nep-fdg New Economics Papers
on Financial Development and Growth
Issue of 2023‒05‒08
twenty-six papers chosen by
Georg Man

  1. Towards inclusive growth in Africa: Remittances, and financial development interactive effects and thresholds By Ofori, Isaac K.; Gbolonyo, Emmanuel Y.; Dossou, Marcel A. T.; Nkrumah, Richard K.; Nkansah, Emmanuel
  2. Towards sustainability: The relationship between foreign direct investment, economic freedom and inclusive green growth By Isaac K. Ofori; Francesco Figari; Nathanael Ojong
  3. Africa's Industrialization Prospects: A Fresh Look By Naudé, Wim; Tregenna, Fiona
  4. Bank Ownership Around the World By Ugo Panizza
  5. Has China’s Growth Gone From Miracle to Malady? By Eswar S. Prasad
  6. Chinese overseas development funds: An assessment of their sustainability approaches By Mathias Lund Larsen; Tancrède Voituriez; Christoph Nedopil
  7. East Asia and the politics of global finance: a developmental challenge to the neoliberal consensus? By Pape, Fabian; Petry, Johannes
  8. Medium-term growth-at-risk in the euro area By Lang, Jan Hannes; Rusnák, Marek; Greiwe, Moritz
  9. Endogenous Growth, Countercyclical Dividends, and Asset Prices By Palma Filep-Mosberger; Lorant Kaszab; Zhou Ren
  10. Narrative-Driven Fluctuations in Sentiment: Evidence Linking Traditional and Social Media By Alistair Macaulay; Wenting Song
  11. Central bank digital currency, poverty reduction and the United Nations sustainable development goals By Ozili, Peterson K
  12. Equilibrium bitcoin pricing By Bruno Biais; Christophe Bisière; Matthieu Bouvard; Catherine Casamatta; Albert J. Menkveld
  13. (De)regulating automation: the rise of credit scoring and market-led banking in the UK and Germany By Van Overbeke, Toon
  14. Bank accounts, bank concentration and mobile money innovations By Simplice A. Asongu; Nicholas M. Odhiambo
  15. Apalancamiento, ciclo financiero y económico By Valdivia Coria, Joab Dan
  16. Long Shadow of the U.S. Mortgage Expansion: Evidence from Local Labour Markets By Mitra, Aruni; Wei, Mengying
  17. Revisiting the Monetary Transmission Mechanism through an Industry-Level Differential Approach By Sangyup Choi; Tim Willems; Seung Yong Yoo
  18. The bank lending channel and monetary transmission in Central, Eastern and South-Eastern European countries By Papavangjeli, Meri
  19. Debt Maturity Structure and Corporate Investment By Hong, Claire Yurong; Hou, Kewei; Nguyen, Thien Tung
  20. Institutional Blockholders and Corporate Innovation By Bing Guo; Dennis C. Hutschenreiter; David Pérez-Castrillo; Anna Toldrà-Simats
  21. Finding Anomalies in China By Hou, Kewei; Qiao, Fang; Zhang, Xiaoyan
  22. The Transmission Mechanism of Stress in the International Banking System By Alexis Stenfors; Lilian Muchimba
  23. Liquidity Constraints, Cash Windfalls, and Entrepreneurship: Evidence from Administrative Data on Lottery Winners By Hsuan-Hua Huang; Hsing-Wen Han; Kuang-Ta Lo; Tzu-Ting Yang
  24. The SME-lender relationship network in Ireland By Gaffney, Edward; McGeever, Niall
  25. Specialization in Banking By Kristian Blickle; Cecilia Parlatore; Anthony Saunders
  26. Banking on Uninsured Deposits By Itamar Drechsler; Alexi Savov; Philipp Schnabl; Olivier Wang

  1. By: Ofori, Isaac K.; Gbolonyo, Emmanuel Y.; Dossou, Marcel A. T.; Nkrumah, Richard K.; Nkansah, Emmanuel
    Abstract: The study employs macro data for 42 African countries to examine the interactive and threshold effects of financial development in the remittances-inclusive growth relationship. First, evidence based on the system GMM estimator shows that remittances are not statistically significant in promoting inclusive growth in Africa. Notably, across the economic growth and income inequality dimensions of inclusive growth, we find that although remittances are ineffective in boosting the former, they deepen the latter. Second, we find that Africa’s underdeveloped financial sector dampens the marginal positive effect of remittances on inclusive growth. Third, our threshold analysis indicates that for financial development to interact with complementary policies to foster inclusive growth in Africa, a minimum threshold of 14.5% is required. We conclude by informing policy on the level of investments needed for financial development to promote fairer income growth and distribution in Africa.
