Banks, markets, and efficiency

A competitive financial system can help reduce banks’ monopoly power and the associated inefficiencies. However, according to Diamond (J Polit Econ 105: 928–956, 1997) and Fecht (J Eur Econ Assoc 6(2), 2004) competition with the financial sector may also constrain the amount of liquidity insurance that banks can provide to households affected by unobservable idiosyncratic liquidity shocks. To study this trade-off, we model competition between banks and between banks and financial markets. Our analysis shows that competition between banks and financial markets can constrain the risk-sharing offered by deposit contracts. This effect is the same if competition between banks mainly affects the reallocation of deposits. However, if banking competition primarily affects new deposits, then such competition only limits inefficient monopoly rents without restraining risk-sharing. We would like to thank Diemo Dietrich, Phil Dybvig, Hans Peter Grüner, Martin Hellwig, Elu von Thadden, Uwe Vollmer, Wolf Wagner as well as seminar participants at the Bundesbank, at the University of Mannheim, at the University of Tilburg, at the 3rd Workshop on Monetary and Financial Economics in Halle, at the University of Lausanne, at the First ProBanker Symposium in Maastricht, at the Global Finance Conference 2005 in Dublin, at the European Economic Association Meeting 2005 in Amsterdam, at the International Finance Conference 2005 in Copenhagen, and at the German Economic Association Meeting 2005 in Bonn. We thank Mike Demott for editorial assistance. The views expressed here are those of the authors and not necessarily those of the Deutsche Bundesbank, the Federal Reserve Bank of New York, or the Federal Reserve System.     

Understanding the Positive Announcement Effects of Private Equity Placements: New Insights from Hong Kong Data

The literature has documented positive announcement effects for privately placed seasoned equity issues. This study shows positive announcement effects not only for private but also for public placements in Hong Kong. Our unique data offer new insights not obtainable from U.S. data as we examine the cross-sections of the announcement effects. Most importantly, we find that the announcement effect is more likely to be positive for smaller issuers, such as private placing firms and some public issuers where asymmetric information arises more from growth than from assets in place. This finding is consistent with the generalized Myers-Majluf model.★The authors wish to thank Jack Cooney, Espen Eckbo, Ned Elton, Cliff Holderness, Rene Stulz, Piet Sercu, Tom Vinaimont, John Wei, and participants at the 2003 Financial Management Association Annual Conference in Denver and at seminars at the Guanghua School of Management of Peking University and the Department of Finance of National Taiwan University for their helpful discussions and comments. Special thanks go to Marco Pagano (the editor) and an anonymous referee for advice and suggestions that have significantly improved the quality of this paper. Wu gratefully acknowledges financial support from the Research Grants Council of the Hong Kong SAR (Project No. CityU 1244/04H) and from the City University of Hong Kong (DAG project No. 7100183).     

The adoption of International Financial Reporting Standards in a non-colonized developing country: The case of Nepal

The purpose of this paper is to provide a systematic and rigorous analysis of the accounting environment in Nepal. Based on the accounting ecology framework developed by Gernon and Wallace (1995) and interviewing selected key stakeholders, it critically examines issues related to the adoption of International Financial Reporting Standards (IFRS) in Nepal. It contributes to the literature by examining issues associated with the adoption of IFRS in a non-colonized developing country. This study finds that the decision to adopt IFRS in Nepal is not driven by the needs of local organizations and is rather imposed by donor organizations such as the Asian Development Bank, International Monetary Fund and World Bank. The findings of this study provide evidence that the adoption of IFRS is likely to be problematic due to the country's contextual environment. Specifically, there is a severe lack of qualified accountants in Nepal and the accounting profession is not ready to adopt IFRS. The study also finds that social problems such as widespread corruption and fraud are likely to cause problems for the adoption of IFRS.     

