Learning and the Disappearing Association Between Governance and Returns
The correlation between governance indices and abnormal returns documented for 1990–1999 subsequently disappeared. The correlation and its disappearance are both due to market participants' gradually learning to appreciate the difference between good-governance and poor-governance firms. Consistent with learning, the correlation's disappearance was associated with increases in market participants' attention to governance; market participants and security analysts were, until the beginning of the 2000s but not subsequently, more positively surprised by the earning announcements of good-governance firms; and, although governance indices no longer generated abnormal returns during the 2000s, their negative association with firm value and operating performance persisted.
Keywords: Corporate Governance;
Saving More to Borrow Less: Evidence from Randomized Access to Formal Savings Accounts in Chile
Poverty is often characterized not only by low average income, but also by highly variable income and expenditures, and a lack of access to insurance services that can help smooth consumption. We investigate whether access to a formal savings account can provide a vehicle for self-insurance, by allowing participants to build a buffer stock of precautionary savings. In a randomized field experiment in Chile, about 3000 low-income micro-entrepreneurs are provided access to a formal savings account with no minimum balance or maintenance fees. Evaluating the impact after one year, we find that access to such accounts helps participants alleviate the burden of economic shocks, both objectively and subjectively. Participants with access to a savings account have less informal debt, fewer outstanding payments, and less often need to reduce consumption due to economic difficulties. Subjectively, they report being less worried about their financial future, and evaluate their recent economic situation as less severe. We therefore conclude that formal savings accounts can be an effective vehicle to provide a means for consumption smoothing in contexts where many other forms of insurance are lacking.
Keywords: Income Characteristics;
Borrowing and Debt;
Kast, Felipe, and Dina D. Pomeranz. "Saving More to Borrow Less: Evidence from Randomized Access to Formal Savings Accounts in Chile." 2013.
The Growth of Finance
The U.S. financial services industry grew from 4.9% of GDP in 1980 to 7.9% of GDP in 2007. A sizeable portion of the growth can be explained by rising asset management fees, which in turn were driven by increases in the valuation of tradable assets, particularly equity. Another important factor was growth in fees associated with an expansion in household credit, particularly for residential mortgages. This expansion was itself fueled by the development of non-bank credit intermediation (or "shadow banking"). Whether the growth of the financial sector has been socially beneficial depends on one's view of active asset management, the increase in household credit, and the growth of shadow banking. While recognizing some of the benefits of professional asset management, we are skeptical about the marginal value of active asset management. We then raise concerns about whether the potential benefits of increased access to household credit—the main output of the shadow banking system—are outweighed by the risks inherent in this new approach to credit delivery.
Keywords: Asset Management;
Financial Services Industry;
Greenwood, Robin, and David S. Scharfstein. "The Growth of Finance
." Journal of Economic Perspectives
(Spring 2013): 3–28.
Surviving the Global Financial Crisis: Foreign Ownership and Establishment Performance
We examine the differential response of establishments to the recent global financial crisis with particular emphasis on the role of foreign ownership. Using a worldwide establishment panel dataset, we investigate how multinational subsidiaries around the world responded to the crisis relative to local establishments. We find that first, multinational subsidiaries fared on average better than local counterfactuals with similar economic characteristics. Second, among multinational subsidiaries, establishments sharing stronger vertical production and financial linkages with parents exhibited greater resilience. Finally, in contrast to the crisis period, the effect of foreign ownership and linkages on establishment performance was insignificant in non-crisis years.
Multinational Firms and Management;
Data and Data Sets;
Banking on Consumer Credit: Explaining Patterns of Household Borrowing in the United States and France
Borrowing and Debt;
Financing and Loans;
Trumbull, J. Gunnar. "Banking on Consumer Credit: Explaining Patterns of Household Borrowing in the United States and France." Chap. 7 in The Development of Consumer Credit in Global Perspective: Business, Regulation, and Culture
, edited by Jan Logemann. New York: Palgrave Macmillan, 2012.
