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We highlight the complexities in estimating the valuation effects of board gender quotas by critically revisiting studies of Norway’s pioneering board gender-quota law. We use the short-run event study of Ahern and Dittmar [Ahern KR, Dittmar A (2012) The changing of the boards: The impact on firm valuation of mandated female board representation. Quart. J. Econom. 127(1):137–197] to illustrate (1) the difficulties in attributing quota-related news to specific dates, (2) the need to account for contemporaneous cross-correlation of stock returns when judging the statistical significance of event-related abnormal stock returns, and (3) the fundamental difficulty of separating quota-induced valuation effects from the influences of firm characteristics and macroeconomic events such as the financial crisis. We provide new evidence suggesting that the valuation effect of Norway’s quota law was statistically insignificant. Overall, our evidence suggests that, at the time of the Norwegian quota, the supply of qualified female director candidates was high enough to avoid the negative consequences of the quota highlighted previously in the literature. This paper was accepted by Renee Adams, finance.

At the onset of the COVID-19 economic crisis, as in other crisis episodes, we observed a rapid appreciation of "safe haven" currencies. We quantify currency-induced balance sheet valuation effects for aggregate external positions as well as for broadly defined asset classes for the first quarter and the full year 2020. To do so, we use new data on the currency composition of cross-border assets and liabilities for 46 countries. In contrast with past financial crises, many emerging markets did not experience losses on their aggregate external balance sheets despite facing a domestic currency depreciation. This was partly due to currency-induced valuation gains on equity positions offsetting losses on debt positions, and partly due to reduced currency mismatch on their external debt positions. We conduct the stock-flow reconciliation of net international investment positions to measure overall valuation effects and compute the proportion that is due to changes in currency values. For about half of the countries in our sample, currency-induced valuation effects were substantial, representing over 50 percent of total valuation effects in 2020Q1 and the full year 2020.

Understanding differences in business cycle phenomena between Emerging Market Economies (EMEs) and industrialized countries has been at the center of recent research on macroeconomic fluctuations. The purpose of this paper is to investigate the importance of certain credit market imperfections in different EMEs. To this end, we develop a small open economy Dynamic Stochastic General Equilibrium (DSGE) framework featuring both permanent and transitory productivity shocks, differentiated home and foreign goods, and endogenous exchange rate movements. Furthermore, our model incorporates liability dollarization as a particular form of financial frictions in EMEs. In this vein, we account for the fact that emerging markets traditionally have had difficulties in borrowing in domestic currency on international capital markets and thus allow for valuation effects in our analysis. We estimate our model using Bayesian techniques for a number of EMEs and thereby control for potential heterogeneity across countries. Contrary to previous studies in this strand of the literature, we include a (vector-)autoregressive measurement error component to capture off-model dynamics. Regarding business cycles in emerging markets, our main findings are that (i) even though we incorporate financial frictions in the framework, trend shocks are the main determinant of macroeconomic fluctuations, (ii) accounting for liability dollarization ameliorates the model fit, and (iii) valuation effects on average stabilize changes in the net foreign asset position.

We provide evidence on two qualitative characteristics of financial reporting errors deemed immaterial by management (immaterial errors) and benchmark these characteristics against those of material errors corrected by restatements. With regard to relevance for equity valuation, our results suggest that investors find immaterial errors relevant, in particular those that are more severe, with valuation effects smaller than those associated with restatements disclosed in form 8-K. With regard to predictive ability for reporting quality, we find immaterial errors are informative about financial reporting reliability because they indicate increased propensities for three outcomes known to be associated with negative economic consequences: future material errors, immaterial errors and material weakness assessments. The predictive ability of immaterial errors for reporting quality is not qualitatively different from that of material errors. Viewed in the context of previous research on material errors, our results support the view that immaterial errors are informative about reporting quality; this qualitative characteristic is not part of the authoritative guidance management applies in assessing materiality of financial reporting errors. Our analysis informs debates about materiality assessments from an investor perspective.

The international monetary system may be viewed as a global insurance system, where the United States enjoys the “exorbitant privilege” of a positive yield differential on its external assets and liabilities during normal times, in exchange for the “exorbitant duty” of valuation losses in the form of wealth transfers to the rest of the world during crisis periods. Evidence for 76 economies and 1995–2019 indicates that some other major developed economies also enjoy an exorbitant privilege, though without suffering an exorbitant duty. By contrast, most developing economies neither have an exorbitant privilege nor benefit from wealth transfers. Developing economies as a group recorded negative return differentials and valuation losses during 2010–2019, implying a total return differential of about minus three percentage points between developing and developed economies and an annual average resource transfer from developing economies of about $800bn, or 3.3 per cent of their GDP. Econometric analysis linking crisis insurance strategies and yield differentials indicates that permanent swap arrangements, reserve holdings and regional monetary arrangements can contain negative yield differentials. Developed economies could make part of past resource transfers available to developing economies to finance recovery from the COVID-19 crisis and achieving the 2030 Agenda for Sustainable Development. Supplementary Information The online version contains supplementary material available at 10.1007/s10290-021-00422-5.

