Risk-sharing Effects Research Articles

Financing a push and pull supply chain under revenue sharing: value addition and default risk transmission mechanism

Supply chain finance (SCF) releases participants' capital constraints and facilitates their operations. SCF and transactional contracts can have synchronised effects on participants' performance. This research analyses how credit financing and bank loans with revenue-sharing contracts can help capital-constrained suppliers and retailers improve their financial and risk management performance in the push and pull supply chains. Results suggest that SCF generates greater profits than capital-constrained supply chains without SCF and well-capitalised supply chains, demonstrating a leverage effect. In a push scenario, SCF enhances the wholesale price effect and risk-sharing effect of the revenue-sharing contract, resulting in increased order quantity and profits for participants, albeit with an amplified default risk transmission effect. Conversely, in a pull scenario, SCF boosts participant profitability by strengthening the order quantity effect of the wholesale price contract, although its risk-sharing effect is weakened by the revenue-sharing contract, thereby mitigating the default risk transmission effect. When the revenue-sharing rate is low, the push model performs better in terms of profit enhancement but exhibits higher default risk transmission levels compared to the pull model, and vice versa. The findings guide participants in leveraging SCF and revenue-sharing contracts to enhance their benefits and control the default risk transmission level.

Effects of financial transfers on redistribution and risk sharing within the EU and the Euro Area

The effectiveness of European fiscal policies is of particular importance for the future economic performance of the community especially during times of crisis due to polarized public opinion and expert criticism. This study attempts to identify the redistributive and risk-sharing effects resulting from centralized financial transfers within the EU. We investigate a broader sample of EU (28) countries during 2000-2021 in addition to the Euro area countries used in most studies on the issue. Traditional regression methods and the Pooled Mean Group (PMG) model were used in order to maximize the objectivity of the analysis. The study’s results show that long-term redistribution is virtually absent with levels below 1%. In some cases, the values are even negative which is an interesting (but not unattested) finding in the context of such a sensitive issue as the permanent shift of wealth within the EA and EU. Budget transfers achieved a risk-sharing effect of 11% for the EU and 29% for the EA. Risk sharing levels are comparable and even better than those of some fully-fledged fiscal federations. This is an attestation to the capacity of the EU to successfully implement its intended policies despite some criticism.

Redistribution and risk-sharing effects of intergovernmental transfers: an empirical analysis based on Italian municipal data

ABSTRACT This paper studies the redistributive and risk-sharing effects of intergovernmental grants at the municipal level, taking advantage of the 2015 reform of the Italian municipal equalization system. The reform introduces formula grants to equalize the fiscal gap only in municipalities in standard regions, but not in municipalities located in special autonomous regions. We can, therefore, use difference-in-differences estimators to identify the causal relationship between formula grants and local gross domestic product thanks to this asymmetric pattern. The final results show that formula grants lead to greater redistribution than pre-reform transfers. On the contrary, new transfers have low risk-sharing effects due to the lag in data available to evaluate fiscal capacity and expenditure needs.

Financing and operating strategies for blockchain technology-driven accounts receivable chains

We focus on blockchain technology (BCT) adoption in a three-echelon supply chain in which upstream sellers offer trade credits to capital-constrained downstream buyers, forming an accounts receivable chain. According to different supply chain partners adopting BCT, we analyze the game equilibrium of the no, upper-stream, lower-stream, and entire BCT-driven accounts receivable chains (NBC, UBC, LBC, and EBC) to understand participants’ motivation and condition to adopt BCT and the different roles of participants in blockchain introduction. We find that trade credit management cost-saving and repayment risk-sharing effects, as facilitated by BCT, help increase the equilibrium order quantity, thereby increasing supply chain efficiency and participants’ profits, although BCT cannot fully coordinate the supply chain. Regarding supply chain efficiency, EBC is superior to LBC, which is better than UBC or NBC. As a supply chain leader and creditor, the supplier plays a passive role in achieving the positive effect of BCT. Given that the retailer and manufacturer are supply chain followers and debtors, their adoption of BCT is the key to enhancing supply chain efficiency and profits. The BCT platform can set appropriate technology-usage fees to guide participants to form the EBC structure through different paths. Meanwhile, the retailer’s initial working capital can evaluate the risk-sharing degree of the supply chain, and the stable EBC selection region defined by the risk-sharing degree can be ascertained. We further find that with the trade credit insurance premium increasing, supply chain participants have become more active in adopting BCT.

