Journal Of Financial Economics Research Articles

Risk analysis of Spanish companies

AbstractThis paper aims to investigate the determinants of different types of market risk faced by Spanish firms from 2012 to 2019. Using Fama and French's (Journal of Financial Economics, 1993, 33, 3) three‐factor model, we estimate total risk, diversifiable risk, and systematic or non‐diversifiable risk in the three dimensions proposed by these authors: market risk, size risk, and valuation risk. Risk determinants are derived from a series of economic and financial variables obtained from the information contained in financial statements. This information is summarised using a factor analysis that aims to resolve the correlation issues between the proposed measures. The study demonstrates that the systematic risk factors proposed by Fama and French in their 1993 three‐factor model incorporate dimensions of systematic risk that are relevant to investors and that the set of economic and financial variables proposed can explain these risks. Among these variables, profitability and the market to book ratio have the greatest impact in explaining company risk, while factors such as operating and financial leverage, growth, or company insolvency have a much smaller effect as explanatory factors for risk.

Does Financial Expertise within the Audit Committee Mitigate Stock Price Crash Risk? Unraveling the Impact of Accounting Proficiency on Market Vulnerability.

Stock price crashes can have severe consequences for investors and the overall financial market. This study investigates whether financial expertise within the audit committee can effectively mitigate stock price crash risk, with a specific focus on the impact of accounting proficiency on market vulnerability. By incorporating a comprehensive empirical analysis and recent scientific references, we aim to shed light on the crucial question of how audit committees' composition influences market stability. Drawing upon recent scientific references, including Smith and Johnson (2023) in the Journal of Accounting and Finance Research, Chen, Wang, and Li (2022) in the Journal of Financial Economics, and Zhang and Lee (2021) in the International Journal of Accounting and Auditing Research, we explore the relationship between financial expertise within audit committees and their ability to act as a safeguard against stock price crashes. Our research methodology involves analyzing data from various financial markets to ascertain the potential effectiveness of audit committees with members possessing higher levels of financial expertise in preventing or mitigating stock price crashes. By integrating insights from these recent scientific articles, we present a comprehensive examination of the influence of accounting proficiency on market vulnerability. The findings of this study will contribute significantly to the existing literature on corporate governance and market stability. Policymakers, investors, and corporate boards will gain valuable insights into the role of financial expertise within the audit committee in managing stock price crash risk and promoting market resilience. Ultimately, these insights can inform decision-making processes and enhance corporate governance practices to foster more stable and sustainable financial markets.

Model Comparison with Transaction Costs

ABSTRACTFailing to account for transaction costs materially impacts inferences drawn when evaluating asset pricing models, biasing tests in favor of those employing high‐cost factors. Ignoring transaction costs, Hou, Xue, and Zhang (2015, Review of Financial Studies, 28, 650–705) q‐factor model and Barillas and Shanken (2018, The Journal of Finance, 73, 715–754) six‐factor models have high maximum squared Sharpe ratios and small alphas across 205 anomalies. They do not, however, come close to spanning the achievable mean‐variance efficient frontier. Accounting for transaction costs, the Fama and French (2015, Journal of Financial Economics, 116, 1–22; 2018, Journal of Financial Economics, 128, 234–252) five‐factor model has a significantly higher squared Sharpe ratio than either of these alternative models, while variations employing cash profitability perform better still.

Postmaterialism and Corporate Tax Avoidance

SynopsisThe research problemThis paper explores the association between postmaterialistic culture and corporate tax-avoidance behavior.MotivationAlthough corporate tax avoidance is prevalent, the degree of tax avoidance varies across countries. Previous studies have suggested that national culture is associated with the level of tax avoidance (e.g., corruption culture in [DeBacker, J., Heim, B. T., & Tran, A. (2015). Importing corruption culture from overseas: Evidence from corporate tax evasion in the United States. Journal of Financial Economics, 117(1), 122–138. https://doi.org/10.1016/j.jfineco.2012.11.009 ], and societal trust in [Kanagaretnam, K., Lee, J., Lim, C. Y., & Lobo, G. J. (2018). Societal trust and corporate tax avoidance. Review of Accounting Studies, 23(4), 1588–1628. https://doi.org/10.1007/s11142-018-9466-y ], among others). Unlike prior studies focusing on longstanding cultural factors, this paper examined the association between corporate tax avoidance and an important current culture trend, i.e., postmaterialistic culture.The test hypothesesThere is no association between postmaterialistic culture and corporate tax avoidance.Target populationVarious stakeholders that care about corporate tax avoidance including the government, policymakers, investors, auditors, and firm managers.Adopted methodologyLinear Probability Model and Ordinary Least Squares regressions.AnalysesWe examined the association between postmaterialistic culture and corporate tax-avoidance behavior. We used a proprietary dataset of China tax audits spanning the 2011–2014 period and tested the moderating effect of tax enforcement. We also examined the external validity of our results using a cross-country sample from 21 countries over the 1993–2014 period.FindingsUsing a proprietary dataset of China tax audits, we found that firms owned by investors from countries with higher postmaterialism values were less likely to engage in tax-avoidance behavior in China. In addition, we found some evidence that the negative association between postmaterialism and tax avoidance is more pronounced when tax enforcement is stronger, indicating that national culture and formal institutions act as complements. To check the external validity of our main results, we further used a cross-country sample from 21 countries over 22 years. The evidence from the cross-country sample was consistent with the findings obtained from the China tax audits setting.

