Kiridaran Kanagaretnam

The Impact of Social Value Orientation and Risk Attitudes on Trust and Reciprocity

Prior experimental studies provide evidence that the levels of trust and reciprocity are highly susceptible to individuals’ preferences towards payoffs, prior experience, capacity to learn more about personal characteristics of each other and social distance. The objective of this study is to examine whether social value orientation as developed by Griesinger and Livingstone (1973) and Liebrand (1984) and risk preferences can help to account for the variability of trust and trustworthiness. We use the Berg et al. (1995) investment game to generate indices of trust and reciprocity. Prior to their participation in the investment game, all subjects participated in two other games. One is used to measure their social value orientation (a measure of other regarding behavior) and the second to measure risk attitudes. These variables are introduced as treatments in the analysis of the trust and reciprocity data. In addition to these preference related variables, gender is introduced to capture any differences between men and women which may not be encompassed by value orientation and risk attitudes. The statistical analysis indicates that the social value orientation measure significantly accounts for variation in trust and reciprocity. As well, the level of trust exhibited by an investor significantly affects the reciprocity of the responders and this measure of trust interacts with social value orientation. Individuals who are highly pro-social reciprocate more as the sender’s trust increases, while those who are highly pro-self reciprocate less as the sender’s trust increases. For this sample of participants, the gender variable does not capture any differences in the behavior of men and women that is not already reflected by the differences captured by their value orientations. Risk attitudes do not significantly account for variation in trusting behavior, except for the case where individuals have neither strongly pro-social nor pro-self social value orientations. In this case, more riskseeking individuals are more trusting.

Impact of FDICIA internal controls on bank risk taking

The Federal Deposit Insurance Corporation Improvement Act (FDICIA) of 1991 was designed, among other things, to introduce risk-based deposit insurance, increase capital requirements, and improve banks’ internal controls. Of particular interest in this study are the requirements for annual audit and reporting of management’s and auditor’s assessment of the effectiveness of internal control for banks with

Relationship between Analyst Forecast Properties and Equity Bid-Ask Spreads and Depths Around Quarterly Earnings Announcements

500 million or more in total assets (raised to

Religiosity and Earnings Management: International Evidence from the Banking Industry

1 billion in 2005). We study the impact of these requirements on banks’ risk-taking behavior prior to the recent financial crisis and the consequent implications for bank failure and financial trouble during the crisis period. Using a sample of 1138 banks, we provide evidence that banks required to comply with the FDICIA internal control requirements have lower risk taking in the pre-crisis period. Specifically, the volatility of net interest margin, the volatility of earnings, and Z score show less risk-taking behavior. Furthermore, these banks are less likely to experience failure and financial trouble during the crisis period.

Unintended Consequences of the Increased Asset Threshold for FDICIA Internal Controls: Evidence from U.S. Private Banks

We study the relationships between three variables which proxy for the ex-ante level of information asymmetry - forecast dispersion, forecast revision volatility, and the level of analyst coverage, and equity bid-ask spread and depth changes around quarterly earnings releases. Kim and Verrecchia (1994) suggest that earnings releases increase the level of information asymmetry and lower the level of liquidity in the security market. Using both an OLS regression framework and a simultaneous equations model, we examine whether equity bid-ask spreads increase and depths decrease as the level of information asymmetry increases. Our results indicate that spreads are higher (relative to a non-event period) around earnings announcements when information asymmetry is more pronounced; however, depths are lower only on the day following the announcement when there is greater information asymmetry. Relative spreads have a significant positive relation with both forecast dispersion and revision volatility and a significant negative relation with analyst coverage. Relative depths have a significant negative relation with forecast dispersion and a significant positive relation with analyst coverage. Our findings indicate that the equity specialist adjusts both spreads and depths when confronting informed traders around earnings releases and that these adjustments are more pronounced when the level of information asymmetry is greater. Copyright Blackwell Publishers Ltd, 2005.

Determinants and consequences of large CEO pay

Using an international sample of banks, we study how differences in religiosity across countries affect earnings management. Given that religiosity is a major source of morality and ethical behavior, it may reduce excessive risk taking and act as deterrence for earnings manipulations. Therefore, we predict lower earnings management in societies that have higher religiosity. Consistent with expectations, our cross-country analysis indicates that religiosity is negatively related to income-increasing earnings management for loss-avoidance and just-meeting-or-beating prior year’s earnings. We also find that religiosity reduces income-increasing earnings management through abnormal loan loss provisions. In additional tests, we document that religiosity increases the information value of bank earnings, with both earnings persistence and cash flow predictability being enhanced by higher religiosity. For the crisis period analysis (i.e., 2007–2009), our evidence shows that banks in countries with higher religiosity exhibit lower probability of reporting asset deterioration and lower probability of having poor performance.

Discretion in Bank Loan Loss Allowance, Risk Taking, and Earnings Management

We examine the unintended consequences of the 2005 increase from

Transparency, Empowerment, Disempowerment and Trust in an Investment Environment

500 million to

Outside director remuneration and the decision to grant CEO stock options

1 billion in the asset threshold for the Federal Deposit Insurance Corporation Improvement Act (FDICIA) internal control reporting requirements. We focus on a test sample of banks that increased their total assets from between

Testing the Efficacy of Replacing the Incurred Credit Loss Model with the Expected Credit Loss Model

100 million and