Non-financial information as a driver of transformation. Evidence from Italy

The EU Directive on disclosure of non-financial and diversity information (2014/95/EU), transposed in Italy by the Legislative Decree no. 254 of December 30, 2016, in force since January 25, 2017, is contributing to a cultural transformation of corporate governance models. By triggering a growing consideration of all stakeholders’ needs, this transformation may influence the processes at the board level, the behavior of board members as well as companies’ culture, strategy and business models. The 2017 CONSOB Report on Corporate Governance of Italian listed companies provided a first review of governance behavior of Ftse Mib companies on the verge of the 2014/95/EU Directive, focusing on the inclusion of non-financial matters in reporting and at the board level. This Report extends the previous analysis by including all Italian firms with ordinary shares listed on the MTA at the end of 2017 and delving deeper along three dimensions. First, it reviews how Italian listed firms have implemented the Directive 2014/95/UE by referring to the publication of a nonfinancial statement (NFS), whether they have realized the materiality analysis and whether they have applied a process including both an internal and an external assessment. Second, the Report explores whether companies consider non-financial issues relevant also at the board level, by referring to the guidelines issued by companies prior to the 2018 board appointment, the board evaluation process and the board induction programs organised in 2018. Finally, the findings of a survey involving the members of the Italian community of non-executive and independent directors (Nedcommunity) are presented. The documental analysis aimed to ascertain whether non-financial topics are deemed important also for the selection of the board members’, while the survey focused on the independent directors’ engagement in the board activity concerning the governance of non-financial issues and the compliance with the Decree 254/2016.1 The goal of the analysis is to detect whether, beyond compliance, companies reporting on environmental, social and governance (ESG) are also undergoing a strategy and business model transformation. Integration of ESG factors into many different areas of company’s organization and processes may in fact trigger a cultural transformation of governance models: from the company’s purpose to the activation of cross-functional and forward thinking behaviors and projects; the progressive consideration of ESG into monitoring and reporting tools; the engagement with internal and external stakeholders and their contribution in defining the relevance of non-financial issues in the materiality analysis; the inclusion in the risk governance of non-financial risk management. The chart below summarizes and classifies the findings of the analysis by identifying three progressive steps marking the transformation process: awareness, capabilities, engagement.2 The evidence gathered in this Report shows that while a few large companies are now starting to integrate ESG into governance, the majority of firms (predominantly small ones) are still focused on compliance

The liquidity of dual-listed corporate bonds: empirical evidence from Italian markets

We compute some indicators (zero-trade, turnover ratio, Amihud price impact, and Roll bid-ask spread) to examine the liquidity conditions of corporate bonds traded on the main Italian retail bond markets from January 2010 to June 2013. In order to compare market liquidity for identical securities, our analysis focuses on fragmented bonds, i.e. bonds traded concurrently on two different venues: either DomesticMOT and EuroTLX, or ExtraMOT and EuroTLX. As for bonds traded on DomesticMOT and EuroTLX, the Amihud and the Roll statistics suggest EuroTLX being more liquid. Moreover, irrespective of the trading venue, on average bank bonds are less liquid than bonds issued by non-financial companies, especially from 2011 due to the impact of the sovereign debt crisis. With regard to bonds traded across ExtraMOT and EuroTLX, the latter is characterized by better liquidity conditions, with bank bonds being more liquid than non-financial ones. Furthermore, we find evidence of better liquidity figures for Italian bonds (nationality), structured bonds (complexity), and securities with greater minimum trading size (MTS). We also find that bonds’ features (issuers’ nationality and industry; bonds’ residual maturity, complexity, rating, etc…) affect liquidity differently depending upon the trading venue, thus supporting the view that market microstructure may play a relevant role. Finally, we investigate the effect of fragmentation by comparing the liquidity of dual-listed bank bonds fragmented across DomesticMOT and EuroTLX with otherwise similar bank bonds traded exclusively on DomesticMOT. Italian fragmented bank bonds turn out to be slightly more liquid than similar Italian bonds traded exclusively on DomesticMOT; whereas, the opposite holds for foreign bank bonds. However, overall there is not a clear-cut evidence on the effect of fragmentation on bond liquidity, probably because it is intertwined with bonds’ attributes, such as the issue size (in our sample, higher for the Italian bank bonds)

The liquidity of dual-listed corporate bonds: empirical evidence from Italian markets

