That's Interesting
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Rational Sustainability
12th June, 2024ESG is under attack from all sides. True believers wish to keep practicing ESG but call it something different; opportunists recognize that an ESG label no longer helps launch funds or attract customers; opponents seek to ban ESG outright. But if ESG is to be scrapped, what do we replace it with? This article proposes an alternative: “Rational Sustainability”. Sustainability refers to the goal – the creation of long-term value rather than the ticking of ESG boxes – which is of interest to all job titles and political leanings. Rational refers to the approach: it recognizes diminishing returns and trade-offs; it is based on evidence and analysis; and guards against irrational sustainability bubbles.
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End of an Era: The Coming Long-Run Slowdown in Corporate Profit Growth and Stock Returns
04th June, 2024This paper shows that the decline in interest rates and corporate tax rates over the past three decades accounts for the majority of the period’s exceptional stock market performance. Lower interest expenses and corporate tax rates mechanically explain over 40 percent of the real growth in corporate profits from 1989 to 2019, however, the boost to profits and valuations from ever-declining interest and corporate tax rates is unlikely to continue, indicating significantly lower profit growth and stock returns in the future.
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Financial Statement Analysis with Large Language Models
30th May, 2024This paper investigates whether an LLM can successfully perform financial statement analysis in a way similar to a professional human analyst. Standardized and anonymous financial statements was provided to GPT4 and the model was instructed to analyze them to determine the direction of future earnings. Even without any narrative or industry-specific information, the LLM outperformed financial analysts in its ability to predict earnings changes.
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Corporate Mergers and Acquisitions Under Lender Scrutiny
15th May, 2024This paper examines corporate mergers and acquisitions (M&A) outcomes under lender scrutiny. Using the unique shocks of U.S. supervisory stress testing, we find that firms under increased lender scrutiny after their relationship banks fail stress tests engage in fewer but higher-quality M&A deals. Evidence from comprehensive supervisory data reveals improved credit quality for newly originated M&A-related loans under enhanced lender scrutiny.
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The Evolving Index Effect: Evidence from Australia
09th May, 2024Evidence around the price response of stocks to index change announcements (the index effect) in Australia is mixed. In contrast to the U.S. market, results often point towards the absence of any index effects in Australia. By studying a comprehensive set of index announcements across S&P/ASX indexes, this article finds significant heterogeneity in the index effect across Australian securities. Additions to small capitalization indexes exhibit economically meaningful index effects, whereas additions to large capitalization indexes are largely insignificant.
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Noise in Expectations: Evidence from Analyst Forecasts
03rd May, 2024Analyst forecasts outperform econometric forecasts in the short run but underperform in the long run. This article decomposes these differences in forecasting accuracy into analysts’ information advantage, forecast bias, and forecast noise. It finds that noise and bias strongly increase with forecast horizon, while analysts’ information advantage decays rapidly.
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Fundamental Analysis via Machine Learning
01st May, 2024This article examines the efficacy of machine learning in a central task of fundamental analysis: forecasting corporate earnings. We find that machine learning models not only generate significantly more accurate and informative out-of-sample forecasts than the state-of-the-art models in the literature but also perform better compared to analysts’ consensus forecasts.
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Quadrophobia: Strategic Rounding of EPS Data
15th February, 2024Managers’ incentives to round up reported earnings per share (EPS) cause an underrepresentation of the number 4 in the first post-decimal digit of EPS, or “quadrophobia.” This article has developed a novel measure of aggressive financial reporting practices based on a firm’s history of quadrophobia. Quadrophobia is pervasive, persistent, and successfully predicts future restatements, Securities and Exchange Commission enforcement actions, and class action litigation.
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The Moderating Effect of CEO Power on the Board Composition–Firm Performance Relationship
12th February, 2024Prior studies of the relationship between the composition of boards of directors and firm performance offer equivocal results. Drawing on agency and power circulation theories, this article attempts to reduce this equivocality by asserting that CEO power moderates the relationship. Specifically, an outside director dominated board is needed to check a powerful CEO, but monitoring by other executives provides sufficient constraints on CEOs with low power.
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