Does Surplus Participation Reflect Market Discipline? An Analysis of the German Life Insurance Market

The aim of this paper is to analyze whether the level of surplus participation affects customer demand. We use multivariate linear regression models and data on surplus participation, new business, and lapse for the German life insurance market from 1998 to 2008. We find a significant positive dependence between surplus participation and new business growth as well as a significant negative dependence between surplus participation and growth of lapse volume. Overall, these findings indicate that customers do react to changes in product characteristics, which might be seen as indicative of market discipline. Our results are important for insurance company managers, regulators, and boards of insurance associations.     

Is There Market Discipline in the European Insurance Industry? An Analysis of the German Insurance Market

Economists often argue in favour of market discipline as a means to distribute resources effectively and efficiently. These same arguments likely influence decision-makers as they incorporate market discipline as the third pillar of Solvency II, the European insurance regulatory scheme currently being implemented. Success for Solvency II, then, is dependent in part on the strength of influence found in market discipline. Our research indicates that the German insurance market demonstrates the existence of such discipline, although the actual effect appears smaller than previously found in the U.S. insurance market. Solvency II, therefore, seems to be following an appropriate path, although further research is needed to evaluate whether or not enhancements to market discipline within the European market are warranted.     

An Analysis of Tianjin＇ s Financial Development

经济发展与金融发展之间的关系已经被国内外许多经济学家所证明。近年来天津金融业取得了较快发展,为天津经济发展提供了显著的金融支持。本文以金融业的绝对规模、相对规模以及金融效率为维度,对天津银行业、证券业和保险业的发展状况进行了纵向梳理和横向比较分析,考察了天津金融发展面临的优势、劣势、存在的机会与威胁,进而从政府、银行业、证券业、保险业等方面提出了推动天津金融发展的政策建议。     

Disclosure Overload? An Empirical Analysis of International Financial Reporting Standards Disclosure Requirements

Despite the positive effects of the adoption of International Financial Reporting Standards (IFRS) noted in the literature, standard setters have issued reports suggesting that the required disclosures in IFRS have become too burdensome and should be reduced. We examine this disclosure overload problem by testing whether the disclosure reduction recommendations of the Excess Baggage Report issued by professional accounting bodies from Scotland and New Zealand in 2011 are associated with companies’ disclosure incentives and are value relevant for a sample of 196 Australian listed companies. The Excess Baggage Report classifies current IFRS disclosure requirement items into three categories: Retain; Delete; and Disclose if Material. We find that Retain items are disclosed the most, followed by those classified as Disclose if Material, and then by Delete items. Only Retain items are significantly associated with companies’ disclosure incentives. We also find that these disclosure categories are value relevant, especially for below-median profitability firms. Our findings may provide input to the IASB’s ongoing Disclosure Initiatives project.     

Does Poor Performance Damage the Reputation of Financial Intermediaries? Evidence from the Loan Syndication Market

We investigate the effect of poor performance on financial intermediary reputation by estimating the effect of large‐scale bankruptcies among a lead arranger's borrowers on its subsequent syndication activity. Consistent with reputation damage, such lead arrangers retain larger fractions of the loans they syndicate, are less likely to syndicate loans, and are less likely to attract participant lenders. The consequences are more severe when borrower bankruptcies suggest inadequate screening or monitoring by the lead arranger. However, the effect of borrower bankruptcies on syndication activity is not present among dominant lead arrangers, and is weak in years in which many lead arrangers experience borrower bankruptcies.     

Is Financial Flexibility a Priced Factor in the Stock Market?

This paper develops a factor analysis–based measure for shifts in corporate financial flexibility (FFLEX) that can be observed from public accounting information. Companies that experience positive shifts in FFLEX are associated with higher future investment growth opportunities. We show that FFLEX is a robust determinant of future stock returns. Firms that have increased their financial flexibility are associated with lower stock returns in the subsequent period. A zero‐cost return portfolio produces a significant positive monthly premium of 0.69%, which is driven by covariance (risk). Risk inherent in the flexibility factor is not explained away by either prominent pricing characteristics or factors.     

The Global Financial Crisis and the European Single Market: The end of integration?

Using various versions of the Feldstein-Horioka (FH) coefficient, we measure the time-varying degree of capital mobility and economic integration in the European Union. Prior research shows high correlation between domestic investment and savings implying low capital mobility. This surprising result has led to subsequent research on the ‘Feldstein-Horioka puzzle’. Our empirical findings show that the puzzle is less puzzling with a coefficient of 0.52 in the period 1990–1995 in EU countries approaching its minimum value of 0.02 in the period 2003–2008. This clearly indicates that the FH coefficient is time-varying signalling a deepening of economic integration in the European Union. Yet, with the advent of the Global Financial Crisis the FH coefficient has increased to 0.26 underlining worrying signs of disintegration.     

