Defined Contribution Pension Plans: Determinants of Participation and Contributions Rates

Records of 793,794 employees eligible to participate in 647 defined contribution pension plans are studied. About 71% of them choose to participate in the plans, and of the participants, 12% choose to contribute the maximum allowed, $10,500. The main findings are (other things equal) (1) participation rates, contributions and (most remarkably) savings rates increase with compensation; on average, a $10,000 increase in compensation is associated with a 3.7% higher participation probability and $900 higher contribution; (2) women’s participation probability is 6.5% higher than men’s and they contribute almost $500 more than men; (3) participation probabilities are similar for employees covered and not covered by DB plans, but those covered by DB plans contribute more to the DC plans; (4) the availability of a match by the employer increases employees’ participation and contributions; the effect is strongest for low-income employees; (v) participation rates, especially among low-income employees, are higher when company stock is an investable fund.

Alphabeticity Bias in 401(k) Investing

Structural factors that cause irrational investment in defined contribution savings plans are of great concern. Using a proprietary database of 401(k) plans we show that alphabeticity—the order that fund names appear when listed in alphabetical order—significantly biases participants’ investment allocation decisions. While we show a larger impact as the number of funds in the plan increases, this bias is strong even when relatively few funds are available in the plan menu. Importantly, our findings suggest that a more strategic ordering of funds could result in favorable outcomes for participants.     

Sustainability priorities,corporate strategy,and investor behavior

Using a sequential experiment, this study examines whether integration of material environmental, social, and governance (ESG) priorities into corporate strategy impacts investors’ short‐ and long‐term stock price assessments and investment allocation. In our examination, we consider the potential moderating effect of financial performance. We find that integration of ESG priorities into strategy does not have a significant effect on investors’ price assessments or investment allocation. This is true regardless of the trend in the company's financial performance. Our results hold across various demographics and the levels of investment knowledge and investment experience. Investors’ perception of relevance and reliability of material ESG information, however, has a mediating effect on their long‐term price assessment and investment allocation. Overall, our findings suggest that any future requirements on disclosure of ESG information by regulators and standard setters should aim to improve investors’ perception of the relevance and reliability of that information.     

Global economic uncertainty and the Chinese stock market: Assessing the impacts of global indicators

We comparatively assess the influence of global economic uncertainty measures on Chinese stock market volatility. Using a model based on generalized autoregressive conditional heteroskedasticity and mixed-data sampling, the results show that the global economic policy uncertainty index, the geopolitical risk index, and the global economic condition index all significantly influence the long-term volatility of China’s equity market. We highlight which of these measures has the most explanatory power under differing contexts. As uncertainty measures have wide applicability, investors, policymakers, and academicians will be quite interested in our results.     

Macroeconomic announcements and price discovery in the foreign exchange market

This study shows that the dominance of the overlapping trading hours of London and New York in the price discovery of the EUR/USD and USD/JPY markets only applies on days with U.S. announcements. Different from Cai et al. (2008) and Wang and Yang (2011), we highlight the informational advantage of local traders at the arrival of macroeconomic announcements in the local market, and find that macroeconomic announcements affect the pattern of price discovery across different markets, consistent with Chen and Gau (2010) and Jiang et al. (2012). We also examine changes in information shares before and after the announcement. A significant increase in price discovery before the announcement suggests the possibility of information leakage, while enhanced price discovery efficacy after the announcement suggests that prices gradually adjust to new information, not just immediately respond to the arrival of announcements.     

LIBOR and swap market models and measures

A self-contained theory is presented for pricing and hedging LIBOR and swap derivatives by arbitrage. Appropriate payoff homogeneity and measurability conditions are identified which guarantee that a given payoff can be attained by a self-financing trading strategy. LIBOR and swap derivatives satisfy this condition, implying they can be priced and hedged with a finite number of zero-coupon bonds, even when there is no instantaneous saving bond. Notion of locally arbitrage-free price system is introduced and equivalent criteria established. Stochastic differential equations are derived for term structures of forward libor and swap rates, and shown to have a unique positive solution when the percentage volatility function is bounded, implying existence of an arbitrage-free model with such volatility specification. The construction is explicit for the lognormal LIBOR and swap “market models”, the former following Musiela and Rutkowski (1995). Primary examples of LIBOR and swap derivatives are discussed and appropriate practical models suggested for each.     

