Banks’ efficiency and credit risk analysis using by-production approach: the case of Iranian banks

This article uses a by-production approach that integrates credit risk to monitor bank efficiency. The method overcomes the possible misspecification issues of the commonly assumed weak disposability (WDA) of undesirable outputs. In addition, our measure extends the classic by-production approach by including statistical aspects through subsampling techniques. We have also provided an algorithm to correct related infeasibilities. Using this approach, we investigate the performance of Iranian banks and credit risk management in the sector for the period 1998–2012. Non-performing loans (NPLs) have been used as an undesirable output and proxy for credit risk in our models. Based on our empirical results, although the banks generally exhibited efficiency improvements over time, their credit risk performance deteriorated considerably after the regulatory changes introduced in 2005. These findings confirm that credit quality can be monitored more actively across Iranian banks.     

On the assessment of the performance in earnings management for the banking industry: the case of China’s banks

Earnings management is popular in the banking industry. Earnings can be manipulated by discretionary loan loss provisions (DLLP). Analysing the trajectories of banks’ DLLP (i.e. their change in DLLP over time) is an effective way to assess the performance in earnings management for the banking industry, but seems not to have been addressed in the earnings management literature. In this study, we analyse the trajectories of DLLP with the yearly data from 2007 through 2012 for four types of banks in China. The results have indicated that state-owned banks, policy banks and city commercial banks seem to manage earnings well. Cautionary notes about bank risks are provided.     

Lending technologies,banking relationships,and firms’ access to credit in Italy: the role of firm size

This paper analyses the role of lending technologies and banking relationships on firms’ credit access in Italy. Using EFIGE firm-level data, we show that the depth and strength of firm–bank relationships have heterogeneous effects on credit demand and rationing probabilities depending on the size of the borrower. Multiple banking relationships alleviate financial constraints for small firms, while borrowing from a large number of lenders hinders access to credit for large companies. Small and medium-sized enterprises with a higher share of debt with the main bank have a lower probability of being credit denied, as debt concentration contributes to overcome the opacity problems typical of the SMEs. Long-lasting relationships, by reducing information asymmetries, significantly improve access to credit for small and large firms. Conversely, we find that medium-sized enterprises are more exposed to financing constraints as relationship duration increases, due to possible lock-in effects. Finally, firms maintaining banking relationships based on transactional technologies are more likely to be credit denied, while the use of relationship lending technologies improves credit availability for both small and large enterprises.     

Firm size,credit scoring accuracy and banks’ production of soft information

Research on SME bank financing generally assumes that smaller firms are more opaque from a lender’s perspective. We propose that the discriminatory power of credit scoring models can be thought of as a proxy for firm opaqueness, given that when these models perform poorly, lenders must invest in the production of ‘soft information’ to supplement the financial data used in these models. Measuring the discriminatory power of probit default models across quintiles of the Irish SME size distribution, we show that our proxy for firm opaqueness increases monotonically as firms get smaller. This finding supports an assumption that is the starting point to a wide strand of literature on SME bank financing. Our findings can also be interpreted as providing an insight to the literature on the determinants of banks’ choice of lending technology. While smaller banks may, as found in a substantial previous literature, produce larger amounts of ‘soft information’ due to their organizational advantages, they may also do so out of necessity: hard-information-based default modelling is less effective among smaller firms, thereby forcing banks that lend to these borrowers to invest more in relationship banking technologies to retain competitiveness.     

Measuring the degree of competition in Pakistan’s banking industry: an empirical analysis

Pakistan’s banking industry has gone through significant transformation from being in a heavily state regulated and controlled environment to a more liberalized market structure in recent years. This liberalization of banking industry in Pakistan has raised concerns over the dominant banks’ exercise of market power on account of increase in market concentration due to mergers and acquisitions, high profitability in banking sector and increasing interest rate spread. Present study therefore explicitly tests the market conduct of banks using quarterly panel data of 30 banks from 2004 to 2012 and employing Panzar–Rosse, Bresnahan–Lau, Hall–Roeger and Boone’s approaches to study market power. Our findings suggest that Pakistan’s banking industry is working in a competitive environment and we find little evidence for the exercise of market power by the dominant banks. Our results remain robust across all these approaches to measure market power. These findings indicate that the liberalization and deregulation of Pakistan’s banking industry has been successful in improving the competitive conditions in the market.     

