Do investors find carbon information useful? Evidence from Italian firms

The usefulness of carbon disclosures has been questioned in the literature because they do not truly reflect firm’s carbon performance, suggesting that they may not be useful for risk evaluation and investment decisions. This study empirically tests the usefulness of carbon information voluntarily disclosed by the Italian firms. Our results based on the price model show that there is a positive association between the stock price and carbon disclosures, suggesting that investors find carbon information useful for their investment decisions. We find similar results based on the market valuation model. Additionally, the results reveal that the positive association is especially strong for firms that have established environmental committees on a voluntary basis and also for firms from the highly polluting industries defined by the EU_ETS program, confirming that investors’ positive response is especially strong to carbon disclosures by firms from the highly polluting industries. We also find that the market reacts positively to carbon disclosures by firms with a higher percentage of independent directors on their corporate boards, but the positive association is marginally significant.     

Do foreign investors insulate firms from local shocks? Evidence from the response of investable firms to monetary policy

Extant research shows that stock returns of investable firms are highly sensitive to foreign market and global information shocks, suggesting that having foreign investors might insulate investable firms from shocks to local fundamentals. Examining 24 emerging markets, we find that both investable and non-investable firms are sensitive to local monetary policy shocks. This allays the concern that emerging-market opening reduces the efficacy of local monetary policy. We also find that in 11 countries (46% of our country-sample), investable firms are more sensitive to local shocks than non-investable firms. Differences in leverage, stock liquidity, size, domestic product-market exposure, or industry cyclicality do not drive this finding.     

Do narrative-related disclosures predict corporate failure? Evidence from UK non-financial publicly quoted firms

By creating a comprehensive corporate failure-related lexicon, this paper explores the incremental explanatory power of narrative-related disclosures in predicting corporate failure. We find that corporate failure-related narrative disclosures significantly predict firms' failure up to two years ahead of actual failure. Additionally, we find that a financially distressed firm would become more vulnerable when financial constraints befall, which in turn would precipitate corporate failure. Various robustness tests assure the credibility of the explanatory ability of corporate failure-related narrative disclosures to predict corporate failure. Collectively, our results show the feasibility of these narrative-related disclosures in improving the explanatory power of models that predict corporate failure.     

Do investors value smooth performance?

This paper presents empirical evidence that cash-flow volatility is negatively valued by investors. The magnitude of the effect is substantial with a 1% increase in cash-flow volatility, resulting in approximately a 0.15% decrease in firm value. We show that this increase, however, is not associated with earnings smoothing resulting from managers’ accrual estimates. Our results are consistent with a preference by the market for less volatile cash flows and suggest that managers’ efforts to produce smooth financial statements add value, but only via the cash component of earnings.     

Do foreign institutional investors drive corporate social responsibility? Evidence from listed firms in China

This paper investigates the effect of qualified foreign institutional investors (QFIIs) on corporate social responsibility (CSR) within the context of listed firms in China. We find that QFIIs offer an incisive channel for improving socially responsible practices. In addition, we find that firms with QFIIs are more likely to comply with the Global Reporting Initiative (GRI) guidelines, and that their sustainability reports tend to be longer. We also find that this positive effect is more pronounced in firms with low initial CSR scores than those with high CSR scores at the time when QFIIs enter the sample. Our empirical evidence further confirms that this positive impact is driven by QFIIs from countries with high social awareness, or QFIIs from geographically distant countries, consistent with their motives, and is linked to the ownership of QFIIs, especially when the QFII is among the top ten of the largest shareholders. Finally, our extended analysis reveals that the increase in CSR performance associated with the presence of QFIIs results in greater firm performance and easier access to finance.     

Do UK firms manage earnings to meet dividend thresholds?

This paper examines earnings management by dividend-paying firms in cases where pre-managed earnings would fall below the expected dividend, and by non-dividend paying firms aiming to avoid reporting losses. We find that within the UK market the likelihood of upward earnings management is significantly greater in the former case than the latter, though both are drivers for earnings management. Large firms are less likely to upwardly manage earnings to reach dividend thresholds, consistent with prior UK evidence on the ability of the largest firms to avoid restrictive debt covenants. We also find that earnings management is more clearly observable through examining working capital discretionary accruals than through examining total discretionary accruals.     

Can investors restrict managerial behavior in distressed firms?

In this article, we show that only distressed firms not identified as distressed by creditors are able to transfer wealth from creditors to shareholders. Using the number of years to future bankruptcy as a proxy for genuine distress and measures based on observable firm characteristics as proxies for perceived distress, genuinely distressed firms incorrectly perceived as healthy cut payouts to shareholders more slowly and invest more aggressively as uncertainty increases than correctly identified distressed firms. Consistent with the idea that incorrectly identified distressed firms actively hide their troubles, we show that they tend to follow more aggressive accounting policies and often resort to earnings misstatements. We also show that they are often not restricted by covenants and can borrow further debt capital at affordable rates, suggesting that a lack of monitoring by creditors allows them to transfer wealth to shareholders.     

