Income, Trading, and Performance: Evidence from Retail Investors
Dien Giau Bui, Chih-Yung Lin, Iftekhar Hasan, Rui-Xiang Zhai
Journal of Empirical Finance,
March
2022
Abstract
We examine whether household income influences the trading styles of retail investors and their investment performance. To investigate this question, we use a unique dataset of branch-level trading that contains all retail investors and observe that those investors with high income trade more and earn significantly higher returns in the stock market. In addition, this income effect becomes stronger for highly risky stocks, such as gambling or lottery-like stocks. These findings are in line with the information model theorized by Peress (2004) in which wealthy investors take extra risks by trading more stocks.
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Stock Liquidity and Corporate Labor Investment
Mong Shan Ee, Iftekhar Hasan, He Huang
Journal of Corporate Finance,
February
2022
Abstract
Labor is among the most crucial factors of production that maintain a firm's competitiveness. Given its economic importance, drivers of firms' labor investment policy have gained increasing attention in the financial economics literature. This study investigates the relation between stock liquidity and labor investment efficiency. We establish a causal relation between the two phenomena using an exogenous shock to liquidity: the 2001 decimalization of stock trading. We find that labor investment efficiency improves following an increase in stock liquidity, and the effect is prevalent in firms experiencing overinvestment in labor. Our findings further support the argument that stock liquidity improves the efficiency of labor investment by enhancing governance through shareholder exit threat.
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26.01.2022 • 2/2022
Investment, output gap, and public finances in the medium term: Implications of the Second Supplementary Budget 2021
With the Second Supplementary Budget 2021, the German government plans to allocate a reserve of 60 billion euros to the Energy and Climate Fund. This additional spending is also meant to reduce the macroeconomic follow-up costs of the pandemic. According to the IWH’s medium-term projection, the expenditure is expected to increase output by about 0.5% at the peak of its impact in 2024. “While this macroeconomic effect is welcome, the additional investment will by no means compensate for the lack of investment activity since the beginning of the pandemic,” says Oliver Holtemöller, head of the Department Macroeconomics and vice president at Halle Institute for Economic Research (IWH). Moreover, the supplementary budget is likely to reduce confidence in the reliability of the debt brake.
Oliver Holtemöller
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Monetary Policy through Exchange Rate Pegs: The Removal of the Swiss Franc‐Euro Floor and Stock Price Reactions
Gregor von Schweinitz, Lena Tonzer, Manuel Buchholz
International Review of Finance,
No. 4,
2021
Abstract
The Swiss National Bank abolished the exchange rate floor versus the Euro in January 2015. Using a synthetic matching framework, we analyze the impact of this unexpected (and therefore exogenous) policy change on the stock market. The results reveal a significant level shift (decline) in asset prices following the discontinuation of the minimum exchange rate. As a novel finding in the literature, we document that the exchange‐rate elasticity of Swiss asset prices is around −0.75. Differentiating between sectors of the Swiss economy, we find that the industrial, financial and consumer goods sectors are most strongly affected by the abolition of the minimum exchange rate.
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Executive Equity Risk-Taking Incentives and Firms’ Choice of Debt Structure
Iftekhar Hasan, Walid Saffar, Yangyang Chen, Leon Zolotoy
Journal of Banking and Finance,
December
2021
Abstract
We examine how executive equity risk-taking incentives affect firms’ choice of debt structure. Using a longitudinal sample of U.S. firms, we document that when executive compensation is more sensitive to stock volatility (i.e., has higher vega), firms reduce their reliance on bank debt financing. We utilize the passage of the Financial Accounting Standard (FAS) 123R option-expensing regulation as an exogenous shock to management option compensation to account for potential endogeneity. In cross-sectional analyses, we find that the documented effect of vega is amplified among firms with higher growth opportunities and more opaque financial information; we also find vega's effect is mitigated in firms with limited abilities to tap into public debt market. Supplemental analyses suggest that firms with higher vega face more stringent bank loan covenants. We conclude that, by encouraging risk-taking, higher vega reduces firms’ reliance on bank debt financing in order to avoid more stringent bank monitoring.