This paper discusses the concepts and measurements of valuation effects of a nation’s external wealth, which has become an important research focus in light of the deepening globalization. Further, it clarified the connections and heterogeneity between valuation effects and three related concepts, dark matter, excess return and financial adjustment, under a uniform theoretical model. It argues that although closely related, these concepts are different in definitions and measurements and the misuse of them in recent research has led to misunderstanding, ambiguity, and confusion. The detailed analysis in this paper will benefit the subsequent academic and policy research by solidifying the conceptual framework in the field of studies.

We investigate the valuation effects of debt issues on the issuing firms’ common stock using a sample of Turkish issuers. For the sample of non-financial firms, we find no significant wealth effects for debt issues around the announcement dates. However, market reactions are more positive when information asymmetry between firm managers and outside investors is low, agency costs are high, and when debt issues are likely to carry positive information about firms’ prospects. These results support pecking order, signaling and agency theories of capital structure. In additional tests, we find positive market reactions to debt issue announcements of financial firms.

Aim: We analyze stock market reactions to merger and acquisition announcements for firms in Europe and contribute to the literature by providing empirical evidence how the decisions with respect to alternative financing sources (equity or debt) and the methods of payment (cash or stock) affect the magnitude of the valuation effects. Research design: An event study methodology is applied to 717 M&A transactions. We analyze the size of the cumulative abnormal returns using the financing sources and payment methods and other variables as the relevant determinants. Findings: The cumulative abnormal results suggest that target shareholders and bidder shareholders in private deals benefit from mergers and acquisitions. The effect found is centered around the announcement date, making our findings consistent with market efficiency. Debt financed deals outperform equity financed deals and cash paid M&A outperform stock paid M&As, due to information asymmetry, signaling and agency effects. Originality: This study adds to our understanding of the relevance of the financing sources and the payment methods for mergers and acquisitions in Europe. Implications: This study may help practitioners to better assess the valuation effects of alternative financing sources and payment methods when acquiring other firms. JEL: G32, G34

At the onset of the COVID-19 economic crisis, as in other crisis episodes, the flight to safety was accompanied by a rapid appreciation of “safe haven” currencies. We quantify currency-induced balance sheet effects for total external positions as well as for individual asset classes using new data on the currency composition of cross-border stocks for 48 countries for the first quarter as well as for the full year 2020. We also conduct the stock-flow reconciliation of net international investment positions to measure overall valuation effects. We show that for many countries currency-induced valuation gains mitigated losses that resulted from declining asset prices in the first quarter of 2020. Moreover, for countries with excess capital out flows during this period, the impact on external balance sheet positions was mitigated by valuation gains. This is because, in contrast with past financial crises, many emerging markets did not experience negative external balance sheet effects from their currency depreciation, partly due to currency-induced valuation gains on equity positions offsetting losses on debt positions, partly due to reduced currency mismatch on their external debt positions.

Aim: In this study, we examine the changes in default risk of the bidder over the course of a merger or acquisition. The data set consists of 531 deals in which the acquirers are European firms. We employ a general set of determinants to analyse the change in default risk and extend the literature by providing new empirical evidence for the European capital market. Research design: Abnormal returns are analysed to provide preliminary insights into the merger induced valuation effects. All hypothesized relationships on the changes in default risk are tested via a regression analysis. We differentiate these results further by analysing which factors determine the increase in default risk. Findings: Previous research on this issue reported mixed results. The main finding of our empirical analysis is that, on average, mergers and acquisitions of European bidders significantly increase default risk during the post-merger period. Originality: This study adds to the mergers and acquisitions literature for European bidders and targets. The empirical findings suggest that some observed relationships and determinants are different in Europe than in the United States. Implications: This research introduces a default risk model that could be applied to predict bidder performance subsequent to a merger or acquisition by analysing possible changes in default risk of the bidder. It also provides some possible explanations for the average increase in default risk. This study may help practitioners to better assess the potential risks when acquiring other firms. Key words: mergers & acquisitions, abnormal returns, default risk, Europe JEL Codes: G32, G34

We show that the acquiring firm's idiosyncratic stock return volatility (sigma) is an important determinant of the selection and perceived valuation effects of earnouts in Mergers and Acquisitions (M&As). Earnout‐based M&As are more often announced by high‐sigma acquirers (nearly 40% of all earnout‐based M&As), yet the documented higher risk‐adjusted returns accrued to acquirers in earnout‐based M&As, relative to M&As settled in cash, stock or mixed payments (the earnout effect), appear in deals announced by low‐sigma acquirers (nearly 20% of all earnout‐based M&As). High‐sigma acquirers employing earnouts appear to break even, or even experience losses, relative to their counterparts employing single up‐front payments. These results are confirmed based on a quasi‐experimental design through which the earnout effect is measured in isolation. We argue that in M&As announced by high‐sigma acquirers, the earnout effect is potentially elusive due to the presence of an acquirer‐specific information revelation effect, resulting from the heightened extent of information asymmetry between (small) acquirers’ managers and outside investors. On the contrary, the use of earnouts in M&As announced by low‐sigma (large) acquirers, whereby the acquirer‐specific information revelation effect is likely negligible, sends a strong signal for value creation that also prevents investors from inducing a size‐related discount.

