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on Corporate Finance |
| By: | Albanesi, Stefania; De Giorgi, Giacomo; Nosal, Jaromir |
| Abstract: | A broadly accepted view contends that the 2007-09 financial crisis in the U.S. was caused by an expansion in the supply of credit to subprime borrowers during the 2001- 2006 credit boom, leading to the spike in defaults and foreclosures that sparked the crisis. We use a large administrative panel of credit file data to examine the evolution of household debt and defaults between 1999 and 2013. Our findings suggest an alternative narrative that challenges the large role of subprime credit in the crisis. We show that credit growth between 2001 and 2007 was concentrated in the prime segment, and debt to high risk borrowers was virtually constant for all debt categories during this period. The rise in mortgage defaults during the crisis was concentrated in the middle of the credit score distribution, and mostly attributable to real estate investors. We argue that previous analyses confounded life cycle debt demand of borrowers who were young at the start of the boom with an expansion in credit supply over that period. Moreover, a positive correlation between the concentration of subprime borrowers and the severity of the 2007-09 recession found in previous research may be driven by the high prevalence of young, low education, minority individuals in zip codes with large subprime population. |
| Keywords: | subprime debt; credit boom; housing crisis; financial crisis |
| JEL: | D14 E01 E21 G01 G1 G18 G20 G21 |
| Date: | 2017–08 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:12230&r=cfn |
| By: | João F. Gomes; Marco Grotteria; Jessica A. Wachter |
| Abstract: | A growing literature shows that credit indicators forecast aggregate real outcomes. While researchers have proposed various explanations, the economic mechanism behind these results remains an open question. In this paper, we show that a simple, frictionless, model explains empirical findings commonly attributed to credit cycles. Our key assumption is that firms have heterogeneous exposures to underlying economy-wide shocks. This leads to endogenous dispersion in credit quality that varies over time and predicts future excess returns and real outcomes. |
| JEL: | E32 G12 G32 |
| Date: | 2017–08 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:23704&r=cfn |
| By: | Hennecke, Peter; Neuberger, Doris; Ulbricht, Dirk |
| Abstract: | Guarantee banks backed by the state aim to close the gap in the financing of small and medium-sized enterprises or start-ups caused by lacking collateral or equity and high information asymmetry. The present study quantifies the economic and fiscal net benefits of guarantee banks in the new federal states of Germany, where economic development is still lacking behind those in the old federal states. Using data of five guarantee banks and results from enterprise and bank surveys, we measure finance and project additionality of loan and equity guarantees provided over the period 1991-2015. Cost-benefit analyses show that the economic benefits of the guarantee banks are considerable because of increased production and employment, while the economic costs are negligible. The real GDP increases by about 1.2 euro per euro guarantee each year. In the years 2008 to 2014, there were net fiscal gains of several hundred million euros in the respective federal states. |
| Keywords: | small business finance,loan guarantee schemes,collateral,credit rationing,public guarantees,cost-benefit analysis |
| JEL: | D61 E17 G21 G28 G38 H81 O16 |
| Date: | 2017 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:roswps:152&r=cfn |
| By: | Leif Andersen; Darrell Duffie; Yang Song |
| Abstract: | We demonstrate that the funding value adjustments (FVAs) of major dealers are debt-overhang costs to their shareholders. In order to maximize shareholder value, dealer quotations therefore adjust for FVAs. Contrary to current valuation practice, FVAs are not themselves components of the market values of the positions being financed. The current dealer practice of reducing the computed market values of their positions by FVAs does, however, align incentives between trading desks and shareholders. While others have already suggested that the market values of swaps do not actually include an FVA component, this is the first paper to identify and characterize the true nature of FVA with a structural model of a dealer's balance sheet. We also establish a pecking order for preferred asset financing strategies and provide a new interpretation of the standard debit value adjustment (DVA). |
| JEL: | G12 G23 G24 G32 |
| Date: | 2017–08 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:23680&r=cfn |
| By: | Kölling, Arnd |
| Abstract: | This paper analyzes the differences in labor demand and labor turnover between family and nonfamily firms. The majority of firms in modern economies and, therefore, also in Germany are family controlled. These firms seem to have better employment performance than non-family controlled companies. Therefore, this study applies a treatment model for panel data using family firms as a treatment indicator. Moreover, a propensity score estimation is introduced to the model to control for selectivity. The results of the estimations indicate that labor demand is possibly larger because of family members joining the firms as extra employees. Moreover, labor turnover is lower, thus supporting the assumption that family firms offer some kind of implicit contracts to their employees and are more loss averse than other establishments. However, evidence of these results for establishments with 20 or more employees is generally weaker, indicating that the differences between both types of firms decrease with firm size. |