China’s competition and the export price strategies of developed countries

This paper analyzes the impact of Chinese competition on developed countries’ export prices. The empirical application is on Italy, one of the main European manufacturing exporters with exports at high risk of competition from China. Our results show that, following China’s entry into the WTO, the price strategies of Italian firms has been affected. While in general the increasing Chinese export competition resulted in an upgrading of products exported, the impact has been different according to the sector and technological level. The incentives to upgrade have been stronger for low technology sectors, where competition is tougher and varieties of products sold lower. To highlight quality differentials, and isolate the effects on the different segments of the distribution of Italy’s export prices, we run quantile regressions. We find that are mainly those products sold at low prices to face a strong pressure to upgrade.     

An experimental study of the impact of competition for Other People’s Money: the portfolio manager market

In this paper we experimentally investigate the impact that competing for funds has on the risk-taking behavior of laboratory portfolio managers compensated through an option-like scheme according to which the manager receives (most of) the compensation only for returns in excess of pre-specified strike price. We find that such a competitive environment and contractual arrangement lead, both in theory and in the lab, to inefficient risk taking behavior on the part of portfolio managers. We then study various policy interventions, obtained by manipulating various aspects of the competitive environment and the contractual arrangement, e.g., the Transparency of the contracts offered, the Risk Sharing component in the contract linking portfolio managers to investors, etc. While all these interventions would induce portfolio managers, at equilibrium, to efficiently invest funds in safe assets, we find that, in the lab, Transparency is most effective in incentivising managers to do so. Finally, we document a behavioral “Other People’s Money” effect in the lab, where portfolio managers tend to invest the funds of their investors in a more risky manner than their Own Money, even when it is not in either the investors’ or the managers’ interest to do so.     

Analysis of the volatility’s dependency structure during the subprime crisis

In this article, we test the hypothesis of contagion amongst sectors within the United States’ economy during the subprime crisis. The econometric methodology applied here is based on the dynamic conditional correlation model proposed by Engle (2002). Further, we applied several Lagrange multiplier (LM)-robust tests to test whether there were structural breaks in series’ dependency structures during the period of interest. Events theoretically classified as relevant to the crisis upshots as well as the interactions between the moments of the series were used as indicator functions to the referred structural breaks. The main conclusion of this study is that one can indeed observe contagion within almost all pairs of sectors’ indices. Thus, we conclude that the dependency structure of the sectors of interest has faced structural changes during the years of 2007 and 2008. Hence, diversification strategies as well as the risk analysis inherent to the portfolios’ management may have been drastically affected.     

Market Shares and Concentration in the EU Auditing Industry: the Effects of Andersen’s Demise

This paper describes and analyses changes at the concentration level of the audit services markets in 15-EU member-countries. The sample consists of 2,862 clients of auditing firms for the period 1998 to 2004. The findings of the research show that concentration in the aggregate sample increased over time. Concentration in the audit markets of the EU-15 member-countries exhibits substantial variation across countries while average concentration, before and after Arthur Andersen’s dissolution, has increased in 12 and declined in three countries. Results segmented by economic sectors indicate that the concentration increased in all sectors except Energy, which is the sector with the highest concentration. Overall, the empirical results suggest that there are complexities in our understanding of auditing services markets for competition purposes.

Italy’s decline and the balance-of-payments constraint: a multicountry analysis

According to the literature, the decline experienced by the Italian economy in the last two decades depends on a slowdown of its labour productivity, starting in the 1990s. The supply-side explanations of this slowdown are inconsistent with the major stylised facts. In this paper, we verify whether a better explanation is provided by the effect of a negative demand shock, through Italy’s external constraints, in the framework of Kaldor-Dixon-Thirlwall’s cumulative growth model. To this end, we use a multi-country generalisation of Thirlwall’s balance-of-payments-constrained growth model, which allows us to investigate the contribution of Italy’s main trade partners to Italy’s long-run growth from 1970 to 2010. The trade partners are disaggregated into seven groups: Eurozone core, Eurozone periphery, United States, other European countries, OPEC countries, BRIC, and the rest of the world. The results show that Italy’s long-run growth has been consistent with the Bop-constraint, that its decline can be explained by a progressive tightening of this constraint, that the sudden slowdown of labour productivity in the 1990s corresponds to a major shock on Italy’s external constraint, and that the major contributions to this shock came, through different channels of transmission, from the core Eurozone countries and from OPEC countries.     

