent with our hypothesis, we find a negative association between analyst career concerns and bank loan spreads. In addition, our mediation analysis suggests that this association is achieved through the channel of reducing firm risk. Additional tests suggest that the effect of analyst career concerns on loan spreads is more pronounced for firms with higher analyst coverage. Our study is the first to identify the demand for risk management as a key channel through which analysts help reduce the cost of debt.
SSRN
Career-concerned analysts are averse to firm risk. Not only does higher firm risk require more effort to analyze the firm, thus constraining analysts’ ability to earn more remuneration through covering more firms, but it also jeopardizes their research quality and career advancement. As such, career concerns incentivize analysts to pressure firms to undertake risk-management activities, thus leading to a lower cost of debt. Consistent with our hypothesis, we find a negative association between analyst career concerns and bank loan spreads. In addition, our mediation analysis suggests that this association is achieved through the channel of reducing firm risk. Additional tests suggest that the effect of analyst career concerns on loan spreads is more pronounced for firms with higher analyst coverage. Our study is the first to identify the demand for risk management as a key channel through which analysts help reduce the cost of debt.
Financing Constraints, Home Equity and Selection into Entrepreneurship
RePEC
We exploit a mortgage reform that differentially unlocked home equity across the Danish population and study how this impacted selection into entrepreneurship. We find that increased entry was concentrated among entrepreneurs whose firms were founded in industries where they had no prior work experience. In addition, we find that marginal entrants benefiting from the reform had higher pre-entry earnings and that a significant share of entrants started longer-lasting firms. Our results are most consistent with the view that housing collateral enabled high ability individuals with less-well-established track records to overcome credit rationing and start new firms, rather than just leading to `frivolous entry' by those without prior industry experience.
RePEC
We exploit a mortgage reform that differentially unlocked home equity across the Danish population and study how this impacted selection into entrepreneurship. We find that increased entry was concentrated among entrepreneurs whose firms were founded in industries where they had no prior work experience. In addition, we find that marginal entrants benefiting from the reform had higher pre-entry earnings and that a significant share of entrants started longer-lasting firms. Our results are most consistent with the view that housing collateral enabled high ability individuals with less-well-established track records to overcome credit rationing and start new firms, rather than just leading to `frivolous entry' by those without prior industry experience.
Forward Backward Stochastic Model of Financial Asset Pricing with Idiosyncratic Noise
SSRN
A new acceptable price approach to stochastic endpoint determination at given horizon accounting for the marginal investor beliefs and behaviour was proposed. Two-sided filtration with FBSDE defined stochastic dynamics was formulated for acceptable asset price under the risk-neutral probability measure, at that the target price distribution is characterized by the averaged over active market agent subset parameters. For the current price at market equilibrium, the acceptable price of risk distribution was found. The implied volatility dependencies for the equilibrium conditions and with predicted utility and liquidity premiums were determined. A generalized solution for the forward-backward stochastic problem and a partial solution for the formulated for options stochastic terminal conditions were found. The deep learning algorithm with simulated idiosyncratic noise was tested.
SSRN
A new acceptable price approach to stochastic endpoint determination at given horizon accounting for the marginal investor beliefs and behaviour was proposed. Two-sided filtration with FBSDE defined stochastic dynamics was formulated for acceptable asset price under the risk-neutral probability measure, at that the target price distribution is characterized by the averaged over active market agent subset parameters. For the current price at market equilibrium, the acceptable price of risk distribution was found. The implied volatility dependencies for the equilibrium conditions and with predicted utility and liquidity premiums were determined. A generalized solution for the forward-backward stochastic problem and a partial solution for the formulated for options stochastic terminal conditions were found. The deep learning algorithm with simulated idiosyncratic noise was tested.
Getting the Measure of Money: A Critical Assessment of UK Monetary Indicators
SSRN
The Monetary Policy Committee of the Bank of England’s reliance on faulty indicators has led to suboptimal policy decisions and masked what is actually happening in the economy. The introduction of quantitative easing (QE) in 2009 has made the money supply relevant again and made a discussion about alternative money supply measures of direct policy significance. Unfortunately, Bank of England figures have proved misleading and subject to major alterations. This book argues in favour of measures such as MZM and Divisia money, which attempt to find a middle ground between narrow and broad measures. It introduces a new and publicly available measure, MA, based on an a priori approach to defining money as the generally accepted medium of exchange. Central bankers are right to alter monetary policy in light of changes in the demand for money (i.e. velocity shocks), but they also need to recognise the potential for their own actions to be the cause of such shocks. In particular, central banks are ‘big players’ who can weaken confidence by generating regime uncertainty, and this played a major role in the 2008 financial crisis. While increased attention to uncertainty by economists should be welcomed, we should also be wary of attempts to measure it. From 1999 to 2006 the Consumer Prices Index (CPI) systematically underreported the inflationary pressure in the UK. More attention should be given to indices that include asset prices. GDP figures available at the time understated the severity of the 2008 recession, but also understated the strength of the recovery. GDP is flawed as a measure of well-being, of economic growth and even of economic activity. We get a fuller picture if we include intermediate consumption (or business-to-business spending), which is known as ‘Gross Output’ (GO). GO for the UK is typically two times bigger than GDP and more volatile. Unfortunately, official figures are only published on an annual basis and with a significant lag.
SSRN
The Monetary Policy Committee of the Bank of England’s reliance on faulty indicators has led to suboptimal policy decisions and masked what is actually happening in the economy. The introduction of quantitative easing (QE) in 2009 has made the money supply relevant again and made a discussion about alternative money supply measures of direct policy significance. Unfortunately, Bank of England figures have proved misleading and subject to major alterations. This book argues in favour of measures such as MZM and Divisia money, which attempt to find a middle ground between narrow and broad measures. It introduces a new and publicly available measure, MA, based on an a priori approach to defining money as the generally accepted medium of exchange. Central bankers are right to alter monetary policy in light of changes in the demand for money (i.e. velocity shocks), but they also need to recognise the potential for their own actions to be the cause of such shocks. In particular, central banks are ‘big players’ who can weaken confidence by generating regime uncertainty, and this played a major role in the 2008 financial crisis. While increased attention to uncertainty by economists should be welcomed, we should also be wary of attempts to measure it. From 1999 to 2006 the Consumer Prices Index (CPI) systematically underreported the inflationary pressure in the UK. More attention should be given to indices that include asset prices. GDP figures available at the time understated the severity of the 2008 recession, but also understated the strength of the recovery. GDP is flawed as a measure of well-being, of economic growth and even of economic activity. We get a fuller picture if we include intermediate consumption (or business-to-business spending), which is known as ‘Gross Output’ (GO). GO for the UK is typically two times bigger than GDP and more volatile. Unfortunately, official figures are only published on an annual basis and with a significant lag.
Governance and Performance of Scheduled Urban Cooperative Banks in India
SSRN
This paper examined the relationship of governance and financial parameters for scheduled urban cooperative banks in India. Governance related parameters such as participation in annual general meetings, low or nil presence of family members in boards, training of staff, etc. were found to have significant, though not strong, positive correlations with Net Interest Margins, Return on Assets, and Return on Equity (ROE). The democratic structure of cooperative banks, beyond a threshold, and the quality of their professional management contributed to the quality of the overall governance at an increasing rate. Aspects such as educational qualifications of CEOs, qualifications and training of directors, training of staff, etc., were assessed as significant differentiators of the quality of governance. Improved quality of professional management contributed to about 32 basis points rise in the Net Interest Income, and the banks with very high governance scores enjoyed a higher ROE by 366 basis points.
SSRN
This paper examined the relationship of governance and financial parameters for scheduled urban cooperative banks in India. Governance related parameters such as participation in annual general meetings, low or nil presence of family members in boards, training of staff, etc. were found to have significant, though not strong, positive correlations with Net Interest Margins, Return on Assets, and Return on Equity (ROE). The democratic structure of cooperative banks, beyond a threshold, and the quality of their professional management contributed to the quality of the overall governance at an increasing rate. Aspects such as educational qualifications of CEOs, qualifications and training of directors, training of staff, etc., were assessed as significant differentiators of the quality of governance. Improved quality of professional management contributed to about 32 basis points rise in the Net Interest Income, and the banks with very high governance scores enjoyed a higher ROE by 366 basis points.
