By Rania Nasrallah-Massaad

During a crisis like the COVID-19 pandemic, when economic uncertainty haunts us all, banks and other credit organizations face important decisions regarding their credit risk strategies, and how much risk they are willing to tolerate. Individuals and corporations across Canada are impacted by the COVID-19 economic crisis, and access to credit by banks is vital to their survival. For example, rapid bank credit is needed for families to procure food, for mortgage payments to continue, and for small businesses to keep their employees and ensure their post-pandemic recovery.

In the aftermath of situations like these, there is a pressing need to better understand how banks cope with fast-changing risks, how much risk is too much, and how much information can and should be disclosed. Is there an advantage to disclosing risk management strategies to investors and stakeholders? What is not clear is how multiple levels of regulation in these organizations affects credit risk disclosures and transparency, and the relationship between bank risk disclosure and performance. To ensure a rapid and complete financial recovery, and to promote transparency and information flow efficiency, it is important to examine how credit risk management disclosures are structured. This includes their evolution over time and across countries, and how they affect bank performance and corporate governance mechanisms.

What is the research about?

Professor Kaouthar Lajili received a Telfer School of Mangement Research Grant to examine how credit risk disclosures impact bank performance. Her project will compare the effect of multiple levels of regulation on credit risk over time, with a focus on Canadian and Italian banks. She plans to develop a credit risk disclosure index that can help assess the comprehensiveness, quality and reliability of bank credit risk disclosures, and investigate its relationship with bank governance and performance.

Who will gain from this research?

Professor Lajili’s work will contribute to the literature on credit risk disclosures and bank performance, and benefit policy makers, financial institutions, investors, and academic scholars. Her risk disclosure index will help inform policy makers and regulators on the most effective risk disclosure strategies, that will in turn maximize bank performance and improve corporate decisions.

“This work is important for practitioners and policy makers because it offers insights on how to develop best practices in assessing the comprehensiveness and transparency of credit risk disclosure requirements and banks' compliance. It also advances our understanding about the degree of conformity and the evolution of harmonization in banks' credit risk disclosures from other jurisdictions adopting similar financial reporting standards and international banking regulations.”

Kaouthar Lajili

Learn more about the Telfer School of Mangement Research Grants.

By Lidiane Cunha

The pandemic has hit communities all over the globe, leaving millions of people uncertain about their health, their financial situation, and the future. However, not everything imposed by the COVID-19 crisis has been bad news. The current situation helped to shine a spotlight on the best of humanity. From rainbow pictures made to pay tribute to front-line health professionals to legions of volunteers helping their neighbours with grocery-shopping and childcare support, people all over the globe are developing a deeper sense of community. In Canada, volunteers responded to the crisis with #Caremongering, a movement to spread kindness through helping vulnerable people in communities.

Many private and public organizations have also stepped up to support those who are in need in their community. Saouré Kaoumé, an Assistant Professor, and Magda Donia, an Associate Professor, both of the University of Ottawa’s Telfer School of Management, discuss why corporate engagement matters, what forms of support are needed, and how these organizations can encourage their workforce to make difference during this challenging time.

Employees’ Contribution to the Community

“As people’s vulnerability increases and the need for more acts of solidarity, caring, and mutual support grows, the situation calls for corporate contribution,” explains Professor Kouamé. Professor Donia agrees: “these unusual times should lead organizations to reflect on the role they play in helping their communities.”

Solidarity, caring, and mutual support can emerge directly through corporate initiatives, as well as through individuals within the organization. According to Professor Donia, even before the COVID-19 crisis, researchers noticed a shift toward employee engagement in social and environmental causes. “We had observed his movement especially in the younger generation of employees, such as Millennials,” but the COVID-19 crisis has broader implications for all generations: “This crisis has raised awareness and concern since we are all ultimately impacted by this situation,” she adds.

Employees may wish to step up and support their communities, but Professor Donia stresses that, given that the pandemic directly affect employees, their organizations should play a supportive role: “To be able to contribute to their community during these challenging times, employees do depend on their organizations to create opportunities for them to engage in ways that can make a difference.”

Even Modest Support Can Make a Difference

Not all organizations can step up and mobilize their workforce to contribute to others during the COVID-19 crisis. “As organizations are forced into restructuring their services and operations to be able to adjust to this new normal, they focus on their own survival and the wellbeing of their employees,” explains Professor Kaoumé.

