Research articles for the 2021-06-11
A Study and Forecast of MCX Comdex Commodity Index Using ARIMA Model
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The purpose of this research paper is to understand the MCX Comdex index, the paper also attempts to forecast the index level, the level of index reflects the change in commodity prices. The index is based on commodity futures prices of an exchange. To study the same daily closing prices of Comdex for last twelve years has been considered. The data are taken from MCX website. Analysis shows that commodities prices have changed substantially since 2007. To forecast the MCX Comdex value ARIMA model has been used. It indicates the range bound or constant increase in commodity prices in near future considering 95% of confidence interval.
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The purpose of this research paper is to understand the MCX Comdex index, the paper also attempts to forecast the index level, the level of index reflects the change in commodity prices. The index is based on commodity futures prices of an exchange. To study the same daily closing prices of Comdex for last twelve years has been considered. The data are taken from MCX website. Analysis shows that commodities prices have changed substantially since 2007. To forecast the MCX Comdex value ARIMA model has been used. It indicates the range bound or constant increase in commodity prices in near future considering 95% of confidence interval.
Accounting Information and Contracting Dynamics
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I develop a dynamic principal-agent framework to examine the role of accounting information in a long-term contracting relationship with uncertainty over fundamental performance in which intertemporal incentives and termination are jointly determined. Learning and the reversal property embedded in the accounting performance measurement system gives rise to an accounting-driven demand for long-term incentives. Measurement precision directly influences the performance-based vesting behavior of these incentives over the course of the contracting relationship. Furthermore, equilibrium manipulation of the accounting report becomes increasingly positive as the agency approaches termination because such a policy reduces the chance of inefficient termination. My framework allows for falsifiable predictions regarding the relationship between the properties of accounting measurement and the evolving nature of incentives over the manager's tenure, managerial risk-taking activity, and managerial turnover.
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I develop a dynamic principal-agent framework to examine the role of accounting information in a long-term contracting relationship with uncertainty over fundamental performance in which intertemporal incentives and termination are jointly determined. Learning and the reversal property embedded in the accounting performance measurement system gives rise to an accounting-driven demand for long-term incentives. Measurement precision directly influences the performance-based vesting behavior of these incentives over the course of the contracting relationship. Furthermore, equilibrium manipulation of the accounting report becomes increasingly positive as the agency approaches termination because such a policy reduces the chance of inefficient termination. My framework allows for falsifiable predictions regarding the relationship between the properties of accounting measurement and the evolving nature of incentives over the manager's tenure, managerial risk-taking activity, and managerial turnover.
Are commodity futures a hedge against inflation? A Markov-switching approach
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This study examines the inflation-hedging ability of commodity futures. Applying a Markov-switching vector error correction model to a sample of commodity futures that cover the period between January 1983 and December 2017, we find that total commodity futures fail to provide a hedge against inflation. However, commodity futures in the markets of industrial metals exhibit significant inflation-hedging properties. Other subindexes, including energy, precious metals, agriculture and livestock, do not have significant inflation hedging ability. The hedging capacity of industrial metal futures exhibits substantial variation over time, with most of the inflation hedging power emerging under relatively longer and more common regimes covering the Great Moderation and post-subprime crisis. Results are robust to the inclusion of stocks and bonds into the model.
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This study examines the inflation-hedging ability of commodity futures. Applying a Markov-switching vector error correction model to a sample of commodity futures that cover the period between January 1983 and December 2017, we find that total commodity futures fail to provide a hedge against inflation. However, commodity futures in the markets of industrial metals exhibit significant inflation-hedging properties. Other subindexes, including energy, precious metals, agriculture and livestock, do not have significant inflation hedging ability. The hedging capacity of industrial metal futures exhibits substantial variation over time, with most of the inflation hedging power emerging under relatively longer and more common regimes covering the Great Moderation and post-subprime crisis. Results are robust to the inclusion of stocks and bonds into the model.
Bank Balance Sheet Constraints and Bond Liquidity
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We explore the ties between bonds and individual dealers formed through home advantage and the persistence of previous underwriting relationships. Building on these connections, we show that the introduction of the leverage ratio for the European banks had a large impact on exposed bonds’ liquidity. Moreover, based on these ties, we show that bond mutual fund panic following the 2020 pandemic outbreak affected substantially more mutual funds with the larger exposures to dealer banks’ balance sheet constraints.
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We explore the ties between bonds and individual dealers formed through home advantage and the persistence of previous underwriting relationships. Building on these connections, we show that the introduction of the leverage ratio for the European banks had a large impact on exposed bonds’ liquidity. Moreover, based on these ties, we show that bond mutual fund panic following the 2020 pandemic outbreak affected substantially more mutual funds with the larger exposures to dealer banks’ balance sheet constraints.
COVID-19 Pandemic and Global Corporate CDS Spreads
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We examine the impact of the COVID-19 pandemic on the credit risk of companies around the world. We find that the pandemic-induced increases in corporate CDS spreads are concentrated in firms with higher leverage, non-investment-grade rating, lower profitability, and higher stock volatility. Further analysis shows that increases in CDS spreads are smaller for firms with employee health policies in place, better corporate social responsibility performance, stronger corporate governance, and operating in industries less affected by social distancing. Lastly, our results reveal that the successful vaccine trials and national policies including income support packages, lockdown policies and health policies help to reduce corporate CDS spreads.
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We examine the impact of the COVID-19 pandemic on the credit risk of companies around the world. We find that the pandemic-induced increases in corporate CDS spreads are concentrated in firms with higher leverage, non-investment-grade rating, lower profitability, and higher stock volatility. Further analysis shows that increases in CDS spreads are smaller for firms with employee health policies in place, better corporate social responsibility performance, stronger corporate governance, and operating in industries less affected by social distancing. Lastly, our results reveal that the successful vaccine trials and national policies including income support packages, lockdown policies and health policies help to reduce corporate CDS spreads.
