Knowledge that Transforms

Abstract Using a new database covering some 91 supervisory agencies, this paper examines how important various skilled experts are in the supervisory process and the relative usage of different kinds of such experts. We seek to explore what kind of perspective supervisors in different institutional settings may adopt: a macro-oriented perspective or a more micro-approach? The answer to this question is relevant, as there is evidence that many financial crises have been macro-induced. It is found that central banks employ more economists and fewer lawyers in their supervisory/financial stability wing than non-central bank supervisory agencies. This result would indicate that an institutional setting with direct or indirect central bank involvement is more likely to produce a macro-approach. Next, there are significant economies of scale in financial supervision, though this can be measured by several alternative variables (e.g., the relative scale of bank intermediation). Finally, there do not appear to be major economies of scope. A more complex financial system with a well-developed stock market would need both more supervisors as well as more skilled ones. JEL classification: G28, E58, O40.

Abstract Many interest rates are as volatile as exchange rates and thus represent an equally important source of risk for corporations. While this is true not only for financial institutions, but for other corporations as well, little is known about the interest rateexposure of nonfinancial firms. Consequently, this paper investigates the impact of interest rate risk on a large sample of nonfinancial corporations. It presents empirical evidence for the existence of linear and nonlinear exposures with regard to movements invarious interest rate variables. The interest rate exposure is empirically determinedbymeasures of firm liquidity, but not by financial leverage. JEL classification codes: G3, F4, F3

This study investigates if the use of derivatives by corporations is likely to affect their financing strategies. I find a strong positive relation between the minimum revenue guaranteed by hedging and investment expenditure. This result implies that hedging increases the likelihood that investments can be financed internally. I also find that firms tend to finance their investment expenditures externally rather than internally. If external capital is more costly than internal capital it would clearly be in a firm's interestto reduce its dependence on external capital. Consistent with this result, Ifind that the median firm that does not hedge finances 100% of its investment expenditures externally, while the median firm that hedges finances only 86% of investments externally. JEL classification codes: G32

Abstract 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. JEL classification codes: G21, G28

Abstract 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. JEL classification codes: E44, G14.

Abstract 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. JEL Classification codes: G10, G12, G15, G30.

Abstract 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. JEL classification code: G32

Abstract 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. JEL Classification: G32, G14 and D80.