Knowledge that Transforms

The evidence here indicates that sovereign debt rating and credit outlook changes of one country have an asymmetric and economically significant effect on the stock market returns of other countries over 1989–2003. There is a negative reaction of 51 basis points (two-day return spread vis-á-vis the US) to a credit ratings downgrade of one notch in a common information spillover around the world. Upgrades, however, have no significant impact on return spreads of countries abroad. Closeness (e.g., geographic proximity) and emerging market status amplify the effect of a spillover. Downgrade spillover effects at the industry level are more pronounced in traded goods and small industries.

Can a stock exchange improve corporate governance and transparency by designating companies that exhibit superior corporate governance? In 2000, the Borsa Italiana created a mid-cap segment with strong listing standards, which is composed of firms (called STARS) that follow stricter standards of transparency, disclosure, monitoring and liquidity. We find that STAR firms exhibit governance characteristics not observed in non-STAR firms, such as a higher incidence of audit and executive committees and higher debt ratios. They experienced a modestly favorable share price response upon the implementation of the STAR initiative. Moreover, they experienced significantly higher buy and hold returns and transparency after the initiative. Several governance characteristics are cross-sectionally associated with performance following the STAR initiative. Overall, the results suggest that firms may be willing to improve governance when they are endorsed by a credible agency for doing so, and such improvements may lead to better performance. The STAR initiative may serve as a model that can be adapted by other stock exchanges to promote transparency and governance.

This paper attempts to estimate comparable efficiency scores for European banks operating in the Single Market in the EU. Using a data set of more than 5000 large commercial banks from all major European banking markets over the period 1993–2004, the application of meta-frontiers enables us to assess the existence of a single and integrated European banking market. We find evidence in favor of a single European banking market characterized by cost and profit meta-frontiers. However, compared to the meta-frontier estimations, pooled frontier estimations tend to underestimate efficiency levels and correlate poorly with country-specific frontier efficiency ranks.

Most bank deposits contain an embedded option which permits the depositor to withdraw funds at will. Demand deposits generally allow costless withdrawal, while time deposits often require payment of an early withdrawal penalty. Managing the risk that depositors will exercise their withdrawal option is an important aspect of input pricing. This paper acknowledges the threat of deposit withdrawal and then solves for the optimal structure of bank deposit rates.

This study considers the issues of noise-to-signal estimation, finite sample performance and hypothesis testing for a new nonparametric and stochastic efficiency estimation technique. We apply the technique for analyzing the efficiency of European banks from various regions and with various specializations. The technique seems well suited for this application area because banking inputs and outputs generally are measured with error, the banking production technology is not well-defined and large banking data sets such as BankScope allow for a nonparametric approach.

We propose a simple model of credit contagion in which we include macro- and microstructural interdependencies among the debtors within a credit portfolio. The microstructure captures interdependencies between debtors that go beyond their exposure to common factors, e.g., business or legal interdependencies. We show that even for diversified portfolios, moderate microstructural interdependencies have a significant impact on the tails of the loss distribution. This impact increases dramatically for less diversified microstructures.