    Keywords: Africa, Financial Development, Inclusive Growth, Income Inequality, GMM, Remittances.
    JEL: F22 F24 G21 I3 N27 O11 O55
    Date: 2023–04–07
  2. By: Isaac K. Ofori (University of Insubria, Varese, Italy); Francesco Figari (Novara, Italy); Nathanael Ojong (York University, Toronto, Canada)
    Abstract: This study contributes to the environmental and socioeconomic sustainability literature by examining three important issues. First, the study examines the effects of foreign direct investment (FDI) and economic freedom on inclusive green growth (IGG) in sub-Saharan Africa (SSA). Second, we investigate whether economic freedom interacts with FDI to promote IGG. Third, we identify minimum the thresholds required for economic freedom to cause FDI to foster IGG. The findings are based on macro data for 20 SSA countries. Evidence, based on instrumental variable regression, show that, unconditionally, FDI is not statistically significant for promoting IGG. Second, the study finds that SSA’s ‘Mostly unfree’ economic architecture conditions FDI to reduce IGG. Third, results from our threshold regression reveal that the minimum threshold required for economic freedom to cause FDI to foster IGG is 66.2% (Moderately free). The study sheds new light on investments necessary for SSA’s economic architecture to form relevant synergies with FDI to promote IGG.
    Keywords: Economic Freedom; FDI; Government Integrity; Inclusive Green Growth; Sustainable Development; sub-Saharan Africa
    JEL: F21 F6 H1 P1 O55 Q01 Q56
    Date: 2023–01
  3. By: Naudé, Wim (RWTH Aachen University); Tregenna, Fiona (University of Johannesburg)
    Abstract: This paper identifies the determinants of industrialization in 18 African countries, 1965 to 2018, using various estimators and applying a battery of robustness checks. Industrialization in Africa is driven by historical legacies such as colonialism; geographical factors such as rainfall and distance from international markets; economic factors such competition from China, market size and urbanization; and technological factors such as digital technology adoption. An inverse U-shape relationship between industrialization and GDP per capita is consistent with (premature) de-industrialization. Technological change and adoption of digital technologies are found to have an ambiguous relationship with industrialisation in Africa. The establishment of the AfCFTA is timely, but its benefits will only be realised if countries also improve infrastructure to overcome the negative consequences of adverse geography, improve trade facilitation to exploit learning-by-exporting from intra-African trade, and facilitate urbanization.
    Keywords: industrialization, development, employment, technology, trade, Africa
    JEL: O47 O33 J24 E21 E25
    Date: 2023–03
  4. By: Ugo Panizza (IHEID, Graduate Institute of International and Development Studies, Geneva)
    Abstract: This paper builds a dataset on bank ownership that covers more than 6, 500 banks in 181 countries (59 low-income economies, 72 middle-income economies, and 50 high-income economies) over 1995-2020. I show that until 2010, there was a reduction in state-ownership of banks and an increase foreign ownership. However, the Global Financial Crisis interrupted or reversed these trends. At the country level, the relationship between bank ownership and each of GDP growth and financial depth is mixed- regressions with country fixed effects indicate that the presence of foreign-owned banks is positively associated with future economic growth and state-ownership is negatively but not robustly associated with future financial depth. Bank-level regressions show that state-owned banks are less profitable and have a higher share of non-performing loans than their private (domestic or foreign) counterparts. State-owned and foreign-owned banks located in developing economies pay and charge lower interest rates than their domestic private counterparts. There is also evidence that state-owned banks stabilize credit in the presence of domestic shocks while foreign banks amplify external shocks. In terms of domestic shocks, foreign banks are not significantly different from their domestic private counterparts.
