ABSTRACT This paper examines how managerial risk‐taking incentives impact corporate hedging decisions. By nesting a well‐known corporate hedging model within a principal‐agent framework, we show that managers are motivated to maintain the same level of hedge intensity even if they are provided with stock option incentives. They are, however, motivated to add speculative positions on the downside to supplement their hedging operations. These predictions are verified empirically using separate measures for hedging and speculative activities. Our results contradict previous studies that suggest that managers hedge less of their firm's risk if they have stock option incentives.
ABSTRACT This paper studies the determinants of banks' and fintech companies' systemic risk. We adopt both a systemic and firm‐level perspective and consider not only factors traditionally used to explain systemic riskiness, which have never been applied to the fintech sector, but also the new potential source of instability, for both banks and fintech firms, stemming from the crypto market vulnerabilities. We find that crypto market downturns exacerbate both banks' and FinTechs' systemic risk, but they do so in a different way. Then, we prove that, overall, firm‐specific accounting and market‐related indicators exhibit lower power in explaining fintech companies' systemic risk, and that their different impact on banks' and FinTechs' systemic risk is consistent with the different nature of these two groups of firms. This work contributes to the debate on the new threats for the financial system stability associated with the development of the tech‐driven revolution and provides useful insights from the perspective of regulators' and supervisors' efforts to define a proper set of rules and monitoring tools.
ABSTRACT We examine the ability of mutual fund managers to generate a positive alpha in a consistent manner around the uncertainty‐generating Federal Open Market Committee (FOMC) meetings. The consistency of active equity mutual funds in generating a positive alpha over the successive FOMC announcements is positively related to future fund flows. This consistency is linked to the sensitivity of fund holdings (average uncertainty beta) to the monetary policy uncertainty related to the FED decisions. The uncertainty beta of mutual funds with respect to monetary policy uncertainty can predict both the investor flows and the future performance of the fund. Thus, the monetary policy uncertainty appears to be an important risk factor for funds, as investors redirect their capital to funds with the ability to hedge this risk and provide a positive risk‐adjusted return over the FOMC announcements.
Does national cultural distance create higher synergistic gains in cross-border mergers and acquisitions (CBMAs)? Existing research on the role of cultural distance suggests that cultural disparities destroy shareholders’ wealth. Using an international sample of CBMAs over 19 years, we document that synergistic gains increase by 1.75 percentage points with one standard deviation increase in cultural distance. Drawing from the organizational learning theory, we suggest that learning diverse cultural practices in the post-acquisition stage is a source of higher synergy gains. The positive association between cultural distance and synergies is more pronounced if the acquirer pays in stock and already has takeover experience. This suggests that better awareness of the target country's culture and risk management through stock payment are boundary conditions for higher gains. Overall, our results lead to the counter-intuitive finding that CBMAs between firms from countries with dissimilar cultures are not always valued as destructive but depend on how merging firms learn the cultural practices of one another and manage integration challenges. We offer practical implications for regulators and policymakers about how the international takeover market can serve as a vehicle for learning new cultural practices and increasing combined firm value.
This study investigates the effect of competition networks among hedge fund managers on strategy distinctiveness and fund performance. Using a sample of 2711 US-based hedge funds from the Lipper TASS database between 1994 and 2018, we construct a hedge fund competition network (HFCN) based on alumni and employment ties derived from LinkedIn profiles. We find that greater centrality in the HFCN, indicating closer proximity to peer competitors, is associated with lower abnormal performance. This effect is partially mediated by a decline in strategy distinctiveness, measured by the Strategy Distinctiveness Index (SDI). Funds with stronger network ties tend to exhibit greater return similarity with peers, suggesting that social proximity encourages strategic conformity. The results are robust across performance metrics, style classifications, and subsamples and are particularly pronounced among managers with strong cognitive profiles.
Recently, the Covid-19 uncertainties have raised interest in identifying factors that influence firms’ resilience. Existing Covid-19 research primarily focused on market reactions and lockdown impacts, overlooking the influence of ideological diversity of firms’ directors on resilience. To address this gap, we examine personal contributions to the US Republican or Democratic parties by 11,741 directors from 328 S&P 500 firms, revealing their political ideologies. Our findings highlight that firms with diverse boards experience milder stock return declines during the Covid-19 outbreak, indicating a positive link between ideological diversity and firm performance. This study presents evidence of the significant impact of ideological diversity in corporate boardrooms, showcasing how it affects firms’ resilience during times of extreme market uncertainty. Our findings emphasise the importance of revisiting the theories to explain the ideological diversity in shaping strategies to respond to uncertainty during unpredictable times. Based on social psychological theory alongside agency theory, the findings provide clear indications to practitioners that during future uncertainties, the ideological diversity of the board should be considered to optimise the board's potential to improve performance.
