Using over a half century of data, this empirical study adopts a simple loanable funds to investigate the impact of the federal budget deficits and other factors, chiefly financial market factors, on the ex post real interest rate yield on high-grade municipal bonds in the United States. Two autoregressive two-stage least squares (AR/2SLS) estimates for the 1960 to 2011 study period and another for the 1971 to 2011 study period find that the ex post real interest rate yield on high-grade municipal bonds is an increasing function of the ex post real interest rate yield on Moody's Baa-rated corporate bonds, the ex post real interest rate yield on 3-year US Treasury notes, the real value S&P 500 stock index and the federal budget deficit (relative to the GDP level). Based on these results, it is observed that factors elevating the federal budget deficit appear to raise the real cost of borrowing to the cities (of all sizes), counties and states across the United States. Given the time period studied, 1960 through 2011, this relationship appears to be an enduring one, one that responsible policy-makers should not overlook. Over the long run, failure to address the federal budget issue could have profound negative impacts on the finances of US cities, counties and states and their economic activities.Keywords: tax-free interest ratesbudget deficitsmoney supplyreal taxable interest ratesJEL Classification: E62G12H62G10
The main idea of the article is to advance some arguments regarding a paradox of corporate governance: if it creates so much value for shareholders why in most countries governance is still heavily regulated by strict codes? The article advances a theoretical framework for the voluntary adoption of better corporate governance practices as influenced by four dimensions: ownership and control issues, capital structure, exit strategies and market performance. I estimate probit panel models with data from Brazilian companies that voluntarily moved to the Novo Mercado (New Market). Results indicate as significant variables representing the need for exit strategies through liquidity and the existence of shareholders' agreements, while higher capital concentration implies a lower probability of companies voluntarily adopting better governance practices. Also, market drivers such as lower capital costs and performance are not statistically significant.
Two crucial problems when research agencies or donors need to assess empirically the microfinance/children education nexus on already operating organizations are lack of availability of panel data and selection bias. We propose an original approach which tackles these problems by combining retrospective panel data, fixed effects and comparison between pre- and post-treatment trends. The relative advantage of our approach vis-à-vis standard cross-sectional estimates (and even panels with just two time periods) is that it allows to analyse the progressive effects of microfinance on borrowers. With this respect, our article gives an answer to the widespread demand of impact methodologies required by regulators or by funding agencies which need to evaluate the current and past performance of existing institutions. We apply our approach to a sample of microfinance borrowers coming from two districts of Buenos Aires with different average income levels. By controlling for survivorship bias and heterogeneity in time invariant and time varying characteristics of respondents we find that years of credit history have a positive and significant effect on child schooling conditional to the borrower’s standard of living and distance from school.
During the first phase of the financial crisis in 2008/09, after Iceland and Belgium, Kazakhstan experienced the most significant bank failures as a share of bank system assets. Using rich monthly data for virtually the entire Kazakh banking industry for the period March 2007–December 2010, Stochastic Frontier Analysis (SFA) is used to fit several functions (cost, revenue, standard profit, alternative profit and input distance). Among other things, we estimate the effects of two measures of the quality and risk of the loan portfolio on the industry best practice frontiers and bank inefficiencies. We find that an increase in the volume of bad loans as a ratio of total lending has a desirable effect on the cost, input-distance and alternative profit frontiers, all of which is consistent with the ‘skimping’ hypothesis.
This article examines the relationship between multiple directorships of directors and board meeting frequency. Precisely, using an ordered probit model, we empirically investigated the effect of accumulation of outside directorships by directors on board meeting frequency. The research sample is composed of 90 nonfinancial French-listed firms that belong to the SBF 120 index, over the period 2008 to 2010. The results suggest that multiple directorships by board members are positively associated with board meeting frequency. So, the findings indicate that the accumulation of outside directorships by directors may motivate the board of directors to meet more frequently.
We test the nexus between local financial development and economic growth upon Italian data highly disaggregated at the territorial level, paying particular attention to the role of local banking market structure. We specify a growth model where a qualitative measure of financial development, bank profit efficiency, is considered in conjunction with a customary quantitative measure of financial development. The model is estimated on panel data over the period 2001 to 2010. The evidence suggests that both indicators of financial development have a significant impact on GDP per worker, especially when considering areas characterized by a larger number of cooperative banks. Results are not much affected by the occurrence of the ongoing recession.