Hiding in Plain Sight: The Global Implications of Manager Disclosure
SSRN
Given the potential for agency conflicts in delegated asset management, and the constant push for disclosure by regulators, we examine a clear potential source of agency conflicts in the mutual fund industry: anonymously managed mutual funds. Using a global sample of mutual funds, we find that 17% of funds worldwide, excluding the US, and 22% of emerging market funds do not disclose the names of their management team. Anonymously managed funds significantly underperform, have lower active share, return gap, tracking error, and higher r2 than funds with named managers. They are more frequent in families with cooperative structures, and in bank affiliated funds. Further examining fund performance and activity around changes in SEC disclosure regulation, we find that both performance and fund activity increases following new regulation that required disclosure of manager names. This is important, as it provides evidence that the underperformance of anonymous teams is related to the disincentive brought on by anonymous management, and not solely due to less skilled managers being kept anonymous.
SSRN
Given the potential for agency conflicts in delegated asset management, and the constant push for disclosure by regulators, we examine a clear potential source of agency conflicts in the mutual fund industry: anonymously managed mutual funds. Using a global sample of mutual funds, we find that 17% of funds worldwide, excluding the US, and 22% of emerging market funds do not disclose the names of their management team. Anonymously managed funds significantly underperform, have lower active share, return gap, tracking error, and higher r2 than funds with named managers. They are more frequent in families with cooperative structures, and in bank affiliated funds. Further examining fund performance and activity around changes in SEC disclosure regulation, we find that both performance and fund activity increases following new regulation that required disclosure of manager names. This is important, as it provides evidence that the underperformance of anonymous teams is related to the disincentive brought on by anonymous management, and not solely due to less skilled managers being kept anonymous.
How Unique is VC’s American History?
SSRN
VC: An American History offers a compelling chronicle of the development of professional venture capital (VC) in the United States, from VC-like forebearers as diverse as 18th century cotton manufacturing and 19th century whaling up to the state of the modern VC market at the turn of the millennium. The book emphasizes America’s enduring advantage in venture capital as a consequence of these early developments and as a practical governance solution for investing in the long-tailed returns of risky new ventures. In this essay we discuss similar historical precedent and governance arrangements in the spice trading voyages of the 16th and 17th century Dutch Republic, calling into question the uniqueness of the early American VC ancestors. Moreover, far from being a distinguishing feature of early ventures, long-tailed returns exist even in public equities, suggesting that the VC governance structure is about more than the distribution of returns. We conclude that the reasons for American dominance of contemporary VC remain unclear. Picking up where the book leaves off, we summarize facts and trends in 21st century venture capital.
SSRN
VC: An American History offers a compelling chronicle of the development of professional venture capital (VC) in the United States, from VC-like forebearers as diverse as 18th century cotton manufacturing and 19th century whaling up to the state of the modern VC market at the turn of the millennium. The book emphasizes America’s enduring advantage in venture capital as a consequence of these early developments and as a practical governance solution for investing in the long-tailed returns of risky new ventures. In this essay we discuss similar historical precedent and governance arrangements in the spice trading voyages of the 16th and 17th century Dutch Republic, calling into question the uniqueness of the early American VC ancestors. Moreover, far from being a distinguishing feature of early ventures, long-tailed returns exist even in public equities, suggesting that the VC governance structure is about more than the distribution of returns. We conclude that the reasons for American dominance of contemporary VC remain unclear. Picking up where the book leaves off, we summarize facts and trends in 21st century venture capital.
Impact of Universal Banking on Investment Decisions of Bank-Dependent Firms
SSRN
The advantages and disadvantages of universal banking have long been debated. Using the successive granting of lead underwriter qualifications to commercial banks in China as a quasi-natural experiment, we study the impact of universal banking on non-financial firms’ investment decisions. We find that after a firm’s main lending banks qualify as lead underwriters, the firm’s investment increases by 7.7 to 8.3 percent on a gross or net basis. The underlying mechanism is that universal banking can generate informational economies of scope and relax constraints on the provision of external finance. In contrast, we find no evidence on the conflict of interest between universal banks and their customers. Our study, therefore, sheds light on the potential gains from universal banking.
SSRN
The advantages and disadvantages of universal banking have long been debated. Using the successive granting of lead underwriter qualifications to commercial banks in China as a quasi-natural experiment, we study the impact of universal banking on non-financial firms’ investment decisions. We find that after a firm’s main lending banks qualify as lead underwriters, the firm’s investment increases by 7.7 to 8.3 percent on a gross or net basis. The underlying mechanism is that universal banking can generate informational economies of scope and relax constraints on the provision of external finance. In contrast, we find no evidence on the conflict of interest between universal banks and their customers. Our study, therefore, sheds light on the potential gains from universal banking.
Inequality in the Time of Covid-19: Evidence from Mortgage Delinquency and Forbearance
SSRN
Using a novel database that combines mortgage servicing records, credit-bureau data, and loan application information, we show that lower-income and minority borrowers have signiï¬cantly higher nonpayment rates during the COVID-19 pandemic, even after controlling for conventional risk factors. A difference-in-differences analysis shows how much the pandemic has exacerbated income and racial inequalities. We then find that government and private-sector forbearance programs have mitigated these inequalities in the near term, as lower-income and minority borrowers have taken up the short-term debt relief at higher rates. Finally, we examine modiï¬cation options for an estimated 2.8 million loans in forbearance, most with terms expiring by mid-year 2021.
SSRN
Using a novel database that combines mortgage servicing records, credit-bureau data, and loan application information, we show that lower-income and minority borrowers have signiï¬cantly higher nonpayment rates during the COVID-19 pandemic, even after controlling for conventional risk factors. A difference-in-differences analysis shows how much the pandemic has exacerbated income and racial inequalities. We then find that government and private-sector forbearance programs have mitigated these inequalities in the near term, as lower-income and minority borrowers have taken up the short-term debt relief at higher rates. Finally, we examine modiï¬cation options for an estimated 2.8 million loans in forbearance, most with terms expiring by mid-year 2021.
Is Framing More Effective Than Regulating Disclosures? The Effects of Risk Disclosure Frame and Regime on Managers’ Disclosure Choices
SSRN
I conduct an experiment with senior executives (CEOs, CFOs, controllers) to examine how their risk disclosure quality, with respect to disclosure volume and specificity, is influenced by three factors. First, whether the disclosure behavior is framed internally by the firm as obtaining a gain or avoiding a loss from disclosure. Second, whether the external disclosure regime mandates risk mitigation disclosures that explain how a risk is handled. Third, whether the risk under consideration for disclosure is weakly- or strongly-mitigated. This research question is important because high-quality risk disclosures are challenging to regulate and changing how disclosure behavior is framed could substitute for costly disclosure regulations. I find that a gain frame prompts managers to make more detailed risk disclosures than a loss frame, regardless of the disclosure regime. A loss frame also leads to less detailed and more boilerplate disclosure of weakly-mitigated risks when risk mitigation plans are mandated. Given that the SEC (2016) is considering mandating risk mitigation disclosures similar to the practice in other regimes, my findings provide insights on the limitations of mandating these disclosures. My results suggest that changing managers’ disclosure frame internally through firm initiatives could be more effective in prompting higher quality risk disclosures.
SSRN
I conduct an experiment with senior executives (CEOs, CFOs, controllers) to examine how their risk disclosure quality, with respect to disclosure volume and specificity, is influenced by three factors. First, whether the disclosure behavior is framed internally by the firm as obtaining a gain or avoiding a loss from disclosure. Second, whether the external disclosure regime mandates risk mitigation disclosures that explain how a risk is handled. Third, whether the risk under consideration for disclosure is weakly- or strongly-mitigated. This research question is important because high-quality risk disclosures are challenging to regulate and changing how disclosure behavior is framed could substitute for costly disclosure regulations. I find that a gain frame prompts managers to make more detailed risk disclosures than a loss frame, regardless of the disclosure regime. A loss frame also leads to less detailed and more boilerplate disclosure of weakly-mitigated risks when risk mitigation plans are mandated. Given that the SEC (2016) is considering mandating risk mitigation disclosures similar to the practice in other regimes, my findings provide insights on the limitations of mandating these disclosures. My results suggest that changing managers’ disclosure frame internally through firm initiatives could be more effective in prompting higher quality risk disclosures.
