Are specialist funds “special”?

In this paper, I explore the relation between portfolio overlap and performance diversity. Using data on actively managed U.S. equity mutual funds, I find that the pairwise portfolio overlap between individual funds has increased over time and is significant compared to various randomized benchmarks. These findings motivate the main question of this paper, namely whether specialist funds (those with low levels of portfolio overlap with other funds) differ significantly from funds with high levels of overlap. Here, I find that these specialists differ with regard to certain portfolio‐ and fund‐specific characteristics, but they do not appear to outperform other funds.     

“I Do”: Does Marital Status Affect How Much CEOs “Do”?

This paper explores whether a CEO's marital status reveals unobservable risk preferences which influence their firm's investment and compensation policies. Using biographical data for CEOs of large domestic companies, we find that corporate deal‐making activity (e.g., mergers, joint ventures, major capital expenditures, etc.) and overall firm riskiness both increase significantly with personal life restructuring (e.g., marriages and divorces). This relation is supported by an instrumental variables analysis and also an investigation surrounding CEO turnover. Finally, the link between a CEO's marital status and preference for option‐based compensation further suggests that personal restructuring may be an indicator of executive risk appetites.     

Material Misstatement of What? A Comment on Smieliauskas et al., ‘A Proposal to Replace “True and Fair View” with “Acceptable Risk of Material Misstatement” ’

This comment explores theoretical and practical aspects of the Smieliauskas et al. (2008 ), ‘A Proposal to Replace “True and Fair View” With “Acceptable Risk of Material Misstatement”, and develops the ideas outlined there. It is argued that these proposals are helpful, but theoretically incomplete. Theoretical developments relating to accounting aspects are offered, and proposed for others to take further. The pragmatic implications suggest difficulties in the operationalization of the ideas of the original paper in a world of multiple and inconsistent user needs.     

Chapter 15 Recognition in the United States: Is a Debtor “Presence” Required?

A recent appellate decision in the USA (In re Barnet) confuses the foreign debtor with the foreign insolvency representative. Notwithstanding the focus of US bankruptcy law on a foreign proceeding as the object of an ancillary case under Chapter 15, with the foreign representative as its emissary, the decision dismayed the international insolvency community by ruling that section 109(a) of the Bankruptcy Code applies to recognition under Chapter 15. The result is to require that the debtor in a foreign proceeding has some minimum jurisdictional presence in the USA as a condition of Chapter 15 recognition. Such a presence might include a domicile, a place of business, or property. While there might be a “backdoor” device avoiding this result, the decision creates serious confusion and a potential obstacle to full international recognition. Copyright © 2015 INSOL International and John Wiley & Sons, Ltd     

What's in a Name? An Experimental Examination of Investment Behavior

A fundamental unresolved issue is whether information asymmetries underlie investors predisposition to invest close to home (i.e., domestically or locally). We conduct experiments in the United States and Canada to investigate agents portfolio allocation decisions, controlling for the availability of information. Providing participants with information about a firms home base, without disclosing its specific identity, is not sufficient to change investment behavior. Rather, participants need to know a firms name and home base. Additional evidence indicates that participants have a greater perceived familiarity with local and domestic securities and, in turn, invest more in such securities.The authors thank Ann Gillette, Josef Zechner (the editor), and two anonymous referees for helpful comments and acknowledge the financial support of the Federal Reserve Bank of Atlanta, Georgia Tech, and Social Sciences and Humanities Research Council of Canada. The views expressed here are those of the authors and not necessarily those of the Federal Reserve Bank of Atlanta or the Federal Reserve System.     

Can Taxes Shape an Industry? Evidence from the Implementation of the “Amazon Tax”

For years, online retailers have maintained a price advantage over brick‐and‐mortar retailers by not collecting sales tax at the time of sale. Recently, several states have required that online retailer Amazon collect sales tax during checkout. Using transaction‐level data, we document that households living in these states reduced their Amazon purchases by 9.4% following the implementation of the sales tax laws, implying elasticities of –1.2 to –1.4. The effect is stronger for large purchases, where purchases declined by 29.1%, corresponding to an elasticity of –3.9. Studying competitors in the electronics field, we find some evidence of substitution toward competing retailers.     

WHAT IS “INSURANCE”? LESSONS FROM THE CAPTIVE INSURANCE TAX CONTROVERSY

Abstract: Over the past 30 years, the tax treatment of insurance premiums paid to captive (i.e., subsidiary) insurance companies has generated considerable controversy and litigation. In this article, we propose a new definition of insurance that is motivated by a careful analysis of the issues raised in the captive insurance tax controversy. Emphasizing the fundamental roles played by market forces and the efficiency of risk transfers, this new definition both broadens and refines traditional definitions of insurance.     

