repudiation risk and restitution costs toward understanding premiums on insured deposits this paper contains a theoretical development of the relationship of cd premiums to both the risks of the cd issuer and the third party government guarantor of those deposits the theoretical development shows that the risk of the guarantor derives from the possibility that the guarantee could be repudiated and or the restitution of the depositor s claim could be costly the empirical analysis of the premiums for insured cds indicates that during the years preceding the ultimate collapse of the fslic the market priced the risk of both the guarantor as well as the firm the guarantor risk pricing was responsive to the insolvency of the guarantor the attempts to recapitalize the guarantor and the efforts to resolve the insolvent thrifts during this eventful time period cd premiums rose to 187 basis points and averaged 79 and 54 basis points copyright 1994 by ohio state university press

nonmonetary effects of the financial crisis in propagation of the great depression this paper examines the effects of the financial crisis of the 1930s onthe path of aggregate output during that period our approach is complementary to that of friedman and schwartz who emphasized the monetary impact of the bank failures we focus on non monetary primarily credit related aspects of the financial sector output link and consider the problems of debtors as well as those of the banking system we argue that the financial disruptions of 1930 33 reduced the efficiency of the credit allocation process and that the resulting higher cost and reduced availability of credit acted to depress aggregate demand evidence suggests that effects of this type can help explain the unusual length and depth of the great depression this abstract was borrowed from another version of this item

macroeconomic shocks and banks foreign assets recent developments in international financial markets have highlighted the role of banks in the transmission of shocks across borders we employ dynamic panel methods for a sample of oecd countries to analyze whether banks foreign assets react to macroeconomic shocks at home and abroad we find that banks reduce their foreign assets in response to a relative increase in domestic interest rates and they increase their foreign assets when the growth rate of world energy prices rises the responses are characterized by a temporal overshooting and a dynamic adjustment process that extends over several quarters

the use of blanket guarantees in banking crises policymakers often use guarantees on bank liabilities to prevent or contain bank runs during systemic banking crises but their success has been debated using a sample of 42 episodes of banking crises this paper finds that blanket guarantees do help to reduce liquidity pressures on banks but only partially since they do not stem withdrawals from non residents withdrawals following the announcement of guarantees are much more pronounced for non resident liabilities than for foreign currency denominated deposits which may also be held by residents suggesting that the results on non residents are not driven by foreign currency risk but by concerns about the government s ability and commitment to honor the guarantee to non resident liability holders

pension regulation and the market value of pension liabilities a contingent claims analysis using parisian options abstract we analyze the market consistent valuation of pension liabilities in a contingent claim framework whereby a knock out barrier feature is applied to capture early regulatory closure of a pension plan we investigate two cases which we call immediate closure procedure and delayed closure procedure in an immediate closure procedure when the assets value hits the regulatory boundary the pension plan is terminated immediately whereas in a delayed closure procedure a grace period is given to the pension fund for reorganization and recovery before premature closure is executed the framework is then used to construct fair pension deals furthermore we provide rules for deriving the optimal recovery period in pension regulation using utility analysis and interconnect the recovery period to the regulatory liquidation probability

bank mergers and crime the real and social effects of credit market competition using a unique sample of commercial loans and mergers between large banks we provide micro level within county evidence linking credit conditions to economic development and find a spillover effect on crime neighborhoods that experience more bank mergers are subject to higher interest rates diminished local construction lower prices an influx of poorer households and higher property crime in subsequent years the elasticity of property crime with respect to merger induced banking concentration is 0 18 we show that these results are not likely due to reverse causation and confirm the central findings using state branching deregulation to instrument for bank competition we examine the real and social impact of local credit competition by documenting a link between the competitiveness of the local banking market credit conditions urban development and crime several recent studies peek and rosengren 2000 cetorelli and gambera 2001 klein peek and rosengren 2002 and burgess and pande 2003 tie credit market imperfections to diminished real economic activity and growth other studies connect the economic environment to property crime freeman 1999 levitt 2001 raphael and winter ebmer 2001 and nilsson 2004 it is reasonable to hypothesize therefore that reductions in bank competition may lead to economic decline and subsequently increases in property crime we empirically investigate the effects of bank consolidation and increased market power on credit availability and real activity using a unique sample of commercial loans and mergers between large banks in the 1990s we provide micro level evidence that garmaise is from the ucla anderson school and moskowitz is from the graduate school of business university of chicago and nber we have benefited from the suggestions and comments of tony bernardo marianne bertrand phillip bond doug diamond mark duggan eugene fama

input and output inventories abstract this paper presents a new stage of fabrication inventory model with delivery usage and stocks of input materials that distinguishes between gross production and value added it extends the linear quadratic model of output inventories by adding the joint determination of input inventories empirically input inventories are more important than output inventories maximum likelihood estimation of the decision rules yields correctly signed and significant parameter estimates using data for nondurable and durable goods industries but the overidentifying restrictions of the model are rejected the value added specification dominates because adjustment costs on materials usage are critical to fitting the data

