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Journal of Banking & Finance
Number of Followers: 161  
  Hybrid Journal Hybrid journal (It can contain Open Access articles)
ISSN (Print) 0378-4266
Published by Elsevier Homepage  [3162 journals]
  • Inter-Market Competition and Bank Loan Spreads: Evidence from the
           Securities Offering Reform
    • Abstract: Publication date: Available online 17 July 2018Source: Journal of Banking & FinanceAuthor(s): Matthew Gustafson I provide evidence of a new mechanism by which access to public securities mitigates the bank hold-up problem and reduces loan spreads – it increases a borrower's bargaining power vis-à-vis a lender by offering a bank loan substitute. Difference-in-differences results indicate that loan spreads decline following legislation that makes public securities more attractive, but only when public securities represent a credible substitute for the bank loan (i.e., for term loans taken out by credit rated borrowers). Spreads on revolving lines of credit, which are more complementary with public securities, increase.
  • Public health insurance and household portfolio Choices: Unravelling
           financial “Side Effects” of Medicare.
    • Abstract: Publication date: August 2018Source: Journal of Banking & Finance, Volume 93Author(s): Marco Angrisani, Vincenzo Atella, Marianna Brunetti Large, unpredictable and not fully insurable health-care costs represent a source of background risk that might deter households’ financial risk taking. Using panel data from the Health and Retirement Study, we test whether universal health insurance, like Medicare for over-65 Americans, shields against this risk promoting stockholding. We adopt a fixed-effects estimation strategy, thereby taking into account household-level heterogeneity in health status and private insurance coverage. We find that, before Medicare eligibility, households in poor health, who face a higher risk of medical expenses, are less likely to hold stocks than their healthier counterparts. Yet, this gap is mostly eliminated by Medicare. Notably, the offsetting is primarily experienced by households in poor health and without private health insurance over the observation period.
  • The competitive effect of a bank megamerger on credit supply
    • Abstract: Publication date: August 2018Source: Journal of Banking & Finance, Volume 93Author(s): Henri Fraisse, Johan Hombert, Mathias Lé We study the effect of a merger between two large banks on credit market competition. We identify the competitive effect of the merger using matched loan-level and firm-level data and exploiting variation in the merging banks’ market overlap across local lending markets. On the credit market side, we find a reduction in lending, in particular through termination of relationships. In the average market, bank credit decreases by 2.7%. On the real side, firm exit increases by 4%, whereas firms that do not exit and firms that start up experience no adverse real effect on investment and employment.
  • Agency problems in firms with an even number of directors: Evidence from
    • Abstract: Publication date: August 2018Source: Journal of Banking & Finance, Volume 93Author(s): Wen He, Jin-hui Luo To avoid a tie in voting, most boards have an odd number of directors. We argue that boards with an even number of directors are more likely to be weak monitors because of inefficient decision making and being captured by controlling shareholders. Consistent with this argument, we find that in China boards with an even number of directors have fewer meetings and are more likely to have board members absent from board meetings. Firms with an even number of directors have more tunnelling through intercorporate loans and related party transactions, lower financial reporting quality and higher incidence of accounting irregularities. This evidence is stronger in firms with weaker external monitoring and for directors with weaker incentives to monitor. Finally, we show that firms with an even number of directors are associated with lower market valuation of equity. Our results suggest that corporate boards with an even number of directors in emerging markets are associated with more agency problems.
  • Does CEO bias escalate repurchase activity'
    • Abstract: Publication date: August 2018Source: Journal of Banking & Finance, Volume 93Author(s): Suman Banerjee, Mark Humphery-Jenner, Vikram Nanda We propose and test the hypothesis that overconfident-CEOs, with upwardly-biased estimates of own firm-value, are more predisposed to repurchasing stock. An implication is that the stock-market, recognizing overconfident-CEO behavior, will react less positively to repurchase announcements. The hypothesis is strongly supported: Overconfident managers repurchase stock at lower levels of cash holdings, and respond more to stock-price declines. Entrenchment exacerbates this behavior. Interestingly, institutional investors appear to encourage repurchases, perhaps to curb excessive investment. Overconfident-CEOs are also more likely to substitute repurchases for dividends or capital expenditure. Consistent with our hypothesis, the stock-market reaction to these share repurchase announcements is less positive.
