A detailed analysis of management and performance fees for asset managers and investment funds is undertaken. While fund fees are considered as a cost of capital for investors, the structuring of such fee mechanisms in a fund can also influence a fund manager’s decisions and investment strategy, thereby also influencing the investment performance of the investors funds. The study undertaken will allow for an assessment of the effect of fee structures and the potential for asymmetric incentives to arise that may promote adverse risk-taking behaviours by the fund manager, to the detriment of the investor or retiree who places a portion of their retirement savings into such a managed fund with such fee structures. As such, understanding the mechanism of fee charging as well as pricing the fees correctly is vital. An exploration of the application of actuarial distortion pricing methods for complete and incomplete market valuation is performed on a variety of path-dependent option-like performance fee structures for various funds in the European and American markets. Furthermore, several scenario analysis and sensitivity studies are undertaken. The class of Net Asset Value models adopted are Lévy processes, and the pricing is performed via Monte Carlo techniques.
{"title":"Analysis of Option-Like Fund Performance Fees in Asset Management via Monte Carlo Actuarial Distortion Pricing","authors":"G. Peters, M. Chudtong, Andrea De Gaetano","doi":"10.2139/ssrn.3946347","DOIUrl":"https://doi.org/10.2139/ssrn.3946347","url":null,"abstract":"\u0000 A detailed analysis of management and performance fees for asset managers and investment funds is undertaken. While fund fees are considered as a cost of capital for investors, the structuring of such fee mechanisms in a fund can also influence a fund manager’s decisions and investment strategy, thereby also influencing the investment performance of the investors funds. The study undertaken will allow for an assessment of the effect of fee structures and the potential for asymmetric incentives to arise that may promote adverse risk-taking behaviours by the fund manager, to the detriment of the investor or retiree who places a portion of their retirement savings into such a managed fund with such fee structures. As such, understanding the mechanism of fee charging as well as pricing the fees correctly is vital. An exploration of the application of actuarial distortion pricing methods for complete and incomplete market valuation is performed on a variety of path-dependent option-like performance fee structures for various funds in the European and American markets. Furthermore, several scenario analysis and sensitivity studies are undertaken. The class of Net Asset Value models adopted are Lévy processes, and the pricing is performed via Monte Carlo techniques.","PeriodicalId":233958,"journal":{"name":"European Finance eJournal","volume":"10 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2021-10-20","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"133218458","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
I. Hasan, Krzysztof Jackowicz, Oskar Kowalewski, Łukasz Kozłowski
In this study, we investigate how the average cultural values of parent bank board members affect lending by foreign subsidiaries and how this influence is moderated by board members’ personal traits. Using a new dataset that includes information on foreign banks and their parent companies from 66 and 29 countries, respectively, we find that loan growth of foreign subsidiaries is faster when parent boards exhibit, on average, higher uncertainty avoidance and power distance but lower individualism and indulgence. Notably, the identified regularities are significantly moderated by gender, busyness, and firm ownership of parent bank board members.
{"title":"Cultural values of parent bank board members and lending by foreign subsidiaries: The moderating role of personal traits","authors":"I. Hasan, Krzysztof Jackowicz, Oskar Kowalewski, Łukasz Kozłowski","doi":"10.2139/ssrn.3945921","DOIUrl":"https://doi.org/10.2139/ssrn.3945921","url":null,"abstract":"In this study, we investigate how the average cultural values of parent bank board members affect lending by foreign subsidiaries and how this influence is moderated by board members’ personal traits. Using a new dataset that includes information on foreign banks and their parent companies from 66 and 29 countries, respectively, we find that loan growth of foreign subsidiaries is faster when parent boards exhibit, on average, higher uncertainty avoidance and power distance but lower individualism and indulgence. Notably, the identified regularities are significantly moderated by gender, busyness, and firm ownership of parent bank board members.","PeriodicalId":233958,"journal":{"name":"European Finance eJournal","volume":"582 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2021-10-19","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"117068128","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
The classic estimates of CAPM equity betas are notoriously unstable. We assume that this is mainly due to changes of firm’s leverage over time. In order to take leverage into account, we propose a new approach where asset correlations among firms are pairwise constant, while equity correlations change over time as a function of the stochastic evolution of firms’ asset values. The paper closes with a simulation that helps to show the model’s features.