do depositors punish banks for bad behavior market discipline deposit insurance and banking crises this paper empirically investigates two issues largely unexplored by the literature on market discipline we evaluate the interaction between market discipline and deposit insurance and the impact of banking crises on market discipline we focus on the experiences of argentina chile and mexico during the 1980s and 1990s we find that depositors discipline banks by withdrawing deposits and by requiring higher interest rates deposit insurance does not appear to diminish the extent of market discipline aggregate shocks affect deposits and interest rates during crises regardless of bank fundamentals and investors responsiveness to bank risk taking increases in the aftermath of crises

pension plan accounting estimates and the freezing of defined benefit pension plans abstract this study provides evidence that when hard freezing their defined benefit pension plans employers select downward biased accounting assumptions to exaggerate the economic burden of their benefit plans downward biased expected rates of return and discount rates allow managers to increase reported pension expenses and for discount rates allow managers to increase reported pension liabilities we find that prior to the sarbanes oxley act both rates are downward biased when firms freeze their plans whereas after sox the bias is lower this finding is consistent with managers opportunistically biasing pension estimates to obtain labor concessions during periods of reduced regulatory scrutiny

the impact of banking deregulation on inbound foreign direct investment transaction level evidence from the united states abstract we evaluate the effects of state level banking deregulation that resulted in improved access to cheaper local finance on foreign firms investing in the u s we provide direct micro level evidence from u s inbound foreign direct investment transactions showing that interstate banking but not intrastate branching deregulation increased the number of transactions reduced the average transaction value and boosted overall investment by foreign multinationals we also show that lower cost of local credit and greater local bank competition in each state following the interstate banking deregulation are potential mechanisms that stimulated fdi activity finally we demonstrate that after the adoption of the interstate banking deregulation both the number and the average value of transactions increased in industries that are more dependent on external finance relative to industries that are less dependent

the international transmission of financial shocks the case of japan one of the more dramatic financial events of the late 1980s and early 1990s was the surge in japanese stock prices that was immediately followed by a very sharp decline of more than 50 percent while the unprecedented fluctuations in japanese stock prices were domestic financial shocks the unique institutional characteristics of the japanese economy produce a framework that is particularly suited to the transmission of such shocks to other countries through the behavior of the japanese banking system the large size of japanese bank lending operations in the united states enables us to use u s banking data to investigate the extent to which this domestic japanese financial shock was transmitted to the united states as well as to identify a supply shock to u s bank lending that is independent of u s loan demand we find that binding risk based capital requirements associated with the decline in the japanese stock market resulted in a decline in commercial lending by japanese banks in the united states that was both economically and statistically significant this finding has added importance given the severe real estate loan problems currently faced by japanese banks how japanese bank regulators decide to resolve these problems will have significant implications for credit availability in the united states as well as in other countries with a significant japanese bank presence

the impact of u s tax reform on foreign direct investment in the united states abstract this study empirically examines how taxes shape foreign direct investment and finds that increased taxes spur inward foreign investment this finding conforms with theories that recognize that foreign investor response is critically shaped by the tax provisions faced by the foreign investor in his home country and by the effects of tax reform on pre tax asset returns we demonstrate that average tax rates may better proxy tax effects than do effective tax rates our findings are more robust than previous results since we utilize the entire 1980s tax history consider a fuller set of industry distinctions and estimate the tax responsiveness in the context of exchange rate fluctuations

firm specific assets and the link between exchange rates and foreign direct investment foreign direct investment fdi theory and empirical studies have generated mixed support for a link between exchange rates and fdi this paper argues that exchange rate movements may affect acquisition fdi because acquisitions involve firm specific assets which can generate returns in currencies other than that used for purchase using data on japanese acquisitions in the united states across three digit sic industries from 1975 to 1992 maximum likelihood estimates from discrete dependent variable models support the hypothesis that real dollar depreciations make japanese acquisitions more likely in u s industries particularly those which more likely have firm specific assets copyright 1997 by american economic association

introduction to sunspots and lotteries abstract this introduces the symposium on sunspots and lotteries two stochastic general equilibrium concepts sunspot equilibrium se and lottery equilibrium le are compared it is shown that for some general pure exchange economies which allow for consumption nonconvexities or moral hazards the set of le allocations is equivalent to the set of se allocations provided that the randomizing device can generate events of any probability journal of economic literature classification numbers d51 d82 d84 e32

the impact of regional financial depth on outbound cross border mergers and acquisitions abstract drawing on china s experience this study examines the role of source province credit conditions and its interplay with host country financial openness in determining the intensity of cross border mergers and acquisitions m as we first show that improved credit conditions in source provinces of china measured by the number of newly established bank branches boost the volume and frequency of their firms cross border m as the effect is stronger for deals where cash is mainly used as the payment method then we identify a complementary effect between the financial openness in host countries and the improved financial depth in source regions more importantly by defining the members of china s the belt and road initiative as countries with higher political openness to china we find that acquirers in china especially the firms affiliated to central government are more political oriented than market oriented when choosing target countries additionally we show that acquirers facing lower political uncertainty from source province benefit more from the enhanced bank access

