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You Call it ‘Self-Exuberance,’ I Call it ‘Bragging.’ Miscalibration in Predicted Emotional Responses to Self-Promotion

December 21, 2014 Comments off

You Call it ‘Self-Exuberance,’ I Call it ‘Bragging.’ Miscalibration in Predicted Emotional Responses to Self-Promotion
Source: Social Science Research Network

People engage in self-promotional behavior because they want others to hold favorable images of them. Self-promotion, however, entails a tradeoff between conveying one’s positive attributes and being seen as arrogant and bragging. We propose that people get this tradeoff wrong because they erroneously project their own feelings onto their interaction partners. As a consequence, people overestimate the extent to which recipients of their self-promotion will feel proud of and happy for them, and underestimate the extent to which recipients will feel annoyed (Experiment 1 and 2). Because people tend to self-promote excessively when trying to make a favorable impression on others, such efforts often backfire, causing targets of the self-promotion to view the self-promoter as less likeable and as a braggart (Experiment 3).

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Finance and Social Responsibility in the Informal Economy: Institutional Voids, Globalization and Microfinance Institutions

December 12, 2014 Comments off

Finance and Social Responsibility in the Informal Economy: Institutional Voids, Globalization and Microfinance Institutions
Source: Social Science Research Network

We examine the heterogeneous effects of globalization on the interest rate setting by microfinance institutions (MFIs) around the world. We consider MFIs as a mechanism to overcome the institutional void of credit for small entrepreneurs in developing and emerging economies. Using a large global panel of MFIs from 119 countries, we find that social globalization that embraces egalitarian institutions on average reduces MFIs’ interest rates. In contrast, economic globalization that embraces neoliberal institutions on average increases MFIs’ interest rates. Moreover, the proportions of female borrowers and of poorer borrowers negatively moderate the relationship between social globalization and MFI interest rate, and positively moderate the relationship between economic globalization and MFI interest rate. This paper contributes to understanding how globalization processes can both ameliorate and exacerbate challenges of institutional voids in emerging and developing economies.

UK — Financial Literacy and Over-Indebtedness in Low-Income Households

December 5, 2014 Comments off

Financial Literacy and Over-Indebtedness in Low-Income Households
Source: Social Science Research Network

Households in Northern Ireland have an increased risk of financial vulnerability compared to the UK as a whole. Financial literacy can explain a significant proportion of wealth inequality. Among the key components of financial literacy are financial numeracy and money management skills. Our study examines the relative importance of these components in the determination of consumer debt and household net worth among credit union members in socially disadvantaged areas. The main finding from our analysis is that money management skills are important determinants of consumer debt behaviour and household net worth but that financial numeracy has almost no role to play. These findings are found to be robust when the sample is reduced to only those who have a clear role in household financial decision-making and also when controlling for potential endogeneity. These results indicate that credit unions could structure an effective programme targeted at those in financial difficulties by promoting awareness of their financial situation, by encouraging them to manage bills more effectively and by improving budgeting skills. Our findings have policy implications throughout the UK where the role of credit unions in providing financial services to the socially disadvantaged is being strongly promoted by the government and the Church of England.

Dodging the Taxman: Firm Misreporting and Limits to Tax Enforcement

December 1, 2014 Comments off

Dodging the Taxman: Firm Misreporting and Limits to Tax Enforcement
Source: Social Science Research Network

Reducing tax evasion is a key priority for many governments, particularly in developing countries. A growing literature has argued that the ability to verify taxpayer self-reports against reports from third parties is critical for modern tax enforcement and the growth of state capacity. However, there may be limits to the effectiveness of third-party information if taxpayers can make offsetting adjustments on less verifiable margins. We present a simple framework to demonstrate the conditions under which this will occur and provide strong empirical evidence for such behavior by exploiting a natural experiment in Ecuador. We find that when firms are notified by the tax authority about detected revenue discrepancies on previously filed corporate income tax returns, they increase reported revenues, matching the third-party estimate when provided. Firms also increase reported costs by 96 cents for every dollar of revenue adjustment, resulting in minor increases in total tax collection.

How the SEC Helps Speedy Traders

November 13, 2014 Comments off

How the SEC Helps Speedy Traders
Source: Social Science Research Network

We show that the Securities and Exchange Commission’s system for disseminating market-moving information in securities filings gives some investors an advantage over others. We describe two systems — the SEC’s file transfer protocol (FTP) server and public dissemination service (PDS) — that give certain investors access to securities filings before the general public. While contemporaneous work on this issue is limited to insider filings, we show that both the FTP and PDS gaps are pervasive across all types of filings, including Form 8-K, which includes market-moving information such as corporate earnings. We show that FTP access gives investors a mean (median) 85 (11)-second lead time, and PDS gives investors a mean (median) 77 (10)-second lead time, before the filing is available on the SEC’s website.

We also provide evidence suggesting that investors had the opportunity to take advantage of this lead time to earn trading profits. In particular, we show that traders could earn economically and statistically significant returns by trading on either the FTP or PDS gaps. Moreover, even investors who waited as long as ninety seconds to execute trades on the FTP or PDS gaps could earn meaningful returns using this strategy. We also identify abnormal trading volume in the moments after PDS subscribers receive SEC filings.

Finally, our direct access to both FTP and PDS also allow us to document the changes to those systems that the SEC implemented after the public revelation of this issue in October 2014. We show that the SEC imposed a significant delay on the PDS service after the existence of the informational advantage was revealed. We also, however, show that, as of November 2014, PDS subscribers still receive some 37% of filings before the general public. We argue that lawmakers should consider reforms that would help the SEC develop a centralized information-dissemination system that is better suited for the high-speed dynamics of modern markets.

How Does Government Borrowing Affect Corporate Financing and Investment?

November 12, 2014 Comments off

How Does Government Borrowing Affect Corporate Financing and Investment?
Source: Social Science Research Network

Using a novel dataset of accounting and market information that spans most publicly traded nonfinancial firms over the last century, we show that U.S. federal government debt issuance significantly affects corporate financial policies and balance sheets through its impact on investors’ portfolio allocations and the relative pricing of different assets. Government debt is strongly negatively correlated with corporate debt and investment, but strongly positively correlated with corporate liquidity. These relations are more pronounced in larger, less risky firms whose debt is a closer substitute for Treasuries. Indeed, we find a strong negative relation between the BAA-AAA yield spread and government debt, highlighting the greater sensitivity of more highly rated credit to variation in the supply of Treasuries. The channel through which this effect operates is investors’ portfolio decisions: domestic intermediaries actively substitute between lending to the federal government and the nonfinancial corporate sector. The relations between government debt and corporate policies, as well as the substitution between government and corporate debt by intermediaries, are stronger after 1970 when foreign demand increased competition for Treasury securities. In concert, our results suggest that large, financially healthy corporations act as liquidity providers by supplying relatively safe securities to investors when alternatives are in short supply, and that this financial strategy influences firms’ capital structures and investment policies.

Crony Capitalism, American Style: What Are We Talking About Here?

November 9, 2014 Comments off

Crony Capitalism, American Style: What Are We Talking About Here?
Source: Social Science Research Network

This paper seeks to reduce the ambiguity surrounding our understanding of what crony capitalism is, what it is not, what costs crony capitalism leaves in its wake, and how we might contain it.

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