Research articles for the 2021-06-25

Analysis of Factors Affecting Fraudulent Financial Reporting with Independent Commissioners as Moderation Variable
Submitter, GATR Journals,Said, Andalia,Amiruddin, Amiruddin,Pontoh, Grace T.
Objective - This study aims to examine and analyze the effect of pressure, opportunity, rationalization, ability and arrogance on fraudulent financial reporting with independent commissioners as the moderating variable.Methodology/Technique - The object of this research is all companies listed on the Indonesian Stock Exchange during 2019. The research sample was obtained through purposive sampling method and resulted in 215 companies. The analysis technique used is multiple regression analysis and Moderated Regression Analysis (MRA).Findings - The results show that pressure, opportunity, rationalization, ability and arrogance had a significant effect on fraudulent financial reporting. The results of the moderation regression analysis show that independent commissioners moderate the effect of pressure and arrogance on fraudulent financial reporting. Meanwhile, independent commissioners did not moderate opportunities, rationalization, and capacity for fraudulent financial reporting.Novelty - This research contributes to the pentagon fraud theory, which proves that the elements contained in this theory can be used as a basis for analyzing fraud committed by companies, and contributing to the company so that the company's internal control is improved and the presence of an independent board of commissioners is not only a fulfillment of the company's internal control. regulations made by the IDX.Type of Paper - Empirical.

Behavioural Intention of Commercial Banks' Customers Towards Financial Technology Services
Submitter, GATR Journals,Peong, Kwee Kim,Peong, Kwee Peng,Tan, Kui Yean
Objective - The objective of this study is to determine the process that takes place in the employment of financial technology in the financial services industry. It is of utmost important that FinTech firms and commercial banks understand the predictors that can influence their consumers' decision to adopt FinTech services and to increase loyalty toward their services.Methodology/Technique â€" An online survey was used in the present research to explore factors that can influence commercial bank users' intention to use FinTech services in Malaysia. The data for the current study was gathered from bank users who aged at least 18 years old and resided in Malacca, Malaysia whom accessed FinTech services via smartphone. This research also employed the convenient sampling in distributing online questionnaires to 400 respondents who had successfully completed and returned the questionnaires.Findings â€" The empirical findings illustrate that trust, social influence, cyber-security risks and privacy risks are the most influential determinants that affect bank customers' behavioural intention to use FinTech services in Malaysia.Novelty â€" This research contributes to the theory of TAM, UTAUT and TPB by proposing a direct effect of trust, social influence, cyber-security risks and privacy risks on the adoption of FinTech services. The findings of the current study will be beneficial to policymakers, specifically financial institutions and FinTech firms as they will be informed on workable means to increase the quality of FinTech applications/websites. This can yield greater intentions to adopt FinTech. Stakeholders should play their important role in noticing and considering the influential factors that can impact the consumers' behavioural intention for using technologies in their policies to fulfil the users' needs.Type of Paper - Empirical

Corporate Governance and Earnings Management: Empirical Evidence of the Distress and Non-Distress Companies
Submitter, GATR Journals,Alexander, Nico ,Indrastuti, Dewi Kurnia,Theresia, Theresia
Objective - The purpose of this research is to obtain empirical research on the effect of corporate governance on earnings management in distressed and non-distressed companies. Corporate governance in this research is measured by independent board, audit committee, board of commissioners, institutional ownership and number of board commissioner meetings. The research predicts that corporate governance has a negative effect on earnings management either both in distressed and non-distressed companies.Methodology/Technique - This research uses 309 manufacturing companies listed on the Indonesian Stock Exchange and the data was obtained using purposive sampling method during 2016 until 2018. Of the 309 respondents in the sample, 287 are distressed companies and 22 are non-distressed companies. The data was analyzed using a multiple regression method.Findings - The empirical results show that commissioner board and institutional ownership have a negative effect on earnings management in non-distressed companies but in distressed companies, corporate governance does not have an effect on earnings management. This research shows that distressed companies, corporate governance cannot minimize earnings management practices because to maintain the company as a going concern, management will do earnings management to ensure stakeholders' trust to encourage further investment in the company. In non-distressed companies, corporate governance can minimize earnings management practices because the company is in a good financial condition, so they don't need to do earnings management. Additionally, in order to ensure stakeholders' trust, the company will strengthen its' corporate governance mechanisms.

