Analysts' Roundtable on Integrating ESG into Investment Decision‐Making

In this third of the three discussions that took place at the SASB 2016 Symposium, practitioners of a broad range of investment approaches—active as well as passive in both equities and fixed‐income—explain how and why they use ESG information when evaluating companies and making their investment decisions. There was general agreement that successful ESG investing depends on integrating ESG factors with the methods and data of traditional “fundamental” financial statement analysis. And in support of this claim, a number of the panelists noted that some of the world's best “business value investors,” including Warren Buffett, have long incorporated environmental, social, and governance considerations into their investment decision‐making. In the analysis of such active fundamental investors, ESG concerns tend to show up as risk factors that can translate into higher costs of capital and lower values. And companies' effectiveness in managing such factors, as ref lected in high ESG scores and rankings, is viewed by many fundamental investors as an indicator of management “quality,” a reliable demonstration of the corporate commitment to investing in the company's future. Moreover, some fixed‐income investors are equally if not more concerned than equity investors about ESG exposures. ESG factors can have pronounced effects on performance by generating “tail risks” that can materialize in both going‐concern and default scenarios. And the rating agencies have long attempted to reflect some of these risks in their analysis, though with mixed success. What is relatively new, however, is the frequency with which fixed income investors are engaging companies on ESG topics. And even large institutional investors with heavily indexed portfolios have become more aggressive in engaging their portfolio companies on ESG issues. Although the traditional ESG filters used by such investors were designed mainly just to screen out tobacco, firearms, and other “sin” shares from equity portfolios, investors' interest in “tilting” their portfolios toward positive sustainability factors, in the form of lowcarbon and gender‐balanced ETFs and other kinds of “smart beta” portfolios, has gained considerable momentum.     

The Next Wave of ESG Integration: Lessons from Institutional Investors

In this panel that also took place at the recent SASB Symposium, senior representatives of four leading institutional investors—BlackRock, Ca lPERS, Ca lSTRS, and Wells Fargo—emphasize the relevance of ESG data for “mainstream” investors and the importance of integrating it with traditional fundamental analysis rather than viewing it as a separate set of reporting responsibilities. Moreover, the logical place for integrating ESG information is in the most forwardlooking section of financial reports, the “Management Discussion and Analysis,” or “MD&A,” which would be strengthened by including more and better information about the companies' ESG risks and initiatives. Some panelists noted that ESG information is likely to be valued by investors because of its ability to shed light on “idiosyncratic” risks that are not captured by the traditional risk factors that have long dominated asset pricing models. Others described ESG information as helpful in evaluating and comparing the “quality” of management in portfolio companies. But all agreed that efforts like the SASB's to standardize ESG data are essential to successful integration of that data into the decision‐making process of large mainstream investors. And as the panelists also made clear, there is an important generational component to the growing movement to integrate ESG into mainstream investing, with Millenials—and particularly Millenial women—showing especially strong support.     

ESG as a Value‐Creation Tool for Active Investors: A Profile of Inherent Group

A growing number of investment managers claim to integrate environmental, social, and governance considerations into their investment strategy and processes, but few have described how they do so in depth. Even fewer reinforce the importance of sustainability within their own firms by becoming a certified ‘B Corporation.’ This article offers a rare, inside look at how one such value‐oriented manager uses ESG as a tool for differentiated investment sourcing, underwriting, and corporate engagement with the aim of achieving superior risk‐adjusted returns. One of the main arguments of the article—and a key principle of the firm's investment approach—is that ESG, as applied to both corporate strategy and operations, is an important factor in determining a company's cost of capital. The authors present specific examples of their investment process at work, highlighting how active engagement with management on ESG issues can catalyze progress that becomes valued by the capital markets.     

Bank Competition: Measurement,Decision‐Making,and Risk‐Taking

This paper investigates whether greater competition increases or decreases individual bank and banking system risk. Using a new text‐based measure of competition, and an instrumental variables analysis that exploits exogenous variation in bank deregulation, we provide robust evidence that greater competition increases both individual bank risk and a bank's contribution to system‐wide risk. Specifically, we find that higher competition is associated with lower underwriting standards, less timely loan loss recognition, and a shift toward noninterest revenue. Further, we find that higher competition is associated with higher stand‐alone risk of individual banks, greater sensitivity of a bank's downside equity risk to system‐wide distress, and a greater contribution by individual banks to downside risk of the banking sector.     

