Finance Commons^™

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

School of Economics and Finance Faculty Publications

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

School of Economics and Finance Faculty Publications

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

School of Economics and Finance Faculty Publications

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.

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

School of Economics and Finance Faculty Publications

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

School of Economics and Finance Faculty Publications

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

School of Economics and Finance Faculty Publications

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 …

Ceo Political Ideology And Management Earnings Forecast, Md Noman Hossain, Ahmed Elnahas, Lei Gao

School of Economics and Finance Faculty Publications

Republican CEOs are more likely to issue earnings forecasts and to issue forecasts that are more accurate and timely. Republican CEOs favor range and less optimistic forecasts, convey more negative news, and have more positive earnings surprises. We address endogeneity using propensity score matching and difference-in-difference estimates. Our results are robust to controlling for CEO characteristics, incentives, overconfidence, and managerial ability, and are stronger for firms with a high level of institutional ownership and litigation risk. The preference for threat and ambiguity avoidance of conservative CEOs seem to outweigh the tendency to seize on information associated with their authoritarian personalities.

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

School of Economics and Finance Faculty Publications

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.

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

School of Economics and Finance Faculty Publications

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 Capital Structure Decisions, Nam H. Nguyen, Hieu V. Phan, Eunju Lee

School of Economics and Finance Faculty Publications

We exploit the staggered adoption of the universal demand (UD) laws across U.S. states, which impedes shareholder rights to initiate derivative lawsuits, as a quasi-natural experiment to examine the relation between shareholder litigation rights and firm capital structures. We find that weaker shareholder litigation rights due to the UD laws adoption lead to higher financial leverage, which enhances firm value. Furthermore, the positive relation between the UD laws adoption and financial leverage is more pronounced for firms exposed to higher shareholder litigation risk ex ante or financially constrained firms. Our evidence is consistent with lower shareholder litigation threats motivating firms …

Total Factor Productivity And Idiosyncratic Volatility Trends, Hussein Abdoh, Yu Liu

School of Economics and Finance Faculty Publications

Firms’ idiosyncratic stock return volatility has become more volatile in the US since the 1960s. This paper investigates why individual stocks became more volatile over the 1964–2013 period using firm-level total factor productivity (TFP). On average, the volatility of idiosyncratic TFP growth rate has increased, being associated with higher idiosyncratic return volatility. The connection between TFP growth and economic profits provides an explanation for the increase in the idiosyncratic volatility of fundamental cash flows. The results are robust when using timeseries and panel regressions and controlling for cash flow and earnings variability, size, book-to-market, leverage, profitability, age, dividend yield, and …

Democracy In Emerging Markets: A New Perspective On The Natural Resources Curse, André V. Mollick, Andre Vianna, Gautam Hazarika

School of Economics and Finance Faculty Publications

Using annual data from 1980 to 2014, we reexamine the relationship between democracy and natural resources for a large sample of emerging market economies. Controlling for human capital (or real GDP per capita) and openness measures, dynamic panel methods address endogeneity from more democratic regimes demanding better control of rents. We find that democracy responds positively to natural resource rents in GDP (NAT) and negatively to terms of trade (TOT). The NAT positive effects mitigate the negative impact of TOT on democracy and holds well in different specifications. By building on a literature focusing on oil rents, increases in NAT …

Political Design Meets Policy Complexity, Roland Pongou, Jean-Baptiste Tondji

School of Economics and Finance Faculty Publications

The rules that are employed to pass policies in legislative bodies vary widely. It is generally argued that policies that differ in complexity or importance level should be decided under different kinds of voting rules. While this question has been examined for static legislative mechanisms, an analysis of the precise relationship between the level of policy complexity and the type of voting rule is still missing for dynamic mechanisms. We address this problem from the perspective of a preference-blind political designer. Given the level of complexity of the decision that is to be made, the political designer's goal is to …

Inflation Targeting And Exchange Rate Volatility In Emerging Markets, Rene Cabral, Francisco G. Carneiro, Andre V. Mollick

