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In a series of experiments, we provide evidence that people pay special attention to the probability of losing. We first analyze this behavior in the typically used one-shot choice tasks. We then extend our analysis to repeated decisions in choice tasks, as well as allocation and investment tasks. Additionally, we test both decision making under risk and under gradually removed uncertainty, as with decisions from experience. Our findings of explicit attention to loss probabilities contradict the predictions of normative and descriptive decision theories, such as Expected Utility Theory and (Cumulative) Prospect Theory. We suggest a value function with a jump rather than a kink at the reference point, which separates gains and losses.

When confronted with new information, rational decision makers should update their beliefs through Bayes’ rule. In economics, however, new information often includes win-loss feedback (profits vs. losses, success vs. failure, upticks vs. downticks). Previous research using a well-established belief-updating paradigm shows that, in this case, reinforcement learning (focusing on past performance) creates high error rates, and increasing monetary incentives fails to elicit higher performance. But do incentives fail to increase effort, or rather does effort fail to increase performance? We use pupil dilation to show that higher incentives do result in increased cognitive effort, but the latter fails to translate into increased performance in this paradigm. The failure amounts to a “reinforcement paradox:” increasing incentives makes win-loss cues more salient, and hence effort is often misallocated in the form of an increased reliance on reinforcement processes. Our study also serves as an example of how pupil-dilation measurements can inform economics.

The literature on the economics of science and technology shows that academic universities—institutions focusing on basic research—positively affect innovation activities in regional economies. Less is known about the innovation effects of universities of applied sciences (UASs)—bachelor-granting three-year colleges teaching and conducting applied research. Furthermore, the evidence for positive innovation effects is predominantly based on average effects, while heterogeneity in innovation effects due to the economic environment is far less considered. By exploiting a public policy development in Switzerland that led to the quasi-random establishment of UASs, we investigate the regional heterogeneity in innovation effects of these UASs. We rely on patent and business census data and analyze the influence and importance of three economic preconditions—labor market size, labor market density and high tech intensity—on innovation effects of UASs. Our results show that only regions with a large or a dense enough labor market or with an above average high tech intensity experience significant innovation effects of UASs. Comparing the relative importance of the three economic preconditions, we find that labor market size is the most important factor that drives heterogeneity in innovation effects of UASs.

Do credit ratings help enforce market discipline on banks? Analyzing a uniquely comprehensive data set consisting of 1,081 rating change announcements for 154 international financial institutions between January 2004 and December 2015, we find that rating downgrades for internal reasons, such as adverse changes in the operating performance or capital structure of banks, are associated with a significant credit default swap spread widening. However, this widening only occurs for banks that are not perceived as to be Too-Big-to-Fail (TBTF). Our findings question the reliability of credit ratings as a tool to discipline TBTF banks and suggest that regulatory monitoring should remain the main mechanism for disciplining these banks.

Small and micro-enterprises are usually majority-owned by entrepreneurs. Using a unique sample of loan applications from such firms, we study the role of owners’ gender in bank credit decisions and post-credit-decision firm outcomes. We find that, ceteris paribus, female entrepreneurs are more prudent loan applicants than are males because they are less likely to apply for credit or to default after loan origination. The relatively more aggressive behavior of male applicants pays off, however, in terms of higher average firm performance after loan origination.

We investigate the compensation of counterparty exposure in the prices of structured products. Our analysis reveals that product issuers did not compensate retail investors for counterparty exposure before the Lehman default. Post‐Lehman, retail prices have no longer neglected this risk. We also measure retail investor attention towards issuer credit risk. For a given level of issuer credit risk, counterparty exposure is compensated more when attention is higher. Furthermore, issuers tend to construct products with larger counterparty exposure. Overall, our results shed light on the conditions under which financial engineering generates neglected risk.

Strong regulatory actions are needed to combat climate change, but climate policy uncertainty makes it difficult for investors to quantify the impact of future climate regulation. We show that such uncertainty is priced in the option market. The cost of option protection against downside tail risks is larger for firms with more carbon-intense business models. For carbon-intense firms, the cost of protection against downside tail risk is magnified at times when the public’s attention to climate change spikes, and it decreased after the election of climate change skeptic President Trump.

