Do capital flows change domestic credit allocation?

Since the 1990s, domestic bank credit has been reallocated away from lending to non-financial business and toward households. An expanding literature discusses negative effects on growth and stability of this change in credit allocation. We research its drivers. We hypothesize that if foreign capital flows into economies with few investment opportunities, it may substitute for domestic bank lending to non-financial business, so that bank balance sheets become more dominated by household lending. In GMM estimations on data for 36 economies over 1990–2011, we find evidence consistent with this mechanism. Foreign capital inflows into the non-bank sector (but not into the bank sector) are associated with lower shares of business lending in domestic bank portfolios. The association is weaker in economies with more investment opportunities, whether proxied by investment shares, current account surpluses, or EMU membership. Our results highlight the importance of sectoral destination in determining the effects of capital flows.     

Do co-opted boards strategically choose LGBT-supportive policies?

This study contributes to the underexplored literature: corporate governance responsibilities towards internal stakeholders (the employees). We investigate (a) whether the co-opted board, that is, the proportion of directors appointed after the current CEO takes office, influences firms' adoption of Lesbian, Gay, Bisexual and Transgender (LGBT)-supportive policies, (b) if so, what motivates the co-opted boards to do so, and (c) how these relationships change at times of limited economic resources and heightened governance. Based on 4850 firm-year observations of 1081 firms over the sample period of 1996–2010, we find (a) firms with co-opted boards are more inclined towards LGBT-supportive policies, that address stakeholders internal to the firms, (b) management of co-opted boards that adopt LGBT-supportive policies experience a higher increase in compensation than management of co-opted boards that do not adopt LGBT-supportive policies, and (c) during the global financial crisis (GFC), when firms aimed to survive economically under tighter governance, co-opted boards have lower tendency to adopt LGBT-supportive policies. This study offers insights to regulators interested in promoting board structures that address stakeholders. Despite the positive benefits documented in the literature on inclusive policies such as LGBT-supportive policies, the adoption of such policies may have a dark side to it.     

Do regulatory policies matter to corporate innovation?

This paper examines the relationship between regulation and innovation from both theoretical and empirical perspectives. The theoretical model focuses on the role of competition policy (measured by increases in the number of firms) and the strength of intellectual property rights in fostering cost-reducing R&D, under both R&D competition and R&D cooperation. It is shown that, theoretically, competition policy and intellectual property rights are complements under R&D competition, while they are substitutes under R&D cooperation. Moreover, under R&D competition, innovation is maximized through strict competition policy and strong intellectual property rights; whereas under R&D cooperation, innovation is maximized through strict competition policy and weak intellectual property rights. The empirical model tests the effect of several regulatory policies on innovation in several MENA countries. The results of dynamic panel data regressions point that competition policy and intellectual property rights are complements. In addition to competition policy and intellectual property rights protection, the following country/regulation characteristics are considered: human capital, government efficiency, foreign direct investment, natural resources dependence, labor market regulations, and GDP level. The paper finds that the extent of regulations in all categories has statistically significant effects on R&D, except FDI. One explanation is that most FDI to the MENA region flows to natural resources and non-tradable sectors, which are less relevant to R&D than other sectors (e.g., manufacturing and information and communications technology sectors).     

Do time-varying risk premiums explain labor market performance?

Within the standard search and matching model, time-to-build implies that high aggregate risk premiums should forecast low employment growth in the short run but high employment growth in the long run. If there is also time-to-plan, high risk premiums should forecast low net hiring rates in the short run but high net hiring rates in the long run. Our evidence indicates two-quarter time-to-build in the aggregate payroll data, no time-to-plan in the aggregate hiring data, but two-quarter time-to-plan in the job creation data for manufacturing firms. High payroll growth and high net job creation rate in manufacturing also forecast low stock market excess returns at business cycle frequencies.     