Utilizing a micro-level hedge fund dataset, we propose a methodology for estimating hedge fund leverage. Initially, we perform a Principal Component Analysis on a set of 49 risk factors for dimension deduction purposes. After acquiring 10 Principal Components, we deploy the Least Absolute Shrinkage and Selection Operator regression (Lasso) per fund by seven 3-year monthly non-overlapping intervals in order to select which Principal Components affect each fund's return. As a last step, we execute a regression in the same manner as previously, with only the non-zero Principal Components. By aggregating β s $\beta {\rm s}$ , we estimate an average sectorial leverage of 3.3 with an average R 2 $R^2$ of 58.2%. Moreover, we observe an analogous degree of Deleveraging in 2007–2009 that includes the 2008 financial crisis as in 2019–2021 that includes the COVID-19 stress period.
This paper examines whether opportunistic or routine insiders in US markets engage in informed trading and earn higher short-term returns during the COVID-19 pandemic. Our findings indicate that trades by opportunistic insiders are indeed informative, yielding higher returns compared to those of routine insiders during the pandemic. Interestingly, we also observe that opportunistic directors earn higher returns than CEOs. Additionally, opportunistic insiders trading in the Nasdaq market achieve higher returns compared to those in the NYSE, and opportunistic insiders in the financial sector outperform those in the non-financial sector. Our results remain robust across various model specifications, alternative measures and considerations for endogeneity. Overall, our findings suggest that opportunistic insiders possess a significant informational advantage, enabling them to engage in informed trading during the pandemic.
This paper examines how supplier IPO events affect their key customers’ cost of debt. The evidence reveals that average loan spreads for customers increase by roughly 20% (23.7 basis points) following suppliers’ IPO events. This negative spillover effect is more pronounced when suppliers make significant relationship-specific investments (high switching cost), when suppliers face less concentrated customer bases, or when customers face more concentrated supplier bases. Our results show that customers receive less favourable trade terms and are forced to pay more for inputs after their suppliers go public, all of which increase customers’ operational costs, risk and subsequent borrowing costs. Furthermore, we document that customer loan contracts become significantly more restrictive after a supplier's IPO. Finally, we find that the observed negative spillover effect is also present in customers’ access to the public bond market.
Firms might adopt capital structure policies which are far away from their optimal targets, this is known in the literature as extreme financing policies. Unlike previous empirical studies, our research sheds new light on the impact of financial flexibility (changes in credit ratings and over/underinvestment) on the duration of these policies. Using a large sample of US firms for the period from 1985 to 2017, we employ a novel empirical approach of multilevel survival model estimators for different subsamples of conservative and aggressive debt policy users. The results show that, on average, the duration of extreme financing policies renders the degree of urgency to shift towards firms' optimal leverage. Accordingly, firms adopting extreme financial policies are less keen to adjust quickly to their target debt ratios and such speed of adjustment varies between conservative and aggressive debt users. Our results provide interesting empirical implications for firms adopting conservative or aggressive debt policies.
This paper examines empirically cross-fertilization in the productivity growth of banks between a state and its neighbouring and non-neighbouring states (i) before (i.e. 1971–1977) the interstate multibank holding company (IMBHC) deregulations and (ii) during (i.e. 1982–1995) the IMBHC deregulations, which, through cross-border bank M&As mainly among neighbouring states, could inject new blood, awaken the market for corporate control and enhance cross-fertilization in bank performance among neighbouring states. Further, the 1978–1981 period offers a natural experiment to examine Baumol's Contestable Markets Hypothesis (CMH). The legislature of Maine made the first IMBHC deregulatory move in 1978. There was no reciprocity until New York and Alaska made their moves in 1982. Under CMH, Maine's move should inject a competitive spirit and alter bank performance for better across all —neighbouring or non-neighbouring – banking markets during this period. Theoretically, Kane's regulatory equilibrium framework provides guidance to address these matters and Tiebout's people vote with their feet framework extends and supplements this guidance. Empirically, FDIC's annual banking data, aggregated at the state level, constitute the main input in computing the productivity growth indices for each of the 48 contiguous sample states between 1971 and 1995. Estimations of a novel spatially driven fixed effects model that uses these indices produce empirical results. The empirical model exploits the proximity of one sample state to its neighbouring states while also embracing a set of randomly chosen non-neighbouring states as a control sample. Results show that cross-fertilization in bank performance, observed among neighbouring states before the introduction of the IMBHC deregulations during 1971–1977, gets stronger in response to the dynamically evolving IMBHC deregulations during 1982–1995 and that improvements in banks' productivity growth during 1978–1981 support Baumol's CMH. Overall, our results demonstrate the importance and influence of cross-fertilization, as a matter of proximity of subjects, on banks' performance and suggest promise for future research that embraces the spatial dimension of banking markets and data.
