Do new listings of EUREX options affect the prices of discount certificates that are replicated with precisely such a newly listed option? An event study provides a significantly negative average abnormal margin change on the day on which the EUREX option of the replication portfolio is listed. I model the abnormal margin changes as a function of hedging cost, unhedgeable risk, and price pressure. Higher hedging costs, higher opportunity costs from unhedgeable risk, and lower intra-EUWAX competition lead to significantly lower abnormal margin changes. I interpret the effect of intra-EUWAX competition as a price pressure effect. Economically, rebalancing and opportunity costs from unhedgeable risk are the most important drivers of abnormal margin changes when EUREX options are listed.

This article investigates how overpricing of outstanding certificates, also called master certificates, changes when competing products that duplicate the features of master certificates are issued. I argue that competition effects may be reverted and overpricing may increase rather than decrease after competitors arrive, when retail investors fail to detect implications of credit risk differences on certificates’ values. Using difference-in-differences estimations on matched samples, I find that overpricing of master certificates decreases after the competing products have been issued, but only when the master issuer’s credit risk is lower than that of the duplicate issuer, while it increases when the credit risk difference is positive. These findings are robust to controlling for retail investors’ demand in various ways. Thus, the study indicates that retail investors’ failure to detect the value implications of issuers’ credit risk can undermine product competition.

We study the international spillover effects of sovereign rating events on the stock returns of large banks in nonevent countries. Using S&P rating assessments from 1983 to 2018, we find that negative sovereign rating events spill over to foreign banks’ stock returns through the foreign asset holdings channel, especially if the rating shock to domestic banks is severe. Foreign sovereign debt holdings are not the only source to open such a channel. Negative sovereign rating events also spill over through foreign interbank exposures, but not through foreign claims to nonbank firms. We further find a previously undocumented positive side effect of government support to banks. The guarantee channel limits international spillover effects if banks with strong expected government support are located in countries with high sovereign ratings.

Banks in bad financial shape are more likely to appoint executive directors from the outside than those in good shape. It is, however, not clear whether all of these appointments necessarily lead to the desired turnaround. We analyze the performance effects of new board members with external boardroom experience (outsiders) by distinguishing between good and bad managerial abilities of executives based on either ROA or risk-return efficiency of their previous employers. Our results show that banks appointing bad outsiders underperform other banks while those appointing good outsiders do so to a lesser extent. The performance differentials are highly pronounced in high-risk banks and in the post-crisis period.

Existing research documents that incoming CEOs in non-financial firms tend to take an “earnings bath”. They reduce their first year’s profits through discretionary expenses, blame the “bad outcome” on their predecessors, lower the performance benchmark, and save income for subsequent accounting periods. Identifying such an earnings bath for incoming CEOs in banks requires us to disentangle under-provisioning, which may have triggered the turnover event, and the earnings bath. For a sample of German savings banks over the period 1993–2012, we find that incoming CEOs increase discretionary expenses and that this increase is stronger for incoming CEOs from outside the bank than for insiders. We further show that CEOs coming from outside increase discretionary expenses during their first year in charge even if the default risk of the bank is low and the stock of risk provisions relative to risk exposure is high. Therefore, we conclude that the effects are only partially driven by incoming CEOs who rectify discretionary expenses by insufficient existing risk provisions, and that big bath accounting plays an important role in explaining discretionary expenses during CEO turnovers.