Abstract

     This paper adds to the recent interest in the link between cash and firm performance, by studying how this relationship varies across boom- and bust cycles. We use data of Norwegian firms from a broad range of sectors in the period 2005–2015, and both replicate and extend previous findings on the relationship between cash and performance over the business cycle. We find that i) cash has a positive, but weakly diminishing effect on operational firm performance (ROA) throughout the entire sample period, and ii) that the curvilinear relationship between cash and firm performance is the most pronounced in the pre-recession years, while it is virtually linearly positive in recessions and post-recession periods. We conclude that cash indeed has an impact on firms’ operational performance, and especially so in recessionary times.

Introduction

     Traditionally, strategy scholars have disregarded cash as a strategic asset (e.g. Barney, 1986), while finance scholars have viewed cash holdings as a signal that a firm lacks profitable investment opportunities or have managerial issues (e.g. Jensen, 1986). Recent studies have questioned these views by documenting that cash may indeed be positively related to performance (Kim & Bettis, 2014), and that contextual factors such as state of the business cycle (Nason & Patel, 2016) and competitive dynamics (Deb et al., 2017, Jung et al., 2020, O’Brien and Folta, 2009) are important moderators for the strength of the cash-performance relationship.

     While this recent research stream has made important advancements to our understanding of the relationship between cash and firm performance, we know less about how these insights can be generalized to other contexts than large, listed (manufacturing) companies operating in relatively stable periods, and if relationships between cash and market-based measures of performance also holds for operational measures of performance. Currently, most studies on the cash-performance relationship use samples of large, listed, US, (manufacturing) firms (e.g. Deb et al., 2017; Jung et al., 2020; Kim & Bettis, 2014; O’Brien & Folta, 2009), study relatively stable periods and not more turbulent times such as economic downturns where financing constraints tends to increase (Forseth et al., 2015), and/or use market-based measures of firm performance such as Tobin’s Q as their dependent variables (e.g. Deb et al., 2017; Jung et al., 2020; Kim & Bettis, 2014; O’Brien & Folta, 2009).

Conclusion

     The purpose of this paper was to examine the relationship between cash and firm performance over the business cycle.

     Throughout our analysis we find that cash has a positive impact on firm performance across the different phases of the business cycle. The linear term of cash is highly significant in all our models and across all time periods. The quadratic term is less consistent; in some cases, we identify a curvilinear relationship, whilst sometimes the quadratic term is low and insignificant indicating a linear relationship between cash and firm performance.

     After running our full and expanded models, we conclude that the curvilinear relationship between cash and performance is weakly curvilinear for our sample of Norwegian firms, and that this curve-linearity is the most pronounced in the pre-recession period, and more or less linear during the recession and post-recession periods.

     In closing, we believe that our results add to an important stream of research at the intersection of strategy and finance. Mainstream theories, especially in strategy discard cash and other financial assets as less important drivers for heterogeneity and performance differences. Our findings, and the findings of the studies we build on, challenge these assumptions. It is, however, important to note that cash seems more likely as an indirect source of performance differences, through enabling firms to make investments and deploy strategies that in turn create performance heterogeneity. That is, cash appears to be less of a king, but more a key member of the court that pull some important strings.

Abstract

A growing body of literature scrutinizes the harmful consequences of capital flight to offshore financial destinations. While financial integration is a well-known facilitator of capital flight, we shed light on an under-appreciated determinant—the availability of an IMF bailout. Expanding on previous literature analyzing moral hazard in the context of IMF programs, we introduce a socially even more destructive mechanism that we label the ‘crash for cash’ effect. We argue that by drawing on the IMF, elites can benefit from accumulating excessive debt to extract rents and hide these safely in offshore financial destinations while steering their countries into financial disaster. To test this mechanism, we show that elite wealth in offshore bank accounts has a first-order impact on a captured government’s willingness to draw on a lender of last resort. From a policy perspective, our analysis underscores the importance of closing financial loopholes to mitigate the devastating socio-economic effects of sophisticated financial engineering in a financially integrated global economy.

Introduction

Capital flight is a key obstacle to sustainable development. While policymakers often point the finger at financial investors, in many cases, well-connected local elites drive capital flight into offshore financial destinations. These elites plunder the wealth of their countries and expatriate assets into safe havens (Jayachandran and Kremer, 2006, Garcia-Bernardo et al., 2017, Andersen et al., 2020).1 Depriving a country of investible capital can lead to a loss of tax revenues and rising inequality, to the effect that elite capital flight ultimately undermines macroeconomic stability (Alesina and Tabellini, 1989, Ndikumana et al., 2014, Frantz, 2018): notwithstanding its ethical status, such behavior undermines the quality of governance, furthering endemic corruption and crony business practices that amplify financial vulnerabilities (Cerra et al., 2008, Meierrieks and Schneider, 2021).

