Knowledge that Transforms

This paper investigates the short-term price behaviour of closed-end funds following eight large market-wide shocks. The findings, from a sample of 63 funds continuously traded on the London Stock Exchange, indicate that prices overreact relative to equilibrium given by net asset values. The speed of reversion in discounts following market-wide shocks is slower than that following fund-specific shocks of a similar magnitude. The post-shock persistence in discounts is related more to the ease of arbitrage rather than to liquidity, as proxied by fund size, or to the speed of recovery in the broader market. The discount decays more slowly for those funds that are difficult to arbitrage.

In this paper we focus on the assumption of a common efficient frontier when performing an efficiency study for the banking sector. The fact that environmental factors that are not appropriately controlled may easily bias efficiency estimates. First, we estimate a common cost and profit frontier. In this first stage, as an innovation to the literature, we use exogenously computed input prices rather than the normally used endogenous input prices. Second, we regress the estimated inefficiencies on a set of a bank’s strategic choices, local banking market variables, and local (regional) macro variables. For the analysis, we use a unique dataset of 401 largely independent cooperative local banks in the Netherlands for the years 1998 and 1999. Our results show that the use of exogenous input prices rather than endogenous input prices is particularly important for the cost frontier as the spread in cost inefficiencies becomes larger and more plausible. Our second stage results suggest that most of the estimated inefficiency indeed is managerial (X-) inefficiency. Environmental factors do play a role, but only to a limited extent.

In this paper we present the results of an international survey among 313 cfos on capital structure choice. We document several interesting insights on how theoretical concepts are being applied by professionals in the uk, the netherlands, germany, and france and we directly compare our results with previous findings from the us our results emphasize the presence of pecking-order behavior. At the same time this behavior is not driven by asymmetric information considerations. The static trade-off theory is confirmed by the importance of a target debt ratio in general, but also specifically by tax effects and bankruptcy costs. Overall, we find remarkably low disparities across countries, despite the presence of significant institutional differences. We find that private firms differ in many respects from publicly listed firms, e.g. Listed firms use their stock price for the timing of new issues. Finally, we do not find substantial evidence that agency problems are important in capital structure choice.

This study examines the impact of forced bank mergers on the shareholders’ wealth of Malaysian banks. Forced bank mergers, which are the result of direct government intervention in the consolidation of the banking industry, are generally rare. Unlike the findings on voluntary mergers and acquisitions, our study shows that the forced merger scheme destroys economic value in aggregate and the acquiring banks tend to gain at the expense of the target banks. Further analysis shows that the contrasting forced merger finding is linked to cronyism.

This paper captures banks’ dynamic response to depositor discipline. Recognizing that the price and quantity response of uninsured deposits in the face of deteriorating fundamentals needs to be modeled as an endogenous process, we investigate how depositor discipline constrains banks’ behavior by extracting the impact of an exogenous rise in interest rates on the quantity of uninsured deposits. We find that good banks can raise uninsured deposits by raising their price, while weak banks cannot. This suggests that depositor discipline not only raises the cost of choosing a higher level of risk but also may, at very high levels of risk, effectively constrain bank managers’ behavior.

Growth-indexed bonds have been suggested as a way of reducing the procyclicality of emerging-market countries’ fiscal policies and the likelihood of costly debt crises. Investor attitude surveys suggest that pricing difficulties are seen as a considerable obstacle. In an effort to reduce such concerns, this article presents a simple way of pricing growth-indexed bonds. As a pleasant by-product, the analysis tracks the quantitative implications of an increase in the share of growth-indexed bonds in total debt, measuring the ensuing decline in the probability of default and the reduction in the spreads at which standard bonds can be issued.

This paper develops a banking-sector framework with heterogeneous loan monitoring costs. Banks are exposed to the moral hazard behavior of borrowers and endogenously choose whether to monitor their loans to eliminate this exposure. After analyzing an unregulated banking system, we examine several cases in which regulatory capital requirements bind the notional loan supplies of various subsets of banks. To gauge the impact of capital requirements, we define loan ‘quality’ in terms of either the ratio of monitored to total loans or the ratio of monitoring banks to total bank population. Under the assumption of a specific cross-sectional distribution of banks, our simulations show that the imposition of binding capital requirements on a previously unregulated banking system unambiguously increases the market loan rate and reduces aggregate lending, but has an ambiguous effect on loan ‘quality’. Nevertheless, once capital requirements are in place, the simulations indicate that regulators can contribute to higher overall loan ‘quality’ by toughening capital requirements.

Traditional data sources do not have institutional holding data on a daily basis. Because of this, most prior empirical studies of institutional herding have focused on quarterly or annual data. The problem, however, with using quarterly or annual data on institutional holdings is that these data may not reveal institutional herding if it occurs over a shorter time interval. For this study, we make use of data from the Taiwan Stock Exchange (TSE). Unlike traditional data sources, the TSE provides daily institutional holdings information. The use of this detailed data allows us to make more interesting analysis and inferences. In this study, we examine the relationship between institutional ownership changes and returns localized around analysts’ earnings forecast release events. Analysis of institutional ownership and return data around the earnings release event allows us to investigate institutional herding and feedback behavior in a different level. Our major results are as follows: (1) there exists a relation between company specific attributes and institutional herding, (2) observed changes in institutional ownership and contemporaneous return are mainly the results of inter-day price impact of herding, (3) institutional investors show evidence of being informed traders in buying but not selling.

The present paper investigates the efficiency of the Polish banking industry between 1997 and 2001. Our preferred methodology is Data Envelopment Analysis, which allows us to distinguish between cost, allocative, technical, pure technical, and scale efficiency. Additionally, we perform a number of tests to investigate whether domestic and foreign banks come from the same population. Finally, we attempt to shed light on the determinants of efficiency. Our results indicate that bank efficiency has not improved during the years analyzed. Whereas greenfield banks have achieved higher levels of efficiency than domestic banks, foreign banks that acquired domestic institutions have not succeeded in enhancing their efficiency.

This paper conducts an event study analysis of the impact of operational loss events on the market values of banks and insurance companies, using the OpVar database. We focus on financial institutions because of the increased market and regulatory scrutiny of operational losses in these industries. The analysis covers all publicly reported banking and insurance operational risk events affecting publicly traded US institutions from 1978 to 2003 that caused operational losses of at least $10 million – a total of 403 bank events and 89 insurance company events. The results reveal a strong, statistically significant negative stock price reaction to announcements of operational loss events. On average, the market value response is larger for insurers than for banks. Moreover, the market value loss significantly exceeds the amount of the operational loss reported, implying that such losses convey adverse implications about future cash flows. Losses are proportionately larger for institutions with higher Tobin’s Q ratios, implying that operational loss events are more costly in market value terms for firms with strong growth prospects.