Review of Quantitative Finance and Accounting

Cedergren, Matthew; Luo, Ting; Wu, Jing; Yu, Jianqiao; Zhang, Yue

2024 Review of Quantitative Finance and Accounting

doi: 10.1007/s11156-024-01332-x

We investigate the effect of customers’ credit default swap (CDS) referencing on suppliers’ issuance of management forecasts. We argue that customers’ CDS referencing increases the suppliers’ business volatility, making forecasting more difficult. At the same time, the information from customers’ CDS market reduces investors’ demand for the suppliers’ disclosure and induces the suppliers to scale back their own disclosure. By using a difference-in-differences design, we find consistent evidence that firms tend to reduce their frequency of forecast issuance after the initiation of sales to CDS-referenced customers, compared to firms without CDS-referenced customers. This relationship is stronger when the supplier’s business relies more on CDS-referenced customers (thus strengthening the effect of customer CDS referencing on suppliers’ forecasting difficulty). In comparison, the relationship is weaker when customers have more analyst following (thus resulting in less incremental information produced by customer CDS referencing). Further analysis shows that the information channel seems to be the main mechanism for our findings. Finally, we find the negative relationship between the supplier’s management forecast issuance and its exposure to CDS-referenced customer firms is driven by good news forecasts, possibly due to the higher litigation risk associated with disclosing good news and withholding bad news. Our findings add to the literature examining the spillover effects of CDSs on entities outside those directly referenced by CDSs.

Gupta, Jairaj; Kushwaha, Narendra Nath; Li, Xia; Ebrahimi, Tahera

2024 Review of Quantitative Finance and Accounting

doi: 10.1007/s11156-024-01330-z

This study diverges from mixed findings in the literature on political uncertainty and earnings management by reporting a significant positive association between the firm-level political risk (FLPR) measure proposed by Hassan et al. (Q J Econ 134(4):2135–2202, 2019) and both accrual-based and real earnings management. This aligns with the predictions of agency theory and the political cost hypothesis, indicating that firms exposed to higher political risk are more prone to heightened earnings manipulation. Additionally, we find that in the face of increased political risk, firms tend to substitute accrual-based earnings management with real earnings management, which is relatively harder to detect. This study further identifies a non-linear ‘U’-shaped association between FLPR and both accrual-based and real earnings management, suggesting significant manipulation at both low and high political risk levels, with the least manipulation at a moderate level. This non-linear association is primarily observed in firms that are smaller in size, pay lower abnormal compensation to their CEOs and are less likely to be monitored by lenders. Thus, emphasising the role of external monitoring mechanisms in driving the non-linear association between FLPR and earnings management.

Lin, Qiang; He, Zhongzhi; Li, Bin; Liu, Zhiwang

2024 Review of Quantitative Finance and Accounting

doi: 10.1007/s11156-024-01337-6

We examine the unique setting of publicly traded non-financial Chinese firms to investigate the joint effects of corporate performance, ownership type, and trade credit characteristics on the decision to issue asset-backed securitization (ABS). We demonstrate that firm performance has a generally negative effect on the probability of securitization issuance, and ownership type plays a crucial and decisive role in a firm’s decision to initiate ABS. While firm performance negatively affects the decision to securitize assets for government-connected enterprises, non-connected enterprises exhibit a significantly positive relationship between enhanced firm performance and securitization initiation. This distinction arises from the varying financing constraints faced by government-connected enterprises and non-connected enterprises, influenced by political connections, which, in turn, create diverse incentives for engaging in securitization programs. Furthermore, we find that corporate trade credit characteristics also significantly affect the decision to securitize assets, with accounts receivable (A/R) exerting a positive effect and accounts payable (A/P) contributing negatively.

