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on Financial Development and Growth |
| By: | David Jones (University of East Anglia); Corrado Di Maria (University of East Anglia); Simone Valente (University of East Anglia) |
| Abstract: | Does financial intermediation affect structural change? We investigate both theoretically and empirically whether financial development accelerates structural change during the post-industrialization phase where employment, value-added and expenditure shares change towards services and away from manufacturing. We build a dynamic general equilibrium model where firms and households face different types of intermediation costs, and structural change can be driven by mutually independent technology differences { exogenous productivity gaps or asymmetric factor elasticities { as well as by learning-by-doing. Besides suggesting a stronger impact of financial development when productivity is endogenous and services are labor-intensive, all the model specifications robustly predict that exogenous reductions in intermediation costs { e.g., deregulation shocks { accelerate the pace and extent of structural change. We test this prediction empirically by examining the effects of state by- state bank branching deregulation in the United States in the 1970-1990s period. Using a range of estimation techniques including synthetic control methods { pooled, augmented, and with staggered treatment { we show that bank branching deregulation accelerated the structural change that was already underway, i.e., services account for a greater share of output and employment than they would have in the absence of deregulation. |
| Keywords: | Economic growth, structural change, nancial development, banking deregulation |
| JEL: | O14 O16 O41 O47 G28 |
| Date: | 2021–07–29 |
| URL: | http://d.repec.org/n?u=RePEc:uea:ueaeco:2021-06&r= |
| By: | Ibrahim D. Raheem (The EXCAS, Liege, Beligium); Kazeem B. Ajide (University of Lagos, Nigeria); Xuan V. Vo (University of Economics Ho Chi Minh City, Vietnam) |
| Abstract: | The trilogy among economic growth, social capital (SC), and financial development is examined based on three hypotheses: first, SC is important in the finance-growth nexus. Second, there is a threshold effect of SC in the finance-growth nexus. Third, the SC-finance-growth trilogy depends on the countries' income level. Building dataset for 70 countries,someinteresting results were obtained: (i) the marginal effects of both SC and finance promotes economic growth at higher levels; (ii)there is evidence of a threshold effect of SC, as finance enhances more growth when SC is below the threshold level; (iii) higher-income countries tend not to benefit from the SC-finance-growth trilogy. These results suggest that the influence of SC on growth trajectory is exaggerated in the literature. The study recommends that policymakers should pursue other sources of economic growth aside SC, while ensuring that the level of SC does not deteriorate. |
| Keywords: | Economic growth, Financial development, Social capital, and Threshold effect |
| JEL: | O43 G20 |
| Date: | 2021–01 |
| URL: | http://d.repec.org/n?u=RePEc:agd:wpaper:21/050&r= |
| By: | Aikman, David (King's College London); Bluwstein, Kristina (Bank of England); Karmakar, Sudipto (Bank of England) |
| Abstract: | We build a semi-structural New Keynesian model with financial frictions to study the drivers of macroeconomic tail risk (‘GDP-at-Risk’). We analyse the empirically observed fat left tail of the GDP distribution by modelling three key non-linearities emphasised in the literature: 1) an effective lower bound on nominal interest rates, 2) a credit crunch in bank credit supply when bank capital depletes, and 3) deleveraging by borrowers when debt service burdens become excessive. We obtain three key results. First, our model generates a significantly fat-tailed distribution of GDP – a finding that is absent in most linear New Keynesian and RBC models. Second, we show how these constraints interact with each other. We find that an economy prone to debt deleveraging will experience significantly more credit crunch and effective lower bound episodes than otherwise. Moreover, as the effective lower bound becomes more proximate, the frequency of credit crunch episodes increases significantly. As a rule of thumb, we find that each 50 basis point decline in monetary policy headroom requires additional capital buffers of 1% of assets or 2%–2.5% points lower debt service burdens to hold the risk level constant. Third, we use the model to generate a historical decomposition of GDP-at-Risk for the United Kingdom. The implied risk outlook deteriorates significantly in the run-up to the Global Financial Crisis, driven by depleted capital buffers and increasing debt burdens. Since then, GDP-at-Risk has remained elevated, with greater bank resilience and lower debt offset by the limited capacity of monetary policy to cushion adverse shocks. |