In this paper, we present economic forces that affect the closed-end fund share price using a simple two-period model with limited participation. We characterize three economic forces: management fee, principal-agent problem effect and diversification benefit effect. The role of the management fee is consistent with recent studies by Ross [Ross S., 2002. Neoclassical finance, alternative finance and the closed end fund puzzle. European Financial Management 8, 129–137, Ross, S., 2002. A neoclassical look at behavioral finance: closed end funds. The Princeton lectures in finance III] and findings of various empirical studies [e.g., Kumar, R., Noronha, G.M., 1992. A re-examination of the relationship between closed-end fund discounts and expenses. Journal of Financial Research 15(2) Summer, 139–147; Russel, P.S., 2005. Closed-end fund pricing: The puzzle, the explanations, and some new evidence, Journal of Business and Economic Studies 11(1), 34–49; Gemmill, G., Thomas, D.C., 2002. Noise trading, costly arbitrage, and asset prices: Evidence from closed end funds. Journal of Finance 57(6), 2571–2594]. The model’s principal-agent problem effect is consistent with empirical findings by Brickley et al. [Brickley, James, Steven Manaster, Schallheim, James, 1991. The tax-timing option and the discounts on closed-end investment companies. Journal of Business 64, 287–312] of positive relation between the fund discount and the average variance of the constituent assets in the fund portfolio. In addition, it provides a theoretical framework for empirical studies, which examine the role of agency costs [Barclay, Michael J., Clifford G. Holderness, Jeffrey Pontiff, 1993. Private benefits from block ownership and discounts on closed-end funds. Journal of Financial Economics 33, 263–291] and compensation contracts [Coles, J., Suay, J., Woodbury, D., 2000. Fund advisor compensation in closed-end funds. Journal of Finance 55 (3), 1385–1414; Deli, Daniel N., 2002. Mutual fund advisory contracts: An empirical Investigation. Journal of Finance 57(1), 109–133] on the behavior of fund managers and fund discounts. The model’s diversification benefit effect supports the result in [Bonser-Neal C., Brauer,G., Neal, R.., Wheatley, S., 1990. International investment restrictions and closed-end country fund prices. Journal of Finance 45, 523–547] that announcement of financial market liberalization is associated with a decrease in the fund premium. It also supports the findings of [Kumar, R., Noronha, G.M., 1992. A re-examination of the relationship between closed-end fund discounts and expenses. Journal of Financial Research 15(2) Summer, 139–147; Chay, J.B., Trzcinka, Charles A., 1999. Managerial performance and the cross-sectional pricing of closed-end funds. Journal of Financial Economics 52, 379–408] of a positive relation between current premium and the risk-adjusted return over the following year.

We analyze a large sample of US corporate bond tender offers to understand what affects tender premiums as well as the percentage of bonds tendered. For the average (median) tender offer, the tender price is 5.55% (3.24%) greater than the pre-tender market price while the percentage of bonds tendered is 82.3% (94.6%). Premiums offered by firms are greater when the firm is simultaneously soliciting consents to amend restrictive covenants and when the bond has a greater number of restrictive covenants. Premiums are also greater when long-term risk-free yields are low and the yield curve is flatter – conditions where a firm might want to lock in favorable long-term rates by issuing new debt and retiring old debt. Bondholders respond to higher tender premiums by tendering a greater percentage of their bonds – a 1% increase in tender premium increases the tendering rate by approximately 9%. Bondholders also tender a greater percentage of bonds possessing less desirable characteristics such as a short remaining maturity or bonds that are simultaneously undergoing consent solicitations. Finally, we find that tender offers are easier to complete when bond ownership concentration is greater.

This paper is the first comprehensive study of price differences for dual class equity at the Oslo Stock Exchange. It analyzes the relative importance of corporate control, foreign ownership restrictions and stock market liquidity for the price differences. The Norwegian market has the peculiar feature that in part of the sample period non-voting shares were trading at a premium to voting shares, i.e., what is usually termed the “voting premium” was negative. This result can be rationalized by restrictions on foreign ownership. In the later part of the period, with no regulatory restrictions on foreign ownership, the voting premium is positive, and related to corporate governance and liquidity.

Despite a lot of restructuring and many innovations in recent years, the securities transaction industry in the European Union is still a highly inefficient and inconsistently configured system for cross-border transactions. This paper analyzes the functions performed, the institutions involved and the parameters concerned that shape market and ownership structure in the industry. Of particular interest are microeconomic incentives of the main players that can be in contradiction to social welfare. We develop a framework and analyze three consistent systems for the securities transaction industry in the EU that offer superior efficiency than the current, inefficient arrangement. Some policy advice is given to select the ‘best’ system for the Single European Financial Market.