Financial Regulation,Financial Globalization,and the Synchronization of Economic Activity

We analyze the impact of financial globalization on business cycle synchronization using a proprietary database on banks’ international exposure for industrialized countries during 1978 to 2006. Theory makes ambiguous predictions and identification has been elusive due to lack of bilateral time‐varying financial linkages data. In contrast to conventional wisdom and previous empirical studies, we identify a strong negative effect of banking integration on output synchronization, conditional on global shocks and country‐pair heterogeneity. Similarly, we show divergent economic activity due to higher integration using an exogenous de‐jure measure of integration based on financial regulations that harmonized EU markets.     

Portfolio Selection and the Investment Performance of the UK Pension Funds*

Pension funds are the main institutional investors, accounting for 38 per cent of personal sector net financial wealth. As a result of their growing importance in mobilizing personal sector saving, they have emerged as the principal institutional investor, controlling over £200bn of funds at the end of 1987, their total net assets equalling 38 per cent of personal sector net financial wealth. Pension funds also dominate domestic asset markets, owning 27per cent of the stock of outstanding UK equity, 23 per cent of UK government securities and 17 per cent of total UK holdings of overseas equity. In this paper we present the conclusions from recent research, undertaken as part of an updating of the LBS Financial Model. Our results suggest that UK pension fund investment since 1980 is better than previous studies have suggested and, in particular, that funds outperformed the equity market in the 1980s, offering a higher return for any given level of risk. In addition fund behaviour is slow to change, with past behaviour exerting the strongest influence on current investment patterns. Fund managers also appear guilty of “short termism” in that they place little weight on events beyond the next three months. However, this has not made them inefficient. Finally, we find that actions to restrict the funds' surpluses should not affect their investment behaviour. Our results also suggest that the costs from exchange controls in the 1970s were substantial, amounting to some £4bn per year.     

Corporate Control around the World

We study corporate control tracing controlling shareholders for thousands of listed firms from 127 countries over 2004 to 2012. Government and family control is pervasive in civil-law countries. Blocks are commonplace, but less so in common-law countries. These patterns apply to large, medium, and small firms. In contrast, the development-control nexus is heterogeneous; strong for large but absent for small firms. Control correlates strongly with shareholder protection, the stringency of employment contracts and unions power. Conversely, the correlations with creditor rights, legal formalism, and entry regulation appear weak. These patterns support both legal origin and political theories of financial development.     

Formative Experiences and Portfolio Choice: Evidence from the Finnish Great Depression

We trace the impact of formative experiences on portfolio choice. Plausibly exogenous variation in workers’ exposure to a depression allows us to identify the effects and a new estimation approach makes addressing wealth and income effects possible. We find that adversely affected workers are less likely to invest in risky assets. This result is robust to a number of control variables and it holds for individuals whose income, employment, and wealth were unaffected. The effects travel through social networks: individuals whose neighbors and family members experienced adverse circumstances also avoid risky investments.     

Investment: A Worldwide Boom

Investment is booming: not only in the UK but also in the US, Japan and in Europe. In this Briefing Paper we seek to understand why this is happening – a global phenomenon clearly requires a global not a local explanation – and to consider whether the boom will continue. To this end (and not in order to discriminate between alternative theories of investment), we examine the main theories of investment and show that recent developments are consistent with models based on the accelerator, or which emphasize the cost of finance or which depend upon stock market valuation effects. And, no matter which theory holds, the implication is the same: investment will weaken in 1989 and this is an important element in our forecast of slower world and UK growth next year.
But there is an alternative view, which implies a more optimistic outlook. The theories which we consider are essentially cyclical: they focus on the key role of (volatile) investment spending in the business cycle. It may well be that the present surge in investment is a long-tern, structural phenomenon reflecting either a shift in the pattern of world demand or the spread of computer-based technology, which has raised the efficiency of investment. In this case, and notwithstanding this year's surge in investment, tighter monetary policy and the stock market crash, the present boom in investment may have a lot further to run.