<Emphasis Type="Bold">Measuring the market response to going concern modifications: the importance of disclosure timing</Emphasis>

Auditor going concern modifications (GCMs) are intended to provide market participants with information related to financial distress, and prior research suggests that the disclosure of a GCM elicits a substantial negative market reaction from investors. In this study, we investigate the market reaction to GCMs in a contemporary disclosure regime and consider whether the observed market reaction is confounded by other material disclosures. We find that the majority of GCMs are issued concurrently with earnings announcements (EAs) and that EAs in the year of new GCMs elicit large negative cumulative abnormal returns (CARs). We also find that CARs surrounding GCMs are significantly more negative when GCMs are disclosed with EAs versus following EAs. We then evaluate whether GCMs convey distress that is incremental to EA disclosures by measuring i) the market reaction to GCMs disclosed following EAs, and ii) whether EA CARs are substantially more negative for companies disclosing GCMs with EAs as opposed to after EAs. In both cases, we find that the incremental market response to GCMs is statistically weak and much smaller in economic magnitude than is suggested by prior research. Finally, we find that management disclosures in EAs, rather than the presence of a GCM, appear to convey information that investors use to anticipate bankruptcy. Taken together, these findings suggest that GCMs are confounded by other significant disclosures and that the informational benefits of GCM reporting are significantly smaller than previously thought.     

Societal trust and corporate tax avoidance

Using an international sample of firms from 25 countries and a country-level index for societal trust, we document that societal trust is negatively associated with tax avoidance, even after controlling for other institutional determinants, such as home country legal institutions and tax system characteristics. We explore the effects of two country-level institutional characteristics—strength of legal institutions and capital market pressure—on the relation between societal trust and tax avoidance. We find that the relation between trust and tax avoidance is less pronounced when the legal institutions in a country are stronger and is more pronounced when the capital market pressure is stronger. Finally, we examine the relation between societal trust and tax evasion, an extreme and illegal form of tax avoidance. We show that societal trust is negatively related to tax evasion and the negative relation is less pronounced when legal institutions are stronger.     

Auditor monitoring and verification in financial contracts: evidence from earnouts and SFAS 141(R)

We study how monitoring and verification of accounting-based performance benchmarks influences the design and efficiency of earnout contracts. Earnouts are commonly used to resolve agency conflicts arising in mergers and acquisitions, but these contracts create measurement and other agency problems when contingent payments are tied to future accounting-based performance. Exploiting changes in auditor monitoring of earnouts that arose as\ a consequence of SFAS 141(R), we find that acquisition contracts are more likely to incorporate accounting-based earnouts and that contingent payments tied to accounting-based performance benchmarks make up a larger portion of the consideration when acquiring firms have high-quality auditors. We also find that market reactions to announcements of earnout deals are more positive after SFAS 141(R) for acquisitions most susceptible to disputes over accounting-based performance metrics and these results are more pronounced for acquiring firms with high-quality auditors. By exploiting the features of this unique setting, we illuminate the role of monitoring and verification of accounting information in financial contracts.     

Some Further Results on the Tempered Multistable Approach

This article provides new results on the tempered multistable approach. After a preliminary section recalling the main definitions, we show the correspondence between a series representation and a characteristic function representation for asymmetrical field-based tempered multistable processes and for asymmetrical independent increments tempered multistable processes. We also show that both processes are semimartingales, which is a convenient property in finance. Next, we study the structure of autocorrelations that is conveyed by this approach. Finally, we provide an illustration showing the term structures of Value-at-Risk that can be obtained with this model.     