Islamic finance and Sustainable Development Goals. A bibliometric analysis from 2000 to 2021
SSRN
Abstractâ€" The aim of this research is to provide, through a bibliometric analysis of the last 21 years of thematic literature, an overview on the contribution of sustainable development goals (SDGs) to the discussion in the field of Islamic finance. A bibliometric method has been used to analyze the characteristics, citation patterns and content of 15 documents published in international academic journals, books review and chapters, editorial material and proceedings papers.Considering the findings, the analysis has shown that there is an enormous gap on that field, with a few works on the topic with an impact on research. Through the analysis of the papers, it emerges that qualitative method is the most used method to demonstrate the link between Islamic finance and its relationship in the achievement of sustainable development goals. The research also shows that there is an increase on the academic interest on the topic only in the last four years.Research limitations/implications â€" The study highlights a limitation, related to the adoption of the bibliometric method. This is due to the fact that databases include only part of the scientific papers and not all world’s sources. However, WOS database, the one adopted for the research, is the world’s most complete index even if it is not complete at all. On the other hand, to have a wider landscape of knowledge on the field of research, they have been considered all kind of sources: books review, chapters, papers published in international and academic journals, editorial materials, reviews and proceedings papers. Originality/value â€" This research shows the initial attention of the academic world toward the relation between Islamic finance and Sustainable Development Goals, however underlying that this contribution is not systematically interpreted by the different stakeholders and in the different countries. The bibliometric analysis of the literature puts Islamic finance and Sustainable Development Goals in relation but contemporarily indicates that more efforts need to be done in order to enhance this bond both from an academical and a practical point of view. Therefore, with the intention of mapping all the studies that have been done in this regard, the study analyzes how research on the relationship between Islamic finance and social development goals has been addressed, confirm with its qualitative approach the link between Islamic finance and social impact.
SSRN
Abstractâ€" The aim of this research is to provide, through a bibliometric analysis of the last 21 years of thematic literature, an overview on the contribution of sustainable development goals (SDGs) to the discussion in the field of Islamic finance. A bibliometric method has been used to analyze the characteristics, citation patterns and content of 15 documents published in international academic journals, books review and chapters, editorial material and proceedings papers.Considering the findings, the analysis has shown that there is an enormous gap on that field, with a few works on the topic with an impact on research. Through the analysis of the papers, it emerges that qualitative method is the most used method to demonstrate the link between Islamic finance and its relationship in the achievement of sustainable development goals. The research also shows that there is an increase on the academic interest on the topic only in the last four years.Research limitations/implications â€" The study highlights a limitation, related to the adoption of the bibliometric method. This is due to the fact that databases include only part of the scientific papers and not all world’s sources. However, WOS database, the one adopted for the research, is the world’s most complete index even if it is not complete at all. On the other hand, to have a wider landscape of knowledge on the field of research, they have been considered all kind of sources: books review, chapters, papers published in international and academic journals, editorial materials, reviews and proceedings papers. Originality/value â€" This research shows the initial attention of the academic world toward the relation between Islamic finance and Sustainable Development Goals, however underlying that this contribution is not systematically interpreted by the different stakeholders and in the different countries. The bibliometric analysis of the literature puts Islamic finance and Sustainable Development Goals in relation but contemporarily indicates that more efforts need to be done in order to enhance this bond both from an academical and a practical point of view. Therefore, with the intention of mapping all the studies that have been done in this regard, the study analyzes how research on the relationship between Islamic finance and social development goals has been addressed, confirm with its qualitative approach the link between Islamic finance and social impact.
Language Style Matching and CFO Turnover
SSRN
Analyzing the language styles of top executives using conference call transcripts, we find that the language style matching between the CEO and the CFO can predict CFO turnover. Using the CEO-CFO pair fixed effects, we find that the mimicry component of language style matching is negatively associated with CFO turnover. We also find that the effect is mitigated by better corporate governance mechanisms, suggesting that corporate decisions driven by social interactions could be a source of agency costs. The effect is also weaker for CFOs appointed by the current CEO.
SSRN
Analyzing the language styles of top executives using conference call transcripts, we find that the language style matching between the CEO and the CFO can predict CFO turnover. Using the CEO-CFO pair fixed effects, we find that the mimicry component of language style matching is negatively associated with CFO turnover. We also find that the effect is mitigated by better corporate governance mechanisms, suggesting that corporate decisions driven by social interactions could be a source of agency costs. The effect is also weaker for CFOs appointed by the current CEO.
Learning Epidemiology by Doing: The Empirical Implications of a Spatial-SIR Model with Behavioral Responses
arXiv
arXiv
We simulate a spatial behavioral model of the diffusion of an infection to understand the role of geographic characteristics: the number and distribution of outbreaks, population size, density, and agents' movements. We show that several invariance properties of the SIR model concerning these variables do not hold when agents interact with neighbors in a (two dimensional) geographical space. Indeed, the spatial model's local interactions generate matching frictions and local herd immunity effects, which play a fundamental role in the infection dynamics. We also show that geographical factors affect how behavioral responses affect the epidemics. We derive relevant implications for estimating the effects of the epidemics and policy interventions that use panel data from several geographical units.
Making Sense of Tesla's Run-up
SSRN
Tesla has run-up again. Between December 2, 2019 and April 30, 2021, the price of Tesla rose more than ten times creating over $600 billion in investor wealth. The analysis presented here implies that the 10x jump cannot be explained by the arrival of fundamental information regarding the macroeconomy, the auto industry, or company specific information related to Tesla as an electric vehicle manufacturer. The only feasible explanation for the run-up was a spreading narrative that Tesla is more than a car company. As stated by Mr. Musk, and echoed by Cathie Wood and others, Tesla is also going to be a renewable energy, artificial intelligence, ride sharing, and robotics company. Such narratives have the advantage that they can blossom and replicate with little in the way of capital expenditure and improvements in operations both of which tend to have a sluggish impact on value. They also benefit from a feedback effect by which spread of the narrative drives up the stock price and the rising stock price is then interpreted as evidence for the veracity of the narrative. Of course, the spread of a narrative and the feedback effect can operate in both directions. A narrative that arises, spreads, and drives stock prices to new highs can collapse just as quickly.
SSRN
Tesla has run-up again. Between December 2, 2019 and April 30, 2021, the price of Tesla rose more than ten times creating over $600 billion in investor wealth. The analysis presented here implies that the 10x jump cannot be explained by the arrival of fundamental information regarding the macroeconomy, the auto industry, or company specific information related to Tesla as an electric vehicle manufacturer. The only feasible explanation for the run-up was a spreading narrative that Tesla is more than a car company. As stated by Mr. Musk, and echoed by Cathie Wood and others, Tesla is also going to be a renewable energy, artificial intelligence, ride sharing, and robotics company. Such narratives have the advantage that they can blossom and replicate with little in the way of capital expenditure and improvements in operations both of which tend to have a sluggish impact on value. They also benefit from a feedback effect by which spread of the narrative drives up the stock price and the rising stock price is then interpreted as evidence for the veracity of the narrative. Of course, the spread of a narrative and the feedback effect can operate in both directions. A narrative that arises, spreads, and drives stock prices to new highs can collapse just as quickly.