A Time Series Analysis of Financial Fragility in the UK Banking System

This paper extends the model proposed by Goodhart, Sunirand, and Tsomocos (2004, 2005, 2006) to an infinite horizon setting. Thus, we are able to assess how the model conforms with the time series data of the UK banking system. We conclude that, since the model performs satisfactorily, it can be readily used to assess financial fragility given its flexibility, computability, and the presence of multiple contagion channels and heterogeneous banks and investors. JEL Classification Numbers C68, E4, E5, G11, G21 We are grateful to seminar participants at the Bank of England, European Central Bank, University of Oxford, University of Pireaus, 59th International Atlantic Economic Conference, London and especially an anonymous referee for helpful comments and suggestions     

Allocation of Decision-making Authority

This paper addresses the question of what determines where in a firm’s hierarchy investment decisions are made. We present a simple model of a CEO and a division manager to analyze when the CEO will choose to allocate decision-making authority over an investment decision to a division manager. Both the CEO and the division manager have private information regarding the profit maximizing investment level. Because the division manager is assumed to have a preference for “empire”, neither manager will communicate her information fully to the other. We show that the probability of delegation increases with the importance of the division manager’s information and decreases with the importance of the CEO’s information. A somewhat counterintuitive result is that, in some circumstances, increases in agency problems result in increased willingness of the CEO to delegate the decision. We also characterize situations in which the CEO prefers to commit to an allocation of authority ex ante, instead of deciding based on her private information. Finally, even though the division manager is biased toward larger investments, we show that under certain conditions, the average investment will be smaller when the decision is delegated. These results help explain some findings in the empirical literature. A number of other empirical implications are developed.We thank Sudipto Dasgupta, Wouter Dessein, Jeff Ely, Mike Fishman, Ehud Kalai, John Matsusaka, Canice Prendergast, Chester Spatt, Lars Stole, Jan Zabojnik, two anonymous referees, participants at the 2002 Utah Winter Finance Conference, the 2002 European Finance Association Annual Meetings, the Harvard/MIT Organizational Economics Workshop, the 2002 University of Illinois Bear Markets Conference, and workshops at the University of Chicago and USC for helpful comments. Financial support from the Center for Research in Security Prices at the University of Chicago Graduate School of Business is gratefully acknowledged.     

Retrospective on Twenty Years of the FDIC-JFSR Bank Research Conference

Journal of Financial Services Research - The first annual Bank Research Conference was held at the Federal Deposit Insurance Corporation in 2000. The conference has served to disseminate...     

BOOK REVIEWS

Book reviewed in this article: Aggregate Theory and Policy: Population, Labor Force, and Long Swings in Economic Growth. By Richahd A. Easterlin . Aggregate Theory and Policy: Policy Simulations With An Econometric Model. By Gary Fromm and Paul Taub-man . Aggregate Theory and Policy: The Neutralized Money Stock: An Unbiased Measure of Federal Reserve Policy Actions. By Patric H. Hendershott . Aggregate Theory and Policy: Consumer Response to Income Increases. By George Katona and Eva Mueller . Aggregate Theory and Policy: The Demand for Money: Theories and Evidence. By David E. W. Laidler . Aggregate Theory and Policy: National Economic Policy: The Presidential Reports. Edited with commentary by Reuben E. Slesinger . Business Finance and Investments: Producer, Consumer, and Social Choice. By O. H. Brownlee and John A. Buttrick . Business Finance and Investments: The Theory of the Firm: Production, Capital, and Finance. By Douglas Vickers . Financial Institutions and Markets: Index-Linked Debts. By Pekka Ahtiala . Financial Institutions and Markets: Proceedings of a Conference on Bank Structure and Competition. Financial Institutions and Markets: The Money Men of Europe. By Paul Ferris . Financial Institutions and Markets: Money and Plan. Edited by Gregory Grossman . Financial Institutions and Markets: Money, Flow of Funds, and Economic Activity. By Nathaniel Jackendoff . Financial Institutions and Markets: Savings and Residential Financing: 1968 Conference Proceedings. Edited by Donald P. Jacobs and Richard T. Pratt . Financial Institutions and Markets: Investment Policies of Life Insurance Companies. By Lawrence D. Jones . Financial Institutions and Markets: Commercial Banking in the Economy. By Paul S. Nadler . Financial Institutions and Markets: Elementary Monetary Theory. By Harlan M. Smith . Financial Institutions and Markets: Elements of Monetary Policy. By Thomas Mayer . Financial Institutions and Markets: The Comptroller and Bank Supervision. By Ross M. Robertson . Financial Institutions and Markets: Commercial Bank Entry Into Revenue Bond Underwriting: Competitive Impact and Public Benefits. By Wm . Paul Smith . Financial Institutions and Markets: Panic on Wall Street: A History of America's Financial Disasters. By Robert Sobel . Financial Institutions and Markets: The Demand for Money in Norway. By Edward M. Syring , Jr . International Finance: Financing Economic Development: Fiscal Policy for Emerging Countries. By Robert B. Bangs . International Finance: The International Bond Market in the 1960's: Its Development and Operation. By John F. Chown and Robert Valentine . International Finance: The Economics of Interdependence: Economic Policy in the Atlantic Community. By Richard N. Cooper . International Finance: A Monetary General Equilibrium Theory for an International Economy. By Per Meinich . International Finance: Development Policy—Theory and Practice. Edited by Gustav F. Papanek . International Finance: Effects of U.K. Direct Investment Overseas: An Interim Report. By W. B. Reddaway in collaboration with J. O. N. Perkins , S. J. Potter and C. T. Taylor . International Finance: Effects of U.K. Direct Investment Overseas: Final Report. By W. B. Reddaway in collaboration with S. J. Potter and C. T. Taylor . Public Finance: A Comprehensive Income Tax Base? A Debate. By Boris I. Bittker , Charles O. Galvin , R. A. Musgrave , and Joseph A. Pechman . Public Finance: Financial Institutions and Markets: Social Security: Perspectives for Reform. By Joseph A. Pechman , Henry J. Aaron , and Michael K. Taussig . Public Finance: The Personal Exemptions in the Income Tax. By Lawrence H. Seltzer . Public Finance: Federal-State-Local Fiscal Relationship: A Symposium.     

