Managerial Overconfidence,Self-Attribution Bias,and Downwardly Sticky Investment: Evidence from Korea

The extant literature on behavioral corporate finance has explored the effects of overconfidence on investment–cash flow sensitivity (ICS) to explain overinvestment, yet it has overlooked the asymmetric behavior of investments in relation to changes in cash flow levels. This study examines whether investments behave asymmetrically responding to changes in cash flows and, if so, how managerial overconfidence affects asymmetric ICS. Using a sample of KOSPI and KOSDAQ firms in Korea, we find the incidence of downwardly sticky ICS in unconstrained firms. We then find that overconfident managers encourage ICS to be stickier than their rational peers do in unconstrained firms. Finally, we find that managerial overconfidence intensified by self-attribution bias induces ICS to get even stickier, suggesting more explicit evidence of corporate investment distortions. The results of alternative tests using the asymmetric models of Homburg and Nasev (2008) are qualitatively consistent with prior results. Overall, our findings imply a higher incidence of excessive investment commitments driven by overconfident managers.     

Effects of budgetary policies in open economies: The role of intertemporal consumption substitution

An economy's optimal response to temporary and anticipated future changes in government spending is examined in the context of a two-country model which highlights the role of intertemporal consumption substitution (ICS). Special attention is devoted to the case in which the two countries coordinate their fiscal measures. The qualitative effects of such measures on an economy's current account, terms of trade (in a two-commodity world), and real exchange and interest rates (in a world with non-traded goods) are shown to depend on the relationship between the domestic and the foreign elasticities of ICS.     

International market segmentation and Eurodebt issues

Implications of capital market segmentation for international capital structure (ICS)—capital structure consisting of equity issued in one country and debt issued in another—are examined. Necessary conditions for the emergence of ICS are analyzed under two options for debt issues (foreign debt and Eurodebt) and comparisons are made. It is shown that in cases where the project cannot support an ICS including foreign debt Eurobonds can be issued and would be profitable.     

Drivers of innovation capital disclosure in intellectual capital statements: Evidence from Europe

Innovation is one of the major determinants of competitive success. As a result, there is demand for information on the innovation activities of firms among investors, other stakeholders and the public. Using content analysis, this paper examines the innovation capital disclosure (INCD) characteristics (i.e. disclosure quantity and quality) in the intellectual capital statements (ICS) of 51 European for-profit firms. Additionally, the relationships between INCD characteristics and industry, firm size, region of registered office and the disclosure guidelines adopted are analysed. Our content analysis detects an average of 29.16 items on innovation capital (INC) per ICS. These are mainly qualitative, non-financial and historically orientated. Furthermore, as expected, industry, firm size, region and disclosure guidelines drive the quantity of disclosure. Prior empirical studies of voluntary disclosure in documents other than ICS have also suggested a relationship between firm size and disclosure quality. Interestingly, our results for INCD in ICS do not support this relationship. This provides tentative evidence for a similar qualitative level of innovation capital disclosure across firm size. Furthermore, our findings show mostly homogeneous disclosure patterns across the regions in Europe, suggesting that multinational efforts towards fostering INCD has made the ICS phenomenon more a European than a local phenomenon.     

Tiered Information Disclosure: An Empirical Analysis of the Advance Peek into the Michigan Index of Consumer Sentiment

This paper studies market microstructure implications of informed high‐frequency traders (HFTs) from two seconds of advance peek into the Michigan Index of Consumer Sentiment (ICS), provided by Thomson Reuters to its elite customers. Using individual stocks in the NASDAQ data set, we show how HFTs trade around ICS events. We find that liquidity demanders during two seconds of advance peek earn substantive profits, which are consistent with the notion that HFTs’ informational advantages may increase adverse selection costs for other market participants. This evidence elucidates the debate on regulatory oversight and its role in circumventing the potentially adverse effects from an advance peek into ICS.     

How control systems influence product innovation processes: examining the role of entrepreneurial orientation

This paper yields insights into the channels through which management accounting and control systems (MACS) exert an influence on product innovation by examining the extent to which different forms of control (i.e. value systems (VS), diagnostic control systems and interactive control systems (ICS)) are directly associated with the distinct phases of innovation processes. Using survey data collected from 118 medium and large Spanish companies, we find that (1) VS and ICS have significant main effects on the creativity, co-ordination and knowledge integration, and filtering (sub-)phases of innovation processes and (2) the significance and direction of these influences vary depending on the entrepreneurial orientation (EO) of firms. By highlighting the relevance of EO in shaping the influence of MACS on product innovation processes, this study calls for caution in generalising the expected effects of MACS on innovation.     

Firm culture and internal control system

The corporate culture within firms is a significant concern for regulators, shareholders and other stakeholders. Drawing on a large sample of US firms, we use the political preferences of the top management team (TMT) to proxy for a firm's culture and examine whether it influences the decision to implement an effective internal control system (ICS) and whether the ICS plays a mediating role between the culture created by the TMT and financial reporting quality. We find that a Republican-leaning TMT with a more conservative ideology is associated with a more effective internal control system. In addition, the TMT's political preferences affect financial reporting quality, both directly and indirectly, via the internal control system. A range of robustness tests reinforces our main findings.     

