Emergence of macro-variables by evaluation and clustering of micro- activities

Recent finance and economic forecasting and risk calculation failures made obvious that macro-modelling without micro-foundation may be treacherous. Reliable macro-modelling requires the consistent bundling of individual actions into intermediate and macro-variables exploiting the individual actions’ coordination and its dynamics. The degree of coordination may range from chaos – absence of coordination – to determined situations caused by macro-level equilibrium dictating any agent's actions and inhibiting interactions. Coordination clusters individual actions into real decision units such as companies, political parties and unions. It structures the emergent intermediate and macro-level situations vitally.The paper presents first a centennial history of prominent scholars’ quotes questioning the equilibrium paradigm, a short survey of prevailing paradigm's deficiencies laid bare once again by the latest financial crises.It proposes second discrete choice (DC) – successfully applied in different fields – to model the individual agent's decision. DCs innovative integration into a Markov process provides a steady foundation to model interactions of individual agents consistently.The final section justifies the actions’ proposed interactive bundling by referring to recent advances in data processing and network topology. The dynamic modelling of the actions’ and interactions’ coordination breaks fresh grounds both with regards to mathematical, computational and economic modeling requirements. The combination of latest developments in data processing like Big Data and the recently (re)discovered network topology capabilities may cope with these challenges.     

European equity market integration and joint relationship of conditional volatility and correlations

We analyse the integration patterns of seven leading European stock markets from 1990 to 2013 using daily data and mismatched monthly macroeconomic data. To study the mismatch of data frequencies we use the DCC-MIDAS (Dynamic Conditional Correlation – Mixed Data Sampling) technique developed by Colacito, Engle and Ghysels (Journal of Econometrics, 2011). We benchmark European integration patterns against the German stock market. The reported integration patterns show a clear divide between large and (relatively) small equity markets' short run and long run return correlations: the small markets display higher short run European convergences than the large markets and vice versa. The across-the-board divergence from Greek risk, during the crisis period, is the most unambiguous conclusion of our study. During this period, cross-country joint relationships of conditional variances and return correlations – a ‘convergence of risks’ resulting in global/regional contagious spillovers – are typically positive. Only exceptions are the German stock market's joint relationships.     

Corporate governance,external market discipline and firm productivity

Using a sample of Australian companies over the 2000–2005 period, we examine the impact of internal corporate governance on firm's total factor productivity, taking into account the interaction between internal governance and external market discipline. Our empirical findings point to a substitution effect between product market competitiveness and firm-level corporate governance. Overall, internal corporate governance mechanisms – more efficient boards and greater CEO stock-based compensation – are effective instruments for improving firm productivity. However, internal governance is less effective when a firm faces a highly competitive product market. We find only weak empirical support for an association between firm's ownership structure and productivity, and no support for an association between industry takeover intensity and firm productivity.     

An inconsistency in SEC disclosure requirements? The case of the “insignificant” private target

Although the SEC's main charge is to ensure the disclosure of material information, it has not always consistently defined materiality. We show that acquisitions of privately-held targets classified as “insignificant” by the SEC appreciably affect market prices, and therefore are material by the SEC's definition. We find significant returns in transactions with targets as small as 2% – compared with the SEC's disclosure threshold of 20% – of the acquirer. Further, an average of 19 undisclosed private acquisitions per year exceed the median IPO value in the same year for our sample period. However, because the SEC deems these transactions insignificant, information like target financial statements remains undisclosed to the market. Disclosure rules regarding target financial statements thus create a regulatory disconnect, in which information that is material is nevertheless deemed “insignificant” and therefore not disclosed.     

Improved corporate governance and Chinese seasoned equity offering announcement effects

Corporate governance and thus overall investor protection in China improved after the Split Share Structure Reform and the release of the new company law in 2005. This study examines the impact of improved corporate governance and investor protection on the market's reaction to seasoned equity offering (SEO) announcements in China. The market reacts to post‐2005 SEOs positively, while it reacts to pre‐2005 SEOs negatively. The different market reactions are attributed to the market's different perceptions of firms' intentions behind SEO decisions – that is, investors are more optimistic and have more trust in SEO issuers when they believe they are better protected.     