Do ETF flows increase market efficiency? Evidence from China

Focusing on the equity exchange traded funds (ETFs) in China, we demonstrate the significant effect of ETF flows on the informativeness of the ETF index. Following the novel approach proposed by Xu et al (2019a). to identify different driving forces for ETF flows, we explore whether the forward-looking ETF flows at a day’s closing substantially improve the index’s efficiency on the next day. The mechanism behind it is inter-market information spread: the efficiency effect of the forward-looking ETF flows strengthens when ETFs share more new information; and the forward-looking ETF flows increase the information flow to the ETF index on the next day.     

Do core and non-core cash flows from operations persist differentially in predicting future cash flows?

This study investigates the persistence of cash flow components (core and non-core cash flows) using a cash flow prediction model. By extending the Barth, Cram, and Nelson (Account Rev 76(January):27–58, 2001) model, we examine the role of cash flow components in predicting future cash flows beyond that of accrual components. We propose a cash flow prediction model that decomposes cash flows from operations into core and non-core cash flow components that parallel the presentation and format of operating income from the income statement. Consistent with the AICPA and financial analysts’ recommendations, and as predicted, we find that core and non-core cash flows defined in our paper are differentially persistent in predicting future cash flows; and these cash flow components enhance the in-sample predictive ability of cash flow prediction models. We also analyze the association of in-sample prediction errors with earnings, cash flow and accruals variability. We find that disaggregating cash flows improve in-sample prediction, especially for large firms with high cash flows and earnings variability.

Do different streams of capital flows affect asset prices differently?

This paper explores the impact of six types of gross capital flows (debt, equity, and banking gross inflows and outflows) on two dimensions: (1) extreme episodes of surges, stops, flights, and retrenchments, and (2) the probability of boom-busts in ASEAN-4 asset markets for the period 1993–2018. To this end, we first decompose gross capital inflows and outflows from Balance of Payments 5 and 6 and show that ASEAN-4 is largely dominated by portfolio flows and a relatively small magnitude of banking flows. However, when we link this decomposition to the extreme episodes, our findings show banking flows are volatile enough to cause greater occurrences of flight and retrenchment episodes while volatile debt flows tend to lead to surge and stop episodes. In the second part, we construct asset price index for ASEAN-4 that can detect boom-busts periods with a minimal noise-to-signal ratio eight quarters ahead. We use heteroscedasticity panel probit and ordinal generalized linear models to show that fundamental variables and banking inflows are statistically significant at increasing likelihood of boom-busts in asset markets. These two findings highlight that although largest percentage of capital flows come through debt and equity markets, the banking channel is of paramount importance in causing extreme episodes of flight and retrenchment as well as boom-busts of asset markets.     

Do multinational and domestic corporations differ in their leverage policies?

This paper examines the leverage policies of multinational corporations (MNCs) in comparison to those of domestic corporations (DCs). Prior studies document that MNCs have lower leverage levels. However, our analysis of U.S. firms over the period 1981–2010 reveals that the leverage levels of MNCs are not significantly lower than those of DCs if we control for key firm characteristics related to leverage levels. We also find that MNCs and DCs do not differ significantly in terms of their debt maturity structure, the speed of leverage adjustments, or the propensity to issue debt vs. equity (or vs. not to issue debt). The results suggest that MNCs' financial policies at the corporate level are not significantly influenced by their greater exposures, in comparison to DCs, to market imperfections such as taxes and regulations. Interestingly, however, our additional analysis of MNCs from outside the U.S. reveals that non-U.S. MNCs issue securities more frequently and adjust leverage faster than their domestic peers.     