Wealth inequality around the world is high and rising. In this paper, we argue that wealth inequality in the United States has been exacerbated by an environment favourable to the ultra-wealthy. Three distinctive changes in the economic and political landscape have fostered the increase in inequality. First, campaign finance law abruptly changed after the Citizens United Supreme Court decision. This decision gave the ultra-wealthy an outsized influence on American politics. Second, an increase in competition for executive talent drove CEO salaries to new heights. Demand increased for executives with general leadership skills as corporations grew larger, increasing competition in the market for executive talent. Third, because tax policy in the United States is subject to lobbying influences, those at the top of the wealth distribution are favoured, leading to further concentration in wealth. Our empirical results are consistent with the view that these changes resulted in an increase in disparity, shifting wealth from the 99% to the 1%.
More than a dozen years after the Dodd-Frank Act was introduced, we investigate whether credit ratings for the US residential mortgage-backed securities (RMBS) market differ given the different levels of creditor protection across the US states. Our paper provides three results. First, for the period 2017–2020, we provide evidence that there is inconsistency between credit rating agencies (CRAs): only for Dominion Bond Rating Service Morningstar (DBRS) and Moody's, we observe that the credit ratings for securitization tranches differ given different creditor protection levels across states. Second, in states with higher creditor protection, the relatively new CRAs, DBRS and Kroll Bond Rating Agency (KBRA), are more likely to provide more optimistic ratings than CRAs historically present in the rating market (Moody's, S&P, and Fitch). Third, issuers appear to issue larger deals in US states that are more creditor friendly.
We examine how environmental performance affects future stock price crash risk. Previous literature shows that legitimacy threats, stemming from environmental risk, lead firms to be particularly sensitive about environmental disclosure and performance. However, we hypothesise and find that under specific conditions, relating to lower operating performance, firms that have higher environmental performance also have higher future stock price crash risk. Further analysis shows that such firms may also have lower readability and more confident tone in their 10-K annual reports. We attribute these findings to impression management utilising environmental performance along with disclosure misdirection practices, where managers of firms with negative news, attempt in some cases to draw the attention of the users of financial reports by obfuscating annual reports for bad news hoarding purposes. Even though in the current year such practices may have a negative effect for stock price crash risk, future stock price crash risk increases due to the dissemination of the negative news in the market. Overall, our results show that environmental disclosure may be used, under certain conditions, as a tool for impression management, which along with financial reporting distraction practices, leads to higher future stock price crash risk.
We investigate the role of financial uncertainty in forecasting aggregate stock market returns. Our results suggest that financial uncertainty, along with its change, are more powerful predictors of excess US monthly stock market returns than 14 macroeconomic predictors commonly used in the literature. Financial uncertainty is shown to outperform short interest, which has been suggested to be the strongest known predictor of the equity risk premium. These results persist using robust econometric methods in-sample, and when forecasting out-of-sample.
Extant studies on political connections document both benefits and costs for firms. In this study, we investigate whether politically connected firms pay higher taxes than their non-connected counterparts and thus facilitate politicians to receive political benefits. Using the presidential election in Indonesia as an exogenous event, and analysing a sample of Indonesian listed firms over the period 2007–2016, we show that politicians extract resources from firms to realise their political objectives, for example, increasing tax revenues and gaining votes. We also find that politicians pursue more rent-seeking among firms with transactional political connections. In return for over-payment of corporate taxes, these connected firms enjoy lower cost of borrowing and higher firm value after the election year. These results are robust to the use of different regression techniques (i.e., pooled ordinary least square and probit) and tests (i.e., endogeneity, parallel trend assumption and placebo), and support the grabbing hand hypothesis of political connections. Our study contributes to the scarce literature showing that politically connected firms help politicians by providing higher tax revenues and experience a lower cost of debt and higher firm value in exchange for providing this favour to politicians.
