nep-cfn New Economics Papers
on Corporate Finance
Issue of 2015‒11‒15
sixteen papers chosen by
Zelia Serrasqueiro
Universidade da Beira Interior

  1. Preaching water but drinking wine? Relative performance evaluation in international banking By Dragan Ilić; Sonja Pisarov; Peter S. Schmidt
  2. Bank and sovereign risk feedback loops By Aitor Erce
  3. Securities Trading by Banks and Credit Supply: Micro-Evidence By Puriya Abbassi; Rajkamal Iyer; José-Luis Peydró; Francesc R. Tous
  4. Tribalism and Financial Development By Kodila-Tedika, Oasis; Asongu, Simplice
  5. Capital Asset Pricing Model Adjusted for Anchoring By Hammad, Siddiqi
  6. Network-Motivated Lending Decisions By Ogura, Yoshiaki; Okui, Ryo; Saito, Yukiko Umeno
  7. State-Aid, Stability and Competition in European Banking By Fiordelisi, Franco; Mare, Davide Salvatore; Molyneux, Philip
  8. International banking and liquidity risk transmission: lessons from the United Kingdom By Hills, Robert; Hooley, John; Korniyenko, Yevgeniya; Wieladek, Tomasz
  9. The supply of long-term credit after a funding shock: evidence from 2007-2009 By Pierre Pessarossi; Frédéric Vinas
  10. Is the European banking system more robust? An evaluation through the lens of the ECB's Comprehensive Assessment By Guillaume Arnould; Salim Dehmej
  11. Does Credit Risk Impact Liquidity Risk? Evidence from Credit Default Swap Markets By Hertrich, Markus
  12. Overview of Social Enterprises and Impact Investment in Finland By Kotiranta, Annu; Widgrén, Joona
  13. Existence of Financial Equilibrium with Differential Information: the no-arbitrage characterization By Lionel de BOISDEFFRE
  14. Countercyclical Foreign Currency Borrowing: Eurozone Firms in 2007-2009 By Bacchetta, Philippe; Merrouche, Ouarda
  15. Firms' excess savings and the Dutch current account surplus: a stock-flow consistent approach By Meijers, Huub; Muysken, Joan; Sleijpen, Olaf
  16. Credit supply disruptions: from credit crunches to financial crisis By Peek, Joe; Rosengren, Eric S.

  1. By: Dragan Ilić; Sonja Pisarov; Peter S. Schmidt
    Abstract: Relative performance evaluation (RPE) is, at least on paper, enjoying widespread popularity in determining the level of executive compensation. Yet existing empirical evidence of RPE is decidedly mixed. Two principal explanations are held responsible for this discord. A constructional challenge arises from intricacies of identifying the correct peers. And on a simpler note, corporate commitments to RPE could be mere exercises in empty rhetoric. We address both issues and test the use of RPE in a new sample of large international non-U.S. banks. Taken as a whole, the banks in our sample show moderate evidence consistent with RPE. We report stronger evidence once we investigate the subsample of banks that disclose the use of peers in their compensation schemes. This finding lends support to the credibility and thus informational value of RPE commitments. Digging deeper, we conclude that RPE usage is driven by firm size and growth options.
    Keywords: Relative performance evaluation, executive compensation, peers, banks, disclosure
    JEL: J33 D86 G3 G21
    Date: 2015–10
  2. By: Aitor Erce (European Stability Mechanism)
    Abstract: Measures of sovereign and bank risk show occasional bouts of increased correlation, setting the stage for vicious and virtuous feedback loops. This paper models the macroeconomic phenomena underlying such bouts using CDS data for 10 euro area countries. The results show that sovereign risk feeds back into bank risk more strongly than vice versa. Countries with sovereigns that are more indebted or where banks have a larger exposure to their own sovereign, suffer larger feedback loop effects from sovereign risk into bank risk. In the opposite direction, in countries where banks fund their activities with more foreign credit and support larger levels of non-performing loans, the feedback from bank risk into sovereign risk is stronger. According to model estimates, financial rescue operations can increase feedback effects from bank risk into sovereign risk. These results can be useful for the official sector when deciding on the form of financial rescues.
