Social and Behavioral Sciences Commons^™

Corporate Cash Holding, Agency Problems And Economic Policy Uncertainty, Siamak Javadi, Mohsen Mollagholamali, Ali Nejadmalayeri, Saud Al-Thaqeb

Economics and Finance Faculty Publications and Presentations

Consistent with the agency view of cash holdings, we document a strong negative relationship between economic policy uncertainty and corporate cash holdings for non-U.S. firms from 19 countries. Our results are robust to different measures of cash holdings and model specifications and survive after addressing endogeneity. We provide evidence that the decrease in cash holdings is moderated by shareholders' ability to force managers to disgorge cash that fits consistently within the agency framework. Overall, results suggest that lowering cash holdings help alleviate agency problems in the presence of policy uncertainty and underscore the significance of country attributes in corporate finance.

A Political Reciprocity Mechanism, Roland Pongou, Jean-Baptiste Tondji

Economics and Finance Faculty Publications and Presentations

We consider the problem of designing legislative mechanisms that guarantee equilibrium existence, Pareto-efficiency, and inclusiveness. To address this question, we propose a finite-horizon voting procedure that embeds clauses of reciprocity. These clauses grant voters the right to oppose actions that are not in their interest, retract actions that face opposition, and punish harmful actions. We study voters' strategic behavior under this voting procedure using two classical approaches. Following the blocking approach, we introduce two related solution concepts---the reciprocity set and the sophisticated reciprocity set---to predict equilibrium policies. We then show that these solution concepts (1) are always non-empty; (2) only …

The Impact Of Climate Change On The Cost Of Bank Loans, Siamak Javadi, Abdullah Al Masum

Economics and Finance Faculty Publications and Presentations

We find that firms in location with higher exposure to climate risk pay significantly higher spreads on their bank loans. This result is robust to different measures of climate risk. Exploiting the economic link between a firm and its customers, we find that the exposure of a firm’s customers to climate risk adversely affects that firm’s cost of borrowing. In the cross-section, we find that the effect is mainly driven by long-term loans of poorly rated firms that are highly exposed to climate risk. Overall, our evidence suggests a slow increase in lenders’ attention to climate risk and that lenders …

Multinationality And The Value Of Green Innovation, Incheol Kim, Christos Pantzalis, Zhengyi Zhang

Economics and Finance Faculty Publications and Presentations

Highlights

• High exposure to foreign markets with more stringent environmental regulations stimulates MNCs' green patent applications.

• The pursuit of green innovation is positively associated with firm value in the long run.

• This long-run advantage is more significant when MNCs' home countries rely on more clean energy for power generation, have a more developed economy and have a more effective government.

• MNCs' environmental competitive advantage is coupled with exposure to MNCs' host countries with high long-term and femininity orientations.

Abstract

When do multinational corporations (MNCs) derive the most from internalizing the transfer of proprietary technological knowhow? We revisit this question, which …

Institutional Investors’ Ownership Stability And Their Investee Firms’ Equity Mispricing, Hamid Sakaki, Surendranath Jory, Dave Jackson

Economics and Finance Faculty Publications and Presentations

This study examines the impact of institutional investors' equity ownership stability and their investment horizon to determine the impact on their investee firms' equity mispricing. Mispricing represents the difference between a firm’s market and fundamental values. We treat institutional investors as a heterogenous group, i.e., dedicated, transient, or quasi-indexer as defined by Bushee, 1998, Bushee, 2001 since their categorization determines their trading strategy. Higher institutional ownership, higher stability in institutional investors' equity ownership, and institutional investors classified as long-term are all associated with lower equity mispricing at investee firms.

Business Strategy And Cost Of Bank Loans, Md Ruhul Amin, Abdullah Al Masum

Economics and Finance Faculty Publications and Presentations

Following Miles and Snow’s Business Strategy (BS) topology, we find that banks impose relatively higher loan spreads for the firms that follow an Innovation-Oriented Business Strategy (IOBS). We further document that IOBS is positively associated with corporate risk measures such as variances in equity returns and returns on assets. Overall, our findings suggest that banks charge a higher cost of debt in anticipation of borrowers’ payback riskiness from an IOBS.

