Small sample properties of the GMM specification test based on the Hansen–Jagannathan distance

Following Hansen and Jagannathan (J. Finance 52 (1997) 557), Jagannathan and Wang (J. Finance 51 (1996) 3) propose a distance measure that estimates the maximum pricing error generated by a linear asset model. Jagannathan and Wang propose a test of this HJ-distance using an empirical p-value as an alternative generalized method of moments (GMM) measure to Hansen's (Econometrica 50 (1982) 1029) GMM specification test. Using Monte Carlo analysis, we examine the finite sample properties of these specification tests. While the Hansen test mildly overrejects correct models in commonly used sample size, the empirical p-value of the HJ-distance rejects correct models too severely in such samples to provide a valid test of such models.     

Can markets stimulate rights? On the alienability of legal claims

The alienability of legal claims holds the promise of increasing access to justice and fostering development of law. I develop a principal‐agent framework where litigation funders provide expertise in reducing uncertainty in agents' disutility of production. The model leads to the counterintuitive prediction that litigation funders prefer cases with novel issues, and social surplus is positively correlated with legal uncertainty. Consistent with the model, court backlog, court expenditures, and a slowing in average time to completion are associated with third‐party funding; cases with third‐party funding receive more citations and are reversed less often than comparable cases without such arrangements.     

On the relationship between the number of a broker’s real estate listings and transaction outcomes

This paper documents that sellers who employ brokerage offices that list a large number of properties (“active brokerages”) obtain higher selling prices, smaller negotiated discounts from the corresponding list prices, and shorter times on the market for their listed properties. Sellers who employ active brokerages list their properties at prices that are closer to our hedonic model’s predicted prices. Interestingly, properties that are listed at discounts relative to their predicted prices are snapped up more quickly only if they are associated with brokerages that list a relatively small number of properties. In addition, properties listed by active brokerages are less likely to be listed “as is” and are more likely to have their defects repaired prior to being listed. Moreover, because the efficacy of brokerage services varies across brokerage offices, the results also suggest that the use of an indicator variable for the use of brokerage services is not sufficient to capture the complete impact of the use of a real estate broker on transaction outcomes. In addition, the Appendix discusses the concern for potential endogeneities between the number of brokerage listings and transaction outcomes. It documents that the Durban–Wu–Hausman test indicates that exogeneity cannot be rejected.     

Portfolio selection based on the mean–VaR efficient frontier

Value-at-Risk (VaR) has become one of the standard measures for assessing risk not only in the financial industry but also for asset allocations of individual investors. The traditional mean–variance framework for portfolio selection should, however, be revised when the investor's concern is the VaR instead of the standard deviation. This is especially true when asset returns are not normal. In this paper, we incorporate VaR in portfolio selection, and we propose a mean–VaR efficient frontier. Due to the two-objective optimization problem that is associated with the mean–VaR framework, an evolutionary multi-objective approach is required to construct the mean–VaR efficient frontier. Specifically, we consider the elitist non-dominated sorting Genetic Algorithm (NSGA-II). From our empirical analysis, we conclude that the risk-averse investor might inefficiently allocate his/her wealth if his/her decision is based on the mean–variance framework.     

On the role of Islamic and conventional banks in the monetary policy transmission in Malaysia: Do size and liquidity matter?

This paper empirically investigates the impact of monetary policy on the credit supply of Islamic versus conventional banks of Malaysia using an unbalanced panel dataset over the period 2005-2016. While estimating the effects of three alternative measures of monetary policy on banks' credit supply, we include several bank-specific and macroeconomic variables in the specification as control variables. We provide strong evidence on the existence of the credit channel of monetary policy transmission mechanism in Malaysia. Yet, we show that Islamic banks respond considerably less to changes in monetary policy instruments as compared to their conventional counterparts. We also find that the monetary policy measures affect small-sized banks and less-liquid banks more as compared to large-sized and more-liquid banks. Our findings suggest that for an effective monetary policy, there is a vital need to consider the nature of Islamic banking while devising any monetary policy instruments to manage credit supply in the economy.     

Is more finance better? Disentangling intermediation and size effects of financial systems

Financial systems all over the world have grown dramatically over recent decades. But is more finance necessarily better? And what concept of financial system – a focus on its size, including both intermediation and other auxiliary “non-intermediation” activities, or a focus on traditional intermediation activity – is relevant for its impact on real sector outcomes? This paper assesses the relationship between the size of the financial system and intermediation, on the one hand, and GDP per capita growth and growth volatility, on the other hand. Based on a sample of 77 countries for the period 1980–2007, we find that intermediation activities increase growth and reduce volatility in the long run. An expansion of the financial sectors along other dimensions has no long-run effect on real sector outcomes. Over shorter time horizons a large financial sector stimulates growth at the cost of higher volatility in high-income countries. Intermediation activities stabilize the economy in the medium run especially in low-income countries. As this is an initial exploration of the link between financial system indicators and growth and volatility, we focus on OLS regressions, leaving issues of endogeneity and omitted variable biases for future research.     

