Relationship Banking: What Do We Know?

This paper briefly reviews the contemporary literature on relationship banking. We start out with a discussion of the raison d'être of banks in the context of the financial intermediation literature. From there we discuss how relationship banking fits into the core economic services provided by banks and point at its costs and benefits. This leads to an examination of the interrelationship between the competitive environment and relationship banking as well as a discussion of the empirical evidence. Journal of Economic Literature Classification Numbers: G20, G21, L10.     

Private Equity Performance: What Do We Know?

We study the performance of nearly 1,400 U.S. buyout and venture capital funds using a new data set from Burgiss. We find better buyout fund performance than previously documented—performance has consistently exceeded that of public markets. Outperformance versus the S&P 500 averages 20% to 27% over a fund's life and more than 3% annually. Venture capital funds outperformed public equities in the 1990s, but underperformed in the 2000s. Our conclusions are robust to various indices and risk controls. Performance in Cambridge Associates and Preqin is qualitatively similar to that in Burgiss, but is lower in Venture Economics.     

Why Do We Need Countercyclical Capital Requirements?

We show that risk-based capital requirements can eliminate the market failure, caused by asymmetric information between entrepreneurs and banks, which distorts the efficient allocation of low-risk and high-risk investment projects among entrepreneurs. If project success probabilities decline in recessions, optimal capital requirements will have to be lower because the size of the market failure changes. This provides a new rationale for keeping risk-based capital requirements higher in good times and lowering them in bad times.     

By What Criteria Do We Evaluate Accounting? Some Thoughts on Economic Welfare and the Archival Literature

The economic role of an accounting regime is to increase welfare through its effects—in conjunction with complementary institutions—on firm and household behavior. I review three major streams of the archival literature (real effects; price effects, including value relevance; and costly contracting), in terms of what they can and cannot reveal as proxies for welfare effects. One conclusion is that the partial correlations and average effects that predominate in this literature have provided valuable insights into the role of accounting in the economy, but provide limited and misleading proxies for welfare effects. A major concern is that teachers, students, and researchers—indeed, regulators and standard setters—raised on this literature could lose sight of, and underestimate, the fundamental contribution of accounting to aggregate welfare.     

Lender of Last Resort: What Have We Learned Since Bagehot?

The maintenance of financial stability is facilitated by well-designed safety-net arrangements aimed at limiting the risk of disruption in the financial system (crisis prevention) and the consequences of disruption if it arises (crisis management). An important element of crisis management is the lender of last resort (LOLR) function. This article reviews the main ideas on LOLR reflected in the academic literature, going back to Henry Thornton almost 200 years ago.     

What Do Management Earnings Forecasts Convey About the Macroeconomy?

We decompose quantitative management earnings forecasts into macroeconomic and firm‐specific components to determine the extent to which voluntary disclosure provided by management has macroeconomic information content. We provide evidence that the forecasts of bellwether firms, which are defined as firms in which macroeconomic news explains the greatest amount of variation in the forecasts, provide timely information to the market about the macroeconomy when bundled with earnings announcements. Further, we show that bellwether firms provide timely information about both industry‐specific events and broader economic events. Finally, we document that the macroeconomic news in individual forecasts is more pronounced for bad news and point forecasts.     

What Do Investment Banks Truly Bring to the Table?

This paper investigates the role of intermediaries in the initial public offering (IPO) process. In the U.S. market, investment banks have traditionally been involved in a firm‐commitment or best‐efforts underwriting capacity. However, in the Australian IPO market, investment banks are increasingly being named in association with new issues in diverse roles such as issue managers, sponsoring brokers and corporate advisers. Using a sample of 468 IPOs over the 1996 to mid‐2006 period, we examine the influence of investment banks across these different engagements. In support of the signalling and information production roles of intermediaries, we find that issuers choosing high intermediary involvement are typically older, retain more capital, seek to raise larger amounts of capital and are without independent expert certification. We find mixed support for the certification hypothesis when testing for the effect of intermediary reputation on IPO issuer wealth loss. Further, the impact of intermediary involvement on underpricing is not significantly different for the different levels of intermediary involvement once issue characteristics have been accounted for. This is puzzling since these different roles by definition do not provide the same level of issue quality assurance.     

Security Issue Timing: What Do Managers Know,and When Do They Know It?

We study put option sales on company stock by large firms. An often‐cited motivation for these transactions is market timing, and managers' decision to issue puts should be sensitive to whether the stock is undervalued. We provide new evidence that large firms successfully time security sales. In the 100 days following put option issues, there is roughly a 5% abnormal stock return, with much of the abnormal return following the first earnings release date after the sale. Direct evidence on put option exercises reinforces these findings: exercise frequencies and payoffs to put holders are abnormally low.     

What Style Liquidity Timing Skills Do Mutual Fund Managers Possess?

Recent studies claim that mutual fund managers demonstrate strong MARKET liquidity timing skills. We extend their liquidity timing tests to the four‐factor case and investigate liquidity timing skills with respect to the MARKET, SIZE, VALUE and MOMENTUM factors. Contrary to these claims, we find no evidence that fund managers adjust market exposure in anticipation of market liquidity changes. We find rather strong evidence that fund managers successfully overweight small stocks as market liquidity increases. Our study also demonstrates that it is easy to misidentify SIZE liquidity timing as MARKET liquidity timing in models that focus only on MARKET liquidity timing.     

What Have We Learned from a Decade of Manufacturing Enterprise Surveys in Africa?