This study examines how firm value (measured via stock prices) is related to corporate social responsibility (CSR) disclosure and how the institutional environment influences this relationship. To test our hypotheses, we apply textual analysis to our data on firms listed in the STOXX Europe 600 for the period 2008–2016. Our investigation of topic-specific CSR disclosure indicates that when firms shifted from voluntary to mandatory reporting, following the announcement of Directive 2014/95/EU, the association between their share price and CSR disclosure became significantly negative. For the period before the announcement, this relationship is either positive or statistically insignificant. We also show that the institutional environment can impact this relationship in four distinct ways: the level of CSR awareness, the level of employee protection, the degree of enforcement and the strength of the legal environment. We find that the first two have a negative impact on the incremental value relevance of specific CSR disclosure, whereas the last two have a positive impact. Lastly, our results also indicate that the magnitude of (a) the relationship between a firm’s CSR disclosure and its value and (b) the impact that the firm’s institutional environment has on this relationship depends on the specific CSR topics.

In an environment of accelerating technological change and increasing digitalization, firms need to adopt new technologies faster than ever before to stay competitive. This paper examines whether updates of education curricula help to bring new technologies faster into firms’ workplaces. We study technology changes and curriculum updates from an early wave of digitalization (i.e., computer-numerically controlled machinery, computer-aided design, and desktop publishing software). We take a text-as-data approach and tap into two novel data sources to measure change in educational content and the use of technology at the workplace: first, vocational education curricula and, second, firms’ job advertisements. To examine the causal effects of adding new technology skills to curricula on the diffusion of these technologies in firms’ workplaces (measured by job advertisements), we use an event study design. Our results show that curriculum updates substantially shorten the time it takes for new technologies to arrive in firms’ workplaces, especially for mainstream firms.

Supplemental material files: supporting information: online appendix; replication file Do financial crises radicalize voters? We study Germany's 1931 banking crisis, collecting new data on bank branches and firm-bank connections. Exploiting cross-sectional variation in precrisis exposure to the bank at the center of the crisis, we show that Nazi votes surged in locations more affected by its failure. Radicalization in response to the shock was exacerbated in cities with a history of anti-Semitism. After the Nazis seized power, both pogroms and deportations were more frequent in places affected by the banking crisis. Our results suggest an important synergy between financial distress and cultural predispositions, with far-reaching consequences. This project has received funding from the ERC (648398). Peydró also acknowledges financial support from the ECO2015-68182-P (MINECO/FEDER, EUE) grant and the Spanish Ministry of Economics and Competitiveness (SEV-2015-0563).

In a capital adequacy framework, risk measures are used to determine the minimal amount of capital that a financial institution has to raise and invest in a portfolio of prespecified eligible assets in order to pass a given capital adequacy test. From a capital efficiency perspective, it is important to be able to do so at the lowest possible cost and to identify the corresponding portfolios, or, equivalently, their payoffs. We study the existence and uniqueness of such optimal payoffs as well as their behavior under a perturbation or an approximation of the underlying capital position. This behavior is naturally linked to the continuity properties of the set‐valued map that associates to each capital position the corresponding set of optimal eligible payoffs. Upper continuity can be ensured under fairly natural assumptions. Lower continuity is typically less easy to establish. While it is always satisfied in a polyhedral setting, it generally fails otherwise, even when the reference risk measure is convex. However, lower continuity can often be established for eligible payoffs that are close to being optimal. Besides capital adequacy, our results have a variety of natural applications to pricing, hedging, and capital allocation problems.

Purpose This study aims to present a brief overview of developments in management accounting research and practice in German-speaking countries, locate the contributions of this special issue in historical trajectories and provide an outlook of expected future developments in this area. Design/methodology/approach This study reviews the literature and draws a critically reflective approach. Findings A century after Schmalenbach, Germanic management and cost accounting have significantly changed, even though the roots of the cost accounting tradition of the late 19th and early 20th centuries are still visible in practice and teaching, which is true for both organisational practice and research. In both cases, an encroachment of the global on the local can be seen but, paradoxically, as Hopwood (1999) noted, the seemingly globally standardised accounting systems allow for local idiosyncrasies to specifically stand out. The anchoring of management accounting in financial accounting, the country-specific ownership and financing models, the importance of capital and labour markets (e.g. strong codetermination) for companies, regulations on corporate governance and the determination of the tax base are examples of institutions that can shape the behaviour of management and, thus, also idiosyncrasies of management accounting in a country. Originality/value The contributions of this special issue provide insight into developments in management accounting research and practice in German-speaking countries and, thus, enhance our understanding of the different historical trajectories and traditions in management accounting. The papers by Weber and Wiegmann and by Gisch et al. demonstrate how specific idiosyncratic practices and understandings of management accounting in German-speaking countries mediate global influences on management accounting in private- and public-sector organisations. The papers by Endenich et al. and by Kreilkamp et al. show that the influence of international developments in management accounting research has become stronger in German-speaking management accounting academia.