School of Economics and Finance Faculty Publications

The paper investigates the exchange rate on the reaction function of 24 emerging markets economies’ (EMEs) central banks from 2000Q1 to 2015Q2. This is done by first employing fixed-effects (FE) ordinary least squares and then system generalized methods of the moments techniques. Under FE, the exchange rate is important in the reaction function of EMEs. Allowing for the endogeneity of inflation, output gap, and the exchange rate, the exchange rate remains positive and statistically significant (but quantitatively less) across inflation targeting countries. When the sample is partitioned into targeting and non-targeting countries, the exchange rate remains relevant in the reaction …

Market Structures In Production Economics, Devin Garcia, Levent Kutlu, Robin C. Sickles

School of Economics and Finance Faculty Publications

Our chapter begins by discussing the structure-conduct-performance (SCP) paradigm, which is an early descriptive literature that provided many of the stylized facts about market behaviors. This is followed by a discussion of the bounds approach, which concentrates on making predictions that can hold across a broad range of industries and is achieved by aiming conclusions based on minimal assumptions. We then briefly talk about commonly used fundamental market structures and illustrate how different combinations of various standard concepts are combined to describe market structures. As dynamic en and markets with product differentiation play important roles in defining market structures, we …

Midair Refueling For Sensation Seeking? Pilot Ceos And Corporate Debt Contracting, Steven Freund, Tunde Kovacs, Nam H. Nguyen, Hieu V. Phan

School of Economics and Finance Faculty Publications

We examine the relation between chief executive officer (CEO) sensation seeking, which captures the desire for varied, novel, and complex personal sensations and experiences, and corporate debt contracting. Using pilot certificates as a proxy for the personality trait of sensation seeking, we find that firms with pilot CEOs use longer maturity debt financing even when long-term debt is more costly than short-term debt. Our findings are robust to controlling for the endogenous matching between firms and CEOs. Our evidence indicates that CEOs with sensation-seeking personality traits prefer long-term debt financing to avoid the liquidity risk associated with short-term debt financing …

Us Community Bank Profitability: A Crosssectional And Dynamic Panel Analysis Of Rural And Metropolitan Banks, Robert D. Morrison, Diego Escobari

School of Economics and Finance Faculty Publications

This study compares 5,286 community banks operating in rural and metropolitan counties from 2000 through the end of 2013 on the variables contributing to bank profitability using pooled OLS, pooled time-series OLS, and dynamic panels methodologies. Following the SCP and competition-fragility literature, one would expect a difference in the variables contributing to profitability. The size of the coefficients indicates that the variables contributing to profitability differ in magnitude when comparing community banks in metropolitan counties to those in rural counties. Both the pooled and time-series OLS models indicate that bank size contributes to profitability more in metropolitan areas; however, on …

Did The Adoption Of Ifrs Affect Corporate Tax Avoidance?, Oliver Nnamdi Okafor, Akinloye Akindayomi, Hussein Warsame

School of Economics and Finance Faculty Publications

This article investigates whether the adoption of international financial reporting standards (IFRS) affected corporate tax avoidance in Canada. Based on a 3,200 firm-year data set of 400 publicly listed Canadian firms that adopted IFRS and 400 listed US firms, matched one-to-one using propensity score matching, the authors’ regression results show that IFRS adoption was followed by a decrease in corporate tax avoidance in Canada, at least in the short run. The study finds a significant increase in cash tax paid in the post-adoption period by Canadian firms that adopted IFRS compared to US firms that used US generally accepted accounting …

Understanding Us Firm Efficiency And Its Asset Pricing Implications, Giovanni Calice, Levent Kutlu, Ming Zeng