the effects of wrongful discharge protection on foreign multinationals evidence from transaction level data using detailed micro level data from 1977 to 1994 we analyze the impact of employment protection measures adopted across us states on the number and the value of new inbound foreign direct investment fdi transactions completed by foreign owned companies our findings point to a robust negative association between the implementation of employment protection laws and both the extensive and the intensive margins of fdi in the us when states adopt regulations that increase employers firing costs fdi transactions by foreign multinational companies become less frequent and decrease in value with stronger negative impacts in more labour intensive industries there is also some evidence of diversion and spillover effects from the adoption of these measures by neighbouring states

regulation and pension fund risk taking abstract we investigate the extent to which regulations governing investment valuation and funding affect the riskiness of defined benefit pension funds asset allocation we compare the regulatory frameworks of public corporate and industry pension funds in the united states canada and the netherlands over 1992 2011 derived from panel data analysis of a unique set of asset allocation details for close to 600 funds our results highlight that regulatory factors are more economically significant than pension funds characteristics in shaping asset allocation in particular risk based capital requirements and mark to market valuation are both associated with a 7 lower risky asset exposure especially equities regardless of market conditions by contrast the exposure of a pension fund subject to a 100 funding requirement does not differ significantly from that of an unconstrained pension fund during normal times but the constrained pension fund invests 4 less in risky assets during a financial crisis in line with theoretical predictions we find that risk based capital requirements and minimum funding limits have different consequences for pension funds risk taking

does deposit insurance increase banking system stability an empirical investigation based on evidence of 61 countries in 1980 97 the authors find that explicit deposit insurance tends to be detrimental to bank stability the more so where bank interest rates are deregulated and the institutional environment is weak the adverse impact of deposit insurance on bank stability tends to be stronger the more extensive is the coverage offered to depositors and where the scheme is funded and run by the government rather than the private sector

catastrophic risk and credit markets we provide a model of the effects of catastrophic risk on real estate financing and prices and demonstrate that insurance market imperfections can restrict the supply of credit for catastrophe susceptible properties using unique micro level data we find that earthquake risk decreased commercial real estate bank loan provision by 22 in california properties in the 1990s with more severe effects in african american neighborhoods we show that the 1994 northridge earthquake had only a short term disruptive effect our basic findings are confirmed for hurricane risk and our model and empirical work have implications for terrorism and political perils

survive another day using changes in the composition of investments to measure the cost of credit constraints abstract we introduce a novel empirical strategy to measure the size of credit shocks theoretically we show that credit shocks reduce the value of long term relative to short term investments empirically we can therefore compare the reduction of long term relative to short term investments within firms allowing for firm times year fixed effects using spanish firm level data we estimate the credit crunch to be equivalent to an additional tax rate of around 11 on the longest lived capital to pin down credit constraints as the underlying cause we apply triple differences strategies using foreign ownership or precrisis debt maturity

troubled banks impaired foreign direct investment the role of relative access to credit during the 1980 s theories were developed to explain the striking correlation between real exchange rates and foreign direct investment fdi however this relationship broke down for japanese fdi in the 1990 s as the real exchange rate appreciated while fdi plummeted we propose the relative access to credit hypothesis and show that unequal access to credit by japanese firms contributes to the explanation of declining japanese fdi using bank level and firm level data sets we find that financial difficulties at banks were economically and statistically important in reducing the number of fdi projects by japanese firms into the united states jel g21 f36

financial intermediaries and liquidity creation trading losses associated with information asymmetries can be mitigated by designing securities which split the cash flows of underlying assets these securities which can arise endogenously have values that do not depend on the information known only to informed agents bank debt deposits is an example of this type of liquid security which protect relatively uninformed agents and we provide a rationale for deposit insurance in this content high grade corporate debt and government bonds are other examples implying that a money market mutual fund based payments system may be an alternative to one based on insured bank deposits

federal deposit insurance regulatory policy and optimal bank capital this paper seeks to explain the combination of explicit and implicit pricing for deposit insurance employed by the fdic essentially the fdic sells two products insurance and regulation to span the product space it must and does set two prices we argue that the need to establish regulatory disincentives to bank risk taking is the heart of the controversy over the adequacy of bank capital and that the ability to close risky banks before exhausting their charter value i e the value of their right to continue in business stands at the center of these disincentives and in front of the fdic s insurance reserves just as a book shouldn t be judged by its cover a government agency shouldn t be judged by the words behind its initials with the fdic federal deposit insurance corporation the agency s name describes only part of its formal operations the fdic is quasi governmental has a regional structure and sells deposit insurance however the initials fail to convey the fdic s critical place in the governmental regulatory structure as the sole federal overseer of the approximately 8900 state chartered commercial banks that have chosen not to belong the federal reserve system reflecting the federal reserve s membership problem the number of these banks is growing year by year besides selling deposit insurance at bargain explicit rates the fdic performs four regulatory functions 1 entry regulation it passes on new banks applications for deposit insurance and on branch and merger proposals as well thereby protecting the value of existing bank charters 2 examination two thirds of fdic employees are concerned with inspecting bank records and supervising managerial activity 3 regulation of deposit rates and conditions for withdrawal by tradition fdic policies on these matters conform entirely with regulations applicable to federal reserve member banks and 4 disposition of failed banks when an insured bank fails the fdic usually chooses not to liquidate it 2

