The real effects of financial constraints: Evidence from a financial crisis

We survey 1,050 Chief Financial Officers (CFOs) in the U.S., Europe, and Asia to directly assess whether their firms are credit constrained during the global financial crisis of 2008. We study whether corporate spending plans differ conditional on this survey-based measure of financial constraint. Our evidence indicates that constrained firms planned deeper cuts in tech spending, employment, and capital spending. Constrained firms also burned through more cash, drew more heavily on lines of credit for fear banks would restrict access in the future, and sold more assets to fund their operations. We also find that the inability to borrow externally caused many firms to bypass attractive investment opportunities, with 86% of constrained U.S. CFOs saying their investment in attractive projects was restricted during the credit crisis of 2008. More than half of the respondents said they canceled or postponed their planned investments. Our results also hold in Europe and Asia, and in many cases are stronger in those economies. Our analysis adds to the portfolio of approaches and knowledge about the impact of credit constraints on real firm behavior.     

The real effects of financial reporting on pay and incentives

This paper discusses two real effects of financial reporting on pay and incentives: (1) Better earnings leads to better incentives, and (2) If pay is mismeasured, pay can be misused. The first real effect follows from the fact that incentives are often based on earnings, and the effectiveness of earnings-based incentives is positively related to the quality of earnings. Greater use of earnings in incentives provides better incentives at a lower cost. The second real effect has to do with how well the accounting system measures the expense of various pay components. Complex calculations are required to value complex pay components such as options, post-employment benefits, and performance-vested equity, and these calculations have historically not been done correctly. The incorrect accounting leads to these pay components being misused. I conclude by discussing how accounting and disclosure of pay and incentives can be improved.     

安永：欧元区金融服务业发展预测

安永预测：欧元区整体经济今年仍然面临着非常严峻的各种挑战,财政紧缩、信贷紧缩以及失业率上升等等,这些导致增长缓慢的因素只不过是欧元区的成员国和其金融机构面临问题的一部分而已,因此,     

关于欧洲主权债务问题与欧元区域制度改革的思考

近来,希腊、葡萄牙、西班牙和爱尔兰等多个欧元区国家均面临主权债务违约风险。这一问题的发生,既有希腊等国自身财政管理的原因,也反映出欧元区体制中存在的一系列长期性、结构性和制度性问题。如果不能妥善解决欧元区国家的主权债务问题,不仅将拖累欧元区经济发展,也会对世界经济金融复苏造成冲击。欧洲主权债务问题的出现,对我国财政预算管理也有一定警示作用。     

International transmission and business-cycle effects of financial stress

We analyze the international transmission of financial stress and its effects on global economic activity. Our analysis is based on country-specific monthly financial stress indices (FSIs) over the sample period 1970–2012 for 20 major economies. First, we show that co-movement between the FSIs increases during major financial crises and towards the end of our sample period. Second, we show that the risk of large financial stress spillovers to an economy increases with its level of economic openness. Third, we show – using a global VAR (GVAR) model – that (i) a financial stress shock in the US quickly transmits internationally, (ii) financial stress shocks have lagged but persistent negative effects on economic activity, and (iii) that a negative US demand shock induces only limited financial stress on a global scale. Finally, we show that spillovers of financial stress run mainly from advanced to emerging economies and not in the opposite direction.     

Static and dynamic liquidity spillovers in the Eurozone: The role of financial contagion and the Covid-19 pandemic

This paper investigates static and dynamic liquidity spillovers for a pool of ten Eurozone countries for the period 2000–2021. We estimate a generalised vector autoregressive (VAR) model based on Diebold and Yilmaz (2009, 2012). We find evidence for static and dynamic transmission of shocks through the liquidity channel. We propose a static measure of liquidity spillovers which captures total and pairwise average spillovers across Eurozone countries. Our measure shows strong evidence of interconnection within the Eurozone through the liquidity channel. We investigate the dynamic intensity and direction of liquidity spillovers, finding significant evidence of contagion during crisis periods. Our results indicate that most of the shocks during periods of financial uncertainty arise from leading economies within the Euro area.     

From me to you: Measuring connectedness between Eurozone financial institutions

This paper aims to analyse the tail risk spillover between banks, insurance companies and the shadow banking system in the Eurozone contest. These intra-sectoral interdependencies between financial market participants have contributed to the spread of instability in the financial system. Therefore mapping these links is important for policy-makers to provide supervisory tools and can be a key input into the design of macroprudential policies. For this purpose, we adopt the Tail-Event driven NETwork (TENET) risk model. The TENET is a useful method to map the tail interconnection between the three sectors and to provide systemic risk measures that take into account the “too big to fail” and “too big to interconnected” concepts. The results suggest that each financial sector has a significant impact on the other. By comparing the contribution of each sector, we show that banks are the largest emitters of risk. However, also shadow banking firms are systemic important, given their high level of connection. The work provides a clear view of risk spillovers and interconnection dynamics during the crisis providing a meaningful ranking of the systemic important financial institutions.     