Do Public Financial Statements Influence Venture Capital and Private Equity Financing?
Baik, Brian K.,Berfeld, Natalie,Verdi, Rodrigo S.
We study whether private firm public financial statements influence the probability of raising venture capital (VC) and private equity (PE) financing. We hypothesize that private firms' public financial statements can help the VC/PE search process by providing a less costly screening tool to identify potential targets at the pre-investment stage. Using two complementary settings, we find that an increase in financial statement availability/transparency is associated with an increase in the probability of a private firm obtaining VC/PE financing. Our evidence highlights the importance of public financial statements in the decision of making of private investors in the early stages of a private firm's financing process.

Examining the Drivers of Stock Prices of Private Sector Banks in India
Rawlin, Rajveer
Indian private sector banking stocks have been rebounding from a massive selloff. Private sector banks which have traditionally maintained their asset quality and profitability when compared to their public-sector counterparts, have recently seen their asset quality erode. Given that private sector banks play an influential role in the Indian economy it would be helpful to understand the key drivers of private bank stock prices. This paper studied the influence of some key micro and macro determinants on the stock prices of all listed private sector banks in India over the 12 years from 2008-2019. Panel regression models were fit to study the relationship between the variables. Liquidity, profitability, growth, inflation and exchange rate indicators proved to be important influencers of the stock prices of private sector banks in India. The study provides evidence for the Fisher effect suggesting that private bank stocks can provide good inflation-adjusted returns over time. Stakeholders of these banks can focus on these determinants which contribute to shareholder value over time.

Factor Investing in Sovereign Bond Markets: Deep Sample Evidence
Baltussen, Guido,Martens, Martin,Penninga, Olaf
We examine government bond factor premiums in a deep global sample from 1800 to 2020 spanning the major markets and maturities. Bond factors (Value, Momentum, Low-risk) offer attractive premiums that do not decay across samples, are persistent over time, and consistent across various market and macroeconomic scenarios. The factor premiums diversify to each other, as well as to bond or equity market risks. A combined multi-factor bond strategy provides the strongest risk-adjusted returns. These results strongly show a consistent added value of government bond factor premiums over a passive bond portfolio.

Financial Intermediary Leverage, Volatility, and the Cross-Section of Asset Returns
Chan, Skyler
Society needs financial intermediaries to create orderly efficient markets, to have informative prices, and to best allocate resources. However, when trust is eroded with high volatility and unpredictable events, financial crises are amplified and prices are distorted as financial intermediaries struggle to hold rapidly depreciating assets that are essential for economic recovery. Using a multi-factor model, I find that intermediary leverage, volatility, and more importantly their interaction, explain cross-sectional variations in expected returns. I propose an advancement based on the joint interaction between intermediary leverage and volatility to enable financial intermediaries to better manage their leverage in a rapidly evolving risk environment.

In Art We Trust
Li, Yuexin,Ma, Marshall Xiaoyin,Renneboog, Luc
While trust is the cornerstone in the functioning of any market, it is of particular importance in the markets that are unregulated, illiquid, and opaque, such as the art market. We therefore examine the role of authenticity, as captured by the provenance information, on the sales probability of auctioned paintings, their price formation and returns. Auction catalogues include four authenticity dimensions: pedigree, exhibition history, literature coverage, and certification. We find that provenance information increases sales probability by up to 4%, leads to price premiums up to 54%, and increases annualized returns by 5% to 16%. As high dimensional fixed effects may induce estimation concerns, we perform LASSO estimations. To address potential endogeneity problems between the provision of provenance and price expectations, we perform quasi-natural experiments in difference-in-differences (DiD) settings on auction houses’ provenance policy changes, and the discovery of fakes and forgeries. We also perform robustness tests on subsamples less affected by past prices such as those estate sales following the death of a collector.

