Capital controls in Brazil: Effective?

A large theoretical literature emerged in recent years analyzing the positive and normative effects of capital controls, begging for empirical studies to validate it. No emerging market experimented as actively with controls on capital inflows as Brazil did since late 2009. This paper analyzes the impact of those measures. These policies had some success in segmenting the Brazilian from global financial markets, as measured by the spread between onshore and offshore dollar interest rates, as well as ADR premia relative to the underlying local stocks. The measures adopted from late 2009 to mid-2011 did not translate into significant changes in the exchange rate, suggesting limited success in mitigating exchange rate appreciation. However, the exchange rate strongly depreciates after a tax on the notional amount of derivatives is adopted in mid-2011. The last of the three restrictions studied may have depreciated the Brazilian real in the range from 4 to 10 percent. That strong response may have been driven by complementarities with the previous measures, as well as an unexpected easing in monetary policy.     

Do dividend initiations signal a reduction in risk? Evidence from the option market

We investigate whether dividends convey information about the risk of a company by examining the reaction of implied volatility in the option market to the announcement of a dividend initiation. Implied volatility decreases after the announcement and the magnitude of the decline in volatility is positively related to both the magnitude of cumulative abnormal returns (CAR) in the equity markets and the size of the dividend. Additionally, firms with weaker (stronger) corporate governance experience larger (smaller) declines in implied volatility. Cross sectional analysis shows that a one-standard deviation decline in measures of risk increases the 2-day CAR by 74–137 basis points. Our results suggest that dividend initiations signal declining firm risk.     

Do Public Banks Compete with Private Banks? Evidence from Concentrated Local Markets in Brazil

We measure the competitive effect of public banks in concentrated local markets in Brazil using branch location patterns. We employ variation in market size, number, and identity of competitors to determine how the conduct of private banks is affected by the entry of a public bank. We find that the market size needed to sustain a private bank branch is 35% larger if a private competitor is present and is not significantly affected by the presence of a public bank. These results suggest that the presence of a public bank does not affect conduct of private banks.     

Risk Analysis in Capital Budgeting Contexts Simple or Sophisticated?

The aim of this paper is to report findings from a comprehensive UK survey which covered a wide range of risk handling issues in capital budgeting. The results provide a clear and up-to-date picture of the current practices of risk analysis within 146 large companies. In addition, the relationships between some risk analysis practices and other firm characteristics were explored. Their implications for theory and management, and some possible suggestions to bridge the gap between theory and practice, are discussed.     

Are capital controls in the foreign exchange market effective?

One of the reasons for governments to employ capital controls is to obtain some degree of monetary independence. In this paper we test whether capital controls can reduce the link between exchange rates fluctuations and cross border interest differentials. Recent capital control proxies are used in order to determine the date of capital account liberalization for a panel of Western European and emerging countries. Results show that capital controls have a very limited effect on observed deviations from interest parities, even when accounting for the political risk associated with capital controls.     

Does Board Independence Matter in Companies with a Controlling Shareholder?

A number of studies have reported value discounts for listed companies in countries that provide weak legal protection to minority shareholders. Such studies typically attribute these discounts to the ability, and the well‐documented tendency, of controlling shareholders to extract a disproportionate share of corporate resources for “private benefits.” This tendency and the resulting discounts create a dilemma for those controlling shareholders intent on maximizing value for not just themselves, but all shareholders: How can such controlling shareholders assure their minority shareholders that they will not exploit their power to expropriate resources and so eliminate the discount from their companies' shares? This article investigates the possibility that such discounts can be reduced by appointing boards of directors made up of individuals who are independent of the controlling shareholders. Based on the systematic analysis of some 800 companies representing 22 countries, the authors' recent study reports that corporate values are consistently higher when boards are more independent of controlling shareholders—and that this relationship is especially strong in those countries that afford fewer rights to minority shareholders. What is likely to cause controlling shareholders to appoint more independent directors—a change that, after all, effectively limits the controlling shareholders' power and “degrees of freedom”? The answer provided by the authors is that board independence is most likely to be pursued by companies with controlling shareholders that also have major growth opportunities that must be funded mainly with outside equity.     

