Finance / CRC TR 224 Seminar SoSe 2019
Tuesday, 12:15-1:30 PM in the Faculty Lounge, Juridicum, Adenauerallee 24-42, 53113 Bonn
April 16, 2019
Zwetelina Iliewa (Max Planck Institute)
"Wall Street Crosses Memory Lane: How Witnessed Returns Affect Professionals’ Expected Returns'"
Abstract: We examine data of a market-moving survey of financial professionals to demonstrate that when forming stock market expectations they extrapolate from the stock returns they have witnessed. Witnessed returns over two different domains predict professionals’ expectations: their lifetime and career in finance. Our results indicate that professionals’ first impressions of the stock market at the beginning of their career are particularly formative. Witnessing a financial crisis similar to 2008 during the first year, results in a bias which may not fully dissolve until retirement. The effects of witnessed returns on expected returns are inconsistent with informativeness and risk-adjustment.
April 30, 2019
Alexandra Niessen (University of Mannheim)
"The Impact of Role Models on Women's Self-Selection in Competitive Environments"
Abstract: We show that female role models increase women's willingness to compete. As in Niederle and Vesterlund (2007), we find that women are less willing to enter a tournament than men, although there are no gender differences in performance. However, the gender gap in tournament entry disappears if subjects are exposed to a competitive female role model. Results are stronger for the best performing women who seem to be particularly encouraged by female role models. Female role models also mitigate gender stereotype threats and lead to higher self-confidence among women. By contrast, we find that competitive male role models seem to intimidate female subjects and increase the gender gap in tournament entry even further. Our results have implications for the socio-political debate on how the fraction of women in top management positions can be increased.
May 14, 2019
Martin Oehmke (LSE)
"A theory of socially responsible investment"
Abstract: Over the past 20 years, assets under management of funds with explicit “sustainability” considerations have grown manyfold, so that impact investing can no longer be considered a niche. At the same time, a large number of competing ESG metrics (e.g., MSCI ESG metrics, ALDC partnership) have been developed with the goal of guiding the capital allocation of these investors. To account for the growing importance of impact capital, our paper sheds light both on the role of impact capital for the adoption of sustainable production technologies within a given firm, but also the equilibrium allocation of impact capital across firms. To this end, we develop a model in which socially responsible investors can have “impact” by incentivizing firms to adopt cleaner production technologies. For any given firm, such impact requires that the additional capital allows firms to increase their scale sufficiently, so that they can make up for the loss of per-unit financial returns associated with clean production. When ethical capital is scarce in the overall economy, socially responsible investors should determine the allocation of impact capital across firms according to a social profitability index (SPI), the theoretically founded ESG metric within our framework. Importantly, the SPI not only accounts for the “narrow” social return generated by the “reformed” firm’s investments, but also for the counterfactual pollution increase that would have occurred in the absence of impact investment. Intuitively, accounting for the latter (counterfactual) component helps social investors to achieve maximal impact with their scarce capital.
May 21, 2019
Christine Laudenbach (University of Frankfurt)
"The Long-lasting Effects of Experiencing Communism on Financial Risk-Taking" (with Ulrike Malmendier and Alexandra Niessen-Ruenzi)
Abstract: We analyze the long-term effects of living under communism and its anticapitalistic doctrine on financial risk-taking. Utilizing comprehensive German brokerage data, we show that, decades after reunification, East Germans still invest significantly less in the stock market than West Germans. Consistent with communist friends-and-foes propaganda, East Germans are more likely to hold stocks of companies in communist countries (China, Russia, Vietnam), and are particularly unlikely to invest in American companies or the financial industry. Effects are stronger for individuals for whom we expect stronger emotional tagging, for example those living in communist “showcase cities". In contrast, East Germans with negative experiences of the communist system, e. g., those experiencing environmental pollution and suppression of religious beliefs and those without access to (Western) TV entertainment, invest more in the stock market today. Election years appear to have trigger effects inducing East Germans to reduce their stock-market investment further. We provide evidence of negative welfare consequences, as indicated by less diversified portfolios and lower risk-adjusted returns.
June 04, 2019
Luc Laeven (European Central Bank)
"Loan Types and the Bank Lending Channel"
June 25, 2019
André Stenzel (University of Mannheim)
"Can You Trust the Blockchain? The (limited) Power of Peer-to-Peer Networks for Information Provision"
Abstract: We investigate the implications of introducing blockchain technology for the generation of information in an economy. We provide a model in which heterogeneous firms can adopt a blockchain that provides information to investors about the firms' value by autonomously verifying their underlying business transactions. The blockchain has the unique ability to access the data of all firms joining the system while ensuring data privacy during a peer-to-peer verification process, potentially rivaling existing institutions. We explicitly model two factors that are critical for the success of such a verification-driven system: (i) the nature of business transactions to be verified, and (ii) the number of firms that subscribe to the system. Alternatively, firms can rely on traditional institutions to inform the market. Our model shows that the blockchain might not unequivocally provide more trustworthy information as advocated by its supporters. The technology can improve information provision in an economy by providing a credible signal via the adoption decision, or by certifying firms' fundamentals via the peer-to-peer verification process. However, we identify conditions under which both channels fail to resolve information asymmetries. We characterize an equilibrium in which a mix of high-value and low-value firms is present both inside and outside the blockchain, and where the information generation falls below the benchmark where the new technology is not available.
