Hoje Jo

The Economics and Politics of Corporate Social Performance

Firms operate in a capital market, a product market, and a market for social pressure directed at them by social activists, NGOs, and governments. An equilibrium in these three markets yields a three-equation structural model that relates corporate financial performance (CFP), corporate social performance (CSP), and social pressure. This paper estimates the simultaneous equation model for a panel of over 1,600 firms and finds that CFP is uncorrelated with CSP and negatively correlated with social pressure. CSP is decreasing in CFP and increasing in social pressure. Social pressure is increasing in CSP and decreasing in CFP, which is consistent with social pressure being directed to soft targets. Disaggregating the panel indicates that CFP is positively correlated with CSP for firms in consumer markets and negatively correlated for industrial markets. For consumer markets, CSP is increasing in CFP, which is consistent with a perquisites hypothesis that managers spend on CSR when they can afford it. For industrial markets CSP is decreasing in CFP, which is consistent with a moral management hypothesis. For both consumer and industrial markets, CSP is responsive to social pressure.

Analyst Coverage, Corporate Social Responsibility, and Firm Risk

This article examines the empirical association between analyst coverage and corporate social responsibility (CSR) by investigating their simultaneous and causal effects, and its joint effects of CSR engagement and analyst coverage on firm risk. We find a positive association between the level and change of CSR engagement and the level and change of analyst coverage after considering simultaneity and causality. Based on the first‐difference approach, we further find that the change in analyst following from the previous year affects the change in CSR in the current period, whereas the change in CSR from the previous period does not influence the change in analyst following in the current period. Furthermore, we find that the change in CSR engagement as well as the interaction effect of changes in CSR and analyst coverage reduces the change of firm risk. When we examine the CSR strengths and concerns separately, analyst following does not significantly influence firms’ CSR strength but CSR concern activities decreases significantly as firms have more analyst followings. We further find the mediating role of financial analysts between CSR concerns (but not CSR strengths) and firm risk. We maintain that analysts provide indirect but additional social pressure to the firms to eventually reduce their irresponsible activities. Taken together, we interpret these results to support the stakeholder theory‐based conflict‐resolution explanation that considers CSR engagement as a vehicle to reduce conflicts of interest between managers and noninvesting stakeholders but not the overinvestment hypothesis that views CSR as a waste of valuable resources at the cost of shareholders.

Data frequency and the number of factors in stock returns

Abstract Determining the number of factors that explain stock returns plays an important role in empirical tests of the Arbitrage Pricing Theory. This paper examines the sensitivity of the number of factors to different data frequencies using daily, weekly, and monthly returns. The empirical results are consistent with the null hypothesis that the number of factors is the same for different data frequencies once daily returns are adjusted for nonsynchronous trading. The evidence also identifies only one or two factors.

The Impact of Information Release on Stock Price Volatility and Trading Volume: The Rights Offering Case

This paper examines whether information released via rights offering announcements induces changes in price volatility and trading volume of underlying stock. The results of this paper provide support for the release of new information via offering announcements and evidence of its effects on price volatility and volume of underlying stock. Specifically, utilization of the announced information by investors is evidenced by greater trading volume following the announcement date than during the pre-announcement period. We interpret this result to mean that informedness dominates consensus. However, stock price volatility decreased from the pre-announcement period to the post-expiration period of rights offerings.

Time-Varying Term Premium in T-Bill Futures Rate and the Expectations Hypothesis

This paper examines time-varying term premium in the T-bill futures rate to determine its significance for the expectations hypothesis (EH). Similar to previous studies on the T-bill forward rates, our data reject the joint hypothesis of the EH and the rational expectations hypothesis (RE). Under the assumption of zero rational expectational error, we find a substantial variation of term premium in the futures rate over time. Furthermore, the lower bound of the expected term premium variance is significantly positive when the rational expectational error is allowed to be nonzero. These findings are inconsistent with the EH. In addition, a relatively high ratio of the lower bound of the expected term premium variance to the prediction error variance implies that the poor predictive power of the futures rate should not be attributed mainly to the markets rational expectational errors.

