07.09.2023 • 23/2023
The German economy continues its downturn
High inflation, increased interest rates, weak foreign demand and uncertainty among private households and firms are currently weighing on the German economy. In its autumn forecast, the Halle Institute for Economic Research (IWH) expects gross domestic product (GDP) to decline by 0.5% in 2023 and to increase by 0.9% in 2024.
Oliver Holtemöller
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Compensation Regulation in Banking: Executive Director Behavior and Bank Performance after the EU Bonus Cap
Stefano Colonnello, Michael Koetter, Konstantin Wagner
Journal of Accounting and Economics,
No. 1,
2023
Abstract
The regulation that caps executives’ variable compensation, as part of the Capital Requirements Directive IV of 2013, likely affected executive turnover, compensation design, and risk-taking in EU banking. The current study identifies significantly higher average turnover rates but also finds that they are driven by CEOs at poorly performing banks. Banks indemnified their executives by off-setting the bonus cap with higher fixed compensation. Although our evidence is only suggestive, we do not find any reduction in risk-taking at the bank level, one purported aim of the regulation.
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To Securitize or To Price Credit Risk?
Danny McGowan, Huyen Nguyen
Journal of Financial and Quantitative Analysis,
forthcoming
Abstract
Do lenders securitize or price loans in response to credit risk? Exploiting exogenous variation in regional credit risk due to foreclosure law differences along US state borders, we find that lenders securitize mortgages that are eligible for sale to the Government Sponsored Enterprises (GSEs) rather than price regional credit risk. For non-GSE-eligible mortgages with no GSE buyback provision, lenders increase interest rates as they are unable to shift credit risk to loan purchasers. The results inform the debate surrounding the GSEs' buyback provisions, the constant interest rate policy, and show that underpricing regional credit risk increases the GSEs' debt holdings.
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Market-implied Ratings and Their Divergence from Credit Ratings
Iftekhar Hasan, Winnie P. H. Poon, Jianfu Shen, Gaiyan Zhang
Journal of Financial Research,
No. 2,
2023
Abstract
In this article, we investigate the divergence between credit ratings (CRs) and Moody's market-implied ratings (MIRs). Our evidence shows that rating gaps provide incremental information to the market regarding issuers' default risk over CRs alone in the short horizon and outperform CRs over extended horizons. The predictive ability of rating gaps is greater for more opaque and volatile issuers. Such predictability was more pronounced during the 2008 financial crisis but weakened in the post-Dodd-Frank Act period. This finding is consistent with credit rating agencies' efforts to improve their performance when facing regulatory pressure. Moreover, our analysis identifies rating-gap signals that do (do not) lead to subsequent Moody's actions to place issuers on negative outlook and watchlists. We find that negative signals from MIR gaps have a real economic impact on issuers' fundamentals such as profitability, leverage, investment, and default risk, thus supporting the recovery-efforts hypothesis.
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AIECE General Report, Part 2, Spring 2023
Andrej Drygalla, Axel Lindner, Birgit Schultz
IWH Studies,
No. 4,
2023
Abstract
The Halle Institute for Economic Research (IWH) is a member of AIECE (Association d'Instituts Europeens de Conjoncture Economique/Association of European Conjuncture Institutes), an association of independent European institutes involved in surveying economic conditions and developments, and in short-term macroeconomic forecasting. The main objective of the Association is to stimulate the exchanges between its members with a view to improve their insight into international economic developments. This ranges from the exchange of statistical or institutional information to discussions on economic policy Guidelines to common research activities. The AIECE organises between its members an exchange of view, of information and of literature on international economic developments, in particular in Europe. The Association provides the framework for joint activities of its members in areas of common interest. Its structure allows its members to develop common views on the future cyclical development. In order to meet these objectives the Association has half-yearly plenary meetings, centred around a general report on the European conjuncture prepared in turn by one of the members in cooperation with the other member institutes, but also with discussions of the working group reports and of special surveys prepared by member institutes. In Spring 2023, the report was written by the Halle Institute for Economic Research (IWH).
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AIECE General Report, Part 1, Spring 2023
Andrej Drygalla, Axel Lindner, Birgit Schultz
IWH Studies,
No. 3,
2023
Abstract
The Halle Institute for Economic Research (IWH) is a member of AIECE (Association d'Instituts Europeens de Conjoncture Economique/Association of European Conjuncture Institutes), an association of independent European institutes involved in surveying economic conditions and developments, and in short-term macroeconomic forecasting. The main objective of the Association is to stimulate the exchanges between its members with a view to improve their insight into international economic developments. This ranges from the exchange of statistical or institutional information to discussions on economic policy Guidelines to common research activities. The AIECE organises between its members an exchange of view, of information and of literature on international economic developments, in particular in Europe. The Association provides the framework for joint activities of its members in areas of common interest. Its structure allows its members to develop common views on the future cyclical development. In order to meet these objectives the Association has half-yearly plenary meetings, centred around a general report on the European conjuncture prepared in turn by one of the members in cooperation with the other member institutes, but also with discussions of the working group reports and of special surveys prepared by member institutes. In Spring 2023, the report was written by the Halle Institute for Economic Research (IWH).
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22.06.2023 • 16/2023
Revival in service sectors, but industrial activity remains weak for the time being
After the recession during winter, the German economy will expand at a moderate pace in the coming quarters and despite higher interest rates, as private consumption will pick up again with slowly declining inflation and increased wage momentum. In its summer forecast, the Halle Institute for Economic Research (IWH) expects gross domestic product to decline by 0.3% in 2023, while growth of 1.7% is forecast for the coming year.
Oliver Holtemöller
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Economic Preferences for Risk-Taking and Financing Costs
Manthos D. Delis, Iftekhar Hasan, Maria Iosifidi, Chris Tsoumas
Journal of Corporate Finance,
June
2023
Abstract
We hypothesize and empirically establish that economic preferences for risk-taking in different subnational regions affect firm financing costs. We study this hypothesis by hand-matching firms' regions worldwide with the corresponding regional economic risk-taking preferences. We first show that higher regional risk-taking is positively associated with several measures of firm risk and investments. Subsequently, our baseline results show that credit and bond pricing increase when risk-taking preferences increase. For the loan of average size and maturity a one-standard-deviation increase in regional risk-taking increases interest expense by $0.54 million USD. We also find that these results are demand (firm)-driven and stronger for firms with more local shareholders.
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23.05.2023 • 14/2023
Analysis of earnings calls: Blathering managers harm their company
If a senior executive refuses to give information to professional investors, the company's stock market value drops afterwards. This is shown in a study by the Halle Institute for Economic Research (IWH) after evaluating
1.2 million answers from tele-phone conferences.
Fabian Wöbbeking
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