Income Diversification and Bank Performance: Evidence from Italian Banks

Using annual data from Italian banks, we study the link between non-interest revenues and profitability. We find that income diversification increases risk-adjusted returns. Our results provide econometric evidence consistent with current studies on EU banks, but do not support findings on the U.S. experience. In our view, the differences depend primarily on the relative importance of local banks: we find that the relation is stronger at large banks. In addition, we find that there are limits to diversification gains as banks get larger. Small banks can make gains from increasing non-interest income, but only when they have very little non-interest income share to start with. The source of non-interest income is less important than its level.

Commonalities in the order book

This paper uses data from one of the most important European stock markets and shows that, in line with predictions from theoretical market microstructure, a small number of latent factors captures most of the variation in stock specific order books. We show that these order book commonalities are much stronger than liquidity commonality across stocks. The result that bid and ask side as well as the visible and hidden parts of the order book exhibit quite specific dynamics is interpreted as evidence that open order book markets attract a heterogeneous trader population in terms of asset valuations and impatience. Quantifying the informational content of the extracted factors with respect to the evolution of the asset price, we find that the factor information shares are highest (about 10%) for less frequently traded stocks. We also show that the informational content of hidden orders is limited.

Disagreement over the persistence of earnings components: evidence on the properties of management-specific adjustments to GAAP earnings

We examine disagreement between management and Thomson Datastream over the persistence of earnings components. Using income statement and footnote disclosures, we identify the source and properties of disputed items. Disagreements typically reflect opaque reporting practices (for example, in the case of transitory operating items) and restrictive classification rules (for example, in the case of discontinued operations). Incremental and relative value relevance tests suggest that the majority of management-specific adjustments reflect appropriate classification of earnings components by insiders. Nevertheless, evidence consistent with strategic disclosure does emerge for a subset of management adjustments.

The Structure of Chinese Urban Land Prices: Estimates from Benchmark Land Price Data

Taking the recent benchmark land prices published by the Chinese city governments, the paper estimates commercial and residential land price curves of Chinese cities using cross-sectional data, controlling for urban population size and income level. The urban land leasing price–distance relationship is estimated based on the argument that monocentric urban structure is representative for Chinese cities. Both population size and income level are found to positively affect urban land price and price–distance gradients. Commercial land prices are higher than residential land prices except in suburbs or outer central urban areas, where the land prices of different uses converge. In most situations, commercial use price gradients are larger than those of residential use.

Joint accounting choices: an examination of firms’ adoption strategies for SFAS No. 106 AND SFAS No. 109

We provide insight into an argument that firms minimize the costs imposed by new accounting standards through their adoption choices. Focusing on two standards with potentially large impacts on both balance sheet and income statement accounts for many firms, we present evidence that firms chose their strategies for SFAS No. 106 (OPEB) and 109 (DTAX) jointly rather than separately. We also provide insight into how firms view recurring versus non-recurring charges, and how they weigh the tradeoff between a large one-time (income decreasing) charge against the smaller, but longer lasting effects of amortization.

Bank Liability Structure,FDIC Loss,and Time to Failure: A Quantile Regression Approach

Deposit insurers are particularly concerned about high-cost failures. When the factors driving such failures differ systematically from the determinants of low- and moderate-cost failures, a new estimation technique is required. Using a sample of more than 1,000 bank failures in the U.S. between 1984 and 2003, I present a quantile regression approach that illustrates the sensitivity of the dollar value of losses in different quantiles to my explanatory variables. These findings suggest that reliance on standard econometric techniques results in misleading inferences, and that losses are not homogeneously driven by the same factors across the quantiles. I also find that liability composition affects time to failure.

What drives the increased informativeness of earnings announcements over time?

Landsman and Maydew (J Acc Res 40:797–808, 2002) document that the information content of earnings announcements has increased over the past three decades, and Francis et al. (Acc Rev, 77:515–546, 2002) conclude that expanded concurrent disclosures in firms’ earnings announcements, especially the inclusion of detailed income statements, explain this increase. We posit and find that the temporal increase in the intensity of the market’s reaction to Street earnings offers a competing explanation for the Landsman and Maydew finding. We also find that expanded concurrent disclosure of GAAP-based information contributes to the temporal increase in the information content of earnings announcements. However, unlike Francis et al., we find that the temporal increase in concurrent balance sheet and cash flow statement information dominates concurrent income statement information once we control for Street earnings.

