Do negative interest rates affect bank risk-taking?

We offer early evidence on the impact of negative interest rate policy (NIRP) on banks’ risk-taking. Our primary result shows banks in NIRP-adopter countries reduce holdings of risky assets by around 10 percentage points following implementation of NIRP in comparison to banks in non-adopter countries. We augment this result by identifying NIRP’s impact on other aspects of banks’ risk-taking behaviour; NIRP is associated with reductions in banks’ loan growth and average loan price (by 3.7 percentage points and 59 basis points) and a rebalancing of asset portfolios towards safer assets. Secondly, we find the NIRP-effect is heterogeneous; post-NIRP risk-taking increases at strongly capitalised banks and at banks operating in less competitive markets that exploit market power to insulate net interest margins and profitability. Our robust empirical evidence supports the “de-leverage” hypothesis which suggests that banks acquire safer, liquid assets to bolster their capital positions rather than searching for value by acquiring riskier assets. We base our evidence on a sample of 2,584 banks from 33 OECD countries across 2012 to 2016, and from models that employ a difference-in-differences framework.     

Does interest rate and its volatility affect banking sector development? Empirical evidence from emerging market economies

This study investigates the relationship between interest rate, interest rate volatility, and banking sector development in 12 emerging market economies located around the world. For this purpose, panel data analysis was conducted using annual data from 1980 to 2014. In parallel to the financial development literature, which asserts that banking sector development, as a broad and complex concept, cannot be measured by a single indicator, this study adopts a set of measures of banking sector development. The empirical results reveal that while interest rate has a positive impact on all banking sector indicators, this relationship weakens at higher interest levels, showing a concave relationship between interest rate and banking sector development. In addition, the empirical results provide evidence that interest rate fluctuations have a negative impact on most banking sector development (BSD) indicators, suggesting that the banking sectors of emerging countries are vulnerable to interest rate risks. Furthermore, all measures of the banking sector indicators are positively affected by economic growth rates, while this association weakens at higher levels of income, confirming a nonlinear relationship. Thus, the results have important implications for policymakers in improving the banking system and promoting the economic growth of these emerging economies.     

Are interest rates too low? Empirical evidence and implications for German life insurers

The current financial crisis has reduced government bond yields in Germany, the U.S., the UK and other countries. Low interest rates do create some problems for the European insurance industry. Especially life insurers seem to face some difficulties. The empirical results reported in this paper give support to the point of view that the relationship among German long-term interest rates, consumer price inflation and industrial production has changed significantly in the year 2009. Turning to the important question under which circumstances an increase to interest rates is likely to occur the empirical evidence reported in this paper does indicate that higher inflation rates should be a cause for rising bond yields.     

Can interest rates really control house prices? Effectiveness and implications for macroprudential policy

This paper investigates how changes in the central bank policy and retail mortgage rates affected real housing prices in New Zealand during the period 1999–2009. We find that real interest rates are significantly and positively related to real housing prices, indicating that increases in the policy rate may not be effective in depressing real housing prices. By testing interest rates, we also find some evidence of housing price bubbles. Our findings suggest that the central bank could have limited housing price bubbles if it had started to intervene in the housing market prior to 2003. Our results set international exemplars for using policy rates or macroprudential tools to cool the housing market, where the extent of policy rate adjustments is limited by internal or external economic factors.     

Is transfer pricing strictness deterring profit shifting within multinationals? Empirical evidence from Europe

This paper examines the extent to which the introduction and tightening of transfer pricing frameworks deter income shifting strategies by European multinational companies. To do so, we have built an index that measures the transfer pricing framework strictness by host country and year. Then, tax rate differentials are used to capture profit-shifting incentives and are interacted with the strictness index to assess whether the host country's transfer pricing framework impacts profit-shifting behaviour. The index is shown to increase significantly over the sample period, indicating that the scrutiny of related party transactions by European governments has increased over the period 2001–2009. Using a sample of European foreign subsidiaries, the results suggest that the stricter the transfer pricing framework the lower the tax rate difference sensitivity of reported earnings. This indicates that tightening the transfer pricing framework is capable of dissuading multinational companies from shifting profits from higher- to lower-tax countries.     

