Do Managerial Risk-taking Incentives Influence Firms' Exchange Rate Exposure?
Bill Francis, Iftekhar Hasan, Delroy M. Hunter, Yun Zhu
Journal of Corporate Finance,
2017
Abstract
There is scant evidence on how risk-taking incentives impact specific firm risks. This has implications for board oversight of managerial risk taking, firms' development of comparative advantage in taking particular risks, and compensation design. We examine this question for exchange rate risk. Using multiple identification strategies, we find that vega increases exchange rate exposure for purely domestic and globally engaged firms. Vega's impact increases with international operations, declines post-SOX, and is robust to firm-level governance. Our results suggest that evidence that exposure reduces firm value can be viewed, in part, as a wealth transfer from shareholders and debt-holders to managers.
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15.03.2017 • 13/2017
The German Economy: Employment Boom in Germany, but no Overheating of the Economy
Employment in Germany continues to increase healthily, and private consumption expands due to rising real incomes. Investment in equipment, however, remains modest. Overall, economic demand is expanding at roughly the growth rate of potential Gross Domestic Product (GDP), and the output gap is nearly closed. “In 2017, GDP will increase by 1.3% and thus at a lower rate than in the previous year, but this is only due to fewer working days and not to sliding demand,” says Oliver Holtemoeller, Head of the Department Macroeconomics and IWH vice president.
Oliver Holtemöller
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20.06.2016 • 24/2016
Financial market reaction to poll data suggests strong effects of a Brexit on exchange rates and the banking system both in the UK and in the EU
On 23 June 2016, there will be a referendum in the United Kingdom (UK) on the question of whether or not the country should remain in the European Union (EU). We use the polls as a measure of the likelihood of an exit to examine the likely effect of a Brexit on financial markets. “Whenever the probability in the polls of a Brexit moves above 50%, we observe a substantial depreciation of the UK pound with respect to most major currencies (including the euro), and strong decline in bank stock prices, suggesting that markets feel the financial sector (both in the UK and the EU) will be most severely affected by a Brexit”, IWH President Reint E. Gropp says. There is little effect on the euro/US Dollar exchange rate. “A huge concern is that overall market volatility both in the UK and the EU are on record highs since last Thursday, reflecting the higher uncertainty associated with Brexit and how exactly, if it happened, it would come about.” Within the UK, we see some evidence for a flight to safety into UK government bonds, but no effects for German bonds.
Reint E. Gropp
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A Market-based Indicator of Currency Risk: Evidence from American Depositary Receipts
Stefan Eichler, Ingmar Roevekamp
IWH Discussion Papers,
No. 4,
2016
Abstract
We introduce a novel currency risk measure based on American Depositary Receipts(ADRs). Using a multifactor pricing model, we exploit ADR investors’ exposure to potential devaluation losses to derive an indicator of currency risk. Using weekly data for a sample of 831 ADRs located in 23 emerging markets over the 1994-2014 period, we find that a deterioration in the fiscal and current account balance, as well as higher inflation, increases currency risk. Interaction models reveal that these macroeconomic fundamentals drive currency risk, particularly in countries with managed exchange rates, low levels of foreign exchange reserves and a poor sovereign credit rating.
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Real Effective Exchange Rate Misalignment in the Euro Area: A Counterfactual Analysis
Makram El-Shagi, Axel Lindner, Gregor von Schweinitz
Review of International Economics,
No. 1,
2016
Abstract
The European debt crisis has revealed severe imbalances within the Euro area, sparking a debate about the magnitude of those imbalances, in particular concerning real effective exchange rate misalignments. We use synthetic matching to construct a counterfactual economy for each member state in order to identify the degree of these misalignments. We find that crisis countries are best described as a combination of advanced and emerging economies. Comparing the actual real effective exchange rate with those of the counterfactuals gives evidence of misalignments before the outbreak of the crisis: all peripheral countries appear strongly and significantly overvalued.
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How Effective is Macroprudential Policy during Financial Downturns? Evidence from Caps on Banks' Leverage
Manuel Buchholz
Working Papers of Eesti Pank,
No. 7,
2015
Abstract
This paper investigates the effect of a macroprudential policy instrument, caps on banks' leverage, on domestic credit to the private sector since the Global Financial Crisis. Applying a difference-in-differences approach to a panel of 69 advanced and emerging economies over 2002–2014, we show that real credit grew after the crisis at considerably higher rates in countries which had implemented the leverage cap prior to the crisis. This stabilising effect is more pronounced for countries in which banks had a higher pre-crisis capital ratio, which suggests that after the crisis, banks were able to draw on buffers built up prior to the crisis due to the regulation. The results are robust to different choices of subsamples as well as to competing explanations such as standard adjustment to the pre-crisis credit boom.
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