Financialized accounts: Share buy-backs, mark to market and holding the financial line in the S&P 500

In recent years the US corporate sector has deployed more cash from operations to finance the repurchase of outstanding share capital for treasury stock. Shares repurchased for treasury stock can help flatter earnings per share, fund senior management share option compensation schemes and finance corporate acquisitions. In financialized accounts these are now significant transactions which, it is argued, serve the financial interests of managers and investors.The US Financial Accounting Standards Board (FASB) is now demanding a “greater use of fair value measurements in financial statements” with the result that share options and corporate acquisitions will be “marked to market”. This will force a financialized ratchet because managers in the S&P 500 will need step up cash extraction if they are to hold the financial line.     

Bank size, market concentration, and bank earnings volatility in the US

We examine whether bank earnings volatility depends on bank size and the degree of concentration in the banking sector. Using quarterly data for non-investment banks in the United States for the period 2004Q1-2009Q4 and controlling for the quality of management, leverage, and diversification, we find that bank size reduces return volatility. The negative impact of bank size on bank earnings volatility decreases (in absolute terms) with market concentration. We also find that larger banks located in concentrated markets have experienced higher volatility during the recent financial crisis.     

Risk‐based explanation for the book‐to‐market effect

This paper proposes a risk‐based explanation for the book‐to‐market (B/M) effect. I decompose B/M into net operating asset‐to‐market (NOA/M) and net financing asset‐to‐market (NFA/M) components. Portfolio analysis shows that (i) positive B/M, NOA/M and NFA/M are positively related to future returns and (ii) negative B/M, NOA/M and NFA/M are negatively related to future returns. To the extent that positive B/M, NOA/M and NFA/M act as measures of asset risk and negative B/M, NOA/M and NFA/M act as inverse measures of borrowing risk, the nonlinear relations between B/M, NOA/M and NFA/M and future returns provide some evidence to support the risk‐based explanation for the book‐to‐market effect in stock returns.     

A neural‐network‐based decision‐making model in the peer‐to‐peer lending market

This study proposes an investment recommendation model for peer‐to‐peer (P2P) lending. P2P lenders usually are inexpert, so helping them to make the best decision for their investments is vital. In this study, while we aim to compare the performance of different artificial neural network (ANN) models, we evaluate loans from two perspectives: risk and return. The net present value (NPV) is considered as the return variable. To the best of our knowledge, NPV has been used in few studies in the P2P lending context. Considering the advantages of using NPV, we aim to improve decision‐making models in this market by the use of NPV and the integration of supervised learning and optimization algorithms that can be considered as one of our contributions. In order to predict NPV, three ANN models are compared concerning mean square error, mean absolute error, and root‐mean‐square error to find the optimal ANN model. Furthermore, for the risk evaluation, the probability of default of loans is computed using logistic regression. Investors in the P2P lending market can share their assets between different loans, so the procedure of P2P investment is similar to portfolio optimization. In this context, we minimize the risk of a portfolio for a minimum acceptable level of return. To analyse the effectiveness of our proposed model, we compare our decision‐making algorithm with the output of a traditional model. The experimental results on a real‐world data set show that our model leads to a better investment concerning both risk and return.     

Interaction of size,book‐to‐market and momentum effects in Australia

This study seeks to disentangle the effects of size, book‐to‐market and momentum on returns. Initial results show that each characteristic has a role in explaining returns, but that there is interaction between size and momentum, as well as between size and book‐to‐market. Three key findings emerge. First, the size premium is the strongest, particularly in the loser portfolios. Second, the value premium is generally limited to the smallest portfolios. Third, the momentum premium is evident for the large‐ and middle‐sized portfolios, but loser stocks significantly outperform winner stocks in the smallest size portfolio. When these interactions are controlled with multivariate regression, we find a significant negative average relation between size and returns, a significant positive average relation between book‐to‐market and returns, and a significant positive average relation between momentum and returns.     

Bank Liability Structure,FDIC Loss,and Time to Failure: A Quantile Regression Approach

Deposit insurers are particularly concerned about high-cost failures. When the factors driving such failures differ systematically from the determinants of low- and moderate-cost failures, a new estimation technique is required. Using a sample of more than 1,000 bank failures in the U.S. between 1984 and 2003, I present a quantile regression approach that illustrates the sensitivity of the dollar value of losses in different quantiles to my explanatory variables. These findings suggest that reliance on standard econometric techniques results in misleading inferences, and that losses are not homogeneously driven by the same factors across the quantiles. I also find that liability composition affects time to failure.

Testing for financial contagion based on a nonparametric measure of the cross‐market correlation

When contagion is defined as a significant increase in market comovement after a shock to one country, we propose a test for financial contagion based on a nonparametric measure of the cross-market correlation. Monte Carlo simulation studies show that our test has reasonable size and good power to detect financial contagion, and that Forbes and Rigobon's test (2002) is relatively conservative, indicating that their test tends not to find evidence of contagion when it does exist. Applying our test to investigate contagion from the 1997 East Asian crisis and the 2007 Subprime crisis, we find that there existed international financial contagion from the two financial crises.     

