Financial Institutions and Non‐Governmental Organizations: An Advocacy Partnership for Sustainable Capital Markets?

In this article, the Chief Responsibility Officer for Aviva Investors examines the potential for financial institutions (FIs) to work in partnership with non‐governmental organizations (NGOs) in advocating changes to public policy that promote sustainable capital markets. Many NGOs have argued that the current form of global economic growth is unsustainable—and they routinely engage in public policy advocacy. However, such advocacy has generally proved ineffective, in large part because most NGOs have a very limited understanding of how capital markets function. Investors, for their part, are increasingly recognizing that key aspects of the global economy are on an unsustainable footing. And some are concerned about the negative implications for the long‐term value of their assets. But with a few notable exceptions, they have not made systematic efforts to work with governments to correct the market failures. NGO‐FI advocacy partnerships could identify specific cases of systemic or sectoral market failures, and recommend long‐term changes to the sectoral operating environment that would affect the cash flows and values of companies operating within that sector in ways designed to “internalize” the effects of negative social and environmental externalities. To foster the development of such partnerships, there is a need for academia to develop learning forums that stimulate the exchange of ideas between the executives within NGOs and FIs in an environment of mutual trust and respect.     

Is Working Capital Information Useful for Financial Analysts? Evidence from China

Financial analysts are important information intermediaries in the capital market. This study investigates whether information about working capital management is useful for financial analysts of Chinese firms. With a sample of listed companies from 2004 to 2014, we find that the efficiency of working capital management is positively associated with the number of analyst following and analyst forecast accuracy, and negatively associated with analyst forecast dispersion. Specifically, when the cash conversion cycle becomes longer, number of analyst following and the accuracy of their mean forecasts decrease, while the forecast dispersion increases. The findings of this study indicate a potential mechanism through which information about working capital management is incorporated in stock price in emerging markets such as China.     

Is Investor Attention for Sale? The Role of Advertising in Financial Markets

Prior research documents capital market benefits of increased investor attention to accounting disclosures and media coverage; however, little is known about how investors and markets respond to attention‐grabbing events that reveal little nonpublic information. We use daily firm advertising data to test how advertisements, which are designed to attract consumers' attention, influence investors' attention and financial markets (i.e., spillover effects). Exploiting the fact that firms often advertise at weekly intervals, we use an instrumental variables approach to provide evidence that print ads, especially in business publications, trigger temporary spikes in investor attention. We further find that trading volume and quoted dollar depths increase on days with ads in a business publication. We contribute to research on how management choices influence firms' information environments, determinants and consequences of investor attention, and consequences of advertising for financial markets.     

What Is the Cost of Financial Flexibility? Theory and Evidence for Make‐Whole Call Provisions

Firms commonly incorporate make-whole call provisions in their newly issued debt, presumably to improve their ability to retire debt early if circumstances require. In return for increased financial flexibility, firms must compensate bondholders with additional (incremental) yield. To estimate theoretical incremental yields, we use and calibrate a structural model for a large sample of callable and noncallable US corporate bonds issued between 1995 and 2004. In a frictionless model where calls occur only when they are in-the-money, theoretical incremental yields average approximately 2 basis points (bp). In an extended model that incorporates taxes, transactions costs, and randomly occurring exogenous events requiring early bond retirement, incremental yields average approximately 5 bp. Empirical analysis, however, indicates that observed incremental yields are significantly greater than model-generated values, averaging between 13 and 24 bp. In the later years of our sample period, however, observed incremental yields begin to converge to model-generated values.     

Why Do REITs Go Private? Differences in Target Characteristics, Acquirer Motivations, and Wealth Effects in Public and Private Acquisitions

This paper first identifies the characteristics of publicly-traded REITs associated with an increased probability of becoming the target of an announced merger or acquisition bid. Second, conditional on being a target, we determine which target characteristics influence the probability of the bidder being a private versus a public firm. Third, we document the magnitude of the wealth effects that accrue to the shareholders of target REITs in both privatizations and public-to-public transactions and how these effects vary with the characteristics of the target firms. Finally, we investigate the extent to which privatizations differ from ??staying public?? acquisitions in the type of financing employed and the motivation of the two investor types. We find that REITs more likely to become acquisition targets are smaller and less liquid with higher dividend yields than non-targets. The existence of an umbrella partnership (UPREIT) structure reduces the probability of becoming a target. Private acquirers are more likely to bid on underleveraged REITs with poor operating performance. Conversely, public buyers are more focused on acquiring highly levered REITs with greater institutional ownership and superior operating results. The determinants of abnormal returns also differ in privatizations and public-to-public deals.     

