SAFE working paper
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440
Recent academic research exhibits considerable disagreement among ESG ratings from different agency providers. The consequences of this disagreement on the market are still under-explored; thus, we investigate whether this disagreement impacts the cost of equity capital. Using a sample of 23,201 firm-month observations from January 2019 to March 2021, we find that ESG disagreement positively moderates the negative relationship between the average ESG score and cost of equity. By disentangling the aggregate ESG score, we find that the moderating effect of this disagreement does not hold for any pillar. Furthermore, the association between ESG rating disagreement and cost of equity is more pronounced in the presence of high analyst information uncertainty. Overall, our findings highlight that ESG rating disagreement jeopardizes investors' confidence in ESG ratings and weakens the role of these ratings in reducing the cost of equity, pointing to the need to improve convergence across agency providers.
439
This study examines the impact of ESG ratings on fund holdings, stock returns, and firm behavior. First, we show that among five major ESG ratings, only MSCI ESG can explain the holdings of US funds with an ESG mandate. We document that downgrades in the MSCI ESG rating substantially reduce firms' ownership by such funds, while upgrades increase it. However, this response in ownership is slow, unfolding gradually over a period of up to two years. This suggests that fund managers use ESG ratings mainly to comply with ESG mandates rather than treating them as updates to firms' fundamentals. Accordingly, we also find a slow and persistent response in stock returns. For a one-year holding period, downgrades lead to an abnormal return of -2.37%. For upgrades, we find a positive but weaker effect. Yet, the extent to which ESG ratings matter for the real economy seems limited. We find no significant effect of up- or downgrades on firms' subsequent capital expenditure. We find that firms adjust their ESG practices following rating changes, but only in the governance dimension.
438
A fundamental concern about green investing is that it may crowd out political support for public policy addressing negative externalities. We examine this concern in a preregistered experiment shortly before a real referendum on a climate law with a representative sample of the Swiss population (N = 2,051). We find that the opportunity to invest in a climate friendly fund does not reduce individuals’ support for climate regulation, measured as political donations and voting intentions. The results hold for participants who actively choose green investing. We conclude that the effect of green investing on political behavior is limited.
437
We report results from a pre-registered field experiment about the impact of index provider engagement on corporate climate policy. A randomly chosen group of 300 out of 1227 international companies received a letter from an index provider, encouraging the company to commit to setting a science-based climate target to remain included in its climate transition benchmark indices. After one year, we observed a significant effect: 21.0% of treated companies have committed, vs. 15.7% in the control group. This suggests that engagement by financial institutions can affect corporate policies when a feasible request is combined with a credible threat of exit.
436
We analyze firms' carbon reduction strategies worldwide and identify one key channel: large, primarily European firms facing increased investor pressure divest pollutive assets to firms that are less in the limelight. There is no evidence of increased engagement in other emission reduction activities. We estimate that 369 million metric tons (mt) of CO2e are reallocated via divestments in the post-Paris Agreement period, shifting pollutive assets from Europe to the rest of the world. Our results indicate significant global asset reallocation effects and imply that responsible investors who want to truly invest responsibly need to monitor firms’ divestment strategies closely.
435
A bonus on the fine in response to the defendant running a corporate compliance program is superfluous because working leniency programs provide all the incentives necessary to implement efficient compliance. Others opposed to such a bonus argue that unreduced fines are sufficient to incentivize the adoption of effective corporate compliance programs. Proponents, on the other hand, argue that a reduction in fines conditional on running a corporate compliance program incentivizes more investments in compliance. Both arguments are incomplete. It is true that, generally, sanctions alone provide only suboptimal incentives to invest in compliance because some compliance investments (those in detecting infringements, i.e., "policing") can increase the detection probability for cartels that remain. However, leniency programs provide an additional incentive to invest in compliance to find cartels in-house as all cartelists strive for being the first to report. Comparing the two effects shows that under plausible assumptions the latter dominates, rendering a bonus on the fine superfluous.
434
The near-rationality hypothesis holds that even very small costs of optimization may lead people to act suboptimally. We embed this idea in a standard model of consumption-savings decisions: households pursue simple quick-fix consumption policies unless they pay a cost to optimize. We design a novel survey to explore this theory. The survey elicits households’ hypothetical consumption responses to a large number of unanticipated income shocks, allowing us to estimate household-level consumption policies. Consistent with the theory, 68% of households follow one of four simple quick-fix consumption rules that either fully consume or fully save out of small shocks before abruptly switching to similar consumption policies for large shocks. Households’ quick-fixing types account for 49% of the variance in MPCs across households, despite not being predictable by other demographic and economic information. Quantitatively, an incomplete-markets model calibrated to our survey findings generates more than three times as much size-dependence in the aggregate consumption response to government transfer shocks as the nested rational model. This large difference in behavior arises while households experience consumption-equivalent welfare costs of near-rationality of at most $65 per quarter.
430
We examine the impact of increasing competition among the fastest traders by analyzing a new low-latency microwave network connecting exchanges trading the same stocks. Using a difference-in-differences approach comparing German stocks with similar French stocks, we find improved market integration, faster incorporation of stock-specific information, and an increased contribution to price discovery by the smaller exchange. Liquidity worsens for large caps due to increased sniping but improves for mid caps due to fast liquidity provision. Trading volume on the smaller exchange declines across all stocks. We thus uncover nuanced effects of fast trader participation that depend on their prior involvement.
429
We show that exposure to anti-capitalist ideology can exert a lasting influence on attitudes towards capital markets and stock-market participation. Utilizing novel survey, bank, and broker data, we document that, decades after Germany's reunification, East Germans invest significantly less in stocks and hold more negative views on capital markets. Effects vary by personal experience under communism. Results are strongest for individuals remembering life in the German Democratic Republic positively, e. g., because of local Olympic champions or living in a "showcase city". Results reverse for those with negative experiences like religious oppression, environmental pollution, or lack of Western TV entertainment.
428
We examine the effect of personal, two-way communication on the payment behavior of delinquent borrowers. Borrowers who speak with a randomly assigned bank agent are significantly more likely to successfully resolve the delinquency relative to borrowers who do not speak with a bank agent. Call characteristics related to the human touch of the call, such as the likeability of the agent’s voice, significantly affect payment behavior. Borrowers who speak with a bank agent are also significantly less likely to become delinquent again. Our findings highlight the value of a human element in interactions between financial institutions and their customers.