Transparency regulation aims at reducing financial fragility by strengthening market discipline. There are, however, two elementary properties of banking that may render such regulation inefficient at best and detrimental at worst. First, an extensive financial safety net may eliminate the disciplinary effect of transparency regulation. Second, achieving transparency is costly for banks, as it dilutes their charter values, and hence also reduces their private costs of risk-taking. We consider both the direct costs of complying with disclosure requirements and the indirect transparency costs stemming from imperfect property rights governing information and particularly infer the conditions under which transparency regulation cannot reduce financial fragility.
This paper delineates the simultaneous impact of non-anticipated information on mean and variance of the intraday return process by including appropriate variables accounting for the news flow into both the mean and the variance function. This allows us to differentiate between the consistent price reaction to surprising news and the traders' uncertainty about the precise price impact of this information. Focussing on the US employment report, we find that headline information is almost instantaneously incorporated into T-bond futures prices. Nevertheless, large surprises, and ‘bad’ news in particular, create considerable uncertainty. In contrast, if surprises in related headlines cross-validate each other, less room for differences of opinion is left and hence volatility is decreased.
The positive relation of returns with Book-to-Market ratio ( BE / ME ) and their negative relation withMarket Value( MVE ) remains strong under a general stochastic discount function (SDF) that does not depend on a specific asset pricing model and avoids potentially serious simultaneity biases inherent in the Fama and French three-factor model. However, we find that SDF s that include the equivalent of the HML portfolio do not span all asset sub-spaces, even with additional conditioning information. Finally, macro and financial variables we introduce to the pricing functions do not offer an alternative explanation of the BE / ME effect.
In this study we investigate the role of leverage in disciplining overinvestment problems. We measure the relationships between leverage, Tobin's q and corporate governance characteristics for Dutch listed firms. Besides, our empirical analysis tests for determinants of leverage from tax and bankruptcy theories. Representing growth opportunities, q is expected to be an agency-based determinant of leverage. Simultaneously, q represents firm value, which is determined by leverage and governance structures. We tes a structural equations model in which we deal with this simultaneous nature of the relation between leverage and q . Our results indicate that Dutch managers avoid the disciplining role of debt, when they are most likely to overinvest. Leverage is mainly determined by tax advantages and bankruptcy costs. In addition, we test the impact of leverage on excess investment.We do not find a difference in the influence of leverage on investment between potential overinvestors and other firms. This confirms that the disciplinary role of leverage in Dutch firms is absent.
This paper examines seasoned equity offerings in France. Even though a rights offering is the primary flotation method, French companies are increasingly using the relatively expensive public offering method. We show that the market reaction to the announcement of seasoned equity issues is significantly negative for rights issues and insignificantly negative for public offerings. Our results suggest that the adverse selection effect is greater for rights issues than for public offerings, due to stronger underwriter certification for the public offerings. We find that the share price effect is positively related to blockholders take-up renouncements for firms with prior concentrated ownership. For these firms, the favourable ownership dispersion effect offsets the adverse selection effect.
Franklin Allen, Hans Gersbach, Jan-Pieter Krahnen, Anthony M. Santomero; Competition Among Banks: Introduction and Conference Overview, European Finance Re
Bank loans are more available and cheaper for new and small businesses in the U.S. in concentrated banking areas than in competitive banking areas. We explain this anomaly by analyzing banks' decisions to screen projects and their competition in loan provisions. It is shown that, by exacerbating the winner's curse, an increase in the number of banks can reduce banks' screening probability by so much that the number of banks that actively compete in loan provisions falls and the expected loan rate rises. This is the case when the screening cost is low, which induces all active bidders to be informed. The opposite outcome occurs when the screening cost is high, in which case there are sufficiently many uninformed banks in bidding to attenuate the winner's curse. We also examine the social optimum.
1. I am grateful for this opportunity to make some policy remarks concerning the very title of this conference, namely among banks: good or bad? This is the case not only because it is always very difficult, at least for me, to invent a title for my remarks, but also because the question is highly stimulating, and the answer - as your discussion today has illustrated - is not at all obvious. The attitudes towards the market economy are not unambiguous. As a matter of fact, no market participant really likes competition. Businessmen tend to praise the competition they practise vis-a-vis other firms, but they usually blame competition when they suffer as a result of it. The ethical attitude of a businessman, like that of a shopkeeper, is very often not to compete, and not to make life difficult for other people in the same profession. Competition ranks even lower in the financial businessmen's favours. This is so because banking activity is closely related to a sense of security, especially security concerning the future. Also, according to many people, the instability that, at least at the level of the individual firm, is inevitably brought about by a competitive system is really not congenial to banking. The Governor of the Bank of Italy in the 1950s - a person who is still held in high regard, years after his death - maintained the view that competition among banks was something to be feared as a potential source of serious disruptions. I belong to a generation which has seen a complete change of attitudes. 2. My remarks will refer to this change, touching on four points. First, I will elaborate on the journey from what I call the old to the new approach, namely from the approach prevailing when I was a student and during my early years as a central banker to that which has been developing subsequently and towards which I, to some extent, have contributed. Second, I will discuss how far this new approach can go. Third, I will bring into the picture aspects relating to the international dimension. Finally, I will address the specific aspects of the euro area dimension. Professor Padoa-Schioppa, a member of the Executive Board of the European Central Bank, presented these remarks as the keynote speech during the conference dinner.
This paper studies financial intermediation in a general equilibrium overlapping generations model. Indivisible investment projects combine with informational imperfections to create a (hidden action) moral hazard problem and introduce a role for third-party monitoring. Agency costs at the intermediary level are also considered. Under some conditions, monitors can be viewed as banks facing a non-trivial portfolio diversification problem. Equilibria are derived in which a large nationwide bank coexists with a number of community-regional banks, a structure of strong empirical relevance. Policies such as a mandatory reserve requirement are shown to have substantial effects on the levels of investment in the economy.