nep-cfn New Economics Papers
on Corporate Finance
Issue of 2015‒05‒16
sixteen papers chosen by
Zelia Serrasqueiro
Universidade da Beira Interior

  1. Cyclicality in Losses on Bank Loans By Bart Keijsers; Bart Diris; Erik Kole
  2. Non-Interest Income and Bank Performance: Is Banks’ Increased Reliance on Non-Interest Income Bad? By Saunders, Anthony; Schmid, Markus; Walter, Ingo
  3. A Framework for Modelling Whole-Farm Financial Risk (PowerPoint) By Nordblom, Thomas L.; Hutchings, Tim; Hayes, Richard; Li, Guangdi
  4. Taking the lead: When non-banks arrange syndicated loans By Grupp, Marcel
  5. Evidence on European fund managers and investors views on dividends post 2008 By Thomas Mc Cluskey
  6. Securitization and Credit Default Swaps (CDSs): Towards Diagnostic of the Fundamental Problem and Suggested Solutions By Shanuka Senarath
  7. Risk-adjusted Valuation of the Real Option to Invest By Carol Alexander; Xi Chen;
  8. Sharing a Director with a Peer By Berg, Tatjana; Horsch, Philipp; Schmid, Markus
  9. Financing Small and Medium Enterprises in China: Recent Trends and Prospects beyond Shadow Banking By Kellee Tsai
  10. Did banks and financial markets developments lead to economic growth in MENA region? Evidence from Dynamic panel data estimation By Hamdi, Helmi; Hakimi, Abdelaziz
  11. On the impact of leveraged buyouts on bank systemic risk By Grupp, Marcel
  12. Boring Banks and Taxes By Rafael Aigner; Felix Bierbrauer
  13. Does Regulation Matter? Riskiness in Pension Asset Allocation By Sandra Rigot
  14. An entropy-based early warning indicator for systemic risk By Monica Billio; Roberto Casarin; Michele Costola; Andrea Pasqualini
  15. Bank sovereign bond holdings, sovereign shock spillovers, and moral hazard during the European crisis By Andrea Beltratti; René M. Stulz
  16. Study on the relationship between the quality of external audit - financial performance, solvency and risk management in the Romanian banking system By Mariana Nedelcu (Bunea)

  1. By: Bart Keijsers (Erasmus University Rotterdam, the Netherlands); Bart Diris (Erasmus University Rotterdam, the Netherlands); Erik Kole (Erasmus University Rotterdam, the Netherlands)
    Abstract: Cyclicality in the losses of bank loans is important for bank risk management. Because loans have a different risk profile than bonds, evidence of cyclicality in bond losses need not apply to loans. Based on unique data we show that the default rate and loss given default of bank loans share a cyclical component, related to the business cycle. We infer this cycle by a new model that distinguishes loans with large and small losses, and links them to the default rate and macro variables. The loss distributions within the groups stay constant, but the fraction of loans with large losses increases during downturns. Our model implies substantial time-variation in banks' capital reserves, and helps predicting the losses.
    Keywords: Loss-given-default; default rates; credit risk; capital requirements; dynamic factor models
    JEL: C32 C58 G21 G33
    Date: 2015–05–04
  2. By: Saunders, Anthony; Schmid, Markus; Walter, Ingo
    Abstract: The issue of optimum bank scope is central to many proposals for banking system reform. For example, a core component of the Dodd-Frank Act (2010) and regulatory proposals in the UK and the EU has been the concept of “ring-fencing” – i.e., restricting banks’ activities to their core retail and wholesale financial intermediation functions. One set of arguments holds that limiting the scope of bank activities reduces the likelihood of failure related to business lines that are highly risky. A second set of arguments holds that diversification of banks across traditional interest generating business and non-traditional businesses enhances bank profitability and reduces idiosyncratic risk. Based on a sample of 368,006 quarterly observations on 10,341 US banks during the period 2002-2013, we find that a higher ratio of non-interest income (derived from fees and non-core activities such as investment banking, venture capital and trading) to interest income (associated with deposit-taking and lending to retail and commercial clients) is associated with a higher profitability across the banking sector and under different market regimes. This finding is stronger during the crisis period than in either the pre- and post-crisis periods. Banks with a higher fraction of non-traditional income are also shown to have a lower insolvency risk as measured by the Z-score, and recovered faster after the 2007-09 crisis. Our results hold across bank size groups and are robust to the inclusion of bank fixed effects, bank size, and various measures of leverage and asset quality in the regressions.
