The Impact of Empowering Investors on Trust and Trustworthiness

This paper uses laboratory mechanism design in an investment environment to examine the impact of empowering investors with the right to veto the investee’s profit distribution decision on the level of trust and trustworthiness. One of the key findings is that the empowerment of investors through both costless and costly vetoes significantly increases trust by over 30% in both cases. Interestingly, we observe a comparable pattern when the power to veto is removed. Analyses of veto decisions indicate that empowering investors increases both trust and trustworthiness without an undue abuse of the power to veto and that the veto decisions are largely driven by unfair responses, consistent with the theory on inequity aversion.Empowerment; Veto; Investment; Trust; Trustworthiness; Reciprocity

The Impact of Social Value Orientation and Risk Attitudes on Trust and Reciprocity

Prior experimental studies provide evidence that the levels of trust and reciprocity are highly susceptible to individuals’ preferences towards payoffs, prior experience, capacity to learn more about personal characteristics of each other and social distance. The objective of this study is to examine whether social value orientation as developed by Griesinger and Livingstone (1973) and Liebrand (1984) and risk preferences can help to account for the variability of trust and trustworthiness. We use the Berg et al. (1995) investment game to generate indices of trust and reciprocity. Prior to their participation in the investment game, all subjects participated in two other games. One is used to measure their social value orientation (a measure of other regarding behavior) and the second to measure risk attitudes. These variables are introduced as treatments in the analysis of the trust and reciprocity data. In addition to these preference related variables, gender is introduced to capture any differences between men and women which may not be encompassed by value orientation and risk attitudes. The statistical analysis indicates that the social value orientation measure significantly accounts for variation in trust and reciprocity. As well, the level of trust exhibited by an investor significantly affects the reciprocity of the responders and this measure of trust interacts with social value orientation. Individuals who are highly pro-social reciprocate more as the sender’s trust increases, while those who are highly pro-self reciprocate less as the sender’s trust increases. For this sample of participants, the gender variable does not capture any differences in the behavior of men and women that is not already reflected by the differences captured by their value orientations. Risk attitudes do not significantly account for variation in trusting behavior, except for the case where individuals have neither strongly pro-social nor pro-self social value orientations. In this case, more riskseeking individuals are more trusting.Trust, Reciprocity, Social Value Orientation, Risk Attitudes, Gender

Organizational memory and bank accounting conservatism

69 p. ; Includes bibliographical references (pp. 45-49).This paper is the first to investigate the impact of banks’ organizational memory of past history on the conservatism of accounting policy. Specifically, we investigate two types of bad time history: banks’ undercapitalization and the failures of other banks during financial crises. Using a large sample of U.S. banks over the period 1997-2013, we find that both types of bad times are positively related to timelier recognition of earnings decreases versus earnings increases in accounting income. We also find that following bad times, banks increase their allowance for loan losses. The results of path analysis and survey research indicate that bad time memory of banks impacts bank accounting conservatism through CEO tenure and board of directors’ tenure. Collectively, our results suggest that banks’ organizational memory of bad times and macro-level banking crises lead to greater accounting conservatism in banks. Valuation Insight: Banks’ organizational memory of bad times (undercapitalization or failures of other banks) leads to greater accounting conservatism in banks. Thus, we may expect banks that went through bad times to have lower book-to-market values

Does firms’ corporate social responsibility reduce crime?

45 p. ; Includes bibliographical references (pp. 27-33)This study examines the impact of firms’ corporate social responsibility (CSR) on state crime rates in the U.S. from 2004 to 2020. Our research bolsters the expanding work under the Law and Political Economy Project out of Yale University and Economics of Crime Working Group of National Bureau of Economic Research (NBER). Our empirical results show that states with domiciled firms having better CSR performance exhibit significantly lower crime rates. This lower crime incidence is driven by the environmental, social, and governance dimensions of CSR. Our study is the first to document the societal impact of CSR by analyzing state crime rates, and we conclude that CSR activities have positive externalities on society. Valuation Insight: Both exposure to crime and Corporate Social Responsibility (CSR) performance may be essential drivers of business value. This paper shows that the two are related in that states in which the firms domiciled have better CSR performance also exhibit lower crime rates

Non-traditional banking activities and bank financial reporting quality

39 p. ; Includes bibliographical references (pp. 25-28). October 2020 ; This version: January 1, 2021.We examine whether and how non-traditional banking activities affect the quality of banks’ financial reporting. We find that a bank’s ratio of non-interest income (derived from nontraditional activities) to total operating income is positively and significantly associated with the magnitude of discretionary loan loss provisions, our proxy for financial reporting quality. Valuation Insight: Earnings from non-traditional activities (non-interest income) are found to cause banks to increase discretionary loan-loss provisions and, accordingly, imply lower financial reporting quality. From a valuation perspective, the non-interest income therefore has a smaller impact on firm value than interest income

The evaluation of the Canadian BAX contract in managing short‐term interest rate exposure

PurposeThe purpose of this paper is to document stylized features and market behaviour of the Canadian Bankers' Acceptance Futures (BAX) contract; and outlook for the BAX contract as the dominant instrument to manage Canadian short‐term interest rate exposure.Design/methodology/approachThe paper adopts GARCH methodology to model the time‐varying nature of the volatility of prices in the context of hedging and presents a time‐varying estimation of the hedge ratios between the BAX contract and major Canadian money market instruments.FindingsThe key finding is that the growth of the BAX Market hinges on the further development of the Canadian money market and its appeal to the international investor.Originality/valueThe paper demonstrates the suitability of the BAX contract as a tool in managing Canadian short‐term interest rate exposure for both domestic and international investors.</jats:sec