Informal or Formal Financing? Evidence on the Co-Funding of Chinese Firms
Hans Degryse, Liping Lu, Steven Ongena
Journal of Financial Intermediation,
2016
Abstract
Different modes of external finance provide heterogeneous benefits for the borrowing firms. Informal finance offers informational advantages whereas formal finance is scalable. Using unique survey data from China, we find that informal finance is associated with higher sales growth for small firms but lower sales growth for large firms. We identify a complementary effect between informal and formal finance for the sales growth of small firms, but not for large firms. Co-funding, thereby simultaneously using the informational advantage of informal finance and the scalability of formal finance, is therefore the optimal choice for small firms.
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Much Ado About Nothing: Sovereign Ratings and Government Bond Yields in the OECD
Makram El-Shagi
IWH Discussion Papers,
No. 22,
2016
Abstract
In this paper, we propose a new method to assess the impact of sovereign ratings on sovereign bond yields. We estimate the impulse response of the interest rate, following a change in the rating. Since ratings are ordinal and moreover extremely persistent, it proves difficult to estimate those impulse response functions using a VAR modeling ratings, yields and other macroeconomic indicators. However, given the highly stochastic nature of the precise timing of ratings, we can treat most rating adjustments as shocks. We thus no longer rely on a VAR for shock identification, making the estimation of the corresponding IRFs well suited for so called local projections – that is estimating impulse response functions through a series of separate direct forecasts over different horizons. Yet, the rare occurrence of ratings makes impulse response functions estimated through that procedure highly sensitive to individual observations, resulting in implausibly volatile impulse responses. We propose an augmentation to restrict jointly estimated local projections in a way that produces economically plausible impulse response functions.
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Direct and Indirect Risk-taking Incentives of Inside Debt
Stefano Colonnello, Giuliano Curatola, Ngoc Giang Hoang
Abstract
We develop a model of managerial compensation structure and asset risk choice. The model provides predictions about the relation between credit spreads and dif-ferent compensation components. First, we show that credit spreads are decreasing in inside debt only if it is unsecured. Second, the relation between credit spreads and equity incentives varies depending on the features of inside debt. We show that credit spreads are increasing in equity incentives. This relation becomes stronger as the seniority of inside debt increases. Using a sample of U.S. public firms with traded credit default swap (CDS) contracts, we provide evidence supportive of the model’s predictions.
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CEO Political Preference and Corporate Tax Sheltering
Bill Francis, Iftekhar Hasan, Xian Sun, Qiang Wu
Journal of Corporate Finance,
2016
Abstract
We show that firms led by politically partisan CEOs are associated with a higher level of corporate tax sheltering than firms led by nonpartisan CEOs. Specifically, Republican CEOs are associated with more corporate tax sheltering even when their wealth is not tied with that of shareholders and when corporate governance is weak, suggesting that their tax sheltering decisions could be driven by idiosyncratic factors such as their political ideology. We also show that Democratic CEOs are associated with more corporate tax sheltering only when their stock-based incentives are high, suggesting that their tax sheltering decisions are more likely to be driven by economic incentives. In sum, our results support the political connection hypothesis in general but highlight that the specific factors driving partisan CEOs' tax sheltering behaviors differ. Our results imply that it may cost firms more to motivate Democratic CEOs to engage in more tax sheltering activities because such decisions go against their political beliefs regarding tax policies.
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The Role of Complexity for Bank Risk during the Financial Crisis: Evidence from a Novel Dataset
Thomas Krause, Talina Sondershaus, Lena Tonzer
Abstract
We construct a novel dataset to measure banks’ business and geographical complexity. Using these measures of complexity, we evaluate how they relate to banks’ idiosyncratic and systemic riskiness. The sample covers stock listed banks in the euro area from 2007 to 2014. Our results show that banks have increased their total number of subsidiaries while business and geographical complexity have declined. Bank stability is significantly affected by our complexity measures, whereas the direction of the effect differs across the complexity measures: Banks with a higher degree of geographical complexity and a higher share of foreign subsidiaries seem to be less stable. In contrast, a higher share of non-bank subsidiaries significantly decreases the probability for a state aid request during the recent crisis period. This heterogeneity advises against the use of a single complexity measure when evaluating the implications of bank complexity.
