Public Signals, Default Risk, and Voluntary Disclosure

In this paper, we address the question whether the impact of default risk on equity returns depends on the financial system firms operate in. Using an implementation of Merton's option-pricing model for the value of equity to estimate firms' default risk, we construct a factor that measures the excess return of firms with low default risk over firms with high default risk. We then compare results from asset pricing tests for the German and the U.S. stock markets. Since Germany is the prime example of a bank-based financial system, where debt is supposedly a major instrument of corporate governance, we expect that a systematic default risk effect on equity returns should be more pronounced for German rather than U.S. firms. Our evidence suggests that a higher firm default risk systematically leads to lower returns in both capital markets. This contradicts some previous results for the U.S. by Vassalou/Xing (2004), but we show that their default risk factor looses its explanatory power if one includes a default risk factor measured as a factor mimicking portfolio. It further turns out that the composition of corporate debt affects equity returns in Germany. Firms' default risk sensitivities are attenuated the more a firm depends on bank debt financing.

Default Risk and Equity Returns: A Comparison of the Bank-Based German and the U.S. Financial System

We study a dynamic moral hazard setting where the manager has private evidence that predicts the firm’s cash flows. Bad-news disclosure is rewarded by a lower borrowing cost relative to the no-evidence case, whereas no disclosure leads to higher borrowing costs. For a given capital structure, disclosure reduces the firm’s default risk by lowering its pay-for-performance sensitivity. However, for a set of low-profitability firms, the anticipation of future disclosure of information by managers lowers both firm value and managerial rents at the financing stage because of a reduction in the firm’s initial liquidity. The model can reconcile the empirical evidence on the effects of providing earnings guidance, especially for loss firms. This paper was accepted by Bruno Biais, finance. Funding: S. Fu is supported by the Shanghai Pujiang Program and the Program for Professor of Special Appointment (Eastern Scholar) at Shanghai Institutions of Higher Learning [Grant 0900000182]. Supplemental Material: The data files are available at https://doi.org/10.1287/mnsc.2023.4860 .

The study examines whether corporate carbon risk exposure is associated with financial reporting quality and whether voluntary carbon disclosure mediates the relationship. We analyze data drawn from firms traded on the Johannesburg Stock Exchange (JSE), for the period 2011 to 2015. We document robust evidence that firms with higher carbon risk exposure tend to provide financial statements of poorer quality (i.e., direct effect) and this association is partially mediated through voluntary carbon disclosure (i.e., indirect effect). The overall negative association between corporate carbon risk exposure and the firm's financial reporting quality is partly explained by the quality of voluntary carbon disclosure.

Prior research uses the basic one-period European call-option pricing model to compute default measures for individual firms and concludes that both the size and book-to-market effects are related to default risk. For example, small firms earn higher return than big firms only if they have higher default risk and value stocks earn higher returns than growth stocks if their default risk is high. In this paper we use a more advanced compound option pricing model for the computation of default risk and provide a more exhaustive test of stock returns using univariate and double-sorted portfolios. The results show that long/short hedge portfolios based on Geske measures of default risk produce significantly larger return differentials than Merton’s measure of default risk. The paper provides new evidence that mediates between the rational and behavioral explanations of value premium.

Value Relevance of Voluntary Risk Disclosure Levels: Evidence from Saudi Banks

Corporate scandals, frauds, and other instances of violations of disclosure laws and standards are common in Nigeria, even though the country has implemented a number of policies to guarantee that businesses there disclose accounting information voluntarily. In light of this, this study examined the voluntary disclosure of Nigerian oil and gas companies as well as the traits of chief executive officers. Multinomial logistic regression and intercorrelation coefficient matrix analysis were used to achieve this goal. According to the findings, chief executive officer traits have a big impact on Nigerian oil and gas companies' voluntary accounting information disclosure.On this note, the paper recommended that there is need for an enhanced chief executive officers‟ characteristics diffusion towards a trend of better voluntary accounting information disclosure in oil and gas firms in Nigeria.

In the innovation and development of modern financial technology, the promotion scope of personal lending platform is more and more wide. Although it expands the construction scope of Internet financial platform, it also causes more security risks. In the typical P2P lending platform, for example, the system arrangement on the base of Internet financial platform user transaction data, through a comprehensive analysis of the transmission of personal loans overdue default behavior, and according to the specific characteristics of building model algorithm, not only can accurately identify high-risk users financial platform, also can be validated with the actual default data analysis, It provides technical basis for the effective operation of modern Internet financial platform. Therefore, on the basis of understanding the current development status of Internet financial platforms, this paper constructs an identification model based on users with high default risk, and proposes an identification model with the transmission of certain and probabilistic default risk as the core. Finally, by comparing the two models, it is found that in the identification of 5% and 10% high-risk groups, the algorithm has strong relevance and recall rate, which can be reasonably applied in the future Internet platform.