Consumer expectations and short-horizon return predictability

Lettau and Ludvigson [Lettau, M., Ludvigson, S, 2001. Consumption, aggregate wealth and expected stock returns. Journal of Finance 56, 815–849] argue that fluctuations from the equilibrium ratio of consumption to wealth (cây) reflect changing expectations of asset returns and document significant short-horizon predictability based on cây. This paper further explores the role of consumer expectations in modeling time variation of expected equity returns by considering two measures of consumer expectations: (i) consumer behavior as reflected in cây, and (ii) a more-direct measure of expectations captured by the Index of Consumer Sentiment (ICS). We report strong regression-based evidence of return predictability based on cây, which remains evident even after accounting for various sources of estimation risk. However, the regression-based evidence of predictability does not necessarily imply that shifts in aggregate consumption and the components of aggregate wealth give rise to economically significant investment signals. The survey-based measure of expectations (ICS) is shown to complement the behavioral measure (cây) but has no apparent stand-alone predictive value in forecasting equity returns.     

企业内控规范实施机制的新制度经济学分析

本文利用新制度经济学理论构建内控规范实施机制分析框架,指出内控规范的实施效果与其实施机制、非正式内控水平密切相关,而所采取的实施机制的强弱则与非正式内控水平负相关。针对当前我国非正式内控制度水平较低的现实,应对内控规范采取强实施机制。本文分析发现我国现有内控实施机制单一、残缺,故必须从法律、法规、公司治理准则、监管政策等不同层次构建一套相互衔接的、以奖惩机制为核心的内控实施机制。     

Transforming the colonial legacy: The future of the Pakistani University

The universities of Pakistan were established by the colonial British government in 1858 so as to produce educated Indians to serve in the expanding bureaucracy. As government and security were the major concerns of the colonial government they made the bureaucracy (ICS) and the military prestigious and efficient institutions while higher education remained subordinate, government-controlled and poor. Being unattractive, the universities could not attract the most competent students and remained medieval teaching institutions with almost no research. This continues in Pakistan because the ruling elites of Pakistan continue to govern the country in the colonial tradition of the past. In the last section certain changes are suggested to make the universities more academically competent.     

An investigation of the asymmetric link between credit re-ratings and corporate financial decisions: “Flicking the switch” with financial flexibility

Using a large sample of non-financial US listed firms over the period from 1985 to 2009, we analyze the interactive effect of financial flexibility and credit re-ratings on corporate investment and financing decisions. Essentially, we document that financial flexibility (inflexibility) “flicks the switch” in the re-rating upgrades (downgrades) scenario. Specifically, a credit rating upgrade (downgrade) for financially flexible firms is followed by a reduction (no change) in their cost of capital, an increase (no change) in their capital expenditure and an increase (no change) in their net debt versus net equity issuance. In contrast, a rating upgrade (downgrade) for financially inflexible firms is followed by an insignificant change (an increase) in their cost of capital, an insignificant change (a decrease) in their capital expenditure and an insignificant change (a decrease) in their net debt versus net equity issuance. We offer plausible explanations for these asymmetric relations.     

International Cross‐Listings and Subsequent Security‐Market Choices: Evidence from ADRs

We study the link between the attributes of American depositary receipt (ADR)‐listed firms and their post‐listing security‐market choices. We find that developed market firms are more likely to issue equity and debt than their emerging market counterparts. Furthermore, we find that large firms are more likely to issue debt and less likely to issue equity. When we examine locations where ADR firms raise their capital, we find that firms originating from countries where the protection of minority shareholders is weak are more likely to issue debt on their home markets and less likely to issue debt on international markets (excluding U.S. markets). Furthermore, ADR firms originating from developed (emerging market) countries are more (less) likely to issue their equity on their domestic markets and less (more) likely to issue equity on international markets (excluding U.S. markets).     

Investment decisions and internal capital markets: Evidence from acquisitions

In this paper, we examine the workings of internal capital markets in diversified firms that engage in related and unrelated corporate acquisitions. Our evidence indicates that bidders invest outside their core business (diversify) when the cash flows of their core business fall behind those of their non-core lines of business. However, bidders invest inside their core business (i.e., undertake non-diversifying investments) when their core business experiences superior cash flows. We also find that bidders whose core business are in industries with low growth prospects engage in diversifying acquisitions while bidders whose core business are in high growth industries undertake non-diversifying acquisitions. The pre-acquisition evidence, then, suggests that firms tend to diversify when the cash flows and the growth opportunities of their core business are considerably lower than those of their non-core business. Subsequent to acquisitions we find that diversifying bidders continue to allocate financial resources from less profitable business segments (i.e., core business) to more profitable business segments (i.e., non-core business). Given the low profitability of diversifying bidders’ core business, this capital resource allocation suggests that diversification increases do not result in capital allocation inefficiencies. The evidence for non-diversifying bidders, however, supports the existence of “corporate socialism” in the sense that there is transfer of funds from the profitable (core) to the less profitable (non-core) business segments in multi-segment bidders. We find that the capital expenditures of bidders’ non-core business segments rely on both core and non-core cash flows.     

