Does reserve accumulation crowd out investment?

It is understood that investment serves as a shock absorber in times of crisis. The duration of the drag on investment, however, is perplexing. For the Asian economies we study, average investment/GDP is about 6 percentage points lower during 1998–2014 than its average level in the decade before the Asian crisis; the decline is greater if China is excluded. We document how in the wake of crisis home bias in finance increases markedly as public and private sectors look inward when external financing becomes prohibitively costly or undesirable from a financial stability perspective. Reserve accumulation involves an official institution (i.e., the central bank) funneling domestic saving abroad and thus competing with domestic borrowers in the market for loanable funds. We suggest a broader definition of crowding out and leakages, driven importantly by rising home bias in finance and by official capital outflows. We present evidence from Asia and advanced European economies with managed currencies to support this interpretation.     

When Does a Merger Create Value? Using Option Prices to Elicit Market Beliefs

I introduce and test a method to identify market expectations about value creation in mergers. Post‐announcement market prices reflect beliefs about both merged and standalone firm values, and the likelihood of either outcome. Stock prices alone do not contain sufficient information to identify these latent beliefs. By adding exchange‐traded stock option data, I deliver a clear decomposition of observed value change into two parts: 1) value creation and 2) new information about standalone value. Previous research has struggled to disentangle the two. This decomposition provides a strong and practical measure of the market's expectations about value creation in a merger.     

How Does Using a Mobile Device Change Investors’ Reactions to Firm Disclosures?

I examine how characteristics of investors’ information access tools change investors’ reactions to firm disclosures. I examine my research question in the context of information choice (i.e., allowing investors to choose the order of information and sections to read within a disclosure) and spatial layout (i.e., how information is displayed when viewing the disclosure). Results of an experiment are consistent with information choice improving investors’ judgments if the disclosure is viewed on a computer screen. Conversely, and consistent with cognitive overload, information choice harms investors’ judgments if the disclosure is viewed on a smaller screen, such as that of a mobile device. Follow-up experiments show that changing the disclosure presentation to reduce the need to scroll is one way to improve investors’ judgments on a smaller (or mobile) screen. My findings caution firms and regulators about expanding information choice within disclosures without considering the screen size used to access the disclosure.     

Does inequality lead to a financial crisis?

The recent global crisis has sparked interest in the relationship between income inequality, credit booms, and financial crises. Rajan (2010) and Kumhof and Rancière (2011) propose that rising inequality led to a credit boom and eventually to a financial crisis in the US in the first decade of the 21st century as it did in the 1920s. Data from 14 advanced countries between 1920 and 2000 suggest these are not general relationships. Credit booms heighten the probability of a banking crisis, but we find no evidence that a rise in top income shares leads to credit booms. Instead, low interest rates and economic expansions are the only two robust determinants of credit booms in our data set. Anecdotal evidence from US experience in the 1920s and in the years up to 2007 and from other countries does not support the inequality, credit, crisis nexus. Rather, it points back to a familiar boom-bust pattern of declines in interest rates, strong growth, rising credit, asset price booms and crises.     

Does consideration matter to China’s split share structure reform?

We investigate the share market response to China’s split share structure reform and find average negative daily return around the government announcement on 29 April 2005. However, there is a turnaround at individual companies’ decision to implement the reform where we find positive and significant average daily return, contingent on the type of consideration. We attribute this change in market sentiment to the company’s announcement that the reform will involve the payment of consideration to holders of tradable A‐shares. Our results also show that holders of tradable A‐shares earn significant abnormal daily returns when companies propose to pay in cash or warrants or combine any of these payment methods with bonus shares.     

Does revenue-expense matching play a differential role in analysts’ earnings and revenue forecasts?

This paper investigates whether matching has differential implications for the accuracy of analysts' earnings and revenue forecasts. We construct a novel measure of firm-level matching and document that matching improves analysts' earnings forecasts to a greater extent than their revenue forecasts. We also document matching's differential impact on analysts' earnings and sales forecasts by proposing a new count metric capturing a wedge in the accuracy of earnings and revenue forecasts. In additional tests, we report that the differential impact of matching is less (more) pronounced in a situation where the balance sheet (income statement) orientation likely dominates. We also report that matching's differential role is weaker (stronger) when firms have high intangible intensity (analysts have appropriate resources or expertise). In short window tests, matching's role in analysts' forecast revisions is more pronounced for earnings than sales forecasts. Overall, these results show how analysts benefit from better revenue-expense matching.     

