Sustainability rating and moral fictionalism: opening the black box of nonfinancial agencies

PurposeThe purpose of this paper is to explore the practices, challenges and ethical issues underlying the fabric and dissemination of corporate sustainability ratings.Design/methodology/approachBased on 36 semi-structured interviews with sustainability rating practitioners, the study shows the trade-offs, ethical judgments and customizable aspects involved in rating practices, which cannot rely only on formal and predefined methods.FindingsIn contrast with the official optimistic rhetoric about the rationality and rigor of sustainability rating methods, agencies face serious challenges in the measurement and comparison of performance in this area, particularly in terms of the aggregation of scattered and fuzzy indicators, commercial pressures and the availability, materiality and reliability of the information collected. Despite these concerns, sustainability ratings do appear to be useful in improving corporate responsiveness and increasing investor awareness of the complex and difficult-to-measure aspects of nonfinancial reports.Practical implicationsRating agencies should collaborate to set up common indicators that would be easier for firms to produce and should better separate their sustainability rating production activities from other services they offer to companies (e.g. consultancy).Originality/valueThis study contributes to the literature on the measurement and promotion of corporate sustainability by analyzing rating practices through the lens of moral fictionalism, which here refers to the human tendency to build ethical judgments on fictional but convenient and useful representations.

Multifractal analysis of volatility for detection of herding and bubble: evidence from CNX Nifty HFT

This study delves into the herding and bubble detection in the volatility domain of a capital market underlying. Furthermore, it focuses on creating heuristics, so that common investors find it relatively easy to understand the state of the market volatility. Hence, it can be termed that this study is focused on the specific financial innovation regarding bubble and herding detection coupled with investor awareness. The traces of possible volatility bubble emerge when it is positioned against its own lags (both lag1 and lag2). The volatility trigger indicated clear traces of herding and an embedded parabola function. Continuous and repetitive parabola function hinted at a subtle presence of “fractals”. Firstly, the detrended fluctuation analysis has been used with its multifractal variant. Secondly, the regularized form of Hurst calculation and analysis have been used. Both tests reveal the traces of nascent bubble formation owing to prominent herding in CNX Nifty HFT environment. They also indicate a clear link with Hausdorff topological patterns. These patterns would help to create heuristics, enabling investors to be aware of possible bubble and herd situations.

Index Membership and Small Firm Financing

This paper investigates the extent to which index membership affects small firm financing. Using a regression discontinuity specification around the lower cutoff of the Russell 2000 small-cap index, we find that index membership causes small firms to transition away from bank financing in favor of seasoned equity offerings. These effects are concentrated in the year following Russell 2000 additions and do not reverse immediately upon deletions. Liquidity, the elasticity of demand for equity, and analyst coverage also significantly increase following Russell 2000 additions but do not significantly decrease following deletions. Finally, firms added to the Russell 2000 obtain lower spreads and have fewer covenants on the bank loans that they do initiate. Our findings are consistent with index membership mitigating the financing frictions of small firms by improving their information environment through increased investor awareness. This paper was accepted by Amit Seru, finance.

Corporate Governance Attributes in Fraud Detterence

The failures of corporations such as Enron, WorldCom and HIH Insurance, to name but a few, have heightened investor awareness of the need to not only evaluate company performance, but also to consider the possibility that financial statements may not be a true reflection of company results, as fraudulent activities may have occurred during the reporting period. Since parties who are outside of the firm do not have access to pertinent information, they have to rely upon published financial and non-financial data to form an opinion regarding performance and/or the risk that fraudulent activities may have occurred. The prior literature shows a relationship between weak corporate governance and fraudulent activities, although most if not all of this research relates to Western economies. The differences in institutional setting e.g. cultural values and legal environment in Malaysia would not give the same findings with the study in western economies. Composing of many ethnicities, Malaysia is a multicultural country. With each ethnic group upholding its own culture, values and belief, businesses are conducted according to each ethnic’s culture. The results of this study could shed some light on the influence of institutional setting regarding corporate governance. Companies that were charged with accounting and auditing offences from year 2003 to 2007 were selected as the fraudulent samples. Data was collected from the years these companies were charged with fraud and the year prior to that. Logistic regression analysis was carried out to determine the significant differences between fraudulent and non-fraudulent companies with respect to corporate governance characteristics. The results indicated that the size of the board and the percentage of institutional shareholdings had significant relationships with the likelihood of corporate fraud occurrences consistently across the two-year period studied. The results of this study will assist public, corporate and accounting policy makers in formulating more effective corporate governance mechanisms.

Market reactions to changes in the Dow Jones industrial average index

Purpose The purpose of this paper is to examine changes in stock returns, liquidity, institutional ownership, analyst following and investor awareness for companies added to and deleted from the Dow Jones Industrial Average (DJIA) index. Previous studies report conflicting evidence regarding the market reactions to changes in the DJIA index membership. Design/methodology/approach This study uses the event-study methodology to calculate abnormal returns and trading volume around the announcement and effective days of DJIA index changes from 1929 to 2015. It also tests for significant changes in liquidity, institutional ownership, analyst following and investor awareness in the 1990–2015 period. Multivariate regressions are used to perform a simultaneous analysis of competing hypotheses. Findings This study resolves the mixed results of previous DJIA index papers by documenting different stock price and trading volume reactions over the 1929–2015 period. Focusing on the most recent period, 1990–2015, the study finds that stocks added to (deleted from) the index experience a significant permanent stock price gain (loss). The observed stock price reaction seems to be associated with changes in liquidity proxies thus lending support for the liquidity hypothesis. Research limitations/implications Limited data availability for the periods prior to 1990 prevents this study from identifying the exact reasons for different stock price and trading volume reactions across subperiods of the 1929–2015 period. Originality/value This study provides the most comprehensive examination of market reactions to changes in the DJIA index and resolves the mixed results of previous studies. A better understanding of market reactions around the DJIA index changes can help both individual and institutional investors with developing effective trading strategies and index managing companies with designing optimal announcement policies.