Corporate Investment Decision: A Review of Literature

This study is an attempt to review relevant literature on the theme of corporate real investment decisions. We have conducted a comprehensive survey of literature on the studies published in well-reputed journals of finance, i.e., The Journal of Finance, The Review of Financial Studies, and The Journal of Financial Economics, during the years 2010 to 2022. The theoretical analysis reveals that information asymmetry, cash holdings, policy uncertainty, idiosyncratic risk, governance quality, financing diversification, financial development, managerial network, investor protection, tax policy, etc., are prominent factors influencing investment decisions. The current review analysis is useful and has certain policy implications for investment managers regarding investment decisions. It guides on the factors that can impede or boost investment volume. Our study has a novel contribution to the literature by summarizing the voluminous empirical literature arranged on physical investment decisions.

The beta anomaly in the Australian stock market and the lottery demand

Frazzini and Pedersen (2014) [Betting against beta. Journal of Financial Economics, 111(1), 1–25] report an insignificant performance for the betting against beta (BAB) strategy in the Australian equity market, suggesting that the beta anomaly does not exist in this market. We extend their sample period and find strong evidence for a low-beta effect. The arbitrage portfolio that takes long positions in low-beta stocks and short positions in high-beta stocks generates a significant abnormal return of 5.9% per year. The beta anomaly over 1995–2019 is strong and robust after controlling for risk factors and stock characteristics. Decomposition of the beta anomaly into stock and industry level components shows that the low-beta effect is driven by the firm, and not the industry level beta. We further find that lottery demand explains the low-beta effect. In a series of portfolio and cross-sectional analyses, we show that the abnormal returns related to the beta anomaly become insignificant after controlling for lottery demand. The findings are robust to different proxies for lottery demand, alternative beta estimation and regression analyses. There is no evidence that the beta anomaly can be explained by leverage constraints, coskewness risk or investment and profitability risk factors. We further show that beta anomaly is more pronounced during the upmarket than the downmarket periods and that lottery demand plays a role in its time-variation. The findings have important implications for retail and institutional investors who trade on beta.

Experiments in finance: A survey of historical trends

Experiments complement other methods in identifying causal relationships and measuring behavioral deviations from theoretical predictions. While the experimental method has long been central in many scientific disciplines, it was almost nonexistent in finance until the 1980s. To survey the development of experiments in finance, we compiled a comprehensive account of experimental studies published in the Journal of Finance, Journal of Financial Economics, Review of Financial Studies, Review of Finance, Journal of Quantitative and Financial Analysis, and Journal of Banking and Finance, and experimental finance studies published in the top 5 journals in economics. With this novel dataset, we identified historical trends in experimental finance. Since the first experiments were published in finance journals in the 1980s, especially in the last 20 years, the share of experimental publications in these journals has markedly increased. In this article, we report trends toward descriptive, individual decision, and field experiments.

Comparing the Effect of Intangible Assets and Macroeconomic Parameters on the Stock Prices in Firms Listed on the Stock Exchange of Iran, Saudi Arabia and Iraq

Comparing the Effect of Intangible Assets and Macroeconomic Parameters on the Stock Prices in Firms Listed on the Stock Exchange of Iran, Saudi Arabia and Iraq

Mediating Effects of Accounting Conservatism on The Relationship Between Corporate Governance and Cost of Capital

Mediating Effects of Accounting Conservatism on The Relationship Between Corporate Governance and Cost of Capital

Drawbacks in the 3-Factor Approach of Fama and French (2018)

This paper features a statistical analysis of the monthly three factor Fama/French return series. Rolling OLS regressions explore the relationship between the 3 factors, using data from July 1926 to June 2018, available on French’s website. The results suggest there are significant and time-varying relationships between the factors. A sub-sample from July 1990 to July 2018 is used to analyze the three series using two-stage least squares and the Hausman test to check for issues related to endogeneity. The empirical results suggest that the factors, when combined in OLS regression analysis, as suggested by Fama and French (2018), are likely to suffer from endogeneity. Ramsey’s RESET tests suggest a nonlinear relationship exists between the three series. We use two instruments to estimate the market betas, and compare them to betas estimated not using instruments. Non-parametric tests of the two sets of betas suggest significant differences. The results suggest that using these factors in linear regression analysis, as recommended by Fama and French [(2018). Choosing factors. Journal of Financial Economics, 128(2), 234–252] is problematic in that the estimated coefficients are highly sensitive to the correct model specification.

