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- PublicationEvolution of auditor-client negotiations from the initial audit tender to subsequent audit cycles: A qualitative study of (non)cooperativeness(University College Dublin. School of Business, 2022)Audit firm-client negotiations commence with the audit tender, continue in subsequent audit cycles, and often persist after rotation via consulting services. However, we do not understand how past negotiation behaviour, or anticipated future interactions, shape current audit negotiations. I interview 31 audit committee chairs, auditors and company managers (triads) and interrogate data from their public and private documents to understand the evolution of triad negotiations from the initial audit tender to subsequent annual audit cycles. Employing McGinn and Keros’ (2002) negotiation framework, four key findings emerge. First, audit committee members become more cooperative in negotiations with auditors and company managers to acquire information and work effectively. Second, auditors are always cooperative to maintain positive relationships with audit committee members and company managers and protect their commercial interests. Third, company managers become more cooperative as they demonstrate their ability to negotiate effectively with auditors to audit committee members. However, there is a limit to their cooperativeness. Company managers are more concerned with meeting analysts’ earnings targets than maintaining the auditor relationship. My findings suggest that parties’ initial negotiation behaviour does not necessarily set a precedent for their counterparties’ subsequent behaviour. However, auditors’ anticipation of future consulting contracts encourages them to cooperate currently, although it may not always be appropriate to do so. Fourth, I uncover four new negotiation types and refine McGinn and Keros’ (2002) conceptualisation of negotiations. This research is the first to study the evolution of auditor-client negotiations from the initial audit tender to subsequent audit cycles. My findings provide insights into how auditors’ balance their professional-commercial interests in client interactions, how audit committee members engage in and oversee audit and accounting negotiations, and company managers’ negotiation behaviour. Ultimately, my findings have implications for audit quality and address concerns at the heart of recent UK audit reviews and parliamentary inquires.
- PublicationEssays in Environmental and AI Finance(University College Dublin. School of Business, 2022)Entitled "Essays in Environmental and AI Finance," this dissertation consists of three self-contained essays. The first essay avails of capital market price signals to assess the presence and magnitude of economic incentives for clean innovation relative to dirty innovation. Second essay examines the utility and ethics of incorporating national culture profiling in bank-level machine-learning informed alert models relating to financial malfeasance. And the third essay tests state-of-the-art model-agnostic explainable AI (XAI) methods to uncover algorithmic injustice in the bank lending space. Essay 1 that seeks to bring new insights to the corporate environmental – financial performance debates examines how Tobin's Q is linked to 'clean' and 'dirty' innovation and innovation efficiency at the firm level. While clean innovation relates to patented technologies in areas such as renewable energy generation and electric cars, dirty innovation relates to fossil-based energy generation and combustion engines. A global patent data set covering over 15,000 firms across 12 countries helps uncover strong and robust evidence that the stock market recognizes the value of clean innovation and innovation efficiency and accords higher valuations to those firms that engage in successful clean research and development activities. The results are substantively invariant across innovation measurement, model specifications, estimators adopted, select sub-samples of firms and the United States and European patent offices. Essay 2 examines the utility and ethics of incorporating national culture profiling in bank-level machine-learning informed alert models relating to financial malfeasance. On a globally significant financial institution, binary classifier type alert models are used to establish the utility of dimensions of national culture in formulating anti-money laundering predictions. For corporate (individual) accounts, Hofstede individuality (individuality, and national-level corruption perception and financial secrecy) scores of the country in which a customer is resident, or from which a wire is sent/received, are of paramount importance. When combined with extensive account and transaction data against an even proprietary institutional algorithm, national culture traits markedly enhance the models' predictive performances. Against a global standard, ethical implications of ascribing values to dimensions of national culture are examined. We posit an ethical framework for the use of national profiling in anti-fraud alert models. Essay 3 provides evidence of the validity of Shapley model-agnostic explainable AI methods’ on real-world datasets. This work contributes initial evidence on the usefulness of Global Shapley Value and Shapley-Lorenz methods, with respect to racial discrimination in lending. Using 157,269 loan applications from the Home Mortgage Disclosure Act data set in New York during 2017, it is confirmed that the methods reveal evidence of racial discrimination inherent in the predictions of a transparent logistic regression model. Thus explainable AI can enable financial institutions to select an opaque creditworthiness model which blends out-of-sample performance with ethical considerations.