Do investors trade uniformly through time?

This study tests whether investors trade uniformly through time by analyzing the quarter-by-quarter trading decision of individual shareholders in one no-load mutual fund family over nearly six years. These shareholders' trading probabilities change dramatically through time. Time has a larger economic effect on the shareholders' trading decisions than data commonly used in prior research, including fund performance. This effect is larger among shareholders who have more prior transactions, and it is robust to controls for unobserved heterogeneity.     

Do investors care about corporate taxes?

This paper conducts a comprehensive examination of the link between corporation tax payment and financial performance in the UK. We find no discernible link between tax rates and stock returns for the UK, no matter how tax payment is measured. This is true throughout the sample period and for both customer-facing and non-customer-facing companies. However, allowing for industry norms and a host of firm characteristics, companies with lower effective tax rates have significantly higher levels of stock market risk. Firms that are reported in the newspapers in a negative way in relation to their level of corporation tax payment experience small negative stock returns, which are partially reversed within a month. However, the initial negative effects and subsequent rebound are both more pronounced for smaller companies. News announcements of the potential involvement of a firm in a corporate inversion (expatriation) result in steeper and much longer-lasting falls in share prices, whereas news stories of a more general nature relating to a firm's tax avoidance or tax payments have little noticeable effect.     

Do stressed PE firms misbehave?

For private equity (PE) firms, follow-on funds provide additional streams of management fees for a considerable time. When prospective investors evaluate the performance of PE firms' latest funds, they have to rely on valuations reported by PE firms. The link between PE firms' fundraising and performance evaluation is thus an area susceptible to manipulation resulting in potentially high stakes. We examine the relationship between PE firms' fundraising pressure and earnings management in portfolio companies, along with heterogeneity in behaviour by reputation and dry powder. To proxy for the degree of fundraising pressure, we develop an index based on PE firms' affiliations, stage in the fundraising cycle, and fundraising frequency. Results suggest that the fundraising pressure leads to more earnings management in portfolio companies, regardless of PE firm reputation. While the reputational effect remains unchanged under a change in funding pressure, dry powder exhibits a strong moderating effect under extreme funding pressure. The results are robust to alternative proxies for earnings management, alternative fundraising indexes, and various controls for endogeneity concerns.     

Do peer firms influence innovation?

Using a large sample of 4,545 US firms over the period 1968–2018, we find robust and significant positive peer effects on corporate innovation. Consistent with the need to keep ahead or abreast of rivals, we document an increase in peer firms’ influence with product market competition. Our further analyses show interesting leader–follower interactions with firms following or adopting innovation policies of counterparts perceived or likely to have superior information. This finding supports the information-based motives of mimicking. More importantly, we show that adopting peers’ innovation policies is associated with improvements in long-term innovation outputs and product market performance. Our results suggest that peer effects are a critical determinant of corporate innovation in addition to other factors examined so far in the literature.     

Do institutional investors exacerbate managerial myopia?

This study analyzes corporate expenditures for property, plant and equipment (PP&E), and research and development (R&D) for over 2500 US firms from 1988 to 1994. We find no support for the contention that institutional investors cause corporate managers to behave myopically. Indeed, we document a positive relation between industry-adjusted expenditures for PP&E and R&D and the fraction of shares owned by institutional investors. This relation is robust to a variety of empirical tests, including those that account for endogeneity between institutional ownership and firm-level discretionary expenditures.     

Do firms use the trade credit channel to manage growth?

While many theories of accounts payable and receivable are related to firm performance, there has not been a direct test whether firms actively use them to manage their growth. We argue that it is not just the accounts payable but also the accounts receivable that matter. While the former help to alleviate imperfections in the financial market, the latter do so in the product market. Using over 2.5 million observations for 600.000 firms in 8 euro area countries in the period 1993–2009, we show that firms use the trade credit channel to manage growth. In countries where the trade credit channel is more present, the marginal impact is lower, but the total impact is still higher. Further, firms that are more vulnerable to financial market imperfections, rely more on the trade credit channel to manage growth. Finally, we show that also the overall conditions of the financial market matter for the importance of the trade credit channel for growth.     