The Oil Futures and Options Markets in 2020: The “Message from Markets”

This paper considers the response of the equity and oil markets to the onset of crisis conditions after February 15, 2020. Based on derivative markets for equities and WTI (West Texas Intermediate) crude-oil futures contracts, implied equity and oil volatilities quantify the depth of the crisis and contrast it with the previous ones. The estimated Black [(1976) Journal of Financial Economics, 3, 167–179] vol skew and Merton [(1976) Journal of Financial Economics, 3, 125–144] option model parameters are able to discern between demand- and supply-side facets. The time when the futures curve is in contango identifies the beginning and, to date, conclusion of the crisis. Using the CAPM, co-movement of oil and equity prices permits computing forecasts of spot oil prices. In considering these events, we recognize the essential role of prices in financial markets: They are conveyors of information, the “Message from Markets,” in which financial theory proves useful, practical and applicable.

Goodbye to Shell Games: Revisiting Factor Models in China

We show that the estimated shell value of reverse mergers dramatically drops in the out-of-sample periods of Liu et al. (2019, Journal of Financial Economics), which is related to Chinese IPO policy change and system reforms. This structural break is due to the fact that fewer firms choose to go public through a reverse merger. Thus, we document that the shell contamination is considerably mitigated and reconstruct factor models by flexibly eliminating the smallest 30% of stocks. Compared with other popular factor models in the finance literature, our revised CH3/4 model not only has the smallest model specification errors but also helps effectively explain the 25 Fama–French portfolios and most of reported stock anomalies in China.

Risk-taking and risk aversion in the period of before and after the 2008 crisis: evaluation with bibliometric analysis

PurposeThis study aims to quantitatively classify the articles with risk-taking and risk aversion keywords and to investigate whether there is a similar emphasis in articles as parallel to the change in risk appetite in the market in the period before the crisis (bubble period) and after the crisis.Design/methodology/approachIn this study, a bibliometric analysis of the articles in which the keywords risk-taking and risk aversion are mentioned together with the word finance in the journals scanned in the Web of Science between 2004 and 2012 was performed. In this context, 936 articles were specified. Analyses were made using the CiteSpace Java program.FindingsThe three journals with the most articles with these characteristics are Journal of Banking and Finance, Journal of Financial Economics and Strategic Management Journal. Along with these two main keywords, the other two most used keywords were “model” and “performance”. In addition, the keywords “attitude”, “corporate governance”, “choice” and “determinant” were used more in the post-crisis period. On the other hand, concepts such as investor sentiment or emotions were not amongst the 10 most frequently used keywords during the nine years. This can be considered as an indicator that risk is being modelled, but emotions are relatively neglected. As a result, the findings of this study show that academic papers do not develop in connection with the mood and excitement in the market.Originality/valueThis study is one of the first studies to examine the reflection of risk appetite in the market on academic papers on financial risk-taking and aversion and to investigate whether the situation in the market and the development in publications are related.

Shadow leverage risk and corporate bond pricing: evidence from China

This study investigates the effect of shadow bank leverage on corporate bond returns. Using a unique dataset of Wealth Management Products (WMPs), we construct a new measurement of shadow leverage in the Chinese banking system. We find that the sensitivity of bond returns to the risk of shadow leverage has a negative effect on corporate bond returns. We propose a new three-factor bond pricing model by adding the factor of shadow leverage risk into the traditional two-factor model of Fama and French (1993. “Common Risk Factors in the Returns on Stocks and Bonds.” Journal of Financial Economics 33: 3–56). A comprehensive empirical analysis shows that the proposed model fits corporate bond returns well and outperforms the two-factor bond pricing model, both in- and out-of-samples. Specifically, the shadow leverage risk factor makes greater marginal contributions in lower credit rating groups and more shadow leverage-sensitive groups. Overall, we highlight the importance of shadow banks in the role of asset pricing.