We compute some indicators (zero-trade, turnover ratio, Amihud price impact, and Roll bid-ask spread) to examine the liquidity conditions of corporate bonds traded on the main Italian retail bond markets from January 2010 to June 2013. In order to compare market liquidity for identical securities, our analysis focuses on fragmented bonds, i.e. bonds traded concurrently on two different venues: either DomesticMOT and EuroTLX, or ExtraMOT and EuroTLX. As for bonds traded on DomesticMOT and EuroTLX, the Amihud and the Roll statistics suggest EuroTLX being more liquid. Moreover, irrespective of the trading venue, on average bank bonds are less liquid than bonds issued by non-financial companies, especially from 2011 due to the impact of the sovereign debt crisis. With regard to bonds traded across ExtraMOT and EuroTLX, the latter is characterized by better liquidity conditions, with bank bonds being more liquid than non-financial ones. Furthermore, we find evidence of better liquidity figures for Italian bonds (nationality), structured bonds (complexity), and securities with greater minimum trading size (MTS). We also find that bonds’ features (issuers’ nationality and industry; bonds’ residual maturity, complexity, rating, etc…) affect liquidity differently depending upon the trading venue, thus supporting the view that market microstructure may play a relevant role. Finally, we investigate the effect of fragmentation by comparing the liquidity of dual-listed bank bonds fragmented across DomesticMOT and EuroTLX with otherwise similar bank bonds traded exclusively on DomesticMOT. Italian fragmented bank bonds turn out to be slightly more liquid than similar Italian bonds traded exclusively on DomesticMOT; whereas, the opposite holds for foreign bank bonds. However, overall there is not a clear-cut evidence on the effect of fragmentation on bond liquidity, probably because it is intertwined with bonds’ attributes, such as the issue size (in our sample, higher for the Italian bank bonds)

The Effectiveness of Insider Trading Regulation in Italy. Evidence from Stock-Price Run-Ups Around Announcements of Corporate Control Transactions

insider trading regulation and enforcement, price run-up,

Boardroom gender diversity and performance of listed companies in Italy

The proportion of women in boardroom has traditionally been low around the world. Over the last decades, several jurisdictions have adopted legislative actions in order to trigger a tangible progress in female representation, also moving from the assumption that gender balanced boards result in improved corporate governance and performance. The investigation of the relationship between female boardroom representation and firm value is therefore key on policy grounds. The empirical evidence gathered so far is however inconclusive, given that potential reverse causality may bias results. In Italy, the Law 120/2011 envisaged mandatory quotas for the three board appointments subsequent August 2012, by setting out a minimum objective of one-third of the corporate board seats for members of the under-represented gender, lowered to one-fifth for the first term. The Italian law has introduced an exogenous shock in board composition, which may enable to overcome the endogeneity problem potentially impairing the analysis of boardroom diversity. This paper contributes to the literature by analyzing both the effectiveness of the Law in terms of its impact on boardroom gender diversity and on other board attributes, and by analyzing the impact of gender quotas on the profitability of listed Italian firms over the period 2008-2016. The analysis confirms a positive impact of the reform: we estimate an instant reform effect on the percentage of female directors of 17 percentage points and a follow-up effect of 11percentage points. The entry of new women pursuant to the law has also contributed to affect other board characteristics, lowering the average age, increasing the diversity in terms of age and professional background, increasing the level of education and the percentage of female interlockers. As for the impact on firms performance, results are not significant when static models are used. Differently, when a dynamic model is considered, female representation is estimated to yield a positive effect on different measures of performance when it exceeds a certain threshold, ranging between about 17% and 20% of the board members, roughly equivalent to at least two seats held by women, given that the average board size over the sample period is around ten members. This evidence supports the idea underpinning the critical mass theory, i.e., the hypothesis that women may influence board decisions and consequently firm performance when a minimum weight is achieved

Financial Disclosure, Risk Perception and Investment Choices: Evidence from a Consumer Testing Exercise