| Keywords: | Financial crises; bank capital; debt deleveraging; macroprudential policy; effective lower bound; GDP-at-Risk |
| JEL: | G01 G28 |
| Date: | 2021–07–26 |
| URL: | http://d.repec.org/n?u=RePEc:boe:boeewp:0931&r= |
| By: | Budnik, Katarzyna; Dimitrov, Ivan; Giglio, Carla; Groß, Johannes; Lampe, Max; Sarychev, Andrei; Tarbé, Matthieu; Vagliano, Gianluca; Volk, Matjaz |
| Abstract: | This paper assesses the macroeconomic implications of the Basel III finalisation for the euro area, employing a large-scale semi-structural model encompassing over 90 banks and 19-euro area economies. The new regulatory framework will influence banks’ reactions to economic conditions and, as a result, affect the ability of the banking system to amplify or dampen economic shocks. The assessment covers the entire distribution of conditional economic predictions to measure the cost and benefit of the reforms. Looking at the means of conditional forecasts of output growth provides an indication of the costs of the reform, namely a transitory reduction in euro area gross domestic product (GDP) and in lending to the non-financial private sector. Looking at the lower percentile of output growth forecasts, i.e. growth at risk, captures the long-term benefits of the Basel III finalisation package in terms of improved resilience and the ability of the banking system to supply lending to the real economy under adverse conditions. These permanent growth-at-risk benefits ultimately outweigh the short-term costs of the reform. JEL Classification: E37, E58, G21, G28 |
| Keywords: | banking sector, Basel III finalisation, impact assessment, real-financial feedback mechanism, regulatory policy |
| Date: | 2021–07 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbops:2021258&r= |
| By: | David Kohns; Tibor Szendrei |
| Abstract: | This paper extends the idea of decoupling shrinkage and sparsity for continuous priors to Bayesian Quantile Regression (BQR). The procedure follows two steps: In the first step, we shrink the quantile regression posterior through state of the art continuous priors and in the second step, we sparsify the posterior through an efficient variant of the adaptive lasso, the signal adaptive variable selection (SAVS) algorithm. We propose a new variant of the SAVS which automates the choice of penalisation through quantile specific loss-functions that are valid in high dimensions. We show in large scale simulations that our selection procedure decreases bias irrespective of the true underlying degree of sparsity in the data, compared to the un-sparsified regression posterior. We apply our two-step approach to a high dimensional growth-at-risk (GaR) exercise. The prediction accuracy of the un-sparsified posterior is retained while yielding interpretable quantile specific variable selection results. Our procedure can be used to communicate to policymakers which variables drive downside risk to the macro economy. |
| Date: | 2021–07 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:2107.08498&r= |
| By: | Corsetti, G.; Lipińska, A.; Lombardo, G. |
| Abstract: | With the Global Financial Crisis, the COVID-19 pandemic, and the looming Climate Change, investors and policymakers around the world are bracing for a new global environment with heightened tail risk. Asymmetric exposure to this risk across countries raises the private and social value of arrangements improving insurance. We offer an analytical decomposition of the welfare effects of efficient capital market integration into a "smoothing" and a "level effect". Enhancing risk sharing affects the volatility of consumption, but also brings about equilibrium adjustment in asset and goods prices. This in turn drives relative wealth and consumption, as well as labor and capital allocation, across borders. Using model simulation, we explore quantitatively the empirical relevance of the different channels through which riskier and safer countries benefit from sharing macroeconomic risk. We offer an algorithm for the correct solution of the equilibrium using DSGE models under complete markets, at higher order of approximation. |
| Keywords: | International Risk Sharing, Asymmetry, Fat Tails, Welfare, Transfer Problem |
| JEL: | F15 F41 G15 |
| Date: | 2021–07–26 |
| URL: | http://d.repec.org/n?u=RePEc:cam:camdae:2153&r= |
| By: | Gouriéroux, Christian; Monfort, Alain; Mouabbi, Sarah; Renne, Jean-Paul |