| Keywords: | Labor Demand,Family Firms,Firm Size,Treatment Model,Panel Data |
| JEL: | J23 D22 G32 C21 C23 |
| Date: | 2017 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:imbwps:92&r=cfn |
| By: | Tracey, Belinda (Bank of England); Schnittker, Christian (Bank of England); Sowerbutts, Rhiannon (Bank of England) |
| Abstract: | We use provisions for misconduct issues as an instrumental variable to identify the causal effect of bank capital on risk-taking. Misconduct provisions can adversely affect bank capital via their negative impact on retained earnings, and we find evidence of this for UK banks. We also find strong support for our assumption that misconduct provisions are otherwise unrelated to risk-taking. We facilitate our analysis with a new UK panel dataset of bank-level information including misconduct provisions, merged with loan-level data on all regulated UK mortgages. Our main finding is that a negative bank capital shock leads to an increase in risk-taking. |
| Keywords: | Banking; risk-taking; capital shocks; 2SLS |
| JEL: | G21 G28 |
| Date: | 2017–08–18 |
| URL: | http://d.repec.org/n?u=RePEc:boe:boeewp:0671&r=cfn |
| By: | Heynderickx, Wouter (European Commission – JRC); Cariboni, Jessica (European Commission – JRC); Petracco Giudici, Marco (European Commission – JRC) |
| Abstract: | After the financial crisis financial regulators increased banks’ capital adequacy ratios (CET1/RWA) requirements in order to make the financial system more resilient. The new capital requirements could be achieved through different channels, some of which might affect bank’s ability to finance the real economy. We perform a decomposition of the changes in capital adequacy ratios into seven factors to check whether banks adjusted their capital ratio by increasing equity, by reducing loans or securities, or by reducing the riskiness of their assets’ portfolio. We employ consolidated balance sheet data of 257 European banking groups including M&A operations and state aid and covering the 2005-2014 period, and find that the main driver alters over time. Our decomposition shows that during the financial crisis the augmentation was mainly driven by new share issuances and government recapitalizations, while during the sovereign crisis a reduction in the RWA-density (RWA/TA) is found. In the post crisis period, we observe a large income effect and a reduction in total assets. Decompositions are also performed at country and major banking group level, showing high heterogeneity in responses to achieve the new requirements. |
| Keywords: | banks; capital ratio; decomposition; regulation; Basel III |
| JEL: | G21 G28 |
| Date: | 2016–12 |
| URL: | http://d.repec.org/n?u=RePEc:jrs:wpaper:201601&r=cfn |
| By: | Qiang Ji (Center for Energy and Environmental Policy research, Institutes of Science and Development, Chinese Academy of Sciences and School of Public Policy and Management, University of Chinese Academy of Sciences, Beijing, China); Bing-Yue Liu (Center for Energy and Environmental Policy research, Institutes of Science and Development, Chinese Academy of Sciences and Department of Statistics and Finance, University of Science and Technology of China, Hefei, China); Juncal Cunado (University of Navarra, School of Economics, Edificio Amigos, E-31080 Pamplona, Spain); Rangan Gupta (Department of Economics, University of Pretoria, Pretoria, South Africa) |
| Abstract: | This paper analyses the risk spillover effect between the US stock market and the remaining G7 stock markets by measuring the conditional Value-at-Risk (CoVaR) using time-varying copula models with Markov switching and data that covers more than 100 years. The main results suggest that the dependence structure varies with time and has distinct high and low dependence regimes. Our findings verify the existence of risk spillover between the US stock market and the remaining G7 stock markets. Furthermore, the results imply the following: 1) abnormal spikes of dynamic CoVaR were induced by well-known historical economic shocks; 2) The value of upside risk spillover is significantly larger than the downside risk spillover and 3) The magnitudes of risk spillover from the remaining G7 countries to the US are significantly larger than that from the US to these countries. |
| Keywords: | Time-varying copula, Markov switching, CoVaR, risk spillover, G7 stock markets |
| JEL: | C21 G32 G38 |
| Date: | 2017–08 |
| URL: | http://d.repec.org/n?u=RePEc:pre:wpaper:201759&r=cfn |
| By: | Berlin, Mitchell (Federal Reserve Bank of Philadelphia); Nini, Gregory P. (LeBow College of Business, Drexel University;); Yu, Edison (Federal Reserve Bank of Philadelphia) |
| Abstract: | Corporate loan contracts frequently concentrate control rights with a subset of lenders. In a large fraction of leveraged loans, which typically include a revolving line of credit and a term loan, the revolving lenders have the exclusive right and ability to monitor and renegotiate the financial covenants in the governing credit agreements. Concentration is more common in loans that include nonbank institutional lenders and in loans originated subsequent to the financial crisis, when recognition of bargaining frictions increased. We conclude that concentrated control rights maintain the benefits of lender monitoring and minimize the costs of renegotiation associated with larger and more diverse lending syndicates. |
| Keywords: | corporate loans; credit agreements; line of credit |
| Date: | 2017–07–31 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedpwp:17-22&r=cfn |