Previous literature analyzing the determinants of elite capital flight identifies dysfunctional governance frameworks that provide a fertile breeding ground for criminal activities such as embezzlement, trade misinvoicing, and tax evasion (for a review, see Cooley et al. (2018)). Weak institutions facilitate capital flight because they allow wealthy elites to move embezzled funds abroad without punishment (Collier et al., 2001, Ndikumana and Boyce, 2003, Le and Rishi, 2006).

Conclusion

The IMF plays a vital role in supporting countries during times of economic hardship, earning it a reputation as “a global payday loan company for countries who have got into trouble and can’t meet their financial commitments — the difference being that instead of charging sky-high interest rates, it demands radical economic reforms”.33

Researchers have analyzed the circumstances under which the IMF decides to intervene and the conditions it imposes in exchange for financial relief (e.g., Reinsberg et al., 2019). We analyze the role of international capital flight and its impact on IMF involvement and program design. We argue that the ability to draw on the IMF creates perverse economic incentives so that a country’s elites can privatize economic gains by moving funds into offshore financial destinations before the arrival of the Fund. Although the Fund possesses numerous instruments to address economic crises, it does not have any means to seize elite wealth in offshore financial destinations, so the costs of elite capital flight are passed onto the population at large.

Abstract

     This study examines the effect of financial statement comparability on stock liquidity. Drawing from information asymmetry arguments, we posit that greater comparability increases financial transparency, which improves the information environment and increases stock liquidity. Our results show a positive relationship between comparability and stock liquidity. However, the effect of comparability on stock liquidity is only significant for non state-owned enterprises. Additionally, institutional ownership strengthens the impact of comparability on stock liquidity. Our findings suggest a more pronounced comparability effect on stock liquidity for firms with greater information opacity. Overall, our study indicates that higher comparability decreases information asymmetry and facilitates investors’ decision-making.

Introduction

     Financial Accounting Standards Board (FASB) (2010) suggests that financial statement comparability (hereafter comparability) is a fundamental qualitative feature of financial reporting. Comparability increases faithful representation and relevance of financial statements as well. Higher comparability enhances the magnitude of firm-specific information and boosts the extant information environment. Comparability facilitates identifying and understanding similarities and differences among different firms (Barth 2013). Relative evaluation of investment avenues would be impossible without comparable information, which makes comparability essential for investment purposes. Therefore, the FASB (2010) conceptual framework suggests that the chief objective of financial reports is to enhance comparability, which improves the usefulness of the information. Similarly, the SEC concept release1 suggests that comparability along with reliability and transparency are the ‘only way to achieve fair, liquid and efficient capital markets’. Thus, comparability, for its immense importance in equity valuation, has been given due importance in textbooks as well (Healy and Palepu 2012). The value of comparability for academics, capital market participants, standard setters, and practitioners makes it crucial to investigate the impact of comparability on stock liquidity. Comparability plays a vital role in the efficient utilization of resources (Kim et al. 2020), improving the informativeness of stock prices (Choi et al. 2019), enhancing acquisition efficiency (Chen et al. 2018), decreasing the cost of capital (Imhof, Seavey, and Smith 2017), reducing the crash risk (Kim et al. 2016), and improving firm value (Neel 2017).

Conclusion

     This study explores the effect of the qualitative aspect of financial reporting, i.e. comparability, on the stock liquidity. Comparability improves the acquisition and processing of financial information leading to lower information asymmetry. Higher comparability improves the comparison of investment avenues and makes decision-making quick and eloquent. This study augments the previous studies that financial reporting bridges the gap among investors and reduces the adverse selection cost leading to higher stock liquidity. In this way, our study extends earlier literature by studying the effects of qualitative aspects of financial reporting.

     We document that higher comparability enhances the flow of information to the traders, reduces adverse selection, and increases stock liquidity. Our results remain identical when we use alternative comparability measures or alternative econometric specifications, e.g. lag of the primary independent variable, two-stage least square regression, and GMM. Further, we delve into the institutional settings of the Chinese market and explore the role of state ownership on the nexus of comparability and stock liquidity. We document that comparability has an insignificant association with liquidity in SOEs. The objectives, as well as decisions of SOEs, are different from NEOs. The support of the state reduces its default risk and improves its suitability for investment. We also examine the effect of institutional ownership on the relationship between comparability and liquidity. Our findings suggest that institutional ownership strengthens the relationship between comparability and liquidity. The findings also indicate that the effect of comparability on stock liquidity is significant only in the non-crisis period. Additionally, the impact of comparability on stock liquidity is profound for firms with higher information opacity.

Abstract

Keywords

1. Introduction

2. Related literature

3. Data sample

4. Methodology

5. Results

6. Discussion

7. Conclusions

Credit author statement

Impact statement

Declaration of competing interest

Acknowledgments

References

Vitae

Abstract

We implement the stress test methodology of the banking industry in conjunction with a Logit model of bankruptcy with parameters estimated with data from the Great Recession (2008–2013) to predict which firms would face financial distress among Spanish hospitality firms during 2020 due to the Covid-19 disaster. The predictions from both methods rely on the last accounting data available and on the expected revenue drop for 2020. Both methods coincide to predict that 25% of these firms will face a financial distress situation if revenues drop 60%. This forecast raises up to 32% of firms if revenues drop 80%. Financial distress will affect mainly small firms. Most of the firms in financial distress will face solvency problems, with total assets being insufficient to pay all debts.

