nep-acc New Economics Papers
on Accounting and Auditing
Issue of 2017‒10‒29
ten papers chosen by

  1. Determining factors for audit opinion in private family and non-family firms. Evidence from Spain. By Santiago Lago-Peñas; Mercedes Mareque Álvarez-Santullano; Elena Rivo-López; Mónica Villanueva-Villar
  2. Spillover from the Haven: Cross-border Externalities of Patent Box Regimes within Multinational Firms By Schwab, Thomas; Todtenhaupt, Maximilian
  3. Financial Frictions and Export Dynamics in Large Devaluations By Michal Szkup; Fernando Leibovici; David Kohn
  4. Bank Capital Redux: Solvency, Liquidity, and Crisis By Moritz Schularick; Bjorn Richter; Alan Taylor; Oscar Jorda
  5. What Drives Systemic Bank Risk in Europe: the balance sheet effect By Wosser, Michael
  6. How Costly is Social Screening? Evidence from the Banking Industry By Simon Cornee; Panu Kalmi; Ariane Szafarz
  7. Simulating fire-sales in a banking and shadow banking system By Susanna Calimani; Grzegorz Hałaj; Dawid Żochowski
  8. Sovereign risk and deposit dynamics:evidence from Europe By David Grigorian; Vlad Manole
  9. The international transmission of monetary policy through financial centres: evidence from the United Kingdom and Hong Kong. By Hills, Robert; Ho, Kelvin; Reinhardt, Dennis; Sowerbutts, Rhiannon; Wong, Eric; Wu, Gabriel
  10. The Sovereign Money Initiative in Switzerland: An Economic Assessment By Bacchetta, Philippe

  1. By: Santiago Lago-Peñas; Mercedes Mareque Álvarez-Santullano; Elena Rivo-López; Mónica Villanueva-Villar
    Abstract: This paper analyzes the determining factors for audit opinion in private firms, and whether such factors differ between family and non-family firms. With a sample of 9,873 Spanish firms for the period 2011-2015, the empirical results suggest that auditor tenure and ROA raise the probability of receiving a favorable opinion; and that losses during the previous year, high financial leverage, and hiring one of the so-called “Big 4” auditing firms increase the probability of receiving an unfavorable opinion. Furthermore, we provide evidence that the size of such effects differs between family and non-family firms.
    Keywords: Auditing; Family Business; Agency Theory; Big 4; Audit Opinion.
    JEL: M14 M41 M42
    Date: 2017–10
  2. By: Schwab, Thomas; Todtenhaupt, Maximilian
    Abstract: We analyze cross-border externalities of patent box regimes. Tax cuts in one location of a MNE reduce the user cost of capital for the whole group if they have no nexus requirement. This spillover effect of foreign tax cuts raises domestic R&D activity. The implementation of a patent box in an affiliate country of a MNE, increases domestic R&D by about 1% per implied tax rate differential. Furthermore, patent boxes generate negative spillovers on average patent quality.
    JEL: H23
    Date: 2017
  3. By: Michal Szkup (The University of British Columbia); Fernando Leibovici (Federal Reserve Bank of St. Louis); David Kohn (Universidad Catolica de Chile)
    Abstract: We study the role of financial frictions and balance-sheet effects in accounting for the dynamics of aggregate exports in large devaluations. We investigate a small open economy with heterogeneous firms and idiosyncratic productivity shocks, where firms face financing constraints and debt can be denominated in domestic or foreign units. In our model, a real depreciation affects firms through two channels. On the one hand, it increases the returns to selling internationally, making exporting more profitable. On the other hand, it tightens the borrowing constraint by increasing the value of foreign-denominated debt relative to firms’ net worth. We calibrate the model to match key features from plant-level data and use it to quantify the importance of these channels. We find that financial frictions slow down the response of aggregate exports, and foreign-denominated debt amplifies this effect by decreasing firms’ net worth on impact. However, we find that these channels can only explain a small fraction of the dynamics of exports observed in the data. While financial frictions and balance-sheet effects distort production and investment decisions, exports are significantly less affected as firms reallocate sales across markets in response to the change in the real exchange rate. We document the importance of cross-market reallocation for export dynamics using firm-level data from Mexico’s devaluation in 1994.
