Knowledge that Transforms

This paper empirically explores the effect of monetary policy uncertainty on corporate cash holdings in China. We find robust evidence that monetary policy uncertainty is positively related to corporate cash holdings. The firms’ precautionary behavior in cash holdings is chiefly attributed to the increase in financial frictions rather than the reduction in corporate investments. The promoting effect of monetary policy uncertainty on cash holdings is more pronounced among firms with more severe financial constraints, firms with higher dependence on external finance, firms with worse access to bank financing, and non-SOEs, and during the period of monetary policy tightening. Our study suggests that firms hold more cash to cushion potential liquidity shortfalls induced by the increase in monetary policy uncertainty.

Credit unions in the United States (US) are exempt (benefit from subsidies) from federal corporate income taxes, which are traditionally justified by their non-profit cooperative status and mission of meeting the financial needs of individuals of modest means. In recent years, the efficacy and fairness of these subsidies has been debated extensively as the traditional demarcation between banks and credit unions and their respective customer bases have blurred. To investigate how credit unions allocate subsidies to various stakeholders, we estimate a structural profit model for matched pairs of credit unions and commercial banks. We find that credit unions use most (approximately 90%) of their tax exemption for the benefit of their membership via above-market deposit interest rates.

This paper uses a comprehensive set of predictor variables from the five largest Eurozone countries to compare the performance of simple univariate and machine learning-based multivariate models in forecasting stock market crashes. In terms of statistical predictive performance, a support vector machine-based crash prediction model outperforms a random classifier and is superior to the average univariate benchmark as well as a multivariate logistic regression model. Incorporating nonlinear and interactive effects is both imperative and foundation for the outperformance of support vector machines. Their ability to forecast stock market crashes out-of-sample translates into substantial value-added to active investors. From a policy perspective, the use of machine learning-based crash prediction models can help activate macroprudential tools in time.

We present a theoretical framework for studying how the cross holdings of asset securitization products may affect systemic risk in banking. We demonstrate that cross holdings can be understood from the perspective of profit seeking and credit creation; these motives drive up banks’ leverage. We also show that the capital adequacy ratio regulatory constraint may become invalid with cross holdings, which adversely impacts the monitoring of the stability of a system. We demonstrate that, generally, the impact of asset securitization on systemic risk is nonmonotonic and critically hinges on the banking asset structure, cross-holding degree among banks, and asset securitization characteristics including its state of risk retention. We empirically examine theoretical predictions using a comprehensive set of data from 27 countries/regions spanning the past 15 years.

This study examines how controlling shareholders’ pledging behavior influences firms’ acquisition decisions. Employing a sample of Chinese listed firms from 2010 to 2018, we find that firms with pledging controlling shareholders are more likely to announce merger and acquisition (M&A) deals than firms with non-pledging shareholders. The positive relationship between share pledging and M&A announcements is more pronounced when the margin call pressure is higher. We show that the link between share pledging and M&As is best explained by the controlling shareholders’ fear of losing control, and is unlikely due to shareholder expropriation or optimism. Further analyses indicate that pledge-related acquisitions are associated with a lower success rate, longer trading suspension periods, and smaller (yet positive) market returns.

The Bank of Japan (BOJ) enhanced its large-scale asset purchases in October 2010 by purchasing equity exchange-traded funds (ETFs). This study is the first to demonstrate that the BOJ provides downside protection for stock prices through the countercyclical purchase of ETFs. The BOJ responds to a large negative stock return during the overnight and morning periods, and submits purchase orders during lunchtime. Using the BOJ’s March 2020 announcement of doubling the annual purchase amount during the COVID-19 pandemic, this study also finds that the announcement effect is small and temporary. In contrast, the flow effect of the actual purchases is significant and increases. The BOJ’s countercyclical ETF purchase prevents equity risk premia from rising during an economic downturn.

The COVID-19 vaccine rollout expects to mitigate the severe negative impacts of the pandemic on global financial markets. Our study provides supporting evidence for this expectation. We find robust evidence that vaccinations significantly reduce the cross-country stock volatility connectedness among G7 nations, suggesting that the diversification benefits of an international equity portfolio may be enhanced during the pandemic when vaccinations accelerate. We present two explanations for this result. First, the vaccine deployment improves stock market return and decreases individual stock market volatility. Second, the vaccine rollout helps a country’s stock market be more resilient to exogenous shocks. We further demonstrate that a global portfolio using a tactical allocation rule based on the intensity of vaccinations can outperform a buy-and-hold portfolio in terms of risk-adjusted returns.

We rationalize the organization of US banking groups into a holding company with subsidiaries – instead of branches or stand-alone units – subject to regulatory provisions of the ”source-of strength” type. We show that their value increases with debt diversity among affiliates and with complexity, as measured by the number of subsidiaries. Regulatory interventions that are aimed at ring fencing reduce (increase) the shareholder value, whenever the Governmental leniency to bailout is low (high). Branches become more valuable when there is no full commitment to internal rescue and Government bailout occurs with certainty.

We document that firms run by female executives are associated with a significantly greater value for their cash holdings. In these firms, the marginal value of one dollar is 1.39, while the comparable value is 0.90 for male managed firms. Further, the marginal value of cash holdings for firms run by female CEOs (CFOs) is 1.56 (1.47) compared to 0.94 (0.91) for firms with male CEOs (CFOs). The significant difference in the value of cash holdings may be attributed to the gender-based female executives’ traits that permeate a myriad of corporate decisions with superior outcomes that cumulatively manifest in the market assigning a higher value to cash holdings by these firms. The effect is more pronounced in firms with any of the following characteristics: financially unconstrained, cash distributing, weak governance, low institutional investors’ monitoring, and low audit quality. Adding another new dimension to the literature, we show that corporate culture is a potential determinant of the value of cash holdings. Specifically, we document that female led firms are associated with a more salubrious corporate environment manifesting in a greater value assigned to corporate cash holdings. Our results are robust to a battery of robustness tests.

We identify the effects of negative rates on bank behavior using difference-in-differences identification. First, we find that going negative can interrupt not only the pass-through from policy to deposit but also to mortgage rates. To preserve their deposit franchise, banks finance negative deposit with increased mortgage spreads, the more the bigger their market power. Second, negative rates on reserves induce banks to cut some reserves without replacement and replace others with riskier assets. Together with increased mortgage spreads, balance sheet restructuring preserves profits but risk-taking increases. Third, pass-through interruption and risk-taking can be reduced through tiered remuneration.