Auditor selection within a business group: evidence from Taiwan

Although auditor selection is well documented in the literature, it is unclear whether group characteristics affect firms’ auditor selection decisions. Generally, a business group is the result of diversification by the core firm. Major decisions of the business group, such as auditor selection, are made by the core firm and influenced by the business group’s characteristics. Using operational and ownership linkages perspectives, this study investigates the determinants of a business group’s member firm engaging the same auditor as its core firm. We employ the input–output relationship of products along a supply chain to construct product vertical relatedness measures between member firms and the core firm, and establish logistic regression models to test our hypotheses. Using a sample of publicly listed business groups in Taiwan from 2000 to 2010, our results suggest that a member firm is more likely to engage the same auditor as its core firm when (1) the core firm engages a Big N auditor, (2) the core firm’s auditor is an industry specialist for both the core firm and its member firm, (3) the degree of vertical relatedness increases, or (4) the controlling shareholders’ deviation of voting rights from cash flow rights increases (hereafter deviation). On the other hand, the likelihood of a member firm engaging the same auditor as its core firm when induced by higher deviation could be offset by the influence of stronger business vertical linkages.     

Bond market access and acquisitions: empirical evidence from the European market

We investigate whether access to bond markets affects acquisition activity of the European firms between 1999 and 2014. Our study provides insight into the effect that the growing European bond market has on corporate investment activity. We find that access to the bond markets, measured by the existence of a credit rating, has a significant effect on the tendency of firms to make acquisitions. The effect is strongest in Continental Europe and during times of high acquisition activity. We further find that consistent with prior U.S. evidence, bond market access has an inverse effect on abnormal returns generated by the acquisitions. That finding suggests that firms with superior access to financing pursue targets of lesser quality.     

Instructor Control in an automated environment: a reconsideration with empirical evidence

Professionals can be distinguished by the degree of control they exercise over their clientele. This control enables professionals to invoke a systematic body of knowladge on behalf of those in need of these services, and serves as the basis for professional monopolies and prestige. Applied to the classroom, instructors exert control over the educational process in a variety of ways. This paper reports on the utilization of an expert system to reduce several dimentions of instructor control at a major university in the United States. It finds that the relaxation of instructor control may be a desirable means of attaining educational goals.     

Executive incentives and payout policy: Empirical evidence from Europe

We investigate how corporate payout policy is influenced by executive incentives, i.e. stock and option holdings, stock option deltas and stock-based pay-performance sensitivity for 1,650 publicly listed firms from the UK, Germany, France, Italy, the Netherlands and Spain, over the period from 2002 to 2009. Our results show that executive stock option holdings and stock option deltas are associated with lower dividend payments in our sample of European countries, where we do not observe any presence of dividend protection for executive stock options. We find that this relationship is mainly driven by exercisable stock options and by options that are in the money. Additionally, we observe that executive stock option holdings and stock option deltas have a negative impact on total payout, suggesting that executives do not substitute share repurchases for dividends. Furthermore, the fraction of share repurchases in total payout increases as executive stock option holdings and stock option deltas increase. Finally, our results show that executive share ownership and stock-based pay-performance sensitivity may mitigate agency conflicts by significantly increasing the level of total payout.     

Securitization and financial solvency: empirical evidence from Portugal

This paper analyses the effect of securitization issues on the solvency of Portuguese financial institutions. For this purpose, we use an unbalanced panel model estimated using GMM methods and find that securitization has a slightly positive impact on the soundness of the issuing entity. We study 35 financial entities and 60 traditional securitizations issued by 9 originators between 2001 and 2013. The analysis reveals that the financial entities’ soundness improved slightly, showing that securitization enhanced the quality of the originators’ portfolios and increased the regulatory capital requirements. We also found that efficiency and profitability improve the risk-adjusted ROAA and that efficiency increases regulatory capital requirements. The robustness analysis confirms the positive effect of securitization on solvency, where both credit quality and liquidity are shown to be significant variables.     

Small business tax policy and informality: evidence from Georgia

Using a panel of administrative data and regression discontinuity analysis, this paper examines how the introduction of preferential tax regimes for Georgian micro- and small businesses in 2010 affected formal firm creation and tax compliance. The results show that the new tax regime for micro-businesses increased the number of newly registered firms by 27–41 % below the eligibility threshold during the first year of the reform, but not in subsequent years. We do not find an effect of the new tax regime for small businesses on formal firm creation in any year. Policy makers are often also concerned about abuse risks stemming from differentiated tax treatment of micro- and small businesses. The analysis in this paper reveals reduced tax compliance among small taxpayers for multiple years after the reform and among micro-business taxpayers only during the first year of the reform.     