    Keywords: Sovereign Risk, Bank Risk, Feedback Loops, Balance Sheet Exposure, Leverage
    JEL: E58 G21 G28 H63
  3. By: Puriya Abbassi; Rajkamal Iyer; José-Luis Peydró; Francesc R. Tous
    Abstract: We analyze securities trading by banks and the associated spillovers to the supply of credit. Empirical analysis has been elusive due to the lack of securities register for banks. We use a unique, proprietary dataset that has the investments of banks at the security level for 2005-2012 in conjunction with the credit register from Germany. Analyzing data at the security level for each bank in each period, we find that during the crisis, banks with higher trading expertise increase their overall investments in securities, especially in those that had a larger price drop. The quantitative effects are largest for trading-expertise banks with higher capital and in securities with lower rating and long-term maturity. In fact, there are no differential effects for triple-A rated securities. Moreover, banks with higher trading expertise reduce their overall supply of credit in crisis times – i.e., for the same borrower at the same time, trading-expertise banks reduce lending relative to other banks. This effect is more pronounced for trading-expertise banks with higher capital, and the credit reduction is binding at the firm level. Finally, these differential effects for trading-expertise banks are not present outside the crisis period.
    Keywords: banking, investments, bank capital, credit supply, risk-taking
    JEL: G01 G21 G28
    Date: 2015–11
  4. By: Kodila-Tedika, Oasis; Asongu, Simplice
    Abstract: We assess the correlations between tribalism and financial development in 123 countries using data averages from 2000-2010. The tribalism index is used to measure tribalism whereas financial development is measured from perspectives of financial intermediary and stock market developments. The long-term variable is stock market capitalisation while short-run indicators include: private and domestic credits. We find that tribalism is negatively correlated with financial development and the magnitude of negativity is higher for financial intermediary development relative to stock market development. The findings are particularly relevant to African and Middle Eastern countries where the scourge is most pronounced.
    Keywords: Tribalism; Financial Development
    JEL: E62 G20 H11 H20 O43
    Date: 2015–05
  5. By: Hammad, Siddiqi
    Abstract: I show that adjusting CAPM for anchoring provides a unified explanation for the size, value, and momentum effects. Anchoring adjusted CAPM (ACAPM) predicts that stock splits are associated with positive abnormal returns and an increase in return volatility, whereas the reverse stock-splits are associated with negative abnormal returns and a fall in return volatility. Existing empirical evidence strongly supports these predictions. Anchoring has the effect of pushing up the equity premium, a finding which is relevant for the equity premium puzzle.
    Keywords: Size Premium, Value Premium, Behavioral Finance, Stock Splits, Equity Premium Puzzle, Anchoring Heuristic, CAPM, Asset Pricing
    JEL: G00 G02 G11 G12 G30
    Date: 2015–10–01
  6. By: Ogura, Yoshiaki; Okui, Ryo; Saito, Yukiko Umeno
    Abstract: We theoretically and empirically demonstrate that monopolistic or collusive banks will keep lending to a loss-making firm at an interest rate lower than the prime rate if the firm is located in an influential position in an inter-firm supply network. An influential firm generates a positive externality, and its exit damages the sales in the supply network. To internalize this externality, the banks may forbear on debt collection and/or bail out such influential firms when the cost to support the loss-making influential company can be recouped by imposing high interest on less influential companies. The analytical model shows that such forbearance can improve welfare. Our empirical study, performed using a unique dataset containing information about inter-firm transactions, provides evidence for such network-motivated lending decisions. In particular, this effect is more clearly observed at less credit-worthy firms whose main bank is a regional bank. Notably, we observe that such banks are often dominant lenders in the local loan market, and most of their clientele do not have direct access to the stock and bond market.
    Keywords: supply network, influence coefficient, centrality, forbearance, bailout
    JEL: D57 G21 G32 L13 L14
    Date: 2015–10
  7. By: Fiordelisi, Franco; Mare, Davide Salvatore; Molyneux, Philip
    Abstract: What is the relationship between bank fragility and competition during a period of market turmoil? Does market power in European banking involve extra-gains after discounting for the cost of government intervention? We answer these questions in the context of Eurozone banking over 2005-2012 and show that greater market power increases bank stability implying aggregate extra-gains of 57% of EU12 gross domestic product for the banking sector after discounting for the costs associated with government intervention. The negative influence of competition on bank stability is non-monotonic and reverses for lower degrees of competition. Capital injections, guarantees and asset relief measures elicit greater bank soundness.
    Keywords: Bank Stability, Prudential Regulation, Competition, Global Financial Crisis, European Banking Union, Government Bailouts
    JEL: C23 G21 G28
    Date: 2015–09
  8. By: Hills, Robert (Bank of England); Hooley, John (International Monetary Fund); Korniyenko, Yevgeniya (International Monetary Fund); Wieladek, Tomasz (Bank of England)
    Abstract: This paper forms the United Kingdom’s contribution to the International Banking Research Network’s project examining the impact of liquidity shocks on banks’ lending behaviour, using proprietary bank-level data available to central banks. Specifically, we examine the impact of changes in funding conditions on UK-resident banks’ domestic and external lending from 2006–12. Our results suggest that, following a rise in the liquidity shock measure, UK-resident banks that grew their balance sheets quicker relative to their peers pre-crisis, decreased their external lending by more relative to other banks, and increased their domestic lending. When we account for country of ownership, we find that the same pattern was true for both UK-owned and foreign-owned banks, but more pronounced for UK-owned banks’ domestic and foreign-owned banks’ external lending. These results are robust to splitting the data into real and financial sector lending, the use of more granular bilateral country loan data and controlling for the various banking system interventions made by governments in 2008–09.