July 02, 2019
Jing Zeng (Frankfurt School of Finance & Management)
"Off-Balance Sheet Funding, Voluntary Support and Investment Efficiency"
Abstract: Off-balance sheet financing of an investment is covered by limited liability, whereas on-balance sheet financing creates unlimited liability towards the bank’s asset-in-place. Off-balance sheet funding thus gives the bank flexibility to voluntarily support debt repayments when the investment fails, which allows the bank to signal information about the quality of its future projects, improving investment efficiency. Yet, limited liability reduces the bank’s effort incentives. Off-balance sheet funding with voluntary support is optimal for activities that are rapidly growing or negatively correlated with existing assets. The model yields testable predictions on the relationship between off-balance sheet debt spreads and sponsors’ characteristics.
July 09, 2019
Ralph de Haas (European Bank for Reconstruction and Development)
"Finance and Carbon Emissions"
Abstract: We study the relation between the structure of financial systems and carbon emissions in a large panel of countries and industries over the period 1990-2013. We find that for given levels of economic and financial development, CO2 emissions per capita are lower in economies that are relatively more equity-funded. Industry-level analysis reveals two distinct channels: stock markets reallocate investment towards less polluting industries and, second, they allow carbon-intensive industries to develop and implement greener technologies. In line with this second channel, we show that carbon-intensive industries produce more green patents as stock markets deepen. Lastly, of these industry-level reductions in domestic carbon emissions, only around one-tenth is offset by an increase in carbon embedded in imported intermediate and consumer goods.
April 02, 2019
Oliver Rehbein and Simon Rother (University of Bonn)
"Why distance matters: The role of social connectedness and culture in bank lending"
Abstract: This paper empirically analyzes the role of social connectedness, cultural distance, and physical distance for bank lending outcomes based on a cross section of Facebook friendship links in the US and a new measure of cultural differences between counties. County-to-county loan volumes increase in social connectedness and decrease in cultural distance. The two variables significantly explain the decrease of loan volumes in physical distance. When exploiting the quasi-random staggered introduction of Facebook across the US as an instrument, loan volumes increase even more strongly in social connectedness, whereas the effect of physical distance disappears entirely. Moreover, our results indicate that the effect of social connectedness on loan volumes is driven by credit demand, but banks appear to hedge loans to culturally more distant and socially less connected areas. Our findings emphasize the importance of informal information channels in bank lending, reveal new ways to overcome the lending barriers posed by large physical distances and have implications for antitrust policies.
April 23, 2019
Christian Kubitza (University of Bonn)
"Rising interest rates and liquidity risk in the life insurance sector"
Abstract: This paper sheds light on the life insurance sector's liquidity risk exposure. Life insurers are important long-term investors on financial markets. Due to their long-term investment horizon they cannot quickly adapt to changes in macroeconomic conditions. Rising interest rates in particular can expose life insurers to run-like situations, since a slow interest rate pass-through incentivizes policyholders to terminate insurance policies and invest the proceeds at relatively high market interest rates. We develop and empirically calibrate a granular model of policyholder behavior and life insurance cash flows to quantify insurers' liquidity risk exposure stemming from policy terminations. Our model predicts that a sharp interest rate rise by 4.5pp within two years would force life insurers to liquidate 12% of their initial assets. While the associated fire sale costs are small under reasonable assumptions, policy terminations plausibly erase 30% of life insurers' capital due to mark-to-market accounting. Our analysis reveals a mechanism by which monetary policy tightening increases liquidity risk exposure of non-bank financial intermediaries with long-term assets.
May 28, 2019
Simon Rother (University of Bonn)
"Macroprudential Policy and Systemic Risk"
Abstract: This paper analyzes the effect of macroprudential regulation on systemic risk based on a broad sample of 73 countries between 2000 and 2014. Using the country- and tool-specific institutional framework as an exogenous IV for macroprudential regulation, the analysis shows that the application of an additional macroprudential tool on average leads to a reduction in systemic risk by 0.46 standard deviations. While the effects are heterogeneous across tools, no tool appears to significantly increase financial fragility. These results alleviate concerns raised in the recent literature regarding destabilizing effects of macroprudential policy due to risk shifting and regulatory arbitrage.
June 18, 2019
Julian Mitkov (University of Bonn)
"Inequality and Bank Risk: Theory and Evidence" (with Ulrich Schüwer)
Abstract: We present, and empirically test, a model where the bank's benefit of risk shifting is increasing in the fraction of low-income subprime borrowers. In this model, income inequality both interacts with and amplifies the fragility enhancing effect of well-known factors, such as low capital ratios, low franchise value, and lax supervision. Our model predicts that, in response to lower profit margins, banks will be incentivized to “search for yield” both among low-income subprime borrowers and among high-income speculative borrowers (i.e. mortgage for non-owner occupied housing) and this effect will be more pronounced in regions with high income inequality. We use the model to assess the effectiveness of regulatory tools to prevent banks from risk-shifting, such as limits to loan-to-value ratios.