Is there a bright side to government banks? Evidence from the global financial crisis

Using a sample of banks from 56 countries, this paper investigates the lending behavior of government banks during the crisis of 2008, and its association with bank performance and the economy. Contrary to the traditional wisdom, we find that government banks can play a beneficial role under certain circumstances. Government banks have higher loan growth rates than private banks during the crisis. In countries with low corruption, the increased lending by government banks is associated with better bank performance and more favorable GDP and employment growth in the crisis period. In contrast, the results for countries with high corruption are more consistent with the political view: the increased lending by government banks is associated with underperformance relative to private banks, and creates no beneficial effects on either GDP growth or employment.     

Is there a viable alternative to ordinary least squares regression when security abnormal returns are the dependent variable?

Regression analysis is often used to estimate a linear relationship between security abnormal returns and firm-specific variables. If the abnormal returns are caused by a common event (i.e., there is “event clustering”) the error term of the cross-sectional regression will be heteroskedastic and correlated across observations. The size and power of alternative test statistics for the event clustering case has been evaluated under ideal conditions (Monte Carlo experiments using normally distributed synthetic security returns) by Chandra and Balachandran (J Finance 47:2055–2070, 1992) and Karafiath (J Financ Quant Anal 29(2):279–300, 1994). Harrington and Shrider (J Financ Quant Anal 42(1):229–256, 2007) evaluate cross-sectional regressions using actual (not simulated) stock returns only for the case of cross-sectional independence, i.e., in the absence of clustering. In order to evaluate the event clustering case, random samples of security returns are drawn from the data set provided by the Center for Research in Security Prices (CRSP) and the empirical distributions of alternative test statistics compared. These simulations include a comparison of OLS, WLS, GLS, two heteroskedastic-consistent estimators, and a bootstrap test for GLS. In addition, the Sefcik and Thompson (J Accounting Res 24(2):316–334, 1986) portfolio counterparts to OLS, WLS, and GLS, are evaluated. The main result from these simulations is none of the other estimator shows clear advantages over OLS or WLS. Researchers should be aware, however, that in these simulations the variance of the error term in the cross-sectional regression is unrelated to the explanatory variable.

Is there an Olympic gold medal rush in the stock market?

Investor sentiment and attention are often linked to the same non-economic events making it difficult to understand why and how asset prices are affected. We disentangle these two potential drivers of investment behaviour by analysing a new data-set of medals for the major participating countries and sponsor firms over four Summer Olympic Games. Our results show that trading volume and volatility are substantially reduced following Olympic success although returns appear to be largely unaffected. Analysis of data from online search volumes and surveys measuring investor sentiment also suggests that the market impact of the Olympics is linked to changes in attention.     

The financial crisis: What is there to learn?

Many are currently studying the origins of the financial crisis in an attempt to answer two seemingly simple questions: why did it happen, and can another crisis be prevented? Those two questions have proved incredibly divisive. The majority opinion of The United States Financial Crisis Inquiry Commission was submitted with two dissenting positions. Furthermore, The 2010 Economic Report of the United States President does not perfectly align with any opinion presented in that report. Few studies, however, provide proper consideration to the evolution of macroeconomic thought and lengthening of the business cycle preceding the current crisis.     

Is there an optimal microcredit size to maximize the social and financial efficiencies of microfinance institutions?

Financial intermediation theory posits that a smaller loan size triggers a higher cost per dollar lent. This leads to question whether microfinance can become a self-sustainable industry. Hence, in microfinance innovations like loans without collateral, progressive loans, solidarity groups and relational lending are employed to reduce asymmetric information costs, adverse selection, and moral hazard while serving the poorest people. Crucially, we find a non-linear U-shaped effect of loan size on financial and social efficiencies. This reconciles the two opposite strands of the literature, aligning microfinance and banking central principles. The major implication of this study is that, unlike banking, microfinance institutions can grant small size loans while simultaneously obtaining high levels of financial and social efficiency. Indeed, our findings do not support the widely debated mission drift assumption since loan size does not generate a trade-off between financial and social outcomes. Therefore, loan size is a core management variable.     

Credit cycle coherence in the eurozone: Was there a euro effect?

This paper examines effects of the euro introduction on credit cycle coherence in the eurozone through six channels. We construct and describe credit cycles for total bank credit, household mortgages and non-financial business loans for 16 EMU economies over 1990–2015. Credit cycle coherence is measured by synchronicity of cycle movements and similarity of their amplitudes. We find that the effect of euro introduction runs through elimination of currency risk and higher capital flows, which decrease coherence of total credit and mortgage credit cycles, but increase coherence of business credit cycles. Falling interest rates contribute to the convergence of total and mortgage credit cycles. Financial deregulation and legal harmonization are associated with lower coherence of all credit cycles, while trade openness has the opposite impact. The findings impinge on monetary policy effectiveness in the eurozone, with implications for macroprudential policy.     

Is there Information in an Earnings Announcement Delay?