  • Value at risk and expected shortfall based on Gram-Charlier-like
    • Abstract: Publication date: August 2018Source: Journal of Banking & Finance, Volume 93Author(s): Maria Grazia Zoia, Paola Biffi, Federica Nicolussi This paper offers a new approach to modeling the distribution of a portfolio composed of either asset returns or insurance losses. To capture the leptokurtosis, which is inherent in most financial series, data are modeled by using Gram-Charlier (GC) expansions. Since we are interested in operating with several series simultaneously, the distribution of the sum of GC random variables is derived. This latter turns out to be a tail-sensitive density, suitable for modeling the distribution of a portfolio return-losses and, accordingly, can be conveniently adopted for computing risk measures such as the value at risk and the expected shortfall as well as some performance measures based on its partial moments. The closed form expressions of these risk measures are derived for cases when the density of a portfolio is the sum of GC expansions, either with the same or different kurtosis. An empirical application of this approach to a portfolio of financial asset indexes provides evidence of the comparative effectiveness of this technique in computing risk measures, both in and out of the sample period.
  • Effects of government bailouts on mortgage modification
    • Abstract: Publication date: August 2018Source: Journal of Banking & Finance, Volume 93Author(s): Sumit Agarwal, Yunqi Zhang This paper shows how liquidity infusions affect loan modification in the mortgage market. The design of pooling and servicing agreements leads mortgage servicers to prefer foreclosure over modification when they are liquidity constrained. Therefore, a positive liquidity shock is expected to boost modification rates. Using a residential mortgage dataset that includes loan-level information, we find that the Troubled Asset Relief Program significantly increased the modification rate. Our findings help us better understand the economic consequences of government intervention and have important policy implications for the renegotiation of distressed mortgages.
  • Risk and performance of bonds sponsored by private equity firms
    • Abstract: Publication date: August 2018Source: Journal of Banking & Finance, Volume 93Author(s): Xiaping Cao, Konan Chan, Kathleen Kahle The bond market is an important source of financing for Private Equity (PE) sponsored transactions. Using the methodology suggested by Bessembinder et al. (2009), we find that PE-sponsored bonds underperform comparable benchmarks. This is especially true for bonds with credit ratings below investment grade and those issued in hot bond markets. Furthermore, bonds sponsored by more experienced PE groups (PEGs) underperform bonds associated with less experienced PE groups, while bonds backed by investment bank-affiliated PEGs underperform bonds sponsored by other PEGs. These findings highlight the risk and return relationship in the high-yield bond market related to leveraged buyouts (LBOs) and PEGs.
  • Does your hedge fund manager smooth returns intentionally or
    • Abstract: Publication date: August 2018Source: Journal of Banking & Finance, Volume 93Author(s): Tae Yoon Kim, Hee Soo Lee We propose an econometrically logical approach that distinguishes intentional from inadvertent smoothing of hedge fund return. Other than the hedge fund return (Y) we introduce an explanatory variable: a market portfolio of hedge fund returns (X). By connecting X and Y, some critical parameters are found to be effectively related to testing the two types of return smoothing. Using those parameters, we develop distinct desmoothing algorithms against intentional and inadvertent smoothing. Our empirical results show that although intentional smoothing is partly responsible for hedge fund smoothing and is done more consistently than inadvertent smoothing, return smoothing is mainly caused by the nature of underlying assets.
  • Downside risk and stock returns in the G7 countries: An empirical analysis
           of their long-run and short-run dynamics
    • Abstract: Publication date: August 2018Source: Journal of Banking & Finance, Volume 93Author(s): Cathy Yi-Hsuan Chen, Thomas C. Chiang, Wolfgang Karl Härdle Any risk-return tradeoff analysis in aggregate equity markets relies on appropriate measures of risk, in most studies based on (co-)variance relations. Consequently, in integrated global markets, country-specific expected return is priced with a world price of covariance risk. This study relates domestic excess stock returns to the world downside risk. Evidence shows that downside tail risk (as a multiplier of volatility) has long memory cointegration properties; hence, the underlying risk aversion behavior in an integrated market is associated with the conditional quantile ratio, the correlation of stock returns, and the cointegrating coefficient of downside risk. Our empirical results based on G7 countries indicate that investors are averse to downside risk, which via Cornish–Fisher expansions is related to higher moment risk and interpretable in a utility-based decision framework.
