This study examines the effectiveness of central bank communication during times of high-intensity adverse shocks. In particular, we explore how the National Bank of Ukraine (NBU) regulated foreign exchange (FX) markets during the Russian-Ukrainian war in 2022. Using data collected from both the black and authorized FX markets, this study suggests that the content of the NBU announcements has a significant impact on the FX market agents. Notably, the announcement aimed to maintain a fixed (floating)

FX rate lead to an increase (decrease) in the black market premium. Furthermore, the response to fixed-rate announcements is greater compared to floating rate announcements. Additionally, the NBU announcements have a stronger influence on the selling side of the foreign currency, where the black market holds near monopolistic power.

While energy risk is recognized as a new systemic risk, surprisingly little research has been done about the risk propagation of energy commodities across geographic regions. In this paper, we examine 24 countries of the European Economic Area (EEA) to address ongoing concerns about energy stability. In addition to traditional panel regressions, we also deploy the Diebold-Yilmaz volatility spillover index (2014) method for a focused network analysis. We also seek to differentiate in the cross-section across the core EU block, new EU countries joining after the 2004 enlargement, and others. In the last 20 years, the major sources of market volatility primarily emanated from economic or political uncertainty of a specific country, or group of countries, for example, from Greece during the sovereign debt crisis, from Central and Eastern European countries (CEEC) after the 2004 EU extension, and from Norway during the oil rout. Energy risks, measured by large oil and gas price shocks, have become major volatility providers since 2019, with increasing volatility risk arising from gas, a green labelled energy source. Lastly, we also show that market development plays a key role in equity market resilience, and that the less liquid CEEC markets with weakening currencies are more sensitive to oil and gas price shocks.

Organized crime represents a relevant threat to countries worldwide and use its coercive power to impose a state of fear. Yet, it is difficult to underpin how organized crime’s threat can generate distortions in the market. By using the semi-annual publication of the Anti-Mafia Investigative Directive (DIA) on Italian mafia families’ surnames over the period 2005-2018 as an exogenous shock, we document that firms located in the same industry and municipality of firms whose top executives happen to have the same surname of Mafiosi (mafia-surname firms) experience a deterioration of operating performance, sales growth, leverage, and WW-index. As a possible mechanism, we show that the fear of mafia can jeopardize firms’ relationships and economic transactions in the legal economy. To this purpose, we find that mafia-surname firms receive a greater liquidity extension than other similar firms. Overall, our results shows that the fear of Mafia has relevant consequences for the real economy.

This paper investigates corporate announcements related to the Russia-Ukraine conflict of S&P 500 firms. We find that firms withdrawing from Russia or suspending operations tend to have more cash reserves. Similarly, firms with more cash seem to announce withdrawals or suspensions relatively quickly. This seems to suggest that cash reserves seem to matter in how firms react to geopolitical events. We do not find that cash appears to matter when firms announce that they will be donating to various causes due to the conflict. However, higher cash levels do seem to speed up the timing of this type of announcement. When we investigate investor reactions to either donation or withdrawal/suspension announcements, we report raw returns surrounding the announcements are negative, between -0.6 to 0.9%. Moreover, cash levels seem to matter for withdrawals/suspensions but not for donations. Our paper confirms that cash levels (i.e., financial flexibility) are an essential determinant of how firms react to geopolitical events.

We test the performance of two ESG score-driven quantitative signals on a large, multi-national cross section of European stock returns. In particular, we ask whether in the cross-section of stock returns, the cost of equity capital to firms is more strongly affected by the (upward) “slope” (identified as momentum over a period of time) of their ESG scores or by their “stability” (identified as the volatility of the scores over a period of time), measured around a given slope. We find that 1-month, short term ESG momentum is priced in the cross-section of stock returns and that it lowers the ex-ante cost of capital (at the same time causing realized ex-post average abnormal returns). ESG momentum may represent a novel, priced systematic risk factor, even though such a finding is not robust to changing the definition of the scores or to increasing the estimation period of ESG momentum. There is equally strong evidence that a ESG spread strategy that buys (sells) low (high) ESG score volatility stocks leads to a significant alpha and alters the ex-ante cost of capital, even though as a characteristic volatility is not significantly priced in the cross-section. Both quantitative ESG signals lead to portfolio sorts and long-short strategies that increase the speed of improvement of the aggregat sustainability profile of the resulting portfolios with no (or with negative, risk-adjusted) costs in terms of average ESG scores or their stability.

The right to speak and ask questions at annual general meetings (AGMs) represents

one of the few avenues for shareholders to interact directly and publicly with the firm’s

management. This paper examines the tone and content of shareholder communication

during AGMs with a focus on environmental, social, and governance (ESG) issues.

Using AGM transcripts of U.S. companies between 2007 and 2021, we find that both

institutional and non-institutional shareholders are vocal about sustainability aspects.

Shareholders assign varying degrees of importance to different ESG issues based on

their individual relationship with the firm. Further, shareholders who are dissatisfied

with a company’s sustainability record use the AGM to express their concerns by

speaking in a negative tone about the sustainability issues at hand. The findings

suggest that the tone of shareholder communication at AGMs may serve as an “early

warning indicator” for management, highlighting ESG areas that require improvement.

We investigate the relationship between internal corporate governance and market performance across multiple countries, utilizing a comprehensive dataset comprising 77,440 firm observations from 15 European Union countries over the period 2002-2018. Specifically, we examine the impact of board characteristics, including size, independence, gender diversity, CEO duality, and classified boards, on market performance. Our findings reveal that board size consistently emerges as a significant predictor of market returns. Smaller boards tend to be associated with better market performance. Additionally, CEO duality exhibits a negative relationship with market performance across countries. Interestingly, we observe a positive association between staggered boards and performance and find no significant relationship between board independence and market performance in Europe. Upon analyzing the data at the country level, we identify that the links between board structure and performance vary by country. These divergent findings indicate that there is no universally applicable corporate governance solution that can be recommended for companies throughout Europe.

