Stock price crash risk and CEO power: Firm-level analysis

This study examines the impact of stock price crash risk on future CEO power. Using a large panel sample with 17,816 firm-year observations, we posit and find a significant negative impact of stock price crash risk on CEO power, suggesting that CEO power becomes smaller after stock price crashes. We also find that our results are stronger for firms with female CEOs and are largely driven by firms with shorter-tenure CEOs. In addition, we find that the significant negative impact of stock price crash risk on CEO power is diminished for firms with strong corporate governance. Our study responds to the call in Habib, Hasan, and Jiang (2018) by providing more empirical evidence on the consequences of stock price crash risk.     

Liquidity risk and stock performance during the financial crisis

We investigate whether and how ex-ante liquidity risk affects realized stock returns during the global financial crisis of 2008–2009 in international equity markets. We find that stocks with higher pre-crisis return exposure to global market liquidity shocks experience larger price reductions during the crisis period. Our findings provide further insight into the comprehensive picture of the effect of liquidity risk on asset prices, especially in an international context and under different market conditions.     

The impact of forced divestments on parent company stock prices: Buy on the rumor,sell on the news?

We measure how warnings of expropriation and forced divestments of private property affect the stock prices of parent companies. We use a unique database of 116 events in 12 countries from 2005 to 2013. Our results show that different types of warnings have significant negative effects on stock prices, and the largest effect is from a warning that takes the form of a transitory permit revocation. In the case of forced divestments, we find a significant negative impact when a permit is permanently revoked. However, nationalizations are associated with a positive market reaction.     

Seeking causality between liquidity risk and credit risk: TED-OIS spreads and CDS indexes

Since the Global Financial Crisis, credit risk and its management have become one of the most appealing topics in finance literature. In this study, we investigate the interaction of credit risk and liquidity risk through the TED and the OIS spreads and various credit default swap indexes from the CDX and the iTraxx family (CDXIG, CDXHY, ITEEU, and ITEXO). The empirical analysis is conducted through the Kapetanios unit root test, the EGARCH model, the Bootstrap Toda-Yamamoto modified Wald test and the asymmetric causality analysis. The results of symmetric and asymmetric causality methods reveal that liquidity risk appears to play an important role in credit risk, and in most cases, the TED and the OIS spreads dominate the CDS indexes. It can, thus, be concluded that the TED and the OIS spreads are superior to the CDS indexes as an early warning indicator in the credit market.     

Have SFAS 166 and SFAS 167 improved the financial reporting for securitizations?

Critics have alleged that securitization accounting prior to 2010 was among the causes of the recent financial crisis. In response to this criticism, the Financial Accounting Standards Board (FASB) implemented two new accounting standards, SFAS 166 and SFAS 167, to improve the financial reporting for securitizations. Bank regulators have stated their belief that SFAS 166/167 will result in a consolidated balance sheet (and risk-based capital ratios based thereupon) that better reflects a bank's exposure to risk related to securitized assets. We document that, by ceding retained power or influence through the servicing/special servicing functions to third parties, SFAS 166/167 resulted in real effects to the extent that banks (particularly those that were weakly capitalized) achieved their accounting objectives in the post-SFAS 166/167 period through legitimate transaction structuring in line with the intent of the new rules. Further, we use capital market participants’ assessments of risk retention by sponsoring banks as a benchmark, and provide evidence consistent with bank regulators’ beliefs. In particular, following SFAS 166/167, equity investors of sponsoring banks do not consider (consider) as risk relevant securitized assets that receive off-balance sheet (on-balance sheet) treatment. Securitized assets that are consolidated under SFAS 166/167 exhibit the same risk relevance as assets that are not securitized, despite contractual provisions that would seem to imply substantial risk transfer.     

Environmental,social, and governance practices and perceived tail risk

Using the implied volatility smirk on individual equity securities to measure perceived tail risk, we find that better environmental, social and governance (ESG) practices significantly reduce ex-ante expectations of a left-tail event. Our findings are robust to using multiple model specifications and to adjusting for potential endogeneity concerns. We also show that, while practices in each ESG pillar are important in reducing perceived tail risk, the environmental pillar plays the most important role. Our results indicate that investors consider strong ESG practices to be insurance against left-tail events rather than wasteful investment borne out of managers’ own values or self-interest.     

Beta and firm age

We document a robust pattern of beta declining over the age of a firm. We find that changes in systematic risk via firm characteristics and life-cycle stages are insufficient to explain this pattern. Moreover, standard proxies for the quantity and quality of information also explain this pattern only partially. To fully explain this pattern we rely on the increasingly important role of familiarity in financial decision making: familiarity is a determinant of beta and firm age is a proxy for the degree of familiarity that investors feel toward individual stocks. To illustrate the implication of our findings, we document that when we control for firm age there is support for the CAPM and its use as an input for the cost of equity capital calculation.     

Investigating tail-risk dependence in the cryptocurrency markets: A LASSO quantile regression approach

We construct the complete network of tail risk spillovers among major cryptocurrencies using the Least Absolute Shrinkage and Selection Operator (LASSO) quantile regression. We capture important features of the network, including major risk-driving and major risk-receiving currencies, and the evolution of the tail dependence among the currencies over time. Importantly, we reveal a striking finding that the right tail dependence among the cryptocurrencies is significantly stronger than the left tail counterpart. This unique characteristic may have contributed to the rise in popularity of cryptocurrencies over the last few years. Our portfolio analysis reveals that diversification in cryptocurrency investment can be accomplished simply by employing the naïve equal-weighted scheme even when transaction costs are taken into account.