Yin Yu-Thompson, Ran Lu-Andrews and Liang Fu
This paper aims to perform empirical analysis to test whether less severe agency conflict between managers and controlling shareholders may improve family firms’ corporate and…
Abstract
Purpose
This paper aims to perform empirical analysis to test whether less severe agency conflict between managers and controlling shareholders may improve family firms’ corporate and stock liquidity, compared to non-family firms.
Design/methodology/approach
The authors use the ordinary least square and two-stage generalized method of moments regression analyses. They also use match-paired design for robustness check.
Findings
Focusing on Standard & Poor’s 500 firms, the authors find that family firms are more conservative by hoarding more corporate liquid assets (as measured by accounting balance sheet liquidity ratios) than their peer non-family firms to prevent underinvestment from external costly finance. These family firms also exhibit higher level of stock liquidity and lower liquidity risk as measured by effective bid–ask spread than non-family firms. The results are consistent with the motivation that organizations (i.e. family firms in this study) whose shareholders can efficiently monitor that their managers are associated with higher level of corporate liquidity and stock liquidity, and lower level of liquidity risk.
Originality/value
This study contributes to the literature on liquidity (both corporate liquidity and stock liquidity) and ownership structure, more broadly corporate governance. It provides insights into corporate and stock liquidity within a unique ownership context: family firms versus non-family firms. Family firms in the USA are subject to both Type I (agency problems arising from the separation of ownership and control) and Type II agency problems (agency conflict arising between majority and minority shareholders). It is an ongoing debate whether family firms suffer more or less agency problems from one type versus the other than non-family firms. The finding that family firms have higher corporate and stock liquidity is consistent with that family firms being subject to less severe agency conflict due to separation of ownership from control.
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Ran Lu-Andrews and Yin Yu-Thompson
The authors intend to perform empirical analysis to test the theory proposed by Edmans and Liu (2011) that CEOs with more debt-like compensations care more about the liquidation…
Abstract
Purpose
The authors intend to perform empirical analysis to test the theory proposed by Edmans and Liu (2011) that CEOs with more debt-like compensations care more about the liquidation value of the firm. The purpose of this paper is to examine the relations between CEO inside debt ratios and tangible assets (i.e. asset tangibility, liquidation value, and fixed asset investment).
Design/methodology/approach
The authors use the Ordinary Least Square (OLS) contemporaneous and lead-lag regression analyses. They also use two-stage least-square (2SLS) regression analysis for robustness check.
Findings
The findings are fourfold: first, CEO inside debt has a positive effect on asset tangibility of the firm; second, CEO inside debt has a positive effect on the liquidation value of the firm; third, CEO inside debt has a positive effect on the tangible asset investment (as measured by capital expenditures) of the firm; and fourth, these positive effects are found in both the contemporaneous year and the subsequent year and in both OLS and 2SLS frameworks. The research provides further evidence that CEOs with higher inside debt holdings exhibit safety-seeking behavior. The authors document direct proof for the theory proposed by Edmans and Liu (2011) that these CEOs, like any creditors, care a great deal of the asset tangibility and liquidation value of the firm.
Originality/value
This study contributes to the existing literature by providing further empirical evidence to support that CEO inside debt holdings have impacts on firm investment decisions and capital allocations. Inside debt does help align the executive managers’ personal incentive with firms’ value, and mitigate the agency conflicts between managers and debt holders. This study provides significant empirical evidence to support the theory suggested by Edmans and Liu (2011) that CEOs with higher level of inside debt holdings do care a greater deal about the asset liquidation value of the firm, and these firms tend to invest more in tangible assets to preserve the liquidation value.
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The purpose of this paper is to empirically examine the relation between incentives from CEO inside debt (deferred compensation and pension benefits) and corporate social…
Abstract
Purpose
The purpose of this paper is to empirically examine the relation between incentives from CEO inside debt (deferred compensation and pension benefits) and corporate social responsibility (CSR).
Design/methodology/approach
Instrumental variable (IV-GMM) regressions are used to estimate the relation between CEO inside debt and CSR.
Findings
The results of this paper indicate that CEOs with large inside debt tend to invest more in CSR. Analysis of CSR strengths and concerns supports this finding and shows that CEO inside debt is significantly positively (negatively) associated with CSR strengths (concerns). Further tests indicate that CEO inside debt exerts a positive and significant effect on all five dimensions of social performance (diversity, community, product, employee relations and environment).
Research limitations/implications
The results of this study are based on US corporations. Future research should investigate if these results hold for firms in other countries in order to better our understanding of the relation between CEO inside debt and CSR.
Practical implications
CEOs use CSR as a risk management strategy to reduce corporate risk in order to protect the value of their inside debt.
Social implications
The results in this paper provide a practical tool to boards of corporations to increase investment in CSR. The results suggest that boards can encourage CEOs to invest in CSR by increasing incentives from inside debt.
Originality/value
This study contributes to the literature that examines the relation between inside debt and CSR by showing that CEO inside debt exerts a positive impact on CSR.