  • Firm size effects in trade credit supply and demand
    • Abstract: Publication date: August 2018Source: Journal of Banking & Finance, Volume 93Author(s): Jochen Lawrenz, Julia Oberndorfer By investigating trade credit usage among SMEs and large companies following the macroeconomic shock of the financial crisis of 2007/08, we identify a firm size effect, which is genuine in the sense that it cannot be entirely explained by financial constraints, external finance dependence or creditworthiness. We find that (i) SMEs, in contrast to large firms, do not display evidence for the inter-firm liquidity redistribution hypothesis. Especially large vulnerable firms did cut down trade credit provision to the detriment of small vulnerable firms. (ii) We document a general substitution effect between bank and trade credit and show that it has strengthened during the crisis among large firms, but not among SMEs. (iii) We provide evidence that the shift in trade credit financing had adverse real effects on investment behaviour of SMEs.
  • Estimating risk-return relations with analysts price targets
    • Abstract: Publication date: August 2018Source: Journal of Banking & Finance, Volume 93Author(s): Liuren Wu Asset pricing tests often replace ex ante return expectation with ex post realization. The large deviation between the two drastically weakens the power of these tests. This paper proposes to use analysts consensus price target for a stock as the market expectation of the stock’s future price to directly construct the stock’s expected excess return. Analyzing the expected excess return behavior both over time and across different stocks shows that classic asset pricing theory works much better on ex ante return expectations than on ex post realizations. The analysis also provides new insights on the pricing of common equity risk factors.
  • Entrepreneurial Manipulation with Staged Financing
    • Abstract: Publication date: Available online 11 July 2018Source: Journal of Banking & FinanceAuthor(s): Chris Yung Finance is staged in entrepreneurial settings. It has been argued that staging has a drawback: entrepreneurs manipulate short-term appearances to keep funds flowing. In contrast, this paper finds that staging can lead to either more or less manipulation than non-staged finance. Finally, behavior in early rounds induces a kind of “manipulation persistence” so that total manipulation is path-dependent. The model makes predictions regarding crowdsourced finance, switching of VCs, and lifecycle issues in entrepreneurial finance.
  • About the Fear of Reputational Loss: Social Trading and the Disposition
    • Abstract: Publication date: Available online 10 July 2018Source: Journal of Banking & FinanceAuthor(s): Matthias Pelster, Annette Hofmann This article studies the relationship between giving financial advice and the disposition effect in an online trading environment. Our empirical findings suggest that leader traders are more susceptible to the disposition effect than investors who are not being followed by any other trader. Using a difference-in-differences approach, we show that becoming a first-time financial advisor increases the disposition effect. This finding holds for investors who engage in foreign exchange trading and for investors who trade stocks and stock market indices. The increased behavioral bias may be explained by leaders feeling responsible to their followers, by a fear of losing followers when admitting a poor investment decision, or by an attempt by newly appointed leaders to manage their social image and self-image.
  • Distilling Liquidity Costs from Limit Order Books Forthcoming in Journal
           of Banking and Finance
    • Abstract: Publication date: Available online 4 July 2018Source: Journal of Banking & FinanceAuthor(s): Diego Amaya, Jean-Yves Filbien, Cédric Okou, Alexandre F. Roch This paper proposes a method to compute ex-ante trading costs at the intraday level from limit order books. Using nearly 500 of the largest traded companies in the NYSE ArcaBook, we show that these costs have nontrivial intraday dynamics, are negatively related to volume and positively related to volatility. When ex-ante trading costs are incorporated into price impact specifications, the results show that this measure provides relevant information about price changes of the market at a high frequency level. Our evidence suggest that ex-ante trading costs constitute a new source of information for the study of intraday liquidity.
  • Do Capital Markets Value Corporate Social Responsibility' Evidence
           from Seasoned Equity Offerings
    • Abstract: Publication date: Available online 3 July 2018Source: Journal of Banking & FinanceAuthor(s): Zhi-Yuan Feng, Carl R. Chen, Yen-Jung Tseng We explore whether firms’ corporate social responsibility (CSR) activities provide added value to capital market participants through seasoned equity offerings (SEOs). SEOs represent cleaner exogenous activity alleviating the reverse causality issue plaguing many prior studies examining the relation between firm performance and CSR. Using a large sample of U.S. SEOs, we find high-CSR issuers experience fewer negative market reactions to SEO announcements. We also show ethical issuers have incentive to provide extensive and informative disclosures, which mitigate the degree of information asymmetry, thereby decreasing SEO underpricing. Among CSR categories, we find issuers engaging in community and environmental CSR activities and improving the rights of women and minorities are more effective at reducing SEO negative announcement returns and underpricing. Our findings remain robust after controlling for possible self-selection bias and endogeneity problems. Overall, our findings support the stakeholder value maximization view of stakeholder theory and ethical theory.
