Finance Commons^™

Overconfidence And Welfare In A Differentiated Duopoly, Jean-Baptiste Tondji

School of Economics and Finance Faculty Publications

We examine whether owners' decisions to delegate corporate responsibilities to overconfident managers improve welfare. We develop a dynamic model with product differentiation, where firms compete in cost-reducing research and development (R&D) and output. Before firms compete, each owner makes a strategic decision whether to hire an overconfident manager. The results reveal that when R&D technology is less productive, owners hire overconfident managers who overinvest in cost-reducing R&D. These strategic decisions improve welfare when spillovers are small and R&D productivity is low, or spillovers are large, or product differentiation is strong.

Stable Allocations Of Vaccines In A Political Economy, Zephirin Nganmeni, Roland Pongou, Bertrand Tchantcho, Jean-Baptiste Tondji

School of Economics and Finance Faculty Publications

We develop a theory that addresses the existence of stable vaccine allocations in a political economy where vaccination offers both private and social benefits. These are allocation policies that a political leader can enforce without losing their popularity. We show that a stable allocation may not exist if vaccine supply is sufficiently low relative to the number of individuals eligible to receive a dose. We then characterize the minimum number of vaccine doses guaranteeing the existence of a stable vaccine allocation. Moreover, when individuals have unequal voting rights in the political economy, stable allocations favor those with greater voting power. …

The Effect Of Foreign Institutional Ownership On Corporate Tax Avoidance: International Evidence, Iftekhar Hasan, Incheol Kim, Haimeng Teng, Qiang Wu

School of Economics and Finance Faculty Publications

We find that foreign institutional investors (FIIs) reduce their investee firms’ tax avoidance. We provide evidence that the effect is driven by the institutional distance between FIIs’ home countries/regions and host countries/regions. Specifically, we find that the effect is driven by the influence of FIIs from countries/regions with high-quality institutions (i.e., common law, high government effectiveness, and high regulatory quality) on investee firms located in countries/regions with low-quality institutions. Furthermore, we show that the effect is concentrated on FIIs with little experience in the investee countries/regions or FIIs with stronger monitoring incentives. Finally, we find that FIIs are more likely …

Unintended Consequences Of The Dodd–Frank Act On Credit Rating Risk And Corporate Finance, Bina Sharma, Binay K. Adhikari, Anup Agrawal, Bruno R. Arthur, Monika K. Rabarison

School of Economics and Finance Faculty Publications

Prior research finds that Dodd–Frank Act’s regulations on credit rating agencies (CRAs) increase rated firms’ risk of rating downgrades, regardless of their credit quality. Our difference-in-difference estimates suggest that after Dodd–Frank, low-rated firms, which face steep costs from a further downgrade, significantly reduce their debt issuance and investments compared to similar unrated firms. Our results are not driven by credit supply or the financial crisis. They reveal an unintended consequence of Dodd–Frank: Greater regulatory pressure on CRAs leads to negative spillover effects on firms concerned about credit ratings, regardless of their credit quality.

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

School of Economics and Finance Faculty Publications

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 …

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

School of Economics and Finance Faculty Publications

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, …

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

School of Economics and Finance Faculty Publications

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 …

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

School of Economics and Finance Faculty Publications

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

School of Economics and Finance Faculty Publications

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

School of Economics and Finance Faculty Publications

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

School of Economics and Finance Faculty Publications

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 …

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

School of Economics and Finance Faculty Publications

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 …

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

School of Economics and Finance Faculty Publications

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 …

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

School of Economics and Finance Faculty Publications

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.

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

School of Economics and Finance Faculty Publications

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

School of Economics and Finance Faculty Publications

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.

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

School of Economics and Finance Faculty Publications

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

School of Economics and Finance Faculty Publications

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

School of Economics and Finance Faculty Publications

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 …

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

School of Economics and Finance Faculty Publications

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 …

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

School of Economics and Finance Faculty Publications

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. …

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

School of Economics and Finance Faculty Publications

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

School of Economics and Finance Faculty Publications

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 …

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

School of Economics and Finance Faculty Publications

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.

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

School of Economics and Finance Faculty Publications

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 …

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

School of Economics and Finance Faculty Publications

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

School of Economics and Finance Faculty Publications

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

School of Economics and Finance Faculty Publications

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

School of Economics and Finance Faculty Publications

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

School of Economics and Finance Faculty Publications

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.