This contribution evokes Orio Giarini’s courage to think ‘outside the box’. It proposes a practical way to bridge the gap between risk (where probabilities of occurrence are fully known) and uncertainty (where these probabilities are unknown). However, in the context of insurance, neither extreme applies: the risk type of a newly enrolled customer is not fully known, loss distributions (especially their tails) are difficult to estimate with sufficient precision, the diversification properties of a block of policies acquired from another company can be assessed only to an approximation, and rates of return on investment depend on decisions of central banks that cannot be predicted too well. This contribution revolves around the launch of an innovative insurance product, where the company has a notion of whether a favourable market reception is more likely than an unfavourable one, of the chance of obtaining approval from the regulatory authority and the risk of a competitor launching a similar innovation. Linear partial information theory is proposed and applied as a particular practical way to systematically exploit the imprecise information that may exist for all of these aspects. The decision-making criterion is maxEmin, an intuitive modification of the maximin rule known from games against nature.

The Bitcoin system keeps its ledger consistent in a blockchain by solving cryptographic problems, in a method called "Proof-of-Work". The conventional wisdom asserts that the mining protocol is incentive-compatible. However, Eyal and Sirer in 2014 have discovered a mining attack strategy called selfish mining (SM), in which a miner (or a mining pool) publishes the blocks it mines selectively instead of immediately. SM strategy would have the impact of wasting resources of honest miners. Scholars proposed various extensions of the SM strategy and approaches to defense the SM attack. Whether selfish mining occurs in practice or not, has been subject of extensive debate. For the first time, in this paper we propose a method to identify selfish miners by detecting anomalies in the properties of consecutive blocks’ statistics. Furthermore, we extend our method to detect the mining cartels, in which miners secretly get together and share timely information. Our results provide evidence that these strategic behaviors take place in practice.

Using a sample of non-financial domestic firms in transition economies from Eastern Europe and Central Asia, we examine whether and how inter-industry spillovers from FDI in the banking sector occur. Our findings show that the innovation pursued by domestic firms benefits from foreign bank penetration. However, these positive inter-industry spillovers surprisingly (and in contrast to conventional wisdom) do not seem to work through enhanced credit access. Our theory suggests that they may occur through the improvement of the local market of fee-based banking services and the transfer of knowledge to domestic firms in non-contractual interactions. These positive spillovers occur mainly for foreign banks that use relationship lending, domestic firms that do not export, and host countries that are less open to the global market.

