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This study investigates the association between variable rate premiums (VRPs) charged by the Pension Benefit Guaranty Corporation (PBGC) and defined benefit pension funding in the United States. The PBGC requires VRPs from firms that fail to adequately fund their pension plans. Because millions rely on pension income, it is important to understand how government incentives impact pension funding decisions. In the aggregate, VRPs are positively associated with increases in pension funding. However, these premiums are not associated with excess pension contributions (EPCs) for financially distressed firms. These results suggest that financially distressed US firms engage in risk shifting. The lack of association persists even for financially distressed firms with tax benefits associated with pension funding. Finally, the association between VRPs and EPCs holds only for firms with combined lower borrowing costs and higher premiums. This finding suggests that higher premiums are not an effective incentive when firms also face higher borrowing costs and that lower premiums are not an effective incentive for EPCs, regardless of a firm's borrowing cost. [ABSTRACT FROM AUTHOR]

The incentives of fund managers and their superior capabilities in order to invest and manage them are two explanations for the risk changes of joint venture funds in different market conditions. To this end, in this research, through the analysis of 21 mutual funds in stock for the period of 79 months from August 2011 to March 2018, using the least squares method, we examine the incentives for risk managers of mutual funds in the stock and its effect on return on investment. The results of the research show that in the bull markets, there is a motivation to compensate for losses, as managers of these funds increase the level of risk in the future, Causing increase the returns of the funds Future period. Against the managers of winning funds, using the exhibit superior investment ability, reduce the risk of fund and increase the returns of the Future period.According to the results, In bearish markets, managers will reduce their future returns by increasing the risk of the fund, which reflects the organizational weakness or weakness of the managers' skills in investing. In contrast managers who reduce the risk level of the fund seek to increase the return on the fund's future period, which is motivated by the managers' career concerns.

Using the China's stock open-end mutual fund data from 2005 to 2020, this paper finds that bank-affiliated funds outperform unaffiliated funds with similar risk shifting levels. We find that risk shifting of bank-affiliated fund managers is more sensitive to previous performance ranking. Coherently, we collect compensation policy data from 62 fund companies, it is shown that the risk shifting behavior is preliminarily related to the motivational compensation policies. Furthermore, our findings also suggest that skilled bank-affiliated managers are prone to aggrandize the portfolio risk shifting levels to pursue future prominent performance. [ABSTRACT FROM AUTHOR]

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We study the optimal information system in a debt contracting setting in which managers can engage in value destroying risk-shifting behavior. The information system issues early-warning signals that allow lenders to take corrective actions such as liquidating unprofitable projects. When managers are empire builders, the optimal system exhibits a conservative bias that leads to excessive early-warning signals and excessive project liquidations relative to first best. In contrast, when managers have a strong preference for a quiet life, the optimal system exhibits a liberal bias that leads to insufficient early-warning signals and excessive project continuations. The broad intuition is that excessive liquidations (continuations) impose costs on managers who have a preference for empire building (a quiet life), and these costs are more severe when managers take excessive risks. The bias in the information system therefore permits managers to commit not to engage in risk shifting and facilitates debt financing. JEL Classifications: G30; G32; M40; M41. [ABSTRACT FROM AUTHOR]

We identify succession as a novel determinant of risk‐taking in family firms. We find significantly higher risk‐taking (mergers and acquisitions and cash flow volatility) and lower operating efficiency in firms controlled by families with multiple sons during the pre‐ rather than the postsuccession period compared to family firms with one or no sons. Presuccession risk‐taking by sons decreases the following inheritance law amendments that require sharing of wealth among heirs, bolstering the causal interpretation of our findings. An infusion of outside talent via daughters' marriages also alleviates the relative rank‐seeking behaviors of sons during succession tournaments. [ABSTRACT FROM AUTHOR]

This paper studies the choice of parameters of the pension plan design and investment strategies in the context of the regulatory environment and their institutional organization. Our objective is to infer whether these choices are driven by preferences of the pension plan members or by opportunities for unfair risk transfers that are possible thanks to perverse regulatory incentives. Empirical findings indicate that discount rates chosen by both the Canadian public and private pension plans are a reflection of risk preferences rather than of regulatory structure or political incentives. [ABSTRACT FROM AUTHOR]

