Showing papers in "Journal of Banking and Finance in 2020"
TL;DR: In this paper, the authors examine the impact of government economic policy uncertainty on corporate innovation and identify a cost-of-capital transmission channel and find that GEPU increases firms' cost of capital, which translates into lower innovation.
Abstract: We examine the impact of government economic policy uncertainty (GEPU) on corporate innovation and identify a cost-of-capital transmission channel. We find that GEPU increases firms’ cost of capital, which translates into lower innovation. As economic policy uncertainty rises, firms with more exposure to such uncertainty face a higher weighted average cost of capital and innovate less. Innovations of financially constrained firms and firms relying on external finance in a competitive environment are affected more. Our study provides novel evidence that higher economic policy uncertainty hinders innovation not only through the traditional investment irreversibility channel, but also through the cost-of-capital channel.
212 citations
TL;DR: This paper examined the impact of financial sector policy announcements on bank stocks around the world during the onset of the COVID-19 crisis and found that liquidity support, borrower assistance programs and monetary easing moderated the adverse impact from the crisis, but their impact varied considerably across banks and countries.
Abstract: This paper examines the impact of financial sector policy announcements on bank stocks around the world during the onset of the COVID-19 crisis. Overall, we find that liquidity support, borrower assistance programs and monetary easing moderated the adverse impact from the crisis, but their impact varied considerably across banks and countries. By contrast, countercyclical prudential measures led to negative abnormal returns in bank stocks, suggesting that markets price the downside risks associated with these policies.
157 citations
TL;DR: In this article, the relationship between geopolitical risk and asset prices was analyzed and it was shown that holding gold and silver within a diversified portfolio lowers the impact of geopolitical risk, while stocks and bonds respond negatively to geopolitical risk.
Abstract: We analyse the relationship between geopolitical risk and asset prices and show that geopolitical risk is distinct from existing measures of economic, financial, and political risk and that the response of precious metals to geopolitical risk differs considerably from that of other assets. Precious metals are hedges against geopolitical risk in general and geopolitical threats (as opposed to acts) in particular. Conversely, stocks and bonds respond negatively to geopolitical risk and geopolitical threats. For extreme geopolitical risks, only gold and silver display consistent safe haven properties. Our results show that holding precious metals within a diversified portfolio lowers the impact of geopolitical risk.
95 citations
TL;DR: The authors examined the relationship between election uncertainty, economic policy uncertainty, and financial market uncertainty in a prediction-market analysis, covering seven US presidential election campaigns, and found that changes in the incumbent party re-election probability should be a key driver of changes in policy uncertainty.
Abstract: We examine the relationship between election uncertainty, economic policy uncertainty, and financial market uncertainty in a prediction-market analysis, covering seven US presidential election campaigns. We argue theoretically that changes in the incumbent party re-election probability should be a key driver of changes in policy uncertainty. Consistent with this theory, we find that a large portion of changes in financial uncertainty in the final stages of election campaign seasons is explained by changes in the probability of the incumbent party getting re-elected. Our findings suggest that the incumbent-party election probability, derived from prediction markets, is an important measure of economic policy uncertainty in the days leading up to US elections.
69 citations
TL;DR: In this paper, the authors estimate the global network structure of sovereign credit risk by applying the Diebold-Yilmaz connectedness methodology on sovereign credit default swaps (SCDSs).
Abstract: This paper estimates the global network structure of sovereign credit risk by applying the Diebold-Yilmaz connectedness methodology on sovereign credit default swaps (SCDSs). The level of credit risk connectedness among sovereigns, which is quite high, is comparable to the connectedness among stock markets and foreign exchange markets. In the aftermath of the recent financial crises that originated in developed countries, emerging market countries have played a crucial role in the transmission of sovereign credit risk, while developed countries and debt-ridden developing countries have played marginal roles. Secondary regressions show that both trade and capital flows are important determinants of pairwise connectedness across countries. The capital flows became increasingly important after 2013, while the effect of trade flows decreased during the crisis and did not recover afterwards.
64 citations
TL;DR: In this article, the authors analyzed the gender gap in the online credit market and found that female borrowers have to compensate lenders by providing higher profitability to achieve a similar funding probability, indicating the existence of a gender gap that discriminate against female borrowers.
