Depositors’ trust: Some empirical evidence from Indonesia

We develop a comprehensive index, based on Robbins and Judge’s (2008) five dimensions of trust, to measure depositors’ trust in individual banks as well as trust in the banking industry and financial safety net. Using a survey of 992 retail depositors in Indonesia, we find that trust in individual banks where depositors save their money is greater than trust in the overall banking industry and financial safety net. We also find that depositors’ trust is affected by personal characteristics—for instance, women and older depositors have relatively less trust. Depositors tend to put their trust in individual banks and the financial system if they have greater trust in information conveyed by the government. Religious and economic values have positive effects on depositors’ trust at both the micro and macro levels. Our results also document that risk-taking behavior is positively associated with depositors’ trust. Furthermore, we find that more-educated depositors have significantly less trust. This finding might imply that the erosion of market discipline by depositors in a country with relatively generous deposit insurance, such as Indonesia, can be mitigated through greater financial literacy.     

When do improved covariance matrix estimators enhance portfolio optimization? An empirical comparative study of nine estimators

The use of improved covariance matrix estimators as an alternative to the sample estimator is considered an important approach for enhancing portfolio optimization. Here we empirically compare the performance of nine improved covariance estimation procedures using daily returns of 90 highly capitalized US stocks for the period 1997–2007. We find that the usefulness of covariance matrix estimators strongly depends on the ratio between the estimation period T and the number of stocks N, on the presence or absence of short selling, and on the performance metric considered. When short selling is allowed, several estimation methods achieve a realized risk that is significantly smaller than that obtained with the sample covariance method. This is particularly true when T/N is close to one. Moreover, many estimators reduce the fraction of negative portfolio weights, while little improvement is achieved in the degree of diversification. On the contrary, when short selling is not allowed and T?>?N, the considered methods are unable to outperform the sample covariance in terms of realized risk, but can give much more diversified portfolios than that obtained with the sample covariance. When T?<?N, the use of the sample covariance matrix and of the pseudo-inverse gives portfolios with very poor performance.     

When does uncovered interest parity hold?

A consensus is emerging that returns to the currency carry trade are driven by two factors. One of these is probably consumption risk but there is widespread disagreement about the identity of the remaining factor. This paper bolsters the case for volatility being the unknown factor. A structural model that specifies that monetary volatility is the second factor is tested for 56 monetary regimes using the artificial economy methodology. The negative slope in the Fama regression arises when monetary volatility is low and the precautionary savings motive dominates the intertemporal substitution motive. When monetary volatility is high, the Fama slope is positive in line with uncovered interest parity. We conclude that, given the predominance of precautionary savings, the degree of monetary volatility explains whether uncovered interest parity holds.     

Does better capitalization enhance bank efficiency and limit risk taking? Evidence from ASEAN commercial banks

This paper assesses the dynamic causal relationships among bank risk, capital, and efficiency. Using a panel dataset of commercial banks in five ASEAN countries from 2005 to 2015, we employ panel vector autoregression analysis to take into account the endogeneity and interdependencies of these three variables while holding other shocks constant. We find that in general, better capitalized banks in ASEAN countries are more efficient and take less credit risk. However, high-efficiency banks tend to maintain low levels of capital, whereas low-efficiency banks have higher capital ratios. We also analyze the sensitivity of the relationships among capital, risk, and efficiency to ownership structure, bank size, and the periods before and after the 2008 crisis.     

When does analyst reputation matter? Evidence from analysts’ reliance on management guidance

We investigate the joint effects of analyst reputation, uncertainty and guidance news valence on analysts’ reliance on management guidance. We find that, compared to less reputable analysts, reputable analysts rely less on guidance when they issue earnings forecasts. This analyst reputation effect is stronger when earnings and information uncertainty are higher or when the guidance contains good news. Further analysis suggests that both reputable and less reputable analysts sacrifice their forecast accuracy when they rely less on guidance; however, reputable analysts are compensated to a greater extent by the increased informativeness of their forecasts. Finally, we find that analysts’ future career advancement is enhanced when their reliance is low.     

When does a firm disclose product information?

A firm chooses a price and the product information it discloses to a consumer whose tastes are privately known. We provide a necessary and sufficient condition on the match function for full disclosure to be the unique equilibrium outcome whatever the costs and prior beliefs about product and consumer types. It allows for products with different qualities as well as some horizontal match heterogeneity. With independently distributed product and consumer types, full disclosure is always an equilibrium and a necessary and sufficient equilibrium condition is that all firm types earn at least the full‐disclosure profit.     