Greenhouse Gas Emission Inefficiency Spillover Effects In European Countries, Levent Kutlu, Ran Wang

Economics and Finance Faculty Publications and Presentations

In our study, we examine whether spatial spillover effects exist for greenhouse gas emission efficiency for 38 European countries between 2005 and 2014. We find that inefficiencies of other countries would lead to lower efficiency levels for a country. This negative inefficiency spillover effect goes down till 2008 then goes up till 2011, then stays relatively stable after 2011. Any strategy to reduce inefficiencies of other countries could potentially improve the efficiency levels. We find that human development index shows significant positive impact on greenhouse gas emission efficiency levels. In particular, one standard deviation increase in human development index would …

Organizational Resources, Country Institutions, And National Culture Behind Firm Survival And Growth During Covid-19, Yu Liu, Mike W. Peng, Zuobao Wei, Jian Xu, Lixin Colin Xu

Economics and Finance Faculty Publications and Presentations

This paper provides one of the first comprehensive and most updated studies on the effects of firms’ organizational resources, country institutions, and national culture on the survival and growth of private firms around the world during the COVID-19 pandemic. Analyzing World Bank Enterprise Follow-up Surveys on COVID-19 that cover 18,770 firms in 36 countries, the paper documents four sets of findings. (1) During the pandemic, firms with favorable organizational resources (state ownership and affiliation with parent companies) are more likely to survive and grow, whereas firms with foreign ownership or more financial obstacles are less likely to survive or grow. …

Information Processing Costs And Corporate Tax Avoidance: Evidence From The Sec’S Xbrl Mandate, Jeff Z. Chen, Hyun Hong, Jeong-Bon Kim, Ji Woo Ryou

Economics and Finance Faculty Publications and Presentations

The IRS uses information contained in financial statements as well as tax returns to detect tax avoidance behavior. We examine the impact on corporate tax avoidance behavior of reductions in the IRS’s information processing costs resulting from the mandatory adoption of XBRL for financial reporting. Motivated by the recent debate in the U.S. Congress over the cost-benefit of mandatory XBRL reporting for small firms, we pay particular attention to small firms, which inherently have relatively high information frictions. We find that the adoption of XBRL for financial reporting results in a significant decrease in tax avoidance. We further find …

Occupancy, Oil Prices, And Stock Returns: Evidence From The U.S. Airline Industry, Andre V. Mollick, Md Ruhul Amin

Economics and Finance Faculty Publications and Presentations

This paper examines whether occupancy of seats affects stock returns of airline companies and how this relationship is affected by WTI oil prices. Our approach combines revenues (occupancy) and costs (oil prices) for 33 U.S. airline companies from 1990 to 2019. Using travel capacity utilization data from U.S. carriers at monthly frequency and exploiting fixed-effects regression models, we document a positive relation between occupancy and stock returns, which is attenuated by oil prices. The role of oil becomes larger with asymmetries: the effects of oil prices are higher when moving up than down. Airline stocks always respond by more than …

Financial Contagion During Stock Market Bubbles, Diego Escobari, Shahil Sharma

Economics and Finance Faculty Publications and Presentations

We investigate the role of bubbles on financial contagion using a set of developed economies. First, using the recursive flexible window right-tailed ADF-based procedure, we date stamp bubble periods in stock index series. Second, we capture contagion with a DCC multivariate GARCH framework. In a third step, we construct a panel by pooling across the time-series dynamic conditional correlations and bubbles to estimate various dynamic panel specifications that consider the endogenous nature of bubbles. We find statistically significant decreases in the dynamic correlations during periods of bubbles, which shows that the financial contagion between pair of countries diminishes when any …

The Dark Side Of Transparency In Developing Countries: The Link Between Financial Reporting Practices And Corruption, Tingting Liu, Yu Liu, Barkat Ullah, Zuobao Wei, Lixin Colin Xu

Economics and Finance Faculty Publications and Presentations

This paper examines the impact of financial reporting practices on corruption obstacles for about 150,000 firms across 143 mostly developing countries from 2006 to 2019. We document a strong positive relationship between the production of audited financial statements (AFS) and corruption obstacles (CO) faced by the firm. We argue that in a corrupt business environment, rent-seeking bureaucrats use the credible financial information to optimize their bribe demands. Our baseline results remain robust after addressing endogeneity concerns. We further show that country-level institutional quality has a moderating effect on the AFS-CO relation. The evidence from surveying entrepreneurs also …