Corporate Board Diversity and Firm Financial Performance: New Evidence from Nigeria
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The bourn of this research was to study the influence of corporation governance characteristics on monetary performance of registered firms in Nigeria. The research intended to answer two study queries: what is the relationship between boards of directors’ characteristics (board independence, board size, and board nationality) of public listed companies in Nigeria and the firms’ financial performance? And what impact does gender diversity among boards of directors’ of Nigerian public listed companies have on firms’ financial performance?The research applied the panel study designs while the longitudinal survey study method was made use of for collection of statistics. The research depended on secondary sources of statistics to collate figures for the variables, and embraced the purposive sampling procedure. The ideal populaces for the research were manufacturing firms registered with the Nigeria Stock Exchange (NSE). The specimen size for the research was 20 manufacturing firms. The statistics was collated from secondary sources of the annual report and accounts, fact books, and publications of the Nigerian stock exchange (NSE). The Hausman test was carried out to ascertain whether to apply Fixed Effects or Random Effects regression. It tested the null proposition to certify that the coefficients predicted by the random effects approximator are one and the same as the coefficients predicted by the unswerving fixed effects approximator.The correlation analysis indicated that the correlation between return on asset (firm financial performance), board size, foreign board member, board gender diversity, firm size and firm age respectively were negative except the independent board members, which was positively correlated with firm performance. The study concludes that board size and independent board of director have a positive and significant effect while board gender diversity has a negative but significant effect and foreign board member has a negative but insignificant effect on performance of manufacturing firms listed on the NSE.
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The bourn of this research was to study the influence of corporation governance characteristics on monetary performance of registered firms in Nigeria. The research intended to answer two study queries: what is the relationship between boards of directors’ characteristics (board independence, board size, and board nationality) of public listed companies in Nigeria and the firms’ financial performance? And what impact does gender diversity among boards of directors’ of Nigerian public listed companies have on firms’ financial performance?The research applied the panel study designs while the longitudinal survey study method was made use of for collection of statistics. The research depended on secondary sources of statistics to collate figures for the variables, and embraced the purposive sampling procedure. The ideal populaces for the research were manufacturing firms registered with the Nigeria Stock Exchange (NSE). The specimen size for the research was 20 manufacturing firms. The statistics was collated from secondary sources of the annual report and accounts, fact books, and publications of the Nigerian stock exchange (NSE). The Hausman test was carried out to ascertain whether to apply Fixed Effects or Random Effects regression. It tested the null proposition to certify that the coefficients predicted by the random effects approximator are one and the same as the coefficients predicted by the unswerving fixed effects approximator.The correlation analysis indicated that the correlation between return on asset (firm financial performance), board size, foreign board member, board gender diversity, firm size and firm age respectively were negative except the independent board members, which was positively correlated with firm performance. The study concludes that board size and independent board of director have a positive and significant effect while board gender diversity has a negative but significant effect and foreign board member has a negative but insignificant effect on performance of manufacturing firms listed on the NSE.
Cross-Section of Option Returns and the Volatility Risk Premium
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This paper presents a robust new finding that delta-hedged equity option returns include a volatility risk premium. To separate volatility risk premia from confounding effects, we estimate conditional quantile curves of implied volatilities using machine learning. We find that a zero-cost trading strategy that is long (short) in the portfolio with low (high) implied volatility -- conditional on the options' moneyness and realized volatility -- produces an economically and statistically significant average monthly return. Using conditional quantile curves not only helps in distinguishing volatility risk premia from other effects, most notably realized volatility, it also leads to returns that are higher than those reported in previous work on similar volatility strategies.
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This paper presents a robust new finding that delta-hedged equity option returns include a volatility risk premium. To separate volatility risk premia from confounding effects, we estimate conditional quantile curves of implied volatilities using machine learning. We find that a zero-cost trading strategy that is long (short) in the portfolio with low (high) implied volatility -- conditional on the options' moneyness and realized volatility -- produces an economically and statistically significant average monthly return. Using conditional quantile curves not only helps in distinguishing volatility risk premia from other effects, most notably realized volatility, it also leads to returns that are higher than those reported in previous work on similar volatility strategies.
Disasters, Large Drawdowns, and Long-term Asset Management
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Long-term investors are often reluctant to invest in assets or strategies that can suffer from large drawdowns. A major challenge for such investors is to gain access to predictions of large drawdowns in order to precisely design strategies minimizing these drawdowns. In this paper, we describe a multivariate Markov-switching model framework that allows us to predict large drawdowns. We provide evidence that three regimes are necessary to capture the negative trends in expected returns that generate large drawdowns, and we correctly predict conditional drawdowns. In addition, investment strategies based on these models outperform model-free strategies based on the empirical distribution of drawdowns. These results hold within and out of the sample.
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Long-term investors are often reluctant to invest in assets or strategies that can suffer from large drawdowns. A major challenge for such investors is to gain access to predictions of large drawdowns in order to precisely design strategies minimizing these drawdowns. In this paper, we describe a multivariate Markov-switching model framework that allows us to predict large drawdowns. We provide evidence that three regimes are necessary to capture the negative trends in expected returns that generate large drawdowns, and we correctly predict conditional drawdowns. In addition, investment strategies based on these models outperform model-free strategies based on the empirical distribution of drawdowns. These results hold within and out of the sample.
Disloyal managers and shareholders’ wealth
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The prohibition against fiduciaries appropriating business opportunities from their companies is a fundamental part of the duty of loyalty, the expectation of which is integral to U.S. corporate governance. However, starting in 2000, several states, including Delaware, allowed boards to waive this duty. Exploiting the staggered passage of waiver laws, we show that this weakening of fiduciary duty has significantly decreased public firms’ investment in innovation. Firms covered by waiver laws invest less in R&D, and produce fewer and less valuable patents. Remaining innovation activities contribute less to firm value, a fact confirmed by the market reaction when firms reveal their curtailed internal growth opportunities by announcing acquisitions. Consistent with the laws’ intent to provide contracting flexibility to emerging firms, we do find evidence of positive impacts for small firms.
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The prohibition against fiduciaries appropriating business opportunities from their companies is a fundamental part of the duty of loyalty, the expectation of which is integral to U.S. corporate governance. However, starting in 2000, several states, including Delaware, allowed boards to waive this duty. Exploiting the staggered passage of waiver laws, we show that this weakening of fiduciary duty has significantly decreased public firms’ investment in innovation. Firms covered by waiver laws invest less in R&D, and produce fewer and less valuable patents. Remaining innovation activities contribute less to firm value, a fact confirmed by the market reaction when firms reveal their curtailed internal growth opportunities by announcing acquisitions. Consistent with the laws’ intent to provide contracting flexibility to emerging firms, we do find evidence of positive impacts for small firms.
