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Employing a unique and hand-collected sample of 648 true sale loan securitization transactions issued by 57 stock-listed banks across the EU-12 plus Switzerland over the period from 1997 to 2010, this paper empirically analyzes the relationship between true sale loan securitization and the issuing banks’ non-performing loans to total assets ratios (NPLRs). We provide evidence for an NPLR-reducing effect during the boom phase of securitizations in Europe suggesting that banks in our sample (partly) securitized NPLs as the most risky junior tranche and did not (fully) retain NPLs as a reputation and quality signal towards less informed investors in imperfect capital markets. In contrast, we find the reverse effect during the crises period in Europe indicating that issuing banks provided credit enhancement and demonstrated `skin in the game'. Our baseline result remains robust when controlling for endogeneity concerns and a potential persistence in the time series of the NPL data. Moreover, results from a variety of sensitivity analysis reveal that the NPLR-reducing effect is stronger for opaque securitization transactions, for issuing banks exhibiting higher average levels of NPLRs and for banks operating from non-PIIGS countries. In addition, a reduction of NPLRs through securitization is observed for issued collateralized debt obligations, residential mortgage-backed securities, consumer and other unspecified loans as well as for non-frequently issuing, systemically less important and worse-rated banks. Our analysis offers essential insights into the loan risk allocation process through securitization and provides important implications for the vital debate on reducing NPL exposures and the process of revitalizing and regulating the European securitization market.

Seasoned equity offerings (SEOs) and return of capital (ROC) are activities carried out by listed companies in the capital market. The decision of the company manager to engage in SEOs and ROC is actually in the scope of the agency mechanism. This paper explores the characteristics of SEO and ROC companies and whether SEOs and ROC will affect the company's performance and whether the agency problem will (partially) mediate the impact of SEOs and ROC on company performance. We use the annual data of domestic (Taiwan) listed companies from the Financial Supervisory Commission website and the Taiwan Economic Journal for the 2000–2018 period and adopt the Fama-French three-factor asset pricing model to hierarchical regression analysis to study the mediating role of the agency problem. The empirical results support that SEO companies are mostly in the expansion or growth stage and SEOs reduce company performance, both in the short term and long term. After considering free cash flow, the effect of SEOs on performance declines. The results support that ROC companies are mostly in decline stage and ROC increases long-term company performance. However, free cash flow does not affect the performance of the companies engaging in ROC. This research combines SEO and ROC data, and it is based on the perspective of the agency problem so that we can understand the impact on company performance.

Between 2003 and 2006, the Federal Reserve raised rates by 4.25%. Yet it was precisely during this period that the housing boom accelerated, fueled by rapid growth in mortgage lending. There is deep disagreement about how, or even if, monetary policy impacted the boom. Using differences in exposure to the deposits channel of monetary policy, we show that Fed tightening induced a large reduction in banks’ deposit funding, which led banks to contract portfolio mortgage lending by 32%. However, this contraction was largely offset by substitution to privately-securitized (PLS) mortgages, led by nonbank originators. Fed tightening thus induced a shift in mortgage lending away from stable, insured deposit funding toward run-prone and fragile capital markets funding with little impact on overall lending. We find similar results during the most recent tightening cycle over 2014–2017 when PLS lending reemerged.

This study seeks to understand how environmental, social, and corporate governance (ESG) affects business performance and the diversification effect of cross-border mergers and acquisitions (M&A) by examining 129 events on cross-border M&A in the Korean Stock Price Index (KOSPI) market representing emerging capital markets between 2012 and 2018 in 38 target countries. The findings indicate that better ESG engagement has a positive effect on the business performance of cross-border M&A, supporting stakeholder theory and confirming that ESG can serve as a strategy for boosting business efficiency in cross-border M&A. The findings also confirm that diversification in cross-border M&A leads to a diversification discount on business performance, negatively affecting acquiring firms, but that ESG engagement can mitigate the diversification discount as a friendly channel. The study's main contribution is providing empirical evidence that ESG can serve as a friendly channel through which to address the diversification discount issue.

The management policy for Taiwan's corporate social responsibility (CSR) reporting was changed from elective to partial mandatory. Some companies that have already submitted their reports are also required to undergo assurance provided by accountants. The present study explores the influences of Taiwan's partial mandatory disclosure and partial mandatory assurance management policies for CSR reports on firms' investment to cash flow sensitivity which is used to measure the information transparency of the capital market. The results showed that investment to cash flow sensitivity decreased after mandatory disclosure and mandatory assurance. This implies that the partial mandatory disclosure and the partial mandatory assurance policies for CSR reports have a positive influence on mitigating information asymmetry and agency problems being experienced by firms. It also indicates that Taiwan's partial mandatory disclosure and partial mandatory assurance policies for CSR reports aid in increasing information transparency of its capital market.