How Different Is the Efficiency of Public and Private Water Companies in Asia?

Several studies have compared the efficiency of publicly andprivately owned water utilities and reached conflicting conclusionson the impact of ownership on efficiency. This article providesfurther evidence by estimating a stochastic cost frontier fora sample of Asian and Pacific regional water companies. Theresults show that efficiency is not significantly differentin private companies than in public ones.     

Corporate Groups and Minority Shareholder Wealth: A Role for Private Benefits?

This paper aims at developing a theoretical framework to address the issue of internal resource allocation within corporate groups, representing an extension of the internal capital market approach developed for Anglo-Saxon type multidivisional enterprises. In particular, the paper investigates how private benefits from control affect investment decision processes in a capital constrained business group. We consider a group of n listed companies controlled by one main shareholder (i.e., a hierarchical group), and suppose that the group as a whole is endowed with an exogenous and limited amount of capital for investment. We analyze the effects of private benefits on the investment allocative efficiency and on the wealth of the group';s various claimants. Under reasonable assumptions, we show that the controlling shareholder always finds preferable to secure private benefits. Moreover, and surprisingly enough, we find that the appropriation of control benefits may give rise to an increase in the market value of the group as well as in the portfolio wealth of the set of minority shareholders. In particular, the positive effect of control benefits on minority interests increases with the capital rationing of the group. Therefore, the effects of private benefits can be different in different markets, depending on the degree of development and the credit capacity of the single market. The findings of this paper challenge the largely accepted view that private benefits from control are always harmful to minority shareholders.     

Is Financial Regulation Good or Bad for Real Estate Companies? – An Event Study

The Journal of Real Estate Finance and Economics - This study investigates how three regulatory reforms undertaken in the aftermath of the global financial crisis have affected returns of real...     

Are Market‐Based Measures of Global Systemic Importance of Financial Institutions Useful to Regulators and Supervisors?

We analyze whether four market‐based measures of the global systemic importance of financial institutions offer early warning signals during three financial crises. The tests based on the 2007–2008 crisis show that only one measure (?CoVaR) consistently adds predictive power to conventional early warning models. However, the additional predictive power remains small and it is not normally confirmed for the Asian and the 1998 crises. We conclude that it is problematic to identify a market‐based measure of systemic importance that remains valid across crises with different features. The same criticism also applies to several conventional proxies of systemic importance, of which size is the most consistent performer.     

Is the Organisation for Economic Co-operation and Development Ready for China?

Abstract:

The re-emergence of China as a global economic power has intensified calls for the urgent reform of Western-dominated international organizations. We evaluate efforts by the Organisation for Economic Co-operation and Development (OECD) to adapt to the challenge of China. From the first decade of the 2000s, the OECD has undertaken reforms to boost its significance as a key policy actor in the global economy. Part of this effort involves bringing China closer to the organization. To date, only limited progress has been made. We set out three bold policy reforms the OECD could implement that would deepen the OECD’s relationship with China as well as with other emerging economies.     

Remarks on “Financial Services Integration: Right for some,Wrong for Others?”

Abstract

I have been asked to provide some introductory remarks on the structure of the financial services industry in the 21st century. Each of the panelists will give their own unique perspective on why consolidation is or is not a good idea for the firms where they work. I, on the other hand, would like to take a little time to provide an overview of what I see as competing “models” for the delivery of financial services. I will try to argue that these models are not necessarily mutually exclusive and that certain clientele may be attracted to one or the other. Thus, integration will indeed turn out to be right for some and wrong for others.     

Is mark-to-market accounting destabilizing? Analysis and implications for policy

Fundamental economic principles provide a rationale for requiring financial institutions to use mark-to-market, or fair value, accounting for financial reporting. The recent turmoil in financial markets, however, has raised questions about whether fair value accounting is exacerbating the problems. In this paper, we review the history and practice of fair value accounting, and summarize the literature on the channels through which it can adversely affect the real economy. We propose a new model to study the interaction of accounting rules with regulatory capital requirements, and show that even when market prices always reflect fundamental values, the interaction of fair value accounting rules and a simple capital requirement can create inefficiencies that are absent when capital is measured by adjusted book value. These distortions can be avoided, however, by redefining capital requirements to be procyclical rather than by abandoning fair value accounting and the other benefits that it provides.     

