Bank efficiency in South‐Eastern Europe

This study examines the cost and profit efficiency of banking sectors in six transition countries of South‐Eastern Europe over the period 1998–2008. Using a stochastic frontier approach, our analysis reveals that the average cost efficiency of South‐Eastern European banks is 68.59 percent, and the average profit efficiency is 53.87 percent. Regressions on the determinants of bank efficiency show that foreign banks are characterized by higher profit efficiency but lower cost efficiency, and government‐owned banks are associated with lower profit efficiency than domestic private banks. However, the efficiency gap between foreign‐, domestic private‐ and government‐owned banks narrows over time. We also find that the market power of a bank has a positive association with both cost and profit efficiency. Institutional development, proxied by progress in banking regulatory reforms, privatization and enterprise corporate governance restructuring, also has a positive impact on bank efficiency.     

Option‐Adjusted Delta Credit Spreads: a Cross‐Country Analysis

This study analyses the determinants of the variation in option‐adjusted credit spreads (OASs) using a unique database and enlarges the traditional analysis to include disaggregated indexes, new variables, and a complete set of markets (USA, UK, and the Eurozone). An extended set of regressors explains almost half the variability of OASs in the three markets. We find that institutional trading activity significantly affects corporate bond spreads, signalling either variation in perceptions of risk or the existence of an indirect measure of liquidity. We also find that US business cycle indicators significantly affect the variability of OASs in the UK and the Eurozone. Finally, we find evidence that stock returns have more influence on high‐yield bonds in the Eurozone than in the USA.     

An assessment of the contribution of consumer confidence towards household spending decisions using UK data

The European Commission’s consumer confidence indicator (CCI) is assembled from responses to four questions about individual and general economic prospects which form part of the EU’s Consumer Survey. However, concerns may be raised about whether the four components should be constrained to exerting the same influence in a forecasting model of household consumption. Also, in this context, it would seem to be appropriate to permit a role to other information that is obtained from the EU survey. Consequently, in this article, different regression functions are specified in order to assess whether there is any gain to be achieved in predictive accuracy from adopting a more flexible approach towards using the data from the EU questionnaire. With an emphasis upon parsimony, an econometric analysis is performed in conjunction with UK quarterly data on household consumption expenditure. For two categories of spending, it is discovered that the quality of forecasts benefits from having undertaken disaggregation involving survey data beyond those which contribute towards the calculation of the CCI. Indeed, the respective consumption variables (relating to non-durable goods and durable goods excluding vehicles) are seen to be associated with relatively volatile behaviour over the forecast interval, 2008–2013.     

Asymmetric benchmarking in bank credit rating

This study proposes an information asymmetry hypothesis to examine why bank credit ratings vary among countries even when bank financial ratios remain constant. Countries are divided among those with low and high information asymmetry. The former include high-income countries, those in North America and West Europe regions, and those with strong institutional environment quality, whereas the latter group possess the opposite characteristics. This study hypothesizes that the influences of financial ratios on ratings are enhanced in low information asymmetry countries but reduced in countries with high information asymmetry. The sample includes the long-term credit ratings issued by Standard and Poor's from 86 countries during 2002-2008. The estimated results show that the effects of financial ratios on ratings are significantly affected by information asymmetries. Countries wishing to improve the credit ratings of their banks thus should reduce information asymmetry.     

Going Public: An Empirical Investigation of U.S. Bound Israeli IPOs

Between 1985–2003, more than 120 Israeli companies went public in the U.S., bringing the accumulated number of U.S. bound, Israeli initial public offerings (IPOs) to a figure greater than all other foreign countries combined. In this study, we compare the short and long run performance of Israeli IPOs to that of similar international and U.S. IPOs. Holding all else equal, we find that Israeli IPOs are significantly less underpriced than their local and foreign counterparts. As we examine the characteristics of Israeli issuers, we find that they differ than those of other foreign and local issuers in some important dimensions that compensate investors for information asymmetry and risk. First, compared to their home market capitalization size, U.S. bound Israeli IPOs, are significantly larger than the IPOs conducted by their foreign counterparts. Second, Israeli issuers tend to perform better than other foreign and U.S. local IPOs during our entire period of observation. Third, to a large extent, the Israeli firms in our sample have products, licensing or franchising relationships or venture capital funds with strong roots in the U.S. prior to the IPO. And fourth, the relevant investor community of Israeli IPOs, at least at the early stages, is small and overwhelmingly American. Our findings are consistent with prior studies documenting that firms raising capital outside of their domicile country are typically a select group of high quality firms in need of external financing that cannot be sufficiently provided in their home market.     

