The role of institutional investors in propagating the crisis of 2007–2008

Using novel data on investors' bond portfolios, we study the contagion of the crisis from securitized bonds to corporate bonds. When securitized bonds became “toxic” in August 2007, mutual funds retained the now illiquid securitized bonds and sold corporate bonds. Funds with negative flows or high liquidity needs liquidated more than others. Yield spreads increased more for corporate bonds whose pre-crisis bondholders were more heavily exposed to securitized bonds, compared to same-issuer bonds held by unexposed investors. The findings suggest that liquidity-constrained investors with exposure to securitized bonds played a role in propagating the crisis from securitized to corporate bonds.     

The EONIA spread before and during the crisis of 2007–2009: The role of liquidity and credit risk

This paper provides an empirical assessment of the factors affecting the spread between the Euro Overnight Index Average (EONIA) and the main policy rate of the European Central Bank (ECB). Up until the period when Lehman Brothers collapsed in mid-September 2008, the spread was small and positive. After this point, the liquidity surplus that developed from the fixed rate full allotment tendering arrangement in refinancing operations drove the widening of EONIA spread (trading below the ECB policy rate), although other factors also played a significant role. This paper explains the drivers of spread across alternative non-crisis/crisis regimes. In addition, the paper examines how the EONIA spread reacts to shocks imposed on a range of liquidity and credit risk factors in alternative crisis/non-crisis regimes. The results have implications for factors that should be monitored closely across both regimes, and also the implications that this may have for steering an unsecured overnight rate in crisis times.     

Ownership,evergreening and crisis: an analysis of bank–firm relationships in India

Employing data on publicly listed firms for 1995–2012, the article examines the behaviour of bank lending and interest cost and how it evolved during the crisis. The evidence suggests that high-Non-performing Loans (NPL) main banks raised their lending and lowered lending rates during the crisis, especially to risky, low-profit firms, indicative of a flight from quality. A disaggregation of the possible reasons for the flight from quality provides evidence in favour of short-termism behaviour by banks. The analysis also provides evidence in support of tunnelling by risky firms, which became amplified during the crisis. The net effect of these developments was a perceptible reduction in overall employment.     

Baltic stock markets and the financial crisis of 2008–2009

This study presents new evidence on stock market integration by investigating the linkages between developed European stock markets and emerging stock markets. We focus on three countries in the Baltic region, namely Estonia, Latvia and Lithuania with particular attention to the recent financial crisis of 2008–2009. The study is motivated by traditional stock market studies of integration, which show that developed stock markets are highly integrated, while emerging markets may be segmented. How integrated these emerging stock markets are in a crisis period with respect to the EUROSTOXX50 stock index is an empirical question investigated in this study. While the results of this study demonstrate that the Baltic stock markets were apparently segmented before the crisis, they were highly integrated during the crisis. The results of the variance decomposition analysis show that a large proportion of the forecast variance of the Baltic stock markets can be explained by the EUROSTOXX50 during the crisis. The results from the quantile regressions demonstrate that during the crisis the returns of the lowest quantile were most sensitive to the EUROSTOXX50 stock index. All these results imply less diversification benefits during crises when investors would need them the most.     

Baltic stock markets and the financial crisis of 2008–2009

This study presents new evidence on stock market integration by investigating the linkages between developed European stock markets and emerging stock markets. We focus on three countries in the Baltic region, namely Estonia, Latvia and Lithuania with particular attention to the recent financial crisis of 2008–2009. The study is motivated by traditional stock market studies of integration, which show that developed stock markets are highly integrated, while emerging markets may be segmented. How integrated these emerging stock markets are in a crisis period with respect to the EUROSTOXX50 stock index is an empirical question investigated in this study. While the results of this study demonstrate that the Baltic stock markets were apparently segmented before the crisis, they were highly integrated during the crisis. The results of the variance decomposition analysis show that a large proportion of the forecast variance of the Baltic stock markets can be explained by the EUROSTOXX50 during the crisis. The results from the quantile regressions demonstrate that during the crisis the returns of the lowest quantile were most sensitive to the EUROSTOXX50 stock index. All these results imply less diversification benefits during crises when investors would need them the most.     