    Keywords: State-owned banks; Foreign-owned banks; Economic growth; Financial depth; Non-performing loans; Credit cyclicality
    JEL: G21 G28 G32 F21 F36 O16
    Date: 2023–04–18
  5. By: Eswar S. Prasad
    Abstract: China’s remarkable run of persistently high growth in recent decades is all the more stunning in light of the country’s low levels of financial and institutional development, state-dominated economy, and nondemocratic government. Notwithstanding the inefficient and risky growth model, the government has maneuvered the economy around various stresses without any major financial or economic crash. With a shrinking labor force and declining efficiency of investment, raising productivity growth is key to maintaining reasonable GDP growth. Unbalanced reforms, a schizophrenic approach to the role of the market versus the state, and strains in financial and property markets could result in significant volatility but a financial or economic collapse is not in the cards.
    JEL: E2 F3 F4 O4 O53
    Date: 2023–04
  6. By: Mathias Lund Larsen (CBS - Copenhagen Business School [Copenhagen]); Tancrède Voituriez (IDDRI - Institut du Développement Durable et des Relations Internationales - Institut d'Études Politiques [IEP] - Paris, Cirad - Centre de Coopération Internationale en Recherche Agronomique pour le Développement); Christoph Nedopil (UCAS - University of Chinese Academy of Sciences [Beijing])
    Abstract: A growing number of emerging economies receive significant parts of their overseas finance and investment from Chinese state-owned or state-linked institutions. While academic research has focused on how Chinese policy and state-owned banks approach sustainable development issues, Chinese sovereign-backed overseas development funds are a critical yet overlooked component. This paper addresses this knowledge gap by providing the first comprehensive overview of such funds regarding their scope, activities and capitalization, as well as by assessing the funds' policy approach to sustainability. Qualitative and quantitative data are collected from databases, funds' websites, newspaper articles and public statements in both Chinese and English to identify common features between funds and to analyse their sustainability policies in comparison with global best practices. The paper specifically analyses the funds' sustainability approaches rather than impact due to a lack of comprehensive data on the funds' investments. First, the paper finds that given their number, announced capital size of US$213 billion, geographic scope and sectorial focus, including on high-emissions projects such as mining, energy and heavy industry, the funds are influential players in global development finance. Second, regarding the funds' approaches to sustainability, the paper finds that the funds lack transparency about their policies and practices,
    Keywords: investment funds, china, Sustainability
    Date: 2023–03–29
  7. By: Pape, Fabian; Petry, Johannes
    Abstract: Recent IPE scholarship locates the key dynamics of financial globalization in two areas: public money flows between the US and Asia, or private banking flows between the US and Europe. This dichotomy presents the globalization of private finance as firmly anchored within transatlantic, neoliberal financial norms. We argue that this creates a blind spot regarding the growing role of East Asian finance within the global financial system. Combining CPE insights on institutional characteristics of Asian financial systems with a macro-financial analysis of the global financial system, this paper analyzes the global implications of the geographic shift towards East Asia. First, we demonstrate the growing importance of East Asia for global macro-financial flows, actors and markets that goes beyond the rise of China. Second, we explore how the institutional arrangements that underpin Asian financial systems differ significantly from transatlantic finance. By investigating the growing importance of global investors in Asian markets and Asian investors in global markets, we explore how the shift towards East Asia introduces a growing role of developmental characteristics within global finance. This calls for a reconsideration of conventional analyses of the global financial system which often assume its role as a force of neoliberal globalization.