Mapping the NFT revolution: market trends, trade networks and visual features
arXiv
arXiv
Non Fungible Tokens (NFTs) are digital assets that represent objects like art, videos, in-game items and music. They are traded online, often with cryptocurrency, and they are generally encoded as smart contracts on a blockchain. Media and public attention towards NFTs has exploded in 2021, when the NFT art market has experienced record sales while celebrated new star artists. However, little is known about the overall structure and evolution of the NFT market. Here, we analyse data concerning 6.1 million trades of 4.7 million NFTs generating a total trading volume of 935 millions US dollars. Our data are obtained primarily from the Ethereum and WAX blockchains and cover the period between June 23, 2017 and April 27, 2021. First, we characterize the statistical properties of the market. Second, we build the network of interactions and show that traders have bursts of activity followed by inactive periods, and typically specialize on NFTs associated to similar objects. Third, we cluster objects associated to NFTs according to their visual features and show that NFTs within the same category tend to be visually homogeneous. Finally, we investigate the predictability of NFT sales. We use simple machine learning algorithms and find that prices can be best predicted by the sale history of the NFT collection, but also by some features describing the properties of the associated object (e.g., visual features of digital images). We anticipate that our analysis will be of interest to both researchers and practitioners and will spark further research on the NFT production, adoption and trading in different contexts.
Measuring and Pricing Cyclone-Related Physical Risk Under Changing Climate
SSRN
We propose a statistical methodology to quantify the financial implications of tropical cyclone-related physical risks implied by climate change. To address the sensitivity of disaster intensity to climate change, we provide a Monte Carlo methodology to generate synthetic cyclones consistent with climate scenarios of the Couple Model Intercomparison Project (CMIP5). Sovereign exposure and vulnerability assessments in principal tropical cyclone basins are based on projections of population densities in shared socioeconomic pathways coupled with downscaled physical asset values constructed using mixed data along with locally calibrated damage functions. Finally, we compute the direct climate impact on emerging countries’ bond spreads using the spread sensitivity to the debt to GDP ratio, assuming that damage costs are financed by issuing new government debt. We find that the ‘business as usual’ RCP8.5 concentration scenario coupled with the ‘middle road’ shared socioeconomic pathway (SSP2) leads to global average annual damages 142% larger than in the concentration scenario RCP2.6 allowing to remain under 2°C warming. In terms of emerging market impact, we estimate that in 2070-2100, the impact of extreme cyclones on the bond spread of most vulnerable countries will up to 200 bps higher in the RCP8.5 pathway than in the 2°C baseline. In every step of our assessment, we quantify the impact of model uncertainty on our results using 7 different climate models from the CMIP5 database.
SSRN
We propose a statistical methodology to quantify the financial implications of tropical cyclone-related physical risks implied by climate change. To address the sensitivity of disaster intensity to climate change, we provide a Monte Carlo methodology to generate synthetic cyclones consistent with climate scenarios of the Couple Model Intercomparison Project (CMIP5). Sovereign exposure and vulnerability assessments in principal tropical cyclone basins are based on projections of population densities in shared socioeconomic pathways coupled with downscaled physical asset values constructed using mixed data along with locally calibrated damage functions. Finally, we compute the direct climate impact on emerging countries’ bond spreads using the spread sensitivity to the debt to GDP ratio, assuming that damage costs are financed by issuing new government debt. We find that the ‘business as usual’ RCP8.5 concentration scenario coupled with the ‘middle road’ shared socioeconomic pathway (SSP2) leads to global average annual damages 142% larger than in the concentration scenario RCP2.6 allowing to remain under 2°C warming. In terms of emerging market impact, we estimate that in 2070-2100, the impact of extreme cyclones on the bond spread of most vulnerable countries will up to 200 bps higher in the RCP8.5 pathway than in the 2°C baseline. In every step of our assessment, we quantify the impact of model uncertainty on our results using 7 different climate models from the CMIP5 database.
Mind the Gap - Safely Incorporating Deep Learning Models into the Actuarial Toolkit
SSRN
Deep neural network models have substantial advantages over traditional and machine learningmethods that make this class of models particularly promising for adoption by actuaries.Nonetheless, several important aspects of these models have not yet been studied in detailin the actuarial literature: the effect of hyperparameter choice on the accuracy and stabilityof network predictions, methods for producing uncertainty estimates and the design of deeplearning models for explainability. To allow actuaries to incorporate deep learning safely intotheir toolkits, we review these areas in the context of a deep neural network for forecastingmortality rates.
SSRN
Deep neural network models have substantial advantages over traditional and machine learningmethods that make this class of models particularly promising for adoption by actuaries.Nonetheless, several important aspects of these models have not yet been studied in detailin the actuarial literature: the effect of hyperparameter choice on the accuracy and stabilityof network predictions, methods for producing uncertainty estimates and the design of deeplearning models for explainability. To allow actuaries to incorporate deep learning safely intotheir toolkits, we review these areas in the context of a deep neural network for forecastingmortality rates.
National Blockchain Laws as a Threat to Capital Markets Integration
SSRN
Various states have started providing private law frameworks for blockchain transfers and crypto assets. The first acts have been adopted by France and Liechtenstein, while a commission of the British government sees no difficulties in extending property protection under the Common law to crypto assets. In the US, an amendment to the Uniform Commercial Code has been suggested, which has not stopped some States going their own, different way. The aim in all cases is to promote the use of modern distributed ledger technology and enhance investor protection. While these initiatives will increase legal certainty, they differ significantly. This has an important downside: there is a strong risk that the blockchain will be made subject to diverging legal rules. Similar to the world of intermediated securities, various national laws will need to be consulted to determine the rights and privileges of investors. This may increase transaction costs, thwart interoperability and produce thorny conflict-of-laws problems. Markets risk being fragmented into national segments, with an inevitable diminution of their depth and liquidity.As a remedy, this article suggests developing uniform rules for the blockchain. Before national legislators and judges once again divide the world through idiosyncratic rules, the private law of crypto assets should be harmonised to the highest degree possible. Uniform rules should ideally be forged at the global level, by fora like the International Institute for the Unification of Private Law (UNIDROIT), the United Nations Commission on International Trade Law (UNCITRAL), and the Hague Conference on Private International Law. In the absence of world-wide rules, uniformisation of private law should take place at the regional level, for instance by the European Union. The article makes specific suggestions as to how this can be achieved and what the content of those rules should be.
SSRN
Various states have started providing private law frameworks for blockchain transfers and crypto assets. The first acts have been adopted by France and Liechtenstein, while a commission of the British government sees no difficulties in extending property protection under the Common law to crypto assets. In the US, an amendment to the Uniform Commercial Code has been suggested, which has not stopped some States going their own, different way. The aim in all cases is to promote the use of modern distributed ledger technology and enhance investor protection. While these initiatives will increase legal certainty, they differ significantly. This has an important downside: there is a strong risk that the blockchain will be made subject to diverging legal rules. Similar to the world of intermediated securities, various national laws will need to be consulted to determine the rights and privileges of investors. This may increase transaction costs, thwart interoperability and produce thorny conflict-of-laws problems. Markets risk being fragmented into national segments, with an inevitable diminution of their depth and liquidity.As a remedy, this article suggests developing uniform rules for the blockchain. Before national legislators and judges once again divide the world through idiosyncratic rules, the private law of crypto assets should be harmonised to the highest degree possible. Uniform rules should ideally be forged at the global level, by fora like the International Institute for the Unification of Private Law (UNIDROIT), the United Nations Commission on International Trade Law (UNCITRAL), and the Hague Conference on Private International Law. In the absence of world-wide rules, uniformisation of private law should take place at the regional level, for instance by the European Union. The article makes specific suggestions as to how this can be achieved and what the content of those rules should be.
Newbuilding orders and freight rate shocks: Evidence from the containership market
SSRN
This paper studies the behaviour of shipping investors following an unexpected shock in the freight rates, while accounting for costs (fuel), and the macro environment (stock prices and trade). The estimates firstly confirm the existence of a long-term relationship between the macroeconomic environment and freight rates, as well as between that and newbuilding orders. Most importantly, we find that when the source of the shock is less clear but still causes an increase in freight rates, shipping investors respond with a delay, which could last almost a year. The thinking behind this “inaction period†is rational, given that the only way to observe whether a shock is permanent or transitory is to wait it out. The above findings have important policy implications not only for shipping investors but also for countries that rely heavily on their ship-building industries.
