Abstracts

  

We examine how debt priority structure affects bank funding costs and soundness. Leveraging an unexplored natural experiment that changes the priority of claims on banks’ assets, we document asymmetric effects that are consistent with changes in monitoring intensity by various creditors depending on whether creditors move up or down the priority ladder. The enactment of depositor preference laws which confer priority on depositors reduces deposit rates but increases non-deposit rates. Importantly, subordinating non-depositor claims reduces bank risk-taking, consistent with market discipline. This insight highlights a role for debt priority structure in the regulatory framework.  

We measure market reactions to announcements concerning liquidity regulation, a key innovation in the Basel framework. Our initial results show that liquidity regulation attracts negative abnormal returns. However, the price responses are less pronounced when coinciding announcements concerning capital regulation are backed out, suggesting that markets do not consider liquidity regulation to be binding. Bank- and country-specific characteristics also matter. Liquid balance sheets and high charter values increase abnormal returns while smaller long-term funding mismatches reduce abnormal returns. Banks located in countries with large government debt and tight interbank conditions or with prior domestic liquidity regulation display lower abnormal returns.

We exploit exogenous legislative changes that alter the priority structure of different classes of debt to study how debtholder monitoring incentives affect bank earnings opacity. We present novel evidence that exposing nondepositors to greater losses in bankruptcy reduces earnings opacity, especially for banks with larger shares of nondeposit funding, listed banks, and independent banks. The reduction in earnings opacity is driven by a lower propensity to overstate earnings and is more pronounced among larger banks, and in banks with larger real estate loan exposure. Our findings highlight the importance of creditors’ monitoring incentives in improving the quality of information disclosure. 

We present a novel way to examine macro-financial linkages by focusing on the real effects of bank supervisors’ enforcement actions. Exploiting plausibly exogenous variation in supervisory monitoring intensity, we show that enforcement actions in single-market banks trigger temporarily large adverse effects for the macroeconomy by reducing personal income growth, the number of establishments, and increasing unemployment. These effects are related to contractions in bank lending and liquidity creation, and are more pronounced when we consider enforcement actions on both single-market and multi-market banks, and in counties with fewer banks and greater external financial dependence.

We investigate the role of CEO power and government monitoring on bank dividend policy for a sample of 109 European listed banks for the period 2005–2013. We employ three main proxies for CEO power: CEO ownership, CEO tenure, and unforced CEO turnover. We show that CEO power has a negative impact on dividend payout ratios and on performance, suggesting that entrenched CEOs do not have the incentive to increase payout ratios to discourage monitoring from minority shareholders. Stronger internal monitoring by board of directors, as proxied by larger ownership stakes of the board members, increases performance but decreases payout ratios. These findings are contrary to those from the entrenchment literature for non-financial firms. Government ownership and the presence of a government official on the board of directors of the bank, also reduces payout ratios, in line with the view that government is incentivized to favor the interest of bank creditors before the interest of minority shareholders. These results show that government regulators are mainly concerned about bank safety and this allows powerful CEOs to distribute low payouts at the expense of minority shareholders.

We are the first to examine the impact of gender diversity on banks' boards on the probability and size of public bailouts. Our findings, based on a sample of listed European banks over the period 2005–2017, suggest that banks with more gender-diverse boards are less likely to receive a public bailout and receive a lower amount of bailout funds as a percentage of total assets than banks with less gender-diverse boards. Specifically, an increase by one standard deviation in gender diversity decreases the probability of a bailout by at least 2.44%, a significant reduction considering that the unconditional probability is 18.7%. Gender diversity is also positively related to bank performance, as proxied by ROA and Tobin's Q and with dividend payout ratios, consistent with the hypothesis that female directors are better monitors than male directors. These results are robust to a variety of econometric approaches and provide support for recent reforms in several EU countries regarding gender quotas. 

