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This paper investigates the impact of mainstream Sharia‐based screening methodologies on equity risk. The study is based on the daily returns of 23 pairs of stock indices belonging to different index providers, namely Dow Jones, FTSE, and S&P. For risk measurement, the study uses five Value at Risk (VaR) methods. Moreover, the conditional VaR (CVaR) is used to analyze the tail behavior of return distributions. The results show that Sharia‐based screening is a source of significant differences in risk. There is strong evidence that Islamic stock indices (ISIs) tend to be less risky than their conventional peers. Also, the screening process allows for keeping extreme negative returns at a lower level relative to unscreened indices. The analysis during the Dotcom and Subprime crises shows that, globally, the results are time‐invariant. In sum, Islamic screening is tantamount to prudential rules that lead to low‐risk portfolios; it is, in its essence, a risk‐reduction strategy. Findings suggest that Sharia‐compliant stocks would be of great attractiveness to risk‐averse investors. They will find their claim in this asset class, as its riskiness is relatively low. For banks, a lower VaR of Islamic investing implies fewer capital requirements for market risk when holding portfolios that include Sharia‐compliant stocks. Fewer capital requirements will enhance the banks' ability to invest and make profits, which will, in turn, result in reducing the cost of capital. [ABSTRACT FROM AUTHOR]

Prior research empirically finds that the systematic equity risk for US firms as measured by beta reflects the risk of their defined benefit pension plans, despite opaque and complicated pension accounting rules. This paper re-examines this question in the context of subsequent clarification of these rules, and the growing importance of non-defined benefit pension funds. This issue is examined by comparing standard equity-based models with a broader pre-existing shareholder model of the reporting entity to re-examine the relationship between firm equity risk and pension plan risk. The empirical tests are conducted on a sample of S&P 500 firms during the first three years of the introduction of the revised pension accounting rules (2006–2008), based on panel data regression relating firm risk to pension risk and controlling for other variables. In contrast to the prior findings of JMB, the estimated cost of capital is additionally sensitive to the following: (a) alternative explicit versus implicit definitions of pension liability; (b) the nature and scope of long-term deferred compensation arrangements; and (c) the scope and nature of investment-related risks through investment in sponsoring company stock that are associated with these pension arrangements. [ABSTRACT FROM AUTHOR]

We study the effects of takeover feasibility on asset prices and returns in a unified framework. We show theoretically that takeover protections increase equity risk, stock returns, and bond yields by removing a valuable put option to sell the firm, notably for firms approaching distress. We investigate these claims empirically and find that distressed firms experience a significant decrease in value and increase in returns and market betas after the passage of antitakeover laws, in line with our predictions. At issue bond yields are also higher when an antitakeover law is in effect. Consistent with the model, the effects of antitakeover laws on stock returns, respectively, bond yields, are greater when shareholders, respectively, bondholders, have greater bargaining power. This paper was accepted by Lukas Schmid, finance. Funding: E. Morellec acknowledges financial support from the Swiss Finance Institute. Supplemental Material: The online appendix and data files are available at https://doi.org/10.1287/mnsc.2022.03111. [ABSTRACT FROM AUTHOR]

Recently, the introduction of Environmental, Social, and Governance (ESG) scores has become crucial for investment decisions and in minimizing portfolio risk. This study aims to understand the relationship between ESG scores and Value-at-Risk (VaR), computed by using a Vine copula–GARCH based approach, chosen for its reliability in detecting interdependencies among multiple stocks. In fact, one of the main challenges in estimating VaR for a stock portfolio is capturing the dependence structure among a large number of assets. The dataset consists of 16 companies listed on the FTSE100 index. The corresponding ESG scores were collected over a comprehensive period of five years, from 2018 to 2022, covering both normal and stressed market conditions. Additionally, a focused analysis was conducted for the period from 2020 to 2022 to isolate the specific effects of the COVID crisis. The results indicate that an increase in assets with the highest ESG scores reduces potential losses in the portfolio. This finding underscores the importance of integrating high-level ESG scores into portfolios to mitigate market risk. Additionally, during periods characterized by stressed market conditions, the impact of ESG scores on VaR is even more pronounced, demonstrating that sustainable assets are more resilient in times of crisis. [ABSTRACT FROM AUTHOR]

