Global Finance and Accounting

Read about Global Finance and Accounting research from faculty.

Dave Cather. (2021) "Insurance Pricing Discrimination and Aristotelian Equality: An Application to Minority Annuity Pricing," forthcoming, Journal of Insurance Regulation.

International courts often apply the social justice standard of Aristotelian equality - treating like people alike and unlike people differently - to cases involving insurance pricing discrimination. This article examines whether the use of insurance pricing variables like gender and race results in discriminatory pricing categories consisting of heterogeneous policy owners, in violation of Aristotelian equality. The article applies this discrimination standard to the pricing of annuities, drawing from studies investigating the racial mortality crossover, data that shows that the mortality rate of black Americans falls below the rate of white Americans at advanced ages. Based on the crossover literature, this study demonstrates how race-based annuity pricing would be discriminatory because it results in heterogeneous pricing within racial pricing categories, but that insurers can control for this heterogeneity by using the wider variety of annuity pricing data (e.g., medical history, diseases, and smoking) developed in the enhanced annuity submarket. The article demonstrates how the increased use of data analytics in insurance pricing to control for heterogeneity is consistent with Aristotelian equality.

Robert Hills, Matthew Kubic, and William J. Mayew. (2021) "State Sponsors of Terrorism Disclosure and SEC Financial Oversight," Journal of Accounting and Economics, April.

We examine whether SEC effort to review state sponsors of terrorism (SST) disclosure negatively influences financial reporting oversight. Using comment letter inquiries about SST to measure effort, we find the likelihood that the SEC fails to identify a financial reporting error increases when comment letters reference SST. Consistent with SST disclosure review crowding out financial reporting oversight, comment letters referencing
SST are less likely to mention accounting, non-GAAP, and MD&A issues. These effects are unique to SST as we find comment letter references to non-SST issues complement financial reporting oversight. Data obtained through a Freedom of Information Act request reveals a temporal shift in the occupational mix of SEC reviewers towards (away from) lawyers (accountants) that coincides with an increased focus on SST. Path analysis reveals that accountants (lawyers) are more (less) likely to detect errors and comment on financial
reporting topics, with an indirect path through SST exacerbating these effects.

Jed Neilson, Philip Wang, Christopher Williams, and Biqin Xie. (2021) "Recognition versus Disclosure of Offsetable Derivatives and Investor Risk Assessment," SSRN Working Paper.
U.S. GAAP allows banks to offset derivative assets against derivative liabilities with the same counterparty and report only the net amount on the balance sheet. Derivatives offsetting under IFRS is much more restrictive, resulting in the single largest difference in balance sheet presentation between U.S. GAAP versus IFRS. We examine whether recognition versus disclosure is associated with differential investor risk assessment of offsetable derivatives. We find that recognition matters for the risk assessment of equity investors but not for CDS investors, which is likely explained by the greater sophistication of CDS investors relative to equity investors. Corroborating this inference, we show that more sophisticated equity investors more fully utilize disclosed offsetable derivatives information. Our findings shed light on the unsettled debate about the divergent accounting treatment of offsetable derivatives under U.S. GAAP versus IFRS

Jiro Yoshida. (2021) "Land Scarcity, High Construction Volume, and Distinctive Leases Characterize Japan's Rental Housing Markets," Brookings Institution Report, April.

The Japanese housing market is characterized by a large construction volume, rapid technological progress, fast depreciation of housing value, a thin secondary market, and low maintenance of existing properties. Legal and tax systems unintentionally encourage wealthy individuals to invest in studio apartments to rent out to young people living in urban areas. Thus, family housing is mainly available through ownership. The public sector played an important role in addressing housing shortages after World War II due to massive migration to large metropolitan areas. The public housing finance program encouraged homeownership, while public and quasi-public rental units provided shelter to low- and middle-income households. Roughly 36% of Japanese households rent their homes today. The biggest challenge is a mismatch between housing stock and demographics in a rapidly aging and shrinking society, exemplified by vacant housing units.

Dave Cather. (2020) "Reconsidering Insurance Discrimination and Adverse Selection in an Era of Data Analytics," Geneva Papers on Risk & Insurance, 45 (3), 426-456.

This article demonstrates how replacing age- and gender-based pricing variables with telematics data in auto insurance risk classification systems minimises insurance discrimination and increases cream skimming adverse selection. The study explains how incorporating telematics data into insurance pricing schemes reduces pricing heterogeneity, consistent with the anti-discrimination objective of Aristotelian equality as embraced by the European Union Court of Justice. It also describes how anti-discrimination prohibitions of age- and gender-based insurance pricing can result in regulatory adverse selection; traditional adverse selection, where asymmetric information favouring applicants can result in an overpopulation of high-risk drivers in risk pools; and cream skimming adverse selection, where asymmetric information favouring telematics-based insurers supports premium discounts that attract safer drivers, prompting an underpopulation of low-risk drivers among non-telematics insurers. The study explains how insurers minimise their vulnerability to cream skimming by quickly entering the pricing “arms race” with their own telematics-based products and how incorporating telematics data increases the efficiency of risk classification systems.