Did Good Corporate Governance Improve Bank Performance during the Financial Crisis?

This paper focuses on the effects of corporate governance on bank performance during the financial crisis of 2008. Using data on large publicly traded U.S. banks, we examine whether banks with stronger corporate governance mechanisms were associated with higher profitability and better stock market performance amidst the crisis. Our empirical findings on the effects of corporate governance on bank performance are mixed. Although the results suggest that banks with stronger corporate governance mechanisms were associated with higher profitability in 2008, our findings also indicate that strong governance may have had negative effects on stock market valuations of banks amidst the crisis. Nevertheless, we document that banks with strong corporate governance practices had substantially higher stock returns in the aftermath of the market meltdown, indicating that good governance may have mitigated the adverse influence of the crisis on bank credibility.     

Where Are They Now? An Analysis of the Life Cycle of Convertible Bonds

We study the determinants of the life convertible bonds' life span issued between 1980 and 1998. About 60% of the bonds survive either to a call or to their maturity. The issuers of the remaining bonds are delisted during the life of their bonds. Calls and delistings shorten the average life span of convertibles from the original 17 years to an effective life span of only seven years. Issuer's post‐issuance performance and investment behavior affect the effective life of convertibles. Our results support the sequential financing hypothesis, as bonds issued by firms with speedier investment schedules have shorter life spans.     

Trade Credit or Financial Credit? An International Study of the Choice and Its Influences

Trade credit financing has usually been assumed to be an expensive source of funds. Recent studies, however, suggested that it can be available at either low or no cost. Using an international panel of firms, we provide an empirical answer to this matter. We analyze the type of firms and financial environments that are associated with a relatively more intense use of financial credit and, consistent with the mainstream literature, we find that trade credit financing is chosen by firms that have more restricted access to financial credit. These results appear to be stronger for firms located in emerging markets.     

Has the Reform of Nontradable Shares Raised Prices?: An Event-Study Analysis

This study examines the abnormal stock returns of pilot companies to determine if investors believed that reform of nontradable shares, which began on April 29, 2005, would lead to higher stock prices. Employing event-study analysis, we find that the pilot companies have positive significant abnormal returns. The average abnormal return of the first batch is higher than that of the second batch, the average abnormal return on the Shenzhen Stock Exchange is higher than that of the Shanghai Stock Exchange, the average abnormal return on the Small and medium Enterprise board is higher than that of the main board, and companies with high-compensation packages have higher average abnormal returns than do companies with low-compensation packages. Our results suggest that investors generally viewed nontradable share reform as positive news.     

Pick Your Poison—Fragmentation or Market Power? An Analysis of RegNMS,High Frequency Trading,and Securities Market Structure

The publication of Michael Lewis's has intensified an already contentious debate over high frequency trading (HFT). But the causes that have given rise to HFT are more complicated—and the general economic consequences far more positive—than at least the popular accounts (including Lewis's own) of the book would suggest. While directing much of its attention to the powerful computers and “predatory” potential of HFT, the “media” version of Lewis's book has all but ignored the fundamental driver of such activity: the implementation in 2007 of SEC Regulation NMS, which required all exchanges to direct their orders to the exchanges with the best prices. Before RegNMS, U.S. equity trading was largely dominated by NYSE and Nasdaq. The major exchanges' effective “ownership” of their order flow gave exchange specialists significant edges in trading. RegNMS has resulted in the proliferation of competing stock exchanges, which in turn has dramatically reduced both trading costs and the economic franchise value enjoyed by institutional traders associated with the previously dominant exchanges. The balance of evidence strongly indicates that the cost of trading has declined for retail traders and investors. The big losers have been the previously advantaged wholesale traders. HFT is simply one of the outcomes of the new, more competitive trading environment created by Regulation NMS.     

Toward the Development of a Global Financial Safety Net or a Segmentation of the Global Financial Architecture?

This article examines the prospects for the development of a comprehensive global financial safety net (GFSN). It discusses the optimal layout of the GFSN, comprising the International Monetary Fund, regional financing arrangements (RFAs), as well as bilateral or multilateral central bank swap arrangements, and the relationship between these. It then briefly reviews and appraises the current structure and functioning of these different layers of the GFSN and discusses the need and scope for strengthening cooperation between RFAs and the IMF. It argues that the GFSN is still very patchy and there is little reason to expect significant progress in better collaboration between RFAs and the IMF as long as the latter’s governance structure is not significantly revamped. Indeed, risks are that the GFSN will become even more fragmented with the further development of the European Stability Mechanism, and the emergence of the BRICS Contingent Reserve Arrangement. To prevent a further fragmentation of the GFSN, substantial governance reform of the IMF is urgently needed.     