    Keywords: Bank Size, Financial Crisis, Profitability, Core-banking Activity
    JEL: G01 G21
    Date: 2014–10
  3. By: Nordblom, Thomas L.; Hutchings, Tim; Hayes, Richard; Li, Guangdi
    Keywords: Farm Management, Risk and Uncertainty,
    Date: 2015–02
  4. By: Grupp, Marcel
    Abstract: In the mid-1990s, institutional investors entered the syndicated loan market and started to serve borrowers as lead arrangers. Why are non-banks able to compete for this role against banks? How do the composition of syndicates and loan pricing differ among lead arrangers? By using a dataset of 12,847 leveraged loans between 1997 and 2012, I aim to answer these questions. Non-banks benefit from looser regulatory requirements, have industry expertise which helps them in the screening and monitoring of borrowers and focus on firms that ask for loans only instead of additional cross-selling of other services. I can show that non-banks specialize on more opaque and less experienced borrowers, are more likely than banks to choose participants that help to reduce potentially higher information asymmetries and earn 105 basis points more than banks.
    Keywords: non-bank lead arrangers,syndicated loans,spread premium
    JEL: G21 G23 G32
    Date: 2015
  5. By: Thomas Mc Cluskey (Dublin City University)
    Abstract: This study reports the views of European fund managers and investors on dividends. Specifically, the study uses semi-structured interviews with twenty participants and analyses their responses concerning the role of dividends in the stock screening process; the perceived relationship between dividend payment policy and share values; the impact of taxation and attitudes to share buybacks. The results suggest that contrary to reported historical evidence there appears to be little support for the notion that dividends are important in stock selection and that dividends influence share valuations. Particularly interesting findings are that since the financial crisis of 2008 European fund managers and investors appear to have to focus on geographical and geopolitical matters as the more significant investment criteria of companies in which they have a shareholding; that taxation issues appear relatively unimportant and that the majority of investors prefer short-term arbitrage capital gains rather than cash dividends or share buybacks.
    Keywords: Dividends, European, fund managers, investors, interviews
    JEL: G35
  6. By: Shanuka Senarath (Griffith University)
    Abstract: Most of the blame for the present Global Financial Crisis (GFC) has been attributed to securitization and CDSs in the years preceding growth of the crisis. On reflection, most of the blame must be “sheeted home” to the former U.S government’s mandate to banks and other financial institutions to mitigate their normal lending criteria on U.S home loans. The fundamental problem with these securitization contracts was not the securitization of good loans, but the securitization of “lemons”. The loans should have never been entered into in the first place. The “failure” of securitization contracts was therefore a failure of well-intended (but poor) government policy makers in foreseeing the unintended consequences. In order to “insure” against expected defaults, the lenders and the investors entered CDS contracts in the shadow banking sector. The fundamental problem with the CDS contracts which are much touted in the regulated and shadow banking sectors as being “desirable” as a profitable form of “insurance”, was that they were (and are) able to be used for wagering or betting purposes. In contrast to the conventional insurance, CDS contracts do not require an insurable interest; do not require compliance with the indemnity principle; and are not uberrima fides.
    Keywords: Credit Default Swaps, Securitization, Global Financial Crisis
    JEL: G01
  7. By: Carol Alexander (School of Business, Management and Economics, University of Sussex); Xi Chen (ICMA Centre, Henley Business School, University of Reading); (ICMA Centre, Henley Business School, University of Reading)
    Abstract: This paper resolves the conceptual ambiguity of real option value and derives a model using risk-adjusted discount rates that can be applied to value the option to invest in a project. The approach adopts stochastic revenue and costs which provide a general solution with the added virtue of applicability. We found the option value arises from the difference between an indi- vidual investor and the market in financing efficiency and risk preferences. Investors’ taking on idiosyncratic risks are crucial to obtaining the real option value; hedging project risks can significantly reduce the associated real option value.
