The priorities dilemma in the EU preventive restructuring directive: Absolute or relative priority rule?

The EU Directive on Preventive Restructuring Frameworks gives the EU Member States (“MSs”) the choice between implementing two fairness rules in cross‐class cram‐down: the US‐style absolute priority rule (“APR”) or the newly conceived relative priority rule (“RPR”). This article argues that there is no good reason for the MSs to implement the RPR in domestic law. While the APR effectively protects the rights of the dissenting classes to get what they are entitled to, the RPR increases moral hazard and opportunism. Also, it might make debt investments in the EU unattractive. On top of that, this article shows that the RPR lacks a clear theoretical justification. One of the main reasons why the RPR was introduced in the Directive alongside the APR is that the RPR was thought to provide a solution to some of the APR's problems. This article considers three of those problems (i.e., the “valuation problem”, the “hold‐out problem” and the “problem of the relevant shareholders”) and explains the reasons why the RPR is not an appropriate solution for these. Among these three problems, the most troublesome one, from the perspective of the EU, is that the APR makes it difficult to award value to the equity of SMEs (the “problem of the relevant shareholders”). This article argues that using the RPR to deal with this problem would incentivize the shareholders to behave opportunistically and to orchestrate the restructuring. Instead of the RPR, this article suggests two alternative techniques which MSs can enact to better address the issue: the new value exception “in kind” and the disposable income method.     

Nominal GDP targeting: Policy rule or discretionary splurge?

In a neo-canonical monetary policy model, targeting of nominal GDP in terms of growth rates (not growing levels) is analytically equivalent to adoption of a policy that is optimal from a “timeless perspective,” in the sense developed by Woodford and widely utilized in recent monetary policy analysis.     

Aggregate insider trading: Contrarian beliefs or superior information?

We decompose realized market returns into expected return, unexpected cash-flow news and unexpected discount rate news to test the relation between aggregate market returns and aggregate insider trading. We find that (1) the predictive ability of aggregate insider trading is much stronger than what was reported in earlier studies, (2) aggregate insider trading is strongly related to unexpected cash-flow news, (3) market expectations do not cause insider trading contrary to what others have documented, and (4) aggregate insider trading in firms with high information uncertainty is more likely to be associated with contrarian investment strategy. These results strongly suggest that the predictive ability of aggregate insider trading is because of insider’s ability to predict future cash-flow news rather than from adopting a contrarian investment strategy. These results hold even after we control for non-informative trades and information uncertainty.     

Push or pull? Performance-pay,incentives, and information

We study a principal-agent model wherein the agent is better informed of the prospects of the project, and the project requires both an observable and unobservable input. We characterize the optimal contracts, and explore the trade-offs between high- and low-powered incentive schemes. We discuss the implications for push and pull programs used to encourage Research and Development (R&D) activity, but our results are relevant in other contexts.     

Are active fund managers collectors of private information or fast interpreters of public information?

Recent studies of fund manager performance find evidence of outperformance. However limited research exists as to whether such outperformance is because of privately collected information, or merely expedient interpretation of publicly released information. In this study, we examine the trade sequences of active Australian equity fund managers around earnings announcements to provide insights into the source of fund managers’ superior information. We document an increased occurrence of buy‐sell trade sequences around good‐news earnings announcements. The evidence is consistent with fund managers having both private information about forthcoming good‐news earnings announcements and being ‘short‐term profiteers’. We find no evidence that fund managers have private information about forthcoming bad‐news earnings announcements. However, we do find an increase in the frequency of fund managers not trading before bad‐news earnings announcements only to subsequently sell during announcements.     

How much is enough? An investigation of nonprofessional investors information search and stopping rule use

Regulators are concerned that the information overload in the current Internet-based disclosure environment may cause investors to overlook important information. To gain a better understanding of the information set gathered by investors, this study incorporates theories from information systems research to examine the cognitive stopping rules used by investors to terminate information search. We survey nonprofessional investors to gain insight into what information they gather and when they determine they have enough information to stop searching and make an investment decision. Demographic analysis shows that investor characteristics are associated with the particular stopping rule used. In addition, results show that the stopping rule used affects the amount and type of information gathered. We find that, in general, investors include very little financial information in their search, and the amount gathered depends on the stopping rule employed. Our results call into question the decision usefulness of accounting information for nonprofessional investors and should be of interest to accounting information systems researchers, regulators, and accounting practitioners.     

Information content of repurchase signals: Tangible or intangible information?

The outperformance of repurchasing firms with a high book-to-market (B/M) ratio is usually explained by investors’ undervaluation of the firm’s past performance. However, several studies suggest that the underestimation of future intangible value may explain the high return associated with the share repurchase. To better understand the actual information content of repurchases, I decompose the B/M ratio into past tangible information and future intangible information and find that repurchase signals an undervaluation of the intangible return. In addition, I investigate several potential proxies for intangible information—R&D expenses, intangible assets, and future operating performance. My results show that intangible information signals the undervaluation of future operating performance.     

