What determines stock option contract design?

We analyze the factors that drive exercise price policy for executive option plans (ESOPs) and their scope in a country where firms are not subject to the tax and accounting considerations that seem to have led to the dominance of at-the-money options in the US Our “unbounded” data for Finland provide us with an excellent opportunity to investigate whether contract design is consistent with compensation theory. Our findings are largely consistent with predictions from the optimal contracting literature. The size of the plan is negatively related to Tobin's Q and firm size and positively related to proxies for monitoring costs, which also influence the probability of launching premium ESOPs. Our results also show that the premium (out-of-the-moneyness) is negatively related to prior stock returns and cash flow-to-assets, which may be an indication of high-water mark contracting, or alternatively, of managerial power. Finally, we also find some support for a positive relation between the premium and the length of the vesting period when maturity is fixed, which indicates an effort to keep the incentives for management from falling over time.     

Does monetary policy determine stock market liquidity? New evidence from the euro zone

The recent financial crisis has been characterized by unprecedented monetary policy interventions of central banks with the intention to stabilize financial markets and the real economy. This paper sheds light on the actual impact of monetary policy on stock liquidity and thereby addresses its role as a determinant of commonality in liquidity. Our results suggest that an expansionary monetary policy of the European Central Bank leads to an increase of aggregate stock market liquidity in the German, French and Italian markets. Furthermore, the effect of monetary policy is significantly stronger for smaller stocks, suggesting a non-linear impact of monetary policy on stock liquidity.     

What is the effect of unconventional monetary policy on bank performance?

This paper examines the relationship between unconventional monetary policy and the US banking performance. Unconventional monetary policy is captured through the central bank's assets and excess reserves. Results show that unconventional monetary policy has a negative relationship with bank performance. Further analysis shows that the negative association between unconventional monetary policy and performance is mitigated for banks with a high level of asset diversification and low deposit funding. We also find that the negative relationship between unconventional monetary policy and performance subdues for deposit insured financial institutions. Finally, we use dynamic panel threshold analysis which reveals that the negative association between unconventional monetary policy and bank performance is particularly pronounced above the reported threshold value.     

What explains the lack of monetary policy influence on bank holding companies?

In this paper, we investigate how monetary policy innovations affect the equity returns of bank holding companies (BHCs). We also examine bank characteristics to determine what explains the cross-sectional and time-series variation in the returns' sensitivity. Similar to non-financial firms, we find that only unanticipated components affect bank equity returns; however, this effect is absent in the second half of our sample period. Smaller, less liquid banks have higher sensitivity; a higher ratio of time deposits to total deposits reduces this sensitivity. A higher ratio of non-interest income to total income also reduces this sensitivity, while capital-constrained banks have a higher sensitivity to monetary policy innovations. We argue that a higher dependence on non-interest income and the use of interest rate derivatives together may explain the disappearing influence of monetary policy on these BHCs.     

Who makes acquisitions? CEO overconfidence and the market's reaction

Does CEO overconfidence help to explain merger decisions? Overconfident CEOs over-estimate their ability to generate returns. As a result, they overpay for target companies and undertake value-destroying mergers. The effects are strongest if they have access to internal financing. We test these predictions using two proxies for overconfidence: CEOs’ personal over-investment in their company and their press portrayal. We find that the odds of making an acquisition are 65% higher if the CEO is classified as overconfident. The effect is largest if the merger is diversifying and does not require external financing. The market reaction at merger announcement (-90$-90$ basis points) is significantly more negative than for non-overconfident CEOs (-12$-12$ basis points). We consider alternative interpretations including inside information, signaling, and risk tolerance.     

What does peer-to-peer lending evidence say about the Risk-Taking Channel of monetary policy?

This paper uses loan application-level data from a peer-to-peer lending platform to study the risk-taking channel of monetary policy. By employing a direct ex-ante measure of risk-taking and estimating the simultaneous equations of loan approval and loan amount, we provide evidence of monetary policy's impact on a nonbank financial institution's risk-taking. We find that the search-for-yield is the main driving force of the risk-taking effect, while we do not observe consistent findings of risk-shifting from the liquidity change. Monetary policy easing is associated with a higher probability of granting loans to risky borrowers and greater riskiness of credit allocation. However, these changes do not necessarily relate to a larger loan amount on average.     

