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on Corporate Finance |
| By: | Xavier Freixas; Kebin Ma |
| Abstract: | This paper reexamines the classical issue of the possible trade-offs between banking competition and financial stability by highlighting different types of risk and the role of leverage. By means of a simple model we show that competition can affect portfolio risk, insolvency risk, liquidity risk, and systemic risk differently. The effect depends crucially on banks’ liability structure, on whether banks are financed by insured retail deposits or by uninsured wholesale debts, and on whether the indebtness is exogenous or endogenous. In particular we suggest that, while in a classical originate-to-hold banking industry competition might increase financial stability, the opposite can be true for an originate-to-distribute banking industry of a larger fraction of market short-term funding. This leads us to revisit the existing empirical literature using a more precise classification of risk. Our theoretical model therefore helps to clarify a number of apparently contradictory empirical results and proposes new ways to analyze the impact of banking competition on financial stability. |
| Keywords: | banking competition, financial stability, leverage |
| JEL: | G21 G28 |
| Date: | 2014–08 |
| URL: | http://d.repec.org/n?u=RePEc:bge:wpaper:781&r=cfn |
| By: | Karkowska, Renata |
| Abstract: | Systemic risk is a very important but very complex notion in banking and how to measure it adequately is challenging. We introduce a new framework for measuring systemic risk by using a risk-adjusted balance sheet approach. The measure models credit risk of banks as a put option on bank assets, a tradition that originated with Merton. We conceive of an individual bank’s systemic risk as its contribution to the potential sector-wide net. In this regard, the analysis of public commercial banks operating in 7 countries from Central and Eastern Europe, shows potential risk which could threaten all the financial system. The paper shows how risk management tools can be applied in new ways to measure and analyze systemic risk in European banking system. The research results is a systemic risk map for the CEE banking systems. The study finds also instability of systemic risk determinants. |
| Keywords: | systemic risk, banking system, instability, emerging markets, Merton option model |
| JEL: | A10 C01 C32 C58 G13 G21 G32 G33 |
| Date: | 2014–01 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:58803&r=cfn |
| By: | Cheong, Juyoung; Kim, Woochan |
| Abstract: | According to the prior literature, family executives of family-controlled firms receive lower compensation than non-family executives. One of the key driving forces behind this is the existence of family members who are not involved in management, but own significant fraction of shares and closely monitor and/or discipline those involved in management. In this paper, we show that this assumption falls apart if family-controlled firm is part of a large business group, where most of the family members take managerial positions but own little equity stakes in member firms. Using 2014 compensation data of 564 executives in 368 family-controlled firms in Korea, we find three key results consistent with our prediction First, family executives are paid more than non-family executives (by 27% more, on average) and this family premium is pronounced in larger business group firms even after controlling for potential selection bias problems. Second, pay to family-executives falls with the influence of outside family members (their aggregate ownership in the firm minus the ownership held by the family executive in the same firm). Third, family premium in large business group firms rises with group size, but falls with family’s cash flow rights. It also rises for group chairs, but falls with the number of board seats the family-executive holds within the group. |
| Keywords: | executive compensation, family firms, business groups, chaebols, dividend |
| JEL: | G30 G32 G34 G35 |
| Date: | 2014–08 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:59250&r=cfn |
| By: | Estrada, Fernando |
| Abstract: | Following Taleb/Tapiero (2009) , the hypotheses are contrasted based on partial information of firms had losses (including external risk factors); the policy implications of this analysis are projected after evaluating two fundamental issues that continue to preoccupy the public opinion: how failures occur in markets in the case of large firms, corporations or companies, and what are the criteria for regulation and rescue available to governments, institutions and citizens to control them. |
| Keywords: | Risk, Size Markets, Assimetric Information, Firm, Regulation |
| JEL: | C44 C46 C58 C72 G14 G18 G21 G28 G32 G33 |
| Date: | 2014 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:59066&r=cfn |
| By: | Cornette, Marcia Millon; Mehran, Hamid (Federal Reserve Bank of New York); Pan, Kevin; Phan, Minh; Wei, Chenyang |