European Bank Performance Beyond Country Borders: What Really Matters?

The paper analyzes bank performance in the context of the integrated EuropeanUnion market and its member countries. First, the paper investigates the technicalefficiency of banks in each country sample using a Data Envelopment Analysis(DEA) model incorporating only banking variables. Then, a second DEA modelis defined incorporating environmental factors together with banking variables inorder to standardize the country-specific environmental conditions. Based on thesemodels, the paper systematically analyzes the efficiency position for each of theEuropean banking industry if average banks decide to operate in any other country.The results indicate that adverse (advantageous) environmental conditions are apositive (negative) factor for the home banking industry and being technicallyefficient appears to be a significant deterrence to foreign competition.     

Corporate Governance and Dividend Payout Policy: A Test Using Antitakeover Legislation

Managers strongly prefer not to pay dividends as dividend payouts reduce the amount of cash subject to managerial discretion ( Easterbrook, 1984 ; Jensen, 1986 ). Previous empirical tests of the relationship between corporate governance and dividend payout policy employ endogenous measures of this agency problem. Using a relatively exogenous measure that incorporates state antitakeover laws and the differences‐in‐differences approach, our analysis indicates that dividend payout ratios and propensities fall when managers are insulated from takeovers. The impact of antitakeover laws on dividend payouts is more pronounced for firms with poor corporate governance and small firms.     

Social capital and capital allocation efficiency

Based on the social norms and structural theories of social capital, this study examines the relationship between community social capital and the firms’ capital allocation efficiency. We hypothesize and find that the community social capital of a firm's headquarter area has a negative and statistically significant impact on its capital allocation inefficiency, which is robust to alternative proxies for community social capital and capital allocation inefficiency, propensity score matching and instrumental variable regressions. In addition, we find that the effect of community social capital is more pronounced for firms with poor internal ethical culture and weak network connections to outside executives and directors, implying that community social capital becomes important in these situations. This finding links prior social norms and networks literature to capital allocation studies in that the norms and networks components of community social capital discipline self-interested managers’ behavior and reduce information asymmetry-two channels of capital allocation efficiency. Overall, community social capital works as a compensatory monitoring and information transfer mechanism and improves the firms’ capital allocation efficiency.     

Political Uncertainty and Bank Loan Contracts: Does Government Quality Matter?

Journal of Financial Services Research - We investigate the relation between political uncertainty and bank loan spreads using a sample of loan contracts for the G20 firms during the period from...     

Loan loss provision decisions: An empirical analysis of the Spanish depository institutions

Accountants and financial economists have long held concerns that inefficient loan loss accounting may have a material impact on reported capital and earnings, especially in the banking industry. Prior research has examined banks’ incentives to manipulate loan loss provisions (LLPs) and the resulting impact. However, most of this research has focused on management incentives and other determinants of LLP decisions without addressing the relevant factors associated with best-practiced or efficient LLP decision-making. In this paper, we identify a stochastic frontier model that examines the “efficiency” of the LLP decisions of bank managers. Further we explore the relationship between efficient LLP decision-making and relevant factors that could potentially explain any inefficiency. Our evidence indicates that there is considerable inefficiency in loan loss decision-making among the sample institutions. The research is based on data from the Spanish banking industry, which is particularly relevant in light of the recent deregulatory initiatives in Spain. The findings in this study with regard to the existence of inefficiency in loan loss decisions and the causes of such inefficiency have far-reaching implications for regulators throughout Europe.