The dialectic of utopian images of the future within the idea of progress

F. Polak and K. Mannheim's reconceptualization of the role of the utopist as a radical/revolutionary who acts to shatter present reality and reconstruct it according to a vision of the future is evaluated in the light of K. Popper's critique of utopian engineering; also, Popper's proposal of piecemeal engineering is critiqued and found deficient. Polak's thesis of a vital image of the future is tested on the basis of J. B. Bury's idea of progress and found to be modern-born. The historic roots of the dominant utopian image of the future (within the idea of progress) are clarified as the technological/consumer society within industrial civilization. However, as this modern thesis become dystopic, an antithesis, in the form of utopian socialism, emerged to contend with the dominant utopian image of the future throughout the 19th and 20th centuries. The dialectical struggle between contending utopic images of the future within the idea of progress brought about the progressivesocialist synthesis, which in turn, opposed by reactionary neoliberalism (a “counter-utopia), has realized a new, postmodern thesis – as global sustainable development – a reconstructed, 21st century utopian image of the future.     

A journey towards a safe harbour: The rhetorical process of the International Integrated Reporting Council

This paper investigates the rhetoric deployed by the International Integrated Reporting Council (IIRC) to legitimise itself and Integrated Reporting (<IR>) and establish its ideology. We draw on Aristotle's rhetorical appeals – ethos, logos, and pathos – and the rhetorical theory of diffusion to conduct a rhetorical analysis of the IIRC's initial documents. Our findings demonstrate how the IIRC's rhetorical strategies serve to: authorise and moralise the IIRC's actions through ethos and pathos; contrast certain social interests and privilege a capitalist ideology through logos; and establish and maintain the IIRC's authority in a way that reflects the interests of the financial community and investors, again, through ethos. We demonstrate how the IIRC has strategically used rhetoric to gain support and develop its authority by contrasting and resisting competing ideological pressures. We also show how a capitalist ideology emerged from this struggle as the shaping force behind <IR> at the cost of marginalising wider social interests. Examining the IIRC's rhetorical process contributes to understanding the ideological struggle surrounding <IR> and enriches our empirical understanding of the ideological turn of rhetorical strategies. Our study contributes to theory and practice by advancing knowledge on the rhetorical strategies that shape and establish dominant ideologies in accounting practice.     

The Association between microfinance rating scores and corporate governance: a global survey

The global microfinance industry has experienced high growth rates over the past decades, and the World Bank foresees a future market with billions of customers. However, the industry's continued growth is contingent on its ability to create a governance structure that supports microfinance institutions' long-term performance. Because microfinance institutions' performance is multidimensional and difficult to measure, prior research has not been successful in establishing consistent associations between governance structures and microfinance institutions' performance. We apply microfinance rating scores – a unique innovation of the microfinance industry – as a summary performance metric and find that several governance metrics are related to microfinance performance. Specifically, we find that CEO/Chair duality has a negative relation to rating scores, whereas the number of international board directors, the presence of internal auditors and the level of competition intensity are positively associated with rating scores. These findings should prove useful in an industry in which there is no established ‘best set-up’ for governance mechanisms.     

Model misspecification,Bayesian versus credibility estimation,and Gibbs posteriors

ABSTRACT

In the context of predicting future claims, a fully Bayesian analysis – one that specifies a statistical model, prior distribution, and updates using Bayes's formula – is often viewed as the gold-standard, while Bühlmann's credibility estimator serves as a simple approximation. But those desirable properties that give the Bayesian solution its elevated status depend critically on the posited model being correctly specified. Here we investigate the asymptotic behavior of Bayesian posterior distributions under a misspecified model, and our conclusion is that misspecification bias generally has damaging effects that can lead to inaccurate inference and prediction. The credibility estimator, on the other hand, is not sensitive at all to model misspecification, giving it an advantage over the Bayesian solution in those practically relevant cases where the model is uncertain. This begs the question: does robustness to model misspecification require that we abandon uncertainty quantification based on a posterior distribution? Our answer to this question is No, and we offer an alternative Gibbs posterior construction. Furthermore, we argue that this Gibbs perspective provides a new characterization of Bühlmann's credibility estimator.     