    Keywords: comparative political economy; East Asia; global financial system; international political economy; comparative capitalism; developmentalism; global finance; macro-finance; neoliberalism; post-crisis; Warwick T&F agreement
    JEL: F3 G3 J1
    Date: 2023–03–15
  8. By: Lang, Jan Hannes; Rusnák, Marek; Greiwe, Moritz
    Abstract: Financial stability indicators can be grouped into financial stress indicators that reflect heightened spreads and market volatility, and financial vulnerability indicators that reflect credit and asset price imbalances. Based on a panel of euro area countries, we show that both types of indicators contain information about downside risks to real GDP growth (growth-at-risk) in the short-term (1-year ahead). However, only vulnerability indicators contain information about growth-at-risk in the medium-term (3-years ahead and beyond). Among various vulnerability indicators suggested in the literature, the Systemic Risk Indicator (SRI) proposed by Lang et al. (2019) outperforms in terms of in-sample explanatory power and out-of-sample predictive ability for medium-term growth-at-risk in euro area countries. Shocks to the SRI induce a rich ”term structure” for growth-at-risk: downside risks to real GDP growth are reduced in the short-term, but over the medium-term the effect reverses and downside risks to real GDP growth go up considerably. We also show that using cross-country information from the panel of euro area countries can improve the out-of-sample forecasting performance of growth-at-risk for the euro area aggregate. JEL Classification: E37, E44, G01, G17, C22
    Keywords: financial stress, financial vulnerabilities, growth-at-risk, local projections, quantile regression
    Date: 2023–04
  9. By: Palma Filep-Mosberger (Central Bank of Hungary); Lorant Kaszab (Central Bank of Hungary); Zhou Ren (Wienna University of Economics and Business)
    Abstract: We study the nexus between endogenous growth and asset prices. We show that endogenous growth models with either horizontal and vertical innovation match financial data well due to countercyclical dividends which are either procyclical or acyclical in US data. Countercyclical dividends redistribute income from consumption towards investment in innovation improving growth prospects which are reflected in asset prices. In the horizontal innovation model of Kung and Schmid (2015) countercyclical dividends are the result of high monopoly markups. When markup is lowered from their benchmark 65 percent to 60 or 55 percent dividends become procyclical, the price-dividend ratio countercyclical, and the mean of the equity risk premia reduces from 290 to 82 or 46 basis points, respectively. When we introduce leisure preferences the wealth effect of technology shocks makes the aggregate dividends countercyclical as long as labour supply is not too elastic even with low values of the monopolist markup.
    Keywords: endogenous growth, innovation, markup, asset pricing, dividends, equity premium.
    JEL: E13 E31 E43 E44 E62
    Date: 2023
  10. By: Alistair Macaulay; Wenting Song
    Abstract: This paper studies the role of narratives for macroeconomic fluctuations. We micro-found narratives as directed acyclic graphs and show how exposure to different narratives can affect expectations in an otherwise standard macroeconomic model. We capture such competing narratives in news media’s reports on a US yield curve inversion by using techniques in natural language processing. Linking these media narratives to social media data, we show that exposure to a recessionary narrative is associated with a more pessimistic sentiment, while exposure to a nonrecessionary narrative implies no such change in sentiment. In a model with financial frictions, narrative-driven beliefs create a trade-off for quantitative easing: extended periods of quantitative easing make narrative-driven waves of pessimism more frequent, but smaller in magnitude.
    Keywords: Financial markets; Inflation and prices; Monetary policy
    JEL: D84 E32 E43 E44 E5 G1
    Date: 2023–04
  11. By: Ozili, Peterson K
    Abstract: This paper examines the role of central bank digital currency (CBDC) for poverty reduction and sustainable development. In the paper, I argue that a CBDC can eliminate poverty by increasing financial inclusion which gives poor people access to affordable credit and other basic financial services which they can use to improve their welfare, thereby enabling them to rise above poverty, and achieve the United Nations sustainable development goal of eradicating poverty. This argument is valid only if a central bank digital currency is designed to incorporate features that increase financial inclusion. The argument may not be valid in cases where a CBDC is not designed to increase financial inclusion as is the case in some developed countries. The implication is that a CBDC can lead to poverty reduction only when the CBDC design incorporate features that increase financial inclusion. Policy makers can ensure that the CBDC used in their countries is designed to incorporate features that increase financial inclusion which is vital for poverty reduction and for achieving the United Nations sustainable development goal of eradicating poverty in all its forms.