School of Economics and Finance Faculty Publications

We investigate the links between firm-level total factor productivity (TFP) growth and technical efficiency change, and their implications on firm-level stock returns. We estimate TFP growth of US firms between 1966 and 2015 and decompose TFP growth into returns to scale, technical progress, and technical efficiency change components. We show that most of the variation in TFP growth is explained by variation in technical efficiency change. Moreover, we examine the effects of important macro- and micro-level factors on inefficiency as well as its asset pricing implications. We find that low-efficiency firms are more vulnerable to a wide class of aggregate …

A Dynamic Stochastic Frontier Model With Threshold Effects: U.S. Bank Size And Efficiency, Pavlos Almanidis, Mustafa U. Karakaplan, Levent Kutlu

School of Economics and Finance Faculty Publications

Common/Single frontier methodologies that are used to analyze bank efficiency and performance can be misleading because of the homogeneous technology assumption. Using the U.S. banking data over 1984-2010, our dynamic methodology identifies a few data-driven thresholds and distinct size groups. Under common frontier assumption, the largest banks appear to be 22% less efficient on average than how they are in our model. Also, in the common frontier model, smaller banks seem to be relatively more efficient compared to their larger counterparts. Hence, common policies or regulations may not be well-balanced about controlling the banks of different sizes on the spectrum.

On The Dynamic Analysis Of Cournot-Bertrand Equilibria, Aggey Semenov, Jean-Baptiste Tondji

School of Economics and Finance Faculty Publications

Highlights

• Firms invest in R&D. One firm sets a quantity, and another sets a price.

• The quantity-setting firm invests more in R&D than the price-setting firm.

• The quantity-setting firm has higher profits than in Bertrand and Cournot.

• Consumer surplus and social welfare are higher than in the Cournot model.

• The quantity-setting firm may produce more than social optimum.

Abstract

We consider a setting where firms in the first stage invest in cost-reducing R&D. In the market stage, one firm sets a quantity, and another sets a price. We prove that the quantity-setting firm invests more in R&D, has a …

The Impact Of Financial Regulation Policy Uncertainty On Bank Profits And Risk, Robert N. Killins, David W. Johnk, Peter V. Egly

School of Economics and Finance Faculty Publications

Purpose

The purpose of this paper is to explore the impact of financial regulation policy uncertainty (FRPU) on bank profit and risk.

Design/methodology/approach

This study applies dynamic panel techniques and uses the Baker et al. (2016) FRPU index and macroeconomic variables to assess FRPU’s impact on bank profit and risk using Federal Deposit Insurance Corporation call reports from Q1 2000 to Q4 2016 for over 4,760 commercial banks.

Findings

The effect of FRPU on profitability (Return on Assets [ROA] and Return on Equity [ROE]) and risk (standard deviation of ROA and ROE) produces complex results. FRPU negatively (positively) impacts profits …

Locating An Optimal Site For A Controversial Facility, Jean-Baptiste Tondji

School of Economics and Finance Faculty Publications

We consider a situation in which policymakers in a local community have to choose an optimal site for a controversial and essential project in a democratic setting. Policymakers have either single-dipped or multi-dipped preferences over a Euclidean space of possible locations. We provide two existence results for this issue. There exists at most two optimal sites if the size of policymakers is odd, and they have single-dipped preferences over a one-dimensional site space.

A Time-Varying True Individual Effects Model With Endogenous Regressors, Levent Kutlu, Kien C. Tran, Mike G. Tsionas

School of Economics and Finance Faculty Publications

We propose a fairly general individual effects stochastic frontier model, which allows both heterogeneity and inefficiency to change over time. Moreover, our model handles the endogeneity problems if either at least one of the regressors or one-sided error term is correlated with the two-sided error term. Our Monte Carlo experiments show that our estimator performs well. We employed our methodology to the US banking data and found a negative relationship between return on revenue and cost efficiency. Estimators ignoring time-varying heterogeneity or endogeneity did not perform well and gave very different estimates compared to our estimator.