using market information in prudential bank supervision a review of the u s empirical evidence in principle market and government supervision provide alternative devices for controlling governing any type of corporation most national governments have instituted nonmarket regulatory mechanisms for banking firms on the grounds that market based mechanisms do not adequately discipline banks but what evidence supports this assessment why must governments assure bank solvency but not the solvency of other firms government oversight naturally displaces private efforts to evaluate and control financial firms moreover if the banking business changes over time as it assuredly has in the past decade or two the best combination of government and private supervision may change concurrently this paper reviews and evaluates the growing empirical literature on private investors abilities to assess the financial condition of banking firms the evidence supports the proposition that market investors and analysts could reasonably provide a greater proportion of corporate governance services for large traded u s financial firms

have the tax benefits of debt been overestimated abstract we re examine the claim that many corporations are underleveraged in that they fail to take full advantage of debt tax shields we show prior results suggesting underleverage stems from biased estimates of tax benefits from interest deductions we develop improved estimates of marginal tax rates using a non parametric procedure that produces more accurate estimates of the distribution of future taxable income we show that additional debt would provide firms with much smaller tax benefits than previously thought and when expected distress costs and difficult to measure non debt tax shields are also considered it appears plausible that most firms have tax efficient capital structures

the effects of real wages and labor productivity on foreign direct investment the volume of foreign direct investment fdi both into and out of the united states has grown rapidly in the past several decades theoretically labor costs in both source and host countries could be important determinants of these flows but thus far no consistently significant effects have been reported for fdi flows between the u s and other industrialized countries in this paper i estimate equations for u s fdi flows to and from five other industrialized countries the explanatory variables include both source and host country real wages and labor productivity but to put my work in perspective i shall first in section ii discuss recent literature in the area then section iii briefly discusses a theoretical model to highlight the possible effects of the labor variables the empirical procedure and results are presented in section iv and a summary in section v

the performance implications of relationship banking during macroeconomic expansion and contraction a study of japanese banks social relationships and overseas expansion we propose a social perspective emphasizing the opportunities and constraints of bank firm relationships to understand the determinants of relationship banks performance using japanese banks to test our theory using social exchange and role theories we found banks that have strong social relationships performed differently during japan s macroeconomic expansion and contraction cycles however our results indicate that social exchange and role relationships are context specific banks benefited from internationalization during a domestic macroeconomic expansion as a result of their home country social relationships but they were less constrained by the same social relationships in their international operations during a domestic macroeconomic contraction

determinants of corporate pension funding strategy abstract several hypotheses concerning pension funding strategy are tested in a cross sectional regression model on a sample of 255 firms results are consistent with the following explanations 1 finance incentives tax benefits and financial slack for high level funding 2 labor incentives for low level funding and 3 financial statement incentives relating to political costs for high level funding and debt contracting costs for low level funding pension funding strategy appears to be complex involving tradeoffs between funding incentives the nature of these interactions and tradeoffs remains to be clarified through future research

foreign direct investment and regulatory remedies for banking crises lessons from japan can regulatory interventions alleviate financial crises if so which ones work we draw inferences from the japanese banking crisis of the 1990s using a hand gathered database of bank loans gathered from original sources our results indicate that whereas risk based capital infusions in japan similar to those following the 2009 supervisory capital assessment program stress tests in the us were successful in stimulating aggregate lending by japanese banks earlier blanket infusions comparable to the 2008 troubled asset relief program tarp in the us were not effective moreover changes in accounting rules in japan that revalued bank assets similar to the relaxation of mark to market requirements for banks in the us did not increase aggregate japanese bank lending but rather reallocated it capital constraints during the crisis also induced many japanese banks to close their overseas branches and switch their charters from international to domestic this endogenous charter switch reversed the process of foreign direct investment fdi for many japanese banks therefore we use the japanese banking crisis as a natural experiment to test fdi theories and find empirical support for the relative access hypothesis but not for the industrial organization approach or for the relative wealth hypothesis

the consumption effects of the 2007n2008 financial crisis evidence from households in denmark did the financial crisis in 2007 2008 spread from distressed banks to households through a contraction of the credit supply we study this question with a dataset that contains observations on all accounts in danish banks as well as comprehensive information about individual account holders and banks we document that banks exposed to the financial crisis reduced their lending relative to nonexposed banks which in turn caused a significant decrease in the borrowing and spending of their customers the effects were persistent borrowing remained lower through the postcrisis years and spending foregone during the crisis was not recovered

moral hazard optimal unemployment insurance and experience rating abstract this paper is concerned with evaluating alternative unemployment insurance ui schemes in a dynamic economy with moral hazard we consider changes in the size and duration of ui benefits and the effects of experience rating and use a dynamic contracting approach to determine a benchmark optimal allocation radical changes in the current ui system increase welfare but not by much a move to full experience rating has distributional effects but the aggregate effects are negligible

