What Drives the Disposition Effect? An Analysis of a Long‐Standing Preference‐Based Explanation

We investigate whether prospect theory preferences can predict a disposition effect. We consider two implementations of prospect theory: in one case, preferences are defined over annual gains and losses; in the other, they are defined over realized gains and losses. Surprisingly, the annual gain/loss model often fails to predict a disposition effect. The realized gain/loss model, however, predicts a disposition effect more reliably. Utility from realized gains and losses may therefore be a useful way of thinking about certain aspects of individual investor trading.     

Event Day 0? After‐Hours Earnings Announcements

In recent years, the proportion of after-hours earnings announcements has increased to more than 40%. For after-hours announcements, earnings-related volume and price changes are not observed on the Compustat or I/B/E/S earnings announcement date, but one trading day later. This study demonstrates the importance of accounting for after-hours announcements for event studies around earnings announcements.     

Do Analyst Stock Recommendations Piggyback on Recent Corporate News? An Analysis of Regular‐Hour and After‐Hours Revisions

Analysts often update their recommendations following corporate news. Questions have been raised regarding analysts’ ability to generate new information beyond recent corporate events. Employing a comprehensive database on corporate news, we show that only a small minority, or 27.9%, of all recommendation revisions directionally confirm the information in the preceding corporate events and even these “confirming revisions” facilitate the information discovery of corporate events and thus cannot simply be dismissed as “piggybacking.” Our analysis further shows that analysts not only facilitate price discovery to corporate news through issuing trending revisions but also help reverse prevailing market sentiments following corporate news by issuing contrarian revisions. Our study is the first to investigate short‐window intraday market reactions to revisions issued after hours, which account for 70% of all recommendation revisions in our sample period. Analysts’ incentives to issue revisions after hours appear to reflect demands from large institutional clients, who dominate after‐hours trading. More importantly, we show that the after‐hours revisions are associated with significantly greater price reactions and different price reaction patterns than revisions issued during regular trading hours. Collectively, our evidence indicates that analysts are a significant source of new information beyond recent corporate news and they also help shape the market's assessment of corporate disclosures.     

What is the Intrinsic Value of the Dow?

We model the time-series relation between price and intrinsic value as a cointegrated system, so that price and value are long-term convergent. In this framework, we compare the performance of alternative estimates of intrinsic value for the Dow 30 stocks. During 1963–1996, traditional market multiples (e.g., B/P, E/P, and D/P ratios) have little predictive power. However, a V/P ratio, where V is based on a residual income valuation model, has statistically reliable predictive power. Further analysis shows time-varying interest rates and analyst forecasts are important to the success of V. Alternative forecast horizons and risk premia are less important.     

Survey Under‐Coverage of Top Incomes and Estimation of Inequality: What is the Role of the UK's SPI Adjustment?

Survey under‐coverage of top incomes leads to bias in survey‐based estimates of overall income inequality. Using income tax record data in combination with survey data is a potential approach to address the problem; we consider here the UK's pioneering ‘SPI adjustment’ method that implements this idea. Since 1992, the principal income distribution series (reported annually in Households Below Average Income) has been based on household survey data in which the incomes of a small number of ‘very rich’ individuals are adjusted using information from ‘very rich’ individuals in personal income tax return data. We explain what the procedure involves, reveal the extent to which it addresses survey under‐coverage of top incomes and show how it affects estimates of overall income inequality. More generally, we assess whether the SPI adjustment is fit for purpose and consider whether variants of it could be employed by other countries.     

What is the Economic Cost of the Investment Home Bias?

Overinvesting domestically is well known as an investment home bias (IHB). We define an economic home bias (EHB), whereby the IHB measures the investment weights and the EHB measures the economic cost induced by the IHB. We may have a large IHB and a negligible EHB. With the increase in the average correlation between foreign markets from 0.4 for the decade ending in 1988 to about 0.9 for more recent decades, the U.S. EHB is becoming negligible despite the domestic investment of 77.5%. Since 2009, the correlations have decreased, indicating that the HB puzzle is emerging once again.     

How to Solve the Price Puzzle? A Meta‐Analysis

The short‐run increase in prices following an unexpected tightening of monetary policy constitutes a puzzle frequently reported in empirical studies. Yet the puzzle is easy to explain away when all published models are quantitatively reviewed. We collect and examine about 1,000 point estimates of impulse responses from 70 articles that use vector autoregressions to study monetary transmission in various countries. We find that the puzzle is created by model misspecifications: especially by the omission of commodity prices, neglect of potential output, and reliance on recursive identification. Our results also suggest that the strength of monetary policy depends on the country’s openness, phase of the economic cycle, and degree of central bank independence.     

