Environmental policies,national culture,and stock price crash risk: Evidence from renewable energy firms

This study investigates the impact of country‐level environmental performance and national culture on the stock price crash risk of renewable energy firms. Employing a large sample of 626 renewable energy firms across 31 countries, we find a significant nonlinear relationship between country‐level environmental performance and crash risk. National culture dimensions are found to strongly predict the crash risk of renewable energy firms, particularly after the global financial crisis. On the contrary, national culture dimensions and environmental policies are observed to not exert any significance in explaining the crash risk of fossil fuel firms. Our results are robust with respect to alternative measures of stock price crash risk and the endogeneity of national culture dimensions. Overall, the findings of this paper contribute to the environmental economics literature by providing new evidence regarding the role of societal and environmental factors in explaining the stock price crash risk of energy firms.     

Trade credit financing and stock price crash risk

This study investigates the association between trade credit financing and stock price crash risk within China's context. We find that firms using more trade credit financing have significantly lower future stock price crash risk. This negative association is more pronounced for firms with greater information asymmetry and for firms located in less developed financial markets. This finding is robust to the endogeneity concern, alternative measures of stock price crash risk, and the inclusion of other factors identified in prior studies that might affect stock price crash risk. Further evidence suggests that both the monitoring mechanism and the disclosure mechanism drive the documented relation. Our study suggests that access to trade credit can significantly reduce the likelihood of crash risk in a country like China with less developed formal bank financing. Our study also suggests that investors can effectively avoid stock price crash risk by using the trade credit information disclosed in financial statements.     

Real Earnings Management and Information Asymmetry in the Equity Market

The literature suggests that real earnings management (REM) activities can increase adverse selection risk in capital markets. Due to their opacity and the difficulties in understanding their implications, REM strategies may increase the level of information asymmetry among investors. This paper examines the association between earnings management through real activities manipulation and information asymmetry in the equity market. To estimate the level of adverse selection risk we use a comprehensive index of information asymmetry measures proposed by the market microstructure literature. For a sample of Spanish listed firms, we find that firms’ strategies of increasing earnings through REM are associated with higher information asymmetry in those firms that meet last year’s earnings. Our findings are consistent with the hypothesis that earnings management through real activities manipulation garbles the market, enhances private information production, and exacerbates information asymmetry in the stock market.     

An Evaluation of Financial Analysts' Earnings Forecasts for Hong Kong Firms

This study evaluates the accuracy and potential bias of analyst forecasts for Hong Kong firms published in the Estimate Directory and compares analyst forecasts to model forecasts. It also examines the association of forecast accuracy with various firm characteristics. The findings of the study show that on an overall basis analyst forecasts for Hong Kong firms are more accurate than model forecasts. Analyst forecasts for Earnings Per Share (EPS) are generally biased towards overstatement. The analysis of the association between forecast accuracy and company characteristics suggests that analyst forecasts for larger firms are comparatively more accurate than for smaller firms. As expected, the results also show that analyst forecasts with shorter time horizons are more accurate than forecasts with longer time horizons. The variability in firms' earnings, beta (market risk) or industry classification have no significant impact on the accuracy of analyst forecasts.     

Herding behavior,market sentiment and volatility: Will the bubble resume?

This paper aims to investigate herding behavior and its impact on volatility under uncertainty. We apply a cross-sectional absolute deviation approach as well as Quantile Regression methods to capture the herding behavior in daily and monthly frequencies in US markets over several time-periods including the global financial crisis. In a novel attempt we modify the empirical CSAD herding modeling by introducing implied volatility as a measure of agent risk expectations. Our findings indicate that herding tends to be intense under extreme market conditions, as depicted in the upper high quantile range of the conditional distribution of returns. During crisis periods herding is observed at the beginning of the crisis and becomes insignificant towards the end. The US market herding behavior exhibits time-varying dynamic trading patterns that can be attributed e.g., to overconfidence or excessive “flight to quality” features, mostly observed in the aftermath of the global financial crisis. Moreover, implied volatility reveals asymmetric patterns and plays a key role in enforcing irrational behavior.     