Abstract: This paper documents and analyzes the gender gap in the online credit market. Using data from Renrendai, a leading peer-to-peer lending platform in China, we show that lending to female borrowers is associated with better loan performance, including a lower probability of default, a higher expected profit, and a lower expected loss than for their male peers. However, despite the higher creditworthiness, we don't find any measurable gender impact on funding success rate, meaning that female borrowers have to compensate lenders by providing higher profitability to achieve a similar funding probability. These evidences indicate the existence of a gender gap that discriminate against female borrowers. Further analysis implies that this gender gap is independent of the amount of information disclosed by borrowers.
56 citations
TL;DR: Li et al. as mentioned in this paper examined whether corporate relationship spending through business entertainment expenses (BEEs) affects future stock price crash risk, showing that BEEs relate positively to future crash risk.
Abstract: This study examines whether corporate relationship spending through business entertainment expenses (BEEs) affects future stock price crash risk. Stakeholder theory suggests that expenditure on relationship building with external stakeholders enhances trust, firm reputation, and transparency, potentially lowering future crash risk. However, agency theory suggests that excessive relationship spending is associated with greater information opacity and managerial opportunism, contributing to greater future crash risk. Our results are more aligned with the agency perspective, showing that BEEs relate positively to future crash risk. China's 2012 anti-corruption campaign significantly moderated the effect of BEEs on stock price crash risk, particularly for firms having weak political connections, weak information transparency, and weak external monitoring mechanisms. The positive BEE-crash relation persists after the anti-corruption campaign for high financial risk firms.
54 citations
TL;DR: It is found that Twitter sentiment predicts stock returns without subsequent reversals, consistent with the view that tweets provide information not already reflected in stock prices.
Abstract: This paper examines the information content of firm-specific sentiment extracted from Twitter messages. We find that Twitter sentiment predicts stock returns without subsequent reversals. This finding is consistent with the view that tweets provide information not already reflected in stock prices. We investigate possible sources of return predictability with Twitter sentiment. The results show that Twitter sentiment provides new information about analyst recommendations, analyst price targets and quarterly earnings. This information explains about one third of the predictive ability of Twitter sentiment for stock returns. Taken together, our findings shed new light on whether and why social media content has predictive value for stock returns.
52 citations
TL;DR: In this paper, the authors investigate the price reaction of listed companies in response to blockchain-related announcements, and find that abnormal returns are linked to the performance of bitcoin, and that speculative announcements exhibit higher returns than non-speculative announcements, while blockchain related Form 8-K disclosures have negligible difference in performance compared to their U.S. peers.
Abstract: We investigate the price reaction of listed companies in response to blockchain-related announcements. The average abnormal return based on a global sample of 713 firm announcements is approximately 5% on the announcement day, with significantly higher returns for U.S. firms, smaller firms and announcements in late 2017 and early 2018. We show that abnormal returns are linked to the performance of bitcoin. Additionally, speculative announcements exhibit higher returns than non-speculative announcements, and blockchain-related Form 8-K disclosures have negligible difference in performance compared to their U.S. peers. Whilst we acknowledge the possibility of a latent variable that affects both the abnormal returns and the performance of bitcoin, we hypothesise that investors have confused bitcoin and blockchain, and used the performance of bitcoin as an indicator of the expected success of the blockchain technology.
48 citations
TL;DR: In this paper, the authors assess the merits of bank-based versus market-based finance by exploring the relationship between financial structure and systemic risk, and find that bank based financial structures are associated with higher systemic risk than market based finance structures.
Abstract: Against the background of the great financial crisis, this paper assesses the merits of bank-based versus market-based financing by exploring the relationship between financial structure and systemic risk. The findings indicate that bank-based financial structures are associated with higher systemic risk than market-based financial structures. In relatively bank-based financial structures, bank financing is found to increase systemic risk while market financing decreases systemic risk. By contrast, in relatively market-based financial structures, bank and market financing do not impact systemic risk. Together, the results signal that market-based financial structures are more resilient to systemic risk.
