Latest findings: New research, studies and papers

This week: Bond returns and climate change, individualistic societies, and investor returns and social goals.

On Bond Returns in a Time of Climate Change

The study of the financial repercussions of low-carbon policy has focused mainly on stocks, leaving bonds out of the picture. In this paper, author Alessandro Ravina assesses the impact of low-carbon policy upon European bond returns and reviews the presence of a statistically significant green premium in the European bond market. According to Ravina’s abstract: “Furthermore, evidence is found that the addition of an environmental factor improves the performance of the original model in Europe. Lastly, the carbon stress test put forward is able to indicate the effects of a plausible but more severe average EU-ETS carbon price on bond returns.”

Author: Alessandro Ravina, Université Paris, Panthéon-Sorbonne

Individualism and Climate Change Policies: International Evidence

This paper examines the extent to which the cultural dimension of individualism-collectivism matters for the stringency of climate change policies across the world. The author postulates that individualistic societies are endowed with a better capacity to implement stringent climate change regulations compared with their collectivistic counterparts. 

According to the results, the evidence shows “that individualism exerts a positive influence on the stringency of climate change policies through enhancing the quality of governance and female political presentation.”

Author: Trung V. Vu, Department of Economics, University of Otago, New Zealand

A Theory of the Proxy Advice Market when Investors have Social Goals

This paper develops a theory of the proxy advice market when some investors have non-pecuniary goals such as environmental sustainability and protection of human rights. The authors develop a model in which advisory firms choose their production technologies and compete for the business of investors with heterogeneous preferences over returns and social goals. When the market for advice is small, the industry equilibrium consists of small “boutique” firms that provide customized advice to each investment fund, and voting outcomes reflect the distribution of investor preferences. When the market is large, the industry reduces to a single advisory firm using a platform technology, the firm’s advice is slanted toward the preferences of funds with non-value-maximizing goals, and voting outcomes overrepresent the preferences of activist funds. We discuss normative principles for assessing proxy advice when value maximization is not the sole objective of investors.

Authors: John G. Matsusaka, University of Southern California - Marshall School of Business; USC Gould School of Law; Chong Shu, University of Southern California, Marshall School of Business, Finance and Business Economics Department

Photo: $5 currency sheets are cut into 16-subject sheets. U.S. Treasury.