Finance and Insurance Seminar WS 2014/15

Jeweils Donnerstags, 13.00-14.00 Uhr in der Faculty Lounge, Juridicum, Adenauerallee 24-42, 53113 Bonn


Michael Böhm, Friedrich-Wilhelms-Universität Bonn, “Since you’re so rich, you must be really smart”: Talent and the Finance Wage Premium. (with Daniel Metzger and Per Strömberg, Stockholm School of Economics)

Abstract: There has been an extraordinary increasing in the relative pay and the dispersion of pay in the financial sector over the last decades. It has been suggested that a reason for this is a strongly increasing demand for skilled workers in finance. This paper exploits detailed talent measures from Swedish administrative data in order to examine the implications of the increasing skill demand hypothesis on the allocation of talent into the financial sector. We find no evidence that the selection of talent into finance increased or improved, neither on average nor at the top of the talent distribution. This alleviates concern about a “brain drain” into finance at the expense of other sectors, but it also suggests that rents in finance are high, increasing, and largely unexplained.


Matthias Fahn, LMU München, “Capital Structure Choice and the Cost of Enforcing Contracts − Theory and Evidence” (joint with Valeria Merlo, Georg Wamser).

Abstract: Existing theories of a firm's optimal capital structure seem to fail in explaining why many healthy and profitable firms rely heavily on equity financing, even though benefits associated with debt (like tax shields) appear to be high and the bankruptcy risk low. New approaches to understand a firm's capital structure choice are hence needed and should also consider the effect of a firm's financing structure on its relationship with non-financial stakeholders like employees or suppliers.

In this paper, we analyze the interaction between the type of contracts a firm uses to deal with its suppliers, and its optimal financing structure. We first develop a theoretical model where a firm needs an intermediate good from a supplier. This intermediate good can be of high or low quality. While court-enforceable contracts can be used to enforce high quality, their use is costly. If these costs are too high, relational contracts – self-enforcing informal arrangements that can be sustained in long-term relationships – become important. Relational contracts, on the other hand, are only sustainable if debt is not too high. The reason is that a firm's commitment in relational contracts is determined by its future profits in the cooperative relationship, and the need to repay debt reduces future profits. We therefore derive the prediction that higher costs of enforcing formal contracts should be associated with firms having less leverage, on average.

We test this prediction by utilizing two datasets. First, the Microdatabase Directinvestment (MiDi) provided by Deutsche Bundesbank, which records balance-sheet data about the universe of German foreign affiliates (including detailed information on external debt, internal debt and equity capital). Second, the World Bank's Doing Business Database, which contains information on the average costs of enforcing (formal) contracts between a firm and a supplier of an intermediate good. Using a panel data model for fractional response variables, we provide robust evidence that an increase in the costs of enforcing contracts is associated with more equity financing.


Martin Kanz, Worldbank, (joint with Xavier Giné), "The Economic Effects of a Borrower Bailout: Evidence from an Emerging Market".

Abstract: We study the credit market implications and real effects of one of the largest borrower bailout programs in history, enacted by the government of India against the backdrop of the 2008-2009 financial crisis. We find that the stimulus program had no effect on productivity, wages or consumption, but led to significant changes in credit allociation and an increase in defaults. Post-program loan performance declines faster in districts with greater exposure to the program, an effect that is not driven by greater risk-taking of banks. Loan defaults become significantly more sensitive to the electoral cycle after the program, suggesting the anticipation of future credit market interventions as an important channel through which moral hazard in loan repayment is intensified.


Tobias Berg, Friedrich-Wilhelms-Universität Bonn, "Are Banks too Highly Levered. A Benchmark Based on Non-Bank Determinants".

Abstract: Banks have much more leverage than non-banks: the raw difference in debt-to-asset ratios between banks (86%) and non-banks (49%) is 37%. However, banks also have much less asset risk than non-banks and asset risk is known to be a major determinant of capital structure choice. After controlling for asset risk, we find that the observed leverage difference shrinks substantially. Excess leverage is substantially reduced to below 5%. Our results have important implications both for the calibration of regulatory capital requirements and for the trade-off between the use of risk-based capital requirements versus unweighted leverage ratios.