In this paper, we assess the relationship between risk-shifting of mutual funds, measured as benchmark-adjusted factor-based investment style change following a structural break, and their risk-adjusted performance. We isolate only the breaks in style risk beyond those embedded in the funds' benchmark index to eliminate any natural style risk changes resulting from varying company fundamentals over time. We group style risk changes into extreme (style rotation), moderate (style drifting), and weak (style-strengthening/weakening) and assess which investment style category is most profitable to shift in to and out of. Our findings show that funds that exhibit breaks generate overall better risk-adjusted performance than those that do not. Funds that are most successful in risk-shifting have both statistically and economically distinct risk-adjusted performance, make shifts towards small/large/value/growth style combinations rather than mid-cap and blend style, exhibit breaks less frequently and has more moderate risk-shifts than funds that are unsuccessful. [ABSTRACT FROM AUTHOR]

The impact of personal risk caused by controlling shareholders' equity pledges on the company's debt policy is an issue worth exploring. Using Chinese A-share listed companies from 2006 to 2020, this paper studies the impact of ultimate owner equity pledges on firm debt size and debt maturity structure and explores the mechanism of ultimate owner personal leverage on firms. The results show that the increase in ultimate owner stock pledges leads to higher financial leverage and a longer debtmaturity structure for the company. In addition, the study reveals that the high personal leverage of the ultimate owner of the pledged equity is an influential mechanism driving the transfer of personal risk to the firm. In particular, even if a company's actual debt ratio is higher than its target debt ratio, equity pledges can prompt listed companies to increase their debt ratios and debt maturities, causing them to take on excessive debt risk and transfer the risk to creditors. It follows that the tunneling effect is a driving force of equity pledging and corporate debt policies. These results remain robust after the robustness test and endogenous test. The conclusions of this paper not only emphasize the impact of shareholders' personal risk on the firm but also provide a reference for investors' perception of firm risk. [ABSTRACT FROM AUTHOR]

Basel III features requirements on bank capital and liquidity along with disclosure requirements. I study these prudential tools by developing a general equilibrium model with bank runs in a global game framework, where leverage, liquidity, interest rates, and the probability of a banking crisis are all determined endogenously. With timely disclosure about bank assets, the unregulated economy has efficient liquidity but excessive leverage due to a pecuniary externality, warranting a leverage restriction. Delayed disclosure gives rise to bank risk shifting, making leverage even more excessive and liquidity insufficient, which warrants joint requirements on leverage and liquidity. Empirical predictions and policy implications are derived and discussed. [ABSTRACT FROM AUTHOR]

In this paper, I theoretically examine the ability of contingent convertible bonds (CoCos), a source of bank capital under Basel III, to reduce the bank's default risk. Although issuing CoCos adds a buffer to the bank's balance sheet, it may induce wrong incentives in the form of debt overhang and risk shifting. My results indicate that the most popular type of CoCos, temporary write‐down (TWD), is least effective at mitigating default risk. Unlike other types of CoCos, TWDs continue affecting shareholders' incentives even after the trigger event, thereby inducing an earlier endogenous default. [ABSTRACT FROM AUTHOR]

Using a sample of open‐end equity mutual funds in China from 2004 to 2017, this study investigates the motivations and consequences of flow‐driven fund risk shifting behaviour. We find that funds experiencing large inflows tend to reduce their degree of risk‐taking. However, good past performance drives funds with high net flows to increase their risk level. High‐performing funds increase risk by increasing turnover, increasing the proportion of equity holdings, and buying more winner stocks. Moreover, risk shifting caused by the flow‐driven trades of high‐performing funds worsens fund performance in the ensuing two quarters before recovering in the third quarter. Finally, high abnormal flow, high performance sourced from luck, young fund age, and small fund size enhance the risk shifting of high‐performing funds when experiencing high flow. [ABSTRACT FROM AUTHOR]

The asset allocation decision is one of the most important decisions made by defined benefit pension schemes, with a major effect on the scheme contribution rate, funding ratio and financial position of the sponsoring company. We investigate the determinants of the equity allocation of UK pension funds using a panel of 1,304 observations on 125 companies that were members of the FTSE 100 over the 2003–2019 period. We find that seven variables have a significant effect on the allocation between equities and bonds – maturity (as measured by the effective duration of scheme liabilities), default risk, leverage of the sponsor, size of the sponsor (or the scheme), whether the scheme is closed to future contributions, whether the scheme has significant overseas liabilities, and a time trend. Our sensitivity analysis finds that the biggest effects on the asset allocation come from scheme maturity, the scheme's funding ratio and a time trend. [ABSTRACT FROM AUTHOR]