This paper investigates the subjective understanding and perception of financial information and their impact on investment decisions. A consumer testing approach is applied in order to explore: i) how different representation formats (or Templates) are appraised in terms of complexity, usefulness and information content, ii) how different Templates influence risk perception, iii) how different Templates affect willingness to invest. A sample of 254 Italian investors were submitted different Templates, each delivering in different modes the same information on risk, return and costs of four financial instruments (two structured bonds -- one outstanding and the other newly issued -- negotiated on the Italian retail bond market and two Italian listed stocks). Risk is alternatively disclosed through four approaches. The first relies on a synthetic risk indicator, aggregating information on market, liquidity and credit risks. The second discloses unbundled quantitative measures of the market risk (volatility and value at risk), the liquidity risk (turn-over ratio) and the credit risk (Moody’s official rating and expected default probability). Both the synthetic and unbundled formats compare the risk/return characteristics of the product with the risk/return attributes of a benchmark portfolio. The third mode is based on what-if scenarios. The fourth resorts to probabilistic modelling of expected returns. Costs are disclosed according to three options. The first shows the impact of costs on the internal rate of return. The second highlights the impact of costs on principal and interest. The third unbundles the product fair value into its bond and derivative components, with specific indication about costs. First, investors were asked to rate the complexity and the usefulness of the Templates and to assess the riskiness of the presented products. In order to control for familiarity bias, in the first stage of the test neither the issuer’s name nor the type of the assets were disclosed. Perceived complexity turns out to rise moving from the synthetic representation to the unbundled one and reaches its highest for the performance scenarios (both what-if and probabilistic). As for usefulness, both what-if and probabilistic modelling are perceived to be less useful than the synthetic and unbundled representations. Perceived complexity and perceived usefulness of financial information are generally inversely related: in other words, the higher the complexity of the information, the lower the perceived usefulness. Second, in order to assess the relation between information disclosure and risk perception investors were asked to rank products by their riskiness. In general, risk perception results to be positively affected by perceived complexity of the information disclosure. The percentage of respondents correctly ranking the risk of products is higher when unbundled formats are used, whereas performance scenario representations are associated with a higher percentage of wrong answers in ranking products’ riskiness. In details, risk tends to be more frequently over-estimated when participants inspect the what-if scenario representation and to be more frequently under-estimated when probabilistic modelling is taken into account. Finally, respondents were asked how much they would invest in each product, given an initial endowment, a time horizon and an investment objective. This allowed observing propensity towards investment driven exclusively by the representation of the financial information. As expected, perceived complexity results to be the main driver of the willingness to invest, since it always contributes to reduce propensity to invest. To this respect, perceived complexity seems to trigger a standard adverse selection problem: it is as if difficulty of understanding cast individuals into uncertainty, leading them to abstain from entering into the market. Financial knowledge, personal traits and investment habits do play a role in the perception of complexity and risk as well as in the attitude towards investment, although with a certain degree of heterogeneity across different representation modes. Higher levels of financial knowledge are generally negatively associated with perceived complexity and with indecision individuals may experience in the assessment of products’ risk. However, being less hesitant is generally associated with the wrong risk ranking. Another interesting consideration is that, in line with the insights of the behavioural literature, in our sample high financial ‘literate’ individuals are not necessarily free of inclination towards behavioural biases. This evidence, coupled with a positive correlation between risk propensity (as measured through the Grable & Lytton test) and the inclination towards behavioural biases, would point to a latent variable, i.e. the overconfidence fed by a good level of financial knowledge, driving the positive relation between high knowledge and inclination towards behavioural biases. This point claims for financial education initiatives attuned also as debiasing programs, in order to be an effective investor protection tool. Finally, making frequently investment decisions, delegating investment choices to an expert, trusting financial advisors are all associated with an easier understanding of financial information and a higher propensity to invest. This evidence indirectly confirms that financial experts and advisors may actually make the difference, by playing an educational role and, by this way, changing individuals’ attitude towards financial choices. Overall, the present paper shows that risk perception is context-dependent and mainly determined by the way financial information is disclosed. It adds to the existing literature by providing new evidence on the impact of framing of different representation modes, partially overlapping with the formats mandated by regulators and super-visors and/or used by the industry. Relying on the actual appraisal elicited from a sample of Italian investors, the study provides insights on how people actually read and understand financial information, which may turn useful in the design of financial disclosure and investor education programmes. For instance, it highlights that simplifying financial disclosure is not sufficient to ensure correct risk perception and unbiased investment choices. Moreover, evidence about investors’ heterogeneity and behavioural biases affecting risk perception supports the idea that the ‘optimal’ disclosure may not exist and the ‘one-size-fits-all’ approach cannot be effective in ensuring a suitable level of investors protection. This paper is in line with the approach adopted by some regulators increasingly engaged in the definition of evidence-based rules and may offer useful insights for the design of effective investor education programmes

How financial information disclosure affects risk perception. Evidence from Italian investors'\u80\u99 behaviour

This paper investigates how different representations of financial information may be appraised in terms of complexity and usefulness, and how financial disclosure influences individuals’ risk perception. By using a consumer testing analytical approach, we run a survey on a sample of Italian investors: 254 bank customers were submitted 4 different templates, each combining a different typology of data (historical and prospective) and framing (words, numbers and charts) to indicate the same level of risk and return of four real-life financial instruments. Representation formats partially overlap with those mandated by regulators and used within the financial industry. Results show that the perceived riskiness of financial products is affected by the way information is disclosed. Perceived complexity of the financial information disclosure intensifies perception of riskiness of the product solicited. Gender, age, personal traits, behavioural biases and financial knowledge, do also play a role. Overall, given investors’ heterogeneity and behavioural biases, neither simplifying disclosure nor a ‘one-sizefits- all’ approach may be sufficient to ensure correct risk perception and to prevent unbiased investment choices

Who intends to become financially literate? Insights from the Theory of Planned Behaviour

Despite the importance that policy-makers acknowledge to financial education, little is known about the demand for financial literacy (especially among the least literate individuals). We here build on the social-psychological framework of the Theory of Planned Behaviour (TPB) to study the intention to learn more about savings and investments as a function of attitudes, subjective norms, and perceived behavioural control, also controlling for individual background factors, including psychological traits. We develop a novel TPB-based module for the CONSOB 2018 Survey on financial investments by Italian households, administered to 1,601 individuals. The analyses conducted also through structural equation models show that attitudes, subjective norms and perceived behavioural control are significant determinants of intentions to learn more about savings and investments, as predicted by TPB. Differences in attitudes, subjective norms, and perceived behavioural control contribute to financial literacy gaps for women and less literate individuals in general. In analogy to other fields, interventions in the area of financial literacy should also target the determinants of individuals’ intentions, especially for adults that are generally involved in financial education programs on a voluntary basis