Earnings Distribution Discontinuity from a Continuous Model of Earnings Management
by Andrew Yim
I formulate a tractable model of earnings management with benchmark beating and auditor-client interaction. Prior... more I formulate a tractable model of earnings management with benchmark beating and auditor-client interaction. Prior models have omitted one or both of these aspects. Under mild conditions, the optimal misreporting strategy is unique. A general characterization of the strategy is provided, with two (effectively four) closed-form solutions derived for certain combinations of the extended audit cost distribution and misreporting cost functions. Some of the solutions are expressed in terms of the Lambert W function, which has wide applications in many scientific fields. The shape of the function can lead to a “discontinuity” in earnings related distributions. Simulation results indicate that the model can accommodate the discontinuity phenomenon, as well as the volcano shape of the distributions of earnings change and earnings surprise, documented in the literature. The insights from the simulations can be summarized in two hypotheses, namely, the mixture conjecture and the continuous “discontinuity” conjecture. Maximum likelihood and nonlinear least squares methods can be used to estimate the model parameters. Several applications of the model are suggested, including the construction of an earnings manipulation measure distinct from but complementary to abnormal accruals.
Where Do Firms Issue Debt? An Empirical Analysis of Issuer Location and Regulatory Competition in Europe
by Lars Hornuf
Co-authored with Horst Eidenmueller and Andreas Engert
In this article, we study the choice of issuer location and regulatory competition in the European corporate debt... more In this article, we study the choice of issuer location and regulatory competition in the European corporate debt market. We find that, in absolute terms, Germany has by far the highest outflow of debt issues, while the Netherlands, the UK, Luxembourg and Ireland see the most inflows (in that order). We use a panel gravity model to investigate country specific factors attracting foreign subsidiaries as issuer. The data clearly support the prediction that the locational choice is positively influenced by a low withholding tax rate. There is also some evidence that corporate tax rates play a role. We do not find support for creditor protection rules in bankruptcy as a driver of cross-border debt securities issues. Hence, countries who wish to attract issuers are well-advised to reduce their withholding tax rates – creditor rights seem not to matter.
2 views
Seen by:
Download (.pdf) Exchanges and Their Investors: A New Look at Reporting Issues, Fraud, and Other Problems by Exchange
Cumming, Douglas J. and Johan, Sofia A., 2011. "Exchanges and Their Investors: A New Look at Reporting Issues, Fraud, and Other Problems by Exchange." Available at SSRN: http://ssrn.com/abstract=1985319 or http://dx.doi.org/10.2139/ssrn.1985319
Statistics reporting litigated cases of fraud on an exchange-by-exchange basis are not readily available to... more Statistics reporting litigated cases of fraud on an exchange-by-exchange basis are not readily available to investors. This paper introduces data from three countries with multiple exchanges with different listing standards, – Canada, the United Kingdom and the United States – to show litigated cases of fraud significantly vary by country, and the different exchanges within the country. Comparisons are also made to Brazil, China and Germany to assess out-of-sample inferences. The data examined suggest there are significant differences in the nature of observed fraud across exchanges within the United States; by contrast, outside the United States there appears to be a comparative lack of enforcement. The data also suggest policy implications for the ways in which fraud ought to be reported to improve investor knowledge, market transparency and market quality.
The Legislative Road to Silicon Valley
Armour, J., and D.J. Cumming, 2006. “The Legislative Road to Silicon Valley” Oxford Economic Papers 58, 596-635.
Must policymakers seeking to replicate the success of Silicon Valley’s venture capital market first copy other US... more Must policymakers seeking to replicate the success of Silicon Valley’s venture capital market first copy other US institutions, such as deep and liquid stock markets? Or can legislative reforms alone make a significant difference? In this paper, we compare the economic and legal determinants of venture capital investment, fundraising, and exits. We introduce a cross-sectional and time series empirical analysis across 15 countries and 14 years of data spanning an entire business cycle. We show that liberal bankruptcy laws stimulate entrepreneurial demand for venture capital; that government programmes more often hinder than help the development of private equity, and that the legal environment matters as much as the strength of stock markets. Our results imply generalizable lessons for legal reform.
