State uncertainty in stock markets: How big is the impact on the cost of equity?

We propose a novel Bayesian framework to incorporate uncertainty about the state of the market. Among others, one advantage of the framework is the ability to model a large collection of time-varying parameters simultaneously. When we apply the framework to estimate the cost of equity we find economically significant effects of state uncertainty. A state-independent pricing model overestimates the cost of equity by about 4% per annum for a utility firm and by as much as 3% for industries. We also observe that the expected return, volatility, risk loading, and pricing error all display state-dependent dynamics that coincide with the business cycle. More interestingly, the forecasted market and Fama–French factor risk premiums can predict the future real GDP growth rate even though the model does not use any macroeconomic variables, which suggests that the proposed Bayesian framework captures the state-dependent dynamics well.     

Does it pay to be socially connected with wall street brokerages? Evidence from cost of equity

We show that social connections between a firm's executives and directors and brokerages that follow the firm decrease the firm's cost of equity. We use quasi-natural experiments to address endogeneity concerns and find that the uncovered effect of firm-brokerage social connections on cost of equity is likely causal. The effect is found to be more pronounced for firms with more soft information, opaque information environments, tight financial constraints, weak corporate monitoring, or high executive equity ownership. Further, consistent with the evidence on cost of equity, we find that firm-brokerage social connections reduce SEO underpricing, decrease information asymmetry in stock markets, and improve the firm's equity valuation.     

Is it all about awareness? The normalization of coastal risk

Coastal risk is already high in several parts of the world and is expected to be amplified by climate change, which makes it necessary to outline effective risk management strategies. Risk managers assume that increasing awareness of coastal risk is the key to public support and endorsement of risk management strategies – an assumption that underlies a common worldview on the public understanding of science, which has been named the deficit model. We argue that the effects of awareness are not as straightforward. In particular, awareness of coastal hazards might not lead to more technically accurate risk perceptions. Based on research on risk perception normalization, we explored the hypothesis that coastal risk awareness reduces coastal risk perception – in particular the perceived likelihood of occurrence of coastal hazards – through its effect on reliance on protective measures to prevent risk. Individuals can rely on protective measures, even when those are not effective, as a positive illusion to reduce risk perception. This effect might be stronger for higher probability hazards and for permanent residents of costal zones. Data from 410 individuals living in coastal zones corroborated most of our expectations. Global results demonstrated a risk normalization effect mediated by reliance on current measures. Additional analyses made clear that this effect occurred in 2 of the 5 high-probability hazards (flood and storm), and not in the low-probability hazard (tsunami). Normalization might be more likely among high-probability hazards which entail catastrophic and immediate impacts. This effect was also found among permanent residents, but not among temporary residents. Results imply that coastal risk management might benefit from (a) taking risk perception normalization effects into account, (b) tailoring strategies for permanent and temporary residents and (c) promoting a higher public engagement, which would facilitate a more adaptive and effective coping with coastal risk than the use of positive illusions.     

How do banks price liquidity? The role of market power.

We empirically examine the effects of different measures of liquidity on interest margins of a sample of U.S. commercial banks from 2001 to 2018. Overall, the results reveal that liquidity ratios exert a positive influence on bank margins. Furthermore, the study investigates the role of market power in the relationship between liquidity and interest margins. It is documented that dominant banks incorporate the costs associated with investing in liquidity into the bank margins to a lesser extent than banks with less market power, suggesting that the cost of complying with regulatory liquidity standards is reduced when the competition in the banking sector is less intense. The study highlights that market competition might be important in the design and implementation of liquidity regulations.     

How do firms finance their investments?: The relative importance of equity issuance and debt contracting costs

This paper examines the financing decisions of firms in response to changes in investments and profits. We find that information frictions play important roles in firms' financing decisions. However, we find no evidence that asymmetric information about the value of a firm's assets causes equity to be used only as a last resort. Indeed equity is the predominant source of finance in situations, such as profit shortfalls, investment in intangible assets, and internally generated growth opportunities, where informational asymmetries and agency costs are likely to be high. We also find that firms respond asymmetrically to positive and negative profit shocks. In financing fixed assets, high asymmetric information firms use more short-term debt and less long-term debt, whereas firms with high potential agency problems use significantly more equity and less long-term debt and cash.     