Non-Financial Reporting And The Cost Of Capital In BRICS Countries
Evdokimova, Mariia,Kuzubov, Sergey
This paper considers the impact of non-financial reporting (NFR) on the cost of capital (COC) in the forms of the cost of equity (COE), the cost of debt (COD), and the weighted average cost of equity (WACC). It was revealed that companies publishing non-financial reports have a lower COC. COD, COE, and WACC reduce after NFR. Six industries, where the cost of equity and debt capital is lower for companies publishing NFR, were determined: consumer discretionary, energy, industrials, information technology, healthcare, and materials. According to the analysis, companies that issued non-financial reports have a lower COE capital growth rate.

On the Unification of Centralized and Decentralized Clearing Mechanisms in Financial Networks
Ketelaars, M.W.,Borm, Peter
We analyze clearing mechanisms in financial networks in which agents may have both monetary individual assets and mutual liabilities. A clearing mechanism prescribes mutual payments between agents to settle their mutual liabilities. The corresponding payments, summarized in a payment matrix, are made in accordance with agent specific claims rules that stem from the vast literature on claims problems. We show that large classes of centralized and decentralized clearing mechanisms all prescribe the same payment matrix under the condition that the underlying claims rules satisfy composition; a property satisfied by the proportional rule that is often applied in insolvency proceedings. This payment matrix is the one that contains the minimal amount of payments required to clear the network. In fact, we show that composition guarantees unification of clearing mechanisms in which agents pay simultaneously and clearing mechanisms in which agents pay sequentially in any arbitrary order. Therefore, for a given financial network, each clearing mechanism gives rise to the same transfer allocation. Moreover, we provide an axiomatic characterization of the corresponding mutual claims rule on the basis of five axioms: scale invariance, equal treatment of equals, composition, path independence and consistency. This characterization extends the analogous characterization for claims rules as given by Moulin (2000).

Recent Developments in Measuring Inflation Expectations: With a Focus on Market-based Inflation Expectations and the Term Structure of Inflation Expectations
Adachi, Ko,Hiraki, Kazuhiro
Economic surveys and the market price of inflation-linked assets are two major sources for gauging inflation expectations. Recent studies have developed methodologies that use various indicators to estimate underlying inflation expectations and their term structure. This article reviews recent research on inflation expectations, with a focus on Hiraki and Hirata's (2020) study on market-based inflation expectations, and Maruyama and Suganuma's (2019) study on the term structure of inflation expectations. We also describe recent movements in inflation expectations in Japan. Overall, inflation expectations weakened somewhat after the outbreak of COVID-19 in early 2020, but they have been more or less unchanged in recent months. Given the great uncertainty over the consequences of COVID-19 and their impact on domestic and overseas economies, future developments in inflation expectations will also continue to be highly uncertain. It is therefore important to continue monitoring the various indicators of inflation expectations by considering their characteristics.

Scenario Analysis with the DD-PD Mapping Approach: Stock Market Shocks and U.S. Corporate Default Risk
Chan-Lau, Jorge A.
This paper introduces the quantile regression- based Distance-to-Default to Probability of Default (DD-PD) mapping, which links individual firms’ DD to their real world PD. Since changes in the DD depend on a handful of parameters, the mapping easily accommodates shocks arising from quantitative and narrative scenarios informed by expert judgment. At end-2020, risks from stock market corrections in the U.S. are concentrated in the energy, financial and technology sectors, and additional bank capital needs could be large. The paper concludes discussing uses of the mapping beyond PD valuation suitable for capital structure analysis, credit portfolio management, and long-term scenario planning analysis.

