What drives credit risk in the Indian banking industry? An empirical investigation

Using a two-step system GMM approach on a unique bank-level dataset for the period 1998/99–2013/14, this paper tries to explore the key determinants of credit risk in the Indian banking industry. The main premise of this paper is that, along with regulatory and institutional factors, both macroeconomic and bank-specific variables influence the formation of credit risk in a banking system, and their influences vary across ownership groups. The empirical findings suggest that lower profitability, more diversification in the banking business, the large size of banks and a higher concentration of banks in lending increase the probability of defaults in India. We find a significant degree of persistence in credit risk, and the observed persistence is higher in the gross non-performing loans (NPLs) specification relative to what has been observed in the net NPLs specification. In the case of public sector banks, NPLs are more sensitive to internal bank-specific factors, while for private and foreign banks, macroeconomic and industry-related factors play a significant role in determining credit risk. Our results are robust for different panel data estimation models and sub-samples of ownership groups. The findings of this paper provide important insights into the formation of default risk in the banking system of an emerging market economy.     

The effects of managerial ownership on international and business diversification: Balancing incentives and risks

Research has examined the effects of managerial share ownership on business diversification, typically from the incentive alignment perspective. Yet, share ownership also shifts risk to managers (the efficient managerial contracting perspective). Furthermore, the effects of managerial ownership on international diversification are unexplored. We examine how managerial ownership influences both international and business diversification in light of the trade‐off between incentive alignment and risk bearing. Based on the differing risk profiles of the two types of diversification, we argue that incentive contracts with higher levels of managerial ownership will be inefficient, i.e., counter to shareholder interests—reducing international diversification and increasing business diversification. Our findings support our arguments for international diversification. We find no significant effect for business diversification after accounting for endogeneity and serial correlation. Copyright © 2013 John Wiley & Sons, Ltd.     

The Market Value of UK Dividends From Shares With Differing Entitlements

Abstract:   This paper determines the market value of dividends in the UK during periods before and after 1997. Previous studies, which use the ex‐dividend day method, tend to provide noisy and potentially biased measures of dividend value. We estimate the value of dividends from the prices of shares that are identical except for their dividend entitlements, and are traded concurrently (within the same hour). We argue that our estimates of dividend value are the cleanest yet available for the UK. Our evidence suggests that ex‐dividend day estimates are biased downwards, but that this bias may be mitigated by the use of robust regression. Dividend values are heterogeneous and are not explained by the tax‐clientele hypothesis.     

Informal Credit Markets and the Transmission of Monetary Policy: Evidence from South Korea

This paper is an empirical investigation of the transmission of monetary policy in South Korea. It combines modern mainstream macroeconomics with aspects of a developing economy with financial dualism through a simple IS-LM type model that explicitly incorporates an informal credit market. Vector autoregression analysis, with both semistructural and structural identifications, confirms the importance of a credit variable as a policy tool. The results show direct credit allocation by the central bank had a significant impact on output, prices, and the interest rate in the informal sector. Previous theoretical and empirical findings of "stagflationary" effects of monetary policy are refuted.     

Understanding Urban Processes in Flint,Michigan: Approaching ‘Subaltern Urbanism’ Inductively

Ananya Roy introduces the concept ‘subaltern urbanism’ in her 2011 article ‘Slumdog Cities: Rethinking Subaltern Urbanism’. She challenges researchers to move beyond existing epistemological and methodological limits, and offers four concepts which, taken together, serve as a useful starting point for understanding and representing subaltern urban space. In this article I argue that instead of a deductive approach that begins with an a priori identification of slums as subaltern urban space, an inductive approach of identifying subaltern urban space would expand the concept and show that subaltern urbanism exists in the global North. I present original research to show that Flint, Michigan, can be considered subaltern urban space. In the final section of the article I argue that this inductive approach to subaltern urbanism can foster comparative research across the North‐South divide, and generate the transfer of knowledge from South to North.     

A Monte Carlo study of ranked efficiency estimates from frontier models

Parametric stochastic frontier models yield firm-level conditional distributions of inefficiency that are truncated normal. Given these distributions, how should one assess and rank firm-level efficiency? This study compares the techniques of estimating (a) the conditional mean of inefficiency and (b) probabilities that firms are most or least efficient. Monte Carlo experiments suggest that the efficiency probabilities are easier to estimate (less noisy) in terms of mean absolute percent error when inefficiency has large variation across firms. Along the way we tackle some interesting problems associated with simulating and assessing estimator performance in the stochastic frontier model.     

Can capacity markets be designed by democracy?

In the United States, Regional Transmission Organizations (RTOs) operate the power grid serving nearly 70% of electricity customers and are critical organizations for ensuring reliable system operations and facilitating the integration of new technologies and market participants. RTOs are designed to be stakeholder-driven organizations, with rules and policies crafted through a highly participatory process. While the decisions that RTOs make have implications for industry, society and the environment, their decision processes have not been modeled in any systematic way. In this paper, we develop a modeling framework for the stakeholder process of PJM, an RTO serving thirteen states plus the District of Columbia, adapting some of the seminal literature from political science and political economy on the theory of voting systems. This modeling framework can generate predictions of stakeholder process outcomes, identify strong coalitions among stakeholders and identify shifts in political power in the formulation of RTO market rules. We illustrate this analysis framework using a detailed data set from stakeholder deliberations of capacity market reform in PJM. Our model predicts that the current structure of the stakeholder process in PJM makes the passage of capacity market reforms through the stakeholder process virtually impossible because it creates strong coalitions that would favor or oppose changes to capacity market rules. In the capacity market case, we also identify a small subset of voters that act as swing voters and confirm that political power is shifted to these voters by deviations from otherwise strong coalitions and abstentions from the voting process altogether. Our framework represents the first attempt to model the decision-making behavior of RTOs in any systematic way, and points towards emerging research needs in evaluating the governance structure of RTOs.     

The realized forward term premium in the repo market

Repurchase agreements for general-collateral government debt measure the short-term cost of riskless borrowing, thus avoiding issues relating to specialness of Treasury offerings or irregular term-to-maturity in the Treasury bill market. The spread between reverse and repo rates has previously been ignored by researchers who find that the pure expectation hypothesis either holds at this extremely short end of the term structure or that observed deviations from the expectations hypothesis are not economically significant. This paper shows that the time-varying realized forward premium at the short-end of the yield curve is consistently positive when accounting for the spread between repurchase and reverse repurchase agreement rates.     

Shareholder Wealth Responses to Bankruptcy Filing Announcements under the Chandler and Reform Acts

This paper examines shareholder wealth responses to bankruptcy filing announcements between 1974 and 1989 to draw inferences about the impact of the adoption of the Bankruptcy Reform Act of 1978. The authors find that post-Reform Act announcements are associated with more negative pre-filing and announcement period returns to shareholders. Unlike prior research, this study finds that large firms and NYSE-listed firms experience more negative returns. It also finds that the market can discriminate between firms that are ultimately worthless and those that may retain some value for shareholders.