Purpose An outcome bias occurs when performance is evaluated based upon the outcome of the decision rather than upon the quality of the decision itself. The purpose of this paper is to test experimentally whether advisors eliminating the uncertainty in the quality of decisions as a potential driver of the outcome bias can eliminate this bias in judgements. Additionally, the paper analyses whether such advisors can attenuate the emotional experience after decisions’ outcomes by supporting the cognitive understanding of these outcomes. Design/methodology/approach The paper employs a between-subject experimental setting where decision makers are asked to make investment decisions. The two variables manipulated were advice (receiving advice vs deciding without an advice) and state (loss vs neutral vs gain state). Participants were randomly assigned to each group. One group completed all tasks while receiving advice before making a final decision. Another group completed all tasks without any advice. After completing each investment task, participants were randomly assigned to one of three possible states that determine their payoff. Findings The results reveal that advisors eliminating the uncertainty in the quality of decision can eliminate the outcome bias in the judgements of decision quality, especially after bad outcomes. Nevertheless, after controlling for the perceived quality of the decisions, advised individuals show a greater emotional sensitivity to bad outcomes than non-advised decision makers. These observations suggest that advisors eliminating the uncertainty in the decision quality can improve the understanding that good decisions can lead to bad outcomes just by chance, but they are not able to prevent affective reactions after bad outcomes; on the contrary, they may even reinforce them. Research limitations/implications The observation that, after bad outcomes, advised decision makers are less willing to decide the same way than non-advised decision makers is consistent with empirical findings on the risk-taking behaviour of self-directed and mutual fund investors. Self-directed investors are less likely to revise their decision and sell an investment at a loss than mutual fund investors (Chang et al., 2016). While investors might sell funds because they are unable to observe the decision process of the manager and use the outcome to judge the manager’s skills, this study shows that such learning from decision outcomes is not necessary for observing the risk-taking behaviour of the investors. Even if the decision process of the advisor is observable (as in this study), the decision makers’ willingness to decide the same way is influenced by the losses – an effect that goes beyond the assessed quality of advice as the results of this study show. Practical implications The results of this study have important implications for advisors aiming to maintain a positive relationship with their clients. Convincing clients that an advice is optimal supports their understanding that a good advice can have bad outcomes. However, this understanding may not prevent affective reactions after bad outcomes. On the contrary, the affective response after bad outcomes is even stronger with the advice than without it. Hence, advisors should address not only issues related to the quality of the provided advice, but also emotional aspects, which could be related to what clients expect from following the advice. Originality/value This study is one of the few that account for the possibility that the outcome bias may arise because there is uncertainty regarding the optimal choice. In particular, this paper uses a much more powerful criterion to define an optimal choice than the expected value criterion used in previous studies. The criterion represents a minimal requirement for rational behaviour in expected utility theory and many non-expected utility theories.

Donald Trump's surprise election shifted expectations: corporate taxes would be lower and trade policies more restrictive. Relative stock prices responded appropriately. High-tax firms and those with large deferred tax liabilities (DTLs) gained; those with significant deferred tax assets from net operating loss carryforwards (NOL DTAs) lost. Domestically focused companies fared better than internationally oriented firms. A price contribution analysis shows that easily assessed consequences (DTLs, NOL DTAs, tax rates) were priced faster than more complex issues (net DTLs, foreign exposure). In sum, the analysis demonstrates that expectations about tax rates greatly impact firm values.

We study the difference between the returns to the integrated approach to investing and those to the mixed approach to investing. Unlike the mixed approach, the integrated approach aggregates factor characteristics at the security level. Recent literature finds that the integrated approach dominates the mixed approach. Using statistical tools for robust performance testing, we demystify these findings as a statistical fluke. We do not find any evidence in favor of the integrated approach. What we do find is that the integrated approach exhibits a higher sensitivity to the low-risk anomaly. However, this reduction in risk does not lead to an improvement in performance.

Public blockchains in support of Smart Contracts (SC), like Ethereum enable everyone to represent scarce, valuable resources (like cryptocurrencies) as so-called tokens. Token issuing and management was the first blockchain use case. However, programming languages and runtime systems used in the current blockchains for their SCs lack a secure and straightforward way to implement and handle tokens. The unnecessary complexity in doing so can lead to erroneous implementation of tokens and applications built on top of these, including the loss or theft of tokens as it happened. The most known attack was "TheDAO" attack which led to the "loss" of tokens, valued at that time at approximately 60 M US Dollar. A better and secure token representation directly embedded into a SC runtime and SC programming language could prevent loss of tokens. Thus this paper presents an approach including parts of a programming language using it. The core of the model is to use opaque and substructural data types together with an onchain soundness checker to generically represent tokens securely as values similar to integers and booleans. Such opaque data types enforce that only a designated piece of code can create values of that type. The substructural data types allow arbitrary values to express scarcity by preventing the duplication and elimination of values. The on-chain soundness checker ensures that the deployed code does not violate guarantees given by the type system, which includes opaque and substructural data types.

Whether bank credit is suitable to finance innovation is a key question. Using a sample of 6422 small firms across 22 emerging economies, we find that a lack of access to credit stifles innovation, especially of the technologically “hard” type. This detrimental impact is stronger in localities or sectors with more dependence on external financing, but only holds for firms that are limited in alternative financing sources. The negative impact is further mitigated by better institutions. Foreign or transactional banks, or banks in more diversified banking markets are better in promoting firm innovation.