The different impacts of heterogeneous lease assets on the costs of debt: a risk-sharing perspective

ABSTRACT We examine whether the credit market participants price operating lease differently from finance lease in the perspective of risk sharing. Using a unique setting that the new lease standard is enforced in China since 2019, we find that operating (finance) lease asset shares are negatively (positively) related to lessees’ costs of debt, the risk-sharing role of operating lease assets is a mechanism of reducing COD, and this effect is more significant at firms with more financial constraints and insufficient cash flow. We fill the gap in the literature with a contribution to separate the risk-sharing effect from the accounting treatment effect in the association between two kinds of lease and costs of debt. These findings have important implications for policymakers and companies.

The Revival of Business Groups’ Risk Sharing: Evidence from Japanese Real Estate Investment Trust Market

AbstractWe examine the business groups’ risk-sharing hypothesis in the Japanese Real Estate Investment Trust (REIT) market in which the unique external management system seems to be reinforcing power relationships among firms affiliated with the modern Japanese business groups, called keiretsu. We find that REITs whose sponsors belong to one of the keiretsu groups (keiretsu REITs) have significantly lower volatility of profitability than REITs whose sponsors do not belong to the keiretsu groups (non-keiretsu REITs). There is no significant difference in profitability between keiretsu REITs and non-keiretsu REITs, controlling for firm and property characteristics. The abnormal portion of the profitability unexplained by firm characteristics is also significantly lower with keiretsu REITs. We also find that the keiretsu affiliation reduces the systematic volatility of affiliated REITs, while such an effect is not observed with the idiosyncratic volatility, suggesting that the risk-sharing effect may be beneficial for the value of REITs. Using the difference-in-differences design with propensity score matching, we find that the negative impact of the Great East Japan Earthquake on the profitability was significantly smaller with keiretsu REITs than with non-keiretsu REITs. Keiretsu REITs were also able to stabilize their capital structure by shifting some short-term debts to long-term debts without increasing the cost of loans under the uncertain situation caused by the Earthquake. Keiretsu REITs were able to borrow money from their affiliated group banks even right after the earthquake, while non-keiretsu REITs seem to have struggled to secure loans from those banks.

Shadow banking participation and stock market crash risk: evidence from China

ABSTRACT In this paper, we use public entrusted loan announcements and financial data on China listed A-shares to identify shadow banking participation as a new factor affecting firms’ stock market crash risks. We also provide new sets of empirical evidence to the inconclusive literature about how borrowing and lending behaviours affect investors’ perceptions and the firms. We find that both borrowing and lending of small firms reduce firms’ stock market crash risks, and lending of big firms increases firms’ crash risks. Moreover, our results on affiliated transactions suggest the existence of both risk-sharing and negative spillover effects in Chinese business groups. The results are robust to different fixed effects, different standard error clustering specifications, alternative crash risk measures and additional control variables.

Does corporate groups accrue higher leverage: Emerging Market Evidence

This article explores the capital structure composition of group-affiliated firms. We find that group member firms choose to accrue higher debt ratios compared to non-group counterparts. Further disentangling the higher debt ratios of group-affiliates, we find risk-sharing or co-insurance effect whereby business groups enable member firms to share risks through income-smoothing and intra-group reallocation of resources. Our results suggest that business groups act as internal capital markets, assist affiliated firms overcome financial constraints, and ease access to external capital. Lastly, our study shows that group affiliations positively contribute to firms’ better financial performance relative to the non-group firms.

The Phenomenon of Financial Integration and the Probable Issues in Financial Alterations Related to EU

The financial integration concept is a very important main key, as an integration phenomenon, that haven taken place in EU, and effect on the member countries' financial reform process for a long time. In this study, we aim to put forth the financial relations between financial alterations and recent developments, which include along the capital movements especially together with the last full member countries. Therefore, we have interrogated two cross-examine related to financial integration fact. That is first of their financial market standards affecting financial harmonization adjustment process. Secondly, the financial risk-sharing and prudential policies' effect that take place in applications related to integration process. In addition to, the price-based policies have been emphasized along the occurred global risks which make sense cross-country dispersion of bond yields among banks in the EU. However, since the process of financial integration represents a process that aims to harmonize national debt limits between member states, it also presents a process where the money market transactions are also questioned among banks on a global level. In this respect, the global alignment of financial markets emerges as the objectives of joint financial change as well as the alignment of macro financial indicators for EU countries, and it appears that this fact makes corporate integrations inevitable among member countries.

