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Journal of Banking & Finance
Number of Followers: 215  
 
  Hybrid Journal Hybrid journal (It can contain Open Access articles)
ISSN (Print) 0378-4266 - ISSN (Online) 0378-4266
Published by Elsevier Homepage  [3206 journals]
  • Regret-based capital asset pricing model
    • Abstract: Publication date: Available online 18 February 2020Source: Journal of Banking & FinanceAuthor(s): Jie QinAbstractThis study examines the influence of regret aversion on asset pricing by proposing a regret-based capital asset pricing model in which individuals maximize the expected returns from chosen portfolios of assets while minimizing anticipated regrets. In equilibrium, a closed-form pricing formula is derived, whereby a risky asset's excess return is proportional to its “regret beta” that measures the exposure to investors’ emotions. The market as a whole pays investors a positive “regret premium” as compensation for regret aversion. As such, this study proposes a conceptual framework to understand the aggregate effects of regret. The model indicates that employing a regret-related beta can help explain cross-sectional returns. It also implies that regret aversion is a possible reason for the flat security market line and high equity premium.
       
  • Where should I publish to get promoted' A finance journal ranking
           based on business school promotions
    • Abstract: Publication date: Available online 16 February 2020Source: Journal of Banking & FinanceAuthor(s): Emanuele Bajo, Massimiliano Barbi, David HillierAbstractHiring and promotion committees consider a broad range of journals and the relative importance of journal titles is highly subjective. In this paper, we present a novel approach to objective Finance journal ranking by considering the impact of journal publications on career advancement. While the top three journals (Journal of Finance, Journal of Financial Economics, Review of Financial Studies) are significant drivers of promotion success, other journals are nearly as important, particularly for business schools outside of the top tier. In rank order, these are the Journal of Banking and Finance, the Journal of Financial and Quantitative Analysis, the Journal of Corporate Finance, and the Review of Finance.
       
  • Sectoral risk-weights and macroprudential policy
    • Abstract: Publication date: March 2020Source: Journal of Banking & Finance, Volume 112Author(s): Alexander Hodbod, Stefanie J. Huber, Konstantin VasilevAbstractThis paper analyses bank capital requirements in a general equilibrium model by evaluating the implications of different designs of such requirements regarding their impact on the tendency of banks to amplify the business cycle. We compare the Basel-established Internal Ratings-Based (IRB) approach to risk-weighting assets with an alternative macroprudential approach which sets risk-weights in response to sectoral measures of leverage. The different methods are compared in a crisis scenario, where the crisis originates from the housing market that affects the banking sector and is then transmitted to the wider economy. We investigate both boom and bust phases of the crisis by simulating an unrealized news shock that leads to a gradual build up and rapid crash in the economy. Our results suggest that the IRB approach creates procyclicality in regulatory capital requirements and thereby works to amplify both boom and bust phases of the financial cycle. On the other hand, our proposed macroprudential approach to setting risk-weights leads to counter-cyclicality in regulatory capital requirements and thereby attenuates the financial cycle.
       
  • Return comovement
    • Abstract: Publication date: March 2020Source: Journal of Banking & Finance, Volume 112Author(s): David Parsley, Helen PopperAbstractWe examine intra-market return comovement within each of 33 economies’ stock exchanges from 1995 through 2013 using a model-free comovement gauge. We find that the stability of international macroeconomic trilemma policies, the number of crises, and the extent of turnover overshadow the empirical relevance of many variables previously thought to be important for intra-market comovement, including country risk, corruption, and investor protections.We also use a much longer historical sample of U.S. firms to examine compositional explanations of the well-known U.S. comovement decline and to decompose the comovement into trend and cycle. Our findings challenge the compositional explanations of the decline; additionally, they suggest that the most recent uptick reflects short-term conditions, rather than a trend reversal.
       
  • The other (commercial) real estate boom and bust: The effects of risk
           premia and regulatory capital arbitrage
    • Abstract: Publication date: March 2020Source: Journal of Banking & Finance, Volume 112Author(s): John V. Duca, David C. LingAbstractIn the 2000 s, U.S. commercial real estate (CRE) prices experienced a boom and bust as dramatic as the more widely analyzed swings in house prices and contributed significantly to bank failures. We model short-run and long-run movements in capitalization rates (rent-to-price-ratio) and risk premia for office building and apartments. In the mid-2000s’ boom, CRE prices were mainly driven by declines in required risk premia that stemmed from a weakening of capital requirements. In the bust, CRE price declines were initially driven by a jump in general risk premia and later by a tightening of effective capital requirements on commercial mortgage-backed securities (CMBS) from the Dodd-Frank Act. The subsequent recovery in CRE prices was induced and sustained by unusually low real Treasury yields. We conclude that macro-prudential regulation of leverage may help limit asset price booms by preventing sharp declines in risk premia.
       
  • Home, safe home: Cross-country monitoring framework for vulnerabilities in
           the residential real estate sector
    • Abstract: Publication date: March 2020Source: Journal of Banking & Finance, Volume 112Author(s): Elias Bengtsson, Magdalena Grothe, Etienne LepersAbstractThis paper presents and assesses a framework for monitoring vulnerabilities related to the residential real estate sector, which can be easily employed for policy purposes. The framework provides intuitive and transparent early warning signals through a composite vulnerability measure, which aggregates indicators in a model-free way across three dimensions of real estate sector vulnerabilities (i.e. valuation, household indebtedness and the bank credit cycle). Our vulnerability measure proves to be a significant predictor of historical real estate crises, with a better forecasting performance than the majority of advantageously in-sample calibrated model-based measures.
       
  • Stock extreme illiquidity and the cost of capital
    • Abstract: Publication date: March 2020Source: Journal of Banking & Finance, Volume 112Author(s): Mohamed Belkhir, Mohsen Saad, Anis SametAbstractWe examine the relationship between stock extreme illiquidity and the implied cost of capital for firms from 45 countries. We document robust evidence that firms whose stocks have a greater potential for extreme illiquidity realizations suffer from higher cost of capital. A one standard deviation increase in a stock's liquidity tail index leads to a rise of 30 basis points in the cost of equity. The reported evidence for stock extreme illiquidity is independent of the systematic extreme liquidity risk and extends to alternative cost-percent liquidity proxies. We further find that this relation is stronger in periods of down markets and high volatility and is weaker in environments with better information quality and stronger investor protection.
       
  • Does corporate social responsibility create shareholder value' The
           importance of long-term investors
    • Abstract: Publication date: March 2020Source: Journal of Banking & Finance, Volume 112Author(s): Phuong-Anh Nguyen, Ambrus Kecskés, Sattar MansiAbstractWe study the effect of corporate social responsibility (CSR) on shareholder value. We argue that long-term investors can ensure that managers choose the amount of CSR that maximizes shareholder value. We find that long-term investors do increase the value to shareholders of CSR activities, not through higher cash flow but rather through lower cash flow risk. Following prior work, we use indexing by investors and state laws on stakeholder orientation for identification. Our findings suggest that CSR activities can create shareholder value as long as managers are properly monitored by long-term investors.
       
