Is there a link between politics and stock returns? A literature survey

This survey starts by reviewing the literature investigating whether political connectedness of companies creates wealth for their shareholders. It then moves on to examine whether there is an association between the orientation of the political executive or the phase of the electoral cycle with movements of the stock market index. The price impact of politically-relevant events, such as wars, terrorist attacks, revolutions, coups or issuance of communications by those in positions of power is also discussed. The review closes with an examination of the impact of political uncertainty on stock markets and with a reflection on the direction of causality.     

Central bank financial strength and inflation: Is there a robust link?

Central bank financial strength has not been a fundamental issue for a substantial period of time. However, recent theoretical and empirical studies argue that central banks need to maintain a sufficient level of financial strength to perform their functions effectively and to achieve monetary policy objectives. In this study, we examine the empirical relationship between central bank financial strength and inflation using an unbalanced panel data set for a sample of selected advanced and emerging countries. We observe a statistically significant and robust negative relationship between central bank financial strength and inflation. This relationship is robust in the presence of other determinants of inflation and for alternative estimation methods. Our results have important implications for policy makers and central bankers. Particularly, our results suggest that avoiding persistent losses and maintaining the health of the central bank balance sheet remain vital pre-conditions for desirable policy outcomes of a central bank.     

What is the relationship between investor protection legislation and target takeover returns? Evidence from Europe

We show that investor protection legislation is an important determinant of the returns of target companies that are subject to takeovers within Europe. Announcement and post-announcement returns are higher in strong investor protection countries, which indicates that bidders are forced to offer larger premiums when the original offer is made, and are more likely to have to revise their offer higher before a takeover is successful. This is consistent with targets having relatively greater bargaining power in strong investor protection environments. Our findings are robust to the inclusion of common determinants of takeover returns.     

Global industry portfolios and short-term predictability of returns: Is it there?

This paper explores the degree of success of a large set of active trading rules that have been popularized in the literature on the short-term predictability of returns in equity and foreign exchange markets by extending the scope of research in three dimensions: global portfolios, industry portfolios, and exclusive versus inclusive portfolios. Our results show that after adjusting for (1) the impact of nonsynchronous prices in the reported closing index levels which causes spurious autocorrelations in returns, (2) data snooping bias caused by searching through a large number of possible trading strategies in order to find a few that yield superior in-sample performance, and (3) transaction costs that reduce any profits from active trading, the risk-adjusted profits generated by short-term trend chasing trading rules are generally not statistically significant and the hypothesis of no outperformance of trading rules over either buy-and-hold or risk-free benchmark return cannot be rejected in most industries. Such findings favor short-term market efficiency and are hardly comforting for active traders.     

Religiosity and risk taking: Is there a demand-side effect?

Religiosity may impact firm risk taking via its risk averse employees or through risk-sensitive demand. Using detailed financial statements of property-liability insurance companies, we find that both religiosity at firms' headquarters and the religiosity of firms' largest geographic market are negatively related to firm risk taking. For firms with one salient market, the impact of market religiosity is approximately the same order of magnitude as headquarter religiosity. Our evidence suggests that firm risk taking is influenced by customer demand.     

Reinsurance Brokers and Advice Quality: Is There a Need for Regulation?

Brokers play an increasing role in the distribution of reinsurance. In order to analyse reinsurance brokers' advice quality, we employ a model in which a monopoly broker advises cedents to buy a particular one out of similar reinsurance policies that cost the same but differ in details. The broker decides on how much to invest in his advice quality and on the price to charge for his service. We find that the broker's advice quality is generally lower and the price for his service higher than in the social optimum, even in the presence of a potential new entrant.     

Is there a CSI-leverage nexus?

We examine how various measures of consumer sentiment index (CSI) affect firms' debt policy decisions. Using U.S. firm-level quarterly data from 1993 to 2017, we provide a strong positive relationship between CSI measures and corporate debt policy, implying that firms use external borrowing during a positive economic outlook and reap the tax-shield benefit. We also find that improved household optimism over financial and business sentiments leads to future household consumption. The CSI-leverage nexus is moderated by the state of firms' financial condition, reputation, and profitability. Importantly, our results are robust to sub-sample analysis, firm-level and macroeconomic controls, econometric specifications, alternative measures of sentiment including Shiller's cyclically adjusted price-earnings ratio (i.e., CAPE_SH), Baker and Wurgler (2006)’s stock market sentiment index (i.e., SENT_BW) and search-based uncertainty measure such as FEARS (i.e., Financial and Economic Attitudes Revealed by Search) index of Da, Engelberg, and Gao (2015).     

Cross-Border Bank Acquisitions: Is there a Performance Effect?

This paper uses a unique database that includes deal and bank balance sheet information for 220 cross-border acquisitions between 1996 and 2003 to analyze the characteristics and performance effects of international takeovers on target banks. A discrete choice estimation shows that banks are more likely to get acquired in a cross-border deal if they are large, bad performers, in a small country, and when the banking sector is concentrated. Post-acquisition performance for target banks does not improve in the first 2 years relative to domestically-owned financial institutions. This result is explained by a decrease in the banks’ net interest margin in developed countries and an increase in overhead costs in emerging economies.     

US stock returns: are there seasons of excesses?

This article explores the existence of seasonality in the tails of stock returns. We use a parametric model to describe the returns, and obtain a proxy of the innovation distribution via a pre-processing model. Then, we develop a change-point algorithm capturing changes in the tails of the innovations. We confirm the good performance of the procedure through extensive Monte Carlo experiments. An empirical investigation using US stocks data shows that while the lower tail of the innovations is approximately constant over the year, the upper tail is larger in Winter than in Summer, in 9 out of 12 industries.     

Is there anyone out there?

