Knowledge that Transforms

We propose an econometrically logical approach that distinguishes intentional from inadvertent smoothing of hedge fund return. Other than the hedge fund return (Y) we introduce an explanatory variable: a market portfolio of hedge fund returns (X). By connecting X and Y, some critical parameters are found to be effectively related to testing the two types of return smoothing. Using those parameters, we develop distinct desmoothing algorithms against intentional and inadvertent smoothing. Our empirical results show that although intentional smoothing is partly responsible for hedge fund smoothing and is done more consistently than inadvertent smoothing, return smoothing is mainly caused by the nature of underlying assets.

We examine the operating performance improvements associated with the extension of trade credit. Our results suggest a positive and significant relation between future profitability and contemporaneous trade credit provision. Further findings indicate significantly higher margins, revenues and market shares for firms that extend more trade credit than industry competitors with similar characteristics, operational necessities and financial distress levels. These inferences are robust to several econometric concerns such as the joint determination of trade credit extension and firm performance. Overall, our results imply that aggressive trade credit policies can provide firm management with a unique channel to improve product market performance.

To avoid a tie in voting, most boards have an odd number of directors. We argue that boards with an even number of directors are more likely to be weak monitors because of inefficient decision making and being captured by controlling shareholders. Consistent with this argument, we find that in China boards with an even number of directors have fewer meetings and are more likely to have board members absent from board meetings. Firms with an even number of directors have more tunnelling through intercorporate loans and related party transactions, lower financial reporting quality and higher incidence of accounting irregularities. This evidence is stronger in firms with weaker external monitoring and for directors with weaker incentives to monitor. Finally, we show that firms with an even number of directors are associated with lower market valuation of equity. Our results suggest that corporate boards with an even number of directors in emerging markets are associated with more agency problems.

The internal markets of fund families can encourage member funds to deviate excessively from their investment mandates. Theoretically, we show that fund managers following sufficiently different style benchmarks can engage in risk-shifting by trading with one another at low cost inside their family. This benefits the managers and the family even in the absence of a family-level strategy. However, the excessive risks taken by the managers can be costly to fund investors. Empirically, we find support for the positive effect of intra-family style diversity on offsetting trades across funds and on deviations of funds’ portfolios from their benchmarks.

The recent surge in the use of team-managed funds in the mutual fund industry suggests that the benefits of team management might outweigh its costs. However, extant empirical evidence is not consistent with the view that team-managed funds generate superior returns relative to individual-managed funds. We argue that the benefits of team management are likely to be manifested in the presence of strong board monitoring because the potential free-rider problems within team-managed funds are alleviated. Our findings, that smaller boards and boards with a higher proportion of independent directors are positively associated with performance in team but not individual-managed funds, are consistent with this view. Our results suggest that in team-managed fund structures, where the potential free-riding problems exist, the presence of strong board monitoring improves fund performance.

This paper investigates the size and development of banking book interest rate risk positions of Dutch banks during 2008 to 2015. Due to hedging, interest rate risk is small and the income from maturity transformation is only a small share of the net interest margin and the return on assets. However, interest rate risk positions do vary significantly between banks and over time. My results suggest that banks lower their interest rate risk significantly when the yield curve flattens. Interest rate risk is negatively related to on-balance sheet leverage and has a U-shaped relation with solvability for banks that do not use derivatives. Banks that received government assistance during the financial crisis have higher interest rate risk than banks that did not receive assistance.

This article investigates the potential role of real estate risk in the pricing of US bank stocks from February 1990 to December 2015. Generalized method of moments estimates of conditional multifactor models are provided. The real estate risk is proxied by the return of an investment strategy that is short on low-leverage real estate investment trust (REIT) assets and long on high-leverage REIT assets. We group banks into portfolios based on their market capitalization, real estate loans as a proportion of total assets, and book-to-market ratios. The results suggest that the real estate premium is a relevant risk factor in bank stocks returns. For instance, we find that a 100-basis-point increase to the real estate premium increases returns by 15.8 to 20.1 basis points for portfolios grouped by market capitalization. This conclusion remains when other oft-cited bank risk factors are considered, including small-minus-big, high-minus-low and the return on equity of the financial sector.

In this paper, we provide evidence for a risk-taking channel of monetary policy transmission in the euro area that works through the relaxation of lending standards for borrowers. Our dataset covers the period 2003Q1-2016Q2 and includes, in addition to the standard variables for real GDP growth, inflation, and the monetary policy stance, indicators of bank lending standards and bank lending margins. Based on vector autoregressive models with (i) recursive identification and (ii) sign restrictions, we show that banks react aggressively to an expansionary monetary policy shock by lowering their lending standards. The banks’ efforts to keep their lending margin stable, however, are not successful as we detect a significant compression. We document these findings for the euro area as a whole and for its individual member states. In particular, banks in the Netherlands, Portugal, Spain, and Ireland lowered their lending standards after expansionary monetary policy shocks. The compression of the lending margin is most pronounced in the five crisis countries (Greece, Ireland, Italy, Portugal, and Spain)

How to properly compensate and incentivize players is an important question in the realm of professional sports, and more broadly, is a central question in contract design. With the increasing use of performance-based compensation packages and tax law favoring such compensation design, a natural question arises as to whether workers do indeed perform for pay. We examine this question in a setting that is not fraught with the typical measurement and identification problems found in many pay-performance settings. Specifically, we examine changes in a NFL player's Win Probability Added (WPA) and Expected Points Added (EPA) in response to his compensation-contract design. Overall, our paper provides evidence that players do indeed perform for (properly designed) pay, and has important implications for future work on compensation and incentive-based contract design.