Bank Failures, Local Business Dynamics, and Government Policy
Salvador Contreras, Manthos D. Delis, Amit Ghosh, Iftekhar Hasan
Small Business Economics,
Nr. 4,
2022
Abstract
Using MSA-level data over 1994–2014, we study the effect of bank failures on local business dynamics, in the form of net business formation and net job creation. We find that at least one bank failure in the metropolitan statistical area (MSA) with the mean population prevents approximately 475 net businesses from forming in that area, compared with MSAs that experience no bank failures, ceteris paribus. The equivalent effect on net job creation is 16,433 net job losses. Our results are even stronger for small businesses, which are usually more dependent on bank-firm relationships. These effects point to significant welfare losses stemming from bank failures, highlighting an important role for government intervention. We show that the Troubled Asset Relief Program (TARP) is effective in reducing the negative effects of bank failures on local business dynamics. This positive effect of TARP is quite uniform across small and large firms.
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The Effect of Foreign Institutional Ownership on Corporate Tax Avoidance: International Evidence
Iftekhar Hasan, Incheol Kim, Haimeng Teng, Qiang Wu
Journal of International Accounting, Auditing and Taxation,
March
2022
Abstract
We find that foreign institutional investors (FIIs) reduce their investee firms’ tax avoidance. We provide evidence that the effect is driven by the institutional distance between FIIs’ home countries/regions and host countries/regions. Specifically, we find that the effect is driven by the influence of FIIs from countries/regions with high-quality institutions (i.e., common law, high government effectiveness, and high regulatory quality) on investee firms located in countries/regions with low-quality institutions. Furthermore, we show that the effect is concentrated on FIIs with little experience in the investee countries/regions or FIIs with stronger monitoring incentives. Finally, we find that FIIs are more likely to vote against management if the firm has a higher level of tax avoidance.
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Are Credit Rating Disagreements Priced in the M&A Market?
Iftekhar Hasan, He Huang, Thomas To
Journal of International Financial Markets, Institutions and Money,
May
2021
Abstract
This paper examines the effect of credit rating disagreements on merger and acquisition (M&A) decisions. We show that acquirers with split ratings prefer to use stock to finance their acquisitions. More importantly, we find that acquirers with split ratings experience lower announcement returns. Further analysis shows that overpayment by acquirers with split ratings is concentrated in acquirers with entrenched managers. Our results are robust to alternative identification strategies. Overall, our evidence indicates that credit rating disagreements are heavily priced in the M&A market.
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Dynamic Equity Slope
Matthijs Breugem, Stefano Colonnello, Roberto Marfè, Francesca Zucchi
University of Venice Ca' Foscari Department of Economics Working Papers,
Nr. 21,
2020
Abstract
The term structure of equity and its cyclicality are key to understand the risks drivingequilibrium asset prices. We propose a general equilibrium model that jointly explainsfour important features of the term structure of equity: (i) a negative unconditionalterm premium, (ii) countercyclical term premia, (iii) procyclical equity yields, and (iv)premia to value and growth claims respectively increasing and decreasing with thehorizon. The economic mechanism hinges on the interaction between heteroskedasticlong-run growth — which helps price long-term cash flows and leads to countercyclicalrisk premia — and homoskedastic short-term shocks in the presence of limited marketparticipation — which produce sizeable risk premia to short-term cash flows. The slopedynamics hold irrespective of the sign of its unconditional average. We provide empirical support to our model assumptions and predictions.
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A Comparison of Monthly Global Indicators for Forecasting Growth
Christiane Baumeister, Pierre Guérin
Abstract
This paper evaluates the predictive content of a set of alternative monthly indicators of global economic activity for nowcasting and forecasting quarterly world GDP using mixed-frequency models. We find that a recently proposed indicator that covers multiple dimensions of the global economy consistently produces substantial improvements in forecast accuracy, while other monthly measures have more mixed success. This global economic conditions indicator contains valuable information also for assessing the current and future state of the economy for a set of individual countries and groups of countries. We use this indicator to track the evolution of the nowcasts for the US, the OECD area, and the world economy during the coronavirus pandemic and quantify the main factors driving the nowcasts.
