Contributions in Merlin

Diversification is a fundamental concept in economics, decision theory, and finance, but the way in which it is implemented in the real world varies greatly. This paper asks how elementary the notion of diversification is by studying whether children apply it as a choice heuristic. We report on results of an experiment that tests whether children diversify in a sequence of hypothetical choice questions and dice-rolling games. Overall, we find that children do exhibit preferences for diversification, both for the sake of variety across consumption goods and for the purpose of mitigating risk when faced with a choice across risky gambles. The naive diversification heuristic, which implies an equal allocation across alternatives, is particularly evident in children's choices when the alternatives are equivalent or unknown. We also investigate the relationship between risk aversion and diversification and find no significant connection between the two. Our results indicate that diversification preferences may have fundamental, developmental roots, which contrasts with the traditional normative view of diversification, in which most economic models take diversification preferences as exogenously given. This may have implications for how one can treat investment anomalies in practice and, in particular, promotes financial literacy training from a young age.

We document significant differences in the financing structure of small firms with managers of diverse cultural backgrounds. To isolate the effect of culture, we exploit cultural heterogeneity within a geographical area with shared regulations, institutions, and macroeconomic cycles. Our findings suggest that there exist significant cultural differences in the preference towards debt funding and in the use of formal and informal sources of financing (bank loans and trade credit). Our results are robust to alternative explanations based on potential differences in credit constraints and in the distribution of cultural origins across industries, trading partners, and headquarters location.

We use a dynamic framework to address the questions: i) when should an insurance firm pay out dividends and raise (costly) capital and ii) when should an insurance firm take (liquid) investment risk. Financial decisions are made by a manager who strives to maximize firm value and operates in the presence of financial frictions and regulatory capital constraints. We show there is a unique pricing measure that is consistent with market prices and a broad ownership base and use it to compute the risk-adjusted net present value of cash flows to shareholders. We describe the capital and dividend strategies of the firm and show that, from a shareholder perspective, investment in risky assets can be value adding. Risky investments may add value by boosting the value of the option to default or, sometimes, by increasing the firm's franchise value.

What is beautiful is good, the ancient Greek lyric poet Sappho wrote over 2,500 years ago. Studies in social sciences, anthropology, psychology, and economics have shown various effects of physical attractiveness. Physically attractive people are hired more often, receive faster promotion, and generally earn more per hour; thus, there is a beauty premium. However, within the context of sports, little is known about consumer preferences concerning athletes’ physical attractiveness. In this study, we analyze 622 live tennis matches from 66 Grand Slam tournaments between 2000 and 2016, examining the relationship between attractiveness, measured by tennis players’ facial symmetry, and TV-viewership. We show that facial symmetry plays a positive role for female matches while there is no significant effect for male matches. The effect persists in several sub-sample regressions and robustness checks. Our results have important implications for managers in the field of sports. TV-broadcasters will likely acknowledge additional revenue potential from advertising due to increased viewership and change their programming accordingly. We contribute to the sports management and economics literature in that we introduce a new method to measure facial symmetry and show that physical attractiveness plays a positive role in tennis TV-viewership.

Using a unique data set of business loan applications to a single bank from individuals who are majority owners of small firms, we study how bank credit origination or denial affects individuals' income. The bank cutoff rule based on the applicants' credit score creates a sharp discontinuity in the decision to originate loans or not. We show that loan origination increases recipients' income five years onward by more than 10% compared to denied applicants. The effect is more pronounced in rural and low-income areas. Our results suggest an important role for banks` credit decisions on the distribution of income.

Model risk needs to be recognized and accounted for in addition to market risk. Uncertainty in risk measures estimates may lead to false security in financial markets. We argue that quantile type risk-measures are at least as good as expected shortfall. We demonstrate how a bank can choose among competing models for measuring market risk and account for model risk. Some BCBS capital requirements formula currently in effect leads to excessive capital buffers even on an unstressed basis. We highlight that the loss to society associated with the inefficient minimum capital requirements calculations is economically substantial over time.

Does neglecting the possibility that fossil fuel reserves become “stranded” result in a "carbon bubble", i.e., an overvaluation of fossil fuel firms? To address this question, we study whether banks price the climate policy risk. We hand collect global data on corporate fossil fuel reserves, match it with syndicated loans, and subsequently compare the loan rate charged to fossil fuel firms-along their climate policy exposure-to non-fossil fuel firms. We find that before 2015 banks did not price climate policy risk. After 2015, however, the risk is priced, especially for firms holding more fossil fuel reserves. We also provide some evidence that "green banks" charge marginally higher loan rates to fossil fuel firms.

Since the 1990s, research on publication outputs in business and economics has almost exclusively focused on journal articles. While earlier work has shown that journal articles and other publications were indeed complements in the 70s and 80s, we find that this is no longer the case when we include the most recent decades. Apparently, the notable shift in the scientific community's attention in the 90s on journal articles and the corresponding incentives towards publications in internationally highly ranked journals on average led researchers to focus one-sidedly on journal publications at the expense of other publication forms. To see whether the aggregate result also holds for individual researchers, we perform a cluster analysis and find four different types of individual researchers: "Journal Specialists", "Book-Based Publishers", a small group of "Highly Productive All-round Publishers" and a large group of what we call "Inconspicuous" researchers, with a very modest publication productivity in all forms. In addition, we find that researchers' age matters for their publication patterns: in our sample, more experienced researchers are less productive with respect to journal articles, but more productive with respect to other publication forms. This, however, is not the result of an individual career effect. Rather, it can be attributed to a cohort effect: among today's active researchers, the younger cohorts are more productive in journal articles than the older ones. Our explanation is as follows: the younger cohorts were still in their socialization and hiring phase and were more strongly affected by the newly introduced incentives towards international journal publications—and have thus reacted more strongly to the “regime change” resulting from the scientific community’s one-sided attention to publications in internationally highly ranked journals.

This paper summarizes results of a project that tries to examine how the revision of vocational training (apprenticeship) curricula affects the training behavior and investment decision of training companies. The project paid particular attention to IT-related changes in curricula and firms' investments in IT and new production technology. Unfortunately, based on the available dataset, the German Linked-Employer-Employee-Data (LIAB), the project was not able to produce conclusive evidence on the expected relationship. We find first support for a positive correlation between curricula changes and the probability to invest in IT for training firms but with the small number of cases (occupational curricula changes) and the limited number of adequate dependent variables we did not find significant effects for most single occupations. In the following, however, we provide some descriptive patterns that shed light on what we do know and what we do not know.