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This study examined the dynamic role of the Japanese property sector, particularly the real estate investment trusts (REITs), in mixed-asset portfolios of stocks and bonds, as…
Abstract
Purpose
This study examined the dynamic role of the Japanese property sector, particularly the real estate investment trusts (REITs), in mixed-asset portfolios of stocks and bonds, as well as office, retail, hotel and residential REITs.
Design/methodology/approach
Daily data were retrieved from 01 January 2008 to 31 December 2019. The sample time frame consisted of in-sample and out-of-sample periods. The dynamic conditional correlation-generalised autoregressive conditional heteroskedastic (DCC-GJRGARCH) model was deployed to obtain the forecast estimates of time-varying volatility of REITs and correlations with other assets. The estimates were employed to construct out-of-sample portfolios based on the three assets for daily investment. The five sets of portfolios with each individual property sector REITs, as well as a portfolio of stocks and bonds that served as a benchmark, were produced. The average utility for each set of portfolios was estimated and compared with the average utility of the benchmark portfolio. The average transaction cost (TC) for portfolio rebalancing was calculated as well.
Findings
The forecast of volatility estimates for each property sector revealed that each asset displayed a similar pattern with the differences in the volatility magnitude. Notably, hotel and retail REITs were more volatile than other property sector REITs. The property sector REITs exhibited a positive correlation with stocks but negatively linked with bonds. The results unveiled the diversification benefits of incorporating property sector REITs. The portfolio with property sector REITs had higher risk-adjusted returns and utility, compared to portfolio consisting of stocks and bonds. The benefits outweighed the TC for portfolio rebalancing.
Practical implications
This study highlights the importance of quantifying the conditional time-varying volatility and correlations of the property sector REITs with other asset returns, especially for investment decision, to select and include property sector REITs in mixed-asset portfolios. For fund managers seeking liquid assets in daily investment, this analysis suggests the inclusion of hotel and retail REITs to enhance REITs' portfolio performance.
Originality/value
This study is the first to investigate the dynamic characteristics of the volatility and correlation of each property sector REITs with other financial assets by employing the conditional framework that accounted for short- and long-run persistency in economic shocks. The reported outcomes shed light on the differences in the underlying properties that contribute to the variances in dynamic volatility of each sector REITs, as well as REITs' correlations with stocks and bonds. This application enables the authors to transmit the dynamics of variance-covariance matrix amongst each property sector REITs, stocks and bonds into asset allocation problem on a daily basis.
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Alexander Scholz, Stephan Lang and Wolfgang Schaefers
Understanding the pricing of real estate equities is a central objective of real estate research. This paper aims to investigate the impact of liquidity on European real estate…
Abstract
Purpose
Understanding the pricing of real estate equities is a central objective of real estate research. This paper aims to investigate the impact of liquidity on European real estate equity returns, after accounting for well-documented systematic risk factors.
Design/methodology/approach
Based on risk factors derived from general equity data, the authors extend the Fama-French time-series regression approach by a liquidity factor, using a pan-European sample of 272 real estate equities.
Findings
The empirical results indicate that liquidity is a significant pricing factor in real estate stock returns, even after controlling for market, size and book-to-market factors. In addition, the authors detect that real estate stock returns load predominantly positively on the liquidity risk factor, suggesting that real estate equities tend to behave like illiquid common equities. These findings are underpinned by a series of robustness checks. Running a comparative analysis with alternative factor models, the authors further demonstrate that the liquidity-augmented asset-pricing model is most appropriate for explaining European real estate stock returns.
Research limitations/implications
The inclusion of sentiment and downside risk factors could provide further insights into real estate asset pricing in European capital markets.
Originality/value
This is the first study to examine the role of liquidity as a systematic risk factor in a pan-European setting.
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Johannes Braun, Jochen Hausler and Wolfgang Schäfers
The purpose of this paper is to use a text-based sentiment indicator to explain variations in direct property market liquidity in the USA.
Abstract
Purpose
The purpose of this paper is to use a text-based sentiment indicator to explain variations in direct property market liquidity in the USA.
Design/methodology/approach
By means of an artificial neural network, market sentiment is extracted from 66,070 US real estate market news articles from the S&P Global Market Intelligence database. For training of the network, a distant supervision approach utilizing 17,822 labeled investment ideas from the crowd-sourced investment advisory platform Seeking Alpha is applied.
Findings
According to the results of autoregressive distributed lag models including contemporary and lagged sentiment as independent variables, the derived textual sentiment indicator is not only significantly linked to the depth and resilience dimensions of market liquidity (proxied by Amihud’s (2002) price impact measure), but also to the breadth dimension (proxied by transaction volume).
Practical implications
These results suggest an intertemporal effect of sentiment on liquidity for the direct property market. Market participants should account for this effect in terms of their investment decisions, and also when assessing and pricing liquidity risk.
Originality/value
This paper not only extends the literature on text-based sentiment indicators in real estate, but is also the first to apply artificial intelligence for sentiment extraction from news articles in a market liquidity setting.
