Knowledge that Transforms

We investigate the relationship between the going-public decision and firm risk. We employ a comprehensive sample of firms that went public on European stock exchanges from 2000 to 2015 and examine how the risks of these newly listed firms are different from those of private firms and long-listing firms. We find that compared with private firms, newly listed firms have significantly increased risks of financial distress. This difference is largely attributable to the increase in leverage and the decline in liquidity, profitability and retained earnings. The results are consistent after controlling for selection bias, the effect of stock issuance, and the impact of the financial crisis and are robust to different risk indicators and estimation models (namely, the treatment effect model and DID). Finally, we find that the risks of newly listed firms are much higher than those of long-listing firms, and the risk effect of newly listed firms gradually weakens after listing. We argue that the increase in risk of IPO firms is temporary and is likely to be caused by the transition to public listing.

Financial markets create endogenous systemic risk, the risk that a substantial fraction of the system ceases to function and collapses. Systemic risk can propagate through different mechanisms and channels of contagion. One important form of financial contagion arises from indirect interconnections between financial institutions mediated by financial markets. This indirect interconnection occurs when financial institutions invest in common assets and is referred to as overlapping portfolios. In this work we quantify systemic risk from indirect interconnections between financial institutions. Complete information of security holdings of major Mexican financial intermediaries and the ability to uniquely identify securities in their portfolios, allows us to represent the Mexican financial system as a bipartite network of securities and financial institutions. This makes it possible to quantify systemic risk arising from overlapping portfolios. We show that focusing only on direct interbank exposures underestimates total systemic risk levels by up to 50% under the assumptions of the model. By representing the financial system as a multi-layer network of direct interbank exposures (default contagion) and indirect external exposures (overlapping portfolios) we estimate the mutual influence of different channels of contagion. The method presented here is the first quantification of systemic risk on national scales that includes overlapping portfolios.

We examine the impact on firm cash holdings of uncertainty of uncertainty, measured as the ex post volatility of economic policy uncertainty. Using the news-based index developed by Baker et al. (2016) for twenty-two countries, we find that, when there is greater volatility of economic uncertainty, firms hold more cash. Our results are robust to controlling for a host of firm-level and country-level factors. Consistent with Baker et al. (2016), we consider that less economic policy uncertainty is associated with more investment; and so the real-option value of cash is sensitive to the possibility of a future desirability of investment. Therefore, when there is greater expected volatility of uncertainty, measured under rational expectations as the recent ex post volatility of uncertainty, firms will hold more cash. We also find that the volatility of economic policy uncertainty is much more economically significant in determining firm cash holdings than economic policy uncertainty itself. Therefore, our paper not only adds to the literature on uncertainty and cash holdings, but also, importantly, to the limited literature in finance on the impact of uncertainty of uncertainty.

This study contributes to the low-carbon city (LCC) related literature by providing causal evidence on the impact of carbon reduction regulation on firm risk. Using staggered adoption of LCC program shocks in China as a quasi-natural experiment, we implement a difference-in-differences (DiD) analysis to investigate the impact of the low-carbon city initiatives on firm risk. We find that low-carbon city initiatives are significantly correlated with firm total risk, systematic risk, and idiosyncratic risk. The results are more pronounced for firms with greater changes of investment in fixed assets and R&D and for firms in provinces with stronger legal enforcement. Our study provides in-depth insights into the low-carbon city initiatives and the firm-level impact of its implementation.

We study the interaction between solvency and funding costs at UK banks. We use the market-based leverage ratio as a proxy for market participants’ perceptions of bank solvency. We investigate the impact that changes in this ratio have on banks’ CDS premia, which are a proxy for their marginal cost of wholesale funding. We find that a negative shock to market participants’ perception of banks’ solvency is associated with an increase in banks’ marginal cost of wholesale funding. We find evidence that this negative relationship is nonlinear, i.e. the responsiveness of funding costs to a shock to solvency is greater at lower initial levels of solvency.

We identify a novel set of macroprudential policy shocks and estimate their effects on credit cycle variables in a panel of 13 EU countries between 1999 and 2018. We find that a typical macroprudential policy tightening shock reduces bank credit-to-GDP by 2.4% points and household credit-to-GDP by 2.2% points over a period of four years. The non-financial corporations and total credit-to-GDP ratios, however, do not react significantly. Using state-dependent local projections, we further find that the effects on the credit-to-GDP ratios are stronger in credit cycle upturns than in downturns. We also detect a sizable leakage of firm credit from the banking to the non-banking sector next to a shift from household to firm credit.

This paper presents a novel approach to investigate and model the network of euro area banks’ large exposures within the global banking system. Drawing on a unique dataset, the paper, for the first time, documents the degree of interconnectedness and systemic risk of the euro area banking system based on bilateral linkages. We then develop a Contagion Mapping (CoMap) methodology to study contagion potential of an exogenous default shock via counterparty credit and funding risks. We construct contagion and vulnerability indices measuring respectively the systemic importance of banks and their degree of fragility. Decomposing the results into the respective contributions of credit and funding shocks provides insights to the nature of contagion which can be used to calibrate bank-specific capital and liquidity requirements and large exposures limits. We empirically confirm that tipping points shifting the euro area banking system from a less vulnerable state to a highly vulnerable state are a non-linear function of the combination of network structures and bank-specific characteristics.

This study investigates whether and to what extent bank control over firms by their representation on boards of directors and by equity holdings through trust business may affect corporate environmental responsibility. Using a large sample of listed firms in the United States from 2004 to 2016, we find that banker directors with equity affiliation improve firms’ environmental performance scores and such impact is associated with affiliated bank’s shareholdings, investment horizon, and environmental orientation. Additionally, we document that the effects of bank control on firm’s environmental investments is stronger for firms with more short-term institutional investors but weaker for firms with more analyst coverage. Moreover, we find that when firms are financially constrained, banker directors reduce environmental investments. Finally, product-market competition matters for a firm’s environmental strategies as the relation of bank control and environmental investments is more profound under conditions of greater industry competition.

We examine the effects of economic policy uncertainty (EPU) on cross-border mergers and acquisitions (CBAs). The results show that a higher degree of EPU at home retards the number and volume of inbound CBA deals. However, this effect is positively moderated by the host country’s better quality of institution, business environment and political risk. The bilateral acquirer-target country-pair investigation reveals that while higher EPU in the target’s domicile deters inbound CBAs, higher EPU in the acquirer’s nation is positively associated with a higher number and volume of outbound CBA deals. Finally, on the announcement of the deals, targets (acquirers) based in countries with a larger increase in EPU are associated with lower (more) stock returns than the targets (acquirers) based in countries with a smaller increase in EPU. These findings imply that countries aiming to attract cross-border investments should strive to mitigate economic policy-related uncertainties.

We analyze the effects on financial stability of the interplay between climate transition risk and market conditions, such as recovery rate and asset price volatility. To this end, we extend the framework of the climate stress-test of the financial system by including an ex-ante network valuation of financial assets which accounts for asset price volatility as well as for endogenous recovery rate on interbank assets. Moreover, we also consider the dynamics of indirect contagion of banks and investment funds, which are key players in the low carbon transition, via exposures to the same asset classes. We derive some analytical results and we apply the model to a unique supervisory dataset in a range of climate policy scenarios and market conditions. In the event of a disorderly low-carbon transition, stronger market conditions allow to reach more ambitious climate policies at the same level of financial risk.