| Abstract: | We study market reactions to seasoned equity issuances that were announced by financial companies between 2002 and 2013. To assess the risk and valuation implications of these seasoned equity issuances, we conduct an event analysis using daily credit default swap (CDS) and stock market pricing data. The major findings of the paper are that CDS prices respond quickly to new, default-relevant information. Over the full sample period, cumulative abnormal CDS spreads drop in response to equity issuance announcements. The reactions are significantly stronger during the financial crisis. At that time, the federal government injected equity into financial institutions to ensure their viability. The market reacted to the equity issue announcements by assessing significantly lower costs for default protection via credit default swaps. The evidence indicates that single-name CDS based on financial firms’ default probabilities are potentially useful for private investors and regulators. |
| Keywords: | financial institutions; stock issuance; credit default swaps; financial crisis |
| JEL: | G01 G21 G32 |
| Date: | 2014–11–01 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fednsr:697&r=cfn |
| By: | Hasan, Iftekhar (Fordham University and Bank of Finland); Jackowicz , Krzysztof (Kozminski University); Kowalewski, Oskar (Institute of Economics of the Polish Academy of Sciences (INE PAN)); Kozlowski , Lukasz (BGZ SA) |
| Abstract: | In this paper, by employing a novel approach, we study the relationship between bank type and small-business lending in a post-transition country. Using a unique dataset on bank branches and firm-level data, we find that local cooperative banks lend more to small businesses than do large domestic banks and foreign-owned banks, even when controlling for the financial situation of the cooperative banks. Additionally, our results suggest that cooperative banks provide loans to small businesses at lower costs than foreign-owned banks or large domestic banks. Finally, we show that small and medium-sized firms perform better in counties with a large number of cooperative banks than in counties dominated by foreign-owned banks or large domestic banks. Our results are important from a policy perspective, as they show that foreign bank entry and industry consolidation may raise valid concerns for small firms in developing countries. |
| Keywords: | small-business lending; cooperative banks; foreign banks; post-transition countries |
| JEL: | G21 G28 |
| Date: | 2014–07–30 |
| URL: | http://d.repec.org/n?u=RePEc:hhs:bofrdp:2014_022&r=cfn |
| By: | Giovanna Nicodano; Luca Regis |
| Abstract: | This paper investigates the financial stability of complex organi- zations. To this end, it examines the determination of both lever- age and intercorporate ownership in a group under the traditional tax-bankruptcy trade-off. Absent internal bail-outs, subsidiary divi- dends contribute to the solvency of the levered parent company. Inter- corporate dividend taxes (IDT) reduce intercorporate ownership and may damage financial stability. With internal bail-outs, intercorporate ownership and IDT do not affect group default costs because the par- ent is unlevered. When \Thin Capitalization" rules are in place, the introduction of fine-tuned IDT lowers default costs in groups, making them more stable than both mergers and stand-alone firms. |
| Keywords: | dividend taxes; thin capitalization; group; corporate ownership; capital structure; debt shifting; multinationals |
| JEL: | G32 H25 H32 L22 |
| Date: | 2014 |
| URL: | http://d.repec.org/n?u=RePEc:cca:wpaper:359&r=cfn |
| By: | Jake Zhao |
| Abstract: | Why do U.S. firms hold much more cash now than they did 30 years ago? Prior empirical studies have discovered a statistically significant positive relationship between firm cash holdings and cash flow volatility. Such findings, however, are subject to endogeneity problems. In this paper, I construct a structural model of firm dynamics where cash provides a buffer against cash-flow shortfalls in the presence of costly external finance. My model finds that 63% of the increase in corporate cash holdings can be accounted for by the increase in cash flow volatility. The increase in cash flow volatility observed in the data arises from a decrease in the correlation between revenue and operating expenses. The model has a corresponding correlation parameter between the shocks on revenue and operating expenses and only this parameter is changed in the primary experiment. The decomposition of revenue and operating expenses is important and I show that other ways of modeling the cash flow volatility increase are both counterfactual and dampening. A regression using the model data then generates a coefficient on cash flow volatility similar to what was found in previous studies which suggests that the regression underestimates the true impact of volatility. Finally, I investigate the response of cash holdings to policy changes and the consequences of cash restrictions on firm value. |
