What Drives Private Equity Returns?– Fund Inflows,Skilled GPs,and/or Risk?*

This paper analyzes the determinants of returns generated by mature European private equity funds. It starts from the presumption that this asset class is characterized by illiquidity, stickiness, and segmentation. Given this presumption, Gompers and Lerner (2000) have shown that venture deal valuations are driven by overall fund inflows into the industry that yield the putative ‘money chasing deals’ phenomenon. It is the aim of this paper to show that this phenomenon explains a significant part of the variation in private equity funds' returns. This is especially true for venture funds, as they are affected more by illiquidity and segmentation than buy‐out funds. In the context of a WLS‐regression approach the paper reports a highly significant impact of total fund inflows on fund returns. It can also be shown that private equity funds' returns are driven by GP's skills as well as stand‐alone investment risk. In a bootstrapping context we can show that most of these results are quite stable.     

Paupers,burial clubs and funeral insurance: Calculating moral panics

Funeral insurance is an example of a practice that has evolved from the grass-roots burial clubs that developed from the 18th century as a response to the social anxiety wrought by the threat of a pauper's funeral. Largely accessed by the poor and working classes to avoid this social stigma, burial clubs commodified a social risk into a manageable and controllable financial arrangement. We explore this phenomenon through the lens of moral panic to trace the calculative practices that recast the social anxiety of a pauper's funeral into the novel metric of a ‘funeral benefit’.     

Popular television formats,The student-as-consumer metaphor,acculturation and critical engagement in the teaching of accounting

This paper discusses six television programme formats which were self-selected by Australian university students to facilitate their group-based presentations of accounting subject matter to fellow students in seminar and tutorial classes. This paper is a reflection upon the experiences of these formats (news and current affairs, game shows, tabloid television, soap operas, children's programmes and situation comedies) using an evaluative framework comprising the student-as-consumer metaphor, notions of ‘acculturation’ and a model of ‘critical engagement’. The television programme format appears to be beneficial in serving accounting students' psychological and emotional needs and in providing them with a shared cultural structure by which to address accounting issues. This shared structure facilitates students' critical and creative engagement with accounting.     

In search of distress risk in China's stock market

We examine the significance of size, book-to-market, and momentum factors in capturing financial distress risk in China's stock market. Consistent with the market underreaction hypothesis, we find that the momentum factor proxies for distress risk in China's stock market and that the explanatory power of momentum is subsumed when a distress factor is included in the asset pricing model. Our analysis demonstrates no evidence that size and book-to-market effects are driven by financial distress risk.¹     

Accounting for African migrants in Naples, Italy

The increasing interest in international migration and the African dimensions of that migration in Europe has received considerable attention by scholars recently. Accounting has been largely absent from contributing to that research. In this article, I address how the limits of a managerialist social accounting of African migrants in Naples, Italy might offer useful insight into the social and economic dimensions of irregular African migrants working in the city's underground economy. To do this, I employed the methods of anthropology and ethnographic study. In a case study of a social audit introduced by a public transit company to control petty crime, I examine how that audit produced an excess knowledge about African migrants that extended beyond it procedural purpose. Beyond the limits of its structure it revealed significant knowledge about the informal economies of remittances sent to Africa.     

Voluntary disclosure,mandatory disclosure and the cost of capital

We examine the association between a firm's cost of capital and its voluntary and mandatory disclosures. We include two types of mandatory disclosure: those that are a function of periodic reports that are realizations of ex‐ante reporting systems and those that arise due to specific corporate events. To capture a firm's voluntary and event‐driven mandatory disclosures, we use information the firm provides via 8K filings. To capture periodic mandatory disclosures, we use earnings quality measures derived from the literature. Consistent with endogenous relations predicted by theory, we find that voluntary disclosure and both types of mandatory disclosure are correlated, although only event‐driven mandatory disclosures are significant in models that explain voluntary disclosure. We also find that the cost of capital is generally influenced by each of these disclosure types. We also find that controlling for periodic mandatory disclosure does not affect the relationship between voluntary disclosure and the cost of capital, while controlling for event‐driven mandatory disclosure sometimes affects the relationship depending on the measures used. Our study suggests that a firm's disclosure environment includes the three types of disclosure examined, although the inclusion of mandatory disclosures does not affect the measured association between voluntary disclosure and the cost of capital.     

