Capital Market Expectations Research Articles

Firm-specific investor sentiment and earnings management: evidence from Brazil

PropósitoEl propósito de este estudio es investigar la influencia del sentimiento de los inversionistas a nivel de empresa en la manipulación contable de las empresas brasileñas entre 2010 y 2018. El documento pretende aportar una visión más profunda sobre la relación entre las expectativas de los inversores y la toma de decisiones de los gestores en un mercado emergente.Diseño/metodologia/enfoqueusamos el enfoque cuantitativo y aplicamos un modelo de regresión lineal múltiple para probar la relación entre las acumulaciones anormales, el índice de sentimiento de los inversores a nivel de empresa y las variables de control. La muestra final incluye datos de 175 empresas, entre 2010 y 2018.HallazgosLos resultados revelan una asociación negativa entre el sentimiento de los inversores a nivel de empresa y la manipulación contable basada em acumulaciones, lo que podría significar que la propensión al riesgo de los administradores a manipular las ganancias aumenta cuando enfrentan pérdidas conocidas en el mercado de capitales.Limitaciones/implicaciones de la investigaciónlos resultados de la investigación proporcionan una valiosa comprensión de cómo las expectativas de los mercados de capitales emergentes pueden influir en las decisiones de gestión, como la manipulación contable basada en acumulaciones. El área geográfica de estudio se limitó únicamente a Brasil y, en consecuencia, los hallazgos y conclusiones del estudio tuvieron sus límites.Originalidad/valorestudios anteriores sobre mercados desarrollados muestran que el sentimiento de los inversores a nivel de mercado influye positivamente en la manipulación contable. Sin embargo, el presente estudio muestra que el índice de sentimiento de los inversores a nivel de empresa tiene una relación significativa y negativa con la manipulación de las ganancias de las empresas brasileñas, mientras que el sentimiento del mercado indica una relación contradictoria en estudios anteriores en el país.

Patent collateral and the trajectory of innovation

Taking the Chinese policy project of patent collateral policy as the quasi-natural experiment setting, we investigate the impact of patent collateral policy on the corporate innovation trajectory. We find that patent collateral increases applications of exploitative patent and its proportion in total patent applications, but no significant impact on exploratory innovation is observed. This finding is still robust in a series of robustness tests. The mechanism tests show that the impact of patent collateral promotes firms' exploitative innovation mainly by increasing the accessibility of firms' bank loans. The economic effects test shows that the patent collateral policy can reduce the deviation of analyst forecast and ease corporate financing constraints, which plays an important role in stabilizing capital market expectations. Heterogeneity analysis shows that patent collateral policy mainly promotes exploitative innovation of companies whose senior executives have no financial background, non-high-tech companies and non-SOEs. This paper enriches the research on the innovation incentive effects of patent collateral policy by providing an empirical investigation of the impact of patent collateral policy on corporate innovation trajectory. It helps to provide insights for emerging market countries as to improve patent collateral policy to promote the quality of corporate innovation.