We find strong empirical support for the risk-shifting mechanism to account for the puzzling negative relation between idiosyncratic volatility and future stock returns. First, equity holders take on investments with high idiosyncratic risk when their firms are in distress and receive less monitoring from institutional holders as well as when the aggregate economy is in a bad state. Second, the strategically increased idiosyncratic volatility decreases equity betas, particularly in bad states when the market risk premium is high. The negative covariance between the equity beta and the market risk premium causes low and negative returns and alphas in firms with high idiosyncratic volatility. This paper was accepted by Tomasz Piskorski, finance. [ABSTRACT FROM AUTHOR]

• Corporate pension policies involve conflicting motives—shifting vs. managing risk. • Corporate governance affects how risk-shifting impacts future underfunding and R&D. • We use foreign ownership and stable ownership to gauge corporate governance quality. • Well-governed firms use risk-shifting to finance R&D and improve shareholder values. • Risk-shifting by poorly-governed firms increases pension deficits but not shareholder values. This study examines how corporate governance affects pension plan sponsors' conflicting motives—risk-shifting vs. risk management—and their future pension funding status, R&D investments, and shareholder values. We focus on managers' discretionary choices of expected rates of return on plan assets and discount rates for pension liabilities to capture risk-shifting motives and measure corporate governance quality through foreign equity ownership (strong monitoring) and stable equity ownership (weak monitoring). The evidence shows that well-governed firms use managerial risk-shifting to finance R&D and increase shareholder values. Risk-shifting by poorly-governed firms results in larger pension underfunding without increasing shareholder values. [ABSTRACT FROM AUTHOR]

This paper introduces a new instrument in the context of hedge fund seeding, which we call fees-for-guarantee swap, with the aim of alleviating the early-stage funds (ESF) managers' financial constraint caused by severe asymmetric information between investors and managers. The swap plays a role in enhancing the ESFs manager's credibility by swapping part of her fees for an insurance on the behalf of seeding investors, whom would be fully refunded once the fund defaults. We set up a dynamic continuous-time framework within which closed-form prices for seed capital, guarantee costs and other claims have been derived. Our numerical findings indicate that incentive compensations, managerial ownership and hedge funds liquidation risks not only inhibit ESFs managers' risk-shifting incentive but align interests among ESFs manager, seeder and insurer as well. [ABSTRACT FROM AUTHOR]

We present a model of a bank with endogenous risk choices, where delegated monitoring by an active market in subordinate debt helps in containing the bank's risk shifting in the presence of deposit insurance. In comparison to static ex ante contracting, an active market enables continuous monitoring by subordinate debt to penalise the bank's risk shifting. The model is instrumental in deriving optimal level of subordinate debt required to achieve equilibrium where banks choose risk levels consistent with the first best as envisaged by a social planner. The optimal quantity of subordinate debt further eliminates any risk shifting associated even with risk insensitive premiums.

Financial crises have become a recurring problem for modern economies with increasingly detrimental fallouts. Risk-sharing finance (RSF) contracts may be the best instrument for addressing the problem and its fallout, and in particular the risk-sharing principles of Islamic finance offer a potential alternative. This paper offers some preliminary thoughts on the design and implementation of RSF for both private and public sector funding, for revenue and non-revenue generating projects. It is argued that such form of financing avoids the leverage of conventional debt, minimizes the costs of dilution, reduces macroeconomic vulnerability, and enhances financial inclusion. It also has the potential to be a less risky alternative for developing countries to finance public spending and economic growth. JEL Classifications: G32, P43, O16

Islam prohibits risk shifting and encourages risk sharing. Consequently, Muslims have developed over the centuries a highly sophisticated know-how of risk sharing partnerships which was the envy of the world. When Europe borrowed this know-how from the 10th century onwards, it entered into the era of “commercial revolution”. 13th century Venice, 19th century Germany and the 20th century United States are the three western cases presented in this article, which demonstrate the dramatic achievements of risk sharing in the West. Thus, the wisdom of the Islamic prohibition is confirmed by these Western examples. The paper then examines how Muslims can re-introduce risk sharing techniques into the modern Islamic finance.