“Upping the ante”: how to design efficient auctions with entry?

Of primary importance in auction design is the set of strategies available to the seller at the auction stage. We first formalize hold‐up regarding entry costs that preys on second‐price auctions when the seller may engage in a costly shill‐bidding activity. We derive the optimal reserve and show how shill bidding can make posted prices outperforming auctions. Second, we advocate for a new regulation where shills would be banned but with the possibility of canceling sales ex post, which offers some valuable flexibility: the English auction with jump bids implements, then, the first best in general environments.     

What Do FAS 157 “Fair Values” Really Measure: Value Or Risk?

FAS 157, the U.S. accounting standard that prescribes how fair values of assets and liabilities are to be measured when other U.S. GAAP standards require fair valuation, stipulates that fair values be measured as the exit values of assets and liabilities—the proceeds for assets hypothetically sold on the date of the financial report, and, correspondingly, the amount required to settle liabilities on the date of the financial report. This conceptual article argues that exit values do not reflect the value of the net assets of the firm to shareholders, which is best reflected by discounted cash flows to maturity. Moreover, exit values—biasing fair values downward when markets are illiquid—have a pernicious, systemic risk effect; specifically, they give rise to write‐downs that in turn cause contagion: prices of equities and other financial instruments of peers react negatively, leading to further write‐downs by those peers. This may have aggravated the recent financial crisis. However, while exit values are not proper measures of value to shareholders, they are useful measures of downside risk when prospects turn sour for a firm. Thus, both exit values and discounted cash flows should be presented in financial statements.     

Is Investor Attention for Sale? The Role of Advertising in Financial Markets

Prior research documents capital market benefits of increased investor attention to accounting disclosures and media coverage; however, little is known about how investors and markets respond to attention‐grabbing events that reveal little nonpublic information. We use daily firm advertising data to test how advertisements, which are designed to attract consumers' attention, influence investors' attention and financial markets (i.e., spillover effects). Exploiting the fact that firms often advertise at weekly intervals, we use an instrumental variables approach to provide evidence that print ads, especially in business publications, trigger temporary spikes in investor attention. We further find that trading volume and quoted dollar depths increase on days with ads in a business publication. We contribute to research on how management choices influence firms' information environments, determinants and consequences of investor attention, and consequences of advertising for financial markets.     

Do U.S. Insurance Firms Offer the “Wrong” Incentives to Their Executives?

We examine the relation between executive compensation and market‐implied default risk for listed insurance firms from 1992 to 2007. Shareholders are expected to encourage managerial risk sharing through equity‐based incentive compensation. We find that long‐term incentives and other share‐based plans do not affect the default risk faced by firms. However, the extensive use of stock options leads to higher future default risk for insurance firms. We argue that this is because option‐based incentives induce managerial risk‐taking behavior, which seeks to maximize managerial payoff through equity volatility. This could be detrimental to the interests of shareholders, especially during a financial crisis.     

“Too big to fail”? The Agrokor case and its impact on West Balkan economies

From about April 2017, Agrokor became the main economic topic in the Balkans. Once the greatest pride of the Croatian economy, it became a serious problem for its government. Its systemic importance for the country and the region required an immediate legislative solution. The Government had Parliament pass a special law intended to save this company. The special law on the procedure of extraordinary administration in companies of systemic importance adopted in April 2017 is an interesting example, because it introduced a new insolvency procedure titled “extraordinary administration” clearly following the example of the Italian Legge Marzano, which was adopted in order to save the Parmalat group in 2003. It also represents an example of a collision of legislation in the case of cross‐border insolvency proceedings inside and outside of the European Union, where different jurisdictions have diverging standpoints on the question of its recognition as a foreign insolvency procedure. However, once the rescue proceedings began, numerous (and some dubious) interests of the different stakeholders came to the light. The government tried not only to rescue the company and its assets throughout the Balkans region but also to acquire control of it. This was especially visible through the prerogatives of the extraordinary commissioner, formally appointed by the court, but in fact a government official. Creditors at risk, mainly Russian and Italian banks, filed lawsuits to prevent the selling of the debtor's assets. At the end, the majority creditors called to vote on the settlement agreement became the new owners of the company. However, Agrokor is still far from the end of the crisis. It has more than 60,000 employees in the region and their destiny depends on the outcome of the crisis. In more recent times, the case also revealed major political scandals.