Purpose On May 17, 2012, the social networking company Facebook Inc. fixes its initial public offering (IPO) price at $38.00 a share. Over the next couple of months, contrary to expectations raised by previous IPOs, the stock price crashes more than 50 per cent. Immediately, the question arises whether the issuer’s or the stock market’s pricing of the share are in line with the firm’s fundamentals. Thus, the purpose of this paper is to determine the company value in close proximity to the date of IPO. Design/methodology/approach As Facebook is an archetypal internet growth company, it is evaluated using the Schwartz/Moon model. This approach features significant advantages over traditional valuation models and more adequately captures the characteristics of growth companies. Findings As of September 30, 2012, the fundamental share value determined was $26.53, which exceeded the market price per share of $22.66 by 22.48 per cent, but was far less than the IPO stock price. The subsequent sensitivity analysis reveals the robustness of the result to key input parameters. Originality/value The results raise doubts about the IPO price of Facebook. Furthermore, this paper is of value from a more conceptual perspective in that an extended version of the Schwartz/Moon model is provided. Beyond extensions previously discussed in the subject-based literature, the authors include stochastic interest rates (as an additional source of uncertainty) and investigate their valuation effects.

This study presents a theoretical model that links chief executive officer (CEO) overconfidence to the value loss of corporate diversification. Consistent with the model's prediction, the findings show that diversified firms run by overconfident CEOs experience value loss compared to diversified firms run by their rational counterparts. Empirically, the value loss is economically significant and ranges between 12.5% and 14.1%. In addition, the model predicts heightened corporate refocusing activity by overconfident CEOs who pursued diversified investments in the past once realized returns fail to match initial expectations. The empirical odds of corporate refocusing decisions are 67% to 98% higher when past diversifications are undertaken by overconfident rather than rational CEOs. Another prediction of the model is that overconfident CEOs exhibit preference for diversified investments, especially in the presence of ample internal funds. This prediction is also strongly supported by the data. Overall, this study proposes CEO overconfidence as a unified and consistent explanation of why firms pursue value-destructive corporate diversification policies and later adopt refocusing policies aiming to restore value.

Money represents a cornerstone of human modern economies and how money emerged as a medium of exchange is a crucial question for social sciences. Although non-human primates have not developed monetary systems, they can estimate, combine and exchange tokens. Here, we evaluated quantity–quality trade-offs in token choices in tufted capuchin monkeys as a first step in the investigation of the generalizability of tokens as reinforcers, which is a potentially relevant factor underlying the emergence of money in humans. We measured capuchins' exchange preferences when they were repeatedly provided with 10 units of three token types yielding food combinations varying in quantity and quality. Overall, capuchins maximized their quantitative payoff, preferring tokens associated with a higher food amount, rather than showing violations of rationality. However, some individuals did not maximize their qualitative payoff, possibly because of conditional valuation effects or owing to the choice overload phenomenon, according to which too many options reduce the accuracy of choice. Our study supports the importance of comparative research to finely analyse the multiple components shaping the economic behaviours of other species, possibly to achieve a more comprehensive, evolutionary- and ecologically based understanding of human economic behaviour. This article is part of the theme issue ‘Existence and prevalence of economic behaviours among non-human primates’.

The $669 billion Paycheck Protection Program (PPP) provides highly subsidized financing to small businesses. The PPP is a positive shock in financing supply to the small, highly constrained publicly listed firms in our sample and has average positive treatment effects. Yet, uptake is not universal. In fact, several firms return PPP funds before use, and curiously, experience positive valuation effects when they do so. These firms desire and the markets value the release from government oversight even if it means giving up cheap funding. The PPP is also a demand shock to the banks making PPP loans. Intermediary supply effects shape PPP delivery. Larger borrowers enjoy earlier PPP access, an effect that is more pronounced in big banks. The results have implications for policy design, the costs of being public, and bank-firm relationships.

This study examines the valuation effects of anti-money laundering (AML) enforcement actions and the Office of Foreign Assets Control (OFAC) economic sanction violations on U.S. financial institutions (FIs). Using a hand-collected sample of 308 enforcement actions issued between 2000 to 2018, results show that a civil money penalty (CMP) adversely affects a bank's value in the next quarter. Neither the magnitude, nor the type of AML-OFAC violation, and neither the bank's ability to deal with an enforcement action― as proxied for by efficiency ratios and governance mechanisms―are able to moderate the adverse effect of the CMP.

Merger control exists to help safeguard effective competition. However, findings from a natural experiment suggest that regulatory merger control reduces the profitability of corporate acquisitions. Uncertainty about merger control decisions reduces takeover threats from foreign and very large acquirers, therefore facilitating agency-motivated deals. Valuation effects are more pronounced in countries with stronger law enforcement and in more concentrated industries. Our results suggest that competition policy may impede the efficiency of the M&A market.

