Credit risk and the business cycle: What do we know?

We perform a meta-regression analysis to characterize the relationship between ex post credit risk, measured through non-performing loans and real GDP growth. Although the prior empirical literature reveals a statistically significant inverse association, the precise effect of growth performance to credit quality diverges and remains subject to several qualifications. Using estimates from 56 studies and applying a Bayesian meta-regression analysis we explore the systematic patterns of the heterogeneity in the reported estimates. According to our evidence, the specification form as well as features related to the type of data, and the sample period are factors that systematically influence the estimated results.     

What matters more in board independence? Form or substance: Evidence from influential CEO-directors

We exploit heterogeneities among CEO-directors and find that influential CEO-directors (ICDs) provide value through advising and monitoring. To expansively capture their relative influence, we identify CEO-directors who command more pay than the appointing firm's CEO. We find ICDs are more (less) likely to serve on the compensation (audit) committee. ICDs serve on more board seats and benefit more by serving on these seats. ICDs improve the performance of their appointing firm by increasing CEO pay-performance sensitivities and by helping with R&D and M&A activities. Alternatively, uninfluential CEO-directors are largely inconsequential or even detrimental to the appointing firm.     

Oil prices implied volatility or direction: Which matters more to financial markets?

We examine the impact of oil price uncertainty on US stock returns by industry using the US Oil Fund options implied volatility OVX index and a GJR-GARCH model. We test the effect of the implied volatility of oil on a wide array of domestic industries’ returns using daily data from 2007 to 2016, controlling for a variety of variables such as aggregate market returns, market volatility, exchange rates, interest rates, and inflation expectations. Our main finding is that the implied volatility of oil prices has a consistent and statistically significant negative impact on nine out of the ten industries defined in the Fama and French (J Financ Econ 43:153–193, 1997) 10-industry classification. Oil prices, on the other hand, yield mixed results, with only three industries showing a positive and significant effect, and two industries exhibiting a negative and significant effect. These findings are an indication that the volatility of oil has now surpassed oil prices themselves in terms of influence on financial markets. Furthermore, we show that both oil prices and their volatility have a positive and significant effect on corporate bond credit spreads. Overall, our results indicate that oil price uncertainty increases the risk of future cash flows for goods and services, resulting in negative stock market returns and higher corporate bond credit spreads.     

Corporate financial policy: What really matters?

Reliable access to funding, as in Myers and Majluf (1984), is what really matters, but there are nontrivial indeterminacies in how such access is arranged and in the debt, cash-balance, and payout components of financial policy. These inferences are from a corporate “twins” comparison study of the financial policies of Henry Ford at Ford Motor Co. and Alfred P. Sloan, Jr. at General Motors Corp. The documented testimony of Ford and Sloan indicates that both focused on funding their business, with debt as a funding tool, not an element of an optimized leverage ratio. Their financial policies differ in five important respects, including (i) the use of debt versus large cash balances to meet funding needs and (ii) a commitment to paying large dividends versus a strong aversion to payouts. The data also point to the importance of the inability of managers to identify optimal policies with reliable precision.     

Are extreme returns priced in the stock market? European evidence

This paper revisits some recently found evidence in the literature on the cross-section of stock returns for a carefully constructed dataset of euro area stocks. First, we confirm recent results for US data and find evidence of a negative cross-sectional relation between extreme positive returns and average returns after controlling for characteristics such as momentum, book-to-market, size, liquidity and short term return reversal. We argue that this is the case because these stocks have lottery-like characteristics, which is attractive to certain investors. Also, these stocks tend to be very volatile so that arbitrageurs are discouraged from correcting potential mispricing. As a consequence, these stocks are often overpriced and hence face lower expected returns. Second, when we control for extreme returns, the recently found negative relationship between idiosyncratic risk and future returns is less robust. In our models, after adding maximum returns, the relationship is insignificant and sometimes even positive. We also find that idiosyncratic skewness and coskewness play an important role for asset pricing, as predicted by several theoretical models.     

Is American business working for the poor?

At first glance, poverty seems to have little to do with business. When most people--managers included--think about poverty, they assume that people are poor because they are isolated from the mainstream economy, not productive participants in it. But according to Harvard University professors Mary Jo Bane and David Ellwood, this is a misleading image of the true face of poverty in the United States today. Most poor adults--and a full 90% of poor children--live in families where work is the norm, not the exception. Poor people often work or want to work. But at the low-wage end of the American economy, having a job is no guarantee of avoiding poverty. Poverty is a business issue, then, because the American poor are part of the American work force. And this poses a problem for managers. In a more competitive and fast-changing economic environment, the performance of companies increasingly depends on the capabilities of their employees. In response to this human-resource challenge, more and more managers are embracing the language of "empowerment". And yet how can low-wage employees believe empowerment when their experience of work is, quite literally, impoverishment? It is unlikely that American companies can create the work force of the future with the poverty policies of the past. Fortunately, there are some simple policy mechanisms that can assist the working poor without putting an undue burden on business. Enacting them, however, requires managers to see poverty policy as one part of a national human-resource strategy that links the strategic concerns of companies to a broad social agenda.     