The ability of organizations to engage their employees in COVID-19 responses/campaigns will of course depend on the organizations’ financial health. Professor Donia mentions the example of Nike, a large organization that is stepping up by creating a campaign to double match their employees donations to community non-profit organizations. Organizations that are currently struggling can encourage their employees to be part of modest initiatives. “For example, a café or restaurant could allow employees at the end of a shift to package leftover food items and deliver them to local foodbanks,” she adds.

The Need for Profound and Genuine Corporate Engagement

There is no doubt that corporate support and employee engagement in these causes can be a powerful way of supporting the community during the COVID-19 crisis. Professor Kouamé explains that helping people who are suffering from social isolation or those who experience poverty and cannot afford their basic needs is crucial right now, but this is just the tip of the iceberg:

“This crisis has major repercussions on all structures of our society even if we cannot see the impact right away: everyone from different social backgrounds may suffer from isolation or personal tragedies that make them vulnerable.”

Organizations also need to be cautious. The motivations for various corporate engagement efforts matter a lot. Professor Donia’s research shows that employees may perceive their organization’s corporate social responsibility (CSR) as genuine or self-serving, and these perceptions have an impact on employee satisfaction, performance, and other outcomes. She reminds corporate leaders of the value of engaging in social causes for the right reasons:

“What we most need is genuine CSR that aims to really help in this time of need. Employees of such organizations are likely to experience a greater sense pride and commitment toward their employer.  In contrast, employees are not likely to respond positively to their organization if they perceive it as launching a COVID-19 campaign simply for the purpose of boosting reputation and increasing profit. Such perceptions will almost certainly lead to cynicism and distrust of their employer.”

Healing Society and the Workforce

This unprecedented situation may lead some people to become more compassionate and supportive. Professor Kaoumé explains that as many of us experience social isolation due to the current physical distancing measures, “we are pushed into developing a higher level of empathy and compassion for those who are vulnerable,” This situation can, as a result, increase our willingness to make a difference.

“My research suggests that compassion, more specifically empathy, is a core emotional driver of employee engagement in corporate response to social causes,” says Professor Kouamé It is in this context that philanthropic organizations are likely to find more corporate support, by directly engaging companies or mobilizing their employees to contribute to social causes.

Corporate engagement during COVID-19 does not simply give back to society. Professor Kouamé believes that these philanthropic initiatives can be rewarding experiences that can help employees heal and find meaning in the face of anxiety and uncertainty:

“Several employees will have suffered trauma or will be very anxious about the uncertainty created by this crisis; playing a role in solving a societal challenge can be a way of rebuilding themselves and getting through this difficult period. By involving employees in these acts of solidarity, corporations can rebuild their employees’ strength—morally and psychologically.”

Practical Recommendations for Corporate Engagement during the COVID-19 Crisis 

If your organization is looking for ways to directly support the community or engage your workforce in a social cause, here are some practical suggestions from Professors Donia and Kouamé:

• Help locally: Look around at your employee base and immediate community. Since everyone in the world is currently affected by this crisis, organizations will be most effective if they attempt to help those closest to them.
• Be genuine and direct your social actions toward real need; do not make choices based on where your efforts will be most visible.
• Develop CSR initiatives bottom-up: Involve your employees in deciding how to help, because they are the real source of innovative solutions to social problems.
• Encourage employees to express their “empathy” and desire to make a difference: when this happens, employees can show an extraordinary creativity to make simple but very effective CSR initiatives.
• Support your employee engagement with social causes this time and create space for them to contribute so they can increase the impact of your organization’s response to the crisis.

A few examples of organizations and employees supporting the community during these challenging times:

• United Way, local health authorities, and front-line agencies coordinate community and social service response to Covid-19
• Montfort Renaissance Offers Online Home Services to Francophone Seniors during COVID-19 quarantine
• MaxSys supports Shepherds of Good Hope to help the homeless
• Read the latest Telfer Acts of Greatness and find out how Telfer students, alumni, and employees are helping the community.

By Rania Nasrallah-Massaad

Telfer graduate students contribute considerably to the excellent research achievements of our school. Beyond their research activities they find exciting and creative ways to challenge fellow students and professors and enhance the overall research experience for everyone. Each year the Telfer School acknowledges these outstanding student accomplishments with two graduate student research awards: the PhD Engagement Award and the John Duncan and Deb Cross Award.