Liquidity and capital under uncertainty and changing market sentiment: A simple analysis

This study introduces a general approach to investigate resource allocation and asset prices in an economy with uncertainty and shifts in market sentiment. The approach presents a number of key features: first, it proposes a choice-theoretic model that determines the utility that the agents derive from holding assets with different liquidity. Second, it incorporates a variable (endogenously-determined) cost structure of asset liquidation, which reflects the (in)efficiencies of the financial infrastructure and changes in market moods. Third, it also incorporates a model of expectations formation under uncertainty and changing market sentiment. While rich in structure, the approach offers a simple analytical framework to investigate resource allocation decision and asset price dynamics under various sources of uncertainty, and to explore the micro-economics of speculative bubbles and boom–bust sequences. The use of a possible market-specific prudential policy tool is discussed.     

Auditing standards,increased accounting disclosure,and information asymmetry: Evidence from an emerging market

The interest in accounting disclosure and audit quality by academics, practitioners, and regulators heightened following the various financial reporting scandals, and subsequent legislative and professional response to these scandals. An important question is whether the implementation of stricter auditing standards such as those mandated by the US Sarbanes-Oxley Act would improve the information environment of firms whose shares are publicly traded. In this paper, I investigate the link between information asymmetry, measured by bid-ask spread, and increased accounting disclosures following the adoption of new auditing standards in China—an environment in which disclosure hitherto was relatively low. I report the following primary results of the statistical analyses. First, information asymmetry cost is substantial in the Chinese order-driven emerging markets. Second, the firms in the sample experienced significant reductions in their bid-ask spreads subsequent to the adoption of the new auditing standards. Third, the reductions in the bid-ask spreads were abrupt and permanent. However, no significant result is found for firms in the control group with foreign ownership, whose financial statements were prepared in accordance with international accounting standards and were audited with international auditing standards. The results have implications for policy makers and regulators in general, and those in emerging markets in particular.     

The crossroads of ESG and religious screening on firm risk

Using a large and extended global dataset of non-financial firms (4624 listed entities from 2002 to 2018), we provide the first empirical evidence on how ESG and Sharia screenings interact and influence market risks. We link two contrasting literature streams: the risk reduction role that the stakeholder theory attributes to ESG scores, and the opposite effect for Sharia-compliance anticipated by the portfolio and agency theories.We find that when ESG scores are not considered, Sharia certification increases risks. We also prove that engagement in sustainable activities mitigates risks for both Sharia-compliant and conventional firms. More interestingly, we show that Sharia-compliant firms obtain a larger risk-mitigating effect for greater levels of ESG scores. These results are robust to endogeneity and to extensive additional checks.Our findings validate the hypothesized complementarity between ESG and Sharia screenings.     

Determinants and consequences of voluntary corporate social responsibility disclosure: Evidence from private firms

We examine whether and how private firms differ from public firms in determining corporate social responsibility (CSR) disclosure policies. We document that private firms are less likely to issue CSR reports compared with their public peers. Adopting a bivariate probit model that accommodates partial observability, we find that the effect is mainly driven by a supply-side force rather than a demand-side force. From a debtholder-oriented perspective, while public firms enjoy more favorable credit ratings and a lower cost of debt due to CSR disclosure, private firms do not reap similar benefits from CSR disclosure. Corporate governance and CSR assurance alleviate debtholders' concern on private firms’ engagements in CSR.     

Backing what works? Social Impact Bonds and evidence-informed policy and practice

ABSTRACT

Social Impact Bonds (SIBs) offer an opportunity to explore the use of evidence to inform public policy and commissioning decisions in both discursive and practical terms in what are frequently highly politicized contexts. We identify three potential mechanisms by which SIBs may promote evidence use and explore these through empirical findings drawn from a three-year evaluation of SIBs applied to health and social care in the English NHS.     

Common Shocks and Relative Compensation

This paper studies qualitative properties of an optimal contract in a multi-agent setting in which agents are subject to a common shock. We derive a necessary and sufficient condition for the optimal reward of an agent producing an output level y to be a decreasing (increasing) function of the outputs of the other agents, under the assumption that the agents’ outputs are informative signals of the value of the common shock. The condition is that the likelihood ratio p(y, e, η)/p(y, e′, η), where e is a higher effort level than e′ and η is the value of the common shock, be a decreasing (increasing) function of η. We give examples of applications of the result and examine its consequences for CEO compensation.     