On the effort-saving effect of audit committee–auditor interlocking

Using unique data on audit hours from China, this paper investigates the effort-saving effect of the audit committee–auditor interlocking (AClk). We find that AClk is negatively associated with audit effort without any deterioration in audit quality. The results suggest that AClk has an effort-saving effect through information sharing between interlocked audit committee members and auditors. However, auditors retain the effort-saving benefits of AClk without sharing them with their client firms. Further analysis shows that the effort-saving effect of AClk is more pronounced for client firms whose auditors have industry expertise, for client firms that share the same individual auditor, or for client firms that share audit committee members with financial expertise.     

On the value relevance of information on environmental and social activities and performance – Some evidence from the UK stock market

Motivated by the requirements of the UK Companies Act 2006 for a Strategic Report introduced in late 2013, and the subsequent Directive 2014/95/EU of the European Parliament and of the Council, we investigate the relationship between the levels of disclosures on environmental and social activities and performance (analyst following) and subsequent analyst following (subsequent levels of disclosures on environmental and social activities and performance). We do so to investigate the value relevance of information about environmental and social activities and performance. Our evidence is consistent with their value relevance and an associated demand for, or general interest in, such disclosures from informed market participants. We also argue that our results suggest positive links between analyst following and the quality of environmental and social disclosure.     

The Impact of Short-Sales Constraints on Liquidity and the Liquidity–Return Relations

Baker and Stein's (2004) model predicts that individual stock liquidity, commonality in liquidity across stocks, the contemporaneous correlation between stock returns and liquidity, and the degree of high liquidity associated with low subsequent stock returns decrease in the absence of short-sales constraints relative to in the presence. To test these theoretical predictions, we examine both the component stocks of the Taiwan 50 index and other nonindex stocks for the sample period before and after the removal of short-sales constraints on the former and use trading turnover and Amihud's (2002) illiquidity ratio as the measure of liquidity to proxy for investor sentiment. Overall, our empirical results are consistent with these theoretical predictions and therefore provide evidence in support of Baker and Stein's (2004) model.     

On the effects of banks�� equity ownership on credit markets

Recent deregulation of the banking sector in the US and in Europe allows commercial banks to hold equity in non-financial firms. We develop a model to investigate the effects of bank equity stakes in firms on credit market competition. The main result is that an equity stake confers a competitive advantage to the holding bank, which in equilibrium results in decreased competition in credit markets and higher interest rates being charged to firms. However, regulatory limits on the size of a bank’s stake may, under certain conditions, be counterproductive: they could actually strengthen the equity-owning bank’s competitive advantage. Our findings shed new light on the role of equity in lending relationships, and highlight that, in addition to the well-known prudential aspects, there is an antitrust dimension in the separation of banking and commerce.     

What Makes a Good Trader? On the Role of Intuition and Reflection on Trader Performance

Using laboratory experiments, we provide evidence on three factors influencing trader performance: fluid intelligence, cognitive reflection, and theory of mind (ToM). Fluid intelligence provides traders with computational skills necessary to draw a statistical inference. Cognitive reflection helps traders avoid behavioral biases and thereby extract signals from market orders and update their prior beliefs accordingly. ToM describes the degree to which traders correctly assess the informational content of orders. We show that cognitive reflection and ToM are complementary because traders benefit from understanding signals’ quality only if they are capable of processing these signals.     

Up and down together? On the linkage of momentum and reversal

This paper presents evidence of momentum and reversal being related phenomena in the German stock market. This finding contrasts Conrad and Yavuz's (2017) results for the US stock market. In the German stock market, the linkage of both phenomena is documented to be more pronounced after the turn of the millennium. In particular, low-risk stocks produce momentum, and high-risk stocks generate return reversal in momentum portfolios. Short-run momentum is consistently generated by the long winner leg, whereas long-run return reversal is due to the short loser leg of long-short portfolios in the German stock market.     

Tax structure,size of government,and the extension of the voting franchise in Western Europe, 1860–1938

We study the consequences of the extension of the voting franchise for the size of (central) government and for the tax structure in ten western European countries, 1860–1938. The main hypothesis under investigation is that the impact of the franchise extension on the tax structure is conditional on tax collection costs. We find that the share of direct taxes (including the personal income tax) is positively affected by the franchise extension, but only if relative tax collection costs are below a given threshold. We use literacy as a proxy for the cost of levying a broad-based income tax. We also show that the gradual relaxation of income and wealth restrictions on the right to vote contributed to growth in total government spending and taxation.      