  • Too big to ignore' Hedge fund flows and bond yields
    • Abstract: Publication date: March 2020Source: Journal of Banking & Finance, Volume 112Author(s): Olga Kolokolova, Ming-Tsung Lin, Ser-Huang PoonAbstractThis paper investigates the information content of aggregate hedge fund flow and its predictive power with respect to bond yields. Using a sample of 9725 hedge funds from 1994 to 2012, we find that fund flow is negatively related to the changes in 10-year Treasury and Moody’s Baa bond yields one month ahead. This relation is still pronounced after controlling for other determinants of yield changes, including the amount of arbitrage capital available in the economy, suggesting a non-trivial effect of flow-induced hedge fund trading on bond yields. Flow impact on corporate bonds is further amplified during periods of decreasing market liquidity, consistent with a fire-sale hypothesis. Hedge fund flow also predicts convergence between constant maturity swap rate and constant maturity Treasury rate, as well as between the TIPS and Treasury bond yields, suggesting that hedge funds exploit arbitrage opportunities in these fixed-income markets.
       
  • Market risk-based capital requirements, trading activity, and bank risk
    • Abstract: Publication date: March 2020Source: Journal of Banking & Finance, Volume 112Author(s): Dmytro Holod, Yuriy Kitsul, Gökhan TornaAbstractThis study investigates if market risk-based capital requirements (MRR) implemented in 1998 mitigated bank risk associated with trading activities. Recognizing that only banks with sufficiently high trading activities are subject to the MRR (regulated), we implement a difference-in-difference (DID) approach to show that in the post-MRR period, unregulated banks experienced an increase in risk associated with trading activity, while their regulated counterparts enjoyed no appreciable change in trading-related risk. We interpret the resulting negative DID coefficient as the evidence of a risk-mitigating effect of the MRR. This effect disappears at already well-capitalized banks. We also show that upon the implementation of the MRR, unregulated banks exhibit a significantly larger increase in contribution of opaque trading activity to bid-ask spreads, compared to regulated banks, for which the association between trading activity and bid-ask spreads actually declines. Our results are consistent with the view that the MRR significantly reduced moral hazard and adverse selection problems associated with opaque trading activities.
       
  • Macroeconomic effects and frailties in the resolution of non-performing
           loans
    • Abstract: Publication date: March 2020Source: Journal of Banking & Finance, Volume 112Author(s): Jennifer Betz, Steffen Krüger, Ralf Kellner, Daniel RöschAbstractResolution of non-performing loans is a key determinant of bank credit default losses. This paper analyzes macroeconomic and systematic frailty effects of the default resolution time for a sample of 17,395 defaulted bank loans in USA, Great Britain, and Canada. We find that frailties have a huge impact on the resolution times. In a representative sample portfolio, median resolution times more than double in a recession when compared to an expansion. This leads to highly skewed distributions of losses and considerable systematic risk of the bank portfolio.
       
  • Government support of banks and bank lending
    • Abstract: Publication date: March 2020Source: Journal of Banking & Finance, Volume 112Author(s): William Bassett, Selva Demiralp, Nathan LloydAbstractThe extraordinary steps taken by governments during the 2007–2009 financial crisis to prevent the failure of large financial institutions and support credit availability have invited heated debate. This paper comprehensively reviews empirical assessments of the benefits of those programs—such as their effectiveness in reducing bank failures or supporting new lending—introduces a combined dataset of five key programs that provided term debt or equity to banks in the U.S., and assesses the effects of such support on lending by U.S. banks. The results, using an instrumental variable approach, suggest that bank loans did not increase at institutions receiving government support.
       
  • Bank credit rates across the business cycle: Evidence from a French
           cooperative contracts database
    • Abstract: Publication date: March 2020Source: Journal of Banking & Finance, Volume 112Author(s): Sébastien Dereeper, Frédéric Lobez, Jean-Christophe StatnikAbstractFinancial theory indicates that bank–firm relationships can induce a hold-up problem, resulting in higher interest rates. Yet only weak empirical confirmation of this result exists. Moreover, the potential influence of the business cycle on the bank–firm relationship still requires empirical consideration. With a unique contracts data set, collected from a French cooperative bank between 1996 and 2009, this study shows that the effects of bank–firm relationships on the credit rate depend on economic conditions and that the hold-up problem is at play only during economic recessions.
       
  • Generalists and specialists in the credit market
    • Abstract: Publication date: March 2020Source: Journal of Banking & Finance, Volume 112Author(s): Daniel Fricke, Tarik RouknyAbstractIn this paper, we propose a method to analyze the structure of the credit market. Using historical data from Japan, we explore banks’ lending patterns to the real economy. We find that generalist banks (with diversified lending) and specialist banks (with focused lending) coexist, and tend to stick to their strategies over time. Similarly, we also document the coexistence of generalist and specialist industries (based on their borrowing patterns). The observed interaction patterns in the credit market indicate a strong overlap in banks’ loan portfolios, mainly due to specialist banks focusing their investments on the very same generalist industries. A stylized model matches these patterns and allows us to identify economically meaningful sets of generalist banks/industries. Lastly, we find that generalist banks are not necessarily less vulnerable to shocks compared to specialists. In fact, high leverage levels can undo the benefits of diversification.
       
  • Debt maturity and the cost of bank loans
    • Abstract: Publication date: March 2020Source: Journal of Banking & Finance, Volume 112Author(s): Chih-Wei Wang, Wan-Chien Chiu, Tao-Hsien Dolly KingAbstractThis study explores the extent to which a firm's debt maturity structure affects the cost of bank loans. By examining the U.S. syndicated loans from 1990 and 2014, we find that debt maturity structure is a major determinant of loan spreads, after accounting for firm- and loan-specific variables and firm and year fixed effects. A one standard deviation increase in the ratio of short-term debt to total assets is associated with an increase of 11.44 basis points in loan spread, representing an additional $0.644 million in interest expenses. The results support the rollover risk hypothesis, which predicts that short-term debts intensify the shareholder and bondholder conflicts and lead to greater credit risk. In addition, high-growth firms experience significantly smaller increases in their loan spreads than low-growth firms when the short-term debt ratio increases. This finding is consistent with the asset substitution theory that short-term debt mitigates the managerial/shareholders’ risk-taking incentives, leading to a decrease in firm risk. Our results remain strong when we use alternative short-term debt proxies, address endogeneity concerns, and perform various robustness tests.
       
  • Borrower distress and the efficiency of relationship banking
    • Abstract: Publication date: March 2020Source: Journal of Banking & Finance, Volume 112Author(s): Han Donker, Alex Ng, Pei ShaoAbstractWe propose that relationship bankers are able to benefit their clients even after they indicate distress. Relationship bankers continually learn about their clients to reduce the asymmetric information problem, reduce adverse selection risk and manage loan risk. We examine the consequences of corporate disclosure, namely profit warnings, as a negative information-releasing event during the normal course of business and evaluate the evolving nature of relationship banking before and after such an event. We show that lenders generally increase the cost of loans, loan security and reduce loan maturity after profit warnings. The average loan spread increases by 17–37 basis points holding all else constant. However, borrowing from relationship lenders lowers the loan spread by 17 basis points compared to borrowing from non-relationship lenders, implying that relationship lenders are able to benefit borrowers. Moreover, borrowers often choose to remain with their relationship bankers due to more favorable loan terms and the high costs of switching lenders. Ultimately, these borrowers end up reducing their default risk and improving their profitability after the profit warning. Our results remain robust even when we control for firms that did not issue profit warnings. We conclude that relationship bankers efficiently use client information to provide effective financial intermediation, even after distress.
       
