Equity Holder Research Articles

Local IPOs and Household Stock Market Participation

Abstract The decrease in companies going public has received widespread attention, and the associated costs are widely debated. We document high local IPO activity leads to increases in stock market participation of 5–6%. This is striking given that such participation represents a key factor toward building wealth. Local IPOs increase both households’ propensity to own stock and their percent equity holdings. The attention channel drives effects: local IPOs attract attention to the market, through increased information production and publicity. The wealth channel has little influence, consistent with local IPOs not generating wealth shocks for most households.

Political uncertainty and institutional herding

Political uncertainty represents a key determinant of corporate investment decisions. In this paper, we study the relation between political uncertainty and investment from the perspective of institutional investors. Using U.S. equity holdings data from 13F filings, we find that institutional investors herd during politically uncertain times. This trading behavior is stronger when U.S. presidents are unpopular, due to their proclivity for controversial policies, and among riskier stocks. We also find that this mechanism, despite generating some excess trading, helps incorporate a risk premium into stock prices. Overall, the findings unveil a new channel through which political uncertainty affects financial markets.

Institutional dual holdings and expected crash risk: Evidence from mergers between lenders and equity holders

AbstractExploiting mergers between lenders and shareholders of the same firm as an exogenous shock to shareholder–creditor conflicts, we examine the causal effect of these conflicts on firms' ex ante expected stock price crash risk evident in the options implied volatility smirk. The decrease in conflicts of interest between lenders and shareholders induces dual holders to encourage the disclosure of more information to alleviate costly information asymmetry with other investors and better execute their oversight role in constraining managers' bad news suppression. Consistent with expectations, we find that a firm's ex ante expected crash risk declines after a shareholder–creditor merger. We also report strong, robust evidence that the negative impact of mergers on firms' expected crash risk increases when institutional investors or lenders have a greater stake in the treatment firms or when shareholder–creditor conflicts are apt to be exacerbated. Additionally, we document that firms issue management earnings forecasts (especially bad news forecasts) more frequently after these mergers. Finally, we find that expected crash risk decreases more after mergers in firms suffering worse information asymmetry and with weak monitoring mechanisms. Our evidence suggests that option market participants value the dual holder's role in deterring managers' bad news hoarding.

მდგრადობის აღრიცხვის მნიშვნელობა თანამედროვე პირობებში

Taking into account the European perspective, Georgia prematurely introduced the international standard of corporate sustainability reporting, the purpose of which is to improve the practice of producing management reports provided for by the Law on Accounting, Reporting and Auditing of Georgia, to contribute the establishment of a sustainable and competitive environment, and reduce the negative impact of enterprises on the environment and society. Georgia, together with the UN member states, expressed its desire to share the goals and objectives of sustainable development set for 2030. Sustainable development is a system of development of society, which, taking into account the interests of economic development and environmental protection of society, ensures the increase in the quality of human life and well-being. One of the important challenges facing today is the implementation of sustainability accounting based on sustainability reporting standards, on the basis of which corporate sustainability reporting will be prepared and published by enterprises. The ustainability counting is a tool that businesses use to become more sustainable. Sustainability accounting is considered as a subcategory of financial accounting, which focuses on publishing non-financial information about the enterprise's activities to external stakeholders, such as equity holders, creditors, etc. Sustainability accounting is an activity that affects society, the environment, and the economic activity of an enterprise. Sustainability accounting is different from managerial accounting. In order to ensure the consistency of information for the preparation of sustainability reports, guidelines were created under the name - Global Reporting Initiative (GRI). According to GRI, enterprise reporting on economic, environmental and social performance is as necessary and time-consuming as financial reporting. The goal of sustainability accounting is to make a fundamental transition to sustainable business models and a sustainable economy. The popularity of sustainability accounting has increased especially recently. This is evidenced by the fact that more and more enterprises are using new methods and techniques in the publication of financial information, along with providing external users with information about the enterprise's main activities and environmental impact. Thus, the challenges of sustainable development of enterprises are directly related to the challenges facing the production and presentation of sustainability accounting-reporting in enterprises, which at this stage is caused by the adoption of the European Union corporate reporting directive. That is why we consider the development and implementation of the legal framework of corporate sustainability reporting as one of the directions for overcoming the challenge and greater involvement of the scientific community, highly qualified accountants and auditors, enterprise managers, entrepreneurs, and students in its process, who in the future will ensure the implementation of the best practices in accounting and reporting in the country.