This study provides new evidence of nonlinearities in the dynamics of volatility expectations during financial crises using Markov regime-switching models of model-free volatility indices. The regimes of changes in implied volatility in international financial markets are defined as function of market sentiment and a realignment process following forecast errors consistent with rational expectations. The results indicate that market returns and changes in forecast errors have indeed the potential of influencing the formation of volatility expectations. But the main force driving the dynamics of volatility expectations during periods of financial instability lies rather in the correlation with returns, reflecting market sentiment. The insignificance of the realignment process may be reflective of consensus beliefs that past information does not provide useful guidance during financial crises. It is forward-looking macroeconomic information and contemporaneous price movements that are more likely to shape the dynamics of volatility expectations.
We examined the effects of sovereign risk on bond duration in European and Latin American sovereign bond markets over the period 1996 to 2011. We compared the sovereign risk-adjusted duration with the Macaulay duration for both investment- and speculative-grade US dollar-denominated sovereign bonds. We found that the sovereign risk-adjusted duration is significantly shorter than its Macaulay counterpart for all ratings, and the ‘shortening’ effect is stronger for lower rated bonds, which generally intensified during the recent financial crisis. Results are robust when credit default swap (CDS) prices are used as a proxy for changes in sovereign risk. This study provides evidence for advocating the importance of adjusting the bond duration for sovereign risk. More important, this study provides a practical methodology for estimating a sovereign risk-adjusted duration measure for managing international bond portfolios.
This article examines the forecasting performance of two-scale realized volatility (TSRV) measure in comparison to that of the conventional sparsely sampled realized volatility (SSRV) measure, using selected volatility forecasting models. There is evidence that the forecasts based on TSRV are more efficient and less biased than those based on SSRV, for all the forecasting models employed. This implies that the quality of forecast predominantly depends on the quality of estimate, and not on the forecasting model. With TSRV estimates, the exponentially weighted moving average models for daily forecasts, and the random walk model for weekly and monthly forecasts, marginally dominate the other models on efficiency and bias criteria.
This article uses several tests to analyse serial dependence in financial data, trying to confirm the existence of some kind of nonlinear dependence in stock markets. In an attempt to provide a better explanation of the behaviour of stock markets, we used tests based on mutual information and detrended fluctuation analysis (DFA). Applying these tests to the series of stock market indexes of 10 countries, we concluded for the absence of linear autocorrelation. However, with other tests, we found nonlinear serial dependence that affects the rates of return. With DFA, we found out that most return rate series have long-range dependence, which appears to be more pronounced for Spain, Greece and Portugal. To confirm the inefficiency of those markets, based on our results, we should prove the existence of abnormal profits.
This article explores the impact of gender-diverse boards on the cost of publicly traded corporate debt. Using a sample of Japanese corporate bond issues, we find that firms with female outside directors enjoy lower cost of corporate public debt after controlling for corporate governance, bond and firm characteristics. In addition, the results using matching methods also show that the cost of corporate public debt is lower for firms with female outside directors. Overall, these findings indicate the importance of gender-diverse boards in corporate bond markets.
Czarnitzki and Stadtmann (2005) measure the interdependence of demand for investment advice (approximated by sales of investor magazines) and stock prices. They find strong evidence that confirms the presence of the disposition effect, i.e. the empirical observation that investors sell winners (too) early and abide losers (too) long. We reinvestigate their findings and confirm that the effect is very well present in the formerly analysed time frame, but clearly wears off afterward. As an explanation for the decline, we provide three lines of argumentation and show that disposition effect might depend on the shareholder structure, which is in line with the theory.
The developed market literature suggests that peer group selection based on a careful selection of valuation fundamentals may improve the valuation accuracy of multiples. However, the literature does not offer an emerging market perspective in this regard. In this article the valuation performances of 16 equity multiples are investigated, based on three individual valuation fundamentals and three different combinations of these valuation fundamentals. The valuation performance of these 16 multiples is assessed in the equity valuation of South African companies listed on the JSE Securities Exchange over the period 2001 to 2010. The empirical results revealed, among other findings, that peer group selection based on a careful selection of valuation fundamentals could, on average, increase valuation accuracy of multiples by as much as 37.88%.
Corporate social responsibility (CSR) is a multidimensional concept that involves several aspects, ranging from environment to social and governance. Companies aiming to comply with CSR standards have to face challenges that vary from one aspect to the other and from one industry to the other. Latent variable models may be usefully employed to provide a unidimensional measure of the grade of compliance of a firm with CSR standards, which is both understandable and theoretically solid. A methodology based on item response theory has been implemented on the multidimensional sustainability rating as expressed by KLD data-set from 1991 to 2007. Results suggest that companies in the oil and gas industry together with firms in industrials, basic materials and telecommunications have a higher difficulty to meet the CSR standards. Criteria based on human rights, environment, community and product quality have a large capacity to select the best performing firms, as they are very discriminant, while governance does not exhibit similar behaviour. A stock selection based on the ranking of the firms according to the proposed CSR measure supports the hypothesis of a positive relationship between CSR and financial performance.
