Volume 10, 2021


pdf Does Investors’ Divergence of Opinion Affect Stock Mispricing?

Diogo Silva*, António Cerqueira, Elísio Brandão

School of Economics and Management, University of Porto

The main purpose of this study is to address the association between investors’ divergence of opinion (DIVOP) and stock mispricing for UK firms listed in the London Stock Exchange Market. Previous research on this topic has provided mixed results. Some studies provide evidence consistent with the overpricing hypothesis, which indicates that DIVOP leads to overpricing because the market overweighs the most optimistic valuations, since optimistic investors can always buy a stock but pessimistic investors can only sell a stock if they already own it or need rely on short-selling, which has costs. Other studies support the underpricing hypothesis, which proposes that DIVOP works as a price risk factor that generates underpricing. We develop an empirical analysis that do not depend on the interpretation of abnormal future stock returns to assess contemporaneous mispricing. We use five explicit measures of mispricing. Also, to safeguard the development of a comprehensive study, we use three kinds of proxies of DIVOP, based on idiosyncratic volatility, dispersion in analysts’ forecasts and unexpected trading volume. The results show a positive significant association between DIVOP and stock mispricing on a yearly basis. This association is stronger for underpriced stocks, which is consistent with the underpricing hypothesis, and indicates that DIVOP signals risk. An implication of this study is that firms have incentives to provide high-quality and explicit information to limit DIVOP and avoid being underpriced.

Keywords: Divergence of opinion, Stock mispricing

pdf Mandatory IFRS Adoption and Real/Accruals Bases Earnings Management in the UK

Mohammad I. Almaharmeh 1, Adel Almasarwah* 2, Ali Shehadeh 1

1 The University of Jordan/Aqaba, 2 The Hashemite University

Here, the link between the mandatory adoption of International Financial Reporting Standards (IFRS) and Real Earnings Management (REM), as well as Accrual Earnings Management (AEM), will be examined for non-financial listed firms in the London Stock Exchange. Robust regression analysis of the mandatory IFRS adoption will be conducted on the panel data, as well as earnings management using three AEM models and three REM models. Mixed results with respect to the qualities of AEM and REM were notably garnered, with mandatory IFRS adoption positively relating to the Roychowdhury of abnormal cash flow and the Roychowdhury of abnormal production. Meanwhile, the Roychowdhury of abnormal discretionary expenses, standard Jones, and Kothari negatively related to mandatory IFRS adoption, whilst modified Jones showed an insignificant relation to mandatory IFRS adoption. Changes in IFRS adoption and guidelines for UK firms may have an impact on AEM and REM, and, as predicted, mandatory IFRS adoption mostly affects the Kothari model followed by the standard Jones model as proxies for accounting earnings quality.

Keywords: Mandatory IFRS, Accruals earnings management (AEM), Real earnings management (REM), Robust Regression

pdf The Role of Political Connections and Family Ownership in Increasing Firm Value

Momon, Lela Nurlaela Wati, Sutar

1 Universitas Padjadjaran, Bandung, Indonesia
2 Sekolah Tinggi Ilmu Ekonomi Muhammadiyah Jakarta, Indonesia

In the face of business competition, a company strategy is needed by seeking and exploiting opportunities in the business environment, one of which is through political connections. Ownership structure plays an essential role in the company to determine the firm performance. The high concentration of family ownership has the power to reduce agency conflicts between management and stakeholders in a company. Concentrated ownership can serve as corporate governance mechanism for better and effective monitoring of management. This study was conducted to determine empirical evidence of the effect of political connections and family ownership structure on firm value. The sample in this study was 390 data of the manufacturing company. The data analysis used is moderating regression analysis. The results of this study are a positive influence of political connections and family ownership structure on firm value. The results showed that the more the company had a strong political connection and was controlled by the family, the more the firm value would increase. The interaction of political connections can strengthen the influence of family ownership on firm value. It proves that the family ownership structure plays a role in determining political connections in Indonesia, especially in manufacturing companies. The existence of empirical evidence that shows that the firm value controlled by a politically connected family is higher than companies that are not connected politically, which implies investors to invest in companies that are politically connected and companies controlled by families with majority ownership because it is proven to increase firm value.

Keywords: Firm value, Political connection, Family ownership, Controlling shareholder

pdf Behavioral Finance Research in 2020: Cui Bono et Quo Vadis?

Katharina Fischer 1, Othmar M Lehner 2

1 University of Applied Sciences Upper Austria
2 Hanken Schools of Economics, Helsinki, Finland

Emanating from the influential survey of Barberis and Thaler (2003), this systematic literature review examines the significant volume of studies on behavioral finance from 36 reputable finance journals published be-tween 2009 and 2019. The findings are clustered into eight prominent research streams, which indicate the current developments in behavioral finance. Findings show that research intensively focuses on behavioral biases and their influence on economic phenomena. Driven by the impetus to understand the human mind, significant findings originated in the relatively new field of Neurofinance. Additionally, the analysis addresses the influence of market sentiment and its correlation with some of the other findings. Furthermore, implications on the limits to arbitrage in connection with some financial anomalies complete the holistic picture.