Reexamining momentum profits: Underreaction or overreaction to firm-specific information?

We design a new measure and find that the predictability of past returns on future returns increases as stocks respond with delay to firm-specific information. Our results suggest that momentum is caused by both investors’ underreaction and overreaction to information. However, underreaction to information seems to be the primary cause, particularly during the more recent period. Our findings are robust for recent explanations of momentum profits and alternative methods for computing our measure. We also find that stocks respond with delay to firm-specific information, partly due to certain firm characteristics, and partly because they escape investor attention due to their low visibility. Our paper extends and refines Jegadeesh and Titman’s (J Financ 56(2):699–720, 2001) finding that momentum profits are consistent with behavioral models’ predictions regarding investors’ overreaction.     

Do exchange rate changes have symmetric or asymmetric effects on stock prices?

Several macro variables have been identified as determinants of stock prices and exchange rate is among them. Exchange rate changes can affect different firms differently depending on whether they are export oriented or they use heavily imported inputs. Therefore, the overall effects of exchange rate changes on an aggregate stock price index could be in either direction. Previous research assumed that exchange rate changes have symmetric effects on stock prices. In this paper after introducing nonlinearity into adjustment process and after using Nonlinear ARDL approach to cointegration and error-correction modeling combined with monthly data from Brazil, Canada, Chile, Indonesia, Japan, Korea, Malaysia, Mexico, and the U.K., we show that exchange rate changes have asymmetric effects on stock prices, though the effects are mostly short-run.     

Margin trading and price efficiency: information content or price-adjustment speed?

The literature offers contradictory views on the effect of margin-trading activities on price efficiency. Based on data from a Chinese margin-trading pilot programme in 2010, we separate price efficiency into information content and price-adjustment speed and investigate the effect of margin-trading activity on price efficiency. We find that after adding to the eligible list, pilot stocks experience a decrease in information content, but an increase in price-adjustment speed. Furthermore, increased margin-buying activities are associated with lower information content, but faster price adjustment. Our results reconcile the debate over the effect of margin trading on price efficiency.     

CEO statements in sustainability reports: Substantive information or background noise?

This paper examines the question of whether corporate sustainability reports can serve as accurate and fair representations of corporate sustainability performance. It presents the results of a sentiment analysis of CEO statements in corporate sustainability reports and corporate financial reports between 2001 and 2010. Making an analogy with corporate financial reporting it is expected that if corporate sustainability reports accurately reflect sustainability performance, then this should be reflected in the rhetoric used. The analysis shows that the rhetoric in the CEO statements of sustainability reports is indicative of impression management rather than accountability, despite increasing standardization of sustainability reporting.     

The Prestige disaster: risk or danger?

The sinking of the Prestige off the coast of Galicia in north-west Spain in November 2002 was an enormous environmental disaster and it had an immense media impact both nationally and internationally, lasting weeks as a social and political phenomenon. Five days before the ship sank, the captain had reported to the maritime authorities that the old tanker was damaged and in trouble. During these five days leading up to the shipwreck, a crucial decision had to be made: what should be done with this dangerous oil tanker? Temporality is a property of the hazardous events which, after being noticed, are evaluated as imminent or deferred. This temporality makes a clear difference between a risk and a danger. Whereas the risk has time to anticipate the events, danger has just a very short time or even has no time. At this point, the Prestige disaster turns to be paradigmatic. To tow away this damaged oil tanker was a risk decision which estimated that there was still a time to prevent its running aground what meant to follow the story repeatedly told by the narrative context of risk. However, the Prestige had been spilling out oil all the time and the damage was not a probability but a fait accompli. This accident has not a risk temporality; in fact, it had not temporality at all because it demanded an immediate intervention. My conclusion here is that this crisis was managed in terms of risk when it should have been treated as a danger situation.     

Can central banks’ monetary policy be described by a linear (augmented) Taylor rule or by a nonlinear rule?

The original Taylor rule establishes a simple linear relation between the interest rate, inflation and the output gap. An important extension to this rule is the assumption of a forward-looking behaviour of central banks. Now they are assumed to target expected inflation and output gap instead of current values of these variables. Using a forward-looking monetary policy reaction function, this paper analyses whether central banks’ monetary policy can indeed be described by a linear Taylor rule or, instead, by a nonlinear rule. It also analyses whether that rule can be augmented with a financial conditions index containing information from some asset prices and financial variables. The results indicate that the monetary behaviour of the European Central Bank and Bank of England is best described by a nonlinear rule, but the behaviour of the Federal Reserve of the United States can be well described by a linear Taylor rule. Our evidence also suggests that only the European Central Bank is reacting to financial conditions.     

The information content of stock split announcements: Do options matter?

