Kerstin Lopatta

Asymmetric Information and Corporate Social Responsibility

This article addresses the question whether companies benefit from their commitment to corporate social responsibility (CSR). The authors argue that firms which score high on CSR activities build investor confidence and find evidence that they benefit from lower information asymmetry. The authors measure information asymmetry by insider trading, which is defined as the trading of a company’s shares by corporate insiders who have an information advantage with the aim to reap gains or avoid losses. Using a sample of U.S. firms listed in the MSCI World Index during the period 2004 to 2013 and the firm- and industry-level CSR rating from Global Engagement Service (GES), the authors show that insider transactions in firms with a high score on CSR activities lead to lower abnormal returns. This investigation extends current literature on the business case for CSR by explaining the influence of CSR activities on asymmetric information.

Does compliance with the German Corporate Governance Code pay off?: An investigation of the implied cost of capital

Purpose - – This paper aims to empirically investigate the relationship between the level of compliance with the German Corporate Governance Code’s (GCGC) recommendations and the implied cost of equity capital (ICC). German listed companies are required by law to annually disclose their compliance with the recommendations of the GCGC. Whether the GCGC achieves its aim to promote the trust of stakeholders in the management and supervision is still an open question. Design/methodology/approach - – ICC is regressed on a score that captures compliance with the GCGC and several control variables. The dataset covers the period of 2003-2012 with declarations of compliance from 447 companies. ICC is chosen as an outcome variable, as it captures general investment risk as well as risk arising from asymmetric information and mistrust of investors in management. Findings - – The results of the empirical analysis demonstrate that a higher level of GCGC compliance is associated with lower ICC. Research limitations/implications - – It is expected that the results of this study will strengthen acceptance of the GCGC and empirically support the work of the government commission that is responsible for it. It has not been analyzed yet whether the firms cite good reasons why they do not adhere to certain items. Originality/value - – This empirical analysis is the first to provide statistically reliable evidence on how compliance with the GCGC affects ICC and whether the work of the government commission reflects good corporate governance as perceived by capital markets.

IASB Changes on Leasing - A Study Discovering the Impact of Lease Disclosures in the Assessment of Equity Risk

We investigate the relationship between equity risk and operating risk as well as equity risk and financial risk by analysing different levels of leverage, reported debt and earnings volatility of German listed companies. The results suggest that the measurement of equity risk is based on the variability in ROA. For firms that already have higher operating risk, investors include operating leases in the measurement of equity risk in addition to operating risk and reported financial risk. For firms with lower variability in ROA, the assessment of equity risk relates only to reported financial risk and operating risk; in addition, off-balance sheet debt is not significant in explaining variations in stock returns. Since reported debt and off-balance sheet debt are not treated equally, a mandated recognition of all lease contracts is expected to enhance the assessment of equity risk for firms with lower variability in earnings.

Corruption, Corporate Social Responsibility and Financial Constraints: International Firm‐level Evidence

This study examines the relationship between firm-level factors including corporate social responsibility (CSR) performance and financial constraints, and the firm-level risk of corruption. Facing a measurement challenge referring to firm-level risk of corruption, we define a corruption score based on corporate disclosures of corrupt activities. We show that, first, CSR performance is negatively related to the risk of corporate corruption. Second, a firms vulnerability to financial constraints is positively related to the risk of corporate corruption. Third, the effects are particularly strong for firms with low board independence. Finally, we contribute to prior literature by developing the first firm-level corruption score that is not only robust to prevalent corruption indices but is also applicable to any dataset and can be used for future research on firm-level corruption. Moreover, the study provides new empirical evidence on firm-level determinants that relate to corporate corruption risk.

Is there a priced risk factor associated with conservatism

Purpose - Garcia Lara Design/methodology/approach - The authors form characteristic-balanced portfolios from dependent sorts of stocks on the firm’s degree of conservatism and the firm’s loading on the conservatism-related factor-mimicking portfolio as proposed by Daniel and Titman (1997) and Davis Findings - The tests indicate that it is the conditional conservatism characteristic rather than the factor loading that explains the cross-sectional differences in average stock returns. Consequently, they do not find evidence for a conservatism-related priced risk factor. Originality/value - This finding suggests that investors misvalue the conservatism characteristic and casts doubt on the rational risk explanation as proposed by Garcia Lara

