Finance and Insurance Seminar SS 2017
Tuesday, 12:15-13:30 in the Faculty Lounge, Juridicum, Adenauerallee 24-42, 53113 Bonn
April 18, 2017
Stefan Zeume, University of Michigan, Ross School of Business
"The Value of Offshore Secrets – Evidence from the Panama Papers" (joint with James O'Donovan and Hannes F. Wagner)
We use the data leak of the Panama Papers on April 3, 2016 to study whether and how the use of secret offshore vehicles affects firm value around the world. The data provide insights into the operations of more than 214,000 offshore vehicles incorporated in tax havens by Panama-based law firm Mossack Fonseca. We find that the data leak erases US$135 billion in market capitalization among 397 public firms that we trace as users of offshore vehicles exposed in the Panama Papers. Firm value declines only when offshore activities are previously secret. In addition, we show that the leak reduces the net benefits of using secret offshore vehicles to violate anti-bribery regulations and evade taxes. Taken together, firms use secret offshore vehicles for value-enhancing but potentially illegal activities that go beyond tax avoidance. Offshore intermediaries facilitate such activities.
April 25, 2017
Vasso Ioannidou, Lancaster University
"Do central banks try to avoid losses?" (joint with Igor Goncharov and Martin Schmalz)
We document that central banks are significantly more likely to report slightly positive profits than slightly negative profits. The discontinuity in the profit distribution is (i) more pronounced amid greater political or public pressure, the public’s receptiveness to more extreme political views, and agency frictions arising from governor career concerns, (ii) absent when no such factors are present, and (iii) correlated with more lenient monetary policy inputs and greater inflation. These findings indicate that balance sheet considerations, while absent from standard theoretical models of central banking, are both present and effective in practice. These facts inform a theoretical debate about monetary stability and the effectiveness and riskiness of non-traditional central banking.
May 16, 2017
Benjamin Guin, Bank of England
"Deposit Withdrawals from Distressed Commercial Banks:The Importance of Switching Costs"
We study retail deposit withdrawals from large European commercial banks which incurred substantial investment losses in the wake of the U.S. subprime crisis. We first show that the propensity of households to withdraw deposits increases with the magnitude of bank distress. This withdrawal risk is, however, substantially mitigated by client-level switching costs that arise from tight client relationship with a distressed bank or limited access to branches of non-distressed banks. Our findings provide empirical support to the Basel III liquidity regulations which emphasize the role of well-established client relationships for the stability of bank funding.
May 18, 2017 (Thursday, 16:15-17:15, Faculty Lounge)
Dirk Jenter, London School of Economics
"Good and Bad CEOs" (joint with Egor Matveyev and Lukas Roth)
This paper analyzes changes in shareholder value and firm performance caused by deaths of incumbent CEOs. We find that CEOs are an important determinant of shareholder value for many firms. The value effects of CEO deaths are heterogeneous. Most sudden deaths, and especially sudden deaths of young and short-tenured CEOs, cause large value losses. Other CEO deaths – non-sudden deaths, and sudden deaths of old and long-tenured CEOs – are on average associated with large value gains. The evidence suggests that many CEO-firm matches generate large surpluses that benefit shareholders. Many other CEOs, however, are either not the optimal match or overpaid.
May 23, 2017
Florian Heider, European Central Bank
"Optimal Margins and Equilibrium Prices" (with Bruno Biais and Marie Hoerova)
We study the interaction between contracting and equilibrium pricing when risk-averse hedgers purchase insurance from risk-neutral investors subject to moral hazard. Moral hazard limits risk-sharing. In the individually optimal contract, margins are called (after bad news) to improve risk-sharing. But margin calls depress the price of investors' assets, affecting other investors negatively. Because of this fire-sale externality, there is too much use of margins in the market equilibrium compared to the utilitarian optimum. Moreover, equilibrium multiplicity can arise: In a pessimistic equilibrium, hedgers who fear low prices request high margins to obtain more insurance. Large margin calls trigger large price drops, confirming initial pessimistic expectations. Finally, moral hazard generates endogenous market incompleteness, raises risk premia, and induces contagion between asset classes.
May 30, 2017
Stefan Bender, Bundesbank
"Gateway to Treasures of Micro Data on the German Financial System" (with Judith Flory and Daniel Werner)
The Deutsche Bundesbank collects monetary, financial and external sector statistical data, comprehensive sets of indicators and seasonally adjusted business statistics. Aggregated data which are relevant for macroeconomic analysis are published in its macroeconomic time series databases. The Bundesbank is one of the largest data producers in Germany and its data of high quality. This applies also to its micro data - quality-tested administrative data covering the fields of banks, securities, enterprises and household finance. For external researchers, the Bundesbank provides free of charge access to its micro data for research purposes. Due to legal requirements and in order to meet data protection requirements, individual data can be made available only under certain restrictions. Therefore, the Bundesbank has established its Research Data and Service Centre (RDSC) in order to provide researchers access to the Bundesbank’s micro data in the context of independent scientific research projects.
Bundesbank’s micro data cover the fields of
-banks (like BISTA: monthly balance sheet statistics, external position of banks, quarterly borrowers statistics, or MIR: MFI interest rate statistics),
-securities (like securities holdings statistics)
-enterprises (like MiDi: Microdatabase Direct Investment, or SITS: Statistics on International Trade in Services, or Ustan: corporate balance sheets), and
-household finance (PHF: Panel on Household Finances).