1. Introduction

The tourism industry is specially affected by health emergences (Chien & Law, 2003; Dahles & Susilowati, 2015; Dombey, 2003; Mckercher & Chon, 2004; Novelli, Gussing Burgess, Jones, & Ritchie, 2018). For example, in China, the SARS crisis in 2003 strongly affected the tourism industry compared to other industries (Dombey, 2003). The Covid-19 crisis is much stronger— not only for its effect on the tourism industry, reducing total activity by 60–80% in 2020 according to the United Nations World Tourism Organization (UNTWO), but also because it is widespread around the globe, collapsing the world economy. In Spain, where tourism’s relevance to the GDP is close to 15%,1 the overall impact to the economy is devastating. In such situations, recent studies are finding that the financial strength of firms is becoming especially relevant: stock market prices are less affected by the crisis in firms with more cash holdings, lower leverage and more profits (Acharya & Steffen, 2020; Ding, Levine, Lin, & Xie, 2020; Pagano, Wagner, & Zechner, 2020; Ramelli & Wagner, 2020). A natural interpretation of this finding is that investors do not expect financial markets to provide the financial resources firms will need to resist this crisis period (Ramelli & Wagner, 2020). The financial markets also predict this issue to be more relevant in industries where it is more problematic to maintain social distance measures, like in the hotel industry (Pagano et al., 2020).

In a stable or growing period, cash holdings are of little value since firms may easily access financial markets to obtain funds, when required. Furthermore, due to the agency conflict between managers and shareholders, cash holdings may generate negative incentives to executives and reduce shareholder value (Jensen, 1986). However, in the Covid-19 crisis stock market prices anticipate the difficulty many firms face to obtain the financial resources to survive this crisis period. Firms with low cash holdings, high financial leverage and with a history of low profits are at a disadvantage (Acharya & Steffen, 2020; Ramelli & Wagner, 2020). Past research in the hotel industry found that the financial structure of firms is irrelevant for the probability tourism firms’ survival (G´emar, Moniche, & Morales, 2016). Indeed, little attention has been paid to the financial strength of hospitality firms in past literature which studies their performance (Claver-Cort´es, Molina-Azorín, & Pereira-Moliner, 2006; Sainaghi, Phillips, & Zavarrone, 2017). Other characteristics of firms, such as the geographical location or the type of service attracted more attention (Assaf & Tsionas, 2018). However, a period with little revenues generates a strong need for financial resources in hospitality firms to survive and pay fixed costs, which are quite relevant in these firms (Nicolau, 2005). This situation could be easily solved in many firms if they had access to bank loans and/or financial markets operated properly, providing these firms with the needed financial resources to survive. This is something that changed in the Covid-19 crisis and that the previous literature on hospitality firms does not consider.

 Abstract

Keywords

JEL classification

1. Introduction

2. Institutional framework and motivating factors

3. Conceptual framework and literature review

4. Hypothesis development

5. Data and methodology

6. Results

7. Conclusion

Data availability statement

Funding details and disclosure statement

Declaration of competing interest

Acknowledgment

Appendix A. Supplementary data

References

Vitae

Abstract

We investigate the relationship between the transactional activity of asset management companies (AMCs) in the non-performing loan (NPL) market and their corresponding debt issuances in a niche bond market in Borsa Istanbul. We analyze the determinants of the trading volume of AMC bonds to determine whether an issue’s volume can reflect bond-specific factors after controlling for firm-specific information. We employ pooled ordinary least squares and random effects panel data regressions on a monthly data set of 26 bonds traded between 2012 and 2019. We find that higher trading volume is associated with larger issues, older bonds, and issuers of long-term debt only. These results suggest that the trading volumes of such bonds decrease when NPL transactions become rare due to worsening economic and financial conditions, at which point the investor demand for new issuances declines and the AMCs are forced to issue short-term debt instead to raise funds.

1. Introduction

Asset management companies (AMCs) help banks free their balance sheets of non-performing loans (NPLs) so that banks can lend more to households and businesses and hence improve their profitability and induce economic growth by facilitating funding mechanisms. Much of the research has focused on the role of AMCs in solving the NPL problem in various countries. For instance, Fell et al. (2017) argue that the pile of NPLs in the European Union, as a financial stability issue, may be effectively resolved with the contribution of state-owned (centralized) and/or privately held (decentralized) AMCs. However, national cases1 show that there is no one-size-fits-all model for AMCs; rather, the best solution often satisfies system-specific issues.