39 citations
TL;DR: In this paper, a meta-analysis of the impact of higher capital requirements imposed by regulatory reforms on the macroeconomic activity (Basel III) is presented, and the empirical evidence derived from a unique dataset of 48 primary studies indicates that there is a negative, albeit moderate GDP effect in response to a change in the target capital ratio.
Abstract: We present a meta-analysis of the impact of higher capital requirements imposed by regulatory reforms on the macroeconomic activity (Basel III). The empirical evidence derived from a unique dataset of 48 primary studies indicates that there is a negative, albeit moderate GDP effect in response to a change in the target capital ratio. Meta-regression results suggest that the estimates reported in the literature tend to be systematically influenced by a selected set of study characteristics, such as econometric specifications, the authors’ affiliations, and the underlying financial system. Finally, we discuss the publication bias.
TL;DR: The authors found a strong positive relation between identifiable intangible assets and leverage, showing that identifiable assets support debt financing as much as tangible assets do, in particular in firms that lack abundant tangible assets.
Abstract: A substantial and increasing proportion of corporate assets consists of intangible assets. Despite their growing importance, internally-generated intangible assets are largely absent from balance sheets and other corporate reports. Consequently, the empirical capital structure research has struggled to evaluate the effects of intangible assets on financial leverage. High valuation risk and poor collateralizability of some intangible assets — e.g. goodwill, may discourage debt financing. In contrast, identifiable intangible assets may support debt because they are separately identifiable, valuable, and potentially collateralizable, and are instrumental in generating cash flows. Utilizing a recent accounting rule change that allows us to observe granular market-based valuations of intangible assets, we find a strong positive relation between identifiable intangible assets and leverage. Overall, identifiable intangible assets support debt financing as much as tangible assets do, in particular in firms that lack abundant tangible assets.
TL;DR: In this paper, the authors investigated how competition affects the double-bottom-line performance of micro-finance institutions and found that competition has an adverse effect on MFIs' economic sustainability and that competition undermines their breadth of outreach.
Abstract: This paper investigates how competition affects the double-bottom-line performance of microfinance institutions (MFIs). While classical economic theory highlights that competition enhances efficiency and benefits both customers and firms, we argue that this is unlikely to apply to institutions operating in socially oriented industries, such as microfinance. Using a cross-country dataset of 4576 MFI-year observations (1139 unique MFIs) operating in 59 countries over a 10-year period (2005-2014), we find that competition has an adverse effect on MFIs’ economic sustainability and that competition undermines their breadth of outreach but enhances their depth of outreach. These results are robust to alternative specifications of competition and to the use of a two-stage least squares (2SLS) analysis to alleviate the endogeneity concern. The findings from our analysis have important implications when considering the regulation of MFI competition, especially in the light of the recent turmoil of MFI markets in some developing countries.
TL;DR: In this paper, the authors compared the distributional effects of conventional monetary policy and quantitative easing (QE) within an estimated open-economy DSGE model of the euro area.
Abstract: This paper compares the distributional effects of conventional monetary policy and quantitative easing (QE) within an estimated open-economy DSGE model of the euro area. The model includes two groups of households: (i) wealthier households, who own financial assets and are able to smooth consumption over time, and (ii) poorer households, who only receive labor and transfer income and live `hand to mouth'. We use the model to compare the impact of policy shocks on constructed measures of income and wealth inequality (net disposable income, net asset position, and relative per-capita income). Except for the short term, expansionary conventional policy and QE shocks tend to mitigate income and wealth inequality between the two population groups. In light of the coarse dichotomy of households that abstracts from richer income and wealth dynamics at the individual level, the analysis emphasizes the functional distribution of income.
TL;DR: This paper investigated the effects of the announcement and the disclosure of the clarification, methodology, and outcomes of the US banking stress tests on banks' equity prices, credit risk, systematic risk, and systemic risk.
