The bull and bear market model of Huang and Day: Some extensions and new results

We develop a financial market model with interacting chartists and fundamentalists that embeds the famous bull and bear market model of Huang and Day as a special case. Their model is given by a one-dimensional continuous piecewise-linear map. Our model, on the other hand, is more flexible and is represented by a one-dimensional discontinuous piecewise-linear map. Nevertheless, we are able to provide a more or less complete analytical treatment of the model dynamics by characterizing its possible outcomes in parameter space. In addition, we show that quite different scenarios can trigger real-world phenomena such as bull and bear market dynamics and excess volatility.     

Economic policy uncertainty and cost of debt financing: International evidence

Prior research shows that economic policy uncertainty affects a wide range of corporate financial decisions; however, there is little research on the relationship between economic policy uncertainty and cost of debt financing across countries. In this paper, we argue that economic policy uncertainty affects cost of debt financing through two mechanisms including information asymmetry and default risk. With a sample of 163,243 firm-years across 17 countries from 2003 to 2016, we find that economic policy uncertainty positively affects cost of debt financing and this effect is stronger during the global financial crisis from 2008 to 2009. Moreover, our research findings show that large firms’ debt financing cost is less affected by economic policy uncertainty.     

The nonlinear price dynamics of U.S. equity ETFs

We investigate the price dynamics of large market-capitalization U.S. equity exchange-traded funds (ETFs) in order to uncover trader motivations and strategy. We show that prices of highly liquid ETFs can deviate significantly from their daily net asset values. By adjusting for changes in valuations, we report the impact of non-classical variables including price trend and volatility using data from 2008 to 2011. We find a cubic nonlinearity in the trend suggesting that traders are not only aware of the underreaction of others, but also self-optimize by anticipating others’ reactions, and sell when the uptrend is stronger than usual.     

On the second-order properties of empirical likelihood with moment restrictions

This paper considers the second-order properties of empirical likelihood (EL) for a parameter defined by moment restrictions, which is the inferential framework of the generalized method of moments. It is shown that the EL defined for this general framework still admits the delicate second-order property of Bartlett correction. This represents a substantial extension of all the established cases of Bartlett correction for the EL. An empirical Bartlett correction is proposed, which is shown to work effectively in improving the coverage accuracy of confidence regions for the parameter.     

The blind power: Power-led CEO overconfidence and M&A decision making

The behavioral finance literature attributes failed M&As to CEO overconfidence. We investigate the source of CEO overconfidence that leads to failed M&As. Among various determinants of CEO overconfidence, we propose that power-led CEO overconfidence delivers undesirable consequences in corporate investments. Using CEO-level data, we find that CEO power increases the probability of a CEO being overconfident. We also show that power-led overconfident CEOs tend to complete more deals regardless of economic circumstances, do stock acquisitions, and make diversifying acquisitions, relative to non-overconfident CEOs. The results suggest that the findings of previous studies on M&As by overconfident CEOs could be driven by power-led overconfident CEOs.     

CEO compensation, shareholder rights, and corporate governance: An empirical investigation

We investigate whether CEO compensation is influenced by the strength of shareholder rights. Our evidence reveals that CEOs of firms where shareholder rights are weak obtain more favorable compensation. It is also found that higher CEO pay is associated with a higher degree of potential managerial entrenchment. Additionally, CEOs of firms with governance provisions that offer them protection from takeovers enjoy more generous pay. We also examine the change in CEO compensation relative to the change in shareholders' wealth. The evidence shows that when there is an increase in shareholders' wealth, the CEO is able to obtain higher incremental compensation when shareholder rights are weak. On the contrary, when shareholders' wealth falls, there is no corresponding decline in CEO compensation when shareholder rights are weak. Given the empirical evidence, we argue that CEO compensation practices reflect rent expropriation rather than optimal contracting.     

Formulation of public debt management strategies: An empirical study of possible drivers

A well-designed public debt management strategy can help countries reduce their borrowing cost, contain financial risks and develop their domestic markets. Using survey data on debt management strategies, this paper studies whether the probability that a country has a formal debt management strategy, publishes the strategy document, and uses quantitative benchmarks to formulate its debt management strategy is affected by democratic accountability, institutional quality, past debt crises/defaults, official development assistance, and participation in debt management programs. We find that countries located in Latin America and the Caribbean are less likely to have developed a debt management strategy and, if they have, are less likely to publish it. In contrast, countries located in the Middle East and North Africa are less likely to use quantitative benchmarks in the formulation of their debt management strategies. A country is more likely to have developed a debt management strategy if it has the experience of a past debt crisis, but not of repeated debt crises. Institutional quality and democratic accountability could significantly contribute to the emergence of more transparent and accountable debt management strategies in developing countries. IFIs’ technical assistance on public debt management could be enhanced by IFIs conducting their own, prior diagnostic reviews.     