The Centre grants access to most of the data during research visits at the Bundesbank in Frankfurt (Germany), where visiting researchers have the opportunity to view and analyse these data during research projects in a secure environment. Only anonymized output is leaving the RDSC. RDSC staff members ensure that the micro data provided are documented in detail and archived. In addition, the RDSC conducts supplementary methodological and descriptive research based on the data sets created, and it collaborates with researchers within and outside the Bundesbank.
June 13, 2017
Sebastian Gryglewicz, Erasmus University Rotterdam
"Growth Options, Incentives, and Pay-for-Performance: Theory and Evidence" (with Barney Hartman-Glaser and Geoffery Zheng)
When firm value is non-linear in manager effort, pay-for-performance, measured as the sensitivity of manager compensation to firm value, is not a sufficient statistic for the strength of managerial incentives. To demonstrate this effect, we characterize the optimal contract between an investor and a risk-averse manager in the presence of a lumpy investment option. In our model, increasing the size of the growth option can decrease pay-performance sensitivity despite always increasing managerial effort and incentives. Low pay-performance sensitivity is consistent with higher effort and incentives because increasing the size of the growth opportunity increases the sensitivity of firm value to managerial effort. We document new empirical evidence consistent with our model. In a within firm analysis, a one standard deviation increase in Market-to-Book, a proxy for the presence of growth options, is associated with a roughly 6.5% decrease in Jensen's (1990) pay-performance sensitivity, as measured by dollar changes in manager wealth to dollar changes in firm value.
June 20, 2017
Neeltje van Horen, Bank of England
“The invisible hand of the government: Moral suasion during the European sovereign debt crisis” (with Steven Ongena and Alexander Popov)
Using proprietary data on banks’ monthly securities holdings, we show that during the European sovereign debt crisis, domestic banks in fiscally stressed countries were considerably more likely than foreign banks to increase their holdings of domestic sovereign bonds during months when the government needed to roll over a relatively large amount of maturing debt. This result is stronger for state-owned and supported banks, and it cannot be explained by concurrent factors such as risk shifting, carry trading, or regulatory compliance. We also find evidence that domestic banks reduced the supply of household credit following months with high government refinancing need.
Juli 4, 2017
Raphael Flore, Uni Köln
"Maturity Transformations in Intermediation Chains"
Maturity transformations are a critical aspect of financial intermediation, which can be performed either in one step (if, for instance, long-term loans are financed by deposits) or in more than one step (if, for instance, securities with long duration are financed by commercial papers with intermediate duration, which are held by financial firms that have deposit-like liabilities). This paper introduces a model that allows for an analysis of the benefits and problems of such stepwise transformations of maturities. On the one hand, a stepwise transformation reduces inefficient liquidations of the long-term, illiquid assets in case of temporary shocks, since their funding cannot be quickly withdrawn. On the other hand, if the future performance of the assets becomes relatively risky, the providers of the funding with intermediate duration become afraid of facing a run on their short-term debt in the future and, in order to avoid the risk of such a run, they might prematurely stop to roll over the funding they provide. The results of the paper help to understand characteristics of the Financial Crisis 07/08 and they have implications for the regulation of maturity transformations.
Juli 11, 2017
Deyan Radev, Uni Frankfurt
"How Bank Resolution Procedures Affect Systemic Risk" (with Thorsten Beck and Isabel Schnabel)
In this paper, we analyze the effect of bank resolution on the systemic risk of 2257 banks, based on hand-collected database of resolution reforms from 2000 to 2015 in 22 member countries of the Financial Stability Board. We focus on a number of events during the global and the sovereign debt crises: the Lehman’ default, the first Greek bailout, Draghi’s “Whatever it takes” announcement and Cyprus’s bail-in. We document a rise in the reform activity after the Lehman Brothers’ collapse in almost all countries in our sample, however, codified bail-in practices appear to be a relatively late phenomenon. Our results suggest that a better resolution regime reduces the systemic risk contributions (measured by ΔCoVaR), especially of highly levered banks. However, the effect is not homogenous: some subcategories of our resolution index tend to increase systemic risk during certain events. The study adds to the policy debate on improving the global bank resolution framework and the resilience of the financial system during crises.
Juli 18, 2017
Katja Mann, BGSE
" Demography, Capital Flows and International Portfolio Choice over the Life-cycle (with Margaret Davenport)"
In an aging world, how does a country's demographic structure impact external positions in safe and risky assets and their respective prices? We answer these questions combining endogenous portfolio choice over the life-cycle with a two-region, general equilibrium model. We show that when one region is aging faster than the other, its demand for both safe and risky assets increases, whereas a greater portfolio share is allocated to safe assets. Absent perfectly elastic supply, this results in a change in autarky rates and, in an open economy, in international asset trades. Calibrating the model to the U.S. and the EU for 1990 to 2095, a negative net external position in safe assets and a positive net external position in risky assets emerges in the U.S. vis-à-vis the EU. We predict these bilateral positions to persist throughout the demographic transition. The model allows us to quantitatively assess the impact of demographic change on trade in different types of assets, whereas previously, the focus has been on aggregate capital flows.