Abstract: We investigate the effects of the announcement and the disclosure of the clarification, methodology, and outcomes of the US banking stress tests on banks’ equity prices, credit risk, systematic risk, and systemic risk We find evidence that stress tests have moved stock and credit markets following the disclosure of stress test results We also find that banks’ systematic risk, as measured by betas, declined in nearly all years after the publication of stress test results Our evidence suggests that stress tests affect systemic risk
TL;DR: This article used a sample of suspected stock price manipulation events based on intraday data for stocks from nine countries over eight years and found evidence of negative effects of market manipulation on innovation.
Abstract: End-of-day stock price manipulation is generally associated with short-termism, long-term damage to equity values, and reduced incentives for employees to innovate. We use a sample of suspected stock price manipulation events based on intraday data for stocks from nine countries over eight years and find evidence of negative effects of market manipulation on innovation. We show that these negative effects are particularly harmful to innovation in markets with low intellectual property rights and high shareholder protection.
TL;DR: In this paper, the authors present evidence that information asymmetry increases equity misvaluation by showing the impact of analyst coverage on misvaluations by using two exogenous events (broker closures and mergers) as well as an instrumental variable approach.
Abstract: This paper presents evidence that information asymmetry increases equity misvaluation by showing the impact of analyst coverage on misvaluation. To establish the causality, I use two exogenous events (broker closures and mergers), as well as an instrumental variable approach. The identification strategies indicate that there is a negative causal effect of analyst coverage on equity misvalutaion. The evidence is consistent with the hypothesis that information environment can cause investors to use their perceived value in cash flow and discount rate to estimate their perceived equity prices, which deviate from intrinsic value.
TL;DR: In this paper, the authors test for contagion between banking stocks and the domestic non-financial sector for eleven Eurozone countries using a Markov-switching factor augmented VAR model.
Abstract: We test for contagion between banking stocks – global and domestic – and the domestic nonfinancial
sector for eleven Eurozone countries. Using a Markov-switching Factor augmented
VAR (MS-FAVAR) model, we assess changes to the transmission mechanism of shocks as
we move from ‘normal’ market conditions to a high-volatility, ‘crisis’ regime. Results
confirm the role of contagion in propagating shocks between the global and domestic banking
sectors but show that the non-financial sector suffered little contagion. In general, the nonfinancial
sectors appear to ‘de-couple’ from the global and domestic banking sectors.
TL;DR: Wang et al. as discussed by the authors examined how holding voting shares in banks can impact the improvement of firms' investment efficiency in the Chinese capital market and found that bank ownership improved firms investment efficiency by mitigating both overinvestment and underinvestment.
Abstract: This study examines how holding voting shares in banks can impact the improvement of firms’ investment efficiency in the Chinese capital market. We found that bank ownership improved firms’ investment efficiency by mitigating both overinvestment and underinvestment and by improving investment sensitivity to investment opportunities. We further found that alleviation of overinvestment in firms was driven by the enhancement of corporate governance (disclosure channels). The better corporate governance in bank holding firms reduced corporate cash holdings and controlling shareholder expropriations. Moreover, we found that this bank-firm connection reduced underinvestment by mitigating financial constraints (financing channels), through the raising of more bank loans and the reduction of the cash flow sensitivity of cash holdings. This connection also served as a buffer when bank lending is tightened. Finally, we found that bank ownership had a more pronounced impact on improving investment efficiency in non-SOEs, in firms located in provinces with low marketization, and in firms without institutional investors.
TL;DR: In this article, the authors investigated the impact of institutional shareholder investment horizons on a firm's use of bank debt and found that short-term institutional ownership of the borrowing firm has a negative effect on bank debt financing.
Abstract: This paper investigates the impact of institutional shareholder investment horizons on a firm's use of bank debt. We find that short-term institutional ownership of the borrowing firm has a negative effect on bank debt financing. This finding provides evidence consistent with the monitoring avoidance incentives of short-term shareholders. In contrast, long-term institutional ownership has a positive impact on the firm's reliance on bank debt financing. These effects are attenuated by higher managerial ownership and more motivated investors and are exacerbated by higher information opacity. Our results are robust to potential endogeneity concerns, the potential use of bonds, firm size effects, and alternative measures of investment horizon. Investigating the effects of investment horizons on other aspects of debt corroborates our main findings.