Dissecting Green Returns
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Green assets delivered high returns in recent years. This performance reflects unexpectedly strong increases in environmental concerns, not high expected returns. German green bonds outperformed their higher-yielding non-green twins as the "greenium" widened, and U.S. green stocks outperformed brown as climate concerns strengthened. To show the latter, we construct a theoretically motivated green factorâ€"a return spread between environmentally friendly and unfriendly stocksâ€"and find that its positive performance disappears without climate-concern shocks. The factor lags those shocks, curiously, by about a month. A theory-driven two-factor model featuring the green factor explains much of the recent underperformance of value stocks.
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Green assets delivered high returns in recent years. This performance reflects unexpectedly strong increases in environmental concerns, not high expected returns. German green bonds outperformed their higher-yielding non-green twins as the "greenium" widened, and U.S. green stocks outperformed brown as climate concerns strengthened. To show the latter, we construct a theoretically motivated green factorâ€"a return spread between environmentally friendly and unfriendly stocksâ€"and find that its positive performance disappears without climate-concern shocks. The factor lags those shocks, curiously, by about a month. A theory-driven two-factor model featuring the green factor explains much of the recent underperformance of value stocks.
Do Analysts Cater to Investor Beliefs? Evidence from Market Liberalization in China
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We examine whether financial analysts cater to investors’ beliefs, using the market liberalization (Stock Connect) programs in China as a shock to investor beliefs. We find that analysts become less optimistic in their recommendations following the introduction of less optimistic investors through the Stock Connect programs. In addition, catering theory predicts that when investors hold heterogeneous beliefs, analysts tend to segment the market and slant toward extreme positions in order to attract target investors. Consistent with this prediction, we find that analyst dispersion increases in the post period. Moreover, analysts with buy or strong buy (sell or underperform) recommendations of a given firm become more optimistic (pessimistic) in their research report tone. Finally, we show that in updating their earnings forecasts, analysts are more (less) responsive to earnings surprises that are consistent (inconsistent) with their stock recommendations. Overall, this paper presents evidence supporting a catering theory for analyst bias.
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We examine whether financial analysts cater to investors’ beliefs, using the market liberalization (Stock Connect) programs in China as a shock to investor beliefs. We find that analysts become less optimistic in their recommendations following the introduction of less optimistic investors through the Stock Connect programs. In addition, catering theory predicts that when investors hold heterogeneous beliefs, analysts tend to segment the market and slant toward extreme positions in order to attract target investors. Consistent with this prediction, we find that analyst dispersion increases in the post period. Moreover, analysts with buy or strong buy (sell or underperform) recommendations of a given firm become more optimistic (pessimistic) in their research report tone. Finally, we show that in updating their earnings forecasts, analysts are more (less) responsive to earnings surprises that are consistent (inconsistent) with their stock recommendations. Overall, this paper presents evidence supporting a catering theory for analyst bias.
Does Household Borrowing Reduce the Trade Balance? Evidence from Developing and Developed Countries
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We examine the dynamic impact of household borrowing on the trade balance using data from 33 developing countries and 36 developed countries over the 1980-2017 period. Our findings suggest that the impact of household borrowing on the trade balance is by and large negative, both in the short and long run. We show that household borrowing’s adverse effects on the trade balance are more pronounced but less persistent in developing countries.
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We examine the dynamic impact of household borrowing on the trade balance using data from 33 developing countries and 36 developed countries over the 1980-2017 period. Our findings suggest that the impact of household borrowing on the trade balance is by and large negative, both in the short and long run. We show that household borrowing’s adverse effects on the trade balance are more pronounced but less persistent in developing countries.
Empowering EU Capital Markets- Making listing cool again Final report of the Technical Expert Stakeholder Group (TESG) on SMEs
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Broadening access to market-based sources of financing for European companies at each stage of their development is at the heart of the capital markets union. To do so, the CMU initiative has strived to create a more conducive regulatory framework supporting access to public funding for small and mid-sized Enterprises (SMEs). In October 2020, as mandated by Regulation 2019/2115 as regards the promotion of the use of SME growth markets, the European Commission set up a Technical Expert Stakeholder Group on SMEs (TESG) that brought together relevant stakeholders with technical expertise on SMEs’ access to finance. The Group was tasked with monitoring and assessing the functioning of SME Growth Markets, as well as providing expertise and possible input on other relevant areas of SME access to public markets. Their work was finalized in May 2021 and culminated with their final report setting out 12 concrete recommendations to foster SME listing.As per action 2 of the new CMU action plan, the Commission will now thoroughly assess the proposals made by the TESG and explore possibilities to simplify listing rules for public markets, in order to facilitate and diversify small and innovative companies’ access to funding.
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Broadening access to market-based sources of financing for European companies at each stage of their development is at the heart of the capital markets union. To do so, the CMU initiative has strived to create a more conducive regulatory framework supporting access to public funding for small and mid-sized Enterprises (SMEs). In October 2020, as mandated by Regulation 2019/2115 as regards the promotion of the use of SME growth markets, the European Commission set up a Technical Expert Stakeholder Group on SMEs (TESG) that brought together relevant stakeholders with technical expertise on SMEs’ access to finance. The Group was tasked with monitoring and assessing the functioning of SME Growth Markets, as well as providing expertise and possible input on other relevant areas of SME access to public markets. Their work was finalized in May 2021 and culminated with their final report setting out 12 concrete recommendations to foster SME listing.As per action 2 of the new CMU action plan, the Commission will now thoroughly assess the proposals made by the TESG and explore possibilities to simplify listing rules for public markets, in order to facilitate and diversify small and innovative companies’ access to funding.
Federalism and Foreign Direct Investment - An Empirical Analysis
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Previous empirical studies suggest that decentralization, measured by the number of government layers, is associated with less foreign direct investment (FDI). With an improved dataset on tax autonomy of sub-federal government tiers, we present evidence that fiscal decentralization (de facto) does not reduce FDI. If local governments can set their tax rates and bases independently, they attract more FDI. Analyzing 83,458 corporate cross-border acquisitions (CBA), between 148 source and 187 host countries from 1997 to 2014, we also find that takeovers between two countries increase with size, cultural similarities and common borders of two economies. Shared institutions such as membership in a customs union facilitate CBA. These results apply for high-income hosts but not for middle-income countries.