Does the stock market reward innovation? European stock index reaction to negative news during the global financial crisis

This study uses data on 27 European stock indices over the period from January 2007 to December 2012 to investigate the relationship between innovations and the market reaction to negative news during the financial crisis. We use the bivariate BEKK-GARCH approach to estimate time-varying betas and abnormal returns. We show that index prices of countries in the high (low) innovation groups experience significantly positive (negative) abnormal returns on and following the negative news announcement dates. We also find that index beta changes following the arrival of bad news is negatively associated with a country's innovativeness. This finding suggests that innovations promote economic stability and enhance investors' confidence in a country's ability to cope during difficult times. Thus, policy makers who are concerned with sustainable growth should encourage R&D investments by adopting effective policies and avoid unnecessary cuts in R&D expenditures even during times of crisis. A study of the pre-crisis period from January 2001 to December 2006, using the same methods, indicates that investors value innovation more during difficult times.     

Do monetary policy announcements affect stock prices in emerging market countries? The case of Thailand

We examine the effect of monetary policy announcements in Thailand, which is one of emerging market countries in Asia, on stock prices at the firm level. We find that the expected change, rather than the unexpected change, in interest rates affects stock prices. The stock price response to the interest rate announcement is asymmetric. For instance, the relation between interest rate surprises and stock prices is conditional on the direction of the interest rate change. In general, macroeconomic conditions and firm characteristics cannot explain the stock price reaction to the announcement. In addition, stock prices of firms in different industries appear to react heterogeneously to the interest rate announcement.     

Are IFRS value-relevant for separate financial statements? Evidence from the Italian stock market

Using a sample of Italian firms, this paper investigates whether separate financial statements are useful to capital market investors, and whether International Financial Reporting Standards (IFRS) are more value-relevant than domestic generally accepted accounting principles (GAAP). These issues are key in evaluating the decision made by some states in the European Union to extend the use of IFRS to separate financial statements. The study provides evidence that separate financial statements are value-relevant, regardless of the accounting standard set. However, contrary to expectations, separate financial statements under IFRS do not have incremental information content beyond domestic GAAP. There is even some evidence that domestic GAAP financial statements are more value-relevant than IFRS. Finally, this paper documents the important role of model specification in value-relevance studies.     

What determines the composition of a firm's cash reserves?

We investigate what determines variation in the composition of the financial assets that constitute corporate cash reserves and how this variation relates to other key liquidity management practices. The degree to which a firm invests its cash reserves in less liquid, longer-maturity financial assets that earn a higher yield is explained by financial constraints, the ability to accurately forecast short-term liquidity needs, and the firm's likelihood of defaulting on its debt. During years when a firm's cash reserves are required to fund increases in investment or operating expenses the firm transfers funds from less liquid to more liquid financial assets. A firm's decisions relating to the composition of its cash reserves interacts with other key liquidity management practices, such as relying on credit lines for liquidity, extending trade credit or using it as a source of financing, and holding large amounts of inventories. Our findings provide insights on an important component of corporate liquidity management decisions.     

Does easing monetary policy increase financial instability?

This paper develops a model featuring both a macroeconomic and a financial friction that speaks to the interaction between monetary and macro-prudential policy and to the role of US monetary and regulatory policy in the run up to the Subprime mortgage crisis. There are two main results. First, interest rate rigidities in a monopolistic banking system increase the probability of a financial crisis (relative to the case of flexible interest rate) in response to contractionary shocks to the economy, while they act as automatic macro-prudential stabilizers in response to expansionary shocks. Second, when the interest rate is the only available instrument, monetary policy faces a trade-off between macroeconomic and financial stability. This trade off is both qualitative and quantitative in response to contractionary shocks, while it is only quantitative in response to positive shocks. We show that a second instrument, such as a Pigouvian tax on credit to households on the demand side of the market, is needed to restore efficiency in the economy when both frictions are at work.     