This paper investigates how environmental and social (E&S) risks and topics (i. e. E&S issues that are important in terms of adaptation to a changing business environment) are integrated in the banking sector. Despite banks’ key role in steering financial flows towards sustainable development, little is currently known as to whether and how banks integrate E&S aspects into their management control systems and whether this integration translates into E&S performance. Building on prior studies in the environmental management control literature, we design a conceptual model in which we link contextual factors, a proactive strategy approach, E&S management controls, and E&S performance. Following common practice in the banking sector, we differentiate between two paths of E&S management controls: risk management (value protection) and topic management (value creation). Based on survey data for a small sample of 50 European banks, we find evidence that contextual factors, reflected in the perceived power and legitimacy of clients, voluntary standard setters and NGOs, are positively related to a proactive strategy approach. This proactive strategy translates into both topic and risk management. Yet, in the next step, only topic management is positively related to the E&S performance of a bank, but not risk management.

The aim of this paper is to put forward a new family of risk measures that could guide investment decisions of private companies. But at the difference of the classical approach of Artzner, Delbaen, Eber, and Heath and the subsequent extensions of this model, our risk measures are built to reflect the risk perception of shareholders rather than regulators. Instead of an axiomatic approach, we derive risk measures from the optimal policies of a shareholder value-maximizing company. We study these optimal policies and the related risk measures that we call shareholder risk measures. We emphasize the fact that due to the specific corporate environment, in particular the limited shareholders' liability and the possibility to pay out dividends from cash reserves, these risk measures are not convex. Also, they depend on the specific economic situation of the firm, in particular its current cash level, and thus they are not translation invariant. This paper bridges the gap between two important branches of mathematical finance: risk measures and optimal dividends.

Erworben im Rahmen der Schweizer Nationallizenzen (http://www.nationallizenzen.ch), Based on a large international survey, we analyze how German-, French-, and Italian-speaking residents of Switzerland differ in their investment decision behavior and investment competence compared to their closest neighbors abroad who speak the same language. Although language may be closer to the individual self than country of residence, we find that there are greater similarities in the decision behavior of residents of Switzerland speaking different languages than there are between these and their linguistically closest neighbors abroad. These similarities hold also for the ability to avoid investment mistakes, which is stronger in all Swiss regions compared to the linguistically closest regions abroad. The Swissness in investment competence is more likely to be emotionally than knowledge driven and is associated with regional differences in the relationships with investment advisors.

We study how securities analysts influence managers’ use of different types of earnings management. To isolate causality, we employ a quasi-experiment that exploits exogenous reductions in analyst following resulting from brokerage house mergers. We find that managers respond to the coverage loss by decreasing real earnings management while increasing accrual manipulation. These effects are significantly stronger among firms with less coverage and for firms close to the zero-earnings threshold. Our causal evidence suggests that managers use real earnings management to enhance short-term performance in response to analyst pressure, effects that are not uncovered when focusing solely on accrual-based methods.

The valuation of a firm with discounted cash flow (DCF) approaches requires assumptions about the firm’s financing strategy. The approaches of Modigliani and Miller and Miles and Ezzell assume that either a passive debt management with predetermined debt levels or active debt management with capital structure targets is applied. Over the last decades, various extensions of these approaches have been developed to allow for a more realistic depiction of financial decision making. However, recent empirical analyses indicate that current theories still have limited power to explain large variances in capital structure across time. We provide an alternative explanation for the empirical observation by assuming that firms combine both capital structure targets and predetermined debt within future periods, and we show how to value a firm given such a partially active debt management. The approaches of Modigliani and Miller and Miles and Ezzell are embedded into a common valuation framework, with the familiar valuation formulas shown as special cases. In a simulation analysis, we illustrate that the textbook valuation formulas may produce considerable valuation errors if a firm applies a partially active debt management.

Proponents of the concept of “value reporting” emphasize the idea that it may be in firms’ interest to provide investors and other stakeholders with a holistic picture of their value generation activities. The basic idea is that by explaining more clearly how and why value is created in the company, especially by considering the interplay of financial and non-financial value drivers, management will enhance its own understanding of the value generation process. This, in turn, enables management to make better operating decisions in the future. Using a 10-year panel of Swiss firms, we document that firms with better value reporting quality deliver better future operating performance and obtain greater economic value added. They also exhibit higher valuation ratios. These results hold when controlling for industry-year fixed effects as well as with two instrumental variables approaches. These findings also shed light on the potential value generation benefits of “integrated reporting”.