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Previous empirical studies suggest that decentralization, measured by the number of government layers, is associated with less foreign direct investment (FDI). With an improved dataset on tax autonomy of sub-federal government tiers, we present evidence that fiscal decentralization (de facto) does not reduce FDI. If local governments can set their tax rates and bases independently, they attract more FDI. Analyzing 83,458 corporate cross-border acquisitions (CBA), between 148 source and 187 host countries from 1997 to 2014, we also find that takeovers between two countries increase with size, cultural similarities and common borders of two economies. Shared institutions such as membership in a customs union facilitate CBA. These results apply for high-income hosts but not for middle-income countries.
Financial Policymaking after Crises: Public vs. Private Interests
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We first present a simple model of post-crisis policymaking driven by both public and private interests. Using a novel dataset covering 94 countries between 1973 and 2015, we then establish that financial crises can lead to government interventions in financial markets. Consistent with a public interest channel, we find post-crisis interventions occur only in democratic countries. However, by using a plausibly exogenous setting -i.e., term limits- muting political accountability, we show that democratic leaders who do not have re-election concerns are substantially more likely to intervene in financial markets after crises, in ways that may promote (obstruct) private (public) interests.
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We first present a simple model of post-crisis policymaking driven by both public and private interests. Using a novel dataset covering 94 countries between 1973 and 2015, we then establish that financial crises can lead to government interventions in financial markets. Consistent with a public interest channel, we find post-crisis interventions occur only in democratic countries. However, by using a plausibly exogenous setting -i.e., term limits- muting political accountability, we show that democratic leaders who do not have re-election concerns are substantially more likely to intervene in financial markets after crises, in ways that may promote (obstruct) private (public) interests.
Financiarización y consumismo multipolarismos y crisis Covid-19 (Financialization and Consumerism: Multipolarisms and the COVID-19 Crisis)
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Spanish Abstract: El presente trabajo postula que bajo la terrible crisis mundial causada por la crisis sanitaria del Covid-19 subyace una crisis económica-financiera, derivada de un continuo de múltiples prácticas especulativas financieras en un entorno multipolar asimétrico y propulsor de desigualdades globales y locales. Dos importantes examinados son la financiarización y el consumismo cuyo entorno causal ha estado influenciado y entreverado con los patrones de gobernanza y gobernabilidad locales e internacionales impulsados por los intereses y hegemonÃa de las empresas transnacionales y multinacionales (TM). Metodológicamente, proponemos precisiones conceptuales sobre estas empresas, asà como acerca de la multipolaridad, gobernanza y gobernabilidad. La evidencia analizada confirma que subyacente a la crisis sanitaria se encuentra una crisis económico-financiera estructural cuyos desequilibrios y abusos profundizan la crisis Covid-19.English Abstract: This work posits that under the terrible global crisis caused by the COVID-19 health crisis lies an economic-financial crisis, stemming from a continuum of multiple financial speculative practices in an asymmetrical multipolar environment and a driving force of global and local inequalities. Two important factors reviewed here are the financialization and consumerism whose causal environment has been influenced and intertwined with local and international governance and governability patterns fostered by the interests and hegemony of transnational and multinational enterprises (tm). Methodologically, we propose research that sheds light on these companies, as well as on multipolarity, governance and governability. The evidence analyzed confirms that underlying the health crisis lies a structural economic and financial crisis whose imbalances and abuses deepen the COVID-19 crisis.
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Spanish Abstract: El presente trabajo postula que bajo la terrible crisis mundial causada por la crisis sanitaria del Covid-19 subyace una crisis económica-financiera, derivada de un continuo de múltiples prácticas especulativas financieras en un entorno multipolar asimétrico y propulsor de desigualdades globales y locales. Dos importantes examinados son la financiarización y el consumismo cuyo entorno causal ha estado influenciado y entreverado con los patrones de gobernanza y gobernabilidad locales e internacionales impulsados por los intereses y hegemonÃa de las empresas transnacionales y multinacionales (TM). Metodológicamente, proponemos precisiones conceptuales sobre estas empresas, asà como acerca de la multipolaridad, gobernanza y gobernabilidad. La evidencia analizada confirma que subyacente a la crisis sanitaria se encuentra una crisis económico-financiera estructural cuyos desequilibrios y abusos profundizan la crisis Covid-19.English Abstract: This work posits that under the terrible global crisis caused by the COVID-19 health crisis lies an economic-financial crisis, stemming from a continuum of multiple financial speculative practices in an asymmetrical multipolar environment and a driving force of global and local inequalities. Two important factors reviewed here are the financialization and consumerism whose causal environment has been influenced and intertwined with local and international governance and governability patterns fostered by the interests and hegemony of transnational and multinational enterprises (tm). Methodologically, we propose research that sheds light on these companies, as well as on multipolarity, governance and governability. The evidence analyzed confirms that underlying the health crisis lies a structural economic and financial crisis whose imbalances and abuses deepen the COVID-19 crisis.
Frequency vs. Size of Bank Fines in Local Credit Markets
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We examine how banking supervisors affect credit at the local level by charging fines to individual banks. Using a macro approach to capture the direct effect on the fined bank and the indirect effect on the other banks operating in the local credit market, we estimate reputational, reallocation and balance sheet effects on Italian provinces over the period 2005-2016 by a fixed effects model and instrumental variables. Provincial gross bank loans expand after a fine independently of its size. The impact of fine frequency depends on the size of the provincial banking sector, but neither on bank governance/ownership nor crises. No evidence was found of reputational or other balance sheet effects. Bank supervisors ought to step up the frequency of bank inspections and downplay the size of bank fines. Bank fines work more like a good housekeeping seal of approval, enhancing transparency and effective banking practices, than a penalty.
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We examine how banking supervisors affect credit at the local level by charging fines to individual banks. Using a macro approach to capture the direct effect on the fined bank and the indirect effect on the other banks operating in the local credit market, we estimate reputational, reallocation and balance sheet effects on Italian provinces over the period 2005-2016 by a fixed effects model and instrumental variables. Provincial gross bank loans expand after a fine independently of its size. The impact of fine frequency depends on the size of the provincial banking sector, but neither on bank governance/ownership nor crises. No evidence was found of reputational or other balance sheet effects. Bank supervisors ought to step up the frequency of bank inspections and downplay the size of bank fines. Bank fines work more like a good housekeeping seal of approval, enhancing transparency and effective banking practices, than a penalty.
