Does economic policy uncertainty raise corporate precautionary cash holdings? Evidence from China

Using China as the research setting, this paper investigates the relationship between economic policy uncertainty and corporate precautionary cash holdings. Empirical results show a U-shaped relation between economic policy uncertainty and corporate precautionary cash holdings. Empirical analysis, in terms of ownership structure, firm size, corporate competitiveness and geographical location, further shows that (i) the effects for economic policy uncertainty in both state-owned and non-state-owned enterprises are significant, but the effect is stronger for state-owned enterprises; (ii) such significant effect is also found more strongly in small and medium-sized enterprises and highly competitive enterprises; and (iii) the effects for eastern, central and western China are all statistically significant, but the effect is strongest for eastern China.     

Does economic policy uncertainty matter for financial reporting quality? Evidence from the United States

Review of Quantitative Finance and Accounting - We examine the effect of economic policy uncertainty (EPU) on the financial reporting quality of US firms over 1999–2015. We use accruals-based...     

Does geopolitical uncertainty affect corporate financing? Evidence from MIDAS regression

This paper investigates the effect of geopolitical uncertainty on (market) leverage ratio, debt maturity, and choice of debt source. Using a new monthly index of geopolitical uncertainty and annual data for corporate financing variables, we find that under geopolitical uncertainty firms tend to reduce debt and increase market leverage. We argue that this increase is driven by asymmetrical reductions in the numerator (total debt) and the denominator (total debt and equity) of the leverage ratio. Under geopolitical uncertainty, firms tend to shorten their debt maturity structure and—especially those firms with lower credit quality—to substitute bank debt for public debt.     

How does economic policy uncertainty affect the bitcoin market?

This paper examines how economic policy uncertainty (EPU) impacts the Bitcoin (BTC) markets denominated in local currencies. We take BTC against British Pound (GBP) and the United States dollar (USD) as examples and construct the value-weighted BTC/GBP and BTC/USD composite indices. Our results show that the returns around the highest EPU days are significantly greater than those around the lowest EPU days. Further, the United States (US) EPU increases the volatility and trading volume of BTC after EPU spike days, whereas the United Kingdom (UK) EPU does not show such trends. Moreover, we observe a spillover effect for the US EPU to the UK BTC market. We further construct the dynamic conditional correlation (DCC)-GARCH model to test the dynamic correlation between EPU and BTC. Our results show that the effect of the US EPU on BTC/USD is greater than the effect of the UK EPU on BTC/GBP. Our empirical findings may provide insights for regulators to intervene in speculations in cryptocurrency markets effectively.     

Do Chinese firms speculate during high economic policy uncertainty? Evidence from wealth management products

It has been well-documented that policy-related uncertainty has significant economic consequences. Studies show that US firms tend to delay investments and be conservative during periods of high economic policy uncertainty (EPU), but findings regarding Chinese firms suggest that they seem to act speculatively. This study examines the impact of policy uncertainty on firms' bank wealth management product (WMP) purchasing and helps better understand firm behaviour during high EPU. Using Chinese listed firms' bank WMPs purchasing data, we find that high EPU is associated with a higher probability of bank WMPs being purchased. Moreover, a 100% increase in EPU is associated with an 11.14% increase in average bank WMP holdings in the sample. We provide evidence that Chinese firms are not speculative, but prudent, and use bank WMP holdings to hedge the risk of policy uncertainty. Additionally, we show that financial constraints are the channels through which EPU affects bank WMP holdings.     

Does economic policy uncertainty drive the initiation of corporate lobbying?

Economic policy uncertainty (EPU) raises firms' incentives to lobby policymakers to access policy information and influence policy outcomes. Surprisingly, we find that non-lobbying firms are less likely to initiate lobbying during periods of heightened EPU. The evidence is consistent with our time-varying barriers hypothesis that entry barriers to lobbying increase with EPU. We verify that the negative effect of EPU on lobbying initiation arises through the channels of lobbying entry expenses and returns to experience. Furthermore, lobbying entry expenses are not large, implying that the returns to experience channel is likely a more serious barrier preventing non-lobbying firms from initiating lobbying. We also find that facing high lobbying entry barriers, non-lobbying firms go for alternative political activities, such as hiring politically connected directors.     

Does independent directors’’ monitoring affect reputation? Evidence from the stock and labor markets

Using novel data on independent directors’ opinions in China, we investigate the stock and labor market effects prompted by independent directors publicly saying “no” to major board decisions. We find that the market reacts negatively to modified director opinions, but positively to firms interlocked with the directors who said “no.” We further find substantial turnover and decline in board seats after independent directors issue modified opinions. Overall, we identify a dilemma in China whereby the labor market does not reward vigilant directors for standing up to firm insiders, although investors add a premium to effective board monitoring.     