Tests of market models: heteroskedasticity or misspecification?

Abstract This paper investigates the nature and the incidence of heteroskedasticity and misspecification in the market models by utilizing tests that are generally applicable. The results show that heteroskedasticity appears more frequently than misspecification even though both are serious problems. The evidence also indicates that the use of a quadratic market model or equally weighted market returns may lead to a smaller percentage of heteroskedastic cases but that, in general, this advantage has to be offset against an increase in the occurrence of specification errors. Small firms and January returns are also observed to produce a higher incidence of both heteroskedasticity and misspecification.

Is Institutional Ownership Related to Corporate Social Responsibility? The Nonlinear Relation and Its Implication for Stock Return Volatility

This study examines the relation between corporate social responsibility (CSR) and institutional investor ownership, and the impact of this relation on stock return volatility. We find that institutional ownership does not strictly increase or decrease in CSR; rather, institutional ownership is a concave function of CSR. This evidence suggests that institutional investors do not see CSR as strictly value enhancing activities. Institutional investors adjust their percentage of ownership when CSR activities go beyond the perceived optimal level. Employing the path analysis, we also examine the mediating effect of institutional ownership on the relation between CSR and stock return volatility. We find that CSR decreases stock return volatility at a decreasing rate through its effect on institutional ownership. Our results remain robust under several different CSR measures and estimation methods.

Corporate Environmental Responsibility and Financial Performance Around the World

This paper examines how environmental costs affect the corporate financial performance (CFP) of manufacturing firms around the world. We maintain that by effectively investing in corporate environment responsibility (CER), executives can decrease their firms’ environmental costs, thereby enhancing CFP. We label this argument as the ‘slack resources’ hypothesis. We find that countries in the Asia-Pacific region have the greatest variation between their return on assets (ROA) and environmental cost-adjusted ROA. This comes at the expense of rapid economic development in the emerging economies in the region. We also find that conventional industries such as the basic resources and the food and beverage industries have substantially high levels of total environmental costs, whereas the opposite holds true for the technology and telecommunication industries. Our results suggest that the reduction of environmental costs is related to higher firm performance. We also identify dynamic relations between these two variables. Lowering environmental costs tends to precede the enhancement of ROA by at least two years. Overall, our findings are supportive of the slack resources hypothesis.

Bitcoin and Sentiment

On the surface, cryptocurrencies share important features in common with high sentiment beta stocks. Baker and Wurgler (2007) identify high sentiment betas with small startup firms that have great growth potential. This paper investigates the degree to which, during the period July 18, 2010 to February 26, 2018, the return to bitcoin displayed the characteristics of a high sentiment beta stock. Using a sentiment-dependent factor model, the analysis indicates that in large measure, bitcoin returns resembled returns to high sentiment beta stocks.

Brexit’s Protectionist Policy and Implications for the British Pound

In this paper, we examine the association among the macroeconomic variables - interest rate, inflation rate, unemployment, and the expected spot rate of the British pound with respect to the Euro around the announcement of “Brexit”, June 2016, using the two international parity relationships, Purchase Power Parity (PPP) and International Fisher effect (IFE). We use the two international parity relationships to examine the significance of change in daily interest rates and monthly inflation rates on the change in actual daily spot rates. In addition, we postulate that the protectionist nature of Brexit policy has contributed to lowering U.K. unemployment and prompted wage growth, resulting in higher inflation rates. Our analysis, examining both the magnitude and directional deviation of the actual spot rate compared to the spot rate using the two parity relations, indicate that spot rates predicted based on the PPP and the IFE relations suggest the weakening of the British pound after the Brexit announcement. Furthermore, we find that U.K. unemployment has reduced due to the expanded monetary policy, consistent with the prediction of the Phillip’s curve.