- PublicationEssays on portfolio optimization and estimation risk(University College Dublin. School of Business, 2022)This thesis is a collection of essays that study the issue of estimation risk in portfolio optimization. Each essay investigates the usage of a probability estimator or optimization approach which addresses estimation risks in portfolio selection under lower-partial moments and stochastic dominance. The three approaches use option-implied data, robust optimization, and sparse multivariate copula models, respectively. The considered empirical applications show robust evidence of enhanced portfolio performance in an out-of-sample setting. The first essay uses an eclectic financial modelling approach to equity sector rotation using sector Exchange Traded Funds. The approach combines stochastic dominance ordering with the use of option-implied probabilities and copulas. We find that the performance of the monthly reweighted long-only portfolio can be improved using an option-implied probability distribution. We further find that option-implied probabilities estimated using the Heston pricing model provide the best portfolio performance. The portfolio outperforms the S&P 500 index, an equally-weighted portfolio and strategies based on historical time series, even after accounting for transaction costs. The superior performance is more pronounced during bad economic times proxied by bear market and high volatility states. No significant performance gains are evident for portfolios formed when we account for non-linear dependence (R-Vine copula) relative to traditional linear dependence (Gaussian copula). The second essay provides an empirical analysis of the out-of-sample performance of robust portfolios, where uncertainty exists in the underlying probability distribution. This study proposes an alternative specification of the uncertainty set allowing for joint uncertainty in both probability and threshold levels for three portfolio selection approaches (expected shortfall, semi-variance and the Omega ratio). There are two cases considered where the uncertainty sets are dependent or independent. The empirical results show that joint uncertainty with dependent sets yields superior results to other portfolios. Furthermore, portfolios constructed using joint uncertainty also have the additional benefit of significant protection against market crashes for portfolios. Robust portfolios have a different correlation with common risk factors compared to non-robust portfolios. In particular, joint uncertainty with dependent sets yields portfolios with significant exposure to the momentum factor, that is, betting on stocks that were past winners. The performance of the robust Omega ratio portfolios can be attributed to the combination of value and momentum factors. The third essay studies the use of high-dimensional Regular-vine copula models in estimating asset interdependence for portfolios with varying sizes. For a large portfolio, the copula parameters outnumber the assets and observations, giving rise to estimation errors. This estimation risk leads to suboptimal portfolio selection and consequently poor out-of-sample performance. In this context, sparse vine models, in which independence pair-copulas prevail, provide significantly improved results for large portfolios across various performance measures. The improvement of portfolio performance is more pronounced in low market volatility periods. The truncated vine copulas, a sub-class of sparse copulas, yield more stable weights for large portfolios and significantly reduce transaction costs.
- PublicationInfluence of Prior Employers and Capital within Entrepreneurial Ecosystems(University College Dublin. School of Business, 2022)Entrepreneurship is both sticky (persistent) and spiky (unevenly located) which presents a problem of how to support new venture creation and scaling in regions which do not exhibit high levels of entrepreneurship. Entrepreneurship is important because it results in regional development through innovation, employment and economic growth. The entrepreneurial ecosystem literature offers an approach to enhance entrepreneurship within regions by emphasising interactions between elements categorised as financial, institutional, knowledge and social capital. This dissertation investigates the influence of different types of prior employers of high-tech entrepreneurs on knowledge capital in entrepreneurial ecosystems in Ireland, the development of knowledge capital in an entrepreneurial ecosystem of high-growth firms in Dublin, and the influence of different types of capital across entrepreneurial ecosystems throughout the United States. It finds that universities, multinationals, venture capital, hubs and start-ups are all important sources of knowledge capital for high-tech entrepreneurs in an entrepreneurial ecosystem. Universities located within each region of Ireland are the most important prior employer despite university spinoffs comprising a small portion of all high-tech entrepreneurial firms in Ireland. In Dublin, as knowledge capital was recycled across multinational high-growth firms through employment mobility the region became a more connected and resilient structure. Across the United States, institutional capital was shown to interact with financial capital. In entrepreneurial ecosystems with low levels of institutional capital, entrepreneurship was influenced by financial capital in neighbouring ecosystems, but this was not evident in ecosystems with high levels of institutional capital. This contributes to the knowledge of the entrepreneurial literature by showing which prior employers are important in the entrepreneurial ecosystem, how knowledge capital derived from prior employment develops resilience and structure in the ecosystem, and how interactions between types of capital affect the relationship on entrepreneurship within the ecosystem.
- PublicationEssays on sustainable finance across asset classes : empirical evidence from China and US(University College Dublin. School of Business, 2022)This thesis contributes to the growing body of literature on sustainable finance by investigating the financial implications of environmental, social, and governance (ESG) risks and opportunities from the perspective of investors and companies. Utilising novel data from the United States (US) and China, I empirically examine how ESG factors are priced in different financial assets, including options, equities, and bonds, throughout the four main chapters. The first main chapter investigates the upside potential and downside risk of responsible investing that incorporate ESG factors into the investment process and decision-making. By using the option market measures of 46 US financial services companies, I find that financial services companies with highly-rated responsible processes are associated with higher upside potential and lower downside risk; however, I do not observe the same effect for investors who are simply Principles for Responsible Investment (PRI) members. The second chapter examines the return on investment (ROI) in human resource management (HRM) practices using an economics-based approach. In particular, I attempt to answer whether a firm's investment in HRM activities reduces the cost of bond issuance. Using a sample of 172 Chinese nonfinancial companies, I find that firms with superior employee relations management are associated with approximately 18.79 basis points lower bond issuance spreads, equivalent to an annual saving of RMB 15.25 million (or USD 2.39 million). Furthermore, the estimated ROI in HRM through the channel of financing cost savings is about 1.24% per annum. Next, I empirically investigate the relationship between corporate environmental performance (CEP) and stock market performance, particularly through the mechanisms of consumer and employee preferences. By using a sample of 629 Chinese nonfinancial companies, I find that firms with superior carbon risk management are associated with higher risk-adjusted returns when there is high consumer demand (i.e., in consumer goods sectors), but an insignificant effect is observed when consumer demand is low (i.e., in non-consumer sectors). Furthermore, I find that employee demand also mediates the corporate environmental and financial performance relationship. The findings suggest that for sectors in which the customer's preference does not play a denominate role in affecting returns (i.e., non-consumer firms), the employee's power is essential in influencing the level of expected returns. The mediating effect of employee preference is particularly significant for firms with more human capital. Finally, the fourth empirical chapter evaluates the financial performance of impact investors who invest with dual objectives in China. I specifically examine whether environmental impact investing adds value to financial institutions by drawing new inferences from their performance in stock returns. The results indicate that financial companies that proactively incorporate environmental impacts in their due diligence and financing decision-making show higher stock returns than firms that poorly manage their indirect environmental impacts. In other words, institutional investors that pursue impact financing show better stock return performance than those that do not.