SSRN
This paper studies the behaviour of shipping investors following an unexpected shock in the freight rates, while accounting for costs (fuel), and the macro environment (stock prices and trade). The estimates firstly confirm the existence of a long-term relationship between the macroeconomic environment and freight rates, as well as between that and newbuilding orders. Most importantly, we find that when the source of the shock is less clear but still causes an increase in freight rates, shipping investors respond with a delay, which could last almost a year. The thinking behind this “inaction period†is rational, given that the only way to observe whether a shock is permanent or transitory is to wait it out. The above findings have important policy implications not only for shipping investors but also for countries that rely heavily on their ship-building industries.
Not Everyone's Cup of Tea: The Verdict on MiFID II
SSRN
MiFID II, together with MiFIR (Regulation (EU) No 600/2014), was intended to create a more transparent, competitive and integrated financial market in the EU by reducing trading outside regulated markets, increasing protection for investors and consumers, and improving financial stability. The Directive harmonises the EU regulatory regime with respect to organisational requirements for investment firms, regulated markets, data reporting services, and conduct of business rules for investment services, including inducements, disclosure requirements, and product governance rules. However, one year on, many practitioners’ initial fears about MiFID II appear to have been realised, especially with regard to unbundled research causing a reduction in the amount of research available on smaller companies. Fears that new firms would be discouraged from starting in the UK due to excessive EU regulation and their "gold plating" by the UK government have also proved to be well founded. Gold plating was cited as a particular problem for new market entrants in the insurance industry.
SSRN
MiFID II, together with MiFIR (Regulation (EU) No 600/2014), was intended to create a more transparent, competitive and integrated financial market in the EU by reducing trading outside regulated markets, increasing protection for investors and consumers, and improving financial stability. The Directive harmonises the EU regulatory regime with respect to organisational requirements for investment firms, regulated markets, data reporting services, and conduct of business rules for investment services, including inducements, disclosure requirements, and product governance rules. However, one year on, many practitioners’ initial fears about MiFID II appear to have been realised, especially with regard to unbundled research causing a reduction in the amount of research available on smaller companies. Fears that new firms would be discouraged from starting in the UK due to excessive EU regulation and their "gold plating" by the UK government have also proved to be well founded. Gold plating was cited as a particular problem for new market entrants in the insurance industry.
On the micro-Corporate-Governance of a Strictly Informational Cascade, as illustrated with analysis of the performativity of the Black-Scholes-Merton Model
SSRN
While macro-corporate-governance (e.g., addressing how a governance process should be administered within a corporate structure) seems to be widely discussed in academic literature, a discussion of micro-corporate-governance (e.g., assessing specific models, including regarding whether they accurately represent a corporate risk exposure) seems sparse, as does midi-corporate-governance (e.g., the model validation process itself, as an administered process toward specific models). An important part of corporate governance (CG) is the model validation (MV) process, with one example of micro-CGMV being how “strictly informational cascades†can influence a validation process, even perhaps suggesting that model validation is not required. Yet, such cascades are not often transparent, and not often detected by validators who are not technically trained. This paper illustrates how a variety of “attention directing tools†used as “fast and frugal heuristics†can help in the model validation process in general and the specific task of identify “strictly informational cascades.†The tools are applied toward the Black-Scholes-Merton Model, a seminal financial derivatives model that is approaching a 50th anniversary of publication, and are illustrated to demonstrate that lessons can be learned to apply to more-complex models and more-complex financial instruments.
SSRN
While macro-corporate-governance (e.g., addressing how a governance process should be administered within a corporate structure) seems to be widely discussed in academic literature, a discussion of micro-corporate-governance (e.g., assessing specific models, including regarding whether they accurately represent a corporate risk exposure) seems sparse, as does midi-corporate-governance (e.g., the model validation process itself, as an administered process toward specific models). An important part of corporate governance (CG) is the model validation (MV) process, with one example of micro-CGMV being how “strictly informational cascades†can influence a validation process, even perhaps suggesting that model validation is not required. Yet, such cascades are not often transparent, and not often detected by validators who are not technically trained. This paper illustrates how a variety of “attention directing tools†used as “fast and frugal heuristics†can help in the model validation process in general and the specific task of identify “strictly informational cascades.†The tools are applied toward the Black-Scholes-Merton Model, a seminal financial derivatives model that is approaching a 50th anniversary of publication, and are illustrated to demonstrate that lessons can be learned to apply to more-complex models and more-complex financial instruments.
Optimal Portfolio Construction Using Sharpe’s Single Index Model-A Study of Selected Stocks from NGSE
SSRN
This study uses Sharpe Single Index Model (SSIM) to construct an optimal portfolio. The sample forthis study was based on the large listed Nigerian companies listed on NGSE. Monthly closing stockprice of the companies was obtained from www.investing.com over the period of October 2019 toNovember 2019. The findings are highly encouraging as results show the cut-off rate and stocks with higher excess return to beta ratio which form the optimal portfolio. This study is highly useful for investors and companies.
SSRN
This study uses Sharpe Single Index Model (SSIM) to construct an optimal portfolio. The sample forthis study was based on the large listed Nigerian companies listed on NGSE. Monthly closing stockprice of the companies was obtained from www.investing.com over the period of October 2019 toNovember 2019. The findings are highly encouraging as results show the cut-off rate and stocks with higher excess return to beta ratio which form the optimal portfolio. This study is highly useful for investors and companies.
Persistence in ESG and Conventional Stock Market Indices
SSRN
This paper uses R/S analysis and fractional integration techniques to examine the persistence of two sets of 12 ESG and conventional stock price indices from the MSCI database over the period 2007-2020 for a large number of both developed and emerging markets. Both sets of results imply that there are no significant differences between the two types of indices in terms of the degree of persistence and its dynamic behaviour. However, higher persistence is found for the emerging markets examined (especially the BRICS), which suggests that they are less efficient and thus offer more opportunities for profitable trading strategies. Possible explanations for these findings include different type of companies’ ‘camouflage’ and ‘washing’ (green, blue, pink, social, and SDG) in the presence of rather lax regulations for ESG reporting.
SSRN
This paper uses R/S analysis and fractional integration techniques to examine the persistence of two sets of 12 ESG and conventional stock price indices from the MSCI database over the period 2007-2020 for a large number of both developed and emerging markets. Both sets of results imply that there are no significant differences between the two types of indices in terms of the degree of persistence and its dynamic behaviour. However, higher persistence is found for the emerging markets examined (especially the BRICS), which suggests that they are less efficient and thus offer more opportunities for profitable trading strategies. Possible explanations for these findings include different type of companies’ ‘camouflage’ and ‘washing’ (green, blue, pink, social, and SDG) in the presence of rather lax regulations for ESG reporting.
Personalized Communication Strategies: Towards A New Debtor Typology Framework
arXiv
arXiv
Based on debt collection agency (PAIR Finance) data, we developed a novel debtor typology framework by expanding previous approaches to 4 behavioral dimensions. The 4 dimensions we identified were willingness to pay, ability to pay, financial organization, and rational behavior. Using these dimensions, debtors could be classified into 16 different typologies. We identified 5 main typologies, which account for 63% of the debtors in our data set. Further, we observed that each debtor typology reacted differently to the content and timing of reminder messages, allowing us to define an optimal debt collection strategy for each typology. For example, sending a reciprocity message at 8 p.m. in the evening is the most successful strategy to get a reaction from a debtor who is willing to pay their debt, able to pay their debt, chaotic in terms of their financial organization, and emotional when communicating and handling their finances. In sum, our findings suggest that each debtor type should be approached in a personalized way using different tonalities and timing schedules.
Portfolio Rebalancing: Tradeoffs and Decisions
SSRN
This paper identifies a clear tradeoff between tracking error â€" performance differences relative to a targeted asset allocation â€" and turnoverâ€"a proxy for rebalancing costs â€" that can help guide investors’ rebalancing choices. We find that calendar-based approaches, while convenient, tend to lead to less efficient rebalancing tradeoffs than rebalancing with tolerance bands. Further improvements can be gained with tiered approaches that apply different tolerance bands across and within asset classes. We do not find evidence that rebalancing choices can reliably increase expected returns. Finally, our study evaluates how rebalancing choices relate to asset allocation and how they may impact a portfolio’s maximum drawdowns and shorter-term return differences to the target allocation.