Does the Quality of Financial Advice Affect Prices?

Using a large data sample of 58,562 new municipal issues covering the period from 1984 to 2002, we examine whether the quality of advice provided by a financial advisor affects new issue interest costs. We find that higher‐quality financial advisors are associated with statistically significant decreases in new issue yields. The effect of advisor quality on yields is more pronounced for revenue, negotiated, and opaque bond issues than for general obligation and competitively sold issues. However, issuers of revenue or negotiated bonds are more likely to choose a low‐quality advisor.     

Did securitization affect the cost of corporate debt?

This paper investigates whether the securitization of corporate bank loan facilities had an impact on the price of corporate debt. Our results suggest that loan facilities that are subsequently securitized are associated with a 17 basis point lower spread than that of facilities that are not subsequently securitized. We consider facility characteristics that are associated with the likelihood of securitization and estimate the extent to which these characteristics are related to spreads. We document that Term Loan B facilities, facilities of B-rated firms, and facilities originated by banks that originate CLOs are securitized more frequently than other facilities. Spreads on facilities estimated to be more likely to be subsequently securitized have lower spreads than otherwise similar facilities. The results are consistent with the view that securitization caused a reduction in the cost of capital.     

An Analysis about the Difficulty of Banning ＂the Stall Bank＂

在中越边境贸易结算中,通过正规银行渠道结算并没有占据主导地位,很多的边贸经营户倾向于通过＂地摊银行＂完成边贸结算。＂地摊银行＂的业务范围和规模也不断发展壮大。本文通过回顾边贸结算的发展历史,比较中越两国有关法律制度以及＂地摊银行＂与商业银行业务操作模式,阐述了＂地摊银行＂相对于正规商业银行的竞争优势,分析了＂地摊银行＂能够与正规商业银行竞争的原因,并基于此提出了限制和监管＂地摊银行＂经营的几点建议。     

The Global Financial Crisis and the Efficient Market Hypothesis: What Have We Learned?

The sharp economic downturn and turmoil in the financial markets, commonly referred to as the “global financial crisis,” has spawned an impressive outpouring of blame. The efficient market hypothesis (EMH)—the idea that competitive financial markets exploit all available information when setting security prices—has been singled out for particular attention. Like all successful theories, the EMH has major limitations, even as it continues to provide the foundation for not only past accomplishment, but future advances in the field of finance. Despite the theory's undoubted limitations, the claim that it is responsible for the current worldwide crisis seems wildly exaggerated. This essay shows the misreading of the theory and logical inconsistencies involved in popular arguments that EMH played a significant role in (1) the formation of the real estate and stock market bubbles, (2) investment practitioners' miscalculation of risks, and (3) the failure of regulators to recognize the bubbles and avert the crisis. At the same time, the author argues that the collapse of Lehman Brothers and other large financial institutions, far from resulting from excessive faith in efficient markets, reflects a failure to heed the lessons of efficient markets. In the author's words, “To me, Lehman's demise conclusively demonstrates that, in a competitive capital market, if you take massive risky positions financed with extraordinary leverage, you are bound to lose big one day—no matter how large and venerable you are.” Finally, behavioral finance, widely considered as challenging and even supplanting efficient markets theory, is viewed in this article as complementing if not reinforcing efficient markets theory. As the author says, “it takes a theory to beat a theory.” Behavioralism, for all its important contributions to finance literature, is described as not a theory but rather “a collection of ideas and results”— one that depends for its existence on the theory of efficient markets.     

Does the Momentum Strategy Work at the Industry Level? Evidence from the Chinese Stock Market

This article examines the effectiveness of momentum strategy at the industry level in the Chinese stock market. We find that the intermediate-horizon momentum effect is stronger in industries with higher competition. This effect is consistent with the hypothesis that information contained in firms from highly competitive industries is vague and hence leaves more space for behavioral biases, which leads to the momentum effect. Alternatively, the measure of the Herfindahl–Hirschman index potentially captures the size effect in explaining this phenomenon. Moreover, concentrated industries experience a pronounced lead-lag effect of big firms on small firms, which is a potential explanation for the contrarian strategy. We do find that the short-horizon contrarian effect is pronounced in highly concentrated industries.