We study the risk-relevance of non-GAAP earnings. Risk is an important earnings attribute in valuation models, and the FASB's conceptual framework identifies providing information about risk as a primary objective for earnings. Although prior research addresses the value-relevance of non-GAAP earnings, researchers have paid little attention to their risk-relevance. We find that non-GAAP adjustments yield an earnings number that isolates the more risk-relevant components of earnings. Excluded earnings components, however, contain some, albeit less, information about risk. Thus, although non-GAAP earnings can help investors prioritize the more versus less risk-relevant components of earnings, non-GAAP earnings are potentially most informative about risk when used together with GAAP earnings. [ABSTRACT FROM AUTHOR]

We compare the effects of corporate social responsibility (CSR) on firms' equity risk under two different (non-)financial reporting regimes: the risk-based U.S. and the content-based EU system. We observe a strongly negative CSR-risk relation in the EU, but a much weaker general impact in the U.S. In correspondence with goal-framing theory, we find several moderating effects on this association, depending on the reporting regime: (i) A highly volatile market environment unfolds the risk-reducing effect of CSR in the U.S. system, but has no moderating effect in the EU; (ii) Rising CSR awareness buttresses the risk-reducing effect of CSR in the EU, but has an opposing effect in the U.S.; (iii) Risk reductions are most strongly associated with social and governance rather than environmental activity in the EU regime, while there are no such individual effects in the U.S. [ABSTRACT FROM AUTHOR]

Background: By decoupling economic growth from an intensive use of resources, preventing the impairment of natural capital, and enhancing resilience to system-wide shocks, the Circular Economy (CE) is a powerful opportunity to hedge against "linear" risk factors. In fact, it helps shielding against the risk of assets becoming stranded, can generate fresh and non-speculative demand for investments, and can improve investment results at both individual and portfolio levels. Problem: Therefore, equity investors into circular undertakings could benefit from (H1) reduced stock return volatility, as well as (H2) a greater ability to withstand exogenous negative events. Approach: For testing these hypotheses, we constructed a sample of 644 listed companies across EU-15 countries, plus Switzerland, and 17 different industries. We retrieved their market data in 2019–2020, as well as their accounting fundamentals in 2018–2019. By controlling for the latter, we investigated whether equity risk—either in total terms (i.e., the standard deviation of returns) or circumscribed to the systematic component thereof (i.e., the Beta against a European or global market index)—may be explained by a company's degree of circularity, measured by the Circularity Score (CS). This is a novel indicator originally proposed by Zara and Ramkumar (2022), based on Refinitiv ESG data, the methodology whereof we significantly amended. As a core innovation, in weighting an entity's performance on a CE framework, we assessed the latter's "financial materiality" (i.e., relevance to the company's business) at sub-industry level, applying the SASB Materiality Maps. Via OLS estimation, we tested our hypotheses (i) over the whole-time horizon, in a panel model; (ii) on specific timeframes, in a standard cross-sectional model. The latter was applied to either the entire 2020 or subperiods thereof: namely, with respect to the COVID-19 outbreak, we distinguished between a pre-shock, a shock and a post-shock phase. Our quest was refined to conduct a deeper investigation into the Oil & Gas industry, which is intrinsically the most exposed to linear risks and, also, did experience the widest volatility in 2020. Findings: Both H1 and H2 received widespread confirmation. The CS was found to exert a negative, significant and robust effect on all the three risk measures, over the whole timespan as well as in subperiods (particularly the post-shock phase). Also, amplifying effects were recorded on the Oil & Gas industry. Conclusions: Our results lend remarkable support to the idea that the CE is a powerful enabler of de-risking, also in case of a severe shock, with a view to mitigating the negative consequences and building back better. They call on firms and policymakers to foster the circular transition, thereby accelerating economic recovery in the aftermath of the pandemic crisis. [ABSTRACT FROM AUTHOR]