Narly Dwarkasing, Friedrich-Wilhelms-Universität Bonn, "The Economic Impact of a Banking Oligopoly: Britain at the Turn of the 20th Century".

Abstract: What happens if banks are allowed to merge during a 40 year period without the regulator (almost) ever saying no? Using data on more than 25,000 loans granted by British banks between 1885 and 1925, we investigate the impact of bank mergers on the real economy in a lightly regulated environment. Borrowers in counties with higher bank concentration received smaller loans, had to post more collateral, and were granted shorter duration loans. In those high concentration counties, the quality of loan applicants had improved, which suggests that banks restricted credit, rather than a changing quality of loan applicants. We find signs that bank concentration negatively impacted local economies. Counties with a more concentrated banking system had lower tax revenues and lower employment to population ratios.


David Martinez-Miera, Universidad Carlos III de Madrid, "Search for Yields" (joint with Rafael Repullo).

Abstract: The paper provides a theoretical model of the "search for yield"-phenomenon that has been associated with the low level of interest rates and the increases in risk-taking prior to the 2007-2009 financial crisis. We show that there are circumstances in which the bank chooses not to screen borrowers and in which it is optimal to screen borrowers. We associate the first case to (shadow) banks that originate-to-distribute and the second case to (traditional) banks that originate-to-hold. Which case obtains depends on the spread between the bank’s lending and borrowing rates.  To endogenize interest rates and interest rate spreads, we also embed our model of bank finance into a general equilibrium model in which a large set of heterogeneous entrepreneurs seek bank finance for their risky investment projects. The results provide a consistent explanation of a number of stylized facts of the period preceding the 2007-2009 financial crisis based on the link between a savings glut, the level of interest rates, and the risk of the banking system.


Valeriya Dinger, Universität Osnabrück (joint with Francesco Vallascas): "Are Banks less likely to issue Equity when they are less Capitalized?"

Abstract: Debt overhang and moral hazard related to risk-shifting opportunities predict that low capitalized banks have a lower likelihood to issue equity. In contrast to this view, for an international sample of bank Seasoned Equity Offerings (SEOs), we show that the likelihood of issuing an SEO is generally higher in low capitalized banks. We provide a series of tests exploring the variation of capital regulation, systemic conditions and market discipline to understand the driving forces behind this result. We find that market mechanisms rather than capital regulation are the primary key driver of the decision to issue by low capitalized banks.


Hendrik Hakenes, Universität Bonn (joint with Isabel Schnabel): "Seperating Trading and Banking: Consequences for Financial Stability".

Abstract: We present a model to analyze the consequences of separating proprietary trading from deposit banking. Our model extends the setup of Diamond & Daybvig (1983) by differentiating between non-fungible securities. Endogenously, some banks use these securities to speculate and experience fundamental bank runs in bad states of the world. In some situations, traditional banking disappears completely leading to full disintermediation. Deposit insurance removes runs but induces moral hazard as banks engage more in proprietary trading. Disintermediation becomes more likely. Deposit insurance leads o a redistribution from depositors and the deposit insurance to outside investors. Separating trading from deposit banking offsets this redistribution.

Nevertheless, the overall effects of separate banking on social welfare are ambigous: Banks become more stable, reducing the costs for the deposit insurance, but the overall loan volume drops.

9.10.2014Nathan Halmrast, University of Toronto: "Trading Constraints: The Market Impact of Short Sale Circuit Breakers".

Abstract: On February 2010, the U.S. Securities and Exchange Commission introduced a new circuit breaker rule which, when triggered, imposes temporary constraints for short sales. I provide impirical documentation of the impact to trading after this circuit breaker has been triggered. Using a difference-in-differences analysis, I study standard market quality measures including depths and spreads. For firms strictly trading in the U.S. market, I find that these triggers negatively impact market quality for firms post circuit breaker. Similarly, international firms are cross-listed in the U.S. see comparable market quality deterioration in their home market, even though the short sale constraint does not apply there. These results suggest the regulation may have some unintended consequences, as these triggers seem to actually reduce liquidity.