Abstract: The question whether convertible bonds are issued to combat the risk‐shifting problem is a subject of debate in the literature, primarily because of the unavailability of clear measures regarding managerial risk‐shifting incentives. Taking advantage of recently developed inside debt‐holding measures for CEOs, we find strong evidence in support of the risk‐shifting hypothesis. When a CEO holds a large amount of inside debt, three distinct patterns emerge: (i) the firm exhibits a lower ratio of outstanding convertibles to total debt; (ii) the firm is less likely to issue convertibles than straight debt; and (iii) the firm devises contract terms to decrease the chance of conversion when it issues convertibles. [ABSTRACT FROM AUTHOR]

In this study, we use a simple 2-period game theoretic model to determine a mutually acceptable interest rate for a construction loan. This mutually acceptable interest rate is the rate that makes a developer indifferent between using 100% equity financing and a construction loan. It is also the highest interest rate that a developer is willing to pay and a bank is willing to lend. The three risk factors identified in the model are the loss, leverage and first-phase loan ratios. Our analytical and numerical analyses indicate that the derived mutually acceptable interest rate has desirable properties as the rate increases with an increase in the three identified risk factors. [ABSTRACT FROM AUTHOR]

In the last five decades, advances in information technology and in financial innovations have made possible the emergence of an immense capacity for banks to switch regimes from risk transfer to risk shifting. The devastating power of this capacity was amply pronounced in the financial crisis of 2007/2008. The fallout of which has intensified calls for a re-examination of current banking model and its risk management (or rather mismanagement). Risk shifting is, axiomatically, absent in an ideal Islamic financial system. The Islamic banking model, thus, provides unique paradigm with risk sharing at its core, potentially fostering financial inclusion and reducing the incidence of bank failures and the size of losses incurred by depositors and tax payers. However, the present formation of Islamic banking has grown out of conventional banking and reverse-engineers many of its techniques and instruments. The main objective of this paper is to empirically investigate risk management in Islamic banks in dual banking systems in member states of the Organization of Islamic Countries. The two-step dynamic difference GMM is applied to cater for the nature of Islamic banking data, which is characterized by a larger dynamic panel and a smaller timeframe. Findings tend to indicate that Islamic banking has a limiting effect on risk shifting. The effect however is not sufficient to fully nullify the overall risk shifting incentives. The evidence supports strengthening risk sharing and reforming Islamic banking configuration as the way forward. [ABSTRACT FROM AUTHOR]

Economic development of transition and developed countries is associated with increasingly unhealthy dietary habits among low-income population segments. Drawing on Ulrich Beck’s sociological theory of risk society, the present research note calls attention to the positive relation between national economic development and food risks that result in the rise of food-related diseases and healthcare costs. On this basis, we argue that the knowledge-intensive agribusiness may translate Cochrane’s technological treadmill into Beck’s risk treadmill that shifts a growing share of food-related healthcare costs from producers toward consumers, state, and the healthcare system. This argument motivates a novel research program dealing with the “food risk treadmill” that emerges in response to modern farming and agribusiness practices. Awareness of the food risk treadmill may help to streamline the development of agricultural science and to prevent it from being excessively dominated by the agricultural and food industry. [ABSTRACT FROM AUTHOR]

This paper provides evidence that pension regulations can incentivize or curb risk shifting in the investment of defined benefit plan assets. We document that in the US, where the pension insurance premium charged by the Pension Benefit Guaranty Corporation is largely flat, financially distressed firms with severely underfunded plans shift pension investment risk. We further find that risk shifting is mitigated in the UK after the implementation of risk-adjusted pension insurance premiums, and in the Netherlands where full pension funding is mandatory. Overall the results in this paper lend support to the view that structural flaws in the US statutory pension insurance scheme incentivize high-risk sponsors to gamble their pension assets when distress terminations of their plans become foreseeable. [ABSTRACT FROM AUTHOR]

We develop an overlapping generations model with leveraged investment in speculative asset bubbles. Financial intermediaries use borrowed funds to speculate on a risky asset bubble, which promises high returns as long as it does not collapse. They can, however, default on their debt and shift the losses to lenders when the bubble collapses. This risk shifting leads to welfare-reducing (or 'toxic') rational asset bubbles. We then analyze a set of often discussed policy interventions: pricking bubbles, macroprudential regulations, and leverage restriction. [ABSTRACT FROM AUTHOR]

The Consumer Price Index (CPI) is the standard measure of household inflation; however its calculations exclude critical areas of household expenditure. This paper is concerned with, first, how the meaning of the CPI has changed in recent decades given the ever increasing financialization of household expenditure, and second, identifying the factors that preclude the CPI from accounting for this shift and leaving it anachronistic in an era characterized by financial risks. [ABSTRACT FROM AUTHOR]