The use of optimistic tone by narcissistic CEOs

The purpose of this paper is to examine how CEO narcissism can be related to the usage of an abnormal optimistic tone in financial disclosures. Drawing on upper echelons theory, this paper suggests a link between CEO characteristics, such as narcissism, and accounting choices, such as optimistic financial reporting language.,To measure the narcissistic trait of a CEO, the study builds on a model using a set of 15 archival indicators. The usage of an abnormal optimistic tone is assessed quantitatively when looking at firms’ 10-K filings, where “abnormal” refers to tone that is unrelated to a firm’s performance, risk, and complexity. This approach allows for the use of firm-fixed effects for a sample of US listed firms over the period 1992-2012.,The results show that CEO narcissism is significantly positively related to abnormal optimistic tone in 10-K filings. If a highly abnormal optimistic tone is present, the level of CEO narcissism is positively related to the likelihood of future seasoned equity offerings and larger future investments in research and development.,The findings are relevant for shareholders and stakeholders as well as auditors and legislators. All stakeholders should be aware of the overly optimistic reporting language resulting from CEO narcissism and need to make allowances for it when assessing firm performance based on financial disclosures.,This study is the first to show in a large-scale sample how CEO narcissism can be related to a firm’s use of optimistic language, and thus contributes to the question of how personality traits affect an organization’s financial reporting strategy.

Estimates and inferences in accounting panel data sets: comparing approaches

Purpose - The purpose of our paper is to review and evaluate the methods commonly used in the accounting literature to correct for cointegrated data and data that is neither stationary nor cointegrated. Design/methodology/approach - We conduct Monte Carlo simulations according to Baltagi et al. (2011), Petersen (2009) and Gow et al. (2010) to analyze how regression results are affected by the possible nonstationarity of the variables of interest. Findings - Our results suggest that biases in regression estimates can be reduced and valid inferences can be obtained by employing robust standard errors clustered by firm, clustered by firm and time or Fama-MacBeth t-statistics based on the mean and standard error of the cross-section of coefficients from time-series regressions. Originality/value - Our findings are suited to give researchers guidance as to which estimation methods are the most reliable given the possible nonstationarity of the variables of interest.

Systemic operational risk: Spillover effects of large operational losses in the European banking industry

Purpose - The aim of this paper is to study the information content of operational loss events occurring at European financial institutions with respect to the announcing bank’s industry rivals from an equity investor’s perspective. Design/methodology/approach - We conduct an event study to identify spillover effects of operational loss events using the Carhart (1997) four-factor model as a benchmark model. In addition, we conduct multiple regression analyses to investigate the extent to which firm-specific factors or the market environment affect abnormal returns. Findings - We observe significant negative abnormal returns following operational loss announcements exceeding € 50 million for both the announcing firms and their competitors. In addition, we find that stock market reactions occur only within a very small event window around the announcement date, indicating a high degree of market efficiency. Finally, abnormal returns tend to be insignificant for smaller loss amounts. Originality/value - While operational risk is often believed to be strictly firm-specific, our results show that large operational risk events are not purely idiosyncratic; rather, they are systemic in the sense that they have contagious effects on non-event banks. Thus, we shed new light on how operational risk affects equity investors’ investment behaviour in an opaque and highly interconnected banking market.

The Solar Shakeout - Capital Market Reactions to Bankruptcy Announcements in the German Solar Industry

This paper investigates how bankruptcy announcements in the German solar industry affect the stock market returns of announcing firms and their competitors. We show that German solar firms experience negative capital market reactions to their own bankruptcy announcements and to the announcements of their competitors. Cross-sectional analysis reveals that these negative information externalities are magnified by higher leverage. Further analysis also indicates that these negative information externalities are valuable predictors in short-term default probability models.

The Effect of Dual Holdings on the Level of Accounting Conservatism

This study evaluates whether dual holdings report less conservatively than non-dual holdings. We define dual holdings as firms who have at least one shareholder who is a creditor simultaneously and hypothesize that this governance structure mitigates information asymmetries and therefore the agency conflict of debt. Hence, we assume that governance structures act as substitutes for agency conflict reducing measures like accounting conservatism. Dual holding structures therefore offer a unique even though never used before opportunity to evaluate the impact of information asymmetries on firms’ capital and agency costs as well as the bid-ask spreads and the market valuation. Our sample is based on US-American data and combines several databases who have not been linked before to aggregate 13,483 firm-year observations from 1998-2014.Our modified model based on Basu (1997) shows that dual holdings indeed report significantly less conservative than non-dual holdings. This result is robust to stricter definitions of dual-holdings. We further apply widely accepted models by El Ghoul et al. (2011), Gompers, Ishii, and Metrick (2010) and Coller and Yohn (1997) to give evidence for lower degrees of information asymmetry in dual holding firms by showing that bid-ask spreads are narrower, cost of capital is lower and the market evaluation measured as Tobin’s Q is higher for firms with this special governance structure. These consistent findings confirm our hypothesis that governance structures act as substitutes for agency conflict reducing measures. These insights are particularly beneficial for financial analysts, investors and all other readers of quarterly and annual reports.