Corruption and bank risk-taking: Evidence from emerging economies

This paper addresses the impact of corruption on banks' risk-taking behavior, using bank-level data from more than 1200 banks in 35 emerging economies during the period 2000–2012. We find consistent evidence that higher levels of corruption increase the risk-taking behavior of banks, in favor of the “sand the wheel” view in the corruption-development nexus. In addition, we examine the indirect effects of corruption on bank risks, and find evidence that the impact of monetary policy on banks' risk-taking behavior is more pronounced with the increasing severity of corruption.     

Monetary policy and bank risk-taking: Evidence from emerging economies

This paper addresses the impact of monetary policy on banks' risk-taking by using bank-level panel data from more than 1000 banks in 29 emerging economies during 2000–2012. We find that, consistent with the proposition of the “bank risk-taking channel” of monetary policy transmission, banks' riskiness increases when monetary policy is eased. This result is robust when we adopt alternative measures of monetary policy and bank risk, and use different econometric methodologies. In addition, we find that bank risk-taking amid expansionary monetary policy is less conspicuous in a more consolidated banking sector and when monetary policy is more transparent.     

The impact of trade and financial openness on bank loan pricing: Evidence from emerging economies

In this paper, we examine the impact of trade and financial openness on bank loan pricing. Using data from 35 emerging economies, we first document that higher trade and financial openness lower interest rates on gross bank loans using country-specific measures for trade and financial openness. We then confirm our findings using firm-specific measures for trade and financial openness and individual loan spread. Exploiting the accession to World Trade Organization (WTO) as a quasi-natural experiment, we observe loan interest rates declined in countries after joining the WTO. Overall, we imply that openness is beneficial for financial development in emerging economies.     

The influence of risk-taking on bank efficiency: Evidence from Colombia

This paper shows evidence on the influence of risk-taking on bank efficiency in emerging markets and identifies heterogeneity in the way risk affects banks with different characteristics. We fit a stochastic frontier model with random inefficiency parameters to a sample of Colombian banks. The model provides accurate cost and profit efficiency estimates. The effects of risk-taking on efficiency vary with size and affiliation. Large and foreign banks benefit more from higher exposure to credit and market risk, while domestic and small banks from being more capitalised. We identify some channels explaining these differences and provide insights for prudential regulation.     

Incentive pay and bank risk-taking: Evidence from Austrian,German, and Swiss banks

We use payroll data in the Austrian, German, and Swiss banking sector to identify incentive pay in the critical banking segments of treasury/capital market management and investment banking for 67 banks. We document an economically significant correlation of incentive pay with both the level and volatility of bank trading income—particularly for the pre-crisis period 2003–2007, in which incentive pay was strongest. This result is robust if we instrument the bonus share in the capital market divisions with the strength of incentive pay in unrelated bank divisions like retail banking. Moreover, pre-crisis incentive pay appears too strong for an optimal trade-off between trading income and risk, which maximizes the net present value of trading income. Further analyses indicate that the bonus moderation during the crisis has removed excessive pre-crisis incentive pay.     

Transmission of central bank communication to emerging economies: Evidence from the Korean stock market

This study analyzes the impact of US central bank communication on financial markets in emerging economies. We find that informal communication from the Fed positively influences the Korean stock market at a greater magnitude than the US stock market. The results show that the Korean stock market experienced higher excess return when Korea's monetary policy decisions are uncertain, suggesting that central bank communication in central countries could transmit to emerging economics through their monetary policy decisions and uncertainty. In addition, various portfolios and individual equities have a positive market risk-return tradeoff in the presence of Fed communication only.     

Central banks' supervisory guidance on corporate governance and bank stability: Evidence from African countries

This paper focuses on the identification of the causal relationship between central banks' supervisory guidance and individual bank stability. We propose and test the hypothesis that this causal relationship is mediated by the degree to which banks comply with their central bank's corporate governance recommendations. Specifically, we exploit the fact that there is considerable cross-country heterogeneity in providing supervisory guidance. Our recursive two-equation system is equivalent to an endogenous treatment effect model in which the treatment is the provision of supervisory guidance. We find that institutional factors, in particular the legal family of origin, political stability, contract enforcement and strength of investor protection promote provision of supervisory guidance. If a central bank has published supervisory guidance, local banks show better internal governance and higher stability.     

