Optimal reinsurance under general law-invariant risk measures

In recent years, general risk measures play an important role in risk management in both finance and insurance industry. As a consequence, there is an increasing number of research on optimal reinsurance decision problems using risk measures beyond the classical expected utility framework. In this paper, we first show that the stop-loss reinsurance is an optimal contract under law-invariant convex risk measures via a new simple geometric argument. A similar approach is then used to tackle the same optimal reinsurance problem under Value at Risk and Conditional Tail Expectation; it is interesting to note that, instead of stop-loss reinsurances, insurance layers serve as the optimal solution. These two results highlight that law-invariant convex risk measure is better and more robust, in the sense that the corresponding optimal reinsurance still provides the protection coverage against extreme loss irrespective to the potential increment of its probability of occurrence, to expected larger claim than Value at Risk and Conditional Tail Expectation which are more commonly used. Several illustrative examples will be provided.     

How to make Dupire’s local volatility work with jumps

There are several (mathematical) reasons why Dupire’s formula fails in the non-diffusion setting. And yet, in practice, ad-hoc preconditioning of the option data works reasonably well. In this note, we attempt to explain why. In particular, we propose a regularization procedure of the option data so that Dupire’s local vol diffusion process recreates the correct option prices, even in manifest presence of jumps.     

Can Management Turnover Restore the Financial Statement Credibility of Restating Firms? Further Evidence

This paper investigates the association between management turnover following financial restatements and the probability of subsequent restatements. We find that restating firms that replace management (CEO and/or CFO) are more likely to restate their financial statements again. We also find that subsequent restatements are mainly attributable to the new management. Overall, our results suggest that management turnover following restatements may not be an effective mechanism to remediate financial restatements, but the change to a new management results in a greater possibility of lower earnings quality (i.e., higher probability of subsequent financial restatements and accruals‐based earnings management). Our study supports prior literature's findings that the change in the top management leads to organizational instability and higher accounting information risk. Our findings have implications for internal decisionmaking with regard to top executive replacement.     

Regret and Regulation

We analyse the welfare effect of governmental regulation for individuals who consider anticipated regret in their decision-making process. Although governmental policies by directing choice, distort individual decisions in the private market, they can alleviate individuals’ pain associated with the feeling of regret. We analyse this trade-off and provide conditions under which the implied reduction of regret justifies regulation. Furthermore, we demonstrate our findings on tax deduction for non-insured losses, a well-studied social policy in insurance. Last, we consider heterogenous individuals and alternative social welfare functions and show that our results hold in these extended settings.     

Sustainability assurance provider participation in standard setting

This paper examines the participation of accounting firms in the development of sustainability standards by the Securities and Exchange Commission (SEC) and the Sustainability Accounting Standards Board (SASB). This study shows that the Big Four accounting firms have an active role in both the submission of comment letters on sustainability to the SEC and participation in the industry working groups (IWG) for the SASB. The SASB participation reveals that individuals located within the US and at international affiliates are participating at earlier career stages. In addition, this paper leverages LinkedIn data, identifying the career path of the individuals subsequent to their participation with the IWG, to determine how large accounting firms are retaining the skills and knowledge necessary for this field. Since the Big Four firms are market leaders in sustainability assurance, the finding that Big Four firms can retain individuals with financial assurance backgrounds differently than individuals with other backgrounds speaks to the unique skill set that financial assurance develops. This suggests that the career opportunities for interested financial assurance individuals within the sustainability sphere remain robust within the Big Four environment.     

Cosmopolitan risk community in a bowl: a case study of China’s good food movement

Abstract

Ulrich Beck fundamentally transformed our way of thinking about human interdependence through his three core theses on risk, individualisation and cosmopolitanisation. However, two commonly observed deficiencies in Beck’s grand theory were its Eurocentric orientation and a lack of empirical grounding. Based on 5 focus groups and 14 interviews with participants of the emerging Clean Food Movement in China, this paper extends the Beckian discussion outside Europe. Through examining how individuals understand both ‘traditional’ and ‘new’ risks associated with contemporary food consumption, this paper demonstrates that in the face of unpredictable and incalculable harms, risks are not seen as a ‘thing’, but are translated into ‘causal relations’. Subsequently, for Chinese stakeholders, the best way to safeguard food risks is to enact more visible and functioning interdependent relations in the food system. This in turn has given rise to new forms of communities which cut across conventional geographic, socio-economic and political boundaries. The paper deepens a Beckian theorisation in two ways. First, it demonstrates that the ‘enabling’ effect of risk towards a cosmopolitan society is not limited to obvious global crises, such as climate catastrophes and financial meltdown. In fact, the mundane yet intimate concern of putting ‘good’ food in one’s dinner bowl already presses actors to form new social solidarities that are cosmopolitan in nature. Second, it goes beyond Beck’s assertion that the risk society has culminated in a cosmopolitan moment, and explores how a performative cosmopolitan community reshapes the ‘relations of definition’ to mitigate risks on the ground.     

What Causes the Positive Price-Turnover Correlation in European Housing Markets?

This paper examines what determines the correlation between prices and turnover in European housing markets. Using a panel vector autoregressive model, we find that there is a particularly strong feedback mechanism between prices and turnover. Momentum effects are another important reason why prices and turnover are correlated. Common underlying factors, such as GDP and interest rates, also explain part of the price-turnover correlation. The results in this paper imply that, to understand price and turnover dynamics, it is important to model prices and turnover as two interdependent processes. There is a considerable bias in the coefficient estimates of standard house price models if this dependency is not explicitly taken into account.     

Business model innovation and decision making: uncovering mechanisms for coping with uncertainty

As a research subject, business model innovation spans the strategy, innovation, and entrepreneurship fields. Yet, despite the importance of the concept, prior work has paid little attention to how decision-makers cope with uncertainty and gain understanding about interdependencies in new business model configurations. To address this gap, we combine top-down theorising and evidence-based exploration and seek to unpack some of the coping mechanisms that operate in the evolutionary view of business model innovation. Using in-depth interviewing to collect data, our study reveals five strategies – customer centricity, value co-creation, capability evolution, ecosystem growth, and adaptive pricing – that decision-makers apply to cope with uncertainty in business model innovation. We find that coping mechanisms support decision making during the development of new business models. Furthermore, we find that the five coping strategies delineate decision making for value proposition, value creation, and value capture configurations in more detail than existing literature has described. Our findings have important implications for decision making in business model innovation.     

Is the grass on the other side greener? Testing the cross-border effect for U.S. acquirers

Why do U.S. acquirers fare worse when acquiring targets in foreign countries than when acquiring domestic targets? This paper investigates reasons for the so called “cross-border effect” by examining the influence of target public status and competitiveness of the takeover market in the target country. Our findings show that the listing status of the target drives the cross-border effect in two opposite directions: acquirers of private targets fare worse in cross-border takeovers, while acquirers of public targets experience significantly higher gains in acquisitions of foreign targets. The positive cross-border benefit for acquirers of public targets is more pronounced if the target is from a country with a less competitive takeover market.