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During the last year twelve months when interest rates declined slightly the Vanguard fund reported a oneyear return of 4.07% versus a return of only 2.42% for the lower duration Loomis Sayles Fund. This is an excellent example for investors that higher duration (all else being equal) means higher returns in a declining interest rate environment and lower relative returns in an increasing interest rate scenario. In addition to duration, investors should consider the type of bonds, their credit quality, fund managers and the expense ratios charged. FINRA warned investors to be cautious of duration but that also other factors including inflation risk, call risk and default risk could affect the value of a bond or bond fund. Investors should always check a bond fund’s prospectus for these risk factors.
Figure 2: Yield Curves for US Treasuries
Lifecycle or Target Date Funds Bear a Closer Examination for Interest Rate Risk Many baby boomers who may currently be or approaching 60 years old and hoping to retire by age 65 may be in an age based life cycle fund such as TIAA-CREF’s Lifecycle 2020 Fund. The purpose of an age based lifecycle fund is that it regularly changes the asset allocation reducing the individual’s equity exposure and increasing their fixed income exposure under the premise that fixed income investments are less risky than equities. However, in our current economic climate in which interest rates are at abnormally low levels, fixed income investments of any significant duration may not be significantly less risky than equities. There is a risk for older investors in lifecycle target date funds since they are more heavily invested in fixed income. Consider the example of a baby boomer with $1 million in the TIAA/CREF’s 2015 Lifecycle fund (TCNIX). At September 30, 2015, 34.1% of the fund’s assets were invested in CREF bonds.
GCBF ♦ Vol. 11 ♦ No. 1 ♦ 2016 ♦ ISSN 1941-9589 ONLINE & ISSN 2168-0612 USB Flash Drive 179 Global Conference on Business and Finance Proceedings ♦ Volume 11 ♦ Number 1 (tiaa-cref.org). This means that if interest rates increase 2% across the board (parallel shift of the yield curve), the bond fund portion of the portfolio would decline by approximately 10.8% (5.4 duration x 2%).
34.1 percent of the $1 million investment is $341,000, and a 10.8% decline would result in a loss of $36,828.
(TIAA/CREF has received multiple awards including the 2013 and 2014 Lipper Fund Award “as the best large fund management company overall”. (de Aenlle). Most investors consider TIAA/CREF to be one of the safest options for retirement portfolios and thus might never expect any loss.)
How to Lower Your Interest Rate Risk (Duration) Without Giving Up Yield
As previously discussed, during this time of extremely low interest rates, many investors and money managers seek to increase the yield on their fixed income investments by buying longer maturity bonds, “going further out on the yield curve”. Longer maturities will of course typically result in a higher duration/interest rate risk. However there is a little known strategy used primarily by institutional investors of keeping the higher yield on longer dated bonds but reducing their duration. Consider an example of two 20-year bonds which both have an effective yield of 2%. Bond A is a bond trading at par (value at maturity) which has a stated interest rate of 2%. Since the bond is trading at par, the effective yield is also 2%. Bond B trades at a large premium (price over par) because the stated interest rate (coupon) on the bond is 5%.
However the effect of paying a premium for the bond reduces the effective yield on Bond B to 2%, equivalent to Bond A. While the term and yield on these two bonds are identical, the durations are very different. Using one of the many online duration calculators (WolframAlpha), Bond A with the 2% coupon has a 16.41 modified duration (16.58 Macaulay), while Bond B with the 5% coupon has a 14.13 modified duration (14.27 Macaulay). How is that possible? While the overall return (yield) to investors is the same, the higher stated/coupon interest payment the investor receives from Bond B (typically semi-annually) effectively returns the investment slightly faster back to the holder of Bond B and consequently reduces the duration of the bond. How important is this difference of 2.28 in duration between Bond A and B? If interest rates increase 1%, Bond A’s price will theoretically decline 2.36% MORE than Bond B’s price.
Besides the reduced interest rate risk, institutional money managers can also report a lower duration for their mutual fund or portfolio by using this tactic. Hence, an observant investor might notice that bond issuers prefer to sell more of their bonds at a premium. In an efficient market, the buyer of Bond B who paid a premium could potentially lose some or all of that premium paid over the face value of the bond if the issuer calls that bond before maturity. Consequently, it is very important for an investor to understand the call or redemption provisions before buying a bond at a premium. A low duration does not mean that a bond or bond fund is risk-free.(FINRA 2013)
In conclusion, investors do not have to know how to calculate duration. However, even the Financial Industry Regulatory Authority has indicated that any knowledgeable investor should know a bond or bond fund’s duration number before blindly making an investment. A savvy investor should also be aware of what percentage of their life cycle holdings are held in bonds and the duration number for those bonds.
