A multinomial logit approach to exchange rate policy classification with an application to growth

We model a country's de jure exchange rate policy as the choice from a multinomial logit response conditioned on the volatility of its bilateral exchange rate, the volatility of its international reserves, and the volatility of its effective exchange rate. The category with the highest predictive probability implied by the logit regressions serves as our de facto exchange rate policy. An empirical investigation into the relationship between the de facto classifications and GDP growth finds that growth is higher under stable currency-value policies. For non-industrialized countries, a more nuanced characterization of exchange rate policy finds that those who exhibit ‘fear of floating’ experience significantly higher growth.     

A positive analysis of corporate capital budgeting practices

Although the academic literature has long argued that discounted cash flow methods are superior to other capital budgeting rules, these methods have only fairly recently come into widespread use. This article points out that there are both costs and benefits to using discounting rules such as net present value. Therefore, they may often not work better in practice than nondiscounting methods. Empirically, the use of discounting methods is positively correlated with market interest rates and the dissemination of information about these tools and negatively correlated with the degree of uncertainty in the economy, which is consistent with our hypotheses.     

The magnet effect of price limits: A logit approach

We investigate the magnet effect of price limits using transaction data from the Taiwan Stock Exchange. A logit model incorporates explanatory variables from microstructure literature and reveals that the conditional probability of a price increase (decrease) increases significantly when the price approaches the upper (lower) price limit, in support of the magnet effect. Our approach recognizes when the magnet effect starts to emerge and identifies possible determinants of magnet effect. The probability of information-based trading has a significant impact on the magnet effect for lower price limits.     

Determinants of corporate borrowing: A note

In his article Determinants of Corporate Borrowing, Myers (1977) says that it is not guaranteed that the maximum value of the firm is reached before the maximum value of the debt is utilized in the case in which the interest payment is fully tax deductible, but the tax shield is lost if the firm goes bankrupt. I have shown here that even in such a case the maximum value of the firm will always be achieved before the maximum available debt is utilized.     

Modeling the bank regulator's closure option: A two-step logit regression approach

This article models the regulator's decision to close a bank as a call option. A two-equation model of bank failure that treats bank closings as an event timed by bank regulators is constructed and estimated for bank failures occurring from 1984 through 1989. The results of the regression experiment are consistent with the underlying theoretical model, as the majority of the regressors in the closure equation are significant with the correct sign.     

A corporate strategy for realizing equal employment opportunity

This paper examines the American corporation's societal environment and finds that an Equal Employment Index (EEI) can serve as a measurement tool to evaluate alternative hiring policies in light of corporate Equal Employment objectives. To help managers choose the “best” hiring policy, a manpower planning model is developed in conjunction with the EEI to solve for the employment policy that comes as close as possible, within manpower flow constraints, to realizing Equal Employment objectives. With this knowledge the manager executes the hiring policy he chooses. The resulting changes in the work force are then evaluated via the EEI and compared to the a priori outcome of the manpower planning model. The difference is used to guide and direct managerial behavior toward attainment of Equal Employment objectives.     

Determinants of corporate borrowing: A behavioral perspective

This article integrates an earnings-based capital structure model into a simple real options framework to analyze the effects of managerial optimism and overconfidence on the interaction between financing and investment decisions. Several empirical implications follow from solving the model. Notably, my analysis reveals that managerial traits can ameliorate bondholder–shareholder conflicts, such as the debt overhang problem. While debt delays investment inefficiently, mildly biased managers can overcome this problem, even though they tend to issue more debt. Similar properties and results are discussed for other real options, such as the asset stripping or risk-shifting problems.     

Tradeoff on corporate cash holdings: a theoretical and empirical analysis

In this study, we propose an optimal cash holding model which examines the tradeoff between illiquidity and opportunity cost concerns as the benchmark to determine corporate excess cash. Through an optimization process, the optimal cash holdings suggested by our illiquidity–opportunity tradeoff model (IOT model) are endogenously determined. Different from many prior studies, the IOT model not only contains the value of cash, through market-based conception, but also adopts the modified Black–Scholes–Merton default probability of illiquidity. We then compare the IOT model with the Opler et al. (J Financ Econ 52(1):3–46, 1999) model (the OPSW model), which is a widely-used benchmark to determine excess cash, by using data for U.S. public firms from 1984 to 2014. The empirical results show that with regard to financial management the IOT model could be a better alternative to determine excess cash, even in light of different corporate characteristics and performance measures. Our conclusion suggests that while exploiting the value of marginal cash has attracted the attention of many recent studies, exploring the issue of optimal cash holdings is still important in the literature.     

The corporate environmental accounting system: A management tool for fighting environmental degradation

Growing social costs and increasing criticism of prevailing accounting practices both on the macroeconomic and microeconomic level have recently led to efforts to expand the scope of accounting for better evaluation of an organization's behavior. CEAS provides corporate management as well as governmental authorities with a comprehensive assessment system of the annual environmental effects of a corporation's regular business activities. As a tool to control an economy's impact on the physical environment, it helps to achieve a better quality of life.     

What affects accounting conservatism: A corporate governance perspective

This study explores the relationship between accounting conservatism and corporate governance. There are two competing perspectives about the possible relationship. One is that the demand for conservatism is greater in situations with more agency problems. Therefore, a weaker governance structure will lead to a more conservative accounting. An alternative perspective is that adequate governance results in better monitoring of management and hence will favor the implementation of conservative accounting. Using the firm-year specific C-Score developed by Khan and Watts [Khan, M., Watts, R.L., 2007. Estimation and validation of a firm-year measure of conservatism. Working Paper, Sloan School of Management, MIT, Cambridge], our empirical results indicate that firms with weaker governance structures tend to be more conservative. These findings are consistent with the view that conservatism is a substitute for other corporate governance mechanisms.     