Book‐to‐Market Equity,Asset Correlations and the Basel Capital Requirement

This paper examines the effect of book‐to‐market equity (BE/ME) on asset correlations under the Basel capital requirement. We find that BE/ME captures variations in asset correlations after controlling for firm size, default probability and industry effects from 1987 to 2011. Obligors with higher BE/ME exhibit lower asset correlations compared to those with lower BE/ME. Decomposing BE/ME into assets‐in‐place and growth options based on the asset pricing literature shows that obligors with more assets‐in‐place or more fixed assets have higher BE/ME and lower asset correlations than those with more growth options. Overall, our findings suggest that BE/ME is an additional important factor that may improve the estimates of asset correlations and thereby banks’ capital adequacy.     

The role of managerial risk‐taking in the ‘rise and fall’ of the CDS market

Since the innovation of credit default swaps (CDSs) in 1997, the market for CDSs grew dramatically to $62 trillion in 2007 (ISDA 2010). However, this market declined significantly with the onset of the GFC, prompting the question, ‘What lies behind the phenomenal growth and the eventual collapse of the CDS market?’ Using CDS spread data from 319 bank and non‐bank financial institutions across 33 countries over the period 2001–2010, I provide evidence of the determinants that affect risk‐taking by financial institutions, proxied by CDS spreads, and argue within an agency theoretical framework that managerial risk‐taking contributed to the ‘rise and fall’ of the CDS market.     

Employee‐friendly practices,product market competition and firm value

In this paper, we examine whether employee‐friendly practices are associated with product market competition, and whether firm value is related to employee‐friendly practices and product market competition. Using a large sample of US firms, we find positive and significant associations between employee friendliness and product market competition, and between firm value and employee friendliness when product market competition is high, consistent with the value creation theory. Both positive relations hold when we account for corporate governance. In addition, using the list of Fortune's ‘100 Best Companies to Work For’ as an alternative measure of employee‐friendly policies, we find firms in more competitive industries are more likely to treat their workers favourably. Furthermore, we find that the market reaction is more positive when firms in more competitive industries are selected for the Fortune list.     

Limits‐to‐arbitrage,investment frictions,and the investment effect: New evidence

This study comprehensively reexamines the debate over behavioral and rational explanations for the investment effect in an updated sample. We closely follow the previous literature and provide several differences. Our tests include five prominent measures of corporate investment and corporate profitability in q‐theory and recent investment‐based asset pricing models. Both classical and Bayesian inferences show that limits‐to‐arbitrage tend to be supported by more evidence than investment frictions for all investment measures. When idiosyncratic volatility and cash flow volatility are used in measuring investment frictions, the inference is more favorable for the rational explanation.     

Information Asymmetry and Voluntary SFAS 157 Fair Value Disclosures by Bank Holding Companies During the 2007 Financial Crisis

We hand‐collect SFAS 157 voluntary fair value disclosures of 18 bank holding companies. The SEC's Division of Corporate Finance likely targeted these entities in 2008 through their “Dear CFO” letters in which they requested specific, additional disclosure items. We collect disclosures that match the SEC recommendations and create eight common factor disclosure variables to examine the effect of such disclosures on information asymmetry. We find that disclosure variables about the use of broker quotes or prices from pricing services and the use of market indices and illiquidity adjustments are related to lower information asymmetry. However, disclosure variables about valuation techniques and asset‐backed securities are related to greater information asymmetry. We also document that disclosure complexity, and disclosure tone (uncertainty and litigious) is related to greater information asymmetry. These findings are consistent with criticism that corporate disclosures are voluminous; management may obfuscate unfavorable information which in turn increases market participants’ assessment of uncertainty associated with the fair value measures. We caveat that the setting of the financial crisis and a small sample size may limit the ability to generalize these inferences to other time periods or other financial firms.     

Monetary Policy,Bank Lending,and the Risk‐Pricing Channel

This paper identifies a monetary policy channel through the risk pricing of bank debt in the market for jumbo certificates of deposit (jumbo CDs). Adverse policy shocks increase debt holder perceptions of bank default, increasing the risk premia for some banks, thereby decreasing their external funding of loans. The results show that contractionary policy increases the sensitivity of jumbo‐CD spreads to leverage and asset risk for small banks, and to leverage for large banks. The results also show a distributional and aggregate effect on banking system jumbo CDs and total loans, producing a risk‐pricing (or market discipline) channel. This channel has implications for monetary and regulatory policies, and financial stability.     

Bank Panics,Government Guarantees,and the Long‐Run Size of the Financial Sector: Evidence from Free‐Banking America

Governments attempt to increase the confidence of financial market participants by making implicit or explicit guarantees of uncertain credibility. Confidence in these guarantees presumably alters the size of the financial sector, but observing the long‐run consequences of failed guarantees is difficult. We look to America's free‐banking era and compare the consequences of a broken guarantee during the Indiana‐centered Panic of 1854 to the Panic of 1857 in which guarantees were honored. Our estimates of a model of endogenous market structure indicate substantial negative long‐run consequences to financial depth when panics cast doubt upon a government's ability to honor its guarantees.       

Returns to Scale,Market Power,and the Nature of Price Rigidity in New Keynesian Models with Self‐Fulfilling Expectations

Increasing returns to scale and firms' market power are two potential sources of sunspot expectations in neoclassical models. We show that in New Keynesian models, returns to scale and market power can have fundamentally different implications for broad macroeconomic issues, including self‐fulfilling expectations, depending on the nature of price rigidity. Our findings suggest that the design of stabilization monetary policy can depend on precise knowledge about the economy's real and nominal features. Therefore, a clear understanding of the specific economic environment and its relevance to monetary policymaking for ensuring macroeconomic stability can be an integrated part of monetary policy practice.