Duration is a good estimate of what effect an interest rate increase or decrease will have on bond investments or bond funds. If interest rates were to rise by 3 percent over the next 10 years, a bond or bond might potentially decline in value by approximately 3 percent times a bond’s duration number. Conservative investors who seek safety may be unpleasantly surprised to realize that they may be experiencing losses in their “safe” investment portfolios if there is a reversion to the mean and more normal interest rates.
REFERENCESCooper, I.A. (1977). Asset Values, Interest-Rate Changes, and Duration. Journal of Financial and Quantitative Analysis, 12, pp 701-723.
GCBF ♦ Vol. 11 ♦ No. 1 ♦ 2016 ♦ ISSN 1941-9589 ONLINE & ISSN 2168-0612 USB Flash Drive 180 Global Conference on Business and Finance Proceedings ♦ Volume 11 ♦ Number 1 Cox, J.C, Ingersoll, J.E, Ross, S.A. “Duration and Measurement of Basis Risk.” The Journal of Business, Volume 52(1), January 1979. Pages 51-61.
de Aenlle, C. (2014). LIPPER AWARDS-Why TIAA-CREF stands out as a fund manager. Retrieved November 14, 2015. http://www.reuters.com/article/2014/03/24/lipper-awards-tiaaidUSL2N0M81RI20140324#0rgcWhdjvXX2swh8.99 Federal Reserve HRB H.15 Release. Retrieved November 6, 2015.
http://www.federalreserve.gov/releases/h15/data.htm FINRA Investor Alert (2013). Duration--What an Interest Rate Risk Could Do to Your Portfolio.
Retrieved September 6, 2015. https://www.finra.org/investors/alerts/duration-what-interest-rate-hikecould-do-your-bond-portfolio Fitch Ratings (2013). Timing Is Everything for Potential "Bond Bubble". Retrieved September 16, 2015.
https://www.fitchratings.com/gws/en/fitchwire/fitchwirearticle/Timing-Is-Everything?pr_id=779231 Fitch Ratings (2012). The “Bond Bubble”: Risks and Mitigants. Retrieved September 14, 2015.
http://www.sifma.org/uploadedfiles/for_members/thought_leader_library/2012/fitch-bondbubble.pdf?n=34035 Ho, Thomas (2013). Yield Curve Movements and Key Rate Durations. Retrieved November 1, 2015.
http://www.thomasho.com/space/viewBlog.asp?blog=33 Macaulay, F.R. (1938). Some Theoretical Problems Suggested by the Movements of Interest Rates, Bond Yields and Stock Prices in the United States since 1856. New York, Columbia University Press.
U.S. News and World Report. Best Long-Term Bond. Retrieved October 26, 2015.
http://money.usnews.com/funds/mutual-funds/rankings/long-term-bond U.S. News and World Report (2010). Best Fit Intermediate-Term Bond. Retrieved October 26, 2015.
http://money.usnews.com/funds/mutual-funds/rankings/intermediate-term-bond WolframAlpha computational knowledge engine. Retrieved November 10, 2015 and November 14, 2015.
http://www.wolframalpha.com/input/?i=bond+duration+calculator&a=*FS-_**BondDuration.DMODBondDuration.rc-.*BondDuration.y-f2=5+Apr+2016&f=BondDuration.SD%5Cu005f5+Apr+2016&f3=4+Apr+2036&f=BondDuration.MD %5Cu005f4+Apr+2036&f4=2%25&f=BondDuration.y%5Cu005f2%25&f5=5%25&f=BondDuration.rc %5Cu005f5%25&a=*FP.BondDuration.f-_SemiAnnual&a=*FVarOpt-_**BondDuration.D-a=*FVarOpt.2-_**-.***BondDuration.DCC---.**BondDuration.DMOD--
Ann Galligan Kelley is Professor of Accountancy at Providence College, Rhode Island. She also serves as the Director for the Business Studies Program at Providence College. Her research appears in journals such as Taxes—The AICPA Tax Magazine, Global Journal of Business Research, Strategic Finance, Saudi Organization for Certified Public Accountants, Journal of Financial Services Professionals, Journal of Applied Business Research, Accounting Instructors’ Reports, International Business and Economics Research Journal, The CPA Journal, Journal of Business Case Studies, Research Journal of Business GCBF ♦ Vol. 11 ♦ No. 1 ♦ 2016 ♦ ISSN 1941-9589 ONLINE & ISSN 2168-0612 USB Flash Drive 181 Global Conference on Business and Finance Proceedings ♦ Volume 11 ♦ Number 1 Disciplines and NACUBO. She can be reached at Providence College, 215 Koffler Hall, Providence, RI 02918.