The impact of foreign equity flows on market volatility during politically tranquil and turbulent times: The Egyptian experience

Since the popular uprising of January 2011, a series of momentous events has rocked Egypt’s political order, jeopardising the country’s economic and financial stability. This study examines the role of foreign capital flows in the volatility of the Egyptian equity market, and whether this role has changed due to the recent domestic political unrest. These issues are empirically addressed in the context of GMM estimation. The results suggest that, unlike those of foreign individual investors, trades of foreign institutional investors contribute to market fluctuations, whether prior to or following the January 2011 uprising. Sell trades by foreign individual and institutional investors exert a significant influence on volatility. Further, when volume is split into its anticipated and unanticipated components, the results show that surprises in trading activity by either group tend to exacerbate volatility in periods of calm and turmoil. These findings are broadly insensitive to volatility measures and robust, even after controlling for a variety of relevant determinants of market volatility. The evidence documented in this study provides important implications for policy markers.     

ESG disclosure and technological innovation capabilities of the Chinese listed companies

The main objective of this study is to explore how ESG disclosure effectively promotes technological innovation capabilities (TIC) and also in different industries (green vs. high-tech). Further, examine the role of financing constraint (FC) in the relationship between the ESG disclosure and TIC. We employed the panel regression model, Causal step approach, Bootstrap mediation effect test, 2SLS, and GMM model. We used Bloomberg’s ESG disclosure score of China’s A-share listed companies from 2011 to 2019 (1); we found that the ESG disclosure has a significant relationship with corporate innovation indicators (OTI, STI, NSTI) and play a significant role in promoting TIC at different levels of corporate innovation (2) ESG disclosure of non-green (high-tech) industry is more effectively promote TIC than green (non-high tech) industry (3) ESG disclosure can promote corporate innovation by reducing the level of corporate financing constraints, and FC has a partial intermediary role between ESG and TIC.     

Banking sector reactions to COVID-19: The role of bank-specific factors and government policy responses

This paper examines the impact of bank-specific factors and variations in the context of stringency of government policy responses on bank stock returns because of the COVID-19 pandemic. A sample of 1,927 publicly listed banks from 110 countries is used for the period of the first major wave of COVID-19, that is, January to May 2020. Our findings indicate that stock returns of banks with higher capitalization and deposits, more diversification, lower non-performing loans, and larger size are more resilient to the pandemic. While banks’ environment and governance scores do not have a significant impact, higher social and corporate social responsibility strategy scores intensify the negative stock price reaction to COVID-19. We further observe that the pandemic-induced reduction in bank stock prices is mitigated as the strictness of government policy responses increases, mainly through economic responses such as income support, debt and contract relief, and fiscal measures from governments.     

The effects of environmental,social and governance disclosures and performance on firm value: A review of the literature in accounting and finance

This paper not only attempts to survey the burgeoning literature on environmental, social and governance disclosures and performance and their effects on firm value, but its focus also lies on highlighting stylised observations coming from the most recent work that has not yet become part of the ‘conventional wisdom’ in the field. In addition, it outlines some of the crucial knowledge gaps and interesting questions that have not, as of yet, been addressed and thus outlines a potential agenda for future research on socially responsible investing. Lastly, it introduces the papers published in this special issue of the British Accounting Review.     

Ritual legitimation, de-coupling and the budgetary process: managing organizational hypocrisies in a multinational company

The study of participation in the budgetary cycle has formed a prominent part of the research literature concerned with the budgetary process. More recently there has emerged a body of literature concerned with exploring the political and symbolic nature of the budgetary process. The paper reports upon the outcomes of an empirical study of the introduction of `budgetary participation' in a division of a European subsidiary of a large North American car manufacturer. We detail the long process of consultation and negotiation within the subsidiary, and between it and the European Headquarters. The study provides a revealing instance of the roles of formal budget participation as a ritual of control and legitimation without the substantive involvement of middle managers and suggested to us the introduction of de-coupling and organizational hypocrisy alongside the introduction of budget participation. The study pays close attention to the contingent effects of the wider political context of the division and the relationships between the division, its organizational context and organizational environment, and how this context played upon the budgetary process in the division. The outcomes that we analyse at `Delta' reflect the de-coupling strategies and organizational hypocrisies commonly found in public sector organizations. In this wider setting the corporation persists with the ritual of `tight' budget negotiation and target setting and apparent underachievement in performance. Yet we conclude that the complex technological and political context to the formation and siting of Delta continued and may continue to support its existence.$g0