Demand for fair value accounting: The case of the asset revaluation boom in Korea during the global financial crisis

When the fair value accounting (FVA) option for property, plant, and equipment was introduced in the midst of the global financial crisis, a significant proportion of Korean firms elected FVA. We attribute this unusual boom in asset revaluations to the nation's culture of government intervention and civilian compliance, which was particularly espoused during this period of financial turmoil, and a foreseeable option to switch back to historical cost accounting. We find that among those firms whose debt‐to‐equity ratios are low, public firms opt for the FVA option more often than private firms, suggesting that the need to communicate fair value information with diversified equity holders is more important than the need to do so with creditors. In contrast, among those firms whose debt‐to‐equity ratios are high enough to warrant such unfavorable dispositions as new debt freezes and monitoring by regulators, we find no difference in the FVA choice between private and public firms. These findings imply that during the global financial crisis, private firms that rely heavily on debt financing have a strong incentive to utilize FVA to comply with government guidelines for the debt‐to‐equity ratio and to ease a potential hold‐up problem by influential creditors.     

A unified approach to systemic risk measures via acceptance sets

We specify a general methodological framework for systemic risk measures via multidimensional acceptance sets and aggregation functions. Existing systemic risk measures can usually be interpreted as the minimal amount of cash needed to secure the system after aggregating individual risks. In contrast, our approach also includes systemic risk measures that can be interpreted as the minimal amount of cash that secures the aggregated system by allocating capital to the single institutions before aggregating the individual risks. An important feature of our approach is the possibility of allocating cash according to the future state of the system (scenario‐dependent allocation). We also provide conditions that ensure monotonicity, convexity, or quasi‐convexity of our systemic risk measures.     

DIFFERENTIAL RISK‐TAKING IMPLICATIONS OF PERFORMANCE INCENTIVES FROM STOCK AND STOCK OPTION HOLDINGS

We study the risk‐taking implications of managerial pay‐for‐performance incentives (delta) arising from stock and stock options separately in the United States between 1992 and 2017. The current literature assumes that each unit of delta has an equal incentive effect on firm performance. Instead, we show that the risk‐reducing effect of performance incentives is more pronounced for executives whose delta comes mostly from stock holdings relative to option holdings. Accordingly, we propose a new measure that takes into account the magnitude of delta from option holdings relative to delta from stock holdings (source ratio). Our results show that risk taking increases as this ratio increases.     

Mortgage lending,monetary policy,and prudential measures in small euro‐area economies: Evidence from Ireland and the Netherlands

This paper examines whether the increased use of macroprudential policies since the global financial crisis has affected the impact of (euro‐area and foreign) monetary policy on mortgage lending in Ireland and the Netherlands, which are both small open economies in the euro area. Using quarterly bank‐level data on domestic lending in both countries for 2003–2018, we find that restrictive euro‐area monetary policy shocks reduce the growth of mortgage lending. We find evidence that stricter domestic prudential regulation mitigates this effect in Ireland, but not so in the Netherlands. There is some weak evidence for an international bank lending channel that can be mitigated by stricter lender‐based domestic prudential regulation.     

Bank ownership type and temporal evolution of long‐term bank funding in the period 2005–2017

This study uses a large panel dataset of Western European banks to examine the determinants of bank funding stability. Banks are divided into three categories by bank ownership type; the ownership types in this study are commercial banks, cooperative banks and savings banks. Three sources of stable bank funding are investigated: customer deposits, equity, and long‐term liabilities. Furthermore, the sum of these funding components is used as a proxy variable for a bank's total available stable funding (ASF). A special focus is on the temporal evolution of these funding types. The regression results show that commercial banks’ funding became much more stable in the period 2005–2017. However, that funding remains, on average, less stable than does cooperative and savings banks’ funding. In addition, funding stability has remained at the pre‐crisis level in cooperative and savings banks, despite a steep dip in cooperative banks’ ASF during the sovereign debt crisis. Furthermore, banks substantially decreased financing from long‐term liabilities after the financial crisis, replacing it with customer deposits and equity.     

THE PHILLIPS CURVE IN A MATCHING MODEL

Following ideas in Hume, monetary shocks are embedded in the Lagos‐Wright model in a new way: There are only nominal shocks accomplished by individual transfers that are sufficiently noisy so that realizations of those transfers do not permit the agents to deduce much about the aggregate realization. Assuming that the distribution of aggregate shocks is almost degenerate, aggregate output increases with the growth rate of the stock of money—our definition of the Phillips curve. This almost degeneracy assumption is far from being necessary; under some mild conditions, the Phillips curve result holds for a large class of distributions.     

IQ and Audit Quality: Do Smarter Auditors Deliver Better Audits?

This study examines the role of an individual auditor's cognitive ability in delivering high‐quality audits. Our results from analyzing archival data from Sweden show that audit partners' IQ scores obtained from psychological tests are positively associated with going‐concern audit reporting accuracy and audit fee premiums. We also find some, albeit weak, evidence that audit partners' IQ scores are negatively associated with the income‐increasing abnormal accruals of the client. These results suggest that, although audit services are standardized through various control mechanisms and audits are conducted by teams rather than by individual auditors, the cognitive ability of audit partners responsible for an audit remains important in delivering high‐quality audit services.     

Did foreign exchange holding influence growth performance during the global financial crisis?

In a context of increased foreign exchange reserves holding from emerging and developing countries, this paper investigates the diminishing return of reserves holding assumption over the most severe phase of the global financial crisis (2008Q1–2010Q4). Relying on a Panel Smooth Transition Regression model, we highlight the differential effect of the accumulation of foreign exchange reserves for a set of financial vulnerabilities variables. In a specific manner, although reserves accumulation is effective above a critical threshold to cope with vulnerabilities related to the financial channel, we show that it becomes less effective beyond a certain threshold for domestic bank vulnerabilities. Our results are robust to alternative specifications.