Mutual Funds that Invest in Private Equity? An Analysis of Labour Sponsored Investment Funds
Cumming, D.J., and J. MacIntosh, 2007. “Mutual Funds that Invest in Private Equity? An Analysis of Labour Sponsored Investment Funds” Cambridge Journal of Economics 31, 445-487
This paper considers the structure, governance and performance of a unique class of mutual funds that receives capital... more This paper considers the structure, governance and performance of a unique class of mutual funds that receives capital only from individuals, and reinvests this contributed capital in private companies, as opposed to traditional mutual funds that invest in publicly traded companies. It considers the particular class of mutual funds known as Canadian Labour-Sponsored Investment Funds (LSIFs). In contrast to expectations, it is shown that LSIFs have artificially low betas, returns that have significantly underperformed industry benchmarks, average management expense ratios greater than 4%, and have collectively accumulated $Can10 billion (£4.3 billion) as at 2005 since their statutory inception in various Canadian jurisdictions in the 1980s and 1990s. It is shown that these incongruous data are directly attributable to the LSIF statutory governance structure.
Private Equity, Leveraged Buyouts and Governance
Cumming, D.J., D. Siegel and M. Wright, 2007. “Private Equity, Leveraged Buyouts, and Governance” Journal of Corporate Finance 13, 439-460
This paper provides an overview of the literature on private equity and leveraged buyouts, focusing on global evidence... more This paper provides an overview of the literature on private equity and leveraged buyouts, focusing on global evidence related to both governance and returns to private equity and leveraged buyouts. We distinguish between financial and real returns to this activity, where the latter refers to productivity and broader performance measures. We also outline a research agenda on this topic.
Government Policy towards Entrepreneurial Finance: Innovation Investment Funds
Cumming, D.J., 2007. “Government Policy towards Entrepreneurial Finance: Innovation Investment Funds” Journal of Business Venturing 22, 193-235.
- Reprinted in David Audtresch, ed., The International Library of Entrepreneurship, Edward Elgar, 2009.
This paper analyses 280 Australian venture capital and private equity funds and their investments in 845... more This paper analyses 280 Australian venture capital and private equity funds and their investments in 845 entrepreneurial firms over the period 1982 – 2005. I focus the analysis on the Innovation Investment Fund (IIF) governmental program, first introduced in 1997. In order to highlight the unique aspects of the IIF, I compare the properties of the Australian IIF program with government venture capital programs in Canada, the UK and the US. The IIF program is unique with a focus on partnering between government-private sector partnerships, as described herein. I analyse the performance of the IIF funds along several dimensions: the propensity to take on risk by investing in early stage and high-tech investments; the propensity to monitor and add value to investees through staging, syndication, and portfolio size per fund manager; and the exit success. For each of these evaluation criteria, I assess the performance of the IIF funds relative to other types of private equity and venture capital funds in Australia. The data analysed show – in both a statistically and economically significant way – that the IIF program has facilitated investment in start-up, early stage and high tech firms as well as the provision of monitoring and value-added advice to investees. Overall, therefore, the data are strongly consistent with the view that the IIF program is fostering the development of the Australian venture capital industry. However, the vast majority of investments have not yet been exited, and the exit performance of IIFs to date has not been statistically different than that of other private funds. Further evaluation of IIF performance and outcomes is warranted when subsequent years of data become available.
Bankruptcy Law and Entrepreneurship
Armour, J., and D.J.. Cumming, 2008. “Bankruptcy Law and Entrepreneurship” American Law and Economics Review 10(2): 303-350.
- Reviewed in James Surowiecki, April 7, 2008, “Going for Broke” in The New Yorker http://www.newyorker.com/talk/financial/2008/04/07/080407ta_talk_surow
Entrepreneurs, catalysts for innovation in the economy, are increasingly the object of policymakers’ attention. Recent... more Entrepreneurs, catalysts for innovation in the economy, are increasingly the object of policymakers’ attention. Recent initiatives both in the UK and at EU level have sought to promote entrepreneurship by reducing the harshness of the consequences of personal bankruptcy law. Whilst there is an intuitive link between the two, relatively little attention has been paid to the question empirically, particularly in the international context. We investigate the link between bankruptcy and entrepreneurship using data on self employment over 16 years (1990-2005) and 15 countries in Europe and North America. We compile new indices reflecting how ‘forgiving’ personal bankruptcy laws are, reflecting the time to discharge. These measures vary over time and across the countries studied. We show that bankruptcy law has a statistically and economically significant effect on self employment rates when controlling for GDP growth, MSCI stock returns, and a variety of other legal and economic factors. The results have clear implications for policymakers.