GCBF ♦ Vol. 11 ♦ No. 1 ♦ 2016 ♦ ISSN 1941-9589 ONLINE & ISSN 2168-0612 USB Flash Drive 182 Global Conference on Business and Finance Proceedings ♦ Volume 11 ♦ Number 1
The evidence of the effect of ownership structure on corporate social responsibility (CSR) is relatively sparse especially in the emerging economies. This paper seeks to address this situation to comprehensively examine the link between different types of shareholders and CSR disclosure in the context of China. Our findings reveal that different owners have differential impact on the CSR. The firms controlled by the state are more likely to disclose CSR information and their CSR reports’ quality is better compared with nonSOEs. Interestingly, firms with more shares held by mutual funds, foreign investors or other corporations are significantly better at CSR disclosure. The study also discloses that firm size, profitability, and leverage affect CSR in China. Overall the study contributes to the literature on CSR practices in emerging countries and point to some policy suggestions.
JEL: M4 KEYWORDS: CSR, China, Ownership Structure, Soes, Stakeholder Theory
INTRODUCTIONCorporate social responsibility (CSR) disclosure has attracted attention from both academic researchers and business practitioners over the past three decades, with a focus on its impact on corporate financial performance (Pava & Krausz, 1996; Margolis, Elfenbein & Walsh, 2007; Nakao, Amano, Matsumura, Genba, & Nakano, 2007; Orlitzky, Schmidt & Rynes, 2003). However, corporate scandals around the world posit whether firms should have social elements as part of their corporate goals (Margolis & Walsh, 2003).
This in turn has increased growing concern about what governance structures can effectively influence social business behavior (Walls, Berrone & Phan, 2012: 885). Recent studies suggest that differences in corporate governance have an impact on CSR (Walls, Berrone & Phan, 2012; Aguilera, Williams, Conley & Rupp, 2006; Dam & Scholtens, 2012; Li, Luo, Wang & Wu, 2013; Li & Zhang, 2010).
Despite the progress that has been made in understanding how corporate governance might influence the decision to disclose social and environmental issues as well as quality of CSR disclosure, the opportunity exists to explore this dynamic more fully. Firstly, the evidence of the effect of corporate governance on CSR is relatively sparse in the emerging economies. Rather, most studies offer insight mainly from the perspective of developed economies (see Walls, Berrone & Phan, 2012). Secondly, the evidence is mixed.
For example, Dam and Scholtens (2012), and Barnea and Rubin (2010) find no relationship between institutional ownership and CSR, while other researchers (Neubaum & Zahra, 2006; Aguilera et al., 2006;
Oh & Chang, 2011) identify a strong and positive relationship. This contradictory empirical evidence indicates that the time is right for us to re-examine this issue by returning to its facts to contribute to develop a dominant theoretical framework to inform the research (Walls, Berrone & Phan, 2012). Thirdly, the majority of prior studies have largely examined the relationship between CSR and institutional investors (Dam & Scholtens, 2012), which neglect the link between other types of investors and CSR disclosure.
GCBF ♦ Vol. 11 ♦ No. 1 ♦ 2016 ♦ ISSN 1941-9589 ONLINE & ISSN 2168-0612 USB Flash Drive 183 Global Conference on Business and Finance Proceedings ♦ Volume 11 ♦ Number 1 This paper seeks to examine the effect of corporate ownership on CSR disclosure in China using stakeholder theory. We identify different types of owners and investigate how various types of shareholders influence the decision to undertake CSR disclosure and the quality of such disclosure. It can be argued that different types of investors will have differential impact on the corporate decision regarding disclosure of social and environmental information and the level of CSR disclosure (Oh & Chang, 2011). Insights into the decision and quality of CSR disclosure from the perspective of corporate ownership can help firms recognise how particular types of owners value their efforts regarding CSR engagement. This study will also assist policy makers in promoting the transparency of ownership information with investors.
We focus on Chinese companies for the following reasons. Firstly, whereas many studies have assessed the extent to which ownership structure explains firm’s CSR engagement across developed nations (for an overview see Walls, Berrone & Phan, 2012), relatively little research has been undertaken in emerging markets (e.g. Li et al., 2013; Li & Zhang, 2010; Oh & Chang, 2011; Khan, Muttakin & Siddiqui, 2013).
Level of CSR disclosure can be explained by the country of origin (Gray, Javad, Power & Sinclair, 2001;