SSRN
This paper identifies a clear tradeoff between tracking error â€" performance differences relative to a targeted asset allocation â€" and turnoverâ€"a proxy for rebalancing costs â€" that can help guide investors’ rebalancing choices. We find that calendar-based approaches, while convenient, tend to lead to less efficient rebalancing tradeoffs than rebalancing with tolerance bands. Further improvements can be gained with tiered approaches that apply different tolerance bands across and within asset classes. We do not find evidence that rebalancing choices can reliably increase expected returns. Finally, our study evaluates how rebalancing choices relate to asset allocation and how they may impact a portfolio’s maximum drawdowns and shorter-term return differences to the target allocation.
Reallocating Liquidity to Resolve a Crisis: Evidence from the Panic of 1873
SSRN
We study financial stability with constraints on central bank intervention. We show that a forced reallocation of liquidity across banks can achieve fewer bank failures than a decentralized market for interbank loans, reflecting a pecuniary externality in the decentralized equilibrium. Importantly, this reallocation can be implemented through the issuance of clearinghouse loan certificates, such as those issued in New York City during the Panic of 1873. With a new dataset constructed from archival records, we demonstrate that the New York Clearinghouse issued loan certificates to member banks in the way our model suggests would have helped resolve the panic.
SSRN
We study financial stability with constraints on central bank intervention. We show that a forced reallocation of liquidity across banks can achieve fewer bank failures than a decentralized market for interbank loans, reflecting a pecuniary externality in the decentralized equilibrium. Importantly, this reallocation can be implemented through the issuance of clearinghouse loan certificates, such as those issued in New York City during the Panic of 1873. With a new dataset constructed from archival records, we demonstrate that the New York Clearinghouse issued loan certificates to member banks in the way our model suggests would have helped resolve the panic.
Regulation Without the State: The Example of Financial Services
SSRN
There are frequent calls for financial markets to be more actively regulated by state agencies, such as the Financial Conduct Authority or the Prudential Regulation Authority. They reflect neo-classical, market-failure approaches to economics, which suggest that the market does not maximise welfare if certain conditions do not hold and that government action is required to move the market towards the welfare-maximising position. But we cannot know whether government regulatory action will move us away from or towards the welfare-maximising position unless we also make unrealistic assumptions about behaviour in regulatory agencies. The neo-classical, market-failure approach therefore takes us down an intellectual rabbit hole. It is instead possible to think of regulation as part of the set of services provided by the market, rather than something that to be done to the market ex-post. The discovery of regulatory organisations is part of the entrepreneurial market process. Regulatory institutions evolving within the market continue to evolve, despite the attempts by government agencies to regulate markets in very detailed ways. Modern examples would include the International Swaps and Derivatives Association (ISDA), whose record during the financial crisis was faultless. There are disadvantages arising from private regulatory bodies: they can encourage cartelistic behaviour and may prove less effective where the economic activity in question gives rise to widespread social costs beyond market participants. However, we should reject market failure analysis and operate under the assumption that the market can provide regulatory services because they are valued by market participants. Where statutory regulation is used, it should generally be voluntary with products not regulated by the statutory regulator being clearly identified as such.
SSRN
There are frequent calls for financial markets to be more actively regulated by state agencies, such as the Financial Conduct Authority or the Prudential Regulation Authority. They reflect neo-classical, market-failure approaches to economics, which suggest that the market does not maximise welfare if certain conditions do not hold and that government action is required to move the market towards the welfare-maximising position. But we cannot know whether government regulatory action will move us away from or towards the welfare-maximising position unless we also make unrealistic assumptions about behaviour in regulatory agencies. The neo-classical, market-failure approach therefore takes us down an intellectual rabbit hole. It is instead possible to think of regulation as part of the set of services provided by the market, rather than something that to be done to the market ex-post. The discovery of regulatory organisations is part of the entrepreneurial market process. Regulatory institutions evolving within the market continue to evolve, despite the attempts by government agencies to regulate markets in very detailed ways. Modern examples would include the International Swaps and Derivatives Association (ISDA), whose record during the financial crisis was faultless. There are disadvantages arising from private regulatory bodies: they can encourage cartelistic behaviour and may prove less effective where the economic activity in question gives rise to widespread social costs beyond market participants. However, we should reject market failure analysis and operate under the assumption that the market can provide regulatory services because they are valued by market participants. Where statutory regulation is used, it should generally be voluntary with products not regulated by the statutory regulator being clearly identified as such.
Resolving Mortgage Distress after COVID-19: Some Lessons from the Last Crisis
SSRN
Abstract We analyse micro data on Irish mortgages and distressed households’ balance sheets in the last decade to assess the debt resolution process in the Irish mortgage market in the lead up to the COVID-19 shock. We highlight the widespread engagement of Irish borrowers with debt resolution mechanisms during a decade in which one sixth of mortgage accounts were restructured by 2016. Lenders favoured short-term mortgage modifications at the beginning of the decade and three-quarters of performing mortgages with short-term modifications in 2011-2012 remained performing at end-2017. However, close to half of these cases involved a subsequent longer-term restructure, consistent with concerns that short-term modification alone is not sufficient to ensure mortgage sustainability. In other cases, an over-reliance on unsustainable short-term arrangements translated into longer-term arrears accumulation. Turning to the financial distress of households seeking a resolution to their arrears, we find an average income fall of roughly one third since mortgage origination and that one third had already reduced their non-housing expenditures to below the recommended minimum level used in the personal insolvency system. Finally, we show that larger cuts in repayment burdens and lower ex-post payment-to-income ratios are both highly predictive of successful long-term restructures.
SSRN
Abstract We analyse micro data on Irish mortgages and distressed households’ balance sheets in the last decade to assess the debt resolution process in the Irish mortgage market in the lead up to the COVID-19 shock. We highlight the widespread engagement of Irish borrowers with debt resolution mechanisms during a decade in which one sixth of mortgage accounts were restructured by 2016. Lenders favoured short-term mortgage modifications at the beginning of the decade and three-quarters of performing mortgages with short-term modifications in 2011-2012 remained performing at end-2017. However, close to half of these cases involved a subsequent longer-term restructure, consistent with concerns that short-term modification alone is not sufficient to ensure mortgage sustainability. In other cases, an over-reliance on unsustainable short-term arrangements translated into longer-term arrears accumulation. Turning to the financial distress of households seeking a resolution to their arrears, we find an average income fall of roughly one third since mortgage origination and that one third had already reduced their non-housing expenditures to below the recommended minimum level used in the personal insolvency system. Finally, we show that larger cuts in repayment burdens and lower ex-post payment-to-income ratios are both highly predictive of successful long-term restructures.
Tax Aggressiveness as a determining factor of Accounting Conservatism in Brazil
SSRN
This paper investigates whether the degree of tax aggressiveness is a determinant of accounting conservatism. The taxable income has a dependent relationship with the accounting income in the Brazilian corporate income tax system. One way to reduce the corporate tax base is to adopt conservative accounting choices. After a conceptual discussion of accounting conservatism, differentiating conditional and unconditional conservativeness, and a thorough literature review on accounting conservatism by Brazilian academia. A literature gap was found since the relationship between a company's degree of tax aggressiveness, and its accounting conservatism behavior has not been investigated. For this research purpose, the Basu model was adopted, adapted with tax aggressiveness controls. The study period was from 2010 to 2019 for Brazilian firms from B3. The findings show a significant relationship between tax avoidance and conditional accounting conservatism. That is, more tax-aggressive firms tend to use more conservative accounting. The results provide insights that firms with higher effective tax rates are less inclined to use conservatism. The choice of a conservative accounting pattern may be in part to avoid the tax burden; therefore, this outcome states evidence that there is a difference between the degree of conservatism depending on the firm's tax aggressiveness profile.