This paper studies the impact of the nonfinancial disclosure on firm value for a large sample of Indian firms, arguably emerging market with poor investor protections and legal enforcement. We proxy the nonfinancial disclosure by the Bloomberg score on the extent of a firm's Environmental, Social, and Governance disclosures, and find positive valuation effects associated with the nonfinancial disclosure. We find the nonfinancial disclosure is more valuable to standalone firms compared to business group firms. This paper shows that the positive valuation effects associated with the nonfinancial disclosure are attributable to lower cost of funds and higher operating cash flows.

This paper studies the impact of major ECB monetary policy announcements on the portfolio allocation of euro area fund investors, using daily data between 2012 and mid-2016, a period that includes a variety of unconventional measures. We distinguish between active portfolio reallocation, driven by redemptions or injections of investors, and passive portfolio rebalancing, triggered by valuation effects related to changes in asset prices and exchange rates. We find that, for this class of fund investors, policy announcements work mainly through valuation effects (the signalling channel), rather than via active reallocation (the portfolio balance channel). Notably, since the autumn of 2014, monetary policy shocks triggered large asset price and exchange rate effects and prompted a passive shift of euro area investors into riskier assets, in particular European and Emerging Market equity funds and out of bond funds.

Recent economic events pose challenging questions for macroeconomists. The rising global imbalances raise the issue whether existing international macroeconomic models can explain the patterns observed in the data on real exchange rates and current accounts. The first chapter of this dissertation addresses the question whether a standard portfolio balance model can account for the long-run dynamic behavior of the real exchange rate and net foreign debt in the United States (US). The rest of the dissertation does not test how well theoretical models fit reality but uses models in order to understand reality better. The second and third chapters are motivated by the most significant economic event in the last decade-the US 2008 financial crisis. It triggered a major collapse in US real activity, called the Great Recession, and disrupted the job matching process in the labor market. The second chapter of this dissertation addresses the challenges faced by monetary policymakers in response to an increase in labor market frictions. Two striking features of the Great Recession are the speed and synchronicity with which real activity collapsed across the world. The third chapter analyzes how shocks such as the 2008 crisis are transmitted across countries. The findings of each chapter are briefly summarized in the following paragraphs.A strand of models of the joint behavior of the current account, net foreign debt stock and the real exchange rate postulate that this behavior is driven by saddle-path dynamics and the related portfolio balance effect. This saddle-path dynamics is based on the assumption that domestic and foreign assets are imperfect substitutes and that the financial markets clear before the goods markets. Chapter 1 uses the Johansen test for cointegration to check the prediction of a portfolio balance model that the net foreign debt stock and real exchange rate display saddle path dynamics. Newly constructed quarterly series on the face value of the United States net foreign debt as a percentage of nominal GDP, together with data on the broad real effective exchange rate index of the United States Dollar, are analyzed. The results indicate that the US net foreign debt and real exchange rate are cointegrated and do not display saddle path dynamics. The cointegrating relationship is found to be negative and trend-stationary. These empirical results suggest that a richer framework that incorporates the dynamic behavior of relative asset supplies is more appropriate for interpretation of the joint dynamics of the US net foreign debt and real exchange rate.In chapter 2 I build a dynamic stochastic general equilibrium model with search and matching frictions in the labor market and analyze the optimal monetary policy response to an outward shift in the Beveridge curve. The main finding is that the optimal monetary policy depends on the shock that causes the shift. A fall in the efficiency of matching does not cause an increase in the unemployment gap; the optimal response of the central bank is to stabilize inflation. An increase in the elasticity of employment matches with respect to vacancies presents the policy maker with a trade off between stabilizing inflation and unemployment. The optimal policy response to the efficient labor market shock changes when real wages are sticky but remains unchanged when home and market goods are imperfect substitutes, compared to the case when they are not. When contrasted to a Taylor rule that targets inflation and output growth, the optimal monetary policy is more aggressive in pursuit of its objectives.Chapter 3 is a joint effort with Abigail Hughes from the Bank of England and explores how financial factors affect the international transmission mechanism. We look at how financial frictions affect the international transmission of country specific productivity shocks. We then explore how two types of shocks that affect the external finance premium are propagated across countries. We build a two country DSGE model with financial frictions to explore the size and nature of international spillovers. Our main findings are that financial frictions magnify movements in international relative prices. In addition, external finance premium shocks can generate significant and persistent international spillovers but they depend on the type of shock. A shock to the dispersion of the productivity of entrepreneurs results in a shift in the foreign aggregate supply curve. A shock to the survival probability of entrepreneurs generates a shift in the foreign aggregate demand curve.