The Remarkable Growth in Financial Economics, 1974-2020

The field of academic finance has grown and evolved in the 47 years since the Journal of Financial Economics (JFE) began publishing papers. This paper examines detailed data on the 3,003 papers written by 3,358 different authors published in the JFE over the period 1974–2020. Advances in computing power and electronic communication have driven trends toward more empirical work, more coauthorship, and more complex papers. The set of authors, referees, and editors has also evolved as the field spans a much larger geographic footprint and as women have come to play a larger role in all aspects of academic finance. Growth in the demand for finance faculty has driven up faculty compensation and the demand for scarce journal space. Also see the internet appendix for additional data here: https://ssrn.com/abstract=3722314.

Top to bottom: an expanded ranking of economics journals

ABSTRACT In what we believe is the largest ranking of its kind in economics, this study extends the economics journal ranking literature by examining the impact of papers published in more than 550 economics journals. Based on Google Scholar citations per article to all articles published in the 15-year period from 2001 through 2015, we find that the top five journals are the American Economic Review, Quarterly Journal of Economics, Journal of Financial Economics, Journal of Political Economy and Journal of Economic Perspectives. Moreover, three of the American Economic Association’s newest journals – American Economic Journal: Applied Economics, American Economic Journal: Macroeconomics, and American Economic Journal: Economic Policy – are ranked among the top 30 economics journals. An expanded ranking such as that provided in this study is likely a useful tool for researchers, particularly the new ones, in navigating the field of economics.

Trends in finance research: Analyzing publication data of leading financial journals

The present study is a bibliometric analysis of the papers published in the top five finance-related journals as listed in the Financial Times (FT50 Journals). The journals included in the study are the Journal of Finance (JF), Journal of Financial and Quantitative Analysis (JFQA), Journal of Financial Economics (JFE), Review of Finance (RF), and Review of Financial Studies (RFS). The study analyses the publication trend, identifying the most prolific and influential authors, most productive countries, institutes, and journals during the twenty years from 1999 to 2018. The study further analyses the keywords related to the papers published in the five journals to identify the hot topics during the study period.

Financial contagion in real economy: The key role of policy uncertainty

AbstractThis paper studies the spread of the Subprime Crisis and the European Sovereign Debt Crisis from Eurozone countries to the real economy by examining 10 sectors in major developed and emerging stock markets. First, we employ Cappiello et al., Journal of Financial Economics, 2006, 4, 537–572 model and copula functions to detect and cross‐check the correlations and the contagion thereafter. Second, we uncover evidence of correlation behaviour between policy uncertainty indexes and stock market returns. The results demonstrate that no country and sector was immune to spillover effects, highlighting the limited effectiveness of policy makers for both the Subprime Crisis and the European Sovereign Debt Crisis. The empirical application provides evidence of significant volatility and tail dependence from the financial sector to many real sectors in the U.S. economy. Additionally, there is clear evidence that certain sectors, particularly Healthcare, Telecommunications, Utilities and Technology, were less severely affected by the crisis, as observed by Baur, Journal of Banking & Finance, 2011, 36, 2680–2692.

Effect of leverage deviation on choices and outcomes of public versus non‐public acquisitions

AbstractThis paper examines whether firms' deviation from target leverage may predict types and outcomes of mergers and acquisitions (M&A) deals. We find that over‐levered firms are more inclined to be involved in public acquisitions than non‐public acquisitions. Consistent with the proposition of information economics theory, our findings suggest that information asymmetry is the main motive behind over‐levered firms' preference for public targets. Specifically, we observe that over‐levered acquirers not only prefer public targets, but also pick those with less information asymmetry. We find that, in the short term, the market reacts negatively to the announcement of public acquisitions by over‐levered firms. However, in the long term these acquirers experience better operating synergies and values, measured by changes in return on assets and Tobin's q, respectively. Our results are robust after controlling for M&A deals‐, firm‐, industry‐characteristics and endogeneity concerns using both propensity score matching and Heckman two stage methods. Overall, our findings support the premises of agency theory and Uysal, Journal of Financial Economics (2011), 102, 602–620 view that over‐levered firms have a high tendency to pursue most value‐enhancing acquisition deals due to the high pressure of holding high levels of debt.

Does policy uncertainty influence mergers and acquisitions activities in China? A replication study

In this paper, we replicate the results of Bonaime, Gulen and Ion (Journal of Financial Economics, 2018, p531–558) who investigate the influence of policy uncertainty on mergers and acquisitions (M&As) amongst US firms for the period 1985 to 2014. Utilising a similar dataset and methodology, we present confirmatory evidence suggesting a negative influence of policy uncertainty on M&As in the US context. We repeat the analysis on a sample of Chinese firms from 2003 to 2017 and also find that subsequent year M&A likelihood is decreasing in policy uncertainty amongst Chinese firms. Overall, our replication exercise confirms the negative effect of policy uncertainty on subsequent M&As in both countries, regardless of institutional differences. Further, the economic significance of the association is found to be lower for both the US and Chinese samples in comparison to the original study.