The Myth of Market Neutrality: A Comparative Study of the European Central Bank’s and the Swiss National Bank’s Corporate Security Purchases

ABSTRACT

Monetary policy operations in corporate security markets confront central banks with choices that are traditionally perceived to be the prerogative of governments. This article investigates how central bankers legitimise corporate security purchases through a comparative study of the European Central Bank (ECB) and the Swiss National Bank (SNB). As we show, central bankers downplay the novelty of corporate security purchases by relying on familiar pre-crisis justifications of Central Bank Independence. Citing an ideal of ‘market neutrality’, central banks present corporate security purchases as pursuing a narrow objective of price stability and obfuscate their distributive consequences. In this way, central bankers depoliticise corporate security purchases: they reduce the potential for choice, collective agency, and deliberation concerning both the pursuit of corporate security purchases and the choices made in implementing these policies. We also describe the undesirable democratic, social and environmental dimensions of these practices, which we propose to address through enhanced democratic accountability.     

Men of Steel Meet the Market: Interpreting Firm Behavior in Russia’s Metallurgy Industry

In Capital in the Twenty-First Century, Thomas Piketty (2014) explains growing income inequality via the difference between the rate of return on capital and the growth rate of the economy: the “r > g” inequality. Even if it is true that r > g leads to increasing inequality, nearly every school of economic thought predicts that r will fall as the economy grows. Thus, for Capital (2014) to be a comprehensive theory of inequality, a more adequate theory of r is required. I term this the “Piketty Problem.” I offer a solution to this problem from an institutionalist perspective.     

Political incentives and the effectiveness of monetary policy: evidence from China’s city commercial banks

From the perspective of official-and-director (OAD), this article takes studies of the effect of monetary policy on bank loans to the heterogeneity of bank. We explore how political incentives affect the lending channel of monetary policy transmission, using a sample of China’s city commercial banks during 2006–2014. And we further analyse the role of OAD’s characteristics, including administrative rank and age. The results indicate that although tight monetary policy can reduce bank loans, the OAD can weaken this relationship, and the higher is the administrative rank of OAD, the larger is the effect. And the older is OAD, the larger is the effect. More importantly, the relationship between monetary policy and bank loan is insignificant in banks with OAD, implying that the lending channel of monetary policy is absent when considering the role of OAD.     

Reappraisal of outbound open innovation under the policy of China’s ‘Market for Technology’

China’s ‘Market for Technology’ policy has attracted much interest over the past decade. In light of a relative emphasis on the spillover effects of joint ventures, this study examines the transferring effects of Multinationals’ (MNCs) outbound open innovation in such a context. A survey of 2071 research and development (R&D) contract transactions between Chinese entities and MNCs indicates both internal factors (e.g. organisational capabilities) and external factors (e.g. the role of Intellectual Property protection) affect the transferring effects, which reformulate the focus of the Policy from the relational dimension of ‘Government vs. MNCs’ to the transactional dimension of ‘Domestic entities vs. MNCs’. We thus conclude that MNCs’ active initiative in the involvement of technology transfer and the success of domestic transaction partners combine to contribute to the technology progress within China’s ‘Market for Technology’ policy.     

The effects of foreign strategic investors on business models in China’s commercial banks: does ownership structure matter?

Introducing foreign strategic investors (FSIs) is a vital step in the ownership reforms of China’s banking industry. Using China’s data from 1995 to 2014, we employ propensity score matching and difference-in-differences approaches to investigate the effects of FSIs on the business models of Chinese banks, including income structure and funding structure. We find that FSIs significantly influence income structure. The bank’s non-interest income (NII) share significantly rises after introducing FSIs. The higher ownership shares of FSIs are associated with the higher NII share. And the NII share has been increased when FSIs assign directors or senior managers to Chinese banks. We also report that the effects of FSIs on income structure are weaker in state-owned banks than those in other banks, and ownership concentration weakens the links between FSIs and income structure. Finally, this article shows that FSIs have no significant influence on funding structure. These findings will be informative and relevant to both policymakers and practitioners.     