Auditor monitoring and verification in financial contracts: evidence from earnouts and SFAS 141(R)

We study how monitoring and verification of accounting-based performance benchmarks influences the design and efficiency of earnout contracts. Earnouts are commonly used to resolve agency conflicts arising in mergers and acquisitions, but these contracts create measurement and other agency problems when contingent payments are tied to future accounting-based performance. Exploiting changes in auditor monitoring of earnouts that arose as\ a consequence of SFAS 141(R), we find that acquisition contracts are more likely to incorporate accounting-based earnouts and that contingent payments tied to accounting-based performance benchmarks make up a larger portion of the consideration when acquiring firms have high-quality auditors. We also find that market reactions to announcements of earnout deals are more positive after SFAS 141(R) for acquisitions most susceptible to disputes over accounting-based performance metrics and these results are more pronounced for acquiring firms with high-quality auditors. By exploiting the features of this unique setting, we illuminate the role of monitoring and verification of accounting information in financial contracts.     

Taxation and foreign direct investment (FDI): empirical evidence from a quasi-experiment in China

China’s new Corporate Income Tax Law was passed in March 2007 and took effect on January 1 2008. It terminates the dual corporate income tax regime by removing the preferential tax treatments offered to foreign investment enterprises (FIEs) and unifies the corporate income tax regime for FIEs and Chinese domestic enterprises (DEs). This paper uses a difference-in-differences approach to determine whether FIEs are responding to the law by reducing their investment in China. Employing the Chinese Industrial Enterprises Database (2002～2008) to implement the analysis, we find that: (1) FIEs are responding to the law by reducing their investment in China; and (2) the magnitude of the response is larger for HongKong-Macau-Taiwan (HMT) investment enterprises than that for other FIEs, which supports the claim that some Chinese investors engaged in “roundtripping” FDI. Our confidence in the conclusions are further boosted by the results of a series of placebo tests and two robustness checks: (1) the results of the placebo tests support the claim that the estimated effect is due to the tax reform rather than to other confounding factors; (2) the results of the first robustness check are consistent with the perception that State-Owned Enterprises (SOEs) might enjoy more favorable treatments from the Chinese government than Private-Owned Enterprises (POEs); and (3) the results of the second robustness check show that incorporating enterprise-specific time trends into the baseline specification of our econometric models does not change the conclusions.     

Socially responsible investing and stock performance: New empirical evidence for the US and European stock markets

This paper empirically examines the theoretically ambivalent relationship between socially responsible investing (SRI) and stock performance. It contributes to the existing literature by considering both the US and the entire European stock markets and by using consistent world-wide corporate sustainability performance data. Our portfolio analysis from 1998 to 2009 is based on the common four-factor model according to Carhart (1997), which comprises market return, size, value, and momentum factors. We show for the US and the European stock markets that SRI is associated with large-sized firms. The insignificant abnormal stock returns for SRI in both regions are the main result of our paper. Therefore, our study supports the view that SRI stocks are correctly priced by market participants, although we cannot rule out that a corresponding mispricing has existed before the beginning of our observation period in 1998.     

Efficiency and risk in commercial banking: empirical evidence from East Asian countries

This paper analyses the effects of off-balance sheet (OBS) activities and various types of risks on the cost and profit efficiencies of banks in seven East Asian countries between 2001 and 2008. Cost and profit efficiency scores are estimated using the data envelopment analysis approach. The results of this analysis are then used to identify the impact of OBS activities and risk exposures on cost and profit efficiencies using a Tobit regression. Bank insolvency risk (as measured by z-scores) is positively related to profit efficiency, while interest sensitivity, size, equity to total assets and OBS exposures all impact on cost efficiency. The analysis of the impact of input and output slacks illustrates that in around 1 in 5 cases banks’ cost efficiency can be improved by adjusting the former variables, whereas in only around 1 in 100 cases a similar outcome is possible for profit efficiency.     

Board size and corporate performance: evidence from European countries

This paper examines the effects of board size on corporate performance across a number of European economies. Agency models suggest that large boards may destroy corporate value. Our fixed effects econometric evidence demonstrates that the effect of board size on corporate performance is generally negative. A negative effect is isolated for all five European countries in question when performance is measured as return on equity; this inverse relationship is more difficult to isolate using market-based measures of performance.     