We find that ownership by different types of institutional investors has varying implications for future firm misvaluation and governance characteristics. Dedicated institutional investors decrease future firm misvaluation, in both direction and magnitude, relative to fundamentals. In contrast, transient institutional investors have the opposite effect. Using the U.S. Securities and Exchange Commission (SEC) Regulation FD as an exogenous shock to information dissemination, we find evidence consistent with dedicated institutions having an information advantage. Similarly, dedicated investors are associated with better future governance characteristics, while transient investors are not. The valuation effects are primarily driven by institutional portfolio concentration while the governance effects are driven by portfolio turnover. These results imply a more nuanced relationship between institutional ownership and firm value and corporate governance.

We examine whether outside directors with government experience add value to their firms. We find that government directors are more likely to miss board meetings and that their appointment announcements are greeted more negatively. Firms with government directors also experience poorer operating performance and more negative merger announcement returns, although their mergers are less likely to be challenged by antitrust authorities. These adverse valuation effects are largely alleviated when firms have large government sales, when they operate in regulated industries, or when government directors are politically connected. Using close gubernatorial election outcomes as a natural experiment and an instrumental variables approach to control for endogeneity bias do not change the results.

I present a new model for the U.S. external position that accounts for the accumulation of international debt over the past 60 years. The model is based on the present value restriction that links a country's external position to future trade flows and financial conditions in the absence of arbitrage opportunities and Ponzi schemes. It features the role played by the stochastic discount factor, the trade and valuation adjustment channels and provides a decomposition of the U.S. external position into secular and cyclical components. The model shows that shocks operating via the valuation channel are the dominant drivers of cyclical dynamics, accounting for approximately 80% of the variance over the 60-year sample. This channel works primarily via capital gains and losses on U.S. foreign assets and is closely tied to the international value of the U.S. dollar. In contrast, there is no evidence that valuation channel adjustments contribute to the secular dynamics, but differences between the average returns on foreign assets and liabilities raise the steady-state debt-to-GDP ratio from approximately 12 to 15%. The long-term deterioration in the U.S. position represents a move towards the steady-state before the early 1990s and a move away from the steady-state thereafter. I quantify the expected improvement in future U.S. trade balances needed to justify this as a sustainable path and show that they are very different from its actual behavior during the last 60 years. I also study the behavior of the U.S. position during the 2007–2008 financial crisis.

Large current account deficits, and the corresponding reliance on capital flows from abroad, can increase a country’s vulnerability to periods of heightened risk. We develop a framework to evaluate such vulnerabilities and clarify which characteristics of a country’s international investment portfolio determine whether a current account deficit is ‘menacing’ or ‘mitigating’. Financial factors, namely international investment income and valuation changes on international investments, are critical. Our framework explores how domestic and global risk shocks affect these factors. An application to 10 OECD economies shows that a substantial degree of international risk sharing can occur through current accounts and international portfolios.

This thesis revisits the valuation relevance of a firm’s carbon risk profile using a broader notion of a firm’s carbon risk profile, which includes carbon risk exposure, and carbon risk mitigation. Prior studies that have begun to explore the value relevance of a firm’s carbon risk profile, focus on carbon risk exposure, typically proxied using its historic carbon emissions, documenting a valuation penalty on high carbon emitters due to the perceived presence of economically significant off-balance sheet liabilities. However, from extant literature, a firm’s carbon risk profile can be conceptualised into two broad aspects, namely carbon risk exposure and carbon risk mitigation. Therefore, the reliance on emissions is limited, not only due to the historic nature of this measure but, because it only partially captures a firm’s carbon risk exposure that is conceptualised in extant literature, and because it ignores how firms respond to carbon risks.This thesis is undertaken in two stages. Initially, I develop measures that capture a broader notion of a firm’s carbon risk profile. I use extant literature and interviews with 28 managers of high carbon emitting firms and five ESG analysts to develop three specific measures that include ‘other carbon risk exposure’, aside from tonnage of emissions typically found in extant literature, ‘emissions reductions’ and ‘proactive carbon responses’ (PCRs), identified from publicly available data. Next, I test the valuation effects of the broader notion of a firm’s carbon risk profile using a modified Ohlson valuation model and a sample of 51 ASX200 firms (122 firm-year observations) reporting under the National Greenhouse and Energy Reporting scheme with the necessary financial and market data. The study documents that, on average, a one standard deviation difference in the level of ‘other carbon-risk exposure’ results in a penalty of 11% of market capitalisation of the sample firms on average. This penalty is in addition to the penalty found to exist on high emitters of 10% of market capitalisation for the sample firms on average. I also find that PCRs partially mitigate the documented penalty on high emitters. The interview results suggest that in terms of PCRs, managers and analysts perceive value in firms developing intangible carbon-related capabilities around adaptability, carbon leadership and stakeholder trust. The empirical results are consistent with this proposition since I find that adaptability, carbon leadership and stakeholder trust partially mitigate the emissions penalty. Taken together these results are consistent with the argument that capital markets impound the valuation impacts of other carbon-risk exposure, aside from emissions, and PCRs identified from publicly available information in firm valuations. Furthermore, I find no evidence that emissions reductions are able to mitigate the penalty assigned to high emitters. These findings are consistent with industry concerns that emissions represent an historic measure that is not perceived to be informative in assessing the future carbon risk profile of a firm. This study contributes to literature through the development of measures of a broader carbon risk profile that are future oriented, based on publicly available information, thereby moving away from the reliance on historic emissions. Further, this study has captured some of the additional future carbon risk incremental to that captured in historic emissions and, provides empirical evidence to suggest that a firm’s broader carbon risk profile is value relevant. These findings progress the discussion on the disclosure of carbon-related non-financial information that is of interest to capital markets, which can inform corporates regarding carbon risk mitigation and policy setters in their future policy deliberations.