Globalization and the state–profession relationship: the case the Bank of Credit and Commerce International

Globalization of businesses raises major questions about the regulation of corporations, both in the national and international context. The debate is marked by two competing views. The ‘hyperglobalists’ claim that in a globalized world, nation-states cannot take effective actions to regulate multinational businesses, especially those relating to banking and finance. In response, the ‘skeptics’ accept the view that to regulate corporations, the nation-state has always had to restructure itself. However, they challenge the contention that globalization has reduced the power, functions and authority of the state. The paper contributes to the debate through an examination of some of the processes leading to the forced closure (and the aftermath) of the Bank of Credit and Commerce International (BCCI), a bank that operated from 73 countries. It particularly focuses upon the role of the banking regulators and their reliance upon auditing technologies to regulate major banks. The paper sides with the ‘skeptics’ and argues that the nation states, especially major Western states, remain important players in the regulation of global businesses. It concludes that the nation-state’s capacity to regulate global enterprises is compromised by history, domestic concerns and relationships with class and capitalist interests rather than by globalization per se.     

Bank ownership and lending patterns during the 2008–2009 financial crisis: Evidence from Latin America and Eastern Europe

This paper examines the impact of bank ownership on credit growth in developing countries before and during the 2008–2009 crisis. Using bank-level data for countries in Eastern Europe and Latin America, we analyze the growth of banks’ total gross loans as well as the growth of corporate, consumer, and residential mortgage loans. While domestic private banks in Eastern Europe and Latin America contracted their loan growth rates during the crisis, there are notable differences in foreign and government-owned bank credit growth across regions. In Eastern Europe, foreign bank total lending fell by more than domestic private bank credit. These results are primarily driven by reductions in corporate loans. Furthermore, government-owned banks in Eastern Europe did not act counter-cyclically. The opposite is true in Latin America, where the growth of government-owned banks’ corporate and consumer loans during the crisis exceeded that of domestic and foreign banks. Contrary to the case of foreign banks in Eastern Europe, those in Latin America did not fuel loan growth prior to the crisis. Also, there are less pronounced and robust differences in the behavior of foreign and domestic banks during the crisis in Latin America.     

International income risk-sharing and the global financial crisis of 2008–2009

We examine the impact of the global financial crisis on the degree of international income and consumption risk-sharing among industrial economies using returns on cross-border portfolio holdings (e.g., debt, equity, FDI). We split the returns from the net foreign holdings as receipts (inflows) and payments (outflows) to investigate which of the two sides exhibited the greater resilience for income risk-sharing during the recent crisis. First, we find that debt delivered better risk-sharing than equity, mainly reflecting the deficit deterioration in EMU countries during the post-crisis period. FDI, by contrast, did not correspond to noticeable risk diversification. Second, separating output shocks into positive and negative components reveals that debt holding receipts (equity liability payments) performed better under negative (positive) realizations of the shock variable. Third, the unwinding of capital flows resulted in a sharp fall in income dis-smoothing via the debt liability channel in the new EU countries.     

The microstructure of fear,the Fama–French factors and the global financial crisis of 2007 and 2008

We analyze minute by minute equity price data from 1 August 2005 to 31 October 2008 to study the relationship between the three sources of systematic risk in Fama and French's (1993) model and the market's expectation of total risk as represented by the VIX (the “fear factor”). Our findings confirm the predicted relationship between the equity risk-premium and risk (Merton, 1980). We find that the size-premium is driven by investors who are flying-to-quality (Abel, 1988; Barsky, 1989). We also find that investors became increasingly sensitive to changes in the VIX during the global financial crisis.     

Ambiguity shifts and the 2007–2008 financial crisis

Faced with doubts about the quality of information and the quality of modeling techniques, ambiguity-averse agents assign higher probabilities to lower utility states, leading to higher CDS premia and lower equity prices. Using data on financial institutions, I find that the sudden increases in credit spreads during the recent crisis can be explained by changes in the amount of ambiguity faced by market participants and changes in how the total amount of ambiguity was distributed between ambiguity about information quality and ambiguity about model quality.     

Understanding the relationship between founder–CEOs and firm performance

We use instrumental variables methods to disentangle the effect of founder–CEOs on performance from the effect of performance on founder–CEO status. Our instruments for founder–CEO status are the proportion of the firm's founders that are dead and the number of people who founded the company. We find strong evidence that founder–CEO status is endogenous in performance regressions and that good performance makes it less likely that the founder retains the CEO title. After factoring out the effect of performance on founder–CEO status, we identify a positive causal effect of founder–CEOs on firm performance that is quantitatively larger than the effect estimated through standard OLS regressions. We also find that founder–CEOs are more likely to relinquish the CEO post after periods of either unusually low or unusually high operating performances. All in all, the results in this paper are consistent with a largely positive view of founder control in large US corporations.     