Using insights from the social network theory which posits that individuals with high network centrality have influence and power within their social networks, we argue that CEO network centrality increases the CEO bargaining power in audit fee negotiations. We find that audit fees are lower in firms managed by CEOs with high network centrality. We also find that high-centrality CEOs do not negotiate audit fees at the expense of lower-quality audit services. We further document the influence high-centrality CEOs have on the audit decisions of their social peers within the network. For example, we show that less central (i.e., peripheral) CEOs are likely to hire auditors that do work for firms with CEOs enjoying high levels of network centrality. Together our findings suggest that high network centrality reflects a bargaining power CEOs can use to lower their audit fees.
The emission of greenhouse gases (GHG), particularly carbon dioxide (CO 2 ), within the atmosphere poses serious threats to society and the environment. In this paper, we examine the effect of carbon dioxide (CO 2 ) emissions on the association between corporate social responsibility (CSR) and stock valuation. Using a sample of listed non-financial US firms from 2002 through 2018, we find that CO 2 emission plays a moderating role in reshaping the CSR-stock valuation nexus. Further analysis showed that our results are robust for using alternate proxies of CSR, CO 2, additional control and methods to alleviate endogeneity concerns. Additionally, we explored how increasing carbon footprints reshape this association only for firms with strong governance structures. Overall, our results indicate that the positive impact of CSR on stock valuation is overlaid by corporate CO 2 emission. The practical and theoretical insights of this study were explored.
We study the empirical association between corporate pollution and reputational exposure using a sample of 745 U.S. firms from 2007 to 2019 and an ordered probit model. Our results reveal an inverse relationship between chemical emissions and reputational exposure rating, after controlling for various firm attributes. We examine the roles of corporate governance structure and the demographic background of the top management team in the transmission process from polluting chemical emissions to reputation. Further, the negative impact of corporate pollution on reputational exposure rating is much stronger in areas where residents are convinced that climate change is happening. We perform several tests and analyses designed to mitigate endogeneity issues and correct sample bias to ensure the robustness of our findings. Finally, our results suggest that the negative effect is stronger for companies with higher information asymmetry, which indicates the importance of information transparency for firms' credibility.
Financial Markets, Institutions & InstrumentsEarly View EDITORIAL Editorial—FMII special issue: "Climate risk: Policy responses, financial market impacts and corporate risk management" Iftekhar Hasan, Iftekhar Hasan Fordham University, New York City, New York, USASearch for more papers by this authorPhilip Molyneux, Philip Molyneux Bangor University, Bangor, UKSearch for more papers by this authorPanagiota Papadimitri, Panagiota Papadimitri University of Southampton, Southampton, UKSearch for more papers by this authorFotios Pasiouras, Corresponding Author Fotios Pasiouras [email protected] Montpellier Business School, Montpellier, France Correspondence Fotios Pasiouras, Montpellier Business School, Montpellier, France. Email: [email protected]Search for more papers by this author Iftekhar Hasan, Iftekhar Hasan Fordham University, New York City, New York, USASearch for more papers by this authorPhilip Molyneux, Philip Molyneux Bangor University, Bangor, UKSearch for more papers by this authorPanagiota Papadimitri, Panagiota Papadimitri University of Southampton, Southampton, UKSearch for more papers by this authorFotios Pasiouras, Corresponding Author Fotios Pasiouras [email protected] Montpellier Business School, Montpellier, France Correspondence Fotios Pasiouras, Montpellier Business School, Montpellier, France. Email: [email protected]Search for more papers by this author First published: 12 January 2024 https://doi.org/10.1111/fmii.12191Read the full textAboutPDF ToolsRequest permissionExport citationAdd to favoritesTrack citation ShareShare Give accessShare full text accessShare full-text accessPlease review our Terms and Conditions of Use and check box below to share full-text version of article.I have read and accept the Wiley Online Library Terms and Conditions of UseShareable LinkUse the link below to share a full-text version of this article with your friends and colleagues. Learn more.Copy URL Share a linkShare onEmailFacebookTwitterLinkedInRedditWechat No abstract is available for this article. Early ViewOnline Version of Record before inclusion in an issue RelatedInformation