Hu, Mingyu; Zhang, Xinyin; Zhang, Yeyu

2024 Review of Quantitative Finance and Accounting

doi: 10.1007/s11156-024-01343-8

In the context of global warming and environmental protection, the green bond market has been experiencing remarkable growth, necessitating a thorough examination of how companies interpret and react to the “green signals” communicated by these bonds. This study aims to delve into the spillover impact of green bond issuance on the financial performance of peer firms within the same industry. Utilizing panel data from China’s listed companies between 2010 and 2022, we observed that the issuance of green bonds by companies positively influences the financial performance of their peers within the same industry, a phenomenon we term as the “spillover effect”. Furthermore, our analysis suggests that this spillover effect can be attributed to three potential influential mechanisms: market competition, green behaviors, and government subsidies. Specifically, intense market competition enhances the positive spillover effect, while the issuance of green bonds encourages peer companies to adopt environmentally friendly practices and increases their chances of receiving government subsidies. Additionally, our findings indicate that this positive influence is more pronounced in non-polluted sector and among companies with lower financial constraints. These insights provide valuable practical implications for policymakers and managers in promoting green and sustainable development.

Nguyen, Thang; Alhababsah, Salem; Nguyen, Thai; Alhaj-Ismail, Alaa

2024 Review of Quantitative Finance and Accounting

doi: 10.1007/s11156-024-01327-8

This paper investigates whether CEO–board age similarity has an impact on firms’ earnings management in M&A contexts. We argue that CEO–board age similarity may have an impact on earnings management through two main roles of the board in M&A, i.e., monitoring and advising roles. On the one hand, board–CEO age similarity may improve the quality of the board’s advice on M&A and thus reduce the CEO’s need to manipulate earnings. On the other hand, board–CEO age similarity may trigger friendship, therefore weaken the monitoring function of the board. Using the sample of all share-financed M&A deals in the UK from 2001 to 2018, we find a lower level of earnings management in firms with higher board–CEO age similarity. The evidence thus highlights the importance of the advisory role of the board in M&A. Our findings have an important contribution to the corporate governance literature and also have implications for practice.

Anderson, Keith; Chowdhury, Anup; Uddin, Moshfique

2024 Review of Quantitative Finance and Accounting

doi: 10.1007/s11156-024-01331-y

Piotroski’s Fscore has become increasingly important to investment managers and analysts as a simple measure of a company’s financial strength. However, how it changes over time, and in particular how it reacts under different economic conditions, has not been considered until now. Macroeconomic conditions and the business cycle affect corporate valuations via stock prices. They also affect corporate liquidity, cash flow, profitability, efficiency, financing, capital structure, and thus Fscores. The Fscore is currently used as if it gives similar results in all economic states, but this is not the case. While macroeconomic conditions strongly affect the aggregate Fscore, the effect of particular variables changes greatly depending on the stage of the economic cycle. During contractionary episodes, monetary and macro-economic factors become much more critical and outweigh firm-level factors in determining Fscore values. Investors should, therefore, be particularly cautious in applying the Fscore equally during contractions as during expansionary periods.

Elshandidy, Tamer; Elsayed, Mohamed; Omara, Hossam; Sharma, Abhijit

2024 Review of Quantitative Finance and Accounting

doi: 10.1007/s11156-024-01329-6

By creating a comprehensive corporate social- and environmental-related lexicon, this paper examines the extent to which board diversity impacts social and environmental disclosures. Contributing to diversity literature, we rely on the faultlines concept, postulated and developed by organizational research, which is hypothetical dividing lines that split a boardroom into relatively homogeneous subgroups based on directors’ diversified attributes. Employing a sample of FTSE All-share non-financial firms, our findings show that firms with higher faultline strength in the boardroom (i.e., relatively more homogeneous subgroups) exhibit significantly lower levels of both social and environmental disclosures in their narrative sections of annual reports. This implies that board diversity faultlines are likely to have a detrimental effect on corporate boards regarding reaching a consensus decision on disclosing information on social and environmental aspects. Our results remain robust after a battery of sensitivity tests and addressing potential endogeneity problems. Our results provide timely evidence-based insights into major recent structural reforms aiming at proposing remedies to corporate governance problems in the UK, specifically that interest should not be confined to board diversity per se but configurations (the extent of convergence) between the diversified attributes. Furthermore, the evidence provided by our paper should be of interest to the UK’s regulatory bodies (Financial Reporting Council) considering their increasing focus and pursuit to understand the underlying challenges of corporate social and environmental reporting.

