Many studies indicate that oil price shocks have an adverse effect on real output and, hence, an adverse effect on corporate profits where oil is used as a key input. The present study examines ...whether and to what extent the adverse effect of oil price shocks impacts stock market returns. To this end we, analyse 35 DataStream global industry indices for the period from April 1983 to September 2005. Our findings indicate that oil price rises have a negative impact on equity returns for all sectors except mining, and oil and gas industries. Generally, these results are consistent with economic theory and evidence provided by previous empirical studies. Little evidence of any asymmetry is detected in the oil price sensitivities. In light of our findings, we recommend that international portfolio investors consider hedging oil price risk.
This study has two related goals – one very specific and one more general. The specific goal is to constructively engage with Lodhia (2017) on the issue of whether and to what extent ‘qualitative ...cousins’ are well served by Faff's (2015) original pitching research (PR) template. Using this ‘cousins’ focus as a primer, the more general goal is to update the agenda created by Faff (2015) and in so doing, explore the ‘extended family’ of PR work/resources now available.
We examine whether corporate investment, financing, and cash policies are interdependent and follow a predictable pattern in line with the firm life-cycle. We find that investments and equity ...issuance decrease with firm life-cycle, while debt issuance and cash holdings increase in the introduction and growth stages and decrease in the mature and shake-out/decline stages of the firm’s life-cycle. These results are robust after using various proxies for life-cycle and controlling for firm, CEO and board level characteristics. Collectively, our results show that corporate policies follow a firm life-cycle.
We examine the role of chief executive officers’ (CEO) pay in contribution to systemic risk in the USA. In particular, by extending the CoVar model of Adrian and Brunnermeier (Am Econ Rev ...106(7):1705–1741, 2016), we document that the systemic risk measure of dollar delta CoVar is positively influenced by CEO pay. Differentiation between the types of CEO pay incentives suggests that bonus and option awards comprise major contribution to systemic risk. It follows that governance measures that are aimed at systemic risk management can benefit from distinguishing between short-term and long-term CEO incentives.
CEO overconfidence and corporate debt maturity Huang, Ronghong; Tan, Kelvin Jui Keng; Faff, Robert W.
Journal of corporate finance (Amsterdam, Netherlands),
02/2016, Volume:
36
Journal Article
Peer reviewed
This paper extends our knowledge of corporate debt maturity structure by examining whether and to what extent overconfident CEOs affect maturity decisions. Consistent with a demand side story, we ...find that firms with overconfident CEOs tend to adopt a shorter debt maturity structure by using a higher proportion of short-term debt (due within 12months). This behavior of overconfident CEOs is not deterred by the high liquidity risk associated with such a financing strategy. Our demand side explanation remains robust even after considering six possible alternative drivers including a competing supply side explanation (in which creditors are reluctant to extend long-term debt to overconfident CEOs).
•We examine the relation between overconfident CEOs and corporate debt maturity.•Consistent with a demand side story, overconfident CEOs prefer shorter-term debt.•Overconfident CEOs use more short-term debt due within 12months.•We reject six possible alternative drivers including a supply side explanation.•The behavior of overconfident CEOs is not deterred by the liquidity risk that firms face.
Despite confirming the continuing downward trend in profitability of pairs trading, this study found that the strategy performs strongly during periods of prolonged turbulence, including the recent ...global financial crisis. Moreover, alternative combined with other measures enhance trading profits considerably, by 22 bps a month for bank stocks.
We examine the impact of trading costs on pairs trading profitability in the U.S. equity market, 1963 to 2009. After controlling for commissions, market impact, and short selling fees, pairs trading ...remains profitable, albeit at much more modest levels. Specifically, we document a risk‐adjusted return of about 30 basis points per month among portfolios of well‐matched pairs that are formed within refined industry groups. Pairs trading exhibits a lower risk and lower return profile than a short‐term reversal strategy that sorts stocks relative to their industry peers. Notably, both these types of contrarian investing are largely unprofitable after 2002.
Does investing in sustainability leaders affect portfolio performance? Analyzing two mutually exclusive leading and lagging global corporate sustainability portfolios (Dow Jones) finds that (1) ...leading sustainability firms do not underperform the market portfolio, and (2) their lagging counterparts outperform the market portfolio and the leading portfolio. Notably, we find leading (lagging) corporate social performance (CSP) firms exhibit significantly lower (higher) idiosyncratic risk and that idiosyncratic risk might be priced by the broader global equity market. We develop an idiosyncratic risk factor and find that its inclusion significantly reduces the apparent difference in performance between leading and lagging CSP portfolios.
•Clayton canonical vine copulas (CVC) successfully capture lower tail dependence.•CVC are mathematically scalable for portfolios of large dimensions (our study investigates its feasibility for ...portfolios of up to 12 constituents).•We focus on asset allocation for loss-averse investors by minimizing CVaR.•CVC can give improved investment performance.•The Clayton CVC can produce strongly positively skewed portfolios.
In the context of managing downside correlations, we examine the use of multi-dimensional elliptical and asymmetric copula models to forecast returns for portfolios with 3–12 constituents. Our analysis assumes that investors have no short-sales constraints and a utility function characterized by the minimization of Conditional Value-at-Risk (CVaR). We examine the efficient frontiers produced by each model and focus on comparing two methods for incorporating scalable asymmetric dependence structures across asset returns using the Archimedean Clayton copula in an out-of-sample, long-run multi-period setting. For portfolios of higher dimensions, we find that modeling asymmetries within the marginals and the dependence structure with the Clayton canonical vine copula (CVC) consistently produces the highest-ranked outcomes across a range of statistical and economic metrics when compared to other models incorporating elliptical or symmetric dependence structures. Accordingly, we conclude that CVC copulas are ‘worth it’ when managing larger portfolios.
Agency theory predicts that institutional ownership plays an important role in monitoring corporate risk-taking. This study examines this ownership-risk taking linkage in Japan over the period 2007 ...and 2019. We proxy risk through measures of idiosyncratic risk, total risk, and market beta. We show that (relational) foreign institutional shareholdings (do not) induce corporate risk-taking, thereby mitigating (preserving) the managerial 'quiet life' in Japanese corporations. Using 2SLS analysis, the roles of institutional shareholders are robust to endogeneity concerns. Finally, we also confirm robustness using alternative accounting-based risk proxies such as the standard deviation of Tobin's Q and ROA. Our study implies that the monitoring of institutional shareholders is important in Japanese corporations whose top executives might be prone to seek a 'quiet life'.