The ties that bind: Bank relationships and small business lending

The importance of bank relationships for small firms’ ability to raise external finance is well-documented, yet the mechanism through which relationships improve access to capital markets has received little empirical attention. This paper uses hand-collected, proprietary data from a mid-sized bank in the United States to identify the channels that strengthen the relationship between a small business and its bank. In contrast to earlier work that focuses on the role of relationships in alleviating information and incentive problems in lending, I find that the source of value in relationship banking is not limited to enhanced monitoring. Exploiting a unique feature of this dataset, I examine two channels of relationship strength that directly measure the stream of non-lending profits generated from (1) the non-credit services cross-sold to the borrower, and (2) the additional bank clients referred by the borrower. I document that non-lending profitability empirically determines the risk-adjusted terms of lending. In models of loan price that already include both the bank’s proprietary risk rating and traditional risk proxies, non-lending profits significantly improve explanatory power and account for up to half of the total explained variation. Conditional on risk profile, a one-standard deviation increase in aggregate non-lending profits lowers the loan interest rate by 32 basis points and increases access to credit by 26%.     

Relocating accounting and business ethics: reflections on a business ethics retreat in Scotland's National Park

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This paper describes an accounting and business ethics course that was developed at Glasgow University's Department of Accounting and Finance and recounts an attempt to increase the effectiveness of aspects of the course through relocating the places where it took place. In particular the paper provides some reflections on an ethics retreat in Loch Lomond National Park in Scotland. The paper provides an account of the weekend and describes the activities in which the students participated. It provides some reflections on the weekend and considers how successful the retreat was in promoting the goals of the course. The paper concludes with a call for further thought and discussion on the role that place could play in making accounting and business ethics education more effective.     

Self-enforcing employment contracts and business cycle fluctuations

This paper incorporates risk-sharing employment contracts into an economy in which matching frictions characterize the labour market and in which agents cannot commit. In equilibrium, the terms of ongoing contracts are affected by those being negotiated in the job market because contracts must be self-enforcing. In this context, risk-sharing implies that hours worked and wages are negatively related, while enforcement considerations imply the converse. Overall, the sign of this relationship is ambiguous. Therefore, the existence of such contracts may explain why movements in hours worked appear weakly related to those in real wages in U.S. aggregate data.     

Inflation targeting and nominal-income-growth targeting: When and why are they suboptimal?

We compare optimal and simple interest-rate rules. Our model features optimizing agents, monopolistic competition in both product and labor markets, and one-period nominal contracts (for wages alone or for both wages and prices) signed before shocks are known. Exact solutions ensure that we obtain correct welfare rankings. Optimal rules maximize the unconditional expected utility of the representative agent with commitment subject to the information set of the policymaker. Even with monopolistic distortions, the optimal full-information rule makes the economy mimic the hypothetical full-flexibility equilibrium. Strict versions of inflation targeting, nominal-income-growth targeting, and other such simple rules are suboptimal under both full and partial information but flexible versions are optimal under certain partial-information assumptions. Nominal-income-growth targeting dominates inflation targeting for plausible parameter values.     

Oil risk contracts,business conduct and performance patterns: Data panel analysis

Using the economic and financial performance data of international companies for the exploration, and exploration–extraction (E&E) of oil, as well as the patterns of institutional situation and orientation with the government market and national oil companies or NOCs that receive project offers, we analyze the institutional development and behavior patterns by type of E&E contract, following the strategic actor approach, or the so-called agency theory. Additionally, in light of Mexico's energy reform being implemented between 2015 and 2019, we analyzed the types of license contracts compared to those for production and shared profit. Subsequently, it was determined-through panel data methods in the analysis of 17 companies between 2005 and 2015-that global companies present bigger yields and commitments compared to specialized companies, confirmed by their net income and returns on equity or ROE.     

Social Ties and the Demand for Financial Services

This paper studies the importance of social interactions for the adoption of financial services among young adults. Specifically, we investigate whether, how, and why financial decisions among interacting agents are correlated. We exploit a unique dataset of friendship networks in the United States and a novel estimation strategy that accounts for possibly endogenous network formation. We find that not all social contacts are equally important: only long-lasting relationships influence financial decisions. Moreover, this peer influence exists only in cohesive social structures. This evidence is consistent with an important role of trust in financial decisions. When agents consider whether or not to adopt a financial instrument, they face a risk and may place greater value on information coming from agents they trust. These results can help explain the importance of face-to-face social contacts for financial decisions.     