The purpose of this paper is to determine whether environmental, social, and governance (ESG) practices affect corporate financial performance (CFP) indicators at Turkish listed companies. The impact of ESG disclosures on the firm-level CFP of companies listed on the Borsa Istanbul Corporate Governance Index (XKURY) over the period 2007–2017 is investigated using the corporate governance principles of the Capital Markets Board and Global Reporting Initiative (GRI) environmental indicators. The contribution of this study is that it explores the influence of twenty independent ESG variables, comprising company disclosures, on CFP in an emerging market. The results of the study reveal a negative effect of environmental disclosures on CFP. Stakeholder involvement in management contributes to operational efficiency in the social dimension of ESG. Provisions related to shareholder rights and the board of directors has a positive impact on CFP in the governance dimension.

This paper analyzes the swap-covered interest parity condition by comparing US Treasury bonds with USD-denominated foreign assets replicated using cross-currency basis swaps. We find that the deviations of these yield spreads declined substantially after the financial crisis, suggesting that the swap-covered interest parity still holds. To reconcile our paradoxical findings with the previous literature that insists upon the failure of covered interest parity, we empirically confirm that the regulatory costs of cross-currency basis swaps are cancelled out by the costs of swaps spread under swap-covered interest parity.

We investigate a firm’s information acquisition and voluntary disclosure decisions regarding demand forecast information. We study the interaction among the firm, its supplier, and the external capital market investors who assess the firm’s interim equity price. We first analyze when it is beneficial for the firm to acquire demand forecast information, and if such information is acquired, when the firm should disclose it to the supplier and investors. Then, we investigate how the firm’s information acquisition and disclosure decisions influence the investors’ and the supplier’s pricing strategies. We show that the optimal information disclosure policy for the firm is highly dependent on the corporate myopia level (CML): when the CML is low, the firm discloses low demand information only; when the CML is medium, the firm always withholds demand information; and when the CML is high, the firm discloses high demand information only. Our findings provide a novel plausible explanation to firms’ non-disclosure behaviors commonly observed in practice and highlight the importance of considering the interaction between the supply chain and the capital market.

Using a theoretical model, we develop an institution-based version of the Linder hypothesis for horizontal FDI; FDI is more likely to occur among countries with smaller institutional distance. We then use firm-level data to estimate the effect of institutional distance between China and the countries that host its FDI on horizontal outward FDI (OFDI) of Chinese multinational enterprises (MNEs). High-dimensional fixed effects (HDFE) estimation shows that the overall institutional distance has a positive effect on China's OFDI, which does not support the institution-based version of the Linder hypothesis. The positive effect of institutional distance on OFDI does not vary significantly across China's state-owned enterprises (SOEs) and private-owned enterprises (POEs). Further analysis based on four sectoral institutional distances shows that the effect of public sector and labour market institutional distances on OFDI of MNEs is negative and this effect is stronger for POEs than SOEs, which supports the institution-based version of the Linder hypothesis for horizontal FDI. However, the effect of the goods and services sector institutional distance and capital market institutional distance on horizontal OFDI is positive. The impact of the goods and services sector institutional distance on OFDI of SOEs is stronger than for POEs. While unravelling the black box of institutional effects, we find significant asymmetries in the effect of sectoral institutions on OFDI. We also find that the effect varies in size across ownership structures.

Using a sample of 14,245 firm-year observations from 2,579 listed firms in the Chinese capital market, this study investigates whether board directors with an educational background in science, technology, engineering, and mathematics (STEM) are associated with greater corporate innovation. The results suggest that such directors have significant beneficial effects on corporate innovation activities. This study provides novel empirical evidence supporting resource dependence theory and extends the labor economics literature regarding the value of STEM graduates for corporate innovation. The findings have significant implications for policymakers and practitioners, showing that firms with a strategic focus on innovation may find it beneficial to appoint more directors with a background in STEM.

This paper analyzes the relation between the announcement discount and the post-merger valuation of merger and acquisition transactions (MA and proposes that the two are linked by the implications of the information asymmetry hypothesis of Myers and Majluf (1984). We track the information asymmetry, value, and synergies of M&As over a three-year post-merger window. The analysis demonstrates that the announcement discount is proportional to the rise in information inequality around the announcement date (not the pre-merger information asymmetry). The announcement discount is also positively related to the post-merge gains which grow in tandem with the gradual decline in information asymmetry and improvements in internal capital market efficiencies, market power, and access to capital markets. Collectively, our findings suggest that M&As instigate a temporary spike in information inequality that results in temporary loss in shareholders' wealth. Over time, synergies materialize, information inequality fades away, and value improves. Our results are robust to several variations in specifications and assumptions including Heckman two-stage self-selection model. Our proposition suggests that management and outside investors should not be swayed by initial market reaction to deal announcements because the true gains of M&As materialize in the long-run. Nevertheless, management should disclose adequate information about future synergies to mitigate the market's initial negative reaction.