Spillover Effects of Cross-Border Bank Acquisitions on Systemic Risk
Sedunov, John,Taboada, Alvaro G.
We examine the spillover and direct effects of cross-border bank M&As on the systemic risk of banks in the target’s country. We document that higher cross-border bank M&A activity is associated with higher systemic risk for peer banks, while target banks exhibit a decrease in systemic risk post-merger. The effect is stronger for deals involving large acquirers from developed countries and from countries with weaker regulatory quality than the target’s country. Our data suggest that the channels for these effects are reductions in peer banks’ market value of equity and income diversity and an increase in market value of equity for target banks post-merger relative to the control group. Our findings show destabilizing effects of cross-border bank M&As that stem from improvements in the quality of the target banks that exert pressure on peer banks.

The Asymmetric Effect of Reporting Flexibility on Priced Risk
Bloomfield, Matthew J.
Most firms covary more positively with downmarkets than upmarketsâ€"a phenomenon I refer to as “risk asymmetry.” I predict and find that risk asymmetry is caused, at least in part, by a firm's ability to selectively obfuscate poor performance. Risk asymmetry decreases significantly when firms are required to adhere to the more stringent auditing standards mandated under Section 404 of the Sarbanes-Oxley Act, however this decrease is more muted for firms with weak internal controls. Consistent with my predictions, these patterns are stronger for more market-sensitive firms and weaker for firms that include relative performance evaluation in their CEOs' pay packages. Taken together with prior literature (which documents that risk asymmetry is priced), my results suggest that a firm can lower its cost of capital by credibly reducing its ability to obfuscate value-relevant information.

The Information Role of the Media in Earnings News
Guest, Nicholas M.
I reexamine whether media articles with substantive editorial content inform the market's reaction to firms' earnings news. Using variation in earnings announcement coverage because of restructuring at The Wall Street Journal (WSJ), my analyses suggest that WSJ earnings articles improve price discovery and increase trading volume at S&P 500 earnings announcements. Additionally, textual analysis suggests media articles that differ more from the firm's earnings release increase trading volume, and that the differences speed up (slow down) price discovery when they corroborate (contradict) the tone of the firm's news. Such high difference articles are slightly longer, are more readable and specific, include more references to the industry and economy, repeat less “stale” news published in previous WSJ articles, and quote more investor and expert sources. Overall, my paper contributes to research on the role of the media in earnings news by providing evidence that journalists' editorial content helps investors understand firms' earnings, instead of simply entertaining or increasing awareness.

The SOFR and the Fed's Influence Over Market Interest Rates
Indriawan, Ivan,Jiao, Feng,Tse, Yiuman
The secured overnight financing rate (SOFR) serves as the successor to LIBOR (London interbank offered rate) as a benchmark rate for lending in the US dollar. Our results show that the SOFR aligns with the Federal Reserve’s policy target more closely than LIBOR. In addition, short-term market rates are more responsive to the SOFR than to LIBOR. Our findings highlight the advantages of the new benchmark rate over its predecessor.

The Strategic Choice of Peers in M&A Valuations
Imperatore, Claudia,Pundrich, Gabriel,Verdi, Rodrigo S.,Yost, Benjamin
We examine the strategic choice of peer comparables in fairness opinions (FOs) used in M&A valuations. Using a hand-collected sample of peer comparable analyses and a regulatory shock to appraisal lawsuit risk, we show that target-sought FOs employ lower-valued peers when litigation risk is higher. Cross-sectionally, the bias is stronger when the target CEO is retained and owns fewer shares in the target. Although the selection of downward-biased peers reduces appraisal lawsuit likelihood, it is also associated with lower premiums. We conclude that FO valuations are driven, at least in part, by the strategic motive to mitigate litigation risk.