Do institutions prevent contagion in financial markets? Evidence from the European debt crisis

ABSTRACT

The recent European Sovereign Debt Crisis brought in attention a number of structural problems in the European Union. Part of the effort to correct these problems in the countries that were mostly affected by the crisis were a number of policy responses from the European Union, the European Central Bank, the International Monetary Fund and the Local Governments. In this study, we attempt to assess the success of these responses to constrain the contagion of the crisis from the banking sector to the real economy sectors of the Eurozone countries. Our results show that policy announcements from the EU/ECB/IMF affect the transmission of shocks generated in the banking sector to the market. Moreover, policy responses of the national governments also seem to play a role in the contagion of the crisis.     

BOOK REVIEWS

Book reviewed in this article: AggregatJJ Theory and Policy Income and Wealth. By Edward Ames . Controlling Monetary Aggregates: Proceedings of the Monetary Conference Held on Nantucket Island, June 8–10, 1969. Sponsored by the Federal Reserve Bank of Boston Essays on Interest Rates, Volume I. Edited by Jack M. Guttentag and Phillip Cagan Business Finance and InvestmentsAn Introduction to Risk and Return from Common Stocks. BY Richard A. Brealey . Capital Allocation Theory: The Study of Investment Decisions. By Gerald A. Fleischer . Quantitative Analysis of Financial Decisions. By James C. T. Mao . Microeconomics and Decision Models of the Firm. By Thomas H. Naylor and John M. Vernon . Financial Institutions and MarketsModern Techniques in Bank Management. Edited by Douglas V. Austin and Gene S. Booker . The Price of Money, 1946 to 1969: An Analytical Study of United States and Foreign Interest Rates. By Sidney Homer and Richard I. Johannesen . Innovations in Bank Management: Selected Readings. Edited by Paul F. Jessup . The Federal Home Loan Bank Board. By Thomas B. Marvell . Municipal Bond Finance and Administration: A Practical Guide to the Analysis of Tax Exempt Securities. By Alan Rabinowitz . Readings in Financial Markets and Institutions. Edited by J. Van Fenstermaker . International FinanceResource Flows to Less Developed Countries. By Clive S. Gray . A Structural Model of the U.S. Balance of Payments. By Martin F. J. Prachowny . Amsterdam and London: North-Holland, 1969. Pp. 176. $9.50. Readings in International Financial Management. Edited by Arthur I. Stonehill . International Financial Management. By David B. Zenoff and Jack Zwick Public FinanceTaxes and Politics: A Study of Illinois Public Finance. By Glenn W. Fisher . The Taxation of Income from Capital. Edited by Arnold C. Harberger and Martin J. Bailey . Commonwealth-State Financial Relations in Australia. By James A. Maxwell . Tax Impacts on Compensation. Sponsored by Tax Institute of America     

