Using monthly data for 1953–2003, we apply a real-time modeling approach to investigate the implications of U.S. political stock market anomalies for forecasting excess stock returns in real-time. Our empirical findings show that political variables, chosen on the basis of widely used model-selection criteria, are often included in real-time forecasting models. However, political variables do not contribute systematically to improving the performance of simple trading rules. For this reason, political stock market anomalies are not necessarily an indication of market inefficiency.

Keywords: Political stock market anomalies, predictability of stock returns, efficient markets hypothesis, real-time forecasting

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Political Views and Corporate Decision Making: The Case of Corporate Social Responsibility

Amir Rubin

This paper conducts an empirical analysis of the relationship between corporate social responsibility (CSR) and political beliefs in the United States. By analyzing the 2004 presidential election results of communities in which corporate headquarters are located, we establish a correlation between the political beliefs of corporate stakeholders and the CSR ratings of their firms. Companies with a high CSR rating tend to be located in Democratic, or "blue" states and counties, while companies with a low CSR rating tend to be located in Republican, or "red" states and counties.

Keywords: CSR, decision making, elections, headquarters, political views

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The Sarbanes-Oxley Act of 2002 and Market Liquidity

Pankaj K. Jain, Jang-Chul Kim, Zabihollah Rezaee

Investors rely heavily on the trustworthiness and accuracy of corporate information to provide liquidity to the capital markets. We find that the rash of financial scandals caused a severe deterioration in market liquidity in the form of wider spreads, lower depths, and a higher adverse selection component of spreads vis-à-vis their benchmark levels. Regulatory responses including the Sarbanes-Oxley Act of 2002 (SOX) had inconsequential short-term liquidity effects but highly significant and positive long-term liquidity effects. These liquidity improvements are positively associated with the improved quality of financial reports, several firm-specific variables (e.g., size), and market factors (e.g., price, volatility, volume).

Keywords: Sarbanes-Oxley Act, SOX, Sarbox, stock-market liquidity, corporate governance, financial reporting, accounting fraud

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Risk shifts following Sarbanes-Oxley: Influences of disclosure and governance

Aigbe Akhigbe, Anna D. Martin, Melinda Newman

The Sarbanes-Oxley Act of 2002 (SOX) aimed to improve financial reporting by enhancing corporate disclosure and governance. We find statistically significant increases, from before to after the passage of SOX, in total return variance, market risk and idiosyncratic risk. The risk increases are consistent with predictions that the legislation would cause firms to disclose more negative information, resulting in increased investment risk. However, in cross-sectional tests, post-SOX improvements in information certainty, board independence and monitoring are associated with smaller increases or greater decreases in risk. If SOX is responsible for these improvements, its effects are consistent with its purpose.

Keywords: Sarbanes-Oxley, risk shifts, corporate governance, disclosure

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Lease Financing and Corporate Governance

Sara H. Robicheaux, Xudong Fu and James A. Ligon

Lease financing is a well-recognized mechanism for reducing the agency costs of debt. This study examines whether firms that attempt to control the agency costs of equity through strong governance structures, including chief executive officer compensation alignment and board structure, are more likely to use an agency cost reducing debt structure such as leasing. For a sample of large firms, we find that firms who use more incentive compensation and have more outside directors also tend to use more lease financing, suggesting these agency cost reducing measures are complements.

Keywords: Leasing, Corporate Governance, Debt Structure

Cointegration and Exogeneity in Eurobanking and Latin American Banking: Does Systemic Risk Linger?

John L Simpson

This paper examines financial integration, interdependence and exogeneity within and between Latin American banking and Eurobanking systems during a period of relative stability after the oil and debt crises of the 1980s. Significant evidence of cointegration in both long- and short-term relationships is reported. Within Latin America, exogeneity lies mainly with the Brazilian system. Within Eurobanking, the USA system is the dominant influence. Between Eurobanking and Latin American banking systems, the USA system is the major driving force. With continued interdependence of these banking systems, systemic risk lingers, and vigilance is required in banking supervision.

Keywords: Contagion, integration, interdependence, Eurobanking systems, Latin American banking systems

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Do Commodity Traders Herd?

Bahram Adrangi, Arjun Chatrath

We test for herding using data on aggregate trader positions for four commodities over twenty years. We show that while the positions of commodity traders are highly related, the relatedness falls short of herding. The crosscommodity relatedness in trader positions is almost entirely explained by common demand and supply factors.

Keywords: Commodity co-movement, herding, speculation

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