Real and Financial Innovation

This research group contributes to the scientific literature in three main ways. First, it provides new ways to identify shocks to the financial sector in financial systems and analyses how these shocks affect intermediaries with regard to risk taking (stability), efficiency (productivity) and the market structure in banking markets in general. Second, the identified external shocks are central to measure effects that financial intermediaries have on the real sector of financial systems. Because financial intermediaries play a special role in financial systems and are subject to many regulations, it is very important to understand how, e.g., risk taking incentives or different competition structures in banking markets affect real sector outcome like sales, GDP growth or employment. Third, the group focuses on the effects of foreign banks in financial systems and specifically how shocks to these banks (e.g., via their holding companies during the recent financial crisis) affect activities (e.g., lending) in the host countries.

Research Cluster
Productivity and Innovation

Your contact

Professor Dr Felix Noth
Professor Dr Felix Noth
Mitglied - Department Financial Markets
Send Message +49 345 7753-702

EXTERNAL FUNDING

07.2016 ‐ 12.2018

Relationship Lenders and Unorthodox Monetary Policy: Investment, Employment, and Resource Reallocation Effects

Leibniz Association

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.

Professor Michael Koetter, PhD
Professor Dr Steffen Müller

01.2015 ‐ 12.2019

Interactions between Bank-specific Risk and Macroeconomic Performance

German Research Foundation (DFG)

Professor Dr Felix Noth

Refereed Publications

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Decision-making Power in Foreign Subsidiaries and Its Effect on Financial Constraints: An Analysis for Selected European Transition Economies on the Basis of the IWH FDI Micro Database 2013

Felix Noth Andrea Gauselmann

in: Eastern European Economics, No. 6, 2016

Abstract

This article analyzes whether the distribution of decision-making power between the headquarters and foreign subsidiaries of multinational enterprises (MNEs) affects the foreign affiliates’ financial constraints. The findings show that not much decision-making power has as yet been moved from headquarters to foreign subsidiaries in European post-transition economies. The high concentration of decision-making power within the MNE’s subsidiary points toward higher financial constraints. However, a nonlinear effect is found, which suggests that financial constraints within the subsidiary only increase with more decision-making power when the power granted to the subsidiary is at a low level. For subsidiaries that already have autonomy in decision-making, granting more power in this regard has no effect on financial constraints.

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Relative Peer Quality and Firm Performance

Bill Francis Iftekhar Hasan Sureshbabu Mani Pengfei Ye

in: Journal of Financial Economics, No. 1, 2016

Abstract

We examine the performance impact of the relative quality of a Chief Executive Officer (CEO)’s compensation peers (peers to determine a CEO's overall compensation) and bonus peers (peers to determine a CEO's relative-performance-based bonus). We use the fraction of peers with greater managerial ability scores (Demerjian, Lev, and McVay, 2012) than the reporting firm to measure this CEO's relative peer quality (RPQ). We find that firms with higher RPQ earn higher stock returns and experience higher profitability growth than firms with lower RPQ. Learning among peers and the increased incentive to work harder induced by the peer-based tournament contribute to RPQ's performance effect.

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Informal or Formal Financing? Evidence on the Co-Funding of Chinese Firms

Hans Degryse Liping Lu Steven Ongena

in: Journal of Financial Intermediation, 2016

Abstract

Different modes of external finance provide heterogeneous benefits for the borrowing firms. Informal finance offers informational advantages whereas formal finance is scalable. Using unique survey data from China, we find that informal finance is associated with higher sales growth for small firms but lower sales growth for large firms. We identify a complementary effect between informal and formal finance for the sales growth of small firms, but not for large firms. Co-funding, thereby simultaneously using the informational advantage of informal finance and the scalability of formal finance, is therefore the optimal choice for small firms.

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Did TARP Distort Competition Among Sound Unsupported Banks?

Michael Koetter Felix Noth

in: Economic Inquiry, No. 2, 2016

Abstract

This study investigates if the Troubled Asset Relief Program (TARP) distorted price competition in U.S. banking. Political indicators reveal bailout expectations after 2009, manifested as beliefs about the predicted probability of receiving equity support relative to failing during the TARP disbursement period. In addition, the TARP affected the competitive conduct of unsupported banks after the program stopped in the fourth quarter of 2009. Loan rates were higher, and the risk premium required by depositors was lower for banks with higher bailout expectations. The interest margins of unsupported banks increased in the immediate aftermath of the TARP disbursement but not after 2010. No effects emerged for loan or deposit growth, which suggests that protected banks did not increase their market shares at the expense of less protected banks.

