Bank concentration and financial constraints on firm-level investment in Europe

This study examines the effect of bank concentration on financing constraints of non-financial firms in 14 European countries between 1992 and 2005. Using firm-level data we analyze financial constraints with the Euler equation derived from the dynamic investment model. We find that with a highly concentrated banking sector firms are less financially constrained. This result is robust to consideration of firm opacity, firm size, and business cycle. Relaxation of financial constraint while greater for firms in less opaque industries also accrues for firms in more opaque industries. Greater bank concentration is associated with less tight financial constraint during both expansions and recessions. Results overall are consistent with an information-based hypothesis that more market power increases banks’ incentives to produce information on potential borrowers. Findings are robust to consideration of country specific institutional factors.     

Seasoned equity offerings: Quality of accounting information and expected flotation costs

Flotation costs represent a significant loss of capital to firms and are positively related to information asymmetry between managers and outside investors. We measure a firm's information asymmetry by its accounting information quality based on two extensions of the Dechow and Dichev [2002. The quality of accruals and earnings: the role of accrual estimation errors. Accounting Review 77, 35–59] earnings accruals model, which is a more direct approach to assessing the information available to outside investors than the more commonly used proxies. Our main hypothesis is that poor accounting information quality raises uncertainty about a firm's financial condition for outside investors, though not necessarily for insiders. This accounting effect lowers demand for a firm's new equity, thereby raising underwriting costs and risk. Using a large sample of seasoned equity offerings (SEOs), we show that poor accounting information quality is associated with higher flotation costs in terms of larger underwriting fees, larger negative SEO announcement effects, and a higher probability of SEO withdrawals. These results are robust to joint determination of offer size and flotation cost components and to adjustments for sample selection bias.     

A case of constitutional apples and oranges: a functional comparison of pension priority and benefit guarantees in U.S., U.K. and Canadian insolvency and pension law regimes

Canada's insolvency law reform increased the priority granted to employer‐sponsored pension claims. The article compares the treatment of such claims in the U.S., the U.K. and Canada. A comparison of the legislative provisions concerning pension funding shortfalls from contribution arrears or economic underperformance in relation to the assumptions used for investment income or liability valuations finds that insolvency law has been used to address contribution arrears, but risks from economic underperformance have been addressed by pension benefit insurance. Post‐insolvency priority for contribution arrears provides appropriate incentives to discourage pre‐insolvency preferences for payments to other creditors, while shortfalls from economic underperformance do not involve issues of preference between creditors. The absence of any insolvency rationale for changing priority for shortfalls from economic underperformance and the likely disparity between the assets available to satisfy clams and the much larger amounts of such shortfalls makes the use of insolvency law to address this risk much less effective than insurance. Canada, however, has not adopted the insurance policy instrument used in the U.S. and U.K. to mitigate the impact of pension funding shortfalls. The constitutional inability of Canada to legislate in respect of matters of pension regulation that would allow it to control the well‐known insurance problems of moral hazard and adverse selection may explain why it has only chosen to adopt an insolvency policy instrument. However, a change in priorities in insolvency may generate incentives for secured creditors that either undermine or reinforce this policy choice. Secured creditors could attempt to circumvent the new priority scheme through private arrangements with the debtor or to increase their monitoring activities to ensure the debtor is current in its pension contributions. Secured creditors choices will be influenced by the bankruptcy courts' interpretation of the preference provisions in the insolvency legislation. Copyright © 2009 John Wiley & Sons, Ltd.     

Nominal interest rates and stationarity

This paper investigates the (break) stationarity null hypothesis using data for 25 interest rates with different maturities and risk characteristics in Canada and the US. In contrast to a large part of the literature, this paper reports strong empirical evidence in favour of the null hypothesis of stationarity for the interest rate series.     

The efficacy of regulatory intervention: Evidence from the distribution of informed option trading

A substantive body of equity-market academic research documents an extensive range of costs arising from the SEC’s October 2000 adoption of strictures on selective disclosure and insider trading; suggesting an unusual outcome, specifically, an increase in informed trading. We investigate the efficacy of the SEC’s regulations by examining informed trading in an attractive setting for exploiting private information; the options market. Using data on the S&P 1500 industrial firms, our analysis indicates that about 38% of firms exhibited symptoms of informed option trading prior to regulatory intervention. After regulatory intervention, we observe that only 19% of firms show symptoms of informed trading. In additional testing of ADR firms – explicitly exempt from complying with Reg FD, we find no evidence of a change in informed option trading from pre- to post-regulation; suggesting that the SEC’s strictures on US firms led a to a significant reduction in informed option trading. Notably, our proxies for large shareholder and financial analyst access are associated with the largest decreases in informed option trading. In developing a unique measure of informed trading based on option market data, we provide evidence on the efficacy of security regulation in limiting informed trading.     

Development prospects and policy for Africa: Structural adjustment and beyond

Conclusion Africa’s economic recovery in the 1990s, though somewhat fragile, is very encouraging. Policy reforms, primarily in the form of SAPs, have led to improved economic performance. However, as we approach the post-SAPs era of the 21st century, African countries need to intensify efforts in the pursuit of sound policies and further structural reforms. Much higher growth rates, exceeding 7 percent annually, are deemed as necessary to be attained and maintained over a longer period for there to be meaningful reductions in poverty. This paper has advocated a set of policy areas which need to be given priority in Africa as the 21st century approaches. African countries are in a better position now, than anytime since the crisis of the 1980s, to build a path toward sustainable development. In that regard, maintaining market-oriented policy reforms remains the imperative for the immediate future and beyond. It is now up to Africa’s leaders to provide the requisite leadership for a home-grown, rather than donor driven, attempt at sustainable socio-economic development.     

Mean Reversion across National Stock Markets and Parametric Contrarian Investment Strategies

For U.S. stock prices, evidence of mean reversion over long horizons is mixed, possibly due to lack of a reliable long time series. Using additional cross-sectional power gained from national stock index data of 18 countries during the period 1969 to 1996, we find strong evidence of mean reversion in relative stock index prices. Our findings imply a significantly positive speed of reversion with a half-life of three to three and one-half years. This result is robust to alternative specifications and data. Parametric contrarian investment strategies that fully exploit mean reversion across national indexes outperform buy-and-hold and standard contrarian strategies.     

Experts and Amateurs: The Role of Experience in Internet Auctions

The use of auctions as a pricing mechanism has grown dramatically over the last few years. The introduction of electronic auctions has significantly widened the pool of consumers who participate in auctions and increased the number of companies attempting to sell their products in an auction format. Previous empirical research on auctions has focused almost exclusively on the behavior of professional bidders in high stakes common value auctions or the behavior of students in laboratory experiments. We collect data on a large number of electronic auctions, across four product categories, to explore the behavior of consumers bidding in a real marketplace. In particular, we focus on the role experience plays in their bidding behavior to uncover whether consumer learning drives the bidding process towards outcomes described in the theoretical literature on auctions. We find that experience does indeed lead to behavior which is more consistent with theory although the proportion of experienced bidders who behave in a manner inconsistent with theory remains quite large.