Keywords: Behavioral Finance, Neurofinance, Limits to Arbitrage, Market Anomalies, Behavioral Biases

pdf Corporate Social Responsibility as a managerial learning process

Ahmed Marhfor *1, Kais Bouslah 2, Bouchra M’Zali 3

1 Université du Québec en Abitibi-Témiscamingue. Member of CAIMD, Mohammed VI Polytechnic University
2 University of St. Andrews. Member of CAIMD, Mohammed VI Polytechnic University
3 Université du Québec à Montréal. Member of CAIMD, Mohammed VI Polytechnic University

The purpose of this paper is twofold. 1) We propose for the first time in the literature a theory (managerial learning hypothesis) that may explain why managers engage in corporate social responsibility (CSR). 2) We use an intuitive empirical methodology (Edmans et al. 2017) to test the relevance/irrelevance of our new theory. The idea behind our main contribution is that managers engage in CSR to learn new relevant information from other informed stakeholders. In return, managers will use both the new information and other information they already have to choose the optimal level of firm’s investment (Jayaraman and Wu, 2019). Therefore, we propose to examine whether a strong CSR engagement improves revelatory efficiency (Edmans et al. 2012, 2017). The latter accounts for the extent to which stock prices reveal new information to managers that will help them make value-maximizing choices. Our findings suggest that CSR activities do not allow firm’s managers to extract new information from their stock prices and ultimately improve the efficiency of their investment choices.

Keywords: Corporate social responsibility, Managerial learning theory, Revelatory efficiency, Investment-price sensitivity

JEL Classification: G14, G34, M14

pdf Beyond the three lines of defense: The five lines of defense model for financial institutions

Georgios L. Vousinas*

National Technical University of Athens, School of Mechanical Engineering, Sector of Industrial Management & Operational Research, Greece

The purpose of this study is to provide an updated version of the widely accepted three lines of defense model (3LoD) to better apply for regulated financial institutions. The author proposes the five lines of defense model (5LoD) which consists of the existing three lines along with external audit and regulators (comprising the fourth and fifth line of defense respectively). In spite of the fact that the bodies forming the two additional lines of defense constitute the external lines of defense, there should be active in supervising and monitoring control issues within the organization, in strong cooperation with the internal lines. This calls for closer interaction among the internal auditors, external auditors and regulators in the design and implementation of an efficient and effective internal control system, aiming to strengthen the existing framework regarding the governance of modern financial institutions, which operate in a highly demanding regulated environment.

Keywords: Three lines of defense, Five lines of defense, Internal audit, External audit Regulator

pdf The Impact of Financial Sector Sustainability Guidelines and Regulations on the Financial Stability of South American Banks

Pedro Ildemaro Alguindigue Ruiz, Olaf Weber*

University of Waterloo

Sustainability risks represent a significant concern for the banking industry. Consequently, financial regulators created financial sector sustainability guidelines and regulations. However, the effect of these policies on banks’ financial stability is unclear. Hence, this study analyzes 149 banks in 17 countries in Latin America to explore the impact of financial sector sustainability guidelines and regulations on the banking industry. We use the Z-Score to measure the financial stability of banks in countries with and without financial sector sustainability guidelines and regulations. Based on panel regression, our results suggest significant differences between banks in countries with and without financial sector sustainability guidelines and regulations. We conclude that sustainable finance regulations promote financial stability as well as sustainable banking practices.

Keywords: Sustainability, Regulation, Supervision, Financial stability, South-America

JEL Classification: G14, G34, M14

pdf The value of political independent supervisory boards: Evidence from Indonesian dual board setting

Joni Joni*, Jahja Hamdani Widjaja, Maria Natalia, Ivan Junius Salim

Maranatha Christian University, Indonesia

We investigate whether political independent supervisory boards (political I-SBs) help companies to reduce their corporate risks in the setting of Indonesian two-tier board system. This study is different from other studies in several ways. First, while most prior studies examine the effectiveness of independent boards in one-tier board setting, we use dual board system. This system promotes the strategic role of political I-SBs. Second, we use two measures of corporate risks: operating and market risks. Based on 1,176 firm-year observations for operating risk analysis and 1,254 firm-year observations for market risk analysis, we find that firms with political I-SBs have lower operating and market risks than firms with non- politically connected independent SBs. We also control for endogeneity problem using GMM (Generalized Method of Moments) method, and the results are still consistent.

Keywords: Political I-SBs, Corporate risks, Two-tier board system