Impact of Race and Gender on the SBA Paycheck Protection Program (PPP) Loan Amounts
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The Paycheck Protection Program (PPP) helped to preserve employment relationships during thesudden shutdown of economic activity due to the Covid-19 pandemic. In this paper, we analyzeaccess of the minority and women-owned businesses to PPP loans. Our quantitative results showthat a minority-owned business with 5 to 9 employees received a 21% smaller PPP loan thantheir white-owned business counterpart. A women-owned small business with 5 to 9 employeesreceived a 15% smaller PPP loan than a male-owned business. Using Lee bounds, we found thatwomen-owned businesses in rural counties received $2,634 and $8,856 smaller PPP loans thanthose in urban counties. From the interviews with PPP loan recipients in Northeast Ohio, welearned that businesses that received smaller loan amounts had more difficulty with the loanapplication process compared to businesses that received larger loans. The discrepancy in PPPloans to women- and minority-owned businesses may have stemmed from a lack of access andknowledge about the program itself.
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The Paycheck Protection Program (PPP) helped to preserve employment relationships during thesudden shutdown of economic activity due to the Covid-19 pandemic. In this paper, we analyzeaccess of the minority and women-owned businesses to PPP loans. Our quantitative results showthat a minority-owned business with 5 to 9 employees received a 21% smaller PPP loan thantheir white-owned business counterpart. A women-owned small business with 5 to 9 employeesreceived a 15% smaller PPP loan than a male-owned business. Using Lee bounds, we found thatwomen-owned businesses in rural counties received $2,634 and $8,856 smaller PPP loans thanthose in urban counties. From the interviews with PPP loan recipients in Northeast Ohio, welearned that businesses that received smaller loan amounts had more difficulty with the loanapplication process compared to businesses that received larger loans. The discrepancy in PPPloans to women- and minority-owned businesses may have stemmed from a lack of access andknowledge about the program itself.
Implied Price Processes Anchored in Statistical Realizations
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It is observed that statistical and risk neutral densities of compound Poisson processes are unconstrained relative to each other. Continuous processes are too constrained and generally not consistent with market data. Pure jump limit laws deliver operational models simultaneously consistent with both data sets with the additional imposition of no measure change on the arbitrarily small moves. The measure change density must have a finite Hellinger distance from unity linking the two worlds. Models are constructed using the bilateral gamma and the CGMY models for the risk neutral specification. They are linked to the physical process by measure change models. The resulting models simultaneously calibrate statistical tail probabilities and option prices. The resulting models have up to eight or ten parameters permitting the study of risk reward relations at a finer level. Rewards measured by power variations of the up and down moves are observed to value negatively(positively) the even(odd) variations of their own side with the converse holding for the opposite side.
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It is observed that statistical and risk neutral densities of compound Poisson processes are unconstrained relative to each other. Continuous processes are too constrained and generally not consistent with market data. Pure jump limit laws deliver operational models simultaneously consistent with both data sets with the additional imposition of no measure change on the arbitrarily small moves. The measure change density must have a finite Hellinger distance from unity linking the two worlds. Models are constructed using the bilateral gamma and the CGMY models for the risk neutral specification. They are linked to the physical process by measure change models. The resulting models simultaneously calibrate statistical tail probabilities and option prices. The resulting models have up to eight or ten parameters permitting the study of risk reward relations at a finer level. Rewards measured by power variations of the up and down moves are observed to value negatively(positively) the even(odd) variations of their own side with the converse holding for the opposite side.
Industry Tournament Incentives and Corporate Innovation
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Our paper examines the relationship between industry tournament incentives for CEOs and corporate innovation. We find that the external pay gap is positively associated with subsequent innovation output and its economic value. Our results are robust to using different industry classifications, alternative measures of industry tournament incentives and innovation, and various controls for corporate governance, business strategy, and CEO attributes. We employ a quasi-natural experiment and an instrumental-variable approach to mitigate endogeneity concerns. We also find evidence of a positive and significant relationship between industry tournament incentives and idiosyncratic risk. Overall, the evidence is consistent with our contention that aspirant CEOs undertake innovation projects which can generate uncertain but potentially rewarding outcomes that increase the likelihood of the aspirant standing out and winning the tournament or extracting the tournament-induced benefits internally.
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Our paper examines the relationship between industry tournament incentives for CEOs and corporate innovation. We find that the external pay gap is positively associated with subsequent innovation output and its economic value. Our results are robust to using different industry classifications, alternative measures of industry tournament incentives and innovation, and various controls for corporate governance, business strategy, and CEO attributes. We employ a quasi-natural experiment and an instrumental-variable approach to mitigate endogeneity concerns. We also find evidence of a positive and significant relationship between industry tournament incentives and idiosyncratic risk. Overall, the evidence is consistent with our contention that aspirant CEOs undertake innovation projects which can generate uncertain but potentially rewarding outcomes that increase the likelihood of the aspirant standing out and winning the tournament or extracting the tournament-induced benefits internally.
Information Frictions and Firm Take up of Government Support: A Randomised Controlled Experiment
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This paper studies whether informational frictions prevent firms from accessing government support measures using an encouragement based randomized controlled trial. We focus on two COVID-19 relief programs for firms in Portugal. These programs provide (i) wage support for workers who are kept on payroll and (ii) lines of credit backed by government guarantees. We randomly assign firms to a treatment providing either simplified information regarding the program or a combination of information and step-by-step application support. We find a significant treatment effect of simple information provision to firms on take up for the wage support program, but not for lines of credit. Our results constitute direct evidence that information frictions can act as a meaningful barrier to comprehensive distribution of firm-level support measures.
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This paper studies whether informational frictions prevent firms from accessing government support measures using an encouragement based randomized controlled trial. We focus on two COVID-19 relief programs for firms in Portugal. These programs provide (i) wage support for workers who are kept on payroll and (ii) lines of credit backed by government guarantees. We randomly assign firms to a treatment providing either simplified information regarding the program or a combination of information and step-by-step application support. We find a significant treatment effect of simple information provision to firms on take up for the wage support program, but not for lines of credit. Our results constitute direct evidence that information frictions can act as a meaningful barrier to comprehensive distribution of firm-level support measures.
