Long-run Competitive Spillovers of the Credit Crunch
William McShane
IWH Discussion Papers,
No. 10,
2023
Abstract
Competition in the U.S. appears to have declined. One contributing factor may have been heterogeneity in the availability of credit during the financial crisis. I examine the impact of product market peer credit constraints on long-run competitive outcomes and behavior among non-financial firms. I use measures of lender exposure to the financial crisis to create a plausibly exogenous instrument for product market credit availability. I find that credit constraints of product market peers positively predict growth in sales, market share, profitability, and markups. This is consistent with the notion that firms gained at the expense of their credit constrained peers. The relationship is robust to accounting for other sources of inter-firm spillovers, namely credit access of technology network and supply chain peers. Further, I find evidence of strategic investment, i.e. the idea that firms increase investment in response to peer credit constraints to commit to deter entry mobility. This behavior may explain why temporary heterogeneity in the availability of credit appears to have resulted in a persistent redistribution of output across firms.
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Natural Disasters and Bank Stability: Evidence from the U.S. Financial System
Felix Noth, Ulrich Schüwer
Journal of Environmental Economics and Management,
May
2023
Abstract
We show that weather-related natural disasters in the United States significantly weaken the financial stability of banks with business activities in affected regions. This is reflected in higher probabilities of default, lower z-scores, higher non-performing assets ratios, higher foreclosure ratios, lower returns on assets and lower equity ratios of affected banks in the years following a natural disaster. The effects are economically relevant and highlight the financial vulnerability of banks and their borrowers despite insurances and public aid programs.
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Short-Selling Threats and Bank Risk-Taking: Evidence from the Financial Crisis
Dien Giau Bui, Iftekhar Hasan, Chih-Yung Lin, Hong Thoa Nguyen
Journal of Banking and Finance,
May
2023
Abstract
The focus of this paper is whether the Securities and Exchange Commission's Regulation SHO strengthens or weakens the effect of short-selling threats on banks’ risk-taking. The evidence shows that pilot banks with looser constraints on short-selling increased their risk-taking during the financial crisis of 2007–2009. The reason is that short-selling threats improved the information environment and mitigated the agency problems of banks during the pilot program that led to greater risk-taking by pilot banks. Additionally, this effect is mainly driven by pilot banks with poor corporate governance, or high information asymmetry. Overall, our paper provides novel evidence that the disciplinary role of short-sellers had a positive effect on bank risk-taking during the financial crisis.
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IWH-Präsident: Silicon Valley Bank in Deutschland?
Reint E. Gropp
Einzelveröffentlichungen,
2023
Abstract
Nach dem Zusammenbruch der zahlungsunfähigen US-amerikanischen Silicon Valley Bank zieht Reint Gropp, Präsident des Leibniz-Instituts für Wirtschaftsforschung Halle (IWH), drei Lehren für die europäische Bankenaufsicht.
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The Impact of Delay: Evidence from Formal out-of-Court Restructuring
Stjepan Srhoj, Dejan Kovač, Jacob N. Shapiro, Randall K. Filer
Journal of Corporate Finance,
February
2023
Abstract
Different types of bankruptcy restructuring procedures are used in most legal systems to decide the fate of businesses facing financial hardship. We study how bargaining failures in an under-researched type of restructuring procedure, a formal out-of-the court procedure impacts the economic performance of participating firms. Croatia introduced a “pre-bankruptcy settlement” (PBS) process in the wake of the Great Recession of 2007–2009. A novel dataset provides us with annual financial statements for both sides of more than 180,000 debtor–creditor pairs, enabling us to address selection into failed negotiations by matching a rich set of creditor and debtor characteristics. Failures to settle at the PBS stage due to idiosyncratic bargaining problems, which effectively delay entry into the standard bankruptcy procedure, lead to a lower rate of survival among debtors as well as reduced employment, revenue, and profits. We are the first study to track how bargaining failures diffuse through the network of creditors, finding a significant negative effect on small creditors, but not others. Our results highlight the impact of delay and the importance of structuring bankruptcy procedures, to rapidly resolve uncertainty about firms’ future prospects.
