European Financial Management

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Latest documents

  • Employee treatment and its implications for bondholders

    We examine the various channels through which the quality of a firm's employee relations can affect the welfare of bondholders. Our evidence suggests that better employee treatment benefits bondholders and leads to a lower bond spread by enhancing a firm's productivity, and by reducing the likelihood of product failures, labor strife, and employee turnover. However, a higher level of satisfaction is costlier for bondholders in firms facing more severe financial constraints or agency problems.

  • Board structure and role of outside directors in private firms

    We examine the board composition and the role of outside directors in US private firms. We find that compared with public firms, private firms have a higher proportion of outside directors on the boards and select their outside directors in a more responsive way to their advisory and monitoring needs. We also find that private firms’ CEO turnover–performance sensitivity, earnings quality, going‐public likelihood, and IPO value increase with the proportion of outside directors. These results are consistent with the view that lack of external governance in private firms leads to a greater demand for board monitoring for private firms.

  • Overreaction to growth opportunities: An explanation of the asset growth anomaly

    The negative relation between asset growth and subsequent stock returns is known as the asset growth anomaly. We propose that overreaction to growth opportunities is the source of the asset growth anomaly. This suggests that growth firms as opposed to mature firms, and firms with longer series of asset growth should experience a stronger asset growth anomaly. Our evidence supports these predictions.

  • Issue Information: European Financial Management 4/2019
  • Is finance a veil? Lead‐and‐lag relationship between financial and business cycles: The case of China

    This study examines the lead‐and‐lag relationship between financial cycles (FCs) and business cycles (BCs) by using Chinese provincial data. We construct FCs of the financial sector on the basis of three financial variables: credit‐to‐GDP (gross domestic product) ratios, house prices, and equity prices. We use the panel dynamic logit model to investigate the lead‐and‐lag effect between two sectors. Results show that each province has its own unique FCs and BCs. Hence, financial policies should be different in dissimilar provinces. Next, we find that FCs lead BCs and not vice versa. Furthermore, the leading effect is stronger in rich provinces than in poor areas.

  • Does MAX matter for mutual funds?

    Extreme returns (MAX) have been shown to impact future expected stock returns. We examine whether this relationship is present in mutual fund returns. We find that high MAX funds, as measured by past extreme daily returns, underperform both in portfolio sorts and cross‐sectional tests. We further test possible explanations for why MAX funds underperform. First, we measure mutual fund flows to determine investor response to MAX. Second, we examine the underlying holdings of MAX funds to measure their concentration in MAX stocks. We find evidence that both fund flows and holdings contribute to the MAX effect on mutual fund returns.

  • Local official turnover, ownership, and firm cash holdings: Insights from an emerging market

    Using a hand‐collected dataset of city‐level local official turnover in China, I find that average cash holdings of listed firms decrease significantly upon turnover of city heads, and this effect concentrates in privately owned enterprises. Such effects are more pronounced in firms located in cities with lower government quality. I also find that local official turnover leads to decreases in equity issuance for privately owned enterprises but not for state‐owned enterprises, which largely explains our primary findings. Overall, this paper reveals that the cash policy of privately owned enterprises is sensitive to local official turnover in an emerging market.

  • Hedge fund leverage: 2002–2017

    Using a large panel data set, we investigate the dynamics of hedge fund leverage from 2002 to 2017 and find considerable variations in both time series and cross section. More than 70% of hedge funds use leverage and almost half of the leveraged funds are levered through margin borrowing. On average, hedge funds decreased leverage prior to the beginning of the financial crisis, with leverage remaining below the pre‐crisis levels. We find that the level of leverage and its changes are related to fund characteristics such as age, governance, performance, risk, fees, liquidity, survival, and the birth of a new fund.