Why DCF capital budgeting is bad for business and why business schools should stop teaching it

The targeted readership of this article are tax educators employed outside the USA and other readers who are interested in tax education and research within the USA. After briefly outlining key features of the US tax system, the article describes the ‘traditional’ approach to tax teaching and documented concerns with this approach. A number of alternative approaches to tax teaching stemming from the work of the Accounting Education Change Commission are described. In addition, a synopsis of prior tax education literature from the USA is presented so that interested readers can further investigate some of the specific techniques described. The pendulum of tax teaching in the USA has swung between a rule-oriented lecture format and a more abstract economic analysis. Now, the current concensus appears to prefer an eclectic approach with a combination of teaching methods, testing techniques, case, economic, and rule-oriented content. Although the underlying tax laws throughout the world obviously differ, it is suggested that the possibility that effective delivery strategies may be universal.     

Corporate social responsibility and investment efficiency: Does business strategy matter?

This study investigates how business strategy moderates the effect of Corporate Social Responsibility (CSR) on over-investment. We provide new evidence on the moderating effect of business strategy between CSR and over-investment. Using a sample of over 3000 US firms with 14,375 observations for the period 1996–2016, we show that high CSR involvement firms tend to over-invest. We demonstrate that both Defend and Prospect strategies can mitigate over-investment by interacting with high CSR firms. The Defend strategy effect on over-investment CSR firms is more pronounced for non-immorality stressed and non-high tech industry firms. We find that the strategy's moderating effect is channeled through agency problems and information asymmetry. The results show that business strategy plays an important role in shaping firms' investment behavior and efficiency.     

Board diversity reforms: Do they matter for EU bank performance?

We examine the impact of governance reforms related to board diversity on the performance of European Union banks. Using a difference‐in‐difference approach, we document that reforms increase bank stock returns and their volatility within the first 3 years after their enactment. The type of reform matters, with quotas increasing return volatility. The effectiveness of reforms depends on a country's institutional environment. The impact of reforms on return volatility is found to be beneficial in countries more open to diversity, with common law system and with greater economic freedom. Finally, reforms play a bigger role in banks that have ex ante less heterogeneous boards.     

Business ethics: A 3000-year-old orthodox perspective which impinges on contemporary business decisions

The exigencies of orthodoxy have determined and continue to determine the business relationships and decisions of many groups. These demands consequently affect the form and content of business transactions and records. The care, under Jewish law, with which a contract of guarantee has to be constructed if it is not to bring about a relationship among borrower, lender and guarantor that would be regarded by rabbinical authorities as usurious illustrates the method, complexity and contemporary relevance of orthodox analysis.     

Taxation and the optimal constraint on corporate debt finance: why a comprehensive business income tax is suboptimal

The tax bias in favour of debt finance under the corporate income tax means that corporate debt ratios exceed the socially optimal level. This creates a rationale for a general thin capitalization rule limiting the amount of debt that qualifies for interest deductibility. This paper sets up a model of corporate finance and investment in a small open economy to identify the optimal constraint on tax-favoured debt finance, assuming that a given amount of revenue has to be raised from the corporate income tax. For plausible parameter values, the socially optimal debt-asset ratio is 2–3% points below the average corporate debt level currently observed. Driving the actual debt ratio down to this level through limitations on interest deductibility would generate a total welfare gain of about 5% of corporate tax revenue. The welfare gain would arise mainly from a fall in the social risks associated with corporate investment, but also from the cut in the corporate tax rate made possible by a broader corporate tax base.     