  • The surface of implied firm’s asset volatility
    • Abstract: Publication date: March 2020Source: Journal of Banking & Finance, Volume 112Author(s): Lidija Lovreta, Florina SilaghiAbstractThis paper analyzes the surface of CDS implied firm’s asset volatility at the aggregate market level, using a sample of European investment-grade firms during the 2007–2014 period. The term structure of asset implied volatilities is backed-out from the term structure of CDS spreads, while the moneyness dimension is proxied by the ratio of the default barrier to asset value. We find both a downward sloping term structure and a negative skew. Principal component analysis on the entire volatility surface shows that the first four components interpreted as a level, a term structure, a skew and a moneyness-related curvature mode capture 86% of the daily variation in asset implied volatility. We also find that the term structure slope is related to market and funding illiquidity, investors’ risk aversion, informational frictions, demand/supply factors and momentum.
       
  • Government support, regulation, and risk taking in the banking sector
    • Abstract: Publication date: March 2020Source: Journal of Banking & Finance, Volume 112Author(s): Luis Brandao-Marques, Ricardo Correa, Horacio SaprizaAbstractGovernment support to banks through the provision of explicit or implicit guarantees affects the willingness of banks to take on risk by reducing market discipline or by increasing charter value. We use an international sample of rated banks and find that government support is associated with more risk taking by banks. More importantly, we find that restricting banks’ range of activities ameliorates the link between government support and bank risk taking. We conclude that, in the presence of moral hazard induced by government support, reducing bank complexity strengthens market discipline.
       
  • Macroeconomic impact of Basel III: Evidence from a meta-analysis
    • Abstract: Publication date: March 2020Source: Journal of Banking & Finance, Volume 112Author(s): Jarko Fidrmuc, Ronja LindAbstractWe present a meta-analysis of the impact of higher capital requirements imposed by regulatory reforms on the macroeconomic activity (Basel III). The empirical evidence derived from a unique dataset of 48 primary studies indicates that there is a negative, albeit moderate GDP effect in response to a change in the target capital ratio. Meta-regression results suggest that the estimates reported in the literature tend to be systematically influenced by a selected set of study characteristics, such as econometric specifications, the authors’ affiliations, and the underlying financial system. Finally, we discuss the publication bias.
       
  • March madness in Wall Street: (What) does the market learn from stress
           tests'
    • Abstract: Publication date: March 2020Source: Journal of Banking & Finance, Volume 112Author(s): Marcelo Fernandes, Deniz Igan, Marcelo PinheiroAbstractAnnual stress tests have become a regular part of the supervisors’ toolkit following the global financial crisis. We investigate their market implications in the United States by looking at price and trade reactions as well as information asymmetry and uncertainty indicators around the tests, and bank behavior after the tests. The evidence we present supports the notion that there is important new information in stress tests. This is particularly the case during crisis. Moreover, public disclosure appears not to adversely affect informational asymmetries and uncertainties. Importantly, public disclosure of stress test results (and methodology) does not seem to have reduced private incentives to generate information or to have led to distorted incentives.
       
  • Bank loyalty, social networks and crisis
    • Abstract: Publication date: March 2020Source: Journal of Banking & Finance, Volume 112Author(s): Sümeyra Atmaca, Koen Schoors, Marijn VerscheldeAbstractIn this paper, we consider how the intensity and channels of the relation between social networks and bank loyalty vary according to the state of the economy. We analyze bank exit over the period 2005–2012 for over 300,000 retail clients of a commercial bank that experienced a bank run in 2008 due to a shock in solvency risk. The unique and rich data we constructed in close collaboration with the bank enables us to distinguish different sorts of family networks from neighborhood networks, while controlling for a wide range of client-level and branch-level characteristics and events. Using a proportional hazards model, we show the importance of family networks. In times of financial distress, family networks become even more important and retail clients take weaker, less direct social relationships into account.
       
  • Is full banking integration desirable'
    • Abstract: Publication date: March 2020Source: Journal of Banking & Finance, Volume 112Author(s): Iván Arribas, Jesús Peiró-Palomino, Emili Tortosa-AusinaAbstractWe analyze the links between banking integration and economic development for a sample of OECD countries. We measure banking integration considering indicators that merge not only openness but also connectedness with other banking systems. We plug these indicators into income regressions, also controlling for other relevant variables considered by the literature. In contrast to previous initiatives, this second stage explicitly takes into account the differing levels of economic development of the countries in our sample, since the benefits of enhanced banking integration might not be generalizable. To this end, we implement quantile regression, also considering the presence of endogenous regressors. Results show that bank connectedness is more important for economic development than bank openness, but the combined effect (i.e., banking integration) overall is positive and significant. The quantile regression models used in the second stage show that the effects are stronger for the poorest economies.
       
  • Interbank contagion: An agent-based model approach to endogenously formed
           networks
    • Abstract: Publication date: March 2020Source: Journal of Banking & Finance, Volume 112Author(s): Anqi Liu, Mark Paddrik, Steve Y. Yang, Xingjia ZhangAbstractThe potential impact of interconnected financial institutions on interbank financial systems is a financial stability concern for central banks and regulators. In examining how financial shocks propagate through contagion effects, we argue that endogenous individual bank choices are necessary to properly consider how losses develop as the interbank lending network evolves. We present an agent-based model to endogenously reconstruct interbank networks based on 6600 banks’ decision rules and behaviors reflected in quarterly balance sheets. We compare the results of our model to the results of a traditional stationary network framework for contagion. The model formulation reproduces dynamics similar to those of the 2007–09 financial crisis and shows how bank losses and failures arise from network contagion and lending market illiquidity. When calibrated to post-crisis data from 2011 to 2014, the model shows the U.S. banking system has reduced its likelihood of bank failures through network contagion and illiquidity, given a similar stress scenario.
       
  • Are banking shocks contagious' Evidence from the eurozone
    • Abstract: Publication date: March 2020Source: Journal of Banking & Finance, Volume 112Author(s): Mardi Dungey, Thomas J. Flavin, Dolores Lagoa-VarelaAbstractWe analyze the transmission of shocks between global banking, domestic banking and the non-financial sector for eleven Eurozone countries. Using a Markov-switching Factor augmented VAR model, we distinguish between contagion, interdependence and decoupling as shock transmission mechanisms during the ‘crisis’ regime. Contagion played a role in propagating global banking shocks to the banking sectors of smaller states, exacerbating the crisis in these countries. In contrast, the non-financial sectors suffered little contagion from either external or domestic banking shocks, and generally managed to decouple from the banking industry – indicative of being able to source alternative financing and shield themselves from the crisis. However, shocks originating in the non-financial sector trigger contagious effects for both the domestic banking sector and, to a lesser extent global banking, thereby acting as a source of fragility for the financial sector during crisis periods.
       
  • Centralized netting in financial networks
    • Abstract: Publication date: March 2020Source: Journal of Banking & Finance, Volume 112Author(s): Rodney Garratt, Peter ZimmermanAbstractWe consider how the introduction of centralized netting in financial networks affects total netted exposures between counterparties. In some cases there is a trade-off: centralized netting increases the expectation of net exposures, but reduces the variance. We show that the set of networks for which expected net exposures decreases is a strict subset of those for which the variance decreases, so the trade-off can only be in one direction. For some network structures, introducing centralized netting is never beneficial to dealers unless sufficient weight is placed on reductions in variance. This may explain why, in the absence of regulation, traders in a derivatives network do not develop central clearing. Our results can be used to estimate margin requirements and counterparty risk in financial networks. We also provide techniques to evaluate the robustness of our results to behavioral responses to the introduction of centralized netting.
       
