Do different forms of government ownership matter for bank capital behavior? Evidence from China

This study attempts to reconcile the conflicting theoretical predictions regarding how government ownership affects bank capital behaviour. Using a unique Chinese bank dataset over 2006–2015 we find that government-owned banks have higher target capital ratios and adjust these ratios faster compared to private banks, supporting the ‘development/political’ view of the government’s role in banking. This effect is stronger for local government-owned and state enterprise-owned banks than for central government-owned banks. We also find that undercapitalized government-owned banks increase equity while undercapitalized foreign banks contract assets and liabilities as their respective main strategy to adjust their capital ratios.     

Are capital buffers pro-cyclical?: Evidence from Spanish panel data

We estimate the relationship between the Spanish business cycle and the capital buffers held by Spanish commercial and savings banks in an incomplete panel of institutions covering the period 1986–2000, which comprises a complete cycle. After controlling for other potential determinants of the surplus capital we find a robustly significant negative relationship between the position in the cycle and capital buffers. From a quantitative standpoint, an increase of 1 percentage point in GDP growth might reduce capital buffers by 17%. This relationship is, moreover, asymmetric, being closer during upturns.     

Do CFOs matter? Evidence from the M&A process

This study examines the effect of Chief Financial Officers (CFOs) on mergers and acquisitions using a newly constructed CFO Influence Index. Because the perceived influence of CFOs is high in U.K. firms, we use that market for our analysis. We find that influential CFOs as measured by experience, stature, and pay are associated with more deal completions and the pursuit of smaller, domestic targets. High influence CFOs require less time to complete a deal and are able to identify higher quality targets for which they pay less. We also discover that firms with high influence CFOs enjoy greater long-term operating and financial performance post-merger. We conclude that influential CFOs are effective in creating shareholder value during M&A.     

Does carbon emission of firms matter for Bank loans decision? Evidence from China

In the context of global climate governance, greater carbon emissions of enterprises often result in a higher potential risk of environmental violations. Taking the non-financial companies listed in China from 2008 to 2018 as research samples, this paper empirically examined the impact of firm carbon emission on their acquisition of new bank loans and its mechanism of action. This paper empirically finds that if the carbon emission of an enterprise is higher, it will be granted with less new bank loans. The results remain robust after pairing analysis and instrumental variable analysis. The mechanism analysis shows that corporate credit rating plays a significant moderating role in the relationship between corporate carbon emission and new bank loans. Carbon emission leads to the improvement of earnings management of enterprises and the significant decline in the conservatism and comparability of accounting information, which is likely to be an important channel for the reduction of corporate bank loans. Upon further analysis, we find that the carbon emission of enterprises will not significantly affect the cost of acquiring bank loans, but it will significantly reduce the loan term structure. The cross-sectional analysis shows that the effect of carbon emission on new bank loans is more obvious in state-owned listed enterprises, enterprises with high internal control quality and enterprises with strong environmental law enforcement. The research results of this paper enrich the research on the economic consequences of carbon emission, reveal the implementation effect of green credit policies, provide empirical evidence for bank credit to play a role in green governance, and promote enterprises to actively reduce carbon emission.     

Do liquidity and idiosyncratic risk matter? Evidence from the European mutual fund market

This paper examines the interaction of idiosyncratic risk, liquidity and return across time in determining fund performance, as well as across investment style portfolios of European mutual funds. This study utilizes a unique data set including returns for equity mutual funds registered in six European countries. Overall, using monthly data, we find that both liquidity and idiosyncratic risk are relevant in determining mutual fund returns. Our results are robust across different model specifications. We show that model specifications up to six factors are useful as these risk factors capture different aspects in the cross-section of mutual funds returns. The evidence regarding mutual funds subgroups is strongly in favor of the significance of liquidity, and idiosyncratic risk to a lesser extent, as risk factors. Even if liquidity and idiosyncratic risk are considered at the same time, one factor is not significantly decreasing the importance of the other factor.     

Do ETF flows increase market efficiency? Evidence from China

Focusing on the equity exchange traded funds (ETFs) in China, we demonstrate the significant effect of ETF flows on the informativeness of the ETF index. Following the novel approach proposed by Xu et al (2019a). to identify different driving forces for ETF flows, we explore whether the forward-looking ETF flows at a day’s closing substantially improve the index’s efficiency on the next day. The mechanism behind it is inter-market information spread: the efficiency effect of the forward-looking ETF flows strengthens when ETFs share more new information; and the forward-looking ETF flows increase the information flow to the ETF index on the next day.     