Interpreting Modern Monetary Reality

During the 1990s and 2000s, the quantity theory of money (QTM) fell out of favor both among policymakers and academics. Central bankers almost universally adopted short‐term interest rates as their policy instruments while money was often dropped entirely from the dominant theoretical macro models.The central bank response to the global financial crisis—which featured the large‐scale asset purchases called “QE”—breathed life back into the quantity theory and its adherents. The widespread, though in fact mistaken, belief that central banks were targeting an increase in money growth to stave off deflation elicited memories of Milton Friedman's famous claim that the Fed could and should have accelerated money growth to bring the U.S. out of the Great Depression. That belief also led to alarming predictions that central banks in the wake of the GFC were massively overdoing it. The Fed's policy led to a nearly fourfold increase in the U.S. monetary base from August 2008 to August 2014!But as things turned out, this monetary expansion turned out to be much ado about nothing. During the 13‐year period ending in December 2020 in which U.S. M1 grew by an annual average rate of 12.7%, inflation averaged just 1.6%. The prediction of QTM that inflation would mirror money growth over the long run has been wildly off the mark and, although things could change quickly, even today's capital market expectations for “long run” U.S. inflation appear to be running within a 2%‐3% band.In this article, the former IMF director of central banking explains why the QTM is no longer a useful “cheat code” for interpreting modern monetary reality. As the most promising replacement, the author offers the outline of a “fiscal theory of the price level” that has had more success in explaining global inflation during the past several decades. As its name suggests, the fiscal theory emphasizes that the underlying driver of inflation is government deficit spending while minimizing the importance of the instruments—whether money or debt—that governments use to finance their deficits. The QTM, by contrast, effectively assumes that whereas money finance is likely to be inflationary, bond finance is not.Among the most compelling features of the fiscal theory is to draw attention to the transformation of global capital markets during the past several decades that has brought government debt finance to the fore while diminishing the role of money finance. When assessing the inflationary consequences of permanent fiscal expansions, policymakers must consider both government monetary and non‐monetary liabilities. Because the policy response to the GFC involved primarily the exchange of bond financing for monetary financing without a significant increase in total sovereign debt, it did not prove inflationary. The response to the global pandemic, by contrast, has involved a significant deterioration in sovereign fiscal finances. But whether this turns out to be inflationary is likely to depend not on how the current deficits are financed in the moment, but on the commitment of sovereigns to shoring up their fiscal positions without resorting to a reduction in the real value of their own debt.

Multi-Period Goals-Based Portfolio Optimization

Portfolio managers regularly have views on capital markets that span multiple periods. A portfolio manager, for example, may expect a recession with high probability over the coming period, followed by a recovery in the subsequent period. Currently, there are few methods for optimal portfolio allocation across these multiple periods that match how practitioners operate in the real world. Herein, we present a multi-period optimization method using a goals-based framework that allows practitioners to develop multi-period capital market expectations and optimize their portfolios across those periods.

Practical Applications of Model Portfolios

<h3>Practical Applications Summary</h3> In <b>Model Portfolios</b>, which appeared in the Spring 2019 issue of <b><i>The Journal of Wealth Management</i></b>, <b>Debarshi Basu</b> of <b>BlackRock</b>, <b>Michael Gates</b> of <b>BlackRock</b>, <b>Vishal Karir</b> of <b>iHuddl</b>, and <b>Andrew Ang</b> of <b>BlackRock</b> present a three-step framework for developing model portfolios: 1) create a performance benchmark that reflects an investor’s risk tolerance, 2) construct a strategic model portfolio that reflects long-term capital market expectations based on that benchmark, and 3) construct a final tactical model portfolio that rotates the holdings around the strategic model portfolio. The authors suggest that investors use this framework as a repeatable and verifiable process for model portfolio construction. To demonstrate the framework’s usefulness, the authors apply it to two examples: building a strategic model portfolio for multi-asset investing, and building a tactical factor timing portfolio. <b>TOPICS:</b>Portfolio construction, risk management, analysis of individual factors/risk premia, performance measurement

Modeling the Performance of Bulk-Carriers for Islamic Equity Investors

This paper investigates the performance of bulk-carriers as a primary shipping segment for Islamic equity investors. Shipping is a strong growth industry with 84% of global trade carried by the shipping industry, although 75% of ship lending is debt-based. Moreover, many Islamic investors have minimal exposure to ship-finance and investment. We adopt an investment analysis of a full population of historical data over 20 years, to evaluate performance involving a maritime return on investment, IRR, net yield and standard deviation measures of risk and return. Our findings reveal that whilst earnings are volatile in comparison to capital market expectations, unlevered, tax-free returns on bulk-carrier investments out-perform other assets. By communicating risk and reward more effectively, Islamic equity investors, will realize the benefit of equity finance on the basis of profit sharing, is more efficient at allocating investible resources than debt finance at interest, thereby increasing investment and economic growth.