Despite the advantages of debt, a significant number of firms that have an established leverage policy deliberately become all-equity. These firms eliminate a substantial amount of long-term debt as the average firm’s leverage ratio is approximately 30 percent at the year-end prior to debt elimination. Firm-level “shocks” such as CEO turnover and changes in credit ratings cannot explain the dramatic recapitalization decision. Consistent with the tradeoff theory, firms that eliminate debt have lower benefits (less tax shield benefits, agency costs) and higher costs (probability of financial distress, access to capital markets, etc.) of leverage in the three prior years compared to a matched sample. We also find that the factors influencing the decision to eliminate all debt is different from those to significantly reduce leverage or to have very low debt levels. Firms primarily finance the approximately $70 million of average long-term debt eliminated using proceeds from sales of relatively unproductive assets and from equity issues. Interestingly, over half of these firms issue significant amount of new debt within three years of becoming all-equity. Firms with lower liquidity and non-debt tax shields, higher potential overinvestment agency costs, and those that issue equity at the debt elimination year are more likely to relever quickly.

We study the role of capital requirements in adjusting market liquidity. Liquidity is necessary as it prevents fire sales and suppresses the risk-shifting problem when a negative shock occurs. However, hoarding excessive liquidity is costly as it crowds out efficient investments. A capital requirement on commercial banks reduces deposit returns. This causes investors to allocate more resources to more efficient capital market investments, improving social welfare. However, an excessively high capital requirement is undesirable because the return from holding liquidity is so low that liquidity provision is insufficient to avoid risk-shifting behaviors. Shadow banks can bypass capital regulation, and strict capital regulation will drive money to shadow banks. Thus, a liquidity shortage emerges because shadow bank securities are less liquid than commercial bank deposits. Policy maker should implement lower capital requirements in the presence of shadow banks.

On October 26, 2008, Porsche announced a largely unexpected domination plan for Volkswagen. The resulting short squeeze in Volkswagen’s stock briefly made it the most valuable listed company in the world. We argue that this was a manipulation designed to save Porsche from insolvency and the German laws against this kind of abuse were not effectively enforced. Using hand-collected data we provide the first rigorous academic study of the Porsche-VW squeeze and show that it significantly impeded market efficiency. Preventing manipulation is important because without efficient securities markets, the EU’s major project of the Capital Markets Union cannot be successful.

Research and development (R&D)-intensive firms have strong incentives to maintain a smooth path for their R&D investments; otherwise, they will incur high adjustment costs. Examining data covering 2009 to 2016, we find that Chinese R&D-intensive firms, especially those with high innovation efficiency, tend to sell operating and financial assets to protect their value-enhancing R&D investments. However, financial constraints have adverse impacts on R&D smoothing with asset sales unless the firms have high innovation efficiency. The results suggest that innovation efficiency offers R&D-intensive firms, even financially constrained ones, a strong motivation to covert asset sales proceeds into R&D inputs, as the proceeds from asset sales provide a less-costly substitute for external financing. Given the importance of R&D for economic growth and the limited external financing opportunities in emerging capital markets like China, our findings reveal new insights regarding R&D financing.

This study examines the effect of corporate social responsibility disclosure (CSRD) on earnings quality (EQ) in member countries of the Gulf Cooperation Council (GCC). Using 1845 firm-year observations covering the 2008–2016 period, this study performs panel data regressions to examine the association between CSRD as measured by a dummy variable and three common EQ measures, namely, value relevance (VR), accrual quality (AQ), and earnings persistence (PER). The study concludes that CSRD in three of the six GCC countries (Bahrain, Saudi Arabia, and the United Arab Emirates) has a positive and significant association with EQ in terms of VR. The use of generalized least squares (GLS) shows that CSRD has an effect on AQ in Kuwait and Bahrain whereas CSRD has an effect on PER only in Kuwait. Regulators of capital markets should use CSR information as guidelines to improve financial reporting quality and achieve better allocation of resources in capital markets.

To explore whether market-oriented reform can help reduce CO2 emissions, by adopting the spatial panel data model based on the provincial panel data of China during 2001-2017, this article empirically tests the impact of labor market distortion and capital market distortion on CO2 emissions. The main findings are yielded as follows. (1) The labor market distortion and capital market distortion are widespread in China. The high wages caused by the insufficient supply of labor and the low marginal output of labor due to the shortage of human capital stock are the main reason for the positive labor market distortion. The capital market distortion can be put down to the excessive interventions of the government on the allocation of capital. (2) The labor market distortion can enhance CO2 emissions, that is, promoting market-oriented reform in the labor market can curb CO2 emissions. (3) The connection between capital market distortion and CO2 emissions can be described as a U-shaped curve. The complete marketization of the capital market and excessive government intervention in the allocation of capital can both cause an increase in CO2 emissions. (4) Improving the marketization of the labor market is effective for reducing CO2 emissions in almost all provinces. In the central region, the capital market distortion can exacerbate CO2 emissions. However, in the western region, the governmental intervention on the allocation of capital can enable limited funds to more effectively move to environmentally friendly enterprises, and avoid these provinces becoming a pollution refuge. Based on these findings, this article goes into more detail on the policy implications.