    Keywords: Liquidity shock; global financial crisis; cross-border and domestic lending.
    JEL: E44 E51 E52 G18 G21
    Date: 2015–11–06
  9. By: Pierre Pessarossi (ACPR - Autorité de Contrôle Prudentiel et de Résolution - Autorité de Contrôle Prudentiel et de Résolution); Frédéric Vinas (EEP-PSE - Ecole d'Économie de Paris - Paris School of Economics, ACPR - Autorité de Contrôle Prudentiel et de Résolution - Autorité de Contrôle Prudentiel et de Résolution)
    Abstract: We study banks supply of long-term credit after a negative funding shock. Thanks to a unique database at bank-firm level, we take advantage of the exogenous interbank market freeze in 2007-2008 to assess the causal relation between French banks' liquidity risk and their lending. We find that banks with higher funding risk and more maturity transformation provided a lower supply of long-term loans after the shock, even controlling for credit demand. Short-term lending supply is however unaffected. These findings help explain the severity of the recession that followed the liquidity crisis. And they support Basel III liquidity regulation. This regulation should have a stabilising effect on long-term lending in times of funding stress.
    Keywords: financial institutions,liquidity risk,loan maturity
    Date: 2015–09
  10. By: Guillaume Arnould (CES - Centre d'économie de la Sorbonne - UP1 - Université Panthéon-Sorbonne - CNRS, LABEX Refi - ESCP Europe); Salim Dehmej (CES - Centre d'économie de la Sorbonne - UP1 - Université Panthéon-Sorbonne - CNRS, LABEX Refi - ESCP Europe)
    Abstract: The results of the Comprehensive Assessment (CA) conducted by the ECB seem to attest the soundness of the European banking system since only 8 of 130 assessed banks still need to raise €6 billion. However it would be a mistake to conclude that non failing banks are completely healthy. Using data provided by the ECB and the ECB and the EBA after the CA, we assess the capital shortfalls for each banks by considering the transitional arrangements, an implementation of Basel III sovereign debt requirements and an enhancement of the leverage ratio. In addition we show, that if the CA has been a very complex exercise, it is not the best lens through which the soundness of the eurozone banking system should be evaluated. The assumptions used for the Asset Quality Review (AQR) and the stress-tests lead to week scenarios and requirements that undermine the reliability of the results. Finally we show that the low profitability, the massive dividend distribution and the incurred fines, give rise to concern on the ability of eurozone banks to meet the incoming capital requirements.
    Keywords: Basel III,Financial stability,stress tests,banking,financial regulation
    Date: 2015–07
  11. By: Hertrich, Markus
    Abstract: During the recent financial crisis that erupted in mid-2007, credit default swap spreads increased by several hundred basis points, accompanied by a liquidity shortage in the U.S. financial sector. This period has both evidenced the importance that liquidity has for investors and underlined the need to understand the linkages between credit markets and liquidity. This paper sheds light on the dynamic interactions between credit and liquidity risk in the credit Default swap market. Contrary to the common belief that illiquidity leads to a credit risk deterioration in financial markets, it is found that in a sample of German and Swiss companies, credit risk is more likely to be weakly endogenous for liquidity risk than vice versa. The results suggest that a negative credit shock typically leads to a subsequent liquidity shortage in the credit default swap market, in the spirit of, for instance, the liquidity spiral posited by Brunnermaier (2009), and extends our knowledge about how credit markets work, as it helps to explain the amplification mechanisms that severely aggravated the recent crisis and also indicates which macro-prudential policies would be suitable for preventing a similar financial crisis in the future.
    Keywords: financial crisis, credit default swap, credit risk, liquidity risk, endogeneity, macroprudential policy
    JEL: E37 E61 G14 G32 G38
    Date: 2015–09
  12. By: Kotiranta, Annu; Widgrén, Joona
    Abstract: The aim of this report has been to produce an analysis of the state of the social enterprises in Finland. Based on a comprehensive survey, there are roughly 19 000 social enterprises in Finland that employ around 125 000 persons. These estimates produced in this report multiply the views on the magnitude of the phenomenon. Self-identified Finnish social enterprises produce social value though their products or services and mostly in the field of social services and welfare. The main hindrances on the way of the growth of the sector are the lack of an unambiguous definition of a social enterprise and the shortages in measuring the most important outcome, social impact. Measuring and valuing the impact is a key element in attracting funding for social enterprises. New means of impact investment attract not only attention but also capital that seeks for targets, especially in Europe. This additional funding is a much needed in the sector that attracts it’s outside financing currently mostly from public sector and struggles to find financing critical for future growth.