Determinants and value of enterprise risk management: empirical evidence from Germany

Enterprise risk management (ERM) has become increasingly relevant in recent years, especially due to an increasing complexity of risks and the further development of regulatory frameworks. The aim of this paper is to empirically analyze firm characteristics that determine the implementation of an ERM system and to study the impact of ERM on firm value. We focus on companies listed at the German stock exchange, which to the best of our knowledge is the first empirical study with a cross-sectional analysis for Germany and one of the first for a European country. Our findings show that size, international diversification and the industry sector (banking, insurance, energy) positively impact the implementation of an ERM system, and financial leverage is negatively related to ERM engagement. In addition, our results confirm a significant positive impact of ERM on shareholder value.     

VAT threshold and small business behavior: evidence from Thai tax returns

International Tax and Public Finance - This paper examines how small firms respond to the VAT registration threshold in the context of high informality. Using the panel of VAT and corporate income...     

Effect of ownership structure on underinvestment and overinvestment: empirical evidence from Spain

This paper investigates how ownership affects the investment‐cash flow sensitivity by taking into account the non‐linearities of ownership with respect to firm value, and using a free cash flow index and a criterion for financial constraints to disentangle underinvestment and overinvestment. Interesting results are provided by estimating using the Generalized Method of Moments to eliminate the endogeneity problem. The alignment of interests between owners and managers and the monitoring by concentrated ownership both alleviate the sensitivity of investment to cash flow both in underinvestor and overinvestor firms. However, in the presence of controlling owners, underinvestment and overinvestment are exacerbated.     

Financial markets and economic performances: Empirical evidence from five industrialized economies

This paper investigates the nature of the links between the development of financial markets and economic performances in five advanced economies. The vector error correction model (VECM) establishes the quantitative importance of long-run relationships among three financial variables and the real output. Granger's causality test then suggests short-run causality between financial markets and the real sector as well as the substitution effect of the individual sectors in the financial market of each country. The results support the supply-leading hypothesis that the development of financial markets spurs growth for all countries except for Canada. The demand-driven hypothesis is confirmed for Canada only in the short run.     

Modelling jumps in electricity prices: theory and empirical evidence

Objective of this paper is to enhance the understanding of modelling jumps and to analyse the model risk based on the jump component in electricity markets. We provide a common modelling framework that allows to incorporate the main jump patterns observed in electricity spot prices and compare the effectiveness of different jump specifications. To this end, we calibrate the models to daily European Energy Exchange (EEX) market data through Markov Chain Monte Carlo based methods. To assess the quality of the estimated jump processes, we analyse their trajectorial and statistical properties. Moreover, even when the models are calibrated to a cross-section of derivative prices substantial model risk remains.      

Family ownership and firm performance: Empirical evidence from Western European corporations

This paper empirically examines how family-controlled firms perform in relation to firms with nonfamily controlling shareholders in Western Europe. The sample consists of 1672 non-financial firms. Active family control is associated with higher profitability compared to nonfamily firms, whereas passive family control does not affect profitability. Active family control continues to outperform nonfamily control in terms of profitability in different legal regimes. Active and passive family control is associated with higher firm valuations, but the premium is mainly due to economies with high shareholder protection. The benefits from family control occur in nonmajority held firms. These results suggest that family control lowers the agency problem between owners and managers, but gives rise to conflicts between the family and minority shareholders when shareholder protection is low and control is high.     

The effectiveness of tax incentives in attracting investment: panel data evidence from the CFA Franc zone

In this paper we investigate to what extent tax incentives are effective in attracting investment in Sub-Saharan Africa. We test the neo-classical investment theory prediction that tax incentives, by lowering the user cost of capital, raise investment. Next to tax incentives, we also estimate the impact on investment of other investment climate variables that are under direct control of the government, such as the transparency and complexity of the tax system, and the legal protection of foreign investors. In developing countries these variables might be as important as or even more important than the tax variables themselves.     

The empirical relationship between risk and return: evidence from the UK stock market

Previous studies reach no consensus on the relationship between risk and return using data from one market. We argue that the world market factor should not be ignored in assessing the risk-return relationship in a partially integrated market. Applying a bivariate generalized autoregressive conditional heteroscedasticity in mean (GARCH-M) model to the weekly stock index returns from the UK and the world market, we document a significant positive relationship between stock returns and the variance of returns in the UK stock market after controlling for the covariance of the UK and the world market return. In contrast, conventional univariate GARCH-M models typically fail to detect this relationship. Nonnested hypothesis tests supplemented with other commonly used model selection criteria unambiguously demonstrate that our bivariate GARCH-M model is more likely to be the true model for UK stock market returns than univariate GARCH-M models. Our results have implications for empirical assessments of the risk-return relationship, expected return estimation, and international diversification.