Insolvency regimes and firms' default risk under economic uncertainty and shocks

One of the arguments often advanced for implementing a stronger insolvency and bankruptcy framework is that it enhances credit discipline among firms. Using a large cross-country firm-level dataset, we empirically test whether a stronger insolvency regime reduces firms' likelihood of defaulting on their debt. In particular, we examine whether it reduces default risk during increased economic uncertainty and various external shocks. Our results confirm that a stronger insolvency regime moderates the adverse effects of economic shocks on firms' default risk. The effects are more pronounced for firms in the top half of the size distribution. We also explore channels through which improved creditor rights influence firms' default risk, including dependence on external finance, corporate leverage, and managerial ethics. Our main results are robust to an alternative measure of default risk, inclusion of currency and sovereign debt crisis episodes, and alternative estimations.     

Market response to syndicated loan announcements from high-profile failed and acquiring banks during the global financial crisis

Previous studies that have examined the impact of the 2008 financial crisis on syndicated loans have ignored potential differences between lending banks by explicitly or implicitly aggregating all lenders together and focusing on borrower characteristics. One must jointly consider both borrower and lender to fully understand the complex role of the syndicate during this period. We consider the identity of the lender, with a focus on five major US banks that failed and their five corresponding acquirers. Our results highlight the distinct roles of investment and commercial banks and facilitate an understanding of relationship and transactional-based lending.     

Politically connected boards,family and business group affiliations,and cost of capital: Evidence from Indonesia

We investigate the effect of politically connected boards (both supervisory boards [SBs] and boards of directors [BODs]) on cost of debt and equity capital of listed companies in Indonesia which has established a two-tier corporate governance system. The results, based on 250 firms, suggest that companies with politically connected SBs experience lower cost of debt and equity capital, whereas politically connected BODs have no association with cost of either debt or equity. Furthermore, we find that family firms and firms belonging to business groups with politically connected SBs enjoy lower cost of debt and equity capital. Our main results are robust to alternative measures and to tests for endogeneity.     

Culture,financial crisis and the demand for property,accident and health insurance in the OECD countries

Culture has been known to play an important role in explaining differences in consumption behaviour across countries. Yet, we know very little how it affects spending on non-life insurance products. This paper attempts to shed some light on how cultural characteristics impact the demand for property, accident and health insurance, focusing on the OECD countries in the period 2000–2017. We find, via the system generalized method of moment estimations, that cultural characteristics such as individualism, long-term orientation, masculinity and uncertainty avoidance were the drivers of the expenditure on property insurance, whereas long-term orientation, uncertainty avoidance and hypometropia explained accident and health insurance spending across the OECD countries. In the presence of the global financial crisis, cultural effects on property insurance spending turned out to be relatively minor, with the exception of individualism. These findings provide valuable information for non-life insurance companies, consumers and policy makers in the OECD countries.     

Stock market dependence in crisis periods: Evidence from oil price shocks and the Qatar blockade

This paper examines the correlation and the dependence patterns of the Qatar stock market with other markets using copula statistical theory and exploiting new datasets covering the period August 1998 to June 2018. To examine the crisis –specific change in the average degree of dependence we decomposed the data into the time periods before and after oil price shocks and the 2017 political crisis among the Gulf Cooperation Council members (i.e. the Qatari blockade). Our findings from the static copula modelling show that the correlations between the Qatari and the other stock markets significantly change after the oil price and the blockade crisis as well. The degree of change in the correlation is time varying and differs from county-group to another. Moreover, our findings reveals that the 2008 global financial crisis has a stronger impact than the price shocks and political crisis. The findings of the paper are of interest and allow for formulating a reliable and dynamic portfolio design framework for investors and risk managers.     

Profit shifting and tax-rate uncertainty

Using firm-level data for 1,084 parent firms in 24 countries and for 9,497 subsidiaries in 54 countries, we show that tax-motivated profit shifting is larger among subsidiaries in countries that have stable corporate tax rates over time. Our findings further suggest that firms move away from transfer pricing and toward intragroup debt shifting that has lower adjustment costs. Our results are robust to several identification methods and respecifications, and they highlight the important role of tax-rate uncertainty in the profit-shifting decision while pointing to an adjustment away from more costly transfer pricing and toward debt shifting.     

Chair-CEO generation gap and bank risk-taking

Poor bank governance has disastrous consequences for economies as the 2007–2009 financial crisis has shown. In the aftermath, board diversity is identified as an effective mechanism to enhance bank governance. Diversity, creating cognitive conflict between board members, is expected to enhance board's independence of thought to better perform monitoring and advising functions. Age is a key demographic measure and age dissimilarity between the chair and the CEO in non-financial firms leads to better economic outcomes (Goergen, Limbach, & Scholz, 2015). In this paper, we examine whether chair-CEO age dissimilarity can mitigate banks' excessive risk-taking behaviour. Using a unique sample of 100 listed banks in Europe between 2005 and 2014, we find that age difference between the chair and the CEO reduces bank risk-taking. A chair-CEO generational gap –defined as a minimum of 20 years' age difference– has a larger impact in reducing risk-taking.     

Household Debt Overhang and Transmission of Monetary Policy

We investigate how the level of household indebtedness affects the monetary transmission mechanism in the U.S. economy. Using state‐dependent local projection methods, we find that the effects of monetary policy are less powerful during periods of high household debt. In particular, the impact of monetary policy shocks is smaller on GDP, consumption, residential investment, house prices, and household debt during a high‐debt state. We then build a partial equilibrium model of borrower households with financial constraints to rationalize these facts. The model points to the weakening of the home equity loan channel as a possible reason for the decline in monetary policy effectiveness when initial debt levels are high.     

Extreme risk spillovers between crude palm oil prices and exchange rates

This study is the first attempt to examine the extreme risk spillovers between Malaysian crude palm oil (CPO) and foreign exchange currencies of the three largest CPO importers: India, the European Union and China throughout the global financial crisis. Using daily data of three currencies, CPO spot and futures from 2000 to 2018, our results show: First, before the crisis, the unexpected change in foreign exchange rates is the primary driver of risk spillover to the CPO market. Second, during the crisis, the extreme movement of CPO spot returns is dominant in the Malaysian exchange rates relative to the euro. Third, after the crisis, the spillover flows from the CPO market to the foreign exchange market. Overall, our findings show the importance of CPO pricing dynamics in mitigating foreign exchange risk over the crisis period. This paper contributes to the extant literature by recognizing the effect of risk spillover on the targeted foreign exchange rate for portfolio allocation.     

Development costs capitalization and debt financing

This study investigates debt market effects of research and development (R&D) costs capitalization, using a global sample of public bonds and private syndicated loans issued by public non‐financial firms. Firstly, we show that firms capitalize larger amounts of R&D in a year when they exhibit a propensity for issuing bonds, rather than borrowing funds privately from the syndicated loan market, in the subsequent year. Secondly, we provide evidence that capitalized R&D investments reduce the cost of debt. We infer that debt market participants are able to identify firms’ motives for R&D capitalization, as we find a reduction in the cost of debt only for those firms that do not show indications of employing R&D capitalization for earnings management reasons. Indeed, only for this sub‐sample of firms, the amount of capitalized R&D contributes positively to future earnings. We confirm that R&D capitalization is positively associated with audit fees and thus can be deemed to be a signaling device. Lastly, we find that it is the amount of R&D a firm is expected to capitalize and not the discretionary counterparts, which facilitates a firm's access to public debt markets, reduces bond and syndicated loan prices, and contributes to future benefits.