DPE Course Programme Archive
DPE Course Programme Archive 2023 2022 2021 2020 2019 2018 2017 2016 2015 2014 2013 2012 2023 Microeconomics several lecturers winter term 2023/2024 (IWH) Econometrics several…
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COVID-19 Pandemic and Global Corporate CDS Spreads
Iftekhar Hasan, Miriam Marra, Thomas Y. To, Eliza Wu, Gaiyan Zhang
Journal of Banking and Finance,
February
2023
Abstract
We examine the impact of the COVID-19 pandemic on the credit risk of companies around the world. We find that increased infection rates affect firms more adversely as reflected by the wider increase in their credit default swap (CDS) spreads if they are larger, more leveraged, closer to default, have worse governance and more limited stakeholder engagement, and operate in more highly exposed industries. We observe that country-level determinants such as GDP, political stability, foreign direct investment, and commitment to crisis management (income support, health and lockdown policies) also affect the sensitivity of CDS spreads to COVID-19 infection rates. A negative amplification effect exists for firms with high default probability in countries with fiscal constraints. A direct comparison between global CDS and stock markets reveals that the CDS market prices in a distinct set of corporate traits and government policies in pandemic times.
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The Disciplining Effect of Supervisory Scrutiny in the EU-wide Stress Test
Christoffer Kok, Carola Müller, Steven Ongena, Cosimo Pancaro
Journal of Financial Intermediation,
January
2023
Abstract
Relying on confidential supervisory data related to the 2016 EU-wide stress test, this paper presents novel empirical evidence that supervisory scrutiny associated to stress testing has a disciplining effect on bank risk. We find that banks that participated in the 2016 EU-wide stress test subsequently reduced their credit risk relative to banks that were not part of this exercise. Relying on new metrics for supervisory scrutiny that measure the quantity, potential impact, and duration of interactions between banks and supervisors during the stress test, we find that the disciplining effect is stronger for banks subject to more intrusive supervisory scrutiny during the exercise. We also find that a strong risk management culture is a prerequisite for the supervisory scrutiny to be effective. Finally, we show that a similar disciplining effect is not exerted neither by higher capital charges nor by more transparency and related market discipline induced by the stress test.
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CEO Network Centrality and the Likelihood of Financial Reporting Fraud
Salim Chahine, Yiwei Fang, Iftekhar Hasan, Mohamad Mazboudi
Abacus,
Nr. 4,
2021
Abstract
This paper investigates the association between CEO’s relative position in the social network and the likelihood of being involved in corporate fraud. Tracing a large sample of US publicly listed firms, we find that CEO network centrality is inversely related to the likelihood of fraudulent financial reporting. We also document a significant spillover effect of financial reporting behaviour from the dominant (most central) CEO to other CEOs in the same social network, suggesting that the ethical corporate behaviour of CEOs is, on average, influenced by that of their dominant CEO in the network. We further find that the role of CEO network centrality in reducing fraud risk is more prominent in firms with lower auditor quality. Overall, our results suggest that network centrality is an important CEO trait that promotes ethical financial reporting behaviour within social networks.
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Executive Equity Risk-Taking Incentives and Firms’ Choice of Debt Structure
Iftekhar Hasan, Walid Saffar, Yangyang Chen, Leon Zolotoy
Journal of Banking and Finance,
December
2021
Abstract
We examine how executive equity risk-taking incentives affect firms’ choice of debt structure. Using a longitudinal sample of U.S. firms, we document that when executive compensation is more sensitive to stock volatility (i.e., has higher vega), firms reduce their reliance on bank debt financing. We utilize the passage of the Financial Accounting Standard (FAS) 123R option-expensing regulation as an exogenous shock to management option compensation to account for potential endogeneity. In cross-sectional analyses, we find that the documented effect of vega is amplified among firms with higher growth opportunities and more opaque financial information; we also find vega's effect is mitigated in firms with limited abilities to tap into public debt market. Supplemental analyses suggest that firms with higher vega face more stringent bank loan covenants. We conclude that, by encouraging risk-taking, higher vega reduces firms’ reliance on bank debt financing in order to avoid more stringent bank monitoring.