TL;DR: The authors found that women are more trustworthy than men and that they are more likely to repay their loans irrespective of any control mechanisms, such as joint liability or dynamic repayment incentives, and that the gender effect on loan repayment is significantly mediated by differences in innate trustworthiness.
Abstract: Growing evidence suggests that women are more likely to repay collateral-free microloans than men. However, we know little about what explains such gender differences. We hypothesize that better repayment performance of women microcredit borrowers can largely be explained by gender differences in innate trustworthiness. We conduct a trust game and a microloan repayment game in rural Bangladesh. We find that women are more trustworthy than men and that they are more likely to repay their loans irrespective of any control mechanisms, such as joint liability or dynamic repayment incentives. The results of a mediation test suggest that the gender effect on loan repayment is significantly mediated by differences in innate trustworthiness. We conduct a sensitivity test to check the extent to which unobserved confounders might have influenced the mediation effect, and find no evidence of significant omitted variables bias.
TL;DR: In this paper, a Bayesian global vector autoregressive model is used to analyze the macroeconomic effects of a flattening of the euro area yield curve, showing positive effects on real activity and prices.
Abstract: In this paper, we use a Bayesian global vector autoregressive model to analyze the macroeconomic effects of a flattening of euro area yield curves. Our findings indicate positive effects on real activity and prices, both within the euro area as well as in neighboring economies. Spillovers transmit through an exchange rate channel and a broad financial channel. We complement our analysis by conducting a portfolio optimization exercise. Our results show that multi-step-ahead forecasts conditional on the euro area yield curve shock improve Sharpe ratios relative to other investment strategies.
TL;DR: In this paper, the authors used a component volatility model to distinguish short-run exchange rate fluctuations from long-run movements that are directly linked to monetary fundamentals, and found significant improvements in the ability to forecast the daily volatility of exchange rate changes by incorporating the monthly monetary fundamentals' volatilities as predictors.
Abstract: We utilize a fundamentals-based component volatility model to forecast the short-run volatility of exchange rate changes using monetary fundamentals quoted at different frequencies. Specifically, we allow the component volatility model to distinguish short-run exchange rate fluctuations from long-run movements that are directly linked to monetary fundamentals. Relative to more traditional time series volatility models, we find significant improvements in the ability to forecast the daily volatility of exchange rate changes by incorporating the monthly monetary fundamentals’ volatilities as predictors into the component volatility model. In the utility-based comparisons, we find that an investor is willing to pay a positive annual management fee of 5.72% on average to switch from the benchmark model to the fundamentals-based models. Of these models, the model with the symmetric and homogeneous Taylor rule and interest rate smoothing obtains the highest positive annual management fee.
TL;DR: In this paper, a group of individual investors in the financial markets displays symptoms of compulsive gambling, or an addiction to trading, based on a standard diagnostic checklist from the American Psychiatric Association.
Abstract: This study shows that a group of individual investors in the financial markets displays symptoms of compulsive gambling, or an addiction to trading, based on a standard diagnostic checklist from the American Psychiatric Association. In a representative sample of Dutch retail investors, we find that 4.4% of the investors meet the criteria for compulsive gambling in the financial markets. Another 3.6% meet the criteria for problem gambling, which is a less severe form of gambling disorder. Investors with symptoms of compulsive gambling problems tend to follow a more active and speculative trading style, indicated by a higher frequency of stock trading, day-trading and investing in derivatives and leveraged products.
TL;DR: In this article, the Alternating Direction Method of Multipliers (AMMM) is used to group constituents with similar correlation properties, and with the same underlying risk factor exposures.
Abstract: We introduce a financial portfolio optimization framework that allows to automatically select the relevant assets and estimate their weights by relying on a sorted l1-Norm penalization, henceforth SLOPE. To solve the optimization problem, we develop a new efficient algorithm, based on the Alternating Direction Method of Multipliers. SLOPE is able to group constituents with similar correlation properties, and with the same underlying risk factor exposures. Depending on the choice of the penalty sequence, our approach can span the entire set of optimal portfolios on the risk-diversification frontier, from minimum variance to the equally weighted. Our empirical analysis shows that SLOPE yields optimal portfolios with good out-of-sample risk and return performance properties, by reducing the overall turnover, through more stable asset weight estimates. Moreover, using the automatic grouping property of SLOPE, new portfolio strategies, such as sparse equally weighted portfolios, can be developed to exploit the data-driven detected similarities across assets.