Catering to investors through capital expenditures: Testing assets substitution problem around financing

We test the catering theory, which describes how investor preferences might influence individual firms' investment financing decisions. To the best of our knowledge, our study may well be the first that directly connects catering with asset substitution to contrast the magnitude of catering by bondholders and shareholders. And indeed, it is interesting to find that although catering behavior is found to exist among both corporate bond and seasoned equity offering (SEO) managers, the coexistence of both appears to offset the abnormal investment phenomena of either underinvestment or overinvestment. The study results further reveal that firms engage in overinvestment when catering to conversion holders of existing convertible bonds. Taken together, we find that support for the asset substitution and abnormal investment argument is strong from a stockholder–bondholder conflict.     

Unlevered betas and the cost of equity capital: An empirical approach

The present paper calculates the systematic risk within the context of the capital asset pricing model to investigate the significance of financial leverage on systematic risk. Rather than testing the unlevered beta directly, we develop a multinomial model with theoretically predicted targets in the unleveraged/leveraged process. We find that including tax shields in this process is statistically more robust than omitting them. Our results also suggest that the use of the proxy levered beta to address the lack of market information for both non-traded firms and individual business units is not misleading.     

Bank ownership and cost efficiency: New empirical evidence from Russia

This paper investigates the cost efficiency of Russian banks with regard to their heterogeneity in terms of ownership form, capitalization and asset structure. Using bank-level quarterly data over the period 2005–2013, we perform stochastic frontier analysis (SFA) and compute cost efficiency scores at the bank and bank group levels. We deduct from gross costs the negative revaluations of foreign currency items generated by official exchange rate dynamics rather than by managerial decisions. The results indicate that the core state banks, as distinct from other state-controlled banks, were nearly as efficient as private domestic banks during and after the crisis of 2008–2009. Foreign banks appear to be the least efficient market participants in terms of costs, which might reflect their lower (and decreasing over time) penetration of the Russian banking system. We further document that the group ranking by cost efficiency is not permanent over time and depends on the observed differences in bank capitalization and asset structure. We find that foreign banks gain cost efficiency when they lend more to the economy. Core state banks, conversely, lead in terms of cost efficiency when they lend less to the economy, which can result from political interference in their lending decisions in favor of unprofitable projects Private domestic banks that maintain a lower capitalization significantly outperform foreign banks and do not differ from the core state banks in this respect.     

Leisure and long-run risks: An empirical evaluation on value premium puzzle

I study the ability of a long-run risk model, with nonseparable leisure and consumption, to price the cross-section of U.S. equity returns over the 1948–2015 period. The stochastic discount factor features innovations to future leisure and consumption growth as factors. The model performs well, in terms of a variety of criteria, relative to competing models in explaining the cross-section of the spread in size and value portfolios.     

Political events and the foreign direct investment decision: An empirical examination

This study investigates the impact of political events on US manufacturing direct investment in Latin America. The relationship between foreign direct investment and political events (and economic factors) is examined through regression analysis of pooled time-series (21 years) and cross-sectional (8 countries) data. In contrast to previous studies using an econometric approach, this study finds that political events do affect direct investment decisions. Specifically, both intra-nation and inter-nation conflict and co-operation have an impact on US direct investment decisions concerning Latin American countries. In addition, the host country's market size and market growth affect these decisions by US multinational firms.     

How tournament incentives affect asset markets: A comparison between winner-take-all tournaments and elimination contests

We investigate the impact of investment managers׳ tournament incentives on investment strategies and market efficiency, distinguishing between winner-take-all tournaments (WTA), where a minority wins, and elimination contests (EC), where a majority wins. Theoretically, we show that investment managers play heterogeneous strategies in WTA and homogeneous strategies in EC, and markets are more prone to mispricing in WTA than in EC. Experimentally, we find that investment managers play more heterogeneous strategies in WTA than in EC, but this does not trigger significant differences in prices. Moreover, prices in WTA and EC do not differ significantly from markets composed of linearly incentivized subjects.     

The effects of formal and informal CEO power on debt policy persistence

We explore the general trends of debt policy persistence and how formal and informal CEO power may influence the persistence based on four dimensions of debt policy. Using a sample of Chinese listed firms during 2008–2018, we clearly identify, for the first time, that the general trends of debt policy persistence include an initial downward trend phase (of 4–5 years) and a subsequent stable trend phase. We divide CEO power into formal and informal CEO power and find that CEOs’ formal power can help to increase debt policy persistence, while the role of informal power is the opposite, providing evidence that CEO power has a double-edged effect on debt policy persistence. Further, our results show that the most important dimensions through which formal and informal CEO power have their respective effects are ownership power and financial expert power. Lastly, it is CEOs’ formal power rather than their informal power that plays a dominant role in promoting the persistence of debt policy.     