When does relationship lending start to pay?

This paper empirically characterizes relationship lending using data from more than 20,000 loans of a Spanish bank to small and medium enterprises (SMEs). The study analyzes the pricing determinants of loans to firms based on the entire previous bank–firm relationship, allowing for the identification of nonlinear pricing patterns in the bank–firm relationship. We show that firms only start capitalizing the gains of relationship lending when the relationship extends beyond two years. This reduction in the loan rate spread charged is driven by the opaque firms, for which the acquisition of “soft” information is especially relevant. Finally, we find that relationship lending significantly mitigates the increased costs of refinancing loans along two dimensions: relationship duration and having additional contracts—other than loans—with the bank.     

When does low interconnectivity cause systemic risk?

We analysed a systemic liquidity crisis by using a unique money market data-set in which the coded identity of the counterparties of each trade is known. Contrary to recent findings, we did not observe a positive relationship between interconnectivity and systemic risk. We have concluded that our conflicting findings can be related to the degree of market concentration on the borrowing side of the funding market. High level of concentration in the borrowing side led to lower interconnectivity but higher systemic risk prior to the crisis. We conclude that measures of market heterogeneity should be used to generalize the relationship between systemic risk and interconnectivity.     

Does banking system transparency enhance bank competition? Cross-country evidence

There seems to be a consensus among regulators and scholars that in order to improve the functioning of a banking system it is necessary to raise the level of bank information disclosure. However, its influence on bank competition – which is an important factor affecting the efficiency and stability of the banking system – is left out of consideration. To test whether greater bank information disclosure is associated with both lower market power and lower concentration in the banking markets, we use country-level data covering the years 1998, 2001, 2005 and 2010. Our findings show that countries with higher levels of bank transparency have lower levels of bank concentration, while the link between transparency and market power is less pronounced. We also show that the reduction of competition due to stricter disclosure requirements depends on bank credit risks and the relationship is U-shaped.     

When does investor sentiment predict stock returns?

We examine the asymmetry in the predictive power of investor sentiment in the cross-section of stock returns across economic expansion and recession states. We test the implication of behavioral theories and evidence that the return predictability of sentiment should be most pronounced in an expansion state when investors' optimism increases. We segregate economic states according to the NBER business cycles and further implement a multivariate Markov-switching model to capture the unobservable dynamics of the changes in the economic regime. The evidence suggests that only in the expansion state does sentiment perform both in-sample and out-of-sample predictive power for the returns of portfolio formed on size, book-to-market equity ratio, dividend yield, earnings-to-price ratio, age, return volatility, asset tangibility, growth opportunities, and 11 widely documented anomalies. In a recession state, however, the predictive power of sentiment is generally insignificant.     

A multi-organizational cross-sectoral collaboration: empirical evidence from an ‘Empty Homes’ project

This paper analyses the processes, outcomes and tensions of a cross-sectoral collaborative venture involving several organizations with multiple logics and is based on empirical evidence from a collaborative ‘Empty Homes’ project. While, paradoxically, multiple logics are a basis for the partnership's existence (for example ‘value for money’ and local community benefit) to achieve these different aims simultaneously, its other aims or logics at times conflicted, resulting in intra-partnership tensions. Hence we offer novel insights into the practical aspects of collaboration at a local level and on multi-organizational relationships.     

Does fundamental indexation lead to better risk‐adjusted returns? New evidence from Australian Securities Exchange

We investigate the claims of superiority of fundamental indexation strategy over capitalisation‐weighted indexation using data for Australian Securities Exchange listed stocks. While our results are in line with the outperformance observed in other geographical markets, we find that the excess returns from fundamental indexation in Australian market are much higher. On a rolling 5‐year basis, the fundamental index always outperforms the capitalisation‐weighted index. Our results suggest that superior performance of fundamental indexation could not be entirely attributed to value, size or momentum effects. The outperformance persists even after adjusting for slightly higher transaction costs related to turnover.     

Trustee reputation in securitization: When does it matter?

We consider the role of trustees–who are nominated to protect the interests of investors–in securitization pricing and whether investors rely on them to mitigate risks. In particular, we examine the effect of trustee reputation on initial yield spreads of European mortgage‐backed security (MBS) issuances between 1999 and the first half of 2007. We find that engaging reputable trustees led to lower spreads during the credit boom period prior to the 2007–2009 financial crisis. Our findings suggest that trustees’ reputation was considered by investors to be more important when risk assessment became more challenging.     