This article studies the link between stock returns and size and book-to-market equity effects for 10 companies listed at the Suriname Stock Exchange (SSE). We analyse the cross-sectional variation in average returns and we find that there is apparently no size effect, but there is a value effect. The findings are broadly in line with those for other emerging markets documented in the literature.
We re-examine the positive relationship between the probability of information-based trading (PIN) measure and timely loss recognition, documented by LaFond and Watts (2008). This relationship has been interpreted as evidence that timely loss recognition plays an information role for equity investors in addition to the debt-contracting role widely suggested by the accounting literature. However, we show that this relationship diminishes after we control for lender–shareholder conflict, for which we use as a proxy the price-change asymmetry (PCA) measure suggested by Easton et al. (2011). This finding implies that timely loss recognition still caters mainly to the demands of lenders rather than equity investors. Our study contributes new evidence to the ongoing debate on the underlying cause of timely loss recognition, which is a fundamental issue in accounting literature.
We examine why independent securities companies and bank subsidiary securities companies can coexist as underwriters in the Japanese corporate bond market in a period when the main bank system is very important in the Japanese financial system. While it has already been found that lending and shareholding relationships between main banks and issuers are not important determinants of underwriting commissions or yield spreads, they are found to be important determinants of lead underwriter choices. The findings about the impact of main bank relationships on underwriter choices suggest that an issuer with a strong main bank shareholding relationship chooses the main bank subsidiary securities company as the lead underwriter, and is unlikely to choose an independent securities company. An issuer with a larger sized bond issue tends to choose an independent securities company as the lead underwriter for its marketing ability. The findings from four different models consistently support the idea that independent securities companies have an advantage in marketing ability, and the main bank subsidiary securities company has an advantage in the information generated through the main bank relationship.
The article investigates market reaction to negative reports published by analysts and auditors for a sample of investment, commercial and savings banks during the 2008 financial crisis and compares the results to noncrisis periods. The results show that during 2008, analysts’ downgrades and underperformance reports resulted in stronger negative returns than during noncrisis periods and that investment banks experienced the worst stock price declines. The market reaction to auditors’ issues and going concern flags is different during the crisis as well. In noncrisis periods no reaction to auditors’ bad news is reported, while during the crisis there is a negative and significant reaction for investment banks only. Overall, the type of bank, investment versus commercial, significantly contributes to explaining the variability in returns during the financial crisis.
We investigate the association between real estate investment by US Bank Holding Companies (BHCs) and their return, risk and risk-adjusted returns. Three portfolios are formed of BHCs according to whether they do or do not invest in real estate, strictness of the regulation on real estate investment and the ratio of real estate investment to assets. Wilcoxon tests of differences in portfolio returns, risk, risk-adjusted returns and value at risk between each pair of portfolios are conducted to determine how engagement in real estate, stricter regulation and increased real estate investment affect BHC performance. These effects are also investigated within a GARCH framework. Wilcoxon tests indicate that real estate investment or operating under lenient rules lower return and risk-adjusted returns and raise risk. Within GARCH, increases in real estate investment are associated with lower returns and greater systematic risk for BHCs with higher real estate shares in assets. These results indicate that benefits from real estate investment by banks are outweighed by greater variability of real estate prices and BHCs’ lack of expertise in the field. BHCs in the sample invested no more than 4.54% of their assets in real estate, leaving open the possibility that a higher threshold exists, beyond which performance improvements would be manifested.
This article examines the relevance of cash dividend from the theoretical and empirical perspective by taking market liquidity into account. We construct an economic model that demonstrates that the effect of cash dividend on firm valuation depends on the status of market liquidity. The hypotheses derived from our model are strongly supported by data from A- and B-share markets in China. Our results from the dynamic panel regression demonstrate that the price premium of B-share relative to A-share is positively correlated to the level of cash dividend, and this relationship becomes even stronger when the relative liquidity of B-share is in a low status. In addition, this price premium is positively affected by the relative liquidity and firm profitability. The results are robust under alternate liquidity and dividend measures. The subsequent analysis based on the event study approach further reveals a more positive (negative) response to the announcement of cash dividend initiation (omission) in the B-share market. In particular, this positive response on the initiation is negatively correlated with the relative liquidity.