Origin matters: How does institution imprint affect family business TFP?

Initial imprint rooted in family business origin renders us great support to identify how current institution conditions and then governance characteristics influence productivity. This study investigates an underexplored institutional imprint effect moulded amid the central planning-to-market orienting transition—the lasting influence of family business origin. Focusing on China, we find that restructured family firms have higher TFPs compared with their entrepreneurial counterparts, thanks to institutional imprint differences. The effect is causal and barely varied with CEO's professional capacity and economic policy uncertainty. The imprints of institutional environment in founding phase and incurred current behavior preferences contribute to divergent productivities, isolating the effect of intervention from the alternative explanation about resource endowment discrepancy across restructured and entrepreneurial family firms.     

Corporation taxes in the European Union: Slowly moving toward comprehensive business income taxation?

This paper surveys and evaluates the corporation tax systems of the Member States of the European Union on the basis of a comprehensive taxonomy of actual and potential regimes, which have as their base either profits; profits, interest and royalties; or economic rents. The current regimes give rise to various instate and interstate spillovers, which violate the basic tenets—neutrality and subsidiarity—of the single market. The trade-offs between the implications of these tenets—harmonization and diversity, respectively—can be reconciled by a bottom-up strategy of strengthening source-based taxation and narrowing differences in tax rates. The strategy starts with dual income taxation, proceeds with final source withholding taxes and rate coordination, and is made complete by comprehensive business income taxation. Common base and cash flow taxation are not favored.     

Internal or external devaluation? What does the EC Consumer Survey tell us about macroeconomic adjustment in the Euro area?

This paper explores the dynamics of national inflation expectations within the euro area during the recent crisis. Using the European Commission's Consumer Survey, we find that the strong anchoring of area-wide inflation expectations, which is typically found in the literature, does not extend to individual member states. We also measure the effect of the crisis on national inflation expectations using sovereign bond spreads and find that increases in sovereign risk have a significant negative effect on inflation expectations. This suggests that consumers expect their country to adjust through a process of internal devaluation. In contrast, we find no evidence that tensions in the sovereign bond markets increase national inflation expectations, as one would be expect under an exit or breakup scenario.     

IPO initial returns in China: Underpricing or overvaluation?

This paper separates the amount of IPO underpricing(primary market underpricing) and overvaluation(secondary market overvaluation) from the value of an IPO's initial return to evaluate the relative importance of these two factors and their main determinants. Using data on the IPOs of 948 Chinese firms, we find that average initial returns are 66% and that underpricing and overvaluation are between 14–22% and 44–53%, respectively, depending on the method used to assess firms' intrinsic values. In addition, while both the value of the initial return and the extent of overvaluation are significantly negatively related to post-IPO long-run stock performance, overvaluation can predict post-IPO performance better than the value of the initial return. Value uncertainty in IPOs is positively related to both underpricing and overvaluation, and both the underwriter's reputation and the existence of pricing regulation are positively related to underpricing. Investor sentiment has a positive effect on overvaluation but has no effect or a negative effect on underpricing. Overall, our results suggest that in China overvaluation accounts for a larger proportion of the initial return than underpricing,and that underpricing and overvaluation have different determinants.     

Stakeholders and the stock price crash risk: What matters in corporate social performance?

This study provides evidence for the differential impacts of corporate social responsibility (CSR) initiatives targeting different stakeholder groups on stock price crash risk. In particular, it highlights CSR's role in mitigating risk and creating shareholder value. Our results reveal that managerial bad news hoarding and the resultant stock crashes are largely determined by the social CSR dimension, and this effect is predominantly seen in undervalued firms. Moreover, social CSR subcategories aimed at specific stakeholder groups (such as the community, employees, or customers) tend to mitigate future crashes. In contrast, firms' environmental initiatives and governance characteristics seem to have trivial effects on stock crashes. Using a quasi-natural experiment, we find that the mitigating effect of social CSR dimension on crash risk is likely to be causal.     

International Outsourcing of Services: What Role for Central and East European Countries?