Turkish banking regulations offer a dual approach for managing NPLs: (1) a centralized approach followed by the government and (2) a decentralized approach followed by the private sector. On the government side, the Savings Deposit Insurance Fund (SDIF)—a public legal entity with administrative and financial autonomy—aids in the resolution of banks in distress. In the private sector, banks and even the SDIF itself are entitled to sell NPLs to AMCs established as joint stock corporations. Turkish AMCs have been involved in the NPL business since 2006, when legislation regarding the foundation and operations of AMCs was enacted. Although the number of selling transactions and AMCs has increased over the years, the dynamics in the secondary NPL market have attracted little attention from the research community. What is more interesting is that AMCs have become leading corporate bond issuers in order to finance their NPL purchases, and a niche market has developed to cater to the investment needs of qualified investors who wish to trade these bonds in Borsa Istanbul since 2012. The emergence of this new habitual mode of finance calls for an empirical investigation on the liquidity of the bonds issued by AMCs, which would also shed light on its association with secondary NPL activity.

Capital controls as restrictions on capital flows are a tool proposed as a cure to the destabilizing market movements of the 1970s (i.e., Tobin, 1978) despite the criticism that they have received (Edwards, 1999). Capital controls resurfaced during the European Financial Crisis and the restrictions imposed on capital flows in Cyprus and Greece. These were the first instances of capital control implementation in the European Union’s history and had various effects on firms’ financial positions. By using a sample of EU countries and distinguishing between austerity and capital controls periods, we assess the effects of capital controls on the stock liquidity of firms. All of the sample countries have a common financial reporting framework (International Financial Reporting Standards -IFRS), and some of them implemented a range of different measures from less intensive, such as increases in tax rates, to more intensive, such as the enforcement of capital controls, in their effort to stabilize their economies. For the task at hand, we specifically engage two accounting determinants of information asymmetry, namely, conditional conservatism and the level of earnings management. Our results show that financial reporting quality as measured by higher conditional conservatism and lower earnings management is beneficial for liquidity. However, during the capital controls period, the relation between conditional conservatism and liquidity becomes negative, and this negative relation relates to less risky firms. Thus, the negative relation between conditional conservatism and liquidity is likely due to investors keeping more conservative firms in their portfolios as a measure against the crisis.

Introduction

The European Financial Crisis, which started as a debt crisis and continued as a generalized financial crisis, had a significantly more adverse impact on a number of South-European countries in relation to the rest of the Eurozone countries. The inability of these countries to borrow money through the markets due to escalating interest rates led to a number of measures that were targeted at limiting the negative effects of the crisis. These measures ranged from increases in tax rates or decreases in wages and pensions to restrictions of capital flows (Cyprus in 2013 and Greece in 2015). These circumstances were the first in which an extreme measure such as capital controls was used in the European Union, which certainly had an impact on the capital flows of the firms domiciled in the affected countries. The present study attempts to examine how such regulations on capital flows may help an economy to break free from the crisis downward spiral. To this extent, we emphasize the usefulness of financial reporting quality as a protecting mechanism against the crisis and underline the presence of the “flight to quality” phenomenon. Capital controls were devised as a measure of fiscal policy to limit market turbulence. For example, Tobin (1978) proposed the use of an international uniform tax on foreign exchange transactions (Edwards, 1999). These measures were particularly common until the 70s (Johnson and Mitton, 2003). However, due to the continuous effort by institutions such as the IMF for more liberalized emerging markets, the use of capital controls was reduced until the Asian Crisis (Bhagwati, 1998). Therefore, despite the controversy around the usefulness of capital controls (Edwards, 1999), there is a tendency of using these measures as a final solution during a financial crisis from a macroeconomic perspective (Krugman, 1998). For example, during the Asian Crisis, Malaysia used capital controls as a measure of reducing the effects of the crisis (Johnson and Mitton, 2003). Moreover, in the European Union, the financial crisis that affected the countries of the South and in particular, Cyprus and Greece, also led to the implementation of capital control measures to limit the drain of their banking systems.

1- Introduction

2- CAT bonds and Asia Pacific markets

3- Liquidity hypotheses

4- Data

5- Empirical analysis and discussion

6- Conclusion

References

Abstract

This study measures liquidity in the catastrophe (CAT) bond market and the liquidity premium embedded in CAT bond spreads. The empirical results show that time to maturity, yield volatility, and yield dispersion from the primary market are the three most effective liquidity proxies. Given these three proxies, the average estimated liquidity premium in the CAT bond market is 67.57bps, accounting for only 9.42% of the average CAT bond spread (717.37bps) in the secondary market during the period 2002-2016. The average CAT bond liquidity premium is higher than the corporate bond liquidity premium of a similar risk class by about 35bps during the pre-crisis period. The more significant part of the high-yield spreads, 90.58%, is attributed to other risk natures of CAT bonds. Lastly, the liquidity premium increases dramatically after occurrences of severe natural catastrophes as well as during the 2008 financial crisis.