In this review I.F. Clarke has taken the opportunity to look into the ideas and expectations that derive from our existence on a minor planet. The night sky has always had a special fascination for the inhabitants of Terra. In the beginning the heavenly bodies displayed the pattern of future events for all who could read their signs. Nowadays the signals are different. As I.F. Clarke shows, the Solar System has become the new frontier and a new future, so they say, is waiting out there in deep space.     

Is there a viable alternative to ordinary least squares regression when security abnormal returns are the dependent variable?

Regression analysis is often used to estimate a linear relationship between security abnormal returns and firm-specific variables. If the abnormal returns are caused by a common event (i.e., there is “event clustering”) the error term of the cross-sectional regression will be heteroskedastic and correlated across observations. The size and power of alternative test statistics for the event clustering case has been evaluated under ideal conditions (Monte Carlo experiments using normally distributed synthetic security returns) by Chandra and Balachandran (J Finance 47:2055–2070, 1992) and Karafiath (J Financ Quant Anal 29(2):279–300, 1994). Harrington and Shrider (J Financ Quant Anal 42(1):229–256, 2007) evaluate cross-sectional regressions using actual (not simulated) stock returns only for the case of cross-sectional independence, i.e., in the absence of clustering. In order to evaluate the event clustering case, random samples of security returns are drawn from the data set provided by the Center for Research in Security Prices (CRSP) and the empirical distributions of alternative test statistics compared. These simulations include a comparison of OLS, WLS, GLS, two heteroskedastic-consistent estimators, and a bootstrap test for GLS. In addition, the Sefcik and Thompson (J Accounting Res 24(2):316–334, 1986) portfolio counterparts to OLS, WLS, and GLS, are evaluated. The main result from these simulations is none of the other estimator shows clear advantages over OLS or WLS. Researchers should be aware, however, that in these simulations the variance of the error term in the cross-sectional regression is unrelated to the explanatory variable.

Regional growth and finance in Europe: Is there a quality effect of bank efficiency?

In this study, we test whether regional growth in 11 European countries depends on financial development and suggest the use of cost- and profit-efficiency estimates as quality measures of financial institutions. Contrary to the usual quantitative proxies of financial development, the quality of financial institutions is measured in this study as the relative ability of banks to intermediate funds. An improvement in bank efficiency spurs five times more regional growth then an identical increase in credit does. More credit provided by efficient banks exerts an independent growth effect in addition to direct quantity and quality channel effects.     

Climate change adaptation: Is there a role for intervention research?

While climate change will expose regions to similar impacts, the extent of those impacts and effective response at the local level will be determined not only by the location's sensitivity and vulnerability but also by local groups and individuals’ capacity, including their institutional links, social networks and motivation to action. In parallel, scientific information and research plays a critical role in informing climate change adaptation by providing both an improved understanding of the actual climate risks and response alternatives.The paper focuses on two local-scale intervention research projects undertaken in urbanised coastal areas in Brazil and in Australia concentrated on improving the dialogue between ‘those who make science’ and ‘those who use science to make decisions’ in order to make climate science more useful, and creating purposeful collective action, respectively. A conceptual model is devised to investigate how intervention research could aid adaptive capacity by generating new knowledge and facilitating change towards climate change adaptation at the local level. Drawing on the findings, a framework is proposed to advance the role of intervention research in policy development for enhancing adaptive capacity.     

Is there a symmetric nonlinear causal relationship between large and small firms?

This paper uses both linear and nonlinear causality tests to reexamine the causal relationship between the returns on large and small firms. Consistent with previous results, we find that large firms linearly lead small firms. We also find a significant linear causality in the direction from small firms to large firms, particularly in the more recent time period where the impact from small firms to large firms is greater than from large to small. More important, in contrast to the received literature, we find significant nonlinear causality that is bi-directional and of the same duration in either direction. Using the BEKK asymmetric GARCH model we are able to capture most of the detected nonlinear relationship. This indicates that volatility spillovers are largely responsible for the observed nonlinear Granger causality.     

Is there a gender gap in CEO compensation?

The gender pay gap generates significant political and social debate. This study contributes to this discussion by examining if a gender pay gap exists at the highest level of corporate management, the CEOs. While previous studies have documented a gender pay gap for most levels of executives the findings with respect to CEOs are conflicting. In this paper we focus only on CEO's as it is the most homogenous of executive roles and does not require us to assume that executives with similar titles undertake identical roles. Our evidence is based on 291 US firm-years for the period of 1998–2010. We do not find any association between CEO pay and gender using both the total sample and a sample matched using propensity scores to control for firm characteristics. These insignificant results hold for total pay, salary and bonuses, and for different matching procedures and econometric specifications. Our results therefore indicate that women who rise through the “glass ceiling” to the level of CEO are remunerated at similar levels to their male counterparts.     

Is there a racial gap in CEO compensation?

Racial gap in corporate leadership has prompted continuous and intense discussions, motivating research into the conditions minorities face after they reach top management positions. We contribute to the ongoing debate in this area by examining the association between CEO race and compensation. We do not find evidence for a significant racial wage gap at the CEO level across various econometric specifications, including total-sample OLS, firm-fixed effects to capture CEO transitions within firm, propensity score matched sample, and instrumental variable analysis. The insignificant results hold for total compensation, cash compensation, and non-cash compensation. Further, there is no consistent evidence of differences in CEO compensation for any of the major racial groups (Blacks, Hispanics, and Asians). Based on our results, we conclude that racial minorities who make it to the CEO position in Corporate America are compensated at similar levels to their Caucasian counterparts.     

Fiscal fragmentation and crime control: Is there an efficiency-equity tradeoff?

International Tax and Public Finance - This article investigates the effects of fiscal fragmentation on aggregate crime rates and the spatial disparities in crime rates among counties in a...