What does PIN identify? Evidence from the T-bill market

The probability of informed trading (PIN) measure has been increasingly used in empirical research in finance. However, there is a growing debate as to whether PIN measures information-based or liquidity-based trading. We contribute to the discussion by estimating PIN using transaction data for one-month T-bills. Our PIN estimates exceed those reported for equities, despite it being unlikely that the probability of informed trading is higher in T-bills than equities. We conclude that PIN identifies trading clusters and that the source of the clustering depends on the economics of the market. The economics of the T-bill market suggest discretionary liquidity traders are the likely source of the clustering.     

What Drives the Owner‐Occupied and Rental Housing Markets? Evidence from an Estimated DSGE Model

Most dynamic stochastic general equilibrium (DSGE) models with a housing market do not explicitly include a rental market and assume a tight mapping between house prices and rents over the business cycle. However, rents are much smoother than house prices in the data. We match this feature of the data by adding both an owner‐occupied housing market and a rental market in a standard DSGE model. The intertemporal preference shock accounts for more than half of the variation in house prices and contributes to residential investment fluctuations through the liquidity constraint, and nominal rigidity in rental contracts captures the variation in the price‐rent ratio.     

Multiple corporate governance attributes and the cost of capital – Evidence from Germany

This paper investigates the extent to which corporate governance affects the cost of debt and equity capital of German exchange-listed companies. I examine corporate governance along three dimensions: financial information quality, ownership structure and board structure. The results suggest that firms with high levels of financial transparency and bonus compensations face lower cost of equity. In addition, block ownership is negatively related to firms' cost of equity when the blockholders are other firms, managers or founding-family members. Consistent with the conjecture that agency costs increase with firm size, I find significant cost of debt effects only in the largest German companies. Here, the creditors demand lower cost of debt from firms with block ownerships held by corporations or banks. My findings demonstrate that a uniform set of governance attributes is unlikely to satisfy suppliers of debt and equity capital equally.     

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 happens in acquisitions?: Evidence from brand ownership changes and advertising investment

We study advertising at the brand level in a sample of corporate acquisitions. New owners display an elevated propensity to sharply cut advertising in acquired brands. This behavior is most pronounced in private equity transactions. When a buyer's existing brands overlap with the acquired brands, aggregate advertising spending on the merged portfolio of brands tends to shift downward. Sharp advertising cuts are more likely to be observed when the old owner of the assets was investing at an elevated level and when the new owner has displayed past restraint in their investment spending activities. Combined buyer and seller abnormal returns are more positive in deals characterized by post-acquisition cuts in advertising, suggesting that these cuts often represent efficiency-enhancing cost savings.     

What do insiders know? Evidence from insider trading around share repurchases and SEOs

We examine the nature of information contained in insider trades prior to corporate events. Insiders' net buying increases before open market share repurchase announcements and decreases before seasoned equity offers. Higher insider net buying is associated with better post-event operating performance, a reduction in undervaluation, and, for repurchases, lower post-event cost of capital. Insider trading also predicts announcement returns and long-term abnormal returns following events. Overall, our results suggest that insider trades before corporate events contain information about changes both in fundamentals and in investor sentiment.     

What determines the profitability of banks? Evidence from Spain

This paper empirically analyses the factors that determine the profitability of Spanish banks for the period of 1999–2009. We conclude that the high bank profitability during these years is associated with a large percentage of loans in total assets, a high proportion of customer deposits, good efficiency and a low doubtful assets ratio. In addition, higher capital ratios also increase the bank’s return, but only when return on assets (ROA) is used as the profitability measure. We find no evidence of either economies or diseconomies of scale or scope in the Spanish banking sector. Finally, our study reveals differences in the performance of commercial and savings banks.     

Do corporate governance attributes affect adverse selection costs? Evidence from seasoned equity offerings

We examine the relation between corporate governance attributes and perceived information asymmetry. In a sample of seasoned equity offerings between 1996 and 2001, we find that board independence, size of the audit committee, and officer and director ownership mitigate the negative effect of the equity offering announcement on share prices. These results are consistent with the notion that investors perceive certain governance systems to better align manager and shareholder incentives, which improves firm access to capital markets.     

Do financial analysts compel firms to make accounting decisions? Evidence from goodwill impairments

Review of Accounting Studies - This paper examines whether financial analysts’ presence compels recognition of goodwill impairments. Analysts could impact managers’ impairment decisions...     

The need for an alternative to shareholder value creation? The Ethomed student experience

This article aims to highlight the need for a radical break with the methodological individualism that dominates the fields of economics and management, especially finance. It advocates the need to try to understand the issues and methods that are required to coordinate economic action in order to meet social needs.The article questions methodological individualism and the dominant role played by shareholders. Is it possible to promote social welfare simply by considering it to be a result of a shareholder value maximization point of view? If not, this implies not only understanding fully the challenges that we face but also being innovative regarding the way in which we coordinate the actions that are necessary to meet these challenges head on, and perhaps promoting another character as a substitute for the shareholder.     

What firm risk factors drive bank loan pricing and other terms? Evidence from China

This study investigates how firm risk factors affect bank loan pricing. Although firm-specific stock price crash risk affects bank loan costs directly, it also prompts other risks, including financial restatement and litigation, which in turn trigger higher bank loan costs. Strong internal and external governance mechanisms help reduce agency problems and improve information transparency, alleviating the adverse effect of stock price crash risk on loan costs. Our results confirm that bankers take good corporate governance into account in their bank loan decisions. We also show that bond investors price the adverse effect of stock price crash risk, prompting higher corporate bond costs. Futher evidence suggests that banks impose stricter non-price terms, such as smaller loan size, shorter loan maturity, and a higher likelihood of collateral requirement, on firms with higher crash risk.     