Do investors show an attentional bias toward past performance? An eye-tracking experiment on visual attention to mutual fund disclosures in simplified fund prospectuses

This study examines the cognitive processes underlying investors’ extrapolations of past fund performance and whether investors’ attention patterns may explain their return-chasing behaviors. We measured the attention that investors paid to mutual fund disclosures in a simplified fund prospectus using unobtrusive infrared eye tracking. Results suggest that prior fund performance, which is normatively irrelevant information and not useful in predicting future performance, received considerable attention from investors. More interestingly, the impact of prior fund performance on investors’ purchasing intentions was fully mediated through expected returns and attention paid to past performance information. The results indicate that investors apparently believe in performance persistence or in a ‘hot hand’ effect, and that mutual fund purchases are driven by salient information such as superior performance. Moreover, we tested the disclaimer mandated by regulatory bodies, which warns that past performance does not guarantee future results. We found that the disclaimer was ineffective in reducing investors’ extrapolation biases, despite the fact that the disclaimer was attended to and properly encoded by investors.     

Do Sukuk provide diversification benefits to conventional bond investors? Evidence from Turkey

We investigate the contribution of Sukuk in diversification of bond portfolios. We do so by comparing Turkish bond funds that invest exclusively in conventional bonds (pure conventional bond funds), in Sukuk (pure Islamic bond funds), and in both (mixed bond funds) among each other for the period of 2014–2019. We employ tests of differences in means and variances of various risk-return measures as well as mean-variance spanning and intersection tests in order to uncover the diversification potentials of Sukuk in the portfolio management industry. Our results suggest that bond funds, of which the portfolios are composed of a combination of Sukuk and conventional bonds (i.e. mixed bond funds), have a relatively “lower risk-higher return” profile. Moreover, including Sukuk to conventional bond portfolios theoretically offers significant diversification opportunities for investors, particularly when the economy worsens.     

Do investors value frequent issuers in securitization?

We assess the value of frequent issuers to investors in securitization markets by examining the initial yield spread of 6132 European mortgage-backed securities (MBS), covering a 20-year period between 1999 and 2018. We find that frequent issuers have certification value, and it increases as the credit cycle approaches its peak, as lending standards loosen, and information asymmetries in securitization markets increase. Investors value frequent issuers more favourably on riskier, difficult to evaluate MBS. We find that after the great financial crisis (GFC), investors began to attribute more value to frequent issuers, regardless of MBS credit quality. We also find that in the pre-crisis period, investors required higher yields to compensate for perceived rating shopping, which is not observed after the GFC. Finally, we show that investors expect higher yields on deals closed by subsidiaries of foreign banks.

     

Do firms lease to hedge? CEO risk-taking and operating lease intensity

Operating leases are used extensively for financing, but their ability to separate ownership and use also creates hedging opportunities. We investigate whether firms recognize such opportunities by examining the relation between chief executive officer (CEO) risk-taking incentives and the use of operating leases. Consistent with firms using operating leases to hedge, we find higher CEO risk-taking incentives lower operating lease intensity. To address endogeneity, we use the adoption of Statement of Financial Accounting Standards 123R as an exogenous shock to option compensation, dynamic panel generalized method of moments, simultaneous equations, and change regressions. Our results are robust to placebo and alternative tests.     

Hidden Gems: Do market participants respond to performance expectations revealed in compensation disclosures?

We find that a new compensation disclosure item on expected payouts from performance-based stock grants reveals unique information regarding future firm performance. Extracting inferred performance expectations from the disclosures, we find that firms disclosing the highest expected grant payout significantly outperform in ROA, Q, sales growth, and profit margin over the next two years, while those disclosing the lowest expected payout underperform. The embedded information is not captured by other information channels, such as managerial earnings guidance, 10-K sentiment, insider selling activities, unexplained CEO pay, and analyst forecasts. Investors and analysts do not fully incorporate the information and are later surprised around earnings announcement days. A portfolio that buys firms with the highest performance expectation and shorts firms with the lowest expectation earns significantly positive abnormal returns. Our findings suggest that the enhanced compensation disclosure contains valuable information, but investors underreact to information that is difficult to collect and process.     

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.     

Do environmentally sustainable practices lead to financially less constrained firms? International evidence

In this study, we utilise a comprehensive dataset from 41 countries spanning 2002–2013 and show that environmentally sustainable practices (ESP) are negatively associated with financial constraints of firms. We refine ESP into three components: emission reduction, product innovation and resource reduction, and show that firms which are more innovative and efficient in reducing wastage of resources are most benefited by ESP. The findings are even stronger for firms operating in countries with high institutional qualities, in high emission and highly competitive industries. These results are important to lending institutions for making financing decisions. Policymakers and investors could also utilise ESP as a key distinguishing factor for firms to benefit from lower financial constraints. Appropriate support and initiatives from local and national regulators could motivate firms to be more environmentally friendly.