The Anna Karenina Principle applied to sustainable finance characteristics of a sustainable firm : an exploratory study

Mestrado Bolonha em FinançasFactors that have an impact on the sustainability of a firm are oftentimes intertwined. This is why the Anna Karenina principle provides a different angle and a more holistic approach to the existing research in this field. Derived from the very first sentence of Tolstoy’s novel “All happy families are alike; each unhappy family is unhappy in its own way”, it translates to the overarching question of this paper: Is there a set of financially measurable prerequisites that are key to a sustainable firm and are all sustainable firms similar. Instead of analyzing the effects of isolated factors, a set of prerequisites are identified and analyzed individually and regarding their causal relations with one another. The identified prerequisites are lower tail risk, lower β-factor, higher dividend yield, higher RoE / RoA, and lower WCR. The first part of this question is approached by comparing the mean average of firms with high ESG ratings to firms with low ESG ratings for each prerequisite. Potential interconnections of characteristics are identified under the fsQCA. This methodology also gives way to further classify characteristics as necessary, sufficient and core or peripheral conditions. Under the comparison of the mean average, the results for the analysis of the tail risk are inconclusive. For all the other characteristics, the initial assumptions could be confirmed. Low WCR was identified as a necessary condition. Yet, there are no causal connections between conditions. The second part of the question is tackled by employing a dispersion analysis. The results were mixed. For the β-factor, RoA, and WCR the assumption that sustainable firms are more alike e.g. display lower dispersion could be confirmed. Concerning RoE, there is some evidence for the AKP, when adjusted for the effects of outliers. However, for dividend yields this assumption could not be verified, yet explained by volatility asymmetry. While dividends can, potentially, rise against infinity, they are floored at zero. However, the key finding of this paper, was that sustainable firms are generally more alike and distinct between high and low ESG ratings for certain factors, as described above. Yet, what is striking and remains to be explored in more detail is the key importance of the operational efficiency of a sustainable firm.info:eu-repo/semantics/publishedVersio

The Accruals Based Trading Strategy on the Swedish Stock Market: Does the benchmark when classifying extreme accrual firms have an impact on the trading strategy’s effectiveness?

Purpose: To investigate if it is possible to earn abnormal returns from the accruals based trading strategy in Sweden. The aim is also to examine if the benchmark used when classifying firms into accruals portfolios has an impact on the abnormal returns from the trading strategy. Methodology: The study investigates the abnormal returns from the trading strategy that aims to exploit the accruals anomaly. Firms are divided into portfolios and using previously established methods of risk-adjustment, the abnormal returns from the trading strategy are estimated and tested for each of the 11 portfolio years. Theoretical perspectives: The theory in the paper is based on previous research on the accruals anomaly. The theories have been applied when investigating other markets to describe and analyse the accruals anomaly. Empirical foundation: The study examines firms listed on NASDAQ OMX Stockholm main market. Portfolios are formed each year between 2002 and 2012. The majority of the data has been collected using Thomson Reuters Datastream. Conclusions: The results show that while the benchmarks classify firms differently, the difference does not spill over to the abnormal returns earned by the investor. Overall, the results for all risk-adjustment methods show that investor may not earn positive abnormal returns from the trading strategy in Sweden

Valuation of Biotechnological Research: A Real Options Application for a Mexican Company

This paper deals with the valuation of a project of Mexican Bioclon Institute, a firm producing antivenoms; this valuation comprises a R&D research portfolio of three antivenoms targeted to the US market. A compound option methodology is used. Bioclon Institute is a world leader in the production, research and development of fabotherapics; these products are manufactured using its own technology, recognized internationally; it is a large company of antivenoms globally and it is the only Mexican biotech company authorized by the US to conduct clinical trials. Real Options valuation constitutes an important analytical tool of limited use by managers and entrepreneurs in developing countries because they are not fully aware about this methodology and its benefits for strategic sequential project analysis.