Profits for nonprofits: find a corporate partner

Here's a familiar story. A nonprofit organization joins forces with a corporation in a caused-related marketing campaign. It seems like a win-win deal, but the nonprofit--and the media--find out several weeks into the campaign that the corporation's business practices are antithetical to the nonprofit's mission. The nonprofit's credibility is severely damaged. Is the moral of the story that nonprofits should steer clear of alliances with for-profit organizations? Not at all, Alan Andreasen says. Nonprofit managers can help their organizations avoid many of the risks and reap the rewards of cause-related marketing alliances by thinking of themselves not as charities but as partners in the marketing effort. More than ever, nonprofits need what many companies can offer: crucial new sources of revenue. But nonprofits offer corporate partners a great deal in return: the opportunity to enhance their image--and increase the bottom line--by supporting a worthy cause. Consider the fruitful partnership between American Express and Share Our Strength, a hunger-relief organization. Through the Charge Against Hunger program, now in its fourth year, American Express has helped contribute more than +16 million to SOS. In return, American Express has seen an increase in transactions with the card and in the number of merchants carrying the card. How can nonprofit managers build a successful partnership? They can assess their organization to see how it can add value to a corporate partner. They can identify those companies that stand to gain the most from a cause-related marketing alliance. And they can take an active role in shaping the partnership and monitoring its progress.     

Data preprocessing and data parsimony in corporate failure forecast models: evidence from Australian materials industry

The present study, based on data for delisted and active corporations in the Australian materials industry, is an attempt to develop a systematic way of selecting corporate failure‐related features. We empirically tested the proposed procedure using three datasets. The first dataset contains 82 financial economic factors from the corporation's financial statement. The second dataset comprises 73 relevant financial ratios, which either directly or indirectly measure a corporation's propensity to fail, and are conciliated from the first dataset. The third dataset is a parsimonious dataset obtained from the application of combining a filter and a wrapper to preprocess the first dataset. The robustness of this preprocessed dataset is tested by comparing its performance with the first and second datasets in two statistical (logistic regression and naïve‐Bayes) and two machine learning (decision tree, neural network) classes of prediction models. Tests for prediction accuracies and reliabilities, using the computational (ROC curve, AUC) and the statistical (Cochran's Q statistic) criteria show that the third dataset outperforms the other two datasets in all four predicting models, achieving various accuracies ranges from 81 per cent to 84 per cent.     

Investor reactions to corporate environmental saints and sinners: an experimental analysis

Following Dierkes and Antal's (1985) model, this study examines the decision usefulness of narrative disclosures on firms' environmental performance by focusing on how investors allocate their investment funds. Using an experimental design, the study examines investors' reactions to two states of corporate environmental performance: one in which the company discloses it is performing badly with respect to the environment, and another in which the company discloses it is a leader in environmental management. The results indicate that investors, as expected, react strongly and negatively to the poor environmental performer, while somewhat less expected, there is no significant reaction to the better environmental performer. Sub-analyses, however, reveal ‘environmental clientele’ effects. For the poor environmental performer, investors who specifically mention environmental performance react even more strongly and negatively than those who make no mention of environmental performance. In the case of the better environmental performer, the reactions are more complex. For those investors who specifically mention the firm's environmental performance, two opposite reactions result. While one group positively invests in the company for its environmental leadership, the other group avoids investing in the company for what it appears to consider excessive and unnecessary expenditure. The results from this study are consistent with the widespread observation that firms will rarely disclose poor environmental performance unless required to do so. Moreover, the mixed reactions to the better environmental performer could also partly explain why firms appear willing to report their positive environmental achievements in only vague and general terms.     

Specification analysis of corporate equity financing decision: a conditional residual approach

This article revisits the debate on the nature of private placements by specifying that informed insiders make trading decisions in the secondary market and equity issuance decision in the primary equity market (Lee and Wu (2008)). This article uses conditional residuals from the insider trading regression (abnormal insider trades) and conditional residuals from equity financing choice regression (unexpected equity financing choice) to measure private information. An important advantage of conditional correlation coefficient approach over the two-stage approach (Lee and Wu 2008) in testing the presence of asymmetric information is that the former is bounded by −1 and 1 and thus permits cross-sectional comparisons the relatedness between abnormal insider trades and unexpected equity financing choice.

The determinants of corporate board size and composition: An empirical analysis

Using a unique panel dataset that tracks corporate board development from a firm's IPO through 10 years later, we find that: (i) board size and independence increase as firms grow and diversify over time; (ii) board size—but not board independence—reflects a tradeoff between the firm-specific benefits and costs of monitoring; and (iii) board independence is negatively related to the manager's influence and positively related to constraints on that influence. These results indicate that economic considerations—in particular, the specific nature of the firm's competitive environment and managerial team—help explain cross-sectional variation in corporate board size and composition. Nonetheless, much of the variation in board structures remains unexplained, suggesting that idiosyncratic factors affect many individual boards’ characteristics.     

The Sarbanes-Oxley act and corporate investment: A structural assessment

We assess the impact of the Sarbanes-Oxley Act of 2002 on corporate investment in an investment Euler equation framework. We allow a dummy for the passage of the Act to affect the rate at which managers discount future investment payoffs. Using generalized method of moments estimators, we find that the rate U.S. firm managers apply to discount investment projects rises significantly after 2002, while the discount rate for U.K. firms remains unchanged. The effects of the legislation on corporate investment are asymmetric, and are much more significant among relatively small firms. We also find that well-governed firms, firms with a credit rating, and accelerated filers of Section 404 of the Act have become more cautious about investment.