Introduction

Catastrophe (CAT) bonds, which are a type of insurance-linked securities (ILS), can resolve inefficiency in the reinsurance market and have been by far one of the most successful securitization structures to date (Cummins and Trainar, 2009).1 CAT bonds are a high-yield financial instrument, presenting an average spread of 717.37 basis points (bps) over LIBOR (London Interbank Offered Rate) and an excess spread of 322.74bps compared to similarly rated corporate bonds during the period 2002: Q2 to 2016: Q1. One theory is that their high-yield spreads are due to their liquidity premium, because CAT bonds are not publicly traded and their transactions are in the over-the-counter market (OTC). Various studies indicate that liquidity is factored into corporate bond yield spreads (Houweling et al., 2005; Chen et al., 2007; Bao et al., 2011; Dick-Nielsen et al., 2012; Schestag et al., 2016; Lo et al., 2019; etc.), but there is no evidence on how liquidity is related to CAT bond spreads. While we do not find any literature investigating the liquidity effect on CAT bond spreads, some relevant studies (Braun, 2016; Gürtler et al., 2016) do consider issue volume, maturity, and time to maturity in order to measure CAT bond liquidity in the primary market or secondary market for such bonds.2 To our surprise, these studies find no empirical evidence to support the liquidity hypothesis, implying that investors do not demand a liquidity premium for CAT bonds. Based on the above background, this study looks to examine whether the liquidity premium is present and, if so, to measure how much it is embedded in CAT bond spreads. Previous studies of CAT bonds focus on finding price determinants of their yield spreads.

I. Introduction

Previous studies show that firms hold cash for several reasons, such as transaction motives, precautionary motives and agency motives (Opler et al., 1999; Bates et al., 2009). In static trade off theory, corporate cash holdings are determined by the marginal cost of liquidity assets shortage and the opportunity cost of holding liquidity assets. In agency theory, entrenched managers prefer to hold excess cash. Since cash allows managers to make investment without the monitoring and punishment from the capital market. In this paper, we argue that stock liquidity has a negative effect on corporate cash holdings. First, stock liquidity reduces the cost of equity issuing and debt financing (Butler et al., 2005; Huang et al., 2015), lowering the cost of liquidity assets shortage. Second, stock liquidity can enhance corporate governance through both increasing blockholder intervention and amplifying threat of exit (Edmans et al., 2013), making managers less entrenched. Hence, according to static trade off theory and agency theory, firms with liquid stocks will hold less cash. Our study has two main contributions. First, to our knowledge, this study is the first attempt to investigate the impact of stock liquidity on corporate cash holdings. Second, we use decimalization as a quasi-natural experiment to effectively mitigate endogenous concerns in our tests.

II. Data and Variables

We obtain our data from two data sources. Accounting variables are from COMPUSTAT and intra-day stock data is from TAQ. The sample period is from 1993 to 2013 and we exclude financial firms and utility firms. Following Opler et al. (1999), we measure cash holdings as the ratio of cash and short-term investments to net assets. We use the negative natural logarithm of the annual dollar effective spread as our liquidity measure. The annual dollar effective spread is calculated as the equallyweighted average of the daily dollar effective spread over a fiscal year for a stock. The daily dollar effective spread is defined as the simple average of the dollar effective spreads for each matched quote/trade1 over a trading day for each stock in our sample. Our control variables include firm size, market-to-book ratio, cash flow, net working capital, capital expenditures, leverage, industry cash flow volatility, dividend dummy, R&D and acquisitions expenditures, all of which have been shown having effects on corporate cash holdings in literature. Additionally, we control the close price at the end of the fiscal year to remove the influence of price level on the dollar effective spread. We also include year dummy variables and 2-digit SIC industry dummy variables to control year fixed effects and industry fixed effects in our regression tests. Table 1 gives the detailed descriptions for these variables. Summary statistics for variables are listed in Table 2. The average (median) cash holding is equal to approximately 31.2% (6.8%) of net assets.

1- Introduction

2- Institutional framework

3- Literature review, contribution, and expectations

4- Methodology

5- Results

6- Conclusions

References

Abstract

This study benefits by a special feature of the UK information environment which allows UK firms to disclose non-GAAP earnings on the face of the income statement to examine two interrelated questions. First, we ask whether the decision to disclose non-GAAP earnings on the face of the income statement is related to the firm’s financial performance and corporate governance characteristics, and second, we investigate the effect of this disclosure decision on market liquidity. Using a dataset of 1227 hand-collected firm-year observations during the period 2006–2013, we show that better governed firms and firms with weaker financial performance are more likely to disclose non-GAAP earnings. Our evidence also suggests that this disclosure is associated with increased levels of market liquidity and the results hold after controlling for self-selection bias. We conclude that firms’ decision to disclose non-GAAP earnings on the face of the income statement is more consistent with the incentive to provide information than to mislead the market.

