Foreign direct investment and economic growth: Is more financial development better?

We investigate the extent to which an increase in financial development affects the positive effect of foreign direct investment on economic growth. Although the financial sector is beneficial for economic growth, the effect of further financial development on growth is found to become insignificant. Using a dynamic panel threshold model on 62 middle- and high-income countries spanning the period 1987–2016, we re-examine the possible nonlinearity between finance, foreign direct investment, and growth. Consistent with the “vanishing effect” of financial development, we find significant evidence that foreign direct investment fosters growth in general, but the growth effect of foreign direct investment becomes negligible when the ratio of private sector credit to gross domestic product exceeds 95.6%. This finding is robust to different econometric methods, various subsamples and interaction analyses, and distinct financial development indicators.     

Does corporate social responsibility reduce financial distress risk?

This paper examines how corporate social responsibility (CSR) affects the level of financial distress risk (FDR). Using a sample of 1201 US-listed firms during 1991–2012, our results indicate that firms with higher CSR levels have lower FDR, suggesting that a better CSR performance makes firms more creditworthy and have better access to financing, which is rewarded with less financial defaults. This finding is robust to using alternative proxies of FDR, to controlling for potential endogeneity, and is mainly driven by the community, diversity, employee relations, and environmental dimensions of CSR. Moreover, this relationship is more prevalent in firms with strong governance mechanisms and high product market competition. It is also more exacerbated for less distressed firms and during non-crisis periods. Overall, our findings suggest that the adoption of CSR practices comes with less distress and default risks, likely leading to a more attractive corporate environment, better financial stability and more crisis-resilient economies.     

CEO compensation in EU telecom companies: Does the state design the right incentives?

This paper analyzes the structure of CEO pay in European fixed telecommunication companies, focusing on the impact of state ownership. Results show that, under the (partial or total) control of the state, the level of CEO compensation is lower and pay-performance sensitivity is higher than in privately-controlled firms. This finding suggests the state provides an incentive as well as a monitoring effect. However, when the state holds the majority of the shares, the pay level is significantly affected by the CEO power, suggesting that in these firms, CEOs are more likely to be entrenched with boards and succeed in raising their pay.     

Is There a Causal Effect of Working Part‐Time on Current and Future Wages?

In this paper, I study the causal effects of part‐time work on current and future wages. To estimate these effects, I use a random effects model with a wage equation capturing the employment history and a dynamic multinomial probit component for the choice of employment status. Exclusion restrictions from the institutional context are exploited to support identification. The results suggest that working part‐time with few hours has a large causal effect on current wages, but more extensive part‐time work does not reduce current wages. However, both types of part‐time work lead to negative long‐term wage effects.     

Does sovereign debt weaken economic growth? A panel VAR analysis

We estimate panel vector autoregressions to analyze the highly disputed relationship between sovereign debt and economic growth. Using data on 20 developed countries, we find no evidence for a robust effect of debt on growth, even for higher levels of debt. We do find a significant negative reverse effect of growth on debt, which explains the negative correlation.     

Tracking down distress risk

This paper shows that exposure to aggregate distress risk is the underlying source of the premiums for the Fama-French size (SMB) and value (HML) factors. Using a unique data set of aggregate business failures of both private and public firms from 1926 to 1997, I build portfolios that track news about future firm failures. These tracking portfolios optimally hedge aggregate distress risk and earn a Capital Asset Pricing Model (CAPM) alpha of approximately −4% a year. Both HML and SMB predict changes in future failure rates. Small stocks have lower returns than large stocks and value stocks have lower returns than growth stocks when the market expects an increase in future failure rates. Finally, a two-factor model with the market and the tracking portfolio for aggregate distress as factors does as well as the Fama-French three-factor model in pricing the 25 size and book-to-market sorted portfolios.     

The long-term role of non-traditional banking in profitability and risk profiles: Evidence from a panel of U.S. banking institutions

The goal of this empirical study is to identify empirically and on a panel basis how non-traditional bank activities affect directly the profitability and risk profiles of the financial institutions involved in such activities. Through a dataset that covers 1725 U.S. financial institutions involved in non-traditional bank activities spanning the period 2000–2013 and the methodology of panel cointegration, the empirical findings document that non-traditional bank activities exert a positive effect on both the profitability and the insolvency risk. The results could be important for regulators given they could serve as a pre-warning signal that sends a clear message to regulators about the potential systemic risk that exists within the financial markets.     

The Risk Effects of Acquiring Distressed Firms

Existing research shows that bidder default risk increases following acquisitions due to a rise in post‐acquisition leverage and managerial risk‐taking actions offsetting the potential for asset diversification. This study examines whether the risk effects of acquiring distressed targets are fundamentally different and investigates possible explanations for any dissimilarities. Bidders often acquire relatively smaller distressed targets in domestic and related industries and have a higher initial target stake and more financial flexibility, thereby minimizing risk exposure. Controlling for several characteristics of bidder investment behaviour in both types of deals, however, we find that the increase in bidder default risk is substantially larger when acquiring distressed firms.     

Firms’ fundamentals,macroeconomic variables and quarterly stock prices in the US

This paper modeled the effects of firms’ fundamentals such as total assets and long-term debt and of macroeconomic variables such as unemployment and interest rates on quarterly stock prices of over 3000 US firms in the period 2000–07. The merged CRSP/Compustat database was augmented by macroeconomic variables and comprehensive dynamic models were estimated by maximum likelihood taking into account heterogeneity across firms. Likelihood ratio statistics were developed for sequentially testing hypotheses regarding the adequacy of macroeconomic variables in the models. The main findings were that the estimated coefficients of lagged stock prices in simple dynamic random effects models were in the interval 0.90–0.95. Second, comprehensive dynamic models for stock prices showed that the firms’ earnings per share, total assets, long-term debt, dividends per share, and unemployment and interest rates were significant predictors; there were significant interactions between firms’ long-term debt and interest rates. Finally, implications of the results for corporate policies are discussed.     

The effectiveness of the ECB’s unconventional monetary policy: Comparative evidence from crisis and non-crisis Euro-area countries

During the European financial crisis, the European Central Bank implemented a series of unconventional monetary policy measures. We argue that these programs lowered the bond yield spreads of Euro-area countries. This hypothesis is tested using pooled OLS estimations and two different datasets: monetary policy event dummies and the purchase volumes of the Securities Markets Programme (SMP). Overall, we find significantly negative effects on bond yield spreads for both datasets, leading us to accept the hypothesis. While the OMT reduces the spreads of both crisis and non-crisis countries, LTROs and the lowering of the deposit rate to 0 percent are mainly effective in non-crisis countries. The SMP lowers the spreads of crisis countries, but it has the opposite effect on non-crisis countries. This converse effect is explained by the risk that increasingly accumulates on the ECB’s balance sheet through the SMP and that way constitutes a fiscal risk for non-crisis countries. The results are confirmed by pooled OLS estimations that measure the effect of unconventional monetary policy on central government debt.