Do employee-friendly firms invest more efficiently? Evidence from labor investment efficiency

We investigate the impact of employee treatment on labor investment efficiency. We provide evidence that employee-friendly treatment is significantly associated with lower deviations of labor investment from the level justified by economic fundamentals, i.e., higher labor investment efficiency. The effect of employee treatment on labor investment efficiency is stronger for firms that are human-capital-intensive, with more skilled labor and knowledge capital, and those that face higher product market competition. Using the 2008–2009 financial crisis as an external shock and applying the difference-in-difference method, we also show that employee-friendly firms have higher labor investment efficiency in the post-financial crisis period, but experience more inefficient labor investments during the crisis. Our results are robust to placebo tests, selection bias, propensity score matching, alternative explanations, alternative proxies for both employee treatment and labor investment efficiency as well as the adjustment for using residuals as dependent variables, additional control variables, and various approaches in addressing endogeneity issues.     

Do non-financial factors influence corporate dividend policies? Evidence from business strategy

In this paper, we examine the influence of business strategy on dividend policy. We find that firms following an innovation-oriented strategy (prospectors) pay significantly lower dividends than those following an efficiency-oriented strategy (defenders). Our cross-sectional analyses show that such association is more pronounced among firms with greater investment opportunities and superior performance. Further analysis reveals that prospectors make significantly more capital investment, consistent with prospectors paying fewer dividends to finance their investment activities. Moreover, we address potential endogeneity concerns by implementing (i) a triple-difference analysis (DiDiD) that exploits an exogenous shock that hinders innovation through curbing the supply of highly skilled employees and (ii) an instrumental variable approach. Our results are robust to a propensity-score-matched (PSM) analysis, the inclusion of individual business strategy components, and the use of alternative measures of the dependent variables. Overall, our findings highlight business strategy as an inherent and non-financial determinant of dividend policies.     

Do European recommendations impact on sustainability policies by Italian local governments?

Taking the role of a facilitator, the EU has published recommendations to steer sustainability policies in local governments. The authors analysed strategic plans published by Italian local governments and found that the EU’s recommendations had zero effect. The way forward is for local governments to be required to produce sustainability policies.     

Do policies and institutions matter for pre-tax income inequality? Cross-country evidence

International Tax and Public Finance - Do policies and institutions matter for pre-tax income inequality? I build an annual panel of 43 countries for the period 1980–2016 to document...     

The quest for non-resource-based FDI: Do taxes matter?

Using manufacturing and services firm-level data for 30 African countries, we show that taxation is not a significant driver for the location of foreign firms in Africa, while other investment climate factors, such as infrastructure, human capital, and institutions, are. By analysing disaggregated foreign direct investment (FDI) data, we establish that, while there is considerable contrast in behaviour between vertical FDI and horizontal FDI, taxation is not a key determinant for either type of FDI. Horizontal FDI is affected more by financing and human capital constraints, and less by infrastructure and institutional constraints, than is vertical FDI.     

Do capital buffers matter? Evidence from the stocks and flows of nonperforming loans

This paper investigates the determinants of the stocks and flows (both in- and outflows) of nonperforming loans (NPLs) by considering a bank-specific factor that is not adequately analysed in the literature, namely, bank capital buffers. Using unbalanced panel data with 6,087 bank-year observations for the 2006–2018 period and a two-step system generalised method of moments (GMM) estimation, we find that banks with higher levels of capital buffers (both in terms of Tier 1 and total capital) have fewer NPL stocks and generate fewer NPL inflows. When we control for the characteristics of the loan portfolio, real guarantees collected by the bank increase the stocks and flows of new, impaired loans, while personal guarantees favour the outflow of bad loans.     

Do earnings reported under IFRS tell us more about future earnings and cash flows?