| Abstract: | We define a disastrous default as the default of a systemic entity, which has a negative effect on the economy and is contagious. Bringing macroeconomic structure to a no-arbitrage asset pricing framework, we exploit prices of disaster-exposed assets (credit and equity derivatives) to extract information on the expected (i) influence of a disastrous default on consumption and (ii) probability of a financial meltdown. Using European data, we find that the returns of disaster-exposed assets are consistent with a systemic default being followed by a 2% decrease in consumption. The recessionary influence of disastrous defaults implies that financial instruments whose payoffs are exposed to such credit events carry substantial risk premiums. We also produce systemic risk indicators based on the probability of observing a certain number of systemic defaults or a sharp drop of consumption. |
| JEL: | E43 E44 E47 G01 G12 |
| Date: | 2021–08–02 |
| URL: | http://d.repec.org/n?u=RePEc:tse:wpaper:125843&r= |
| By: | van Buggenum, Hugo (Tilburg University, School of Economics and Management) |
| Date: | 2021 |
| URL: | http://d.repec.org/n?u=RePEc:tiu:tiutis:daabe114-81fa-44fc-aafd-b6120e730c7d&r= |
| By: | Nicola Amendola (Università di Roma Tor Vergata, Italy); Lorenzo Carbonari (Università di Roma Tor Vergata, Italy); Leo Ferraris (Università di Milano-Bicocca, Italy) |
| Abstract: | We examine a theoretical model of liquidity with three assets - money, government bonds and equity- that are used for transaction purposes. Money and bonds complement each other in the payment system. The liquidity of equity is derived as an equilibrium outcome. Liquidity cycles arise from the loss of confidence of the traders in the liquidity of the system. Both open market operations and credit easing play a beneficial role for different purposes. |
| Keywords: | Money, Bonds, Equity, Liquidity, Credit Easing |
| JEL: | E40 |
| Date: | 2021–07 |
| URL: | http://d.repec.org/n?u=RePEc:rim:rimwps:21-14&r= |
| By: | Markus Eberhardt; Andrea F. Presbitero |
| Abstract: | Commodity prices are one of the most important drivers of output fluctuations in developing countries. We show that a major channel through which commodity price movements can affect the real economy is through their effect on banks' balance sheets and financial stability. Our analysis finds that the volatility of commodity prices is a significant predictor of banking crises in a sample of 60 low-income countries (LICs). In contrast to recent findings for advanced and emerging economies, credit booms and capital inflows do not play a significant role in predicting banking crises, consistent with a lack of de facto financial liberalization in LICs. We corroborate our main findings with historical data for 40 'peripheral' economies between 1848 and 1938. The effect of commodity price volatility on banking crises is concentrated in LICs with a fixed exchange rate regime and a high share of primary goods in production. We also find that commodity price volatility is likely to trigger financial instability through a reduction in government revenues and a shortening of sovereign debt maturity, which are likely to weaken banks' balance sheets. |
| Keywords: | banking crises, commodity prices, volatility, low income countries |
| Date: | 2021 |
| URL: | http://d.repec.org/n?u=RePEc:not:notcfc:2021/02&r= |
| By: | Kristian Blickle (Federal Reserve Bank of New York); Markus Brunnermeier (Princeton University); Stephan Luck (Princeton University) |
| Abstract: | This paper studies a major financial panic, the run on the German banking system in 1931, to distinguish between banking theories that view depositors as demanders of liquidity and those that view them as providers of discipline. Our empirical approach exploits the fact that the German Crisis of 1931 was system-wide with cross-sectional variation in deposit flows as well as bank distress and took place in absence of a deposit insurance scheme. We find that interbank deposit flows predict subsequent bank distress early on. In contrast, wholesale depositors are more likely to withdraw from distressed banks at later stages of the run and only after the interbank market has started to collapse. Retail deposits are—despite the absence of deposit insurance—largely stable. Our findings emphasize the heterogeneity in depositor roles, with discipline being best provided through the interbank market. |
| Keywords: | Germany |
| JEL: | G01 G21 N20 N24 |
| Date: | 2020–06 |
| URL: | http://d.repec.org/n?u=RePEc:pri:cepsud:275&r= |
| By: | Heine, Michael; Herr, Hansjörg |
| Abstract: | Zusammen mit der Gründung des Deutschen Reiches im Jahr 1871 wurde eine neue Geldverfassung mit der Mark als nationaler Währung geschaffen zusammen mit der Gründung der Deutschen Reichsbank im Jahre 1876. England folgend wurde der Goldstandard etabliert mit dem Recht Banknoten in Gold zu tauschen und umgekehrt. Die Deckung der Banknoten wurde durch ein kompliziertes System geregelt. Im Vergleich zur Bank of England konnte die Reichsbank ihre Funktion als Lender of Last Resort flexibler wahrnehmen. Das Hauptziel der Geldpolitik der Reichsbank, das dann auch bis zum Beginn des Ersten Weltkrieges 1914 erfüllt wurde, war die Einlösung ihrer Banknoten in Gold und damit implizit die Verteidigung der fixen Wechselkurse im Goldstandard. Andere Ziele, etwa Preisniveaustabilität oder Wachstum des Sozialproduktes, waren von zweitrangiger Bedeutung. Über die Jahre wurde die Reichsbank immer mächtiger, bekam neue Instrumente und entwickelte sich zu einer modernen Zentralbank. Jedoch blieb Gold immer eine Fessel für ein für eine kapitalistische Ökonomie funktionales Geldsystem. |