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May the Force Be with You: Exit Barriers, Governance Shocks, and Profitability Sclerosis in Banking
Michael Koetter, Carola Müller, Felix Noth, Benedikt Fritz
Deutsche Bundesbank Discussion Paper,
Nr. 49,
2018
Abstract
We test whether limited market discipline imposes exit barriers and poor profitability in banking. We exploit an exogenous shock to the governance of government-owned banks: the unification of counties. County mergers lead to enforced government-owned bank mergers. We compare forced to voluntary bank exits and show that the former cause better bank profitability and efficiency at the expense of riskier financial profiles. Regarding real effects, firms exposed to forced bank mergers borrow more at lower cost, increase investment, and exhibit higher employment. Thus, reduced exit frictions in banking seem to unleash the economic potential of both banks and firms.
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Effects of Specification Choices on Efficiency in DEA and SFA
Michael Koetter, Aljar Meesters
Efficiency and Productivity Growth: Modelling in the Financial Services Industry,
2013
Abstract
This chapter assesses the sensitivity of bank cost-efficiency scores obtained with stochastic frontier analysis and data envelopment analysis. We compare CE scores of either type for a large cross-country sample of EU banks from 1996 until 2010. The results show that CE measures differ considerably depending on specification choices across parametric and nonparametric methods. The chapter documents the reasons for these differences in terms of theoretical, sample, and further specification choices.
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Mission, Motivation, and the Active Decision to Work for a Social Cause
Sabrina Jeworrek, Vanessa Mertins
Abstract
The mission of a job does not only affect the type of worker attracted to an organisation, but may also provide incentives to an existing workforce. We conducted a natural field experiment with 267 short-time workers and randomly allocated them to either a prosocial or a commercial job. Our data suggest that the mission of a job itself has a performance enhancing motivational impact on particular individuals only, i.e., workers with a prosocial attitude. However, the mission is very important if it has been actively selected. Those workers who have chosen to contribute to a social cause outperform the ones randomly assigned to the same job by about 15 percent. This effect seems to be a universal phenomenon which is not driven by information about the alternative job, the choice itself or a particular subgroup.
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Why They Keep Missing: An Empirical Investigation of Rational Inattention of Rating Agencies
Gregor von Schweinitz, Makram El-Shagi
Abstract
Sovereign ratings have frequently failed to predict crises. However, the literature has focused on explaining rating levels rather than the timing of rating announcements. We fill this gap by explicitly differentiating between a decision to assess a country and the actual rating decision. Thereby, we account for rational inattention of rating agencies that exists due to costs of reassessment. Exploiting information of rating announcements, we show that (i) the proposed differentiation significantly improves estimation; (ii) rating agencies consider many nonfundamental factors in their reassessment decision; (iii) markets only react to ratings providing new information; (iv) developed countries get preferential treatment.
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Transmitting Fiscal Covid-19 Counterstrikes Effectively: Mind the Banks!
Reint E. Gropp, Michael Koetter, William McShane
IWH Online,
Nr. 2,
2020
Abstract
The German government launched an unprecedented range of support programmes to mitigate the economic fallout from the Covid-19 pandemic for employees, self-employed, and firms. Fiscal transfers and guarantees amount to approximately €1.2 billion by now and are supplemented by similarly impressive measures taken at the European level. We argue in this note that the pandemic poses, however, also important challenges to financial stability in general and bank resilience in particular. A stable banking system is, in turn, crucial to ensure that support measures are transmitted to the real economy and that credit markets function seamlessly. Our analysis shows that banks are exposed rather differently to deteriorated business outlooks due to marked differences in their lending specialisation to different economic sectors. Moreover, a number of the banks that were hit hardest by bleak growth prospects of their borrowers were already relatively thinly capitalised at the outset of the pandemic. This coincidence can impair the ability and willingness of selected banks to continue lending to their mostly small and medium sized entrepreneurial customers. Therefore, ensuring financial stability is an important pre-requisite to also ensure the effectiveness of fiscal support measures. We estimate that contracting business prospects during the first quarter of 2020 could lead to an additional volume of non-performing loans (NPL) among the 40 most stressed banks ‒ mostly small, regional relationship lenders ‒ on the order of around €200 million. Given an initial stock of NPL of €650 million, this estimate thus suggests a potential level of NPL at year-end of €1.45 billion for this fairly small group of banks already. We further show that 17 regional banking markets are particularly exposed to an undesirable coincidence of starkly deteriorating borrower prospects and weakly capitalised local banks. Since these regions are home to around 6.8% of total employment in Germany, we argue that ensuring financial stability in the form of healthy bank balance sheets should be an important element of the policy strategy to contain the adverse real economic effects of the pandemic.
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