Environmental proactivism and firm performance: evidence from security analyst earnings forecasts

There is an ongoing debate over the impact of corporate pro-environment actions and strategies (reflected, for example, in pollution prevention and emission reductions, product re-design, materials stewardship) on corporate financial performance in US corporations today. A review of the existing literature in this area yields no consistent pattern of relationships between corporate environmental proactivism and financial performance when historical corporate accounting performance and stock market measures of performance are used. We revisit this relationship using a novel measure of firm performance: security analyst earnings forecasts. Specifically, we demonstrate a significant, negative relationship between environmental proactivism (using Toxic Release Inventory data) and industry analyst 1- and 5-year earnings-per-share performance forecasts for a sample of 523 US firms in 1992. We discuss the implications of these findings and provide suggestions for future research. © 1997 John Wiley & Sons, Ltd and ERP Environment.     

Internal Control and Stock Price Crash Risk: Evidence from China

This paper examines the role played by internal control and its five components (i.e. control environment, risk assessment, control activities, information and communication, and monitoring) in alleviating future stock price crash risk. Using a unique dataset from China, we find evidence that internal control is negatively associated with future stock price crash risk. Specifically, control environment, information and communication, and monitoring are significantly and negatively associated with future stock price crash risk. Moreover, the negative association between internal control and crash risk is significantly more pronounced in firms with weak internal and external governance (i.e. audited by non-Big 4 auditors, located in provinces with low market development, and less conservative in accounting) and with poor ability to mitigate impacts of extreme negative events (i.e. non-state-owned enterprises). Our study highlights the delicate role of internal control as a mechanism in preventing crash of stock price.     

The financial investment decision of non-financial firms in China

This paper constructs a portfolio model to analyze the determinants of the financial investment decision of non-financial firms in China. Unlike the literature assuming that financial investments are riskless, our model allows risks in both fixed and financial investments. We show that this extension provides an analytically similar but economically different model from the literature. In particular, it is relative risk and risk-adjusted return gap, not pure risk and simple return gap that enter into firms’ financial investment decision model. Using firm-level panel data of 1902 firms listed in Chinese stock market over the period from 2006 to 2016 with semi-annual frequency, we find that the ratio of fixed investment risk over total risk dominates financial investment decisions of non-financial firms. However, rates of risk-adjusted return gap between financial and fixed investments play no role in Chinese firms’ financial investment decisions, which is in stark contrast to the results using a model assuming riskless financial investments. The baseline findings are robust to alternative measures of financialization and investment risk and different firm sizes, ownership structures and time periods.     

Bank herding and systemic risk

Bank herding behavior is often hypothesized to increase systemic risk, but the actual effect is unclear ex-ante from the theory and unknown ex-post from the data. We expand the literature on this topic in several dimensions – posing alternative hypotheses regarding the effects of herding in asset, liability, and off-balance sheet portfolios; developing a novel set of bank-specific, time-varying measures of herding in these portfolios; and empirically testing the relations between bank herding for all three portfolios and bank systemic risk contributions. We find nuanced empirical results that differ by portfolio, bank size class, and periods before versus after TARP.     

COVID-19, ESG investing,and the resilience of more sustainable stocks: Evidence from European firms

Following the COVID-19 outbreak, orientation toward sustainability is a critical factor in ensuring firm survival and growth. Using a large sample of 1,204 firms in Europe during the year 2020, this study investigates how more sustainable firms fare during the pandemic compared with other firms in terms of risk–return trade-off and stock market liquidity. We also highlight the drivers of the resilience of more sustainable firms to the pandemic. Particularly, we document that higher levels of cash holdings and liquid assets in the pre-COVID period help these firms to perform and absorb the COVID-19 externalities better than other firms. Our results are robust to a host of econometric models, including GMM estimations and several measures of stock market performance. These findings contribute to the theoretical and empirical debate on the role of the sustainability as a source of corporate resilience to unexpected shocks.     