| Keywords: | Deutsche Reichsbank,Goldstandard,Geldpolitik |
| JEL: | N13 E58 F02 |
| Date: | 2021 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:ipewps:1632021&r= |
| By: | Valerie Habbel (German Institute for Development Evaluation); Edward T. Jackson (Carleton University); Magdalena Orth (German Institute for Development Evaluation); Johanna Richter (German Institute for Development Evaluation); Sven Harten (German Institute for Development Evaluation) |
| Abstract: | This paper provides an overview of how to evaluate different blended finance instruments and mechanisms, including equity instruments, debt instruments, first loss capital, guarantees and insurance, development impact bonds, performance-based grants, structured funds and syndicated loans. It is structured along the most important and common questions evaluators seek to answer, including how to measure the mobilisation of additional financial resources, and assessing results. It provides a description of the most appropriate methods and tools for answering these questions, highlighting their advantages and disadvantages, and discusses their application. |
| Keywords: | additionality, assessment, blended finance, evaluation methods, impact, ODA, private finance |
| JEL: | E43 O16 Q01 |
| Date: | 2021–08–06 |
| URL: | http://d.repec.org/n?u=RePEc:oec:dcdaaa:101-en&r= |
| By: | Taguchi, Hiroyuki |
| Abstract: | This paper aims to provide empirical evidence for demonstrating financial additionality of multilateral development banks (MDBs) in private participation in infrastructure (PPI) projects in terms of financing beyond what is available in the markets. To verify MDB financial additionality, this study examines whether the PPI projects with multilateral support have significantly larger investment commitments than the total average projects, by using the PPI database of the World Bank. The empirical analysis identifies MDB financial additionality in that the larger investment commitments of multilateral-supported projects beyond the average are confirmed in any income levels and regions in host countries, and any sectors and types in the projects. In particular, MDB financial additionality is valid even in low-income countries where private finance is still too premature to be available. In the host countries where their government effectiveness is in the poorest edge, however, MDB financial additionality loses its significance, thereby requiring the governance enhancement and capacity building in the host countries for its additionality to work. |
| Keywords: | Financial Additionality, Multilateral development banks, Private participation in infrastructure, Investment Commitments, and Government effectiveness |
| JEL: | F33 O18 |
| Date: | 2021–07 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:108936&r= |
| By: | Lorenzo Menna (Banco de México); Martín Tobal (Banco de México) |
| Abstract: | The ability of credit rating agencies (CRAs) to influence financial markets has been widely debated in the academic literature, policy circles and general press. While some commentators think that CRAs’ announcements have relevant effects on the markets, others reckon that they may simply follow investor opinion. To address the issue, the empirical literature has mainly employed the event study methodology, analyzing the behavior of financial markets around rating change announcements. Following a recent trend that has emphasized the use of high-frequency data to achieve credible identification in macroeconomics, in this paper, we use the instrumental variable-local projection (IV-LP) methodology to obtain the effect of structural shocks to CRAs’ communication on financial markets. Applying this approach to Mexico, we find that CRAs’ communication about the sovereign has statistically significant effects on CDS spreads, interest rates and the exchange rate. |
| Keywords: | credit rating agencies, financial markets, instrumental variable |
| JEL: | G14 F40 |
| Date: | 2021–07 |
| URL: | http://d.repec.org/n?u=RePEc:aoz:wpaper:80&r= |
| By: | Grzegorz Halaj; Sofia Priazhkina |