    JEL: C44 D81 G11
    Date: 2014–12
  8. By: Berg, Tatjana; Horsch, Philipp; Schmid, Markus
    Abstract: Exploiting a unique feature of the Clayton Antitrust Act, we analyze how directors holding outside directorships at peer firms affect firm value and performance of financial firms. We find that directors serving simultaneously at horizontally-related firms have a negative impact on firm value and performance, whereas directors holding outside directorships in vertical industries, i.e., customer or supplier industries, enhance firm value and performance. Our results suggest a tradeoff between director experience and conflicts of interest. Further, stock market reactions provide evidence that investors recognize the value-diminishing effect of horizontal directors as well as the value-increasing effect of vertical directors.
    Keywords: Governance, Firm value, Financial institutions
    JEL: G20 G32 G34
    Date: 2015–04
  9. By: Kellee Tsai (Division of Social Science, Hong Kong University of Science and Technology; Division of Political Science, Johns Hopkins University; Institute for Emerging Market Studies, Hong Kong University of Science and Technology)
    Abstract: Small and medium enterprises (SMEs) represent the backbone of China's economy, yet they lack access to bank credit. SMEs thus rely on a wide range of alternative sources, including informal finance, online peer-to-peer (P2P) platforms, registered non-banking financial institutions (NBFIs), and underground financiers. This paper distinguishes among different types of 'shadow banking' to clarify popular misconceptions about the nature of risks associated with informal financial intermediation in China. The evolution of SME finance in other contexts suggests that regulated and well-managed NBFCs provide an enduring foundation for commercialised financial intermediation even in advanced industrialised economies.
    Keywords: China, shadow banking, informal finance, financial development
    JEL: G23 G21 O17
    Date: 2015–05
  10. By: Hamdi, Helmi; Hakimi, Abdelaziz
    Abstract: This study examines the consequences of banks and stock markets developments on economic growth for eleven Middle Eastern and North African (MENA) countries for the period from 1995 to 2010. We perform dynamic panel data estimation and we use GMM estimator as suggested by Arellano and Bond (1991). The overall results suggest a positive relationship between banking and financial developments and economic growth. The results reveal that stock markets in MENA countries are still at an early stage of development and the sector needs the implementation of deep policy reforms to attract investors and to promote the contribution of the financial market in economic development.
    Keywords: Financial development, Economic growth, MENA, Dynamic Panel Data
    JEL: E44 G20 O16
    Date: 2015–05–12
  11. By: Grupp, Marcel
    Abstract: Although banks are at the center of systemic risk, there are other institutions that contribute to it. With the publication of the leveraged lending guideline in March 2013, the U.S. regulators show that they are especially worried about the private equity firms with their high-risk deals. Given these risks and the interconnectedness of the banks through the LBO loan syndicates, I shed light on the impact of a bank's LBO loan exposure on its systemic risk. By using 3,538 observations between 2000 and 2013 from 165 global banks, I show that banks with higher LBO exposure also have a higher level of systemic risk. Other loan purposes do not show this positive relationship. The main drivers influencing this relationship positively are the bank's interconnectedness to other LBO financing banks and its size. Lending experience with a specific PE sponsor, experience with leading LBO syndicates or a bank's credit rating, however, lead to a lower impact of the LBO loan exposure on systemic risk.
    Keywords: leveraged buyouts,syndicated loans,systemic risk
    JEL: G21 G23 G28
    Date: 2015
  12. By: Rafael Aigner (University of Bonn); Felix Bierbrauer (University of Cologne)
    Abstract: How do taxes in the financial sector affect economic outcomes? We analyze a simple general equilibrium model with financial intermediation. We formalize a trade-off between tax policies that burden the owners of banks and tax policies that burden households. We also study the implications of the financial sector's exemption from value added taxation (VAT). Main results are that an increased taxation of the banks' profits goes together with a larger financial sector, as measured by the volume of loans and the employment in banking. We also show that the general presumption that the VAT-exemption is beneficial for banks is unjustified.