We provide a new test of the informational efficiency of trading in stock options in the context of stock split announcements. These announcements tend to be associated with positive abnormal returns. Our traditional event study results show abnormal returns that are significantly lower for optioned than non-optioned stocks, whether traded on the NYSE, Amex, or Nasdaq. After controlling for market returns, capitalization, book-to-market ratio, and trading volume, we find that the abnormal returns are significantly lower for NYSE/Amex optioned than non-optioned stocks. Although the results for Nasdaq stocks are not as clear, the overall effects tend to be lower after optioning. These findings are consistent with the hypothesis that the prices of optioned stocks embody more information, diminishing the impact of the stock split announcement. They provide new evidence of the beneficial effects of options on their underlying stocks.     

Dividend payouts under a societal crisis: Financial constraints or signaling?

Dividend payouts of Chinese firms are typically flexible and unstable, and firms have leeway to change dividends in response to a crisis. Using this setting, we document that Chinese listed firms tend to decrease dividend payouts under the coronavirus crisis, supporting our financial constraints hypothesis instead of the alternative dividend signaling hypothesis. The baseline result is robust to a series of sensitivity checks. Underlying mechanism tests show that the negative effect of COVID-19 on dividend policies is enhanced in high-constrained groups compared to that in low-constrained groups. Further analysis of crisis-related factors reveals that the main result is enhanced when firms engage in international diversification, when firms have greater labor intensity and when firms are nonstate-owned.     

Short-term under/overreaction, anticipation or uncertainty avoidance? Evidence from India

We examine the short-term price behaviour of three, size-conditioned Indian stock market indices, in response to informational shocks. A standard mean-adjusted returns model as well as the GJR-GARCH specification point towards underreaction to negative events in the medium and small capitalization indices. Also, the pre-event coefficients are generally negative and statistically significant, regardless of the sign of the shock, thus ruling out information leaks. We uncover a stable abnormal volatility pattern which increases monotonically a few days before the shock before suddenly decreasing in magnitude on the event day and beyond. We suggest uncertainty avoidance as a potential explanation of these features. The results are fairly robust across alternative event selection procedures, time, and size-conditioned shocks.     

Where to turn? The influence of information source on belief and behavior

When individuals face risks, they seek information to reduce uncertainty. This study examines where people turn for information and the effects this information seeking has on belief and behavior. Genetically, modified organisms pose a perceived environmental and health risk to society, creating worry and fear (negative affect) in many individuals. Though many people turn to personal sources, such as friends and family, for risk-relevant information, others turn to the news. Using structural equation modeling, the current research is able to analyze direct and indirect effects to construct a model of risk information seeking that differentiates these two forms of information seeking behavior. The results are intriguing, as personal information seeking and news information seeking have significantly different impacts on policy belief and avoidance behavior.     

Red chips or H shares: which China-backed securities process information the fastest?

This study examines the information flow between China-backed securities, namely H shares, red chips, Shanghai and Shenzhen listed common shares. We document several findings. We find that an exponential generalized autoregressive conditional heteroscedasticity in mean (EGARCH-M) model appears to describe adequately the return process of the China-backed securities. Our empirical findings show that both H shares and red chips (which are listed in Hong Kong) are more sensitive to ‘good’ news than ‘bad’ news, while stocks listed in the China market are more sensitive to ‘bad’ news than ‘good’ news. Using a multivariate EGARCH-M model, we have found significant return and volatility spillover effects among the China-backed securities. Our study indicates that the red chips appear to spread information to other China-backed markets ‘directly’ or ‘indirectly’. The results imply that the red chip market processes information faster than the other markets.     

Is the relationship between investment and conditional cash flow volatility ambiguous,asymmetric or both?

We investigate the effect of cash flow volatility on investment. Our evidence suggests that financially constrained firms decrease investment (i) when experiencing persistently high volatility; (ii) when experiencing both high volatility and negative cash flow growth realisations; and (iii) when holding low cash levels and experiencing both high volatility and a negative cash flow growth realisations. In financially unconstrained firms, the above effects are either not found or are of relatively low economic importance. Overall, our findings lend support to the financial flexibility literature and tend to contradict predictions of the real options literature.     

The expectations hypothesis: New hope or illusory support?

Recent studies of the expectations hypothesis of the term structure (EHTS) find evidence in favor of the EHTS using post 1980s US data. This has been attributed to the relative macro stability of this period and greater market efficiency. Using a panel of forecasts for 3-month interest rates for ten countries we test separately for EHTS and rational expectations. Assuming rational expectations holds we find support for the EHTS is illusory due to an off-setting time-varying term premia and non-rational expectations. Previous forecast-based studies suggest biased expectations tend to reinforce the effect of a time varying term premium. This change can be understood in the context of Fama’s (2006) argument that markets tend to underestimate future spot rates during periods of long-run increases and overestimate during declines.