British voters decided in a June 2016 referendum that they wanted the UK to leave the European Union (EU). The Brexit referendum result represents a critical turning point for the UK and the EU alike, and the decision to exit the bloc is bound to have far-reaching consequences. UK’s persistent current account deficits and its outsized external assets and external liabilities reflect Britain’s deep economic and financial integration with the European Single Market System, and highlight London’s central role as Europe’s financial capital. Unraveling of the symbiotic relationship between the UK and the EU will profoundly impact Britain’s ability to entice foreign investors to fund its current account deficits. Using a rich intertemporal current account framework that incorporates valuation effects, this study examines the potential impact of Brexit on UK’s current account sustainability and on UK’s net foreign debt position. It argues that a “hard Brexit” outcome would imperil UK’s ability to sustain current account deficits. UK’s role as a gateway for non-EU states looking to invest inside EU, and the benefits enjoyed by UK-based financial institutions from the European “financial passport” system would both be endangered if UK is shutout of the European Single Market system. UK is bound to become far less attractive to foreign investors in such a scenario, and a rapid and painful current account deficit reduction is probable. On the other hand, the study shows that a “soft Brexit” outcome in conjunction with a sustained and orderly depreciation of the pound would actually improve UK’s current account balance and its net foreign debt position.

This study analyzes the dynamics between real effective exchange rates and current accounts from a novel perspective. We start by dissecting long-run and time-varying short-run dynamics as well as causalities between both variables. Following this, we extend our framework by including short-term interest rates. Finally, we examine common exchange rate and current account dynamics across countries based on common factors. Our results show that a real appreciation coincides with a worsening of the current account in most cases. The adjustment pattern is time varying but suggests that the causality mainly runs from effective exchange rates to current accounts. However, an extension of our framework based on monthly data shows that trade balance adjustment is observed less frequently, suggesting that valuation effects play an important role for the relationship between current accounts and exchange rates. From a global point of view, cross-country trends that drive exchange rates and current accounts also share similar dynamics over the long run, which is an important finding in the context of global imbalances.

We show that gender diversity in corporate boards could improve firm value because of the contributions that women make to the board. Prior studies examine valuation effects of gender-diverse boards and reach mixed conclusions. To help resolve this conundrum, we consider how gender diversity could affect firm value, that is, what mechanisms could explain how female directors benefit corporate board performance. We hypothesize and provide evidence that women directors contribute to boards by offering specific functional expertise, often missing from corporate boards. The additional expertise increases board heterogeneity which Kim and Starks (2015) show can increase firm value.

We empirically characterize the timing dynamics of cross-listing valuation effects for 643 cross-listings events towards five major host exchanges. We use flexible event windows to investigate how and when prices adjust to cross-listing. Reactions start before the cross-listing date in 79% of the cases, and finish before this date in 64%. Averaging 62 days, the reaction shortens for large firms and firms with lower diversification potential for international investors. The time span to revert to stable state beyond the initial reaction averages 213 days, but is reduced for more frequently traded firms and cross-listings on a US stock exchange.

This paper examines determinants of the international reserves (IR) currency composition before and after the Global Financial Crisis (GFC). Applying the annual data of 58 countries, we confirm that countries that trade more with the US, euro zone, UK, and Japan, and issue more debt denominated in the big four currencies (US dollar, euro, pound, and yen) hoard more IR in these currencies. We find scale effects in which countries tend to diversify from the big four currencies as they increase their IR/GDP and that a growing shortage of global safe assets (GSAs) induces countries to hold more big four currencies. Countries hold less big four currencies as IR after the 2008 GFC, while they hold more of such currencies since the tapering of the Fed’s quantitative easing (QE). The 2008 GFC and QE tapering weakened and sometimes reversed the effect of several economic factors. We also find that TARGET2 balances matter for the currency composition of IR in the euro zone; commodity-exporting countries tend to diversify their IR from the big four currencies when their terms of trade improve; and that the valuation effects induced by Euro/USD exchange rate changes diminish the significance of the GFC in explaining the currency composition of IR.