Forecasting corporate default risk in China

Default risk prediction can not only provide forward-looking and timely risk measures for regulators and investors, but also improve the stability of the financial system. However, the determinants of corporate default risk in China have not been well-identified. An empirical analysis was conducted using a unique dataset of default events in the Chinese market to fill this gap. First, we demonstrated that the default probability estimated by a structural model, which is widely used in the literature, do not fully reveal the default risk of firms in China. Second, we classified default events into minor and major defaults for empirical analysis. We found that firms that survive minor defaults behave differently from other bankrupt firms. Our results suggest that the determinants of corporate default risk in China and the United States differ. We also found that a firm’s continued increase in cash holdings is one of the most important signs of default. Overall, our study significantly improves the accuracy of forecasting corporate default risk in China.     

Animal Behavior in Capital markets: Herding formation dynamics,trading volume,and the role of COVID-19 pandemic

This paper provides new evidence on herding behavior. Using daily frequency data for 336 US listed firms over a five-year period, we investigate three important elements of financial herding behavior. First, trading volume, representing market interest, as a significant variable in capital markets apart from stock prices. Second, herding dynamics since herding formation is a dynamic process. Third, the reaction of possible financial herding to exogenous events-threats, as we use the pandemic event in order to investigate a market under stress. Even though the benchmark herding model used does not provide evidence of herding behavior, our results verify the significance of the above herding elements. We also find that trading volume and positive changes in trading volume result in increased cross-sectional absolute deviation (CSAD). Most importantly, we find that herding behavior is evident during the COVID-19 pandemic confirming that investors tend to herd during major crisis periods.     

股价崩盘风险、信息环境与企业现金调整

以我国2009—2016年沪深上市公司数据为样本，探究了股价崩盘风险、信息环境对企业现金调整的影响。研究发现：股价崩盘风险越大，企业现金调整速度越快，且这种正相关关系对于分析师跟踪数量较少、机构投资者持股比例少的企业而言更为显著。进一步考察股权性质在企业现金调整速度中的影响，发现国有企业与民营企业面对股价崩盘风险的现金调整速度并不具有显著差异，但是对于民营企业而言，更多的分析师跟踪和机构投资者持股将显著降低企业应对股价崩盘风险的现金调整速度，信息环境对于国有企业的作用并不显著。     

Cash holding dynamics and competition intensity: Evidence from UK firms

Using a quasi-natural experiment and various measures of competition intensity, we examine whether an increase in product market competition is a key driver of firm cash holdings. We find that firms increase cash holdings when competition is intense. The results suggest that the degree of increase in cash holdings is magnified among firms exposed to high predatory threat and financing friction. In addition, we examine if increasing cash holdings offers a competitive advantage in the product market. Our results indicate that firms with large cash reserves make gains in market share at the expense of their rivals. Gains in the product market are more pronounced among firms with low exposure to predatory risk and financing frictions.     

Herding behavior in the cryptocurrency market during COVID-19 pandemic: The role of media coverage

This paper examines herding behavior in the cryptocurrency market during the COVID-19 pandemic using daily data and based on static and regime-switching models. Furthermore, we investigate whether herding behavior is affected by the coronavirus media coverage. Based on a sample of the top-43 cryptocurrencies in terms of market capitalization between 2013 and 2020, we find significant evidence of herding for the entire sample period only during high volatility state. Moreover, during the COVID-19 crisis, results suggest that investors in the cryptocurrency market follow the consensus. Finally, the impact of coronavirus media coverage is significant on herding among investors, explaining such behavior in the cryptocurrency market during the COVID-19 crisis. Our findings explain herding determinants that may help investors avoid such comportment, mainly during the crisis.     

