Finance & Accounting (F&A)

Research area

Finance and Accounting

Keywords

Asset Management, Corporate Finance, Corporate Governance, Real Estate Finance, Financial Accounting, Financial Econometrics, Financial Markets, Investments, Management Accounting, Risk Management

Mission of the programme

The F&A programme aims to enhance our understanding of the financial decision-making of firms, managers and market participants, as well as the functioning of financial markets and intermediaries. The research programme is carried out by a young, ambitious, and diverse group that is internationally highly visible. We strive for high quality scientific contributions in all major areas of finance and accounting, and disseminate our knowledge locally and internationally.

Current programme coordinators

	Dick van Dijk  Professor of Econometrics (Finance)		Ingolf Dittmann Professor of Corporate Governance and Managerial Accounting
	Abe de Jong  Professor of Corporate Finance and Corporate Governance		Frank Hartmann  Professor of Management Accounting and Management Control
	Marno Verbeek  Professor of Finance  Scientific Director ERIM  Dean of Research RSM		Willem Verschoor  Professor of Finance

Background of the programme

The ERIM Finance and Accounting programme aims to cover all areas of finance and accounting, and encourages research that is relevant for a broad audience in the finance and accounting profession. A large part of our research is empirical, based on various commercial or hand-collected data sets and econometric techniques, but we also work with theory, numerical calibrations, and experiments. Much of our more recent research takes a behavioural view and tests or analyses behavioural models with the same methodological rigour as is usual for classical models. We believe that diversity across researchers in terms of research topics and research methods together with the frequent exchange of ideas during seminars and conferences creates a rich knowledge base that fosters interaction and innovative research. We strive for influential publications in high-ranking journals, and we have made publications in such journals a prerequisite for obtaining a tenured position in our group. Over time, four specialties have arisen in our programme, which make Rotterdam a unique place in Europe to do research. First, we have a large group of people who work on asset management, a research topic that benefits from close ties to local asset management companies. Second, we are very successful in the field of corporate governance that spans the two sub-disciplines finance and accounting and that therefore benefits from an integrated finance and accounting programme. Third, we are well-known for our research in real estate finance, a research topic that fits well with Rotterdam being one of the most dynamic and expanding cities in Western Europe. Finally, we have developed a sizeable group specialised in behavioural research in accounting, employing both survey and experimental data, thus benefitting from the presence of the Erasmus Behavioural Lab.

Below we provide a brief overview of recent and ongoing research projects. For the sake of readability we group these projects into three themes:

1. Asset pricing
2. Corporate finance
3. Accounting

Asset Pricing

The fundamental and general questions in this theme focus on how assets are priced, which sources of risk play a role, how (various dimensions of) risk can be modelled and optimised, how different assets co-move together, and what these imply for asset management, risk management and, more generally, for financial policy making. Modelling and understanding financial markets plays a key role because this is where supply and demand meet and prices are established. Since firms rely on financial markets for their capital needs and risk management, a clear link exists with the Corporate Finance theme.

Our research includes models of market microstructure, the analysis of specific financial markets, such as foreign currency, fixed income, commodity futures, credit risk, and energy, the development of (econometric) tools for modelling and forecasting financial data, the performance and role of the professional investment industry, and the financial economics of real estate decisions and investments.

Many asset pricing results are based on the assumption of representative rational agents. However, in recent years we see increased attention to the role of investor heterogeneity and behavioural biases. In our programme we pay substantial attention to these issues by investigating the merits of heterogeneous agent models for a broad range of financial markets, including foreign currency. We also investigate the asset pricing implications of alternative attitudes towards risk, loss aversion, and behavioural biases. Besides understanding the cross-sectional variation in expected returns, we also deal with practically relevant issues such as the time-series predictability of asset returns, volatility, and co-movement. We employ econometric techniques to estimate and empirically evaluate forecasting models for returns and volatilities. Measuring expected returns and volatilities is vital for empirical research on asset pricing and asset allocation. We develop new and better proxies for expected returns, while we also investigate how high frequency data can be used to better measure volatility and covariances, with applications to portfolio construction and risk management.

ASSET MANAGEMENT

A team of researchers builds upon the asset pricing and predictability results and focuses on the role and performance of mutual funds, hedge funds, and other forms of delegated portfolio management. Mutual funds are well-regulated pooled investment vehicles that provide professional asset allocation, while hedge funds are largely unregulated and opaque investment vehicles targeted at institutional investors and wealthy individuals. Key questions are to what extent mutual funds and hedge funds are able to add value (by outperforming easy to obtain benchmarks) and to what extent past performance is informative about the future. Other research addresses the behaviour of investors in mutual funds and hedge funds, like the relationship between past performance and money flows, and the relationship between institutional investors’ behavior and asset prices, such as the implications of frictions and short sale constraints.

Financial markets are occasionally affected by abrupt events, such as crises and crashes or a dryup of liquidity. Several members of our programme analyse and model such abrupt events with advanced econometric techniques, such as structural breaks, copulas, model averaging, and regime switching. We also pay specific attention to the role of market liquidity in the wellfunctioning of capital markets, especially during financial crises. Credit risk refers to the potential that a bank borrower or counterparty will fail to meet its obligations. Investors can trade credit risk using credit default swaps (CDS) or other derivatives. We investigate the pricing of credit risk, including the effect of liquidity on credit risky instruments, as well as the structure and informational efficiency of CDS markets, including how public and private information drives prices in CDS markets and how systematic risk is priced.

