Journal of Business Accounting and Finance Perspectives

This paper examines the role of economic uncertainty in the Eurozone countries by analyzing the credit supply and the evolution of non-performing loans following the 2008 global financial crisis. The discussion centers on how greater economic uncertainty restricts credit supply and increases the number of non-performing loans. Quarterly data for the Eurozone countries are studied for the period 2005 to 2016. To test the aforementioned hypothesis, an index of economic uncertainty for the Eurozone countries is calculated. Panel data analysis is performed using fixed effects estimation. This approach allows for individual heterogeneity, with different intercepts across countries and quarterly time dummies to control for time-specific effects that are common to all countries in the sample. The primary conclusions of the analysis are as follows: (1) When economic uncertainty increases, total gross loans decrease, and the number of non-performing loans increases. (2) When uncertainty increases, loans to deposit-takers, other domestic sectors, and general government decrease, while loans to financial corporations increase as a means of supporting the financial sector. (3) The most vulnerable Eurozone economies play a prominent role in these overall effects. In these economies, the effects of the recent global financial crisis are most pronounced, with uncertainty increasing significantly over the study period. Full article

While the average annual small-cap premia for the US and Canada are substantial over long horizons, there is considerable time variation of this premium within and across these countries. For the US, during expansions, the average annualized premium is a sizable 5.44%, while during recessions, there is a small-cap discount of 6.23%. The differentials are less pronounced in Canada. This paper investigates the hypothesis that the variation of the small-cap premium is related to macroeconomic and financial variables that can be captured by a nonlinear time series econometric model, i.e., the smooth transition autoregressive model (STAR model), with different factor sets across regimes between and countries. The regimes reflect expansionary vs. contractionary phases of the business cycle. For the Canadian small-cap premium, an augmented factor model that includes US factors dominates a purely domestic factor model, which is consistent with integrated markets. Full article

Investment diversification is a prerequisite for dynamic growth performance. It is intuitively accepted that cultural background affects investment behavior and investment decision making, but does cultural change affect investment diversification? This paper assesses whether cultural background shapes growth performance through investment diversification. Empirical analysis was conducted using decade-level data for a sample of 33 OECD countries over the 30-year period from 1981 to 2010. Using fixed effects estimation, different intercepts across countries, and decade time dummies, the analysis shows that societies that are closer to the optimal cultural background achieve better investment diversification behavior. The article thus contributes to the long-standing debate on the cultural roots of growth. Full article

Specialized literature has centered on analyzing the relationship between the entrepreneur and innovation, since the former is considered to be a driver for innovation. However, there are other factors that can influence innovation that should be considered: business cash flow, because it uses its own resources to innovate; bank credit, the possibility of accessing external financing; and taxes, which account for a reduction in businesses’ cash flow when they increase. The objective of this article is to analyze the existing relationship between these factors and innovation and the latter with growth. To achieve this, an empirical study has been carried out using a Partial Least Square (PLS) estimation with eleven European countries. Full article

This paper considers whether adding two established anomalies, momentum and low volatility, will improve our understanding of asset pricing beyond the FF5 model. We do this by considering whether these factors provide economic, as opposed to statistical, significance within the asset pricing model. We measure economic significance in two ways: First, we consider whether the factor coefficient signs and values on the factors are economically meaningful, for example, do the coefficients distinguish between high- and low-risk portfolios? Second, we consider an out-of-sample trading rule based on expected returns derived from each asset pricing model. Our results suggest that the momentum and volatility factors provide no additional information over the FF5 model. Moreover, it is not clear that the FF5 model itself provides a noticeable improvement over the FF3 model. Of note, the momentum and low-volatility factors exhibit limited statistical significance and have similar coefficients across high and low values of different anomalies and big- and small-firm portfolios. The trading performance of a seven-factor model, while reasonable itself, is worse than both the FF3 and FF5 models. Furthermore, based on the trading results, the FF5 model provides no noticeable contribution over the FF3 model, the latter of which could be regarded as preferred. Full article

Digital liabilities are the unknown future costs that occur after an event related to digital assets threatens organizational value. These events emerge from: (1) an IT data breach or cybersecurity failure; (2) IT infrastructure limitations that limit future opportunities; and (3) changes in business models that are limited due to IT infrastructure. Potential digital liabilities are not fully understood and can be difficult to quantify. Derived from prior research, this research note proposes four methods, modified from existing research literature, for estimating the cost of digital liabilities prior to a digital asset compromise. We conclude the research note by discussing opportunities for future research in this area. Full article

Motivated by the disconnect between survey evidence documenting that executives prioritize implicit contracting (i.e., labor market-based career concerns) when making earnings management decisions (^{Graham et al., 2005}) and the extant literature’s focus on explicit contracting to explain earnings manipulation, we analytically examine the role of managerial career concerns in earnings management. Building on ^Holmstrom (¹⁹⁸², ¹⁹⁹⁹), we present a career concerns-based earnings management model that incorporates the unique reversing nature of earnings management. A key insight derived from the model is that whether the predictions of a traditional career concerns model prevail, which is to say that managers engage in more income-increasing behavior in their early years, critically depends upon the reversal characteristics of the earnings management vehicle chosen. Full article