  • Analysis of banks’ systemic risk contribution and contagion determinants
           through the leave-one-out approach
    • Abstract: Publication date: March 2020Source: Journal of Banking & Finance, Volume 112Author(s): Stefano Zedda, Giuseppina CannasAbstractIn this paper we develop an in-depth analysis of the systemic risk and contagion determinants through the differential effects of excluding one bank on the banking system.The measure allows for splitting the contribution of individual banks into systemic risk as the sum of two components—the stand-alone bank risk and the contagion risk—and measuring the role of assets, riskiness, capitalization, and interconnectedness as determinants of each of the two components. Results show that the variables determining the stand-alone risk component are different from those determining the contagion risk component, so that a bank which is relatively safe with respect to stand-alone risk, can be an important contagion vehicle, or vice versa.Results also show that crisis severity significantly affects results, so that the severity of different crises results in different weights for the input variables and different contributions for the banks considered. These results add highly significant information for macroprudential regulation, not only from the cross-sectional point of view, but also with reference to the time dimension.
       
  • The interconnected nature of financial systems: Direct and common
           exposures
    • Abstract: Publication date: March 2020Source: Journal of Banking & Finance, Volume 112Author(s): P. Giudici, P. Sarlin, A. SpeltaAbstractTo capture systemic risk related to network structures, this paper introduces a measure that complements direct exposures with common exposures, as well as compares these to each other. Trying to address the interconnected nature of financial systems, researchers have recently proposed a range of approaches for assessing network structures. Much of the focus is on direct exposures or market-based estimated networks, yet little attention has been given to the multivariate nature of systemic risk, indirect exposures and overlapping portfolios. In this regard, we rely on correlation network models that tap into the multivariate network structure, as a viable means to assess common exposures and complement direct linkages. Using BIS data, we compare correlation networks with direct exposure networks based upon conventional network measures, as well as we provide an approach to aggregate these two components for a more encompassing measure of interconnectedness.
       
  • Challenges to global financial stability: Interconnections, credit risk,
           business cycle and the role of market participants
    • Abstract: Publication date: March 2020Source: Journal of Banking & Finance, Volume 112Author(s): Meryem Duygun, Daniel Ladley, Mohamed Shaban
       
  • Bank-based versus market-based financing:Implications for systemic risk
    • Abstract: Publication date: Available online 13 February 2020Source: Journal of Banking & FinanceAuthor(s): Joost V. Bats, Aerdt C.F.J. HoubenAbstractAgainst the background of the great financial crisis, this paper assesses the merits of bank-based versus market-based financing by exploring the relationship between financial structure and systemic risk. The findings indicate that bank-based financial structures are associated with higher systemic risk than market-based financial structures. In relatively bank-based financial structures, bank financing is found to increase systemic risk while market financing decreases systemic risk. By contrast, in relatively market-based financial structures, bank and market financing do not impact systemic risk. Together, the results signal that market-based financial structures are more resilient to systemic risk.
       
  • On the term structure of liquidity in the European sovereign bond market
    • Abstract: Publication date: Available online 7 February 2020Source: Journal of Banking & FinanceAuthor(s): Conall O’Sullivan, Vassilios G. PapavassiliouAbstractThe paper provides a high-frequency analysis of liquidity dynamics in the eurozone sovereign bond market over tranquil and crisis periods. We study time series of liquidity across the yield curve using high-frequency data from MTS, Europe’s leading electronic fixed-income trading platforms. We document flight-to-liquidity effects as investors prefer to trade on shorter-term benchmarks during liquidity dry-ups. We provide evidence of significant commonalities in spread and depth liquidity proxies which are weaker during the crisis period for both core and periphery economies although periphery countries display higher commonality than core countries during the crisis. We show that illiquidity of the periphery countries plays an important role in market dynamics and Granger causes illiquidity, volatility, returns, and CDS spreads across the maturity spectrum in both calm and crisis periods. Liquidity is priced both as a characteristic and as a risk factor even when controlling for credit risk, pointing to liquidity’s systematic dimension and importance.
       
  • Can Mutual Funds Profit from Post Earnings Announcement Drift' The
           Role of Competition
    • Abstract: Publication date: Available online 6 February 2020Source: Journal of Banking & FinanceAuthor(s): Ashiq Ali, Xuanjuan Chen, Tong Yao, Tong YuAbstractThis study examines how competition affects the profitability of mutual funds’ trading on the post earnings announcement drift (PEAD). Our results show that among funds actively pursuing this strategy, only those that manage to avoid competition deliver superior performance. Further, we find that funds avoid competition by investing in illiquid stocks. Our analysis shows that the outperformance of these low-competition funds is mainly attributable to their information advantage in identifying mispricing among illiquid stocks.
       
  • Does CDS trading affect risk-taking incentives in managerial
           compensation'
    • Abstract: Publication date: Available online 7 January 2019Source: Journal of Banking & FinanceAuthor(s): Jie Chen, Woon Sau Leung, Wei Song, Davide AvinoAbstractWe find that managers receive more risk-taking incentives in their compensation packages once their firms are referenced by credit default swap (CDS) trading, particularly when institutional ownership is high and when firms are in financial distress. These findings provide suggestive evidence that boards offer pay packages that encourage greater risk taking to take advantage of the reduced creditor monitoring after CDS introduction. Further, we show that the onset of CDS trading attenuates the effect of vega on leverage, consistent with the threat of exacting creditors restraining managerial risk appetite.
       
  • Monetary Policy Announcements and Market Interest Rates’ Response:
           Evidence from China
    • Abstract: Publication date: Available online 1 February 2020Source: Journal of Banking & FinanceAuthor(s): Rongrong SunAbstractThis paper examines the daily responses of market interest rates to three monetary policy announcements in China using the event-study approach. I find that the interest rate responses to announced changes in the regulated retail interest rate and the required reserve ratio are positive and significant at all maturities of interest rates but smaller at the long end of the yield curve. By contrast, market interest rates barely respond to the qualitative MPC announcements about the monetary policy stance. These findings are robust to alternative econometric methods that correct for potential bias arising from violations of the identification assumption. These findings suggest that the PBC should formulate its policy communication in a quantitative way.
       
  • Know thy neighbor: Political uncertainty and the informational advantage
           of local institutional investors
    • Abstract: Publication date: Available online 31 January 2020Source: Journal of Banking & FinanceAuthor(s): Tom Aabo, Suin Lee, Christos Pantzalis, Jung Chul ParkAbstractPrevious literature finds a positive association between short-term changes in institutional holdings (especially those of local institutions) and subsequent short-term stock performance. We contribute by investigating the importance of geographical proximity under policy uncertainty. We show that the short-term informational advantage of local institutions only thrives in areas that are either politically closely aligned with the president or where the state government (governorship and legislature) is under the control of one party. Our findings are important in understanding the avenues through which geographical proximity may provide the basis for exploitable informational advantages.
       