We use the theory of coherent measures to look at the problem of surplus sharing in an insurance business. The surplus share of an insured is calculated by the surplus premium in the contract. The theory of coherent risk measures and the resulting capital allocation gives a way to divide the surplus between the insured and the capital providers, i.e., the shareholders., Risks, 7 (1)

We argue that stronger debt enforcement in bankruptcy can reduce indirect costs of financial distress: (i) by increasing the likelihood of restructuring outside bankruptcy and (ii) by improving the recovery rate of stakeholders, such as trade creditors, through explicit legal provisions. Consistent with these predictions, we find that when debt enforcement is stronger, financially distressed firms are less exposed to indirect distress costs in the form of reduced access to trade credit and forgone sales. We document these effects in a panel of firms from forty countries with heterogeneous debt enforcement characteristics and in differences-in-differences tests exploiting several recent bankruptcy reforms.

We study the impact of higher capital requirements on banks’ balance sheets and its transmission to the real economy. The 2011 EBA capital exercise is an almost ideal quasi-natural experiment to identify this impact with a difference-in-differences matching estimator. We find that treated banks increase their capital ratios by reducing their risk-weighted assets and - consistent with debt overhang - not by raising their levels of equity. Banks reduce lending to corporate and retail customers, resulting in lower asset-, investment- and sales growth for firms obtaining a larger share of their bank credit from the treated banks.

According to our survey about climate risk perceptions, institutional investors believe climate risks have financial implications for their portfolio firms and that these risks, particularly regulatory risks, already have begun to materialize. Many of the investors, especially the long-term, larger, and ESG-oriented ones, consider risk management and engagement, rather than divestment, to be the better approach for addressing climate risks. Although surveyed investors believe that some equity valuations do not fully reflect climate risks, their perceived overvaluations are not large.

Firms frequently attempt to increase profits by replacing some existing workers with new lower-wage workers. However, this strategy may be ineffective in an incomplete-contract environment because the new workers may provide lower effort in response to their lower wages, and hiring new lower-wage workers may damage the remaining original workers' reciprocal relationship with the firm. We conduct an experiment to examine this issue and find that when new lower-wage workers become available, firms hire them to replace original higher-wage workers and pay the new workers lower wages. However, these lower wages do not improve firm profit because the decision to hire new lower-wage workers causes both the new and remaining workers to provide lower effort. Moreover, hiring lower-wage workers reduces new workers' payoffs and, thus, decreases social welfare. These unintended consequences suggest that firms should consider both the wage savings and the potential costs when deciding whether to replace some workers with new lower-wage workers. We discuss the implications of our findings for contract design, hiring practices, and managerial accountants.

We examine the effect of a change in the director election system — the switch from a plurality voting standard to a more stringent standard known as majority voting (MV). Using a regression discontinuity design, we document abnormal returns of 1.43-1.60% around annual meeting dates where shareholder proposals to adopt MV are voted upon, suggesting that shareholders perceive the adoption of MV as value-enhancing. We document an increase in boards’ responsiveness to shareholders at MV firms. In particular, relative to a propensity score-matched control sample, firms adopting MV exhibit an increase in the rate of implementation of shareholder proposals supported by a majority vote and in the responsiveness to votes withheld from directors up for election. Instead, we do not find a relation between votes withheld and subsequent director turnover, regardless of the election standard. Overall, it appears that, rather than a channel to remove specific directors, director elections are viewed by shareholders as a means to obtain specific governance changes and that, in this respect, their ability to obtain such changes is stronger under a MV standard.