{"title":"Deleveraging CAPM: Asset Betas vs. Equity Betas","authors":"Emilio Barone, Gaia Barone","doi":"10.2139/ssrn.3941752","DOIUrl":"https://doi.org/10.2139/ssrn.3941752","url":null,"abstract":"The classic estimates of CAPM equity betas are notoriously unstable. We assume that this is mainly due to changes of firm’s leverage over time. In order to take leverage into account, we propose a new approach where asset correlations among firms are pairwise constant, while equity correlations change over time as a function of the stochastic evolution of firms’ asset values. The paper closes with a simulation that helps to show the model’s features.","PeriodicalId":233958,"journal":{"name":"European Finance eJournal","volume":"79 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2021-10-13","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"113977629","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
We model a startup run by an entrepreneur and a group of co-investors with heterogeneous capital contributions and risk preferences, who together decide on the firm's financial policies, ownership structure and governance. Investors' optimal claims resemble preferred stock with heterogeneous dividend caps, and common stock. The optimal investment policy is a time-varying weighted average of investors' optimal policies and converges to the policy of the least (most) risk averse investor in booms (recessions). Optimal leverage is procyclical. The dynamic financial policies and diversity in equity claims resolve investors' diverging preferences and inability to trade.
{"title":"The Dynamics of Financial Policies and Group Decisions in Private Firms","authors":"Shiqi Chen, B. Lambrecht","doi":"10.2139/ssrn.3351802","DOIUrl":"https://doi.org/10.2139/ssrn.3351802","url":null,"abstract":"We model a startup run by an entrepreneur and a group of co-investors with heterogeneous capital contributions and risk preferences, who together decide on the firm's financial policies, ownership structure and governance. Investors' optimal claims resemble preferred stock with heterogeneous dividend caps, and common stock. The optimal investment policy is a time-varying weighted average of investors' optimal policies and converges to the policy of the least (most) risk averse investor in booms (recessions). Optimal leverage is procyclical. The dynamic financial policies and diversity in equity claims resolve investors' diverging preferences and inability to trade.","PeriodicalId":233958,"journal":{"name":"European Finance eJournal","volume":"105 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2021-10-11","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"124742326","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
This paper analyses the consequences for monetary policy arising from private, centralised digital currencies (PCDC) such as Facebook's Diem. Firms introduce PCDC to generate seignorage revenues and information on consumers. In a benchmark model of imperfectly competing firms, information shapes the degree of currency competition: firms do not accept their competitors' currencies, which limits the seignorage base. Issuers of PCDC then optimally implement the Friedman rule to remove their seignorage income altogether. As a result, public currency is unable to compete unless the central bank follows suit, resulting in deflation. However, private currency market power breaks this benchmark: inflationary pressures arise if firms form currency consortia, but decision powers and seignorage claims are concentrated in the hands of one firm. The paper highlights scenarios in which information collection is inflationary, and offers an explanation for the Diem consortium's plan to issue stablecoins denominated in public currencies.
{"title":"Money Talks: Information and Seignorage","authors":"Maxi Guennewig","doi":"10.2139/ssrn.3940408","DOIUrl":"https://doi.org/10.2139/ssrn.3940408","url":null,"abstract":"This paper analyses the consequences for monetary policy arising from private, centralised digital currencies (PCDC) such as Facebook's Diem. Firms introduce PCDC to generate seignorage revenues and information on consumers. In a benchmark model of imperfectly competing firms, information shapes the degree of currency competition: firms do not accept their competitors' currencies, which limits the seignorage base. Issuers of PCDC then optimally implement the Friedman rule to remove their seignorage income altogether. As a result, public currency is unable to compete unless the central bank follows suit, resulting in deflation. However, private currency market power breaks this benchmark: inflationary pressures arise if firms form currency consortia, but decision powers and seignorage claims are concentrated in the hands of one firm. The paper highlights scenarios in which information collection is inflationary, and offers an explanation for the Diem consortium's plan to issue stablecoins denominated in public currencies.","PeriodicalId":233958,"journal":{"name":"European Finance eJournal","volume":"1 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2021-10-07","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"129310745","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
This paper proposes an econometric framework for nowcasting the monetary policy stance and decisions of the European Central Bank (ECB) exploiting the ow of conventional and textual data that become available between two consecutive press conferences. Decompositions of the updated nowcasts into variables' marginal contribution are also provided to shed light on the main drivers of the ECB's reaction function at every point in time. In out-of-sample nowcasting experiments, the model provides an accurate tracking of the ECB monetary policy stance and decisions. The inclusion of textual variables contributes significantly to the gradual improvement of the model performance.
