Why do firms pay dividends? International evidence on the determinants of dividend policy

In the US, Canada, UK, Germany, France, and Japan, the propensity to pay dividends is higher among larger, more profitable firms, and those for which retained earnings comprise a large fraction of total equity. Although there are hints of reductions in the propensity to pay dividends in most of the sample countries over the 1994–2002 period, they are driven by a failure of newly listed firms to initiate dividends when expected to do so. Dividend abandonment and the failure to initiate by existing nonpayers are economically unimportant except in Japan. Moreover, in each country, aggregate dividends have not declined and are concentrated among the largest, most profitable firms. Finally, outside of the US there is little evidence of a systematic positive relation between relative prices of dividend paying and non-paying firms and the propensity to pay dividends. Overall, these findings cast doubt on signaling, clientele, and catering explanations for dividends, but support agency cost-based lifecycle theories.     

How credible is a too-big-to-fail policy? International evidence from market discipline

This paper analyzes in an international sample of banks from 104 countries if the sensitivity of the cost of deposits to bank risk varies across banks depending on their systemic and absolute size. We analyze a period before the 2007 financial crisis and control for endogeneity of bank size, intervention policies in past banking crises, and soundness of countries’ public finances. Our results are consistent with the predominance of the too-big-to-fail hypothesis, although this effect is stronger in countries that did not impose losses on depositors in past banking crises and in countries with sounder public finances.     

Is there an employee-based gender gap in informal financial markets? International evidence

We study the impact of female production workers on firms' access to trade credits across the world. Using two sources of plausibly exogenous variations in gender bias and a difference-in-differences framework, we document that firms with more female production workers have less access to trade credits in countries with stronger gender beliefs that favor males. This relationship is largely driven by firms in industries with unexpected credit shortages and industries dominated by males. Since female firms rely more on informal finance, this study is relevant for policies that direct female firms towards formal credit markets in highly gender-biased places.     

What determines fund performance persistence? International evidence

We study performance persistence across a global sample of equity mutual funds from 27 countries. In contrast to the existing U.S.‐based evidence, we find that net performance persistence is present in the majority of fund industries, suggesting that fund manager skill is commonplace rather than a rarity. Consistent with the intuition that more competition in the mutual fund industry makes remaining a winner fund less likely but keeping a loser fund at the bottom of the performance ranks more probable, we show that competitiveness explains the cross‐sectional variation in performance persistence.     

“Black Swans” before the “Black Swan” evidence from international LIBOR–OIS spreads

The LIBOR–OIS spread is a closely monitored indicator of the financial health of economy. Previous research has used this spread to identify and anticipate abrupt changes in financial markets. Taylor and Williams (2009) refer to the drastic increase in the US LIBOR–OIS spread on August 7th, 2007 as a “Black Swan” in the money market. In this paper, rather than rely on visual observations of “Black Swans” we estimate them using Bai and Perron’s (1998) procedure. We estimate structural breaks, Granger causality tests, and innovation accounting in international LIBOR–OIS spreads and a CDS index to better understand their dynamics during the recent crisis. Our results reveal that “Black Swans” appeared in smaller economies prior to that in large ones during the financial crisis. In addition, we find that only shocks to the US LIBOR–OIS spread has any statistically significant effects after 30 days.     

Is “voting with your feet” an effective mutual fund governance mechanism?

Investors in open-end mutual funds can vote with their feet by withdrawing assets from or adding assets to these funds. This paper assesses the effectiveness of this market discipline mechanism by investigating whether voting with the feet prevents the abusive practices that led to the 2003-2004 trading scandals. The research results indicate that funds with higher flow sensitivity—that is, a higher density of vigilant clients—have lower arbitrage potential and fewer abnormal flows, which in turn implies less opportunistic trading. As a result, these funds have a lower probability of being implicated in scandals. These findings suggest that investor ability to withdraw assets from or add assets to the funds is an effective mutual fund governance mechanism. In funds with less sophisticated investors who cannot use this option, other means of governance are especially important.     

Does national culture affect corporate innovation? International evidence

We examine whether and how national culture influences corporate innovation using a newly available comprehensive database on innovation around the world. After controlling for the impacts of formal institutions, and firm-level and country-level variables, we find that culture has relevance for innovation: The probability of a firm innovating is higher in individualistic, indulgent, and long-term oriented societies, as well as in cultures with less power distance, less uncertainty avoidance, and less masculine cultures. In the innovative firms subsample, we continue to find the same significant impact of culture on firms' innovation performance/quality. Our results are robust to endogeneity concerns, different model specifications, alternative measures of innovation and culture, and different subsample analyses.     

Should the insurance industry be banking on risk escalation for solvency II?

