An Agency Perspective of Auditor Change in Small Firms

This paper uses an agency theory perspective to develop an understanding of the determinants of auditor change for small firms in the United Kingdom. The paper, therefore, extends the existing literature (see Williams [22] and Francis and Wilson [9]) from a consideration of auditor change for large firms in the United States to small firms in the U.K. The results indicate that small U.K. firms have a greater propensity to change their auditors subsequent to the receipt of a first-time audit qualification, to a change in the composition of their board of directors, to a change in their use of external loan capital, and when their existing loans are not secured. The results indicate some support for the agency arguments examined, though there is also evidence of auditor ‘accommodation’ being sought

The Bank Financing of Small Unlisted Firms in the UK: An Analysis of Recent Conflicts

This paper examines the characteristics of UK small firm bank finance and the causes of the frequently strained relationship between small firms and banks in the UK. Debt, credit rationing, and call option problems under the UK system are examined. The bank’s solutions including the potentially harmful “secured overdraft system” are then considered. It is argued that the majority of solutions tried by the banking system led to a heightened conflict of interest between small firms and banks during the recent recession due to the banks’ loan restructuring to avoid unnecessary risk

Market Development, Information Diffusion and the Global Anomaly Puzzle

Previous literature finds anomalies are at least as prevalent in developed markets as in emerging markets; namely, the global anomaly puzzle. We show that while market development and information diffusion are linearly related, information diffusion has a nonlinear impact on anomalies. This is consistent with theoretical developments concerning the process of information diffusion. In extremely low efficiency regimes, without newswatchers sowing the seeds of price discovery and ensuring the long-run convergence of price to fundamentals, initial mispricing and subsequent correction will not occur. The concentration of emerging countries in low efficiency regimes provides an explanation to the puzzle

Market Development, Information Diffusion and the Global Anomaly Puzzle

Previous literature finds anomalies are at least as prevalent in developed markets as in emerging markets; namely, the global anomaly puzzle. We show that while market development and information diffusion are linearly related, information diffusion has a nonlinear impact on anomalies. This is consistent with theoretical developments concerning the process of information diffusion. In extremely low efficiency regimes, without newswatchers sowing the seeds of price discovery and ensuring the long-run convergence of price to fundamentals, initial mispricing and subsequent correction will not occur. The concentration of emerging countries in low efficiency regimes provides an explanation to the puzzle

Does Debt Concentration Depend on the Risk-Taking Incentives in CEO Compensation?

[EN] Coordination problems amongst creditors are reduced when a firm’s debt structure is concentrated in fewer debt types. Using a sample of US non-financial firms, we show that an increase in risktaking incentives in CEO pay is associated with a greater debt concentration by debt type. This result holds in various settings that account for endogeneity and is primarily driven by pay incentives embedded in vested options that are expected to favor business choices with more immediate negative effects on debtholders’ wealth. Further, our findings are stronger for firms with a higher default risk where coordinated efforts amongst creditors become more pressing. A final test documents that a more concentrated debt structure reduces the negative influence of CEO risk-taking incentives on debtholder wealth thus highlighting the advantages of lower coordination problems amongst creditors

A cross-country analysis of herd behavior in Europe

This paper examines country specific herding behavior in European liquid constituent indices for the period of 2001-2012. While we report insignificant results for the whole period, we document significant herding behavior during crises and asymmetric market conditions. Particularly, herding effect is pronounced in most continental countries during the global financial crisis and Nordic countries during the Eurozone crisis. However, PIIGS countries are the victims in both crises. Furthermore, we find evidence that the cross sectional dispersions of returns can be partly explained by the cross sectional dispersions of the other markets, with Germany having the greatest influence on the regional cross-country herding effect. Apprehensions heighten among the regulators, policy makers, and investors in the European markets for the herding behavior during volatile market conditions.

Reaching for the Stars: An Experimental Study of the Consumption Value of Social Approval

We present a theoretical model of a linear public good game in which heterogeneous players express social approval after observing contributions. The model explains how social approval is expressed and predicts positive contributions if subjects have a preference for social approval. Using a controlled laboratory experiment we test our model. In the experiment, subjects conduct computerized tasks that require substantial effort resulting in endowments from which contributions can be made to a linear public good. After observing others' contributions subjects express social approval. Our main hypothesis is that subjects have a preference for social approval so that the expression of social approval will increase contributions, even if reputation building is impossible. We vary the information available to subjects and investigate how this affects the expression of social approval and individual contributions. Our main finding is that the expression of social approval significantly increases contributions. However, the increase in contributions is smaller if additional information is provided, suggesting that social approval is more effective if subjects receive a noisy signal about others' contributions

The Shareholder Wealth Effects of Insurance Securitization: Preliminary Evidence from the Catastrophe Bond Market

Insurance securitization has long been hailed as an important tool to increase the underwriting capacity for companies exposed to catastrophe-related risks. However, global volumes of insurance securitization have remained surprisingly low to date which raises questions over its benefits. In this paper, we examine changes in the market value of insurance and reinsurance firms which announce their engagement in insurance securitization by issuing catastrophe (Cat) bonds. Consistent with the hitherto underwhelming contribution of Cat bonds to global catastrophe coverage, we do not find evidence that Cat bonds lead to strong wealth gains for shareholders in the issuing firm. More importantly, we report large variations in the distribution of wealth effects in response to the issue announcement. We show that the wealth effects for shareholders in firms which issue Cat bonds appear to be driven by explanations according to which Cat bonds offer cost savings relative to other forms of catastrophe risk management (and less by the potential of Cat bonds to hedge catastrophe risk). Thus, abnormal returns are particularly large for issues by firms which face low levels of loss uncertainty (which reduces the information acquisition costs in financial markets) as well as for issues during periods when prices for catastrophe coverage (including Cat bonds) are low