    Keywords: Taxation of the financial sector, Financial activities tax, Value added taxation
    JEL: H21 G21 H22
    Date: 2015–04
  13. By: Sandra Rigot (University Paris North)
    Abstract: We investigate the influence of investment regulations on the riskiness and procyclcality of defined-benefit (DB) pension funds' asset allocations. We provide a global comparison of the regulatory framework for public, corporate and industry pension funds in the US, Canada and the Netherlands. Derived from panel data analysis of a unique set of close to 600 detailed funds’ asset allocations, our results highlight that regulatory factors are vitally important – more so than the funds’ individual and institutional characteristics, in shaping these asset allocations. In particular, risk-based capital requirements, balance sheet recognition of unfunded liabilities, lower liability discount rates, and shorter recovery periods lead pension funds to decrease their asset allocation to risky assets. Risk-based capital requirements reduce overall risky asset allocation by as much as 5%, but they do not affect the asset classes identically. While equities, real estate and mortgages are at a disadvantage, high yield bonds and commodities are slightly favored.
    Keywords: Solvency, Pension funds, Defined Benefit, Liability discount rate, Valuation requirements, Financial stability, Regulation
    JEL: G28 G11
  14. By: Monica Billio (Department of Economics, University Of Venice Cà Foscari); Roberto Casarin (Department of Economics, University Of Venice Cà Foscari); Michele Costola (Department of Economics, University Of Venice Cà Foscari); Andrea Pasqualini (Department of Economics, University Of Venice Cà Foscari)
    Abstract: The purpose of this paper is the construction of an early warning indicator for systemic risk using entropy measures. The analysis is based on the cross-sectional distribution of marginal systemic risk measures such as Marginal Expected Shortfall, Delta CoVaR and network connectedness. These measures are conceived at a single institution for the financial industry in the Euro area. We estimate entropy on these measures by considering different definitions (Shannon, Tsallis and Renyi). Finally, we test if these entropy indicators show forecasting abilities in predicting banking crises. In this regard, we use the variable presented in Babeck? et al. (2012) and Alessi and Detken (2011) from European Central Bank. Entropy indicators show promising forecast abilities to predict financial and banking crisis. The proposed early warning signals reveal to be effective in forecasting financial distress conditions.
    Keywords: Entropy, systemic risk measures, early warning indicators, aggregation.
    JEL: C10 C11 G12 G29
    Date: 2015
  15. By: Andrea Beltratti; René M. Stulz
    Abstract: From 2010 to 2012, the relation between bank stock returns from European Union (EU) countries and the returns on sovereign CDS of peripheral (GIIPS) countries is negative. We use days with tail sovereign CDS returns of peripheral countries to identify the effects of shocks to the cost of borrowing of these countries on EU banks from other countries. A CDS tail return affects banks with greater exposure to the country experiencing that return more, but it has an impact on banks regardless of exposure. Shocks to peripheral countries that are more pervasive impact the returns of banks from countries that experience no shock more than shocks to small individual peripheral countries. In general, the impact of tail returns is asymmetric in that banks suffer less from adverse shocks to peripheral countries than they gain from favourable shocks to such countries.
    JEL: F34 G12 G15 G21 H63
    Date: 2015–05
  16. By: Mariana Nedelcu (Bunea) (Bucharest University of Economic Studies)
    Abstract: At the European level - and even global – the prolonged economic and financial crisis was a challenge for the financial institutions, negatively affecting the banking system and beyond. The impact of the global crisis has affected gradually overwhelmingly the profitability of the banking industry, affecting all types of banking products and services offered to the customers, the models of supervision and the evaluation methods known so far. The audit function has an important role in the corporate mechanism, especially by extra value conferred to the governance process, so who, over time, this issue was debated assiduously in a series of studies and analysis on information transparency at the level of companies.The purpose of this article is to provide a more comprehensive analysis of the relationship between the quality of external audit and the financial performance, the solvency and requirements of capital adequacy at risk at the level of the Romanian banking system. Thus, concentrating attention on the quality of external audit, we tried to find answers motivated by the empirical analysis results to the general question "How influences the quality of external audit the performance of the banking system? How is the value added by the quality of external audit at the level of credit institutions?".In order to test the formulated hypotheses, the research methodology used is mainly quantitative, based on a statistical analysis deductive and having as starting point the agency theory having as objective the testing and possible links from cause - effect, and also analyzing the significance level thereof.
    Keywords: corporate governance, banking system, solvency, audit
    JEL: G20 G30 M40

This nep-cfn issue is ©2015 by Zelia Serrasqueiro. It is provided as is without any express or implied warranty. It may be freely redistributed in whole or in part for any purpose. If distributed in part, please include this notice.
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