What is an Investment Project's Implied Rate of Return?

How to measure a project's implied rate of return has long been an unresolved problem, except for some special cases. This paper derives return on present cost (ROPC) as the correct measure of an investment project's implied rate of return. The IRR is a biased measure except for projects classified as simple projects, and this bias is likely to be substantial in many real‐world applications. Thus while net present values should be used to determine whether to accept/reject projects, I recommend that analysts use ROPC in place of the IRR as a measure of a project's true rate of return.     

What is an OTC Transaction

What is an OTC(over-the-counter) transactionand how is it different from an automaticprice-matching transaction?The OTC approach refers to spot foreign exchangetransactions between participants of the inter-bankforeign exchange market through independent …     

Under What Conditions Is an Insurance Guaranty Fund Beneficial for Policyholders?

In this article, we derive conditions in an imperfect market setting, under which the introduction of a self‐supporting insurance guaranty fund improves the position of the policyholders. When a guaranty fund is advantageous given homogeneous firms in the market, all policyholders benefit from it to the same extent, if they have the same underlying risk preferences and are charged identical premiums. In a more realistic heterogeneous setting, the introduction of an insurance guaranty fund is in general no longer beneficial for all policyholders in the same manner. Hence, systematic wealth transfers take place between the policyholders of different insurance companies. As a possible solution, and in order to counteract this effect, we introduce a framework for utility‐based fund charges.     

What is the effect of an additional dollar of IPO proceeds?

We examine the effect of IPO proceeds on post-IPO liquidity and market monitoring. To do so we exploit variation in the amount of proceeds raised that is unrelated to firm size and manager decisions using an instrumental variable approach. We find that marginal increases in IPO proceeds lead to large increases in liquidity, analyst coverage, and institutional ownership in the first two years a firm is public. Increases in IPO proceeds also lead to more frequent follow-on offerings and longer survival as a public firm. We find evidence that immediate shocks to ownership dispersion represent one plausible channel through which changes in IPO proceeds affect long-run liquidity and market monitoring. Overall, our findings support the theoretical liquidity and market quality benefits associated with reductions in ownership concentration.     

What is an InsurTech? A scientific approach for defining the term

The insurance sector has been transformed as a result of the impact of InsurTech. However, although InsurTech has become a highly relevant concept in recent years, there has yet to be an agreed-upon meaning of InsurTech. Therefore, it is necessary to establish a solid definition that provides a clear understanding of the term InsurTech. For this purpose, an essential study of the complete scientific production has been carried out through the results obtained for InsurTech in the most relevant databases up to December 31, 2021. This paper aims to define the term InsurTech considering all the contributions made by scholars in the existing academic literature. The research methodology has consisted of an extensive systematic literature review merged with a comprehensive analysis of the nature of the definitions of InsurTech through a three-stage procedure. A total of 111 academic articles referring to InsurTech have been found. Based on a rigorous analysis and building on the common elements of the 17 meanings provided by the academics, a definition of Insurtech from a scientific approach has been presented. Finally, the nuances of this definition for an Insurtech to be considered as such are discussed and explained.     

What Cost of Capital Should You Use? The Market Has an Answer

The most widely used means of estimating a company's cost of equity capital is the Capital Asset Pricing Model (CAPM). But as a growing number of academics and practitioners have suggested, use of the CAPM produces estimates that often fail to reflect the risks of the companies as perceived by current and potential investors. The authors' work, together with other research, also suggests that the cost of equity produced by the CAPM is often too high. To the extent this is so, companies are discounting investment projects at rates of return that may be leading them to pass up value‐adding opportunities. The authors advocate the use of a simple and practical alternative to the CAPM that does not use either an assumed market risk premium or a beta. It uses instead an equity premium that is implied by the current market price of a company's stock and, as such, is implicitly derived from investors' assessments of the firm's risk that are reflected in that price. More specifically, the alternative approach solves for the internal rate of return that equates the present value of expected future cash flows to the current market price. In support of this approach, studies have shown that such market‐implied measures are better predictors than CAPM‐based estimates of future stock returns, both at the individual‐firm and aggregate market levels.     

What types of banks profit most from fees charged? A cross-country examination of bank-specific and country-level determinants

The perception that banks are exploiting customers through their fee-charging practices in a bid to maximize profits, has fuelled widespread public interest in identifying the banks that profit most heavily from fees. Using hierarchical cross-country regression analyses, this paper seeks to answer the question – what types of banks profit most from fees charged? It also highlights the country level factors that influence banks’ ability to profit from fees charged. The factors at the country level distinguish between those that relate specifically to the financial services industry and broader macroeconomic indicators. The paper also identifies three channels through which national culture impacts banks’ ability to make high profits from fees. This paper uses the most comprehensive set of explanatory variables in studies of this nature. It has also extended the spatial scope of previous studies on bank fees by including data on banks from 46 developed and developing countries. In light of swelling public pressure on governments to do ‘something’ about bank fees, ill-advised measures are highlighted.     

What was privacy?

Why is that question in the past tense? Because individuals can no longer feel confident that the details of their lives--from identifying numbers to cultural preferences--will be treated with discretion rather than exploited. Even as Facebook users happily share the names of their favorite books, movies, songs, and brands, they often regard marketers' use of that information as an invasion of privacy. In this wide-ranging essay, McCreary, a senior editor at HBR, examines numerous facets of the privacy issue, from Google searches, public shaming on the internet, and cell phone etiquette to passenger screening devices, public surveillance cameras, and corporate chief privacy officers. He notes that IBM has been a leader on privacy; its policy forswearing the use of employees' genetic information in hiring and benefits decisions predated the federal Genetic Information Nondiscrimination Act by three years. Now IBM is involved in an open-source project known as Higgins to provide users with transportable, potentially anonymous online presences. Craigslist, whose CEO calls it "as close to 100% user driven as you can get," has taken an extremely conservative position on privacy--perhaps easier for a company with a declared lack of interest in maximizing revenue. But TJX and other corporate victims of security breaches have discovered that retaining consumers' transaction information can be both costly and risky. Companies that underestimate the importance of privacy to their customers or fail to protect it may eventually face harsh regulation, reputational damage, or both. The best thing they can do, says the author, is negotiate directly with those customers over where to draw the line.     

