European Financial Management

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Latest documents

• Can quantitative investment improve market efficiency?—Evidence from China

  We investigate the impact of quantitative investment on market efficiency in China. We provide an illustrative model to show that quantitative investment enhances market efficiency. Empirically, we conduct both time‐series and cross‐sectional analysis. Regarding the time series dimension, we construct QuantDegree to measure the level of quantitative investment. We find that the performance of most anomalies decreases as QuantDegree increases. In the cross‐sectional dimension, we sort stocks into portfolios based on quant fund holdings and traditional anomalies. We find the anomaly return is lower within the groups with higher quant fund holdings, a result further confirmed by Fama–MacBeth regressions.

• Mortgage rates and credit risk: Evidence from mortgage pools

  In the 1990s, securitised subprime loans supported the growth of mortgage lending. We study the evolution of initial mortgage rates as a function of loan and borrower characteristics during 1992–2015. We compare the evolution of initial rates on securitised subprime mortgages with rates of prime privately securitised mortgages, mortgages securitised by government‐sponsored enterprises, and nonsecuritised mortgages. Starting in 2003 the risk premium on subprime loans decreases until it disappears at the onset of the Global Financial Crisis. We find that loading factors on subprime rates are cointegrated with delinquencies and house price movements, providing evidence of the important role of the subprime market.

• A success dressed as a failure? Evidence from post‐IPO withdrawal outcomes in Europe

  What happens to companies that file for an initial public offering (IPO), but withdraw and do not list? How long does the post‐IPO outcome take? These questions are investigated by analysing market, firm and offer characteristics of 334 withdrawn IPOs in Europe between 2001 and 2015. The majority of withdrawn IPOs is engaged in M&A, only few file for a second time IPO. These post‐IPO withdrawal outcomes happen shortly after the IPO filing. Private equity and venture capital‐backed firms are more frequently engaging in M&A or trading. The evidence suggests that the IPO may be used as a marketing mechanism, being one of several alternatives of exit.

• The impact of credit reforms on bank loans and firm leverage around the world

  This study examines how credit reforms impact commercial bank loans and nonfinancial firms' debt. Using two international samples for commercial banks and nonfinancial firms from 2004 to 2019, we find that global information‐sharing reforms encourage banks to increase corporate loans, thus improving firm debt financing, particularly in countries with weak creditor rights. Legal rights reforms significantly boost corporate bank loans in emerging countries and enhance firms' debt financing in developed countries. Our findings suggest credit reforms positively impact firms' financing; however, their effects on debt financing supply and demand vary by economic development level and the strength of creditor rights.

• So different and yet so alike: A comparative analysis of firms' connectedness in the stock and corporate bond markets

  We study firms' return and volatility connectedness in the stock and corporate bond markets. Our approach to capturing firm‐specific return and volatility time series in the corporate bond market is based on a repeat‐sales index at the firm level. Measuring the pairwise connectedness of firms, we show that the two markets share similar dynamics in the connectedness of their firms. Firms tend to cluster within their own sectors and ties between firms in the corporate bond market are proportionally weaker. Financial firms play a critical role in the propagation of shocks, but this role differs markedly in the two markets.

• Issue Information: European Financial Management 5/2024
• Benefit corporation certification and financial performance: Capital structure matters

  We are examining the impact of benefit corporation certification on the profitability of UK companies, taking into account their capital structure. We contribute to the literature that scrutinizes the financial ramifications of Benefit Corporation Certification. Analyzing UK Certified Benefit Corporations (CBCs) and their noncertified counterparts using a difference‐in‐differences analysis, we find that the performance of CBCs with a capital structure heavily weighted towards debt declines in comparison to non‐CBCs, using Return on Assets as a measure of financial performance. Conversely, the performance of CBCs with a capital structure primarily composed of equity is comparable to that of non‐CBCs.

• Do customers matter in currency hedging policies? Evidence from product warranties

  Using a data set of US manufacturing firms with sales from foreign operations, we find that firms' currency hedging activities vary with their warranty obligations. The positive link of warranty obligations to currency hedging policies prevails in financially more constrained firms, companies facing fiercer product market competition and corporations producing more unique products. Our results suggest that firms are likely to incorporate their contractual commitments to customers into their currency hedging activities, especially when their failures to honor these commitments are more likely or costly.