| Abstract: | We model bank management actions in severe stress test conditions using a game-theoretical framework. Banks update their balance sheets to strategically maximize risk-adjusted returns to shareholders given three regulatory constraints and feedback effects related to fire sales, interactions of loan supply and demand, and deteriorating funding conditions. The framework allows us to study the role of strategic behaviors in amplifying or mitigating adverse macrofinancial shocks in a banking system and the role of macroprudential policies in the mitigation of systemic risk. In a macro-consistent stress testing application, we show that a trade-off can arise between banking stability (solvency) and macroeconomic stability (lending) and test whether the release of a countercyclical capital buffer can reduce systemic risk. |
| Keywords: | Central bank research; Economic models; Financial institutions; Financial stability; Financial system regulation and policies |
| JEL: | C72 G21 |
| Date: | 2021–07 |
| URL: | http://d.repec.org/n?u=RePEc:bca:bocawp:21-35&r= |
| By: | Selva Bahar Baziki; Tanju Capacioglu |
| Abstract: | We study the effect of two counter-cyclical credit policies on banks’ lending decisions using a unique matched bank-firm-loan micro level data. These two policy actions; the implementation of commercial real estate loan-to-value (LTV) ratio and an expansion of a collateral guarantee scheme, stand out as they give banks the freedom of choice over which customers would be subject to the policy and to what degree. When faced with a tightening LTV policy banks elect to issue loans above the LTV cap to firms with better credit history and with whom they had a longer established relationship while charging higher interest rates. Firms constrained by the policy see an increase in their other borrowing while the policy is in effect, suggesting the existence of credit spillover across loan types. In the second policy, banks again prefer firms with healthier credit histories and with whom they have a longer relationship into the credit guarantee scheme. In contrast to the existing literature, we do not see a preference for riskier firms under the scheme. At the same time, among the recipients of scheme loans, those with stronger relationships but relatively lower past credit performance have larger amounts of loans. Scheme loans are issued for larger amounts, longer periods and at higher interest rates compared to loans issued to non-participating firms during the same period. Finally, we show that the increase in scheme utilization has resulted in lower other corporate credit and general-purpose loans in banks with larger utilization rates. |
| Keywords: | Macroprudential policy, Commercial real estate, Corporate loans, Loan-to-value, Relationship banking, Credit guarantee funds |
| JEL: | E51 E61 G20 G21 G28 G32 |
| Date: | 2021 |
| URL: | http://d.repec.org/n?u=RePEc:tcb:wpaper:2120&r= |
| By: | Annamaria de Crescenzio; Etienne Lepers |
| Abstract: | The COVID-19 pandemic triggered a sudden funding squeeze manifested in major disruptions in international capital flows, the most dramatic of the wave of extreme capital flow episodes since the global financial crisis (GFC). This paper contributes to efforts to better understand this extreme episode in the context of post-GFC structural financial changes. To do so, it presents a new monthly dataset of gross capital flows for 41 countries, better suited to the identification of sudden shocks than quarterly Balance of Payments data. Leveraging on this dataset, the paper first develops a more precise identification of extreme capital flow episodes since the GFC and revisit their drivers, asking whether COVID-19 episode significantly changed recent findings of the weaker role of global factors. The answer is no. Rather, the role of global factors may have further lost explanatory power in the post-GFC period including COVID. On the other hand, pull factors such as pre-COVID vulnerabilities and country-specific and pandemic-specific factors appear key to explaining the identified cross-country heterogeneity. |
| JEL: | F32 F34 F38 |
| Date: | 2021–07–26 |
| URL: | http://d.repec.org/n?u=RePEc:oec:dafaaa:2021/05-en&r= |
| By: | Buesa, Alejandro; De Quinto, Alicia; Población García, Francisco Javier |
| Abstract: | This paper describes a novel methodology of measuring risky and conservative mortgage credit using household survey data for 18 European Union countries and the United Kingdom. In addition, we construct time series for both types of credit and embed them into a global vector autoregressive (GVAR) model, so as to study how shocks to both variables affect domestic output and propagate across countries through cross-border banking exposures. The results show that a decrease in risky credit can have long-lasting positive effects on GDP, both in the originating country and its most exposed peers, while a fall in conservative credit is detrimental. In some geographies, negative shocks to both types of credit reduce output, a feature linked to the lower relevance of homeownership which implies that mortgage credit plays a less prominent role in the domestic economy. JEL Classification: C32, F47, G21, G51 |
