Innovation or imitation?: The role of intellectual property rights protections

We study how uncompensated research and development (R&D) spillovers – the leakage of proprietary information through imitation or theft – affect firms’ investment decisions. Using variation in property rights protections across different regions within China we find that (1) uncompensated spillovers are greater in regions with weaker property rights, (2) such spillovers are associated with lower R&D expenditures, and (3) the latter is exacerbated in low property rights regimes. In addition to identifying a specific channel through which legal protections affect incentives for innovation and R&D, our results support arguments in the literature that the enforcement of property rights affects firm investment and growth.     

What drives international equity correlations? Volatility or market direction?

We consider impulse response functions to study the impact of both return and volatility on the correlation between international equity markets. Using data on the US (as the reference country), Canada, the UK and France equity indices, empirical evidence shows that without taking into account the effect of return, there is an (asymmetric) effect of volatility on correlation. The volatility seems to have an impact on correlation especially during downturn periods. However, once we introduce the effect of return, the impact of volatility on correlation disappears. These observations suggest that, the relation between volatility and correlation is an association rather than a causality. The strong increase in the correlation is driven by the past of the return and the market direction rather than the volatility.     

The market price of risk and the equity premium: A legacy of the Great Depression?

By positing learning and a pessimistic initial prior, we build a model that disconnects a representative consumer's subjective attitudes toward risk from the high price of risk that a rational-expectations econometrician would deduce from financial market data. We follow Friedman and Schwartz [1963. A Monetary History of the United States, 1857-1960. Princeton University Press, Princeton, NJ] in hypothesizing that the Great Depression heightened fears of economic instability. We use a robustness calculation to elicit a pessimistic prior for a representative consumer and let him update beliefs via Bayes’ law. Learning eventually erases pessimism, but while it persists, pessimism contributes a volatile multiplicative component to the stochastic discount factor that a rational-expectation econometrician would detect. With sufficient initial pessimism, the model generates substantial values for the market price of risk and equity premium and predicts high Sharpe ratios and forecastable excess stock returns.     

Does the equity premium puzzle persist during financial crisis? The case of the French equity market

This paper examines the effects of the financial crisis that began in 2008 on the equity premium of 6 French sector indices. Since the systematic risk coefficient beta remains the most common explanatory element of risk premium in most asset pricing models, we investigate the impact of the crisis on the time-varying beta of the six sector indices cited. We selected daily data from January 2003 to December 2012 and we applied the bivariate MA-GARCH model (BEKK) to estimate time-varying betas for the sector indices. The crisis was marked by increased volatility of the sector indices and the market. This rise in volatility led to an increase in the systematic risk coefficient during the crisis and first post-crisis period for all the major indices. The results are intuitive and corroborate findings in the empirical literature. The increase of the time-varying beta is considered by investors as an additional risk. Therefore, as expected, investors tend to increase their equity premiums to b ear the impact of financial crisis.     

The real value of China’s stock market

What capital allocation role can China’s stock market play? Counter to perception, stock prices in China have become as informative about future profits as they are in the US. This rise in stock price informativeness has coincided with an increase in investment efficiency among privately owned firms, suggesting the market is aggregating information and providing useful signals to managers. However, price informativeness and investment efficiency for state-owned enterprises fell below that of privately owned firms after the postcrisis stimulus, perhaps reflecting unpredictable subsidies and state-directed investment policy. Finally, evidence from realized returns suggests Chinese firms face a higher cost of equity capital than US firms.     

The capital structure of multinational companies under tax competition

This article studies the relation between debt policies of multinational companies (MNCs) and governments’ tax strategies. In the first part, we show that the ability to shift income from high- to low-tax countries affects MNCs’ financial choices. In the second part we show how MNCs’ financial decisions can affect the tax strategies of two governments competing to attract income.      

Tests of market models: heteroskedasticity or misspecification?

This paper investigates the nature and the incidence of heteroskedasticity and misspecification in the market models by utilizing tests that are generally applicable. The results show that heteroskedasticity appears more frequently than misspecification even though both are serious problems. The evidence also indicates that the use of a quadratic market model or equally weighted market returns may lead to a smaller percentage of heteroskedastic cases but that, in general, this advantage has to be offset against an increase in the occurrence of specification errors. Small firms and January returns are also observed to produce a higher incidence of both heteroskedasticity and misspecification.     

Rewarding risk-taking or skill? The case of private equity fund managers

We examine whether typical private equity fund compensation contracts reward excessive risk-taking rather than managerial skill. Our analysis is based on a novel model of investment value, cash flows, and fee dynamics of private equity funds. Given the embedded option-like fee components, our results demonstrate that fund managers indeed have an incentive for excessive risk-taking when only fee income from the current fund is considered. However, when managers also consider potential compensation from follow-on funds, their risk-taking incentives depend on their individual skill levels, and skilled managers will have an incentive to reduce fund risk. We also show that managers must generate substantial abnormal returns in order to compensate investors for the given fee components.     