What is the systemic risk exposure of financial institutions?

I compare the performance of three measures of institution-level systemic risk exposure — Exposure CoVaR (Adrian and Brunnermeier, 2016), systemic expected shortfall (Acharya et al., 2016), and Granger causality (Billio et al., 2012). I modify Exposure CoVaR to allow for forecasting, and estimate the ability of each measure to forecast the performance of financial institutions during systemic crisis periods in 1998 (LTCM) and 2008 (Lehman Brothers). I find that Exposure CoVaR forecasts the within-crisis performance of financial institutions, and provides useful forecasts of future systemic risk exposures. Systemic expected shortfall and Granger causality do not forecast the performance of financial institutions reliably during crises. I also find, using cross-sectional regressions, that foreign equity exposure and securitization income determine systemic risk exposure during the 1998 and 2008 crises, respectively; financial institution size determines systemic risk exposure during both crisis periods; and executive compensation does not determine systemic risk exposure.     

What is the effect of an additional dollar of IPO proceeds?

We examine the effect of IPO proceeds on post-IPO liquidity and market monitoring. To do so we exploit variation in the amount of proceeds raised that is unrelated to firm size and manager decisions using an instrumental variable approach. We find that marginal increases in IPO proceeds lead to large increases in liquidity, analyst coverage, and institutional ownership in the first two years a firm is public. Increases in IPO proceeds also lead to more frequent follow-on offerings and longer survival as a public firm. We find evidence that immediate shocks to ownership dispersion represent one plausible channel through which changes in IPO proceeds affect long-run liquidity and market monitoring. Overall, our findings support the theoretical liquidity and market quality benefits associated with reductions in ownership concentration.     

Why is Convertible Debt Subordinated? An Investment‐Based Agency Theory

This paper offers an agency‐based explanation for the junior priority status of convertible bonds. Using a simple economic model, I show that when convertible and straight debt have equal priority, shareholders can prefer value‐decreasing projects, which results in wealth transfers from bondholders to shareholders; and I prove that this problem is solved when convertible debt is subordinated. Empirical evidence supports the theory. I find that firms with greater potential for investment‐based agency conflicts are more likely to issue subordinated convertible debt, and firms with senior convertible debt are more likely to deviate from the optimal investment policy.     

Opting for Opting‐In? An Evaluation of the European Commission's Proposals for Reforming VAT on Financial Services*

This paper provides a legal and economic analysis of the European Commission's recent proposals for reforming the application of VAT to financial services, with particular focus on their ‘third pillar’, under which firms would be allowed to opt in to taxation on exempt insurance and financial services. From a legal perspective, we show that the proposals’‘first and second pillars’ would give rise to considerable interpretative and qualification problems, resulting in as much complexity and legal uncertainty as the current regime. Equally, an option to tax could potentially follow significantly different legal designs, which would give rise to discrepancies in the application of the option amongst Member States of the European Union (EU). On the economic side, we show that quite generally, when firms cannot coordinate their behaviour, they have an individual incentive to opt in on business‐to‐business (B2B) transactions, but not on business‐to‐consumer (B2C) transactions. We also show that opting‐in eliminates the cost disadvantage that EU financial services firms face in competing with foreign firms for B2B sales. But these results do not hold if firms can coordinate their behaviour. An estimate of the upper bound on the amount of tax revenue that might be lost from allowing opting‐in is provided for a number of EU countries.     

An innovative method of classroom presentation: What is “Jeopardy?”

Current pedagogical literature is replete with recommendations that college and university faculty more actively involve their students in the learning process. Among the many approaches that faculty may add to their “repertoire of instructional skills” is the modification of the traditional lecture by incorporating visual-based instruction and interaction with the students. This article discusses the use of that approach in teaching a complex subject—the Revenue Reconciliation Act of 1993, which was signed into law by President Clinton on 10 August 1993. The method was developed for a one-hour CPE session presented to a group of accounting professionals at a regional conference. The goal was to present a significant amount of material in a concise, novel, and effective manner. The method described can be adapted and used to present a variety of accounting topics, both inside and outside the classroom.     

What is the impact of wealth shocks on asset allocation?