A simple template for pitching research

In this article, I propose a simple new research tool – a template designed for pitching research. The two‐page pitching template begins with four ‘preliminaries’: working title, research question, key papers and motivation. Following this is the core of the template based on a ‘3‐2‐1 countdown’, namely THREE elements – idea, data and tools; TWO questions – What's new? and So what?; and ONE bottom line – contribution. The template ends with ‘other’ considerations. Finance and accounting examples are given to illustrate application of the template.     

Competition among exchanges through simplified disclosure requirements: evidence from the American and Global Depositary Receipts

In this study, we address the ongoing debate as to whether the competition among the world's major exchanges through simplified disclosure requirements is justified. Companies from across the globe have a choice of cross-listing shares as either American or Global Depositary Receipts (ADRs and GDRs, respectively). The former are primarily listed on the US exchanges – NYSE, NASDAQ and AMEX – whereas the latter are issued into non-US markets such as the London Stock Exchange (LSE). The GDRs listed on the LSE are subject to simplified disclosure requirements compared to their exchange-listed ADR peers that have to meet more stringent compliance standards. Proponents of the ‘light touch’ approach argue that firms cross-listing as GDRs are not subject to the higher reporting costs faced by ADRs yet still face similar valuation benefits. Those who challenge this approach argue that simplified disclosure requirements set by the LSE will ultimately be recognised by the market as ineffective, diverting traders from investing in GDRs. This study provides evidence that supports the LSE's ‘light touch’ approach and shows that the benefits of information risk reduction for ADRs and GDRs are comparable. The explanation for this finding is that the two avenues through which information asymmetry is expected to be resolved after cross-listing – disclosure and analysts – are substitutive and make equally important contribution to information risk reduction, eventually leading to similar cost of capital decline for ADRs and GDRs.     

Life-cycle funds: Much Ado about Nothing?

The core idea of life-cycle funds or target-date funds is to decrease the fund's equity exposure and conversely increase its bond exposure towards the fund's target date. Such funds have been gaining significant market share and were recently set as default choice of asset allocation in numerous defined contribution schemes or related old-age provision products in several countries. Hence, an assessment of life-cycle funds’ risk-return profiles – that is, the probability distribution of returns – is essential for sustainable financial planning of a large group of investors. This paper studies the risk-return profile of life-cycle funds in particular compared to simple balanced or lifestyle funds that apply a constant equity portion throughout the fund's term instead. In a Black–Scholes model, we derive balanced funds that reproduce the risk-return profile of an arbitrary life-cycle fund for single and regular contributions. We then analyze the accuracy of our results under more complex asset models with stochastic interest rates, stochastic equity volatility and jumps. We further show that frequently used ‘rule of thumb approximations’ that only take into account the life-cycle fund's average equity portion are not suitable to approximate a life-cycle fund's risk-return profile. Our results on the one hand facilitate sustainable financial planning and on the other hand challenge the very existence of life-cycle funds since appropriately calibrated balanced funds can offer a similar (often dominating) risk-return profile.     

Modelling the term structure of interest rates in a small emerging market economy

This paper investigates the term structure of interest rates in a small emerging market economy – the Dominican Republic. The modelling finds a significant dynamic link amongst the day-to-day interbank interest rate and a representative banking system interest rate. But the interbank rate's forecasting power breaks down in the aftermath of the 2003 banking crisis. This episode illustrates how the monetary authorities' credibility with the public and market expectations affect the term structure's reliability.     

IAS 39: Underlying Principles

There has been much recent debate about the merits of certain aspects of the IASB's recent improvements to IAS 39 Financial Instruments – Recognition and Measurement. Many have sought changes to IAS 39 and lengthy discussions have taken place to determine whether proposed changes are appropriate. These discussions have often focused on the practical effects of the proposed changes – an aspect that is certainly worthy of in-depth consideration. However, the IASB has also focused discussions on whether proposed changes are consistent with the principles underlying the standard. This article seeks to highlight those principles underlying the recognition, measurement and hedge accounting aspects of IAS 39, and their consequences for the resultant accounting requirements as a means to enhance understanding of the reasons why the IASB may find it difficult to accept certain proposed changes.     