The stock market should fund promising new firms, thereby breeding competition, innovation, and economic growth. However, using three decades of data from 47 countries, we show that concentrated stock markets dominated by a small number of very successful firms are associated with less efficient capital allocation, sluggish initial public offering and innovation activity, and slower economic growth. These findings are robust to alternative sample periods, econometric specifications, and competing explanatory variables. Our evidence is consistent with the paradox that the capital market of a competitive economy can impede the continuing competitiveness of that economy.

Leveraging from the recent short sales deregulation in China, we examine whether analyst optimism bias increases or decreases in the presence of short sales. We use a novel approach of conducting a textual analysis of research reports to quantify analysts’ negative tone on their covered stocks to proxy for their negative information production and disclosure both pre- and post-short sales deregulation. Using a difference-in-differences approach, our findings suggest that, after short sales deregulation, analysts engage in more negative information production and disclosure as revealed by a more negative tone in their analyst reports. The findings are robust to a battery of checks. Additional analysis suggests that when a covered firm obtains future financing or has high institutional ownership, the extent of negative analyst tone in research reports weakens, indicating that analyst conflicts of interest continue to affect analyst research optimism. Finally, we document that negative information production and disclosure by analysts mediates the impact of short sales deregulation on stock price idiosyncratic volatility and cumulative abnormal return, which suggests the important role of analysts in capital market efficiency.

Based on A-share listed companies' data from 2008 to 2018, we study the influence of factor market distortions on enterprises' outward foreign direct investment (OFDI) behavioral decisions and their effect on enterprises' investment productivity. We further analyze the influence of regional heterogeneity and enterprise ownership heterogeneity. First, the results show that factor market distortions suppress the outward FDI tendency of enterprises, and there are negative distortions of capital and positive distortions of labor in most regions of China. Second, there are general productivity effects on OFDI behavior. In other words, firms in non-factor-intensive and distorted regions can increase their productivity through OFDI. Third, factor market distortions and capital distortions in the eastern region enhance the investment propensity of local firms, whereas factor market distortions in the northeast, central, and western regions dampen the investment propensity of local firms. In addition, capital market distortions have a less dampening effect on SOEs and FIEs, and labor distortions have a more promoting effect on the investment propensity of FIEs and private firms.

This study investigates how group’s value maximization considerations determine affiliates’ access to internal capital. Previous studies have indicated that both the amount of group resources and affiliates’ financial weakness are relevant to internal capital allocation decisions. Our study investigates how these two factors jointly affect affiliates’ access to internal capital. By analyzing the effects of capital shortage on various financing channels in the context of insurance groups, we reveal that financially-weak firms’ capital shortage positively affects the receipt of internal capital when groups own abundant resources. Conversely, when the amount of group resources is limited, those affiliates enjoying better financial conditions receive more internal capital to manage their capital shortage, and financially-weak ones do not; thus, such financially-weak firms exhibit increased tendency to use costly external capital to manage their capitalization. Our findings indicate that groups with less abundant resources tend to engage in “winner-picking” allocation decisions to maximize value.

We integrate a plausible expectation formation and learning scheme of boundedly rational investors into a standard user cost housing market model, involving a rental and a housing capital market. In particular, investors switch between heterogeneous expectation rules according to an evolutionary fitness measure, given by the rules’ past profitability. We analytically show that our housing market model may produce endogenous boom-bust dynamics. Furthermore, we demonstrate that policy makers may use our model as a tool to explore how different tax policies may affect the housing market’s steady state, its stability and out-of-equilibrium behavior.

Insurance-linked securities (ILS) have recently become an important risk transfer mechanism to help insurers and reinsurers transfer catastrophe risks to the capital market. We employ the utility indifference approach to establish a pricing framework for a representative agent who trades an ILS with payoff linked to an insurance risk process and a reference rate process. The agent, while investing in a financial market composed of traditional financial instruments, discovers her indifference prices of the ILS by weighing the ILS trade on her exponential utility. The problem has been studied extensively, but mainly in one-period models that are best suited for zero-coupon instruments. In view of the prevalence of ILS with interim payments, we extend the study to a multi-period model by working with time 0 equivalent values and solving a multi-period optimization problem. We offer insights into issues such as coherence and time consistency of the ask and bid indifference prices obtained. Finally, we conduct a sensitivity analysis of the prices against certain risk parameters.