Central and East European countries (CEECs) that have recently acceded to the European Union are increasingly emerging on the map of global companies as possible locations for outsourcing services. Starting from the assumption of labor cost differentials in favor of the CEECs, the paper explores the CEECs' capacity and potential to supply outsourcable services to the EU-15. We analyze trends in trade flows and foreign direct investment in computer services and other business services. Although the available statistical data are deficient and excessively aggregated, the scattered evidence suggests that the CEECs are important suppliers of outsourcable services to the EU-15. Apart from labor cost differentials, other factors, such as the availability of skilled workforce as well as geographical and cultural proximity, might also contribute to EU-15 companies' preference for the CEECs when deciding on the location for international outsourcing of services. Increased specialization within the enlarged European Union could bring greater benefits from the international outsourcing of services, provided the European Union improves the functioning of labor markets and the competitiveness of the service sector, including the efficient implementation of the internal market for services.     

When is cash king? International evidence on the value of cash across the business cycle

Review of Quantitative Finance and Accounting - Precautionary-motive theory implies that corporate cash holdings should be valued at a premium during recessions when uncertainty is high. However,...     

Nonconvex factor adjustments in equilibrium business cycle models: do nonlinearities matter?

Recent empirical analysis has found nonlinearities to be important in understanding aggregated investment. Using an equilibrium business cycle model, we search for aggregate nonlinearities arising from the introduction of nonconvex capital adjustment costs. We find that, while such costs lead to nontrivial nonlinearities in aggregate investment demand, equilibrium investment is effectively unchanged. Our finding, based on a model in which aggregate fluctuations arise through exogenous changes in total factor productivity, is robust to the introduction of shocks to the relative price of investment goods.     

Commodity returns co-movements: Fundamentals or “style” effect?

This paper investigates dynamic correlations both across commodities and between commodities and traditional assets, such as equities and government bonds, using the Regime Switching Dynamic Correlation (RSDC) model. There are three major findings. First, results from correlations both across commodities and between them and equities and bonds are in line with the “style” effect theoretical findings. Before the recent financial crisis, while correlations across In-index commodities started to increase from mid-2005, correlations between them and equities and bonds remained at low level. Second, all correlations increased markedly with a regime change which coincides exactly with the demise of the Lehman Brothers on September 15, 2008. We therefore suggest that the low correlation between In-index commodities and equities and bonds detected before the financial crisis should not be interpreted as a weak integration between commodity and financial markets. Integration was actually high, as revealed by the financial crisis, but was masked by the “style” effect. Finally, the new and original finding here is the temporary nature detected of the financial crisis effect on correlations which reverted to their pre-crisis level from April 2013. This highlights the impact of the financial-based factors on commodity price movements.     

Is the European Capital Market Ready for the Single Currency?

This paper defines, and investigates the extent of, capital market integration in the European Ecu government bond market sector utilising Johansen's (1992) multivariate analysis. Evidence suggests the yield system is driven by a unique common trend, although we reject the zero-sum restriction on the cointegrating vector. The former finding is consistent with our definition of full Ecu capital market integration, the latter is not, although it is explainable by failure of the expectations hypothesis. Our results support market utilisation of the extant Ecu yield curve as the initial benchmark for pricing euro-denominated debt securities following stage III EMU.     

What Causes the Positive Price-Turnover Correlation in European Housing Markets?

This paper examines what determines the correlation between prices and turnover in European housing markets. Using a panel vector autoregressive model, we find that there is a particularly strong feedback mechanism between prices and turnover. Momentum effects are another important reason why prices and turnover are correlated. Common underlying factors, such as GDP and interest rates, also explain part of the price-turnover correlation. The results in this paper imply that, to understand price and turnover dynamics, it is important to model prices and turnover as two interdependent processes. There is a considerable bias in the coefficient estimates of standard house price models if this dependency is not explicitly taken into account.     

European territories confronted with climate change: Awaiting the events or timely preparation?

Today, climate change is viewed as one of the main global challenges. The EU has become a major player in the political arena and seeks to reach worldwide agreements on ‘mitigation’ policies to reduce greenhouse gas emissions. Despite speaking with one voice at the global scale, the effects of climate change on European territories vary widely according to local circumstances. The ESPON scenarios explore what those impacts could be, and what effect EU climate change adaptation policies would have. The first scenario envisions an EU policy limited to emergency funds following extreme events like floods and droughts. In the second scenario, the EU takes a much more proactive stance by funding radical and costly adaptation strategies. The exercise demonstrates the difficulty in identifying the cost-effectiveness of each approach. Territorial effects are often indirect and affect a variety of economic, social and ecological systems. Moreover, a great deal of uncertainty exists surrounding their magnitude and timing.