Performance and investment styles of international multi-asset funds during market crises

This paper presents a comprehensive investigation into the performance of multi-asset funds investing internationally. Based on a custom-built conditional multi-factor model, which includes several bond and equity-related factors, along with time-varying betas and alphas, we show that funds in our dataset significantly underperform from 2004 to 2021. This evidence holds even on a before-fee basis, with funds investing predominantly in bonds exhibiting significantly higher alphas than funds investing predominantly in equities. Since multi-asset funds may better hedge against market downturns than equity or bond funds, given their higher asset class diversification, we also evaluate performance for crisis and non-crisis phases separately. The results show that, during market crises, international multi-asset funds perform significantly better than in non-crisis times, achieving neutral performance. However, while funds that favour bond investments perform similarly across different market phases, funds that prioritize equity investments perform significantly better during crises. Consequently, multi-asset funds with higher bond holdings can be a better option during non-crisis periods, while funds with higher equity holdings should be preferred during market downturns. This somewhat puzzling finding seems to be related to funds’ cash holdings. By providing a better understanding of the asset allocation decisions of international mutual fund managers, as well as of their impact on fund performance, this work has meaningful implications for investors.

Crowding of international mutual funds

We study the relationship between crowding and performance in the active mutual fund industry. Using the equity holdings overlap of 17,364 global funds, we find that funds that crowd into the same stocks underperform passive benchmark funds by 1.4% per year. The negative returns to crowding can at least in part be explained by excess demand for liquidity and the associated discount for holding liquid stocks. We show that our measure of crowding contains novel information about performance that is not reflected in other variables that describe funds’ investment environment, such as fund size and style. Our findings suggest that crowding of investment opportunities is important for understanding diminishing returns.

When shareholders cross-hold lenders’ equity: The effects on the costs of bank loans

We show that syndicated loan spreads are lower as borrowers’ shareholders cross-hold more lenders’ equity. Apart from controlling for borrower and lender fixed effects and various other ownership measures, we address endogeneity concerns by conducting a difference-in-differences analysis exploiting the mergers of institutional investors. Additional tests on cross-holding shareholders’ holding period, the impact of active cross-holders, subsamples of borrowers subject to different degrees of shareholder–creditor conflicts, changes in borrower risk around loan initiation, and the number of financial covenants provide support for the hypothesis that borrower shareholders’ equity holdings of lenders reduce agency costs of debt.

Environment Social Governance Performance and Capital Structure: Evidence in Indonesia and Malaysia

Purpose: This research aims to investigate the relationship between Environmental, Social, and Governance (ESG) performance and capital structure, using Debt-to-Equity Ratio (DER) and Debt-to-Asset Ratio (DAR) proxies, in Indonesia and Malaysia. The study seeks to address the gap in the literature by exploring how ESG factors influence the capital structure decisions of both financial and non-financial companies in these countries. Additionally, the research analyzes the impact of ESG performance on the cost of equity and cost of debt. Methods: The research utilizes secondary data extracted from annual reports and sustainability reports spanning from 2015 to 2020. A total of 102 companies, comprising 59 Indonesian companies and 52 Malaysian companies registered on CSRHub, are included in the analysis. ESG performance is assessed based on community, environmental, social, and governance indicators. Capital structure is measured using DER and DAR proxies. Statistical analysis techniques are employed to examine the relationship between ESG performance and capital structure, as well as its impact on the cost of equity and cost of debt. Results and Discussion: The research findings indicate that community, environmental, social, and governance performance exhibit a negative effect on the cost of equity, suggesting that companies with stronger ESG performance experience lower costs of equity financing. However, these ESG factors do not significantly affect the cost of debt. This implies that while ESG performance may influence equity holders' perceptions of risk and return, it may not have a direct impact on the cost of debt financing for companies in Indonesia and Malaysia. Implications of the Research: The results of this research have important implications for companies, investors, and policymakers interested in understanding the relationship between ESG performance, capital structure decisions, and financing costs. By demonstrating the impact of ESG factors on the cost of equity, the findings underscore the importance of integrating sustainability considerations into financial decision-making processes. Moreover, the research highlights the need for further investigation into the mechanisms through which ESG performance influences capital structure and financing costs. Originality/Value: This study contributes to the literature by offering novel insights into the relationship between ESG performance and capital structure in Indonesia and Malaysia. By examining the impact of ESG factors on both equity and debt financing costs, the research expands our understanding of how sustainability considerations influence corporate financial decisions. The findings provide valuable guidance for companies seeking to enhance their ESG performance and optimize their capital structure, ultimately contributing to more sustainable and responsible business practices in emerging markets.