Basel II introduced a three pillar approach which concentrated upon new capital ratios (Pillar I), new supervisory procedures (Pillar II) and demanded better overall disclosure to ensure effective market discipline and transparency. Importantly, it introduced operational risk as a standalone area of the bank which for the first time was required to be measured, managed and capital allocated to calculated operational risks. Concurrently, Solvency II regulation in the insurance industry was also re-imagining regulations within the insurance industry and also developing operational risk measures. Given that Basel II was first published in 2004 and Solvency II was set to go live in January 2014. This paper analyses the strategic challenges of Basel II in the UK banking sector and then uses the results to inform a survey of a major UK insurance provider. We report that the effectiveness of Basel II was based around: the reliance upon people for effective decision making; the importance of good training for empowerment of staff; the importance of Board level engagement; and an individual's own world view and perceptions influenced the adoption of an organizational risk culture. We then take the findings to inform a survey utilizing structural equation modelling to analyze risk reporting and escalation in a large UK insurance company. The results indicate that attitude and uncertainty significantly affect individual's intention to escalate operational risk and that if not recognized by insurance companies and regulators will hinder the effectiveness of Solvency II implementation.     

Political uncertainty and analysts’ forecasts: International evidence

This study examines the influence of political uncertainty proxied by national election on analysts’ forecasts across 28 countries. We find analysts’ forecasts’ accuracy decreases, and the optimism increases in national election years compared to these in non-election years. Further analysis supports information opacity, local political connections, politically sensitives industries and the quality of institutions channels through which political uncertainty affects the analysts’ forecasts.     

Sovereign ceilings “lite”? The impact of sovereign ratings on corporate ratings

Although credit rating agencies have gradually moved away from a policy of never rating a corporation above the sovereign (the ‘sovereign ceiling’), it appears that sovereign credit ratings remain a significant determinant of corporate credit ratings. We examine this link using data for advanced and emerging economies over the period of 1995–2009. Our main result is that a sovereign ceiling continues to affect the rating of corporations. The results also suggest that the influence of a sovereign ceiling on corporate ratings remains particularly significant in countries where capital account restrictions are still in place and with high political risk.     

When is cash king? International evidence on the value of cash across the business cycle

Review of Quantitative Finance and Accounting - Precautionary-motive theory implies that corporate cash holdings should be valued at a premium during recessions when uncertainty is high. However,...     

Do institutional investors drive corporate social responsibility? International evidence

This paper assesses whether shareholders drive the environmental and social (E&S) performance of firms worldwide. Across 41 countries, institutional ownership is positively associated with E&S performance with additional tests suggesting this relation is causal. Institutions are motivated by both financial and social returns. Investors increase firms’ E&S performance following shocks that reveal financial benefits to E&S improvements. In cross section, investors increase firms’ E&S performance when they come from countries with a strong community belief in the importance of E&S issues, but not otherwise. As such, these institutional investors transplant their social norms regarding E&S issues around the world.     

Has stock exchange demutualization improved market quality? International evidence

Review of Quantitative Finance and Accounting - We investigate the market quality effects of stock exchange demutualization and find that demutualized exchanges have achieved significant...     

Does corporate social responsibility impact equity risk? International evidence

Review of Quantitative Finance and Accounting - Based on a large panel of listed firms from 52 countries in the period 2002–2020, we investigate the relationship between corporate social...     

Monetary policy and macroprudential policy: Rivals or teammates?

This paper sheds some light on situations in which monetary and macroprudential policies may interact (and potentially get into conflict) and contributes to the discussion about the coordination of those policies. Using data for the Czech Republic and five euro area countries we show that monetary tightening has a negative impact on the credit-to-GDP ratio and the non-risk-weighted bank capital ratio (i.e. a positive impact on bank leverage), while these effects have strengthened considerably since mid-2011. This supports the view that accommodative monetary policy contributes to a build-up of financial vulnerabilities, i.e. it boosts the credit cycle. On the other hand, the effect of the higher bank capital ratio is associated with some degree of uncertainty. For these and other reasons, coordination of the two policies is necessary to avoid an undesirable policy mix preventing effective achievement of the main objectives in the two policy areas.     

Banks’ lending behavior and monetary policy: evidence from Sweden

The main purpose of this paper is to investigate the aggregate data about bank loans which may hide significant information about the monetary transmission mechanism. This study, by disaggregating bank loans data and using the relevant interest rates in Sweden, investigates the behaviour of banks after a monetary policy tightening. By using an unrestricted VAR model and impulse response analysis, our results show that a shock on the policy rate affects the main components of the banks’ loan portfolios differently. Initially, banks do not reduce lending to firms and households and they present a sluggish reaction concerning the relevant interest rates. On the contrary, they reduce lending to mortgage credit institutions significantly since real estate lending can be considered as a risky long-term investment. Moreover mortgage credit institutions reduce lending for housing purposes to non-bank public. This reduction is mainly driven by flexible rate loans and loans secured on tenant owned apartments. Consequently, theses actions have a significant effect on real economic activity, by amplifying the initial shock from the tightening monetary policy. The latter result provides evidence of the bank lending channel in Sweden working via mortgage lending and could be very important for policy makers.