How much is reasonable? The size of termination fees in mergers and acquisitions

We investigate termination fee size in mergers. Although the deal premium does not significantly affect fee size, smaller targets and targets with lower institutional ownership offer larger fees. Low or moderate fees do not eliminate post-announcement competing bids, while large fees do. Fee size is generally positively correlated with deal completion. However, large fees are negatively correlated with the consummation of high-premium deals. Fee size is generally unrelated to announcement-date cumulative abnormal returns. However, returns are significantly lower for deals including fees larger than 5%. Overall, the study provides evidence that low- or moderate-size fees serve as efficient contractual devices, while large fees are less beneficial to shareholders and therefore tend to suggest agency conflicts.     

Game changer? The impact of the VW emission-cheating scandal on the interrelation between large automakers’ equity and credit markets

This paper investigates the change in the securities market pricing behavior of 16 large, global automakers following disclosure of the Volkswagen (VW) emission-cheating scandal on September 18, 2015, when the EPA issued a notice of violation to VW, stating that VW had intentionally circumvented the US clean air rules for diesel automobile emissions. We contend that this event unblocked an informational cascade, in that much of the information was already known to outside parties, yet no significant market response occurred until the September 18 EPA notice. We also find a significant change in the evolution of equity and credit default swap (CDS) prices in the automobile industry consistent with more-informed trading in the equity market. A test of economic significance further supports this finding by showing a decrease in the profitability of a trading rule based on a predictive relation between CDS spread changes and lagged equity returns.     

The high-frequency impact of news on long-term yields and forward rates: Is it real?

Macroeconomic news announcements move yields and forward rates on nominal and index-linked bonds and inflation compensation. This paper estimates the reactions using high-frequency data on nominal and index-linked bond yields, allowing the effects of news announcements on real rates and inflation compensation to be parsed far more precisely than is possible using daily data. Long-term nominal yields and forward rates are very sensitive to macroeconomic news announcements. Inflation compensation is sensitive to announcements about price indices and monetary policy. However, for news announcements about real economic activity, such as nonfarm payrolls, the vast majority of the sensitivity is concentrated in real rates. Accordingly, most of the sizeable impact of news about real economic activity on the nominal term structure of interest rates represents changes in expected future real short-term interest rates and/or real risk premia rather than changes in expected future inflation and/or inflation risk premia. Such sensitivity of real rates to macroeconomics news is hard to rationalize within the framework of existing macroeconomic models.     

Liquid asset sheltering,or cost of capital? The effect of political corruption on corporate cash holdings

I posit that political corruption affects firms through an entrenchment between entrepreneurs and politicians instead of coercive extortion. Based on this postulate, I refute the claim that firms in a more corrupt environment hold less cash due to liquid assets sheltering from political extraction. Instead, I propose that firms in a more corrupt environment hold less cash because of the high cost of capital. In fact, I find that firms in more corrupt countries hold cash beyond their optimum for the given cost of carry due to severe financial constraints. This excess cash results in value destruction. I call this phenomenon the financial effect of corruption. Thus, I challenge the conventional wisdom and argue that the effects of political corruption on corporate cash holdings are primarily indirect through financial mechanisms.     

Call it good,bad or no news? The valuation effect of debt issues

Studies investigating market reactions to changes in capital structure aim to find the impact of private information conveyed. However, these studies ignore that financial decisions are not made randomly but are conditional on managers’ private information. Using a sample of U.S. leverage‐increasing public companies with public long‐term debt offerings, we find that debt offerings convey no new information to the markets after considering the conditionality of decisions. We also show that results can be biased if the deterministic role played by private information ex ante is omitted, which may explain the conflicting valuation evidence found in the literature.     

The Fed and short-term rates: Is it open market operations,open mouth operations or interest rate smoothing?