Transitions in environmental risk in a transitional economy: management capability and community trust in Russia

Following the collapse of the Soviet Union 10 years ago, the Russian Federation has undergone a radical social, political and economic transformation. This paper's focus is particularly on the consequences of this transformation for the natural environment. This is done by utilizing Beck's (Risk Society: Towards a New Modernity, London: Sage, 1992) concept of Risk Society to explore the interrelationships between managers, firms and communities in terms of transitions in capabilities, knowledge, trust, and even the very notion of community vis‐à‐vis pollution control and environmental protection. A qualitative study of managers in Russian manufacturing enterprises, environmental regulators and local communities, was undertaken in two provincial Oblasts in the Russian Federation, identifying a number of factors characteristic of Beck's (1992) treatise including ‘risk culture’, ‘organized irresponsibility’, ‘individualization’ and ‘subpolitics’. In so doing a deeper understanding is developed of the impact of economic transition on the environment, indicating a different risk society trajectory to that predicted for the West. The implications for continued, in‐depth research in focusing on economies in transition are also discussed.     

The joint influence of financial risk perception and risk tolerance on individual investment decision‐making

The increasing complexity of the investment environment has accelerated the need for better quality financial advice services. Central to quality advice is advisers’ accurate assessment of their clients’ risk characteristics. Typically a client's risk characteristic is assessed by measuring the client's risk tolerance but not risk perception. To assess whether this practice fails to fully capture the client's risk profile, we explore both risk tolerance and risk perception in the investment decision‐making context. Using Australian online survey data of financial adviser clients (n = 364), our results reveal that risk tolerance influences risky‐asset allocation directly and indirectly through risk perception. These results thus clarify the joint role of both risk constructs in the investment making decision and highlight the importance of assessing both in the provision of client financial advice services. Importantly, our results validate a new comprehensive risk perception measure applicable in the financial advice context.     

Exploring the Optimal Design of an Employer-Sponsored Sickness-Disability Compensation Insurance Plan When Sickness Presenteeism Is Penalized

We explore the impact of presenteeism, absenteeism, and shirking on the optimal design of an employer-sponsored sickness-disability compensation insurance plan when the employer penalizes sickness presenteeism. We assume an employee's health follows a simple multistate model with a “severely ill” sickness state. To combat absenteeism, the employer randomly verifies an employee's claim of sickness. However, to combat presenteeism, we also introduce the new concept of a presenteeism penalty whereby employees who are found to be at work in the “severely ill” sickness state are sent home and receive a penalized sick pay that is lower than the normal sick pay. Thus sick employees must decide whether to stay at home and receive a sick pay or go to work sick and run the risk of being sent home and penalized. We further assume (1) employees are risk-averse utility maximizers, (2) each employee has a strategy for staying home or working while sick that maximizes his or her lifetime expected discounted utility, and (3) an employee's strategy is unknown to the employer. The primary plan design factors that affect an employee's lifetime expected discounted utility and the employer's discounted expected accounting profits over an employee's working lifetime are the sick pay, the presenteeism penalty, and two health check probabilities. Volterra integral equations are used to derive expressions for an employee's lifetime expected discounted utility and the employer's expected discounted accounting profits over an employee's lifetime under various employee strategies. Laplace transforms are used to derive asymptotic expressions for the solutions to these integral equations. These asymptotic solutions are used to explore the impact of these factors on the optimal sickness compensation insurance plan design.     

Stock recommendation of an analyst who trades on own account

This article analyzes the provision of information acquisition and truthful reporting incentives to a financial analyst who can privately trade on own account. In a binary message and state space, I show that the analyst's reward scheme essentially provides him with a portfolio endowment traded in the market. Regardless of the true signal, the analyst issues the report that corresponds to the portfolio endowment with maximum market value, given security prices. The analyst's information acquisition incentive is driven only by private portfolio considerations: he acquires information only if he will be holding a large enough position in the stock he covers.     

