Department of Finance

1. Rookie independent directors and corporate fraud in China


Source:Finance Research Letters,2021,Vol.

Abstract:This paper examines whether rookie independent directors (RIDs) have an effect on corporate fraud in Chinese public companies. In firm-level analysis, we find that the presence of RIDs increases the likelihood of corporate fraud. In director-level analysis, we reveal that rookie independent directors are less likely to dissent using the voting records collected from company announcements. And the cost of dissension for RIDs is the higher likelihood of losing current board seats, compared with seasoned independent directors. Our results are robust to alternative variables about the existence of RIDs, the IV approach and the conditional model.
2. From watchdog to watchman: Do independent directors monitor a CEO of their own age?

Author:Fan, YY;Jiang, YX;John, K;Liu, FH


Abstract:We examine the impact of age similarity between independent directors and the CEO on earnings management. Using changes in independent director composition due to same-aged director deaths and retirements for identification, we find that firms with the presence of independent directors who have the same age with the CEO are more likely to manage earnings. We further find that age similarity between these two parties increases earnings management through lowering the effectiveness of board monitoring. Additionally, this positive impact decreases as the age gap widens, but intensifies if independent directors share other characteristics with the CEO, if independent directors sit on audit or nomination committees, if firms with lower information asymmetry and if CEOs are older. Our results are robust to alternative proxies of earnings management.
3. The implied arbitrage mechanism in financial markets

Author:Chen, SY;Chng, MT;Liu, QF


Abstract:The no-arbitrage condition is a cornerstone concept in financial market research. However, the arbitrage mechanism that is inherent in the trading process for related securities, is not readily observable. We develop a generalized smooth-transition vector error-correction model, or GST-VECM, to estimate the arbitrage mechanism from financial market data. The GST-VECM can (i) back out the implied no-arbitrage band, (ii) estimate arbitrage intensity for upper and lower bound violations, and (iii) accommodate convergence risk for statistical arbitrage. Using the introduction of CSI300 ETF trading in China as a natural experiment, we estimate the GST-VECM to reveal some insight into how a microstructural policy, by altering the index arbitrage mechanism, affects the pricing link between spot and futures markets. (c) 2020 Elsevier B.V. All rights reserved.
4. Pension insurance schemes and moral hazard: The Pension Benefit Guaranty Corporation should restrict the insured pension plans’ portfolio policy


Source:Quarterly Review of Economics and Finance,2021,Vol.82

Abstract:The pension insurance schemes existence leads to moral hazard: the insured defined benefit pension plans tend to invest more heavily in risky assets. A possible countermeasure mentioned in the literature, but not yet analyzed, is the introduction of a restriction on the pension plans’ portfolio policy. The US context is chosen for analysis. We argue that a portfolio restriction is needed in the case of a sponsoring firm in financial difficulty having an underfunded pension plan. We prove that the restriction should respond to the objective of liability hedging. Estimation results suggest that the corresponding portfolio strategy is a low-risk policy. The paper recommends that the maximum equity proportion is fixed at 30%%.
5. Are bonds blind? Board-CEO social networks and firm risk

Author:Fan, YY;Boateng, A;Ly, KC;Jiang, YX


Abstract:We examine the impact of social networks between independent directors and the CEO on firm risk. Employing the deaths and retirements of socially connected independent directors and the passage of the 2002 Sarbanes-Oxley Act for two identifications, we find that board-CEO social networks have a positive impact on firm risk. Specifically, CEOs who are socially connected to their independent directors are motivated to adopt riskier investment, operating and financing strategies. This positive influence is more pronounced for prior under-performing firms and for CEOs with low power or overconfidence, indicating that board-CEO social networks act as career insurance and a power-enhancing mechanism to encourage managerial risk-taking.
Total 5 results found
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