{"title":"The ECB's Tracker: Nowcasting the Press Conferences of the ECB","authors":"Armando Marozzi","doi":"10.2139/ssrn.3943743","DOIUrl":"https://doi.org/10.2139/ssrn.3943743","url":null,"abstract":"This paper proposes an econometric framework for nowcasting the monetary policy stance and decisions of the European Central Bank (ECB) exploiting the ow of conventional and textual data that become available between two consecutive press conferences. Decompositions of the updated nowcasts into variables' marginal contribution are also provided to shed light on the main drivers of the ECB's reaction function at every point in time. In out-of-sample nowcasting experiments, the model provides an accurate tracking of the ECB monetary policy stance and decisions. The inclusion of textual variables contributes significantly to the gradual improvement of the model performance.","PeriodicalId":233958,"journal":{"name":"European Finance eJournal","volume":"1 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2021-10-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"129133968","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
This study examines the impact of geographic income diversification of large European banks on performance and risk‐taking by using unique data. By dividing the total operating income into three regions as the home country, the rest of Europe and the rest of the world, we find evidence that geographic income diversification reduces bank performance and increases risk‐taking. Particularly, shifting operations from home countries to other European countries or the rest of the world reduces bank performance and enhances risk‐taking unless the bank is highly concentrated in these areas. We also identify contributing channels, including the “follow‐the‐customer” hypothesis, new subsidiaries and board diversity, to explain the adverse effect.
{"title":"Geographic Income Diversification of Large European Banks: Better or Worse?","authors":"Caner Gerek, Ahmet M. Tuncez","doi":"10.2139/ssrn.3824041","DOIUrl":"https://doi.org/10.2139/ssrn.3824041","url":null,"abstract":"This study examines the impact of geographic income diversification of large European banks on performance and risk‐taking by using unique data. By dividing the total operating income into three regions as the home country, the rest of Europe and the rest of the world, we find evidence that geographic income diversification reduces bank performance and increases risk‐taking. Particularly, shifting operations from home countries to other European countries or the rest of the world reduces bank performance and enhances risk‐taking unless the bank is highly concentrated in these areas. We also identify contributing channels, including the “follow‐the‐customer” hypothesis, new subsidiaries and board diversity, to explain the adverse effect.","PeriodicalId":233958,"journal":{"name":"European Finance eJournal","volume":"1 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2021-09-18","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"130188359","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
High-frequency (HF) surprises of relevant asset prices around central bank meetings are extensively employed in the literature to identify the effects of conventional/unconventional monetary policy. This identification strategy assumes that these surprises reflect either a single unconventional ‘monetary shock’ or, as recently suggested, jointly an unconventional monetary shock and a central bank ‘information shock’. In this paper we show that monetary policy in the euro area after 2008 is best characterized by three shocks, not two. Besides the unconventional monetary shock and the information shock, we consider a third shock resulting from the ECB directly managing fragmentation risk in the sovereign bond market. We call this additional shock ‘spread shock’, and show that it permits to solve a puzzle we observe in HF comovement of long term risk free rates and sovereign spreads around press conferences. We identify the dynamic causal effects produced by the three shocks through a proxy-SVAR methodology which, using HF surprises of the euro area risk-free yield curve, stock prices and sovereign spreads, combines sign-restrictions with narrative restrictions and then extracts external variables (instruments) from an admissible identification set. Empirical results, obtained through a daily proxy-SVAR and Local Projections based on monthly data, reveal that the spread shock represents an important ingredient of the transmission mechanism of the monetary policy after the Global Financial Crisis. It reflects ECB’s attempt to offset self-fulling expectations of default in the euro area sovereign debt markets and behaves as a complement, not a substitute of the information shock.