| Keywords: | borrower-based measures, cross-border spillovers, LTV limits, Mortgage rating |
| Date: | 2021–08 |
| URL: | http://d.repec.org/n?u=RePEc:srk:srkwps:2021123&r= |
| By: | Alex Cobham (Tax Justice Network); Petr Jansky (Institute of Economic Studies, Faculty of Social Sciences, Charles University, Prague, Czech Republic); Jan Mares (Institute of Economic Studies, Faculty of Social Sciences, Charles University, Prague, Czech Republic) |
| Abstract: | Despite a Sustainable Development Goals target to reduce trade mispricing and other illicit financial flows, it is not clear how to measure trade mispricing over time for countries worldwide. We aim to combine a broad coverage of countries by using UN Comtrade data and robustness by developing a new methodology that sheds new light on a potential scale of trade mispricing for many countries worldwide. Specifically, we provide new estimates of the trade reporting gap and, for the first time, we decompose it into seven individual components. Our explorative analysis reveals three main findings. We show, first, that trade reporting gap is large, in absolute values as well as relative to the overall trade. Second, conceptually well-defined components such as product and country misclassifications account only for a small share of trade reporting gap. The large remaining residual hints at the degree of imprecision in international trade reporting and calls for a significant improvement in data quality. Third, the low-income countries' trade reporting gap has the highest ratio relative to their GDP, which is consistent with existing literature that shows low-income countries to be more vulnerable to a variety of illicit financial flows. |
| Keywords: | international trade; trade reporting gap; trade mispricing; illicit financial flows; low-income countries; global development |
| JEL: | F13 F14 H26 |
| Date: | 2021–07 |
| URL: | http://d.repec.org/n?u=RePEc:fau:wpaper:wp2021_26&r= |
| By: | Babic, Milan (University of Amsterdam); Dixon, Adam; Fichtner, Jan (University of Amsterdam) |
| Abstract: | Existing studies have scrutinized the rise of states as global owners and investors, yet we still lack a good understanding of what state-led investment does in a globalized economy, especially in its host states. Comparative capitalisms research has analyzed foreign state investment as a potential source of patient capital for coordinated and mixed market economies. However, this patient capital framework cannot explain the recent surge of protectionist sentiments, even among the ‘good hosts’ of state-led investment. Therefore, we extend the patient capital argument and develop a broader framework centered on the globalized nature of foreign state investment. We create and empirically illustrate a novel typology based on different modes of cross-border state investment – from financial to strategic – and different categories of host states. Our results provide a new pathway to study the rise and effects of cross-border state investment in the twenty-first century. |
| Date: | 2021–07–29 |
| URL: | http://d.repec.org/n?u=RePEc:osf:osfxxx:tm82g&r= |
| By: | Chen, Yongmin; Jiang, Haiwei; Liang, Yousha; Pan, Shiyuan |
| Abstract: | This paper studies how foreign direct investment (FDI) affects innovation in the host country, using matched firm-level patent data of Chinese firms. The data contain multidimensional information about patent counts and citations which, together with an identification strategy based on Lu et al. (2017), allows us to measure innovation comprehensively and to uncover the causal relationship. Our empirical analysis shows that FDI has positive intra-industry effects on the quantity and quality of innovation by Chinese firms. We show that these positive effects are driven by increases in competition, rather than by knowledge spillover from FDI which is measured by patent citations between domestic firms and foreign invested enterprises (FIEs). We further investigate the inter-industry effects of FDI and find that FDI has positive vertical effects on innovation in upstream sectors. |
| Keywords: | FDI; Innovation; Patent; Competition; Spillover |
| JEL: | F2 L5 O3 |
| Date: | 2021–07–26 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:108902&r= |
| By: | Berninger, Marc; Fiesenig, Bruno; Schiereck, Dirk |
