Mitigating risks in cross-border acquisitions

Compared to domestic acquisitions, cross-border acquisitions present greater challenges for buyers. This article analyzes the use of contingent payments, joint ventures, and toehold investments as potential mechanisms for reducing uncertainty in cross-border acquisitions. Toehold investments and earnout payments are associated with larger gains to buyers in domestic acquisitions, but not in cross-border acquisitions. The results indicate that joint ventures can be an effective mechanism to ameliorate the uncertainty associated with cross-border acquisitions in the presence of severe valuation uncertainties and country investment risks.     

Impact of interchange fees on a nonsaturated multi-agent payment card market

The impact that the level of interchange fees has on the payment adoption rate in a non-saturated market is investigated. This study is performed under different degrees of consumers' and merchants' awareness of the benefits arriving from the network externalities. In a four-party scheme, we model explicitly the interactions between consumers and merchants at the point of sale. The interchange fees flow from the acquirers to issuers. We allow card issuers to charge consumers with fixed fees and provide net benefits from card usage, whereas acquirers could charge fixed and transactional fees to the merchants. Merchant's transactional fees are determined proportionally to the level of interchange fees. We establish that, under this scheme, the two-sided nature of the market leads to higher adoption rates with lower interchange fees. Copyright © 2009 John Wiley & Sons, Ltd.     

How effective are rewards programs in promoting payment card usage? Empirical evidence

Card issuers have mainly relied on rewards programs as their main strategy to increase usage. However, there is scarce evidence on the effectiveness of these programs. This paper is addressing two topics which could have important managerial and public policy implications: (i) it estimates the impact of rewards on the use of cards and (ii) it quantifies their economic effects in terms of the cash substitution. We find that rewards may significantly modify choice for card payments. Their economic impact also varies significantly across types of rewards and merchant activities. Additionally, rewards seem to be more effective for debit cards.     

A note on the price- and cost structure of retail payment services in the Swedish banking sector 2002

We estimate private costs in the Swedish banking sector for the production of payment services and investigate to what extent the price structure reflects the estimated cost structure. We find that (i) banks tend to use two-part tariffs but (ii) variable costs are poorly reflected in transaction fees towards both consumers and corporate customers. (iii) There exist large cross subsidies between different payment services, foremost from acquiring card payments to cash distribution to the public, while payment services as a whole are not subsidized.     

Perceived auditor independence and audit firm fees

Regulations requiring the disclosure of fees paid to an auditor for audit and non-audit services (NAS) respond to concerns that such payments are potentially detrimental to auditors' actual or perceived independence. Although empirical studies have failed to produce unequivocal evidence of detrimental effects on auditor independence, the actions of regulators, audit firms and companies are consistent with the belief that economic bonding generated by fees can impair perceived levels of auditor independence.

Using a sample of UK companies over a six year period to March 2006, we study perceived impairment of auditor independence by examining the relationship between levels of total relative fees (combined audit and NAS fees payable by a company to its auditor as a proportion of the audit firm's UK income) and market value. This paper's methodological innovation is its use of a valuation framework in this setting. A further contribution lies in dropping the assumption of linearity found in most prior empirical studies. We provide evidence that shareholders perceive a threat to auditor independence only at high total relative fee levels. At lower levels, total relative fees are positively related to company value. These results suggest that disclosure of NAS and audit fees are of relevance to investors, as is information about auditor income. Our results support the view that regulation by reference to the threshold at which total relative fees are perceived negatively is more consistent with investor preferences than prohibition of the supply of NAS by auditors to their audit clients.     

Pricing and commitment by two‐sided platforms

I study pricing and commitment by platforms in two‐sided markets with the following characteristics: (i) platforms are essential bottleneck inputs for buyers and sellers transacting with each other; (ii) sellers arrive before buyers; and (iii) platforms can charge both fixed fees and variable fees (royalties). I show that a monopoly platform may prefer not to commit to the price it will charge buyers at the same time it announces its seller price if it faces unfavorable seller expectations. With competing platforms, commitment makes the existence of an exclusive equilibrium (in which sellers register with only one platform) less likely, but it has no impact on multi‐homing equilibria (in which sellers support both platforms) whenever these exist.     