Do personal taxes affect capital structure? Evidence from the 2003 tax cut

Because the personal tax treatments of interest and dividend income likely affect the relative cost of debt and equity financing, a sharp change in tax treatment could affect firms' optimal leverage. This paper examines the effect of the 2003 equity income tax cut on firms' debt usage. Because this tax cut affected only individual investors, we can use a difference-in-differences method to identify the effect of personal tax on firms' leverage. Previous research has found that the 2003 tax cut encouraged dividend payouts and reduced the cost of equity, but it provides no link to equilibrium leverage ratios. We estimate that the tax cut causes the affected firms' leverage to decrease by about 5 percentage points. Furthermore, we show that the effects of the tax cut are stronger for firms with lower marginal corporate tax rates and for firms that are not financially constrained, consistent with our theoretical predictions. Overall, we find strong evidence that personal tax is an important determinant of firms' optimal leverage.     

Do the business cycle and revenue diversification matter for banks’ capital buffer and credit risk: Evidence from ASEAN banks

We examine the association of the business cycle and revenue diversification with the banks’ capital buffer and credit risk for a sample of banks from the Association of Southeast Asian Nations (ASEAN) region from 1998 to 2018, using 2847 banking firm–year observations. We find that ASEAN region banks react anticyclically in adjusting their capital buffer levels and credit risk. We find revenue diversification benefits and that banks, through revenue diversification, can reduce their credit risk while achieving capital savings when confronting economic downturns. Our results offer support for the Basel III accord. However, the relations revealed are somewhat moderated by the regulatory quality, competition, and phase of the business cycle encountered by ASEAN region banks.     

Do capital flows change domestic credit allocation?

Since the 1990s, domestic bank credit has been reallocated away from lending to non-financial business and toward households. An expanding literature discusses negative effects on growth and stability of this change in credit allocation. We research its drivers. We hypothesize that if foreign capital flows into economies with few investment opportunities, it may substitute for domestic bank lending to non-financial business, so that bank balance sheets become more dominated by household lending. In GMM estimations on data for 36 economies over 1990–2011, we find evidence consistent with this mechanism. Foreign capital inflows into the non-bank sector (but not into the bank sector) are associated with lower shares of business lending in domestic bank portfolios. The association is weaker in economies with more investment opportunities, whether proxied by investment shares, current account surpluses, or EMU membership. Our results highlight the importance of sectoral destination in determining the effects of capital flows.     

Does the signature of a CPA matter? Evidence from Taiwan

This paper employed aquestionnaire survey to investigate the opinions of audit report stakeholders in Taiwan regarding the regulation of signatures in audit reports. The Public Company Accounting Oversight Board (PCAOB) proposed these regulations in 2009, and again in 2011 with a slight alteration. Most respondents agree that having the engagement partner sign the audit report could increase the accountability of CPAs. In addition, the participants believed that knowledge of the name of the engagement partner is important for the users of audit reports. Both of these views are consistent with the views voiced by the PCAOB. Most of the respondents also believe that the regulation of signatures would increase the legal responsibility of the engagement partner and minimize the role of firms in the auditing process. Finally, the respondents felt that the engagement partner has a much greater responsibility when their signature is in the audit report than when it is disclosed elsewhere, indirectly supportingthe second proposal of the PCAOB, which, rather than having the engagement partner sign their name on the audit report, simply lists the names of engagement partners elsewhere.     

Does investment banker human capital matter in acquisitions? Evidence from China

Investment banker human capital is valuable in mergers and acquisitions. Exploiting a unique hand-built dataset, this paper studies whether and how investment banker's education and experience impact the merger performance in China. We find that investment bankers' education credentials are positively related to the post-merger performance; however, greater investment banker experience does not. We further explore the channels and show that the education effect is stronger in deals with higher information asymmetry and acquirers with worse corporate governance. On the other hand, experience increases merger performance in deals with high information asymmetry but reduces deal performance in poorly governed firms. Our findings suggest that higher education attainment facilitates both the advisory and monitoring role of investment bankers, while more experience makes investment bankers better advisors yet worse monitors. Our findings also suggest that investment bankers' roles in value creation are highly dependent on different institutional backgrounds, and one cannot generalize the findings in the U.S. across borders.     

Do different streams of capital flows affect asset prices differently?

This paper explores the impact of six types of gross capital flows (debt, equity, and banking gross inflows and outflows) on two dimensions: (1) extreme episodes of surges, stops, flights, and retrenchments, and (2) the probability of boom-busts in ASEAN-4 asset markets for the period 1993–2018. To this end, we first decompose gross capital inflows and outflows from Balance of Payments 5 and 6 and show that ASEAN-4 is largely dominated by portfolio flows and a relatively small magnitude of banking flows. However, when we link this decomposition to the extreme episodes, our findings show banking flows are volatile enough to cause greater occurrences of flight and retrenchment episodes while volatile debt flows tend to lead to surge and stop episodes. In the second part, we construct asset price index for ASEAN-4 that can detect boom-busts periods with a minimal noise-to-signal ratio eight quarters ahead. We use heteroscedasticity panel probit and ordinal generalized linear models to show that fundamental variables and banking inflows are statistically significant at increasing likelihood of boom-busts in asset markets. These two findings highlight that although largest percentage of capital flows come through debt and equity markets, the banking channel is of paramount importance in causing extreme episodes of flight and retrenchment as well as boom-busts of asset markets.     