Stock index dynamics and derivatives pricing with stochastic interest rates

The paper analyzes the equilibrium valuation of stock index derivatives in an economy with stochastic interest rates and with a representative agent having time-additive power utility. The equilibrium short interest rate dynamics and the equilibrium term structure of interest rates are described by an affine one-factor term structure model. In equilibrium the value of the stock index is a non-trivial function of the short interest rate. The paper investigates the consequences of the induced stock index dynamics for the theoretical spreads between index forward prices and index futures prices and the consequences for the valuation of options on stock index futures.The paper was written while the author was a visiting scholar at Department of Finance, Kellogg Graduate School of Management, Northwestern University. I thank for helpful comments and suggestions from Gurdip Bakshi, Avi Bick, Menachem Brenner (the editor), Zhiwu Chen, San-Lin Chung, Mark Fisher, Andreas Höger, Marti Subrahmanyam, two anonymous referees, and participants at the Western Finance Association meeting in San Diego, the European Financial Management Association meeting in Istanbul, the European Finance Association meeting in Vienna, and the Center of Analytical Finance workshop at University of Aarhus. Financial support from the Danish Natural Science and Social Science Reasearch Councils is gratefully acknowledged.     

Black Market Premia, Exchange Rate Unification, and Inflation in Sub-Saharan Africa

World Bank and International Monetary Fund (IMF) programs favorunification of official and black market exchange rates on theargument that multiple exchange rates misallocate resources.This article shows that such policy advice sometimes overlooksan important consideration: when multiple rates are a meansof taxation, the widened deficit from unification increasesinflation. This article uses the experience of Ghana, Nigeria,and Sierra Leone to illustrate the tradeoff between the benefitsof unification for resource allocation and its costs for inflation.     

论温州外向型企业把握人民币升值的"危"和"机"

2010年,随着全球经济步入复苏的关键时期,欧美各国与中国之间围绕人民币汇率问题的摩擦日渐加剧,美国总统奥巴马呼吁中国推动人民币加快升值,世界银行和国际货币基金组织要求中国提高人民币币值.人民币持续的升值态势,将对温州地区外贸造成较大影响.外向型企业应趋利避害,应对人民币升值带来的挑战,克服不利因素,把握商机,顺势而为,实现更好发展.     

Exports,foreign direct investment,and the costs of corporate taxation

This paper develops a model of a monopolistically competitive industry with extensive and intensive investment and shows how these margins respond to changes in average and marginal corporate tax rates. Intensive investment refers to the size of a firm’s capital stock. Extensive investment refers to the firm’s production location and reflects the trade-off between exports and foreign direct investment as alternative modes of foreign market access. The paper derives comparative static effects of the corporate tax and shows how the cost of public funds depends on the measures of effective marginal and average tax rates and on the elasticities of extensive and intensive investment. The paper was presented in 2006 at the German public finance meeting in Giessen; the Institute for Advanced Studies in Vienna; the ESF/CEPR Workshop on Outsourcing, Migration and the European Economy in Rome; the University of St. Gallen; the Graduate Institute for International Studies in Geneva, and in 2007 at the International Monetary Fund in Washington, DC, the CESifo Area Conference in Public Sector Economics in Munich and the 63rd IIPF Congress in Warwick. I appreciate stimulating comments by Michael Devereux and seminar participants and, in particular, by the discussants Andreas Haufler and Nadine Riedl, an anonymous referee and the editor Richard Cornes.     

BOOK REVIEWS

Book reviewed in this article: Developments of Monetary Theory in the Netherlands. By Frits J. De Jong . Studies in Monetary Economics. By Don Patinkin . A Consumption-Savings Model and Its Applications. By W. H. Somermeyer and R. Bannink . Beta Coefficients and Models of Security Return. By John W. Aber . Financial Decision Making—Theory and Practice. By Avery B. Cohan . Institutional Investors and Corporate Stock. Edited by Raymond W. Goldsmith . The Bank Holding Company 1973. Edited by Richard B. Johnson . Financial Deepening in Economic Development. By Edward S. Shaw . The International Linkage of National Economic Models. By R. J. Ball , ed. The World Bank since Bretton Woods. By Edward S. Mason and Robert E. Asher .     