Sustainable financial systems are gaining importance in light of the increasing impacts of ESG risk in the real and financial spheres. It is believed that sustainable financial systems effectively support the management of this risk on national, international and global scales, hence the, inter alia, UNEPFI recommendations. Work on building sustainable financial systems differs in the degree of advancement at the level of individual countries and institutions. The aim of the article is to show that the level of advancement of activities in building sustainable financial systems depends on the attitude and awareness of financial managers and financial institutions and, consequently, on the banking system model. As a result of the research, it was shown that bank finance managers (German-Japanese model) were more aware of the role and importance of sustainable financial systems in the management of financial institutions than financial managers who represent capital market institutions (Anglo-Saxon model).

How does the expansion of multinational banks influence the business cycle of host countries? We study an economy where multinational banks can transfer liquidity across borders through internal capital markets but are hindered in their allocation of liquidity by limited knowledge of local firms’ assets. We find that, following domestic banking shocks, multinational banks moderate the depth of the contraction but slow down the recovery. A calibration to Polish data suggests that multinational banks reduce the average depth of recessions by about 5% but increase their duration by 10%. The predictions are broadly consistent with evidence from a large panel of countries.

Trends in capital markets are difficult to predict due to the complex linkages. Recent research has shifted from predicting single market trends to predicting multiple market co-movements. Based on the WTI oil price, Douglas stock index and Shenzhen composition index, we use wavelet transformation to extract the stable domains and identify the co-movement directions. Next, we construct a spectrum plot for co-movement prediction. Experimental results show that a discrete wavelet transform is effective in predicting financial market co-movements within the three markets.

This study analyzes the evolution of how seasoned equity offerings in the Chinese stock market affect corporate technological innovation by considering the easing of financing constraints through a reduced corporate tax burden. We use 2007–2016 data on listed manufacturing firms registered in the Chinese provinces and cities where a pilot reform program that replaced the business tax with a value added tax (VAT) was implemented in 2012. We explore the changes in and causes of the impacts of seasoned equity offerings on corporate R&D investment, technological innovation output, and technological innovation efficiency before and after the implementation of the pilot reform. Our empirical findings are as follows. (1) Generally, the seasoned equity offerings of listed firms in the manufacturing industries have a significantly positive effect on the firms’ current R&D investment and subsequent technological innovation output. (2) This positive effect shifts along with changes in corporate financing constraints and the dimensions of technological innovation. The pilot VAT reform has significantly changed how manufacturing firms’ seasoned equity offerings affect their R&D investments and technological innovation output. The positive effects of seasoned equity offerings on corporate R&D investment increase after the pilot reform, while the positive effects on the output of technological innovation decrease. (3) Finally, we find that seasoned equity offerings have a negative impact on firms’ technological innovation efficiency after the pilot VAT reform. Corporate governance plays a prominent role.

Identifying fraudulent financial statement is critical for capital market regulation and is generally formulated as a classification problem. Feature selection in traditional machine learning methods does not consider correlation information among financial features which may influence performance of classifiers. To explore correlation information on conducting financial statement fraud detection (FSFD), we combine traditional features with knowledge graph models, and learn new representations enriched with feature embedding of various financial categories. These feature relations defined by correlation types may form knowledge graphs with features as nodes and correlation relations as edges. Experimentations demonstrate that financial feature representations with correlation information significantly improve classification performances for SVM and K-NN, marginally better than decision trees and logistic regression, but not outperforming naive Bayes (Kernel).

This study uses public opinions on tourism in China in 2010–2017 as exogenous shocks to analyze how the capital market responds to public opinions on tourism events, and how the investor relations (IR) of listed firms affects investor responses in the tourism industry. We find that firms located in provinces where public opinions broke out experience significant decreases in cumulated abnormal returns, thereby indicating investors’ pessimistic reaction on negative events in the local tourism industry. Furthermore, firms’ IR facilitates the alleviation of market fluctuations, and this effect is more pronounced in private firms and firms spending less on advertising. This study offers important policy implications. First, the government and supervisors should formulate policies and provide feasible plans to improve investor relations. Second, firms could reduce unfavorable fluctuations of stock prices by strengthening their investor relations.

While the purpose of academic research is to obtain new knowledge and understanding, there is an increasing concern that many scholars value work based upon where it is published rather than on its intrinsic quality. We argue that the degree to which journal ranking lists affect research has an important field-specific component. Using a large-scale survey of UK business academics and underpinned with a conceptual framework inspired by Bourdieu, we examine the attitudes towards journal ranking lists of individuals working within 22 ‘fields’ operating under the umbrella of business and management in the Academic Journal Guide (AJG). We show that scholars in economics and finance at one end of the spectrum, and in organisational studies at the other, systematically differ from accounting scholars in how they relate to the list. While the empirical evidence suggests that finance and economics are more insular than other fields, members of these two fields are the ones who are significantly less likely to consider that journal lists create a ‘research monoculture’, foster ‘technically well-executed but boring research’, or ‘encourage work that is not of interest to practitioners/policy makers’. On the other hand, scholars in organisational studies show the highest agreement with these concerns about journal ranking lists. Our findings have important implications for the evolution of accounting as a field that spans both a critical, interpretive paradigm with a strong focus on organisational context as well as a positivist, financial and capital markets-based research paradigm. If accounting scholars of these two approaches attach different authority to journal ranking lists and the value of publications in highly ranked journals, these perception differences could lead to tensions within the field and could have distortive effects on resource allocations and the career prospects of accounting scholars working in the respective sub-fields.