It is widely believed that the Fed controls the federal funds rate by altering the degree of pressure in the reserve market through open market operations when it changes its target for the funds rate. Recently, however, several analysts have suggested that the Fed need not conduct open market operations to change the funds rate. Rather, they argue it is sufficient that the Fed indicate its desire for the funds rate. This paper notes that there is yet a third alternative, the interest-rate-smoothing hypothesis, that suggests that the Fed does not move rates per se but, rather, smooths the transition of rates to the new equilibrium required by economic shocks. This paper tests the open market and open mouth alternatives using a methodology first used by Cook and Hahn [Journal of Monetary Economics (1989a) 331]. Finding no evidence that either open market operations or open mouth operations can account for the close relationship between the funds rate and the funds rate target, a variety of evidence consistent with the interest-rate-smoothing hypothesis is considered. The results suggest that many changes in the Fed’s funds rate target are an endogenous response to economic events and suggest that an alternative way to identify exogenous changes in policy is to identify exogenous changes in the Fed’s funds rate target.     

How wide is the gap between IASC and U.S. GAAP? impact of the IASC comparability project and recent international developments

The objectives of this paper involve determining the significant areas of difference between International Accounting Standards (IASs) and U.S. GAAP following the IASC’s Comparability Project and the most recent IASC and FASB projects on these issues. In addition, the paper assesses the consistency of U.S. practice with the IASs revised via the Comparability Project. For this purpose, the 1996 annual reports of 38 large multinational U.S. companies are examined and an empirical analysis of reporting practices is carried out. Finally, the remaining gap between IASs and U.S. GAAP is evaluated and policy implications are considered for the IASC and FASB. It is concluded that while there are still some significant issues to be resolved, notably relating to the determination of net profit/loss for the period, research and development, changes in foreign exchange rates, and business combinations, these differences are not insurmountable.     

Does the source of uncertainty matter? The impact of financial,newspaper and Twitter-based measures on U.S. banks

This study examines if the source of uncertainty (newspaper, Twitter, financial market) matters in its impact on bank stock returns in the United States. By applying discrete wavelet transformation, we model directional spillovers and Granger causality between uncertainty and bank returns for different time horizons. Our results demonstrate that this distinction between time horizons is crucial. Although newspaper and Twitter-based measures are correlated, they capture a different source of investor perception. Twitter-based uncertainty adversely affects bank stocks in the short run, while newspaper-based policy uncertainty is relevant in the medium run. Financial-based uncertainty, VIX, is the most important factor. Moreover, we find that the impact of uncertainty on bank returns is stronger during the COVID-19 pandemic and for banks with a high ratio of loans to total assets and large off-balance-sheet activities.     

Single-equation,multiple-regression methodology: Is it an appropriate methodology for the estimation of the structure-performance relationship in banking?

Tests of the structure-performance paradigm of the industrial organization literature have been carried out almost exclusively using a single-equation, multiple-regression methodology. The purpose of this paper is to suggest that where the firms being considered are multiple product in nature and may pursue objectives in addition to maximizing the value of the firm, such a methodology may be inappropriate. The results presented in this paper suggest that the absence of a consistently strong, positive, and statistically significant relationship between market concentration and bank profitability may be traced in part to such an inappropriate methodology.     

How is the IFRS for SME accepted in the European context? An analysis of the homogeneity among European countries,users and preparers in the European commission questionnaire

In this paper we analyze the answers to the “Questionnaire on the public consultation of the IFRS for SMEs”, promoted by the European Commission. Our aim is to evaluate the homogeneity among respondents, according to the different perspectives of analysis between both users, preparers and also in European Countries. Results show a substantial diversity among respondents. In particular, preparers demonstrate a strong opposition to the IFRS for SMEs, while users are more favorable. Concerning Country classification, German-speaking Countries and Latin Countries show much less appreciation for that standard with respect to Anglo − Nordic Countries. Relevant consequences for European public policy issues and for accounting studies on differential reporting arise from this result, concerning respectively the role of European accounting system and the acceptance of “user primacy” principle.