Toward an optimal hedging strategy considering earnings volatility through fair value accounted financial derivatives

Purpose The purpose of this paper is to determine a financial institution's optimal hedging degree under consideration of costly earnings volatility induced by fair value accounted derivatives. The discussion on the adoption of fair value accounting in the financial industry has been rather controversial in recent years. Under this accounting regime, the change in market values of specific assets must be considered as profit or loss. Critics argue that fair value accounting induces higher earnings volatility compared to historical cost accounting and, therefore, may initiate a downward spiral during recessions. Thus, increased earnings volatility induces costs, which can be explained by disappointed capital market expectations. Consequently, in general, a lowering of earnings volatility will be rewarded. Consistent with this theoretical finding, empirical research provides strong evidence that companies pursue income smoothing to reduce earnings volatility. In contrast to industrial corporations, financial institutions may easily reduce their earnings volatility by engaging in additional hedging activities. However, more intense hedging usually reduces expected profits. Design/methodology/approach Based on a research project initiated by a large German bank, this study quantitatively models the trade-off between the (utility of) costs of earnings volatility and the reduction of profit potential through additional hedging. Findings By conducting sensitivity analyses and simulations of the crucial factors of the trade-off, we examine relevant causal relationships to obtain first indications about the economic benefits of income smoothing. Originality/value To the best of our knowledge, we are the first to develop an optimization model that supports decision-making by attempting to determine an optimal (additional) hedging degree considering the costs induced by earnings volatility.

Capital Market Expectations, Asset Allocation, and Safe Withdrawal Rates

Most retirement withdrawal rate studies are either based on historical data or use a particular assumption about portfolio returns unique to the study in question. But planners may have their own capital market expectations for future returns from stocks, bonds, and other assets they deem suitable for their clients’ portfolios. These uniquely personal expectations may or may not bear resemblance to those used for making retirement withdrawal rate guidelines. The objective here is to provide a general framework for thinking about how to estimate sustainable withdrawal rates and appropriate asset allocations for clients based on one’s capital market expectations, as well as other inputs about the client including the planning horizon, tolerance for exhausting wealth, and personal concerns about holding riskier assets. The study also tests the sensitivity of various assumptions for the recommended withdrawal rates and asset allocations, and finds that these assumptions are very important. Another common feature of existing studies is to focus on an optimal asset allocation, which is expected either to minimize the probability of failure for a given withdrawal rate, or to maximize the withdrawal rate for a given probability of failure. Retirement withdrawal rate studies are known in this regard for lending support to stock allocations in excess of 50 percent. This study shows that usually there are a wide range of asset allocations which can be expected to perform nearly as well as the optimal allocation, and that lower stock allocations are indeed justifiable in many cases.

Corporate strategy financialized: Conjuncture, arbitrage and earnings capacity in the S&P500

The conjuncture that ushered in the era of shareholder value served to embed capital market expectations into corporate governance aligning management and shareholder interests. Market arbitrage focussed on modifying contractual relations with stakeholders to extract a (higher) return on invested capital. In this article we focus on cash earnings on capital employed generated by the S&P 500 survivor group of firms covering the period 1990–2008. We use this financial data to construct three complementary perspectives on corporate financial performance: firm, firm-relative and macro. Within this framework the financial numbers and perspectives are analogous to a ‘hall of mirrors’ where ambiguity and contradiction are in play frustrating straightforward performative narratives that connect purpose with financial transformation an era of shareholder value.

Pro-Market Reform Sustainability and the Tool of 'Constitutionalization': Economic Rights as Fundamental Rights?