  • Labor Law and Innovation Revisited
    • Abstract: Publication date: Available online 28 June 2018Source: Journal of Banking & FinanceAuthor(s): Bill B. Francis, Incheol Kim, Bin Wang, Zhengyi Zhang This paper examines the impact of changes in job security on corporate innovation in 20 non-U.S. OECD countries. Using a difference-in-differences approach, we provide firm-level evidence that the enhancement of labor protection has a negative impact on innovation. We then discuss possible channels and find that employee-friendly labor reforms induce inventor shirking and a distortion in labor flow. Further investigation reveals that the negative relation is more pronounced in 1) firms that heavily rely on external financing, 2) firms that have high R&D intensity, 3) manufacturing industries, and 4) civil-law countries. Our micro-level evidence indicates that enhanced employment protection impedes corporate innovation.
  • Aftershocks of monetary unification: Hysteresis with a financial twist
    • Abstract: Publication date: Available online 19 June 2018Source: Journal of Banking & FinanceAuthor(s): Tamim Bayoumi, Barry Eichengreen In the 1990s it was widely agreed that neither Europe nor the United States satisfied the conditions for constituting an optimum currency area, although the U.S. came closer (Bayoumi and Eichengreen 1993). Moderating this concern about Europe was the fact that it was possible to distinguish a regional core and periphery. Using updated data, we confirm that the United States remains closer to an optimum currency area. More intriguingly, the Euro Area shows striking changes in correlations and responses. We interpret these as reflecting hysteresis with a financial twist, in which the financial system causes aggregate supply and demand shocks to reinforce each other. An implication is that the Euro Area needs vigorous, coordinated regulation of its banking and financial systems by a single supervisor—that monetary union without banking union will not work.
  • Speculation, risk aversion, and risk premiums in the crude oil market
    • Abstract: Publication date: Available online 19 June 2018Source: Journal of Banking & FinanceAuthor(s): Bingxin Li Speculative activity in commodity markets has increased dramatically since 2002. This paper investigates how aggregate risk aversion and risk premiums in the crude oil market covary with the level of speculation. Using crude oil futures and option data, we estimate aggregate risk aversion in the crude oil market and find that it is significantly lower between 2005 and 2008 when speculative activity increases dramatically. Risk premiums implied by the state-dependent risk aversion are also negatively correlated with speculative activity and are on average lower and more volatile during this period. These findings, together with the increased index fund and managed-money infusion in the commodity market, suggest that speculators who demand commodity futures for the purpose of portfolio diversification are willing to accept lower compensation for their positions. Decreasing speculation after 2009 amid increased producers’ hedging demand has a reverse impact on the market risk aversion and risk premiums.
  • Macroeconomic impact of Basel III: Evidence from a meta-analysis
    • Abstract: Publication date: Available online 31 May 2018Source: Journal of Banking & FinanceAuthor(s): Jarko Fidrmuc, Ronja Lind We 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.
  • Made for each other: Perfect matching in venture capital markets
    • Abstract: Publication date: Available online 25 May 2018Source: Journal of Banking & FinanceAuthor(s): Hui Fu, Jun Yang, Yunbi An This paper studies bargaining power allocation and stable matching between venture capitalists and entrepreneurs with double-sided moral hazard in venture capital markets. We find that the optimal bargaining power allocation is determined by the output elasticities of effort by the two parties; the higher the output elasticity for one's effort, the greater her bargaining power. We show that efficient and stable matching follows the principle of positive assortative matching, suggesting that strong entrepreneurs/VCs match with strong partners, and weak ones match with weak counterparts. Using a large sample from the Chinese venture capital market, we empirically confirm that entrepreneurs and VCs with similar standing in their peer groups are more likely to match.
  • Households rejecting loan offers from banks
    • Abstract: Publication date: Available online 16 May 2018Source: Journal of Banking & FinanceAuthor(s): Yiyi Bai, Liping Lu This paper studies the mechanism of adverse selection in the credit market using a sample of mortgage applications that are approved by lenders but rejected by applicants. We find that a low-risk applicant is more likely to reject a loan offer, except when the offer is made by an informed lender. Using jumbo mortgage and loan acceptance rate data to proxy for the information advantage, we find that lenders with a lower likelihood of being rejected are indeed better informed than others.
