Social and Behavioral Sciences Commons^™

Stock Returns, Oil Prices, And Leverage: Evidence From U.S. Firms, Md Ruhul Amin, André Varella Mollick

Economics and Finance Faculty Publications and Presentations

This paper examines how the relationship between stock returns of U.S. firms and WTI oil prices is affected by leverage (debt to total assets) from 1990 to 2020. Results from our fixed-effect regression models suggest that leverage effects on stock returns are pervasive both in aggregate and cross-industry levels, while the mining industry is more sensitive. In addition to the positive oil price effects attenuated by leverage at the aggregate level, we observe stronger marginal effects of leverage only for the mining sector. Being more exposed to commodity prices, the positive effects of oil prices on stock returns in the …

Covid-19 And Women-Led Businesses Around The World, Yu Liu, Siqi Wei, Jian Xu

Economics and Finance Faculty Publications and Presentations

The impacts of crises are never gender-neutral, and the COVID-19 pandemic is no exception. Using a brand-new dataset covering 24 countries, we document that women-led businesses are subject to a higher likelihood of closure and a longer closure duration than men-led businesses during the pandemic. Women business leaders are also more pessimistic about the future than men business leaders. The disadvantages suffered by women-led businesses widen in high gender inequality economies and developing economies. Our results further indicate that finance and labor factors are likely to be the major contributors to these disadvantages. We suggest that COVID-19′s policy response should …

The Behavioral Si* Model, With Applications To The Swine Flu And Covid-19 Pandemics, Jussi Keppo, Marianna Kudlyak, Elena Quercioli, Lones Smith, Andrea Wilson

Economics and Finance Faculty Publications and Presentations

The 1927 SIR contagion model is the dynamical system for an infection that passes at a constant rate in random pairwise meetings. Our Behavioral SI* Model assumes that everyone has access to a constant elasticity of avoidance technology. We then derive the passing rate in fully solvable Nash equilibrium of the game where everyone optimizes. The resulting dynamics are log-linear, and incidence is log-linear in prevalence, with slope less than one.

The SI* models yields extreme predictions for major contagions, not realized. At breakout, the SI* models capture exponential growth. In our BSI* model, increasing avoidance behavior bends the curve, …

Mixed-Signal Stock Splits, Ahmed M. Elnahas, Pankaj K. Jain, Thomas H. Mcinish

Economics and Finance Faculty Publications and Presentations

We investigate CEOs who combine insider selling with stock splits, which is suspicious, because dumping stocks is inconsistent with the positive stock-split signal. Our empirical results indicate that, compared with other splits, these mixed-signal splits perform poorly and are followed by much lower buy-and-hold abnormal returns and much higher likelihoods of announcing an earnings restatement and CEO turnover in the post-split period. Our results are robust to entropy balancing and controlling for CEO characteristics, incentives, and corporate governance and highlight previously ignored agency issues around stock splits. Attention to insider trades is essential to properly interpret a stock-split signal.

Local Religiosity, Workplace Safety, And Firm Value, Md Ruhul Amin, Incheol Kim, Suin Lee

Economics and Finance Faculty Publications and Presentations

This paper examines the effect of local religiosity on employee treatment, proxied by workplace safety incidents. Using the establishment-level data compiling on the incidents of work-related injuries, we find that employees of the establishments in more religious counties get less injured than those in less religious counties. We further find that a reduction in occupational accidents is more evident for establishments in counties dominated by one religious denomination, strengthening our argument on community solidarity and homophily stemming from religious networks. Firms whose establishments are located in high religiosity counties are less likely to violate workplace conduct and more likely to …

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 …