Securitization without Adverse Selection: The Case of CLOs
In this paper, we investigate whether securitization was associated with risky lending in the corporate loan market by examining the performance of individual loans held by CLOs. We employ two different datasets that identify loan holdings for a large set of CLOs and find that adverse selection problems in corporate loan securitizations are less severe than commonly believed. Using a battery of performance tests, we find that loans securitized before 2005 performed no worse than comparable unsecuritized loans originated by the same bank. Even loans originated by the bank that acts as the CLO underwriter do not show underperformance relative to the rest of the CLO portfolio. While there is some evidence of underperformance for securitized loans originated between 2005 and 2007, it is not consistent across samples, performance measures, and horizons. Overall, we argue that the securitization of corporate loans is fundamentally different from securitization of other asset classes because securitized loans are fractions of syndicated loans. Therefore, mechanisms used to align incentives in a lending syndicate are likely to reduce adverse selection in the choice of CLO collateral.
Keywords: Personal Finance;
Banks and Banking;
Financing and Loans;
Behavioral Corporate Finance: A Current Survey
We survey the theory and evidence of behavioral corporate finance, which generally takes one of two approaches. The market timing and catering approach views managerial financing and investment decisions as rational managerial responses to securities mispricing. The managerial biases approach studies the direct effects of managers' biases and nonstandard preferences on their decisions. We review relevant psychology, economic theory and predictions, empirical challenges, empirical evidence, new directions such as behavioral signaling, and open questions.
Keywords: Managerial Roles;
Prejudice and Bias;
Forecasting and Prediction;
Baker, Malcolm, and Jeffrey Wurgler. "Behavioral Corporate Finance: A Current Survey
." In Handbook of the Economics of Finance
. Vol. 2, edited by George M. Constantinides, Milton Harris, and Rene M. Stulz. Handbooks in Economics. New York, NY: Elsevier, 2012.
Frictions in Shadow Banking: Evidence from the Lending Behavior of Money Market Funds
We document the consequences of money market fund risk taking during the European sovereign debt crisis. Using a novel data set of security-level holdings of prime money market funds, we show that funds with large exposures to risky Eurozone banks suffered significant outflows between June and August 2011. Due to credit market frictions, these outflows have significant spillover effects on other firms: non-European issuers that typically rely on these funds raise less financing in this period. The results are not driven by issuers' riskiness or exposure to Europe: for the same issuer, money market funds with greater exposure to Eurozone banks decrease their holdings more than other funds. We show that relationships are important in short-term credit markets so that these spillover effects cannot be seamlessly offset, even though issuers are large, highly rated firms. Our results illustrate that instabilities associated with money market funds persist despite recent changes to the regulations governing them.
Keywords: Financial Crisis;
Borrowing and Debt;
Banks and Banking;
Financial Services Industry;
Leviathan in Business: Varieties of State Capitalism and Their Implications for Economic Performance
In this paper we document the extent and reach of state capitalism around the world and explore its economic implications. We focus on governmental provision of capital to corporations—either equity or debt—as a defining feature of state capitalism. We present a stylized distinction between two broad, general varieties of state capitalism: one through majority control of publicly traded companies (e.g., state-controlled SOEs) and a hybrid form that relies on minority investments in companies by development banks, pension funds, sovereign wealth funds, and the government itself. We label these two alternative modes Leviathan as a majority investor and Leviathan as a minority investor, respectively. Next we differentiate between these two modes by describing their key fundamental traits and the conditions that should make each mode more conducive to development and superior economic performance.
Keywords: State capitalism;
sovereign wealth funds;
Business and Government Relations;
Putting Integrity into Finance: A Purely Positive Approach
We summarize our new positive theory of integrity that has no normative content, and argue that there are large gains from putting integrity into finance—into both the theory and practice of finance. We define integrity as being whole and complete and unbroken. We argue that if finance scholars, teachers and practitioners take this approach to applications in finance there are huge gains to be achieved. We caution the reader that since our intention in this piece is to call attention to aspects of life and aspects of finance that are not commonly discussed, or certainly not discussed in the way we will do so here, you are likely to find it strange and even wrong or irrelevant. It is unlikely to fit your view of what a finance paper should be. And that will be encouraged by the fact that it is impossible to be complete on such a huge topic in one paper. As a young scholar, Michael lived through the days of the revolution in finance in the 1960s and 1970s when the modern approaches to finance were coming into vogue. Consistent with Kuhn's (1996) Structure of Scientific Revolutions, the established profession, and the established journals, systematically rejected such new thinking. But change did occur and we are committed to see such change continue to happen in the finance of today.