  • Organizational Form, Business Strategies and the Demise of Demutualized
           Building Societies in the UK
    • Abstract: Publication date: Available online 8 May 2018Source: Journal of Banking & FinanceAuthor(s): Radha K Shiwakoti, Abdullah Iqbal, Warwick Funnell This paper examines and compares the performance and operating behaviour of demutualized building societies (DBS) over the period of 1987-2007 relative to mutual building societies and major retail banks in the UK. We find significant differences in their operating behaviour over this period and show that the operating behaviour varies with the form of ownership. We also investigate the potential causes of the failure of all DBS in the UK. Our findings show significant changes in the funding and lending strategies of DBS which expose them to higher risk. We also find a strained capital formation and deteriorating capital base of DBS in the post-conversion period. Our results suggest that changes in the business model, diminished capital base and, in part, failing to get all the necessary funding from the wholesale market at the time of the financial crisis of 2007-08 contributed to the demise of a once a successful financial institution in the UK.
  • Sectoral risk-weights and macroprudential policy
    • Abstract: Publication date: Available online 5 May 2018Source: Journal of Banking & FinanceAuthor(s): Alexander Hodbod, Stefanie J. Huber, Konstantin Vasilev This 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.
  • Generalists and specialists in the credit market
    • Abstract: Publication date: Available online 24 April 2018Source: Journal of Banking & FinanceAuthor(s): Daniel Fricke, Tarik Roukny In 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.
  • Equilibrium commodity prices with irreversible investment and non-linear
    • Abstract: Publication date: Available online 7 April 2018Source: Journal of Banking & FinanceAuthor(s): Jaime Casassus, Pierre Collin-Dufresne, Bryan R. Routledge We model oil price dynamics in a general equilibrium production economy with two goods: a consumption good and oil. Production of the consumption good requires drawing from oil reserves at a fixed rate. Investment necessary to replenish oil reserves is costly and irreversible. We solve for the optimal consumption, production and oil reserves policy for a representative agent. We analyze the equilibrium price of oil, as well as the term structure of oil futures prices. Because investment in oil reserves is irreversible and costly, the optimal investment in new oil reserves is periodic and lumpy. Investment occurs when the crude oil is relatively scarce in the economy. This generates an equilibrium oil price process that has distinct behavior across two regions (characterized by the abundance/scarcity of oil). We undertake three empirical tests suggested by our model. First, we estimate key parameters using SMM to match moments of oil price futures as well as other macroeconomic properties of the data. Second, we estimate an affine regime switching model of the oil price, which captures the main features of our equilibrium model and preserves the tractability of reduced-form models. Lastly, we compare the risk premium in short-maturity oil futures implied by our model to the data.
  • The other (commercial) real estate boom and bust: The effects of risk
           premia and regulatory capital arbitrage
    • Abstract: Publication date: Available online 21 March 2018Source: Journal of Banking & FinanceAuthor(s): John V. Duca, David C. Ling In 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.
  • Gas storage valuation under multifactor Lévy processes
    • Abstract: Publication date: Available online 22 February 2018Source: Journal of Banking & FinanceAuthor(s): Mark Cummins, Greg Kiely, Bernard Murphy A practical problem for energy companies is instituting a consistent framework across its supply and trading activities to deliver on all-important P&L and at-Risk reporting requirements. With a focus on storage assets and wider natural gas market exposures, we present a gas storage valuation methodology, which uniquely uses a flexible multifactor Lévy process setting that allows for consistent valuation and risk management reporting across a general derivative book. Our approach is capable of replicating the complex covariance structure of the natural gas forward curve and capturing time spread volatility, a key driver of extrinsic storage value, while being simultaneously capable of accurately calibrating to market traded options. We begin by extending a single factor Mean Reverting Variance Gamma process to an arbitrary number of dimensions and, by way of specific examples, show how the traditional Principal Component Analysis based view of gas forward curve dynamics can be incorporated into a primarily market based valuation. We develop in the process an innovative implied moments based calibration technique, which allows for efficient calibration of general multifactor forward curve models to delivery period options common in energy and commodity markets. Furthermore, to accommodate the forward curve and traded options market consistency, we propose an appropriate joint market based calibration and historical estimation methodology. Through a formal model specification analysis, we provide evidence that the multifactor Lévy models we propose provide a better joint fit to NBP natural gas options-forward market data, relative to comparative benchmark models. Finally, we develop a novel multidimensional fast Fourier transform based storage valuation algorithm and provide empirical evidence that the multifactor Lévy model suite is better specified to more accurately capture extrinsic value.