What determines the profitability of banks? Evidence from Spain

This paper empirically analyses the factors that determine the profitability of Spanish banks for the period of 1999–2009. We conclude that the high bank profitability during these years is associated with a large percentage of loans in total assets, a high proportion of customer deposits, good efficiency and a low doubtful assets ratio. In addition, higher capital ratios also increase the bank’s return, but only when return on assets (ROA) is used as the profitability measure. We find no evidence of either economies or diseconomies of scale or scope in the Spanish banking sector. Finally, our study reveals differences in the performance of commercial and savings banks.     

Does the ECB act as a lender of last resort during the subprime lending crisis?: Evidence from monetary policy reaction models

We investigate whether the ECB aligns its monetary policy with financial crisis risk in EMU member countries. We find that since the outbreak of the subprime crisis the ECB has significantly increased net lending and reduced interest rates when banking and sovereign debt crisis risk in vulnerable EMU countries (Greece, Ireland, Italy, Portugal, and Spain) increases, while no significant effect is identified for the pre-crisis period and relatively tranquil EMU countries (Austria, Belgium, France, Germany, and the Netherlands). These findings suggest that the ECB acts as a Lender of Last Resort for vulnerable EMU countries.     

How does house price influence monetary policy transmission?

The literature has focused on house price growth to explain the inefficiency of monetary policy. From the perspective of substitution, this paper explains the relationship between house prices and monetary policy considering not only house price growth but also house price uncertainty. By constructing a theoretical model including both financial-asset and fixed-asset investment, we find that expansionary monetary policy not only promotes total investment but simultaneously also leads to substitution towards financial assets. However, a rise in house price growth or house price uncertainty will mitigate the substitution effect generated by monetary policy. These propositions are supported by empirical data on China's nonfinancial listed firms from 2009 Q1 to 2018 Q3 and the results are robust to a variety of model specifications and empirical approaches. Our findings imply that real estate regulatory policy should coordinate with monetary policy in maximizing fixed-asset investment.     

What determines the Japanese corporate credit spread? A new evidence

This paper investigates the determinants of the corporate credit spreads changes in the Japanese bond markets. We show that the business cycle risk and market skewness risk affect changes in the credit spread in Japan even after controlling for the frequently used variables. We also find that the magnitude of market skewness risk is relatively higher for low-rated bonds. Our results are robust to changes in credit ratings, different maturity groups and time periods around the recent global financial crisis.     

Do foreign investors insulate firms from local shocks? Evidence from the response of investable firms to monetary policy

Extant research shows that stock returns of investable firms are highly sensitive to foreign market and global information shocks, suggesting that having foreign investors might insulate investable firms from shocks to local fundamentals. Examining 24 emerging markets, we find that both investable and non-investable firms are sensitive to local monetary policy shocks. This allays the concern that emerging-market opening reduces the efficacy of local monetary policy. We also find that in 11 countries (46% of our country-sample), investable firms are more sensitive to local shocks than non-investable firms. Differences in leverage, stock liquidity, size, domestic product-market exposure, or industry cyclicality do not drive this finding.     

Macroeconomic shocks and the forward yield curve: how important is monetary policy?

The associations between macroeconomic fluctuations and the yield curve tend to be explained by the reactions of the monetary authority. This paper evaluates how macroeconomics shocks affect the forward yield curve for domestic and foreign debt markets in Venezuela, where monetary policy is not the main source of macroeconomic fluctuations. As previous results in the literature, macroeconomic shocks affect more strongly the short end of the yield curve in the expected direction. Overall, supply shocks explain most of the variability of long-term yields, spread and volatility. Nonetheless, short-term yield movements can be associated with general monetary conditions of the economy and not necessarily with monetary policy actions.     

Preferences or private assessments on a monetary policy committee?

Using Bank of England voting data, we show empirically that members’ votes are driven by heterogeneous individual assessments of the economy as well as their individual policy preferences. Estimates indicate that internal committee members form more precise assessments than externals and are also more hawkish. The estimates allow the first quantification of the gain due to information aggregation on monetary policy committees. The marginal gain from additional committee members tapers quickly after five members. There is no evidence of gains through externals’ moderating internals’ preferences. A relatively small committee of highly informed internal members emerges as a desirable committee structure.