Impact of the 2008–2009 financial crisis on the external and internal linkages of European frontier stock markets

This study investigates the impact of the 2008–2009 financial crisis on (i) external linkages of European frontier stock markets (Croatia, Estonia, Romania, Slovakia and Slovenia) with the developed equity markets (the US, the UK, and Germany) and (ii) internal linkages within the frontier markets. The results demonstrate that both long- and short-run external linkages were strengthened during the crisis. The analysis of internal linkages reveals strong relationship only between the Croatian and Slovenian markets. However, the other frontier markets in the group were weakly linked, implying that European frontier stock markets may constitute a good alternative source of diversification benefits during crises periods.     

The European Central Bank and green finance: How would the green quantitative easing affect the investors' behavior during times of crisis?

In July 2021, the European central bank (ECB) announced the application of new environmental criteria to purchase private assets as part of its Quantitative Easing (QE) program. Using a Bayesian VAR model with time varying parameters and stochastic volatility (TVP-BVAR-SV), we investigate the transmission of Green bond shocks to the stock market during the pre-and-post COVID-19 pandemic. We document a nonlinear relation between the green bonds and the green equities. Our findings suggest that the ECB's Green QE can drive investors towards green investment in the stock market through the green bond market during the non-crisis period. However, we show that the proper transmission of Green QE shocks to the stock market depends on the economic conditions and could not be effective during the crisis period. Our results also support previous findings that state the growing demand for sustainable investing after COVID-19. These findings have important implications for investment professionals, policymakers, and environmentally concerned actors.     

What drives investment bank performance? The role of risk,liquidity and fees prior to and during the crisis

This paper examines factors that affect the performance of investment banks in the G7 and Switzerland. In particular, we focus on the role of risk, liquidity and investment banking fees. Panel analysis shows that those variables significantly impact upon performance as derived from Stochastic Frontier Analysis (SFA). Given our sample also comprises the financial crisis, we further test for regime switches using dynamic panel threshold analysis. Results show different underlying regimes, in particular over the financial crisis. In addition, a strong positive effect of Z-Score on performance for banks in the regime of low default risk is reported, while fee-income ratio has also a positive impact for banks with low level of fees. On the other hand, liquidity exerts a negative impact. Notably, there is a clear trend of mobility of banks across the two identified threshold regimes with regard to risk a year before the financial crisis. Our results provide evidence that recent regulation reforms regarding capital adequacy and liquidity requirements are on the right track and could enhance performance.     

Bank risk-taking and corporate investment: Evidence from the Global Financial Crisis of 2007–2009

In this paper, we explore the relation between the banking sector's risk-taking and a firm's investment (“corporate investment”). Specifically, we ask whether firms' cash holdings moderate the effect of the banking sector's risk-taking on corporate investment. Based on a panel sample of publicly listed non-financial firms in 15 EU countries during the period 1990–2015, we document several key findings. First, both cash holdings and the banking sector's risk-taking are positively associated with corporate investment. Second, bank loan growth, which roughly captures the supply of bank credit, is not related to corporate investment. Third, firms with smaller cash holdings disproportionately invest more than do firms with larger cash holdings during periods of higher risk-taking by the banking sector.     

Do defaulting CEOs and directors increase the likelihood of financial distress of the firm?

We hypothesize that the information on a CEO’s and directors’ (board members) past personal payment default entries in public credit data files significantly increases the predictive power of Altman’s (in J Fin 23(4):589–609, 1968) and Ohlson’s (In J Acc Res 18(1):109–131, 1980) distress prediction models. We base our hypothesis on the literature showing that (1) managerial traits such as overconfidence, over-optimism, and the illusion of control affect corporate decisions and that (2) these same personal traits explain personal over-indebtedness and credit defaults. Our results of analyzing the credit data files of more than 100,000 CEOs and directors of the Finnish private limited liability companies support this hypothesis. Our results remain materially unchanged when using the bootstrapping method to assess their significance and when excluding small firms (firm size below the sample median). Collectively, our results imply that creditors should recognize the increased distress risk of firms appointing defaulting CEOs and directors.     