| JEL: | G3 |
| Date: | 2014–09 |
| URL: | http://d.repec.org/n?u=RePEc:nys:sunysb:14-04&r=cfn |
| By: | Sandra Cavaco; Patricia Crifo; Antoine Rebérioux; Gwenaël Roudaut |
| Abstract: | This paper develops a two-way director-firm fixed effect model to study the relationship between independent directors’ individual heterogeneity and firm operating performance, using French data. This strategy allows considering and differentiating in a unified empirical framework mechanisms related to board functioning and to director selection. We first show that the independence status, netted out unobservable individual heterogeneity, is negatively related to performance. This result suggests that independent board members experience an informational gap compared to other affiliated members. However, we show that industry-specific expertise as well as informal connections inside the boardroom may help to bridge this gap. Finally, we provide evidence that independent directors have higher intrinsic ability as compared to affiliated board members, consistent with a reputation-based selection process. |
| Keywords: | independent director heterogeneity, information asymmetry, director selection, firm performance, two-way fixed effect model, |
| JEL: | G30 G34 |
| Date: | 2014–09–01 |
| URL: | http://d.repec.org/n?u=RePEc:cir:cirwor:2014s-39&r=cfn |
| By: | Hirshleifer, David |
| Abstract: | Behavioral finance studies the application of psychology to finance, with a focus on individual-level cognitive biases. I describe here the sources of judgment and decision biases, how they affect trading and market prices, the role of arbitrage and flows of wealth between more rational and less rational investors, how firms exploit inefficient prices and incite misvaluation, and the effects of managerial judgment biases. There is need for more theory and testing of the effects of feelings on financial decisions and aggregate outcomes. Especially, the time has come to move beyond behavioral finance to social finance, which studies the structure of social interactions, how financial ideas spread and evolve, and how social processes affect financial outcomes. |
| Keywords: | Investor psychology, heuristics, overconfidence, attention, feelings, reference dependence, social finance |
| JEL: | G02 G1 G11 G14 G3 |
| Date: | 2014–08–14 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:59028&r=cfn |
| By: | Molyneux , Philip (BOFIT); Liu, Hong (BOFIT); Jiang , Chunxia (BOFIT) |
| Abstract: | We investigate ownership effects on capital and adjustments speed to the target capital ratio in China from 2000 to 2012 and find that state-owned banks hold higher levels of capital than banks of other ownership types. Foreign banks are more highly capitalized than local non-state banks but under-capitalized compared with the bigger non-state banks with nationwide presence. Foreign banks adjust risk-weighted capital towards their optimal targets at a slower speed than domestic banks, while foreign minority ownership results in a faster adjustment process. Capital is positively influenced by profitability, asset diversification and liquidity risk, but negatively influenced by bank market power. Capital ratios typically co-move with the business cycle although this relationship is reversed during the crisis period due to active government intervention. Our results are robust to various modelling specifications and have important policy implications. |
| Keywords: | banking; capital; adjustment; ownership; China |
| JEL: | C32 G21 G28 |
| Date: | 2014–09–15 |
| URL: | http://d.repec.org/n?u=RePEc:hhs:bofitp:2014_016&r=cfn |
| By: | Gospodinov, Nikolay (Federal Reserve Bank of Atlanta); Jamali, Ibrahim (American University of Beirut) |
| Abstract: | In this paper, we investigate the dynamic response of stock market volatility to changes in monetary policy. Using a vector autoregressive model, our findings reveal a significant and asymmetric response of stock returns and volatility to monetary policy shocks. Although the increase in the volatility risk premium, futures-trading volume, and leverage appear to contribute to a short-term increase in volatility, the longer-term dynamics of volatility are dominated by monetary policy's effect on fundamentals. The estimation results from a bivariate VAR-GARCH model suggest that the Fed does not respond to the stock market at a high frequency, but they also suggest that market participants' uncertainty regarding the monetary stance affects stock market volatility. |
| Keywords: | stock market volatility; federal funds futures; monetary policy; variance risk premium; vector autoregression; bivariate GARCH; leverage effect; volatility feedback effect |
| JEL: | C32 C58 E52 E58 G10 G12 |
| Date: | 2014–08–01 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedawp:2014-14&r=cfn |