| Abstract: | Purpose – The fundamental theory of Modigliani and Miller (1958) states that a firm’s financing decisions are independent from the firm’s value. Nevertheless, several empirical studies as well as theoretical approaches from the past decade impugn this relation for real markets with their immanent inefficiencies. However, these questions are rather than academic in nature: Especially the influence of macroeconomic conditions on the market perception of debt issues is from high economic importance, since the need for new liquidity usually becomes even more urgent when the economic conditions worsen. Design/methodology/approach – This paper analyzes the reaction of shareholders to the issue of debt by Latin American firms under special consideration of the macroeconomic sentiment. To do so, a sample of debt issued by Latin American companies between 2003 and 2010 is empirically examined through an event study. Findings – The authors empirically demonstrate that specifically in Latin America, debt issuing companies show a significant underperformance during recessionary periods and an overperformance during nonrecessionary periods. These findings differ from previous results for mature capital markets. The authors conclude that not only the overall economic conditions matter to explain stock market reactions on bond issues but also the maturity of the corporate debt market plays an important role. Originality/value – The authors provide first evidence that the previously described changes in the returns on specific stocks depending on the economic sentiment (Baker and Wurgler, 2006) are under certain conditions also present in the market for corporate debt. Keywords – Emerging markets, Debt issue, Sentiment, Event study, Corporate debt, Financing decisions, Firm value Paper type – Research paper |
| Date: | 2021 |
| URL: | http://d.repec.org/n?u=RePEc:dar:wpaper:127645&r= |
| By: | Adrien Matray (Princeton University); Charles Boissel (HEC-Paris) |
| Abstract: | This paper investigates how the 2013 three-fold increase in the dividend tax rate in France affected firms’ investment and performance. Using administrative data covering the universe of firms over 2008–2017 and a quasi-experimental setting, we find that firms swiftly cut dividend payments. Firms use this tax-induced increase in liquidity to invest more, particularly when facing high demand and return on capital. For every euro of undistributed dividends, firms increase their investment by 0.3 euro, leading to higher sales growth. Heterogeneity analyses show that no group of firms cut their investment, thereby rejecting models in which higher dividend taxes increase the cost of capital. Overall, our results show that the tax-induced increase in liquidity relaxes credit constraints and can reduce capital misallocation. |
| Keywords: | France; Financing Policy; Business Taxes; Capital and Ownership Structure |
| JEL: | G11 G32 H25 O16 |
| Date: | 2020–09 |
| URL: | http://d.repec.org/n?u=RePEc:pri:cepsud:276&r= |
| By: | Srivastava, Jagriti; Gopalakrishnan, Balagopal |
| Abstract: | Using a cross-country quarterly firm-level dataset, we empirically examine the impact of the COVID-19 pandemic on the trade credit channel of firms. In contrast to the impact on trade credit documented during earlier crisis episodes, we find that firms with poor credit quality obtain lower amounts of trade credit from their supplier firms during the quarters following the COVID-19 outbreak. The findings suggest that less creditworthy firms are credit rationed by their suppliers during a product market crisis, in contrast to the credit substitution documented between formal financial institutions and suppliers during a credit market crisis. Furthermore, we document that firms with better growth prospects and firms with better stakeholder relationships are able to obtain trade credit in the post-pandemic period, despite their poor creditworthiness. Our empirical analysis supports the view that supplier financing is conditional on the product market conditions and is not always a generous substitute for bank credit. |
| Keywords: | Trade credit; COVID-19; Financial constraints; Credit default; ESG |
| JEL: | G30 G32 G33 M14 |
| Date: | 2021–07 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:108951&r= |
| By: | Sumit Agarwal; Thomas Kigabo; Camelia Minoiu; Andrea F. Presbitero; André F. Silva |
| Abstract: | A large-scale microcredit expansion program---together with a credit bureau accessible to all lenders---can enable unbanked borrowers to build a credit history, facilitating their transition to commercial banks. Loan-level data from Rwanda show the program improved access to credit and reduced poverty. A sizable share of first-time borrowers switched to commercial banks, which cream-skim less risky borrowers and grant them larger, cheaper, and longer-maturity loans. Switchers have lower default risk than non-switchers and are not riskier than other bank borrowers. Switchers also obtain better loan terms from banks compared with first-time bank borrowers without a credit history. |
| Keywords: | Access to credit; Microfinance; Unbanked; Credit bureau; Bank loans |
| JEL: | G21 O12 O55 |
| Date: | 2021–07–15 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedgfe:2021-41&r= |