Can interest rate volatility be extracted from the cross section of bond yields?

Most affine models of the term structure with stochastic volatility predict that the variance of the short rate should play a ‘dual role’ in that it should also equal a linear combination of yields. However, we find that estimation of a standard affine three-factor model results in a variance state variable that, while instrumental in explaining the shape of the yield curve, is essentially unrelated to GARCH estimates of the quadratic variation of the spot rate process or to implied variances from options. We then investigate four-factor affine models. Of the models tested, only the model that exhibits ‘unspanned stochastic volatility’ (USV) generates both realistic short rate volatility estimates and a good cross-sectional fit. Our findings suggest that short rate volatility cannot be extracted from the cross-section of bond prices. In particular, short rate volatility and convexity are only weakly correlated.     

Do aggressive orders affect liquidity? An evidence from an emerging market

This paper investigates how aggressive orders affect spreads and trading activity measures on the stock market. Based on a sample of stocks listed on the Warsaw Stock Exchange this study finds that spreads and trading activity measures increase significantly when aggressive orders are executed, but quickly revert to initial levels. The reaction to these orders on the bid and ask side of the market is similar. The effect of aggressive orders differ depending on the size of the firms. Trading activity measures such as volumes or number of transactions increase stronger for bigger than for smaller stocks, while spreads increase more for smaller firms than for bigger ones. These findings enrich the understanding of liquidity dynamics especially on the emerging markets where liquidity is an important price formation factor.     

Can book-tax differences capture earnings management and tax Management? Empirical evidence from China

This study investigates the relationship between book-tax differences (BTDs) and earnings management, tax management, and their interactions in Chinese-listed companies. Using unique tax-effect BTDs obtained from Chinese B-share-listed firms, we find that firms with strong incentives for earnings and tax management exhibit high levels of abnormal BTDs. This suggests that BTDs can be used to capture both accounting and tax manipulations induced by managerial motivations. Our results indicate that earnings management explains 7.4% of abnormal BTDs, tax management accounts for 27.8% of abnormal BTDs, and their interaction explains 3.2% of abnormal BTDs. Tax-effect BTDs are more powerful than income-effect BTDs in capturing opportunistic reporting at both conceptual and empirical levels.     

Do political connections affect the role of independent audit committees and CEO Duality? Some evidence from Malaysian audit pricing

This study examines whether political connection to firms affects the association between audit committee independence and demand for higher quality audits. In line with Carcello et al. (2002), our findings show that there is a positive association between audit committee independence and audit fees thus supporting the hypothesis that more independent audit committees demand higher audit quality. However, we find that this relationship is weaker for politically connected (PCON) firms suggesting that the independence of audit committees in Malaysian PCON firms may be compromised. Additionally, we provide evidence that PCON firms that have CEO duality are perceived by audit firms as being of higher risk than CEO duality firms without political connection.     

How do different performance measures affect managerial time orientation? Empirical evidence from sales managers in the oil and gas industry

This study investigates the relative effect of performance measures on managerial time orientation. We collect survey data on the actual time allocation of sales managers for tasks that affect financial performance on the short-, medium-, and long-term horizons. In addition, we obtain survey data on the specific metrics used by an oil and gas firm and classify them into three groups: traditional accounting (gross margin and budgeted costs), nonfinancial (market share and sales volume), and accounting returns (economic value added — EVA). Based on partial least-squares analysis, our results suggest that, in our setting, both nonfinancial and accounting return measures can supplement traditional accounting metrics to mitigate potential short-term orientation by inducing sales managers to consider mainly not only sales tasks but also investing tasks, which will affect the firm results more than a quarter ahead. In addition, our results imply that accounting return metrics are not better than nonfinancial measures in inducing a longer-term orientation in our research setting.