Tang, Siyuan

2024 Review of Quantitative Finance and Accounting

doi: 10.1007/s11156-024-01333-w

This study examines the effectiveness of price limits using a quasi-natural experiment in China, where ChiNext stocks’ daily price limits changed from 10 to 20%. The empirical results show asymmetric performance of the upper and lower limits. Widening the upper limit range can alleviate delayed price discovery and trading interference, whereas an equivalent lower limit can exacerbate these adverse effects. A wider upper limit range increases volatility spillovers but a wider lower-limit range does not. Such asymmetry is more pronounced when there is higher investor sentiment, a greater possibility of manipulation, and eligibility for short selling. Additional analyses suggest that widening the limit range provides investors with a greater opportunity to buy (sell) more on the upper (lower) limit hitting day and sell (buy) more on the following day, resulting in a greater order imbalance primarily caused by institutional investors. The results indicate that the daily price limit leads to market inefficiencies when the price rises but reduces stock price crashes and acts as a price stabilizer.

Sung, Hao-Chang

2024 Review of Quantitative Finance and Accounting

doi: 10.1007/s11156-024-01322-z

Considering the trade-off between reporting accuracy and production efficiency, in this paper, I study the impacts of clawback provisions where, within the clawbacks, if the long-term reported earnings do not meet the predetermined earnings threshold, the manager cannot earn his/her long-term compensation. He/she will only receive the fixed compensation and needs to return the portion of his/her period-one performance-based compensation over the recouped compensation threshold when the first-period reported earnings are higher than the recouped compensation threshold. Within a principal-agent model, this paper shows that first, depending on the level of realized earnings in period one, mandatory adoption of such clawbacks motivates a risk-averse manager to use an enriched reporting strategy menu. Second, adopting the clawbacks will induce the manager to engage in lower or higher short-term effort but lower long-term effort relative to the case without clawbacks. However, a higher recouped compensation threshold will motivate the risk-averse manager to a higher short-term effort. Then, to recalibrate the manager’s effort incentives to be the same as in the case of no clawbacks but restrain his/her misreporting incentives, this study shows that a firm should grant a risk-averse manager a lower short-term fixed pay level but a higher long-term pay level relative to the case without clawbacks. Besides, the performance pay rates for the two periods must be sufficiently different in order to control the manager’s misreporting incentives. Finally, this paper discusses the empirical implications of the results and provides the policy implications regarding the efficiency of meeting or beating earnings thresholds when managerial contracts contain clawback provisions.

Chau, Frankie; Deesomsak, Rataporn; Shaikh, Raja

2024 Review of Quantitative Finance and Accounting

doi: 10.1007/s11156-024-01318-9

This paper examines whether the Federal Reserve (Fed) communication has significant impact on the level of uncertainty and risk aversion in the U.S., U.K., and Eurozone equity markets. We first apply computational linguistic tools to the Federal Open Market Committee (FOMC) meeting minutes to measure the tone of Fed communication and then decompose the option-implied volatility into proxies for risk aversion and expected market volatility (“uncertainty”). We provide novel evidence that the Fed's optimistic tone decreases both uncertainty and risk aversion in global equity markets, with the former effect being stronger. We also find a stronger response of market participants to central bank communication during recessions and in periods of high policy uncertainty. Further analysis reveals that, in formulating their risk preferences, investors pay particular attention to FOMC's discussion about financial market, credit condition, employment, and growth. Overall, our results suggest that central bank communication plays an important role in shaping perceptions and risk appetite of financial market participants.