International Experience,China’s Development and Prospect of Carbon Market Construction

Carbon market, which is capable of scientific quantifying and marked-based pricing of carbon emission, is an important way for countries to achieve the target of carbon emission reduction. The global carbon market, after more than ten years of development, has developed a mature mechanism. China started the trial of carbon market in 2011. After ten years of exploration, the national carbon trading market was officially launched in mid-July 2021. Against the backdrop of carbon neutrality, the national carbon market will shoulder a greater mission of carbon emission reduction and speed up its financialization and internationalization. However, it should take a dialectical attitude toward the opportunities and risks of carbon market financialization. In the future, China can promote the development of carbon market through efforts to develop market participants, clarify the attributes of carbon finance, prevent potential risks of carbon finance, improve the connection mechanism with the international carbon market, and innovate carbon finance services.     

Trade liberalization,intra-industry trade and the environment: competition mode and the order of firms’ moves

This paper explores the implications of trade liberalization by extending the intra-industry trade framework à la Fung and Maechler (J Int Trade Econ Dev 16(1):53–69, 2007) to the case of sequential move and taking the mode of firms’ competition into consideration as well. It is shown that the existing results obtained for the case of simultaneous price competition are robust in quantity competition and sequential move cases. Moreover, it studies the likelihood that the environmental effects of trade liberalization occur.

Fixed versus flexible election terms: explaining innovation in the timing of Canada’s election cycle

This paper argues that there is an efficiency gain underlying the recent adoption of legislation calling for a fixed 4-year governing term by the federal and most provincial governments in Canada. The efficiency gain arises from foreclosing an externality produced by the Canadian constitutional provision that sets a maximum length for a legislative term (5 years) while allowing the governing party (through the Governor General) to dissolve the House early. Because the opportunistic use of surprise can improve the governing party’s probability of winning, strategic choice can lead to elections being held at times that most disadvantage the incumbent’s rivals. Evidence from Canada is introduced suggesting that federal elections became less predictable through successive reductions in the campaign time given to competitors, thus raising the cost of this externality. The same reasoning suggests that the party most likely to propose this legislative innovation will be the party in opposition rather than in power and/or the new leader of an established party facing loss in the upcoming election. By fulfilling the fixed term even when it could benefit by calling the election early, the party establishes a precedent that raises the political cost to others of cancelling the fixed term legislation.     

Monopoly power and the firm’s valuation: a dynamic analysis of short versus long-term policies

Summary. Recent anti-trust cases exacerbated the concerns of investors regarding the effects of a firms monopoly power on its production choice, shareholder value, and the overall economy. We address this issue within a dynamic equilibrium model featuring a large monopolistic firm whose actions not only affect the price of its output, but also effectively influence the valuation of its stock. The latter renders time-inconsistency to the firms dynamic production choice. When the firm is required to pre-commit to its strategy, the ensuing equilibrium is largely in line with the predictions of the textbook monopoly model. When the firm behaves in a time-consistent manner, however, the predictions are strikingly at odds. The trade-off between current profits and the valuation of future profits induces the firm to increase production beyond the competitive benchmark and cut prices. This policy may result in destroying shareholder value, and does indeed fully wipe out the firms profit in the limit of the decision-making interval shrinking to zero, in line with the Coase conjecture.Received: 23 December 2003, Revised: 1 March 2004, JEL Classification Numbers: D42, D51, D92, E20, G12.Correspondence to: Anna PavlovaWe thank Steve Spear and the anonymous referees for helpful suggestions. We are also grateful to Franklin Allen, Dave Cass, Peter DeMarzo, Bernard Dumas, Ron Giammarino, Rich Kihlstrom, Leonid Kogan, Branko Urosevic, Dimitri Vayanos, seminar participants at Boston University, University of Colorado at Boulder, Columbia University, MIT, University of Pennsylvania, Princeton University, American Finance Association Meetings, and European Finance Association Meetings for valuable comments. All errors are solely our responsibility.