Does regulatory reform of cumulative voting promote a more balanced power distribution in the boardroom?

In the presence of dominant shareholders, it remains uncertain whether the introduction of cumulative voting (CV) in board elections can elevate board representation of non-controlling substantial shareholders and curb the expropriation of minority shareholders by dominant shareholders. With hand-collected director-level data, we conduct DID-style analysis of China's CV reform. We find that non-controlling substantial shareholders cooperated in voting to raise their board representation, and CV implementation curbed tunneling activities and enhanced firm value. The results are especially strong in a subsample of firms whose second largest shareholder has a sufficiently large ownership proportion to elect her/his favored candidates onto boards.     

Does proprietary day trading provide liquidity at a cost to investors?

Capitalizing on the special case of Malaysia in which proprietary day traders (PDTs) are mandated to boost liquidity and the recent availability of trading data, this paper empirically examines the liquidity effect of proprietary day trading. Using daily data spanning October 2012 to June 2018, we find evidence that PDTs' trade volume is associated with higher aggregate liquidity in the Malaysian stock market, which can be attributed to the theoretical channel of intense competition among informed traders. However, such improved liquidity comes at a cost to investors, as proprietary day trading is found to be associated with higher conditional volatility and conditional skewness of closing percent quoted spreads. The former is due to the exchange-imposed immediacy for PDTs to close their open positions, whereas the latter can be attributed to the exclusive rights granted to PDTs to engage in intraday short selling.     

Does access to external finance improve productivity? Evidence from a natural experiment

We study the relation between access to finance and productivity. Our contribution to the literature is a clean identification of a causal effect of access to finance on productivity. Specifically, we exploit an exogenous shift in demand for a product to expose how producers adapt their productivity in the presence of varying levels of access to finance. We use a triple differences testing approach and find that production increases the most over the sample period in areas with relatively strong access to finance, even in comparison with a control group. This result is statistically significant and robust to a variety of controls, alternative variables, and tests. The causal effect of access to finance on productivity that we find speaks to the larger role of finance in economic growth.     

How to build a factor portfolio: Does the allocation strategy matter?

Factor-based allocation embraces the idea of factors, as opposed to asset classes, as the ultimate building blocks of investment portfolios. We examine whether there is a superior way of combining factors in a portfolio and provide a comparison of factor-based allocation strategies within a multiple testing framework. Factor-based allocation is profitable beyond exploiting genuine risk premia, even when applying multiple testing corrections. Investment portfolios can be efficiently diversified using factor-based allocation strategies, as demonstrated by robust economic performance over various economic scenarios. The naïve equally weighted factor portfolio, albeit simple and cost-efficient, cannot be outperformed by more sophisticated allocation strategies.     

Does a national industrial policy promote financial market stability? A study based on stock price crash risk

Whether the implementation of a national industrial policy can maintain stability in the financial market is a question of theoretical and practical significance. Using data from China’s non-financial listed firms from 2007 to 2020, we find that a national industrial policy lowers stock price crash risk. We find that the effect of an industrial policy on lowering stock price crash risk is more pronounced in regions with low levels of regional marketization and if firms have high external uncertainty, low total asset turnover, greater earnings management and receive small increments of long-term loans and fewer government subsidies, suggesting that industrial policies lower stock price crash risk by improving firm fundamentals and reducing external uncertainty, agency costs and information asymmetry.     

Food in the future: Does futures studies have a role to play?

Futures studies (FS) has not taken up food as a topic to any degree perhaps because of complexity, gender, urban bias, professional bias, cultural diversity, and fear. But there is a need and responsibility for FS scholars and practitioners to consider the growing and preparation of food in our work. Today's movements in food security, organic farming and Slowfood can direct us towards futures based in healthy, diverse, and joyful communities.     

Misconduct risk in banking services: Does a propensity to be sanctioned exist?