Turnaround Prediction Model with Content Dimension on Financial Distressed Firms
Submitter, GATR Journals,Giriati,
Objective - This article aims to examine the influence of content dimensions of Organization Change Theory, such as CEO Expertise, Free Assets, Debt to Equity Ratio and Growth of Sales, on a company's turnaround ability when it is experiencing financial distress. The companies examined are listed on the Indonesian Stock Exchange (IDX).Methodology â€" The population used in this study is companies from sectors excluding the finance sector that were listed on the Indonesian Stock Exchange between 2013 and 2018. The sample size was determined using purposive sampling method. From the 109 companies that experienced financial distress, 57 have successfully turned their business around. The research data was collected from the ICMD (Indonesian Capital Market Directory), which was then analysed using multi regression technique analysis, using SPSS software to examine the determinants of company turnaround ability.Findings â€" The results indicate that CEO Expertise, Debt to Equity Ratio and Growth of Sales have a negative relationship on a company's turnaround ability. Meanwhile, Free Assets has a positive and significant relationship on a company's turnaround ability.Novelty â€" Previous studies have been conducted in many western countries, giving rise to researchers' doubts about the generalizability of research based on previous research findings when applied in developing countries such as Indonesia, particularly due to differences in regulations, conditions of distress, culture, financial systems and strategies used in overcoming distress.Type of Paper - Empirical

Unrecognized Expected Credit Losses and Bank Share Prices
Wheeler, Barrett
Accounting for credit losses under U.S. GAAP is transitioning from an incurred to an expected loss model. The model change was motivated by concerns that reporting only incurred losses does not provide investors with sufficient and timely information about banks’ credit risk. In this paper, I develop a measure of lifetime expected credit losses using vintage analysis to examine whether stock prices reflect information about unrecognized expected credit losses in an incurred loss regime. Consistent with investors being able to obtain information about expected losses that are not recognized in the financial statements, I find that unrecognized expected credit losses are negatively associated with bank stock prices. The pricing of these losses is stronger for larger banks, consistent with lower costs of obtaining this information for banks with better information environments. I also find that recorded allowances were less than estimated expected losses, on average, consistent with concerns that implementing the expected loss model will adversely impact regulatory capital adequacy.

Voice of the Customers: Local Trust Culture and Consumer Complaints to the CFPB
Hayes, Rachel M.,Jiang, Feng,Pan, Yihui
We use complaints filed with the Consumer Financial Protection Bureau (CFPB) to study the interplay between social norms and the effectiveness of consumer protection laws. We find that a higher level of trust in a given location is associated with a lower number of complaints filed against financial institutions in that location. Employing a difference-in-differences approach, we further find that, after the establishment of the CFPB, banks in low-trust areas reduce fees charged to consumers more compared to banks in high-trust areas. Our results suggest that the threat of consumer complaints to a government agency affects how banks treat their customers, and they shed light on the interaction between informal culture and formal institutions, as well as on stakeholders’ influence in corporate policies.

¿Exuberancia de los precios de la vivienda en Colombia? (Exuberance of Housing Prices in Colombia?)
Pardo Niño, Juan Camilo
Spanish Abstract: El presente documento evidencia la existencia de burbujas en el precio de la vivienda en Colombia (a nivel nacional y de ciudades) entre el periodo 1995-2019. Para comprobar su presencia se utiliza la prueba de detección de burbujas propuesta por Phillips et al. (2015) al ratio precio-renta y a una medida del componente no fundamental del precio de la vivienda, encontrando varios periodos de comportamiento exuberante. Además, se demuestra la existencia de migración de burbujas desde Medellín hacia siete ciudades receptoras (entre nueve posibles), cuyas intensidades son cambiantes en el tiempo. Los resultados tienen importantes implicaciones para el diseño de políticas publicas dado que utiliza un mecanismo de detección en tiempo real.English Abstract: This document report evidence of the existence of house price bubbles in Colombia (as a country and several cities) between 1995-2019. To verify its presence, I apply the bubble detection test proposed by Phillips et al. (2015) to the price-to-rent ratio and a measure of the non-fundamental component of housing prices, finding several episodes of exuberant behavior. In addition, I show evidence of the existence of bubble migration from Medellín to seven cities (out of nine possible) whose intensities are time-varying. The results have important implications for the design of public policies since it uses a real-time detection mechanism.