Introduction

Prior research provides evidence that non-GAAP earnings disclosures are becoming more prevalent as an increasing number of firms choose to disclose pro forma earnings in a number of forms and different venues. Extant literature though has not yet settled on what drives the decision to disclose non-GAAP earnings and how it affects the firm’s information environment. Non-GAAP earnings capture the “core” or “permanent” part of earnings by excluding components of GAAP earnings that are deemed exceptional or nonrecurring. However, given their discretionary and voluntary nature, the disclosure of non-GAAP earnings falls within the realm of positive accounting theory (Watts & Zimmerman, 1978), and it centers around the question of whether such choice is made to benefit managers against the interests of investors or to increase firm value (Bowen, Rajgopal, & Venkatachalam, 2008). Choi and Young (2015) define the former incentive as strategic and the latter as informative. That said, extant literature has been inconclusive as to which of the two incentives can better explain a firm’s decision to disclose non-GAAP earnings. In essence, the issue of whether nonGAAP earnings disclosures provide new and value relevant information to the market or whether they are merely intended to mislead capital market participants is still an open research question. Thus, the aim of this paper is to provide more evidence on this debate by examining the determinants of non-GAAP earnings disclosures and their effects on market liquidity, a market characteristic that is especially affected by changes in the firm’s information environment, making it a better indicator of information quality. Specifically, we examine these questions using a sample of UK firms which choose to make non-GAAP earnings disclosures on the face of the income statement. Even though in recent years a number of studies examined the economic consequences of non-GAAP earnings, there is only scant research in the UK, since the majority of related studies employ US data (Young, 2014). Nevertheless, research on non-GAAP disclosure in the UK is of particular importance, because the corresponding European legislative framework is very different from that of the US. First, the UK is a country with strong legal enforcement and developed capital markets, characteristics that set it apart from other European countries. More importantly though, UK financial reporting is based on IFRS, which is mandatory for the consolidated accounts of public companies across Europe. In sharp contradiction to the requirements regarding non-GAAP earnings in the US, IFRS allow such disclosures to be shown on the face of the income statement. Given their more prominent place in the financial statements, the incentives and effects associated with disclosures of non-GAAP earnings on the face of the financial statements may be fundamentally different from those associated with disclosures which are sparsely incorporated in the notes or which are made in venues other than the financial statements.

Purpose- This study examines the relationship between economic policy uncertainty and stock market liquidity in an order-driven emerging stock market. Design/methodology/approach- Empirical estimates are based on vector autoregressive Granger-causality tests, impulse response functions and variance decomposition analysis. Findings- The empirical findings suggest that economic policy uncertainty moderately influence stock market liquidity during normal market conditions. However, the role of economic policy uncertainty for determining stock market liquidity is significant in times of financial crises. We have also observed a significant portion of variation in stock market liquidity is attributed to investor sentiments during financial crises. Originality/value- This study is original in nature and provides evidence to consider economic policy uncertainty as a possible source of commonality in liquidity in the context of an emerging market.

Introduction

Stock market liquidity is one of the most debatable topics in the recent literature on economics and finance. It has attracted enormous attention of academic researchers and practitioners for two fundamental reasons. First, liquidity is instrumental for hedging and risk management, asset pricing, determination of cost of capital and efficient capital allocation (Acharya and Schaefer, 2006; Amihud and Mendelson, 1986; Borio, 2004; Brunnermeier and Pedersen, 2009; Chordia et al., 2000, 2008; Das and Hanouna, 2009; Wang, 2013). Second, the potential impairment caused by lack of liquidity during financial crisis and uncertain market condition. Therefore, it is essential to study the dynamics of stock market liquidity and its determinants. Related literature has documented that market microstructure variables, macroeconomic variables, firm-specific characteristics, behavioral factors and investor sentiment are significant determinants of stock market liquidity. (Chordia et al., 2000; Goyenko and Ukhov, 2009; Liu, 2015; Kamara et al., 2008; Moshirian et al., 2017; Massa, 2004; Naes et al., 2011; Soderberg, 2008; Taddei, 2007). Besides, in the wake of global economic meltdown, another strand of literature has largely discussed on the effect of economic policy uncertainty (EPU) on various economic units such as growth, investment, output, productivity, consumption and stock market performance (Bachman et al., 2012; Bhagat and Obreja, 2013; Bhagat et al., 2016; Brogaard and Detzel, 2015; Friedman, 1968; Gilchrist et al., 2014; Gulen and Ion, 2012; Rodrik, 1991). Available research work on EPU and stock market performance indicators has mostly concentrated on either the impact of EPU on stock market volatility or stock market return (Antonakakis et al., 2013; Bhagat et al., 2016; Dzielinski, 2012; Kang and Ratti, 2013; Ozoguz, 2009; Pástor and Veronesi, 2012, 2013).

