Showing papers by "Horacio Sapriza published in 2012"

Sovereign credit risk, banks' government support, and bank stock returns around the world

Abstract: Banking crises have been largely associated with la rge output and welfare losses, and bank bailouts by the public sector are a recurring feature of financial crises. Such stylized facts underscore the importance of a well- functioning financial system for attaining economic stability and growth, as well as the relevance of understanding the relationship between the economic conditions fa ced by the government and the banking sector. In particular, differences and cha nges in explicit (and implicit) government support to banks may affect investors’ i ncentives to hold bank stocks, and thus impact banks’ external financing costs, wh ich may send ripples through the rest of the economy. Similarly, sovereign debt rat ing changes may unveil new information about a country’s fundamentals, generat ing a significant externality for the country’s banking system, and thus they also af fect investors’ incentives to hold bank stocks. We explore the joint impact of sovere ign debt rating changes and government support on bank stock returns from 36 countries between 1995 and 2011. Our findings show that sovereign rating chan ges have a significant and robust impact on bank stock returns. The impact is nonlin ear and varies across banks and countries. Moreover, we find that the effect is as ymmetric and stronger for downgrades than for upgrades, and that large downgr ades have a particularly strong negative impact on returns. Importantly, this resu lt is significantly stronger for banks with more ex-ante government support, providing evidence that investors perceive sovereigns and domestic banks as markedly interconnected.

Financial Frictions, Trade Credit, and the 2008-09 Global Financial Crisis

Abstract: This paper studies the role of the credit crunch in the severe contraction of trade and economic activity at the height of the 2008-09 global financial crisis, using firm-level data from six emerging market economies in Asia. We construct firm-specific measures of global demand, which allow us to disentangle the effect of falling demand from that of financial constraints on sales. The results indicate that: (1) Although the fall in demand adversely affected the sales of all firms during the crisis, sales declined by less for firms with better pre-crisis financial conditions. (2) In the face of the decline in external financing opportunities, some firms relied more on trade credit from suppliers to supplement operating capital during the crisis, which allowed them to post relatively better sales. (3) Export-intensive firms with comparable financial vulnerability resorted less to trade credit as an alternative source of finance, and hence experienced sharper declines in sales than the domestically-oriented firms. These findings point to the presence of credit frictions among the factors that contributed to the disproportionately large decline in international trade during the crisis.

Liquidity shocks, dollar funding costs, and the bank lending channel during the European sovereign crisis

Abstract: This paper documents a new type of cross-border bank lending channel A deepening of the European sovereign debt crisis in 2011 restrained the financial intermediation of European banks in the United States In this period, some of the US branches of European banks faced a dollar liquidity shock – due to their perceived risk reflecting the sovereign risk of their countries of origin – which in turn affected the branches’ lending to US entities We use a novel dataset to analyze the operations of branches of foreign banks in the United States Our results show that: (1) The US branches of foreign banks from countries with a greater increase in sovereign risk (mostly European banks) were less able to attract dollar funding from US money market funds (2) Instead, the branches with curtailed access to large time deposits relied more on funding from their own parent institutions, thus shifting from being net suppliers to being net receivers of dollar funding from their related offices (3) Since the additional funding received from parent institutions was not enough to offset the decreased access to US funding, such branches reduced their lending to US entities

Forecasting the Macroeconomy: Analysts versus Economists

Abstract: We investigate whether and to what extent aggregate earnings forecasts by sell-side analysts and forecasts of macroeconomic indicators by economists convey different information about the macroeconomy, and whether such differences have implications for forecast efficiency and the stock market. We find that the two sets of forecasts strongly covary over the 1984 to 2010 period, suggesting that they contain a non-trivial amount of common macroeconomic information. We also find that while real GDP growth forecasts have incremental predictive ability over aggregate earnings forecasts with respect to future aggregate earnings, the converse is not true. Additional tests suggest that analysts underreact to economists’ negative forecast revisions (i.e., aggregate earnings forecast errors are predictably more negative following economists’ downward forecast revisions), with the extent of underreaction more pronounced for more procyclical and larger firms. The stock market does not appear to see through such inefficiency — the market returns surrounding the first few “bellwether” firms’ earnings announcements are predictably more negative following quarters with more negative macroeconomic forecast revisions. Finally, we show that an “adjusted” aggregate earnings forecast that incorporates macroeconomic forecast revisions performs marginally better in terms of forecast accuracy and efficiency.

Liquidity shocks, dollar funding costs, and the bank lending channel during the European sovereign crisis

Abstract: This paper documents a new type of cross-border bank lending channel. The deepening of the European sovereign debt crisis in 2011 restrained the financial intermediation of European banks in the United States. In this period, some of the U.S. branches of European banks faced a dollar liquidity shock—due to their perceived risk reflecting the sovereign risk of their countries of origin—which in turn affected the branches’ lending to U.S. entities. We use a novel dataset to analyze the operations of branches of foreign banks in the United States. Our results show that: (1) The U.S. branches of European banks experienced a run on their deposits, mainly from U.S. money market funds. (2) The branches with curtailed access to large time deposits relied more on funding from their own parent institutions, thus shifting from being net suppliers to being net receivers of dollar funding from their related offices. (3) Since the additional funding received from parent institutions was not enough to offset the decreased access to U.S. funding, such branches reduced their lending to U.S. entities.