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Legal Insider Trading and Stock Market Liquidity

Hans Degryse Frank de Jong Jérémie Lefebvre

in: De Economist, No. 1, 2016

Abstract

This paper assesses the impact of legal trades by corporate insiders on the liquidity of the firm’s stock. For this purpose, we analyze two liquidity measures and one information asymmetry measure. The analysis allows us to study as well the effect of a change in insider trading regulation, namely the implementation of the Market Abuse Directive (European Union Directive 2003/6/EC) on the Dutch stock market. The first set of results shows that, in accordance with theories of asymmetric information, the intensity of legal insider trading in a given company is positively related to the bid-ask spread and to the information asymmetry measure. We also find that the Market Abuse Directive did not reduce significantly this effect. Secondly, analyzing liquidity and information asymmetry around the days of legal insider trading, we find that small and large capitalization stocks see their bid-ask spread and the permanent price impact increase when insiders trade. For mid-cap stocks, only the permanent price impact increases. Finally, we could not detect a significant improvement of these results following the change in regulation.

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Working Papers

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Predicting Earnings and Cash Flows: The Information Content of Losses and Tax Loss Carryforwards

Sandra Dreher Sebastian Eichfelder Felix Noth

in: IWH Discussion Papers, No. 30, 2017

Abstract

We analyse the relevance of losses, accounting information on tax loss carryforwards, and deferred taxes for the prediction of earnings and cash flows up to four years ahead. We use a unique hand-collected panel of German listed firms encompassing detailed information on tax loss carryforwards and deferred taxes from the tax footnote. Our out-of-sample predictions show that considering accounting information on tax loss carryforwards and deferred taxes does not enhance the accuracy of performance forecasts and can even worsen performance predictions. We find that common forecasting approaches that treat positive and negative performances equally or that use a dummy variable for negative performance can lead to biased performance forecasts, and we provide a simple empirical specification to account for that issue.

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Banking Globalization, Local Lending, and Labor Market Effects: Micro-level Evidence from Brazil

Felix Noth Matias Ossandon Busch

in: IWH Discussion Papers, No. 7, 2017

Abstract

This paper estimates the effect of a foreign funding shock to banks in Brazil after the collapse of Lehman Brothers in September 2008. Our robust results show that bank-specific shocks to Brazilian parent banks negatively affected lending by their individual branches and trigger real economic consequences in Brazilian municipalities: More affected regions face restrictions in aggregated credit and show weaker labor market performance in the aftermath which documents the transmission mechanism of the global financial crisis to local labor markets in emerging countries. The results represent relevant information for regulators concerned with the real effects of cross-border liquidity shocks.

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Financial Transaction Taxes: Announcement Effects, Short-run Effects, and Long-run Effects

Sebastian Eichfelder Mona Lau Felix Noth

in: IWH Discussion Papers, No. 4, 2017

Abstract

We analyze the impact of the French 2012 financial transaction tax (FTT) on trading volumes, stock prices, liquidity, and volatility. We extend the empirical research by identifying FTT announcement and short-run treatment effects, which can distort difference-in-differences estimates. In addition, we consider long-run volatility measures that better fit the French FTT’s legislative design. While we find strong evidence of a positive FTT announcement effect on trading volumes, there is almost no statistically significant evidence of a long-run treatment effect. Thus, evidence of a strong reduction of trading volumes resulting from the French FTT might be driven by announcement effects and short-term treatment effects. We find evidence of an increase of intraday volatilities in the announcement period and a significant reduction of weekly and monthly volatilities in the treatment period. Our findings support theoretical considerations suggesting a stabilizing impact of FTTs on financial markets.

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Bank-specific Shocks and House Price Growth in the U.S.

F. Bremus Thomas Krause Felix Noth

in: IWH Discussion Papers, No. 3, 2017

Abstract

This paper investigates the link between mortgage supply shocks at the banklevel and regional house price growth in the U.S. using micro-level data on mortgage markets from the Home Mortgage Disclosure Act for the 1990-2014 period. Our results suggest that bank-specific mortgage supply shocks indeed affect house price growth at the regional level. The larger the idiosyncratic shocks to newly issued mortgages, the stronger is house price growth. We show that the positive link between idiosyncratic mortgage shocks and regional house price growth is very robust and economically meaningful, however not very persistent since it fades out after two years.

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How Effective is Macroprudential Policy during Financial Downturns? Evidence from Caps on Banks' Leverage

Manuel Buchholz

in: Working Papers of Eesti Pank, No. 7, 2015

Abstract

This paper investigates the effect of a macroprudential policy instrument, caps on banks' leverage, on domestic credit to the private sector since the Global Financial Crisis. Applying a difference-in-differences approach to a panel of 69 advanced and emerging economies over 2002–2014, we show that real credit grew after the crisis at considerably higher rates in countries which had implemented the leverage cap prior to the crisis. This stabilising effect is more pronounced for countries in which banks had a higher pre-crisis capital ratio, which suggests that after the crisis, banks were able to draw on buffers built up prior to the crisis due to the regulation. The results are robust to different choices of subsamples as well as to competing explanations such as standard adjustment to the pre-crisis credit boom.

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