Export Volatility with Trade Policy Uncertainty: Evidence from China

This paper studies the effect of trade policy uncertainty on firm-level volatility. Using data on exporting firms from China around its WTO accession, we find that a reduction of trade policy uncertainty between China and the US decreases the volatility of firm-level export to the US and increases the volatility of export to the rest of the world, suggesting a risk-sharing effect among export destinations. In the aggregate level, the shock in trade policy uncertainty has no significant effect on the volatility of total firm export or the volatility of total firm sales.

Welfare-improving Consumption Tax in the Presence of a Wage Tax under Idiosyncratic Returns from Investment and Incomplete Markets

In a standard multi-period model, consumption tax and wage tax are equivalent. I show that when a capital market is incomplete---in the sense that the rates of return from risky investments are idiosyncratic and there is no insurance for such idiosyncratic risk---the introduction of consumption tax in the presence of wage tax improves welfare. This holds true even in the presence of optimal or non-optimal capital income taxes. In the general equilibrium model, the optimal level of consumption tax is determined to balance the benefits of the risk-sharing effect and asset accumulation effect and the costs of postponing government revenue to later periods.

Financial Markets with Hierarchical Information

We present a financial market with investors who have nested private information. Small perturbations of price informativeness, coming from distortions of dividend expectations, can trigger an oscillating shock throughout the economy that destabilizes the feedback loop between prices and expectations. Moreover, decreasing the volatility of liquidity trading makes the equilibrium less stable. We investigate what the distribution of informed investors implies for equilibrium stability and for the risk premium of the asset. We find that different investor distributions have different implications, depending on whether adverse-selection or risk-sharing effects dominate in the economy.

A Note on Health Insurance under Ex Post Moral Hazard

In the linear coinsurance problem, examined first by Mossin (1968), a higher absolute risk aversion with respect to wealth in the sense of Arrow–Pratt implies a higher optimal coinsurance rate. We show that this property does not hold for health insurance under ex post moral hazard; i.e., when illness severity cannot be observed by insurers, and policyholders decide on their health expenditures. The optimal coinsurance rate trades off a risk-sharing effect and an incentive effect, both related to risk aversion.

Who Bears the Lion's Share of a Black Pie of Oil Pollution Costs?

Liability generates incentives for responsible parties to reduce oil pollution risks and enables risk sharing in the oil production, transportation, refining, and consumption nexus. Limitation of liability in the oil supply chain, such as contained in the U.S. Oil Pollution Act of 1990, could make a difference in the incentive and risk-sharing effects between the sectors in the chain. It is the argument in this article that liability limits have led to a failure to generate a proper set of incentives for the reduction of oil pollution risks and to ensure efficient risk sharing among the U.S. public, the shipping sector, and the oil cargo sector.

Alternative Risk-Sharing Mechanisms of Social Security

Adopting a portfolio choice approach to pension design, we derive illuminating closed form solutions for optimal pay-as-you-go social security programs. We demonstrate that the nature of the implied risk-sharing effects and their magnitudes are sensitive to the stochastic specification of aggregate wage income growth (i.e. the implicit return on the pay-as-you-go program). Considering individuals in any generation from a Rawlsian, prebirth perspective, fairly large pay-as-you-go programs in terms of the magnitude of the optimal contribution rate can be rationalized if wage shocks are not permanent.

Investment distortions and the value of the government's tax claim

This article integrates the government in the context of company valuation. Our framework allows to analyse and to quantify the risk-sharing effects and conflicts of interest between the government and the shareholders when firms follow different financial policies. We provide novel evidence that firms with fixed future levels of debt might invest more than socially desirable. Economically, this happens if the gain in tax shields is big enough to outweigh the loss in the unlevered firm value. Our findings have implications for the practice of investment subsidy programmes provided by the government to avoid fostering investments beyond the socially optimal level.

