On the determinants of household debt maturity choice

This article jointly analyses a behavioural and a cultural concept to explain household debt portfolio choice. The behavioural approach explores the role of time preferences on household debt maturity in a theoretical model and a numerical analysis. We derive a positive relationship between the long-term discount factor δ and the optimal maturity of household loans. The cultural approach examines whether national culture is a reasonable predictor for household debt maturity. We show that culture is an important factor for households’ borrowing decisions and has even more predictive power than time preferences. Countries with higher scores on the Hofstede dimension of long-term orientation tend to have shorter household debt maturity. Time preferences incur a primarily mediating role, because the effect of national culture on the borrowing decision is reduced, as the long-term discount factor δ increases.     

International Differences in Conditional Conservatism – The Role of Unconditional Conservatism and Income Smoothing

Abstract

Prior research documents that conditional conservatism, measured as the asymmetric timeliness of earnings reflecting bad vs. good news, varies with cross-country differences in institutional regimes. In this paper, we examine the determinants of conditional conservatism and related earnings attributes internationally. First, using panel data, we investigate whether competing earnings attributes such as unconditional conservatism and income smoothing affect conditional conservatism and its international differences. We find that these attributes are predictably correlated with conditional conservatism. Second, we address the question whether income smoothing and conditional conservatism are two fundamentally different earnings attributes. We show theoretically that both attributes yield different earnings distributions and that the motivations for producing earnings which possess these attributes differ. To test these predictions empirically, we calculate firm-specific time-series measures of asymmetric timeliness, using a novel trigonometric measure based on the standard Basu (1997)-type regression. Using this cross-sectional data, we test whether conditional conservatism and income smoothing are different and find them to be only weakly correlated for a broad international sample. Also, we demonstrate that income smoothing explains international differences in conditional conservatism. Finally, we estimate simple determinant models of conditional conservatism and income smoothing, showing that both earnings attributes are driven by different explanatory firm-level factors: Conditional conservatism increases with the importance of debt financing, while income smoothing increases with the importance of dividends. Despite some important limitations, we believe our results to be meaningful because they show that cross-country differences in conditional conservatism are influenced by the effects of other accounting properties, predominantly income smoothing. Especially, legal regime appears to drive income smoothing while losing its explanatory power for conditional conservatism when firm-specific factors are controlled for.     

An Evolutionary Approach to Financial Innovation

The purpose of this paper is to explain why some markets for financial products take off while others vanish as soon as they have emerged. To this end, we model an infinite sequence of CAPM-economies in which financial products can be used for insurance purposes. Agents' participation in these financial products, however, is restricted. Consecutive stage economies are linked by a mapping ('transition function") which determines the next period's participation structure from the preceding period's participation. The transition function generates a dynamic process of market participation which is driven by the percentage of informed traders and the rate at which a new asset is adopted. We then analyse the evolutionary stability of stationary equilibria. In accordance with the empirical literature on financial innovation, it is obtained that the success of a financial innovation, a mutation, depends on a sufficiently high trading volume, marketing, and new and differentiated hedging opportunities. In particular, a set of complete markets forming a stationary equilibrium is robust with respect to any further financial innovation while this is not necessarily true for a set of incomplete markets.
"There is no generally accepted theory of financial innovation, but some broad generalizations of the innovation process are possible. What matters is not the invention of a financial product or process (which is often obscure) but its diffusion through the market environment".
Ted Padolski (1987) in: The New Palgrave on Money and Finance: Financial
Innovation and Money Supply (p. 68)     

Press freedom and jumps in stock prices

Press freedom varies substantially across countries. In a free environment, any news immediately becomes public knowledge through mediums including various electronic media and published materials. However, in an unfree environment, (economic) agents would have more discretionary powers to disclose good news immediately, while hiding bad news or releasing bad news slowly. We argue that this discretion affects stock prices and that stock markets in countries with a free press should be better processors of economic information. Using an equilibrium asset-pricing model in an economy under jump diffusion, we decompose the moments of the returns of international stock markets into a diffusive risk and a jump risk part. Using stock market data for a balanced panel of 50 countries, our results suggest that in countries with a free press, the better processing of bad news leads to more frequent negative jumps in stock prices. As a result, stock markets in those countries are characterized by higher volatility, driven by higher jump risk and more negative return asymmetry. The results are robust to the inclusion of various controls for governance and other country- or market-specific characteristics. We interpret these as good stock market characteristics because a free press improves welfare and increases economic growth.     

Tournament Winner Proportion and its Effect on Effort: An Investigation of the Underlying Psychological Mechanisms

This study investigates the effects of the psychological mechanisms activated by different proportions of tournament winners on effort. Using a real-effort experiment that allows the evolution of social comparison, which is central to our theory, we show that firms can increase employee effort (and performance) by increasing the proportion of winners. Based on a causal model, we generate evidence for our theory that this effect is driven by relative performance concerns and bonus concerns, both of which depend on the proportion of tournament winners. In addition, we find that, over time, the change in effort is more negative the lower the proportion of winners. This effect is driven by the different behaviors of winners and losers in a previous tournament.     

Campaign dynamics of cognitive accessibility of political judgments: measuring the impact of campaigns and campaign events using response latencies in two German rolling cross section studies

Do campaigns matter? Based on two rolling cross-section computer-assisted telephone surveys conducted in the run-up to the 2009 and 2013 German Federal Election, we test whether we can detect campaign effects on the accessibility of voters’ judgments: how do response latencies of political judgments evolve over the course of campaigns? The study uses response latencies, i.e. the standardized time it takes respondents to answer a survey question, as a proxy measurement of cognitive accessibility of political judgments. If campaigns do help voters to make up their minds, we should be able to observe changes at the implicit level of response latencies. Do people answer questions about their voting behavior and political attitudes faster as Election Day comes closer? Our results suggest that attitudes towards candidates and voting intentions become more cognitively accessible during campaigns whereas the accessibility of party identification is conditional on the contextual features of campaigns. In addition we find specific short-term effects of TV debates.     

Odious Debt in an Imperfect World

The odious debt problem refers to a government's ability to borrow for elite consumption while the general population repays. Although an intuitive response is to ban lending to such regimes, this paper shows that if a government faces endogenous replacement risk, then an international odious debt doctrine which (i) decreases the country's debt ceiling; (ii) decreases the likelihood that the citizens must repay the debt; or (iii) increases the government's cost of borrowing for a given default risk can all decrease citizens' welfare. These findings suggest that, even when a regime is clearly odious, allowing it to borrow up to a point may be preferable to a complete lending ban.     

Complaint management expectations: An online laddering analysis of small versus large firms

This study explores complaint management expectations in business relationships, particularly the qualities and behaviours that affect buying companies as part of the complaint handling encounter with a supplier. An exploratory empirical study uses a hard laddering approach which also allows us to compare the expectations of large and small companies to understand size-effects. The research indicates that complaining companies perceive disruptions of their supplier relationships in the context of the business network within which they are embedded, especially vis-à-vis the benefits associated with long-term supplier ties. However, these network concerns are more pronounced for large companies. Issues of effective complaint management in business-to-business settings therefore need to be addressed not just as isolated managerial activities with limited benefits for the parties involved, but should be seen as being part of a wider activity set of strategic networking activities with an impact on whole business systems. Thus, the findings enrich the existing limited stock of knowledge on the context of complaint management in business relationships and networks.