Investors’ Uncertainty And Stock Market Risk, Diego Escobari, Mohammad Jafarinejad

School of Economics and Finance Faculty Publications

We propose a novel approach to model investors' uncertainty using the conditional volatility of investors' sentiment. Working with weekly data on investor sentiment, six major U.S. stock indices, and alternative measures of uncertainty, we run various tests to validate our proposed measure. The estimates show that investors' uncertainty is greater during economic downturns, and it is linked with lower investors' sentiment. In addition, the results support the existence of a positive conditional correlation between sentiment and returns. This positive spillover between sentiment and returns is interpreted as a positive link between investors' uncertainty and market risk. We also find that …

Exchange Rates, Oil Prices And World Stock Returns, Andre V. Mollick, Hamid Sakaki

School of Economics and Finance Faculty Publications

This paper examines responses of 14 major currency/USD pairs to two global factors (oil and world equity returns) from January 1999 to July 2017, a period comprising the global financial crisis and oil price boom and collapse. With global equity markets advancing, risk tolerance increases and oil and stock markets impact currencies under two methodologies: transmission of shocks and mean-variance approaches. Vector autoregressions (VARs) suggest large and statistically significant responses: commodity currencies strongly appreciate following positive oil price shocks and depreciate with positive global equity shocks. GARCH models provide similar qualitative results with coefficients typically larger for global equity returns …

Return Predictability: The Dual Signaling Hypothesis Of Stock Splits, Ahmed Elnahas, Lei Gao, Ghada Ismail

School of Economics and Finance Faculty Publications

This paper aims to differentiate between optimistic splits and overoptimistic/opportunistic splits. Although markets do not distinguish between these two groups at the split announcement time, optimistic (over-optimistic/opportunistic) splits precede positive (negative) long-term buy-and-hold abnormal returns. Using the calendar month portfolio approach, we show that the zero-investment, ex-ante identifiable, and fully implementable trading strategy proposed in this paper can generate economically and statistically significant positive abnormal returns. Our findings indicate that pre-split earnings management and how it relates to managers’ incentives, is an omitted variable in the studies of post-split long-term abnormal returns.

An Index Of Unfairness, Victor H. Aguiar, Roland Pongou, Roberto Serrano, Jean-Baptiste Tondji

School of Economics and Finance Faculty Publications

The Shapley distance is introduced as a measure of the extent to which output sharing among the stakeholders of an organization can be considered unfair. In fact, it measures the distance between an arbitrary pay profile and the Shapley pay profile under a given technology, the latter profile defining the fair distribution. Therefore, this chapter contributes to the literature that studies economic inequality using game theory. In particular, we provide an axiomatic characterization to a notion of unfairness, namely the Shapley distance, and show that it can be used to determine the outcome of an underlying bargaining process. We also …

Institutional Investors And Corporate Environmental, Social, And Governance Policies: Evidence From Toxics Release Data, Incheol Kim, Hong Wan, Bin Wang, Tina Yang

School of Economics and Finance Faculty Publications

This paper studies the role of institutional investors in influencing corporate environmental, social, and governance (ESG) policies by analyzing the relation between institutional ownership and toxic release from facilities to which institutions are geographically proximate. We develop a local preference hypothesis based on the delegated philanthropy and transaction-costs theories. Consistent with the hypothesis, local institutional ownership is negatively related to facility toxic release. The negative relation is stronger for local socially responsible investing (SRI) funds, local public pension funds, and local dedicated institutions. We also find that the relation is more negative in communities that prefer more stringent environmental policies …

Getting On And Moving Up The Property Ladder: Real Hedging In The Us Housing Market Before And After The Crisis, Damian S. Damianov, Diego Escobari

School of Economics and Finance Faculty Publications

Real hedging is the practice of getting onto the property ladder in order to trade up to a larger home in the future. We define the value of the real hedge of home ownership as the difference between the risk premiums of renting and owning and explore how this value depends on local housing price dynamics and household characteristics. Controlling for the potential endogeneity of housing bubble bursts across different U.S metropolitan areas, we find a significantly higher correlation in the appreciation rates across the Standard & Poor's Case-Shiller tiered house price indices in the period after the housing crisis. …