Investments,Credit, and Corporate Financial Distress: Evidence from Central and Eastern Europe

Although they are instrumental for economic development, productivity-enhancing corporate investments may increase the financial vulnerability of companies, especially in an economic and financial crisis. We employ an instrumental probit model with the aim of finding evidence for the investment and credit patterns that led companies into financial distress during the global financial crisis 2009–2010. The company-level micro-data for our study on three Central and East European countries—Hungary, Bulgaria, Romania and two Baltic countries, Latvia and Lithuania—originates from two independent surveys, the Business Environment and Enterprise Performance Survey conducted in 2008 and the Financial Crisis Survey conducted in 2009/2010. Both were carried out jointly by the EBRD and the World Bank. Our results emphasize a substantial adverse impact from investment intensity and debt financing on company financial soundness during a crisis. On top of that, we discover a strong non-linear pattern in the sensitivity of company distress to its investment-financing nexus.     

On the properties of high-order non-monetary measures for risks

This paper investigates how welfare losses for facing high-order risk increases change when the risk environment of the decision maker is altered. To that aim, we define the nth-order utility premium as a measure of pain associated with facing the passage of one risk to a more severe one and we examine some of its properties. Changes in risk are expressed through the concept of stochastic dominance of order n. The paper investigates more particularly welfare changes of merging increases in risk, first ignoring background risks, then taking them into account. Merging increases in risk may be beneficial or not, depending on whether background risks are considered and how. The paper also provides conditions on individual preferences for superadditivity of the nth-order utility premium. The results confirm the importance and usefulness of two analytical concepts: mixed risk aversion and risk apportionment.     

Behavioral portfolio selection and optimization: an application to international stocks

The behavioral approach of decision making has emerged as a diversified solution in the presence of risk and uncertainty. Using the popular cumulative prospect theory as an objective function for portfolio selection, this study implements the classical mean–variance model to compare the portfolio performance of high behavioral stocks with that of stocks with lower behavioral values. Based on a sample of 37 international stocks over the period from October 1998 to November 2017, empirical results from D-vine pair copula GARCH-GEV indicate that the portfolio of high behavioral prospect stocks outperforms the portfolio of stocks with low behavioral scores. This finding may suggest that portfolios with high behavioral values coincide with rational efficiency sets.     

Risk measurement distortion: an improved model of return smoothing

We examine the effects of smoothed hedge fund returns on standard deviation, skewness, and kurtosis of return and on correlation of returns using a MA(2)-GARCH(1,1)-skewed-t representation instead of the traditional MA(2) model employed in the literature. We present evidence that our proposed representation is more consistent with the behavior of hedge fund returns than the traditional MA(2) representation and that the traditional method tends to overstate the degree of smoothing observed in hedge fund returns. We examine methods for correcting the distortive effects of smoothing using our representation.     

Mean–variance and mean–semivariance portfolio selection: a multivariate nonparametric approach

While univariate nonparametric estimation methods have been developed for estimating returns in mean-downside risk portfolio optimization, the problem of handling possible cross-correlations in a vector of asset returns has not been addressed in portfolio selection. We present a novel multivariate nonparametric portfolio optimization procedure using kernel-based estimators of the conditional mean and the conditional median. The method accounts for the covariance structure information from the full set of returns. We also provide two computational algorithms to implement the estimators. Via the analysis of 24 French stock market returns, we evaluate the in-sample and out-of-sample performance of both portfolio selection algorithms against optimal portfolios selected by classical and univariate nonparametric methods for three highly different time periods and different levels of expected return. By allowing for cross-correlations among returns, our results suggest that the proposed multivariate nonparametric method is a useful extension of standard univariate nonparametric portfolio selection approaches.     

Are financial constraints of corporate activist investors perceived negatively?

This paper shows that financial constraints of corporate activist investors are negatively perceived by the market. By conducting an event study on a sample of 561 Schedule 13(D) filings disclosed by US corporations in the years 1996–2016, abnormal share price reactions in the [?10, \(+\)3] event window are about 10.8% lower for targets of financially constrained corporate investors. The average abnormal return for all targets is equal to 13.4%. This positive market response suggests that activism results in actual value improvement for the target. Yet, our analyses show that value improvements crucially depend on the investor’s access to external financing.