On the Effect of Bank of Japan’s Outright Purchase on the JGB Yield Curve

This paper examines an impact of Bank of Japan (BOJ)’s outright purchase on the Japanese government bond (JGB) yield curve. Particularly, we develop a simple state space model, which incorporates new factors regarding the BOJ’s announcement for its outright purchase and the current market outstanding with standard level and spread factors. Based on the model with a filtering method, we also implement an empirical analysis with time series of the BOJ’s announcement records during 2014/10/22–2017/8/3 in the quantitative–qualitative easing period to estimate the sensitivities of interest rates against the changes in the market expectation for the net supply with each sector of JGB. We expect the current work provides a basis for considering quantitative effects on the term structure by BOJ’s policy changes such as termination or significant reduction of the BOJ’s outright purchase. For instance, our scenario analysis shows substantial increase in the 30 year yield with widening of 20–30 year spread.     

Impact of the 2008–2009 financial crisis on the external and internal linkages of European frontier stock markets

This study investigates the impact of the 2008–2009 financial crisis on (i) external linkages of European frontier stock markets (Croatia, Estonia, Romania, Slovakia and Slovenia) with the developed equity markets (the US, the UK, and Germany) and (ii) internal linkages within the frontier markets. The results demonstrate that both long- and short-run external linkages were strengthened during the crisis. The analysis of internal linkages reveals strong relationship only between the Croatian and Slovenian markets. However, the other frontier markets in the group were weakly linked, implying that European frontier stock markets may constitute a good alternative source of diversification benefits during crises periods.     

Political–security risk in the oil and gas industry: the impact of terrorism on risk management and mitigation

Oil and gas companies are experiencing an increase in terrorist attacks. The industry became a legitimate target for terrorist groups in the 1990s and the number of attacks have increased yearly, with a spike after the 9/11 attacks. In today’s interconnected world, political risk is not only about the relationship between the host government and the company. Oil and gas companies may experience risks on a transnational, national and human security level. The success of new investments often depends on the successful utilization of risk management strategies. This study focuses on the importance of political–security risk in the oil and gas industry. In January 2013, the oil and gas industry experienced one of its deadliest attacks at the In Amenas gas facility in Algeria, forcing firms to reconsider its focus on security management. Statoil undertook a thorough analysis of security at the site as well as of the company′s corporate security risk management. The report revealed a lack of focus on political–security risk. This study argues that political–security risk has not been used to its full potential in the oil and gas industry. The oil and gas industry has always focused on site security, but a broader more holistic approach to risk management has been lacking. As a result of the In Amenas incident, the industry has become more willing to have a new discussion on security and this has resulted in changes in the way companies operate.     

Improvement in finite sample properties of the Hansen–Jagannathan distance test

Jagannathan and Wang [Jagannthan, R., and Wang, Z., “The conditional CAPM and the cross-section of expected returns.” Journal of Finance, 51 (1996), 3–53] derive the asymptotic distribution of the Hansen–Jagannathan distance (HJ-distance) proposed by Hansen and Jagannathan [Hansen, L.P., and Jagannathan, R., Assessing specific errors in stochastic discount factor models." Journal of Finance, 52 (1997), 557–590], and develop a specification test of asset pricing models based on the HJ-distance. While the HJ-distance has several desirable properties, Ahn and Gadarowski [Ahn, S.C., and Gadarowski, C., “Small sample properties of the GMM specification test based on the Hansen–Jagannathan distance.” Journal of Empirical Finance, 11 (2004), 109–132] find that the specification test based on the HJ-distance overrejects correct models too severely in commonly used sample size to provide a valid test. This paper proposes to improve the finite sample properties of the HJ-distance test by applying the shrinkage method [Ledoit, O., and Wolf, M., “Improved estimation of the covariance matrix of stock returns with an application to portfolio selection.” Journal of Empirical Finance, 10 (2003), 603–621] to compute its weighting matrix. The proposed method improves the finite sample performance of the HJ-distance test significantly.     

The agency problem and the moderating role of culturally based management style on Chinese managers’ discretionary accruals

Upon completion of overseas acquisitions, Western firms typically hire Chinese locals or expatriates to run their Chinese operations. This action is an important consideration because a Western executive's managerial style may impact Chinese employee behavior differently than a Chinese executive's managerial style. Utilizing an experiment with Chinese managers as participants, we examine the effect of the agency problem (when both an incentive and opportunity to act in line with one's self-interest are present) on Chinese managers’ discretionary accrual decisions, as well as the role that their executives’ culturally based management style (Eastern versus Western) plays in affecting their propensity to manage earnings. We find that Chinese managers tend to override corporate concerns and recommend higher discretionary expense accruals in an effort to maximize their two-year bonus potential when the agency problem is present. Conversely, they tend to recommend lower discretionary expense accrual figures to help achieve corporate goals when the agency problem is not present. Interestingly, we also find that an executive's culturally based management style moderates the impact of the agency problem in that Chinese managers’ willingness to manage earnings across agency problem conditions is significantly more pronounced in the presence of a Western (U.S.) executive than in the presence of an Eastern (Chinese) executive.