    Keywords: CBDC, central bank digital currency, financial inclusion, poverty reduction, sustainable development goals, United Nations.
    JEL: E40 E42 Q01 Q50 Q56
    Date: 2023
  12. By: Bruno Biais (TSE-R - Toulouse School of Economics - UT Capitole - Université Toulouse Capitole - UT - Université de Toulouse - EHESS - École des hautes études en sciences sociales - CNRS - Centre National de la Recherche Scientifique - INRAE - Institut National de Recherche pour l’Agriculture, l’Alimentation et l’Environnement, CNRS - Centre National de la Recherche Scientifique); Christophe Bisière (TSE-R - Toulouse School of Economics - UT Capitole - Université Toulouse Capitole - UT - Université de Toulouse - EHESS - École des hautes études en sciences sociales - CNRS - Centre National de la Recherche Scientifique - INRAE - Institut National de Recherche pour l’Agriculture, l’Alimentation et l’Environnement); Matthieu Bouvard (TSE-R - Toulouse School of Economics - UT Capitole - Université Toulouse Capitole - UT - Université de Toulouse - EHESS - École des hautes études en sciences sociales - CNRS - Centre National de la Recherche Scientifique - INRAE - Institut National de Recherche pour l’Agriculture, l’Alimentation et l’Environnement); Catherine Casamatta (TSE-R - Toulouse School of Economics - UT Capitole - Université Toulouse Capitole - UT - Université de Toulouse - EHESS - École des hautes études en sciences sociales - CNRS - Centre National de la Recherche Scientifique - INRAE - Institut National de Recherche pour l’Agriculture, l’Alimentation et l’Environnement); Albert J. Menkveld (Unknown)
    Abstract: We offer an overlapping generations equilibrium model of cryptocurrency pricing and confront it to new data on bitcoin transactional benefits and costs. The model emphasizes that the fundamental value of the cryptocurrency is the stream of net transactional benefits it will provide, which depend on its future prices. The link between future and present prices implies that returns can exhibit large volatility unrelated to fundamentals. We construct an index measuring the ease with which bitcoins can be used to purchase goods and services, and we also measure costs incurred by bitcoin owners. Consistent with the model, estimated transactional net benefits explain a statistically significant fraction of bitcoin returns.
    Date: 2023–01–19
  13. By: Van Overbeke, Toon
    Abstract: AI and other forms of automation are causing a shift into a more capital-intensive form of capitalism. Many scholars have suggested that we can best understand this process as the cost-efficient substitution of labour by capital in routine tasks based on relative factor costs. However, this model, which has cast firms as endlessly chasing the productivity frontier, has not paid sufficient attention to cross-national divergences in technological changes. This paper builds a comparative historical case study tracing the divergent introduction of credit scoring in British and German bank branches to argue that the introduction of credit scoring was a result of a policy-led process in both countries. Increased liberalisation of financial market institutions benefitted the rise of market-led banking which fundamentally changed the business model of banks resulting in a devaluation of the services provided by branch managers. This case suggests we need to think about the role of politics and policy within our, often deterministic, models of labour-saving technological change.
    Keywords: automation; comparative political economy; credit-scoring; market-led banking
    JEL: F3 G3
    Date: 2022–04–20
  14. By: Simplice A. Asongu (Yaounde, Cameroon); Nicholas M. Odhiambo (Pretoria, South Africa)
    Abstract: The present study investigates how increasing bank accounts and bank concentration affect mobile money innovations in 148 countries. It builds on scholarly and policy concerns in the literature that increasing bank accounts may not be having the desired effects on financial inclusion on the one hand and on the other, that bank concentration which is a proxy for market power is a relevant mobile money innovation demand factor. The empirical evidence is based on Tobit regressions. From the findings, it is apparent that boosting bank accounts is positively related to the three mobile money innovations (i.e. mobile bank accounts and the mobile phone used to send money). Moreover, some critical levels of bank account penetration require complementary policies in order to maintain the positive relationship between boosting bank accountsand positive outcomes in terms of money mobile innovations.Conversely, financial inclusion in terms of the three mobile money innovations is not significantly apparent upon enhancing bank concentration. Policy implications are discussed in the light of the provided thresholds for complementary policies.