The PhD Engagement Award recognizes an exemplary doctoral student who demonstrates continued initiative in applying for funding and scholarships, leadership and engagement in the PhD Program, academic success, and persistent research progress. Alexander Chung received the 2019-2020 PhD Engagement Award for demonstrating continued commitment within the PhD program and on many levels at the Telfer School. He recently served as president of the graduate research programs student association, and previously as vice-president and PhD representative. In these roles, he initiated various activities to help his fellow PhD students, including a writing bootcamp, a skills-sharing activity, business on tap, and a career workshop on consulting. He was also responsible for voicing the collective interest of research-based graduate students at School Council meetings. Since starting his research training, he has been actively seeking opportunities to participate in several research projects. He contributed to four research publications and presented his work at two international conferences. Beyond his thesis project requirements, he repeatedly participates in research competitions and has received many scholarships and awards. He recently received the James Flaherty Research Scholarship from the Ireland Canada University Foundation to support a research project he developed in collaboration with researchers at Cork University Business School.

The John Duncan and Deb Cross Award recognizes the quality and impact of two PhD student’s publications in peer-reviewed journals. The 2019-2020 John Duncan and Deb Cross Award goes to Hong Qiu, who won the first prize for her article entitled “Managing Family-Related Conflicts in Family Businesses: A Review and Research Agenda” in the prestigious journal Family Business Review. Her publication reviews 93 studies addressing conflict and conflict management in family businesses, proposing a new framework for conflict management strategies.

Alison Coates won the second prize for her article “Sustaining Rural Access to Emergency Care through Collaborative Emergency Centres in Nova Scotia” published in Health Reform Observer. This publication puts Alison in the centre of Canada’s health policy debates and has important implications for the field of rural emergency medicine.

Congratulations Alexander, Hong, and Alison on these outstanding accomplishments. Your hard work and dedication are remarkable, and you certainly deserve this recognition. Learn more about our graduate scholarships.

By Lidiane Cunha

François-Éric Racicot and William F. Rentz, Professors from the University of Ottawa’s Telfer School of Management co-authored the article “Testing the new Fama and French factors with illiquidity: A panel data investigation,” published in Finance. Their article was shortlisted to receive an academic prize by l’Association française des investisseurs institutionnels in December 2019. The authors discussed their insights with Instit Invest, a magazine that targets institutional investors in France. We interviewed Professors Racicot and Rentz to learn more about the practical implications of their study.

What’s the Fama-French Five Factor model?

In 1992, University of Chicago’s professors Eugene Fama and Kenneth French developed an asset pricing model to describe portfolio returns. Known as the Fama and French Three Factor Model, this tool used three different factors: market risk, size of firms, and book-to-market values. Their tool could explain as much as 95% of returns whereas the classic Capital Asset Pricing Model explained around 70% of the returns. Twenty-two years later, Fama and French further adapted their model by including two new factors: profitability and investment.

What does the new Fama French model tell investors?

Surprisingly, the Fama-French Five Factor model suggests that the highest returns can be expected to come from companies that are small, valuable, profitable and are not investing in costly growth initiatives. Why? Firms that follow a conservative investment policy are more likely to earn higher returns in the long run. On the other hand, companies that are more aggressive in their investments and take risks in major project are likely to experience losses in the stock market.

How does your research improve the Fama and French model?

We tested these five factors with the help of an algorithm that Professor Racicot developed in a previous study. Then we decided then to divide our data into two samples: information about the market before and during the 2007-2009 crisis. Finally, we included a new factor before running our analysis, illiquidity. Illiquidity refers to stock, bond, or other assets that cannot easily be bought or sold without a substantial loss in value. We decided to include this factor because we expected illiquidity to stand out in times of economic growth. Our results surprisingly showed that illiquidity was more significant in times of economic downturn. Hence, by adding illiquidity to the Fama-French model, we could better explain portfolio returns during an economic crisis.

What does you research tell us about the global markets?

Our model can explain portfolio returns in diversified markets such as the US market. However, when it comes to less diversified markets, such as the Canadian market, our results might not hold. We are currently working on an extension to this framework to be able to address questions around other markets.

Based on your expertise on the topic, what are your recommendations to investors and financial institutions in Canada?

• The Canadian economy has fewer industries compared to the Fama-French US industry sectors; therefore, expanding beyond Canadian investments may enhance diversification.
• Institutional investors (e.g., pension and endowment funds) in Canada typically have an exposure to domestic investments but may have larger exposure to US equities.
• Investments in alternative markets are becoming increasingly important and may be useful to enhance the returns of institutional investors.

François-Éric Racicot is a Full Professor at the Telfer School of Management. Learn more about his research.

William F. Rentz is an Associate Professor at the Telfer School of Management. Learn more about his research.

Learn more about this study:

Racicot, F.E., Rentz, W.F. and Théoret, R. 2019. “Testing the new Fama and French factors with illiquidity: A panel data investigation.” Finance, 39(3): 45-102.