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Nested Models and Model Uncertainty
Alexander Kriwoluzky, Christian A. Stoltenberg
Scandinavian Journal of Economics,
No. 2,
2016
Abstract
Uncertainty about the appropriate choice among nested models is a concern for optimal policy when policy prescriptions from those models differ. The standard procedure is to specify a prior over the parameter space, ignoring the special status of submodels (e.g., those resulting from zero restrictions). Following Sims (2008, Journal of Economic Dynamics and Control 32, 2460–2475), we treat nested submodels as probability models, and we formalize a procedure that ensures that submodels are not discarded too easily and do matter for optimal policy. For the United States, we find that optimal policy based on our procedure leads to substantial welfare gains compared to the standard procedure.
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Structural Reforms in Banking: The Role of Trading
Jan Pieter Krahnen, Felix Noth, Ulrich Schüwer
Abstract
In the wake of the recent financial crisis, significant regulatory actions have been taken aimed at limiting risks emanating from trading in bank business models. Prominent reform proposals are the Volcker Rule in the U.S., the Vickers Report in the UK, and, based on the Liikanen proposal, the Barnier proposal in the EU. A major element of these reforms is to separate “classical” commercial banking activities from securities trading activities, notably from proprietary trading. While the reforms are at different stages of implementation, there is a strong ongoing discussion on what possible economic consequences are to be expected. The goal of this paper is to look at the alternative approaches of these reform proposals and to assess their likely consequences for bank business models, risk-taking and financial stability. Our conclusions can be summarized as follows: First, the focus on a prohibition of only proprietary trading, as envisaged in the current EU proposal, is inadequate. It does not necessarily reduce risk-taking and it likely crowds out desired trading activities, thereby negatively affecting financial stability. Second, there is potentially a better solution to limit excessive trading risk at banks in terms of potential welfare consequences: Trading separation into legally distinct or ring-fenced entities within the existing banking organizations. This kind of separation limits cross-subsidies between banking and proprietary trading and diminishes contagion risk, while still allowing for synergies across banking, non-proprietary trading and proprietary trading.
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Paternal Unemployment During Childhood: Causal Effects on Youth Worklessness and Educational Attainment
Steffen Müller, Regina T. Riphahn, Caroline Schwientek
Abstract
Using long-running data from the German Socio-Economic Panel (1984-2012), we investigate the impact of paternal unemployment on child labor market and education outcomes. We first describe correlation patterns and then use sibling fixed effects and the Gottschalk (1996) method to identify the causal effects of paternal unemployment. We find different patterns for sons and daughters. Paternal unemployment does not seem to causally affect the outcomes of sons. In contrast, it increases both daughters‘ worklessness and educational attainment. We test the robustness of the results and explore potential explanations.
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Size of Training Firms and Cumulated Long-run Unemployment Exposure – The Role of Firms, Luck, and Ability in Young Workers’ Careers
Steffen Müller, Renate Neubäumer
Abstract
This paper analyzes how life-cycle unemployment of former apprentices depends on the size of the training firm. We start from the hypotheses that the size of training firms reduces long-run cumulated unemployment exposure, e.g. via differences in training quality and in the availability of internal labor markets, and that the access to large training firms depends positively on young workers’ ability and their luck to live in a region with many large and medium-sized training firms. We test these hypotheses empirically by using a large administrative data set for Germany and find corroborative evidence.
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To Separate or not to Separate Investment from Commercial Banking? An Empirical Analysis of Attention Distortion under Multiple Tasks
Reint E. Gropp, K. Park
IWH Discussion Papers,
No. 2,
2016
Abstract
In the wake of the 2008/2009 financial crisis, a number of policy reports (Vickers, Liikanen, Volcker) proposed to separate investment banking from commercial banking to increase financial stability. This paper empirically examines one theoretical justification for these proposals, namely attention distortion under multiple tasks as in Holmstrom and Milgrom (1991). Universal banks can be viewed as combining two different tasks (investment banking and commercial banking) in the same organization. We estimate pay-performance sensitivities for different segments within universal banks and for pure investment and commercial banks. We show that the pay-performance sensitivity is higher in investment banking than in commercial banking, no matter whether it is organized as part of a universal bank or in a separate institution. Next, the paper shows that relative pay-performance sensitivities of investment and commercial banking are negatively related to the quality of the loan portfolio in universal banks. Depending on the specification, we obtain a reduction in problem loans when investment banking is removed from commercial banks of up to 12 percent. We interpret the evidence to imply that the higher pay-performance sensitivity in investment banking directs the attention of managers away from commercial banking within universal banks, consistent with Holmstrom and Milgrom (1991). Separation of investment banking and commercial banking may indeed be associated with a reduction in risk in commercial banking.
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