The effects on investment incentives of an allowance for corporate equity tax system: the Belgian case as an example

The Modigliani–Miller theorem serves as the standard finance paradigm on corporate capital structure and managerial decision making. Implicitly, it is assumed that the market possesses full information about the firm. However, if firm managers have insider information, they may attempt to ‘signal’ changes in the firm’s financial structure and, in competitive equilibrium, shareholders will draw deductions from such signals. Empirical work shows that the value of underlying firms rises with leverage because investors expect such firms to implement positive NPV projects. We empirically examine this view using a sample of debt issue announcements by publicly traded firms listed on the London Stock Exchange. We argue that the timing of debt issues is fundamental in determining the relationship between leverage and risk-adjusted returns. We show that an announcing firm’s intrinsic value may not rise depending on when management publicly ‘signals’ changes in their firm’s capital structure. Specifically, we show that risk-adjusted returns rise positively for firms that make debt announcements during normal economic conditions while they tend to decline for firms making debt announcements during recessionary periods. During recessionary periods, market risk and loss aversion rise and investors focus less on the potential growth of debt announcing firms and focus more on potential losses instead. We conclude that the timing of new debt is of paramount importance and managers’ inability to prudently time such announcements can lead to exacerbated levels of systematic risk coupled with a significant erosion in shareholder wealth.     

Leading the herd: evidence from mutual funds’ buy and sell decisions

This article investigates whether a mutual fund’s performance is related to its herding behavior. Using the methodology of Sias (Rev Finance Stud 17:165–206, 2004), we develop a measure to capture the magnitude that a fund’s buy (sell) decisions are leading other funds’ buys (sells), and find that a fund’s performance is positively (negatively) related to its “buy leading” (“sell leading”). We interpret these findings as evidence that “buy leaders” (“sell leaders”)’ performance benefits (suffers) from the positive (negative) price effect associated with buy (sell) herds. Additionally, we find a positive relationship between fund performance and valuation-motivated “buy leading”, while we find weak evidence on the relationship between performance and valuation-motivated “sell leading”. We interpret these results as evidence that leading funds’ outperformance is due, in part, to their ability to value stocks.     

On the Earnings and Price Momentum Strategies: Evidence from European Real Estate Firms

We test the performance and interaction between earnings and price momentum for European real estate companies by first making use of decile portfolios sorted on the previous 3- to 12-month returns, standardized unexpected earnings and a combination of both. Then, the relation is tested on a risk-adjusted basis employing a 3-factor asset pricing model and Fama and Macbeth (1973) cross-sectional regression analyses. Our analyses reveal several critical findings: (1) both price and earnings momentum are effective for European firms, the effect being stronger for the UK than EU firms; (2) unlike U.S. REITs, price momentum seems to dominate drift for European firms; (3) there is weak evidence for positive interaction between drift and price momentum, contrary to the U.S. evidence; (4) the performance of momentum strategies depends on the state of the economy, while controlling for systematic factors; (5) idiosyncratic risk of real estate property firms may influence the returns on drift and momentum factors.     

A Reexamination of Housing Price and Household Consumption in China: The Dual Role of Housing Consumption and Housing Investment

It is important to investigate the correlation between housing price and household consumption to gain an understanding of the behavior of the economy and effectively handle the consequences of economic development. In the last two decades, the accumulation of housing wealth by Chinese households has not been effectively transmitted to their final consumption. We discovered that the sustained increase in household wealth and housing-ownership rate in China has been accompanied by a decrease in consumption rate. We also identified a negative correlation between housing price and household consumption for both the homeowners who own one housing unit and those who own two units of housing. We investigated this phenomenon in China both theoretically and empirically by capturing the dual nature of housing as a consumption good and an investment vehicle. We found that the demand for second housing units is motivated by increasing housing consumption demand rather than pure investment needs. To explain the mechanisms that drive household-consumption behavior, we also explored the effects on household consumption of China’s educational system, marriage market and ageing society, as well as future housing-market uncertainty. The implications of government intervention in the housing market are discussed.     

House Price and co-Residence with Older Parents: Evidence from China

Numerous Chinese families choose to reside together with their elderly parents due to the considerable impacts of conventional values such as filial duty in Chinese society. However, as house prices rocketed up in major Chinese cities over the past decade, this arrangement is facing a sizeable challenge, therefore also raising new research question about it. This paper attempts to investigate the phenomenon of co-residence of adult children with their elderly parents in China. Using the 2013 data of China Household Finance Survey (CHFS), we document that house price is indeed a significant determinant for the pattern of intergenerational co-residence. Our empirical results can provide interesting insights into the important implication of rising house price for household residential arrangements in this country.     

Bank Competition with Financing and Savings Substitutes

This paper models the banking competition in loan and deposit markets on two levels. We measure the competition among different banks and among banks and non-bank financing and saving alternatives. We estimate a model of demand, cost, and market equilibrium equations for differentiated products by using data from the confidential reports that Spanish banks provide to the Bank of Spain during the period from 1988 to 2003. This database contains information on the effective interest rates on new loans and deposits, and the expected loan losses obtained from the Spanish Credit Register. The estimated price elasticities show that the products offered by different banks are close substitutes, which puts pressure on the banks’ profits margins. However, the substitutability between bank and non-bank products is much lower than the substitutability among products offered by different banks. The results also show that Spain’s entrance into the Eurozone did not cause a structural change in the demand and cost conditions of Spanish banks. The banks financed most of the imbalances between bank loans and domestic deposits before the crisis through the interbank market.     

Short-Sale Restrictions and Price Clustering: Evidence from SEC Rule 201

We provide a novel test of information-based theories of price clustering by examining trade, order, and the National Best Bid and Offer (NBBO) quote price clustering during periods when information is removed from the market. We use a natural experiment of short-sale restrictions resulting from Securities and Exchange Commission (SEC) Rule 201 to more effectively determine the impact of information on price clustering. We find evidence of increased price clustering for trades, orders, and NBBO prices during short-sale restrictions. Overall, our findings indicate that short-sale restrictions harm the price discovery process and lead to a reduction in market efficiency.     

The 2015 Maastricht-NUS-MIT International Real Estate Finance &; Economics Symposium: Editors’ Introduction to the Special Issue

We use an empirical model of commercial mortgage spreads to examine how tenant diversification impacts credit spreads for mortgages on retail properties. We find that mortgages on properties with a highly diversified tenant base have spreads that are up to 7.1 basis points higher than spreads on mortgages for single-tenant properties, but that mortgages on properties with moderate levels of tenant diversification have spreads that are up to 5.2 basis points lower than mortgages on single-tenant properties. The spread discount for mortgages on properties with moderate levels of tenant diversification disappears when the lease of the property’s largest tenant expires before the loan matures. Despite the spread discount that is given to properties with moderate levels of tenant diversification, we find that the likelihood with which a mortgage goes into default increases as tenant diversification increases.     

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.