The role of the carbon market in relation to the cryptocurrency market: Only diversification or more?

The role of the carbon market in relation to the cryptocurrency market is still unclear. Given the carbon-intensive nature of the cryptocurrency industry, whether the carbon market is able to capture the carbon footprint of the cryptocurrency market (i.e., diversification) or act as a safe haven or a hedge against it remain unexplored issues. To address this issue, this paper employs the generalized autoregressive score-dynamic conditional score-Copula (GAS–DCS–Copula) model, incorporating the asymmetric tail distribution. We identify the asymmetric tail properties of both the carbon and cryptocurrency markets with significant otherness. Further, to account the importance of China in mining the cryptocurrencies, we incorporate Chinese carbon market in our analysis to investigate the difference with the European carbon market. Finally, we provide evidence that the European carbon market provides a safe haven and a hedge against the cryptocurrency market while Chinese carbon market is not. Our findings have implications for both investors and policymakers.     

Association between environmental factors and equity market performance: evidence from a nonparametric frontier method

In this cross-sectional study, equity market performance is assessed in a multidimensional risk-adjusted return framework using a nonparametric procedure known as data envelopment analysis. Employing a censored regression procedure, the association between equity market performance and a set of variables that proxy market characteristics and the political and business environment in which the market operates is investigated. The paper contributes to the literature on the association between environmental factors and equity market performance by using a methodology not previously employed in such investigations. The results reveal that equity market performance may be positively related to the size of the market and friendliness of the business environment. Friendliness of the business environment is an objective measure of regulations conducive to business and their enforcement.     

The real effect of banking crises: Finance or asset allocation effects? Some international evidence

This paper analyzes whether the decline in economic growth that follows a banking crisis occurs because of a reduction in the amount of credit available (finance effect) or a worsening in the allocation of investable resources (asset allocation effect). We use a sample of more than 2500 industrial firms in 18 developed and developing countries that experienced 19 systemic banking crises between 1989 and 2007. The results indicate that banking crises negatively affect firms’ intangible investments, which intensifies the economic downturn. The negative growth effect produced by the worsening of the investment allocation is stronger in countries with highly developed financial systems and institutions.     

Do political connection disruptions increase labor costs in a government-dominated market? Evidence from publicly listed companies in China

This paper investigates whether the disruption of political connections increases labor costs among Chinese listed firms. Using the Communist Party of China's Rule No. 18 as an exogenous shock that forces firms to lose their politically connected independent directors, we find that the disruption of political connections is associated with an increase in labor costs (both in terms of aggregate labor costs per firm and average labor costs per employee) and an increase in employee turnover. Such increases do not lead to labor productivity improvements, and cannot be attributed to changes in corporate policies or the composition of labor forces after Rule No. 18. We also find that firms with higher unemployment risk and skilled labor risk increase their labor costs to a larger extent. Our results are robust to alternative labor cost measures, controlling for potential confounding events, and alternative political connection channels. Our study shows an unintended labor market consequence—increases in labor costs—of political connection disruptions for firms that are adversely affected by such disruptions.     

Do corporate governance recommendations improve the performance and accountability of small listed companies?

This study examines whether the implementation of the 2003 Australian Securities Exchange Limited governance recommendations influenced the governance choices of small companies and whether compliance improves their accounting and market performance and earnings quality. Our analysis examines small and large companies because we are interested in the different effects of the governance recommendations on the two groups. The analysis shows a significant shift by small and large companies to comply with the recommendations around the time of their introduction. We find that formation of an audit committee surrounding the reform period is significantly associated with improved earnings quality for small and large companies. However, compliance with other governance recommendations is not systematically associated with improved performance or earnings quality.     

Have ‘European’ and US GAAP measures of income and equity converged under IFRS? Evidence from European companies listed in the US

The EU's adoption of IFRS, combined with the SEC's removal of the US GAAP reconciliation requirement for non‐US registrants reporting under IFRS, signifies a major shift towards the acceptance of global standards. Based on 20‐F reconciliations provided by the population of US listed European companies filing IFRS‐based statements with the SEC in 2005, we examine whether ‘European’ and US GAAP measures of income and equity converged under IFRS. We find that during the period immediately preceding IFRS, for our sample companies, European and US GAAP measures are generally comparable in respect of income and equity. However, as an exception to the latter, we find that UK GAAP yielded significantly lower measures of equity than US GAAP For companies adopting IFRS for the first time in 2005, we find a significant gap between IFRS and US GAAP measures of income, thereby, signifying de facto divergence from US GAAP in regard to income determination. Furthermore, we find that, following IFRS adoption, significant differences with US GAAP equity persisted for companies that previously reported using UK GAAP. Our findings, thus, support critics’ claims that standard‐setters, most notably the IASB and FASB, have more work to do to achieve a sufficient degree of convergence between IFRS and US GAAP that will convince the SEC to require US companies to use IFRS.     