Market liquidity and institutional trading during the 2007–8 financial crisis

This paper shows that institutional sell-side herding increased bid–ask spreads and liquidity risk during the 2007–8 financial crisis. Such an impact on liquidity is most pronounced in firms with large numbers of institutions that sold the same stocks, that is, have correlated trades. For the same reason, we find institutional investors with a dedicated, buy-and-hold, investment style to be the least likely to herd; their trading activity did not affect stock market liquidity during the crisis. Our results are robust to alternative explanations, different test specifications and consistent with recent theories highlighting the negative impact of institutional trading activity on market liquidity during a crisis.     

The impact of the global financial crisis on the cross-currency linkage of LIBOR–OIS spreads

This article examines the impact of global financial crisis on cross-currency linkage of the LIBOR–OIS spread, a financial stress measure in interbank markets. The impulse response analysis is conducted in a multivariate setting, adopting the bias-corrected bootstrap as a means of statistical inference. The overall evidence suggests that the crisis has substantially changed the nature of the cross-currency interactions in liquidity stress. Also global money markets have failed to contain stress in US dollar funding and the role of the Japanese yen as a liquidity source appears to be significant, while these two currencies drive the cross-currency system of liquidity stress.     

The role of annual reports in gender and class contradictions at general motors: 1917–1976

This paper argues that studies of female exploitation frequently pay too little attention to the broader social context; particularly alienation and crises in the development of late capitalism. This criticism applies with equal force to the domestic labor/housework studies and labor process studies and labor process studies where male domination is often advanced as the primary explanatory variable in accounting for female oppression. Even where labor process researchers have emphasized mediating affects on partiarchial influences (technology and control processes for instance; c.f. Milkman, Politics and Society, pp. 159–203, 1983), we argue that the broader context of alienated capitalist social relations is frequently understated.Female subordination under capitalism is traced to two primary sources in this study: First, that part of the labor process where the existence of female labor facilitates surplus value appropriation by playing the part of an “industrial reserve army” (sometimes “latent”, at other times “floating”). Second, in times of overproduction and underconsumption, capital has invented a consumerist ideology about women to help resolve its crisis of realizing surplus value. Only by seeing these different instances of female oppression as part of a larger, mutually reinforcing configuration of “instances” — emanating from capitalist social relations — are we likely to begin to adequately comprehend the resilience of social ideology concerning women and develop effective political and social counter-strategies.In this research, the above considerations are explored using evidence from a longitudinal study of General Motors where the annual reports are used to monitor the evolution of managerial ideology vis-a-vis women over some sixty years. We see in this study how the manner of women's exploitation changes with changes in the crises facing capitalism.The implications of the study are severalfold: Firwt, we see how a socially “unreflective” view of “management” and “management control systems” may lead to practices that are oppressive and exploitative. Second, we find “the labor process” to be an important but insufficient conceptual terrain for understanding women's oppression; instead we propose that the starting point of any analysis should be capitalist alienation. Third, this work has implications for the various controversies about class essentialism and the primacy of class. (Wright, New Left Review, pp. 11–36, 1983; Giddens, Central Problems in Social Theory: Action, Structure and Contradiction in Social Analysis, 1979; Miliband, New Left Review, pp. 57–68, 1983; Tinker, Journal of Accounting and Public Policy, pp. 1–20, 1984). as well as the relation between male domination and class oppression (Fox-Genovese, New Left Review, pp. 5–29, 1982, Goldelier, New Left Review, pp. 3–17, 1981) in that it examines the interplay between class and other forms of domination. Lastly, we see how annual reports may contribute to a general “world view” that aids social appropriation and domination.     

Trading by bank insiders before and during the 2007–2008 financial crisis

This paper sheds new light on the role bank executives played in the financial crisis. It examines whether they foresaw the poor performance of their own bank by analyzing their insider trading patterns. Insider trading during 2006 predicts stock returns during the crisis: a portfolio strategy based on insider trading information earns a risk-adjusted return of over 40% during the crisis. Further, banks with a high exposure to the housing market and banks with a low exposure exhibit different insider trading patterns starting in mid-2006, when US housing prices first decline: insiders of high-exposure banks are 20% more likely to sell stock than insiders of low-exposure banks. This pattern is more pronounced for CEOs than other insiders. However, insider trading patterns of high- and low-exposure banks do not differ before 2006. Replacing high-exposure banks by too-big-too-fail banks yields similar results. This evidence indicates that insiders of high-exposure and too-big-too-fail banks revised their assessment of their banks’ investments following the reversal in the housing market.