Empirical findings focusing on the relationship between capital markets and macroeconomic variables are used as data sources in determining policies for the development of the conventional and Islamic financial system. The aim of this study is to investigate the existence of volatility spillover effects between foreign exchange markets and Islamic stock markets in three major emerging countries, namely India, Malaysia, and Turkey using daily data for the period 2013-2019. Volatility spillover effects are investigated using the causality-in-variance test developed by Hafner and Herwartz (2006). In order to examine the nature of the relationship between the variables, and whether it changes over time, the time-varying test statistic is estimated using rolling samples. We find evidence in favor of volatility spillovers from the Islamic stock market to the foreign exchange market only in Turkey. The time-varying test results show that the presence of volatility spillover is at least one direction between exchange rates and the Islamic stock market at specific periods. Copyright (C) 2020, Borsa Istanbul Anonim Sirketi. Production and hosting by Elsevier B.V.

This study uses a cash-based profitability factor that is completely free from accounting accruals to test the five-factor and three other models against eight different market anomalies in Borsa Istanbul (BIST). According to the results, only beta (β) and book-to-market (B/M) effects are significant in BIST and the recently added profitability and investment factors improve neither the pricing nor the economic performances of the traditional three-factor model. Therefore, the clean surplus relationship cannot represent dividends and fail to explain common stocks’ pricing behavior in an emerging market setting. This paper provides the first evidence concerning the performance of the five-factor model which uses a profitability factor consistent with the theory underlying the model and shows that the recently added factors cannot improve the mean-variance efficiency of the three-factor model in an emerging market. The results are robust against several tests.

In the case of revenue uncertainty, the static capital structure predefined in the feasibility stage of Public-Private Partnership (PPP) cannot satisfy the need of dynamic adjustment in the capital structure of Chinese PPPs during project operation, thus deteriorating project financial viability in the long run. Therefore, this paper aims to propose a Monte-Carlo optimization model that can enhance the requirement of the dynamic capital structure of PPPs in the uncertain environment regarding the Chinese bridge sector. By quantifying the adjustment cost derived from changes in equity and debt, the proposed model can make a comparison analysis of dynamic capital structures of a specific project in different scenarios with three capital structure adjustment strategies adopted, respectively. In particular, the before-and-after effects and effectiveness derived from the use of government subsidies, capital market financing, and debt financing in adjusting capital structures of a PPP project, respectively, can be compared and evaluated. Based on historic data of the Hangzhou Bay Bridge (HBB) case, the imbalanced roles of the three strategies are unveiled that the strategy of government subsidies has a stronger effect as compared with the other two strategies, thereby enhancing project financial viability and sustainability. The simulation results of the HBB case further indicate that the debt financing strategy, which is the actual strategy applied to HBB can alleviate the short-term project operation pressure, but it may affect the project revenue in the long term, and aggravate the repayment risk of the project. These analyses have uncovered the strategic role of dynamic capital structure in maintaining financial viability and avoiding project bankruptcy. This model fills a gap when we need to deal with changes through dynamic capital structures in PPP projects. Several policy implications are provided in the end for transport PPP projects to improve the survival of PPPs during project operation under revenue uncertainty.

Refereed/Peer-reviewed We investigate the formal credit effect on firm level innovations of small and medium enterprises in developing economies. Using the instrumental regression method, we control for potential endogeneity in innovation and credit relationships. Results indicate that formal credit availability boosts all four types of innovations. However, this impact is more significant for soft innovations compared to hard innovations. The results also point to the importance of informal finance as a source of external finance for firms where capital markets suffer from imperfections. Our study encourages the development of policy around financing for various types of innovation, which is especially suited for developing economies.

In this paper, we reconsider the leadership of tax competition, focusing on a situation where total amount of capital competed by countries is endogenously determined. Specifically, we model a timing game under asymmetric tax competition, in which capital is supplied not only by the residents of two countries, but also by investors outside these countries. The results show that, when the capital market becomes more accessible for outside investors, sequential-move equilibria are more likely to be realized, in which one country leads and the other follows. Conversely, only a simultaneous-move equilibrium emerges when the openness of the market is sufficiently small. These results are reversed when governments compete in public investment rather than tax.

We investigate how competition between fund managers and disclosure of other managers’ fees and performance influence fees, risk taken, earnings, and investor concentration, with a controlled lab experiment. We find that more competition and disclosure lead to a reduction in fees: The relative decrease is larger for management fees than for performance fees. Although, the decrease in fees does not affect managers’ investment strategies, it increases investors’ readiness to entrust their funds to a manager. This leads to higher overall earnings, with the benefits going to investors and to fund managers able to attract more or new investors. The empirical literature provides a mixed picture of the consequences of competition in delegated portfolio management, but our results suggest that more competition is mostly beneficial for the development of capital markets.