Integrated Report Quality: Share Price Informativeness and Proprietary Costs
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Our study addresses whether integrated report quality, IRQ, is positively associated with greater price informativeness and whether, and the extent to which, the greater price informativeness is diminished when firms have higher proprietary costs of disclosure. In integrated reports firms integrate financial and non-financial information to explain how it uses its financial, manufactured, intellectual, human, social and relationship, and natural capitals to create value. Thus, financial statements and sustainability information both are key to integrated reports. Based on firms in South Africa where integrated reporting is mandatory, we find IRQ is significantly negatively related to synchronicity, which indicates IRQ is positively related to price informativeness. This finding indicates that higher quality integrated reports enable investors to make more informed decisions and, thus, allocate capital more efficiently. All twelve IRQ components are negatively associated with synchronicity, and eleven are significantly so. These findings reveal that most dimensions of IRQ, and the integration of financial and non-financial information, including sustainability information, contribute to greater price informativeness. The relation between synchronicity and IRQ is significantly less negative for firms with higher proprietary costs, particularly costs associated with growth opportunities and intangible assets. For firms with these types of proprietary costs, IRQ is not significantly associated with synchronicity. Our study helps inform the rapidly changing standard-setting landscape for integrated financial and non-financial information, particularly information related to sustainability.
SSRN
Our study addresses whether integrated report quality, IRQ, is positively associated with greater price informativeness and whether, and the extent to which, the greater price informativeness is diminished when firms have higher proprietary costs of disclosure. In integrated reports firms integrate financial and non-financial information to explain how it uses its financial, manufactured, intellectual, human, social and relationship, and natural capitals to create value. Thus, financial statements and sustainability information both are key to integrated reports. Based on firms in South Africa where integrated reporting is mandatory, we find IRQ is significantly negatively related to synchronicity, which indicates IRQ is positively related to price informativeness. This finding indicates that higher quality integrated reports enable investors to make more informed decisions and, thus, allocate capital more efficiently. All twelve IRQ components are negatively associated with synchronicity, and eleven are significantly so. These findings reveal that most dimensions of IRQ, and the integration of financial and non-financial information, including sustainability information, contribute to greater price informativeness. The relation between synchronicity and IRQ is significantly less negative for firms with higher proprietary costs, particularly costs associated with growth opportunities and intangible assets. For firms with these types of proprietary costs, IRQ is not significantly associated with synchronicity. Our study helps inform the rapidly changing standard-setting landscape for integrated financial and non-financial information, particularly information related to sustainability.
Linear Classifiers Under Infinite Imbalance
SSRN
We study the behavior of linear discriminant functions for binary classification in the infinite-imbalance limit, where the sample size of one class grows without bound while the sample size of the other remains fixed. The coefficients of the classifier minimize an expected loss specified through a weight function. We show that for a broad class of weight functions, the intercept diverges but the rest of the coefficient vector has a finite limit under infinite imbalance, extending prior work on logistic regression. The limit depends on the left tail of the weight function, for which we distinguish three cases: bounded, asymptotically polynomial, and asymptotically exponential. The limiting coefficient vectors reflect robustness or conservatism properties in the sense that they optimize against certain worst-case alternatives. In the bounded and polynomial cases, the limit is equivalent to an implicit choice of upsampling distribution for the minority class. We apply these ideas in a credit risk setting, with particular emphasis on performance in the high-sensitivity and high-specificity regions.
SSRN
We study the behavior of linear discriminant functions for binary classification in the infinite-imbalance limit, where the sample size of one class grows without bound while the sample size of the other remains fixed. The coefficients of the classifier minimize an expected loss specified through a weight function. We show that for a broad class of weight functions, the intercept diverges but the rest of the coefficient vector has a finite limit under infinite imbalance, extending prior work on logistic regression. The limit depends on the left tail of the weight function, for which we distinguish three cases: bounded, asymptotically polynomial, and asymptotically exponential. The limiting coefficient vectors reflect robustness or conservatism properties in the sense that they optimize against certain worst-case alternatives. In the bounded and polynomial cases, the limit is equivalent to an implicit choice of upsampling distribution for the minority class. We apply these ideas in a credit risk setting, with particular emphasis on performance in the high-sensitivity and high-specificity regions.
Location Density, Systematic Risk, and Cap Rates: Evidence from REITs
SSRN
A property's location is often considered to be the ultimate determinant of its investment performance. But how exactly does a property's location influence its risk and return? We focus on the effects of location density on the risk and return of commercial real estate investments. We do this by studying the geographical characteristics of the property portfolios of U.S. equity REITs. We show that REITs with property holdings in high-density locations experience higher rental growth and carry higher systematic risk than their otherwise comparable peers in low-density locations. Consistent with higher rental growth rates, high-density REITs also have lower implied cap rates. Our results suggest that location density is an important determinant of REIT performance outcomes, implying that geographical characteristics can drive investment risk and return across commercial real estate markets.
SSRN
A property's location is often considered to be the ultimate determinant of its investment performance. But how exactly does a property's location influence its risk and return? We focus on the effects of location density on the risk and return of commercial real estate investments. We do this by studying the geographical characteristics of the property portfolios of U.S. equity REITs. We show that REITs with property holdings in high-density locations experience higher rental growth and carry higher systematic risk than their otherwise comparable peers in low-density locations. Consistent with higher rental growth rates, high-density REITs also have lower implied cap rates. Our results suggest that location density is an important determinant of REIT performance outcomes, implying that geographical characteristics can drive investment risk and return across commercial real estate markets.
