Why are some Chinese Firms Failing in the US Capital Markets? A Machine Learning Approach
Gonul Colak, Mengchuan Fu, Iftekhar Hasan
Pacific-Basin Finance Journal,
June
2020
Abstract
We study the market performance of Chinese companies listed in the U.S. stock exchanges using machine learning methods. Predicting the market performance of U.S. listed Chinese firms is a challenging task due to the scarcity of data and the large set of unknown predictors involved in the process. We examine the market performance from three different angles: the underpricing (or short-term market phenomena), the post-issuance stock underperformance (or long-term market phenomena), and the regulatory delistings (IPO failure risk). Using machine learning techniques that can better handle various data problems, we improve on the predictive power of traditional estimations, such as OLS and logit. Our predictive model highlights some novel findings: failed Chinese companies have chosen unreliable U.S. intermediaries when going public, and they tend to suffer from more severe owners-related agency problems.
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Investor Relations and IPO Performance
Salim Chahine, Gonul Colak, Iftekhar Hasan, Mohamad Mazboudi
Review of Accounting Studies,
No. 2,
2020
Abstract
We analyze the value of investor relations (IR) strategies to IPO firms. We find that firms that are less visible and have inexperienced management tend to hire IR consultants prior to the issue date. IR consultants help create positive news coverage before an IPO, as reflected in a more optimistic tone of published media. Their presence is associated with higher underpricing at the IPO date but with lower long-run returns. IR-backed IPOs also exhibit disproportionately higher insider-related agency problems, as IR-induced higher underpricing tends to occur primarily in IPOs where underwriter and venture capitalist agency conflicts are more severe. These findings suggest that the IR programs of IPO firm are mostly short-term oriented and facilitate the ulterior motives of some insiders (underwriters and venture capitalists) targeting higher first-day returns.
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Financial Incentives and Loan Officer Behavior: Multitasking and Allocation of Effort under an Incomplete Contract
Patrick Behr, Alejandro H. Drexler, Reint E. Gropp, Andre Guettler
Journal of Financial and Quantitative Analysis,
No. 4,
2020
Abstract
We investigate the implications of providing loan officers with a nonlinear compensation structure that rewards loan volume and penalizes poor performance. Using a unique data set provided by a large international commercial bank, we examine the main activities that loan officers perform: loan prospecting, screening, and monitoring. We find that when loan officers are at risk of losing their bonuses, they increase prospecting and monitoring. We further show that loan officers adjust their behavior more toward the end of the month when bonus payments are approaching. These effects are more pronounced for loan officers with longer tenures at the bank.
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Transmitting Fiscal Covid-19 Counterstrikes Effectively: Mind the Banks!
Reint E. Gropp, Michael Koetter, William McShane
IWH Online,
No. 2,
2020
Abstract
The German government launched an unprecedented range of support programmes to mitigate the economic fallout from the Covid-19 pandemic for employees, self-employed, and firms. Fiscal transfers and guarantees amount to approximately €1.2 billion by now and are supplemented by similarly impressive measures taken at the European level. We argue in this note that the pandemic poses, however, also important challenges to financial stability in general and bank resilience in particular. A stable banking system is, in turn, crucial to ensure that support measures are transmitted to the real economy and that credit markets function seamlessly. Our analysis shows that banks are exposed rather differently to deteriorated business outlooks due to marked differences in their lending specialisation to different economic sectors. Moreover, a number of the banks that were hit hardest by bleak growth prospects of their borrowers were already relatively thinly capitalised at the outset of the pandemic. This coincidence can impair the ability and willingness of selected banks to continue lending to their mostly small and medium sized entrepreneurial customers. Therefore, ensuring financial stability is an important pre-requisite to also ensure the effectiveness of fiscal support measures. We estimate that contracting business prospects during the first quarter of 2020 could lead to an additional volume of non-performing loans (NPL) among the 40 most stressed banks ‒ mostly small, regional relationship lenders ‒ on the order of around €200 million. Given an initial stock of NPL of €650 million, this estimate thus suggests a potential level of NPL at year-end of €1.45 billion for this fairly small group of banks already. We further show that 17 regional banking markets are particularly exposed to an undesirable coincidence of starkly deteriorating borrower prospects and weakly capitalised local banks. Since these regions are home to around 6.8% of total employment in Germany, we argue that ensuring financial stability in the form of healthy bank balance sheets should be an important element of the policy strategy to contain the adverse real economic effects of the pandemic.
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Banks’ Equity Performance and the Term Structure of Interest Rates
Elyas Elyasiani, Iftekhar Hasan, Elena Kalotychou, Panos K. Pouliasis, Sotiris Staikouras
Financial Markets, Institutions and Instruments,
No. 2,
2020
Abstract
Using an extensive global sample, this paper investigates the impact of the term structure of interest rates on bank equity returns. Decomposing the yield curve to its three constituents (level, slope and curvature), the paper evaluates the time-varying sensitivity of the bank’s equity returns to these constituents by using a diagonal dynamic conditional correlation multivariate GARCH framework. Evidence reveals that the empirical proxies for the three factors explain the variations in equity returns above and beyond the market-wide effect. More specifically, shocks to the long-term (level) and short-term (slope) factors have a statistically significant impact on equity returns, while those on the medium-term (curvature) factor are less clear-cut. Bank size plays an important role in the sense that exposures are higher for SIFIs and large banks compared to medium and small banks. Moreover, banks exhibit greater sensitivities to all risk factors during the crisis and postcrisis periods compared to the pre-crisis period; though these sensitivities do not differ for market-oriented and bank-oriented financial systems.
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How to Talk Down Your Stock Performance
Andreas Barth, Sasan Mansouri, Fabian Wöbbeking, Severin Zörgiebel
SSRN Discussion Papers,
2020
Abstract
We process the natural language of verbal firm disclosures in order to study the use of context specific language or jargon and its impact on financial performance. We observe that, within the Q&A of earnings conference calls, managers use less jargon in responses to tougher questions, and after a quarter of bad economic success. Moreover, markets interpret the lack of precise information as a bad signal: we find lower cumulative abnormal returns and a higher implied volatility following earnings calls where managers use less jargon. These results support the argument that context specific language or jargon helps to efficiently and precisely transfer information.
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Does Working at a Start-Up Pay Off?
Daniel Fackler, Lisa Hölscher, Claus Schnabel, Antje Weyh
Abstract
Using representative linked employer-employee data for Germany, this paper analyzes short- and long-run differences in labor market performance of workers joining startups instead of incumbent firms. Applying entropy balancing and following individuals over ten years, we find huge and long-lasting drawbacks from entering a start-up in terms of wages, yearly income, and (un)employment. These disadvantages hold for all groups of workers and types of start-ups analyzed. Although our analysis of different subsequent career paths highlights important heterogeneities, it does not reveal any strategy through which workers joining start-ups can catch up with the income of similar workers entering incumbent firms.
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Managerial Biases and Debt Contract Design: The Case of Syndicated Loans
Tim R. Adam, Valentin Burg, Tobias Scheinert, Daniel Streitz
Management Science,
No. 1,
2020
Abstract
We examine whether managerial overconfidence impacts the use of performance-pricing provisions in loan contracts (performance-sensitive debt [PSD]). Managers with biased views may issue PSD because they consider this form of debt to be mispriced. Our evidence shows that overconfident managers are more likely to issue rate-increasing PSD than regular debt. They choose PSD with steeper performance-pricing schedules than those chosen by rational managers. We reject the possibility that overconfident managers have (persistent) positive private information and use PSD for signaling. Finally, firms seem to benefit less from using PSD ex post if they are managed by overconfident rather than rational managers.
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