  • Directors who serve multiple pension funds: are they conflicted or
           skilled'
    • Abstract: Publication date: Available online 30 January 2020Source: Journal of Banking & FinanceAuthor(s): Elizabeth OoiAbstractDirectors who hold concurrent directorships within a single industry may have an information advantage or face conflicts of interest. This practice is permitted in the Australian pension fund industry, even between competing funds. Results show that funds with directors who hold competing board seats are associated with poor fund performance. Non-competing seats are associated with better fund performance in complex funds. Directors favor positions which align with personal and reputational incentives. Overall, the opposing arguments regarding the effect of multiple directorships are not mutually exclusive but dependent on cross-sectional variation in fund characteristics and the types of directorships held.
       
  • Does competition enhance the double-bottom-line performance of
           microfinance institutions'
    • Abstract: Publication date: Available online 27 January 2020Source: Journal of Banking & FinanceAuthor(s): Shahadat Hossain, Jeremy Galbreath, Mostafa Monzur Hasan, Trond RandøyAbstractThis paper investigates how competition affects the double-bottom-line performance of microfinance institutions (MFIs). While classical economic theory highlights that competition enhances efficiency and benefits both customers and firms, we argue that this is unlikely to apply to institutions operating in socially oriented industries, such as microfinance. Using a cross-country dataset of 4576 MFI-year observations (1139 unique MFIs) operating in 59 countries over a 10-year period (2005-2014), we find that competition has an adverse effect on MFIs’ economic sustainability and that competition undermines their breadth of outreach but enhances their depth of outreach. These results are robust to alternative specifications of competition and to the use of a two-stage least squares (2SLS) analysis to alleviate the endogeneity concern. The findings from our analysis have important implications when considering the regulation of MFI competition, especially in the light of the recent turmoil of MFI markets in some developing countries.
       
  • The distributional effects of conventional monetary policy and
           quantitative easing: Evidence from an estimated DSGE model
    • Abstract: Publication date: Available online 8 January 2019Source: Journal of Banking & FinanceAuthor(s): Stefan Hohberger, Romanos Priftis, Lukas VogelThis paper compares the distributional effects of conventional monetary policy and quantitative easing (QE) within an estimated open-economy DSGE model of the euro area. The model includes two groups of households: (i) wealthier households, who own financial assets and are able to smooth consumption over time, and (ii) poorer households, who only receive labor and transfer income and live `hand to mouth'. We use the model to compare the impact of policy shocks on constructed measures of income and wealth inequality (net disposable income, net asset position, and relative per-capita income). Except for the short term, expansionary conventional policy and QE shocks tend to mitigate income and wealth inequality between the two population groups. In light of the coarse dichotomy of households that abstracts from richer income and wealth dynamics at the individual level, the analysis emphasizes the functional distribution of income.
       
  • How Connected is the Global Sovereign Credit Risk Network'
    • Abstract: Publication date: Available online 25 January 2020Source: Journal of Banking & FinanceAuthor(s): Gorkem Bostanci, Kamil YilmazAbstractThis paper applies the Diebold-Yilmaz connectedness methodology on sovereign credit default swaps (SCDSs) to estimate the global network structure of sovereign credit risk. The level of credit risk connectedness among sovereigns, which is quite high, is comparable to the connectedness among stock markets and foreign exchange markets. In the aftermath of the recent financial crises that originated in developed countries, emerging market countries have played a crucial role in the transmission of sovereign credit risk, while developed countries and debt-ridden developing countries have played marginal roles. Secondary regressions show that both trade and capital flows are important determinants of pairwise connectedness across countries. The capital flows became increasingly important after 2013, while the effect of trade flows decreased during the crisis and did not recover afterwards.
       
  • Procyclical leverage: Evidence from banks’ lending and financing
           decisions
    • Abstract: Publication date: Available online 25 January 2020Source: Journal of Banking & FinanceAuthor(s): H. Özlem Dursun-de Neef, Alexander SchandlbauerAbstractMiddle-aged people have a higher demand for bank loans compared to other age groups and banks that are active in regions with more middle-aged residents are exposed to higher loan demand. This generates a geographically varying demand for loans. Using this variation, we show that banks increase their loan supply and expand their balance sheet with an increase in their loan demand. They finance this expansion mainly with debt. This leads to a decrease in their Tier 1 ratios and an increase in their leverage, i.e., leverage is procyclical. By differentiating between worse-and better-capitalized banks, we highlight the importance of bank capital in banks’ lending and financing decisions.
       
  • Corporate Relationship Spending and Stock Price Crash Risk: Evidence from
           China's Anti-corruption Campaign
    • Abstract: Publication date: Available online 23 January 2020Source: Journal of Banking & FinanceAuthor(s): Juncheng (Ben) Hu, Xiaorong Li, Keith Duncan, Jia (Jessica) XuAbstractThis study examines whether corporate relationship spending through business entertainment expenses (BEEs) affects future stock price crash risk. Stakeholder theory suggests that expenditure on relationship building with external stakeholders enhances trust, firm reputation, and transparency, potentially lowering future crash risk. However, agency theory suggests that excessive relationship spending is associated with greater information opacity and managerial opportunism, contributing to greater future crash risk. Our results are more aligned with the agency perspective, showing that BEEs relate positively to future crash risk. China's 2012 anti-corruption campaign significantly moderated the effect of BEEs on stock price crash risk, particularly for firms having weak political connections, weak information transparency, and weak external monitoring mechanisms. The positive BEE-crash relation persists after the anti-corruption campaign for high financial risk firms.
       
  • Number of Brothers, Risk Sharing, and Stock Market Participation
    • Abstract: Publication date: Available online 22 January 2020Source: Journal of Banking & FinanceAuthor(s): Geng Ni, Qi Wang, Han Li, Yang ZhouyAbstractSiblings are important sources of support. Male siblings, in particular, are valuable extended family resources in patriarchal societies such as China. This paper examines the effects of the number of brothers on household stock market participation in China. We find that having more brothers increases both the probability of stock market participation and the portfolio share in stocks. This positive effect is more pronounced for individuals who face high income risk, suffer from poor health, lack private insurance, and reside in areas with low financial development and high gender discrimination. In addition, the brother effect persists in recent periods. This evidence highlights the importance of informal risk-sharing networks in household investment decisions. Our results imply that demographic changes such as fertility decline might have unnoticed but sizable impacts on household portfolio choice, especially in countries with strong family ties.
       
  • Debiased Expert Forecasts in Continuous-Time Asset Allocation
    • Abstract: Publication date: Available online 22 January 2020Source: Journal of Banking & FinanceAuthor(s): Mark Davis, Sébastien LleoAbstractExpert forecasts are an essential component of asset management and an important research topic. However, the effect of behavioral biases on expert forecasts is generally ignored. This paper examines the effect of biased expert forecasts on asset allocations. We find that biases have a significant impact on portfolios, explaining nearly 70% of excess risk-taking in our implementation. To address the effect of behavioral biases, we propose an integrated behavioral continuous-time portfolio selection model which we solve in closed form. The model applies general principles to identify and reduce the impact of five main behavioral biases. This paper concludes with a new personal fractional Kelly decomposition to account for the effect of opinions on the optimal asset allocation.
       