forecasting bankruptcy more accurately a simple hazard model i argue that hazard models are more appropriate than single period models for forecasting bankruptcy single period models are inconsistent while hazard models produce consistent estimates i describe a simple technique for estimating a discrete time hazard model i find that about half of the accounting ratios that have been used in previous models are not statistically significant moreover market size past stock returns and idiosyncratic returns variability are all strongly related to bankruptcy i propose a model that uses both accounting ratios and market driven variables to produce out of sample forecasts that are more accurate than those of alternative models copyright 2001 by university of chicago press

lessons from the asian crisis abstract this paper provides an asymmetric information analysis of the recent east asian crisis it then outlines several lessons from this crisis first there is a strong rationale for an international lender of last resort second without appropriate conditionality for this lending the moral hazard created by operation of an international lender of last resort can promote financial instability third although capital flows did contribute to the crisis they are a symptom rather than an underlying cause of the crisis suggesting exchange controls are unlikely to be a useful strategy to avoid future crises fourth pegged exchange rate regimes are a dangerous strategy for emerging market countries and make financial crises more likely

the pecking order of cross border investment abstract is there a pecking order of cross border investment in that countries become financially integrated through some types of investment rather than others using a novel database of bilateral capital stocks for all types of investment fdi portfolio equity securities debt securities as well as loans for a broad set of 77 countries we show that such a pecking order indeed exists the paper focuses on two key determinants of this pecking order information frictions and the quality of host country institutions overall we find that in particular fdi and to some extent also loans are substantially more sensitive to information frictions than investment in portfolio equity and debt securities we also show that the share as well as the size of fdi that a country receive are largely insensitive to institutional factors in host countries while portfolio investment is by far the most sensitive to the quality of institutions this provides new evidence in favor of some hypotheses but contradicts others put forward in the literature on trade in financial assets

foreign banks trends and impact over the past two decades foreign banks have become much more important in domestic financial intermediation heightening the need to understand their behavior we introduce a new comprehensive database made publicly available on bank ownership including the home country of foreign banks for 5 324 banks in 137 countries over the period 1995 2009 we document large increases in foreign bank presence in many countries but with substantial heterogeneity in terms of host and banks home countries bilateral investment patterns and bank characteristics in terms of impact we document that the relation between private credit and foreign bank presence importantly depends on host country and banks characteristics specifically foreign banks only seem to have a negative impact on credit in low income countries in countries where they have a limited market share where enforcing contracts is costly and where credit information is limited available and when they come from distant home countries this shows that accounting for heterogeneity including bilateral ownership is crucial to better understand the implications of foreign bank ownership

pareto optima and competitive equilibria with adverse selection and moral hazard this paper explores the extent to which standard general equilibrium analysis of pareto optima and of competitive equilibria can be applied to environments with moral hazard and adverse selection problems allowing for lotteries contracts with random components we first establish that an adverse selection insurance economy a moral hazard insurance economy a signaling economy and a private information labor market economy are all special cases of a simple general structure we then show that techniques for characterizing pareto optimal contracts as solutions to concave programming problems are useful and nice and appear to be broadly applicable allowing for lotteries we show how to characterize the optimal allocations for the adverse selection insurance and labor market economies we then show that standard existence and optimality theorems for competitive equilibria apply in the linear space containing lotteries if agents with characteristics which are distinct and privately observed at the time of initial trading enter the economy wide resource constraints in a homogeneous way other kinds of diversity are not critical for economies with moral hazard which satisfy the homogeneity condition competitive contract markets single out a subset of the optima and thus can be consistent with apparent unemployment and with a random allocation of labor supplied though all households are averse to risk the adverse selection insurance and signaling economies however do not satisfy the homogeneity condition and are difficult to decentralize efficiently with a price system

should asean 5 monetary policy makers act pre emptively against stock market bubbles stock market rises and asset price inflation in asean economies have raised the question of whether monetary authorities in these economies should act pre emptively against these rising trends to prevent impending financial crises using structural vector error correction models svecms which incorporate mixed data characteristics we examine the effects and interactions between monetary policy and stock market shocks for singapore malaysia thailand indonesia and the philippines the results suggest that monetary policy focused on the stock market detracts from price stability objectives in particular because containing a stock market bubble may inadvertently depress output and inflation

institutional and individual investors saving for old age this paper brings together the academic literature on individual and institutional investors in order to understand the nature of difficulties faced by them and set the background for the special issue this introductory article and the papers in the special issue contribute to the debate on how to support individuals in their savings commitments and investment decision making and whether and how institutional investors have fulfilled their role in supporting the development of the funded pension industry there are three main conclusions i individual investors are not ready for the role that has been assigned to them in the pension industry ii institutional investors are a long way short of establishing healthy relational contracts and trustworthy relationships with their clients and iii more effective regulation may be needed