A breach in information security (infosec) can materially impact a firm’s long-term competitiveness. For publicly listed firms, an infosec breach can have a long-lasting effect on their competitive stock performance, including their equity risk. Despite its significance, past research has focused primarily on examining the short-term effect of infosec breaches while ignoring its long-term effect on the firm’s equity risk. Therefore, in this research, we examined the long-run effect of 276 infosec breaches at publicly traded firms on equity risk from 2009 to 2018. We analyzed each firm’s equity risk compared to its competitive control firms of similar sizes and performances for three years, from one year before to two years after the breach, using a one-to-one matching methodology. The univariate analysis of infosec breaches on equity risk indicated that breach firms have a 7% higher equity risk than competitive control firms. Additionally, the quantile regression analysis of the effect of infosec breach factors on long-run equity risk showed that the rise in equity risk is higher if the breach involves the compromise of confidential information and is a repeat breach for the same firm. The findings provide a valuable resource for investors, managers, and researchers interested in understanding the long-term relationship between infosec breaches and a firm’s stock competitiveness.

Based on a large panel of listed firms from 52 countries in the period 2002–2020, we investigate the relationship between corporate social responsibility (CSR) and equity risk. We confirm previous evidence that higher CSR scores are related to lower risk measures, considering all types of risks: total, systematic, and idiosyncratic. Analyzing a large international sample allows us to investigate the role of country and company characteristics in the relationship between CSR scores and risk measures. The risk-reducing effect is more pronounced in weaker institutional environments. It is stronger in civil-law countries, in countries with low security regulation or disclosure requirement levels and where financial information is less widespread. Firms in high impact or high profile industries benefit more from CSR than firms in other industries as do firms that are not cross-listed. The financial crisis has increased the risk-reducing effect of CSR. The main results are confirmed in the COVID-19 period. [ABSTRACT FROM AUTHOR]

With the use of empirical data, this paper focuses on solving financial and investment issues involving extremal dependence of 10 pairwise combinations of the 5 BRICS (Brazil, Russia, India, China, and South Africa) stock markets. Daily closing equity indices from 5 January 2010 to 6 August 2018 are used in the study. Unlike previous literature, we use bivariate point process and conditional multivariate extreme value models to investigate the extremal dependence of the stock market returns. However, it is observed that the point process was able to model many more extreme observations or exceedances that contribute to the likelihood estimation. It gives more information than the threshold excess method of the CMEV model. This study shows varying levels of low extremal dependence structure whose outcomes are highly beneficial to investors, portfolio managers and other market participants interested in maximising investment returns and financial gains. [ABSTRACT FROM AUTHOR]

This study was conducted to determine the impact of financial decisions on equity risk in enterprises. The factors representing financial decisions include investment decisions, working capital decisions, and funding decisions. The equity risk is represented by beta in firms. Research and analysis of panel data with generalized least squares (GLS) via industry construction companies listed on the Vietnam Stock Exchange from 2015 to 2019. The data analysis results show that investment decisions do not affect equity risk, working capital decisions have a positive impact on equity risk, and funding decisions have a negative impact on equity risk. Furthermore, this study shows that agency theory does not exist in the relationship between financial decisions and equity risk in industry-construction enterprises in Vietnam. From this result, the authors also provide implications to help investors and corporation managers make decisions according to their goals based on signs of financial decisions.

This study provides fully mathematically and economically feasible solutions to estimating implied correlation matrices in equity markets. Factor analysis is combined with option data to receive ex ante beliefs for cross-sectional correlations. Necessary conditions for implied correlation matrices to be realistic, both in a mathematical and in an economical sense, are developed. An evaluation of existing models reveals that none can comply with the developed conditions consistently. This study overcomes this pitfall and provides two estimation models via exploiting the underlying factor structure of returns. The first solution reformulates the task into a constrained nearest correlation matrix problem. This method can be used either as a stand-alone instrument or as a repair tool to re-establish the feasibility of another model's estimate. One of these properties is matrix invertibility, which is especially valuable for portfolio optimization tasks. The second solution transforms common risk factors into an implied correlation matrix. The solutions are evaluated upon empirical experiments of S&P 100 and S&P 500 data. They turn out to require modest computational power and comply with the developed constraints. Thus, they provide practitioners with a reliable method to estimate realistic implied correlation matrices. [ABSTRACT FROM AUTHOR]