Contracts and Exits in Venture Capital Finance
Cumming, D.J., 2008. “Contracts and Exits in Venture Capital Finance” Review of Financial Studies 21, 1947-1982.
Using a sample of European venture capital investments, I study the relation between venture capital (VC) contracts... more Using a sample of European venture capital investments, I study the relation between venture capital (VC) contracts and exits. The data indicate that ex ante, stronger VC control rights increase the likelihood that an entrepreneurial firm will exit by an acquisition, rather than through a write-off or an IPO. My findings are robust to controls for a variety of factors, including endogeneity and cases in which the VC preplans the exit at the time of time of contract choice. My findings are consistent with control-based theories of financial contracting, such as Aghion and Bolton (1992).
Legality and Venture Capital Governance around the World
Cumming, D.J., D. Schmidt and U. Walz, 2010. “Legality and Venture Capital Governance around the World” Journal of Business Venturing 25, 54-72.
We analyze governance with a new dataset on investments of venture capitalists in 3848 portfolio firms in 39 countries... more We analyze governance with a new dataset on investments of venture capitalists in 3848 portfolio firms in 39 countries from North and South America, Europe and Asia spanning 1971–2003. We provide evidence that cross-country differences in legality, including legal origin and accounting standards, have a significant impact on the governance structure of investments in the VC industry: better laws facilitate faster deal screening and deal origination, a higher probability of syndication and a lower probability of potentially harmful co-investment, and facilitate investor board representation of the investor. We also show that country-specific differences exist apart from legal and economic development.
Private Equity Returns and Disclosure Around the World
Cumming, D.J., and U. Walz, 2010. “Private Equity Returns and Disclosure around the World” Journal of International Business Studies 41(4), 727-754.
- Reprinted as Cumming, D.J., and U. Walz, 2010. “Private Equity Returns and Disclosure around the World” Journal of Business Valuation, Vol 2., pp.1-33 (lead article)
- Winner of the Canadian Institute of Chartered Business Valuators (CICBV) Best Paper Prize ($5,000)
- PWC Global Competency Centre Research Excellence Award (€3,000)
To obtain more funds from the institutional investors, private equity fund managers may report inflated valuations of... more To obtain more funds from the institutional investors, private equity fund managers may report inflated valuations of private investee companies that are not yet sold. However, such overvaluations may result in a reputational cost when those investments are realized. Using evidence from 39 countries, we show that there are significant systematic biases in managers' reporting of fund performance. We find that these biases depend on the accounting and legal environment in a country, and on proxies for the degree of information asymmetry between institutional investors and private equity fund managers.
A Critical Analysis of Mudarabah & A New Approach to Equity Financing in Islamic Finance
Financial intermediation serves a valuable purpose, but it can also be structured using equity modes of financing.... more Financial intermediation serves a valuable purpose, but it can also be structured using equity modes of financing. This can relieve the financee and increase diversity of entrepreneurial undertakings as in debt based commercial financing, there is little room for diversity with obligatory and stipulated servicing of debt. Using Islamic equity modes of financing poses the challenge of the agency problem and moral hazard. The extent of this agency problem in Mudarabah and its impact on economic payoffs between counterparties is analyzed in this study with a simulation model. Based on review of alternate solutions proposed, the author presents two possible covenants which could make Mudarabah mode of financing more acceptable and widely usable in financial intermediation. This would also further the egalitarian objectives of an Islamic economic order.
SUKUK BOND: The Global Islamic Financial Instrument
Global financial markets are volatile right now and will remain so for the next 2-years. Equity markets are shaky.... more Global financial markets are volatile right now and will remain so for the next 2-years. Equity markets are shaky. Investors risk appetite is suddenly moving to commodities. Bond market is precarious as Sovereign debt risk goes high. Global economy is slowly moving into recession which will be either U or W-Shaped. Recovery figures are questionable and are creating doubts among investors. So, where are we heading towards? As we navigate through treacherous times, Islamic financial market provides a new hope without speculation and exploitation of resources. The emergence of Sukuk Islamic Bond in the financial markets heralds a new era which can provide much needed financial stability and mitigation of risk in these arduous times. With advent of Sukuk in the financial world, the market players have got a new option to invest into this asset which hold considerable value and benefit for all. This bond promises to all investors an equitable return which is justifiable and above all safe for the strategic investment purpose.