Herding in Open-end Funds: Evidence from China

This paper aims to detect the herding of Chinese open-end fund managers and examine the role that structural features of their industry play in their herding. The herding behaviour is investigated by employing the cross-sectional absolute deviation (CSAD) model, drawing on the Chinese open-end fund market for the 2007–2020 period. Our findings suggest that the presence of herding has been confirmed in all other types of funds except for income funds, with their herding being mainly driven by non-fundamental factors. Most types of funds show more pronounced herding when the market is rising and the fund flow is positive. Up markets foster positive fund flows, which promote herding to a certain extent. The structural characteristics of fund networks of common asset holdings produce an impact on the fund herding. Herding is observed in the network with larger centrality index and the disassortative network. Moreover, we also find that herding in most types of funds is more pronounced under conditions of high volatility and high economic policy uncertainty, and the fund herding tends to grow inversely with fund-size.     

Financial analyst coverage for U.S. firms facing foreign competition: Evidence from trade liberalization

This study examines financial analyst coverage for U.S. firms following an increase in foreign product market competition. To capture exogenous shocks to domestic firms' competitive environments, we exploit a quasi‐natural experiment from large import tariff reductions over the 1984 to 2005 period in the manufacturing sector. Using data for the years before and after large tariff reductions, our difference‐in‐differences analysis shows evidence of a significant decrease in analyst coverage for incumbent U.S. firms when they face greater entry threat from foreign competitors. We also find that analysts with less firm‐specific experience and less accurate prior‐period forecasts are more likely to stop following the domestic firm when foreign competition intensifies. Overall, the findings suggest that foreign product market competition from global trade liberalization is an important determinant of financial analysts' coverage decisions.     

Regulatory risk, market uncertainties, and firm financing choices: Evidence from U.S. Electricity Market Restructuring

Based on the universe of rate-regulated electric utilities in the U.S., we examine why firms alter their financing decisions when transitioning from a regulated to a competitive market regime. We find that the significant increase in regulatory risk after the passage of the Energy Policy Act, state-level restructuring legislations, and divestiture policies have reduced leverage by 15 percent. Policies that encouraged competition, and hence increased market uncertainty, lowered leverage by another 13 percent on average. The ability to exercise market power allowed some firms to counter this competitive threat. In aggregate, regulatory risk and market uncertainty variables reduce leverage between 24.6 and 26.7 percent. We also confirm findings in the literature that firms with higher profitability and higher asset growth have lower leverage, and those with more tangible assets are more levered. Firms with greater access to internal capital markets and those with a footloose customer segment use less debt, while those actively involved in trading power in the wholesale market use more debt.     

Affiliated block shareholders and analyst optimism

We investigate several previously under-documented conflicts of interest that may result in analyst optimism by utilizing two unique features of brokerage firms in China, namely, the dominant ownership of large shareholders within the brokerage firms and the mandatory disclosure of brokerage firms’ commission income derived from each mutual fund client. We show that controlling shareholders of an analyst’s brokerage-firm put pressure on the analyst to report more optimistically biased earnings forecasts and recommendations to the stocks they hold larger positions in. We also find that the magnitude of analyst optimism increases with the shareholdings of the mutual funds that contribute commission fees to the analyst’s brokerage firm. These findings remain robust after incorporating a regulation change that reduces conflicts of interest in the brokerage industry and higher dimensional fixed effects, and thus are unlikely to be driven by reverse causality or omitted variable bias.     

Analyst following,disclosure quality,and discretionary impairments: Evidence from China

Financial statement preparers’ discretion in fair value measurements is integral to asset impairment accounting. Firms may misuse this discretion to report more or less impairment loss than is warranted by underlying economic circumstances. Using data from a sample of publicly listed firms in China, this study finds that analyst following reduces abnormal impairment loss, the portion of reported impairment loss that cannot be explained by corporate economic circumstances and that this effect is more pronounced for firms with lower information disclosure quality. However, the reducing effects of analyst following and its interaction with disclosure quality are greater for income‐decreasing than for income‐increasing abnormal impairment loss. Additional analyses support the argument that these differences are attributable to the dominance of accounting’s contracting role over its informational role. Overall, the findings indicate that the influence of analyst following on discretionary impairment accounting decisions is moderated by disclosure quality and by the relative importance of accounting’s contracting and informational roles in an emerging market setting.