{"title":"Unconventional Monetary Policy in the Euro Area: A Tale of Three Shocks","authors":"L. Fanelli, Antonio Marsi","doi":"10.2139/ssrn.3924827","DOIUrl":"https://doi.org/10.2139/ssrn.3924827","url":null,"abstract":"High-frequency (HF) surprises of relevant asset prices around central bank meetings are extensively employed in the literature to identify the effects of conventional/unconventional monetary policy. This identification strategy assumes that these surprises reflect either a single unconventional ‘monetary shock’ or, as recently suggested, jointly an unconventional monetary shock and a central bank ‘information shock’. In this paper we show that monetary policy in the euro area after 2008 is best characterized by three shocks, not two. Besides the unconventional monetary shock and the information shock, we consider a third shock resulting from the ECB directly managing fragmentation risk in the sovereign bond market. We call this additional shock ‘spread shock’, and show that it permits to solve a puzzle we observe in HF comovement of long term risk free rates and sovereign spreads around press conferences. We identify the dynamic causal effects produced by the three shocks through a proxy-SVAR methodology which, using HF surprises of the euro area risk-free yield curve, stock prices and sovereign spreads, combines sign-restrictions with narrative restrictions and then extracts external variables (instruments) from an admissible identification set. Empirical results, obtained through a daily proxy-SVAR and Local Projections based on monthly data, reveal that the spread shock represents an important ingredient of the transmission mechanism of the monetary policy after the Global Financial Crisis. It reflects ECB’s attempt to offset self-fulling expectations of default in the euro area sovereign debt markets and behaves as a complement, not a substitute of the information shock.","PeriodicalId":233958,"journal":{"name":"European Finance eJournal","volume":"9 2 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2021-09-15","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"126897242","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Researchers and regulators regularly debate whether mandatory audit firm rotation affects audit quality. Theoretically, rotation might improve auditor independence but impair competence. In 2014, the European Commission mandated audit firm rotation for public-interest entities, starting from 2020 for nonfinancial firms. However, any auditor change in the transition period could already be interpreted in light of the upcoming mandatory rotation regime, consistent with anecdotal evidence on such interpretations. These changes provide a unique setting because auditors have strong incentives to build a reputation for high-quality audits when choosing to participate in the market for rotations during the transition period. Using a balanced panel of 287 German firms and data from 2014 through 2019, we hypothesize and find lower discretionary accruals, abnormal working capital accruals, and total accruals in the first year after rotation. This effect is restricted to smaller public companies. Data Availability: The data are from public sources and are available from the third author upon written request. JEL Classifications: M42; M48.
{"title":"Anticipation of Mandatory Audit Firm Rotation and Audit Quality","authors":"C. Friedrich, Nicolas Pappert, R. Quick","doi":"10.2139/ssrn.3693129","DOIUrl":"https://doi.org/10.2139/ssrn.3693129","url":null,"abstract":"\u0000 Researchers and regulators regularly debate whether mandatory audit firm rotation affects audit quality. Theoretically, rotation might improve auditor independence but impair competence. In 2014, the European Commission mandated audit firm rotation for public-interest entities, starting from 2020 for nonfinancial firms. However, any auditor change in the transition period could already be interpreted in light of the upcoming mandatory rotation regime, consistent with anecdotal evidence on such interpretations. These changes provide a unique setting because auditors have strong incentives to build a reputation for high-quality audits when choosing to participate in the market for rotations during the transition period. Using a balanced panel of 287 German firms and data from 2014 through 2019, we hypothesize and find lower discretionary accruals, abnormal working capital accruals, and total accruals in the first year after rotation. This effect is restricted to smaller public companies.\u0000 Data Availability: The data are from public sources and are available from the third author upon written request.\u0000 JEL Classifications: M42; M48.","PeriodicalId":233958,"journal":{"name":"European Finance eJournal","volume":"5 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2021-09-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"122231292","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
I show that once one incorporates country-specific yields into the identification of monetary factors for the European Central Bank, a new factor arises which plays a quantitatively important role in explaining the end of the sovereign debt crisis and the resulting convergence in economic outcomes across the Euro block. Specifications that exclude this novel factor instead imply that the central bank played little role in ending the crisis. I argue that this new factor reflects ECB communications that respond to certain countries' conditions beyond their share of Euro area activity, mostly during the crisis period.
{"title":"How Much Did the ECB Really Contribute to Ending the Sovereign Debt Crisis?","authors":"Frederico Mira Godinho","doi":"10.2139/ssrn.3898195","DOIUrl":"https://doi.org/10.2139/ssrn.3898195","url":null,"abstract":"I show that once one incorporates country-specific yields into the identification of monetary factors for the European Central Bank, a new factor arises which plays a quantitatively important role in explaining the end of the sovereign debt crisis and the resulting convergence in economic outcomes across the Euro block. Specifications that exclude this novel factor instead imply that the central bank played little role in ending the crisis. I argue that this new factor reflects ECB communications that respond to certain countries' conditions beyond their share of Euro area activity, mostly during the crisis period.","PeriodicalId":233958,"journal":{"name":"European Finance eJournal","volume":"64 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2021-08-23","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"133891486","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
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