Financial System Adaptability and Resilience
This research group investigates critical aspects of financial system adaptability and resilience. First, it analyses the impact of natural disasters on financial systems. Second, the group aims to investigate the effects of political preferences for the green transition. Third, the group's research analyses the role of culture in economies.
Research ClusterFinancial Resilience and Regulation
07.2016 ‐ 12.2018
Relationship Lenders and Unorthodox Monetary Policy: Investment, Employment, and Resource Reallocation Effects
We combine a number of unique and proprietary data sources to measure the impact of relationship lenders and unconventional monetary policy during and after the European sovereign debt crisis on the real economy. Establishing systematic links between different research data centers (Forschungsdatenzentren, FDZ) and central banks with detailed micro-level information on both financial and real activity is the stand-alone proposition of our proposal. The main objective is to permit the identification of causal effects, or their absence, regarding which policies were conducive to mitigate financial shocks and stimulate real economic activities, such as employment, investment, or the closure of plants.
01.2015 ‐ 12.2019
Interactions between Bank-specific Risk and Macroeconomic Performance
German Research Foundation (DFG)
The Impact of Financial Transaction Taxes on Stock Markets: Short-Run Effects, Long-Run Effects, and Reallocation of Trading Activity
in: National Tax Journal, No. 3, 2022
We investigate the French 2012 financial transaction tax (FTT) and find robust evidence for anticipation effects before the implementation date. Controlling for short-run effects, we only find weak evidence for a long-run reduction in trading activity. Thus, the main impact of the French FTT on trading activity is short-run. In line with liquidity clientele effects, we find a more potent effect for low-liquidity stocks and a reallocation of trading to high-liquidity stocks from the Supplemental Liquidity Provider (SLP) program. Finally, we find weak evidence for a persistent volatility reduction but no indication of a significant FTT impact on price efficiency.
Firm Social Networks, Trust, and Security Issuances
in: European Journal of Finance, No. 4, 2022
We observe that public firms are more likely to issue seasoned stocks rather than bonds when theirs boards are more socially-connected. These connected issuers experience better announcement-period stock returns and attract more institutional investors. This social-connection effect is stronger for firms with severe information asymmetry, higher risk of being undersubscribed, and more visible to investors. Our conjecture is this social-network effect is driven by trust in issuing firms. Given stocks are more sensitive to trust, these trusted firms are more likely to issue stocks than bonds. Trustworthiness plays an important role in firms’ security issuances in capital markets.
Social Capital, Trusting, and Trustworthiness: Evidence from Peer-to-Peer Lending
in: Journal of Financial and Quantitative Analysis, No. 4, 2022
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.
Bank Failures, Local Business Dynamics, and Government Policy
in: Small Business Economics, No. 4, 2022
Using MSA-level data over 1994–2014, we study the effect of bank failures on local business dynamics, in the form of net business formation and net job creation. We find that at least one bank failure in the metropolitan statistical area (MSA) with the mean population prevents approximately 475 net businesses from forming in that area, compared with MSAs that experience no bank failures, ceteris paribus. The equivalent effect on net job creation is 16,433 net job losses. Our results are even stronger for small businesses, which are usually more dependent on bank-firm relationships. These effects point to significant welfare losses stemming from bank failures, highlighting an important role for government intervention. We show that the Troubled Asset Relief Program (TARP) is effective in reducing the negative effects of bank failures on local business dynamics. This positive effect of TARP is quite uniform across small and large firms.
Banking Reform, Risk-Taking, and Accounting Quality: Evidence from Post-Soviet Transition States
in: Journal of International Accounting Research, No. 1, 2022
The drastic banking reform within Central and Eastern Europe following the collapse of the Soviet Union provides an ideal quasi-experimental design to examine the causal effects of institutional development on accounting quality (AQ). We find that banking reform spurs significant improvement in predictive power of earnings and reductions in earnings smoothing, earnings-inflating discretionary provisions, and avoidance of reporting losses. These effects hold under alternative model specifications and after considering concurrent institutional developments. In contrast, corporate reform shows no such effects, refuting the alternative explanation that unobserved factors affect both reform speed in general and the quality of financial reporting. We further identify four specific reformative actions that are integral to the drastic banking reform process where prudential regulation contributes the most to the observed AQ improvement. It supports the conjecture that banking reform improves AQ by reducing banks' risk-taking behaviors and, as a result, their motive behind accounting manipulation.
Monetary Policy under the Microscope: Intra-bank Transmission of Asset Purchase Programs of the ECB
in: IWH Discussion Papers, No. 9, 2015
With a unique loan portfolio maintained by a top-20 universal bank in Germany, this study tests whether unconventional monetary policy by the European Central Bank (ECB) reduced corporate borrowing costs. We decompose corporate lending rates into refinancing costs, as determined by money markets, and markups that the bank is able to charge its customers in regional markets. This decomposition reveals how banks transmit monetary policy within their organizations. To identify policy effects on loan rate components, we exploit the co-existence of eurozone-wide security purchase programs and regional fiscal policies at the district level. ECB purchase programs reduced refinancing costs significantly, even in an economy not specifically targeted for sovereign debt stress relief, but not loan rates themselves. However, asset purchases mitigated those loan price hikes due to additional credit demand stimulated by regional tax policy and enabled the bank to realize larger economic margins.
Corporate Governance Structures and Financial Constraints in Multinational Enterprises – An Analysis in Selected European Transition Economies on the Basis of the IWH FDI Micro Database 2013 –
in: IWH Discussion Papers, No. 3, 2015
In our analysis, we consider the distribution of decision power over financing and investment between MNEs’ headquarters and foreign subsidiaries and its influence on the foreign affiliates’ financial restrictions. Our research results show that headquarters of multinational enterprises have not (yet) moved much decision power to their foreign subsidiaries at all. We use data from the IWH FDI Micro Database which contains information on corporate governance structures and financial restrictions of 609 enterprises with a foreign investor in Hungary, Poland, the Czech Republic, Slovakia, Romania and East Germany. We match data from Bureau van Dijk’s AMADEUS database on financial characteristics. We find that a high concentration of decision power within the MNE’s headquarter implicates high financial restrictions within the subsidiary. Square term results show, however, that the effect of financial constraints within the subsidiary decreases and finally turns insignificant when decision power moves from headquarter to subsidiary. Thus, economic policy should encourage foreign investors in the case of foreign acquisition of local enterprises to leave decision power within the enterprise and in the case of Greenfield investment to provide the newly established subsidiaries with as much power over corporate governance structures as possible.