  • Governance, Board Inattention, and the Appointment of Overconfident CEOs
    • Abstract: Publication date: Available online 17 January 2020Source: Journal of Banking & FinanceAuthor(s): Suman Banerjee, Lili Dai, Mark Humphery-Jenner, Vikram NandaAbstractAre overconfident executives more likely to be promoted to CEOs' Using an option-based overconfidence measure, we show that firms with overconfident executives tend to hire internally. Further, when firms hire internally, they are more likely to pick a more confident candidate. The results suggest that governance and board inattention can play a role, with overconfident executives being more likely to become CEOs in firms with entrenched and busy boards, suggesting that such boards might confuse luck-with-skill following the confident executives’ tendencies towards greater risk-taking.
       
  • Voting methods for director election, monitoring costs, and institutional
           ownership#
    • Abstract: Publication date: Available online 16 January 2020Source: Journal of Banking & FinanceAuthor(s): Kee H. Chung, Choonsik LeeAbstractWe show that firms that employ the majority voting method for director election exhibit higher institutional ownership than firms that employ the plurality voting method, especially after the 2010 amendment to NYSE Rule 452. Firms that adopt majority voting in a bylaw or charter exhibit increases in institutional ownership and share price. These results are consistent with our conjecture that institutional investors favor companies with majority voting and investors react favorably to the adoption of majority voting because it reduces management monitoring costs by improving the accountability of elected board members.
       
  • Ultimate Ownership, Crash Risk, and Split Share Structure Reform in China
    • Abstract: Publication date: Available online 15 January 2020Source: Journal of Banking & FinanceAuthor(s): Quanxi Liang, Donghui Li, Wenlian GaoAbstractThis study investigates the relationship between ultimate ownership and stock price crash risk for Chinese firms and the impact on this relationship by the implementation of the split share structure reform, which rendered previously non-tradable shares freely tradable. We find that government-controlled firms, especially local ones, have a significantly higher crash risk than privately controlled firms. After the reform, crash risk of all firms decreases significantly, with a greater risk reduction for privately controlled firms than for government-controlled firms. Further evidence demonstrates that government-controlled firms with stronger political incentives tend to have a higher crash risk.
       
  • Impacts of Interest Rate Caps on the Payday Loan Market: Evidence from
           Rhode Island
    • Abstract: Publication date: Available online 15 January 2020Source: Journal of Banking & FinanceAuthor(s): Amir FekrazadAbstractInterest rate caps are the most common form of payday loan regulation, yet little academic research has examined their consequences. I investigate the impacts of tightening the cap from 15% to 10% in Rhode Island, using a difference-in-difference framework and a unique proprietary dataset of payday loans issued by major nationwide lenders between 2009 and 2013. Lenders always charge the prevailing cap, creating a sharp and clean variation in interest rate. I show that loan usage increases at the extensive and intensive margins, amounting to elasticity estimates in the range of 0.7-1.0. I also find that loan sequences become longer and more likely to end with default. No lenders exit the market, implying that market power existed. Furthermore, I find no evidence of credit rationing as a result of the lower cap. These changes imply an upper bound of $3.3 million per year for neoclassical consumer surplus. However, I show that behavioral consumers can be worse off by the policy if more than half of the increase in demand is due to overborrowing.
       
  • Currency Matching by Non-Financial Corporations
    • Abstract: Publication date: Available online 14 January 2020Source: Journal of Banking & FinanceAuthor(s): Péter Harasztosi, Gábor KátayAbstractThe paper investigates firms’ willingness to match the currency composition of their assets and liabilities. Using detailed information at the loan contract level for the Hungarian non-financial corporate sector, the paper provides strong evidence to support the theory that currency matching plays a role in exporters’ debt currency choices. However, natural hedging is not the primary motive for firms to choose a foreign currency: it explains only 3.8 per cent of the overall new corporate foreign currency loans contracted by exporters and 2.9 per cent of the aggregate new foreign currency bank loans. Besides hedging, our results suggest that both carry trade and diversification strategies are relevant factors in firms’ currency-of-denomination decisions. Supply side factors are also found to be responsible for the prevalence of foreign currency loans among Hungarian corporate borrowers.
       
  • Political Uncertainty, Market Anomalies and Presidential Honeymoons
    • Abstract: Publication date: Available online 11 January 2020Source: Journal of Banking & FinanceAuthor(s): Kam Fong Chan, Philip Gray, Stephen Gray, Angel ZhongAbstractThe first 100 days of a newly-elected President's administration are often a period of substantial and concentrated policy change. This paper shows that measures of uncertainty and risk aversion rise sharply during Presidential honeymoons. Consistent with theoretical models that suggest that investors demand compensation for bearing heightened political risk, we document striking spread returns to value, investment and profitability anomalies during honeymoons. For example, the book-to-market value premium averages 3.51% per month during Presidential honeymoons, yet only 0.27% per month at other times. These findings survive numerous robustness checks. Nonetheless, establishing a direct link between escalating political risk and equity returns proves challenging.
       
  • The Informativeness of Derivatives Use: Evidence from Corporate Disclosure
           through Public Announcements
    • Abstract: Publication date: Available online 11 January 2020Source: Journal of Banking & FinanceAuthor(s): Chitru S. Fernando, Seth A. Hoelscher, Vikas RamanAbstractWe provide new evidence on the determinants of corporate derivatives use by studying how markets respond to announcements of changes in derivatives positions by gold-mining firms. Announcements of increases or decreases in derivatives positions are associated with, respectively, negative or positive reactions in equity prices for both the announcing firm and other gold-mining firms, and, respectively, negative or positive reactions in the gold market. The reactions in the gold market and stock market (both firm and industry) are significantly more positive or negative, respectively, when firms explicitly state that they are decreasing or increasing derivatives positions due to changes in their market views of future gold prices. We help bridge an important gap in the literature by providing evidence consistent with some firms possessing credible private information that underlies changes in their derivatives positions, despite the absence of documented shareholder benefits created by firms that engage in selective hedging. Our findings also provide support for distress-cost minimization as a rationale for corporate derivatives use.
       
  • How does bank ownership affect firm investment' Evidence from China
    • Abstract: Publication date: Available online 10 January 2020Source: Journal of Banking & FinanceAuthor(s): Tianpei Luo, Gary Gang Tian, Hongjian Wang, Huanmin YanAbstractThis study examines how holding voting shares in banks can impact the improvement of firms’ investment efficiency in the Chinese capital market. We found that bank ownership improved firms’ investment efficiency by mitigating both overinvestment and underinvestment and by improving investment sensitivity to investment opportunities. We further found that alleviation of overinvestment in firms was driven by the enhancement of corporate governance (disclosure channels). The better corporate governance in bank holding firms reduced corporate cash holdings and controlling shareholder expropriations. Moreover, we found that this bank-firm connection reduced underinvestment by mitigating financial constraints (financing channels), through the raising of more bank loans and the reduction of the cash flow sensitivity of cash holdings. This connection also served as a buffer when bank lending is tightened. Finally, we found that bank ownership had a more pronounced impact on improving investment efficiency in non-SOEs, in firms located in provinces with low marketization, and in firms without institutional investors.
       
