Do accounting measurement regimes matter? A discussion of mark-to-market accounting and liquidity pricing

Using a model with banking and insurance sectors, Allen and Carletti show that marking-to-market interacts with liquidity pricing to exacerbate the likelihood of financial contagion between the two sectors. In this discussion, I lay out the main ingredients of their model and explain how they interact with liquidity pricing to generate financial contagion. I then discuss some limitations of their model and propose an interesting extension.     

Exchange rate regimes,capital controls,and currency crises: Does the bipolar view hold?

This paper empirically examines the link between de facto exchange rate regimes and the incidence of currency crises in 84 countries from 1980 to 2001 using probit models. We employ the de facto classification of Reinhart and Rogoff (2004) that allows us to estimate the impact of relatively long-lived exchange rate regimes on currency crises with much greater precision. We find no evidence that, as the bipolar view argues, intermediate regimes have a significantly higher probability of currency crises than both hard pegs and free floats. Using the combined data of exchange rate regimes and the existence of capital controls, we also find that hard pegs with capital account liberalization have a significantly lower probability of currency crises than intermediate regimes with capital controls and free floats with capital controls. Hence, the bipolar view does not strictly hold in the sense that intermediate regimes are significantly more prone to currency crises than the two extreme regimes. However, the fact that hard pegs with capital account liberalization are substantially less prone to currency crises is worthy of note.     

Funding conditions and insurance stock returns: Do insurance stocks really benefit from rising interest rate regimes?

We examine funding conditions and U.S. insurance company stock returns. Although constrained funding conditions, signaled by restrictive Federal Reserve monetary policy, correspond with increases in the future payouts of fixed‐income securities held by insurance firms and potentially provide value through the liability side of insurer balance sheets, they also decrease the values of securities currently held in insurer portfolios. Prior research finds that restrictive policy has a negative effect on equity returns in general. Our results suggest the negative impacts of constrained funding environments outweigh the potential positives, as insurance company stock returns are significantly lower during periods of constrained funding. This effect varies within a given funding state and also across insurer type. The effect is strongest during the first 3 months of a constrained funding environment and for life and health insurers—insurer types with longer portfolio durations. For property and liability (P&L) insurers, lower stock return performance only exists in the first 3 months of a constrained funding environment. In the subsequent months, P&L insurers actually have higher stock returns during constrained periods, consistent with their typically shorter duration asset portfolios, which are more quickly rolled over into new higher‐yielding securities.     

Does transition to IFRS substantially affect key financial ratios in shareholder-oriented common law regimes? Evidence from the UK

This paper provides evidence of how a transition to IFRS affects key financial ratios and the pertinent financial statement items. Building on Lantto and Sahlström's (2009) evidence from creditor-oriented code law regimes, we examine the impact of IFRS transition on listed companies in the shareholder-oriented common law regime of the UK. The study contributes two insights: First – despite their similarities – conversion from the UK General Accepted Accounting Principles (GAAP) to IFRS leads to substantial differences in key financial ratios. These even surpass differences reported by companies in creditor-oriented code law regimes. We find that medians of profitability ratios increased substantially: Operating Income Margin (OPM) increased by 10.8%, Return on Equity (ROE) by 27.0%, and Return on Invested Capital (ROIC) by 14.4%. The Current Ratio (CR) and Price-to-Earnings (P/E) Ratio also exhibit significant but less drastic changes of 4.2% and − 2.9%, respectively. Second, differences in shareholder-oriented common law regimes have the same causes as in creditor-oriented code law regimes, i.e., an increase in Operating Income, Net Income, Current Liabilities and Invested Capital, as well as a decrease in Shareholder Equity.     

The conditional performance of US mutual funds over different market regimes: do different types of ethical screens matter?

We investigate the performance of US mutual funds that employ different ethical criteria: religious, socially responsible, and irresponsible. Performance is evaluated over different market regimes using a Markov-switching conditional CAPM approach that endogenously defines different states of the market. This model is also extended to a multifactor context. The results show that estimates of performance vary across different market regimes. The Vice Fund, which invests in unethical firms, outperforms in low-volatility regimes, but underperforms in high-volatility regimes. These results contradict the Vice Fund’s claim that it constitutes a “solid investment during recessionary periods”. Our results show that socially responsible and morally responsible funds exhibit different performance across different market conditions, thereby supporting the use of performance evaluation models that take into account different market regimes. Overall, different types of ethical screens seem to lead to different performance patterns across different market regimes.