新兴市场环境下机构投资者投资行为——基于中国大陆资本市场的研究

本文研究中国为代表的新兴资本市场中机构投资者的投资行为。我们发现,以证券投资基金为代表的机构投资者偏好净损失成本较低的个股,同时关注股票所在地域的经济发展水平和行业特征。基金对经济发展较好地区的个股采取价值投资策略,而对上游行业产值较高和垄断行业产值较低地区的个股则表现出"题材"式迎合策略与价值型策略兼顾的投资行为。而这种两者兼顾的投资策略可以带来更好的业绩。     

Decision‐making capabilities of a hybrid system applied to the auditor's going‐concern assessment

The purpose of this study is to evaluate a hybrid system as a decision support model to assist with the auditor's going‐concern assessment. The going‐concern assessment is often an unstructured decision that involves the use of both qualitative and quantitative information. An expert system that predicts the going‐concern decision has been developed in consultation with partners at three of the Big Five accounting firms. This system is combined with a statistical model that predicts bankruptcy, as a component of the auditor's decision, to form a hybrid system. The hybrid system, because it combines the use of quantitative and qualitative information, has the potential for better prediction accuracy than either the expert system or statistical model predicting separately. In addition, testing of the system provides some insight into the characteristics of firms that experience problems, but do not necessarily receive a going‐concern modification. Further investigation into those firms that have problems could reveal factors that may be incorporated into decision support systems for auditors, in order to improve accuracy and reliability of these decision tools. © 2001 John Wiley & Sons, Ltd.     

Firm‐Level Competition and Exchange Rate Exposure: Evidence from a Global Survey of Firms

We examine the effect of competition on exchange rate exposure using survey data from 55 countries. We find that exposure increases with the intensity of competition. Exposure is higher when firms face price competition in international and domestic product markets and when rivals compete using an unfair financial advantage. Furthermore, competition is a leading determinant of exposure, dominating the usual determinants. Exposure also increases with several determinants not previously empirically examined, such as firm‐level financial constraints. These results hold for small, large, foreign‐involved, and purely domestic firms. Finally, import‐only firms have higher exposure than export‐only firms. Our survey results are likely to capture exposure before firms’ hedging actions.     

Attracting Early‐Stage Investors: Evidence from a Randomized Field Experiment

This paper uses a randomized field experiment to identify which start‐up characteristics are most important to investors in early‐stage firms. The experiment randomizes investors’ information sets of fund‐raising start‐ups. The average investor responds strongly to information about the founding team, but not to firm traction or existing lead investors. We provide evidence that the team is not merely a signal of quality, and that investing based on team information is a rational strategy. Together, our results indicate that information about human assets is causally important for the funding of early‐stage firms and hence for entrepreneurial success.     

Judgment and Decision‐Making Research in Auditing and Accounting: Future Research Implications of Person,Task, and Environment Perspective

The discipline of accounting and auditing has increasingly recognized judgment and decision making (JDM) as highly important attributes in the profession because individuals such as managers, auditors, financial analysts, accountants, and standard setters make pivotal judgments and decisions. Many studies undertaken in this domain of research also substantiate the significance of JDM in accounting and auditing. This study evaluates all the papers published in 10 accounting journals among the leading ones from 1980 to 2010 that fall within the domain of JDM research. The categorization of the studies reviewed in this paper is based on Bonner's ( 1999 ) three major determinants of JDM: Person, Task, and Environment variables. The review highlights the progress in the literature over the past three decades and also identifies the methodological limitations of previous research. The identified limitations will be useful for improving the research method of future JDM studies in accounting and auditing. The review also draws inferences on how JDM research in auditing, which is well established, could usefully guide future JDM research in financial accounting.     

Carrot or Stick? Contract Frame and Use of Decision‐Influencing Information in a Principal‐Agent Setting

A fundamental management accounting issue is how to incorporate decision‐influencing information (e.g., an ex post state signal) into employment contracts. Our experiment examines the effects of contract framing on such information use in a principal‐agent setting. In each of 40 rounds, participants (as employer and worker) negotiate a contract that specifies pay depending on an ex post state signal. State‐signal pay is framed as either a bonus or a penalty over two groups. The results show that the bonus frame facilitates information use, because of worker loss aversion. Although both groups initially underweigh the state signal, the bonus group quickly converges toward the optimal weight, whereas the penalty group persistently underweighs the state signal.     