Cash flow accounting and the cost of debt

The aim of this study is to examine why firms may manipulate not just their earnings but also their cash flows, and to investigate the effects of this behaviour in debt markets with respect to the cost of debt. This research addresses current concerns about accounting rules (both GAAP and IFRS) which allow companies discretion in the presentation of their operating cash flow in financial statements. Using a sample of 8,684 UK and 23,935 USA firm-years from 1998 to 2010, the reported operating cash flow is decomposed into two components, unmanaged and managed, in order to examine the association between the estimated discretionary part of operating cash flow and the cost of debt. The results show that the cost of debt has a significantly positive association with the managed component of operating cash flows. By using path analysis, it is further shown that the effect of cash flow management in increasing the cost of debt is largely through its impact on accounting quality. Also it is found that the market positively prices abnormal operating cash flow information when firms experience financial problems, especially when companies are faced with low cash flows

Expanding Credit Access: Using Randomized Supply Decisions to Estimate the Impacts

Expanding credit access is a key ingredient of development strategies worldwide. Microfinance practitioners, policymakers, and donors have ambitious goals for expanding access, and seek efficient methods for implementing and evaluating expansion. There is less consensus on the role of consumer credit in expansion initiatives. Some microfinance institutions are moving beyond entrepreneurial credit and offering consumer loans. But many practitioners and policymakers are skeptical about “unproductive” lending. These concerns are fueled by academic work highlighting behavioral biases that may induce consumers to over borrow. We estimate the impacts of a consumer credit supply expansion using a field experiment and follow-up data collection. A South African lender relaxed its risk assessment criteria by encouraging its loan officers to approve randomly selected marginal rejected applications. We estimate the resulting impacts using new survey data on applicant households and administrative data on loan repayment, as well as public credit reports one and two years later. We find that the marginal loans produced significant benefits for borrowers across a wide range economic and well-being outcomes. We also find some evidence that the marginal loans were profitable for the Lender. The results suggest that consumer credit expansions can be welfare-improving.Microfinance, credit impact, consumer credit

Fiscal policy in developing countries : a framework and some questions

This paper surveys fiscal policy in developing countries from the point of view of long-run growth. The first section reviews existing methodologies to estimate the effects of fiscal policy shocks and of systematic fiscal policy, with time series or with cross-sectional methods, and their applicability to developing countries. The second section surveys optimal fiscal policy in developing countries, by considering the role of the intertemporal government budget, and sustainability and solvency. It also reviews the fuzzy debate on"fiscal space"and"macroeconomic space"- and the usefulness (or lack thereof) of these terms for policy analysis. The third section asks what theory tells us about the optimal cyclical behavior of fiscal policy in developing countries. It shows that it very much depends on the assumptions about the interactions between credit market imperfections at the individual, firms, or government level, and on the supply of external funds to the country. Different sets of assumptions lead to different implications about optimal cyclical behavior. The available evidence on the cyclical behavior of fiscal policy, and possible reasons for the observed prevalence of a procyclical behavior in developing countries, is also reviewed. If one agrees that fiscal policy is indeed less countercyclical than we think is optimal, the issue is how to correct the problem. One obvious question is why government do not self-insure, i.e. why they do not accumulate assets in upturns and decumulate them in downturns. This leads to the analysis of fiscal rules and stabilization funds, in the fourth section. The last section concludes with what the author considers important research and policy questions in each part.Economic Stabilization,Debt Markets,Public Sector Expenditure Analysis&Management,Economic Theory&Research,

CREDIT, VENTURE CAPITAL AND REGIONAL ECONOMIC GROWTH

In this paper we investigate the relationship between finance and regional economic growth. The dataset consists of a panel of 53 regions belonging to three countries, Germany, Italy and Spain, for the period 1995-2008. To avoid a problem of endogeneity, we estimate a dynamic panel using the generalised method of moments (GMM). The results underline the important role played by bank lending in regional economic growth. The distinction between mutual and commercial credit suggests that both types of bank are important for regional growth but the role of mutual banks is greater in economically deprived areas [EDAs]. Similar results are obtained for the venture capital variableregional economic growth, relationship lending, venture capital, economically deprived areas, dynamic panel techniques

