Abstract We examine the cross-sectional predictive ability of the Refinitiv Environmental, Social and Governance (ESG) score for returns in the foreign exchange market, using ESG scores aggregated at the national level, and find that ESG is a strong negative predictor of currency returns. Intuitively, investors require a premium for financing low-ESG countries while high-ESG countries offer lower returns and provide a hedge in the bad state of the world. We show that ESG is priced in the cross-section of currency returns. We also consider the different components of ESG and show that its predictability is driven by the environmental pillar of the ESG ratings. Our results have strong implications for portfolios of individual investors and fund managers and offer new insights for policymakers in the foreign exchange market. The profitability of the ESG currency strategy is not driven by the carry trade and is robust to transaction costs.
{"title":"Pricing Ethics in the Foreign Exchange Market: Environmental, Social and Governance Ratings and Currency Premia","authors":"I. Filippou, Mark P. Taylor","doi":"10.2139/ssrn.3887760","DOIUrl":"https://doi.org/10.2139/ssrn.3887760","url":null,"abstract":"Abstract We examine the cross-sectional predictive ability of the Refinitiv Environmental, Social and Governance (ESG) score for returns in the foreign exchange market, using ESG scores aggregated at the national level, and find that ESG is a strong negative predictor of currency returns. Intuitively, investors require a premium for financing low-ESG countries while high-ESG countries offer lower returns and provide a hedge in the bad state of the world. We show that ESG is priced in the cross-section of currency returns. We also consider the different components of ESG and show that its predictability is driven by the environmental pillar of the ESG ratings. Our results have strong implications for portfolios of individual investors and fund managers and offer new insights for policymakers in the foreign exchange market. The profitability of the ESG currency strategy is not driven by the carry trade and is robust to transaction costs.","PeriodicalId":269008,"journal":{"name":"DecisionSciRN: Decision-Making Authority (Topic)","volume":null,"pages":null},"PeriodicalIF":0.0,"publicationDate":"2021-07-15","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"125605523","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 invoke the famous Louis XIV quote “L'État, c'est moi,” applying it to the corporate world, and introduce the novel idea that a self-serving bias, which we define as “I Am The Firm,” is infused within the culture of certain companies. We hypothesize that the owners of eponymous firms – firms that bear the names of their owners – experience enhanced self-identification with their firms, and thus tend to inject their own subjective beliefs and desires into the realistic objective prospects of the firms. The “I am the firm” effect is a form of a self-serving bias, which arises from the blurring of boundaries between the owner and the corporate eponymy entity that carries the same name. Employing a unique corporate setting in Israel, we demonstrate that eponymous firms disclose unduly optimistic biased forecasts relative to their non-eponymous counterparts, which cannot be validated or justified solely by rational explanations. The obfuscation of the boundaries in eponymous firms between subjective illusory desires and objective realistic truths is revelatory and has far-reaching implications in various aspects of corporate decisions, which we suggest will require future research.
我们引用路易十四的名言“L'État, c'est moi”，将其应用于企业界，并引入一个新颖的想法，即在某些公司的文化中注入了一种自我服务的偏见，我们将其定义为“我是公司”。我们假设同名公司的所有者——以其所有者的名字命名的公司——对其公司的自我认同增强了，因此倾向于将自己的主观信念和愿望注入到公司的现实客观前景中。“我是公司”效应是一种自私自利的偏见，它源于所有者与同名公司实体之间界限的模糊。采用以色列独特的企业环境，我们证明了同名公司相对于非同名公司披露了过度乐观的偏见预测，这不能仅仅通过理性解释来验证或证明。在同名公司中，主观的虚幻欲望和客观的现实真相之间的界限模糊具有启发性，并对公司决策的各个方面具有深远的影响，我们认为这需要未来的研究。
{"title":"I Am The Firm! Eponymous Firms and Rose-Coloured Forecasts","authors":"D. Kliger, Yevgeny Mugerman, Ruth Rooz","doi":"10.2139/ssrn.3755887","DOIUrl":"https://doi.org/10.2139/ssrn.3755887","url":null,"abstract":"We invoke the famous Louis XIV quote “L'État, c'est moi,” applying it to the corporate world, and introduce the novel idea that a self-serving bias, which we define as “I Am The Firm,” is infused within the culture of certain companies. We hypothesize that the owners of eponymous firms – firms that bear the names of their owners – experience enhanced self-identification with their firms, and thus tend to inject their own subjective beliefs and desires into the realistic objective prospects of the firms. The “I am the firm” effect is a form of a self-serving bias, which arises from the blurring of boundaries between the owner and the corporate eponymy entity that carries the same name. Employing a unique corporate setting in Israel, we demonstrate that eponymous firms disclose unduly optimistic biased forecasts relative to their non-eponymous counterparts, which cannot be validated or justified solely by rational explanations. The obfuscation of the boundaries in eponymous firms between subjective illusory desires and objective realistic truths is revelatory and has far-reaching implications in various aspects of corporate decisions, which we suggest will require future research.","PeriodicalId":269008,"journal":{"name":"DecisionSciRN: Decision-Making Authority (Topic)","volume":null,"pages":null},"PeriodicalIF":0.0,"publicationDate":"2020-12-27","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"116716571","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}
Multinational and multiproduct firms often experience uncertainty in the relative return of conducting activities in different markets due to, for example, exchange rate volatility or the changing prospects of different products. We study how a multi-divisional organization should optimally allocate decision-making authority to its managerial members when operating in such volatile markets. To be able to adapt its decisions to local conditions, the organization has to rely on self-interested division managers to collect and disseminate the relevant information. We show that if communication takes the form of verifiable disclosure, then centralized decision-making does not suffer from information asymmetry and it allows the headquarter of the organization to better cope with the inter-market uncertainty. However, a downside of centralization is that it can discourage information acquisition, and this negative effect is amplified by the need for coordinating the activities of different divisions. As a result, the optimality of decentralized decision-making can actually be driven by a large coordination motive.
{"title":"Designing Organizations in Volatile Markets","authors":"Shuo Liu, Dimitri Migrow","doi":"10.2139/ssrn.3275742","DOIUrl":"https://doi.org/10.2139/ssrn.3275742","url":null,"abstract":"Multinational and multiproduct firms often experience uncertainty in the relative return of conducting activities in different markets due to, for example, exchange rate volatility or the changing prospects of different products. We study how a multi-divisional organization should optimally allocate decision-making authority to its managerial members when operating in such volatile markets. To be able to adapt its decisions to local conditions, the organization has to rely on self-interested division managers to collect and disseminate the relevant information. We show that if communication takes the form of verifiable disclosure, then centralized decision-making does not suffer from information asymmetry and it allows the headquarter of the organization to better cope with the inter-market uncertainty. However, a downside of centralization is that it can discourage information acquisition, and this negative effect is amplified by the need for coordinating the activities of different divisions. As a result, the optimality of decentralized decision-making can actually be driven by a large coordination motive.","PeriodicalId":269008,"journal":{"name":"DecisionSciRN: Decision-Making Authority (Topic)","volume":null,"pages":null},"PeriodicalIF":0.0,"publicationDate":"2019-03-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"132196397","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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