Ivan Diaz-Rainey

The CO2 Trading Market in Europe: A Financial Perspective

The trading of carbon dioxide (CO2) emission allowances, or permits, has been established in recent years as one of the primary mechanisms for tackling global warming and climate change. The European Union (EU) has taken an important initiative in this direction by establishing in 2003 the first ever mandatory cap-and-trade system for CO2 permits: the EU Emissions Trading Scheme (EU ETS). The purpose of this paper is to initially provide a brief introduction to the EU ETS and subsequently assess its operation during the years 2005-2010 from a financial market perspective. The in-sights gained through this analysis are particularly important not only for policy makers and market stakeholders but also for the growing community of the so-called ‘carbon’ investors.

Financial Development and the Determinants of Capital Structure in Vietnam

This paper explores the capital structure of listed Vietnamese companies in the broader context of financial development (the recent expansion of domestic equity and debt capital markets). Accordingly, the paper provides the first insights into the capital structure of listed companies in one of the most dynamic economies in the Asia-Pacific region and in an economy that has experienced rapid change in recent years. We employ a panel GMM (generalized method of moments) system estimator to analyse the determinants of the capital structure of 116 non-financial firms listed on either the Ho Chi Minh Stock Exchange or the Hanoi Stock Exchange for the period 2007-2010. From this analysis we conclude that despite the emergence in recent years of equity and (to a lesser extent) corporate debt capital markets, the capital structure of Vietnamese enterprises are still dominated by the use of short-term financing sources. Further, our results show that state controlled enterprises continue to have preferential access to finance and that high growth firms still rely principally on external debt rather than equity issuance. These results indicate that policymakers need to continue to pursue policies that will deepen capital markets and ensure that bank finance is allocated on a purely commercial basis.

Stranded research? Leading finance journals are silent on climate change

Finance research has shaped the modern financial system, influencing investors and market participants directly through research findings and indirectly through teaching and training programmes. Climate change presents major risks to the global financial system as well as new opportunities for investors. Is climate finance an important topic in finance research? We systematically analyse the content of 20,725 articles published in the leading 21 finance journals between January 1998 and June 2015. We find that only 12 articles (0.06%) are related in some way to climate finance. The three elite finance journals (Journal of Finance, Journal of Financial Economics and Review of Financial Studies) did not publish a single article related to climate finance over the 17.5-year period. We repeat our analysis across a sample of 29 elite business journals spanning accounting, economics, management, marketing and operations research, as well as finance. We find a similar dearth of published climate finance research. We consider four possible explanations for this failure of top finance and business journals to engage with climate finance as a research topic. These include methodological constraints and editorial policies. We conclude by arguing why it is critical for climate-related research to be given greater attention and prominence in finance journals.

The impact of regulatory change on EU energy utility returns: the three liberalization packages

ABSTRACT The European Union’s (EU) energy sector is changing due to major policy reforms. In this article, we examine the impact of major legislative changes which were designed to induce competition in the energy sector: the three liberalization packages. Competition was expected to benefit the industry by phasing out inefficient firms. EU citizens were also expected to benefit as competition was likely to promote a more efficient energy sector and more consumer choice of energy products and services. However, this legislative change occurred during a period of extreme market turmoil. We examine the impact of all these changes on the risk profile of the sector. Our results show that the liberalization legislation significantly increased systematic risk exposure of the sector, reducing its role as a defensive investment asset. We also show that commodities had relatively little impact on sector returns, but this was expected as utilities can offset commodity risk in hedging markets. We compare our results to those obtained in neighbouring EU sectors and find the impacts are isolated to the energy sector. This article makes a major contribution to energy policy by empirically showing the change in risk as a result of sector liberalization.

