Capital Market Participants Research Articles

Subprime Borrowers, Securitization and the Transmission of Business Cycles

A growing literature (i.e. Jaffee, Lynch, Richardson, and Van Nieuwerburgh, 2009, Acharya and Schnabl, 2009) argues that securitization improves financial stability if the securitized assets are held by capital market participants, rather than financial intermediaries. I construct a quantitative macroeconomic model with a novel specification for mortgage-backed securities (MBS) to evaluate this claim for subprime securitization during the Great Recession. I find that output in the U.S. would have dropped by only about a third and house prices by only a half of what we actually observed, if subprime MBS had been purchased by non-financial agents, rather than held by banks. This is because banks are subject to capital requirements and if MBS remain within the banking system, the fall in their value puts a strain on banks’ balance sheets. The subsequent deleveraging amplifies business cycles. My findings suggest that the existence of the securitization market stabilizes the economy under the condition that financial intermediaries do not engage in the acquisition of securitized assets.

ANALYZING THE RELATIONSHIP BETWEEN STOCK RETURNS AND RISK MANAGEMENT STATUS IN THE BANKS LISTED ON THE STOCK EXCHANGE FROM THE PERSPECTIVE OF SHAREHOLDERS

According to nature of their activities, banks are exposed with various risks and risk management in the management of these institutions is one of the essential activities. In leading research also tries to use the analysis of financial statements, the status of risk management at Tehran Stock Exchange member banks to be evaluated and determine its relationship that, which of bank stock returns and is capital market participants consider the risk management in decisions about pricing bank stocks? The result shows that there is a significant relationship between indicators of capital adequacy and resources which are taken by the banks with the bank stock returns. However, there is not a significant relationship between net interest and net wage income with stock returns. The results indicate that the hypothesis of relationship between the bank's risk management and stock returns in and capital adequacy and resources the margins taken by the banks is true.

Managerial Discretion and Firm Fundamentals

We hypothesize and provide evidence that the economic consequences of managerial accounting discretion vary systematically with volatility in firm fundamentals. Unlike common approaches in the literature that identify managerial discretion as orthogonal to business volatility, we use a model structure that identifies both types of variation in earnings attributes and allows for a correlation structure between the two. Our results show that in the eyes of three types of capital market participants, investors, financial analysts and regulators, managerial discretion is overall viewed as enhancing information uncertainty, but the effect is attenuated with volatility in firm fundamentals. Our findings suggest that broad samples may exhibit different types of managerial discretion and that volatility in firm fundamentals is key in identifying accounting choices that reduce information uncertainty.

Accounting accruals, earnings management and future performance of IPOs

This paper investigates the impact of public-listing age on the future operating performance of Iranian firms making initial public offerings (IPOs) during the period 2003 to 2014, and examines whether accounting accruals and earning management contribute to this impact. In addition, return on net operating assets (RNOA), operational accruals (TAC) and the earnings management (EM) of 81 initial public offerings have been calculated, with the aim of helping capital market participants, policy makers, financial analysts and potential investors thorough the findings of this study, in the stock exchange of financial assets and security investment projects. Multivariate linear regression was used in analysing data. We found that, on average, public-listing age and accounting accruals have a direct effect on future operating performance in Iran, and that earning management does play an indirect role on performance.

MARKET RISK ESTIMATION IN (T+)-TRANSACTIONS

Market risk analysis and estimation are presentedin T+ transactionsas they are used within the Moscow Exchange. There is a need to do so as a result of the cut-off of a new REPO product with Central Counterpartner (CCP). Here repurchase agreement goes through the National Clearing Center (NCC), the last being a bank and a clearing structure within the Moscow Exchange group.NCC actsas an intermediary (so called “Central Counterpartner”) between trading participants.REPOs with CCP raisecontractor claims and commitments to the CCP which takes the risk of default on commitments from unfair contract side. The REPO with CCP cut-off made ready a technological platform to implement T+2 trades at the Moscow Exchange. As a result of it there appeared the possibility to enter security purchase/sell contracts partially collateralized. All these transactions (the REPO with CCP, T+) made it a must determining security market risks. The paper is aimed at presenting VaR-like risk estimates. The methods used are from the computer fi nance. Unusual TS rate of return indicator is proposed and applied to find optimal portfolios under the Markowitz approach and their VaRs (losses) forecasts given the real “big” share price data and various horizons. Portfolio extreme rate and loss forecasting is our goal. To this end the forecasts are computed for three horizons (2, 5 and 10 days) and for three significance levels.There were developed R-, Excel- and Bloomberg-basedsoftware tools as needed. The whole range of proposed computing steps and the tables with charts may be considered as candidates to be included in the future market risk standards.Paper results permit capital market participants to choose the correct (as to the required risk level) common stocks.