WGEA的全球性环境审计调查结果:分析与借鉴

随着环境和可持续发展领域大量财政资金的投入,环境审计已纳入各国审计机关的发展规划,并将成为未来审计机关参与国家治理乃至全球治理的重要工具。本文通过分析最高审计机关国际组织下属的环境审计工作组从1993至2009年的六次全球性环境审计问卷调查结果,识别环境审计的国际动态与发展趋势,包括对环境审计的认识与理解,全球环境审计的开展情况、主题事项、审计目标、实施障碍以及国际合作。在此基础上,对比我国环境审计的发展现状,提出加快推进我国环境审计发展的意见和建议。需要重视环境审计在国家治理方面的作用、深化环境审计的理论研究,并且将水环境审计作为推动我国环境审计的突破口,高度关注国际背景下环境审计的合作问题研究等。     

How Informed Are Actively Trading Institutional Investors? Evidence from Their Trading Behavior before a Break in a String of Consecutive Earnings Increases

We examine whether transient institutional investors (i.e., institutions that trade actively to maximize short‐term profits) have information that allows them to predict a break in a string of consecutive quarterly earnings increases and thereby avoid the economically significant negative stock price response associated with the break announcement. We show that transient institutions predict the break at least one quarter in advance of the break quarter. We also provide evidence that is consistent with transient institutions obtaining information regarding the impending break from private communications with management.     

Trading Is Hazardous to Your Wealth: The Common Stock Investment Performance of Individual Investors

Individual investors who hold common stocks directly pay a tremendous performance penalty for active trading. Of 66,465 households with accounts at a large discount broker during 1991 to 1996, those that trade most earn an annual return of 11.4 percent, while the market returns 17.9 percent. The average household earns an annual return of 16.4 percent, tilts its common stock investment toward high-beta, small, value stocks, and turns over 75 percent of its portfolio annually. Overconfidence can explain high trading levels and the resulting poor performance of individual investors. Our central message is that trading is hazardous to your wealth.     

Making charity effectiveness transparent: Building a stakeholder‐focussed framework of reporting

Effectiveness in achieving mission is fundamental to evaluating charity performance, and is of central concern to stakeholders who fund, regulate and otherwise engage with such organisations. Exploring the meaning of transparency in the context of stakeholder engagement, and utilising previous research and authoritative sector discussion, this paper develops a novel framework of transparent, stakeholder‐focussed effectiveness reporting. It is contended that such reporting can assist the charity sector in discharging accountability, gaining legitimacy and in sharpening mission‐centred managerial decision making. Then applying this to UK charities’ publicly available communications, it highlights significant challenges and weaknesses in current effectiveness reporting.     

Allocation to Anchor Investors,Underpricing, and the After‐Market Performance of IPOs

We study bidding by anchor investors in a two‐stage initial public offering (IPO) process and document a negative, causal relation between allocation to anchor investors and underpricing. We find that anchor investors are likely to invest in hard‐to‐place offerings characterized by valuation uncertainty. We also document a positive relation between allocation to reputed anchor investors and returns up to lock‐up expiration. Our evidence provides support for information revelation and targeting specific investors’ theories of book building. Anchor‐backed IPOs earn superior returns mainly due to monitoring. Who bids in an IPO seems to matter just as particular types of bids do.     

How to Design a Contingent Convertible Debt Requirement That Helps Solve Our Too‐Big‐to‐Fail Problem*