Analyst Activity and Firm Value: Evidence from the REIT Sector

This paper is the first to examine (1) properties of analyst forecasts and (2) effects of analyst following on firm value for all REITs on CRSP, Compustat and I/B/E/S. Our results suggest that REITs operate in an information environment that has changed over time. We find that for periods when the REIT industry was either in the developmental stage (pre-1992), or after other structural changes in the industry (post-2000), more analysts cover REITs and forecasts are more accurate and less biased. Further, we find that mortgage REITs are more transparent than other REIT structures and exhibit properties of analyst behavior that are different from other types of REITs. Our investigation into the effect of analyst coverage on REIT value suggests that analyst coverage increases REIT value (as measured by Tobin’s q) and that the causality does not run the opposite way.

Securitization of mezzanine capital in Germany

A recent trend in the German asset-backed securities (ABS) market is the securitization of subordinated loans and profit participation agreements (PPAs) granted to medium-sized enterprises (MEs). This paper provides an overview of this growing market and analyzes the benefits of such transactions for portfolio companies as well as for originators and potential investors. Simulations of 10 recent transactions indicate that despite the relatively low interest rates charged on obligors, originators and investors can earn attractive returns at fairly low risk. In particula, the junior tranches of these securitizations exhibit quite attractive risk-return profiles.

Interest rate risk of German financial institutions: the impact of level,slope, and curvature of the term structure

We investigate here the sensitivity of the equity values of a large sample of German financial institutions to movements in the term structure of interest rates. While similar approaches rely on a single interest rate factor only, we quantify the exposure to changes in level, slope, and curvature, which are the driving factors of term structure changes. Our main findings are: (i) banks and insurances are exposed to level and curvature changes but only marginally to slope movements; (ii) the interest rate risk exposure depends on the banking sector investigated; (iii) level and curvature changes are priced in the cross-section of stock returns.

Publicly traded versus privately held: implications for conditional conservatism in bank accounting

Compared with privately held banks, publicly traded banks face greater agency costs because of greater separation of ownership and control but enjoy greater benefits from access to the equity capital market. Differences in control and capital market access influence public versus private banks’ accounting. We predict and find that public banks exhibit greater degrees of conditional conservatism (asymmetric timeliness of the recognition of losses versus gains in accounting income) than private banks. We predict and find that public banks recognize more timely earnings declines, less timely earnings increases, and larger and more timely loan losses. Although public ownership gives managers greater ability and incentive to exercise income-increasing accounting, our findings show that the demand for conservatism dominates within public banks and that the demand for conservatism is greater among public banks than private banks. Our results provide insights for accounting and finance academics, bank managers, auditors, and regulators concerning the effects of ownership structure on conditional conservatism in banks’ financial reporting.

The impact of monetary policy surprises on asset return volatility: the case of Germany

This paper investigates the impact of monetary policy surprises by the FED or Bundesbank/ECB on the return volatility of German stocks and bonds using a GARCH-M model. We show that stock return volatility is susceptible to monetary policy surprises in the United States, whereas monetary policy surprises in the Euro zone matter for bond return volatility. These findings are robust for other Euro zone stock markets, but not significant for other Euro zone bond markets. The empirical evidence also suggests that monetary policy surprises have larger effects on German stock return volatility in bear markets than in bull phases. Moreover, our results support the claim that stock return volatility can be negatively correlated with stock returns, contradicting predictions made by many asset pricing models (e.g., CAPM or ICAPM) and the empirical finding of an insignificant relationship often reported in the literature.

Pricing Structure in Tokyo Metropolitan Land Markets and its Structural Changes: Pre-bubble,Bubble, and Post-bubble Periods

In this paper, we estimate hedonic price equations of Japanese commercial and residential land prices for a 25-year period and to investigate possible structural changes in these price equations. Our price equations are based on transaction prices, not appraised land values, of commercial land in Central Business Districts of Tokyo (Chiyoda Ward, Chuo Ward, and Minato Ward), and residential land of its suburb (Setagaya Ward). We find that price structure differs substantially among locations, reflecting differences in supplier pricing and end-user preferences. We also find significant structural changes in price structure, identifying pre-bubble, bubble and post-bubble periods.

