Knowledge that Transforms

We use a cross-section of economic survey forecasts to predict the distribution of US macro variables in real time. This generalizes the existing literature, which uses disagreement (i.e., the cross-sectional variance of survey forecasts) to predict uncertainty (i.e., the conditional variance of future macroeconomic quantities). Our results show that cross-sectional information can be helpful for distribution forecasting, but this information needs to be modeled in a statistically efficient way in order to avoid overfitting. A simple one-parameter model which exploits time variation in the cross-section of survey point forecasts is found to perform well in practice.

Using detailed data on control chains of 710 European commercial banks, we test whether the presence of some categories of controlling shareholders affects product diversification performance. We find that when banks have no controlling shareholder or have only family and state shareholders activity diversification yields diseconomies. However, as long as the control chain involves banking institutions, institutional investors, industrial companies or any other combination of these shareholder categories, banks benefit from diversification economies: they display higher profitability, lower earnings volatility and lower default risk. This is potentially because such categories of shareholders bring additional skills to manage diverse activities. A further exploration shows that such mitigating roles are greater for domestic and diversified shareholders. Our findings provide insights on why banks suffer from greater activity diversification and have several policy implications.

We examine whether corporate investment, financing, and cash policies are interdependent and follow a predictable pattern in line with the firm life-cycle. We find that investments and equity issuance decrease with firm life-cycle, while debt issuance and cash holdings increase in the introduction and growth stages and decrease in the mature and shake-out/decline stages of the firm’s life-cycle. These results are robust after using various proxies for life-cycle and controlling for firm, CEO and board level characteristics. Collectively, our results show that corporate policies follow a firm life-cycle.

This paper examines the choices of retail investors in the market for structured financial products with a focus on implicit and explicit pricing components. We evaluate more than 72,000 single stock discount certificates on a daily basis from 2004 through 2008. The certificates are quoted an average of 0.58% above their fair value before the financial crisis, increasing to 1.24% during 2008. Although credit risk explains a major part (39%) of the certificates’ overpricing, we find that issuer default risk does not have any influence on investors’ product choices. Instead, retail investors are strongly influenced by irrational factors such as issuer and product familiarity. Finally, investors are found to make poor product choices (in terms of bid/ask spreads and markups over fair value), resulting in significant losses.

This paper finds that factors determined outside of a country, at the quarterly frequency and especially after 2008, are more closely related to the global bank loans it receives. These loans are generally more stable when global banks face more competition and have a higher presence in the recipient country. We obtain our results by using bilateral lending data from 15 countries and a unique methodology to identify and compare the independent effects of external and internal factors. We identify theoretical mechanisms that can explain our empirical findings and draw more detailed inferences for competition and global bank presence by solving a simple model of global banking.

We investigate the evolution of entrepreneurial firms’ debt policies over a period of 15years after startup, considering leverage, debt specialization, debt maturity and debt granularity. Our analysis is based on a unique sample covering all non-financial Belgian firms founded between 1996 and 1998. We find that the debt policy of entrepreneurial firms is remarkably stable over time. The debt policy in the initial year of operation is a very important determinant of future debt policies, even after controlling for traditional contemporaneous determinants. The founder-CEO has an important impact on the stability of debt policies: the influence of initial debt policies on future debt policies is significantly reduced when the founder-CEO is replaced or when (s)he dies. Combined, our findings support imprinting theory.

We examine the information role of financial advisors by focusing on mergers and acquisitions in which acquiring firms hire target firms’ ex-advisors. We document that by employing targets’ ex-advisors, acquirers pay lower takeover premiums and secure a larger proportion of merger synergies. The corresponding targets exhibit lower announcement returns and are less likely to be propositioned by competing bidders. These results indicate that acquirers take advantage of value-relevant information about targets through targets’ ex-advisors, and achieve bargaining advantages in deal negotiations. In contrast, we document no discernible value effects when targets hire acquirers’ ex-advisors, suggesting that the information role of acquirers’ ex-advisors hired by targets is weaker than that of targets’ ex-advisors hired by acquirers.

We compare the market pricing of euro area government bonds and the corresponding Credit Default Swaps (CDSs). In particular, we analyse the “basis” defined as the difference between the premium on the CDS and the credit spread on the underlying bond. Our sample of weekly data covers the period from January 2007 to December 2012 and contains several episodes of sovereign market distress. Overall, we observe a complex relationship between the derivatives market and the underlying cash market characterised by sizable deviations from the no-arbitrage relationship (i.e. basis equal to zero). We show that short-selling frictions explain the persistence of positive basis deviations while funding frictions explain the persistence of negative basis deviations which are observed for countries with weak public finances. Moreover, we show that the “flight-to-quality/liquidity” phenomenon in bond markets is a key driver of the large positive basis of better rated countries.

Bank capital ratios have increased steadily since the financial crisis. For a sample of 101 large banks from advanced and emerging economies, retained earnings account for the bulk of their higher risk-weighted capital ratios, with reductions in risk weights playing a lesser role. On average, banks continued to expand their lending in real terms, though lending contracted among European banks. Lower dividend payouts and (for advanced economy banks) wider lending spreads have contributed to banks’ ability to use retained earnings to build capital. Banks that came out of the crisis with higher capital ratios and stronger profitability were able to expand lending more.