  • Cross-border transmission of emergency liquidity
    • Abstract: Publication date: Available online 16 February 2018Source: Journal of Banking & FinanceAuthor(s): Thomas Kick, Michael Koetter, Manuela Storz We show that emergency liquidity provision by the Federal Reserve transmitted to non-U.S. banking markets. Based on manually collected holding company structures, we identify banks in Germany with access to U.S. facilities. Using detailed interest rate data reported to the German central bank, we compare lending and borrowing rates of banks with and without such access. U.S. liquidity shocks cause a significant decrease in the short-term funding costs of the average German bank with access. This reduction is mitigated for banks with more vulnerable balance sheets prior to the inception of emergency liquidity. We also find a significant pass-through in terms of lower corporate credit rates charged for banks with the lowest pre-crisis leverage, US-dollar funding needs, and liquidity buffers. Spillover effects from U.S. emergency liquidity provision are generally confined to short-term rates.
  • The role of investment bankers in M&As: New evidence on Acquirers’
           financial conditions
    • Abstract: Publication date: Available online 6 February 2018Source: Journal of Banking & FinanceAuthor(s): Jie (Michael) Guo, Yichen Li, Changyun Wang, Xiaofei Xing This paper investigates whether top-tier M&A investment bankers (financial advisors) create value for acquirers with different financial conditions in both the short and long term via analyzing 3420 US deals during 1990–2012. In this paper, deals are divided into three groups based on acquirer financial constraints – acquisitions by constrained, neutral and unconstrained firms. We find that the effects of top-tier bankers are dependent on acquirer financial conditions. Specifically, top-tier advisors improve performance for constrained acquirers rather than neutral, and unconstrained acquirers. Our results show that top-tier investment bankers improve constrained acquirers’ short- (5 days) and long-term (36 months) performance by 1.45% and 24.27% respectively, after controlling for firm, deal and market characteristics. For deals with investment banker involvement, constrained acquirers advised by top-tier advisors have the lowest deal completion rate, and pay the lowest bid premiums; while unconstrained acquirers that retain top-tier investment bankers have the highest deal completion rate, and pay relatively high bid premiums. Our findings imply that constrained acquirers tend to retain top-tier investment bankers to gain superior synergy, while unconstrained acquirers appear to retain top-tier investment bankers to ensure the deal completion.
  • Government support, regulation, and risk taking in the banking sector
    • Abstract: Publication date: Available online 2 February 2018Source: Journal of Banking & FinanceAuthor(s): Luis Brandao-Marques, Ricardo Correa, Horacio Sapriza Government 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.
  • Home, safe home: Cross-country monitoring framework for vulnerabilities in
           the residential real estate sector
    • Abstract: Publication date: Available online 1 February 2018Source: Journal of Banking & FinanceAuthor(s): Elias Bengtsson, Magdalena Grothe, Etienne Lepers This 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: Available online 31 January 2018Source: Journal of Banking & FinanceAuthor(s): Mohamed Belkhir, Mohsen Saad, Anis Samet We 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.
  • Borrower distress and the efficiency of relationship banking
    • Abstract: Publication date: Available online 9 January 2018Source: Journal of Banking & FinanceAuthor(s): Han Donker, Alex Ng, Pei Shao We 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 balance sheet effects of oil market shocks: An industry level analysis
    • Abstract: Publication date: Available online 5 January 2018Source: Journal of Banking & FinanceAuthor(s): Khalid ElFayoumi The paper estimates the dynamic impact of structural oil market shocks on the balance sheet of US firms, using industry level data covering manufacturing, trade and mining sectors. For manufacturing firms, findings indicate that an unexpected disruption in oil supply that raises oil prices by 1% lowers firm profits by 1.3% on impact. On the other hand, profits rise by 0.39% in response to the same increase in the price of oil, when it is driven by a positive movement in the global demand for oil, and by 0.79% after an unexpected surge in speculative oil demand. The positive balance sheet effect of speculative oil shocks on the manufacturing sector contrasts their negative effect on global economic activity. An explanation follows from the industry level analysis, which suggests that speculation in the oil market creates a ripple effect in downstream industries and raises inventory demand for petroleum and chemical products. In contrast to its secondary role in explaining historical variations in the price of oil and profits in trade and mining sectors, oil supply shocks are found to have been the dominant oil market innovations in driving fluctuations in manufacturing firms' profits. The analysis also finds a limited response of production costs to exogenous changes in the oil price, disputing the classic notion that the cost share of oil in an industry determines its level of exposure to oil market shocks.
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