earnings manipulation pension assumptions and managerial investment decisions managers appear to manipulate firm earnings through their characterizations of pension assets to capital markets and alter investment decisions to justify and capitalize on these manipulations managers are more aggressive with assumed long term rates of return when their assumptions have a greater impact on reported earnings firms use higher assumed rates of return when they prepare to acquire other firms when they are near critical earnings thresholds and when their managers exercise stock options changes in assumed returns in turn influence pension plan asset allocations instrumental variables analysis indicates that 25 basis point increases in assumed rates are associated with 5 percent increases in equity allocations

the fiscal cost implications of an accommodating approach to banking crises abstract in recent decades a majority of countries have experienced a systemic banking crisis requiring a major and expensive overhaul of their banking system budgetary outlays whether immediate or deferred have exceeded 50 of gdp in some cases this paper uses cross country econometric evidence to examine whether the design of crisis containment and resolution policies can systematically influence the overall magnitude of fiscal costs we find that accommodating policies such as blanket deposit guarantees open ended liquidity support repeated partial recapitalizations debtor bail outs and regulatory forbearance all tend to add significantly and sizably to fiscal costs

financial market development in host and source countries and their effects on bilateral foreign direct investment we study an underexplored research question namely whether financial market development in both host and source countries has an effect on bilateral stocks of foreign direct investment fdi and particularly whether the effect of financial market development in one member of the country pair conditions the effect of financial market development in the other member we estimate gravity type models in a global sample of 43 source and 137 host countries over the period 2001 12 we address reverse causality concerns by restricting the sample to observations where reverse causality if existent should be less relevant our major and robust findings are that bilateral fdi increases with better developed financial markets in both the host and the source country and that for developing host countries financial market development in source and host countries functions as substitutes for each other

what determines corporate pension fund risk taking strategy abstract corporate sponsors of defined benefit pension plans generally assume low investment risk when they have low funding ratios and high default risk consistent with the risk management hypothesis however for financially distressed sponsors and sponsors that freeze terminate or convert defined benefit to defined contribution plans the risk shifting incentive moral hazard dominates pension fund risk taking is also affected by labor unionization and sponsor incentives to maximize tax benefits restore financial slack and justify the accounting choices of pension assumptions sponsors shift toward an aggressive risk strategy when their pension plans emerge from underfunding bankruptcy risk is reduced or marginal tax rate decreases overall we show that corporate sponsors adopt a dynamic risk taking strategy in their pension fund investments

the real exchange rate and foreign direct investment in the united states relative wealth vs relative wage effects abstract there has been a significant correlation between u s inward foreign direct investment and the united states real exchange rate since the 1970s in this paper we examine the determinants of four measures of inward foreign direct investment to the united states from seven industrial countries over the period 1979 1991 we find strong evidence that relative wealth significantly affects u s inward foreign direct investment we find no evidence that relative wages have a significant impact on the determination of u s foreign direct investment

market discipline and bank subordinated debt note a lengthy literature in banking has addressed the question of whether the market prices of liabilities respond to individual bank risk taking activity that is whether any market disciplines exists however despite the obvious importance of this question the current record has led to no consensus on the issue results have been contradictory in this journal alone hannan and hanweck 1988 conclude that the market does extract at least some price for risk taking while avery belton and goldberg 1988 find no such evidence in this study we argue that this line of inquiry has a serious f law in that it fails to use theoretical models of bank instrument valuation to determine the appropriate testing of market discipline therefore the empirical models have lacked the necessary exactness to isolate the appropriate null hypotheses to redress this shortcoming and advance the methodology of this area of the literature we use a pricing model which comes to the banking area from the options pricing literature to look at the yield spread on bank liabilities using this model it is clear that the value of large uninsured bank liabilities cannot be described as a linear monotonic function of risk moreover current bank regulation affects the assumed role risk measures play in the pricing of such debt instruments both of these complications mean that simple regressions are not likely to adequately address the relationship between the value of debt and underlying risk in the final section we empirically investigate the presence of market discipline using contingent claims pricing we find that accounting measures of bank risk still have little predictive value in explaining yield spreads and therefore offer little evidence of meaningful market discipline

the real effects of financial sector interventions during crises we assess the importance of supply side credit market frictions by studying the impact of bank recapitalization on firm growth in 50 countries during the recent crisis our identification strategy exploits the crisis as a shock to credit supply and combines an exogenous measure of firms dependence on external financing with policy interventions aimed at restoring bank capital we find that the growth of financially dependent firms is disproportionately positively affected by bank recapitalization this effect is quantitatively important and robust to controlling for other policies these results provide new evidence of the influence of credit market frictions on economic activity

