Methods for multicountry studies of corporate governance: Evidence from the BRIKT countries

We discuss empirical challenges in multicountry studies of the effects of firm-level corporate governance on firm value, focusing on emerging markets. We assess the severe data, “construct validity”, and endogeneity issues in these studies, propose methods to respond to those issues, and apply those methods to a study of five major emerging markets—Brazil, India, Korea, Russia, and Turkey. We develop unique time-series datasets on governance in each country. We address construct validity by building country-specific indices which reflect local norms and institutions. These similar-but-not-identical indices predict firm market value in each country, and when pooled across countries, in firm fixed-effects (FE) and random-effects (RE) regressions. In contrast, a “common index”, which uses the same elements in each country, has no predictive power in FE regressions. For the country-specific and pooled indices, FE and RE coefficients on governance are generally lower than in pooled OLS regressions, and coefficients with extensive covariates are generally lower than with limited covariates. These results confirm the value of using FE or RE with extensive covariates to reduce omitted variable bias. We develop lower bounds on our estimates which reflect potential remaining omitted variable bias.     

Banking efficiency in South East Europe: Evidence for financial crises and the gap between new EU members and candidate countries

In this study we compare the cost efficiency of banks in ten South East European countries and find out how differences in efficiency are related to EU membership. The results reveal a statistically significant cost efficiency gap between EU and non-EU banking systems in the region, where on average EU banking systems tend to be more cost efficient than their non-EU counterparts. In contrast to other similar studies analyzing banking efficiency in South East European countries, we also run β-convergence and σ-convergence tests, as proposed in the literature. Based on these tests we can draw conclusions concerning the existence of a catching-up effect, since the detected cost efficiency gap is closing predominantly because of adjustments on the side of the less efficient banks. Additionally, we found that during the 2008 global financial crisis, the average cost efficiency scores of banks in the region improved, which could be explained by enhanced incentives of bank managers for intensified cost optimization in banks in crisis times. Our results suggest that the institutional adjustments in the non-EU countries should continue towards EU standards, as the EU banking systems tend to dominate in terms of measured cost efficiency.     

The international transmission channels of US supply and demand shocks: Evidence from a non-stationary dynamic factor model for the G7 countries

We employ a multi-country non-stationary dynamic factor model to assess spillover effects and transmission channels of US supply and demand shocks on a variety of macroeconomic variables in individual non-US G7 countries. We find that trade, financial and confidence channels all play a significant role in the international transmission of US shocks. However, the results point to substantial heterogeneities of shock transmission across the individual G7 economies. In particular, we find negative transmission effects for Italy and Japan as the only two G7 countries not well integrated into global value chains. Moreover, the exchange rate responses of Germany, France and Italy turn out to be far less pronounced in comparison to the other G7 economies which we relate to their membership of the euro area and their coordinated monetary policies prior to the establishment of the euro. Whereas we document a close comovement of stock market dynamics across the G7 countries, we find credit and real estate markets to be less synchronized. We do not find the effects and transmission channels to be fundamentally affected by the post-2008 economic environment.     

Accounting for financial instruments in the banking industry: conclusions from a simulation model

The paper analyses the effects of three sets of accounting rules for financial instruments – Old IAS before IAS 39 became effective, Current IAS or US GAAP, and the Full Fair Value (FFV) model proposed by the Joint Working Group (JWG) – on the financial statements of banks. We develop a simulation model that captures the essential characteristics of a modern universal bank with investment banking and commercial banking activities. We run simulations for different strategies (fully hedged, partially hedged) using historical data from periods with rising and falling interest rates.

We show that under Old IAS a fully hedged bank can portray its zero economic earnings in its financial statements. As Old IAS offer much discretion, this bank may also present income that is either positive or negative. We further show that because of the restrictive hedge accounting rules, banks cannot adequately portray their best-practice risk management activities under Current IAS or US GAAP. We demonstrate that – contrary to assertions from the banking industry – mandatory FFV accounting adequately reflects the economics of banking activities.

Our detailed analysis identifies, in addition, several critical issues of the accounting models that have not been covered in previous literature.