Firms adjust output prices to cost decreases with a delay relative to cost increases. I document firms’ operating income becomes less persistent when their input costs decrease than when their costs increase. The stocks of firms slowly cutting output prices due to asymmetric output-price rigidities also experience high stock return volatility, and their CEOs more frequently manage expectations of financial analysts. I show these results are consistent with a New Keynesian model with trend inflation.

This commentary lays out four challenges that currently prevent capital markets from contributing to a socially and environmentally sustainable economy. It reflects on how these can be turned into opportunities and the role of transdisciplinary research and action in promoting such change.

As part of the environment-related stimulus package implemented in the aftermath of the 2008 global financial crisis, the Japanese government introduced tonnage and acquisition tax breaks as well as a subsidy programme for eco-friendly vehicles. However, there has been limited research on their economic effects. This paper employs the event study methodology to examine not only the direct economic effects of the eco-friendly vehicle tax breaks and subsidy programme but also their spillover economic effects. In particular, we consider the economic effects on firms using the event study methodology to analyse how the stock prices of automobile firms responded to the programmes and to assess the spillover effects on the automobile parts firms. Our results show that the eco-friendly vehicle tax breaks had lower positive economic direct effects and no positive spillover effects while the eco-friendly vehicle subsidy programme had more significant positive direct economic effects and positive spillover effects. The differences in economic effects between tax breaks and a subsidy programme result from the differences in the implementation duration and in the preferential monetary benefits. In addition, the spillover effects between tax breaks and a subsidy programme may differ according to the time of announcements and the investments in the production of eco-friendly vehicle parts.

A flexible retirement policy has often been proposed as a solution to address the social dilemma of individuals in the population having different desired retirement ages. We analyze such a policy in an overlapping generations general equilibrium framework, where individuals differ in terms of their health condition at the standard retirement age, and therefore in their suitability for remaining in the labor force beyond the standard age. In our model, workers know about their future health condition when they are young, and adjust their savings and labor supply accordingly in order to maximize their lifetime utility. The applies to situations in which workers can fairly accurately predict their health status based upon personal, family, community and professional health status tendencies. We compare the flexible retirement policy to the mandatory retirement policy in the labor and capital markets, and the effects on savings and wages in the aggregate for both healthy and unhealthy, young and elderly cohorts. For economies with sufficiently high capital intensity of production and high levels health among the elderly, a flexible retirement policy can result in a welfare reduction compared to a mandatory retirement policy. Our study links the social desirability of the two retirement policies to the technological and population structure of the economy.

The frequent empirical failure of uncovered interest rate parity raises a question that has not been definitively answered: why do predictable excess returns on currencies persist in competitive currency markets? Supported by data from nine major currencies for 1978:08–2019:09, I provide a novel resolution to this enduring forward premium puzzle by building on the financial economics literature that explores the economic implications of limited access to capital markets. A liquidity shock, or the urgent demand for liquidity by credit-constrained arbitragers liquidating bond holdings, causes losses from sudden drops in bond prices. Arbitragers require a liquidity premium to compensate for potential losses that vary directly with the interest rate. It is this liquidity premium that explains persistent excess returns on currencies. I argue for policies favoring a low interest rate environment and macroprudential controls that ease liquidity constraints to increase the efficiency of international capital markets by reducing the liquidity premium.

Between 2000 and 2015, China’s aggregate income quadrupled, its provincial income inequality fell by a third, and its share of employment in agriculture fell by a half. Internal migration is central to this transformation, with the number of internal migrant workers reaching 300 million by 2015. Combining rich data on migration with a spatial general equilibrium model of China’s economy, we quantify the size and the impact of internal migration cost reductions in China between 2000 and 2015. During the 15-year period, China’s internal migration costs fell by forty-five percent. In addition to contributing substantially to growth, these migration cost changes account for the majority of the reallocation of workers out of agriculture and the drop in regional inequality. We compare the effect of migration policy changes with other important economic changes, including changes in trade costs, capital market distortions, average cost of capital, and productivity. While each contributes meaningfully to growth, migration policy changes are central to China’s structural change and regional income convergence. We also find that the recent slow-down in aggregate economic growth between 2010 and 2015 is associated with smaller reduction in inter-provincial migration costs and a larger role of capital accumulation.

This paper argues that a deeper integration of capital markets in the European Union is necessary to support accelerated economic growth. Further integrated equity and bond markets will provide access to capital funding improve the allocation of capital, help mitigate market and systemic risks, and ultimately foster a counter-cyclical, sustained real economy growth. The paper provides evidence that the increases in both total portfolio equity and debt to GDP ratios in the euro area actively contribute to real GDP growth.

