BETA,SIZE, RISK,AND RETURN

We relate the cross‐section of stock returns to firm size, beta, and total risk. We find that as extreme monthly security returns are censored from the data, the significance level decreases rapidly for the size variable and increases for beta and total risk. An analysis of up and down markets reaffirms our findings. Consequently, average returns relate positively with beta, negatively with total risk, and not at all with firm size. We infer that investors willingly accept a lower average return on high‐total‐risk investments as the trade‐off for buying a chance at an extreme positive return. JEL classification: G1.     

Capital taxation,investment, growth,and welfare

This paper formulates a model of economic growth to study the effects of broad capital taxation (of profits, dividends, and capital gains) on macroeconomic outcomes in small open economies. A framework of exogenous growth permits modeling countries in transition to a country-specific steady state and to discern steady-state and transitory effects of shocks on economic outcomes. The chosen framework is amenable to structural estimation and, in view of the parsimony of the model, fits data on 79 countries over the period 1996–2011 well. The counterfactual analysis based on the estimated model suggests that capital-tax reductions induce positive effects on output and the capital stock (per unit of effective labor) that are economically significant and are accommodated within time windows of 5 years without much further economic response after that. The responses of economic aggregates are found to be relatively strongest to changes in corporate-profit-tax rates and weaker for dividend and capital-gains taxes.     

Wealth,Composition, Housing,Income and Consumption

The present research covering the latest residential boom and bust cycle highlights the lack of uniform or constant time invariant wealth, housing and income relations. More important, wealth composition is shown to be a significant determinant of consumption. The marginal effects of housing equity, financial wealth and income differ substantially based on the composition of household wealth. Households with the highest percentage of net worth in financial assets have much lower income effects, have substantially higher marginal effects associated with stock holdings and have housing equity effects that differ noticeably from other households. Income effects for groups with the smallest amounts of relative financial wealth are dramatically higher than for households with greater financial wealth. Wealth and its composition affect consumption.     

Consumption,asset wealth,equity premium,term spread,and flight to quality

We link transitory deviations of consumption from its equilibrium relationship with aggregate wealth and labor income to equity returns on the one hand, and to two characteristics of bond investors—the premium demanded to hold long‐term assets, and “flight to quality” behavior—on the other hand. Using a panel of 10 euro area countries over the period 1984Q1–2017Q4, we show that a rise in the consumption–wealth ratio predicts both higher equity returns and the future term spread, while a fall in the consumption–wealth ratio explains a large fraction of the rise in the spread between the “risky” and the “safe‐haven” bond.     

Good News,Bad News,Volatility, and Betas

We investigate the conditional covariances of stock returns using bivariate exponential ARCH (EGARCH) models. These models allow market volatility, portfolio-specific volatility, and beta to respond asymmetrically to positive and negative market and portfolio returns, i.e., “leverage” effects. Using monthly data, we find strong evidence of conditional heteroskedasticity in both market and non-market components of returns, and weaker evidence of time-varying conditional betas. Surprisingly while leverage effects appear strong in the market component of volatility, they are absent in conditional betas and weak and/or inconsistent in nonmarket sources of risk.     

Corporate governance,institutions, markets,and social factors

We use a comprehensive set of country-level social and institutional measures to study the relationship between country-level factors and firm-level governance. We also examine the roles of the country’s financial development status and the firm’s external financing needs in influencing the firm’s governance framework. Using a sample of 43 countries and 3301 firms, we find that country-level factors explain a large part of the variation in firm-level governance across countries. We also find evidence that the relationship between country-level factors and firm-level mechanisms is best represented as a moderating relationship. The results also indicate the presence of a complementary relationship, albeit sometimes insignificant, between firm-level governance and all the country-level variables included in our study. When accounting for the effect of a country’s financial development status and a firm’s external financing needs, we find evidence of a positive relationship between firm-level governance and firm returns and value for firms with high financing needs which operate in countries with high financial development.     

Tourism, globalization, social externalities, and domestic welfare

One of the impacts of globalisation has been the growth in tourism and mobility of capital. This paper examines the welfare effect of tourism on the host economy with imperfect competition. Three channels that affects domestic welfare by tourism are: social externalities accompanied with tourists, the terms of trade effect via rises in the non-tradable prices, and the resource movement effect to the manufacturing sector. Owing to the positive terms-of-trade effect and/or the beneficial resource movement effect, the optimal levels of tourism occur at the situations that tourists bring negative social externalities to the economy.     