We contribute to the debate about the relative benefits and costs of International Financial Reporting Standards (IFRS) adoption by examining whether earnings persistence and the association between current accounting earnings and future cash flows differ for firms reporting under IFRS versus firms reporting under United States Generally Accepted Accounting Principles (U.S. GAAP) and firms reporting under non-U.S. domestic accounting standards (DAS). Using samples comprised of 58,832 firm-year observations drawn from 33 countries from 2002 through 2008, we find that positive earnings reported under IFRS are no more or less persistent than earnings reported under U.S. GAAP but losses reported under IFRS are less persistent than losses reported under U.S. GAAP. Moreover, we find that earnings reported under IFRS are no more or less persistent and are no more or less associated with future cash flows than earnings reported under non-U.S. DAS. However, we find that earnings reported under U.S. GAAP are more closely associated with future cash flows than earnings reported under IFRS. This is important if a key role of reported earnings is to help investors form expectations about future cash flows. These results should be of interest to academics and standard-setters as they debate the merits of transitioning to IFRS, and to parties who use reported earnings to form expectations about future earnings and cash flows.     

Do labor unions affect firm payout policy?: Operating leverage and rent extraction effects

While previous literature documents weak effects of unionization on payout policy on average, we find that this average relationship hides significant heterogeneous effects of unionization on payouts across firms that depend on firm profitability. The effect of unionization on payouts is negative for low-profitability firms but positive for high-profitability firms. We posit that labor unions (i) increase operating risk, which negatively affects payouts, but (ii) increase potential for rent extraction from unions, which could induce shareholders to demand positive payouts. Higher profitability mitigates the negative effect while strengthening the positive effect, making the relation between unionization and payouts less negative or more positive. We provide evidence consistent with both the negative and positive effects of unionization on payouts. Our empirical design mitigates endogeneity concerns. Further, an instrumental variable analysis and a cross-sectional test using right-to-work laws confirm that endogeneity is unlikely to drive our results.     

Do women managers keep firms out of trouble? Evidence from corporate litigation and policies

We find that firms where women have more power in the top management team, measured by female executives’ plurality and pay slice, face fewer operations-related lawsuits. This effect is robust to several treatments of endogeneity and does not appear to be driven by female executives' greater willingness to settle the cases. Evidence from a simultaneous equations approach suggests that firms where women executives have more power avoid lawsuits partly by avoiding some risky but value-increasing firm policies, such as more aggressive R&D, intensive advertising, and policies inimical to other parties.     

Do analysts’' forecast properties deter suboptimal labor investment decisions? Evidence from Regulation Fair Disclosure

We examine whether analysts' forecast properties deter inefficient labor investment decisions. Using accuracy and dispersion as analysts' forecast properties, we find that more accurate and less dispersed forecasts are associated with less inefficient corporate labor investments. Utilizing Regulation Fair Disclosure (Reg FD) as an exogenous variation to analysts' forecast activities, we find a causal relationship between analysts' forecast properties and labor investment inefficiency. We also find that more accurate and less dispersed forecasts decrease labor cost stickiness. Our results are consistent with the view that analysts' forecast properties enhance the information environment, which, in turn, improves corporate labor investment decisions.     

Do green financial policies offset the climate transition risk penalty imposed on long-term sovereign bond yields?

Asset valuations in high-carbon sectors face significant corrections due to climate risks. This paper specifically analyses whether markets impose a penalty on long-term sovereign bonds issued by countries facing higher climate-related transition risk while rewarding those that have implemented green financial policies to mitigate these risks. We find that higher carbon dioxide emissions and a lower sustainable development score (both proxies for transition risks) lead to an increase in long-term sovereign bond yields. However, the presence of green financial policies appears to offset this climate transition risk premium.     

Do supply shocks in the audit partner labor market affect auditor choice? Evidence from a quasi-natural experiment

We examine whether supply shocks in the audit partner labor market induce clients to switch audit partners. We argue that audit partners in their early careers (i.e., junior partners) charge low audit fees to attract clients, which induces client firms to switch from senior partners to junior partners when there are more junior partners available. Utilizing the Big4 localization policy, we find that Big4 clients are more likely to replace senior auditors with junior auditors to cut costs after the policy. Furthermore, the results are mainly driven by clients who are charged high fees. Our empirical evidence enriches the understanding of auditor choice determinants and informs the ongoing debates surrounding new regulations for Big4 firms in China.