The paper by Presbitero, Udell and Zazzaro (henceforth, PUZ) aims to investigate whether the financial crisis that in Italy really “hit” after Lehman Brothers in September 2008 actually led to a credit crunch there and which types of firms suffered most. PUZ start from the quarterly editions of a monthly survey of about 3,800 Italian manufacturing firms (by ISAE, now ISTAT) to analyze credit access by 3,623 firms between 2008:Q1 to 2009:Q3, i.e., 23,140 firm-quarter observations of which 12,734 came after Lehman. PUZ find suggestive evidence that there was a credit crunch in Italy post-Lehman, that firms in provinces with bank branches located further from their bank’s headquarter (i.e., with banks that are more functionally distant) suffered relatively more, and that in those provinces especially high-quality firms were affected. These findings are consistent with a home bias but not with a flight-to-quality interpretation. This nice paper by PUZ is truly thought-provoking as the home bias in banking that is documented is occurring within one country. But before pointing out a possible broader avenue for further investigation, I want to discuss a few limitations of this study (most of which the authors are also aware of and candidly highlight) and in this way also indicate more immediate directions for follow-up research.

Using an experimental design that exploits exogenous reductions in coverage resulting from brokerage house mergers, we find that a reduction in coverage causes a deterioration in financial reporting quality. The effect of coverage on disclosure is more pronounced for firms with weak shareholder rights, consistent with a substitution effect between analyst monitoring and other corporate governance mechanisms. The effects we uncover using our experimental design are an order of magnitude larger than estimates from ordinary least squares regressions that do not account for the endogeneity of coverage. Overall, our results suggest that security analysts monitor managers and entrenched managers adopt less informative disclosure policies in the absence of such scrutiny.

Focusing on the art market, where auction houses act as brokers between art sellers and buyers, we investigate whether more experienced brokers achieve better performance as information providers. We use a unique data set of auctions of Italian paintings in various houses around the world, and we measure experience as the number of times an auctioneer has auctioned the artworks of a certain artist in a given location. We find that more experienced auction houses (i) are more likely to sell and (ii) provide more precise pre-sale estimates. These findings suggest that experience plays an important role for brokers to reduce illiquidity and opacity in markets with asymmetric information.

The pricing kernel is an important link between economics and finance. In standard models of financial economics, it is proportional to the aggregate marginal utility in the economy. We first show that none of the three standard assumptions (completeness, risk aversion, and correct beliefs) is needed for the pricing kernel to be generally decreasing. If at least one of the three assumptions is violated, the pricing kernel can have increasing parts. We explain the economic principles that lead to an increasing part in the pricing kernel and compare the resulting pricing kernels with the empirical pricing kernel estimated in Jackwerth (2000, Rev. Financ. Stud., 13, 433--451). Copyright 2013, Oxford University Press.

Despite the enormous growth of the asset management industry during the past decades, little is known about the asset pricing implications of investment intermediaries. Standard models of investment theory neither address the distinction between individual and institutional investors nor the potential implications of direct investing and delegated investing. In a model with endogenous delegation, the authors find that delegation leads to a more informative price system and lower equity premia. In the presence of relative return objectives, stocks exhibiting high correlations with the benchmark have significantly lower returns than stocks with low correlations. The authors' empirical results support the model's predictions. Copyright 2012, Oxford University Press.

We examine the stock price reactions of four Swiss banks to negotiations between Switzerland and the European Union and between Switzerland and the United States to (i) obtain an estimate of the value of banking secrecy to Swiss banks, and (ii) distinguish between tax evasion and genuine privacy concerns as sources of that value. We find that the value of banking secrecy to the private banks is large, accounting for 8 to 14% of their market value; in contrast, the value of banking secrecy to the universal banks is small. We further find that tax evasion may be less important and privacy concerns more important a source of value of banking secrecy than might previously have been thought.

We develop a dynamic model of a firm facing agency costs of free cash flow and external financing costs. An explicit solution for the firm's optimal balance sheet dynamics is derived. Financial frictions affect issuance and dividend policies, the value of cash holdings, and the dynamics of stock prices. The model predicts that the marginal value of cash varies negatively with the stock price, and positively with the volatility of the stock price. This yields novel insights on the asymmetric volatility phenomenon, on risk management policies, and on how business cycles and agency costs affect the volatility of stock returns

Cooper and Nyborg (2008) derive a tax-adjusted discount rate formula under a constant proportion leverage policy, investor taxes and risky debt. However, their analysis assumes zero recovery in default. We extend their framework to allow for positive recovery rates. We also allow for differences in bankruptcy codes with respect to the order of priority of interest payments versus repayment of principal in default, which may have tax consequences. The general formula we derive differs from that of Cooper and Nyborg when recovery rates in default are anticipated to be positive. However, under continuous rebalancing, the formula collapses to that of Cooper and Nyborg. We provide an explanation for why the effect of the anticipated recovery rate is not directly visible in the general continuous rebalancing formula, even though this formula is derived under the assumption of partial default. The errors from using the continuous approximation formula are sensitive to the anticipated recovery in default, yet small. The ‘cost of debt’ in the tax adjusted discount rate formula is the debt’s yield rather than its expected rate of return.