Do firms underreport information on cyber-attacks? Evidence from capital markets

Firms should disclose information on material cyber-attacks. However, because managers have incentives to withhold negative information, and investors cannot discover most cyber-attacks independently, firms may underreport them. Using data on cyber-attacks that firms voluntarily disclosed, and those that were withheld and later discovered by sources outside the firm, we estimate the extent to which firms withhold information on cyber-attacks. We find withheld cyber-attacks are associated with a decline of approximately 3.6% in equity values in the month the attack is discovered, and disclosed attacks with a substantially lower decline of 0.7%. The evidence is consistent with managers not disclosing negative information below a certain threshold and withholding information on the more severe attacks. Using the market reactions to withheld and disclosed attacks, we estimate that managers disclose information on cyber-attacks when investors already suspect a high likelihood (40%) of an attack.     

Does trust matter for the cost of bank loans?

This paper extends the literature related to the role of trust on economic activity, focusing on the influence of trust on lender-borrower relationships and analysing its effect on the interest rate spread for a sample of 20,699 loans from 47 countries over the period 2003–2018. We consider not just the role of trust, but also how its effect is moderated by the country's legal enforcement and degree of economic development. The results show that trust has no effect on loan spreads. However, trust is found to reduce loan spreads when a country's formal institutions are weak, in line with the existence of a substitutive effect between formal and informal institutions in reducing interest rates. As regards the degree of economic development, our results show that both trust and legal enforcement have a greater influence on the interest rate spread of bank loans in countries with a lower level of economic development.     

Controlling capital? Legal restrictions and the asset composition of international financial flows

How effective are capital account restrictions? We provide new answers based on a novel panel data set of capital controls, disaggregated by asset class and by inflows/outflows, covering 74 countries during 1995–2005. We find the estimated effects of capital controls to vary markedly across the types of capital controls, both by asset categories, by the direction of flows, and across countries' income levels. In particular, both debt and equity controls can substantially reduce outflows, with little effect on capital inflows, but only high-income countries appear able to effectively impose debt (outflow) controls. The results imply that capital controls can affect both the volume and the composition of capital flows.     

Do extreme returns matter in emerging markets? Evidence from the Chinese stock market

Recent evidence in the U.S. and Europe indicates that stocks with high maximum daily returns in the previous month, perform poorly in the current month. We investigate the presence of a similar effect in the emerging Chinese stock markets with portfolio-level analysis and firm-level Fama–MacBeth cross-sectional regressions. We find evidence of a MAX effect similar to the U.S. and European markets. However, contrary to U.S. and European evidence, the MAX effect in China does not weaken much less reverse the anomalous idiosyncratic volatility (IV) effect. Both the MAX and IV effects appear to independently coexist in the Chinese stock markets. Interpreted together with the strong evidence of risk-seeking behaviour among Chinese investors, our results partially support the suggestion that the negative MAX effect is driven by investor preference for stocks with lottery-like features.     

Target loans, current account balances and capital flows: the ECB’s rescue facility

This paper presents the first comprehensive Target database of the Eurozone and interprets it from an economic perspective. We show that the Target accounts measure the intra-Eurozone balances of payments and indirectly also international credit given through the Eurosystem in terms of reallocating the ECB’s net refinancing credit. We argue that the Euro crisis is a balance-of-payments crisis similar to the Bretton Woods crisis, and document to what extent the Target credit financed the current account deficits and outright capital flight in Greece, Ireland, Portugal, Spain and Italy. To prevent the ECB from undermining the allocative role of the capital market, we propose adopting the US system of credit redemption between the District Feds.     

Do banks appraise internal capital markets during credit shocks? Evidence from the Greek crisis

Using data of bank loans to Greek firms during the Greek crisis we provide evidence that affiliated firms, having access to the internal capital markets of their associated group, are less likely to default on their loans. Furthermore, banks require lower loan collateral coverage from affiliated firms and are less likely to downgrade the affiliates’ credit profile. Finally, banks are more likely to show forbearance to affiliated firms with non-performing loans. The results are consistent with the view that banks manage their relationships with firms in a business group jointly, as opposed to viewing each firm as an independent entity. Our findings also suggest that the value of risk sharing through internal capital markets increases when external financing is scarce.     

Is the venture capital market liquid? Evidence from India

This paper models investment duration in the Indian venture capital (VC) market, by industry and exit route. We examined 3416 investment and exit transactions in India during the period 2000–2017 and found that the probability of staying invested for more than ten years was 70%. Exit probabilities were low in most sectors. Investment duration was not positively associated with the investment valuation; rather, it was impossible to exit from the majority of investments because of the illiquidity of the VC market.