Bank CEO careers after bailouts: The effects of management turnover on bank risk

We study whether bank bailouts affect CEO turnover and its subsequent impact on bank risk. Exploiting the Troubled Asset Relief Program (TARP) of 2008, we find that TARP funds temporarily decreased the likelihood of bank CEO turnover during the crisis (2008–2010) but significantly increased CEO changes afterwards. Our results show that replacing TARP CEOs reduced individual bank's risk as well as the bank's contributions to the systemic risk. Finally, we find that TARP CEO turnover was mainly driven by a decrease in the bank's political capital. Overall we provide evidence that bank bailouts have important implications for banks’ risk-taking and systemic risk, insofar as bailouts affect bank CEO turnover.     

SMB — Arousal,disproportionate reactions and the size-premium

This paper examines SMB (small minus big), the mimicking portfolio in Fama and French's [Fama, E., French, K., 1993. Common risk factors in the returns on stocks and bonds, Journal of Financial Economics 33, 3–56] three-factor asset pricing model. We do not examine whether SMB is a factor in explaining the cross-section of returns. This paper's focus is why S is greater than B. After controlling for market-pervasive effects, we argue that the small-firm premium is driven by both investors' emotional arousal (proxied by the turnover ratio) and their disproportionate reactions to arousing stimuli.     

Session I: Corporate Purpose and Governance

In this first of five sessions of a recent Columbia Law School symposium devoted to discussion of his new book, Prosperity—and The Purpose of the Corporation, Oxford University's Colin Mayer begins by calling for a “radical reinterpretation” of the corporate mission. For all but the last 50 or so of its 2,000‐year history, the corporation has combined commercial activities with a public purpose. But since Milton Friedman's famous pronouncement in 1970 that the social goal of the corporation is to maximize its own profits, the gap between the social and private interests served by corporations appears to have grown ever wider, helping fuel the global outbreaks of populist protest and indictments of capitalism that fill today's media. In Mayer's reinterpretation, the boards of all companies will produce and publish statements of corporate purpose that envision some greater social good than maximizing shareholder value. To that end, he urges companies to make continuous investments of their financial capital and other resources in developing other forms of corporate capital—human, social, and natural—and to account for such investments in the same way they now account for their investments in physical capital. Although the author appears to prefer that such changes be mandatory, enacted through new legislation and enforced by regulators and the courts, his main efforts are directed at persuading the largest institutional owners of corporations—many of whom are already favorably predisposed to ESG—to support these corporate initiatives. Marty Lipton, after expressing enthusiasm about Mayer's proposals, suggests that mandating such changes is likely neither feasible nor desirable, but that attempts—like his own New Paradigm—to gain the acceptance and support of large shareholders is the most promising strategy. Ron Gilson, on the other hand, after voicing Lipton's skepticism about the enforceability of such statements of purpose, issues a number of warnings. One is about the political risks associated with ever more concentrated ownership of public companies in a world where populist distrust of all concentrations of wealth and power is clearly on the rise. But most troubling for the company themselves is the confusion such proposals could create for corporate boards whose responsibility is to limit two temptations facing corporate managements: short‐termism, or underinvestment in the corporate future to boost near‐term earnings (and presumably stock prices); and what Gilson calls hyperopia, or overinvestment designed to preserve growth (and management's jobs) at all costs.     

The social risk–rent thesis: A reply to Harney

The paper responds to Stefano Harney's critique, ‘Accounting, Risk and Revolution’ and in doing so offers a further extension of Toms, 2006, Toms, 2010 perspective on labour rents and capitalist risk. Harney's challenge, to ask what is left out of critical accounting's account of risk, is an important one. Therefore the social rent–risk (SRR) hypothesis extends the analysis of critical accounting from systematic risk to include firm specific risk and primitive accumulation risk. It is argued that the SRR approach provides a generalised method of accounting for social relations of production and the necessary conditions of social transformation.     

Sentiment-scaled CAPM and market mispricing

This study explores the conditional version of the capital asset pricing model on sentiment to provide a behavioural intuition behind the value premium and market mispricing. We find betas (β) and the market risk premium to vary over time across different sentiment indices and portfolios. More importantly, the state β derived from this sentiment-scaled model provides a behavioural explanation of the value premium and a set of anomalies driven by mispricing. Different from the static β–return relation that gives a flat security market line, we document upward security market lines when plotting portfolio returns against their state βs and portfolios with higher state βs earn higher returns.     