Subsidizing Liquidity: The Impact of Make/Take Fees on Market Quality

Facing increased competition over the last decade, many stock exchanges changed their trading fees to maker‐taker pricing, an incentive scheme that rewards liquidity suppliers and charges liquidity demanders. Using a change in trading fees on the Toronto Stock Exchange, we study whether and why the breakdown of trading fees between liquidity demanders and suppliers matters. Posted quotes adjust after the change in fee composition, but the transaction costs for liquidity demanders remain unaffected once fees are taken into account. However, as posted bid‐ask spreads decline, traders (particularly retail) use aggressive orders more frequently, and adverse selection costs decrease.     

An Exploration of Competitive Signalling Equilibria with “Third Party” Information Production: The Case of Debt Insurance

In markets in which sellers know more about product quality than buyers, but cannot convey their superior information either by directly issuing costly signals of the Spence type or by successfully funding the production of information, I suggest another way in which the informational asymmetry problem can be resolved; a third party can produce the necessary information at a cost and use it to price a service consumed by the sellers. Buyers can then observe a seller's choice of service consumption level and be well informed in equilibrium. In this framework I construct a model in which a borrower's choice of insurance coverage signals its default probability to lenders, and explore the properties of the resulting signalling equilibrium in a variety of cases.     

Buying reputation as a signal of quality: Evidence from an online marketplace

Seller reputation, generated by buyer feedback, is critical to fostering trust in online marketplaces. Marketplaces or sellers may choose to compensate buyers for providing feedback. Signaling theory predicts that only sellers of high-quality products will reward buyers for truthful feedback, especially when a product lacks any feedback and when the seller is not established. We confirm these hypotheses using Taobao's reward-for-feedback mechanism. High-quality products, especially without established feedback, are chosen for feedback rewards, which cause sales to increase by 36%. Marketplaces and consumers can therefore benefit from allowing sellers to buy feedback and signal their high-quality products in the process.     

The Debt‐Payment‐to‐Income Ratio as an Indicator of Borrowing Constraints: Evidence from Two Household Surveys

Liquidity constraints have been proposed as an important explanation for deviations from the rational expectations/permanent income hypothesis. This paper introduces to the liquidity constraint literature the ratio of a household's debt payments to its disposable personal income, the debt service ratio (DSR). We find that a household with a high DSR is significantly more likely to be turned down for credit than other households. Also, the consumption growth of likely constrained households, identified using the DSR along with the liquid‐asset‐to‐income ratio, is significantly more sensitive to past income than that of other households, confirming the DSR's value in identifying constrained households.     

Governance regulatory changes,International Financial Reporting Standards adoption,and New Zealand audit and non‐audit fees: empirical evidence

This study examines the association between overseas and New Zealand governance regulatory reforms and New Zealand companies’ audit and non‐audit fees. Our models use temporal and International Financial Reporting Standards (IFRS) indicator variables to relate the timing of the fee changes to the incidence of the overseas and local reforms. We find that audit fees increased in New Zealand over 2002–2006. Such increases associate reliably with the transition to and adoption of NZ IFRS and not with earlier overseas governance reforms. Our study also documents a decrease in non‐audit fees over the same period, but we find no IFRS effect for non‐audit fees.     

Quantifying equilibrium network externalities in the ACH banking industry

We seek to determine the causes and magnitudes of network externalities for the automated clearing house (ACH) electronic payments system. We construct an equilibrium model of customer and bank adoption of ACH. We structurally estimate the parameters of the model using an indirect inference procedure and panel data. The parameters are identified from exogenous variation in the adoption decisions of banks based outside the network and other factors. We find that most of the impediment to ACH adoption is from large customer fixed costs of adoption. Policies to provide moderate subsidies to customers and larger subsidies to banks for ACH adoption could increase welfare significantly.     

IFRS fair value measurement and accounting policy choice in the United Kingdom and Australia

This study investigates the use of fair value measurement by 228 listed companies in the UK and Australia around the time of adoption of IFRS from 1 January 2005. We test whether within and between country comparability in policy choices (as measured by T indices) has changed in relation to (a) mandatory and (b) optional use of fair value measurement. Mandatory requirements related to financial instruments (IAS 39) and share-based payments (IFRS 2) have increased comparability, with a weaker effect for biological assets (IAS 41). In relation to the optional use of fair value, comparability increased in relation to property (IAS 16) because some companies discontinued fair value measurement. Under IAS 39, the fair value option for other financial assets and other financial liabilities decreased comparability. Options to use fair value in other areas (intangible assets, plant and equipment and investment properties) are not generally taken up, either for on-going measurement or on IFRS adoption (under the ‘deemed cost’ option). The results suggest a conservative approach and/or lack of incentives to use fair value measurement for most companies. Exceptions include some banks and insurance companies (for other financial assets and liabilities) and companies holding investment properties.     

