Effect Of Financial Instability Research Articles

Effects of financial instability on subjective well-being: a preference-based approach

PurposeThe purpose of this paper is to examine the link between banking crises and the subjective well-being of individuals. In addition, the authors examine the transmission of crises from the banking sector to well-being and show that negative financial shocks have significant adverse effects.Design/methodology/approachThe authors employ agent-based modeling to test for the direct and indirect welfare effects of banking crises. The model includes a support vector machine (SVM) optimized subjective well-being function. The existing literature suggests that this is influenced by both the negative psychological effects of recessions and the adverse economic effects of income loss and increased unemployment.FindingsThe authors show that the different choices of policy response to a banking crisis carry different opportunity costs in terms of welfare and that societal preferences should be taken into account. The authors demonstrate that these effects influence different population classes in an asymmetric manner. Finally, the results demonstrate that the welfare loss of a bank failure is much higher than the cost of a bailout.Practical implicationsThe authors are able to propose to the authorities the best policy mix in order to handle banking crises in the most adequate manner, according to society's preferences between financial stability and public goods.Social implicationsThe findings extend the existing literature on subjective well-being, by quantifying the welfare cost of banking crises and showing that authorities should reconsider bank bailouts as a policy solution to bank distress.Originality/valueThe originality of this article lies in the use of an agent-based model to model the relationship between societal well-being and financial stability. Also, the authors extend existing agent-based methodologies to include machine learning optimization techniques.

The start-up decision under default risk

This study introduces a real option model to investigate how fiscal policy affects a representative firm's investment decision and to measure its welfare effects. On the one hand, the effects of financial instability on the optimal investment timing and on the probability of default are studied. On the other hand, it is shown how the net present value of an investment project, the tax revenue generated and the welfare are influenced by financial instability. Then, a comparison of welfare effects of tax policy on start-ups, mature and obliged firms is provided. This comparison provides policy-makers a tool to shape their tax systems according to the characteristics of their firms. All presented analyses are supported by numerical simulations, based on realistic data.

Corporate social responsibility, financial instability and corporate financial performance: Linear, non-linear and spillover effects – The case of the CAC 40 companies

This article examines the influence of corporate social responsibility (CSR) on the financial performance (CFP) for CAC 40 companies from 2002 to 2017, considering the effect of financial instability at the macro level. We based our approach on a dynamic modeling of the CFP-CSR relationship, as well as on the generalized method of moments (GMM) to overcome the problem of endogeneity. Our results show that CSR positively affects the CFP in two ways: directly, through an overall positive non-linear effect, and indirectly by mitigating the negative effect of banking crises on the CFP, which is a positive spillover effect.

Financial instability and performance of banking sector in Nigeria: an evaluation

This study critically evaluates the financial instability and the performance of banks in Nigeria as regards to its causes and implications. This critical evaluation required the formulation of some testable hypotheses to confirm the effect of financial instability in the performance of banking sector. The results obtained confirmed that financial instability adversely affect the performance of the banking sector, has significant relationship with the level of unemployment in the banking sector; as it caused retrenchment of staff due to inability of banks to meet up with their obligations and as an the attempt to reduce operations costs. The study concludes that government as well as CBN should formulate policies that will enhance in flow of fund in the system, eliminate fraud and non-performing credits. We recommend that banks should diversify their lending activities to the agricultural sector and tourism, encourage export activities and involve in investment opportunities.

Finance and poverty: Evidence from fixed effect vector decomposition

In this paper we attempt to distinguish the direct effect of financial development on poverty reduction from its indirect effect through economic growth. Using an efficient estimator called fixed effect vector decomposition (FEVD) we employ a set of panel data from 54 developing countries for the period 1993–2004. Our results indicate that on average financial development is conducive for poverty reduction but the instability accompanying financial development is detrimental to the poor. The major policy recommendations suggested by the paper indicate that financial sector reforms should be directed at easing credit restrictions while taking into consideration the effects of financial instability on the poor.