Preferencing, Internalization, Best Execution, and Dealer Profits

The practices of preferencing and internalization have been alleged to support collusion, cause worse execution, and lead to wider spreads in dealership style markets relative to auction style markets. For a sample of London Stock Exchange stocks, we find that preferenced trades pay higher spreads, however they do not generate higher dealer profits. Internalized trades pay lower, not higher, spreads. We do not find a relation between the extent of preferencing or internalization and spreads across stocks. These results do not lend support to the "collusion" hypothesis but are consistent with a "costly search and trading relationships" hypothesis.     

Political regimes,business cycles,seasonalities, and returns

This paper provides a method for testing for regime differences when regimes are long-lasting. Standard testing procedures are generally inappropriate because regime persistence causes a spurious regression problem – a problem that has led to incorrect inference in a broad range of studies involving regimes representing political, business, and seasonal cycles. The paper outlines analytically how standard estimators can be adjusted for regime dummy variable persistence. While the adjustments are helpful asymptotically, spurious regression remains a problem in small samples and must be addressed using simulation or bootstrap procedures. We provide a simulation procedure for testing hypotheses in situations where an independent variable in a time-series regression is a persistent regime dummy variable. We also develop a procedure for testing hypotheses in situations where the dependent variable has similar properties.     

Banks, markets, and efficiency

A competitive financial system can help reduce banks’ monopoly power and the associated inefficiencies. However, according to Diamond (J Polit Econ 105: 928–956, 1997) and Fecht (J Eur Econ Assoc 6(2), 2004) competition with the financial sector may also constrain the amount of liquidity insurance that banks can provide to households affected by unobservable idiosyncratic liquidity shocks. To study this trade-off, we model competition between banks and between banks and financial markets. Our analysis shows that competition between banks and financial markets can constrain the risk-sharing offered by deposit contracts. This effect is the same if competition between banks mainly affects the reallocation of deposits. However, if banking competition primarily affects new deposits, then such competition only limits inefficient monopoly rents without restraining risk-sharing. We would like to thank Diemo Dietrich, Phil Dybvig, Hans Peter Grüner, Martin Hellwig, Elu von Thadden, Uwe Vollmer, Wolf Wagner as well as seminar participants at the Bundesbank, at the University of Mannheim, at the University of Tilburg, at the 3rd Workshop on Monetary and Financial Economics in Halle, at the University of Lausanne, at the First ProBanker Symposium in Maastricht, at the Global Finance Conference 2005 in Dublin, at the European Economic Association Meeting 2005 in Amsterdam, at the International Finance Conference 2005 in Copenhagen, and at the German Economic Association Meeting 2005 in Bonn. We thank Mike Demott for editorial assistance. The views expressed here are those of the authors and not necessarily those of the Deutsche Bundesbank, the Federal Reserve Bank of New York, or the Federal Reserve System.     

Digitization,digitalization, and digital transformation in accounting,electronic commerce,and supply chains

This paper provides some basic definitions associated with digital transformation in organizations and applies those definitions to accounting, electronic commerce, and supply chains. I also drill down on the dimensions associated with digital transformation, including digital everywhere, integration (across applications and with customers and partners), and the need to reengineer processes. I examine several examples of processes ranging from digitization to digital transformation. I also examine the role of people in digitally transformed organizations and some technologies that are important to continued evolution of digitally transformed organizations. Further, we explore a number of scenarios of digital transformation. Finally, these investigations result in the determination of a number of emerging research issues.     