What counts as a reasonable extent? – a systems approach for understanding fire safety in Sweden

Swedish legislation requires that any owner or user of a building maintain a reasonable level of fire protection measures to ensure the safety of all people located in the building. If a building, in the wake of a fire, in court is determined not to have had a reasonable fire protection, the blame will likewise be assigned to the building owner or user. Using the perspective of risk governance, this study aims at analysing how regulation and stakeholders interact to maintain a specific level of fire protection in hotels. The focus is on identifying problems and frictions that have emerged from the complex relationships, and differences of interests, between the different stakeholders. Based on a stakeholder analysis, 11 respondents were selected for an interview study. The main problems identified in the analysis are that there are ambiguities for the individual hotel owner to know whether her or his fire protection measures are reasonable according to the law, that the system has emerged without clear political goals, problems related to the process of local supervision, that the ambiguous situation gives rise to opportunities of other stakeholders to claim the definition of what counts as a reasonable extent, and the ethical problems associated with convicting a single individual for failure in a complex multi-actor system.     

What Matters in Venture Capital? Evidence from Entrepreneurs’ Stated Preferences

We study how entrepreneurs evaluate the ability of different US venture capitalists (VCs) to add value to start-up companies. Analyzing a large data set of entrepreneurs’ stated preferences regarding VCs, we demonstrate that entrepreneurs view independent partnership VCs more favorably than other VC types (e.g., corporate, financial, and government sponsored VCs). Although entrepreneurs are able to correctly identify VCs with better track records, they do not believe them to be more desirable investors. We also find that an entrepreneur's rankings are affected by their overall exposure to VCs, emphasizing the role of experiential learning in the venture capital market.     

Can a stock exchange improve corporate behavior? Evidence from firms' migration to premium listings in Brazil

Because Brazil's legal system lacked protection for minority shareholders and trading of Brazilian shares flowed to U.S. exchanges, in 2001 the São Paulo Stock Exchange, Bovespa, created three premium exchange listings that require more stringent shareholder protections. This paper examines the effects of a commitment to improved corporate disclosure and governance by firms' voluntary migration to these premium listings. Our analysis finds that a firm's migration brings positive abnormal returns to its shareholders, particularly when its shares did not have a prior cross-listing on a U.S. exchange and also when the firm chooses a premium listing with the highest standards. Migration to a premium listing also leads to a significant increase in the trading volume of non-voting shares. Firms that choose a premium listing tend to have growth opportunities that they finance with subsequent seasoned equity offerings. These results suggest that a premium listing is a mechanism for bonding to improved corporate behavior that can be less costly than cross-listing on a U.S. exchange.     

How does Monetary Policy Influence Capital Markets? Using a Threshold Regression Model

This study indicates that the effects of interest rate changes on stock prices could be twofold and that the net effect is determined by which effect is dominant. The study employs a threshold regression model to see if, before and after the central banks cut the interest rates, there is a nonlinear relation between interest rates and the stock index. Based on traditional economic theory, stock prices should be inversely related to interest rates. However, the present study finds that as interest rates start to increase or decrease, the stock index prices are significantly and positively related to the interest rates. The changes in interest rates affect stock indexes inversely only after interest rates have crossed a certain threshold. The inverse U-shaped relationship between interest rates and stock indexes differs from the traditional wisdom. It could make interest rates more valuable in forecasting stock indexes, and it holds implications for monetary policies of central banks. To avoid the spurious regression problem, this study uses a cointegration test and an error correction model to confirm the results from the threshold regression model and finds that there is a significant cointegration relationship before and after central banks cut interest rates.     

Are you in with the in crowd?

At the core of your company, there is a group of people who seem to call the shots--or, rather, all the shots seem to be called for their benefit. This core group can't be found on any organization chart. It exists in people's hearts and minds. It comprises the people whose perceived interests and needs are taken into account as decisions are made throughout the organization. In most companies, talking explicitly about this group is taboo; its existence seems to contradict the vital corporate premise that we all have a common stake in the firm's success. In the best organizations, the core group can be a resource: Members represent the unique values and knowledge that distinguish their companies. When core groups display independence, creativity, and power, the rest of the company follows. Such behavior on the part of the company, in turn, creates value for shareholders, especially over the long term. But because of the core group's enormous power, members need to make themselves aware of the signals they send, both intended and unintended. For better and for worse, the core group reinforces whatever it pays attention to. A core group member who casually mentions a product might well discover three weeks later that someone has spent $1 million introducing it. If you do not know who constitutes the core group in your organization, or what the members stand for, you may find that leading will be extremely difficult--even if you are ostensibly the person in charge. If you want to move the organization in a new direction, you may need to explicitly challenge the core group. Otherwise the rest of the organization will not go along.     