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Corporate Culture and Firm Value: Evidence from Crisis
Yiwei Fang, Franco Fiordelisi, Iftekhar Hasan, Woon Sau Leung, Gabriel Wong
Journal of Banking and Finance,
January
2023
Abstract
Based on the Competing Values Framework (CVF), we score 10-K text to measure company culture in four types (collaborative, controlling, competitive, and creative) and examine its role in firm stability. We find that firms with higher controlling culture fared significantly better during the 2008–09 crisis. Firms with stronger controlling culture experienced fewer layoffs, less negative asset growth, greater debt issuance, and increased access to credit-line facilities during the crisis. The positive effect of the controlling culture is stronger among the financially-constrained firms. Overall, the controlling culture improves firm stability through greater support from capital providers.
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20.12.2022 • 31/2022
No deep recession despite energy crisis and rise in interest rates
High energy prices and deteriorating financial conditions are weighing on the German economy. However, the period of weakness over the winter is likely to be moderate, partly because the energy price brakes are supporting private incomes. The Halle Institute for Economic Research (IWH) forecasts that due to the recovery from the pandemic in the first three quarters, gross domestic product (GDP) is estimated to have increased by 1.8% in 2022. Due to high energy prices, however, GDP will slightly decline in the winter months and stagnate on average in 2023. Inflation will fall from 7.8% in 2022 to 6.5% in 2023.
Oliver Holtemöller
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European Real Estate Markets During the Pandemic: Is COVID-19 also a Case for House Price Concerns?
Michael Koetter, Felix Noth
IWH Policy Notes,
No. 3,
2022
Abstract
We use a new database on European real estate purchase and rental prices – the IWH European Real Estate Index – to document the relationship between staggered COVID-19 dynamics and real estate prices in 14 EU countries between January 2020 and December 2021. For most countries, we find no statistically significant response of monthly purchase and rental prices due to an increase of regional COVID-19 cases. For the UK we find that more COVID-19 cases depressed both purchase and rental prices significantly, but the economic magnitude of effects was mild during this sample period. In contrast, rents in Italy increased in response to hiking COVID-19 cases, illustrating the importance to consider heterogeneous crisis patterns across the EU when designing policies. Overall, COVID-19 dynamics did not affect real estate values significantly during the pandemic, thereby mitigating potential financial stability concerns via a mortgage lending channel at the time.
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European Real Estate Prices
Michael Koetter, Felix Noth
IWH Technical Reports,
No. 3,
2022
Abstract
Real estate markets are pivotal to financial stability given their dual role as the underlying asset of crucial financial products in financial systems, such as mortgage loans and asset-backed securities, and the primary source of household wealth alike. As such, they also play traditionally a crucial role for the transmission of monetary policy. Imbalances and sudden corrections in real estate markets have been the root cause of many financial crises over the last decades. But whereas some national, often survey-based indicators of real estate prices are provided by central banks and statistical offices, a comprehensive collection of purchase prices, rents, and proxies for the liquidity of European real estate markets is lacking. The IWH European Real Estate Index (EREI) seeks to fill this void for residential property. This technical report describes the gathering and processing of sale and rental prices for properties in 18 European countries. We provide the general scrapeing step in the section before describing country-specific details for each country in separated sub-sections.
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Surges and Instability: The Maturity Shortening Channel
Xiang Li, Dan Su
Journal of International Economics,
November
2022
Abstract
Capital inflow surges destabilize the economy through a maturity shortening mechanism. The underlying reason is that firms have incentives to redeem their debt on demand to accommodate the potential liquidity needs of global investors, which makes international borrowing endogenously fragile. Based on a theoretical model and empirical evidence at both the firm and macro levels, our main findings are twofold. First, a significant association exists between surges and shortened corporate debt maturity, especially for firms with foreign bank relationships and higher redeployability. Second, the probability of a crisis following surges with a flattened yield curve is significantly higher than that following surges without one. Our study suggests that debt maturity is the key to understand the financial instability consequences of capital inflow bonanzas.
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