Youth-led social change: Topics,engagement types,organizational types,strategies, and impacts

This paper provides a framework for evaluating youth-led social change. The framework considers: seven topics (e.g., environment, human health and safety, and education); nine engagement types (e.g., volunteerism, research and innovation, and political engagement); six organizational types (e.g., advisory body, social enterprise, and individual); three strategies (socialization, influence, and power); and three scales of impacts (individual, community/inter-organizational, and national/international). Using this framework, empirical research provides evidence of how youth – defined as young people 15–24 years of age – have been agents of change in Canada over the 35 years from 1978 to 2012. A media content analysis of 264 articles, combined with frequency and chi-square tests, were completed to study the factors and the relationships among them. The results show a strong relationship between the impact and the strategy, topic, engagement type, and organizational type. The results also show a strong relationship between the strategy and the impact, engagement type and organizational type. The findings have implications for youth leaders and those who advocate for, work with, support, and educate them, and for those interested in evaluating social change efforts.     

Environmental policy,pollution, unemployment,and endogenous growth

The paper develops a model of endogenous economic growth with pollution externalities and a labor market distorted by union monopoly power and by taxes and transfers. We study the optimal second-best pollution tax and abatement policy and find that a shift toward greener preferences will tend to reduce unemployment, although it will hamper growth. We also find that greater labor-market distortions call for higher pollution tax rates. Finally, we show that a switch from quantity control of pollution combined with grandfathering of pollution rights to regulation via emission charges has the potential to raise employment, growth, and welfere without damaging the environment.     

Production flexibility, stochastic separation, hedging, and futures prices

We study a dynamic model where uncertainty about interim outputadjustments causes producers to face price, cost and outputuncertainty. Stochastically separable production decisions areindependent of the producer's risk preferences and expectationsand are based on the prevailing futures price as a certain outputprice. Conditions under which futures contracts achieve stochasticseparation are established. Optimal hedging and maturity structureof futures contracts, equilibrium futures prices, and the effectsof futures trading on output are studied. The systematic riskpremium depends on the product of the futures beta and the covarianceof the market return with production revenues.     

PORTFOLIO PERFORMANCE IN RELATION TO QUALITY,EARNINGS, DIVIDENDS,FIRM SIZE,LEVERAGE, AND RETURN ON EQUITY

This paper examines the risk-return performance of portfolios formed from S&P quality rankings over the time period 1970–1979. In addition, the risk-return characteristics of the portfolios are compared with performance as measured by fundamental data regarding earnings, dividends, firm size, leverage, and return on equity. The results suggest that the S&P quality rankings are closely correlated to risk as measured by the variability of returns and earnings changes, but the rankings are not correlated with the variability of dividend changes. The quality rankings are not uniformly correlated with mean portfolio returns or mean dividend changes, nor is the relationship between quality and mean earnings changes strong. Finally, quality rankings are related to firm size and return on equity. However, relationships between quality and leverage are discernible only at the extremes.     

Infrastructure, Geographical Disadvantage, Transport Costs, and Trade

The authors use different data sets to investigate the dependenceof transport costs on geography and infrastructure. Infrastructureis an important determinant of transport costs, especially forlandlocked countries. Analysis of bilateral trade data confirmsthe importance of infrastructure and gives an estimate of theelasticity of trade flows with respect to the trade cost factorof around –3. A deterioration of infrastructure from themedian to the 75th percentile raises transport costs by 12 percentagepoints and reduces trade volumes by 28 percent. Analysis ofAfrican trade flows indicates that their relatively low levelis largely due to poor infrastructure.     

Liquidity,default, taxes,and yields on municipal bonds

We examine the effects of liquidity, default and personal taxes on the relative yields of Treasuries and municipals using a generalized model with liquidity risk. The municipal yield model includes liquidity as a state factor. Using a unique transaction dataset, we estimate the liquidity risk of municipals and its effect on bond yields. Empirical evidence shows that municipal bond yields are strongly affected by all three factors. The effects of default and liquidity risk on municipal yields increase with maturity and credit risk. Liquidity premium accounts for about 9–13% of municipal yields for AAA bonds, 9–15% for AA/A bonds and 8–19% for BBB bonds. A substantial portion of the maturity spread between long- and short-maturity municipal bonds is attributed to the liquidity premium. Ignoring the liquidity risk effect thus results in a severe underestimation of municipal bond yields. Conditional on the effects of default and liquidity risk, we obtain implicit tax rates very close to the statutory tax rates of high-income individuals and institutional investors. Furthermore, these implicit income tax rates are quite stable across bonds of different maturities. Results show that including liquidity risk in the municipal bond pricing model helps explain the muni puzzle.