The impact of oil price movements on bank non-performing loans: Global evidence from oil-exporting countries

It is generally believed that economic and financial performance in oil-rich countries are interlinked to oil price movements. On this assumption, we consider whether oil prices shocks have any impact on bank non-performing loans (NPLs), and if so, whether the effect is homogenous across banks. This paper addresses these questions by applying a dynamic GMM model on data from 2310 commercial banks in 30 oil-exporting countries over the period 2000–2014. Three main results emerge. First, changes in oil prices do have a significant impact on bank NPLs: A rise (fall) in oil prices is associated with a decrease (increase) in NPLs. Second, oil prices shocks have asymmetric effects on bank problem loans, with negative oil price movements generally have a greater impact than positive oil price movements. Third, the unfavourable impact of adverse oil prices shocks on the quality of bank loans tends to be more pronounced in large banks. Overall, these robust results favour the adaptation of appropriate macroprudential policies and diversification of the economy, in order to mitigate the adverse impact of oil prices shocks.     

Effect of climate-related risk on the costs of bank loans: Evidence from syndicated loan markets in emerging economies

Based on a novel dataset that combined syndicated loans originated in the emerging market economies with greenhouse gas emission intensity data of borrowers, this study examines whether and to what extent banks in these emerging markets have factored in climate transition risk in their lending decisions. On loan pricing, our results suggest that banks in these emerging markets have started to price-in climate transition risk for loans to emissions-intensive sector since the Paris Agreement. This could reflect their increased awareness of a climate-transition risk towards such firms. The extent of the transition risk premium is also found to be dependent on the environmental attitude of banks. Specifically, green banks are found to charge a higher loan spread than other banks, when lending to the same brown firm after the Paris Agreement. Apart from pricing a transition risk premium in the loan spread, we find evidence that banks may also consider imposing more stringent non-pricing contractual terms, such as shortening loan tenor and imposing collateral requirement, on brown firms especially when the associated credit risk impacts on these firms are more uncertain.     

Monetary policies for developing countries: The role of institutional quality

Weak public institutions, including high levels of corruption, characterize many developing countries. We demonstrate that this feature has important implications for the design of monetary policymaking institutions. We find that a pegged exchange rate or dollarization, while sometimes prescribed as a solution to the credibility problem, is typically not appropriate for countries with poor institutions. Such an arrangement is inferior to a Rogoff-style conservative central banker, whose optimal degree of conservatism is proportional to the quality of institutions. Finally, we cast doubt on the notion that a low inflationary framework can induce governments to improve public institutions.     

Revisiting the risk-taking effect of executive stock options on firm performance

While the relation between equity-based compensation and firm performance has been widely discussed, the findings on how executive stock options (ESOs) affect firm value are still inconclusive. This research examines the risk-taking effect of ESOs on firm performance by taking into consideration managers' personal risk aversion. A three-stage-least-squares approach is adopted to examine a simultaneous system of equations describing option compensation, risk-taking, and firm performance. Evidence confirms that ESOs increase managerial risk-taking, but such risk-taking is constrained by managers' personal risk aversion. In addition, evidence indicates that managerial risk-taking induced by ESOs would increase both long-term and near-term stock returns. The negative impact on near-term and the positive impact on long-term returns on investment imply that it takes time for accounting performance to reflect the risk-taking effect of ESOs. These results further indicate that managers focus their concerns more on stock risk and return rather than near-term accounting results.     

Impact of institutional quality on the capital structure of firms in developing countries

This paper investigates the effects of institutional quality on firms' capital structure for a panel of 3891 firms from 23 developing countries. Our main findings for the full panel show institutional quality has a significantly positive effect on firms' capital structure. At the regional level, based on the panel data for 2187 firms from Asian countries and 1091 firms from Latin American and Eastern European countries, institutional quality has a significantly positive effect on capital structure. However, for the 613 firms from African countries, institutional quality is mostly insignificant. Additional analysis reveals positive effects of legal enforcement on capital structure.     

Pay-performance sensitivity and risk-taking behaviors: Evidence from closed-end funds

The pay-performance sensitivity (PPS) of managers of closed-end funds is explicitly specified in their contracts as the marginal rate of the funds' net asset value. Using a sample of US closed-end funds from 2006 to 2009, this paper investigates the relationship between the PPS and risk-taking behaviors of fund managers. After controlling for endogeneity, we find that fund return volatility and fund PPS positively determine each other. Furthermore, the positive relationship is more pronounced for closed-end funds engaging in alternative investments or in emerging markets.     