Is performance measurement and management fit for the future?

Performance measurement and management (PMM) is a management and research paradox. On one hand, it provides management with many critical, useful, and needed functions. Yet, there is evidence that it can adversely affect performance. This paper attempts to resolve this paradox by focusing on the issue of “fit”. That is, in today's dynamic and turbulent environment, changes in either the business environment or the business strategy can lead to the need for new or revised measures and metrics. Yet, if these measures and metrics are either not revised or incorrectly revised, then we can encounter situations where what the firm wants to achieve (as communicated by its strategy) and what the firm measures and rewards are not synchronised with each other (i.e., there is a lack of “fit”). This situation can adversely affect the ability of the firm to compete. The issue of fit is explored using a three phase Delphi approach. Initially intended to resolve this first paradox, the Delphi study identified another paradox – one in which the researchers found that in a dynamic environment, firms do revise their strategies, yet, often the PMM system is not changed. To resolve this second paradox, the paper proposes a new framework – one that shows that under certain conditions, the observed metrics “lag” is not only explainable but also desirable. The findings suggest a need to recast the accepted relationship between strategy and PMM system and the output included the Performance Alignment Matrix that had utility for managers.     

Legal Institutions,Ownership Concentration,and Stock Repurchases Around the World: Signal Mimicking?

One of the central puzzles of signaling theory is how to assess signal quality, in particular the potential for signal mimicking. Our study provides evidence of signal mimicking in the context of stock repurchases. Employing an ex-ante proxy for the likelihood of mimicking stock repurchases and data on open market stock repurchases from 30 countries, we find that long-term operating and market performance following stock repurchases improve less for suspected mimicking firms. This finding contradicts the conventional characterization that managers use stock repurchases to signal undervaluation and enhanced future performance. We find that mimicking firms have smaller capital investments, need greater external financing, buy back fewer shares, and issue more new shares (and/or resell more treasury shares) in the year of the repurchase. Our analysis further shows that mimicking is more likely in countries with weak investor protections and in firms with higher ownership concentration. Further, mimicking associated with concentrated ownership is mitigated in countries with stronger investor protections and by the adoption of International Financial Reporting Standards (IFRS). Altogether, our findings provide evidence of signal mimicking in stock repurchases in international data that is influenced by market, ownership, legal, and financial reporting characteristics of countries.     

Private Equity and the COVID‐19 Economic Downturn: Opportunity for Expansion?

The coronavirus‐related global economic downturn poses a significant risk to PE portfolio companies, but also represents a significant opportunity to purchase quality companies at a discount. Because the industry is today much larger, as well as more diversified and experienced, than at the time of the 2008 downturn, it is better positioned not only to weather the severe economic storm, but emerge with an even larger and stronger asset base. Compared with PE at the time of the global financial crisis, today's $3.9 trillion private equity industry has considerably more dry powder, with more heavily capitalized strategies, including private credit and “secondaries,” more permanent capital, and stronger operational capabilities. In contrast with the pre‐crisis hyper‐competitive market environment in which purchase multiples were at record highs and returns faced significant downward pressure, the fear and uncertainty that characterize current market conditions have put PE in a position to grow its asset base at bargain prices. The advantages of scale, diversification, adaptability, and access to longer‐term capital are all expected to help today's larger alternative asset groups, which have in recent years achieved greater diversification in terms of strategy as well as geography and investors.     

Market Liquidity,Investor Participation,and Managerial Autonomy: Why Do Firms Go Private?

We focus on public-market investor participation to analyze the firm's decision to stay public or go private. The liquidity of public ownership is both a blessing and a curse: It lowers the cost of capital, but also introduces volatility in a firm's shareholder base, exposing management to uncertainty regarding shareholder intervention in management decisions, thereby affecting the manager's perceived decision-making autonomy and curtailing managerial inputs. We extract predictions about how investor participation affects stock price level and volatility and the public firm's incentives to go private, providing a link between investor participation and firm participation in public markets.     

Three Triggers? Negative Equity,Income Shocks and Institutions as Determinants of Mortgage Default

The Journal of Real Estate Finance and Economics - In understanding the determinants of mortgage default, the consensus has moved from an ‘option theory’ model to the ‘double...