    Keywords: Mobile money; technology; diffusion; financial inclusion; inclusive innovation, information asymmetry
    JEL: D10 D14 D31 D60 O30
    Date: 2023–01
  15. By: Valdivia Coria, Joab Dan
    Abstract: This paper provides pioneering estimates of the impact of loan-to-value (LTV) ratios, also known as leverage, on economic growth in Bolivia. The analysis reveals the pro-cyclicality between the economic and financial cycles, confirming the stylized facts. We emphasize the significance of recognizing the interplay between these cycles to attain greater stability and foster economic growth. The findings suggest that shocks in the loan-to-value (LTV) ratios trigger a rise in housing prices and greater consumption by entrepreneurs, leading to an increase in economic growth and employment levels. However, we also confirm the notion that leverage can be a double-edged tool, as its excessive utilization can disrupt markets and destabilize the overall economy.
    Keywords: Real bussines cycles (RBC), financial frictions, loan to value (LTV), bayesian estimation.
    JEL: E21 E32 E44
    Date: 2022–08
  16. By: Mitra, Aruni; Wei, Mengying
    Abstract: We construct U.S. county-level credit supply shocks by interacting the mortgage growth of multi-market lenders with a county’s initial exposure to those lenders. The credit shocks did not impact the local labour markets during the credit boom but had a negative effect during the Great Recession. While local unemployment rates recovered post-Recession, wage growth remained depressed. Further, a long-run increase in older firms’ employment share suggests a credit-induced reduction in business dynamism and labour demand. A mechanism through occasionally binding financial constraints tied to house prices can qualitatively explain these asymmetric effects of credit shocks in booms and busts.
    Keywords: mortgage lending, credit supply shocks, local labour markets
    JEL: E24 E32 E44 G01 G20
    Date: 2023–04–05
  17. By: Sangyup Choi (Yonsei University); Tim Willems (Bank of England); Seung Yong Yoo (Yale University)
    Abstract: We combine industry-level data on output and prices with monetary policy shock estimates for 105 countries to analyze how the effects of monetary policy vary with industry characteristics. Next to being interesting in their own right, our findings are informative on the importance of various transmission mechanisms, as they are thought to vary systematically with the included characteristics. Results suggest that monetary policy has greater output effects in industries featuring assets that are more difficult to collateralize, consistent with the credit channel, followed by industries producing durables, as predicted by the interest rate channel. The credit channel is stronger during bad times as well as in countries with lower levels of financial development, in line with financial accelerator logic. We do not find support for the cost channel of monetary policy, nor for a channel running via exports. Our database (containing estimated monetary policy shocks for 177 countries) may be of independent interest to researchers.
    Keywords: Monetary policy transmission; Industry growth; Financial frictions; Heterogeneity in transmission; Monetary policy shocks.
    JEL: E32 E52 F43 G20
    Date: 2023–04
  18. By: Papavangjeli, Meri
    Abstract: Using disaggregated data for 266 individual banks from Bankscope database and other supplementary sources, this article investigates the functioning of the bank lending channel and monetary transmission in 10 Central, Eastern and South-Eastern European (CESEE) countries over the period 2010-2018. It also takes into account the banks’ characteristics such as: size and capitalisation, classifying the countries in three groups according to the development level of their banking sector, captured by the EBRD banking reform criteria. Results confirm the theory of bank lending channel, with smaller banks being more sensitive to monetary contractions in less developed financial systems. Capitalisation has a positive effect on loan growth, and changes in funding costs have the most significant impact on small and less capitalised banks. GDP growth and inflation have a positive impact on loan growth in all country groups.
