The Centre for the Analysis of Investment Risk (CAIR) has financed a number of new research projects covering subjects such as climate change, disclosure of modern slavery reports, dual-class listings, and corporate securities.
Modern Slavery
ESG (Environment, Social, and governance) and sustainable finance have increasingly become the central focus of the investment community, and modern slavery is an important social aspect in ESG and has become the key compliance concern of many regulators and supply chains specialists. In particular, the 2015 UK Modern Slavery Act (MSA) makes it mandatory for all UK businesses which have global revenues exceeding £36m to produce an annual Modern Slavery Report.
A project co-headed by Professor Ser-Huang Poon is now looking at the disclosure quality of UK Modern Slavery reports. A previous study she co-authored studied more than 6,000 MSA statements, but the latest project will covers more than 13,000 reports by 8,500 businesses up until 2021.
As she explained: “We are using an automated process which will manually score the reports by FTSE100 companies against benchmarks provided by the Business & Human Rights Resource Centre. The ultimate goal is to fully automate the entire MSA reports scoring process in real time, thereby making it a dynamic process.”
Climate uncertainty
Under the threat of climate change companies have become increasingly reliant on stakeholders and other parties to hedge risks and increase values. In a project entitled Corporate Decisions under Climate Uncertainty, Professor Viet Dang, Dr Ning Gao and Hongge Lin are investigating various company decisions in the face of climate uncertainties which involve both transition risks and physical risks.
As Professor Dang commented: “The study will specifically shed light on the impact of climate risks on corporate decisions and outcomes, and will help inform institutional investors, company stakeholders and managers, and policymakers on the impact of climate risks on the corporate sector and suggest appropriate responses. It will also be a valuable input to the increasingly heated debate regarding the best way forward amongst the uncertainties imposed on economy and society by climate change.”
Dual-share structures
A project led by Dr Wei Jiang will explore important issues in relation to dual-class firms such as disclosure, CSR, risk management and regulations.
The dual-class share structure has become more prevalent on US stock markets over the past decades with, for instance, more than 20 per cent of companies listing shares on US exchanges between 2017 and 2019 having a dual-class structure.
As she explains: “In recent years several prominent companies such as Google, Facebook and Alibaba have gone public with dual-class share structures which deviate from the one-share one-vote principle and allows company founders and executives who hold a minority of the company shares to have special voting rights.
“This provides them with effective control, while outside investors who hold a majority of the company’s stock have regular voting rights. As such the rise of dual-class shares and the corresponding desire by stock exchanges to attract public offerings in more recent years, have drawn renewed attention to these structures.”
Shelf registrations
Another project, entitled Shelf Registrations and Takedowns as a Nested Decision Process, is investigating shelf-registered corporate security offerings. The research, by Mengqian Chen and her PhD supervisors Professor Norman Strong and Professor Marie Dutordoir, is inspired by the observation that only a fraction of shelf registrations leads to actual takedowns. For instance just under half of universal shelf filings between 2000 and 2020 did not result in an actual security offering, with the firm leaving all funding “on the shelf”.
The project will focus on three key research questions. Firstly, what are the determinants of universal shelf takedowns? Secondly, given that universal shelf filings allow firms to choose between various security types, what are the determinants of different takedown types? And thirdly, does the market incorporate the predicted takedown probability into its stock price reactions at the shelf filing and takedown dates?
Shelf registrations allow eligible firms to offer and sell securities with a delay or continuously within a specified period. Once registered, an issuer can sell all or parts of the registered security anytime, without further red tape, within the shelf coverage period.