Business innovations from emerging market countries into developed countries: Implications for multinationals from developed countries

This article addresses innovation and emerging‐market countries. Both are important topics in the business world today. The focus of this article is on the importance of innovation and market development in emerging‐market countries by Western multinational companies typically based in North America and Western Europe. The authors of this article argue that as Western multinationals innovate and develop emerging markets, this will give multinationals the opportunity not only to compete effectively in emerging markets but also to protect their home markets in developed countries. Implications for Western multinationals are discussed. © 2012 Wiley Periodicals, Inc.     

Market power and risk-taking of banks: Some semiparametric evidence from emerging economies

We investigate the impact of market power of banks on their risk-taking. Appling bank-level data from 35 emerging economies during the period of 2000–2014 to our semiparametric model of the market power-bank risk nexus with the Bayesian inference, we present consistent evidence that there is a significant nonlinear relationship between market power and risk-taking of banks. Bank stability is found bolstered with increasing market power, but this relationship tends to weaken and even reverse as banks' market power grow further over a threshold level.     

The impact of trade facilitation on poverty and inequality: Evidence from low- and middle-income countries

This paper using a trade model of imperfect competition and product differentiation, examines the welfare effects of two popular tariff-tax reforms: (i) a tariff cut combined with an equal increase in the consumption tax and (ii) a tariff cut combined with an increase in the consumption tax that leaves the consumer price of the imported good unchanged. It is shown that if tax revenues are lump-sum distributed and firms compete over prices, then coordinated tariff-tax reforms improve welfare for a low degree of product differentiation, whereas these reforms are welfare-reducing for any degree of product differentiation under Cournot competition. When, instead, revenues are used to finance the provision of public goods, then the total effect of these reforms on welfare depends, under plausible assumptions, on the strength of the consumer's valuation of the public good.     

The institutional analysis of CSR: Learnings from an emerging country

This paper presents an explanation of why and how institutional arrangements influence the practice of CSR in Pakistan. The authors conduct in-depth interviews with CSR managers; national regulators; and, members of CSR promoting institutions. Our findings suggest that Pakistani CSR is largely found to be in support of charities and donations. Family traditions and religion are primary drivers for the adoption of CSR followed by the influence of peer pressure. Additionally, limited regulative pressures were attributed to the current ambiguity surrounding corporate regulation in Pakistan. This paper contributes to the literature on CSR by identifying internal drivers of CSR praxis.     

The role of government affiliation in explaining firm innovativeness and profitability in emerging countries: Evidence from China

Drawing from institutional polycentrism, we advance understanding of how affiliation with different government levels influences innovativeness and profitability in emerging countries. Our framework suggests that as different government levels vary in their objectives and resources, they affect firm innovativeness vis-à-vis profitability in qualitatively different ways. The analysis of 18,430 Chinese firms shows that affiliation with higher-level governments enhances firms’ innovativeness, whereas affiliation with lower-level governments is effective for enhancing profitability. Our framework also clarifies how location-specific institutional substitution occurs, indicating that the usefulness of government affiliation for innovativeness depends on how effectively legal institutions protect intellectual property in each region.     

Foreign bank lending: Evidence from the global financial crisis

We exploit highly disaggregated bank-firm data to investigate the dynamics of foreign vs domestic credit supply in Italy around the period of the Lehman collapse, which brought a sudden and unexpected deterioration of economic conditions and a sharp increase in credit risk. Taking advantage of the presence of multiple lending relationships to control for credit demand and risk at the individual-firm level, we show that foreign lenders restricted credit supply (to the same firm) more sharply than their domestic counterparts. A number of exercises testing alternative explanations for this result suggest that such more intense restriction also reflects the (functional) distance between a foreign bank's headquarter and the Italian credit market.     

Bank risk-taking and market discipline: Evidence from CoCo bonds in Korea

We investigate whether the risk profile of contingent convertible (CoCo) bonds is well-priced by testing the sensitivity of bond spreads to bank asset volatility. While equity holders (bankers) have an incentive to make riskier investments to trigger the write-off, such risk-taking behavior can be contained if CoCo bond investors punish it by demanding higher returns. We have found that investors in the Korean financial market understand the risk profile of CoCo bonds and require higher returns for the additional bank risk, which suggests the presence of market discipline with regard to CoCo bonds.