Market microstructure refers to the way financial markets are organised and how transactions take place. Several researchers in our programme specify and estimate empirical models in this area, for example to investigate the links between market microstructure and exchange rates, to identify the impact of technological advances, and to examine the role of market makers and other intermediaries. We also investigate the interaction between trading volume and asset prices in stock and bond markets.

REAL ESTATE

While real estate finance and economics has obvious links to mainstream finance, its development as an academic field is relatively independent having, for example, its own dedicated journals and conferences. A small but highly visible group of scholars at ERIM analyses the financial economics of real estate decisions and investments in a broad sense. Real estate investments have gained momentum over the past three decades, but empirical research on the international performance of these investments is still scarce. We address issues relating to the performance of both public and private equity investments in real estate markets, the functioning of Real Estate Investment Trusts (REITs), and the value and importance of real estate investments within an asset-liability framework. We also investigate the price dynamics and risks of the housing and mortgage market. The financial integration and shifting banking standards are analysed in an international study, where lessons from ten different markets are compared and collected. Further, we investigate office rent dynamics and agglomeration effects for markets at different continents.

Corporate Finance

 CORPORATE GOVERNANCE

Corporate governance deals with the question of how control rights should be allocated among the parties involved in running a firm in order to safeguard the interests of stakeholders, including the financial interests of investors. It deals with the conflict between managers and shareholders and the conflict between minority shareholders and blockholders. A large part of our research addresses the role of big shareholders, which can be ambiguous. They help to monitor top management but they might also try to expropriate minority shareholders. We also investigate the role of shareholder voting and the value of voting rights. To ensure that the firm is run in the interest of shareholders, the board of directors is supposed to monitor management. In addition, performance-related executive compensation can be used to align the incentives between management and shareholders. On a more general level, we also deal with the question of whether self-regulation through national corporate governance codices can improve corporate governance and how the financial market values different features of corporate governance.

FINANCING DECISIONS

The principal question in Corporate Finance is how to finance firms at various stages during their life cycle. How should corporate assets be valued and how should they be combined in different firms? Our group has performed considerable research in this area.

Start-up finance is vital for the emergence of young and dynamic firms. We conduct research on start-up capital, the development of Europe’s new stock markets, and initial public offerings. We also look at start-up finance from the perspective of financiers (private equity) and combine real options valuation with game theory.

Financing decisions of more mature, listed firms are another major topic in corporate finance. A principal source of external financing comes from commercial banks. Here, we investigate bank internal credit ratings, checking account activity and the link between loan growth, loan maturity, and borrower risk. We also analyse the wealth effects of bank loan announcements and whether close ties between banks and non-financial firms help the latter to overcome financing constraints. An alternative to bank financing is the issuance of corporate bonds. More generally, we perform research on the relation between capital structure, dividend policy, and company valuation and on the effects of financial distress, learning, and competition on investment and financing policies. In this area financial perspectives on restructuring is another theme, which includes divestitures, mergers, and acquisitions.

Accounting

GOVERNANCE AND DISCLOSURE

The market for financial information is determined by demand and supply. Voluntary corporate disclosure provides investors and other external stakeholders with relevant information to judge the quality of the performance and to assess the value of firms. This research topic addresses questions such as why, how and when do firms provide information and also how do investors use this information.

Publicly listed firms face important decisions regarding the amount and nature of their disclosures. Our research examines the use of alternative performance measures by companies and how information is communicated (for example during earnings conference calls), what incentives firms have to disclose, and what the information content of such voluntary disclosure is. Another part of our research focuses on how intangible assets (like R&D or brands) are managed, measured, and reported.

Apart from examining various aspects of the supply side, our research group also conducts research on the demand side of financial information. We use, for instance, web site statistics to investigate what parts of the financial statements are used by investors. More generally, the group investigates the role of financial information on capital markets. We analyse the impact of accounting choices and earnings management practices on the costs of capital and credit ratings, and study the role of analysts in financial markets.

GOVERNANCE AND CONTROL

Accounting information plays a vital role in the management of organisations and in the way stakeholders evaluate the organisation’s performance. This research theme addresses questions relating to the impact of performance measurement systems, management control systems, and incentives systems on managerial decision making and organisational viability. A major focus is the role of accounting information in performance measurement, where we analyse the role of information performance measurement on agents’ performance. Within this general area, we have a special interest in the use of environmental performance measures and in performance measurement in public sector or governmental organisations. This research is predominantly empirical and relies on field and archival methods.

Behavioural accounting research is an increasingly important part of our research agenda. Several members of the F&A programme conduct behavioural (i.e., experimental and survey) research both in the laboratory and the field. We analyse judgment and decision making in the context of audit and accounting information systems, using psychology theory to explain decision makers’ cognitive and motivational responses to audit and accounting information. Access to the Erasmus Behavioural Lab (EBL) has enabled multiple studies investigating, for example, the effect of managers’ use of discretion in evaluation processes, the effect of incentives on performance misreporting, and the effect of incentives on managerial time horizons.