Risk aversion and business cycles: An empirical analysis

Unlike investors, who tend to maintain highly-diversified portfolios, private entrepreneurs usually lack access to complete risk-pooling for idiosyncratic risks, thus more directly internalize the cost of volatility. Risk aversion, however, modifies the optimal contract between entrepreneurs and lenders by incorporating the risk premium that entrepreneurs demand for the uninsurable risk: the private equity premium. Consequently, real shocks tend to be amplified as changes in entrepreneurs’ net worth affect the private equity premium and so the rental rate of capital, investment and output. This theoretical framework suggests that economies where the private entrepreneurial sector is a relatively larger, and therefore more vulnerable to uninsurable risk, all else equal, should present higher volatility. I test this prediction by (1) conducting a simple reduced-form analysis that shows that output volatility is negatively associated with the relative importance of the corporate vs. the privately-held sector; and (2) estimating the model's structural parameters. Intuitively, countries where private entrepreneurs are predominant and so risk aversion is likely to impose stronger impacts, positive risk aversion coefficients should be found. Results suggest that risk aversion is empirically more relevant for economies like Argentina, Brazil, Chile, Korea, Mexico and Thailand than for Canada, France, Germany, the U.K. and the U.S.     

Job location and the journey-to-work: An empirical analysis

In this paper we present and estimate a single equation model designed to explain the job-location behaviour of individuals living in a multi-centered metropolitan area. We test the model separately for heads of households and non-heads of households, as well as for the total working population, in order to isolate differences in commuting behaviour between primary and secondary wage earners. The relationships are estimated from 1971 Census, cross-section data using least squares multiple regression.The results of the location equation indicate that wage gradient variables are important determinants of job location for heads of households. On the other hand, non-heads are rather insensitive to the wage gradient. Rather, contrary to the decisions of heads, the job-location choices of non-heads are strongly influenced by socio-economic attributes, notably occupation, family size and age. Clearly, job-location decisions of primary wage earners (usually the household heads) are influenced by earnings-maximizing considerations while secondary earners (non-heads in general) put more weight on other socio-economic factors. The results also suggest that there is a hidden cost associated with uneven directional growth in the Toronto CMA. It is suggestive that urban planning strategies should reflect consideration of the greater desire or need for accessibility on the part of secondary wage earners (non-heads) and the need to balance residential and job opportunities at the extending margin of the urban area.     

Risk sharing,risk shifting and the role of convertible debt

This paper considers a financial contracting problem between a risk neutral entrepreneur and a risk averse investor. Once the venture is started, the entrepreneur chooses an action that determines the riskiness of the venture’s payoff. When action choice is contractible, the optimal risk sharing consideration under limited liability calls for a pure debt contract and the low risk action is adopted. When the action choice is not contractible, due to the risk shifting problem implementing the low risk action requires a deviation from the optimal risk sharing. I focus on situations where despite this deviation, the risk averse investor prefers to implement the low risk action and show that a convertible debt contract is superior to pure debt, pure equity and any mixture of debt and equity.     

Designing vendor evaluation systems: An empirical analysis

Companies today are increasing efforts to develop their vendor evaluation system (VES) to qualify and select the best suppliers, monitor their performance and foster continuous improvement. VES lies at the intersection of three disciplines: purchasing management, supply chain management, and performance management. The extant literature especially focuses on vendor rating tools from a mathematical modeling standpoint, whereas firms are mostly concerned with guidelines necessary to design and implement an effective VES. The present study develops an encompassing research framework to investigate VES by means of thirteen case studies. In particular, the paper investigates VES design in terms of strategic alignment, process configuration and execution, as well as corresponding benefits and costs, exploring how the combination of the previous elements determines company satisfaction. Three groups of VESs are identified, leading to different levels of satisfaction.     

Term structure models and the zero bound: An empirical investigation of Japanese yields

When Japanese short-term bond yields were near their zero bound, yields on long-term bonds showed substantial fluctuation, and there was a strong positive relationship between the level of interest rates and yield volatilities/risk premiums. We explore whether several families of dynamic term structure models that enforce a zero lower bound on short rates imply conditional distributions of Japanese bond yields consistent with these patterns. Multi-factor “shadow-rate” and quadratic-Gaussian models, evaluated at their maximum likelihood estimates, capture many features of the data. Furthermore, model-implied risk premiums track realized excess returns during extended periods of near-zero short rates. In contrast, the conditional distributions implied by non-negative affine models do not match their sample counterparts, and standard Gaussian affine models generate implausibly large negative risk premiums.