Not Dead Yet: The Surprising Survival of Negotiability
SSRN
Over and over, legal scholars have argued that the law governing negotiable instruments as applied to residential mortgages is aged and decrepit to the point of irrelevance, and now only serves to curse the present with a set of useless rules almost mindlessly preserved through codification in the UCC. Worse yet, as we charge into the age of electronic documents, scholars claim that negotiability based on the physical preservation of paper documents signed with wet ink will become even more foolhardy and archaic. At the same time, the law of negotiable instruments has entered into a startlingly vibrant era, with the subprime crash causing the Great Recession and leaving countless home loans in default and subject to foreclosure. In dealing with the resulting foreclosure crisis, even the most abstruse points of negotiability are regularly argued throughout the United States. While legal scholars consider aspects of negotiability such as indorsements in blank and allonges as archaic as prehistoric insects trapped in amber, today, these recondite points of negotiable instruments law are the subject of Congressional inquiry, federal and state legislation, newspaper articles and public debate. Webpages on how to avoid foreclosure devote extensive content to the arcana of negotiable instruments law. Courts, too, have been increasingly focused on formerly almost unnoticed aspects of negotiability, such as the use and defects of allonges.This article discusses how the subprime crisis and resulting tsunami of foreclosures have put negotiable instrument law as applied to residential mortgages through a massive stress test, and how it has been found wanting. It discusses various criticisms of negotiability, including the harm caused by the holder-in-due-course doctrine. It discusses the challenges that the financial industry faces in complying with the requirements of negotiable instrument law, including retaining original copies of residential loan notes and complete chains of indorsements, including allonges affixed to those notes. The article discusses the financial risk to the owners of loans where those rules are not scrupulously observed and also the benefits to lenders and buyers of notes of negotiable instrument law, and the methods they use to protect themselves from risk. The article concludes with recommendations for reform to retain the benefits of negotiability without the harm to borrowers that negotiable instrument law causes.
SSRN
Over and over, legal scholars have argued that the law governing negotiable instruments as applied to residential mortgages is aged and decrepit to the point of irrelevance, and now only serves to curse the present with a set of useless rules almost mindlessly preserved through codification in the UCC. Worse yet, as we charge into the age of electronic documents, scholars claim that negotiability based on the physical preservation of paper documents signed with wet ink will become even more foolhardy and archaic. At the same time, the law of negotiable instruments has entered into a startlingly vibrant era, with the subprime crash causing the Great Recession and leaving countless home loans in default and subject to foreclosure. In dealing with the resulting foreclosure crisis, even the most abstruse points of negotiability are regularly argued throughout the United States. While legal scholars consider aspects of negotiability such as indorsements in blank and allonges as archaic as prehistoric insects trapped in amber, today, these recondite points of negotiable instruments law are the subject of Congressional inquiry, federal and state legislation, newspaper articles and public debate. Webpages on how to avoid foreclosure devote extensive content to the arcana of negotiable instruments law. Courts, too, have been increasingly focused on formerly almost unnoticed aspects of negotiability, such as the use and defects of allonges.This article discusses how the subprime crisis and resulting tsunami of foreclosures have put negotiable instrument law as applied to residential mortgages through a massive stress test, and how it has been found wanting. It discusses various criticisms of negotiability, including the harm caused by the holder-in-due-course doctrine. It discusses the challenges that the financial industry faces in complying with the requirements of negotiable instrument law, including retaining original copies of residential loan notes and complete chains of indorsements, including allonges affixed to those notes. The article discusses the financial risk to the owners of loans where those rules are not scrupulously observed and also the benefits to lenders and buyers of notes of negotiable instrument law, and the methods they use to protect themselves from risk. The article concludes with recommendations for reform to retain the benefits of negotiability without the harm to borrowers that negotiable instrument law causes.
Outsourcing Active Ownership in Japan
SSRN
This paper examines active ownership in Japan by an equity ownership service, Governance for Owners Japan (GOJ). GOJ engages with portfolio companies on behalf of Japanese and international institutional investors. The engagements are exclusively private and are not observable to the public. We use the stated objectives of the interventions to measure the incidence of success, and the stock market response to the public announcement of engagement outcomes. We find a high rate of success and average cumulative abnormal returns (CARs) of about 2.6 percent between -5 and +5 of an event date in response to outcome announcements. Since there is more than one outcome per engagement, the average CARs per engagement is 6.5 percent. Target companies were more likely to adopt recommendations proposed in GOJ’s private engagements than in a sample of public activist engagements over a similar time period.
SSRN
This paper examines active ownership in Japan by an equity ownership service, Governance for Owners Japan (GOJ). GOJ engages with portfolio companies on behalf of Japanese and international institutional investors. The engagements are exclusively private and are not observable to the public. We use the stated objectives of the interventions to measure the incidence of success, and the stock market response to the public announcement of engagement outcomes. We find a high rate of success and average cumulative abnormal returns (CARs) of about 2.6 percent between -5 and +5 of an event date in response to outcome announcements. Since there is more than one outcome per engagement, the average CARs per engagement is 6.5 percent. Target companies were more likely to adopt recommendations proposed in GOJ’s private engagements than in a sample of public activist engagements over a similar time period.
Ponzi Scheme and Indian Laws
SSRN
Ponzi scheme, multi-level marketing (MLM) programs or pyramid schemes disguised as direct selling companies are India's nightmare. The problem is huge. In fact, it's so good that the massive redemptions ordered by the Securities & Exchange Board of India (SEBI) in the case of Sahara group companies (Rs 25,000 crore plus interest) or PACL (Rs 49,100 crore) don't even start the surface of money stolen from ordinary savers. The Indian Legislature has sadly been extremely slow on the uptake and as a result many well-known ponzi schemes have been able to thrive undetected. This paper will tend to discuss the laws pertaining to the ban of Ponzi like schemes in India.
SSRN
Ponzi scheme, multi-level marketing (MLM) programs or pyramid schemes disguised as direct selling companies are India's nightmare. The problem is huge. In fact, it's so good that the massive redemptions ordered by the Securities & Exchange Board of India (SEBI) in the case of Sahara group companies (Rs 25,000 crore plus interest) or PACL (Rs 49,100 crore) don't even start the surface of money stolen from ordinary savers. The Indian Legislature has sadly been extremely slow on the uptake and as a result many well-known ponzi schemes have been able to thrive undetected. This paper will tend to discuss the laws pertaining to the ban of Ponzi like schemes in India.
Quantitative Easing and the Safe Asset Illusion
SSRN
The massive recourse to quantitative easing (QE) calls for a better understanding of its effects on safe assets. Based on a simple balance sheet framework, we show how QE impacts the total amount, cross-sectional distribution, and composition of safe assets in the economy. Analyzing the ECB’s Public Sector Purchase Programme (PSPP), we ï¬nd that the amount of universally accessible safe assets decreases and there is a transfer of safe assets from the non-bank to the banking sector. We call this phenomenon the safe asset illusion. The sectoral shift in the holding structure of safe assets has important implications for ï¬nancial stability and the cost of secured liquidity.