Jianhua Gang, Liang Peng, and Jinfan  Zhang.  (2020) “Are Pricier Houses Less Risky? Evidence from China,” The Journal of Real Estate Finance and Economics.

Houses are the largest component of most households’ wealth and their risk is important. Recent research shows that pricier houses have lower price appreciation risk. This relationship can be due to competing reasons: risk is related to the price level, or risk is related to location-related features that are reflected in prices. This paper disentangles these two relationships by analyzing condo data from China with a special feature: Condos in the same subdivision have identical location but different prices. Our results indicate that larger and pricier condos are less risky than smaller ones in the same location. Furthermore, for condos with the same size, those with higher price per square meter are less risky. These results seem to indicate that pricier houses are less risky not due to location-related features that are reflected in prices.

Jiro Yoshida. (2020) "The Economic Depreciation of Real Estate: Cross-sectional Variations and their Return Implications," Pacific-Basin Finance Journal, 61, June.

This study analyzes how real estate depreciates in economic value as it ages. The economic depreciation of real estate affects investment decisions by decreasing appreciation returns and increasing income returns. The data show significant cross-sectional variation in depreciation rates for residential and commercial real estate for Japan and residential real estate for the U.S. The depreciation rate is larger if a property is commercial, newer, denser, located in a smaller city, more distant from the central business district, and in Japan. The depreciation rate of structures is approximately 6% for Japanese housing, 10% for Japanese commercial structures, and 1% for the U.S. housing. This study also proposes new methods to correct for survivorship biases. These results serve as essential inputs for the analysis of real estate investment, consumer choice of housing, sustainability, and the macroeconomy.

Renee Flasher and Kristy Schenck. (2019) "Exploring PCAOB Inspection Results for Audit Firms Headquartered Outside of the US," Journal of International Accounting, Auditing and Taxation. 37, December.

This study examines the audit quality, measured using Public Company Accounting Oversight Board (PCAOB) reports, for audit firms headquartered outside of the United States (US). We hypothesize and test if differences in firm audit quality as measured by PCAOB inspection deficiencies exist depending upon the size and nature of arrangements with other audit firms. More specifically, we examine five different categories of auditing firm arrangement: Big Four network affiliates; BDO and Grant Thornton network affiliates; firms with other network affiliations; firms with associations and alliances; and other (unknown or no stated affiliation). In this underexplored area of research, we find that non-US firms without formal connections to other firms have lower audit quality in comparison to the other four arrangement types. Our analysis also suggests that those with more formal connections (i.e., networks and larger associations/alliances arrangements) have similar levels of audit quality. Moreover, our results suggest that network firms that primarily do work referred to them by US audit firms have better results on PCAOB inspections; however, we do not find this relationship for associations and alliances. As the PCAOB explores group audit work standards, it is imperative that a more nuanced understanding of global audit quality progresses.

Peter Iliev and Lukas Roth. (2018) "Learning from Directors' Foreign Board Experiences," Journal of Corporate Finance, 51, pp. 1-19.

We study the transfer of governance across countries through overlapping boards. Companies converge to the governance characteristics and board practices of foreign firms through their directors’ foreign board experiences. Learning from foreign firms’ governance practices is as important as learning from connected domestic firms, and increases with the number of directors with foreign board appointments. This learning is stronger in firms domiciled in less-developed governance markets, suggesting a potential channel through which better governance practices are propagated. Our results are also obtained when we use an exogenous shock to board practices, are present in the time series, and don’t exist in placebo samples.

Jiro Yoshida, Junichiro  Onishi, and Chihiro Shimizu. (2017) "Energy Efficiency and Green Building Markets in Japan," in N. Edward Coulson, Cliff Lipscomb, and Yongsheng Wang (Eds.), Energy Efficiency and the Future of Real Estate Palgrave Macmillan.

This study presents a review of the extant studies on Japanese green buildings and a new empirical analysis of the relation between office rent, green building labels, and actual energy use. We provide evidence as to what causes the positive association between green building labels and office rents. We first show that sustainability related features of building are effective in reducing the actual consumption of electricity and water. After controlling for the effect of these observed sustainability features, we find that green labels have separate effects on the reduction of the consumption of electricity and water. Thus, various green features required by green building labels are effective in saving energy and water usage. However, green labels do not have a direct effect on office rents once we control for the effect of electricity and water usage. Thus, tenants pay a rent premium to green buildings not for a brand associated with green building labels but for material benefits of green buildings regarding lower costs of energy and water.

Peter Iliev, Karl Lins, Darius Miller, and Lukas Roth. (2015) “Shareholder Voting and Corporate Governance Around the World,” Review of Financial Studies 28 (8), 2167-2202.

Using a sample of non-U.S. firms from 43 countries, we investigate whether laws and regulations as well as votes cast by U.S. institutional investors are consistent with an effective shareholder voting process. We find that laws and regulations allow for meaningful votes to be cast, as shareholder voting is both mandatory and binding for important elections. For votes cast, we find there is greater dissent voting when investors fear expropriation. Further, greater dissent voting is associated with higher director turnover and more M&A withdrawals. Our results suggest that shareholder voting is an effective mechanism for exercising governance around the world.