Purpose – The purpose of this paper is to predict real gross domestic product (GDP) growth and business cycles by using information from both liquidity and volatility measures. Design/methodology/approach – The paper estimates liquidity and volatility measures from over 5,000 NYSE rms and extracts a common factor, which the paper calls uncertainty. In-sample and out-ofsample forecasting tests are used to determine the ability of the uncertainty factor to predict growth in real GDP, industrial production, consumer price index, real consumption and changes in real investment. Findings – The paper finds that on average, positive shocks to the uncertainty factor occur in the quarters preceding and at the beginning of a recession. During the quarters toward the end of recessions, there are negative shocks to uncertainty on average. Originality/value – Previous research has explored using either liquidity or volatility to forecast economic activity. The paper bridges the two branches of research and finds a link to real GDP growth and business cycles.

Introduction

Recently, there has been a large branch of literature that examines market liquidity. Pástor and Stambaugh (2003), Acharya and Pedersen (2005), Chen (2005) and Sadka (2006), all look into systematic liquidity risk. Additionally, as there are several different measures of liquidity, many studies have focused on identifying a common systematic liquidity factor (Chordia et al., 2000; Hasbrouck and Seppi, 2001; Eckbo and Norli, 2002; Korajczyk and Sadka, 2008). Amihud, Hameed, Kang and Zhang (2015) examine 45 countries and find evidence that the illiquidity premium exists in a number of international markets. With the most recent financial crisis, there has been an interest in the apparent causal link between a reduction in liquidity and an economic slowdown. Czauderna et al. (2015) find a bidirectional link between liquidity (as measured using exchange traded funds) and market returns in the German stock market between July 2006 and June 2010. Wagner and Winter (2013) include liquidity risk in models to evaluate daily mutual fund performance for funds focused on the European market. When using a six-factor model including liquidity and idiosyncratic risk, they find that a large number of funds have significant loadings on both the liquidity and idiosyncratic risk factors. In measuring exposure to the liquidity risk factor, they find that on average, fund managers prefer liquid stocks. In a paper by Næs et al. (2011), they show that this link between liquidity and recessions is not a recent phenomenon but has existed in past recessions as well. They find that, on average, there is an increase in illiquidity before a recession followed by an increase in liquidity during the tail end of the recession. Furthermore, measures of liquidity help in forecasting future real gross domestic product (GDP) growth. Switzer and Picard (2016) also examine measures of aggregate liquidity and their relation to economic cycles. Rather than using a linear model, as was done by Næs et al. (2011), Switzer and Picard (2016) use nonlinear models and find the relationship between aggregate liquidity measures and the real economy to be significantly less pronounced. In addition to linking liquidity to business cycles, several papers have explored stock market volatility and its relation to real macroeconomic variables and business cycles (Schwert, 1989; 1990; Hamilton and Gang, 1996). Hamilton and Gang (1996) find that stock volatility may be useful in forecasting economic activity. We merge these two trains of thought and check if there is any added benefit from considering liquidity and volatility jointly. In Carlston (2012), multiple daily liquidity and volatility measures are estimated from daily stock prices and returns. Common factors, what we will term as “uncertainty”, are extracted across all of the liquidity and volatility measures. He finds that this common risk factor carries a significant premium and helps explain the cross section of expected returns. In this paper, we follow the methodology of Næs et al. (2011) to explore a possible link between this common liquidity and volatility measure and the real economy and business cycles.

Purpose – The purpose of this paper is to examine whether the underlying option impacts an insider’s propensity to purchase and sell before corporate announcements, the proportion of insiders’ trading after announcements relative to before announcements, and the insider’s profitability around corporate announcements. Design/methodology/approach – The authors test whether the timing information and option have impacted on the tendency of insider trade, the percentage of all shares traded by insiders in the post-announcement to pre-announcement periods and the average cumulative abnormal stock returns during the pre-announcement period. Findings – Insiders’ propensity to trade before announcements is higher for stocks without options listed than for stocks with traded options. This result is stronger for unscheduled announcements than for scheduled ones. The proportion of insiders’ trade volume after announcements relative to before announcements in stocks that have not options listed is higher than those in stocks with traded options. The positive relationship between the insiders’ signed volume and the informational content of corporate announcements is stronger in stocks without traded options than in stocks with options listed. Insider trades prior to unscheduled announcement are more profitable than those before scheduled ones. Research limitations/implications – The paper examines whether there is a difference between the effects of optioned stock and non-optioned stock. Roll et al. (2010) use the relative trading volume of options to stock ratio (O/S) to proxy for informed options trading activity. Future research could explore the impact of O/S. Moreover, the authors examine how insiders with private information use such information to trade in their own firms. Mehta et al. (2017) argue that insiders also use private information to facilitate trading (shadow trading) in linked firms, such as supply chain partners or competitors. Therefore, future research could consider the impact of shadow trading. Social implications – Since the insider’s propensity to buy before announcements in stocks without options listed is larger than in stocks with traded options and the relationship is stronger for unscheduled announcements than for scheduled ones, the efforts of regulators should focus on monitoring insider trading in stocks without options listed prior to unscheduled announcements. Originality/value – First, Lei and Wang (2014) find that the increasing pattern of insider’s propensity to trade before unscheduled announcements is larger than that before scheduled announcements. The authors document the underlying option has impacted the insider’s propensity to purchase and sell, and the relationship is stronger for unscheduled announcements than for scheduled ones. Second, related studies show insider’s trading activity has shifted from periods before corporate announcements to periods after corporate announcements to decrease litigation risk. This paper find the underlying option has influenced the proportion of insiders’ trading after announcements relative to before announcements when the illegal insider trade-related penalties increase.

