http://d1c25a6gwz7q5e.cloudfront.net/papers/67.pdf

Efficiency of financial institutions: International survey and directions for future research

Differences in interest margins reflect differences in bank characteristics, macroeconomic conditions, existing financial structure and taxation, regulation, and other institutional factors. Using bank data for 80 countries for 1988-95, Demirguc-Kunt and Huizinga show that differences in interest margins and bank profitability reflect various determinants: Bank characteristics. Macroeconomic conditions. Explicit and implicit bank taxes. Regulation of deposit insurance. General financial structure. Several underlying legal and institutional indicators. Controlling for differences in bank activity, leverage, and the macroeconomic environment, they find (among other things) that: Banks in countries with a more competitive banking sector-where banking assets constitute a larger share of GDP-have smaller margins and are less profitable. The bank concentration ratio also affects bank profitability; larger banks tend to have higher margins. Well-capitalized banks have higher net interest margins and are more profitable. This is consistent with the fact that banks with higher capital ratios have a lower cost of funding because of lower prospective bankruptcy costs. Differences in a bank's activity mix affect spread and profitability. Banks with relatively high noninterest-earning assets are less profitable. Also, banks that rely largely on deposits for their funding are less profitable, as deposits require more branching and other expenses. Similarly, variations in overhead and other operating costs are reflected in variations in bank interest margins, as banks pass their operating costs (including the corporate tax burden) on to their depositors and lenders. In developing countries foreign banks have greater margins and profits than domestic banks. In industrial countries, the opposite is true. Macroeconomic factors also explain variation in interest margins. Inflation is associated with higher realized interest margins and greater profitability. Inflation brings higher costs-more transactions and generally more extensive branch networks-and also more income from bank float. Bank income increases more with inflation than bank costs do. There is evidence that the corporate tax burden is fully passed on to bank customers in poor and rich countries alike. Legal and institutional differences matter. Indicators of better contract enforcement, efficiency in the legal system, and lack of corruption are associated with lower realized interest margins and lower profitability. This paper - a product of the Development Research Group - is part of a larger effort in the group to study bank efficiency.

https://papers.ssrn.com/sol3/Delivery.cfm/546.pdf?abstractid=614949&rulid=18542&mirid=4

Determinants of Commercial Bank Interest Margins and Profitability: Some International Evidence

The short-run interdependence of prices and price volatility across three major international stock markets is studied. Daily opening and closing prices of major stock indexes for the Tokyo, London, and New York stock markets are examined. The analysis utilizes the autoregressive conditionally heteroskedastic (ARCH family of statistical models to explore these pricing relationships. Evidence of price volatility spillovers from New York to Tokyo, London to Tokyo, and New, York to London is observed but no price volatility spillover effects in other directions are found for the pre-October 1987 period.

Correlations in Price Changes and Volatility Across International Stock Markets

Value stocks have higher returns than growth stocks in markets around the world. For 1975-95, the difference between the average returns on global portfolios of high and low book-to-market stocks is 7.60% per year, and value stocks outperform growth stocks in 12 of 13 major markets. An international CAPM cannot explain the value premium, but a two-factor model that includes a risk factor for relative distress captures the value premium in international returns.

Value Versus Growth: The International Evidence

Using bank-level data for 80 countries in the year's 1988-95, this article shows that differences in interest margins and bank profitability reflect a variety of determinants: bank characteristics, macroeconomic conditions, explicit and implicit bank taxation, deposit insurance regulation, overall financial structure, and underlying legal and institutional indicators. A larger ratio of bank assets to gross domestic product and a lower market concentration ratio lead to lower margins and profits, controlling for differences in bank activity, leverage, and the macroeconomic environment. Foreign banks have higher margins and profits than domestic banks in developing countries, while the opposite holds in industrial countries. Also, there is evidence that the corporate tax burden is fully passed onto bank customers, while higher reserve requirements are not, especially in developing countries.