  • Back to the Future: Backtesting Systemic Risk Measures during Historical
           Bank Runs and the Great Depression
    • Abstract: Publication date: Available online 9 January 2020Source: Journal of Banking & FinanceAuthor(s): Christian Brownlees, Ben Chabot, Eric Ghysels, Christopher KurzAbstractWe evaluate the performance of two popular systemic risk measures, CoVaR and SRISK, during eight financial panics in the era before FDIC insurance. Bank stock price and balance sheet data were not readily available for this period. We rectify this shortcoming by constructing a novel dataset for the New York banking system before 1933. Our evaluation exercise focuses on two challenges: ranking systemically important financial institutions (SIFIs) and financial crisis prediction. We find that CoVaR and SRISK meet the SIFI ranking challenge. That is, they help identify systemic institutions in periods of distress beyond what is explained by standard risk measures up to six months before panics. In contrast, aggregate CoVaR and SRISK are only somewhat effective at predicting financial crises.
       
  • Capital flows in the euro area and TARGET2 balances
    • Abstract: Publication date: Available online 8 January 2020Source: Journal of Banking & FinanceAuthor(s): Nikolay Hristov, Oliver Hülsewig, Timo WollmershäuserAbstractThis paper explores how the uneven recourse by national banking systems in the euro area to the ECB’s unconventional refinancing operations that led to the accumulation of large TARGET2 balances at the NCBs has contributed to the evolution of aggregate economic activity in important member states of the euro area. For the period between 2008 and 2014 we estimate a panel VAR model and identify the structural shocks by means of sign restrictions. Our results suggest that the build-up of TARGET2 balances was driven mainly by capital flow shocks while being barely responsive to other aggregate shocks. Furthermore, on the basis of counterfactual experiments we find that the ability to build up sizeable TARGET2 liabilities has contributed substantially to avoiding deeper recessions in the distressed euro area member countries like Spain, Italy, Ireland and Portugal, while to a smaller extent depressing aggregate economic activity in core member states such as Germany, the Netherlands and Finland.
       
  • Market in Financial Instruments Directive (MiFID), stock price
           informativeness and liquidity
    • Abstract: Publication date: Available online 23 December 2019Source: Journal of Banking & FinanceAuthor(s): Daniel Aghanya, Vineet Agarwal, Sunil PoshakwaleAbstractThe paper examines the impact of MiFID on stock price informativeness and liquidity in 28 EU countries. We find that post-MiFID the stock prices reflect greater firm specific information and the market becomes more liquid. Consistent with the ‘Catch-up Hypothesis’ our evidence shows that the impact of MiFID in terms of price informativeness is greater for countries that have weaker quality of regulation. We find that regulation with enforcement improves market efficiency. Our results are robust with respect to the choice of price informativeness and liquidity proxies as well as the control sample.
       
  • Why do private firms hold less cash than public firms' International
           evidence on cash holdings and borrowing costs
    • Abstract: Publication date: Available online 13 December 2019Source: Journal of Banking & FinanceAuthor(s): Sandra Mortal, Vikram Nanda, Natalia ReiselAbstractWe contend that high borrowing costs can overwhelm precautionary motives and induce low cash holdings in private firms. Supportive of our hypothesis, we find European private firms hold less cash than public firms and this differential relates to borrowing costs. Results are robust to endogeneity concerns and reveal private firms use cash flow to pay-down existing debt instead of building cash reserves. Further, stronger creditor rights and debt market development lead to convergence in cash policies of private and public firms.
       
  • Curve Momentum
    • Abstract: Publication date: Available online 6 December 2019Source: Journal of Banking & FinanceAuthor(s): Raphael Paschke, Marcel Prokopczuk, Chardin Wese SimenAbstractWe propose a momentum strategy that operates within commodity futures curves. The diversified curve momentum strategy generates a significantly positive average excess return and a (annualized) Sharpe ratio of 1.28. The profitability of the strategy has increased markedly in the more recent years. These excess returns are difficult to reconcile with risk based explanations, as evidenced by the significantly positive alpha after controlling for exposure to several well-known risk factors. The average excess return on the diversified curve momentum strategy remains significantly positive even after accounting for transaction costs.
       
  • Simulating Fire Sales in a System of Banks and Asset Managers
    • Abstract: Publication date: Available online 21 November 2019Source: Journal of Banking & FinanceAuthor(s): Susanna Calimani, Grzegorz Hałaj, Dawid ŻochowskiAbstractWe develop an agent-based model of traditional banks and asset managers to investigate the contagion risk related to fire sales and balance sheet interactions. We take a structural approach to the price formation in fire sales as in Bluhm et al. (2014) and introduce a market clearing mechanism with endogenous formation of asset prices. We find that, first, banks which are active in both the interbank and securities markets act as plague-spreaders during financial distress. Second, higher bank capital requirements may aggravate contagion by creating incentives for banks to increase exposures in the interbank market, which also leads to lower levels of a voluntary capital buffer above the minimum capital requirement. Third, asset managers absorb small liquidity shocks, but they exacerbate contagion when their voluntary liquid buffers are fully utilised. Fourth, a system with larger and more interconnected agents is more prone to contagion risk stemming from funding shocks.
       
  • CSR-Contingent Executive Compensation Contracts
    • Abstract: Publication date: Available online 23 September 2019Source: Journal of Banking & FinanceAuthor(s): Atif Ikram, Zhichuan Li, Dylan MinorAbstractFirms have increasingly started tying their executives’ compensation to CSR-related objectives. In this paper, we attempt to understand why firms offer CSR-contingent compensation and the conditions under which such compensation improves corporate social performance. Using hand-collected data from proxy statements, we find that this emerging compensation practice varies significantly across industries and across different CSR categories. Further, well-governed firms are more likely to offer CSR-contingent compensation, and such compensation does lead to higher corporate social standing. Such firms are more likely to offer formula-based, Objective CSR-contingent compensation. However, our results suggest that non-formulaic, Subjective CSR-contingent compensation also helps improve companies’ social performance when firm outcomes are more volatile and unpredictable, and therefore executives’ effort and performance are harder to evaluate, and when firms have better corporate governance.
       
  • Gender Gap in Peer-to-Peer Lending: Evidence from China
    • Abstract: Publication date: Available online 10 September 2019Source: Journal of Banking & FinanceAuthor(s): Xiao Chen, Bihong Huang, Dezhu YeAbstractThis paper documents and analyzes the gender gap in the online credit market. Using data from Renrendai, a leading peer-to-peer lending platform in China, we show that lending to female borrowers is associated with better loan performance, including a lower probability of default, a higher expected profit, and a lower expected loss than for their male peers. However, despite the higher creditworthiness, we don't find any measurable gender impact on funding success rate, meaning that female borrowers have to compensate lenders by providing higher profitability to achieve a similar funding probability. These evidences indicate the existence of a gender gap that discriminate against female borrowers. Further analysis implies that this gender gap is independent of the amount of information disclosed by borrowers.
       
  • Together or apart' The relationship between currency and banking
           crises
    • Abstract: Publication date: Available online 5 September 2019Source: Journal of Banking & FinanceAuthor(s): Sylvester C.W. Eijffinger, Bilge KarataşAbstractThe purpose of this study is to provide empirical evidence on the links between currency and banking crises. Panel data probit and bivariate probit models are estimated to a sample of 21 developed and developing countries having monthly observations between the years 1985 and 2010. The findings indicate that banking crises precede currency crises, and vice versa. Currency crises also indirectly influence future banking crises probability through external shocks, liberalized financial markets, or highly-leveraged banking sectors. The study also finds evidence of contemporaneous correlation between the two crises. The results not only confirm the theoretical links between banking and currency crises, but also underline the importance of higher frequency data in analyzing the relationship between various financial crises.
       