    Date: 2017
  4. By: Moritz Schularick (University of Bonn); Bjorn Richter (University of Bonn); Alan Taylor (Department of Economics & Graduate School of Management); Oscar Jorda (Federal Reserve Bank of San Francisco an)
    Abstract: Higher capital ratios are unlikely to prevent the next financial crisis. This is empirically true both for the pre-WW2 and the post-WW2 periods, and holds both within and between countries. We reach this startling conclusion using newly collected data on the liability side of banks’ balance sheets. Data coverage extends to 17 advanced economies from 1870 to 2013. A solvency indicator, the capital ratio has no value as a crisis predictor; but we find that liquidity indicators such as the loan-to-deposit ratio and the share of non-deposit funding do signal financial fragility, although they add little predictive power relative to that of credit growth on the asset side of the balance sheet. However, higher capital buffers have social benefits in terms of macro-stability: recoveries from financial crisis recessions are much quicker with higher bank capital.
    Date: 2017
  5. By: Wosser, Michael (Central Bank of Ireland)
    Abstract: Since the 2008 global financial crisis (GFC) several systemic risk measures (SRMs) have gained traction in the literature. This paper examines whether Delta-CoVaR (?CoVaR) is relevant in the context of European banks and compares risk rankings against those found using marginal expected shortfall (MES). The analysis reveals that a cluster of large banks, operating in one particular country, is the principal contributor to financial system risk, if measured by ?CoVaR. When the direction of risk flow is reversed, i.e. from the system to the institution (via MES), a second cluster of banks, headquartered in a different jurisdiction, would be most affected by a large and systemic financial shock. The analysis reveals that future realisations of systemic risk is strongly associated with institution size, maturity mismatch, non-performing loans and non-interest-to-interest-income ratios. However, in certain cases, the relationship depends upon the systemic risk measure used. For example, forward bank leverage appears correlated with MES but not with ?CoVaR.
    Keywords: Systemic banking crisis, Systemic risk measurement, ?CoVaR, MES, Bank Balance Sheet, Macroprudential policy
    JEL: G01 G21 G28
    Date: 2017–10
  6. By: Simon Cornee; Panu Kalmi; Ariane Szafarz
    Abstract: Social banks screen loan applicants by using both social and financial criteria, and social screening implies an extra workload. To check the costs involved in this type of screening we use balance-sheet information on European banks, and compare the operating costs of social banks with those of other banks. Surprisingly, our first results suggest that social banks’ costs are not significantly higher than those of their mainstream counterparts. Next, we uncover that the extra costs of social screening are offset by a cheaper workforce. Despite their need for specific screening, social banks are financially sustainable in a market dominated by for-profit institutions.
