Differences In Institutional Framework Research Articles

EU Regulation and open market share repurchases: new evidence

ABSTRACT This paper re-examines the impact of the EU Market Abuse Directive (MAD) on the market reaction around share repurchase announcements. We use a unique hand-collected dataset of firms listed on the Athens Stock Exchange, and we find evidence that contrasts with previous conclusions for large European economies. The implementation of the MAD is followed by a significant increase in announcement abnormal returns, which is more pronounced in initial repurchase programs. Our results remain robust to a series of robustness tests. We attribute our findings to cross-country differences in institutional framework and pre-MAD existing national laws. Collectively, our results support the notion that EU directives do not have a uniform effect across Member States. Thus, the impact of such reforms should also be examined in individual capital market studies.

Market Reaction to Stock Repurchases in Greece

This paper re-examines the impact of the EU Market Abuse Directive (MAD) on the market reaction around share repurchase announcements. We use a unique hand-collected dataset of firms listed on the Athens Stock Exchange, and we find evidence that contrasts with previous conclusions for large European economies. The implementation of the MAD is followed by a significant increase in announcement abnormal returns, which is more pronounced in initial repurchase programs. Our results remain robust to a series of robustness tests. We attribute our findings to cross-country differences in institutional framework and pre-MAD existing national laws. Collectively, our results support the notion that EU directives do not have a uniform effect across Member States. Thus, the impact of such reforms should also be examined in individual capital market studies.

An international forensic perspective of the determinants of bank CDS spreads

Against the backdrop of the Great Recession, investigating the differences in institutional frameworks became important to explain the heterogeneity in the market perception about the credit quality and default risk of banks in different countries. Using data for 118 banks of 30 countries over the period 2004–2011, we find that an improvement of the quality of economic and legal institutions can help in reducing banks' CDS spreads, as banks operating in countries where the regulatory quality is stronger tend to be less affected by spikes in financial stress of 2008–2009. Considering a series of indicators of the financial structure of the banking system, our results reveal that more concentration of the banking sector, a stronger presence of foreign banks, a deterioration of the banking sector health or the lack of alternative means of finance is associated with higher CDS spreads of banks. We also show that the dynamics of bank CDS spreads accrue to: (i) the quality of banks’ balance sheet; (ii) (il)liquidity of banks’ assets; (iii) how profitable banks’ operations are; and (iv) the banks’ leverage ratios. Finally, higher CDS spreads of banks tend to be associated with periods of high inflation and low GDP growth.

Structural Asymmetries and Financial Imbalances in the Eurozone

Almost two decades after the introduction of the common currency, differences in institutional frameworks remain a major source of cross-country heterogeneity in the eurozone. We develop a two-country model with incomplete international markets in which the availability of credit depends on the country’s institutional environment. Our main finding is that structural differences in domestic credit environments provide an explanation for the procyclicality of net capital inflows observed in the South of Europe. We show that frictions in domestic credit markets generate asymmetries in the transmission mechanism of shocks that are common to both regions.

Does the law of one price apply to dually listed ETFs belonging to the same family? Evidence from iShares

According to the law of one price, two identical securities traded in different places at the same time should command the same price. This law is expected to strongly hold when the identical securities also belong to the same investment family. In this article, we examine whether the law of one price applies to dually listed securities belonging to the same family. In particular, we use a sample of 12 pairs of the UK and US ETFs managed by the same family (the Blackrock) and tracking the same stock index in the period 2002–2011 so as to investigate whether there are any differences in key institutional characteristics, such as assets under management, expense ratio, return, risk and tracking ability. The results indicate significant differences in assets, expenses, performance and risk profile but not in the tracking efficiency between the UK and US ETFs. The results also indicate that the performance of the UK ETFs is independent to the performance of the US counterparts. On the basis of the findings, we may conclude that dual or multiple offerings originated in countries with differences in institutional framework, currencies and time zones are likely to differ despite them being offered and managed by the same firm. Therefore, the assumption about the one price is rejected and, thus, multiple offerings of ETFs are expected to co-exist.

What If Everything We Know About Economic Policy is Wrong?

Like other sciences, economics shows long periods of gradual refinement of theory and the steady accretion of empirical evidence, punctuated by the occasional sea change in world views. Thus the history of economic thought and practice reveals distinctive eras characterized by differences in what was considered conventional wisdom by informed lay persons and policy practitioners, differences in institutional frameworks, and differences in the preoccupations of the leading theoreticians. An example of such a change came in the pivotal decade of the 1970s from the Bretton Woods era package of Keynesian demand management, fiscal policy pre-eminence, fixed exchange rates, and New Deal welfare economics to the neoliberal combination of supply-side public policy, monetary policy pre-eminence, floating exchange rates and an emphasis on market disciplines and incentives that has dominated since. This paper argues that a similar confluence of pressures, contradictions and policy impotence that accompanied the paradigm shift of the 1970s is in evidence today. This argues for a fundamental re-appraisal of what is presently considered conventional wisdom — i.e., of what we “know” about economic policy today.

Do financial markets react to Bank of England communication?

This paper examines how United Kingdom financial markets react to Bank of England communication. We might expect asset prices to react to official communication if it is informative to market participants about the policy inclination or economic outlook and risks. We find evidence that the publication of the Minutes of Monetary Policy Committee meetings and the Inflation Report significantly affect near-term interest rate expectations, an effect particularly visible in intraday data. Our results for the United Kingdom are arguably less strong than Kohn and Sack's [Kohn, D., Sack, B., 2003. Central bank talk: does it matter and why? Federal Reserve Board Finance and Economics Discussion Series 2003–55] findings for United States Federal Reserve communication, where the impact extends along the yield curve. Although differences in institutional frameworks between the United Kingdom and United States mean communications are not directly comparable, our results might also reflect the different mandates of the FOMC and the MPC, with the Federal Reserve having greater freedom to interpret its objectives.

Monitoring cost, agency relationships, and equilibrium modes of labor contracts

In this paper, we attempt to give an economic explanation for differences in institutional framework between Japan and Western countries. We propose that the differences may be created because economies sometimes have multiple equilibria, each of which is characterized by a different institutional norm. Thus, differences in institutional framework that exist between different societies may be ascribed neither to the difference in “cultures” nor to underlying behavioral norms or parameters. Particularly, we investigate why and how different modes of economic relations arise in a labor market when work incentive is a crucial factor in labor management. Like many other papers in this field, this paper shows that there may be involuntary unemployment in order to create a threat of dismissal for workers who shirk their duties. One novelty of the current paper lies in the fact that, by introducing an immediate penalty to those workers who are found shirking, equilibrium labor contracts may not be of the form in which contracts are automatically renewed as long as workers are not found shirking. Thus, our economy is found to be characterized either by long-term labor contracts with involuntary unemployment or by short-term labor contracts with no unemployment, depending upon the value of underlying parameters. We identify the factors which make firms choose different labor contracts, and perform comparative statics. Moreover, we show that the economy normally has two equilibria, the one described above and the other characterized by long-term labor contracts with no unemployment. Work incentive is created by the belief that dismissed workers will not find new jobs. The latter type of equilibrium is proved to be Pareto superior. The implications of multiple equilibria in such a framework are discussed.