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Trade Shocks, Labour Markets and Elections in the First Globalisation
Richard Bräuer, Wolf-Fabian Hungerland, Felix Kersting
Abstract
This paper studies the economic and political effects of a large trade shock in agriculture – the grain invasion from the Americas – in Prussia during the first globalisation (1871-1913). We show that this shock accelerated the structural change in the Prussian economy through migration of workers to booming cities. In contrast to studies using today’s data, we do not observe declining per capita income and political polarisation in counties affected by foreign competition. Our results suggest that the negative and persistent effects of trade shocks we see today are not a universal feature of globalisation, but depend on labour mobility. For our analysis, we digitise data from Prussian industrial and agricultural censuses on the county level and combine it with national trade data at the product level. We exploit the cross-regional variation in cultivated crops within Prussia and instrument with Italian trade data to isolate exogenous variation.
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14.09.2021 • 23/2021
Production bottlenecks delay recovery
The German recovery made good progress over the summer 2021. However, bottlenecks in sea transport and the production of intermediate goods are weighing on world trade. The rise in raw material prices has prompted inflation rates to spike, and an increase in new infections is clouding the outlook again. A weak final quarter is therefore to be expected. The Halle Institute for Economic Research (IWH) forecasts that German gross domestic product (GDP) will increase by 2.2% in 2021 and 3.6% in 2022 (East Germany: 1.8% and 2.8%).
Oliver Holtemöller
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The Effect of Language on Investing: Evidence from Searches in Chinese Versus English
Hui-Ching Chuang, Iftekhar Hasan, Yin-Siang Huang, Chih-Yung Lin
Pacific-Basin Finance Journal,
June
2021
Abstract
This study examines the language effect on investing behavior in local stock markets for local- and foreign-language investors using Google search records. First, we find that attention to a local language stimulates attention to a foreign language, increases abnormal news coverage, and has better predictability on stock returns. Second, investors who do Google searches in the local language react faster to a news event's shock than those who search in the foreign language. Third, only attention to the local language can reduce the price drift of an earnings surprise. Last, firm-level information asymmetry is a channel for local advantage. Therefore, we suggest that investors who use a stock market's local language have a local advantage when seeking more profitable investment opportunities in that stock market.
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Are Credit Rating Disagreements Priced in the M&A Market?
Iftekhar Hasan, He Huang, Thomas To
Journal of International Financial Markets, Institutions and Money,
May
2021
Abstract
This paper examines the effect of credit rating disagreements on merger and acquisition (M&A) decisions. We show that acquirers with split ratings prefer to use stock to finance their acquisitions. More importantly, we find that acquirers with split ratings experience lower announcement returns. Further analysis shows that overpayment by acquirers with split ratings is concentrated in acquirers with entrenched managers. Our results are robust to alternative identification strategies. Overall, our evidence indicates that credit rating disagreements are heavily priced in the M&A market.
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What Drives the Commodity-Sovereign Risk Dependence in Emerging Market Economies?
Hannes Böhm, Stefan Eichler, Stefan Gießler
Journal of International Money and Finance,
March
2021
Abstract
Using daily data for 34 emerging markets in the period 1994–2016, we find robust evidence that higher export commodity prices are associated with lower sovereign default risk, as measured by lower EMBI spreads. The economic effect is especially pronounced for heavy commodity exporters. Examining the drivers, we find that, first, commodity dependence is higher for countries that export large volumes of commodities, whereas other portfolio characteristics like volatility or concentration are less important. Second, commodity-sovereign risk dependence increases in times of recessions and expansionary U.S. monetary policy. Third, the importance of raw material prices for sovereign financing can likely be mitigated if a country improves institutions and tax systems, attracts FDI inflows, invests in manufacturing, machinery and infrastructure, builds up reserve assets and opens capital and trade accounts. Fourth, the country’s government indebtedness or amount of received development assistance appear to be only of secondary importance for commodity dependence.
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