Valuation and Communication: Two Conflicting Roles of Stock Price

In an environment where capital market participants collectively possess superior information about a decision faced by a firm manager, we use an experimental market to analyze the effectiveness with which the market communicates this information to the manager through stock price. We do so in a setting in which an inherent conflict exists between pricing that communicates information to the manager and pricing that accurately values the firm given the manager’s optimal response to the communicated information. Despite this conflict, we find that when the manager initially selects a low-value project, the stock price from the capital market is lower than the price that accurately values the firm given the manager’s optimal response to this price. Because managers often respond to this lower stock price by switching to a higher value project, firms with the lowest initial stock price generate the greatest future returns. Consistent with behavioral theory, we further highlight that imposing a small cost on the manager for switching projects decreases the communicative effectiveness of price leading to lower future returns in response to a low stock price. Collectively, our results potentially contribute to a better understanding of the seemingly anomalous book-to-market effect and results from the executive compensation literature.

China’s Volatility: Should Regulators Intervene?

“Chinese capital market participants need to adopt a more realistic expectation of the role of regulators.”

Activist hedge funds and firm disclosure

This study examines whether firms' disclosure decisions are affected by the presence of activist hedge funds. Using a large sample of firms that experienced increases in ownership by activist hedge funds, we find that firms are more likely to cease providing financial guidance or reduce the information in the guidance in the quarter subsequent to new investment by activist hedge funds. These results hold even for firms that experienced good quarters and consistently provided guidance in previous quarters. Since guidance has been shown to be beneficial to capital market participants in many ways, reduced guidance has meaningful market implications. Our findings highlight a negative and possible unintended consequence of activist hedge funds' investment in firms, which provides some counterbalance to the numerous positive consequences documented in the prior literature on hedge fund activism.

The Lemons Problem in Markets for Strategy

Research in corporate governance has predominantly focused on the moral hazard problem and governance mechanisms that mitigate it. In this conceptual paper, we instead focus on adverse selection as an alternative agency problem, emphasizing well-intentioned managers making strategic choices they believe will increase firm value, but facing difficulty informing capital market participants about the value of these choices. We suggest that more valuable strategies are more difficult for market participants to evaluate, and that pressures on managers to adopt easy-to-evaluate strategies can generate this adverse selection or ‘lemons’ problem. We argue that governance mechanisms designed to mitigate moral hazard operate differently here, in some cases exacerbating rather than solving the adverse selection problem. We further propose that firms with unique and complex strategies may migrate to private equity.

Derivatives disclosure in corporate annual reports: bank analysts' perceptions of usefulness

Responding to mixed evidence on the decision-usefulness of annual report disclosures for derivative financial instruments to capital market participants, and concerns identified by practice, this paper examines usefulness in a direct study of user perceptions. Interviews with analysts from Australia's four major banks reveal essential usefulness, limited by the disclosures' failure to reflect companies' actual use of derivatives throughout the period, and inability of users to understand companies' off-balance sheet risk and risk management practices from information considered generic and boilerplate. The research complements and extends existing archival and survey research and provides new evidence suggesting low-cost ways for increasing usefulness. It supports the International Accounting Standards Board's disclosure recommendations in its recent Discussion Paper: A Review of the Conceptual Framework for Financial Reporting, but, at the same time, highlights that for these proposed measures to be successful in relation to IFRS 7, they may need to address other issues. The research increases knowledge of the informational requirements of lenders, an important class of financial information user, and supports calls from practice for companies to improve their disclosure of material economic risks.

Goodwill Impairment Test Disclosures Under IAS 36: Disclosure Quality and its Determinants in Europe

The European Securities and Markets Authority (EMSA) criticizes the low disclosure quality and boilerplate disclosures in the accounting for goodwill among European listed companies, but it does not identify possible causes. Prior research also finds generally low compliance with disclosure requirements but usually does not consider disclosure quality or systematically examine the drivers of the observed levels of either compliance or disclosure quality. In this study, we analyze compliance and disclosure quality among European listed companies. We find low levels of compliance and disclosure quality and both are positively associated with firm size, goodwill intensity, enforcement and free float. In addition, disclosure quality is positively affected by board skills and company growth but negatively affected by proprietary cost. Our findings are of interest to regulators and enforcers who intend to increase the quality of disclosures. Moreover, we direct the attention of capital market participants to large differences in disclosure quality and the associated firm and governance characteristics.

Discussion of “Equity Financing and Social Responsibility: Further International Evidence”

Even though corporate social responsibility (CSR) has grown substantially in recent years, there has been limited empirical research on the relation between CSR and the perceptions of capital market participants. One stream of the literature focuses on the relation between CSR and firm cost of capital. The Wang et al. (forthcoming) study advances our understanding of the CSR–financial performance relationship by investigating whether CSR performance significantly reduces the cost of equity capital internationally. Future research on CSR should a) provide more in-depth economic intuition and address methodological issues related to differences in cross-country analyses, and b) investigate further and in greater detail the circumstances in which investments in CSR are not beneficial to the firms.