Global carbon pricing has been recognized as one of the most efficient mechanisms that can be used to reduce CO2 emissions. Many countries and firms alike are currently reviewing and/or implementing carbon pricing as a method to reduce their emissions, but questions remain about the magnitude of the price and the speed of implementation. Reports indicate significant variation in carbon prices across countries, while research is divided over what the global average carbon price should be in order to reach the Paris Climate Agreement goals to limit global warming to 1.5-2oC by 2100 relative to pre-industrial levels. We examine this important issue by extending the Dynamic Integrated Climate and Economy (DICE) model to estimate global carbon prices that will be required to reach various warming scenarios.

Similar to the conclusions of Cruz and Rossi-Hansberg (2022), our analysis suggests that while carbon pricing can play a critical role in reducing greenhouse gas emissions and limiting global warming, it must be supported by other policy measures and innovations in order to reach the Paris Agreement targets. In particular, we found there was no feasible carbon pricing scenario that was high enough to limit emissions sufficiently to achieve anything below 2.4oC warming on its own. Our findings indicate that a significant increase in the global average carbon price, which we estimate at $2.79 per tonne of CO2 emissions as of 2022, is necessary to achieve the target of 2.4oC by 2100.

We project significant differences in global physical costs due to climate change across various warming scenarios, which highlights the urgency of taking action to mitigate global warming. For example, our projected physical damages under a 2.4oC scenario is $331 trillion (t) by 2100, versus $479.9t under a 3oC scenario, and more than double the 2.4oC scenario figure at $764.6t under a 4.2oC scenario (which is the “zero carbon price” scenario). It is interesting to note that total damages even under the 2.4oC scenario at $331.18t are 25% higher than under the 2oC scenario ($264.69t) and are more than double (i.e., 118% higher) than under a 1.5oC scenario ($151.84t), which confirms the importance of hitting these important targets.

Air-pollution affects firms’ operating costs, reduces firms’ productivity, and future investment opportunities. Therefore, surprises in air-pollution level constitute an added risk factor to individual firms, which will be priced by rational investors. Using the Chinese data, we construct a simple measure of air-pollution risk for individual firms. Cross- sectional evidence suggests that differences in air-pollution betas are related to firms’ future fundamentals, including profit margins and investment. More important, future return differences of individual stocks can be explained by the differences in their air pollution betas, which is consistent with the pricing story of air-pollution risk. In addition, we present natural experiments to account for alternative channels and potential endogeneity issues. Different from the current research on the subject that adopts a behavioral approach, our study provides robust evidence on air-pollution as an independent risk factor that firms should care.

Using a novel loan-level identification of loans financing the environmental transition, we study non-bank lenders’ involvement in green lending. After the Paris Agreement, we find that syndicated corporate loans are more likely to be green loans (2%) if they include institutional loan tranches that cater to non-bank lenders. The effect is further amplified when non-bank lenders actively participate in the primary corporate lending market for such tranches, i.e., they join the syndication group at the loan origination stage. Robustness of the results are tested through a falsification test based on a placebo shock and through a reversed treatment test based on the US’s withdrawal from the Paris Agreement. The result is only partially explained by access to the securitization market by green corporate loans’ originators.

At the height of the COVID-19 related market stress in March 2020, six European countries coordinated to impose market-wide short selling bans. Complementing existing literature in three ways, the analysis uses regulatory data on share trading volumes and short positions to assess the link between the bans and market fragmentation, and extend the analysis to the sectors most affected by the market stress. Based on a difference-in-difference approach and consistent with prior theoretical and empirical work, our estimation confirms that the 2020 short selling bans are associated with a deterioration in liquidity, volatility and volumes, with persistent liquidity effects. However, the bans did neither support nor harm the prices of banned shares over the enactment period. The deterioration of liquidity appears more pronounced for large-cap stocks, highly fragmented stocks, and stocks with listed derivatives – pointing towards stronger effects for shares deemed as liquid. Sectoral effects are observed for the stocks most affected by the market stress, namely the healthcare and the consumer cyclical sectors. Shares that were already shorted before the bans saw an expected stronger increase of their illiquidity, but a volatility decrease under the bans, signalling a more difficult price discovery process.

Environmental, Social and Governance (ESG) principles have grown in popularity lately causing a surge in assets managed under the green mandate. In our study we examine the impact on capital flows and performance of U.S. equity mutual funds that signaled an ESG connection. We use two different greening events to examine investor’s response, the first event is by becoming a PRI signatory and the second event is when a fund changes their name to include an ESG indicative word. Our study reveals that one of the two events analyzed had a significant impact on fund flows, increasing the annual fund flow by 11%. However, we did not find any significant impact on returns.

A large literature establishes a set of predictors that robustly forecast future market returns, raising questions about these predictors' origins. We develop an approach to determine whether a particular predictor represents a proxy for fundamental risk, which is based on an intuitive assumption that risk-based predictors should be linked to new information about economic conditions. We show that an overwhelming majority of predictors forecast returns either on days with macroeconomic announcements or on the remaining days. This suggests that the sources of return predictability differ across predictors with some driven by fundamental risk and others having different origins. Shiller's excess volatility puzzle is confined to non-announcement days, indicating that the ability to forecast the noise component of stock market movements underlies much of the stock market return predictability documented in the literature.