ABSTRACTThis is the first study that uses Merton's (1974) option pricing model to compute default measures for individual firms and assess the effect of default risk on equity returns. The size effect is a default effect, and this is also largely true for the book‐to‐market (BM) effect. Both exist only in segments of the market with high default risk. Default risk is systematic risk. The Fama–French (FF) factors SMB and HML contain some default‐related information, but this is not the main reason that the FF model can explain the cross section of equity returns.

Small and medium-sized textile enterprises generally experience financial difficulties, with a high default risk because of the textile industry’s characteristics of low concentration, long industrial chains, and large seasonal fluctuations. Using a two-echelon supply chain model of the textile industry comprising a core retailer and capital-constrained supplier, this study investigates disclosed and undisclosed factoring while considering the default risk of both the supplier and retailer under two guarantee mechanisms: no guarantee and a third-party partial credit guarantee. Utilizing a Stackelberg game model, this study finds that both the default risk and financial institutions’ loan-to-value ratio for accounts receivable significantly affect optimal financing decisions and financing efficiency. First, excessively pursuing higher loan-to-value ratios lowers financing efficiency. In addition, a partial credit guarantee from a third party can effectively reduce the financing interest rate but cannot improve financing efficiency if the supplier assumes the guarantee fee. Thus, while introducing a guarantee mechanism to control financing risk, financial institutions should consider supply chain participants, rather than the supplier, to assume the guarantee fees. Furthermore, both the supplier and retailer should finance through disclosed factoring regardless of a guarantee. Our findings offer textile industry-specific financing insights regarding the options of guarantee and factoring financing type based on the accounts receivable.

The objective of this study was to analyze the quality of mandatory and voluntary risk disclosure in Indonesia during the period of 2011 and 2012. The risk disclosure quality is defined as the quality of risk information that are disclosed by firms in term of relative quantity (adjusted by type of sub-industry and firm size), depthness (the potential impact of risk disclosed on firm’s future performance), the coverage within every type of risk, and the outlook profile of firm’s risk management. This study used samples of 48 firm-years of infrastructure companies that were listed in Indonesia Stock Exchange. Infrastructure industry was chosen due to the strategic role of this industry to support the acceleration and expansion of Indonesia's economic development. By using a descriptive qualitative method, the result showed that firms were still emphasizing on relative quantity dimension compared to the other three dimensions: coverage, depth, and outlook profile of firm risk management. In addition, the quality of mandatory risk disclosure was better than voluntary risk disclosure either for depth, coverage, or an outlook profile of firm risk management dimension. In other words, financial risk items (mandatory risk disclosure items) have better quality rather than non-financial risk items (voluntary risk disclosure items).

The objective of the research was to investigate and evaluate the impact of organizational culture on voluntary disclosure in firms that are listed on the Iraq Stock Exchange. This was done by analyzing the organizational culture model developed by Cameron and Quinn in 1999, which has four dimensions: Clan, Adhocracy, Market, and Hierarchy. The study utilized content analysis of annual financial reports to assess the disclosure index of a sample of 92 firms across different economic sectors listed on the Iraqi Stock Exchange for the fiscal year 2021. The study employed statistical techniques such as Pearson correlation coefficient, simple linear regression, and multiple regression analysis to investigate the association and influence of the research variables. The findings indicated a noteworthy inverse relationship between the Clan, Market, and Hierarchy dimensions and voluntary disclosure. However, no significant link was seen between the Adhocracy component and voluntary disclosure. Furthermore, the dimensions of Clan, Market, and Hierarchy had a notable impact on voluntary disclosure, however the Adhocracy dimension did not have a significant influence on voluntary disclosure. Moreover, the organizational culture dimensions had a notable impact on the control variables (debt ratio, industry type, firm size) in relation to voluntary disclosure.

A survivor swap refers to an agreement for the future exchange of cash flows based upon a mortality-dependent index. Pricing survivor swaps involves the determination of a fixed proportional premium, π, which results in an initial zero value of the swaps for each party. In order to provide a precise valuation of a mortality derivative, such as a survivor swap, an appropriate model is necessary for the forecasting of the mortality rate. The model proposed for use in this study extends the model provided by Cox et al. (2006) by simultaneously considering mortality jumps and default risk. Using this extended model to price survivor swaps in this study, we mainly find from our simulated results, based upon the data collected, that the survivor swap premium has a positive correlation with both the market price of risk and the frequency of jumps. Furthermore, we find that a stronger jump frequency will enhance the effects of the market price of risk on the premium. On the other hand, the survivor swap premium is also found to have a positive correlation with the market price of risk and the frequency of jumps at any level of default risk. However, when the market price of risk and jump frequency levels are both fixed, a higher (lower) default risk will imply a lower (higher) premium.

Using a transactor/revolver scorecard to make credit and pricing decisions

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