Crude Inventory Accounting and Speculation in the Physical Oil Market

This paper uses inventory data from financial accounts to explore whether companies involved in the physical oil market were speculating in the run-up to 2008. Using quarterly inventory data over the period 1990Q4 to 2012Q1 and a sample of 15 of the largest listed oil companies in the world, we derive an Index of Scaled Physical Inventories (ISPI). We find declining ISPI up to the early 2000s is consistent with firms minimizing inventory for efficiency sake; then ISPI starts to increase, suggesting physical inventories could have contributed to the run-up in oil prices between 2003 and 2008. Highlighting heterogeneity in inventory behaviors amongst the large oil companies, the structural break test on the ratio of inventory to sales and the days to sales for individual companies shows that five companies had positive structural breaks during the speculation period, while the other companies had no or negative structural breaks. Contrary to declining inventory expectations due to a tightening oil market, the positive structural breaks suggest speculative behavior. We also examine the relationship between changes in profitability and changes in oil inventory over the pre-speculation and speculation period. Though some coefficients for inventory do switch from negative to positive over the two periods as hypothesized, they are only significant in a few cases. However, aggregate measures of inventory do switch and are significant, suggesting that, on average, inventory holdings negatively affected profitability in the pre-speculation period and positively affected profitability in the speculation period.

Carbon Pricing in New Zealand's Emissions Trading Scheme

The New Zealand Emissions Trading Scheme (NZ ETS) is an intensity-based system and the second oldest national ETS. It is unique in that it is highly international (with unlimited use of Kyoto allowances) and it incorporates forestry. We provide the first empirical analysis of the determinants of allowance prices on the NZ ETS. Our results indicate that imports of offsets rather than fundamentals have been the major price determinant. Moreover, the pricing of New Zealand units (NZUs) can be placed into three distinct periods, delineated by two structural breaks. In the first period, the system is largely autarkic; in the second period, as international offset prices drop below the NZU price, the system becomes a ‘price taker’; in the final period, following some policy interventions, the system regains some independence. The case of the NZ ETS shows both the power of linking ETSs and the dangers of doing so.

Modelling Sector-Level Asset Prices

We present a modelling approach for sector asset pricing studies that incorporates sector-level risk factors, sub-group portfolios, and structural break point tests that are better at isolating the time-varying nature and the firm-specific component of returns. The sub-group portfolios show considerable subsector heterogeneity, while the asset pricing model using local risk factors and inductive structural breaks results in a superior model (R2 of 80.42% relative to R2 of 68.79% of ‘conventional’ models). Finally, we show that 28% of the variance of residuals, normally assumed to be the firm-specific component of returns, can be attributed to the changing relationship between sector returns and risk premia.

Aggregate Market Quality Implications of Dark Trading

We test theoretical predictions regarding the implications of operating dark pools alongside lit venues for market quality in London ‘City’ trading venues. We find that dark trading at moderate levels enhances market transparency and reduces both trading noise and incidences of trading manipulation. Results however imply that there is a threshold of value when dark trading diminishes transparency and thus induces a deterioration in market quality. Evidence also suggests that the positive effects of dark trading could be linked to uninformed traders gravitating towards dark pools and informed traders concentrating on lit venues; this self-selection reduces information asymmetry.

Securities class actions and operating performance

Purpose - The purpose of this paper is to examine how the filing of a securities class action, and associated corrective actions taken by management, impact the operating performance of sued firms. Design/methodology/approach - A matched sample is formed three years prior to the filing of a class action, as opposed to the traditional one year used in the literature. Match adjusted performance is analyzed from three years prior to the filing to five years after. Further the authors analyze the impact corrective actions have on operating performance. Findings - The results show that operating underperformance happens considerably earlier than had hitherto been believed. Further, there is no evidence that the filing adversely affects performance, rather securities class actions appear to act as a turning point. The findings also indicate that firms that increase leverage post filing, experience subsequent increases in their operating performance. Originality/value - The results show that rather than leading to a deterioration in performance, as is currently understood, the filing of a securities class actions results in improved operating performance. This improvement is, in part, associated with more optimal use of leverage by management. Overall, class actions appear to be an effective disciplinary mechanism.

Corporate Lobbying and Fraud Detection: Revisited

This paper re-examines the size of penalties following securities class actions and the impact of lobbying on the time it takes to detect managerial misconduct. Managers of lobbying firms are able to get away with misconduct for longer and are marginally less likely to have to settle a class action up to 2004. From 2005, lobbying no longer impacts the time it takes to detect misconduct or the outcome of the case. Our findings suggest that the tacit power of lobbying firms has decreased over time and the most likely explanation for this is the enactment of SOX.