the integration of insurance and taxes in corporate pension strategy this paper examines the implications of the joint effects of insurance and taxes for the optimal corporate pension strategy it is shown that neither the mini max nor the maxi min strategy advocated by previous authors is necessarily best in corporate pension management in the presence of capital market imperfections the analysis via a single period contingent claims model indicates that optimal corporate pension strategy in both asset allocation and funding decisions can be a noncorner interior solution since the passage of the employee retirement income security act erisa in 1974 considerable attention has been given to the development of optimal strategies for corporate pension management under erisa the corporate pension liabilities have become parts of corporate liabilities and consequently the management of corporate pension plans has become an integral dimension of the overall corporate financial policy at present corporate pensions are subject to special tax treatments in the internal revenue code as well as various erisa regulations therefore it is important to analyze the complex tradeoffs among various explicit and implicit benefits and costs in order to derive an optimal corporate pension strategy several important contributions in the area of corporate pension strategy have been developed in finance and economic literature for instance sharpe 18 has shown that in the absence of taxes and under the current structure of a fixed insurance premium charged by the pension benefit guaranty corporation pbgc the insurance effect calls for the mini max corporate pension strategy that involves a minimum level of pension plan funding and a maximum level of pension investment in risky assets conversely black 1 and tepper 19 have argued that in the absence of default risk and pension insurance the tax effect calls for the maxi min corporate pension strategy that suggests a maximum level of plan funding and a minimum level of investment in the lowtax risky assets in their recent work harrison and sharpe 8 and marcus 12 have shown that the corner solutions in pension strategy are optimal even when the insurance and tax effects are considered jointly the purpose of this study is to examine the joint insurance and tax effects on corporate pension strategies in the presence of some relevant market imperfections the single period contingent claim analysis is applied to examine these important effects on corporate pension strategies

a zero inflated negative binomial regression model with hidden markov chain abstract this paper proposes a zero inflated negative binomial regression model with hidden markov chain for panel count data with excess zeros and provides an estimation method using the em and quasi newton algorithms an application to the analysis of fdi is given

market discipline by thrift depositors this paper tests for the presence of depositor discipline by examining the effect of depository institutions risk on the pricing and growth of uninsured deposits the study analyzes a large panel of thrifts that includes detailed information on interest rate schedules this information allows the authors to develop a time consistent risk profile for thrifts their empirical findings support the presence of market discipline riskier banks are found to pay higher interest rates but attract smaller amounts of uninsured deposits the authors also find that qualitative results are similar for fully insured deposits although statistical significance is substantially lower

foreign direct investment and external financing conditions evidence from normal and crisis times this paper investigates the effects that external financing conditions in source and destination countries have on foreign direct investment fdi in normal and crisis times using a difference in differences approach we find that source and destination countries financial development have a strong positive impact on the relative volume of fdi in financially vulnerable sectors in normal times on the other hand during the 2008 2010 global financial crisis the relative volume of fdi in financially vulnerable sectors fell relatively more in financially developed source and destination countries most notably if these countries experienced a credit crisis

foreign direct investment regulations and growth this paper explores the linkage between income growth rates and foreign direct investment fdi inflows so far the evidence is rather mixed as no robust relationship between fdi and income growth has been established the authors argue that countries need a sound business environment in the form of good government regulations to be able to benefit from fdi using a comprehensive data set for regulations they test this hypothesis and find evidence that excessive regulations restrict growth through fdi only in the most regulated economies this result holds true for different specifications of the econometric model including instrumental variable regressions

determinants of foreign direct investment in wind energy in developing countries abstract the renewable energy industry is one of the fastest growing industries attracting a great amount of foreign direct investment being one of the top 5 industries in 2015 in terms of the amount of investment allocated however the allocation of foreign direct investment in the sector greatly varies between developing countries preceding studies have tried to explain the location determinants of foreign direct investment mainly by looking at the effects of institutional and macroeconomic factors the renewable energy sector has been supported by various economic regulatory and political support policies considering the importance of these support policies the paper analyses their effects on foreign direct investment as location determinants in comparison with that of the widely accepted determinants institutional and macroeconomic determinants focusing on wind energy in developing countries the results show that renewable energy support policies have equivalent or greater effect compared to the widely accepted determinants such as corruption level price stability access to finance and gdp growth the paper demonstrates the importance of analysing determinants of foreign direct investment focusing on a specific sector rather than looking at overall foreign direct investment the paper also provides important policy implications including the need to improve the regulatory aspect of renewable energy sector such as access to grid infrastructure in order to attract foreign direct investment into the sector

does the debt market assess large banks risk time series evidence from money center cds abstract uninsured bank liabilities should offer a promised yield that compensates depositors for their expected default losses however the conjectural guarantees available to large u s banking firms makes it questionable whether large depositors should or do feel themselves exposed to credit risk prior papers have evaluated the determinants of bank risk premia using cross sectional data with relatively inconclusive results this paper investigates the same issue in a methodologically independent fashion using time series data on specific banks daily offering rates during the period may 1982 through july 1988 we find that cd rates paid by large money center banks include significant default risk premia

unnatural selection perverse incentives and the misallocation of credit in japan we examine the misallocation of credit in japan associated with the perverse incentives faced by banks to provide additional credit to the weakest firms firms are more likely to receive additional bank credit if they arein poor financial condition because troubled japanese banks have an incentive to allocate credit to severely impaired borrowers in order to avoid the realization of losses on their own balance sheets this evergreening behavior is more prevalent among banks that have reported capital ratios close to the required minimum and is compounded by the incentives arising from extensive corporate affiliations