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Financial Analysts' Career Concerns and the Cost of Private Debt
Bill Francis, Iftekhar Hasan, Liuling Liu, Qiang Wu, Yijiang Zhao
Journal of Corporate Finance,
April
2021
Abstract
Career-concerned analysts are averse to firm risk. Not only does higher firm risk require more effort to analyze the firm, thus constraining analysts' ability to earn more remuneration through covering more firms, but it also jeopardizes their research quality and career advancement. As such, career concerns incentivize analysts to pressure firms to undertake risk-management activities, thus leading to a lower cost of debt. Consistent with our hypothesis, we find a negative association between analyst career concerns and bank loan spreads. In addition, our mediation analysis suggests that this association is achieved through the channel of reducing firm risk. Additional tests suggest that the effect of analyst career concerns on loan spreads is more pronounced for firms with higher analyst coverage. Our study is the first to identify the demand for risk management as a key channel through which analysts help reduce the cost of debt.
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The State Expropriation Risk and the Pricing of Foreign Earnings
Iftekhar Hasan, Ibrahim Siraj, Amine Tarazi, Qiang Wu
Journal of International Accounting Research,
Nr. 2,
2021
Abstract
We examine the pricing of U.S. multinational firms' foreign earnings in regard to their risk of expropriation and unfair treatment by the governments of the countries in which their international subsidiaries are located. Using 8,891 firm-years observations during the 2001–2013 period, we find that the value relevance of foreign earnings increases with the improvement of the protection from state expropriation risk in the subsidiary host-countries. Our results are not driven by the earnings management practice, investor distraction, country informativeness, and political and trade relationship of a foreign country with the U.S. Furthermore, our results are robust to the confounding effects of country factors, measurement error in the variable of the risk of expropriation, the influence of private contracting institutions, and endogeneity in the decision of the location of subsidiaries.
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Structural Reforms in Banking: The Role of Trading
Jan Pieter Krahnen, Felix Noth, Ulrich Schüwer
Journal of Financial Regulation,
Nr. 1,
2017
Abstract
In the wake of the recent financial crisis, significant regulatory actions have been taken aimed at limiting risks emanating from banks’ trading activities. The goal of this article is to look at the alternative reforms in the US, the UK and the EU, specifically with respect to the role of proprietary trading. Our conclusions can be summarized as follows: First, the focus on a prohibition of proprietary trading, as reflected in the Volcker Rule in the US and in the current proposal of the European Commission (Barnier proposal), is inadequate. It does not necessarily reduce risk-taking and it is likely to crowd out desired trading activities, thereby possibly affecting financial stability negatively. Second, trading separation into legally distinct or ring-fenced entities within the existing banking organizations, as suggested under the Vickers proposal for the UK and the Liikanen proposal for the EU, is a more effective solution. Separation limits cross-subsidies between banking and proprietary trading and diminishes contagion risk, while still allowing for synergies and risk management across banking, non-proprietary trading, and proprietary trading.
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The Impact of Credit Default Swap Trading on Loan Syndication
Daniel Streitz
Review of Finance,
Nr. 1,
2016
Abstract
We analyze the impact of credit default swap (CDS) trading on bank syndication activity. Theoretically, the effect of CDS trading is ambiguous: on the one hand, CDS can improve risk-sharing and hence be a more flexible risk management tool than loan syndication; on the other hand, CDS trading can reduce bank monitoring incentives. We document that banks are less likely to syndicate loans and retain a larger loan fraction once CDS are actively traded on the borrower’s debt. We then discern the risk management and the moral hazard channel. We find no evidence that the reduced likelihood to syndicate loans is a result of increased moral hazard problems.
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Abnormal Real Operations, Real Earnings Management, and Subsequent Crashes in Stock Prices
Bill Francis, Iftekhar Hasan, Lingxiang Li
Review of Quantitative Finance and Accounting,
Nr. 2,
2016
Abstract
We study the impact of firms’ abnormal business operations on their future crash risk in stock prices. Computed based on real earnings management (REM) models, firms’ deviation in real operations (DROs) from industry norms is shown to be positively associated with their future crash risk. This association is incremental to that between discretionary accruals (DAs) and crash risk found by prior studies. Moreover, after Sarbanes–Oxley Act (SOX) of 2002, DRO’s predictive power for crash risk strengthens substantially, while DA’s predictive power essentially dissipates. These results are consistent with the prior finding that managers shift from accrual earnings management to REM after SOX. We further develop a suspect-firm approach to capture firms’ use of DRO for REM purposes. This analysis shows that REM-firms experience a significant increase in crash risk in the following year. These findings suggest that the impact of DRO on crash risk is at least partially through REM.
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