SSRN
This paper investigates whether the degree of tax aggressiveness is a determinant of accounting conservatism. The taxable income has a dependent relationship with the accounting income in the Brazilian corporate income tax system. One way to reduce the corporate tax base is to adopt conservative accounting choices. After a conceptual discussion of accounting conservatism, differentiating conditional and unconditional conservativeness, and a thorough literature review on accounting conservatism by Brazilian academia. A literature gap was found since the relationship between a company's degree of tax aggressiveness, and its accounting conservatism behavior has not been investigated. For this research purpose, the Basu model was adopted, adapted with tax aggressiveness controls. The study period was from 2010 to 2019 for Brazilian firms from B3. The findings show a significant relationship between tax avoidance and conditional accounting conservatism. That is, more tax-aggressive firms tend to use more conservative accounting. The results provide insights that firms with higher effective tax rates are less inclined to use conservatism. The choice of a conservative accounting pattern may be in part to avoid the tax burden; therefore, this outcome states evidence that there is a difference between the degree of conservatism depending on the firm's tax aggressiveness profile.
Tax Haven Incorporation and the Cost of Capital
SSRN
Incorporating the firm’s corporate parent in a tax haven is a major decision that receives significant attention from many stakeholders, yet certain implications of this corporate strategy remain unclear. While tax haven incorporation offers tax savings, it also imposes risks that are potentially costly and hence important to consider. We predict and find a higher cost of equity capital in firms with parent companies that are incorporated in tax havens but that are primarily based in nonhaven countries. We also predict and find that the observed cost of equity premium is more pronounced in firms with greater tax risk, firm-level information risk, and country-level legal risk. We also employ corporate inversions in a difference-in-differences test and again find a positive relation between tax haven parent incorporation and the cost of capital. Our findings imply that an increased cost of capital is a material cost of tax haven parent incorporation. We contribute to the literatures on valuation of tax haven use, tax and nontax costs of corporate tax strategies, corporate inversions, and the relation between taxes and the cost of capital. Our study provides evidence on the tax and nontax risks of a uniquely observable tax strategy (i.e., tax haven parent incorporation) that could factor into firms’ decisions about whether to incorporate in a tax haven and policymakers’ efforts to deter such activity.
SSRN
Incorporating the firm’s corporate parent in a tax haven is a major decision that receives significant attention from many stakeholders, yet certain implications of this corporate strategy remain unclear. While tax haven incorporation offers tax savings, it also imposes risks that are potentially costly and hence important to consider. We predict and find a higher cost of equity capital in firms with parent companies that are incorporated in tax havens but that are primarily based in nonhaven countries. We also predict and find that the observed cost of equity premium is more pronounced in firms with greater tax risk, firm-level information risk, and country-level legal risk. We also employ corporate inversions in a difference-in-differences test and again find a positive relation between tax haven parent incorporation and the cost of capital. Our findings imply that an increased cost of capital is a material cost of tax haven parent incorporation. We contribute to the literatures on valuation of tax haven use, tax and nontax costs of corporate tax strategies, corporate inversions, and the relation between taxes and the cost of capital. Our study provides evidence on the tax and nontax risks of a uniquely observable tax strategy (i.e., tax haven parent incorporation) that could factor into firms’ decisions about whether to incorporate in a tax haven and policymakers’ efforts to deter such activity.
Tax Progressivity and Wealth Inequality: Evidence from Forbes 400
arXiv
arXiv
Using Forbes 400 data together with historical data on tax rates and macroeconomic indicators, we study the effects of the maximum marginal income tax rate on wealth inequality. To this end, we develop a novel tail regression method, which accommodates the unique feature that the data are truncated from below at the 400th order statistic. Applying this tail regression to the "natural experiment" (Feldstein, 1995) of the event that tax rates rapidly declined in the 1980s, we find that higher maximum marginal income tax rates induce higher Pareto exponents of the wealth distribution. Setting the maximum tax rate to 0.30-0.40 (as in U.S. currently) leads to a Pareto exponent of 1.5-1.8, while counterfactually setting it to 0.80 (as suggested by Piketty, 2014) would lead to a Pareto exponent of 2.6. We present a simple economic model that explains these findings and discuss the welfare implications of taxation.
The Absence or Misuse of Statistics in Forensic Science as a Contributor to Wrongful Convictions: From Pattern Matching to Medical Opinions About Child Abuse
SSRN
The new scrutiny that has been applied to the forensic sciences since the emergence of DNA profiling as the gold standard three decades ago has identified numerous concerns about the absence of a solid scientific footing for most disciplines. This article examines one of the lesser-considered problems that afflicts virtually all of the pattern-matching (or "individualization") disciplines (largely apart from DNA), and even undermines the validity of other forensic disciplines like forensic pathology and medical determinations about child abuse, particularly Shaken Baby Syndrome/Abusive Head Trauma (SBS/AHT). That problem is the absence or misuse of statistics. This article begins by applying basic statistical principles to pattern-matching disciplines to demonstrate how those disciplines have historically hidden or failed to reckon with the probabilistic nature of their judgments, and how, when they have acknowledged the probabilistic nature of their claims, they have often botched the statistical analyses. The article then does a deeper dive into showing how those same deficiencies apply to medical opinions about child abuse, particularly SBS/AHT.
SSRN
The new scrutiny that has been applied to the forensic sciences since the emergence of DNA profiling as the gold standard three decades ago has identified numerous concerns about the absence of a solid scientific footing for most disciplines. This article examines one of the lesser-considered problems that afflicts virtually all of the pattern-matching (or "individualization") disciplines (largely apart from DNA), and even undermines the validity of other forensic disciplines like forensic pathology and medical determinations about child abuse, particularly Shaken Baby Syndrome/Abusive Head Trauma (SBS/AHT). That problem is the absence or misuse of statistics. This article begins by applying basic statistical principles to pattern-matching disciplines to demonstrate how those disciplines have historically hidden or failed to reckon with the probabilistic nature of their judgments, and how, when they have acknowledged the probabilistic nature of their claims, they have often botched the statistical analyses. The article then does a deeper dive into showing how those same deficiencies apply to medical opinions about child abuse, particularly SBS/AHT.
The COVID Pandemic in the Market: Infected, Immune and Cured Bonds
SSRN
By focusing on the cost conditions at issuance, I find that not only the Covid-19 pandemic effects were different across bonds and firms at different stages, but also that the market composition was significantly affected, collapsing on investment-grade bonds, a segment in which the share of bonds eligible to the ECB corporate programmes strikingly increased from 15% to 40%. Contemporaneously, the high-yield segment shrunk to almost disappear at 4%. Another source of risk detected in the pricing mechanism is the weak resilience to pandemic: the premium requested is around 30 bp and started to be priced only after the early containment actions taken by the national authorities. On the contrary, I do not find evidence supporting an increased risk for corporations headquartered in countries with a reduced fiscal space, nor the existence of a premium in favour of green bonds, which should be the backbone of a possible “green recoveryâ€.
SSRN
By focusing on the cost conditions at issuance, I find that not only the Covid-19 pandemic effects were different across bonds and firms at different stages, but also that the market composition was significantly affected, collapsing on investment-grade bonds, a segment in which the share of bonds eligible to the ECB corporate programmes strikingly increased from 15% to 40%. Contemporaneously, the high-yield segment shrunk to almost disappear at 4%. Another source of risk detected in the pricing mechanism is the weak resilience to pandemic: the premium requested is around 30 bp and started to be priced only after the early containment actions taken by the national authorities. On the contrary, I do not find evidence supporting an increased risk for corporations headquartered in countries with a reduced fiscal space, nor the existence of a premium in favour of green bonds, which should be the backbone of a possible “green recoveryâ€.
The Determinants of Commercial Bank’ Profitability in the South-Eastern Europe Region: A System GMM Approach
SSRN
This study investigates the determinants of banks’ profitability on a sample of 169 commercial banks located in 7 countries of South-Eastern Europe. Specifically, the study employs dynamic panel data analysis based on the generalized method of moments over a period spanning from 2003â€"2012. Using alternative profitability measures, such as ROA and ROE, suggests that total assets and loan loss provision usually have more pronounced effects on banks' profitability than other variables and that macroeconomic variables are usually statistically significant, therefore highlighting their importance. Splitting the sample into small and large banks, we found that the determinants of profitability on small banks have a larger effect in comparison to large banks irrespective of the profitability measures used in the analysis; the opposite is the case on macroeconomic variables.