We examine the impact of Federal Reserve stress tests from 2009 to 2016 on U.S. bank liquidity creation. Empirical results show that regulatory stress tests have a negative effect on both on-and off-balance sheet bank liquidity creation and asset-side liquidity creation. As banks enter the stress tests, they reduce their liquidity creation to avoid failing the stress tests. These results are consistent with the hypothesis that banks manage their risk exposures to meet higher capital requirements. The negative effect of stress testing on liquidity creation continues to persist in the quarters after the stress tests. Finally, stress test banks appear to increase liability-side liquidity creation. These findings highlight that the enhanced financial stability from greater regulatory scrutiny may be achieved at the expense of financial intermediation.

Following a natural disaster, the rate of economic growth recovers faster in less competitive banking markets. A 10% reduction in competition increases the rate of economic growth by 0.3%. In less competitive markets, banks respond to a disaster by increasing the supply of real estate credit by refinancing mortgage loans but do not lend more to businesses or consumers. Instead, government agencies provide disaster loans to affected businesses and households. Smaller, profitable and well-capitalized institutions that rely more on traditional retail banking originate most mortgage credit. 

We investigate the impact of corporate diversification on stock risk. For identification, we exploit an exogenous shock on volatility expectations related to COVID-19 lockdowns resulting in a period of high volatility. We show that firms that diversify only internationally experience a lower post-shock increase in daily volatility. However, diversifying only by business segment leads to a higher increase in post-shock daily volatility. Our main results are robust to different proxies for international and business diversification and daily volatility. Overall, these findings provide a more nuanced picture of the potential impact of corporate diversification on stock risk.

We estimate the impact of the Cap-and-Trade Program (CATP) in California on regional greenhouse gas emissions and economic growth. Our preferred identification strategies, based on spatial distance and county-level contiguity, fail to provide evidence of a reduction in regional emissions or economic growth due to the CATP. Multi-state organisations do not transfer emissions to non-Californian facilities, but parent-level concentration in emissions changes, consistent with an insofar unexplored form of regulatory arbitrage. Overall, our results highlight the importance of a regional approach when designing climate policies and evaluating their effects.

We exploit announcements related to targeted longer-term financing operations (TLTROs) as exogenous shocks in investor perceptions to test recent theories on bank funding liquidity (Liu 2015, Ahnert et al. 2019). We find that banks with high derivative holdings and more exposed to sovereign credit risk respond better to the announcements, consistent with the view that lower funding costs benefit banks with higher asset encumbrance and located in more vulnerable Eurozone countries. The TLTRO announcements also elicit reductions in short positions on bank stocks relative to stocks of non-financial corporations without impairing their market liquidity. Robustness tests rule out that our results are driven by confounding events and anticipation effects. Placebo tests confirm that the TLTRO announcements are driving the estimated price reactions and changes in short positions.

The COVID-19 pandemic has resulted in governments playing increasingly prominent roles as active economic agents. However, state capitalism does not necessarily serve broad developmental purposes, and rather can be directed to supporting sectional and private interests. As the literature on variegated capitalism alerts us, governments and other actors regularly devise fixes in response to a systemic crisis, but the focus, scale and scope of the interventions vary considerably, according to the constellation of interests. Rapid progress with vaccines notwithstanding, the UK government’s response to COVID-19 has been associated with much controversy, not only because of an extraordinarily high death rate, but also because of allegations of cronyism around the granting of government contracts and bailouts. We focus on the latter, investigating more closely who got bailed out. We find that badly affected sectors (e.g., hospitality, transportation) and larger employers were more likely to get bailouts. However, the latter also favored the politically influential and those who had run up debt profligately. Although, as with state capitalism, crony capitalism is most often associated with emerging markets, we conclude that the two have coalesced into a peculiarly British variety, but one that has some common features with other major liberal markets. This might suggest that the eco-systemic dominance of the latter is coming to an end, or, at the least, that this model is drifting towards one that assumes many of the features commonly associated with developing nations.