When does the tone of earnings press releases matter?

The tone of a firm's financial disclosure is increasingly used as a variable in panel data regressions to predict future performance and explain investors' reaction at earnings announcement. We investigate when tone is informative, and argue that the informativeness of tone increases with the information asymmetry between firms and investors. Using a sample of over 50,000 earnings press releases of about 1800 U.S. public firms between 2004 and 2015, we find that firm growth, size, age, complexity and forecast inaccuracy are key drivers of tone informativeness. The effect is economically significant, since, compared to the reference case of a transparent firm, we find that the slope coefficient of tone doubles or even quadruples in panel data regressions when the firm operates in an environment with high information asymmetry.     

When does leverage hurt productivity growth? A firm-level analysis

In the wake of the global financial crisis, several macroeconomic contributions have highlighted the risks of excessive credit expansion. In particular, too much finance can have a negative impact on growth. We examine the microeconomic foundations of this argument, positing a non-monotonic relationship between leverage and firm-level productivity growth in the spirit of the trade-off theory of capital structure. A threshold regression model estimated on a sample of Central and Eastern European countries confirms that TFP growth increases with leverage until the latter reaches a critical threshold beyond which leverage lowers TFP growth. This estimate can provide guidance to firms and policy makers on identifying “excessive” leverage. We find similar non-monotonic relationships between leverage and proxies for firm value. Our results are a first step in bridging the gap between the literature on optimal capital structure and the wider macro literature on the finance-growth nexus.     

Does it matter where assets are held and income is derived? Further evidence of differential value relevance from Quebec

In this paper, we build on recent studies documenting an economic discount on firms located in the Canadian province of Quebec that seems to be associated with the political risk generated by the Quebec separatist movement (e.g., Graham, Morrill, & Morrill, 2005). We use information on firms’ economic activity in the province of Quebec as collected and published by the Quebec business newspaper Les Affaires for the period 1990–2008. We find that variables proxying for extent of operations in Quebec are associated with market-to-book multiples on book value and earnings.     

Farmers’ crop insurance perception and participation decisions: empirical evidence from Hunan,China

The measurement of risk perception and risk attitudes, and their link to actual risk behaviors have been extensively discussed. However, the potential impact of perception of risk management instruments on the decision to use those instruments has rarely been addressed. This article hypothesizes that the degree of perception of insurance contracts and participation decisions could have substantial mutual influence depending on the development of the market. An empirical work is carried out based on a survey of data for paddy rice farmers in Hunan Province, China. It shows that the sampled farmers’ crop insurance perception was surprisingly low despite years of pilot programs and tens of billions of expenditure in government subsidies. The result of simultaneous equations model indicates that crop insurance perception and participation are simultaneously determined and mutually improving. Moreover, empirical evidence indicates that the impact of crop insurance participation on perception is slightly stronger than that of perception on participation, and thus provides weak evidence of a ‘learning-by-doing’ stage in China at present. Together with evidence of substantial local disparities in perception, implications for the Chinese government in further cultivating the crop and rural insurance market are discussed.     

When does the dividend–price ratio predict stock returns?

If the dividend–price ratio becomes I(1) while stock returns are I(0), the unbalanced predictive regression makes the predictability test more likely to indicate that the dividend–price ratio has no predictive power. This might explain why the dividend–price ratio evidences strong predictive power during one period, while it exhibits weak or no predictive power at other times. Using international data, this paper demonstrates that the dividend–price ratio generally has predictive power for stock returns when both are I(0). However, this paper also shows that the dividend–price ratio loses its predictive power when it becomes I(1). The results are shown to be robust across countries.     

How does earnings management influence investor’s perceptions of firm value? Survey evidence from financial analysts

Survey evidence shows CFOs to believe that earnings management can enhance investor valuation of their firms. This evidence raises the question of correspondence between the beliefs of CFOs and investors. Surveying financial analysts to gain insight into how earnings management influences investor perception of firm value, we find analysts’ and CFOs’ beliefs to be generally consistent. We find that analysts perceive meeting earnings benchmarks and smoothing earnings to enhance investor perception of firm value and all earnings management actions to reach a benchmark, save share repurchases, to be value destroying. CFOs, however, are reluctant to repurchase shares, preferring to use techniques viewed by analysts as value destroying (e.g., reductions in discretionary spending). Analysts’ inability to unravel such techniques perhaps explains CFOs’ preferences.