Shareholder Litigation Rights And Stock Price Crash Risk, Ivan Obaydin, Ralf Zurbruegg, Md Noman Hossain, Binay K. Adhikari, Ahmed Elnahas

Economics and Finance Faculty Publications and Presentations

We study the impact of shareholder-initiated litigation risk on a firm's stock price crash risk. Our empirical analysis takes advantage of the staggered adoption of universal demand laws, which led to an exogenous decline in derivative litigation risk. We find that a decline in the threat of derivative litigation reduces crash risk and that information hoarding associated with earnings management is a channel through which litigation risk affects crash risk. The relationship is also moderated by how exposed firms are to the other primary form of shareholder litigation, namely securities class-action lawsuits.

Threshold Effects Of Terms Of Trade On Latin American Growth, Andre C. Vianna, Andre V. Mollick

Economics and Finance Faculty Publications and Presentations

This paper investigates nonlinear relationships between terms of trade volatility (totvol) and economic growth in 14 Latin American economies from 1997 to 2014. In the 2000s, Latin American countries experienced accelerated economic growth often attributed to commodity price booms. We split the sample into two regimes based on totvol thresholds determined by bootstrap techniques. Fixed-effects, instrumental variable and dynamic panel regressions address endogeneity in trade-growth, subject to traditional economic channels such as domestic investment, population growth, exchange rate, government size, and institutions. We find statistically significant thresholds and stronger trade-growth links during the 2000s commodity boom and in larger economies.

The Impact Of The Yield Curve On Bank Equity Returns: Evidence From Canada, Robert N. Killins, Peter V. Egly, Sourav Batabyal

Economics and Finance Faculty Publications and Presentations

We examine the reaction of Canadian banks equity returns to changes in yield curve spreads. We find that Canadian banks equity returns are positively impacted by contemporaneous (and lagged) yield curve spreads. Our results also suggest that Canadian banks have become more sensitive to changes in the slope of the yield curve in the post 2007-2009 financial crisis. We also find an asymmetric impact of the slope of the yield curve on Canadian bank equity returns. For equity investors, the yield curve’s relevance varies with spreadmaturities. Our findings have important implications for the estimations of banks’ cost of capital and …

Explaining The Nonlinear Response Of Stock Markets To Oil Price Shocks, Diego Escobari, Shahil Sharma

Economics and Finance Faculty Publications and Presentations

This paper is set to reconcile the existent conflicting empirical evidence on the effect of oil prices on stock prices. We estimate various nonlinear models where the response changes according to a first-order Markov switching process. More importantly, we model the transition probabilities between the high- and low-response regimes to depend on state variables to allow us to explain the forces behind the asymmetry in the response. The results show statistically significant asymmetries that can be explained by economic recessions and to a lower extent depend on the magnitude of the oil price shift and on whether the shift is …

Environmental Regulation And The Cost Of Bank Loans: International Evidence, Amirhossein Fard, Siamak Javadi, Incheol Kim

Economics and Finance Faculty Publications and Presentations

Using a sample of 27 countries between 1990 and 2014, we find that banks charge a higher interest rate on their loans when lending to firms that face more stringent environmental regulations. Further, we show that firms facing such regulations maintain lower financial leverage, incur more operating expenses, and have fewer banks participating in their loan syndicate. The results of the subsample analysis suggest that the increase in the cost of bank loans is more pronounced for financially constrained firms, firms in industries with high environmental litigation risk, and those located in bank-based economies. Overall, our results provide evidence that …

Political Corruption And Mergers And Acquisitions, Nam H. Nguyen, Hieu V. Phan, Thuy Simpson

Economics and Finance Faculty Publications and Presentations

This research examines the relation between political corruption and mergers and acquisitions (M&As). We find that local corruption increases firm acquisitiveness but decreases firm targetiveness. The levels of corruption in acquirer areas relate positively to the bid premiums and negatively to the likelihood of deal completion. Corruption motivates acquiring firms to use excess cash for payment, which mitigates the negative effect of corruption on acquirer shareholder value. The evidence indicates that acquisitions help acquiring firms convert cash into hard-to-extract assets and relocate assets from the high to low corruption areas, thereby shielding their liquid assets from expropriation by local officials.