Subsidiary divestiture and acquisition in a financial crisis: Operational focus, financial constraints, and ownership

We exploit parent- and subsidiary-level data for publicly listed firms in Thailand before, during, and after the 1997 Asian Financial Crisis to investigate the extent to which firms with different types of ownership restructure their business portfolios, in terms of divestitures and acquisitions. We compare restructuring choices made by firms mostly owned by (a) domestic individuals with block shares (family firms), (b) domestic firms and/or institutions (DI firms), and (c) foreign investors (foreign firms). We show that following the crisis (1) foreign firms' restructuring behavior is the least affected; (2) domestic firms owned by families and domestic institutions (DI) behave similarly to one another; (3) domestic firms do not increase divestiture in their peripheral segments to improve operational focus or to obtain cash in a credit crunch; they actually reduce divestiture in core segments; and (4) domestic firms also significantly reduce the acquisition of new subsidiaries. Our results challenge traditional explanations for divestiture such as corporate governance, operational refocus, and financial constraints. They indicate that in the great uncertainty of a crisis, domestic firms are able to hold onto their core assets to avoid fire-sale. In essence, they act more conservatively in churning their business portfolios.     

Drivers of differences in performance of ESG-focused funds relative to their underlying benchmarks

Several studies have examined whether environmental, social, and governance (ESG) focused funds outperform their benchmarks. While these studies vary in their methods and scope, their findings indicate that, at a minimum, these funds do not underperform their benchmarks on a risk-adjusted basis. This study is designed to further contribute to this body of research by analyzing the performance of the Jantzi Social Index (JSI) relative to its underlying benchmark, the TSX 60, and to gain insight into the possible factors that drive their performance differences. Our findings indicate that JSI's performance differential is driven (primarily) by the higher weight that JSI attaches to companies with higher net ESG scores and not (necessarily) by its superior asset-selection ability. As the regulators globally move toward making ESG disclosure mandatory, these findings become particularly relevant.     

Reputation management and the disclosure of earnings forecasts

In this paper, managers differ from each other in terms of the probability that they are ??forthcoming?? (and disclose all the earnings forecasts they receive) or ??strategic?? (and disclose the earnings forecasts they receive only when it is in their self-interest to do so). Strategic managers choose whether to disclose their forecasts based on both the disclosure??s effects on their firms?? stock price and on their reputation among investors for being forthcoming. Our findings include: strategic managers can build a reputation for being forthcoming by disclosing unfavorable forecasts; managers?? incentive to build a reputation for being forthcoming may be so strong that they disclose even the most negative forecasts; as managers become more concerned about their reputation: (a) the current price of the firm in the event the manager makes no forecast increases; (b) managers who have a high probability of behaving strategically (as forthcoming) in the future issue forecasts more (less) often in the present.     

Is Proprietary Trading Detrimental to Retail Investors?

We study the conflict of interest that arises when a universal bank conducts proprietary trading alongside its retail banking services. Our data set contains the stock holdings of every German bank and those of their corresponding retail clients. We investigate (i) whether banks sell stocks from their proprietary portfolios to their retail customers, (ii) whether those stocks subsequently underperform, and (iii) whether retail customers of banks engaging in proprietary trading earn lower portfolio returns than their peers. We present affirmative evidence for all three questions and conclude that proprietary trading can, in fact, be detrimental to retail investors.     

Managerial Career Concerns and Risk Management

We present a dynamic model of corporate risk management and managerial career concerns. We show that managers with low (high) initial reputation have high (low) career concerns about keeping their jobs and receiving all future income. These managers are more likely to speculate (hedge) early in their careers. In the later stage of their careers when managers have less career concerns, there is no speculative motive for self interested managers. On the other hand, highly reputable managers have minimal career concerns and they engage in neither hedging nor speculation early in their careers, but they may choose to hedge after poor early performance.     

Tunneling or propping: Evidence from connected transactions in China

Friedman et al. (2003) develop a model in which, in equilibrium, controlling shareholders may choose either tunneling or propping of their listed companies depending on the magnitude of an adverse shock and the magnitude of the private benefits of control. In this paper, we employ connected transaction data from China to test the implications of their model. We hypothesize that, when listed companies are financially healthy (in financial distress), their controlling shareholders are more likely to conduct connected transactions to tunnel (prop up) their listed companies and the market reacts unfavorably (favorably) to the announcement of these transactions. Our empirical findings strongly support our hypotheses. We also find that all of the transaction types in our sample can be used for tunneling or propping depending on different financial situations of the firms. Finally, political connection is negatively associated with the announcement effect. Overall, our analysis supports Friedman et al.'s (2003) model by furnishing clear evidence for propping and tunneling to occur in the same company but at different times.