I test the assumption of constant relative risk aversion using U.S. macroeconomic data and analyse the role of wealth shocks in generating transitory changes in asset portfolio composition. I show that the risky asset share exhibits cyclical behavior and it is significantly (and positively) affected by unexpected variation in wealth. Therefore, the empirical evidence suggests that risk aversion is counter-cyclical. I also find that the portfolio share of housing wealth falls when the agent is faced with a positive wealth shock, i.e. housing is a hedge against unfavorable wealth fluctuations. Finally, considering a variety of wealth definitions, the results show that: (i) wealth effects are stronger for direct holdings of risky assets than for indirect holdings, which highlights that investors do not typically trade some assets such as pension or mutual funds; (ii) although significant, wealth effects on asset allocation are mainly temporary as agents quickly rebalance the asset portfolio composition (i.e. there is weak evidence of inertia or slow adjustment in asset allocation); and (iii) changes in expected returns partially explain the variation in risky asset allocation.     

What is in a Name? Group Coordination or Consolidation Plan—What is Allowed Under the EIR Recast?

The European Insolvency Regulation Recast allows for group coordination proceedings if insolvency proceedings have been opened against different companies belonging to a single group. Group coordination proceedings imply the drafting of a group coordination plan in order to define an integrated solution to the group's problems. This plan shall not include recommendations as to any consolidation of proceedings or insolvency estates. Against the backdrop of the evolving notion of ‘procedural consolidation’ and the fact the insolvency practitioners and courts concerned have to cooperate and communicate with each other, this prohibition is misplaced and should be interpreted to mean only that main or secondary proceedings opened in a member state cannot be transferred to another jurisdiction. The effective administration of insolvency proceedings of related group companies often demands an integrated solution to the group's problems, which will inevitably lead to some form of consolidation. Copyright © 2016 INSOL International and John Wiley & Sons, Ltd.     

What Drives the Cross‐Section of Credit Spreads?: A Variance Decomposition Approach

I decompose the variation of credit spreads for corporate bonds into changing expected returns and changing expectation of credit losses. Using a log‐linearized pricing identity and a vector autoregression applied to microlevel data from 1973 to 2011, I find that expected returns contribute to the cross‐sectional variance of credit spreads nearly as much as expected credit loss does. However, most of the time‐series variation in credit spreads for the market portfolio corresponds to risk premiums.     

What Drives Fiscal Decentralisation? Further Assessing the Role of Income*

This paper investigates the determinants of fiscal decentralisation, focusing in particular on the impact of the level of income on the level of fiscal decentralisation. Various measures of fiscal decentralisation, several of them novel in this context, are employed in a cross‐country econometric model to test established and more recent hypotheses. Paying careful attention to variable measurement, model specification and sample coverage, the results suggest that there are significant relationships between fiscal decentralisation and income, as well as a range of other factors. However, these relationships may be more complicated than previously reported. For the entire large sample of countries, and for the OECD subsample, a positive relationship between income and decentralisation is found. This corroborates the results found in earlier studies. However, for the middle‐ and lower‐income nations, higher income is found to be associated with less decentralisation.     

What is behind the magic of O-Score? An alternative interpretation of Dichev’s (1998) bankruptcy risk anomaly

Using Ohlson’s (J Account Res 18(1):109–131, 1980) measure of bankruptcy risk (O-Score), Dichev (J Fin 53(3):1131–1147, 1998) documents a bankruptcy risk anomaly in which firms with high bankruptcy risk earn lower than average returns. This study first demonstrates that the negative association between bankruptcy risk and returns does not generalize to an alternative measure of bankruptcy risk. Then, by examining the nine individual components of O-Score, I find that funds from operations (FFO) is the only component that is associated with returns. Furthermore, I show that the return-predictive power of FFO is due to cash flows from operations. Taken as a whole, this study provides evidence that Dichev’s bankruptcy risk anomaly is a manifestation of investors’ under (over)-pricing of cash flows (accrual) component of earnings, i.e., the accrual anomaly documented by Sloan (Account Rev 71(3):289–316, 1996).     

What is the effect of unconventional monetary policy on bank performance?

This paper examines the relationship between unconventional monetary policy and the US banking performance. Unconventional monetary policy is captured through the central bank's assets and excess reserves. Results show that unconventional monetary policy has a negative relationship with bank performance. Further analysis shows that the negative association between unconventional monetary policy and performance is mitigated for banks with a high level of asset diversification and low deposit funding. We also find that the negative relationship between unconventional monetary policy and performance subdues for deposit insured financial institutions. Finally, we use dynamic panel threshold analysis which reveals that the negative association between unconventional monetary policy and bank performance is particularly pronounced above the reported threshold value.