The Effect of Foreign Ownership on Capital Structure of Non-Financial Firms
by Aroob Tamimi
A study examines empirically the impact of foreign ownership on financing decisions from a corporate governance... more A study examines empirically the impact of foreign ownership on financing decisions from a corporate governance perspective. To explore the underlying relationship, we employ panel data analysis for a unique set of non-financial (services and industrial) firms listed on Amman Stock Exchange (ASE) over the period from 2005 to 2009. This study contributes to the literature by examining the effects of foreign ownership on capital structure in the emerging economies context. Empirical evidence is provided indicating that foreign ownership is significantly negatively related to total leverage based on book value of assets and short-term leverage based on each of book value of assets and market value of equity, demonstrating that firms with foreign shareholdings are becoming less reliant on external cash financing. The results show that capital structure is affected by firm’s size, profitability and liquidity. The implication of this study helps financial managers and investors to have insight into the ownership composition (local and foreign) that is associated with an advantageous selection of financing modes, in accordance with the individual firm preferences.
4 views
Seen by: Moving from Pegged Rates to Greater Exchange Rate Flexibility
Academic Articles of “Kicking the Habit: Moving from Pegged Rates to Greater Exchange Rate Flexibility”
Under Discussion of “Developing countries need fixed exchange rates? ”
Moving from pegged exchange rates to greater exchange rate flexibility1, there is a problem need to be solved that... more Moving from pegged exchange rates to greater exchange rate flexibility1, there is a problem need to be solved that there are powerful incentives for greater flexibility deriving from changes in the international economic and financial environment but that policymakers find it difficult to engineer “a smooth transition”. They offer practical suggestions and a framework under which the probability of a smooth transition can be maximized and drawing examples from recent economic history. This is an attempt to understand the experience of selected countries which have undertaken this transition. The pressures for greater exchange rate flexibility coming from trading and borrow of different currencies therefore we can understand the fear of shifting to greater exchange rate flexibility. As the recent experience of the Asian economies has underscored, pegging to a particular currency is not preferable for countries that trade and borrow from a variety of different partners.
9 views
Seen by:
How important are exchange rate in determining the significant of FDI in Asia?
Academic Articles Of “Y. Xing, G. Wan. Exchange Rates and Competition for FDI in Asia,The world economy, 2006”
Discussed under of "How important are exchange rate in determining the significant of FDI in Asia?"
This paper investigates the competition for FDI and the role of exchange rates analyses to what extent they may have... more This paper investigates the competition for FDI and the role of exchange rates analyses to what extent they may have altered the relative competitiveness of the recipient countries for FDI from the same source country. The importance of exchange rates in determining FDI has been emphasized in the literature. The theoretical literatures show explicitly that relative FDI inflows are a function of relative real exchange rates. In particular, if one host country devalues its currency against that of the source country more than the other does, FDI into the former country will be expected to increase relative to the other country. The empirical inference is examined with Japanese FDI in manufacturing industries of China and ASEAN-41, and results generally support the theoretical conclusion, suggesting that the real devaluation of the Chinese Yuan undercut FDI into the ASEAN-4. It also tries to summarize the mechanisms of how exchange rate influences on MNCs engaging in foreign investment activities.
Flying the nest-an analysis of Kiwi firms delisting from the NZX
Lawrence, G., Sharman, A., and Chapple, B. July 2009. Flying the nest: an analysis of Kiwi firms delisting from the NZX. Ministry of Economic Development occasional paper 09/01, Ministry of Economic Development, New Zealand.
Recent commentary has suggested an increasing trend in delistings from the NZX, driven by offshore takeovers. However,... more Recent commentary has suggested an increasing trend in delistings from the NZX, driven by offshore takeovers. However, some of that commentary has been driven by anecdotal evidence. In order to shed light on this discussion, we examine the extent and nature of delisting activity over the past 15 years. Our results indicate no increase in offshore takeovers, with well under half of the delistings in the sample period the result of foreign takeovers.