This paper explores the potential of the concept of 'constitutionalisation' of pro market policies to explain the contemporary nature of the state market relationship. The analysis in this paper shows that the contemporary legal framework offers opportunities to investors to challenge and control state action on the 'micro level' via what has been described as a 'regulatory freeze'. This means that it is not so much that courts and tribunals have adopted significantly expanded definitions of expropriation in order to fundamentally restrict state regulatory discretion. On the contrary, a regulatory freeze is the consequence of states' own reluctance to legislate/regulate in areas where challenges might be brought. The paper goes on to argue that the legal position is supplemented by an enforcement arm distinct from legal mechanisms. The market exercises 'macro level' control over state discretion through its ability to penalise states that challenge or seek to challenge the current, predominately pro market incarnation of the state market relationship. The paper begins by an evaluation of the role of private property rights in modern capitalism which shows the extent to which modern interpretations of market expectations are anchored on the protection of private property. The paper then proceeds with a comparative study examining definitions of expropriation internationally, aiming to define the outer limits of curbs on state discretion. This discussion inevitably addresses the work of private dispute resolution mechanisms (ICSID, Iran-US Claims Tribunal) and institutional mechanisms for dispute resolution contained in NAFTA, the EU and the ECHR. Finally, the paper reflects on the Greek sovereign debt crisis of 2010, showing the potential of international markets to influence policy directions consistent with global capital market expectations, creating an almost constitutional global system of restrictions on government discretion consistent with a liberal version of the state-market relationship. The paper concludes by suggesting that efforts to cement a liberal version of the state-market relationship, using national and supranational legal curbs on government discretion are politically dangerous and developmentally short sighted, especially when the enforcement mechanisms take extra legal paths.

Strategic Asset Allocation: Determining the Optimal Portfolio with Ten Asset Classes

This study explores which asset classes add value to a traditional portfolio of stocks, bonds and cash. Next, we determine the optimal weights of all asset classes in the optimal portfolio. This study adds to the literature by distinguishing ten different investment categories simultaneously in a mean-variance analysis as well as a market portfolio approach. We also demonstrate how to combine these two methods. Our results suggest that real estate, commodities and high yield add most value to the traditional asset mix. A study with such a broad coverage of asset classes has not been conducted before, not in the context of determining capital market expectations and performing a mean-variance analysis, neither in assessing the global market portfolio.

Financial accounting information and the relevance/irrelevance issue

Some current research concludes that the numbers in financial statement are not relevant for three basic reasons. The numbers: are not isomorphic with capital market values; do not have a future orientation; and are un–interpretable since they are based upon five different measurement attributes. The lack of isomorphism argument is invalid since actual current performance is not identical with the capital market expectations of future performance. The lack of a future orientation argument is invalid since financial statements capture what has happened and not what is expected to happen. Since a single measurement attribute is required to produce meaningful measures, the un–interpretability argument holds. A unique measurement attribute is identified in this paper to address this problem.

Asset Location: Client Goals and Objectives

Private client investment managers must use a dynamic asset allocation process in a multigenerational context. The tax exposure of different asset pools (asset locations), as well as the client's goals and constraints, considerably affect investment strategies and tax-planning options. Capital market expectations, the various sources of risk, tax constraints, and an understanding of the causes of performance drag are all inputs that help determine the most appropriate portfolio strategies for private clients.

Maintaining Consistent Global Asset Views (with a Little Help from Euclid)

Global economic and capital market integration has led to a host of new concerns for plan sponsors and money managers. In such an environment, ensuring consistent capital market expectations, policies, and strategies among different base currencies is important. A primary difficulty is translating risk and correlation estimates from the home currency into any other currency. We provide a method for converting risk and correlation views. The method makes use of a geometric interpretation of risks and correlations, dramatically simplifying the requisite calculations.

The Impact Of Financial Reporting On Revenue Investment: Theory And Evidence

This paper, (a) discusses possible motivations of top management in publicly quoted companies for increasing or decreasing expenditure on research, development, advertising and training; (b) presents hypotheses that such managers will adjust their level of spending on the items of 'revenue investments' listed in (a) to attempt to report earnings which will be in line with capital market expectations; and (c) considers and analyses empirical evidence from a survey of finance directors which is mainly consistent with the hypotheses. The survey also elicited the opinions of finance directors as to the basis of valuation used by the capital market. It was found that different beliefs concerning the market's use of short-term earnings were significantly associated with differing responses regarding expenditure on the investigated categories of revenue investment.