Reducing complexity and compliance costs: a simplification safe harbour for the global minimum tax

I present a simplification safe harbour based on tax administrative guidance for Pillar Two, the global minimum tax, developed together with Cedric Döllefeld, Joachim Englisch, Simon Harst and Felix Siegel. It aims at reducing unnecessary compliance costs by avoiding effective tax rate (ETR) calculations if a minimum tax of 15 per cent has already been paid. The simplification safe harbour consists of a two-level test to determine if a full GloBE ETR calculation is required from a multinational enterprise (MNE) or if a simplified ETR calculation or no calculation at all is sufficient. The test consists of a country-level test and – only if necessary – an MNE-level test. The country-level test assesses a country's tax system. It seeks to determine whether the national tax system's nominal tax rates are (too) low and whether significant deviations between a country's tax base and the GloBE income exist. The second level, the MNE-level test, is only carried out if the country-level test has identified potential ‘red flags’. Even if this second test is required, the simplification safe harbour offers a significant reduction in compliance costs. This reduction is achieved by relying on national tax data, which are readily available in firms, instead of highly adjusted accounting data.     

The Validity of the Economic Value Added Approach: an Empirical Application

This study investigates the relative explanatory power of the Economic Value Added (EVA) model with respect to stock returns and firms' market value, compared to established accounting variables (e.g. net income, operating income), in the context of a small European developing market, namely the Athens Stock Exchange, in its first market‐wide application of the EVA measure. Relative information content tests reveal that net and operating income appear to be more value relevant than EVA. Additionally, incremental information tests suggest that EVA unique components add only marginally to the information content of accounting profit. Moreover, EVA does not appear to have a stronger correlation with firms' Market Value Added than the other variables, suggesting that – for our Greek dataset – EVA, even though useful as a performance evaluation tool, need not necessarily be more correlated with shareholder's value than established accounting variables.     

The use of digital footprints in the US mortgage market

We study the rise of digital footprint (DF) users in the U.S. residential mortgage market. The proportion of lenders that use a borrower's DF has witnessed remarkable growth from 6% in 2013 to 34% in 2018 in a short span – according to our analysis. We show that the use of DFs can significantly reduce a lender's overall risk and that the use of DFs can result in considerable societal benefits, by reducing the overall discriminatory forces. In sum, we provide evidence that the informational advantage associated with using a borrower's DF far outweighs that of existing traditional lending methods.     

A Study of the Informal Interactions between Audit Committees and Internal Auditors in Australia

This paper finds evidence for the growing importance of informal interactions between the internal audit function and the audit committee (AC) in Australia – a relatively unexplored topic in the literature – using a survey of Chief Audit Executives (CAEs). It also describes the nature of these informal interactions. The most innovative elements of this paper are the findings that certain personal characteristics of CAEs, the specific knowledge and expertise of the AC chair, as well as some of the AC chair's personal characteristics are associated with the existence (and increase) of informal interactions.     

Decline of Controlled Foreign Company Rules and Rise of Intellectual Property Boxes: How the European Court of Justice Affects Tax Competition and Economic Distortions in Europe

The European Court of Justice (ECJ) has become an influential player in the field of direct taxation in the European Union (EU) in the past 20 years. However, it is unclear whether or not the ECJ's decisions and the corresponding reactions by the member states actually contribute to tax neutrality in economic terms and, therefore, to the achievement of the internal market. In 2006, the ECJ limited the applicability of specific tax rules in the EU that are intended to prohibit the excessive use of low‐tax countries by multinationals. Our counterfactual analysis shows that the court's restriction of so‐called controlled foreign company rules and the related second‐round reactions by some member states – i.e. the introduction of low‐tax regimes for income from acquired intellectual properties (IP boxes for acquired IP) – cast doubt on the seemingly positive effects the ECJ has on reducing tax distortions. In addition, we demonstrate that the restricted applicability of IP boxes as endorsed by the OECD and the European Commission would strengthen tax neutrality in Europe.