Litigation against a bank is indicative of misconduct risk because it suggests a failure to process customer complaints. This study examines the relationship between certain bank features and potential and actual misconduct based on a panel of complaints submitted to the Italian ombudsman. We find that bank profits and financial health are strong determinants of potential and actual illegal behaviour, respectively. We control for the level of bank-client contentiousness at the national level and bank size and provide some implications for regulators.     

Does overcapacity prompt controlling shareholders to play a propping role for listed companies?

A major risk currently facing the Chinese economy is overcapacity, which affects the efficiency of social resource allocation (Xi et al., 2017; Huang et al., 2019). When a company is in crisis, the internal capital market often plays a propping role. This study approached this issue from the perspective of the controlling shareholder and examined whether controlling shareholders provide financial support to enterprises in industries with excess capacity. According to the data for China’s A-share listed companies from 2007 to 2019, companies in industries with excess capacity received more financial support from controlling shareholders compared with those in non-overcapacity industries. Analysis of the mechanism revealed that state-owned enterprises and companies with relatively poor financial status received more financial support from controlling shareholders. This study also examined the economic consequences of such support and found that it is conducive to enhancing enterprise value. This study enriches the literature on overcapacity and internal capital markets by demonstrating that internal capital markets play a propping role for companies facing industry-level crises. This finding has both theoretical value and practical implications related to supply-side reform and capacity reduction.     

Beyond bankruptcy: Does the US bankruptcy code provide a fresh start to entrepreneurs?

This paper assesses the extent to which the US bankruptcy system is effective in providing small businesses a “fresh start” after a bankruptcy filing. I use data from the 1993, 1998 and 2003 National Survey of Small Business Finances to explore how firms fare after a bankruptcy filing. On the positive side, previously bankrupt firms are not any more burdened than the average small firm by problems relating to profitability, cash flow, health insurance costs, or taxes. Further, the fact that these firms are surviving several years after the filing is itself a testament to the efficient functioning of the US bankruptcy system. It suggests that the bankruptcy system goes a long way toward helping businesses recover after a bankruptcy filing.     

Setting a fox to keep the geese — Does the comply-or-explain principle work?

The German Corporate Governance Code works according to the comply-or-explain principle. One of its recommendations was to publish the remuneration of the members of the executive board on an individual basis. We examine the characteristics of the firms that complied with the code requirement. Our results indicate that firms that paid higher average remunerations to their management board members were less likely to comply, whereas firms with higher Tobin's Q were more likely to comply. We also document a non-monotonic relation between ownership concentration and the probability of compliance that is consistent with standard corporate governance arguments.Due to the fact that the number of firms complying with the disclosure requirement was low, a new law was passed that mandates disclosure unless the shareholders' meeting (with a 75% majority) decides otherwise. We find that this “loophole” in the new legislation is exploited by smaller firms, firms with comparatively high levels of executive remuneration, and firms with concentrated ownership. We discuss the implications of our results for the effectiveness of the comply-or-explain regulation.     

The macroeconomic effects of monetary and fiscal policy in a small open economy: Does the exchange rate regime matter?

This paper develops a small open economy model in the spirit of Obstfeld and Rogoff (1995). The introduction of endogenous traded sector output unlocks current account and real exchange rate effects. Within this framework where specific consideration is given to the case with fixed but adjustable parities, exchange rate devaluation generates similar qualitative effects as a money supply expansion under floating rates. Output and external effects of government spending shocks are broadly consistent with the adjusted basic non-micro founded Mundell and Fleming (MF) framework, but differ in significant ways from the baseline MF model. Contrary to the textbook MF model a government expenditure shock depreciates the nominal exchange rate and generates real effects under the fixed rate system.     

Does the ECB act as a lender of last resort during the subprime lending crisis?: Evidence from monetary policy reaction models

We investigate whether the ECB aligns its monetary policy with financial crisis risk in EMU member countries. We find that since the outbreak of the subprime crisis the ECB has significantly increased net lending and reduced interest rates when banking and sovereign debt crisis risk in vulnerable EMU countries (Greece, Ireland, Italy, Portugal, and Spain) increases, while no significant effect is identified for the pre-crisis period and relatively tranquil EMU countries (Austria, Belgium, France, Germany, and the Netherlands). These findings suggest that the ECB acts as a Lender of Last Resort for vulnerable EMU countries.     

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.