As bank regulatory reform tries to come to grips with the lessons of the financial crisis, several experts have proposed that some form of contingent convertible debt (CoCo) requirement be added to the prudential regulatory toolkit. In this article, the authors show how properly designed CoCos can be used not just to absorb losses, but more importantly to encourage banks to recognize losses and replace lost equity in a timely way, as well as to manage risk more effectively. Their proposed CoCos requirement strengthens management's incentives to promptly replace lost capital and enhance risk management by imposing major costs on the managers and existing shareholders of banks that fail to do so. Key elements of the proposal are that conversion of the CoCos into equity would be (1) triggered at a high trigger ratio of equity to assets (long before the bank is near an insolvency point), (2) determined by a market trigger (using a 90‐day moving average market equity ratio) rather than by supervisory discretion, and (3) significantly dilutive to shareholders. The only clear way for bank managements to avoid such dilution would be to issue equity into the market. Under most circumstances—barring an extremely rapid plunge of a bank's financial condition—management should be able and eager to replace lost capital in a timely way; as a result, dilutive conversions should almost never occur. Banks would face strong incentives to maintain high ratios of true economic capital relative to risky assets, and to manage their risks effectively. This implies that “too‐big‐to‐fail” financial institutions would not be permitted to approach the point of insolvency; they would face strong incentives to recapitalize long before that point. And if they should fail to issue new equity in a timely manner, the CoCos conversion would provide an alternative means of recapitalizing banks well before they reach the brink of insolvency. Thus, a CoCos requirement would go a long way to resolving the “too‐big‐to‐fail” problem. Such a CoCos requirement would not only increase the effectiveness of regulation, but also reduce its cost. It would be less costly for banks to raise CoCos than equity, reflecting both the lower adverseselection costs of CoCos issuance and the potential tax advantages of debt. And precisely because of the low probability of CoCo conversion, the Cocos would be issued at relatively modest (if any) discounts to otherwise comparable but straight subordinated debt. Thus requiring a mix of equity and appropriately designed CoCos would be less costly to banks, and would entail less of a reduction in the supply of loans than would a much higher book equity requirement alone.     

No System Is Perfect: Understanding How Registration‐Based Editorial Processes Affect Reproducibility and Investment in Research Quality

The papers in this volume were published through a Registration‐based Editorial Process (REP). Authors submitted proposals to gather and analyze data; successful proposals were guaranteed publication as long as the authors lived up to their commitments, regardless of whether results supported their predictions. To understand how REP differs from the Traditional Editorial Process (TEP), we analyze the papers themselves; conference comments; a survey of conference authors, reviewers, and attendees; and a survey of authors who have successfully published under TEP. We find that REP increases up‐front investment in planning, data gathering, and analysis, but reduces follow‐up investment after results are known. This shift in investment makes individual results more reproducible, but leaves articles less thorough and refined. REP could be improved by encouraging selected forms of follow‐up investment that survey respondents believe are usually used under TEP to make papers more informative, focused, and accurate at little risk of overstatement.     

The Capital Structure of PE‐Funded Companies (and How New Debt Instruments and Investors Are Expanding Their Debt Capacity)

The capital structures and financial policies of companies controlled by private equity firms are notably different from those of public companies. The concentration of ownership and intense monitoring of leveraged buyouts by their largest investors (that is, the partners of the PE firms who sit on their boards), along with the contractual requirement of PE funds to return their capital within seven to ten years, have resulted in capital structures that are far more leveraged than those of their publicly traded counterparts, but also considerably more provisional and “opportunistic.” Whereas the average U.S. public company has long operated with roughly 30% debt and 70% equity, today's typical private‐equity sponsored company is initially capitalized with an “upside‐down” structure of 70% debt and just 30% equity, and then often charged with working down its debt as quickly as possible. Although banks supplied most of the debt for the first wave of LBOs in the 1980s, the remarkable growth of the private equity industry in the past 25 years has been supported by the parallel development of a new leveraged acquisition finance market. This financing innovation has led to a general movement away from a bankcentered funding base to one comprising a relatively new set of institutional investors, including business development corporations and hedge funds. Such investors have shown a strong appetite for new debt instruments and risks that banks have been unwilling or, thanks to increased capital requirements and other regulatory burdens, prohibited from taking on. Notable among these new instruments are second‐lien loans and uni‐tranche debt—instruments that, by shifting the allocation of claims on the debtor's cash flow and assets in ways consistent with the preferences of these new investors, have had the effect of increasing the debt capacity of their portfolio companies. And such increases in debt capacity have in turn enabled private equity funds—now sitting on near‐record amounts of capital from their limited partners—to bid higher prices and compete more effectively in today's intensely competitive M&A market, in which high target acquisition purchase prices are being fueled by a strong stock market and increased competition from corporate acquirers.     

Private Equity and Long‐Run Investment: The Case of Innovation

A long‐standing controversy is whether leveraged buyouts (LBOs) relieve managers from short‐term pressures from public shareholders, or whether LBO funds themselves sacrifice long‐term growth to boost short‐term performance. We examine one form of long‐run activity, namely, investments in innovation as measured by patenting activity. Based on 472 LBO transactions, we find no evidence that LBOs sacrifice long‐term investments. LBO firm patents are more cited (a proxy for economic importance), show no shifts in the fundamental nature of the research, and become more concentrated in important areas of companies' innovative portfolios.