We study the consequences of unobserved heterogeneity when employing different econometric methods in the estimation of two major value-relevance models: the Price Regression Model (PRM) and the Return Regression Model (RRM). Leveraging a large panel data set of European listed companies, we first demonstrate that robust Hausman tests and Breusch-Pagan Lagrange Multiplier tests are of fundamental importance to choose correctly among a fixed-effects model, a random-effects model, or a pooled OLS model. Second, we provide evidence that replacing firm fixed-effects with country and industry fixed-effects can lead to large differences in the magnitude of the key coefficients, with serious consequences for the interpretation of the effect of changes in earnings and book values per share on firm value. Finally, we offer recommendations to applied researchers aiming to improve the robustness of their econometric strategy.

We are the first to examine the market reaction to 13 announcement dates related to IFRS 9 for over 5400 European listed firms. We find an overall positive reaction to the introduction of IFRS 9. The regulation is particularly beneficial to shareholders of firms in countries with weaker rule of law and a smaller divergence between local GAAP and IAS 39. Bootstrap simulations rule out the possibility that sampling error or data mining are driving our findings. Our main findings are also robust to confounding events and the extent of the media coverage for each event. These results suggest that investors perceive the new regulation as shareholder-wealth enhancing and support the view that stronger comparability across accounting standards of European firms is beneficial to international investors and outweighs the costs of poorer firm-specific information.

In non-financial firms, higher risk taking results in lower dividend payout ratios. In banking, public guarantees may result in a positive relationship between dividend payout ratios and risk taking. I investigate the interplay between dividend payout ratios and bank risk-taking allowing for the effect of charter values and capital adequacy regulation. I find a positive relationship between bank risk-taking and dividend payout ratios. Proximity to the required capital ratio and a high charter value reduce the impact of bank risk-taking on the dividend payout ratio. My results are robust to different proxies for the dividend payout ratio and bank risk-taking.

We investigate how investors perceive the adoption of the expected-loss model (ELM) for impairment incorporated in IFRS 9. Using a sample of European listed banks covering the period of the standard-setting process of IFRS 9, we examine whether the market perceives the new regulation to increase shareholder wealth. First, we document a positive market reaction to the ELM adoption events. Second, we find that investors perceive that the potential benefits of ELM are more pronounced for larger banks, banks with lower profitability and higher systemic risk, and for those that received a public bailout and with more positively skewed returns. Overall, these results support a “monitoring” channel suggesting that ELM may lead to greater bank transparency and more effective market discipline, fundamental for improving financial stability. 

The COVID-19 pandemic has resulted in governments playing increasingly prominent roles as active economic agents. However, state capitalism does not necessarily serve broad developmental purposes, and rather can be directed to supporting sectional and private interests. As the literature on variegated capitalism alerts us, governments and other actors regularly devise fixes in response to a systemic crisis, but the focus, scale, and scope of the interventions vary considerably, according to the constellation of interests. Rapid progress with vaccines notwithstanding, the UK government's response to COVID-19 has been associated with much controversy, not only because of an extraordinarily high death rate, but also because of allegations of cronyism around the granting of government contracts and bailouts. We focus on the latter, investigating more closely who got bailed out. We find that badly affected sectors (e.g. hospitality, transportation) and larger employers were more likely to get bailouts. However, the latter also favored the politically influential and those who had run up debt profligately. Although, as with state capitalism, crony capitalism is most often associated with emerging markets, we conclude that the two have coalesced into a peculiarly British variety, but one that has some common features with other major liberal markets. This might suggest that the eco-systemic dominance of the latter is coming to an end, or, at the least, that this model is drifting towards one that assumes many of the features commonly associated with developing nations. 

I examine the predictability of dividend cuts based on the time interval between dividend announcement dates using a large dataset of US firms from 1971 to 2014. The longer the time interval between dividend announcements, the larger the probability of a cut in the dividend per share, consistent with the view that firms delay the release of bad news.

The properties of an iterative procedure for the estimation of the parameters of an ARFIMA process are investigated in a Monte Carlo study. The estimation procedure is applied to stock returns data for 15 countries. 

