Peter de Goeij

The Impact of Firm and Industry Characteristics on Small Firms' Capital Structure: Evidence from Dutch Panel Data

We investigate small firms’ capital structure, employing a proprietary database containing financial statements of Dutch small and medium-sized enterprises (SMEs) from 2003 to 2005. We find that the capital structure decision of Dutch SMEs is consistent with the pecking order theory: SMEs use profits to reduce their debt level, and growing firms increase their debt position since they need more funds. Furthermore, we document that profits reduce in particular short term debt, whereas growth increases long term debt. This implies that when internal funds are depleted, long term debt is next in the pecking order. We also find evidence for the maturity matching principle in SME capital structure: long term assets are financed with long term debt, while short term assets are financed with short tem debt. This implies that the maturity structure of debt is an instrument for lenders to deal with problems of asymmetric information. Finally, we find that SME capital structure varies across industries but firm characteristics are more important than industry characteristics.

Corporate Governance Rules and Insider Trading Profits

We investigate patterns of abnormal stock performance around insider trades on the Dutch market. Listed firms in the Netherlands have a long tradition of limiting shareholders rights. Using a change in corporate governance regulations as a natural experiment we show that governance rules have a causal effect on insider trading profits. Our results imply that insider transactions are more profitable at firms where shareholder rights are not restricted by anti-shareholder mechanisms. These findings are inconsistent with internal monitoring of insider trading. Rather, we explain this empirical pattern by imperfect substitution between insider trading profits and other private benefits of control.

Modeling the Conditional Covariance Between Stock and Bond Returns: A Multivariate Garch Approach

To analyze the intertemporal interaction between the stock and bond market returns, we assume that the conditional covariance matrix follows a multivariate GARCH process. We allow for asymmetric effects in conditional variances and covariances. Using daily data, we find strong evidence of conditional heteroskedasticity in the covariance between stock and bond market returns. The results indicate that not only variances, but also covariances respond asymmetrically to return shocks. Bad news in the stock and bond market is typically followed by a higher conditional covariance than good news. Cross asymmetries, that is, asymmetries followed from shocks of opposite signs, appear to be important as well. Covariances between stock and bond returns tend to be relatively low after bad news in the stock market and good news in the bond market. A financial application of our model shows that optimal portfolio shares can be substantially affected by asymmetries in covariances. Moreover, our results show sizable gains due to asymmetric volatility timing. Copyright 2004, Oxford University Press.

Do Macroeconomic Announcements Cause Asymmetric Volatility

In this paper we study the impact of macroeconomic news announcements on the conditional volatility of stock and bond returns. Using daily returns on the S&P 500 index, the NASDAQ index, and the 1 and 10 year U.S. Treasury bonds, for January 1982 - August 2001, some interesting results emerge. Announcement shocks appear to have a strong impact on the (dynamics of) bond and stock market volatility. Our results provide empirical evidence thatasymmetric volatility in the Treasury bond market can be largely explained by these macroeconomic announcement shocks. This suggests that the asymmetric volatility found in government bond markets are likely due to misspecification of the volatility model. After including macroeconomic announcements into the model, the asymmetry disappears. Becausefirm-specific news is the most important source of information in the stock market, the asymmetries in stock volatility do not disappear after incorporating macroeconomic announcements into the volatility model.

Analysts' earnings forecasts: Coexistence and dynamics of overconfidence and strategic incentives

This paper formulates a two-stage model to capture the decision process of financial analysts when issuing earnings forecasts. Our model extends the model of Chen and Jiang [(2005). Analysts’ weighting of private and public information. Review of Financial Studies, 19 (1), 319–355], by allowing for a distortion of forecasts independent of whether an analyst has private information. Using quarterly earnings forecasts, we provide empirical evidence on the coexistence of overconfidence and strategic incentives. Financial analysts overweight their private information and at the same time strategically inflate their forecast.

Improving Index Mutual Fund Risk Perception: Increase Financial Literacy or Communicate Better?: Improving Index Mutual Fund Risk Perception

We investigate the effect of financial literacy and index mutual fund risk disclosure format on investors’ risk perception by examining the risk disclosure part in the Key Investor Information Document (KIID) for UCITS funds in Europe. Using an experimental survey administered to 244 university students we find that both financial literacy and the KIID risk representation affect investors’ risk level perception accuracy. In addition, we find indications that financial literacy is less important if the complexity of the risk decision framework is reduced, although in our samle this effect is weak. Our results indicate that as an alternative to efforts taken to stimulate financial literacy, policy makers can effectively impact investors’ risk assessment by presenting a risk indicator that simplifies the decision framework for all investors, irrespective of their level of financial literacy.

What Do Investors Learn from Advertisements

Individual investors use advertisements to make investment decisions. We test how advertising content affects investor’s knowledgeability and evaluation of an equity offering. The results show that persuasive content (e.g. images) increases investor knowledgeability about fundamental characteristics of securities offerings while salient disclosure of risk factors only increases risk factor knowledge. Persuasive content also increases average investment amounts by 16 percent, while salient risk factor disclosure reduces the tendency to consult additional information. Our results are robust against differences in financial literacy and investor experience and provide insights for regulating investment marketing.

Regulatory Certification, Risk Disclosure and Investor Behavior

Given the complexity of statutory disclosure (Beshears et al., 2011), we examine how the framing and balance in risk disclosure (e.g. vis-a-vis return information) and reference to regulatory approval of prospectuses in advertisements affect investor behavior. Using an experimental survey design with mock advertisements, we demonstrate that explicit risk disclosure increases investors’ risk perception by 5 percent, while balancing risk disclosure with other information decreases the search for additional information with 12 percent. We document strong ‘regulatory-seal’ effects as it increases willingness to invest by more than 10 percent, while decreasing perceived risks by almost 6 percent. Finally, we use inter-subject variation to show that willingness to invest is causally driven by the presence of a regulatory seal, the presence of which increases it by almost 17 percent.

Regulatory Certification, Risk Factor Disclosure and Investor Behavior

Given the complexity of statutory disclosure (Beshears et al., 2011), we examine how the framing and balance in risk disclosure (e.g. vis-a-vis return information) and reference to regulatory approval of prospectuses in advertisements affect investor behavior. Using an experimental survey design with mock advertisements, we demonstrate that explicit risk disclosure increases investors’ risk perception by 5 percent, while balancing risk disclosure with other information decreases the search for additional information with 12 percent. We document strong ‘regulatory-seal’ effects as it increases willingness to invest by more than 10 percent, while decreasing perceived risks by almost 6 percent. Finally, we use inter-subject variation to show that willingness to invest is causally driven by the presence of a regulatory seal, the presence of which increases it by almost 17 percent.

The Effect of Salient Risk Disclosure and Regulatory Oversight on Investor Behavior

Given the complexity of statutory disclosure (Beshears et al., 2011), we examine how the framing and balance in risk disclosure (e.g. vis-a-vis return information) and reference to regulatory approval of prospectuses in advertisements affect investor behavior. Using an experimental survey design with mock advertisements, we demonstrate that explicit risk disclosure increases investors’ risk perception by 5 percent, while balancing risk disclosure with other information decreases the search for additional information with 12 percent. We document strong ‘regulatory-seal’ effects as it increases willingness to invest by more than 10 percent, while decreasing perceived risks by almost 6 percent. Finally, we use inter-subject variation to show that willingness to invest is causally driven by the presence of a regulatory seal, the presence of which increases it by almost 17 percent.