Introduction

This paper investigates the difference between insider trading in optioned and non-optioned stocks around scheduled and unscheduled corporate announcements. Extant studies have investigated insider trading around takeover and earning announcements separately. Lei and Wang (2014) exploit the time-varying liquidity trading around announcements to examine how insiders take advantage of time variation to camouflage their trades. They find that the increasing pattern of an insider’s propensity to trade is larger before unscheduled announcements than before scheduled announcements. Related studies about insider trading focus on stock markets rather than option markets. Exceptionally, Hyland et al. (2003) document that the level of insider trading is lower for optioned stocks than for non-optioned stocks. In addition, Ge et al. (2016) find that bankruptcy filing returns are significantly associated with pre-filing insider options trading, whereas filing returns are not significantly related to pre-filing insider stock trading. Therefore, this paper aims to fill a research gap by examining whether the underlying option impacts trading patterns of insider trading before corporate announcements. In addition to information-based trading (Amel-Zadeh et al., 2016), the main reasons that insiders sell their firm stocks are liquidity and diversification. Since insider sales often reflect diversification desires rather than the need to trade on information which insider purchases reflect, it is necessary to examine insider purchases and sales separately. Further, insider sales are more exposed to litigation than purchases because regulators seem to be more attentive to potentially illegal insider trading after stock price drops than after price run-ups (Gao et al., 2015). Insiders might be more careful in using negative information than exploiting positive information (Lee et al., 2014). Thus, it is regarded that insiders respond to positive and negative information asymmetrically. Moreover, Brochet (2010) finds that abnormal returns around filings of insider purchases are greater after the Sarbanes-Oxley Act (SOX) than before it, while in insider sales, stock returns are not more negative. Therefore, this paper explores whether the underlying option impacts an insider’s propensity to purchase and sell before corporate announcements.

1- Introduction

2- Related literature and hypothesis development

3- Measurement of variables and model specification

4- Data and summary statistics

5- Empirical findings

6- Conclusion

References

Abstract

This study investigates the impact of excess cash on the liquidity risk faced by investors and their required liquidity premium. It shows that excess cash improves trading continuity and reduces both liquidity risk and the cost of equity capital. These findings are consistent with the view that firms with excess cash attract more traders even when market liquidity dries up. The increase in investors’ trading propensity reduces stock price exposure to shocks to market liquidity and the liquidity premium required by investors. We also examine the impact of excess cash on firm value. We show that while the direct effect of excess cash on firm value is negative, its indirect effect through liquidity is significantly positive, indicating that investors are less likely to sanction (or even reward) illiquid firms for holding excess cash. Further analysis suggests that the liquidity benefits of excess cash are greater for financially constrained firms and firms with high growth opportunities. Our results are robust over time, after addressing endogeneity concerns, and to alternative estimation methods and alternative measures of liquidity.

Introduction

Cash reserves held by US firms have increased considerably in the last few decades. According to Huang et al. (2013), non-financial firms increased their holdings of cash and other liquid assets to a record $2 trillion in 2011. Early studies, such as Jensen and Meckling (1976), Jensen (1986), and Myers and Majluf (1984), have debated the potential costs and benefits of corporate cash holdings. Related studies by Opler et al. (1999) and Harford et al. (2008) have investigated the effect of various financial variables on the level of corporate cash reserves and identified size, book-to-market ratio, and past cash flows as the key determinants of corporate cash holdings. More recently, a number of papers have focused on whether investors sanction firms for hoarding cash in excess of the level predicted by firm characteristics (“excess cash”). However, the results of these studies have been relatively mixed. For example, Simutin (2010) documents a positive association between excess cash and stock returns, implying that investors view excess cash as a proxy for risky growth opportunities. Nevertheless, Asem and Alam (2014) show that the relationship between excess cash and stock returns depends on investors’ outlook for firm prospects and conclude that investors’ support for cash hoards is not ubiquitous. In this study, we assess investors’ perceptions of excess cash from a different perspective. Specifically, we investigate whether excess cash affects stock trading continuity and the liquidity risk faced by investors. Excess cash may affect stock trading continuity and liquidity risk in two ways. On the one hand, it is commonly argued that managers hoard cash to cushion shortfalls in future cash flows (e.g., Bates et al., 2009; Palazzo, 2012) or to finance growth (Simutin, 2010). Consistent with this prediction, Faulkender and Wang (2006) and Denis and Sibilkov (2009) show that cash holdings are more valuable for financially constrained firms with valuable growth opportunities.