Which institutional investor types are the most informed?

We examine the informativeness of quarterly disclosed portfolio holdings across four institutional investor types: hedge funds, mutual funds, pension funds and private banking firms. Overweight positions outperform underweight positions only for hedge funds. By decomposing holdings and stock returns, we find that hedge funds are superior to other institutional investors both at picking industries and stocks and that they are better at forecasting long‐term as well as short‐term returns. Furthermore, our results show that hedge funds, mutual funds and pension funds are able to successfully time the market. The outperformance of hedge funds is not explained by a liquidity premium.     

What if IFRS were a Tax Base? New Empirical Evidence from an Austrian Perspective

This paper is a response to Singleton-Green's examination of the relationship between scholarly financial accounting research and financial accounting policymaking and, in particular, the failure of policymakers to make much use of contemporary research (Accounting in Europe, 7(2), pp. 129–145, 2010). He argues that a major cause of this failure is a communication gap between academics and policymakers but this paper suggests that there is a major gulf between the interests and approaches of the academic and policymaking communities that will not be overcome by improving communication. Thus, his conclusion is too optimistic and may lead policymakers to expect much more from engagement with academic research than they are likely to obtain and academics employing contemporary research paradigms to believe that their work will be received by policymakers with more enthusiasm than is likely to be the case.     

What Moves Investment Growth?

We use accounting identities to decompose unexpected changes in investment growth into surprises to current cash‐flow growth and stock returns, and revisions of expectations about future cash‐flow growth and future discount rates. Using a vector autoregressive model we find that current cash‐flow surprises account for the largest element of the variance decomposition. Investment growth and current cash‐flow surprises are negatively correlated with news about future cash‐flow growth, which can be expected from persistent productivity shocks and decreasing returns to scale. We find little evidence of a discount rate channel for investment since return terms are small and have unintuitive signs.     

What Is Systemic Risk?

The traditional view of risk in a financial system is that it is the summation of individual risks within the system. However, the financial crisis that started in 2007 has driven home that this view of risk is inadequate. It is the interactions of financial institutions and markets that determine the systemic risks that drive financial crises. We identify four types of systemic risk. These are (i) panics—banking crises due to multiple equilibria; (ii) banking crises due to asset price falls; (iii) contagion; and (iv) foreign exchange mismatches in the banking system.     

What makes a leader?

Superb leaders have very different ways of directing a team, a division, or a company. Some are subdued and analytical; others are charismatic and go with their gut. And different situations call for different types of leadership. Most mergers need a sensitive negotiator at the helm, whereas many turnarounds require a more forceful kind of authority. Psychologist and noted author Daniel Goleman has found, however, that effective leaders are alike in one crucial way: they all have a high degree of what has come to be known as emotional intelligence. In fact, Goleman's research at nearly 200 large, global companies revealed that emotional intelligence--especially at the highest levels of a company--is the sine qua non for leadership. Without it, a person can have first-class training, an incisive mind, and an endless supply of good ideas, but he still won't make a great leader. The components of emotional intelligence--self-awareness, self-regulation, motivation, empathy, and social skill--can sound unbusinesslike. But exhibiting emotional intelligence at the workplace does not mean simply controlling your anger or getting along with people. Rather, it means understanding your own and other people's emotional makeup well enough to move people in the direction of accomplishing your company's goals. In this article, the author discusses each component of emotional intelligence and shows through examples how to recognize it in potential leaders, how and why it leads to measurable business results, and how it can be learned. It takes time and, most of all, commitment. But the benefits that come from having a well-developed emotional intelligence, both for the individual and the organization, make it worth the effort.     

What Drives Consumption Booms?

Consumption booms have been common in both industrial and developingcountries, and several explanations have been offered for theiroccurrence. These include economywide wealth effects associatedwith favorable movements in the terms of trade or euphoric expectationstriggered by macroeconomic reforms, Ricardian effects associatedwith fiscal stabilization, lending booms following financialliberalization, and a variety of distortions in intertemporalrelative prices. Using a large cross-country sample of booms,this article assesses how widely applicable these explanationsare. The key finding is that wealth effects linked to favorablemovements in the terms of trade and anticipated improvementsin macroeconomic performance seem to have been more importantempirically than explanations relying primarily on fiscal phenomenaor distortions in intertemporal relative prices.     

What Drives ETF Flows?

The value of exchange traded fund (ETF) assets has increased from $66 billion in 2000 to almost a trillion dollars in 2010. We use this massive expansion in ETF assets to study what drives ETF flows. Using a data set of over 500 ETFs from 2001 to 2010, we show that ETF investors chase returns in the same way as mutual fund investors. While there is an active debate about whether return chasing by mutual fund investors represents the pursuit of superior talent, the existence of return chasing in this passively managed environment should not represent a search for skilled managers. We also show that ETF flows increase following high volume, small spreads, and high price/net asset value ratios. Finally, we find little evidence of superior market timing in ETF flows. Our results suggest that return chasing in both mutual funds and ETFs is more likely the result of naïve extrapolation bias on the part of investors that has contributed to the growth of the ETF industry.