In response to the financial crisis, the IASB issued on 13 October 2008 an amendment to IAS 39 which enables entities to reclassify non-derivative financial assets held for trading and financial assets available-for-sale. This paper examines the influence of this controversial amendment on the 2008 financial statements of 219 European banks which apply IFRS. I find that approximately one-third of the sample banks have taken extensive advantage of these reclassification opportunities. The mean reclassification amount is 3.9% of total assets and 131% of the book value of equity, respectively. I further document that reclassifying banks avoid substantial fair value losses, and hence, report significantly higher levels of return on assets (ROA), return on equity (ROE), book value of equity and regulatory capital. In particular, the mean ROE switches sign from a negative ROE of −1.4% to a positive ROE of 1.3% due to gains from reclassifications. Overall, this paper documents a substantial impact of the amendme...

Using an international sample of 222 banks from 41 countries, this study examines whether the fair value option (FVO) affects earnings volatility. Prior empirical studies associate higher levels of earnings volatility with fair value accounting (Barth et al. 1995; Hodder et al. 2006). In contrast, I find evidence that banks applying the FVO to reduce accounting mismatches exhibit lower earnings volatility than other banks. I assign this alternative outcome to the optional characteristic of the FVO. Banks can use the flexibility in accounting to reduce artificial earnings volatility. The cross-sectional results are robust against outliers and several model alterations, including controls for endogeneity bias. Furthermore, I predict and find that banks from countries with high regulatory quality are more likely to apply the FVO to reduce accounting mismatches. Overall, the findings confirm the IASB’s initial intention on introducing the FVO. Hence, the study contributes to the current debate on the use of fair values in financial reporting.

This paper studies loan conditions when firms switch banks. Recent theoretical work on bank–firm relationships motivates our matching models. The dynamic cycle of the loan rate that we uncover is as follows: a loan granted by a new (outside) bank carries a loan rate that is significantly lower than the rates on comparable new loans from the firm's current (inside) banks. The new bank initially decreases the loan rate further but eventually ratchets it up sharply. Other loan conditions follow a similar economically relevant pattern. This bank strategy is consistent with the existence of hold-up costs in bank–firm relationships.

This paper studies qualitative characteristics of accounting systems that are used in debt financing. We consider a financially constrained firm that provides to lenders information on the value of assets that serve as collateral in a financing contract for a risky investment project. We find that the investor prefers an accounting system that provides biased signals about the value of assets. This bias adjusts the information content of the signals to maximize the probability of undertaking the project. Under fair value accounting, low book values are more precise measures of actual value than high book values, which is consistent with conditional conservatism. Next, we study accounting risk to study the effect of institutions that govern the financial reporting policy based on the optimal precision. We find that fair value measurement introduces greater accounting risk and is preferred by financially constrained firms to measurement at historical cost.

Performance of investment managers are evaluated in comparison with benchmarks, such as financial indices. Due to the operational constraint that most professional databases do not track the change of constitution of benchmark portfolios, standard tests of performance suffer from the "look-ahead benchmark bias," when they use the assets constituting the benchmarks of reference at the end of the testing period, rather than at the beginning of the period. Here, we report that the "look-ahead benchmark bias" can exhibit a surprisingly large amplitude for portfolios of common stocks (up to 8% annum for the S&P500 taken as the benchmark) -- while most studies have emphasized related survival biases in performance of mutual and hedge funds for which the biases can be expected to be even larger. We use the CRSP database from 1926 to 2006 and analyze the running top 500 US capitalizations to demonstrate that this bias can account for a gross overestimation of performance metrics such as the Sharpe ratio as well as an underestimation of risk, as measured for instance by peak-to-valley drawdowns. We demonstrate the presence of a significant bias in the estimation of the survival and look-ahead biases studied in the literature. A general methodology to test the properties of investment strategies is advanced in terms of random strategies with similar investment constraints., 16 pages, 1 table, 4 figures