Islamic Labeled Firms: Revisiting Dow Jones Measure Of Compliance, Ahmed Elnahas, Ghada Ismail, Rwan El-Khatib, M. Kabir Hassan

Economics and Finance Faculty Publications and Presentations

Billions of dollars, across 131 countries, are invested in Islamic law‐compliant funds that are often promoted as consistent with the spirit and overall objectives of Islam (Maqasid Al‐Sharia), thereby indicating they are more socially responsible, less risky, and less prone to failure. The empirical results of this study indicate that Shariah‐compliant firms identified by the Dow Jones do not have higher corporate social responsibility (CSR) scores, lower risk, or lower likelihood of failure than non‐compliant firms. We address endogeneity using the instrumental variable (IV) approach and selection bias using propensity score matching (PSM). Our results are similar when using the …

Greenhouse Gas Emission Efficiencies Of World Countries, Levent Kutlu

Economics and Finance Faculty Publications and Presentations

Greenhouse gas emissions have increased rapidly since the industrial revolution. This has led to an unnatural increase in the global surface temperature, and to other changes in our environment. Acknowledging this observation, the United Nations Framework Convention on Climate Change started an international environmental treaty. This treaty was extended by Kyoto protocol, which was adopted on 11 December 1997. Using the stochastic frontier analysis, we analyze the efficiencies of countries in terms of achieving the lowest greenhouse gas emission levels per GDP output in the years between 1990–2015. We find that the average greenhouse gas emission efficiencies of world countries …

Tournament-Based Incentives And Mergers And Acquisitions, Nam H. Nguyen, Hieu V. Phan, Hung V. Phan, Dung T. T. Tran, Hong Vo

Economics and Finance Faculty Publications and Presentations

This research examines the relation between tournament-based incentives, which are proxied by the difference between a firm’s CEO pay and the median pay of the senior managers, and mergers and acquisitions (M&As). We find that tournament-based incentives are positively related to firm acquisitiveness and acquiring firms’ stock and operating performance. Further analysis indicates that positive acquisition performance increases the likelihood of the CEO being promoted from inside the acquiring firm. Our evidence is consistent with the view that tournament-based incentives motivate acquiring firms’ managers to make greater efforts and take more risk that result in superior acquisition performance.

A Spatial Stochastic Frontier Model With Endogenous Frontier And Environmental Variables, Levent Kutlu, Kien C. Tran, Mike G. Tsionas

Economics and Finance Faculty Publications and Presentations

We propose a spatial autoregressive stochastic frontier model, which allows for the endogeneity in both the frontier and environmental variables (i.e., endogeneity due to correlation of inefficiency term and the two-sided error term). The model parameters are estimated using a single-stage control function approach. Monte Carlo simulations show that our proposed model and approach perform well in finite samples. We employed our methodology to the Chinese chemicals firm data and found evidence for both spatial effects and endogeneity.

India’S Calorie Consumption Puzzle: Insights From The Stochastic Cost Frontier Analysis Of Calorie Purchases, Gautam Hazarika, Sourabh Bikas Paul

Economics and Finance Faculty Publications and Presentations

Between the early 1970s and very nearly the present, Indians’ per capita calorie consumption declined. This decline, perplexing in the face of rising per capita income when malnutrition is rampant, has been termed India’s Calorie Consumption Puzzle. It has been partially attributed to a squeeze in the household food budget. This study employs Stochastic Cost Frontier Analysis to evaluate this explanation, upon the logic that such a squeeze shall likely result in the rising cost-efficiency of calorie purchases, that is, the more economical purchase of calories. Analysis of household expenditure data from India’s National Sample Survey reveals that Indian households’ …

The Racial/Ethnic Gap In Financial Literacy In The Population And By Income, Marco Angrisani, Sergio Barrera, Luisa R. Blanco, Salvador Contreras

Economics and Finance Faculty Publications and Presentations

We investigate the determinants of the racial/ethnic gap in financial literacy in the general population and within income classes, with a focus on childhood family circumstances and neighborhood socioeconomic characteristics. Our model explains 48% and 57% of the observed gap for Blacks and Hispanics, respectively. For both groups, differences in individual characteristics and neighborhood socioeconomic status contribute the most to the explained gap. The White–Minority gap narrows when moving from low- to high-income classes, but the ability of the model to explain it decreases monotonically. Identifying which additional barriers put minorities at a disadvantage is key to improve financial literacy.