Using a sample of announcements drawn from the 1980s and early 1990s, we reassess the relation between earnings news and earnings announcement timing. Using analyst forecast errors to proxy for news, we find that early announcements are associated with good news relative to late announcements. The relation between news and timing, however, does not appear to be strictly monotonic. Furthermore, we find that unexpected earnings explain 4% or less of the variation in timing. Finally, we assess whether abnormal returns behave in a manner that is consistent with a good news early, bad news late relation.     

Is spin-off policy an effective way to improve performance of Islamic banks? Evidence from Indonesia

Indonesia has adopted a dual banking system in which both conventional and Islamic banks operate. Most of the sharia-based banks, however, are still operating Islamic windows within their conventional entity. To strengthen the role of Islamic banking in the intermediation system, the government issued Islamic Banking Law No. 21/2008 to encourage Islamic windows of conventional banks to become a legal entity separate from their parent company. Because some Islamic windows have spun off in this fashion, we can employ a difference-in-difference approach to examine the effect of such a spin-off on Islamic banks’ performance, efficiency, and risk. Our study covers all Islamic commercial banks (including Islamic windows of conventional banks) in Indonesia from 2008–2019. We find that the performance and efficiency of full-fledged Islamic banks are significantly lower compared with Islamic windows of conventional banks. Moreover, our results show that financing risk increases after the spin-off. The inferior performance of full-fledged Islamic banks persists for four years after the spin-off. We also find that a conversion strategy results in better outcomes, particularly for profitability and efficiency, than a pure spin-off strategy.     

Is implementing the IPSASs an appropriate reform?

The purpose of this paper is to argue that the implementation of the accrual-based IPSASs in European-influenced developing and transition economy countries is not an appropriate reform unless preceded or accompanied by other, essentially managerial, reforms. The nature and extent of these prior reforms depend upon the political and cultural context and, not least, upon the power relationships within and between public institutions. The advocates of the application of the IPSASs appear not to recognize that for the reform to be effective it cannot be treated as simply a technical accounting reform, yet this is what is occurring. The issues identified in this paper are based upon the author’s practical experiences of working in many of these countries.     

Chinese jigsaw: Solving the equity market response to the COVID-19 crisis: Do alternative asset provide effective hedging performance?

Against COVID-19 risks, this paper examines the hedging performance of alternative assets including some financial assets and commodities futures for the Chinese stock market in a multi-scale setting. Dynamic conditional correlations and optimal hedge ratios of the Shanghai stock exchange with Bitcoin, Dow Jones Industrial Average, Gold, WTI, Bonds and VIX returns are estimated before and during the pandemic crisis. In the short-term, the use of wavelet decomposition shows that Bitcoin provides the best hedge to the Shanghai stock market. In the long-term, commodities dominate. Whereas WTI offers the highest hedging effectiveness, Gold ranks second by a slight margin. These results allow investors to choose the highest returns and protecting tail risk during the current sanitary crisis. Our findings suggest particularly more pronounced economic benefit of diversification including alternative financial assets while commodities futures serve as good hedge assets especially during unpredictable crisis like the current sanitary crisis relating to the covid-19.     

Shaping sustainability: Is there an unreleased potential in utopian thought?

This article develops from the argument that sustainable development primarily will be restricted to rhetorical discourse if the utopian dimension of politics and planning is neglected. I will firstly discuss what is typical for utopian thought in general as well as its potential role in politics and planning. Secondly, I will briefly explore of the contemporary politics of sustainable development with the focus on its utopian dimensions, and thirdly, I will also comment on the different kinds and forms of utopian thought that should be relevant for sustainability projects on different levels. My conclusions are that the utopian language is flourishing in many of the discourses on sustainable development, especially in comparison to other fields of politics, but that the role of utopian thought in this area needs to be reflected on and more thoroughly recognized in the practical endeavors taken in this area.     

Is the realized volatility good for option pricing during the recent financial crisis?

The contributions of this paper are threefold. The first contribution is the proposed logarithmic HAR (log-HAR) option-pricing model, which is more convenient compared with other option pricing models associated with realized volatility in terms of simpler estimation procedure. The second contribution is the test of the empirical implications of heterogeneous autoregressive model of the realized volatility (HAR)-type models in the S&P 500 index options market with comparison of the non-linear asymmetric GARCH option-pricing model, which is the best model in pricing options among generalized autoregressive conditional heteroskedastic-type models. The third contribution is the empirical analysis based on options traded from July 3, 2007 to December 31, 2008, a period covering a recent financial crisis. Overall, the HAR-type models successfully predict out-of-sample option prices because they are based on realized volatilities, which are closer to the expected volatility in financial markets. However, mixed results exist between the log-HAR and the heterogeneous auto-regressive gamma models in pricing options because the former is better than the latter in times of turmoil, whereas it is worse during the rather stable periods.     

Fiscal fragmentation and crime control: Is there an efficiency-equity tradeoff?

International Tax and Public Finance - This article investigates the effects of fiscal fragmentation on aggregate crime rates and the spatial disparities in crime rates among counties in a...     