Investment Distortions and the Value of the Government's Tax Claim

This study integrates the government in the context of company valuation. Our framework allows to analyze and to quantify the risk-sharing effects and conflicts of interest between the government and the shareholders when firms follow different financial policies. We provide novel evidence that firms with fixed future levels of debt might invest more than socially desirable. Economically, this happens if the gain in tax-shields is big enough to outweigh the loss in the unlevered firm value. Our findings have implications for the practice of investment subsidy programs provided by the government to avoid fostering investments beyond the socially optimal level.

Market liberalizations at the firm level: Spillovers from ADRs and implications for local markets

This paper studies the cross-sectional properties of market liberalizations by decomposing the channels through which financial market liberalization affects firms from segmented markets. Using data on 27 emerging markets and 1000 firms, we show that the first ADR issuance in a country produces a positive spillover effect across other firms in the local market, and can thus be interpreted as a market liberalization event. The first ADR leads to a strong revaluation effect, a decrease in expected returns and average volatility; in addition, exposure to international factors increases. Overall, the cross-section of gains across firms is consistent with improved risk sharing after the cross-listing, in that firms whose returns are highly correlated with those of the issuing firm benefit the most. We also examine the dynamics of the integration process. The positive spillover effect is not limited to the first ADR introduction. Each additional cross-listing further integrates the market, although as expected, early cross-listings have stronger impact than later ones. The results also suggest that despite the negative impact on liquidity, the net effect of cross-listings on home market firms is positive, as the improved risk-sharing effect dominates the trade-diversion effect.

Market Liberalization at the Firm Level: Spillovers from ADRs and Implications for Local Markets

This paper studies the cross-sectional properties of market liberalizations by decomposing the channels through which financial market liberalization affects firms from segmented markets. Using data on 27 emerging markets and 1000 firms, we show that the first ADR issuance in a country produces a positive spillover effect across other firms in the local market, and can thus be interpreted as a market liberalization event. The first ADR leads to a strong revaluation effect, a decrease in expected returns and average volatility; in addition, exposure to international factors increases. Overall, the cross section of gains across firms is consistent with improved risk sharing after the cross-listing, in that firms whose returns are highly correlated with those of the issuing firm benefit the most. We also examine the dynamics of the integration process. The positive spillover effect is not limited to the first ADR introduction. Each additional cross-listing further integrates the market, although as expected, early cross-listings have stronger impact than later ones. The results also suggest that despite the negative impact on liquidity, the net effect of cross-listings on home market firms is positive, as the improved risk-sharing effect dominates the trade-diversion effect.

Proportional Income Tax and the Ricardian Equivalence in a Non-Expected Utility Maximizing Model

A number of papers have examined the issue whether the Ricardian equivalence holds in a world where tax is proportional to future labor income. Barro [2] and Tobin [16] discuss deviations from Ricardian equivalence arising from the interaction between individual uncertainty and tax policy. Following the same line of reasoning as Chan [5], Barsky, Mankiw and Zeldes [3] as well as Kimball and Mankiw [10] make a persuasive argument that in an environment where future labor is uncertain, the marginal propensity to consume out of a deficit financed tax cut is significantly positive if future taxes are proportional to income. Their argument is that future taxes provide insurance to consumers by reducing the variance of after tax future income. Such an insurance which Barsky, Mankiw, and Zeldes [3] call reduces the precautionary saving of the consumer, thus boosting current consumption. The purpose of this paper is to reexamine this risk-sharing hypothesis and the issue of debt non-neutrality using a nonexpected utility maximizing framework. My analysis builds on recent advances in the representation of non-expected utility functionals which enable us to disentangle risk aversion from intertemporal substitution in consumption. I use a hybrid non-expected utility preferences a la Weil [17], which is isoelastic in intertemporal substitution but exponential in risk preference. The benefit of using this class of non-expected utility functionals is that it admits an analytical solution which is difficult to obtain in the existing permanent models [18]. Aside from its analytical tractability, this formulation of the preference also helps us to have a useful decomposition of the effect of a deficit financed tax cut into income and information effects. The risk-sharing effect of a deficit financed tax cut discussed by Barsky, Mankiw, and Zeldes [3] depends on the relative strengths of the aforementioned two effects. Our results show that the above risk-sharing effect is quantitatively small for a plausible range of risk aversion and intertemporal substitution. The marginal propensity to consume out of a deficit financed tax cut is considerably lower than the Keynesian consumption propensity proposed by Barsky, Mankiw, and Zeldes [3]. This means that the Ricardian equivalence may be a reasonable