Financial Management

Publisher:: Wiley
Publication date:: 2021-02-01

ISBN:: 0046-3892

Issue Number

No. 52-4, December 2023

Latest documents

ESG news spillovers across the value chain
We document the impact of ESG shocks on the stock returns of suppliers and clients of affected firms. Our empirical analysis of US stocks, along with their global clients and suppliers, reveals that ESG shocks are integrated into prices intradaily and that the cross‐effect between shocks and ESG levels is statistically significant. The indirect diffusion of ESG shocks to customers' and suppliers' returns is also significant, but takes more time (a few days) and is less pronounced. Finally, the impact is stronger for small firms and for corporations that benefit from less media coverage. In addition, effects are more pronounced in the recent period (posterior to 2017), possibly due to increased investor attention toward sustainability.
To see is to believe: Corporate site visits and mutual fund herding
Using a unique data set of corporate site visits by mutual funds to Chinese firms listed on the Shenzhen Stock Exchange from 2013 to 2021, we find that firms with visits (more visits) are associated with lower mutual fund herding than those with no (fewer) visits. In addition, we demonstrate that mutual funds’ visits to a firm drive the change in their herding propensity by verifying hard information (e.g., the firm's technology, innovation, accounting, and finance information) and obtaining soft information (e.g., management's risk appetite, employee morale, and corporate culture). Furthermore, corporate site visits are found to strengthen herding's price impact without return reversals. Overall, our results are consistent with information cascade theory.
Issue Information
Diagnostics for asset pricing models
The validity of asset pricing models implies white‐noise pricing errors (PEs). However, we find that the PEs of six well‐known factor models all exhibit a significant reversal pattern and are predictable by their lagged values up to 12 months. Moreover, the predictability of the PEs can produce substantial economic profits. Similar conclusions hold for recently developed machine learning models too. Additional analysis reveals that the significant PE profits cannot be explained by common behavioral biases. Our results imply that much remains to be done and there is a great need to develop new asset pricing models.
Announcements
Are sustainability‐linked loans designed to effectively incentivize corporate sustainability? A framework for review
This paper analyzes sustainability‐linked loans (SLLs), a new category of debt instrument that incorporates environmental, social, and governance (ESG) considerations. Using a large sample of loans issued between 2017 and 2022, we assess the design of SLLs by evaluating their key performance indicators (KPIs) using a comprehensive quality score. Our findings suggest that SLLs only partially rely on KPIs that generate credible sustainability incentives. We document that SLL borrowers do not significantly improve their ESG performance post issuance and show that stock markets are rather indifferent to the issuance of SLLs by EU borrowers, while SLL issuance announcements by US borrowers are met with significantly negative abnormal returns by investors. These findings call into question the beneficial sustainability and signaling effects that borrowers may hope to achieve by issuing ESG‐linked debt.
Joint dynamics of stock returns and cash flows: A time‐varying present‐value framework
This paper proposes a novel time‐varying present‐value model to analyze the joint dynamics of stock returns and cash flows periodically. We use a nonparametric time‐varying vector autoregressive model to examine the economic implications of the time‐varying present‐value model. By conducting several nonparametric tests, we reject the stability of multivariate forecasting models and the null that stock returns and cash flows are simultaneously unpredictable in any given period. Additional bootstrap analyses show that under the null of unpredictable returns, dividend growth is highly predictable. Finally, the proposed time‐varying present‐value framework holds robustly for both the dividend–price ratio and the earnings–price ratio.
Overselling corporate social responsibility
We show that firms hype up their corporate social responsibility (CSR) narratives during the turn‐of‐the‐year earnings conference calls to project an overly responsible public image of their firms. This previously unexplored phenomenon does not appear to be related to past, current, and future CSR engagements and cannot be explained by observed time‐varying firm attributes and unobserved time‐invariant firm and CEO attributes. We find that the fourth‐quarter CSR narrative hike is more pronounced among firms that are (ex ante) expected to do more corporate good as well as firms embedded in dirty industries, but less prevalent among firms facing elevated product‐market threats. Although elevated CSR narrative is associated with positive short‐term market reaction and lower near‐term stock price crash risk, such behavior tends to reduce financial report readability and leads to lower equity valuation in the longer term. Our analyses suggest that CSR narrative hike at the turn‐of‐the‐year is a pervasive phenomenon in the corporate landscape and may have valuation and governance implications.
The consequences of non‐trading institutional investors
We document that institutional investors do not trade a single share, on average, in one of five stocks in their portfolio for an extended period. Investors with high inaction are likely to underperform in the future. Our results show a similar underperformance for stocks with a high non‐trading level of institutional investors. We investigate several behavioral biases as potential drivers of the non‐trades and find no evidence of distraction, overconfidence, and disposition effects. Institutional investors’ tendency to sell stocks with salient price movements and recency bias best explains their inactions. Overall, the non‐trading behavior of institutional investors serves as a unique predictor for their future performance and potential behavioral biases are driving this predictability.
Tick size and price efficiency: Further evidence from the Tick Size Pilot Program
This paper examines whether larger tick sizes improve or hinder price efficiency for small‐capitalization stocks using data from implementing and terminating the Tick Size Pilot Program (TSPP). We show that the TSPP led to increases in various liquidity measures, and its termination restored them to their pre‐TSPP levels. We also find evidence that the TSPP led to trader migration from the pilot to control stocks. The TSPP implementation (termination) is associated with decreases (increases) in price efficiency, indicating that price efficiency decreases with tick sizes. Liquidity and informed trading are two channels through which the TSPP changes price efficiency.