Stock market volatility: friend or foe?

Although a good deal of research effort has been allocated to understanding the time-series volatility of stock returns – as both market (or systematic) volatility and idiosyncratic (or non-systematic) volatility – the relationship of such volatility with cross-sectional volatility or dispersion of outcomes is sparse. Nevertheless, the quest to understand one must involve the quest to understand the other. In this paper, we investigate the dispersion of returns in relation to inter-temporal volatility, as well as the dynamic of dispersion of returns in generating a portfolio’s return outcome. We find that the level of such dispersion is highly significant for portfolio performance and the notion of risk.     

Do shareholder agreements affect market valuation?: Evidence from Brazilian listed firms

Shareholder agreements are contracts that govern the relationship among different shareholders in a firm. This article uses a unique dataset to analyze shareholder agreements in listed companies and shows how they affect firm valuation. While shareholder agreements may be used to expropriate value from non-controlling investors, they can also mitigate conflicts of interest and protect minority shareholders. The analysis of a broad time-series and cross-section of Brazilian listed firms provides evidence that the latter effect dominates. We build a shareholder agreement index in order to measure on a firm-level basis the degree of investor protection granted by shareholder agreements. Companies with shareholder agreements have higher valuation and the degree of investor protection granted by shareholder agreements is positively related to firm value, even after controlling for the endogeneity of the firm's decision to adopt shareholder agreements.     

Fluctuations in the UK equity market: what drives stock returns?

Present value parameters from a state-space model are estimated for the UK FT All-Share Index. The estimated parameters are used to construct a time series of expected future returns and expected future values of dividend growth, both of which are found to be time-varying with persistent components. Variations in the price-dividend ratio appear to be driven primarily by the variance in expected returns. A comparison with the findings from a present value-constrained vector autoregression model indicates that the latter forecasts future realized returns and dividend growth better than the series constructed using a state-space approach. Furthermore, when the model is estimated for monthly and quarterly data, expected dividend growth is found to be more persistent.     

Sources of exchange rate fluctuations: Are they real or nominal?

I analyze the role of real and monetary shocks on exchange rate behavior using a structural vector autoregressive model of the US vis-à-vis the rest of the world. The shocks are identified using sign restrictions on the responses of the variables to orthogonal disturbances. These restrictions are derived from the predictions of a two-country DSGE model. I find that monetary shocks are unimportant in explaining exchange rate fluctuations. By contrast, demand shocks explain between 21% and 37% of exchange rate variance at 4-quarter and 20-quarter horizons, respectively. The contribution of demand shocks plays an important role but not of the order of magnitude sometimes found in earlier studies. My results, however, support the recent focus of the literature on real shocks to match the empirical properties of real exchange rates.     

Discount or premium? Pricing of structured products: An analysis of Chinese market

Structured products combine elementary instruments from the spot and derivative markets. The existing evidence on mature markets shows that structured products are commonly charged with large implicit premiums compared to their theoretical values. However, this paper finds that structured products in Chinese market are, on average, priced closely to their theoretical values, which no longer favors the issuing institution. This is reasonable as the issuing banks' market power in China is relatively low compared to those in mature markets, given three characteristics in Chinese market (the intense competition from Internet finance, strict short-sell constraints, and the lack of secondary market as well as redeemable claims). Specifically, based on a database including 126 structured products with various underlying assets and durations from two main structured products issuing banks in China, this paper finds two more interesting results. First, structured products with call option and double option components are generally issued at a small discount, while most structured products with put options components are issued at a small premium. Second, a significantly negative correlation is also found between implicit premium and duration, indicating that the implicit premium rates of short-term products are higher than those of long-term products. Overall, these findings suggest that issuing banks' market power is weakened by the competitive market and incomplete market structure.     

The determinants of companies’ levels of integration: Does one size fit all?

This article extends current knowledge in the field of integrated thinking and reporting (ITR) by providing new empirical evidence on the nature and determinants of companies' levels of integration (i.e. ITR levels). Based on legitimacy theory and stakeholder theory, we empirically investigate companies' levels of integration and examine the drivers of different ITR levels. Our results suggest that companies' levels of ITR, namely Holistic, Integrated, Conservative, and Minimalist, are related to company characteristics and tend to remain consistent over time exhibiting routine and imitation. Companies with greater size, leverage, bigger board size and meetings, as well as companies operating in sensitive industries and with higher environmental performance are more likely to exhibit a Holistic or Integrated level of integration, while Minimalist and Conservative levels are driven by the same variables in opposite direction. Furthermore, at country level, economic growth, market performance, citizens freedom and lower environmental performance significantly contribute to higher integration. These results could drive companies' choices alongside policymakers’ initiatives, by identifying which levers should be pulled to achieve the desired level of integration, and suggest the need for a tailored approach rather than a one size fits all within the debate on the future developments of ITR.