SSRN
This study investigates the determinants of banks’ profitability on a sample of 169 commercial banks located in 7 countries of South-Eastern Europe. Specifically, the study employs dynamic panel data analysis based on the generalized method of moments over a period spanning from 2003â€"2012. Using alternative profitability measures, such as ROA and ROE, suggests that total assets and loan loss provision usually have more pronounced effects on banks' profitability than other variables and that macroeconomic variables are usually statistically significant, therefore highlighting their importance. Splitting the sample into small and large banks, we found that the determinants of profitability on small banks have a larger effect in comparison to large banks irrespective of the profitability measures used in the analysis; the opposite is the case on macroeconomic variables.
The Real Effects of Shadow Banking: Evidence from China
SSRN
We investigate the real effects of shadow banking in the case of technological innovation. Using manually collected entrusted loan data, we find that firm-to-firm entrusted loans, once the largest part of the shadow banking sector in China, enhance the borrowers’ innovation output. The effects are more prominent when the borrowers are subject to severer financial constraints and information asymmetry. A plausible underlying economic channel is capital reallocations from less productive but easy-financed lender firms to more innovative but financially less-privileged borrower firms. Our paper sheds new light on the bright side of shadow banking in China, i.e., it helps correct bank credit misallocations and thus serves as a second-best market design in financing the real economy.
SSRN
We investigate the real effects of shadow banking in the case of technological innovation. Using manually collected entrusted loan data, we find that firm-to-firm entrusted loans, once the largest part of the shadow banking sector in China, enhance the borrowers’ innovation output. The effects are more prominent when the borrowers are subject to severer financial constraints and information asymmetry. A plausible underlying economic channel is capital reallocations from less productive but easy-financed lender firms to more innovative but financially less-privileged borrower firms. Our paper sheds new light on the bright side of shadow banking in China, i.e., it helps correct bank credit misallocations and thus serves as a second-best market design in financing the real economy.
The Risk Management Approach to Macro-Prudential Policy
SSRN
Macro-prudential authorities need to assess medium-term downside risks to the real economy, caused by severe financial shocks. Before activating policy measures, they also need to consider their short-term negative impact. This gives rise to a risk management problem, an inter-temporal trade-off between expected growth and downside risk. Predictive distributions are estimated with structural quantile vector autoregressive models that relate economic growth to measures of financial stress and the financial cycle. An empirical study with euro area and U.S. data shows how to construct indicators of macro-prudential policy stance and to assess when interventions may be beneficial.
SSRN
Macro-prudential authorities need to assess medium-term downside risks to the real economy, caused by severe financial shocks. Before activating policy measures, they also need to consider their short-term negative impact. This gives rise to a risk management problem, an inter-temporal trade-off between expected growth and downside risk. Predictive distributions are estimated with structural quantile vector autoregressive models that relate economic growth to measures of financial stress and the financial cycle. An empirical study with euro area and U.S. data shows how to construct indicators of macro-prudential policy stance and to assess when interventions may be beneficial.
The pricing of carbon risk in syndicated loans: which risks are priced and why?
SSRN
Do banks price the risks of climate policy change? Combining syndicated loan data with carbon intensity data (CO2 emissions relative to revenue) of borrowers across a wide range of industries, we find a significant “carbon premium†since the Paris Agreement. The loan risk premium related to CO2 emission intensity is apparent across industries and broader than that due simply to “stranded assets†in fossil fuel or other carbon-intensive industries. The price of risk, however, appears to be relatively low given the material risks faced by borrowers. Only carbon emissions directly caused by the firm (scope 1) are priced, and not the overall carbon footprint including indirect emissions. “Green†banks do not appear to price carbon risk differently from other banks.
SSRN
Do banks price the risks of climate policy change? Combining syndicated loan data with carbon intensity data (CO2 emissions relative to revenue) of borrowers across a wide range of industries, we find a significant “carbon premium†since the Paris Agreement. The loan risk premium related to CO2 emission intensity is apparent across industries and broader than that due simply to “stranded assets†in fossil fuel or other carbon-intensive industries. The price of risk, however, appears to be relatively low given the material risks faced by borrowers. Only carbon emissions directly caused by the firm (scope 1) are priced, and not the overall carbon footprint including indirect emissions. “Green†banks do not appear to price carbon risk differently from other banks.
Theoretical and methodological approaches to the study of the problem of corruption
arXiv
arXiv
The article reveals the main theoretical approaches to the analysis and study of the phenomenon of corruption. Special attention is paid to the consideration of the index approach to the analysis of corruption.
Transitional Dynamics of the Savings Rate and Economic Growth
arXiv
arXiv
We estimate the relationship between GDP per capita growth and the growth rate of the national savings rate using a panel of 130 countries over the period 1960-2017. We find that GDP per capita growth increases (decreases) the growth rate of the national savings rate in poor countries (rich countries), and a higher credit-to-GDP ratio decreases the national savings rate as well as the income elasticity of the national savings rate. We develop a model with a credit constraint to explain the growth-saving relationship by the saving behavior of entrepreneurs at both the intensive and extensive margins. We further present supporting evidence for our theoretical findings by utilizing cross-country time series data of the number of new businesses registered and the corporate savings rate.
Veblen was right: Conspicuous consumption and car loans in Russia
SSRN
We study the connection between the social pattern of conspicuous consumption, on the one hand, and financialization, on the other. Our claim is that greater availability of consumer loans from Russian banks feeds consumerism and promotes the institution of conspicuous consumption. Cars have long been recognized as status symbols or ‘positional goods’ whose utility goes beyond their core functionality as a transportation means. The perception of social identity drives people to seek more expensive and fancy cars, while auto makers and car lenders deliberately foster consumer demand for them. We operationalize financialization with empirical evidence of bank financing of car purchase in the Rostov region of Russia. We find that leveraged car buying has taken root over the past 20 years. Getting a bank loan to buy an otherwise unaffordable car has become an acceptable social pattern. We see a sign of conspicuousness in the fact that the monetary income of households grows slower than the average price of a new car financed by a car loan, the amount of loans issued, and outstanding bank debt on car loans. Thus, households incur such expense by sacrificing other items including basic needs and their human capital development. The phenomenon that we study occurs among less affluent citizens rather than more affluent ones that Veblen focused on, and the range of cars serving as status symbols is broader than just luxury brands usually believed to be the object of conspicuous consumption. Our contribution to the literature is that a basic concept of institutional theory (conspicuous consumption) is combined with elements from other research approaches, namely social significance of bank lending, functional differentiation of credit, and the effects of financialization.
SSRN
We study the connection between the social pattern of conspicuous consumption, on the one hand, and financialization, on the other. Our claim is that greater availability of consumer loans from Russian banks feeds consumerism and promotes the institution of conspicuous consumption. Cars have long been recognized as status symbols or ‘positional goods’ whose utility goes beyond their core functionality as a transportation means. The perception of social identity drives people to seek more expensive and fancy cars, while auto makers and car lenders deliberately foster consumer demand for them. We operationalize financialization with empirical evidence of bank financing of car purchase in the Rostov region of Russia. We find that leveraged car buying has taken root over the past 20 years. Getting a bank loan to buy an otherwise unaffordable car has become an acceptable social pattern. We see a sign of conspicuousness in the fact that the monetary income of households grows slower than the average price of a new car financed by a car loan, the amount of loans issued, and outstanding bank debt on car loans. Thus, households incur such expense by sacrificing other items including basic needs and their human capital development. The phenomenon that we study occurs among less affluent citizens rather than more affluent ones that Veblen focused on, and the range of cars serving as status symbols is broader than just luxury brands usually believed to be the object of conspicuous consumption. Our contribution to the literature is that a basic concept of institutional theory (conspicuous consumption) is combined with elements from other research approaches, namely social significance of bank lending, functional differentiation of credit, and the effects of financialization.
