Category Archives: RESEARCH ARTICLE

Financial effects of carbon risk and carbon disclosure: A review

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Abstract

Carbon risk has generated significant adverse impacts on firms, investors and other stakeholders. Carbon disclosure may provide market participants with information to effectively manage risks and explore opportunities. We conduct a critical review of the growing literature in these fields and seek to examine the financial effects of carbon risk and carbon disclosure. A total of 78 papers, published in influential accounting, finance, business, economics and management journals between 2011 and 2021, are reviewed. We categorise the financial effects into four groups: financial performance, valuation relevance, cost of capital and risk profiles (measures). The proxies for carbon risk and carbon disclosure are summarised. This review demonstrates inconclusive relationships between carbon risk (carbon disclosure) and firms' financial measures. These inconclusive findings may result from different carbon risk (carbon disclosure) measures, financial performance measures, sample geographies, sizes and periods, and model specifications. This review further identifies and highlights future research opportunities in relevant areas and calls for more research work to understand the influence of climate change on firms' value and activities.

The value of communication: Evidence from in‐depth investor relations management data

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Abstract

This study investigated the value of investor communication in a firm's market valuations. The higher the frequency of communication and degree of investor involvement, the greater the increase in firm value. This effect is more prominent in companies with less information transparency, more volatile performance, and investor relations officers holding multiple executive positions and are highly experienced. Furthermore, investor relations (IR) activities can affect market valuations, including liquidity, market visibility, and institutional holdings. This study provided a new approach to measuring IR management and practical implications for governments to actively encourage companies to improve IR.

The relationship between responsible financial behaviours and financial wellbeing: The case of buy‐now‐pay‐later

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Abstract

Buy-now-pay-later (BNPL) in Australia is a rapidly growing payment innovation. Regulators and consumer groups have expressed concerns at the financial risks posed by BNPL. As BNPL is not regulated under consumer credit law, financial regulator and consumer groups have recommended that BNPL users adopt a range of responsible financial behaviours for their financial wellbeing. This study, using a survey of BNPL users and structural equation modelling, shows a link between most of these recommended financially responsible behaviours and financial wellbeing and that the financial behaviours of younger users (aged under 25) place them at greater risk of reduced financial wellbeing.

Managerial tone and investors’ hedging activities: Evidence from credit default swaps

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Abstract

This study examines investors' hedging behaviours in the credit default swap (CDS) market in response to the managerial tone of the Management Discussion and Analysis section in 10-K/Q flings. Utilising CDS positions data derived from the Depository Trust & Clearing Corporation, we first document that managerial tone is negatively associated with CDS positions. We further find that such an effect is stronger for investors with less reliable alternative information channels and for firms with greater default probability. Our inferences persist when using the abnormal tone from a two-stage analysis, when using change model regression, and when filtering out other potential confounding impacts. The results of this study advance the understanding of how the linguistic tone presented by management affects CDS market investors' hedging decision making through the use of public accounting information in financial disclosures.

Improving small and medium‐size enterprise performance: Does working capital management enhance the effectiveness of financial inclusion?

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Abstract

Growth of the small and medium-size enterprise (SME) sector is traditionally an important driver of overall economic growth, particularly in emerging economies. SME growth is enhanced by access to finance (financial inclusion). In this study, we show that efficient working capital management has a positive influence on performance that is independent of the effect of financial inclusion. Our results remain robust to alternative measurements and estimations, and may be useful to national policy-makers in developing strategies for SMEs' greater access to finance and introducing ways of improving financial management education and training for SME managers.

Role of OTC options in stock price efficiency: Evidence from the Chinese market

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Abstract

We examine the effect of Chinese OTC equity options on the underlying stock information efficiency by using the standardisation of the OTC options market as an exogenous event. The results show that, due to the tight short-sale constraints, the introduction of OTC stock options can widen the divergence of opinion about the stock price, and thus reduce the price efficiency. The significantly lower margin-debt ratio exhibited by optioned stocks supports the argument that OTC stock options act as a substitute for margin trading. Further analysis reveals that optioned stocks are more speculative, but there is no significant change in liquidity.

Do women empower other women? Empirical evidence of the effect of female pervasiveness on firm risk‐taking

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Abstract

This study examines the relationship between female pervasiveness within the entire company and firm-risk taking. We exploit The UK Equality Act (2010), further enforced in 2017, which was made mandatory for firms operating in UK to disclose their gender pay gap. We use this measure to proxy female pervasiveness and we find it to be negatively associated with firm risk-taking. These results are robust to several tests using female participation in each pay quartile and the difference in bonus payments between men and women. Our findings provide insights into the role played by women consistent with tokenism theory predictions.

Does executive accountability enhance risk management and risk culture?

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Abstract

We evaluate a novel regulation designed to address ongoing risk management failures: Australia's Banking Executive Accountability Regime (BEAR). This mixed methods study draws on a survey and 41 interviews with accountable persons and their reports across 15 organisations. Consistent with theory and previous experimental research, the study demonstrates the benefits of enhanced accountability for promoting more diligent ‘system 2’ behaviour. We provide evidence that BEAR promotes greater felt accountability among senior executives which in turn stimulates more proactive and diligent risk management behaviour. This behaviour has the potential to attenuate many of the behavioural biases associated with risk management failures.

How do co‐shareholding networks affect negative media coverage? Evidence from China

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Abstract

This paper explores the relationship between the co-shareholding network and negative media coverage in the context of China. We find that the high degree centrality and structural holes of firm's co-shareholding networks have negative effects on the amount and severity of negative media coverage but through differentiated mechanisms. Focal firms in high degree centrality positions can decrease negative coverage by information sharing through the network, but focal firms in the position of structural holes reduce negative coverage through information control. Our findings can complement both research on the disparate impacts of co-shareholding networks and the media spin effect.

Default risk and earnings expectations: The role of contract maturity in the credit default swap market

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Abstract

Agency conflicts increase with contract maturity. As contract maturity increases, managers, acting on behalf of shareholders, have more opportunities to use their discretion in ways that adversely affect future payoffs. Agency theory suggests that when contract maturity increases, creditors place less weight on a firm's growth opportunities in assessing default risk. We present a counter-argument: because the timing of future payoffs is uncertain, longer-duration debt provides creditors with a longer horizon over which payoffs are earned. Using credit default swap (CDS) spreads, we demonstrate that the relevance of future earnings expectations increases with CDS maturity. Our results suggest that contract maturity is not a reliable proxy for agency costs when evaluating the credit market relevance of financial information.