Stock Liquidity, Empire Building, and Valuation
Sris Chatterjee, Iftekhar Hasan, Kose John, An Yan
Journal of Corporate Finance,
2021
Abstract
We conjecture that high stock liquidity negatively affects firm valuation by inducing inefficient investment. Using takeovers of public targets to study the empire-building motive, we find that a liquid firm is more likely than an illiquid firm to acquire a public firm. Such a takeover by a bidder with higher stock liquidity destroys bidder value to a larger degree. These patterns occur in both stock and cash acquisitions and hold after we use decimalization of tick size as a quasi-exogenous shock to stock liquidity. Finally, we show that financial constraints and corporate governance play important roles in the effects of stock liquidity on empire building in mergers and acquisitions.
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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,
No. 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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Micro-mechanisms behind Declining Labor Shares: Rising Market Power and Changing Modes of Production
Matthias Mertens
International Journal of Industrial Organization,
March
2022
Abstract
I derive a micro-founded framework showing how rising firm market power on product and labor markets and falling aggregate labor output elasticities provide three competing explanations for falling labor shares. I apply my framework to 20 years of German manufacturing sector micro data containing firm-specific price information to study these three distinct drivers of declining labor shares. I document a severe increase in firms’ labor market power, whereas firms’ product market power stayed comparably low. Changes in firm market power and a falling aggregate labor output elasticity each account for one half of the decline in labor's share.
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Inequality in Life and Death
Martin S. Eichenbaum, Sergio Rebelo, Mathias Trabandt
IMF Economic Review,
March
2022
Abstract
We argue that the COVID epidemic disproportionately affected the economic well-being and health of poor people. To disentangle the forces that generated this outcome, we construct a model that is consistent with the heterogeneous impact of the COVID recession on low- and high-income people. According to our model, two-thirds of the inequality in COVID deaths reflect preexisting inequality in comorbidity rates and access to quality health care. The remaining third stems from the fact that low-income people work in occupations where the risk of infection is high. Our model also implies that the rise in income inequality generated by the COVID epidemic reflects the nature of the goods that low-income people produce. Finally, we assess the health-income trade-offs associated with fiscal transfers to the poor and mandatory containment policies.
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Kommentar: Brauchen wir ein Öl- und Gasembargo?
Reint E. Gropp
Wirtschaft im Wandel,
No. 2,
2022
Abstract
Die russische Wirtschaft ist durch die westlichen Sanktionen nach dem Einmarsch in die Ukraine schwer getroffen. Die Wirtschaft schrumpft um über 8%, die Inflation hat sich auf knapp 20% erhöht. Die meisten internationalen Firmen haben sich aus Russland zurückgezogen. Viele reiche Russen haben keinen Zugang mehr zu ihren Vermögenswerten im Ausland, Kapitalverkehrskontrollen verhindern, dass Russen und russische Firmen Fremdwährung kaufen können, und sowohl die russischen Banken als auch die russische Zentralbank haben fast keine Möglichkeiten mehr, mit ausländischen Banken Transaktionen durchzuführen. Gleichzeitig hat Putin das Gegenteil von dem erreicht, was er laut eigener Aussage wollte: eine Schwächung der NATO, der Europäischen Union und des Westens im Allgemeinen. Schweden und Finnland haben um die Aufnahme in die NATO gebeten und damit die gemeinsame Grenze der NATO mit Russland um über 800 km verlängert. Die Chancen, dass die Ukraine in die EU aufgenommen wird, haben sich deutlich erhöht, und der Westen ist mit wenigen Ausnahmen (Ungarn, Türkei) geeinter denn je.
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Macroprudential Policy and Intra-group Dynamics: The Effects of Reserve Requirements in Brazil
Chris Becker, Matias Ossandon Busch, Lena Tonzer
Abstract
This paper examines whether intra-group dynamics matter for the transmission of macroprudential policy. Using novel bank-level data on the Brazilian banking system, we investigate the effect of reserve requirements targeting headquarter banks’ deposit share on credit supply by their municipal bank branches. For identification purposes, we exploit that reserve requirements are adjusted following global economic cycles. Our results reveal a lending channel of reserve requirements for branches whose parent banks are more exposed to targeted deposits. Branch ownership and exposure to internal liquidity are central in explaining the results. Our findings reveal limitations in current macroprudential policy frameworks.
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Social Capital, Trusting, and Trustworthiness: Evidence from Peer-to-Peer Lending
Iftekhar Hasan, Qing He, Haitian Lu
Journal of Financial and Quantitative Analysis,
No. 4,
2022
Abstract
How does social capital affect trust? Evidence from a Chinese peer-to-peer lending platform shows regional social capital affects the trustee’s trustworthiness and the trustor’s trust propensity. Ceteris paribus, borrowers from higher social capital regions receive larger bid from individual lenders, have higher funding success, larger loan size, and lower default rates, especially for low-quality borrowers. Lenders from higher social capital regions take higher risks and have higher default rates, especially for inexperienced lenders. Cross-regional transactions are most (least) likely to be realized between parties from high (low) social capital regions.
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