Does foreign investor demand for information affect forecast accuracy? Evidence from the Chinese stock markets

Prior international accounting studies have examined mainly the supply side of analyst research. Specific trading rights and financial reporting systems in China provide a unique opportunity to test both demand and supply factors of analyst information. For shares traded only by less-informed foreign investors, the increased information demand may create incentives for analysts to exert greater efforts than for shares traded by local investors. This study provides evidence that analyst effort (proxied by analyst coverage) and expertise (proxied by consensus cross-analyst forecast variability) affect forecast accuracy more significantly for shares traded by foreign investors than for shares traded by local investors. Additionally, I find that the relation between analyst characteristics and relative forecast accuracy is stronger for shares traded by the foreign investors. The findings are consistent with analysts responding to demands for information by less-informed investors.     

Does economic policy uncertainty affect cross-border M&As? —— A data analysis based on Chinese multinational enterprises

This paper analyzes the impact of economic policy uncertainty (EPU) of home and host countries on cross-border mergers and acquisitions (M&As) using EPU indexes and the amount and quantity of China's cross-border M&As in 21 countries from 2001 to 2017. First, we find that uncertainty in the economic policy of the home country drives cross-border M&As, uncertainty in the host country's economic policy significantly inhibits cross-border M&As, and when the economy is in a pro-cyclical period, alleviates the influence of the host country's economic policy uncertainty on M&As. Second, the impact of the host country's economic policy uncertainty on cross-border M&As differs before and after the financial crisis. The host country's economic policy uncertainty is positively correlated with cross-border M&As before the crisis and significantly negatively correlated with it after the crisis. Third, the impact of economic policy uncertainty in the home and host countries on cross-border M&as is significant in developed countries but not significant in developing countries finally, differences in bilateral uncertainty and bilateral market growth are significantly positively correlated with the scale of M&A     

Does economic policy uncertainty drive nonlinear risk spillover in the commodity futures market?

We propose the rolling tail-event driven network technique (RTENET) to measure the dynamic nonlinear tail risk spillover of 20 US commodity futures. In addition, we investigate the effect of economic policy uncertainty (EPU) on risk spillover based on quantile-on-quantile regression (QQR). We find that the risk spillover effect increases sharply and that the market is tightly connected when EPU is at a high level. Crude oil, silver and corn, the three greatest risk transmitters in the system, need more attention. More importantly, the effect of EPU on the risk spillover of the commodity futures market is asymmetric and heterogeneous. When the risk spillover falls within extremely high quantiles, a significant positive effect of EPU is observed. In addition, grain and soft crops are more sensitive to EPU. Our findings provide a reference for policy-makers and investors to manage commodity futures markets in different uncertainty periods.     

How do IMF announcements affect financial markets in crises?: Evidence from forward exchange markets

We employ a theoretical model to interpret the liquidity and moral hazard effects of IMF support during a financial crisis. We then estimate the response of forward exchange markets to IMF-related announcements, using data on the 3-, 9-, and 12-month forward exchange rates. Our results indicate that the announcement of IMF negotiations is associated with a premium on the baht and the rupiah, where the premium is much larger on the latter. This result is largely consistent with the responses of stock and bond markets, especially when country-specific data are employed.     

Does oil price uncertainty matter in firm innovation? Evidence from China

Inspired by the prevalence of firm innovation and substantial influence of international oil price uncertainty (OPU) on firm operation and decision-making, we investigate the influence of OPU on firm innovation. Using a sample of Chinese listed firms over the 2007–2019 period, our study reveals that OPU decreases firm innovation. This finding is consistent with the real options theory and the prospect theory. Mediation analysis shows that OPU could decrease firm innovation by increasing firms' financing constraints degree. Moreover, high-tech firms and those in highly competitive industries have fewer options to delay their innovation investments, we find that the adverse effects of OPU on their innovation are weaker. Finally, further analysis shows that government subsidies can help mitigate adverse effects of OPU on firm innovation. This paper reveals that OPU goes beyond the commonly known and understood regular indicator that shapes a firm's innovation activity and enriches firm-level evidence for the effects of OPU by highlighting the effects on long-term investment in intangible assets.     

Oil prices and economic policy uncertainty: Evidence from global,oil importers,and exporters’ perspective

Containing various information, economic policy uncertainty reflects significant rises and declines when facing shocks like financial crisis, oil-price change, and other specific economic or policy events. This paper empirically studies the interaction between oil prices and the newly formulated economic policy uncertainty indices using a time-varying parameter vector autoregression framework. Generally, the results of this study suggest that economic policy uncertainty reveals fluctuating responses to oil price shocks, while the oil price has a negative response to the uncertainty. The findings also reveal that the economic policy uncertainty indices for oil-importers and oil-exporters respond to oil price shocks differently. The oil price shock has a larger fluctuation to the economic policy uncertainty of oil-exporters than that of importers. Moreover, for the oil-exporters, the negative response to the oil price shock is greater than that of the oil-importing countries. This paper also discusses the impact of asymmetric shocks of oil price on economic policy uncertainty. In particular, after two financial crises, positive shocks decrease the uncertainty and vice versa. These findings are robustly verified.     