    Keywords: bank lending channel; size and capitalisation; monetary transmission
    JEL: C51 E51 G21 P34
    Date: 2021–07–10
  19. By: Hong, Claire Yurong (SAIF, Shanghai Jiao Tong U); Hou, Kewei (Ohio State U); Nguyen, Thien Tung (Ohio State U)
    Abstract: We show that firms' debt maturity structure plays an important role in investment above and beyond that of leverage. Firms with a longer debt maturity structure tend to invest more. These results are stronger for firms with high leverage, profitability, and growth potential. We rationalize our results in a model in which debt maturity structure is determined by the trade-off between liquidity cost and the repayment flexibility of long-term debt. In our model, highly productive firms invest more and prefer to use long-term debt to free up funds for future investment. This mechanism is supported by the data. Our findings highlight the importance of debt maturity structure in understanding corporate investment decisions.
    JEL: E22 G11 G32 G33
    Date: 2023–02
  20. By: Bing Guo; Dennis C. Hutschenreiter; David Pérez-Castrillo; Anna Toldrà-Simats
    Abstract: Institutional investors’ ownership in public firms has become increasingly concentrated in the last decades. We study the heterogeneous effects of large versus more dispersed institutional owners on firms’ innovation strategies and their innovation output. We find that large institutional investors induce managers to increase spending in internal R&D by reducing short-term pressure. However, to avoid empire building and dilution, large institutional investors prevent acquisitions, which reduces firms’ investment in external innovation. The overall effect on firms’ future patents and citations is negative. By acquiring less innovation from external sources, firms reduce the returns of their investment in internal R&D, jeopardizing their total innovation output. We use the mergers of financial institutions as exogenous shocks on firms’ institutional ownership concentration. Our findings complement the previously found positive effects of institutional ownership on firm innovation and indicate that the effects become negative when institutional investors become large owners.
    Keywords: institutional ownership, blockholders, innovation, acquisitions
    JEL: G32 G24 O31
    Date: 2023–04
  21. By: Hou, Kewei (Ohio State U); Qiao, Fang (U of International Business and Economics, Beijing); Zhang, Xiaoyan (Tsinghua U)
    Abstract: To study the cross-section of returns in the Chinese stock market, we follow the anomaly literature and construct 454 strategies between 2000 and 2020, based on 208 firm-level trading and accounting signals. With the conventional single-testing t-statistic cutoff of 1.96, 101 strategies have significant value-weighted raw returns, and 20 remain significant after risk adjustments. To avoid false discoveries, we recalibrate the t-statistic cutoff to 2.85 to accommodate multiple testing. 36 strategies survive the higher hurdle rate in value-weighted raw returns, while none remains significant after risk adjustments. When we use machine learning techniques to combine information from multiple signals, the resulting composite strategies mostly have significant returns after risk adjustments, even with the higher t-statistic cutoff. We relate Chinese anomaly returns to aggregate economic conditions and find that they comove with financial market development, accounting quality, market liquidity, and government regulations.
    JEL: G1 G12
    Date: 2023–01
  22. By: Alexis Stenfors (University of Portsmouth); Lilian Muchimba (University of Portsmouth)
    Abstract: Significant and volatile deviations from the covered interest parity (CIP) are indicators of stress in the international banking system. This paper uses a TVP-VAR model to investigate the dynamic connectedness and spillovers of such stress between the US, the UK, Japan and the Eurozone from 4 July 2006 to 9 June 2022. To do so, we use daily price data on cross-currency basis swaps (CRSs), typically used to trade and express CIP deviations for maturities of 1 year and beyond. We also incorporate a yield curve dimension by including prices representative of the short-term (1Y), medium-term (5Y) and long-term (10Y) to obtain a more nuanced picture of the role of market expectations. Our findings suggest that overall connectedness is highly event-dependent and peaks during periods of high volatility and market stress. However, the transmission mechanism across banking systems and yield curve maturities has evolved considerably over time, which has significant implications for policies attempting to mitigate future crises.