Current global status of male reproductive health.

Current global status of male reproductive health.

Dehydrated human amnion/chorion membrane to treat venous leg ulcers: a cost-effectiveness analysis.

To evaluate the cost-effectiveness of dehydrated human amnion/chorion membrane (DHACM) in Medicare enrolees who developed a venous leg ulcer (VLU). This economic evaluation used a four-state Markov model to simulate the disease progression of VLUs for patients receiving advanced treatment (AT) with DHACM or no advanced treatment (NAT) over a three-year time horizon from a US Medicare perspective. DHACM treatments were assessed when following parameters for use (FPFU), whereby applications were initiated 30-45 days after the initial VLU diagnosis claim, and reapplications occurred on a weekly to biweekly basis until completion of the treatment episode. The cohort was modelled on the claims of 530,220 Medicare enrolees who developed a VLU between 2015-2019. Direct medical costs, quality-adjusted life years (QALYs), and the net monetary benefit (NMB) at a willingness-to-pay threshold of $100,000/QALY were applied. Univariate and probabilistic sensitivity analyses (PSA) were performed to test the uncertainty of model results. DHACM applied FPFU dominated NAT, yielding a lower per-patient cost of $170 and an increase of 0.010 QALYs over three years. The resulting NMB was $1178 per patient in favour of DHACM FPFU over the same time horizon. The rate of VLU recurrence had a notable impact on model uncertainty. In the PSA, DHACM FPFU was cost-effective in 63.01% of simulations at the $100,000/QALY threshold. In this analysis, DHACM FPFU was the dominant strategy compared to NAT, as it was cost-saving and generated a greater number of QALYs over three years from the US Medicare perspective. A companion VLU Medicare outcomes analysis revealed that patients who received AT with a cellular, acellular and matrix-like product (CAMP) compared to patients who received NAT had the best outcomes. Given the added clinical benefits to patients at lower cost, providers should recommend DHACM FPFU to patients with VLU who qualify. Decision-makers for public insurers (e.g., Medicare and Medicaid) and commercial payers should establish preferential formulary placement for reimbursement of DHACM to reduce budget impact and improve the long-term health of their patient populations dealing with these chronic wounds. Support for this analysis was provided by MiMedx Group, Inc., US. JLD, and RAF are employees of MiMedx Group, Inc. WHT, BH, PS, BGC and WVP were consultants to MiMedx Group, Inc. VD, AO, MRK, JAN, NW and GAM served on the MiMedx Group, Inc. Advisory Board. MRK and JAN served on a speaker's bureau. WVP declares personal fees and equity holdings from Stage Analytics, US.

Examining Investment Companies’ ESG Data to Determine Investment Efficiency

Environment, Social, and Governance (ESG) investing is a crucial topic in modern society. Every day, new government regulations and incentives fuel sustainable investing by requiring robust corporate ESG disclosures. As companies become more aware of their societal and environmental impacts, investment companies such as Blackrock and Vanguard also learn to reshape their capital allocation decisions to benefit their customers. In this paper, we examine the S&P 500 equity holdings of some of these significant asset managers with a specific focus on the ESG scores of the companies they invest in. Through the compiled data, we see that the ESG scores of asset managers are ultimately very similar. Additionally, we derive that asset managers tend to base their decisions on several other factors, including the expected returns, as most investors also demand profit. As the ESG investing landscape continues to evolve, we determine that investors approaching their investments in an ESG-conscious manner may prefer to make their investments based on their independent analysis until the birth of more ESG-conscious investing strategies.