SSRN
The massive recourse to quantitative easing (QE) calls for a better understanding of its effects on safe assets. Based on a simple balance sheet framework, we show how QE impacts the total amount, cross-sectional distribution, and composition of safe assets in the economy. Analyzing the ECB’s Public Sector Purchase Programme (PSPP), we ï¬nd that the amount of universally accessible safe assets decreases and there is a transfer of safe assets from the non-bank to the banking sector. We call this phenomenon the safe asset illusion. The sectoral shift in the holding structure of safe assets has important implications for ï¬nancial stability and the cost of secured liquidity.
The Effect of Innovation Box Regimes on Investment and Employment Activity
SSRN
We study whether innovation box tax incentives, which reduce tax rates on innovation-related income, are associated with increased fixed asset investment and employment. Using a stacked cohort difference-in-differences design on an entropy-balanced sample of European multinationals, we find innovation box regimes are associated with higher levels of capital expenditures but lower levels of compensation expense and number of employees relative to companies in countries without such regimes. However, additional tests suggest patent-owning observations in innovation box countries have a more highly-compensated workforce following innovation box implementation. Our study contributes to the literature on, and policy evaluation of, innovation box regimes by examining the extent to which these incentives result in tangible investment and employment and by identifying how different characteristics of innovation box regimes impact these outcomes.
SSRN
We study whether innovation box tax incentives, which reduce tax rates on innovation-related income, are associated with increased fixed asset investment and employment. Using a stacked cohort difference-in-differences design on an entropy-balanced sample of European multinationals, we find innovation box regimes are associated with higher levels of capital expenditures but lower levels of compensation expense and number of employees relative to companies in countries without such regimes. However, additional tests suggest patent-owning observations in innovation box countries have a more highly-compensated workforce following innovation box implementation. Our study contributes to the literature on, and policy evaluation of, innovation box regimes by examining the extent to which these incentives result in tangible investment and employment and by identifying how different characteristics of innovation box regimes impact these outcomes.
The Long-Term Effects of Capital Requirements
SSRN
We build a stylized dynamic general equilibrium model with financial frictions to analyze costs and benefits of capital requirements in the short-term and long-term. We show that since increasing capital requirements limits the aggregate loan supply, the equilibrium loan rate spread increases, which raises bank profitability and the market-to-book value of bank capital. Hence, banks build up larger capital buffers which (i) lowers the public losses in case of a systemic crisis and (ii) restores the banking sector’s lending capacity after the short-term credit crunch induced by tighter regulation. We confirm our model’s dynamic implications in a panel VAR estimation, which suggests that bank lending has even increased in the long-run after the implementation of Basel III capital regulation.
SSRN
We build a stylized dynamic general equilibrium model with financial frictions to analyze costs and benefits of capital requirements in the short-term and long-term. We show that since increasing capital requirements limits the aggregate loan supply, the equilibrium loan rate spread increases, which raises bank profitability and the market-to-book value of bank capital. Hence, banks build up larger capital buffers which (i) lowers the public losses in case of a systemic crisis and (ii) restores the banking sector’s lending capacity after the short-term credit crunch induced by tighter regulation. We confirm our model’s dynamic implications in a panel VAR estimation, which suggests that bank lending has even increased in the long-run after the implementation of Basel III capital regulation.
What Can Capital Markets Teach Us About Learning?
SSRN
These are Powerpoint slides prepared for a seminar at ISMed, the Institute for Studies on the Mediterranean, under the aegis the National Research of Italy (CNR). Standard models of finance assume risks are stable, in which case beliefs normally converge smoothly toward the actual risks. In fact, most macro financial risks are chronically unstable, in which case rational learning often looks turbulently irrational. These findings sketch the main findings and implications. For more elaboration, see the companion paper Enigmatic Forecasts of Enigmatic Risks, SSRN 3863662, or other sources listed on the last slide.
SSRN
These are Powerpoint slides prepared for a seminar at ISMed, the Institute for Studies on the Mediterranean, under the aegis the National Research of Italy (CNR). Standard models of finance assume risks are stable, in which case beliefs normally converge smoothly toward the actual risks. In fact, most macro financial risks are chronically unstable, in which case rational learning often looks turbulently irrational. These findings sketch the main findings and implications. For more elaboration, see the companion paper Enigmatic Forecasts of Enigmatic Risks, SSRN 3863662, or other sources listed on the last slide.
[Enter Paper Title]Valuation Risk in Mutual Fund Portfolio Disclosure
SSRN
Valuation risk of a securityâ€"uncertainty about its fair valueâ€"is a subject of considerable concern in the mutual fund industry. If funds report different values for identical securities, investors cannot easily compare performance. Yet it is not unusual to see identical illiquid stocks, small-cap stocks, stocks with high analyst dispersion, stocks with less analyst coverage, and newly listed stocks valued differently across mutual funds. An equity fund that has positive price dispersion in its portfolio holdings, that performs poorly, that belongs to a fund family with an inclination for aggressive reporting, that holds more stocks subject to stale prices, that holds more pre-IPO firms, or that experiences net outflows will tend to show positive price dispersion again in the next quarter. This behavior is significant in a volatile market. Aggressive reporting helps funds gain in the mutual fund tournament.
SSRN
Valuation risk of a securityâ€"uncertainty about its fair valueâ€"is a subject of considerable concern in the mutual fund industry. If funds report different values for identical securities, investors cannot easily compare performance. Yet it is not unusual to see identical illiquid stocks, small-cap stocks, stocks with high analyst dispersion, stocks with less analyst coverage, and newly listed stocks valued differently across mutual funds. An equity fund that has positive price dispersion in its portfolio holdings, that performs poorly, that belongs to a fund family with an inclination for aggressive reporting, that holds more stocks subject to stale prices, that holds more pre-IPO firms, or that experiences net outflows will tend to show positive price dispersion again in the next quarter. This behavior is significant in a volatile market. Aggressive reporting helps funds gain in the mutual fund tournament.
