A MIDAS multinomial logit model with applications for bond ratings

In multinomial classification analysis, the issue of mixed-frequency data is becoming increasingly common. To solve the multiclassification problem in a mixed-frequency data environment with a large frequency ratio, we combine the restricted mixed data sampling (MIDAS) method with a multinomial logit (MLogit) model to construct a MIDAS-MLogit model. The MIDAS-MLogit model imposes functional constraints on high-frequency variable parameters and fully uses high-frequency information to complete multiclassification tasks in a mixed-frequency data environment. Through extensive Monte Carlo simulations, we prove that this novel MIDAS-MLogit model has better classification performance than conventional MLogit and U-MIDAS-MLogit models for solving multiclassification problems with a large frequency ratio. In addition, we use the MIDAS-MLogit model to predict the ratings of corporate bonds issued by Chinese-listed companies from 2008 to 2021 and find that its prediction accuracy outperforms several competitive models. We further verify the validity of the MIDAS-MLogit model for different periods, including the global financial crisis, the post-financial crisis, and the pandemic. The results show that all three models perform well during the global financial crisis, but the MIDAS-MLogit model predominates the post-financial crisis and pandemic periods. The empirical results also show that covariates from bond, corporate, and financial environment levels have varying effects on corporate bond ratings.     

Early warning systems and systemic banking crises in low income countries: A multinomial logit approach

This paper estimates an early warning system (EWS) for predicting systemic banking crises in a sample of low income countries in Sub-Saharan Africa. Since the average duration of crises in this sample of countries is longer than one year, the predictive performance of standard binomial logit models is likely to be hampered by the so-called crisis duration bias. The bias arises from the decision to either treat crisis years after the onset of a crisis as non-crisis years or remove them altogether from the model. To overcome this potential drawback, we propose a multinomial logit approach, which is shown to improve the predictive power of our EWS compared to the binomial logit model. Our results suggest that crisis events in low income countries are associated with low economic growth, drying up of banking system liquidity and widening of foreign exchange net open positions.     

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.     

The flexible coefficient multinomial logit (FC‐MNL) model of demand for differentiated products

We show FC‐MNL is flexible in the sense of Diewert ( 1974 ), thus its parameters can be chosen to match a well‐defined class of possible own‐ and cross‐price elasticities of demand. In contrast to models such as Probit and Random Coefficient‐MNL models, FC‐MNL does not require estimation via simulation; it is fully analytic. Under well‐defined and testable parameter restrictions, FC‐MNL is shown to be an unexplored member of McFadden's class of Multivariate Extreme Value discrete‐choice models. Therefore, FC‐MNL is fully consistent with an underlying structural model of heterogeneous, utility‐maximizing consumers. We provide a Monte‐Carlo study to establish its properties and we illustrate its use by estimating the demand for new automobiles in Italy.     

Extending corporate accountability: A survey and framework for analysis

This paper has three objectives: to review the state of the art with regard to the literature on corporate internal audit activities; to report on a research study of recent developments in the scope and organization of the internal audit function in major companies in U.S.A.; and to propose an analytical framework which may be used in future research to describe the scope, procedures and responsibilities of the corporate internal audit function. Although there appears to be some confusion in the extant literature regarding the definition and scope of certain internal audit efforts, this research provides new evidence that major U.S. companies are engaging in unprecedented experiments into the use of auditing as a tool for enforcing management and social accountability. This is a movement away from the traditional financial audit which is frequently assumed to fully circumscribe the internal audit function. The implications for implementing heightened standards of corporate accountability should be of interest to audit committees of boards of directors, corporate management, investors, consumers, and future researchers.     

Dominant shareholders,corporate boards,and corporate value: A cross-country analysis

We investigate the relation between corporate value and the proportion of the board made up of independent directors in 799 firms with a dominant shareholder across 22 countries. We find a positive relation, especially in countries with weak legal protection for shareholders. The findings suggest that a dominant shareholder, were he so inclined, could offset, at least in part, the documented value discount associated with weak country-level shareholder protection by appointing an ‘independent’ board. The cost to the dominant shareholder of doing so is the loss in perquisites associated with being a dominant shareholder. Thus, not all dominant shareholders choose independent boards.     

Currency hedging and corporate governance: A cross-country analysis

This paper examines the impact of the strength of governance on firms' use of currency derivatives. Using a sample of firms from 30 countries over the period 1990 to 1999, we find that strongly governed firms tend to use derivatives to hedge currency exposure and overcome costly external financing. On the other hand, weakly governed firms appear to use derivatives mostly for managerial reasons. These results are robust to alternative measures of corporate governance, various subsamples, the use of foreign denominated debt as an alternative strategy to hedge currency exposure, and a potential selection bias. Overall, the results serve as the first comprehensive evidence of the impact of firm- and country-level corporate governance on firms' use of derivatives.     

