Post‐merger strategy and performance: evidence from the US and European banking industries

The banking industry has one of the most active markets for mergers and acquisitions. However, little is known about the type of operational strategies adopted by banking firms in the years following a deal. For a sample of bidding banks in the USA and Europe, this study compares the design and performance implications of different post‐merger strategies in both geographical regions. Using accounting data, we show that European banks pursue a cost‐cutting strategy by increasing efficiency levels vis‐à‐vis non‐merging banks and by cutting back on both labour costs and lending activities. US banks, on the other hand, raise both interest and non‐interest income in the post‐merger period.     

Is sin always a sin? The interaction effect of social norms and financial incentives on market participants’ behavior

Using alcohol, tobacco, and gaming consumption data and people’s attitudes toward these sin products to proxy for social norm acceptance levels, we show a strong interaction effect between social norms and financial incentives, which significantly influence the behavior of market participants. Specifically, institutional investors’ shareholdings and analyst coverage of sin companies increase with the degree of social norm acceptance. The association between shareholdings/coverage and social norm acceptance is less pronounced for firms with higher future expected performance. Our results show that social norms and financial incentives have a powerful interaction effect in determining the behavior of market participants, suggesting that social norms can be crossed when motive and opportunity exist.     

The consequences to analyst involvement in the IPO process: Evidence surrounding the JOBS Act

The JOBS Act allows certain analysts to be more involved in the IPO process, but does not relax restrictions on analyst compensation structure. We find that these analysts initiate coverage that is more optimistically biased, less accurate, and generates smaller stock market reactions. Investors purchasing shares following these initiations lose over 3% of their investment by the firm's subsequent earnings release. By contrast, issuers, analysts, and investment banks appear to benefit from this increased bias, as optimism is more positively associated with proxies for firm visibility and investment banking revenues when analysts are involved in the IPO process.     

Voting, Regulation, and the Railroad Industry: An Analysis of Private and Public Interest Voting Patterns

We examine the role of public and private interests in the passage of major legislative bills that have governed the rail industry since 1887. Our model of voting patterns in the House and Senate introduces novel measures of industry concentration, competition, and network characteristics. We find that both the level and concentration of rail infrastructure in a state, the presence of water competition, and the level of agricultural production each have a major influence over voting patterns not only for the inception of regulation but also in the major bills that deregulated the industry in the 1970s and in 1980.     

通向2075之路 全球经济增长放缓,但将继续趋同发展

<正>高盛全球投资研究部宏观经济研究团队2023年发表关乎未来数十年全球增长预测的四个核心主题,即人口增速放缓拖累全球潜在经济增长率;在亚洲经济引擎的带领下,新兴市场的趋同趋势保持不变;美国经济独有的超预期表现在未来十年不太可能重演;全球不平等减少,国家内部不平等增加。同时文章揭示了全球增长面临的两大主要长期风险:保护主义和气候变化。     

Machine learning methods in finance: Recent applications and prospects

We study how researchers can apply machine learning (ML) methods in finance. We first establish that the two major categories of ML (supervised and unsupervised learning) address fundamentally different problems than traditional econometric approaches. Then, we review the current state of research on ML in finance and identify three archetypes of applications: (i) the construction of superior and novel measures, (ii) the reduction of prediction error, and (iii) the extension of the standard econometric toolset. With this taxonomy, we give an outlook on potential future directions for both researchers and practitioners. Our results suggest many benefits of ML methods compared to traditional approaches and indicate that ML holds great potential for future research in finance.     

A NOTE ON BIAS IN CAPITAL BUDGETING INTRODUCED BY STOCHASTIC LIFE

This note extends work by Young and Contreras and by Rosenthal on the present worth of cash flows under uncertain timing. In capital budgeting analysis, the use of the expected life of a project instead of the life distribution of the project biases the estimate of its expected net present value. In most situations the bias results in an overestimate of the expected net present value of the project. When the exact life distribution is unknown, the bias can be approximated by Taylor series expansion. The sensitivity of the bias to the discount rate, to cash flow patterns, and to income taxes is also investigated.     

Backtesting Stochastic Mortality Models

Abstract

This study sets out a backtesting framework applicable to the multiperiod-ahead forecasts from stochastic mortality models and uses it to evaluate the forecasting performance of six different stochastic mortality models applied to English & Welsh male mortality data. The models considered are the following: Lee-Carter’s 1992 one-factor model; a version of Renshaw-Haberman’s 2006 extension of the Lee-Carter model to allow for a cohort effect; the age-period-cohort model, which is a simplified version of Renshaw-Haberman; Cairns, Blake, and Dowd’s 2006 two-factor model; and two generalized versions of the last named with an added cohort effect. For the data set used herein, the results from applying this methodology suggest that the models perform adequately by most backtests and that prediction intervals that incorporate parameter uncertainty are wider than those that do not. We also find little difference between the performances of five of the models, but the remaining model shows considerable forecast instability.     

Qualitative audit materiality and earnings management

This study investigates auditors’ propensity to rely on quantitative materiality thresholds to the exclusion of qualitative materiality thresholds. Specifically, we examine whether auditors are more likely to allow earnings management that is less than typical quantitative materiality thresholds but that nonetheless is qualitatively material. We use changes in tax expense as a proxy for earnings management. Our results indicate that companies with pre-managed earnings that would have missed the consensus analyst forecast are more likely to decrease their tax expense when the magnitude of the decrease is less than quantitative audit materiality thresholds. The results also indicate that firms are more likely to meet or beat the forecast when the amount of earnings management necessary to meet the analyst forecast is less than quantitative materiality. These results are consistent with auditors relying on quantitative materiality thresholds to the exclusion of qualitative materiality thresholds, i.e., the importance of meeting or beating the analyst forecast. Finally, we find that the ability to use tax expense reduction within quantitative materiality to meet or beat analysts’ consensus forecasts was significantly reduced by the SEC’s guidance on materiality in SAB-99 and by the passage of the Sarbanes–Oxley Act.     

The Volatility of European Banking Systems: A Two-Decade Study

This paper examines the trends and composition of volatility across European banking systems from January 1988 to December 2010. While there is no evidence of a long-term trend in the average level of banking system volatility, there is a change in its composition resulting from the growing importance of International and European nonfinancial components, especially in the largest banking systems. We argue that the changing composition of banking system volatility is the effect of a long-term integration process (with a growing importance of cross-border activities) that has not been influenced by the introduction of the Euro. Our results highlight the increasing vulnerability of the European banking systems to International and European shocks and an increasing likelihood of cross-border banking crises, and the need for regulatory reforms that focus on effective cross-border crisis management and resolution so as to safeguard the systemic stability of European banking in the near future.