In the early 1990s the World Bank launched the Regional Programon Enterprise Development (RPED) in several African countries,a key component of which was to collect data on manufacturingfirms. The data sets built by these and subsequent enterprisesurveys in Africa generated considerable research. This articlesurveys the research on the African business environment, focusingon risk, access to credit, labor, and infrastructure, and onhow firms organize themselves and do business. It reviews theresearch on enterprise performance, including enterprise growth,investment, and exports. The article concludes with a discussionof policy lessons.      

Stock Market Anomalies: What Can We Learn from Repurchases and Insider Trading?

We examine whether managers’ trading decisions (both at a firm and personal level) are correlated with trading strategies suggested by the operating accruals and the post-earnings announcement drift (SUE) anomalies. We discuss advantages and disadvantages of the use of managerial trading activity to infer managers’ private valuation about their own securities. Our results provide corroborative evidence for the accruals anomaly, i.e., managers’ repurchase and insider trading behavior varies consistently with the information underlying the operating accruals trading strategy. On the other hand, we do not find corroborative evidence for the SUE anomaly.

Bank Heterogeneity and Interest Rate Setting: What Lessons Have We Learned since Lehman Brothers?

A substantial literature has investigated the role of relationship lending in shielding borrowers from idiosyncratic shocks. Much less is known about how lending relationships and bank‐specific characteristics affect the functioning of the credit market in an economy‐wide crisis. We investigate how bank and bank–firm relationship characteristics have influenced interest rate setting since the collapse of Lehman Brothers. We find that interest rate spreads increased by less for those borrowers having closer lending relationships. Furthermore, firms borrowing from banks endowed with large capital and liquidity buffers and from banks engaged mainly in traditional lending were kept more insulated from the financial crisis.     

Margin Requirements, Volatility, and Market Integrity: What Have We Learned Since the Crash?

This study assesses the state of the policy debate that surrounds the federal regulation of margin requirements. A review of the literature finds no undisputed evidence that supports the hypothesis that margin requirements can be used to control stock return volatility and correspondingly little evidence that suggests that margin-related leverage is an important underlying source of excess volatility. The evidence does not support the hypothesis that there is a stable inverse relationship between the level of Regulation T margin requirements and stock returns volatility nor does it support the hypothesis that the leverage advantage in equity derivative products is a source of additional returns volatility in the stock market.     

Surmounting Life＇s Obstacles - Do You Cling to What You Were Before？

An 84-year-old retired stockbroker was admitted to our hospital＇s intensive-care unit, suffering froma peptic ulcer and shock from internal hemorrhage. As intravenous lines were started and fluid infused, his vital signs improved rapidly.     

What Do Consumers’ Fund Flows Maximize? Evidence from Their Brokers’ Incentives

We ask whether mutual funds’ flows reflect the incentives of the brokers intermediating them. The incentives we address are those revealed in statutory filings: the brokers’ shares of sales loads and other revenue, and their affiliation with the fund family. We find significant effects of these payments to brokers on funds’ inflows, particularly when the brokers are not affiliated. Tracking these investments forward, we find load sharing, but not revenue sharing, to predict poor performance, consistent with the different incentives these payments impart. We identify one benefit of captive brokerage, which is the recapture of redemptions elsewhere in the family.     

What Do Banks Evaluate When They Screen Borrowers? Soft Information, Hard Information and Collateral

By applying factor analysis to unique data on loan screening for small and medium-sized enterprises (SMEs) in Japan, we investigate the factors that banks actually evaluate when underwriting commercial loans. We find that banks emphasize three factors when they decide whether to grant loans: the relationship factor, the financial statement factor, and the collateral/guarantee factor. We also find that smaller banks place greater emphasis on the relationship and the collateral/guarantee factors, and that banks under competitive pressure emphasize the relationship factor to a greater extent. We interpret these findings based on the theory of relationship lending and lending technologies.     

Governance Indicators: Where Are We, Where Should We Be Going?

Progress in measuring governance is assessed using a simpleframework that distinguishes between indicators that measureformal rules and indicators that measure the practical applicationor outcomes of these rules. The analysis calls attention tothe strengths and weaknesses of both types of indicators aswell as the complementarities between them. It distinguishesbetween the views of experts and the results of surveys andassesses the merits of aggregate as opposed to individual governanceindicators. Some simple principles are identified to guide theuse and refinement of existing governance indicators and thedevelopment of future indicators. These include transparentlydisclosing and accounting for the margins of error in all indicators,drawing from a diversity of indicators and exploiting complementaritiesamong them, submitting all indicators to rigorous public andacademic scrutiny, and being realistic in expectations of futureindicators. JEL codes: H1, O17     

At What Age Do You Expect to Retire? Retirement Expectations and Increases in the Statutory Retirement Age

We analyse the extent to which an increase in the statutory retirement age affects individuals' retirement expectations. Understanding how individuals adjust their expectations is crucial to the evaluation of this policy, since retirement expectations directly affect other important decisions such as labour supply, engagement in (further) education and, of course, savings and investments. We consider the 2007 German pension reform that legislated an increase in the statutory retirement age from 65 years to 67. Our analysis is based on a longitudinal study that directly asks respondents at what age they expect to retire. Using a difference‐in‐differences approach, we look at the changes in subjective retirement expectations over time and estimate the extent to which they can be attributed to the 2007 reform. We find that the reform shifted the retirement expectations of the younger cohorts, although there is some heterogeneity in the way individuals adjusted. While there are no significant differences between men and women, lower‐educated individuals failed to revise their expectations. As these individuals usually acquire both lower pension claims and lower private savings, the fact that they have been slower in updating their retirement expectations causes concern regarding their income security after retirement.