  • The Risk-Shifting Value of Payout: Evidence from Bank Enforcement Actions
    • Abstract: Publication date: Available online 19 July 2019Source: Journal of Banking & FinanceAuthor(s): Leonid PugachevAbstractThis paper reexamines whether investors value payout and why. I study abnormal stock returns around regulatory enforcement actions that restrict bank dividends and repurchases. Market reactions are significantly worse for enforced banks that pay out than for those that do not. Withstanding alternative explanations and parallel trend concerns, these results present rare, causal evidence of a value to corporate distribution. The cross-section of abnormal returns suggests that risk-shifting, not agency cost-reduction, drives payout. In my sample of distressed banks, especially around financial crises, the ability to shift risk through payout has value.
       
  • Purchases of Sovereign Debt Securities by Banks During the Crisis: The
           Role of Balance Sheet Conditions
    • Abstract: Publication date: Available online 13 June 2019Source: Journal of Banking & FinanceAuthor(s): Raffaele Santioni, Massimiliano Affinito, Giorgio AlbaretoAbstractThe literature exploring the determinants of the increase in sovereign debt securities in banks’ portfolios during the crisis generally adopted a macroeconomic perspective (governments’ moral suasion, redenomination risk, etc.). This study adopts a microeconomic approach and analyzes the main bank-by-bank determinants of the purchases by investigating Italian banks’ balance sheet conditions from 2007 to 2013. The results show that banks’ specific balance sheet characteristics matter, and banks buy government securities to support their financial conditions. The high liquidity of government bonds, high yields, and convenience in terms of capital charges make them well suited to satisfying banks’ needs in periods of intense liquidity demand, declining bank profitability and loan quality, and rising capital constraints.
       
  • U.S. bank M&As in the post-Dodd-Frank Act era: Do they create value'
    • Abstract: Publication date: Available online 11 June 2019Source: Journal of Banking & FinanceAuthor(s): George N. Leledakis, Emmanouil G. PyrgiotakisAbstractWe analyze the impact of the Dodd-Frank Act on the shareholder wealth gains using a sample of 640 completed U.S. M&As announced between 1990 and 2014. Our results indicate a positive DFA effect on announcement period abnormal returns in small bank mergers. In fact, mergers with combined firm assets of less than $10 billion create more shareholder value after the DFA, than ever before. This positive announcement effect in small deals appears to be linked with merger-related compliance cost savings and profitability improvements. By examining long-run abnormal returns, we find that the documented DFA effect on small deals announcement abnormal returns does not disappear overtime. Finally, we do not find such effects for non-U.S. bank M&As over the same period.
       
  • Determinants of Household Broker Choices and Their Impacts on Performance
    • Abstract: Publication date: Available online 11 June 2019Source: Journal of Banking & FinanceAuthor(s): Kingsley Fong, Juliane D. Krug, Henry Leung, Joakim P. WesterholmAbstractWe use Finnish OMX Helsinki data to examine the relationship between demographic variables, individual investors' broker choices and trade informativeness. We find that men prefer to use Full-Service-Retail over Discount-Retail brokers and that a higher level of income leads to a higher likelihood of using Discount-Retail brokers. Women present more heterogenous broker choice behaviors. However, both genders are more likely to carry out larger trades through Discount-Retail brokers. We show that trades executed via Discount-Retail brokers are more informative than those of Full-Service-Retail brokers and that only Discount-Retail brokers show trade informativeness differences across gender after controlling for age. Collectively, women make more informative trades then men, but this result reverses after partitioning by age. We conclude that conditioning on the type of broker reduces unobserved individual investor heterogeneity and that demographic variables are essential to the understanding of broker clientele effect. Furthermore, clientele differences observed across broker types are market specific and dominate the effects of financial advice in determining trade informativeness.
       
  • Risk-Taking Spillovers of U.S. Monetary Policy in the Global Market for
           U.S. Dollar Corporate Loans
    • Abstract: Publication date: Available online 7 June 2019Source: Journal of Banking & FinanceAuthor(s): Seung Jung Lee, Lucy Qian Liu, Viktors StebunovsAbstractWe study the effects of U.S. interest rates and other factors on risk-taking in the global market for U.S. dollar syndicated term loans. We find that, before the Global Financial Crisis, both U.S. and non-U.S. lenders originated ex ante riskier loans to non-U.S. borrowers in response to a decline in short-term U.S. interest rates and, after the crisis, in response to a decline in longer-term U.S. interest rates. After the crisis, this behavior was more prominent for shadow banks and less prominent for banks with relatively low capital. Separately, before the crisis, lenders originated less risky loans in response to U.S. dollar appreciation. Across the periods, the responses to risk appetite and economic uncertainty varied. To the extent that the Federal Reserve affects U.S. interest rates, we provide evidence of global risk-taking spillovers of U.S. monetary policy, which are important but not dominant factors for risk-taking in the market.
       
  • International effects of a compression of euro area yield curves
    • Abstract: Publication date: Available online 27 March 2019Source: Journal of Banking & FinanceAuthor(s): Martin Feldkircher, Thomas Gruber, Florian HuberAbstractIn this paper, we use a Bayesian global vector autoregressive model to analyze the macroeconomic effects of a flattening of euro area yield curves. Our findings indicate positive effects on real activity and prices, both within the euro area as well as in neighboring economies. Spillovers transmit through an exchange rate channel and a broad financial channel. We complement our analysis by conducting a portfolio optimization exercise. Our results show that multi-step-ahead forecasts conditional on the euro area yield curve shock improve Sharpe ratios relative to other investment strategies.
       
  • Does banks’ systemic importance affect their capital structure and
           balance sheet adjustment processes'
    • Abstract: Publication date: Available online 7 March 2019Source: Journal of Banking & FinanceAuthor(s): Yassine Bakkar, Olivier De Jonghe, Amine TaraziAbstractFrictions prevent banks to immediately adjust their capital ratio towards their desired and/or imposed level. This paper analyzes (i) whether or not these frictions are larger for regulatory capital ratios vis-à-vis a plain leverage ratio; (ii) which adjustment channels banks use to adjust their capital ratio; and (iii) how the speed of adjustment and adjustment channels differ between large, systemic and complex banks versus small banks. Our results, obtained using a sample of listed banks across OECD countries for the 2001-2012 period, bear critical policy implications for the implementation of new (systemic risk-based) capital requirements and their impact on banks’ balance sheets, specifically lending, and hence the real economy.
       
  • Risk Taking and Low Longer-term Interest Rates: Evidence from the U.S.
           Syndicated Term Loan Market
    • Abstract: Publication date: Available online 22 February 2019Source: Journal of Banking & FinanceAuthor(s): Sirio Aramonte, Seung Jung Lee, Viktors StebunovsAbstractWe use supervisory data to investigate the ex-ante credit risk taken by different types of lenders in the U.S. syndicated term loan market during the LSAPs period. We find that nonbank lenders, mutual funds and structured-finance vehicles, take higher risk when longer-term interest rates decrease. The results are stronger for mutual funds that charge higher fees. Banks accommodate other lenders’ investment choices by originating riskier loans and selling them off. These results are consistent with “search for yield” by nonbanks and with a risk-taking channel of monetary policy. Over the sample we study, lower longer-term interest rates appear to have only a minimal effect on loan spreads.
       
 
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