In this paper, we measure the market and the longevity risks borne by an insurer by computing their solvency capital for a given annuity and within an investment strategy. For this purpose, we propose the investment strategy in such a way as to mitigate the solvency capital of the insurer and improve the internal rate of return of a shareholder investing on a given annuity. Numerically, we study the sensitivity of both the solvency capital and the internal rate of return with respect to some significant parameters. [ABSTRACT FROM AUTHOR]

A breach in information security (infosec) can materially impact a firm's long-term competitiveness. For publicly listed firms, an infosec breach can have a long-lasting effect on their competitive stock performance, including their equity risk. Despite its significance, past research has focused primarily on examining the short-term effect of infosec breaches while ignoring its long-term effect on the firm's equity risk. Therefore, in this research, we examined the long-run effect of 276 infosec breaches at publicly traded firms on equity risk from 2009 to 2018. We analyzed each firm's equity risk compared to its competitive control firms of similar sizes and performances for three years, from one year before to two years after the breach, using a one-to-one matching methodology. The univariate analysis of infosec breaches on equity risk indicated that breach firms have a 7% higher equity risk than competitive control firms. Additionally, the quantile regression analysis of the effect of infosec breach factors on long-run equity risk showed that the rise in equity risk is higher if the breach involves the compromise of confidential information and is a repeat breach for the same firm. The findings provide a valuable resource for investors, managers, and researchers interested in understanding the longterm relationship between infosec breaches and a firm's stock competitiveness. [ABSTRACT FROM AUTHOR]

This paper analyzes the Solvency Capital Requirement (SCR) for equity risk under the guidelines of the current insurance regulation in Mexico (equivalent to Solvency II): It is assumed that the Mexican Stock Index (IPC/BMV) is a representative sample of the behavior of the shares listed in the Mexican stock market. A GARCH methodology is proposed with innovations t-student for the calculation of the VaR (99.5 %) required as equivalence to the standard formula of the Circular Única de Seguros y Fianzas (CUSF): By this means, the aim is to demonstrate an underestimation of the equity risk when using the standard model of the Comisión Nacional de Seguros y Fianzas (CNSF): The contemplated time series runs from April 1990 to December 2018 on a daily basis. It was found that the RS(2)-GARCH (1, 1) model with t-student innovations, efficiently estimates the behavior of the CPI growth rate, and presents a greater statistical significance when compared with the asymmetric E-GARCH models, T-GARCH and the model with normal distribution. Consequently, the RS-GARCH model represents an additional methodology for the measurement of equity risk, and that can be translated into a tool for insurance companies to estimate their solvency. [ABSTRACT FROM AUTHOR]

With the use of empirical data, this paper focuses on solving financial and investment issues involving extremal dependence of 10 pairwise combinations of the 5 BRICS (Brazil, Russia, India, China, and South Africa) stock markets. Daily closing equity indices from 5 January 2010 to 6 August 2018 are used in the study. Unlike previous literature, we use bivariate point process and conditional multivariate extreme value models to investigate the extremal dependence of the stock market returns. However, it is observed that the point process was able to model many more extreme observations or exceedances that contribute to the likelihood estimation. It gives more information than the threshold excess method of the CMEV model. This study shows varying levels of low extremal dependence structure whose outcomes are highly beneficial to investors, portfolio managers and other market participants interested in maximising investment returns and financial gains.