This article examines the impact of earnout financing on the value of acquiring firms engaged in cross-border acquisitions (CBAs), using a dataset of UK, US, Canadian and Australian firms from 1992 to 2012. The results show that firms initiating international business operations via earnout-financed CBAs enhance their value more than acquirers in (a) domestic acquisitions and (b) remaining CBAs by established multinational corporations (MNCs). Our findings demonstrate the superiority of earnout financing in CBAs announced by acquirers that have no prior international business experience. The results are robust to the firms’ endogenous choice to diversify globally and to the use of earnout financing. We contend that earnouts contribute to the reduction of valuation risk faced by firms acquiring a foreign target firm for the first time. Our empirical findings contribute to the existing debate on the merit of international expansion through CBAs and the role of earnout contingent payment.

We investigate the effect of Sharia compliance on stock valuations. To this end, we examine the price effects of additions to and deletions from the Dow Jones Islamic Market Index (DJIMI). Using the event study methodology, we measure abnormal returns for companies from Muslim countries and the US over the period of 2000–2017. We find that additions to the Islamic index lead to a positive stock market reaction in Muslim countries but a negative reaction in the US. Conversely, deletions from the Islamic index generate a negative stock market reaction in Muslim countries but a positive one in the US. The differing valuation effects can be explained by different perceptions of investors. In Muslim countries, investors have a positive perception of the Sharia compliance because of religious beliefs, while in the US they negatively react because of a negative perception of Islam and of the restrictions associated with Sharia compliance.

We examine the effect of Corporate Social Responsibility activities on the value of corporations through the supply contracts with customers, one of important stakeholders. The analyses using KEJI index and supply contract announcements show that the likelihood of involving in a supply contract is lower and the announcement return is lower when CSR performance is higher. However, this negative effect of CSR is different across the level of CSR performance. The negative effects of CSR do not exist in the firms with highest level of CSR performance while most of the negative effects are concentrated in the firms with mediocre performance in CSR. These results indicate that market recognizes not best CSR activities but mediocre CSR activities as sacrifice of shareholder value.

The ability to issue debt that pays in units of the domestic good leads a country to accumulate a large and negative net foreign asset position while maintaining a positive position in equity. This debt market advantage also helps to explain the weak relationship between the real exchange rate and relative consumption. Our stylized model matches the key facts about the U.S. international portfolio, the U.S. real exchange rate, and explains nearly 50% of the observed variation in the valuation effects. We find that taxing bond market transactions increases the volatility of the exchange rate, capital flows and allocations. In contrast, taxing equity positions stabilizes the exchange rate and capital flows while having little impact on the allocation. Lastly, the paper describes a global solution method for portfolio problems under incomplete markets. (C) 2015 Elsevier B.V. All rights reserved.

From 2005 to 2015, the 25 largest global financial institutions paid more than 285 billion US dollars in legal penalties, corresponding to approximately 20% of their market value. We examine the stock, bond, and CDS market reaction to the announcements of fines and settlements for banks. We document positive stockholder and bondholder valuation effects as well as a tightening of CDS spreads for banks to these resolution announcements. These reactions can be attributed to the resolution of uncertainty surrounding legal proceedings. Moreover, even though monetary penalties are cash-flow-effective, they are not income-effective in the year they are announced, suggesting that banks make adequate provisions for these penalties. In addition, we observe positive spillover effects to other banks facing pending lawsuits with the same plaintiff.

International audience; We assess the sustainability of the current account (CA) balance, net international investment position (NIIP) and net external debt (NED) in a sample of 22 EU countries using two complementary approaches. First, we employ time‐series stationarity tests of current account balance‐to‐GDP ratios as well as cointegration tests of exports and imports of goods and services. Second, we assess the level of trade balance that stabilises the NIIP and the NED. We find that there is sustainability of the CA balance in eight countries, NIIP in five countries and NED in 10 countries, whereas there is evidence of a lack of sustainability in five debtor nations and three creditor nations. Both approaches are consistent with each other given the relationship between flows and stocks, the existence of structural breaks, and valuation effects via exchange rate and interest rate changes.

Limited investor attention allows overvalued companies to engage in stock-financed acquisitions of listed target firms without experiencing significant reductions in their existing valuations. Our robust findings show that overvalued stock-paying acquirers that are subject to limited investor attention do not experience significant announcement period wealth losses. However, the overvaluation of these acquirers is corrected in the post-announcement period. On the contrary, the overvalued acquirers that receive high investor attention and use stock as the payment method in their listed-target acquisitions experience negative announcement period abnormal returns. The widely documented evidence that stock-financed acquisitions are associated with significant announcement period wealth losses is primarily driven by deals in which the acquirers are subject to high investor attention.

We study the role of outside directors in defined benefit pension plan freezes, where the interests of shareholders are in apparent conflict with the interests of firm employees. We examine the effect of independent directors on the likelihood, valuation effects, and long term consequences of plan freezes. We find that a greater percentage of independent directors makes plan freezes more likely and more valuable to shareholders, and mitigates their effect on investment and leverage levels. Our results extend evidence on the monitoring value of independent directors from shareholder-manager to shareholder-employee conflicts, consistent the predictions of agency rather than stakeholder management theories of independent director behavior.