We examine the value and efficiency of analyst recommendations through the lens of capital market anomalies. We find that analysts do not fully use the information in anomaly signals when making recommendations. Specifically, analysts tend to give more favorable consensus recommendations to stocks classified as overvalued, and, more importantly, these stocks subsequently tend to have particularly negative abnormal returns. Analysts whose recommendations are better aligned with anomaly signals are more skilled and elicit stronger recommendation announcement returns. Our findings suggest that analysts’ biased recommendations could be a source of market friction that impedes the efficient correction of mispricing.

This study investigates the determinants of bank profitability in 23 countries from 2002 to 2016 using the system generalized method of moments. The findings indicate that the number of bank cards issued, the number of automated teller machines (ATMs) and the number of point of sale (POS) terminals can improve bank profitability. Hence, this suggests a need for further expansion of these delivery channels. Also, the findings show the negative impact of market power on bank profitability, implying that competition improves bank profitability. Further, the positive relationship between capital market development and bank profitability suggests that they should be considered as complementary to one another.

This study aims to analyse, within the scope of publicly listed Spanish companies, whether the mandatory implementation of International Financial Reporting Standards (IFRS) has had an effect on financial analysts’ earnings forecasts and investments in non-cross-listed Spanish companies (those only listed on the Spanish capital market). A sample of 369 observations for companies listed on the Spanish securities market for the period 2004–2007, of which 84 are cross-listed, was used to perform the analysis. The results show that the transition from domestic to international accounting standards has had positive effects for non-cross-listed Spanish companies, leading to the improved accuracy of financial analysts’ earnings forecasts and an increase in investments.

Target companies are differently affected when acquired by a financial sponsor as opposed to a strategic buyer. In this paper we analyze M&A activity by financial sponsors and strategic buyers in the euro area between 2002 and 2018, linking their relative contributions to deal flow to the conditions in capital markets. Does the composition of the M&A deal flow change over time? How do different types of acquirers respond to varying conditions in debt and equity markets? We find that M&A activity by financial sponsors and strategic buyers are not synchronous and that capital market conditions affect the composition of the M&A deal flow through multiple channels. In particular, the relative contribution of financial sponsors to overall deal flow grows when the risk-free rate increases, while the opposite occurs when the difference between the credit risk premium of high-yield and investment-grade issuers widens and when stock market valuations rise.

This study investigates the impact of external debt and export on economic growth of Sub-Saharan African countries, using ARDL panel model and appropriate estimation techniques. The estimation results reveal insignificant positive impact of both external debt and export on economic growth, in the short run. The impact turns negative in the long run, with export exerting a more significant adverse impact than external debt. However, there is long-run convergence among the variables. Furthermore, the estimated model exhibits significant structural stability, hence the estimation results are reliable for purpose of policy making. In the light of these findings, some policy options may be considered. These policy options include the curtailing of external borrowing until current debt stocks are repaid, ensuring external loans are tied to specific projects to avoid inefficient allocation of the funds, exploring domestic capital market for funds as alternative to external borrowing, embarking on more export diversification in order to mitigate poor performance of primary commodity exports, and establishment of commodity exchanges that would attract more foreign buyers of export products. These policy options can help to stem growing external debt and declining export, and subsequently ameliorate the unfavorable effect on economic growth in the countries.

In perfect capital markets, the futures price of an asset should be an unbiased forecast of its realized spot price when the contract matures. In reality, futures prices are often higher for some assets and lower for others. However, there is no stability in the relationship between futures prices and the realized spot prices. This instability has been a puzzle in the existing financial literature. The key to this puzzle may lie in the nature of the model and the lack of market imperfections. In this study, we take a theoretical approach in a dynamic multi-period environment. We incorporate competition between disparate economic agents and impose financial frictions (i.e., imperfections) that are in the form of hedging and borrowing limits on them. Our model gives rise to multiple equilibria, each with unique market clearing prices, with the market switching between these equilibria. Our analysis incorporates a comprehensive consideration of the risks faced by the futures markets participants (i.e., speculators and hedgers) and leads to a better understanding of the puzzle. JEL Classification

One of the strategic objectives of the European Union is to increase the renewable energy consumption level, in a market which brings together technological, financing and customer engagement innovations. However, little is known about the impact of the financial sector on renewable energy consumption. The aim of the paper is to examine the effect of financial development on renewable energy consumption using a panel data of 28 countries in the European Union (EU) over the period 1990–2015. Our research is based on a panel fixed effects model, where renewable energy consumption is given as a function of income, energy prices, financial development, and foreign direct investments. The results of the empirical analysis show that all three different dimensions of financial development (banking sector, bond market, and capital market) have a positive effect on the share of renewable energy consumption. Additionally, our results show that capital market development does not influence renewable energy consumption in the new EU Member States. Our empirical results give valuable insights into how best to deploy capital in the renewable sector, in order to provide cost-competitive options to customers, with the final objective of expanding higher value-added services.