The Diversification and Cost Effects of Interstate Banking

This study examines recent interstate bank geographic diversification inside the United States. More than 80 holding companies that gradually evolved into interstate banking companies were tested for significant linkages to risk and efficiency indicators. The study finds that while geographic expansion frequently is associated with increases in risk, when banking firms were grouped by threshold levels of geographic diversification more highly diversified interstate banks appear to achieve reductions in risk exposure and operating costs. The study's results suggest the spread of interstate banking may change the industry's risk and cost profile significantly with profound implications for the future of the deposit insurance fund.     

Collective efficacy and natural hazards: differing roles of social cohesion and task-specific efficacy in shaping risk and coping beliefs

Abstract

Previous research in non-disaster contexts has shown that the concept of collective efficacy, which is a group’s sense of its ability to achieve a specific objective, assists understanding of community readiness and households’ decisions to take preparedness actions. Collective efficacy expands the concept of social capital, which refers to social resources such as trust, norms and networks, by addressing how likely communities are to activate these resources for specific tasks. This paper empirically investigates the effect of three distinct collective efficacy components on risk perception, fear and self-efficacy regarding natural hazards in Austria. The three components have differing impacts on risk and coping beliefs: (1) Social cohesion decreases risk perception and fear but has no effect on self-efficacy; (2) Efficacy belief in social support increases self-efficacy; (3) Efficacy belief in citizen groups increases risk perception and fear. The combination of efficacy belief in social support and citizen groups seems to be most promising for stimulating protective action, as they together promote both risk and coping appraisal. However, overreliance on social support may have the undesirable effect of creating a false sense of safety among disaster-prone households. The findings demonstrate that collective efficacy provides a meaningful perspective from which to examine risk and coping beliefs but caution against treating it as an umbrella concept, given the differing effects of its components. Future studies are needed to investigate the impact of collective efficacy on other key explanatory factors of protective action, such as response efficacy or non-protective responses.     

Who Charges More: Hedge Funds or Mutual Funds?*

Explicit mutual fund fees are typically less than 1% of the assets under management. By comparison, the typical hedge fund charges a base fee of 2% plus a performance fee equal to 20% of net profits. Thus, hedge funds appear to charge far more for even comparable performance—unless one takes account of the following:

• ? For most mutual funds, a very high percentage of performance is driven by its passive exposure to the market, even though the fee is applied to the total fund.
• ? Many hedge funds are designed to provide returns that are completely independent of market performance.

Using these two assumptions, the author provides a simple example that shows that a representative mutual fund's performance can be replicated by combining an index fund, which represents the mutual fund's passive component, with a hedge fund, representing the mutual fund's active component. When analyzed in this way, the fee of the combined fund turns out to be remarkably close to the actual fee of the mutual fund. This in turn suggests that the implicit fee for the mutual fund's small active component is comparable to the fees of the hedge fund.     

The microstructure of fear,the Fama–French factors and the global financial crisis of 2007 and 2008

We analyze minute by minute equity price data from 1 August 2005 to 31 October 2008 to study the relationship between the three sources of systematic risk in Fama and French's (1993) model and the market's expectation of total risk as represented by the VIX (the “fear factor”). Our findings confirm the predicted relationship between the equity risk-premium and risk (Merton, 1980). We find that the size-premium is driven by investors who are flying-to-quality (Abel, 1988; Barsky, 1989). We also find that investors became increasingly sensitive to changes in the VIX during the global financial crisis.     

Local religious beliefs and municipal bond market outcomes

This study investigates whether religion-induced risk aversion affects municipal bond market outcomes from 1990 to 2017. The results indicate that local government bonds issued from U.S. counties with a high Catholic-to-Protestant population ratio have lower credit risk ratings and lower yield spreads, and are less likely to have credit enhancement. The results stand up to additional tests. I control for issuer's county political party affiliation and state term limits, and continue to find significant effects. The effects are not driven by the issuer's county fiscal policies. Furthermore, the effects persist when I use an alternate specification that controls for omitted factors that are time invariant. Overall, my evidence suggests that a bond issuer's religion-induced risk aversion plays a significant role in the pricing of local government bonds.