A theory of corporate financial decisions with liquidity and solvency concerns

This paper studies the impact of both liquidity and solvency concerns on corporate finance. I present a tractable model of a firm that optimally chooses capital structure, cash holdings, dividends, and default while facing cash flows with long-term uncertainty and short-term liquidity shocks. The model explains how changes in solvency affect liquidity and also how liquidity concerns affect solvency via capital structure choice. These interactions result in a dynamic cash policy in which cash reserves increase in profitability and are positively correlated with cash flows. The optimal dividend distributions implied by the model are smoothed relative to cash flows. I also find that liquidity concerns lead to a decrease of dispersion of credit spreads.     

Optimal investment under multi-factor stochastic volatility

We consider a model for multivariate intertemporal portfolio choice in complete and incomplete markets with a multi-factor stochastic covariance matrix of asset returns. The optimal investment strategies are derived in closed form. We estimate the model parameters and illustrate the optimal investment based on two stock indices: S&P500 and DAX. It is also shown that the model satisfies several stylized facts well known in the literature. We analyse the welfare losses due to suboptimal investment strategies and we find that investors who invest myopically, ignore derivative assets, model volatility by one factor and ignore stochastic covariance between asset returns can incur significant welfare losses.     

Elimination of systemic risk in financial networks by means of a systemic risk transaction tax

Financial markets are exposed to systemic risk (SR), the risk that a major fraction of the system ceases to function, and collapses. It has recently become possible to quantify SR in terms of underlying financial networks where nodes represent financial institutions, and links capture the size and maturity of assets (loans), liabilities and other obligations, such as derivatives. We demonstrate that it is possible to quantify the share of SR that individual liabilities within a financial network contribute to the overall SR. We use empirical data of nationwide interbank liabilities to show that the marginal contribution to overall SR of liabilities for a given size varies by a factor of a thousand. We propose a tax on individual transactions that is proportional to their marginal contribution to overall SR. If a transaction does not increase SR, it is tax-free. With an agent-based model (ABM) (CRISIS macro-financial model), we demonstrate that the proposed ‘Systemic Risk Tax’ (SRT) leads to a self-organized restructuring of financial networks that are practically free of SR. The SRT can be seen as an insurance for the public against costs arising from cascading failure. ABM predictions are shown to be in remarkable agreement with the empirical data and can be used to understand the relation of credit risk and SR.     

Die Prognose von Serviceintervallen mit?der?Hazard-Raten-Analyse – Ergebnisse einer empirischen Studie im Automobilmarkt

Mit dem After Sales-Gesch?ft generieren die deutschen Automobilbauer etwa die H?lfte ihrer Gewinne. Gerade vor dem Hintergrund der aktuellen gesamtwirtschaftlichen Entwicklungen, wovon insbesondere das Neuwagengesch?ft betroffen ist, erscheinen Anstrengungen zur Optimierung der kundenindividuellen Ansprache im Service-, Teile- und Wartungsgesch?ft aussichtsreich zu sein. Als Voraussetzung dafür kann das Wissen über die kundenindividuellen Serviceintervalle als entscheidender Wettbewerbsvorteil gesehen werden, denn nur hiermit lassen sich Kunden auch zielgerichtet ansprechen und potenzielle Abwanderungen vermeiden. Genau an diesem Punkt knüpft dieser Beitrag an, indem mit der Hazard-Raten-Analyse ein wissenschaftlich fundiertes und praktikables Verfahren zur Prognose kundenindividueller Serviceintervalle illustriert wird. Da dieses im betriebswirtschaftlichen Kontext ohnehin sehr junge Analyseverfahren bislang überwiegend im FMCG (Fast Moving Consumer Goods)-Bereich auf Scannerdaten zum Einsatz kam, kann dieser Beitrag als Leitfaden für eine Erweiterung im Bereich langlebiger Konsum- und Investitionsgüter gesehen werden. Die Ergebnisse zeigen, dass der Anteil korrekt gesch?tzter Serviceintervalle die einfache lineare Fortschreibung, die bis dato das Standardverfahren zur Prognose von Serviceintervallen darstellt, um über 20% übertrifft bzw. die Prognosegenauigkeit von ±73 Tagen auf ±38 Tage gesteigert werden kann. Das Erfolgspotenzial einer kundenindividuellen Direktansprache l?sst sich mit dieser substanziellen Verbesserung der zugrunde liegenden Informationsbasis erheblich steigern. Aus der Verbesserung der Prognosegenauigkeit auf kundenindividueller Ebene (Mikroebene) resultiert schlie?lich auch auf der Makroebene (Unternehmensplanung- und steuerung) eine erh?hte Planungssicherheit.     

The Interplay of Core and Peripheral Actors in the Trajectory of an Accounting Innovation: Insights from Beyond Budgeting*

Previous studies on accounting innovations emphasize the key role played by innovators and other core actors in theorizing and popularizing such innovations. This paper extends this literature by drawing attention to the role of actors who occupy a more peripheral position within the innovation-based field. We regard accounting innovations as strategic action fields, in which core and peripheral actors interact to shape the trajectory of the innovation. In contrast to core actors, peripheral actors only weakly identify with the innovation-based field and often occupy a core position in some other industry, professional, and/or geographical field. Given their embeddedness in these other fields, they are likely to try to accommodate an innovation with existing practices. Such frame blending can be problematic for core actors who envisage a more radical frame shift. Using the case of Beyond Budgeting, we show how the interplay between core and peripheral actors shapes the trajectory of an innovation, in terms of the composition of the field and the framing tactics that dominate at different stages in the development of the field. Our paper advances a perspective on accounting innovations which highlights the variable nature of the innovation space, in terms of different actors entering and exiting this space over time, as well as the importance of considering the overlaps between an innovation-based field and other (industry, professional, geographical) fields.     

Core Labour Standards and FDI: Friends or Foes? The Case of Child Labour

We test the often-cited hypothesis that high levels of child labour attract foreign investors. Using panel data we show the overall effect which child labour has on foreign direct investment (FDI) to be a (small) negative one. We find strong evidence for the theoretical prediction that child labour deters FDI by slowing down economic development. Weaker evidence is provided for our theoretical prediction that child labour can discourage FDI via its impact on the availability of a skilled labour force in an economy. The data do not indicate that high levels of child labour drive down the factor share of labour, thereby increasing the attractiveness of an economy for foreign investors. JEL no. C33, F23, J82     

The impact of carbon disclosure mandates on emissions and financial operating performance

Review of Accounting Studies - We examine the impact of a disclosure mandate for greenhouse gas emissions on firms’ subsequent emission levels and financial operating performance. For...     

Does model complexity improve pricing accuracy? The case of CoCos

Review of Derivatives Research - In this study, we analyze whether model complexity improves accuracy of CoCo pricing models. We compare the out-of-sample pricing ability of four models using a...