Knowing stories that matter: learning for effective safety decision-making

Ongoing safe operation of hazardous industries such as hydrocarbon production and transportation, air traffic control and nuclear power generation depends on effective decision-making by those in key positions. Safety studies often focus on the extent to which actions of operational personnel in particular are dictated by procedures or rules and hence reinforce the need for compliance to ensure the best outcomes. This article directs attention to a different area – the judgements made by experts in the cases that are not covered by rules and, in particular, the key role of stories and storytelling. This ethnographic research draws on literature related to high-reliability theory, organisational learning and naturalistic decision-making to examine how experts working in diverse critical contexts use stories to share and make sense of their experiences. It argues that such stories are vital to effective decision-making as a result of both the general and specific lessons that they embody. Our analysis shows that experts use stories as parables to nurture their ability to imagine possible outcomes and maintain a safety imagination. Stories are also embedded in work practices to support decision-making in the moment. Finally, stories are strongly linked to organisational learning for experts as a group and in mentoring less-experienced colleagues. We argue that the increased focus on incident reporting systems in hazardous industries, which is driven at least in part by a consideration of organisational learning, is failing in this regard because such systems do not facilitate story-based learning. We appeal to organisations to support story-based learning with as much vigour as formal systems for professional development and reporting.     

Anomalies in finance: What are they and what are they good for?

In the natural sciences, anomalies contribute significantly to the development of new and ultimately more successful theories. The role of anomalies in financial economics, however, has been quite different. Although at the beginning, the word was used to show deviations from the Efficient Markets Hypothesis (EMH)/Capital Asset Pricing Model (CAPM) paradigm, lately, it has been applied to a new literature that is also more accurately called Behavioral Finance (BF). This paper argues that this misuse and misapplication of the word anomaly is not a simple coincidence. It is rather a sophisticated and accordant effort to imply that although there are some unresolved deviations from the norm, the reigning paradigm is irreplaceable, and its validity needs no empirical proof. In fact, an alternative paradigm such as BF is not only insignificant but also unnecessary and even impossible.     

Accounting ethics education: Integrating reflective learning and virtue ethics

This paper explains the use of reflective learning techniques to create and deliver a new ethics course. Students apply virtue-based reasoning with reflective thinking to resolve conflicts faced by accounting professionals. Teaching techniques include class discussion, minute papers, reflection journals, role playing, and case analysis. Students express their thoughts orally and in written form, interact with other students, receive feedback during and after assignments, and demonstrate what they have learned. Reflective learning helps to transform existing ideas and understandings to come to a new understanding of a situation. As a tool for ethics education in accounting, reflective learning provides the link that may enhance ethical understanding and enable students to apply virtue and reflective thinking to a variety of situations discussed in accounting courses. For students, reflective learning slows down classroom activity giving them more time to process the material, linking it to prior ideas. Instructors benefit from frequent student feedback and greater involvement in the learning process.     

Specification and negotiation in incomplete contracts

We investigate contractors' bargaining power and holdup on buyers in procurement auctions of incomplete contracts held by California Department of Transportation. Using a model where contractors bid competitively in response to a buyer's choice of initial contract design, we infer the contractors' costs and bargaining power from the bids and transfers negotiated after the auction. We find that the contract winners have substantial bargaining power in post‐auction negotiation. The average holdup on the buyer is about 20% of project costs. Counterfactual cost‐plus contracts would reduce the buyer's surplus in 72% of the projects, with an average reduction over $382,000.     

Does emotional intelligence matter to academic work performance? Evidence from business faculties in Australia

Using data collected through survey questionnaire across 15 universities, we examine the effect of emotional intelligence on academic work performance (in research, teaching and service) in Australian business faculties. We find academics’ ability to use emotion enhances performance across research, teaching and service, while ability to regulate emotion enhances performance for teaching and service only. We also find support for a process‐based model of emotional intelligence in which appraisal of emotion is a necessary antecedent to emotion’s use and regulation. The results have implications for management in appointment decisions and professional development programmes in business/accounting faculties.     

Do the business cycle and revenue diversification matter for banks’ capital buffer and credit risk: Evidence from ASEAN banks

We examine the association of the business cycle and revenue diversification with the banks’ capital buffer and credit risk for a sample of banks from the Association of Southeast Asian Nations (ASEAN) region from 1998 to 2018, using 2847 banking firm–year observations. We find that ASEAN region banks react anticyclically in adjusting their capital buffer levels and credit risk. We find revenue diversification benefits and that banks, through revenue diversification, can reduce their credit risk while achieving capital savings when confronting economic downturns. Our results offer support for the Basel III accord. However, the relations revealed are somewhat moderated by the regulatory quality, competition, and phase of the business cycle encountered by ASEAN region banks.