/pdf/determinants-of-commercial-bank-interest-margins-and-4wc4ey2dph.pdf

Determinants of commercial bank interest margins and profitability : some international evidence

Prior research on international banking has proposed many reasons for the multinationalization of U.S. banks but provided little empirical support for its propositions. Using a pooled-time series data set from 1987 to 1990, this study analyzes the ray and expansion path scale economies and expansion path subadditivity of U.S. based multinational banks (MNBs), both at the firm and the plant levels. It also measures and analyzes inefficiencies for these banks. Inefficiencies are measured relative to a ‘thick frontier’ cost function. A similar analysis is conducted for domestic banks (DBs) for comparison purposes. No support is found for the prior belief that similar cost structures exist for MNBs and DBs. In general, we find that MNBs are able to fully exploit economies of scale, and face lesser diseconomies from joint production and lower inefficiencies than DBs.

Cost structures in multinational and domestic banking

A future global economy to be built by BRICs

We investigate the equity market timing hypothesis of capital structure in major industrialized (G-7) countries. As claimed by its proponents, we find that leverage of firms is negatively related to the historical market-to-book ratio in all G-7 counties. However, this negative relationship cannot be attributed to equity market timing. We find no association between equity issues and market-to-book ratios at the time of equity financing decisions by Japanese firms. Firms in all G-7 countries, except Japan, undo the effect of equity issuance and the impact of equity market timing attempts on leverage is short lived. This is inconsistent with the prediction of the equity market timing hypothesis and more in line with dynamic tradeoff model.

Equity Market Timing and Capital Structure: International Evidence

We investigate the equity market timing hypothesis of capital structure in major industrialized (G-7) countries. As claimed by its proponents, we find that leverage of firms is negatively related to the historical market-to-book ratio in all G-7 countries. However, this negative relationship cannot be attributed to equity market timing. We find no association between equity issues and market-to-book ratios at the time of equity financing decisions by Japanese firms. Firms in all G-7 countries, except Japan, undo the effect of equity issuance and the impact of equity market timing attempts on leverage is short lived. This is inconsistent with the prediction of the equity market timing hypothesis and more in line with dynamic trade-off model.

/pdf/equity-market-timing-and-capital-structure-international-1g7rvfx5qw.pdf

Equity market timing and capital structure: International evidence

The Arbitrage Pricing Theory (APT) of Ross [23; 24], later refined and extended by Connor [8], Huberman [15], Huberman et al. [16], Dybvig [11], Stambaugh [29], Chamberlin and Rothchild [4], Grinblatt and Titman [14], Ingersoll [17], Chen, Roll, and Ross [5] among others, has attracted considerable attention as a testable alternative to the Sharpe [26]-Lintner [20]-Mossin [21] Capital Asset Pricing Model (CAPM).' The APT resembles the CAPM in the sense that both are linear models where the CAPM is a single factor (market) model while the APT assumes that m unobservable factors drive the security prices through time. The pricing equation of the APT is developed by imposing the "no arbitrage condition," resulting in a linear relationship between expected return and systematic risk. Similar to the extensions of the single currency CAPM to a multicurrency environment, Solnik [27] extended the APT to the international capital markets, leading to the International Arbitrage Pricing Theory (IAPT).2 Since the IAPT provides a theoretical framework to investigate the existence of factors that generate returns, and to check whether these factors are "priced" in the international capital markets, it is possible to empirically test the validity of the IAPT jointly with the hypothesis that the international capital markets are integrated. The purpose of this study is to develop and empirically test these hypotheses and it is organized as follows. Section II provides a brief discussion of the IAPT. Section III describes the testable hypotheses implied by the IAPT and the data and the methodology utilized in this study to test these hypotheses. Empirical results obtained are reported in section IV and section V concludes the paper.

http://www.jstor.org/stable/pdfplus/1059376.pdf

Arvind Mahajan

Papers

Cost structures in multinational and domestic banking

A future global economy to be built by BRICs

Equity Market Timing and Capital Structure: International Evidence

Equity market timing and capital structure: International evidence

International Arbitrage Pricing Theory: An Empirical Investigation