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Gaurav Gupta, Jitendra Mahakud and Vivek Verma
The purpose of this study is to examine the impact of financial and technical education of chief executive officer (CEO) on investment–cash flow sensitivity (ICFS) of Indian…
Abstract
Purpose
The purpose of this study is to examine the impact of financial and technical education of chief executive officer (CEO) on investment–cash flow sensitivity (ICFS) of Indian manufacturing firms.
Design/methodology/approach
The study uses the dynamic panel data model and more specifically, the system-generalized method of moments (GMM) technique to investigate the effect of CEOs' education on ICFS of Indian manufacturing firms during the period 1998–1999 to 2016–2017.
Findings
The study shows that financial (technical) education of CEOs does (not) affect ICFS. The results explain that the role of the CEO's education in ICFS is highly significant during the crisis period. The robustness test depicts that the influence of financial education on ICFS is less (more) for group-affiliated and large-sized firms (stand-alone and small-sized firms). Further, the CEO's education is significantly associated with corporate investment decisions.
Research limitations/implications
Due to the unavailability of the CEO's compensation data for the selected sample, future research could explore the impact of CEO's education with respect to CEO's compensation on ICFS.
Practical implications
First, the authors find that financially educated CEOs affect ICFS; therefore, firms should take care of CEO's education during recruitment of CEOs. Second, lending agencies should also consider the educational background of the CEO before approval of funding to make it safe. Third, investors should keep in mind the educational background of the CEO for the growth of their investment as it may be easier for financially educated CEOs to borrow from the market at the time of requirement.
Originality/value
This study contributes to the existing literature by providing empirical evidence through analyzing the impact of a CEO's education on ICFS in the context of India. This study is very unique in itself as it uses the sample of manufacturing sectors of India, which are growing very fast and attracting global investors to create a global hub of manufacturing in India. This study also considers different types of education such as financial and technical education of CEOs in the context of a developing economy like India. This study made its findings robust across company characteristics and periods based on the financial crisis.
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Alexander Scholz, Karim Rochdi and Wolfgang Schaefers
The purpose of this paper in this context is to examine the impact of asset liquidity on real estate equity returns, after taking well-documented systematic risk factors into…
Abstract
Purpose
The purpose of this paper in this context is to examine the impact of asset liquidity on real estate equity returns, after taking well-documented systematic risk factors into account. Due to their unique characteristics, real estate equities constitute an inherently low degree of underlying asset liquidity.
Design/methodology/approach
Following the Fama-French time-series regression approach, the authors extend the conventional asset pricing model by a real estate-specific asset liquidity factor (ALF), using a sample of 244 real estate equities.
Findings
The results, based on monthly data for the period 1999-2012, reveal that asset liquidity is a relevant pricing factor which contributes to explaining return variations in real estate equity markets. Accordingly, investors expect a risk premium from listed real estate companies with a low degree of asset liquidity, which is especially the case for companies facing financial constraints and during economic downturns. Furthermore, an investment strategy exploiting differences in the underlying asset liquidity yields considerable average excess returns of upto 8.04 per cent p.a.
Practical implications
Considering the findings presented in this paper, asset liquidity should receive special attention from investors, as well as from the management boards of listed real estate companies. While investors who ignore the magnitude of asset liquidity may systematically misprice real estate equities, management can influence the firm’s cost of capital by adjusting the underlying asset liquidity.
Originality/value
This is the first study to examine the role of an ALF in a real estate asset pricing framework.
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Alain Coën and Patrick Lecomte
The purpose of this paper is to analyze and revisit the risk and performance of publicly traded real estate companies from 14 countries over the period 2000–2015, marked by the…
Abstract
Purpose
The purpose of this paper is to analyze and revisit the risk and performance of publicly traded real estate companies from 14 countries over the period 2000–2015, marked by the unprecedented Global Financial Crisis, in presence of errors-in-variables (EIV) and illiquidity (measured by serial correlation, following Getmansky et al. (2004)).
Design/methodology/approach
The authors extend the seminal work of Bond et al. (2003), and shed a new light on the relative performance of listed real estate before and after the GFC. First, the authors suggest the use of various asset pricing models (APM) including the Fama and French (2015) five-factor APM with global and country-level factors. Second, the authors implement unbiased estimators to correct for the econometric bias induced by EIV in APM. Third, the authors deal with the impact of illiquidity (measured by serial correlation) on the risk properties of international securitized real estate returns.
Findings
The findings show that post-GFC, a radical change in international listed real estate risk factors has resulted in more homogeneous markets internationally and less diversification opportunities for international investors.
Practical implications
The authors suggest the use of robust linear APM (including the Fama and French (2015) five-factor APM) to analyze the risk and performance of publicly traded real estate companies from 14 countries over the period 2000–2015.
Originality/value
The authors analyze and revisit the risk and performance of publicly traded real estate companies from 14 countries over the period 2000–2015, marked by the unprecedented Global Financial Crisis.