Finance and Insurance Seminar SS 2015

Jeweils Donnerstags, 12.00-13.00 Uhr in der Faculty Lounge, Juridicum, Adenauerallee 24-42, 53113 Bonn

16. April 2015

Lyndon Moore, University of Melbourne

“The vicar, the widow, or the gentleman: Who gets allocated IPO shares?”

Abstract: Rock’s (1986) seminal paper derives that ‘informed’ investors will be allocated more shares in good (more underpriced) IPOs rather than bad IPOs, whereas ‘uninformed’ investors receive more shares in bad IPOs. Due to data limitations the literature typically characterizes institutional investors as ‘informed’ and retail investors as ‘uninformed’. We examine 554 IPOs in the U.K. from 1891 to 1911. We have data on the occupation and geographical location of all allocated shareholders for 141 of these IPOs. Shareholders who are both occupationally and geographically close to the firm receive larger allocations of good IPOs, and avoid bad IPOs. In contrast institutions receive smaller allocations of good IPOs.



Daniel Streitz, Uni Bonn

“Real Effects of Securitization"

Abstract: We assess the impact of securitization on corporate credit supply and real effects such as investment, sales, and employment. Exploiting the staggered entry of banks in the CLO markets, we document that firms are able to borrow larger amounts after the relationship bank becomes securitization active. This effect is concentrated in the set of BB/B-rated firms, i.e., firms whose loans are purchased by CLO vehicles. The effect of securitization on investment, sales, and employment is limited. This is because firms predominantly use the additional credit supply to increase leverage, decrease book equity, and increase payout to shareholders. Overall, our results suggest that securitization mainly impacts financing decisions, without a major impact on the real activity. 


Stephan Luck, University of Bonn: „Liquidity, equity, and runs”.

Abstract: What is the optimal leverage, and what is the optimal mix of liquid and illiquid assets for financial institutions? I discuss a model in which banks finance risky and illiquid assets by issuing short-term debt and equity. The maturity mismatch may give rise to the risk of a bank run. Unlike to previous models, fire-sale prices, leverage, investment in liquid assets as well as the probability of a run, are all endogenous objects. I show that it is never optimal for banks to rely on market liquidity, as equilibrium fire-sale prices will always be such that panic-based runs will occur with a positive probability. I then show that holding liquid and safe assets in order to prevent runs can only be a local, but never a global optimum. The only global optimum is to choose sufficiently low leverage so that short-term claims become information-insensitive and runs are excluded altogether. Implications for current bank regulation are discussed.


Katharina Knoll, Uni Bonn: "Predicting House Price Crashes. House Price Cycles in Historical Context, 1870-2013".

Abstract: The global financial crisis has focused new attention on housing markets. This paper studies house price cycles in 16 advanced economies in the long-run. I present new evidence that the anatomy of house price cycles has changed over the years 1870‒2013. Today's house price upswings and downturns are not only longer than they were a hundred years ago but have also become more pronounced. The historical record also shows that booms and crashes in house prices are nothing new. Yet, the frequency of extreme events appears to have increased over the past century and a half. Focusing on the predictability of house price crashes, I demonstrate that price-to-rent ratios historically have been useful predictors of major price corrections.


Christian Andres, WHU, Otto Beisheim School of Management: "Do What You Did Four Quarters Ago: Trends and Implications of Quarterly Dividends".

Abstract: Analyzing the inter-temporal structure of all quarterly dividend announcements available in CRSP, we find that firms increasingly announce dividend increases in persistent 4-quarter cycles. In recent years, nearly 60% of all dividend increases are announced exactly every four quarters. This compares to less than 30% in the 1970s. We provide evidence that this structure is incorporated in market participants’ expectations about future dividend announcements.

Accordingly, announcement returns are lower (higher) for dividend increases that follow (deviate from) this structure. Investigating firm characteristics, we find valuation, earnings stability, and size to be positively related to the propensity to adopt 4-quarter cycles. The widespread adoption of persistent 4-quarter cycles in dividend increases helps to explain two phenomena described in the previous literature, (1) the declining information content of dividend announcements (Amihud and Li, 2006), and (2) the time trend in dividend smoothing (Leary and Michaely, 2011).


Jasmin Gider, University of Bonn, (joint with Mintra Dwarkasing and Narly Dwarkasing): How Does Tax Avoidance Affect Corporate Innovation?

We investigate the impact of tax avoidance on corporate innovation. On the one hand, tax avoidance may be conducive to innovation by increasing internal funds and thereby alleviating financing constraints. On the other hand, tax avoidance may hamper innovation due to decreasing corporate transparency and agency conflicts. Exploiting variation in tax avoidance introduced by the so-called Check-the-Box regulations in 1997 in the U.S., we document a negative effect of tax avoidance on innovation, which is statistically and economically significant. This negative impact is more pronounced for firms with weak governance but less pronounced for firms that are more financially constrained. Our results suggest a novel channel through which tax avoidance may be costly for shareholders and society.



Dirk Bezemer, University of Groningen: "A Global House Of Debt Effect? Mortgages and Post-Crisis Recessions In Fifty Economies".

The composition of private debt matters to the severity of post-2007 recessions. Using new data on fourtypes of bank credit over 2000-2012 for 51 economies in OLS and Bayesian averaging models, we find that changes in the share of household mortgage credit in total credit before the crisis are significantly associated with recession depth and growth loss after the 2007 crisis. This finding is robust to a wide range of control variables and to the different responses across advanced and emerging economies. The evidence also suggests that mortgage growth combined with increasing bank leverage was particularly damaging to output growth. We discuss policy implications and future research.



Nataliya Klimenko, Universität Zürich, "Bank Capital and Aggregate Credit" (co-authored with Sebastian Pfeil and Jean-Charles Rochet).

This paper seeks to explain the role of bank capital in fluctuations of lending and output. We build a continuous time model of an economy in which commercial banks finance their loans by deposits and equity, while facing issuance costs when they raise new equity. The dynamics of the loan rate and the volume of lending in the economy are driven by aggregate bank capitalization. The model has a unique Markovian competitive equilibrium that can be solved in closed form. We use our model to study the effect of minimum capital requirements and find that, in the short run, a higher minimum capital ratio  simultaneously induces banks to hold more capital and reduces aggregate credit,  which creates a trade-off between financial stability and output. However, in the long run, this trade-off disappears: there is a range of regulatory capital ratios that yield both financial stability and no reductions in lending. However, excessively high  capital requirements lead to serious credit crunches.


Christian Westheide (Uni Mannheim, CFS and Research Center SAFE):  "The Effects of Post-Trade Transparency in Equity Markets: Evidence from MiFID Large Trade Disclosure Rules" (joint with Stefan Scharnowski).

Abstract: Exploiting annual stock-specific adjustments of large trade reporting delays permissible under MiFID, we find that post-trade transparency in equity markets matters. In particular, an increase in transparency leads to a decrease in return volatility and a decrease in transparency leads to a decrease in price efficiency. These results run counter to earlier studies that, likely due to limited amounts of data and methodological shortcomings induced by their institutional setting, were not able to identify significant effects of similar rules. Additionally, we also analyze whether investors adjust their block trading to the changes in reporting rules.