The real effects of financial (dis)integration: A multi-country equilibrium analysis of Europe

Using data from 15 European Union economies, we quantify the real effects of supply-side frictions due to the financial disintegration of European countries since the 2008 financial crisis. We develop a multi-country general equilibrium model with heterogeneous countries and destination-specific financial frictions. Financial institutions allocate capital endogenously across countries, determining the cost of capital to firms and the wealth of nations. The cost of financial disintegration is reduced access to capital for firms which results in lower output. Financial disintegration leads to a 0.54% fall in output in Europe since the crisis. We also estimate benefits of further financial integration.     

News spillovers from the Greek debt crisis: Impact on the Eurozone financial sector

We examine the impact of changes in Greek sovereign yield spreads on abnormal returns of financial sector stocks for a sample of Eurozone countries, during the Greek debt crisis. We find that increases in yield spreads are associated with negative abnormal returns on financial stocks in the Portugal, Spain and Netherlands. These abnormal returns are driven in part by ratings downgrades and other unfavorable news announcements about Greece. We isolate the effects of known transmission channels–impairment of financial firms’ asset base due to cross-holdings of Greek bonds, from increases in domestic interest rates and higher funding costs. Our analysis indicates that news events lead to spillovers in excess of what can be explained by these channels of transmission.     

Reporting matters: the real effects of financial reporting on investing and financing decisions

In this paper, I provide an overview of the research on the real effects of financial reporting on investing and financing decisions made by firms. Accounting can improve investment efficiency and affect nearly every aspect of the financing decision by reducing information asymmetry and improving monitoring. However, limitations in the financial reporting system, specifically distinguishing liabilities from equity and determining control for consolidations, result in opportunities to structure transactions to achieve certain financial reporting outcomes. A recent new stream of research documents a link between accounting and macroeconomic indicators, providing evidence that accounting predicts revisions in these indicators. An interesting avenue for future research could be to investigate the link between accounting, investing and financing, and macroeconomic performance.     

Linkages between Indian and US financial markets: impact of global financial crisis and Eurozone debt crisis

This paper examines inter-linkages between Indian and US equity, foreign exchange and money markets using the vector autoregressive-multivariate GARCH-BEKK framework. We investigate the impact of global financial crisis (GFC) and Eurozone debt crisis (EZDC) on the conditional volatility and conditional correlation estimates derived from the multivariate GARCH model for Indian and US financial markets. Our results indicate that there is significant bidirectional causality-in-mean between the Indian stock market returns and the Rs./USD market returns, and significant unidirectional causality-in-mean from the US stock market returns to the Indian stock market returns. As regards volatility spillovers, we find that volatility in the Indian stock market rises in response to domestic as well as US financial market shocks but Indian financial market shocks do not impact the US markets. Further, impact of the recent crisis episodes on the covariance matrix is found to be significant. We find that volatility in the Indian and US financial markets significantly amplified during GFC. The conditional correlations across asset markets were significantly accentuated in the wake of the two crisis episodes. The impact of GFC on cross-market conditional correlations is higher for majority of the asset market pairs in comparison to the EZDC.     

The Euro Bias of Bank Assets in the Eurozone

Abstract:

The integration of eurozone financial markets since the advent of the euro in 1999 has been the center of attention in policy debates and academic research. We analyze the bank assets of monetary financial institutions in Germany vis-à-vis nonresidents. The financial institutions of the eurozone countries have tended to invest in assets of other eurozone countries substantially more since the introduction of the euro. The euro effect is especially stronger in the weaker eurozone economies than in the stronger eurozone economies. Furthermore, the impact of the euro has been even greater in securities than in loans. In this paper, we use Bundesbank balance-of-payment statistics to analyze the euro’s effects on the asset portfolios of German banks vis-à-vis nonresidents.     