    Keywords: Banks, CIP deviations, Cross-currency basis swaps, Dynamic connectedness, TVP-VAR, Yield curves
    JEL: C32 C5 F3 G15
    Date: 2023–04–24
  23. By: Hsuan-Hua Huang; Hsing-Wen Han; Kuang-Ta Lo; Tzu-Ting Yang
    Abstract: Using administrative data on Taiwanese lottery winners, this paper examines the effects of cash windfalls on entrepreneurship. We compare the start-up decisions of households winning more than 1.5 million NTD (50, 000 USD) in the lottery in a particular year with those of households winning less than 15, 000 NTD (500 USD). Our results suggest that a substantial windfall increases the likelihood of starting a business by 1.5 percentage points (125% from the baseline mean). Startup wealth elasticity is 0.25 to 0.36. Moreover, households who tend to be liquidity-constrained drive the windfall-induced entrepreneurial response. Finally, we examine how households with a business react to a cash windfall and find that serial entrepreneurs are more likely to start a new business but do not change their decision to continue the current business.
    Date: 2023–03
  24. By: Gaffney, Edward (Central Bank of Ireland); McGeever, Niall (Central Bank of Ireland)
    Abstract: In this Note, we examine the relationship between non-bank lenders and Irish small and medium enterprises (SMEs). We review the relevance of non-bank lending to financial stability. We then describe the SME-lender relationship network in Ireland. We find that 36 per cent of SME company borrowers owe money to a non-bank lender, with 15 per cent borrowing exclusively from nonbanks and 21 per cent borrowing from both banks and non-banks. We also show that 71 per cent of borrowers have only one lender. Finally, we characterise the firms that rely on non-bank lenders for credit. We find that SMEs that borrow from non-banks are younger, less liquid, and have higher leverage than SMEs that borrow from banks.
    Date: 2022–11
  25. By: Kristian Blickle; Cecilia Parlatore; Anthony Saunders
    Abstract: Using supervisory data on the loan portfolios of large US banks, we document that these banks specialize by concentrating their lending disproportionately in a few industries. This specialization is consistent with banks having industry-specific knowledge, reflected in reduced risk of loan defaults, lower aggregate charge-offs, and higher propensity to lend to opaque firms in the preferred industry. Banks attract high-quality borrowers by offering generous loan terms in their specialized industry, especially to borrowers with alternative options. Banks focus on their preferred industry in times of instability and relatively lower tier 1 capital as well as after sudden surges in deposits.
    JEL: D04 G20 G21
    Date: 2023–03
  26. By: Itamar Drechsler; Alexi Savov; Philipp Schnabl; Olivier Wang
    Abstract: Motivated by the regional bank crisis of 2023, we model the impact of interest rates on the liquidity risk of banks. Prior work shows that banks hedge the interest rate risk of their assets with their deposit franchise: when interest rates rise, the value of the assets falls but the value of the deposit franchise rises. Yet the deposit franchise is only valuable if depositors remain in the bank. This creates run incentives for uninsured depositors. We show that a run equilibrium is absent at low interest rates but appears when rates rise because the deposit franchise comes to dominate the value of the bank. The liquidity risk of the bank thus increases with interest rates. We provide a formula for the bank’s optimal risk management policy. The bank should act as if its deposit rate is more sensitive to market rates than it really is, i.e., as if its “deposit beta” is higher. This leads the bank to shrink the duration of its assets. Shortening duration has a downside, however: it exposes the bank to insolvency if interest rates fall. The bank thus faces a dilemma: it cannot simultaneously hedge its interest rate risk and liquidity risk exposures. The dilemma disappears only if uninsured deposits do not contribute to the deposit franchise (if they have a deposit beta of one). The recent growth of low-beta uninsured checking and savings accounts thus poses stability risks to banks. The risks increase with interest rates and are amplified by other exposures such as credit risk. We show how they can be addressed with an optimal capital requirement that rises with interest rates.
    JEL: E52 G12 G21
    Date: 2023–04

This nep-fdg issue is ©2023 by Georg Man. 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.
General information on the NEP project can be found at For comments please write to the director of NEP, Marco Novarese at <>. Put “NEP” in the subject, otherwise your mail may be rejected.
NEP’s infrastructure is sponsored by the School of Economics and Finance of Massey University in New Zealand.