When in Rome, Look Like Caesar? Investigating the Link between Demand-side Cultural Power Distance and CEO Power

Agency theory-grounded research on boards of directors and firm legitimacy has historically viewed CEO power as de-legitimating, often taking this fact for granted in theorizing about external assessors' evaluations of a firm. With few exceptions, this literature has focused exclusively on capital market participants (e.g., investors, securities analysts) as the arbiters of a firm's legitimacy and has accordingly assumed that legitimate governance arrangements are those derived from the shareholder-oriented prescriptions of agency theory. We extend this line of research in new ways by arguing that customers also externally assess firm legitimacy, and that firms potentially adjust their governance characteristics to meet customers' norms and expectations. We argue that the cultural-cognitive institutions prevalent in customers' home countries influence their judgments regarding a firm's legitimacy, such that firms competing heavily in highpower distance cultures are more likely to have powerful CEOs, with CEO power a source of legitimacy-rather than illegitimacy-among customers. We also argue that the more dependent a firm is on its customers and the more salient cultural power distance is as a demand-side institutional norm, the greater this relationship will be. Data from 151 U.S. semiconductor and pharmaceutical firms over a 10-year period generally support our predictions.

Leases: A Review of Contemporary Academic Literature Relating to Lessees

SYNOPSISAccounting for corporate leasing activities has been examined and debated for more than 30 years. Currently both the Financial Accounting Standards Board (FASB) and International Accounting Standards Board (IASB) are developing standards to modify financial reporting for operating leases, which are currently reported off-balance sheet. In light of these proposals, we examine existing literature to better anticipate possible effects of any changes. Namely, we review existing studies to understand why firms engage in operating leases and how information about these arrangements impacts users. First, we review studies directly examining leases. As that review reports, some studies show that companies engage in off-balance sheet leasing at least in part to manage financial statement presentation. Other studies, however, suggest that firms utilize operating leases to manage costs and preserve capital. In general, the research reports that lenders, credit rating agencies, and other capital market participants sufficiently understand off-balance sheet leases and consider them in their decision making. Second, we provide commentary on one of the current proposals' more debated areas and a current point of FASB and IASB divergence: classification of expenses associated with operating leases. While the IASB proposes disaggregating interest and amortization elements, the FASB proposes reporting a single, combined lease expense. However, very little research explicitly addresses expenses associated with operating leases. Existing studies do, however, suggest that information disaggregation, particularly with regard to operating and financing activities, is important. Our review may be useful to regulators as the reporting standards for operating leases are debated.

Directors’ and officers’ legal liability insurance and audit pricing

Abstract Directors’ and officers’ (D&O) legal liability insurance is commonly provided to corporate executives and directors. Prior literature suggests managers are more willing to engage in opportunistic behaviors when their personal assets are more protected from litigation risk. Therefore, information about D&O policy details is potentially useful in assessing potential managerial opportunism. However, many countries, including the U.S., do not require firms to disclose this information. We provide evidence on whether mandatory D&O disclosures are likely to provide information about managerial opportunism that is incremental to that provided by other sources of information using a sample of Canadian firms, who are required to make D&O disclosures. We examine the association between excess D&O coverage limits and audit fees since auditors have extensive private information about the likelihood of managerial opportunism and strong incentives to incorporate this information into their audit fees. We find a positive association between excess D&O coverage limits and audit fees after controlling for numerous other audit fee determinants, including other proxies for managerial opportunism such as discretionary accruals and corporate governance variables. Additional analyses suggest auditors are more sensitive to potential managerial opportunism when managers are more likely to act on their opportunistic incentives. We also find a positive association between excess D&O coverage limits and the likelihood of future shareholder litigation. Our findings suggest that D&O insurance disclosures convey incremental information to shareholders and other capital market participants. As such, they suggest a beneficial role for mandatory D&O disclosures.

Family Firm Governance and Financial Policy Choices in Newly Public Firms

AbstractManuscript TypeEmpiricalResearch Question/IssueUsing agency theory and socioemotional wealth perspective as the theoretical framework, we evaluate the extent to which financing choices subsequent to going public and their economic consequences differ for family firms relative to non‐family firms.Research Findings/InsightsOur results suggest that family firms maintain higher post‐IPO leverage and longer debt maturity structure relative to non‐family firms. Further, family firms raise less external capital subsequent to going public relative to non‐family firms. The reluctance of family firms to raise post‐IPO capital, however, results in higher investment sensitivity to internal cash flows and consequently inefficient investment. In addition, family firm financing choices differentially influence various facets of post‐IPO performance.Theoretical/Academic ImplicationsThis study suggests that agency conflicts among firm stakeholders as well as socioemotional wealth considerations are important determinants of family firm financing behavior subsequent to going public. Further, ownership structure is an important determinant of the extent IPO firms capitalize on the opportunity to raise capital subsequent to going public to finance investments.Practitioner/Policy ImplicationsOur results offer insights to entrepreneurs, managers, venture capitalists, and other capital market participants with regard to the link between firm ownership structure and the economic benefits of going public

