China Adopts EVA: An Essential Step in the Great Leap Forward*

At the start of 2010, the Central SASAC initiated a three‐year “Performance Assessment Policy” that has the potential to transform Chinese business practices. Since 2010, return on capital has been a major criterion in the performance evaluation and compensation of the senior managements of the 100 largest Chinese state‐owned enterprises. Although sales growth will still count for 60% of executive assessment, 40% will be determined by a simplified version of EVA, or Economic Value Added. The guiding principle behind the new policy is simple and straightforward: Executives of state‐owned enterprises are now being asked to manage capital more efficiently than they have in the past—and in much the same way that private enterprises are now expected to do. Observers might be inclined to downplay this change. The assessed cost for capital, at 5.5%, is well below the market's required rate of return. And SASAC may not allow the firms to close plants, make positions redundant, and lay off employees. Veteran managers may try to outlive the interest in EVA, expecting SASAC's new standards to be unenforced. But SASAC's leaders expect a few pioneering companies to take the framework farther than the guidelines demand. To the extent they succeed in creating value for their shareholders, these companies could help bring about important change at many other Chinese companies.     

Spatial statistical modelling of insurance risk: a spatial epidemiological approach to car insurance

Spatial models, such as the Besag, York and Mollie (BYM) model, have long been used in epidemiology and disease mapping. A common research question in these subjects is modelling the number of disease events per region; here the BYM models provides a holistic framework for both covariates and dependencies between regions. We use these tools to assess the relative insurance risk associated with the policyholders geographical location. A Bayesian modelling approach is presented and an elastic net is used to reduce the large number of possible geographic covariates. The final inference is performed using Integrated Nested Laplace Approximation. The model is applied to car insurance data from If P&C Insurance together with spatially referenced covariate data of high resolution, provided by Insightone. The entire analysis is performed using freely available R-packages. Including spatial dependence when modelling the number of claims significantly improves on the result obtained using ordinary generalised linear models. However, the support for adding a spatial component to the model for claims cost is weaker.     

Reserves and cash flows under stochastic retirement

Uncertain time of retirement and uncertain structure of retirement benefits are risk factors for life insurance companies. Nevertheless, classical life insurance models assume these are deterministic. In this paper, we include the risk from stochastic time of retirement and stochastic benefit structure in a classical finite-state Markov model for a life insurance contract. We include discontinuities in the distribution of the retirement time. First, we derive formulas for appropriate scaling of the benefits according to the time of retirement and discuss the link between the scaling and the guarantees provided. Stochastic retirement creates a need to rethink the construction of disability products for high ages and ways to handle this are discussed. We show how to calculate market reserves and how to use modified transition probabilities to calculate expected cash flows without significantly more complexity than in the traditional model. At last, we demonstrate the impact of stochastic retirement on market reserves and expected cash flow in numerical examples.     

The Stambaugh bias in panel predictive regressions

This paper analyzes predictive regressions in a panel data setting. The standard fixed effects estimator suffers from a small sample bias, which is the analogue of the Stambaugh bias in time-series predictive regressions. Monte Carlo evidence shows that the bias and resulting size distortions can be severe. A new bias-corrected estimator is proposed, which is shown to work well in finite samples and to lead to approximately normally distributed t-statistics. Overall, the results show that the econometric issues associated with predictive regressions when using time-series data to a large extent also carry over to the panel case. The results are illustrated with an application to predictability in international stock indices.     

Competition between Exchanges: Euronext versus Xetra

Exchanges in Europe are in a process of consolidation. After the failure of the proposed merger between Deutsche Börse and Euronext, these two groups are likely to become the nuclei for further mergers and co‐operation with currently independent exchanges. A decision for one of the groups entails a decision for the respective trading platform. Against that background we evaluate the attractiveness of the two dominant continental European trading systems. Though both are anonymous electronic limit order books, there are important differences in the trading protocols. We use a matched‐sample approach to compare execution costs in Euronext Paris and Xetra. We find that both quoted and effective spreads are lower in Xetra. The differences are more pronounced for less liquid stocks. When decomposing the spread we find no systematic differences in the adverse selection component. Realised spreads, on the other hand, are significantly higher in Euronext. Neither differences in the number of liquidity provision agreements nor differences in the minimum tick size or in the degree of domestic competition for order flow explain the different spread levels. We thus conclude that Xetra is the more efficient trading system.     

Corporate Cash Holdings and Acquisitions

We find that acquirers’ announcement returns decline with their cash holdings, but only when at least part of the payment is in the form of stock. We further find evidence that acquirers that use stock payment are overvalued, especially when they have excess cash that they could have used instead. Collectively, our results suggest that investors interpret announcements of stock acquisitions as a signal that the acquirers’ equity is overvalued and that high cash holdings intensify this signal. However, our results are inconsistent with the common belief that cash holdings induce value‐destroying acquisitions.     

Labor unemployment risk and firm risk

This paper examines the effect of labor unemployment risk on firm risk. Using unemployment insurance benefits as a proxy for unemployment risk, we find an economically significant positive relation between unemployment risk and firm risk. This positive relation is more pronounced for firms that are more labor-intensive, have a higher layoff propensity and are more financially constrained. While existing literature that employs corporate policy measures such as debt and cash holdings suggests an opposite relationship, our paper presents evidence that the effects stemming from earnings management, earnings quality and reporting quality appear to dominate.     

Top management team nationality diversity and firm performance: A multilevel study

This research reexamines the equivocal relationship between top management team (TMT) diversity and firm performance. Combining upper echelons theory with insights from institutional theory, we establish a new, timely dimension of TMT diversity—nationality diversity—and develop an integrated multilevel framework explaining how its performance implications vary across contextual settings. We find that nationality diversity is positively related to performance; and this effect is stronger in (a) longer tenured teams, (b) highly internationalized firms, and (c) munificent environments. More generally, our research demonstrates that the consequences of TMT diversity depend on the (1) specific attributes of diversity being considered and (2) firm and industry conditions under which strategic decisions take place. Copyright © 2012 John Wiley & Sons, Ltd.     

Working Hours in Supply Chain Chinese and Thai Factories: Evidence from the Fair Labor Association's ‘Soccer Project’

This article examines the determinants of working excessive hours, defined as working in excess of 60 hours per week or for more than six consecutive days, in Chinese and Thai supply chain factories. We use a matched employer–employee dataset collected from 15 Chinese and Thai footwear and sporting apparel supply chain factories, which supply international brands. Matched employer–employee data allow us to examine the effect of worker and firm characteristics on hours worked. We find that in addition to the demographic and human capital characteristics of workers, firm‐level characteristics and worker awareness of how to refuse overtime are important in explaining variation in hours worked.