CDS contract initiations: REIT board monitoring and corporate decision outcomes

In this article, we investigate whether the negative creditor governance shock due to the initiation of credit default swap (CDS) contracts results in monitoring substitution effects between bondholders and shareholders. Using several mechanisms to test increased shareholder monitoring such as board structure, CEO–chair duality, and institutional ownership, we show that shareholder monitoring increases post-CDS contract initiation. We examine board decision outcomes and show that incentive compensation is higher for real estate investment trusts (REITs) post-CDS initiation. Furthermore, we find that post-CDS initiation, REITs undertake more acquisitions that are more likely to be paid for with stocks and take longer to complete than non-REITs. Finally, we find that REITs industry-adjusted cash holdings and dividend yield increases post-CDS initiation.     

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.     

A cross-country analysis of corporate carbon performance: An international investment perspective

In this study, we examine corporate carbon performance globally from the perspective of country-level dispersion. The average carbon performance of listed companies in the non-OECD countries increases more after the Paris Agreement than that of listed companies in the OECD countries. However, under an increasing trend of average country-level carbon performance, the dispersion of corporate carbon performance is reduced more in the OECD countries vis-à-vis the non-OECD countries. In addition, international equity ownership is negatively associated with the dispersion of country-level corporate carbon performance in the post-Paris Agreement period. This finding supports our conjecture that sophisticated foreign investors from developed countries exert a significant positive influence on the carbon management efficiency of domestic firms in developing countries.     

Labour market conditions and the corporate financing decision: A European analysis

This study examines the influence of labour market conditions on corporate capital structure in a sample of 2892 firms from France, Germany, Italy, Spain, and the UK. After considering the effect of unemployment and inflation, we analyse the impact of two market imperfections: employees’ rights and downward wage rigidity. Results indicate that financial leverage responds to changes in unemployment and inflation. We also find that the influence of employees’ rights is non-linear, whereas the negative effect of downward wage rigidity is moderated by firms’ market power. Taken together, our results show that corporate financial decisions are conditioned not only by firm-level issues but also by a country’s labour market.     

Regulation: The market for corporate control and corporate governance

This study examines the effects of regulation and a contested market for corporate control on the internal mechanisms of corporate governance. The study focus is on two sectors, manufacturing and banking, due to their differences in the governance environment. In the United Kingdom for the sample period used in this study, manufacturing was characterized by a contested market for corporate control with little or no regulatory interference. In banking on the other hand, takeovers, hostile or otherwise, were absent and ownership changes and board appointments were supervised by the regulator—the Bank of England. The findings of the panel data estimates show that, unlike in the manufacturing sector, disciplinary top management turnover in banks was not related to share price performance. Outside directors were significantly less effective in disciplining top management in banks than in manufacturing firms.     

Corporate failure in the UK: An examination of corporate governance reforms

In the context of major corporate collapses, executive compensation, board network, gender diversity and oversight committees have all received attention in a package of corporate governance (CG) reforms that were recently issued in the UK. This paper examines whether these reforms of CG can influence the likelihood of corporate failure (CF). It also investigates how efficient they are when CF approaches. After controlling for variables that prior research shows to be related to CF, we find that CF is less likely when a firm is characterized by a lower executive compensation, larger size of the board's social network, and smaller degree of the board's managerial network. However, board gender diversity and independence of oversight committees do not reduce the likelihood of CF. We further observe that the explanatory power of these CG variables is significant but relatively decreased as the time to CF closes. This implies that despite the capability of these variables to render early warning alerts of CF, they are less helpful (efficient) as failure becomes closer. Our results remain robust after a battery of sensitivity tests and addressing potential endogeneity problems. Collectively, the evidence provided by our paper should be of interest to the UK's regulatory bodies (Financial Reporting Council) and legislators (the UK's Parliament), since it shows the practical implications of the UK's CG Code and other governance regulations on reducing future corporate collapses. This paper provides timely evidence-based insights to major recent structural reforms aiming at proposing remedies to CG problems in the UK.     

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.     

History repeats itself: The failure of rational choice models in corporate governance

Conventional proposals to reform corporate governance based on the rational model of decision making may be insufficient in preventing future corporate debacles. Typically underestimated are the pressures from conflicts of interest and bias on reputational intermediaries. Judgements and choices made by auditors during professional engagements may not strictly adhere to the rational model of decision making. This is of significance with regard to the gatekeeper function of auditors and relevant legislation. A discussion on earnings management elaborates by suggesting that strictly numerical measures are not a reliable guide to the quality of corporate governance. It is suggested that our understanding of monitor behaviour in corporate governance would be improved by placing it on psychologically more realistic foundations. Some of these foundations are introduced.     

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.