The effect of corporate ethical misconduct on JSE-listed companies’ returns

The purpose of the study was to determine the relationship between corporate misconduct announcements and share prices. The study employed an event study methodology where data was collected from a sample of 30 companies that were listed on the Johannesburg Stock Exchange (JSE). Data collected spanned a period of ten years, from 2011 to 2020. The study’s findings demonstrate that there is no significant relationship between announced incidents of ethical misconduct by JSE-listed companies and the returns of the underlying shares. Previous studies of a similar nature have asserted that the announced ethical misconduct of a company has a significantly negative effect on its share price. The study considers the dynamics that exist between principals (shareholders) and their agents (directors), who are charged with the governance of listed companies. It considers the morality of the actions taken by agents in governing organisations and the implications for the equity returns of principals. Contrary to the previous studies and studies in other countries, analysed results imply that equity holders of JSE-listed companies do not significantly punish companies that have incidents of ethical misconduct that are announced. The study’s findings have practical implications for the JSE and its requirements for disclosure of ethical issues to firm principals.

Research on the Nature and Effectiveness of Equity Holding

Research on the Nature and Effectiveness of Equity Holding

State corporate tax changes and bond pricing: U.S. evidence

In this study, we empirically investigate whether and to what extent state tax changes may affect the cost of debt. We employ staggered changes in state corporate income tax rates in the U.S. as exogenous shocks and estimate the effects of these state tax changes on bond at-issue yield spreads. We find a significant and positive relation between bond yield spreads and state tax increases but an insignificant relation between bond yield spreads and state tax decreases. On average, tax increases result in an increase of 34 basis points in the average bond yield spread. In addition, we document that bond investors demand higher yield spreads because tax increases aggravate firms' default risk by increasing firm leverage and return volatility. Moreover, we extend our analysis to equity holders and report a negative relation between stock market reaction to bond issuances subject to state tax increases.

CEOs’ capital gains tax liabilities and accounting conservatism

AbstractRecent studies show that the tax‐induced lock‐in effect discourages CEOs from unwinding their unrestricted equity and subsequently exacerbates their risk‐aversion. I investigate how CEOs’ unrealized capital gains tax liabilities (tax burdens) influence financial reporting conservatism. I find that the demand for accounting conservatism decreases with CEO tax burdens. Further analyses show that the negative relation between CEO tax burden and conservatism is stronger when the firm has high leverage and high default risk and when the CEO's incentives are more aligned with equity holders. This highlights the shareholder–creditor agency conflicts mitigation role of CEO tax burdens in reducing creditors’ demand for conservatism. I exploit the Federal Taxpayer Reform Act of 1997 and staggered state‐level tax cuts that significantly decreased personal capital gains tax rates as identification strategies.

The Influences of Foreign Shareholdings on Chinas Financial Market

Chinas financial market is one of the largest in the world, with a vast scale and diverse range of financial instruments, including stocks, bonds, currencies, futures, and foreign exchange. Operating within a highly regulated environment, the Chinese financial market continues to advance market-oriented reforms and financial innovation, attracting the attentions of both domestic and international investors. Simultaneously, the Chinese financial market is closely interconnected with the international market, providing crucial support for Chinas economic development, but also facing numerous challenges. As the era progresses, in order to enhance the development level of Chinas financial market, it is necessary to invigorate national enterprises and promote foreign equity holdings. This article aims to explore the influences of foreign shareholding on the development of Chinas financial market from the perspectives of the history of foreign shareholding in China, the positive role it has played, the current issues surrounding foreign shareholding, and the future prospects and suggestions for its development.

The role of inside debt in banks’ M&A choices: wealth expropriation or conflict resolution?