production in entrepreneurial firms the effects of financial constraints on labor and capital i model the contrasting capital labor decisions of financially constrained and unconstrained firms i show that financially restricted firms use relatively more labor than physical capital because informed employees provide more efficient financing than uninformed capital suppliers i demonstrate that constrained firms cannot easily attract new employees to replace existing staff their greater employee retention aligns owner worker incentives and encourages workers to make firm specific investments constrained firms however gradually suffer from their inability to replace low quality workers such that their relative labor productivity decreases over time empirical tests utilizing instrumental variables confirm several implications of the theory

shareholder activism of public pension funds the political facet abstract this paper studies the political incentive of public pension funds in shareholder activism using a sample of shareholder proposals from 1993 to 2013 and a hand collected data set of the political variables of public pension funds we document evidence consistent with the political attention hypothesis we find that the number of politicians on public pension fund boards is significantly positively related to the frequency with which portfolio firms are targeted moreover the frequency of social responsibility proposals by public pension funds increases significantly as the funds have a greater number of board members running for election to public office however the frequency of corporate governance proposals is not related to the number of board members running for elections to public office furthermore we document that political connection between a portfolio firm and a public pension fund mitigates the firm s likelihood of being targeted by the fund with social responsibility proposals this result supports the political contribution hypothesis the paper provides direct evidence that public pension fund board members employ shareholder proposals to enhance their political capital

scale economies in pension fund investments a dissection of investment costs across asset classes abstract using a unique dataset of 225 dutch occupational pension funds with a total of 928 billion euro of assets under management we provide a comprehensive cross sectional analysis of the relation between investment costs and pension fund size our dataset is free from self reporting biases and decomposes investment costs for 6 asset classes in management costs and performance fees we find that a pension fund that has 10 times more assets under management on average reports 7 67 basis points lower annual investment costs economies of scale differ per asset class we find significant economies of scale in fixed income equity and commodity portfolios but not in real estate investments private equity and hedge funds we also find that large pension funds pay significantly higher performance fees for equity private equity and hedge fund investments

the benefits of lending relationships evidence from small business data this paper empirically examines how ties between a firm and its creditors affect the availability and cost of funds to the firm we analyze data collected in a survey of small firms by the small business administration the primary benefit of building close ties with an institutional creditor is that the availability of financing increases we find smaller effects on the price of credit attempts to widen the circle of relationships by borrowing from multiple lenders increases the price and reduces the availability of credit in sum relationships are valuable and appear to operate more through quantities rather than prices

japan s banking crisis an event study perspective we calculate abnormal stock returns for japanese non financial companies around major events associated with the banking crisis 1995 2000 and find that not all companies were equally sensitive to the malaise of the banking sector the most affected were small leveraged low tech companies with low credit ratings and low market to book ratios this is consistent with credit crunch theories companies with limited access to financial markets are sensitive to changes in bank lending and with claims that innovation is rarely financed by bank debt we do not find much evidence on the alleged misallocation of loans to support ailing bank clients

market discipline and deposit insurance cross country evidence presented in this paper suggests that explicit deposit insurance reduces required deposit interest rates while at the same time it lowers market discipline on bank risk taking internationally deposit insurance schemes vary widely in their coverage funding and management this reflects that there are widely differing views on how deposit insurance should optimally be structured to inform this debate we use a newly constructed data set of deposit insurance design features to examine how different design features affect deposit interest rates and market discipline

a characterization of robust sunspot equilibria abstract in nonconvex environments a sunspot equilibrium can sometimes be destroyed by the introduction of new extrinsic information we provide a simple test for determining whether or not a particular equilibrium survives or is robust to all possible refinements of the state space we use this test to provide a characterization of the set of robust sunspot equilibrium allocations of a given economy it is equivalent to the set of equilibrium allocations of the associated lottery economy journal of economic literature classification numbers d51 d84 e32

the pbgc s flat fee schedule moral hazard and promised pension benefits abstract the pension benefit guarantee corporation pbgc initially insured private pension benefits in exchange for a premium that was not risk sensitive this paper derives conditions under which a moral hazard problem caused promised pension benefits to increase the hypotheses are tested using data on individual pension contracts from the pre and post pbgc periods

equilibrium prices when the sunspot variable is continuous we analyze sunspot equilibrium prices in nonconvex economies with perfect markets and a continuous sunspot variable our primary result is that every sunspot equilibrium allocation can be supported by prices that when adjusted for probabilities are constant across states this result extends to the case of a finite number of equally probable states under weak nonsatiation conditions but does not extend to general discrete state spaces we use our primary result to establish the equivalence of the set of sunspot equilibrium allocations based on a continuous sunspot variable and the set of lottery equilibrium allocations

prospective deficits and the asian currency crisis this paper argues that a principal cause of the 1997 asian currency crisis was large prospective deficits associated with implicit bailout guarantees to failing banking systems the expectation that these future deficits would be at least partially financed by seigniorage revenues or an inflation tax on outstanding nominal debt led to a collapse of the fixed exchange rate regimes in asia we articulate this view using a simple model whose key feature is that a speculative attack is inevitable once the present value of future government deficits rises we present empirical evidence in support of the key assumptions underlying our interpretation of the crisis