Perceived international environmental factors and corporate voluntary disclosure practices: An empirical study

Drawing upon the contingency theory of organisations, we identify a set of perceived international environmental factors and examine how these factors influence a company's voluntary disclosure levels. The perceived international environmental factors identified are (a) intensity of global competition, (b) international socio-political institutions, (c) international accounting standards, and (d) international financial institutions. Based on data collected from 100 Egyptian non-financial listed companies, the results of multiple regression analysis indicate that the level of a company's voluntary disclosure is positively and significantly associated with its perceived influence of (a) international socio-political institutions (such as the United Nations, the European Union, the Association of South East Asian Nations, the World Trade Organization, and the Organization for Economic Co-operation and Development), (b) international accounting standards, and (c) international financial institutions (such as the World Bank and the International Monetary Fund). Contrary to our expectations, our findings reveal no significant association between voluntary disclosure level and perceived intensity of global competition. Our study contributes to the international accounting disclosure field by providing evidence from Egypt that perceived international environmental factors may influence the type and level of accounting disclosures by organisations. These findings are also applicable to other emerging countries.     

Too Big to Change: The Stabilizing Force of Reserve Currency Preferences in the International Monetary System

We empirically investigate whether reserve currency preferences have been a source of stability for the international monetary system. Our findings suggest that reserve-hoarding countries, especially the emerging/developing countries, tend to adopt a stabilizing diversification strategy in their reserve portfolio allocation, buying (selling) assets denominated in depreciated (appreciated) currency. The result is robust to both International Monetary Fund and Bank for International Settlements measures of quantity changes of reserve shares. The stabilizing diversification strategy reveals the fact that reserve-hoarding countries may fall into a "dollar trap," and escaping from it may cause more valuation loss of their existing reserve portfolios.     

Accounting development in Pakistan

This paper examines the origins, growth, and the development of accounting practices and disclosures in Pakistan and the factors that influenced them. We trace the early days of accounting in the Indian subcontinent and discuss the British colonial influence. We examine the development of accounting in Pakistan through three eras: Independence through 1971, Post 1971-1984, and 1984 to present. We describe how the colonial past and later the international financial institutions such as the Asian Development Bank and the International Monetary Fund played key roles in shaping accounting and reporting practices of the country. Pakistan's adoption of International Financial Reporting Standards as national standards has not led to improvement in the quality of financial reporting. We argue that Pakistan, even though classified as a common law country in literature, exhibits most of the properties of code law countries. We conclude that lack of investor protection (e.g., minority rights protection, insider-trading protection), judicial inefficiencies, and weak enforcement mechanisms are more critical to explaining the state of financial reporting in Pakistan than are cultural factors. This insight has policy implications for developing countries that are making efforts to improve the quality of the financial reporting of their business entities.     

Errors and weaknesses detected by the European Court of Auditors in the reports on the European Structural Funds 2000–2004

The present paper shows the weaknesses and the errors detected by the European Court of Auditors (ECA) in the reports regarding the Structural Funds (the European Social Fund (ESF); the European Agricultural Guidance and Guarantee Fund, ‘Guidance’ section (EAGGF-Guidance), the European Regional Development Fund (ERDF) and the Financial Instrument for Fisheries Guidance (FIFG)), presented by 15 countries of the European Union from the year 2000 to 2004. We have classified the said countries in four groups, regarding the date of their EU incorporation. The main aim of our work is to highlight the errors made by the Member States on the management and control of the structural funds received from the EU, analysing the likely causes and consequences of such errors.     

BOOK REVIEWS

Book reviewed in this article: Capital Budgeting Techniques. By F. M. Wilkes . National Monetary Policies and International Financial Markets. By Richard J. Herring and Richard C. Marston . By Robert Solomon . The International Monetary System, 1945–1976. Foreign Direct Investment, Industrialization, and Social Change. By Stephen Jay Korbrin . Revisited Monetary History Revisited. By P. Temin . Bank Holding Companies and the Public Interest. By Michael A. Jessee and Steven A. Seelig . Evolution, Welfare and Time in Economics: Essays in Honor of Nicholas Georgescu-Roegen. Edited by Anthony M. Tang , Fred M. Westfield, and Ames S. Worley . Lectures on the Theory of Production. By Luigi L. Pasinetti . Toward Full Employment and Price Stability. By Paul Mc Cracken, et al .     

Financial challenges for the new millennium

This article highlights the main issues raised in 13 articles that were selected from papers presented at the 12th Australasian Finance and Banking Conference held in Sydney in December 1999. It also analyses the issues related to global financial coordination and integration for the new millennium. It highlights the cost associated with foreign exchange volatility and the significance of macroeconomic coordination at the global level for further integration of the financial market. It also highlights the challenges facing international institutions such as the International Monetary Fund (IMF) and the need for global financial institutions with greater influence, which could address the major financial challenges facing the new millennium.