The properties of statistical tests for hypotheses concerning the parameters of the multifractal model of asset returns (MMAR) are investigated, using Monte Carlo techniques. We show that, in the presence of multifractality, conventional tests of long memory tend to over-reject the null hypothesis of no long memory. Our test addresses this issue by jointly estimating long memory and multifractality. The estimation and test procedures are applied to exchange rate data for 12 currencies. Among the nested model specifications that are investigated, in 11 out of 12 cases, daily returns are most appropriately characterized by a variant of the MMAR that applies a multifractal time-deformation process to NIID returns. There is no evidence of long memory.

We test for departures from normal and independent and identically distributed (NIID) log returns, for log returns under the alternative hypothesis that are self-affine and either long-range dependent, or drawn randomly from an L-stable distribution with infinite higher-order moments. The finite sample performance of estimators of the two forms of self-affinity is explored in a simulation study. In contrast to rescaled range analysis and other conventional estimation methods, the variant of fluctuation analysis that considers finite sample moments only is able to identify both forms of self-affinity. When log returns are self-affine and long-range dependent under the alternative hypothesis, however, rescaled range analysis has higher power than fluctuation analysis. The techniques are illustrated by means of an analysis of the daily log returns for the indices of 11 stock markets of developed countries. Several of the smaller stock markets by capitalization exhibit evidence of long-range dependence in log returns.

The properties of an iterative procedure for the estimation of the parameters of an ARFIMA process are investigated in a Monte Carlo study. The estimation procedure is applied to stock returns data for 15 countries.

We report an empirical analysis of long-range dependence in the returns of eight stock market indices, using the Rescaled Range Analysis (RRA) to estimate the Hurst exponent. Monte Carlo and bootstrap simulations are used to construct critical values for the null hypothesis of no long-range dependence. The issue of disentangling short-range and long-range dependence is examined. Pre-filtering by fitting a (short-range) autoregressive model eliminates part of the long-range dependence when the latter is present, while failure to pre-filter leaves open the possibility of conflating short-range and long-range dependence. There is a strong evidence of long-range dependence for the small central European Czech stock market index PX-glob, and a weaker evidence for two smaller western European stock market indices, MSE (Spain) and SWX (Switzerland). There is little or no evidence of long-range dependence for the other five indices, including those with the largest capitalizations among those considered, DJIA (US) and FTSE350 (UK). These results are generally consistent with prior expectations concerning the relative efficiency of the stock markets examined. 

Since 2005, European-listed companies have been required to prepare their consolidated financial statements in accordance with the International Financial Reporting Standards (IFRS). We examine whether value relevance increased following the introduction of IFRS, using a sample of 3,721 companies listed on five European stock exchanges: Frankfurt, Madrid, Paris, London, and Milan. We find mixed evidence of an increase in value relevance. However, the influence of earnings on share price increased following the introduction of IFRS in Germany, France, and the United Kingdom, while the influence of book value of equity decreased (except for the United Kingdom).

Tests for random walk behaviour in the Italian stock market are presented, based on an investigation of the fractal properties of the log return series for the Mibtel index. The random walk hypothesis is evaluated against alternatives accommodating either unifractality or multifractality. Critical values for the test statistics are generated using Monte Carlo simulations of random Gaussian innovations. Evidence is reported of multifractality, and the departure from random walk behaviour is statistically significant on standard criteria. The observed pattern is attributed primarily to fat tails in the return probability distribution, associated with volatility clustering in returns measured over various time scales.

We examine the market reaction to events related to the standard-setting process of International Financial Reporting Standard (IFRS) 9 for over 3,000 European firms that have adopted IFRS. We find that the market reaction to IFRS 9 is largely affected by firm-specific factors associated with information quality and information asymmetry. In particular, lower information asymmetry and higher information quality have a positive effect on market-adjusted returns. This is in conflict with the common view that IFRS 9 will improve accounting quality for those firms that need it most (namely, small firms with low liquidity and concentrated ownership structure).