• The influence of initial sponsor backing on post‐IPO acquisition activity

  We investigate the impact of financial sponsor backing [venture capital (VC) or private equity (PE)] on post‐initial public offerings (IPO) acquisition strategies of newly public companies. We find that PE‐backed newly public firms undertake nearly three times more acquisitions than VC‐backed ones and almost twice as many as non‐backed firms, indicating that acquisitions are a primary growth strategy for PEs. This result remains robust after addressing potential endogeneity concerns. Additionally, PE syndicate‐backed firms engage in transformative acquisitions, proxied by size, while VC‐backed firms prioritise organic growth through R&D spending. Moreover, PE‐backed acquirers experience significant positive long‐run post‐IPO stock returns, unlike VC‐backed acquirers.

• Spillovers of PE investments

  We investigate a potential primary effect of leveraged buyouts (LBOs) by private equity (PE) on peers in the same industry using data on US public‐to‐private LBO transactions between 1985 and 2016. We use a network‐based instrumental variable approach to account for potential endogeneity concerns. Our findings indicate that the LBOs by PEs matter for peer firms' performance and corporate strategy relative to nonpeer firms. Our study supports a learning factor hypothesis, but we find no evidence to support the conjecture that peers lose due to the increased competitiveness of the LBO target.

Featured documents

• Costs and benefits of trading with stock dealers: The case of systematic internalizers

  Systematic internalizers are single‐dealer platforms run by investment firms that trade out of their own inventories by internalizing the trades off exchanges. We analyze the determinants of dealers' market shares and trading costs. We find that dealer trades have lower price impacts than exchange...

• Credit risk, owner liability, and bank loan maturities during the global financial crisis

  We relate credit risk and owners’ personal guarantees to bank loan maturities during the global financial crisis. The findings, which remain robust to reverse causality, show that firms rated as low risk, with a strong relationship with the bank, whose owners provided personal guarantees and with...

• Corporate debt maturity and stock price crash risk

  We find that firms with a larger proportion of short‐term debt have lower future stock price crash risk, consistent with short‐term debt lenders playing an effective monitoring role in constraining managers’ bad‐news‐hoarding behaviour. The inverse relationship between short‐maturity debt and...

• CSR activity in response to the Paris Agreement exit

  In 2017, U.S. President Donald Trump announced his intention to withdraw the United States from the Paris Agreement. Although there were concerns that the exit would impede the global effort to reduce greenhouse gas emissions, the environmental performance of U.S. firms in carbon‐intensive sectors...

• Machine learning methods in finance: Recent applications and prospects

  We study how researchers can apply machine learning (ML) methods in finance. We first establish that the two major categories of ML (supervised and unsupervised learning) address fundamentally different problems than traditional econometric approaches. Then, we review the current state of research...

• The impact of credit reforms on bank loans and firm leverage around the world

  This study examines how credit reforms impact commercial bank loans and nonfinancial firms' debt. Using two international samples for commercial banks and nonfinancial firms from 2004 to 2019, we find that global information‐sharing reforms encourage banks to increase corporate loans, thus...

• Securitization and credit quality in the European market

  We assess the effect of securitization activity on relative credit quality employing a uniquely detailed dataset from the euro‐denominated syndicated loan market. We find that at issuance, based on observable characteristics, banks do not seem to select and securitize loans of lower credit quality. ...

• Firm‐level exposure to trade policy shocks: A multidimensional measurement approach

  We propose a firm‐level measure of exposure to trade policy shifts that combines characteristics (tradability of goods, share of output exported and corporate risk disclosures) with information from stock returns. We show that the measure reliably captures out‐of‐sample differences in price...

• Mandatory ESG disclosure, information asymmetry, and litigation risk: Evidence from initial public offerings

  I use the staggered adoption of mandatory environmental, social, and governance (ESG) disclosure regulations around the world to explore the impact of ESG disclosure on initial public offering (IPO) underpricing. I find robust evidence that underpricing is substantially lower in countries with ESG...

• Bond return predictability: Macro factors and machine learning methods

  We investigate the impact of macroeconomic variables on bond risk premia prediction via machine learning techniques. On the basis of Chinese treasury bonds from March 2006 to December 2022, we show that adding macroeconomic factors improves bond return forecasts and generates higher economic...