  • How friends with money affect corporate cash policies? The international evidence

    We examine the association between managerial social capital and the cash flow sensitivity of cash in an international setting. We find that social capital reduces the marginal propensity to save cash out of cash flows. This association is stronger for more financially constrained firms, firms with high hedging needs, and firms with more uncertain cash flows. The effect of social capital is partially moderated by the extent of legal protection standards and financial development. We also show that social capital matters for valuation. These findings are robust to alternative model specifications, alternative variable measurement, and tests for endogeneity.

  • Median momentum

    The median is a better measure of a sample's central tendency in the presence of extreme observations. We propose an alternative momentum strategy formed by buying (shorting) stocks with high (low) average median returns over a formation period of 3–12 months. The median momentum strategy outperforms the traditional price momentum strategy for all holding periods from 1 month to 5 years, with no long‐term reversal. This same return pattern is observed for all G7 countries. Further analysis indicates that median momentum profitability is an underreaction‐only phenomenon and shows behavioral patterns related to short‐sale restrictions and investor sentiment.

Featured documents

  • Private Equity Lemons?Evidence on Value Creation in Secondary Buyouts

    This paper analyses whether secondary buyouts have a value creation profile and offer equity returns different from those of primary buyouts. Using a sample of 2,456 buyout transactions (including 448 secondary buyouts), we find no evidence that secondary buyouts generate lower equity returns or...

  • Common Factors in the Performance of European Corporate Bonds – Evidence before and after the Financial Crisis

    We examine monthly excess returns for 23 Euro‐denominated corporate bond indices and propose a new specification for bond asset pricing models. Specifically, we separate level and slope components of term and default risk factors and examine liquidity risk. Our results suggest that level and slope...

  • Optimal ownership structure in private equity

    We develop a tractable model to analyse the valuation of a general partner (GP) and the ownership allocation in a private equity (PE) fund. Our results indicate that holding ownership will increase GP's value. We further explore the influential factors that affect GP's optimal ownership decision....

  • Financial Hedging and Firm Performance: Evidence from Cross‐border Mergers and Acquisitions

    Using a sample of 1,369 cross‐border acquisitions announced by Standard & Poor's 1500 firms between 2000 and 2014, we find strong evidence that derivatives users experience higher announcement returns than non‐users, which translates into a US$ 193.7 million shareholder gain for an average‐sized...

  • The Revealed Preference of Sophisticated Investors

    Berk and van Binsbergen (2016) have shown that the Capital Asset Pricing Model (CAPM) best represents the revealed preferences of any investor who can invest in mutual funds (i.e., all investors). This claim seems overly broad, as it applies to all asset classes. However, we show that hedge fund...

  • More than Just Contrarians: Insider Trading in Glamour and Value Firms

    This study examines the patterns of, and long‐run returns to, directors’ (insiders’) trades along the value‐glamour continuum in all stocks listed on the main London Stock Exchange and analyses what these directors’ trades add to a naïve value‐glamour strategy. We consider alternative definitions...

  • Envy‐Motivated Merger Waves

    This study examines whether top managerial executive envy plays an important role in merger waves. Since managerial benefits, especially compensation, always increase with firm size, the envy hypothesis conjectures that top executive officers rush into acquisitions due to their envious psychology...

  • The Liquidity Dynamics of Bank Defaults

    We compare liquidity patterns of 10,979 failed and non‐failed US banks from 2001 to mid‐2010 and detect diverging capital structures: failing banks distinctively change their liquidity position about three to five years prior to default by increasing liquid assets and decreasing liquid liabilities. ...

  • The Alternative Three‐Factor Model: An Alternative beyond US Markets?

    We investigate the performance of the alternative three‐factor model across markets. The important US evidence of Chen et al. (2010) in favour of the alternative model does not translate to a test setting using data from 40 non‐US stock markets. The three‐factor model of Fama and French provides...

  • The Sophisticated and the Simple: The Profitability of Contrarian Strategies from a Portfolio Manager's Perspective

    Valuation signals have been among the most popular between equity portfolio managers. Given the large variation of techniques and theories with regard to how value is measured, this study investigates the efficacy of alternative value measures. We consider a cross section of simple and...

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