While Switzerland's net creditor position is sizable, it has long remained steady despite large and persistent current account surpluses. This pattern reflects valuation losses on Swiss foreign assets driven by movements in exchange rates and assets prices. We compute estimates of these valuation effects and the associated rates of returns on Swiss external assets and liabilities. While Switzerland benefits from a modest advantage in terms of yields (interest and dividends in percent of holdings), we show that this has been dwarfed by valuation losses driven by the strengthening of the Swiss franc, even before the crisis. We then assess the extent to which the return on assets and liabilities (including capital gains) provides a hedge against movements in Swiss GDP and the purchasing power of income. While we find little evidence of such a hedge at a quarterly frequency, financial returns provide some offset for business cycle movements at the horizon of a year. This hedging property has strengthened since 2010 and is more pronounced for privately held assets and liabilities than for the fast-growing holdings of reserves by the Swiss National Bank.

© 2020 The Author(s) 2020. Published by Oxford University Press on behalf of The Society for Financial Studies. All rights reserved. There is a discrepancy between CAPM-implied and realized returns. Using the CAPM in capital budgeting - as recommended in textbooks - should thus have real effects. For instance, low beta projects should be valued more by CAPM users than by the market. We test this hypothesis using M&A data and show that bids for low-beta private targets entail lower bidder returns. We provide further support by testing several ancillary predictions. Our analyses suggest that using the CAPM when valuing targets leads to valuation errors (relative to the market's view) corresponding on average to 12% to 33% of the deal values.

In this paper we exploit the choice allowed by International Financial Reporting Standards (IFRS) regarding the presentation of interest payments on the cash flow statement to answer two related questions: First, whether the classification choice is explained by firm reporting incentives and second, whether it is value relevant. Using a UK sample, we find that firms reporting losses, with a greater proportion of their debt stemming from public sources, with CFO-based covenants and greater increases in leverage in the year of adoption are less likely to report interest payments in cash flows from operating activities (CFOA). Results also suggest that the incentive to meet or beat analyst CFO forecasts decreases, but strong corporate governance increases the probability of including interest payments in CFOA. Based on the assumption that the decision not to classify interest payments in CFOA captures lower disclosure quality or poor future expected performance, we posit that these firms should also exhibit lower valuations. Results obtained after correcting for self-selection bias confirm this assertion. We conclude that managers’ decision not to classify interest payments in CFOA is consistent with the opportunistic use of the choice allowed by IFRS. 48 6 613 650

This paper aims at estimating the impact of the recent Asset Purchase Programs implemented by the ECB – known as Quantitative easing (QE) – on external assets and liabilities recorded in one economy’s International Investment Position (IIP). Our analysis focused on the case of France. We start by describing the recent evolution of the four main items constituting the French IIP; namely Portfolio Investments, Other Investments, Derivatives and Direct Investments. We observe ample, albeit temporary, variations of these items surrounding QE programs. This analysis is complemented by an econometric approach in which we consider as QE variables both the announcements of the programs and their actual implementation. QE measures do impact all the items of the French IIP. Announcements – and particularly the one of January 2015 – play a stronger role compared to the amounts purchased. We also decompose changes in the IIP into flows and valuation effects and show that the latter is the most reactive to QE measures. Finally, we establish counterfactual scenarios to quantify what France’s IIP would have been in the absence of QE. The strong impact observed following the announcement of January 2015 is rapidly counterbalanced; which suggests an over-adjustment phenomenon at the beginning of the program. This analysis allows estimating the outcome of the policy on the net IIP and thus on international wealth transfer. Consistently with our previous findings, we observe a robust impact at the beginning of the program which is then partly offset.

Monetary integration, and more specifically, the creation of a monetary union in Europe, raises new economic questions concerning its functioning and governance. In particular, we focus on the implications of high and persistent current account deficits for the economic performance of monetary union members in the medium term. Recent literature has argued that conventional measures of external sustainability are misleading because they omit the effects of capital variations on net foreign asset positions due to, among others, stock or debt market crises. In this paper we revisit external sustainability making use of the database developed by Lane and Milesi-Ferretti (2007) that includes these “valuation effects”. The sample period studied covers from the launching of the monetary integration process in Europe (the creation of the European Snake in 1972) up to 2011. Our econometric methodology accounts for the increasing cross-section dependence among EMU countries as well as for possible structural breaks endogenously determined. The results point to the need of abrupt adjustments, either led by the markets or promoted by pro-active policy measures, in order to offset external disequilibria. These results would give support to the surveillance measures proposed by the European Commission (2009, 2010a) and would reject the Lawson's doctrine of “laissez-faire”. M. Camarero and C. Tamarit, and J.L. Carrion-i-Silvestre gratefully acknowledge the financial support from the MICINN CICYT co-ordinated projects CICYT ECO2011-30260-C03-01 and 03 respectively. Cecilio Tamarit and Mariam Camarero are also members of the Research Group of Excellence on Economic Integration INTECO, funded by Generalitat Valenciana Prometeo action 2009/098. This paper has been developed within the research network SOLVEX, (ECO2009-06676-E/ECON) funded by MICINN.