The 2008–2009 Global Financial Crisis (GFC) has swayed regulators to set forth the Solvency II agreement for determining Solvency Capital Requirement (SCR) for insurance companies. In this paper, we apply novel internal models to investigate whether the latest version of the Solvency II standard model demands sufficient capital charges, both in normal and stressed times, for the different risk categories included in bond and stock portfolios. Because the GFC has shown that extreme events on the tail of probability distributions can occur quite often, our empirical findings indicate that the magnitude of the equity risk using the GJR–EVT–Copula method requires insurers to keep more SCR for stock portfolios than the Solvency II standard model. In the case of a bond portfolio, we conclude that the Solvency II standard model requires approximately the same SCR as our internal model for the higher quality and longer maturity bonds, whereas the standard model overestimates SCR for the lower quality and shorter maturity bonds. At the same time, the standard model underestimates interest-rate risk and overestimates spread risk. Overall, the discrepancies in the estimated SCRs between the Solvency II standard technique and our internal models increase as the level of the risks rise for both stock and bond markets. Our empirical results are in line with other competing internal modeling techniques regarding stock market investment and bond portfolios with the higher quality and longer maturity bonds, while for the lower quality and shorter maturity bonds, the results contradict other modeling procedures. The obtained empirical results are interesting in terms of theory and practical applications and have important implication for compliance with the Solvency II capital requirements. Likewise, it can be of interest to insurance regulators, policymakers, actuaries, and researchers within the field of insurance and risk management. [ABSTRACT FROM AUTHOR]

The ongoing COVID-19 pandemic has strongly reminded equity investors that rare but extreme events occur from time to time. At the individual firm level, such events also impact the likelihood of bankruptcy, a feature that is not well represented in the traditional Capital Asset Pricing Model. This paper presents a functional form for equity asset pricing that is realistic, and reconciles the observed high equity risk premium with the observed lower than expected slope of the Security Market Line. Most importantly, we will demonstrate how including the potential for such large events changes traditional views of equity returns and the known factors that contribute to those returns. On the basis of empirical examination of a dataset stretching over 30 years without survivorship bias, we conclude that when the probabilities of rare extreme events are considered, strategies that focus on "alpha" (risk adjusted return) as defined in Jensen (J Finance 23(2):389–416, 1967) are structurally superior to "smart beta" strategies that seek to outperform a market index benchmark. [ABSTRACT FROM AUTHOR]

In this study, we investigate how labor protection institutions and the presence of controlling shareholders interact to determine a firm's cost of equity capital in an international setting. Our firm- and country-level analyses reveal that firms in countries with greater labor rights have a higher cost of equity, over and above the differences explained by investor protection environments and firm- and country-level risk factors. We find that operating leverage and information asymmetry serve as channels through which labor protection increases the cost of equity capital. More interestingly, the detrimental effect of labor protection on the cost of equity is mitigated in the presence of controlling shareholders, especially in the case of a family controlling owner, indicating the effectiveness of controlling owners at coping with difficult labor relations. The economic significance of this advantage is non-trivial: a one-unit increase in the labor market regulation index increases the annual cost of equity by 0.776% in widely held firms, whereas it increases by only 0.415% in firms with controlling shareholders. Our study identifies better labor relations as a potential channel through which concentered ownership affects the interaction of labor power and the cost of equity capital. [ABSTRACT FROM AUTHOR]

How much of the equity risk premium puzzle can be attributed to the insecure property rights of shareholders? This paper develops a version of the CCAPM with insecure property rights. The model implies that the current expected equity premium can be reconciled with a coefficient of risk aversion of 3.76, thus resolving the equity premium puzzle.

In this paper, we investigate IPO first-day returns in French market. Our focus is to assess the relationship between equity risk, corporate leverage and IPO initial returns. Based on data of 254 French IPOs, traded on Euronext/Alternext markets over the period 2006 and 2016, we find that estimated beta and idiosyncratic volatility are strongly and negatively related to book and market net gearing ratios. We also find that the interaction terms between equity risk measures and corporate leverage ratios are inversely related to IPO first-day returns. In addition, we highlight that industry and macroeconomic environment variables are significant predictors of equity initial returns. Robustness check of our findings indicates less relevant results for corporate leverage when it is estimated as independent variable. [ABSTRACT FROM AUTHOR]

By using data from thirteen publicly traded commercial and deposit banks this paper estimates the determinants of market risk for banks' equities in the case of an emerging market economy, Turkey. The analysis reveals that maturity composition of banks' loans, share of trading income in banks' overall revenue stream and its foreign-ownership structure are important indicators of the volatility of its equity returns. Banks with shorter loan maturity positions are regarded by investors as safer companies to invest in while increases in trading income as a source of banks' overall revenue increases the volatility of its equity returns. Foreign ownership of a bank also lowers its equity return risk.