Brand Equity, Earnings Management, And Financial Reporting Irregularities, Ghada M. Ismail, Fariz Huseynov, Pankaj K. Jain, Thomas H. Mcinish

Economics and Finance Faculty Publications and Presentations

Owning valuable brands enhances the financial well-being of firms not only through increased revenues and profitability but also by mitigating agency problems, earnings management, and financial reporting irregularities. Firms with high brand equity are less likely to have income-inflating discretionary accruals, announce earnings restatements, or experience SEC investigations. Brand equity reduces the likelihood of manipulation through incentive and opportunity channels, which we capture in CEO characteristics and compensation, and corporate governance measures. Brand equity reduces the likelihood of financial reporting irregularities more for durable goods firms and firms with shorter-tenured CEOs, as the latter are most vulnerable to performance pressures.

Unknown Latent Structure And Inefficiency In Panel Stochastic Frontier Models, Levent Kutlu, Kien C. Tran, Mike G. Tsionas

Economics and Finance Faculty Publications and Presentations

This paper extends the fixed effect panel stochastic frontier models to allow group heterogeneity in the slope coefficients. We propose the first-difference penalized maximum likelihood (FDPML) and control function penalized maximum likelihood (CFPML) methods for classification and estimation of latent group structures in the frontier as well as inefficiency. Monte Carlo simulations show that the proposed approach performs well in finite samples. An empirical application is presented to show the advantages of data-determined identification of the heterogeneous group structures in practice.

Voting Over Redistribution In The Meltzer–Richard Model Under Interdependent Labor Inputs, Armando R. Lopez-Velasco

Economics and Finance Faculty Publications and Presentations

This paper extends the median voter result of Meltzer and Richard (1981) to the case where a labor economy has any constant returns to scale production function under quasilinear preferences with constant wage elasticity. Average productivities of the different labor inputs depend on their relative abundance in the economy. Agents are heterogeneous due to their labor type and (given type) due to their relative efficiency. They vote over income tax rates which in turn dictate the level of redistribution. The paper shows that preferences over tax rates are single-peaked and hence the median voter theorem applies. This framework connects the …

The Impact Of Stronger Shareholder Control On Bondholders, Sadra Amiri-Moghadam, Siamak Javadi, Mahdi Rastad

Economics and Finance Faculty Publications and Presentations

We study the impact of stronger shareholder control on bondholders. We find that the passage of shareholder-sponsored governance proposals causes a decline in CDS spreads, indicating a net positive effect on bondholders. Evidence suggests that the direct benefit of stronger shareholder control, through “management disciplining” channel, is larger than the combined adverse effects of directly escalating shareholder-bondholder conflict and indirectly exacerbating exposure to shareholder opportunism. Results are stronger for firms with existing high levels of shareholder-bondholder conflict and for proposals that mitigate managerial entrenchment without exacerbating risk-shifting. Finally, stronger shareholder control improves credit ratings and operating performance in the long-term.

Financing Patterns In Transition Economies: Privatized Former Soes Versus Ab Initio Private Firms, Yu Liu, Nilesh Sah, Barkat Ullah, Zuobao Wei

Economics and Finance Faculty Publications and Presentations

We employ 19,521 unique firms in 30 transition economies to investigate the relation between the origins of private firms and their financing patterns. In our sample, the private firms are either privatized former state-owned enterprises (SOEs) or ab initio (from the beginning) private firms. Our results show that privatized former SOEs finance a higher proportion of their fixed assets from bank finance and supplier credit, while ab initio private firms rely more on informal finance. We argue that privatized former SOEs continue to benefit from the political and financial connections established during their SOE era. We further document that financial …

Shareholder Litigation Rights And Corporate Acquisitions, Chune Young Chung, Incheol Kim, Monika K. Rabarison, Thomas Y. To, Eliza Wu

Economics and Finance Faculty Publications and Presentations

We examine the effect of shareholder litigation rights on managers’ acquisition decisions. Our experimental design exploits a U.S. Ninth Circuit Court of Appeals ruling on July 2, 1999 that resulted in a reduction in shareholder class actions. We find that, since the ruling, firms in Ninth Circuit states acquire larger targets. Furthermore, acquirers’ returns are lower in these states, especially for those with weaker corporate governance. Further analysis shows that value destruction is the result of managers’ freedom to conduct empire-building acquisitions using overvalued equity. Overall, our findings indicate the importance of shareholder litigation as an external governance mechanism.