| By: | Galang, Ivory Myka G. |
| Abstract: | Policymakers and donors have long viewed credit programs as salient means to develop the agriculture sector, especially the small-farm agriculture. Credit programs in the country have evolved from subsidized directed credit programs to a more market-based approach. There have been little to no studies that examine poor agricultural producers’ access to credit and how it affects agricultural performance, especially in the context of Agrarian Reform Beneficiary Organization (ARBO) members. This policy study utilized primary data from the Baseline Survey of Project ConVERGE, a project of the Department of Agrarian Reform, to analyze the borrowing incidence among ARBO member households, particularly those engaged in farm production. It appears from the results of the study that: membership in an ARBO is associated with better credit access; borrowing ARBO agricultural households are better off than nonborrowing ARBO agricultural households; and farmer associations/cooperatives are among the top sources of agricultural credit in the countryside aside from microfinance institutions; and Certificate of Land Ownership Award (CLOA)-holding ARBO agricultural households have higher borrowing incidence than the average ARBO agricultural households. Strengthening the capacity of credit retailers through trainings, especially in leadership and credit management, is needed to further improve their lending performance. <p> Comments to this paper are welcome within 60 days from date of posting. Email publications@mail.pids.gov.ph. |
| Keywords: | credit, poor, CLOA, collective CLOA, individual CLOA, loan, formal credit, informal credit, agricultural households, DAR |
| Date: | 2020 |
| URL: | http://d.repec.org/n?u=RePEc:phd:dpaper:dp_2020-44&r= |
| By: | Capucine Nobletz |
| Abstract: | This paper assesses the interconnectedness between global green energy and sectoral stock indexes. We show that green energy return spillovers need to be monitored. The green energy index has a significant degree of financial openness, and it is tightly interconnected with sectors producing similar goods as materials or industrials. Over time, the green energy return spillovers vary according to global events and economic/financial uncertainties. Spillovers rose during the pandemic crisis, illustrating the "fly to liquidity" mechanism. |
| Keywords: | Marchés financiers, Indices boursiers verts, Indices sectoriels, Analyse de réseaux |
| JEL: | C32 G15 Q42 |
| Date: | 2021 |
| URL: | http://d.repec.org/n?u=RePEc:drm:wpaper:2021-24&r= |
| By: | Aayush Tandon |
| Abstract: | With only a decade left to reduce emissions drastically, the scale, pace and extent of global transformation needed is truly demanding. Long-term emission goals and the nature of the low-emission transition in each country will be a function of its unique socio-economic priorities, capabilities, resource endowment, vision for post 2050 economic structure, and social and political acceptability of what constitutes a just transition. As we enter the “decade for delivery”, a whole of economy approach is needed to realise the low-emission transition. This includes focusing not only on upscaling zero and near-zero emitting technologies and businesses but also supporting, to the extent possible, the progressive lowering of emissions in high emitting and hard to abate sectors. In this context, “transition finance” is gaining traction among governments and market participants. To identify the core features of transition finance, this paper reviews 12 transition relevant taxonomies, guidance and principles by public (Japan, Singapore, Malaysia, Russia, European Union, EBRD) and private actors (Climate Bonds Initiative, International Capital Markets Association, Research Institute for Environmental Finance Japan, AXA Investment Managers and DBS), as well as 39 transition relevant financial instruments (vanilla transition bonds, key performance indicator-linked fixed income securities). This paper does not aim to define transition finance, but rather to review emerging approaches and instruments to highlight commonalities, divergences as well as issues to consider for coherent market development and progress towards global environmental objectives. Based on the review, this paper puts forth two preliminary views. First, that the essence of transition finance is triggering entity-wide change to reduce exposure to transition risk; second, that transition finance may be better understood as capital market instruments with a set of core functions/attributes rather than a specific format or label. |
| Keywords: | finance, low-carbon transition, sustainable debt, taxonomy, transition risk |
| JEL: | D5 E4 Q01 |
| Date: | 2021–08–05 |
| URL: | http://d.repec.org/n?u=RePEc:oec:envaaa:179-en&r= |