From Fiduciary Duty to Impact Fidelity: Managerial Compensation in Impact Investing

Journal of Business Ethics - Investors with standard monetary preferences will give a fund manager incentives to increase firm profits, which can be achieved through a share in profits via carried...     

Modern Monetary Theory: The Right Compass for Decision-Making

In the November/December 2021 issue of Intereconomics, Françoise Drumetz and Christian Pfister examine Modern Monetary Theory (MMT) and approach it from the policy consequences that would follow. This paper is a reply to Drumetz and Pfister. It restates the core of MMT and offers some suggestions for central banks. Theories are explanations of what we see, and MMT describes money creation and destruction. Hence, MMT cannot be and is not a political manifesto. In contrast to most other theories of money, MMT is falsifiable in its core statements, which are based on a balance sheet approach to macroeconomics. Since many central banks already educate the public about the creation of modern money through bank lending, it would be most welcome if they would do the same for the creation of modern money through government spending. Here, MMT and central bankers can find common ground to move forward and leave the theory of loanable funds and that of the money multiplier behind.

     

Co‐integration Rank Determination in Partial Systems Using Information Criteria

We investigate the asymptotic and finite sample properties of the most widely used information criteria for co‐integration rank determination in ‘partial’ systems, i.e. in co‐integrated vector autoregressive (VAR) models where a sub‐set of variables of interest is modelled conditional on another sub‐set of variables. The asymptotic properties of the Akaike information criterion (AIC), the Bayesian information criterion (BIC) and the Hannan–Quinn information criterion (HQC) are established, and consistency of BIC and HQC is proved. Notably, the consistency of BIC and HQC is robust to violations of weak exogeneity of the conditioning variables with respect to the co‐integration parameters. More precisely, BIC and HQC recover the true co‐integration rank from the partial system analysis also when the conditional model does not convey all information about the co‐integration parameters. This result opens up interesting possibilities for practitioners who can now determine the co‐integration rank in partial systems without being concerned about the weak exogeneity of the conditioning variables. A Monte Carlo experiment based on a large dimensional data generating process shows that BIC and HQC applied in partial systems perform reasonably well in small samples and comparatively better than ‘traditional’ methods for co‐integration rank determination. We further show the usefulness of our approach and the benefits of the conditional system analysis in two empirical illustrations, both based on the estimation of VAR systems on US quarterly data. Overall, our analysis shows the gains of combining information criteria with partial system analysis.     

Three decades of research on corporate governance and R&D investments: a systematic review and research agenda

This paper reviews and systematizes the empirical research on the nexus between corporate governance (CG) and investments in research and development (R&D) published in leading business, management, economics and finance journals over the past 30 years. We find that CG is key in shaping R&D investments. Moreover, the effects of both firm- and country-level CG are important for both internal and external R&D investments. Drawing on our review, we welcome future studies to examine the effect of the interplay between various CG mechanisms and different types of R&D investments, and possibly identify mediating variables besides the moderating ones. Moreover, we highlight the need for future interdisciplinary studies, as well as investigations of private companies and across developing countries. Whenever causal interpretations are attempted, both sample selection and endogeneity problems should be addressed, along with testing the CG-R&D investment nexus for nonlinear dynamics. The implications of the study for both theory and practice are also discussed.     

Sensitive Survey Questions: Measuring Attitudes Regarding Female Genital Cutting Through a List Experiment

Potential bias in survey responses is higher if sensitive outcomes are measured. This study analyses attitudes towards female genital cutting (FGC) in Ethiopia. A list experiment is designed to elicit truthful answers about FGC support and compares these outcomes with the answers given to a direct question. Our results confirm that the average bias is substantial as answers to direct questions underestimate the FGC support by about 10 percentage points. Moreover, our results provide suggestive but not statistically significant evidence that this bias is more pronounced among uneducated women and women targeted by an NGO intervention (not randomly assigned).     

Investment opportunities and R&D investments in family and nonfamily firms

The firm’s investment opportunity set (IOS) reflects the prospective growth opportunities related to physical and human capital investments. IOSs are largely firm specific, embedded in assets-in-place, or generated by experience curves, learning-by-doing, and other similar phenomena. However, the value of an IOS can be destroyed if a firm does not exercise the option to invest. In this study, we theorize that a firm’s ability to invest in R&D is conditional on the availability of a favorable IOS. We test our theoretical propositions in the European business environment using a sample of large publicly traded firms with concentrated ownership. Our findings support the notion that the IOS is a significant determinant of corporate R&D investments, but the magnitude of this effect depends on the identity of the ultimate owner. Specifically, the sensitivity of R&D investments of family- and state-owned corporations is higher to favorable IOS than that of widely held corporations, suggesting these firms are more responsive to favorable IOS than others. By introducing the IOS dimension, our results have interesting implications for both theory and practice.     

Debt Relief as a Last Resort for the Lender of Last Resort?

The coronavirus crisis has led to a sharp increase in the debt-to-GDP ratios of the euro area member states. Without external support, access to the capital market could be seriously threatened in the medium term for Italy, but also for other member states. While the Pandemic Emergency Purchase Programme, which is designed as a monetary policy instrument, is regarded by some as a violation of the prohibition of monetary financing, the Next Generation EU recovery fund is likely to direct the fundamental structures of the European Union towards a fiscal union with considerable redistribution elements. This article analyses an alternative strategy, namely debt relief by the European System of Central Banks through an EU debt agency. Such a scheme would be possible without amending the EU treaties and would avoid negative equity at the central banks. The question is under what circumstances would this approach be suitable and proportionate?

     

Inflation Risk?

Intereconomics - Inflation is on the rise again in the industrialised world. This has led to fears of a sustained surge in inflation. This article argues that while such fears may make sense in the...     

Excess corporate payouts and financial distress risk

Firms that follow excessive payout policies (over-payers) are higher on the financial distress spectrum and have lower survival rates than under-payers. In addition, over-payers endure lower future sales and asset growth than under-payers and experience negative abnormal returns in the bond and stock markets. Exogenous import tariff reductions and commodity price jumps reduce the likelihood of overpayment. We interpret this as evidence consistent with financial flexibility considerations, rather than risk-shifting, explaining the decision to overpay. We also find that CEO overconfidence and catering incentives affect overpayment.