How predictable : patterns of human economic behavior in the wild

Thesis (S.M.)--Massachusetts Institute of Technology, School of Architecture and Planning, Program in Media Arts and Sciences, 2010.Cataloged from PDF version of thesis.Includes bibliographical references (p. 40-41).Shopping is driven by needs (to eat, to socialize, to work), but it is also a driver of where we go. I examine the transaction records of 80 million customers and find that while our economic choices predict mobility patterns overall, at the small scale we transact unpredictably. In particular, we bundle together multiple store visits, and interleave the order in which we frequent those stores. Individual predictability also varies with income level. I end with a description of how merchant composition emerges in US cities, as seen through the lens of credit card swipes.by Katherine (Coco) Krumme.S.M

Credit Elasticities in Less-Developed Economies: Implications for Microfinance

Policymakers often prescribe that microfinance institutions increase interest rates to eliminate their reliance on subsidies. This strategy makes sense if the poor are rate insensitive: then microlenders increase profitability (or achieve sustainability) without reducing the poor\u27s access to credit. We test the assumption of price inelastic demand using randomized trials conducted by a consumer lender in South Africa. The demand curves are downward sloping, and steeper for price increases relative to the lender\u27s standard rates. We also find that loan size is far more responsive to changes in loan maturity than to changes in interest rates, which is consistent with binding liquidity constraints

Predicting failures of large U.S. commercial banks

Since 2007 several banks have fallen into bankruptcy in the U.S. What is historically notable in this situation is the amount of assets lost in bankruptcies that are already measured in hundreds of billions of dollars. Since financial institutions magnitude to the current economic system is crucial, bank failures have a dramatic impact also on real economy. Therefore, feasible bank failure prediction models can also diminish the real economy problems. The purpose of this thesis is to study how accurately recent U.S. commercial bank failures can be predicted with logistic regression model utilizing financial statement variables. With the overall predictability of the model, also the statistical significance of the independent variables is studied. In addition, it is tested how the prediction accuracy reduces as the timeframe from the bankruptcy prolongs from one quarter to three years. The evolution and history of bankruptcy prediction models and banking crises is also studied in order to develop the base for the bank failure model. It is also noted that several bankruptcy prediction models contain financial statement variables. In addition, by studying the history of the banking crises it is noticed that traditional banking factors such as liquidity, credit risk, and profitability have a substantial impact on failures of individual financial institutions. It is also argued that banks’ exposure to the subprime related securities might deteriorate the solvency of the financial institutions. The data of the analysis in gathered from the FDIC database. It contains bank-specific variables from 2004 to 2009 including 124 commercial banks with total assets worth more than 500 million dollars. In the empirical part of the thesis it is noted that 25 independent variables are statistically significant for the bank failure prediction. On the other hand, several of these explanatory variables correlate significantly with each other, erasing the possibility to include all the statistically significant variables into the same model. Therefore, 72 potential models are constructed, which are then studied with the help of logistic regression. After short and long-term analysis it can be noticed that the most accurate failure prediction is provided by the model having nonaccrual rate, loan diversification, return on equity, capital growth, tax exposure, CMO ratio, uninsured deposits, risk free securities, dividend rate, loan growth, assets variation, and liquid assets as the explanatory variables. The accuracy of the model is measured by correctly classified (CC) percentage figure. The model in question can predict 95.16% of failures correctly one quarter prior the bankruptcies. CC figure is 82.26% one year, 72.58% two years, and 71.77% three years prior the bank failures. The analysis recovers, however, that only two of the explanatory variables, nonaccrual rate and risk free loans, are both statistically significant in the long-term and consistent with time. Although the model with only two explanatory variables tends to lose some of its predicting accuracy, it permits a precise analysis of the independent coefficients. It can be confirmed that only one percentage point increase in nonaccrual rate at least doubles the bankruptcy probability. On the other hand, the more the bank ties its investments to risk free securities the greater the probability that the bank survives. Empirical analysis proves also that the logit model is slightly more suitable for bank failure prediction than the corresponding probit model