TL;DR: In this paper, the authors show that the aggregate Lerner index only qualifies as a consistently aggregated Lerner index if three conditions hold: the aggregate index reduces to a weighted average of the product-specific Lerner indices.
Abstract: The aggregate Lerner index is a popular composite measure of multi-product banks’ market power, based on total assets as the single aggregate output factor. We show that the aggregate Lerner index only qualifies as a consistently aggregated Lerner index if three conditions hold. Under these conditions, the aggregate Lerner index reduces to a weighted-average of the product-specific Lerner indices. We test the three conditions for a sample of U.S. banks covering the years 2011–2017. All three conditions are rejected and we show that they may cause an economically relevant bias to the aggregate Lerner index, depending on the economic context. As a general solution, we propose using the always consistently aggregated weighted-average Lerner index whenever a composite Lerner index is needed.
TL;DR: In this paper, the authors explored the impact of cross-border capital flows on bank lending volumes and risk and found that capital inflows are associated with higher bank credit supply and lower average loan quality.
Abstract: This paper explores the impact of cross-border capital flows on bank lending volumes and risk. Employing bank-level data from the euro area, we show that capital inflows are associated with higher bank credit supply and lower average loan quality. By showing that the lending patterns of smaller domestic banks are also affected, we present evidence that the impact of international capital flows is not limited to large banks with international exposure. Nevertheless, the observed effects are stronger for large banks as well as for banks with low levels of capitalisation, suggesting that agency issues reinforce the link between capital flows and bank lending.
TL;DR: In this paper, the authors study how employment protection laws (EPLs) affect corporate cash-holding decision and show that following an increase in the stringency of EPLs, firms' cash holdings increase significantly.
Abstract: We study how employment protection laws (EPLs) affect corporate cash-holding decision. By exploiting within-country changes in EPLs across 20 OECD countries as a source of variation in labor adjustment costs, we show that following an increase in the stringency of EPLs, firms’ cash holdings increase significantly. This relationship is stronger for firms with high labor turnover, no multinational presence, or financial constraints, indicating that labor adjustment cost raising distress risk is the mechanism in play. Cash buffers created by firms faced with stricter EPLs help them mitigate the underinvestment problem in subsequent episodes of industry-wide distress. Consistent with this precautionary motive, the market's valuation of excess cash is positively associated with the EPL strictness. We further demonstrate that the response of cash policy to changes in EPLs is distinct from that of debt policy or investment policy. Our evidence highlights the role of interaction between labor-market and financial frictions in determining the level and the value of corporate cash.
TL;DR: In this paper, the authors show that banks contract their supply of business credit in response to an exogenous increase in economic policy uncertainty, and that this contraction takes two main, distinct forms.
Abstract: Using a Vector Autoregressive framework of analysis, we show that banks contract their supply of business credit in response to an exogenous increase in economic policy uncertainty. This contraction takes two main, distinct forms. On the one hand, banks restrict their supply of spot funds, which we document using flows of loans and term loan originations. On the other hand, banks also curtail their provision of liquidity insurance, reducing the amount of new credit lines and embedding in them a pricing structure that reduces the probability of borrowers drawing down on the lines. At the peak of the responses, we find that a one-standard-deviation increase in EPU causes a contraction in the supply of business loans between 3 and 5% on the extensive margin.
TL;DR: This paper found that major corporate customer concentration is positively associated with a firm's future stock price crash risk and that this positive relation is more pronounced when the supplier firms have made a higher level of relationship-specific investments, have a poorer information environment, and/or face lower customer switching costs.
Abstract: Using a large sample of U.S. firms, we find that major corporate customer concentration is positively associated with a firm's future stock price crash risk. This positive relation is more pronounced when the supplier firms have made a higher level of relationship-specific investments, have a poorer information environment, and/or face lower customer switching costs. Our evidence suggests that exposure to an undiversified corporate customer base can have a negative bearing on a firm's crash risk.