Nonlinear Pricing and the Market for Settling Payments

Fedwire Funds is a real‐time gross settlement system that uses a decreasing block pricing scheme to attract nonurgent payments. A bank's optimal response to Fedwire's pricing depends on its perceived benefits to settling nonurgent payments quickly. If the urgency for immediate settlement is great enough, a bank responds to marginal price; otherwise, it responds to average price. We find banks respond to average price, suggesting that Fedwire's advantage over competing services of being able to provide immediate settlement is small. Moreover, attempts to increase demand for Fedwire services by lowering the cost of banks' final block of payments may be ineffective if there is not a corresponding decrease in average cost.     

Payments Settlement: Tiering in Private and Public Systems

What are the benefits provided by a payment system? What are the trade‐offs in public versus private payment systems and in restricted versus open payments arrangements? Modern payment systems encompass a variety of institutional designs with varying degrees of counterparty protection. We develop a framework that allows for an examination and comparison of payment systems, and specification of conditions leading to their adoption. We relate these conditions to the design of present large‐value payment systems (Fedwire, CHIPS, TARGET, etc.).     

Ad valorem platform fees,indirect taxes,and efficient price discrimination

This article explains why platforms such as Amazon and Visa rely predominantly on ad valorem fees, fees which increase proportionally with transaction prices. It also provides a new explanation for why ad valorem sales taxes are more desirable than specific taxes. The theory rests on the ability of ad valorem fees and taxes to achieve efficient price discrimination, given that the value of a transaction to buyers tends to vary proportionally with the cost of the good traded.     

MUTUAL FUND BROKERAGE COMMISSIONS

The brokerage commissions paid for portfolio transactions by a large sample of equity mutual funds are investigated. Median brokerage commissions measured as a percentage of net assets are 21 basis points per year with a standard deviation of 27 basis points. The commission levels are negatively correlated with fund size and positively correlated with fund turnover and expense ratio. The average brokerage commission measured as a percentage of assets traded exceeds the typical execution-only commissions for large institutional traders. This finding is consistent with many mutual fund brokerage commissions including payments for research, so-called soft dollar payments. Funds' expense ratios are positively correlated with commissions per trade, inconsistent with the idea that mutual fund managers who pay soft dollars for research have a corresponding reduction in management fees.     

An Assessment of the Impact of IFRS Adoption on Public Sector Audit Fees and Audit Effort – Some Evidence of the Transition Costs on Changes in Reporting Regimes

While many countries have adopted International Financial Reporting Standards (IFRS) for private sector enterprises, New Zealand (NZ), Australia and the United Kingdom adopted IFRS for all sectors, including the public sector. This approach is consistent with the concept of sector‐neutral accounting standards that gained wide acceptance in NZ and Australia in the early 1990s. Although a number of studies have assessed the impact of IFRS adoption in the private sector, and the public sector has provided some evidence as to the effects of IFRS adoption on financial statements, the costs of adopting IFRS have not been examined. One measure of cost is the change in audit fees in an IFRS reporting environment. The authors examine the impact of IFRS adoption in the NZ public sector on audit fees and audit effort. They obtained data regarding audit fees and audit effort in the NZ public sector and compared the pre‐adoption year with the first year of adoption for all segments. Their results indicate a substantial increase in audit fees and audit effort in the first year of IFRS adoption for all segments, with some variation across the segments. Two sectors, local authorities and energy companies, have had significant increases in audit fees and audit effort. These findings provide some empirical evidence regarding the cost of transition to IFRS and are of interest to researchers and regulators in countries that are currently considering transitioning to IFRS or IFRS‐based International Public Sector Accounting Standards standards in reporting for the public sector.     

ATM foreign fees and cash withdrawals

We evaluate the impact of “foreign” fees paid by consumers on their cash withdrawals at automatic teller machines (henceforth ATMs). These so called foreign fees are paid when consumers withdraw cash from ATMs which are not owned by their home bank. We take advantage of a natural experiment whereby (non linear) foreign ATM fees in one specific bank became suddenly applicable at one point in time. We also use this experiment to evaluate the substitutions between foreign ATM withdrawals and other home ATM or desk withdrawals as well as with payments by card. Using panel data on accounts, we first estimate average treatment effects on the treated before carrying on with the estimation of a simple structural model. The latter procedure allows us to compute the counterfactual impacts of changing the schedule of foreign fees. Impacts are sizeable on bank profits and consumer welfare.