Knowledge that Transforms

In this paper, we compute a non-parametric Metafrontier Malmquist index to evaluate the Total Factor Productivity (TFP) change among UK-based trademarking and non-trademarking commercial banks between 2005 and 2013. The use of the metafrontier approach allows us to: a) identify the drivers of TFP growth for each group of banks, b) compare the TFP growth of each group to the TFP growth experienced by the whole industry, and c) assess the extent to which the former catches up with the latter measured along the metafrontier. Our results suggest that TFP has been increasing among trademarking banks up to the onset of the financial crisis but this process has since reversed. The catch-up indexes suggest that both groups of banks were catching up with the metafrontier up to the financial crisis although the drivers of this process differed between the two groups. After the financial crisis, improvements in technology have been driven by a small number of commercial banks i.e. the non-trademarking banks. These results suggest that a large section of the commercial banking sector has not been able to overcome the effects of the financial crisis.

This paper examines the determinants and the effects of CEO stock ownership guideline adoption, differentiating Not-meet/Meet adopters – those setting the guideline above/below the CEO’s stock ownership at the time of adoption. While Meet adoption is mainly determined by factors related to stakeholder management, we find that Not-meet adoption is associated with factors related to both incentive alignment and stakeholder management. CEO ownership increases and CEO incentive alignment improves for Not-meet firms. But CEO ownership and incentives are unchanged for Meet firms following guideline adoption. We find no evidence that CEO compensation changes abnormally after adoption. Not-meet firms have larger improvement in operating performance and better stock performance than Meet firms. We provide evidence that the motives and the effects of guideline adoption depend on the level of the ownership restriction relative to the CEO’s ownership at the time of adoption.

This paper identifies the prevailing financial factors that influence credit spread variability and shows how they affected the U.S. business cycle during the 1990–91 and 2001 recessions of the Great Moderation period (1984–2006) and the Great Recession of 2007–09. To do this, we develop and estimate a dynamic general equilibrium model in which financial intermediation and equity assets play a central role. Over the three recession periods, we find that bank market power (sticky rate adjustments and loan rate markups) played a significant role in the credit spread variability that disrupted the U.S. business cycle. Equity prices exacerbate movements in credit spreads through the financial accelerator channel, but cannot be regarded as one of the main driving forces of credit spread variability. Across the three periods, we observe a remarkable decline in the influence of technology and monetary policy shocks. The influence of loan-to-value ratio shocks declined after the 1990–91 recession, while the bank capital requirement shock exacerbated and prolonged credit spread variability over the 2007–09 recession.

European banks became a source of risk to global financial markets during the financial crisis and attention to the European banking sector increased during the sovereign debt crisis. To measure the systemic risk of European banks, we calculate a distress insurance premium (DIP), which integrates the characteristics of bank size, probability of default, and correlation. Based on this measure, the systemic risk of European banks reached its height in late 2011 around €500 billion. We find that this was largely due to sovereign default risk. The DIP methodology is also used to measure the systemic contribution of individual banks. This approach identifies the large systemically important European banks, but Italian and Spanish banks as a group notably increased in systemic importance during the sample period. Bank-specific fundamentals like capital-asset ratios predict the one-year-ahead systemic risk contributions.

A country’s economic growth exhibits a significant response to sovereign rating changes: a one-notch upgrade (downgrade) causes an increase (decline) of about 0.6% (0.3%) in re-rated countries’ five-year average annual growth rates. The results hold after accounting for other determinants of economic growth and potential endogeneity problems, and are robust to the use of quarterly data. Changes in country rating affect economic growth via the interest-rate and capital-flow channels: narrower sovereign bond yield spreads and increased capital inflows are associated with upgrades, which stimulate re-rated countries’ economic performance, and the converse holds for downgrades.

Whether, and how, the introduction of deposit insurance affects non-bank financial market development depends on whether banks and non-bank financial markets are substitutes or complements and theory has conflicting views. Using data on 134 countries over a 28-year period and several identification strategies we find that the introduction of deposit insurance retards the equity market, the non-bank depositaries sector, and the banking sector when law and order is weak. While strong law and order mitigates this effect, it does not lead to a positive outcome for all markets. For non-bank financial markets, the effect is greater in the long run so that while deposit insurance increases banking sector development in the long run, it retards non-bank financial markets regardless of the level of law and order. Finally, several design features exacerbate the negative outcomes. Our results have important policy implications for implementing or altering deposit insurance schemes.

We document that capital flows in and out of emerging or developed markets are sensitive to global equity market conditions. Capital tends to move out of emerging into developed countries in global down markets, leading to depreciation (appreciation) of emerging (developed) currencies. This generates a positive (negative) correlation between currency and equity in emerging (developed) markets which is amplified by the magnitude of the capital movement. We also verify that hedging currency risks may undo the natural hedge and increase the total return volatility under negative correlation.

We examine whether time-variation in the profitability of momentum strategies is related to variation in macroeconomic conditions. We find reliable evidence that the momentum strategy exposes investors to greater downside risk. Momentum strategies deliver economically large and statistically reliable negative profits in bad economic states when the expected market risk premium is high, whereas positive profits in good economic states when the expected market risk premium is low. Our results are robust to alternative constructions of momentum portfolios, out-of-sample estimation of the expected market risk premium, and after controlling for the January effect, lagged market return, and investor sentiment.

The consolidation process which characterized the banking industry in the last decades has been widely analyzed, but very few studies have investigated the reasons which bring a number of announced deals to failure. We fill this gap in the literature analyzing the characteristics of failed M&A operations in a large sample, including all the major domestic and cross-border deals in the banking sector announced worldwide between 1992 and 2010. The results show that the most important factors which determine the failure of an announced operation are deal specific characteristics, in particular the hostility of the bidder and the presence of multiple potential acquirers. Moreover, lengthier negotiations have a lower probability of success. Contrary to expectations, cross-border operations are more likely to be successfully completed than domestic ones.

This paper examines the efficiency of the S&P 500 options market by testing the martingale properties of the Model-Free Forward Variance (MFFV) time series using the Generalized Spectral Test (GST). Based on a sample from January 1, 1996 to May 31, 2010, our tests show robust evidence that the S&P 500 options market is not efficient. By examining the subsamples before and after the 2008 financial crisis, we find this options market inefficiency is mainly driven by the outbreak of the subprime crisis. Our diagnostic tests further indicate that this inefficiency is due to the skewness-in-mean effect of forward variance. Specifically, the skewness-in-mean effect is weakened once we account for the S&P 500 index jump effects. Hence, we can establish a link between jumps and options market inefficiency. Finally, we find that the lagged skewness of the forward variance can help forecasting the forward variance both in-sample and out-of-sample. The economic significance of this forecasting ability is further highlighted by the performance of a trading strategy based on forward variance. In sum, out study provides robust evidence and a trading implication on testing the S&P 500 options market efficiency.