Is there an optimally diversified conglomerate? Gleaning answers from capital markets

Motivated by recent productivity-based theories of diversification, we argue that only conglomerates with an optimal degree of diversification can utilize their comparative advantages across various industries and achieve economies of scope by eliminating redundancies. Evidence from both corporate bond and equity markets suggests that optimally diversified conglomerates consist of either (1) approximately five equally weighted divisions, or (2) one large core business segment that roughly accounts for 75 % sales. Moreover, the relative size of divisions has a critical impact on how diversification affects credit spreads and excess values. Nonparity among divisions correlates with greater costs that increase with the number of divisions.     

Is there a relation between audit fee cuts during the global financial crisis and banks’ financial reporting quality?

As a result of the global financial crisis (GFC), several audit clients were able to negotiate lower audit fees for the years 2008 and 2009. However, the PCAOB has expressed concern that lower audit fees might lead to lower audit effort and lower audit quality and financial reporting quality. This study examines the relation between audit fee cuts and banks’ financial reporting quality. Specifically, we focus on earnings management via loan loss provisions (LLP), the relation between current period LLP and future loan charge-offs, i.e., LLP validity, and the timely recognition of loan losses. For banks audited by Big 4 auditors, we find that income-increasing abnormal LLP are decreasing in audit fee cuts and LLP validity is increasing in audit fee cuts. For banks audited by non-Big 4 auditors, LLP validity is higher for banks that received a fee cut of more than 25% relative to other banks audited by non-Big 4 auditors. We do not observe an association between timely loan loss recognition and cuts in audit fees except for banks audited by non-Big 4 auditors and exempt from internal control audits where a fee cut of more than 25% is associated with less timely loan loss recognition. Overall, the findings suggest that Big 4 auditors constrained earnings management via LLP in banks that received cuts in audit fees. Our findings have important implications for regulators, investors, and others.     

Is there a postnormal time? From the illusion of normality to the design for a new normality

Ziauddin Sardar's characterization of ‘postnormal times’ elegantly captures the mood of despair, uncertainty and insecurity in the West due to the multiple shocks of terrorism, economic recession and climate change. However, the prevailing mood in India, most of Asia and developing countries in general is confidence and optimism for the future. The label ‘postnormal times’ is inappropriate for resurgent Asia and other ‘emerging markets’. Similarly, these countries - as illustrated by examples from India - need more modernization and efficiency to save and improve the lives of their citizens. This paper argues that the seeming normality of twentieth century in the West was an illusion arising out of the ignorance and neglect of environmental and health consequences of unbridled industrial growth. The distorted assumptions of neoclassical economics are largely to blame for this. It is now time to pay back for those excesses. A new normality will emerge only by addressing these distortions and by creating democratic global institutions that can reflect the changed global balance of power of the 21st century. The intellectuals, opinion-makers and leaders of the world have to exercise their ethical responsibility and creative imagination to enable this new normality to emerge.     

Is sustainability rating material to the market?

This study examines whether information about a firm's engagement in environmental, social, and governance (ESG) practices is material to market participants. Evidence from a sample of 1856 initial public offerings (IPOs) by U.S. companies for the 2007–2018 period robustly documents that firms for which there is available ESG performance information prior to going public exhibit higher underpricing due to a positive market response. Such a reaction is validated by agency cost-reducing practices that ESG-rated firms follow prior to the IPO, the superior post-IPO market performance they exhibit in terms of equity financing, and the higher share of financially sophisticated investors they attract compared to their ESG-unrated peers. Overall, our results highlight that it pays off to do good and to have the right investors; however, firms’ good ESG practices need to be visible to the market, through rating practices, to reap the benefits.     

Is there an employee-based gender gap in informal financial markets? International evidence

We study the impact of female production workers on firms' access to trade credits across the world. Using two sources of plausibly exogenous variations in gender bias and a difference-in-differences framework, we document that firms with more female production workers have less access to trade credits in countries with stronger gender beliefs that favor males. This relationship is largely driven by firms in industries with unexpected credit shortages and industries dominated by males. Since female firms rely more on informal finance, this study is relevant for policies that direct female firms towards formal credit markets in highly gender-biased places.     

Is sovereign risk related to the banking sector?

We examine whether the banking sector within a nation is related to sovereign risk. We hypothesize that more competitive and sophisticated financial systems are less prone to panics or bank runs, and consequently will be associated with superior sovereign credit ratings. Using Ordered Probit with Aggregate Time Effects methodology, our results show that banking sector characteristics such as concentration in the banking system, liquidity of bank assets, and size of financial system are significantly related to sovereign credit ratings. Since the use of these sovereign ratings is ubiquitous in international finance in varied applications such as determination of the cost of international borrowing by governments, international cost of capital for FDI, and others, the relationships identified in this paper have important public policy implications.     

Is the accrual anomaly robust to firm-level analysis?

This study investigates whether firm-level accrual mispricing exists and if such mispricing is persistent. Our results show both under and overpricing of accruals that persevere. Specifically, we show that a trading strategy going a dollar long (short) in underpriced (overpriced) accrual firms yields significant abnormal returns in most years investigated. We examine whether firm characteristics such as size, analyst following and real activities management can explain why some firms are mispriced and others not. Our findings show that firm-level mispricing differs from that documented at the country-level. Whilst the country-level anomaly seems to have diminished; the firm-level accrual anomaly remains.