Does office size matter in client acceptance decisions? Evidence from big 4 accounting firms

Review of Quantitative Finance and Accounting - This study examines whether audit firm office size affects auditors’ risk tolerance in making client acceptance decisions. Analyzing publicly...     

How do labor adjustment costs affect corporate tax planning? Evidence from labor skills

Labor adjustment costs (LACs) are a broad concept and involve costs incurred to search, hire, train, retain, and fire employees. Using the level of labor skills as a proxy for LACs, I find that higher LACs are associated with greater tax savings. The effect is stronger for firms facing more intense competition, and firms in states that strengthen labor protection, but weaker for firms in states that restrain labor mobility. High-LAC firms avoid taxes in order to generate precautionary cash. Collectively, the evidence indicates a significant influence of frictions in labor markets (i.e., LACs) on corporate tax planning behavior.     

What drives cross-segment diversity in returns and risks? Evidence from Japanese and U.S. firms

The usefulness of segment reporting is grounded on the presumption of diversities of returns and risks across reported segments. We examine the effect of country-specific factors, reporting incentives, and choices on an ANOVA-based measure of cross-segment diversities (CSD) in risk and returns for a sample of Japanese and U.S. multi-segment firms. We find that, in contrast to our expectations, Japanese firms exhibit greater CSD than U.S. firms. Moreover, we find that in both countries CSD is driven especially by reporting incentives associated with profitability and foreign sales, but not by proprietary costs. Further, the manager's choice of the number of reported segments is an important factor affecting CSD.     

Do corporations learn from mispricing? Evidence from takeovers and corporate performance

In this article we form the simple prediction that mispricing encourages traders to collect costly information that guides managerial decisions at corporate level. Our findings support this prediction based on evidence derived from both the US market for corporate control and the overall variation in aggregate corporate profits. The trading activity in response to the temporary mispricing of the merging companies provides useful information that leads to the design of high-synergy deals. Such synergies are reflected in an increase in the announcement period acquirer abnormal returns and are not reversed in the long-run. At the market-wide level, our results suggest that the growth in the overall stock trading volume in response to market mispricing is associated with high future corporate profit growth. Overall, after controlling for several economic and financial conditions, the temporary mispricing in a developed and generally efficient stock market stimulates informative trading, ultimately leading to value- and performance-enhancing corporate decisions.     

Does accounting quality change following a switch from U.S. GAAP to IFRS? Evidence from Germany

This study examines whether accounting quality changed following a switch from U.S. GAAP to IFRS. Using a sample of German high tech firms that transitioned to IFRS from U.S. GAAP in 2005, we find that accounting numbers under IFRS generally exhibit more earnings management, less timely loss recognition, and less value relevance compared to those under U.S. GAAP. In addition, after analyzing the accounting quality of firms that applied IFRS throughout the entire sample period, we find that, for the metrics suggesting a decline in accounting quality for both groups of firms, the change is significantly more pronounced for firms switching to IFRS from U.S. GAAP. Overall, our findings indicate that the application of U.S. GAAP generally resulted in higher accounting quality than application of IFRS, and a transition from U.S. GAAP to IFRS reduced accounting quality. Our findings provide the first evidence on the potential consequences of a switch from U.S. GAAP to IFRS.     

What Matters in Venture Capital? Evidence from Entrepreneurs’ Stated Preferences

We study how entrepreneurs evaluate the ability of different US venture capitalists (VCs) to add value to start-up companies. Analyzing a large data set of entrepreneurs’ stated preferences regarding VCs, we demonstrate that entrepreneurs view independent partnership VCs more favorably than other VC types (e.g., corporate, financial, and government sponsored VCs). Although entrepreneurs are able to correctly identify VCs with better track records, they do not believe them to be more desirable investors. We also find that an entrepreneur's rankings are affected by their overall exposure to VCs, emphasizing the role of experiential learning in the venture capital market.     

What factors affect behavioral biases? Evidence from Turkish individual stock investors

This paper investigates behavioral biases among Turkish individual stock investors during 2011. Using transaction data, we analyze how common disposition effect, familiarity bias, representativeness heuristic, and status quo bias are, what factors affect these biases and how these biases relate to each other including overconfidence and return performance. We find that biases are common among investors. Male, younger investors, investors with lower portfolio value, and investors in low income, low education regions exhibit more familiarity bias. Female, older investors and investors with high portfolio values are more subject to disposition effect and representativeness heuristic. Individuals in the opposite edge of overconfidence are subject to status quo bias. Overconfidence is positively correlated with familiarity bias. Representativeness heuristic deteriorates wealth while status quo bias results in higher trade performance. Familiarity bias has a nonmonotonic effect on return; lower (higher) levels of familiarity bias have a negative (positive) effect on return. To the best of our knowledge, this is one of the few studies that focus on nationwide data and analyze the biases simultaneously. Using a unique dataset, we extend the findings of the behavioral finance literature to emerging markets. Besides, analysis of multiple biases helps us better understand the relationship among biases.     

What Are Boards For? Evidence from Closely Held Firms in Colombia

Using a large survey database on the corporate governance practices of privately held Colombian firms, we investigate why firms have boards, and how that choice and the balance of power among the board, controlling shareholders, and minority shareholders affect the trade‐offs between control, liquidity, and growth and, ultimately, firm performance. We find that the probability of having a board increases with the number of shareholders and in family firms. When the preferences of controlling and minority shareholders diverge, as with respect to capital structure and dividend policy, boards support controlling shareholders’ decisions, thereby exacerbating the agency conflict between the two groups of shareholders.