    Keywords: social enterprises, impact investment
    JEL: L38 L26 N34 P13 G23 G24 M14 G11 G14
    Date: 2015–10–23
  13. By: Lionel de BOISDEFFRE
    Abstract: In Cornet-De Boisdeffre (J Math Econ 38: 393-410, 2002), we extended the classical equilibrium and arbitrage concepts of symmetric information to an asymmetric information model dropping Radner's (Econometrica 47: 655-678, 1979) rational expectations' assumption. In Cornet-De Boisdeffre (Econ Theory 38: 287-293, 2009), we showed how agents could infer enough information, in this model, to preclude arbitrage from financial markets. In De Boisdeffre (Econ Theory 31: 255-269, 2007), we extended to that model Cass' (CARESS WP 84-09, 1984) classical existence theorem for nominal assets, by showing the existence of equilibrium was characterized by a general no-arbitrage condition. We now display the same characteristic property for numeraire assets and, thus, extend Geanakoplos-Polemarchakis' (Essays in Honnor of K.J. Arrow, Starr & Starett ed., Cambridge UP Vol. 3, 65-96, 1986) classical theorem to the asymmetric information setting. Contrasting with Radner's, these results show that symmetric and asymmetric information economies can be embedded into a common model, where they share similar properties.
    Keywords: general equilibrium ; asymmetric information ; arbitrage ; existence
    JEL: D52
    Date: 2015–11
  14. By: Bacchetta, Philippe; Merrouche, Ouarda
    Abstract: Despite international financial disintegration, we document a dramatic increase in dollar borrowing among leveraged Eurozone corporates during the Great Financial Crisis. Using loan-level data, we trace this increase to the twin crisis in the credit market and in funding markets. The reduction in the supply of credit by Eurozone banks caused riskier borrowers to shift to foreign banks, in particular US banks. The coincident rise in the relative cost of euro wholesale funding and the disruptions in the FX swap market caused a rise in dollar borrowing from US banks, especially for firms in export-oriented sectors. Although global bank lending is often reported to amplify the international credit cycle, we show that foreign banking acted as a shock absorber that weathered the real consequences of the credit crunch in Europe.
    Keywords: corporate debt; credit crunch; foreign banks; money market
    JEL: E44 G21 G30
    Date: 2015–11
  15. By: Meijers, Huub (UNU-MERIT); Muysken, Joan; Sleijpen, Olaf
    Abstract: In the Netherlands firms' savings, i.e. retained profits, exceed investment at a national level. The resulting net savings are mainly held abroad. Moreover, there is a striking resemblance in the development of net savings of firms' on the one hand and the surplus on the current account on the balance of payments on the other. Both have increased to almost 10% of GDP in recent years. Next to that, the housing boom household net-savings have decreased prior to 2007 following the housing boom, accompanied by an increase in government net-savings. These trends reversed thereafter due to the bursting of the housing bubble. We present a stock-flow consistent model of the firm to explain firms' excess savings, inspired by Hein (2012), and embed that in an open economy model with a banking sector which we have developed earlier. This enables us to model the preference of firms to invest in financial assets abroad and to analyse the close link between firms' excess savings and the current account surplus. As a consequence we also explain the close link between net household savings and government budget deficit. We present simulation results to illustrate the working of our model.
    Keywords: stock-flow consistent modelling, retained profits, current account surplus
    JEL: E44 E60 G32
    Date: 2015
  16. By: Peek, Joe (Federal Reserve Bank of Boston); Rosengren, Eric S. (Federal Reserve Bank of Boston)
    Abstract: Events that transpired during the recent financial crisis highlight the important role that financial intermediaries still play in the economy, especially during economic downturns. While the breadth and severity of the financial crisis took most observers by surprise, it has renewed academic interest in understanding the effects on the real economy of both financial shocks and the changing nature of financial intermediation. This interest in the real effects of financial shocks highlights a literature that began more than 20 years ago associated with the bank credit crunch of the early 1990s. It is useful to reflect on what we thought we had learned from that research and how that research has helped to guide policy in the more recent crisis.
    Keywords: financial crisis; credit availability; financial intermediaries; liquidity; shadow banking; financial innovations
    JEL: E44 E51 G21 G23 G28
    Date: 2015–10–01

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