PurposeThis study investigates the impact of bank CEOs’ inside debt on shareholder benefits in the context of bank mergers and acquisitions (M&A) before the 2008–2009 financial crisis.Design/methodology/approachEmploying an event-study methodology, this analysis delves into market reactions to bank M&A announcements during 2006–2007, encompassing 105 M&As by 79 public commercial banks. This era witnessed heightened risk-taking behavior on the verge of the financial crisis. We explore the relation between relative inside debt and market abnormal returns at M&A announcements and the association between relative inside debt and cash payment preferences in M&As.FindingsEvidence suggests that M&A announcements from banks where acquiring CEOs hold a substantial inside debt experience favorable stock market reaction, particularly for smaller banks. Additionally, banks with elevated CEO inside debt tend to favor cash as a payment mode for M&As.Research limitations/implicationsOne limitation of this study is the short period of data availability. The data used in this study covers only 2006 and 2007, the periods marked by notable risk-taking activities on the verge of the financial crisis. Although this period is perfectly suitable for our investigation, given the prevalence of conflicts between equity and debt holders, it is essential to acknowledge that our findings may not capture changes or trends over time. Nevertheless, the results offer valuable insights into the factors that influence the behavior of the studied population. Future research could employ a longitudinal design to address this limitation and gain a more comprehensive understanding of the dynamics over extended periods.Practical implicationsOur study has significant implications for businesses and policymakers as it provides insights into the factors contributing to financial crises and how compensation mechanisms can be used to moderate bank risk-taking. We propose that CEO inside debt compensation presents a plausible mechanism that boards of directors can incorporate into bank executive compensation contracts. By doing so, they can promote value-enhancing investments and moderate excessive risk-taking, thereby safeguarding the financial stability of individual banks and overall financial system.Originality/valueOur study sheds light on the beneficial role of bank CEO inside debt for shareholders, contributing empirical backing to the conflict resolution viewpoint in the discourse on wealth appropriation. From a regulatory stance, our findings advocate for the inclusion of bank CEO inside debt in executive remuneration agreements. Such a strategy can empower boards of directors to mitigate undue risk and enhance shareholder value in M&As, safeguarding both individual bank and broader financial system stability.

Agree to disagree: Lender equity holdings, within-syndicate conflicts, and covenant design

Lenders’ simultaneous equity holdings introduce conflicts of interest among members of syndicated loans. We argue that lenders address such within-syndicate conflicts with financial covenant design to improve contracting efficiency. We show that loans with higher conflicts rely less on performance-based covenants, which serve as tripwires to facilitate ex-post control transfer and require coordination among syndicate members. Instead, high-conflict loans rely more on capital-based covenants to align shareholder-creditor interest ex-ante and incentivize shareholder monitoring. Overall, these results suggest that such conflicts can reduce capital flexibility and renegotiation efficiency for the borrowers.

Bankruptcy Risk in Discounted Cash Flow Equity Valuation

We investigate the importance of bankruptcy risk in discounted cash flow (DCF) equity valuation. Our analyses first show how bankruptcy risk is incorporated in DCF valuation, where investment risk is captured by cash flow certainty equivalents. Within this general setting, we find that bankruptcy risk can be captured by discounting factors incorporating period-specific bankruptcy probabilities, allowing the numerators in a DCF valuation model to follow a binary random walk. Elaborating a model of this kind, we assess the value of the equity holders’ limited liability right (the equity holders’ right to hand over the firm to its creditors if bankruptcy occurs). Two valuation models commonly used in academic research and professional practice—the Dividend Discount Model (DDM) and the Residual Income Valuation (RIV) model—are addressed specifically. Our analyses show that bankruptcy probabilities are important for the estimation of the value drivers in both models. Even if bankruptcy probabilities are as low as 0.02, equity values might be severely exaggerated if bankruptcy risk is ignored in DDM or RIV. In particular, this holds for firms expected to have high future growth (conditioned on firm survival). For the RIV model to properly capture bankruptcy risk, we identify “bankruptcy event accounting principles” and an additional term that must be included in the model. We also show that bankruptcy risk under certain conditions can be handled through a specific calibration of the discounting rate/-s in all DCF models, allowing the value drivers—i.e., future dividends or residual income—to be forecasted conditioned on firm survival.

The journey is the reward: A study of corporate site visits and mutual fund performance

Institutional investors often visit corporate sites to conduct first-hand assessments of firms' business operations and management quality. We find that corporate site visits contribute significantly to mutual fund performance in China. Our results indicate that corporate site visiting is an important part of mutual funds' stock selection process. Fund managers utilize these visiting activities as a verification channel to affirm their selection of outperforming stocks. The impact on fund performance is stronger when funds are active, have more concentrated equity holdings or invest in small-cap stocks. Performance enhancement is more profound when mutual funds visit firms with high information disclosure quality, and when fund managers have an alumni connection with corporate executives.