Review of Quantitative Finance and Accounting最新文献

We model sequential, corporate investment decisions with time-to-build delays, operating scale mode switching, operating constraints, and path dependencies. We also account for stochastic salvage (abandonment) values that are utilization (path) dependent. Our results highlight a key link between economic depreciation, stochastic salvage values and operational flexibility with asymmetric switching costs. We further identify conditions uncovering a non-conventional impact of resulting path-dependencies on the investment-uncertainty relationship: higher uncertainty and lower asset return shortfall (“dividend yield”) may expedite, rather than delay, corporate investment. High switching costs, operating constraints, and economic depreciation may reduce or eliminate these non-conventional effects.

Abstract

This paper theoretically and empirically investigates whether and how audit committee (AC) equity incentives affect future stock price crash risk. Consistent with our model prediction that equity incentives for ACs contribute to reducing the skewness of return distributions, we document evidence of a negative relationship between AC equity incentives and expected crash risk for a merged sample of 6550 US-listed firms over the 2001–2018 period, even after controlling for a wide range of other firm characteristics, using alternative variable specifications, and addressing potential endogeneity concerns. On average, a one-standard-deviation increase in AC equity incentives is associated with a reduction of 14.09–15.46% in stock price crash risk. Further analysis shows that AC equity incentives affect crash risk through financial reporting quality, the negative relationship between AC equity incentives and future stock price crash risk is more pronounced for firms with weaker external governance and for firms with more financial expertise in the AC, and this negative relationship is mainly driven by option-based equity incentives. Taken together, these findings are consistent with the view that equity-based compensation is critical for inducing greater monitoring efforts from AC members and mitigating managerial incentives to withhold bad news.

This study investigates the informativeness of realized higher moments of stock index returns, namely, realized skewness and kurtosis, in explaining trading activity in the futures market to investigate whether information flows from price risk to trading activity. By analyzing high-frequency data covering a twelve-year period, we discover that futures trading activity can be attributed to high-moment market risks, as observed in the significant explanatory power of realized high moments even after controlling for other risk factors. The results are robust to the use of various adjusted measures of high-moment risk, their subcomponents, various measures of trading activity, and data attributes. This study suggests that realized high moments are a market risk and cannot be combined with volatility risk and other risk measures. Most importantly, this study finds that there exists a flow of market information from price risk to trading activity.

We develop a stochastic dynamic model of dividend optimization under the conditions of a positive recovery, in which shareholders can recover a portion of their capital, and nonterminal bankruptcy due to private capital infusion or government bailout. In the presence of a recovery, the optimization problem becomes a mixed classical impulse stochastic control problem. We provide a closed-form solution for optimal dividend payout and timing under nonterminal bankruptcy. We take the model to the real data and show that this model explains the dividend puzzle during the financial crisis when the US government bailed out insurance companies and banks.

This study investigates the impact of the opioid crisis on local firms’ risk and payout flexibility using a sample of 4094 U.S. firms headquartered in 542 counties. We find that firms headquartered in counties with higher opioid mortality rates are associated with higher risk than those with lower opioid mortality rates. This association is more prominent for states severely inflicted by opioid abuse and firms with very high risk. Moreover, firms headquartered in counties with higher opioid mortality rates use more flexible payout policies that favor share repurchases over dividends than those in counties with lower opioid mortality rates. Further, opioid abuse increases local firms’ risk by increasing labor costs. Besides, the staggered passage of state opioid laws mitigates the impact of opioid abuse on firm risk and payout flexibility. The above findings suggest that the opioid crisis raises local firms’ risk, and they respond with more flexible payout policies to improve financial flexibility.

We propose that corporate directors are in greater need of soft information about the firm when the quality of hard accounting information is low. We further propose that board meetings constitute a key opportunity for corporate directors to gather soft information about the firm, and empirically investigate the relationship between financial reporting quality and the board's soft information gathering, as revealed by board meeting frequency. Consistent with expectations, we find that boards meet more frequently when accruals quality is low. We further find that the proportion of outside directors, insider ownership, and SOX regulation moderate this relationship. The evidence is reinforced by analysis of management earnings forecasts, financial restatements, and internal control weaknesses and is robust to several alternative earnings quality specifications. Additional empirical tests suggest that our results are incremental to the alternative explanation of increased meeting frequency to address problems in the reporting process per se. We conclude that corporate directors seek more frequent board meetings as an alternative information source to low earnings quality.

The economic impact of the COVID-19 pandemic placed many small businesses across the US in financial distress. In response to this, in March 2020 the US government introduced, as part of the CARES Act, the Paycheck Protection Program (PPP) intended to provide relief to small businesses and to preserve jobs during the pandemic. The latter resulted in three waves of funding distributed to small businesses through SBA approved lenders, mainly represented by US banks. By using a panel dataset of 4610 banks over the period Q1 2019–Q4 2020 and by employing a difference-in-differences approach (DiD), I investigate whether participation in the Paycheck Protection Program affected community banks’ credit risk-taking behaviour in the post-PPP period, compared to their non-community banking counterparts in the US. I find that the Paycheck Protection Program led community banks to decrease their risk appetite outside of the program relative to non-community banks, consistent with their greater exposure to the commercial real estate sector, heavily hit by the pandemic. My results are robust to a battery of robustness tests and identification strategies. In this research article, I offer novel evidence on the indirect impact of the Paycheck Protection Program as a government-funded stimulus program administered through banks by investigating the indirect effect of the Paycheck Protection Program on the risk-taking of US community banks that dominate lending of PPP loans as a result of their competitive advantage in soft information-intensive small business lending. Such evidence is informative to policymakers as they weigh the merits of various program options to combat the economic damage imposed by the COVID-19 pandemic and as they consider the design of economic stimulus programs in response to future economic crises.

We provide evidence that firms managed by CEOs with high general ability, or broad experience in their background, are more likely to utilize discretionary accruals to manage earnings than CEOs with focused experience. Cross-sectional variation suggests that the mechanism underlying the increased use of discretionary accruals is generalist CEOs’ increased willingness to bear the risk inherent in managing earnings given their enhanced tolerance for failure stemming from outside career options. Importantly, the practice is more pronounced for CEOs of firms with suspect earnings. To better control for unobservable variation between generalists and specialists, we use a propensity score-match sample and entropy balancing to adjust the sample to balance differences between firms with generalists and firms with specialists and firm fixed effects. The evidence suggests that the diversity of CEOs’ experience influences incentives to manage earnings. The increased trend to hire generalist CEOs may be coupled with an unintended increase in the use of discretionary accruals, largely stemming from the outside employment options of these executives.