Freeing Greece from capital controls: Were the restrictions enforced in time?

Recent developments in Greece have caused for the implementation of banking capital controls on the outflow of funds, a policy decision not uncommon, especially in emerging markets. However, the issues of the Greek economy, which seem to stem from the public sector but have been passed on to the banking sector, pose a unique challenge to researchers. In this paper, we employ VBanking, an object-oriented model for banking simulations to examine whether capital controls in Greece were enforced at the appropriate time. Additionally, we propose that the banking sector will not purge this regulation soon. Finally, we demonstrate the destructive effects of capital controls both on the financial system and on the real economy. We present the empirical results of our work, which suggest that the Greek authorities’ response to the deterioration of the banking sector was lagged.     

Does Social Capital Matter in Corporate Decisions? Evidence from Corporate Tax Avoidance

We investigate whether the levels of social capital in U.S. counties, as captured by strength of civic norms and density of social networks in the counties, are systematically related to tax avoidance activities of corporations with headquarters located in the counties. We find strong negative associations between social capital and corporate tax avoidance, as captured by effective tax rates and book‐tax differences. These results are incremental to the effects of local religiosity and firm culture toward socially irresponsible activities. They are robust to using organ donation as an alternative social capital proxy and fixed effect regressions. They extend to aggressive tax avoidance practices. Additionally, we provide corroborating evidence using firms with headquarters relocation that changes the exposure to social capital. We conclude that social capital surrounding corporate headquarters provides environmental influences constraining corporate tax avoidance.     

Were Modern Capital Structure Theories Valid in Belgium Before World War I?

Abstract:  This study investigates whether modern theories can explain capital structure in a historical environment which was characterized by poor investor protection, booming stock markets and strong banks, and in which taxes did not affect leverage. Our results, based on a unique, hand-collected sample of 556 firm-year observations for 129 listed companies in Belgium before World War I, are remarkably similar to findings for present-day samples. Leverage was positively related to asset tangibility, firm size and firm age, and it was negatively related to profitability and prior stock returns. Bank relationships were associated with lower leverage.     

Accounting for preference dependency in target costing – a note

Review of Quantitative Finance and Accounting - Target costing is a well-established strategic cost management tool in theory and practice. The original target costing model implies independence of...     

Transition to IFRS and compliance with mandatory disclosure requirements: What is the signal?

The present study examines 153 Greek listed companies' compliance with all IFRS mandatory disclosure requirements during 2005 and complements and extends prior literature in the following way. The unique setting i.e., measuring compliance with IFRS mandatory disclosure requirements during the first year of IFRS implementation, allows for examination of the possibility that the changes in the 2004 shareholders' equity and net income, as a result of the adoption of IFRS, constitute explanatory factors for compliance. Thus, this study hypothesises that, in addition to the financial measures and other corporate characteristics that prior literature identifies as proxies for explaining compliance, a significant change in fundamental financial measures, because of the change in the accounting regime, may also explain compliance based on the premises of the relevant disclosure theories. The findings confirm these hypotheses. This study also makes a methodological contribution on measuring compliance with all IFRS mandatory disclosure requirements by using two different disclosure index methods and pointing out the different conclusions may be drawn as a result.     

Investing in gold – Market timing or buy-and-hold?

The literature on gold is dominated by empirical studies on its diversification, hedging, and safe haven properties. In contrast, the question “When to invest in gold?” is generally not analyzed in much detail. We test more than 4000 seasonal, technical, and fundamental timing strategies for gold and find evidence for some market timing ability and economic gains relative to a passive buy-and-hold benchmark. However, since the results are not robust to data-snooping biases and limited to specific evaluation periods, we conclude that our findings support the efficiency of the gold market.