Answering a major demand in modern credit risk management, we propose a nonparametric survival approach for the modeling of the recovery rate and the recovery time of a defaulted counterparty, by introducing what we call the Recovery Reinforced Urn Process, a special type of combinatorial stochastic process. The new model allows for the elicitation and exploitation of prior knowledge and experts’ judgements, and for the constant update of this information over time, as soon as new data become available. We show how to use it to perform Bayesian nonparametric prediction about the recovered amounts and the (total) recovery time of a series of defaulted exposures. An application to real data is provided using the Single Family Loan-Level Dataset by Freddie Mac.

We examine the disclosure policies of non-unionized firms operating in unionized industries. We test the hypothesis that non-unionized firms have an incentive to disclose more information when their unionized rivals are engaged in labor renegotiations; that is, to weaken them. We find that non-unionized firms disclose more information and more good news when renegotiations are ongoing. This behavior is stronger for larger firms, firms with fewer peers in the industry, and firms more similar to their renegotiating rivals. We also find some evidence that unionized firms are harmed by this behavior and that non-unionized firms benefit from their increased disclosures.

Managers are increasingly aware that strategic judgments need to be made in the context of risk assessments. It has been proposed that strategic performance management systems, such as the balanced scorecard (BSC), offer a useful framework for integrating strategic risk and performance information to provide managers with a more comprehensive overview of their strategy. In this study, we conduct an experiment to investigate whether integrating strategic risk information in a BSC affects managers' responses to different strategic risk profiles when making strategy evaluation and recommendation judgments. Specifically, we provide strategic risk information either as a stand-alone list (a stand-alone approach), or incorporated in a BSC (an integrated approach). We also vary the risk profile of the strategy provided, by manipulating whether the strategy has relatively higher risks associated with performance drivers (high performance driver risks) or relatively higher risks associated with performance outcomes (high performance outcome risks). Our results show that managers make less favorable strategy evaluation and recommendation judgments with high performance driver risks than with high performance outcome risks when strategic risk information is integrated in a BSC, but not when the strategic risks are presented as a stand-alone list. While we find a significant difference in strategic risk profile effects between the two presentation formats for strategy recommendation judgments, this difference is not significant for strategy evaluation judgments. Overall, our study shows that how organizations choose to combine the reporting of strategic risk and performance information is important for managers making strategic judgments.

Does modelling stochastic interest rates, beyond stochastic volatility, improve pricing performance on long-dated commodity derivatives? To answer this question, we consider futures price models for commodity derivatives that allow for stochastic volatility and stochastic interest rates and a correlation structure between the underlying variables. We examine the empirical pricing performance of these models on pricing long-dated crude oil derivatives. Estimating the model parameters from historical crude oil futures prices and option prices, we find that stochastic interest rate models improve pricing performance on long-dated crude oil derivatives, when the interest rate volatility is relatively high. Furthermore, increasing the model dimensionality does not tend to improve the pricing performance on long-dated crude oil option prices, but it matters for long-dated futures prices. We also find empirical evidence for a negative correlation between crude oil futures prices and interest rates that contributes to improving fit to long-dated crude oil option prices.

China has been adopting a “mercantilist” policy by lavishing massive government subsidies on Chinese firms. Using hand-collected subsidy data on Chinese listed companies, we find that firms receiving more subsidies tend to have a lower cost of debt. However, such firms fail to have superior financial performance. Instead, firms with more subsidies tend to be overstaffed, which demonstrates higher social performance. These results are mainly driven by non-tax-based subsidies rather than tax-based subsidies. Overall, our results suggest that the Chinese government uses non-tax-based subsidies to achieve its social policy objectives at the expense of firms’ profitability.

In this study, we examine whether internal control over financial reporting affects firm operational efficiency. We find that operational efficiency, derived from frontier analysis, is significantly lower among firms with material weaknesses in internal control relative to firms without such weaknesses. We also find that the remediation of material weaknesses leads to an improvement in operational efficiency. Additional analyses indicate that the negative effect of material weaknesses on operational efficiency is stronger for firms with a greater demand for higher quality information for decision making, for weaknesses that are deemed to be more severe, and to a certain extent, for smaller firms. Overall, our study extends the literature by presenting systematic evidence on the effect of effective internal control on operational efficiency and informs the debate over the costs and benefits of the internal control reporting requirements under the Sarbanes‐Oxley Act of 2002.