Environmental transparency and investors' risk perception: Cross-country evidence on multinational corporations' sustainability practices and cost of equity

We explore whether a greater amount of environmental disclosure can reduce a firm's ex ante cost of equity. This could occur because the quantity of environmental information changes investors' risk perception of the company, thereby influencing its ex ante cost of equity. Our study is a cross-country analysis of 1481 multinational corporations (MNCs) across 43 countries and territories from 2013 to 2019. Firstly, we measure investors' risk perception as a firm's ex ante cost of equity by employing five different valuation models, all based on equity analysts' forecasted data. We then investigate whether large quantities of environmental information disclosed by an MNC affect its ex ante cost of equity. We find evidence that investors price the amount of environmental disclosure. More environmental disclosure decreases a firm's ex ante cost of equity because it lessens investors' information asymmetry. However, this relationship is non-linear. Once the amount of environmental disclosure data exceeds a certain threshold level, a firm's ex ante cost of equity will rise again. Our empirical results also suggest that non-financial factors at the country level play a role in shaping how investors perceive a firm's riskiness. Locating the firm in a country with better environmental performance and a higher score of the human development index can reduce investors' risk perception and result in a lower ex ante cost of equity. A policy implication of our findings is that a global standardised and effective corporate sustainability reporting is needed to provide investors a more holistic view for evaluating the riskiness of their investments.     

The interaction between potential criminals' and victims' demands for guns

I develop a model with endogenous gun ownership and study the interaction between the demands for guns by heterogeneous potential offenders and victims. I show that the interaction depends on pervasiveness of guns, injury probabilities and, in particular, the impact of the gun on the probability of success against armed relative to unarmed adversaries. While the sanction on armed offense is maximal under plausible conditions, the sanction on unarmed offense balances direct deterrence benefits against marginal deterrence costs and corresponding net property losses. Optimal gun control policy disarms all offenders but allows the attractive potential victims to own guns. The paper also discusses the effects of enforcement and price controls on the demands for guns and welfare.     

Grace Periods in Sovereign Debt

This paper presents a theoretical analysis of grace periods in the context of an overhang of external debt creating a tax on domestic investment. The grace period arises as a Nash equilibrium strategy of the creditor in a dynamic, noncooperative game. Its length is shown to depend on the planning horizon of the parties, the discount factor and the growth prospect of the debtor country.     

All-or-nothing verdict as a screening device

An adversarial model of criminal trial is considered with threeverdict choices—innocent, guilty of moderate crime, andguilty of serious crime. Depending on the parties' access toevidence and initial beliefs in the courtroom about the possiblecrimes, the judge may agree to the defendant's request to eliminatethe verdict of moderate crime from jury deliberation if theprosecution brings the charge of serious crime. Though thisall-or-nothing verdict choice confers the defendant some manipulativepower, it is shown that such verdict choice may also screenout an overstated charge of serious crime. Conditions are derivedunder which screening is effective and powerful enough to generate(ex-ante) efficiency gains.     

On Creating and Claiming Value in Negotiations

This paper presents a negotiation model that includes value creation. It shows that creative negotiation efforts tend to intensify toward the deadline, and that the deadline is determined endogenously by the tension between two motives, creating more value and claiming from existing value. When the parties can present misleading offers in order to claim rather than create value, the outcome in early negotiation rounds may display an impasse where any proposal is rejected without inspection, while negotiation activities such as value creation through sincere offers and inspection of clauses intensify toward the deadline.     

Beneficial collusion in corruption control: The case of nonmonetary penalties

We analyze a corruption model where a principal seeks to control an agent's corruption by supplementing a costless noncollusive outside detector such as the media with a collusive internal supervisor. The principal's objective is to minimize the overall costs, made up of enforcement costs and social costs of corruption. If the penalties on the corrupt agent and a failing supervisor are nonmonetary in nature and yet the two parties can engage in monetary side-transfers, the principal may stand to benefit by allowing supervisor–agent collusion. This benefit may even prompt the principal to actively encourage collusion by hiring a dishonest supervisor in strict preference over an honest supervisor.     

The Old‐Boy Network and the Quality of Entrepreneurs

We study a model of network formation and start‐up financing with endogenous entrepreneurial type distribution. A hub firm admits members to its network based on signals about entrepreneurs' types. Network membership is observable, which allows lenders to offer different interest rates to network and stand‐alone entrepreneurs. We show that a network outcome can display a smaller number of high‐type entrepreneurs even though the network is neither nepotistic nor informationally disadvantaged. Although a welfare‐improving network can emerge as a technically stable or unstable equilibrium, one that decreases welfare is always formed by a technically unstable equilibrium. However, the adverse welfare effects of a network and its corresponding type configuration may persist because ex post high‐type entrepreneurs prefer to stay high type whereas those who wish to become high type may need some time to react.     

Switching costs and screening efficiency of incomplete contracts

We study the role of switching costs in a dynamic buyer-seller relationship where quality is not contractible and the sellers retain private information about their quality-relevant abilities. In this environment buyer switching costs increase the seller's bargaining power in negotiations for the second contract, but they also induce the seller to improve quality during the first ontract, in signalling his type. The overall effect is to enhance efficiency and ncrease the buyer's welfare. This beneficial effect stems from the link between quality, the buyer's posterior beliefs, and ex post distribution of bargaining power as a function of the switching cost. JEL Classification: L14
L'auteur étudie le rôle des coûts de commutation dans une relation dynamique acheteur-vendeur où la qualité de la prestation ne peut être partie du contrat, et où les vendeurs peuvent rationner l'information quant à leurs compétences à livrer un produit de qualité. Dans ce contexte, les coûts de commutation de l'acheteur accroissent le pouvoir de marchandage du vendeur dans la négociation du second contrat, mais ils peuvent aussi inciter le vendeur à améliorer la qualité au cours du premier contrat pour signaler ses compétences à l'acheteur. L'effet global est d'améliorer l'efficacité et d'accroître le bien-être de l'acheteur. Cet effet bénéfique émerge du lien entre la qualité, les croyances de l'acheteur a posteriori, et la répartition du pouvoir de négociation ex post en tant que fonction des coûts de commutation.     

Law Enforcement and Legal Presumptions

We compare two alternative legal presumptions, one more pro-defendant than the other, with the objective of reducing bureaucratic corruption to any target level at minimum social costs, broadly defined to include law enforcement costs, trial costs, and verdict error costs. In the absence of collusion possibilities between law enforcers and offenders, presumption of innocence involves lower social costs for low corruption targets while presumption of guilt has a cost advantage for high corruption targets. Allowing for collusion enlarges the corruption range over which the presumed innocence rule will dominate. However, there are two possible exceptions to this outcome, namely, if the government's law enforcement budget is limited and if the offenders can be penalized only up to a maximum permissible limit. In each of these cases, presumption of guilt may become the cost-effective rule. J. Comp. Econ., December 2001, 29(4), pp. 722–748. Bilkent University, Bilkent 06533, Ankara, Turkey; and Department of Economics and Finance, Birkbeck College, University of London, 7-15 Gresse Street, London W1T 1LL, United Kingdom. © 2001 Elsevier ScienceJournal of Economic Literature Classification Numbers: D73, D78, K41, K42.