    Keywords: Social Screening; Social Banks; Screening Costs; Warm Glow
    JEL: G20 L33 J32 L31 D63 D82 G21
    Date: 2017–10–23
  7. By: Susanna Calimani; Grzegorz Hałaj; Dawid Żochowski
    Abstract: We develop an agent based model of traditional banks and asset managers. Our aim is to investigate the channels of contagion of shocks to asset prices within and between the two financial sectors, including the effects of fire sales and their impact on financial institutions’ balance sheets. We take a structural approach to the price formation mechanism as in Bluhm, Faia and Kranen (2014) and introduce a clearing mechanism with an endogenous formation of asset prices. Both types of institutions hold liquid and illiquid assets and are funded via equity and deposits. Traditional banks are interconnected in the money market via mutual interbank claims, where the rate of return is endogenously determined through a tatonnement process. We show how in such a set-up an initial exogenous liquidity shock may lead to a fire-sale spiral. Banks, which are subject to capital and liquidity requirements, may be forced to sell an illiquid security, which impacts its, endogenously determined, market price. As the price of the security decreases, both agents update their equity and adjust their balance sheets by making decisions on whether to sell or buy the security. This endogenous process may trigger a cascade of sales leading to a fire-sale. We find that, first, mixed portfolios banks act as plague-spreader in a context of financial distress. Second, higher bank capital requirements may aggravate contagion since they may incentivise banks to hold similar assets, and choose mixed portfolios business model which is also characterized by lower levels of voluntary capital buffer. Third, asset managers absorb small liquidity shocks but they exacerbate contagion when liquid buffers are fully utilised. JEL Classification: C63, D85, G21, G23
    Keywords: fire sales, contagion, systemic risk, asset managers, agent based model
    Date: 2017–06
  8. By: David Grigorian; Vlad Manole
    Abstract: The unprecedented expansion of sovereign balance sheets since the beginning of the global crisis has given a new meaning to the term sovereign risk. Developments in Europe since early 2010 revealed new challenges for the functioning of private banks in an environment of heightened sovereign risk and may have contributed to deleveraging. The paper uses an innovative way of measuring the perception of sovereign risk and its impact. Using an extension of a common market discipline framework, it shows that exposure to sovereign risk may have limited the ability of banks in Europe to collect deposits. Potential identification issues between deposits and bank efficiency are controlled by using Data Envelopment Analysis. The results are robust to inclusion of conventional measures of bank performance and the sector-wide holdings of foreign sovereign debt.
    Keywords: Sovereign risk, market discipline, bank deposits, European crisis
    JEL: E44 G21 G28
    Date: 2016–03
  9. By: Hills, Robert (Bank of England); Ho, Kelvin (Hong Kong Monetary Authority); Reinhardt, Dennis (Bank of England); Sowerbutts, Rhiannon (Bank of England); Wong, Eric (Hong Kong Monetary Authority); Wu, Gabriel (Hong Kong Monetary Authority)
    Abstract: This paper explores the cross-border transmission of monetary policy by comparing and contrasting the results for two major international financial centres: Hong Kong and the United Kingdom. We examine the effect of monetary policy in the US, euro area and Japan, on UK and Hong Kong-resident banks’ domestic lending behaviour, using individual bank-level data. Focusing on financial interconnections and other balance sheet characteristics as a transmission mechanism, we find that both of these factors play an important role in the transmission of foreign monetary policy. We are able to establish evidence for both a bank funding and bank portfolio channel of monetary policy, for both Hong Kong and the United Kingdom. There are important differences between the two countries; in particular, the currency denomination of lending appears to play a major role only in the United Kingdom, which probably reflects Hong Kong’s linked exchange rate system by which the HK dollar is pegged with the US dollar. These results contrast to the largely inconclusive results from previous studies, whose aggregate nature may have masked offsetting individual bank effects.
    Keywords: International financial linkages; monetary policy transmission; bank lending
    JEL: E52 F42 G21
    Date: 2017–10–16
  10. By: Bacchetta, Philippe
    Abstract: The Sovereign Money Initiative will be submitted to the Swiss people in 2018. This paper reviews the arguments behind the initiative and discusses its potential impact. I argue that several arguments are inconsistent with empirical evidence or with economic logic. In particular, controlling sight deposits neither stabilizes credit nor avoids financial crises. Also, assuming that deposits at the central bank are not a liability has implications for fiscal and monetary policy; and Benes and Kumhof (2012) do not provide support for the reform as they do not analyze the proposed Swiss monetary reform and their closed-economy model does not fit the Swiss economy. Then, using a simple model with monpolistically competitive banks, the paper assesses quantitatively the impact of removing sight deposits from commercial banks balance sheets. Even though there is a gain for the state, the overall impact is negative, especially because depositors would face a negative return. Moreover, the initiative goes much beyond what would be the equivalent of full reserve requirement and would impose severe constraints on monetary policy; it would weaken financial stability rather then reinforce it; and it would threaten the trust in the Swiss monetary system. Finally, there is high uncertainty both on the details of the reform and on its impact.
    Date: 2017–10

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