The Eurozone needs exit rules

This study argues that the key issue for defining and solving the Eurozone’s (EZ) difficulties lies in readjusting the relationship between the centre and the periphery of the EZ. Our argument proceeds in two steps. Firstly, the basic finance problem of a centre-periphery system is captured by a threat game with complete but imperfect information. To get close to the essence of the current EZ sovereign debt crisis we analyse to what extent a ‘troubled’ periphery member can negotiate a bailout from the centre due to the existence of a negative externality arising from its potential default. Secondly, we analyse how establishing ‘exit rules’ would shift the centre-periphery relationship in a way that safeguards the stability of the EZ. We demonstrate that such rules may help limit the scope for brinkmanship whereby fiscal problems in one member state create a negative externality for the rest of the EZ. We then discuss key policy implications concerning financial aspects of the centre-periphery relationship within the EZ.     

The effect of financial leverage on real and accrual-based earnings management

Past research has documented a substitution effect between real earnings management (RM) and accrual-based earnings management (AM), depending on relative costs. This study contributes to this research by examining whether levels of (and changes in) financial leverage have an impact on this empirically documented trade-off. We hypothesise that in the presence of high leverage, firms that engage in earnings manipulation tactics will exhibit a preference for RM due to a lower possibility – and subsequent costs – of getting caught. We show that leverage levels and increases positively and significantly affect upward RM, with no significant effect on income-increasing AM, while our findings point towards a complementarity effect between unexpected levels of RM and AM for firms with very high leverage levels and changes. This is interpreted as an indication that high leverage could attract heavy outsider scrutiny, making it necessary for firms to use both forms of earnings management in order to achieve earnings targets. Furthermore, we document that equity investors exhibit a significantly stronger penalising reaction to AM vs. RM, indicating that leverage-induced RM is not as easily detectable by market participants as debt-induced AM, despite the fact that the former could imply deviation from optimal business practices.     

Asymmetric effects of the international transmission of US financial stress. A threshold-VAR approach

During period of financial stress, the effect of financial stress shocks on economic activity might be different from what is usually observed in normal times. This paper investigates the transmission of financial stress episodes on the macroeconomy during stressed and normal periods and it explores how these events are transmitted to the Eurozone. We find that, a detrimental US financial shock leads to a worsening in economic and financial conditions both domestically and in the Eurozone. In addition, during turmoil times, financial accelerator mechanism amplifies and propagates the transmission of US financial stress shocks to the Eurozone by reducing its economic activity. Moreover, small financial stress shocks, rather than infrequent large ones, are able to create large fluctuations in inflation rates. Last, the effect of a detrimental shock in financial conditions has larger negative effects in the economy compared with the positive effects that would be generated by a beneficial shock in financial conditions.     

Exploring interactions between real activity and the financial stance

In this paper we empirically study interactions between real activity and the financial stance. Using aggregate data we examine a number of candidate measures of the financial stance of the economy. We find strong evidence for substantial spillover effects on aggregate activity from our preferred measure. Given this result, we use a large micro-data set for corporate firms to develop a macro–micro-model of the interaction between the financial and real economy. This approach implies that the impulse responses of a given aggregate shock will depend on the portfolio structure of firms at any given point in time.     

The real effects of proxy advisors on the firm

This paper examines the influence of proxy advisors (PA) on firm voting outcomes, policies, and value. We measure PA influence with shareholders' historical propensity to follow PA recommendations. PA influence increases the impact of PA recommendations on proxy voting outcomes and firm policies. When shareholders have private incentives to engage in costly research in the absence of a proxy advisor, PA influence neither harms nor benefits shareholder value. However, at firms with dispersed shareholders PA influence can increase value. Our findings are consistent with theories of voting in which proxy advisors compete with private information acquisition efforts by large shareholders.     

The real effects of credit default swaps

We examine the effect of introducing credit default swaps (CDSs) on firm value. Our model allows for dynamic investment and financing, and bondholders can trade in the CDS market. The model incorporates both negative and positive effects of CDSs. CDS markets lead to more liquidations, but they also reduce the probability of costly debt renegotiation and reduce costly equity financing. After calibrating the model, we find that firm value increases by 2.9% on average with the introduction of a CDS market. Firms also invest more and increase leverage. The effect on firm value is strongest for small, financially constrained, and low productivity firms.     

The effects of perceived salesperson listening effectiveness in the financial industry

The goals of this paper are twofold: (a) to test the multidimensional structure of the listening construct and (b) to identify major consequences of perceived salesperson listening effectiveness. A survey was completed by more than 400 buyer–seller dyads. Following structural equations modelling analyses, results show that customers’ perceptions of listening effectiveness is positively (and strongly) associated with service quality, trust, satisfaction, word-of-mouth propensity, purchase intentions and sales performance. Numerous managerial implications are proposed to entice organisations to emphasise salespeople listening skills as a competitive advantage. Research opportunities are also presented to accrue academic efforts in understanding the truly rich role of listening.