Does product market competition affect corporate governance? Evidence from corporate takeovers

We examine the extent to which shareholders strategically allow a weak governance structure in response to increasing competition pressures in the product market. We treat acquisitions by rival firms as shocks that increase threats in a competitive product market. We find that firms adopt greater entrenchment provisions when there are greater competition threats. Moreover, firms with high institutional ownership – especially by dedicated investors – and​ board independence within the compensation committee are particularly aggressive, which is consistent with our theory that aggressive behavior represents a strategic decision by shareholders. Finally, we find positive relationship between the adoption of entrenchment provisions and firm’s future performance, but only for the adoption under relatively severe competitive pressures.     

Does operating risk affect portfolio risk? Evidence from insurers' securities holding

This study empirically examines, in the setting of insurance companies, the hypothesis that investors facing more operating risk may behave as if they were more risk averse in investment decisions. Specifically, we study how operating risk from underwriting insurance policies affects insurers' risk taking behavior in their portfolio investments. We find that insurers with higher volatilities in underwriting incomes and cash flows are more conservative in their financial investment risk taking – they have lower credit risk exposure in their bond investments, as well as lower portfolio weights on risky bonds and equities. Further, insurers' portfolio risk exposure is sensitive to the risk of permanent underwriting income shocks but insensitive to the risk of transitory shocks. Transitory operating risk, however, is significantly related to portfolio risk when insurers face tight financing constraints. Our findings suggest a substitutive effect of operating risk on investment decisions by financial institutions.     

Does reporting quality affect systematic risk? Evidence from a regulatory lottery

On June 1, 1976, the Swedish parliament voted on a legislative bill that, if approved, would have substantially increased the quality of the corporate information disclosed to the public. Since parliament was hung, the outcome of the vote was decided by a lottery. The winning lottery ticket was a “No”, which meant that the bill was rejected. I exploit this lottery as an exogenous event to study if reporting quality affects systematic risk. I find that the rejection of the bill resulted in a negative abnormal return that persisted in the following day. This result suggests that there is a causal relationship between reporting quality and equity prices through its impact on systematic risk.     

Does vertical integration affect firm performance? Evidence from the airline industry

We investigate the effects of vertical integration on operational performance. Large U.S. airlines use regional partners to operate some of their flights. Regionals may be owned or governed through contracts. We estimate whether an airline's use of an owned, rather than independent, regional at an airport affects delays and cancellations on the airline's own flights out of that airport. We find that integrated airlines perform systematically better than nonintegrated airlines at the same airport on the same day. Furthermore, the performance advantage increases on days with adverse weather and when airports are more congested. These findings suggest that, in this setting, vertical integration may facilitate real‐time adaptation decisions.     

Does bank ownership affect lending behavior? Evidence from the Euro area

We analyze the differences in lending policies across banks characterized by different types of ownership, using micro-level data on Euro area banks during the period 1999–2011 to detect possible variations in bank lending supply responses to changes in monetary policy. Our results identify a general difference between stakeholder and shareholder banks: following a monetary policy contraction, stakeholder banks decrease their loan supply to a lesser extent than shareholder banks. A detailed analysis of the effect among stakeholder banks reveals that cooperative banks continued to smooth the impact of tighter monetary policy on their lending during the crisis period (2008–2011), whereas savings banks did not. Stakeholder banks’ propensity to smooth their lending cycles suggests that their presence in the economy has the potential to reduce credit supply volatility.     

Does the Euro affect the dynamic interactions of stock markets in Europe? Evidence from France,Germany and Italy

The dynamic links between stock market indices are analyzed in a GARCH-M framework, using daily data from France, Germany, Italy and the USA. It is shown that indices in the periods before and after the introduction of the Euro as a single currency display a very distinct behaviour. Consistent with the literature, in the earlier period price changes are found to have an impact the next day on other markets. In the latter period this type of co-movement disappeared within Europe. Feedback trading has been shown to induce (negative) autocorrelation in national stock markets. In this paper an international version of the feedback trading model is used to illustrate that the lead–lag relationships across countries and the strength of these links depend on the currency regime.     

Is idiosyncratic volatility priced in cryptocurrency markets?

This paper investigates how idiosyncratic volatility is priced in the cross-section of cryptocurrency returns. By conducting both portfolio-level analysis and Fama-MacBeth regression analysis, we demonstrate that idiosyncratic volatility is positively related to the expected returns of cryptocurrencies. This finding is not subsumed by effects of size, momentum, liquidity, volume, and price and is robust to different weighting schemes, holding periods, and sample sizes. Besides, we find no evidence of temporal relation between idiosyncratic volatility and returns in cryptocurrency markets.