Financial products’ structuring in the sustainable financing market

Staněk Gyönyör L., Horváth M.

If ESG characteristics of companies attract loyal and resilient investors and customers, does ESG affect the stock-market connectedness during market upturns and downturns? The micro-level analysis uses the cross-quantilogram to measure quantile dependence between stocks in the S&P 1200 and the market with distinguishing factors of ESG scores. We employed the scores of seven major ESG data providers and their structural combination to capture the shared information. We found a systematic effect both on the level of multidimensional and unidimensional ESG scores. Moreover, we showed Governance scores create a counter-effect on the Environmental and Social pillars. In general, the high- and middle-ESG stocks tend to have lower dependence on the market during market downturns, with E and S scores pushing the dependence down and the G dimension pushing it up. Results suggest a lower distinguishing power of Environment and Social pillars and persistent Governance pillar power during moderate and upturn market times.

Schmidt J.H., Pilinja E.

Degtyareva V.V., Murzintseva D.A.

The object of this article is a study of the ESG agenda for Russian business in the changed geopolitical conditions. The statistical data used in the study were collected by the authors from open sources posted on the Internet and printed publications. The main purpose of the study was to identify ESG strategies of companies, their development, and to define key drivers of the development of the ESG agenda in Russia. During the research, the authors used general scientific methods such as synthesis, system and comparative analyses. The authors of the article identified the key drivers of the ESG concept development which will contribute to the growth of not only a single company, but also of the country’s economy as a whole. Based on the results of the study the authors have developed recommendations for the implementation of the ESG strategy in the current geopolitical circumstances.

Kallio M., Halme M., Dehghan Hardoroudi N., Aspara J.

• Prior critique of the complexity of structured investment products (SPs) is revisited. • Simple-to-understand, transparent SPs (TSPs) are introduced and conceptualized. • TSPs are studied with both theoretical & empirical approaches of operations research. • Results show that both rational and behavioral investor demand exists for TSPs. • Moderately priced TSPs are competitive even compared to index fund products. Structured investment products (SPs) are derivative securities whose return is contingent on the return of their underlying assets, such as a certain stock market index. SPs have been criticized for being complex and costly on the inside, while attracting retail investors with emotionally appealing promises, on the surface, to provide tempting yields and protection for the capital invested. To circumvent such criticism, we consider transparent SPs (TSPs), which simply offer a lower and upper limit on annual return (after costs and fees) as well a transparent rule defining the return based on the return of the underlying asset. We study TSPs using both empirical and theoretical approaches. An empirical survey of real investors with best-worst scaling as well as theoretical analyses based on utility theory and multi-stage stochastic programming (MSSP) show that moderately priced TSPs are competitive in comparison with other investment products, such as index funds. Furthermore, retail investors actually exhibit substantial preference for TSPs with partial capital guarantees, over and above SPs with the superficially tempting, full capital guarantees. A theoretical, MSSP-based analysis similarly confirms that including TSPs in an investment portfolio can yield substantial gains in certainty equivalent annual return. The results further indicate that perceived gains from TSPs are sensitive to costs, market imperfections, and interest rates, as well as private preferences and stock market expectations of retail investors. This demonstrates how MSSP can be applied to financial engineering for successful implementation of TSPs in future financial markets.

Bofinger Y., Heyden K.J., Rock B.

We study the impact of corporate social responsibility (CSR) on firm misvaluation in the US. Our results indicate that a firms Environmental, Social and Governance (ESG) profile significantly affects valuation: an improvement of a firms CSR leads to a higher ratio of actual to true firm value. Analyzing the relation between ESG and misvaluation separately, we find that ESG expands existing overvaluation whereas it reduces undervalued firms’ deviation from the true value. We argue that both valuation effects are attributable to the worldwide trend of sustainable investing. Further analyses reveal a moderating role of market sentiment towards sustainability in the ESG-misvaluation relationship. Our findings suggest that firms CSR is indeed perceived as valuable by shareholders and supports stakeholder theorys view in considering CSR as beneficial.

Fusai G., Longo G., Zanotti G.

In this paper, we investigate the contribution of interest rate structured bonds to portfolios of risk-averse retail investors. We conduct our analysis by simulating the term structure according to...

Fushiya H., Kitamura T., Nakasato M.

Purpose This study aims to investigate the impact of interest rates, the underlying asset and investment experience on the investment behavior of Japanese retail investors toward structured products (SPs). Design/methodology/approach Three treatments are constructed through internet-based survey experiments: interest rate, underlying asset framing and investment experience treatments. The interest rate treatment includes high- and low-interest rate environments. The underlying asset framing treatment includes equity and foreign exchange rates for the SP. The investment experience treatment includes experienced and inexperienced respondents for SPs. Findings The main finding of this study concerns the effect of the interaction between low-interest rates and investment experience. Specifically, SP-experienced investors tend to choose SPs in a low-interest rate environment and prefer equity-linked SPs, even though such SPs are overpriced. This finding is useful for financial regulators in formulating policies that protect retail SP investors in low-interest rate environments worldwide. Originality/value This study is the first to measure the sensitivities of investment behavior regarding the relative attractiveness of SPs to low-risk straight bonds, given interest rates, the underlying asset and investment experience. It provides evidence to support the development of SP regulations.

Baule R., Muenchhalfen P.

PurposeThe authors evaluate the preferences of retail investors with regard to the investment in structured financial products. The purpose of the paper is an analysis of the relative importance of key product attributes namely the issuing bank, the product structure, the associated costs and the disclosed risk.Design/methodology/approachThe authors conduct a choice-based conjoint analysis, based on an online experiment. Participants judge their preferences for products which are presented by shortened key information documents according to the requirements of EU regulation.FindingsInvestors consider the costs and the product structure to be most important, whereas the issuer and information on risk are of less interest. Their preferences depend on their (self-evaluated) expertise: while inexperienced retail investors concentrate on costs, experienced investors pay more attention to the product structure.Research limitations/implicationsThe study is limited to a subsegment of the market, the discount certificates. For these products, issuing banks gain insight into the attractiveness of their products. Furthermore, the study carries implications for regulators: since investors emphasize the costs in their decisions, an unbiased disclosure of costs should be enforced.Originality/valueWhile the recent literature has studied preferences for the investment in mutual funds, this is the first paper which directly analyzes the drivers of an investment in structured retail products.

Abreu M., Mendes V.

Structured retail products (SRP) are one of the most visible faces of financial innovation and are becoming increasingly popular amongst retail investors. However, there is strong consensus that retail investors’ preference for structured products is difficult to explain using the standard rational theory, those products being in general sold at a significant premium. Studying the actual trading behavior of individual investors we provide evidence consistent with the view that SRP likely offer value to some informed investors compared to other products, and that SRP allow investors to access segments otherwise not available to them. Nonetheless, our results also suggest that the increasing popularity of SRP is deeply related to investors’ behavioral biases, particularly overconfidence and gambling.

Maringer D., Pohl W., Vanini P.

Wallmeier M., Diethelm M.