Determinants of Expected Returns at Public Defined-Benefit Pension Plans

Estimated expected returns are important for pension plans, as they influence many plan characteristics including required asset levels, annual contributions, and the extent of plan under- or overfunding. Yet, there seems to be little prior literature on the factors influencing these estimated future returns. In an attempt to fill this gap, this paper presents the results of a panel analysis of data on the determinants of such returns used by US public defined-benefit (DB) pension plans for the period 2001–2011. As expected, we find that real return estimates by DB public pension funds are positively related to fund size, fund age, international asset diversification, state income, and corruption levels. However, more interestingly and importantly, we document that real return estimates by public US DB pension funds are positively related to cultural measures of individualism and masculinity, and negatively related to uncertainty avoidance. These results should be of much interest not only to scholars and pension benefi ciaries, but also to fund managers, other capital market participants, and policymakers.

Identifying Islamic alternatives to short selling in Iranian stock market and prioritizing them using TOPSIS

Purpose – This paper aims to first explain short selling and its benefits and damages; then, using experts’ opinions and Technique for Order of Preference by Similarity to Ideal Solution (TOPSIS) method as well as based on the legal, financial and jurisprudential criteria adopted, evaluate and prioritize Islamic alternatives to short selling; and finally, introduce the most proper approach for implementing it in Iran’s stock market. Design/methodology/approach – The methods applied in the paper are as follows: Library method to collect the required data for developing the theoretical and jurisprudential foundations of the study, identifying the appropriate criteria for prioritizing; the alternative methods for short selling in the Islamic markets; and the field method to determine the level of significance of the ranking criteria and prioritize the alternative methods for short selling in the Islamic markets on the basis of such criteria. The alternative methods for short selling in Iranian stock market were identified and analyzed jurisprudentially and legally. Afterwards, these strategies were prioritized based on the (legislative, financial and jurisprudential) criteria which were adopted in the form of Delphi from the related literature, research and expert opinions by means of TOPSIS approach. The method with the highest ranking will be introduced as the alternative method for short selling. Findings – The paper suggests that among all Islamic alternatives to short selling, based on experts’ opinions and legal considerations, method of combining Murabaha and Wa’ad is the most proper strategy in Iranian stock market. Research limitations/implications – An important limitation we faced in this study was limited familiarity of Iran, capital market participants with Islamic finance concepts including Islamic alternatives to short selling. Therefore, designed questionnaire was sent only to participants who had experience in the field of Islamic finance that they were not more than 31 people. Of course, in this study, large sample size was not necessary because the questionnaire was completed by experts, and therefore, results were scientific and reliable. Originality/value – One of the transaction strategies which significantly contributes to the enhancement of market liquidity is short selling. However, this strategy is not applicable to the Islamic stock markets because of its contradictions with a number of Islamic laws. Therefore, Islamic financial researchers have attempted to design relevant legal mechanisms drawing on the Islamic contracts to make use of the merits of this transaction strategy. In addition to introducing short selling and its demerits for the stock market, the paper explored the alternative methods and proposed the most proper one for implementing in Iranian stock market.

The Effect of International Financial Reporting Standards Adoption on the Relation Between Earnings Quality and Information Asymmetry in Korea

ABSTRACTWhereas prior studies provide mixed results on whether the adoption of International Financial Reporting Standards (IFRS) either improves earnings quality or lowers information asymmetry, none examines whether the adoption has indeed altered the assumed negative relation between earnings quality and information asymmetry. Using Korean data with a difference-in-difference design, we address the question by examining whether IFRS adoption has strengthened the assumed negative relation. We fail to document such evidence. This study raises questions regarding the validity of prior studies’ findings that IFRS adoption has helped capital market participants in Korea via improved earnings quality or lower information asymmetry.

A Critical-Realist Account of the Greek Crisis

We try to explain the origins and the dynamics of the sovereign debt crisis in Greece, in the context of critical realist economics. The origins of the Greek crisis are discovered in the global credit crisis of 2007 and are rooted in the institutional design of the Eurozone and the fiscal and institutional weaknesses of the Greek economy. We explore the period from the outbreak of the crisis in late 2009 until the return of the Greek government to bond markets in April 2014. We discuss the dynamics of the crisis as outcomes of the choices made by Greek and European citizens, Greek and European political leaders, international policy makers and capital market participants. Our analysis demonstrates how important actors set the mechanism of the crisis in motion, either by reproducing or by transforming the structures which underlie Greek and European political economies.