Never judge a book by its cover: what security analysts have to say beyond recommendations

Our study analyzes market reaction to the entire content of a large sample of analysts’ reports from the period 2002 to 2004 for the German market. In particular, we explore whether the three summary measures in the reports, i.e., recommendation revisions, earnings forecast revisions, and target price forecast revisions are acknowledged by the market. Additionally, we investigate if stated justifications in the written text of analysts’ reports contain information value beyond the three summary measures. We find that earnings forecast revisions and target price forecast revisions contain valuable information, both unconditionally and conditional on the rest of the information in the report. Our findings also reveal that justifications made by analysts are of high salience to market participants. These justifications provide valuable information, both unconditionally and conditional on all other types of information in a report. Our findings also suggest that business ties between banks and the analyzed companies do not affect market reaction to dissemination of an analysts’ report.

Governance structure and the weighting of performance measures in CEO compensation

We empirically examine how governance structure affects the design of executive compensation contracts and in particular, the implicit weights of firm performance measures in CEO’s compensation. We find that compensation contracts in firms with higher takeover protection and where the CEO has more influence on governance decisions put more weight on accounting-based measures of performance (return on assets) compared to stock-based performance measures (market returns). In additional tests, we further find that CEO compensation in these firms has lower variance and a higher proportion of cash (versus stock-based) compensation. We further find that CEOs’ incentives (measured as changes in CEO annual wealth which includes expected changes in the value of the CEO’s equity holdings in addition to yearly compensation) do not vary across governance structures. These findings are consistent with CEOs in firms with high takeover protection and where they have more influence on governance negotiating different contracts.

The Effect of Time-on-Market and Location on Search Costs and Anchoring: The Case of Single-Family Properties

Regarding single-family residential properties purchased for investment (non-owner occupied) we examine whether out-of-state buyers pay more than in-state buyers. We focus on the effects of search costs and anchoring. We use data on 2,828 Las Vegas non-owner occupied (investor) residences, 40% of which are purchased by non-local investors. We find that the location of the property affects the empirical results. Specifically, search cost and anchoring effects that appear significant when the location of the property is ignored disappear when location is introduced as an independent variable.

The Long-Horizon Performance of REIT Mergers

We study long-horizon shareholder returns in a comprehensive sample of Real Estate Investment Trust (REIT) mergers, to test whether or not the anomaly of post-merger underperformance observed in conventional firms applies to the case of REITs. Constructing synthetic benchmark portfolios controlling for firm size and for book-to-market value ratio, we find that 60-month buy-and-hold abnormal returns for REIT acquirers are significantly negative at approximately −10%, supporting the position that REIT merger acquirers underperform non-merging REITs in the long run. We find no evidence to challenge previous studies reporting positive announcement period returns for acquirers when the target is privately held, but we do find evidence that these positive returns do not persist. The long term performance of acquiring REITs is approximately the same whether the target is public or private.

Should more local governments purchase a bond rating?

We investigate whether issuers that choose to forgo a bond rating suffer an interest cost penalty greater than the cost of the rating. We use estimated ratings provided by Moody’s Investor Service to proxy for what the rating would have been if it had been purchased. We find that the primary factors associated with an issuer’s decision to purchase a rating are the rating expected by the issuer and the extent to which an issue is marketed locally. After controlling for self-selection bias, we find that the issuers that forgo a rating do not suffer an interest cost penalty.

Changes in CEO compensation structure and the impact on firm performance following CEO turnover

We document changes in compensation structure following CEO turnover and relate them to future performance. Compared to outgoing CEOs, incoming CEOs derive a significantly greater percentage of their compensation from option grants and new stock grants. The voluntary turnover sample shows similar changes in compensation structure while the forced turnover sample results suggest that new stock grants drive the significant increase in incentive compensation following turnover. Post-turnover performance is positively associated with new stock grants as a percentage of total compensation in the full sample and when analyzing forced and voluntary turnovers separately. We find limited evidence that future operating income is positively associated with option grants following forced turnover. Post-turnover improvement in operating income is positively associated with an increase in new stock grants for the incoming relative to the outgoing CEO.

Market reactions to the disclosure of internal control weaknesses and to the characteristics of those weaknesses under section 302 of the Sarbanes Oxley Act of 2002

We examine the stock price reaction to management’s disclosure of internal control weaknesses under §302 of the Sarbanes Oxley Act and to the characteristics of these weaknesses, controlling for other material announcements in the event window. We find that some characteristics of the weaknesses—their severity, management’s conclusion regarding the effectiveness of the controls, their auditability, and the vagueness of the disclosures—are informative. We also find that the information content of internal control weakness disclosures depends on the severity of the internal control weakness. Moreover, in a sub-sample uncontaminated by other announcements in the event window, we find negative price reactions to the disclosure of internal control weaknesses and material weaknesses.