Negative Real Effects Research Articles

Impact of China on commodity exporters

AbstractWe compare the effect of a domestic shock in China and the US on the real economy and financial markets of various commodity‐exporting countries. To obtain a reliable indicator for China's macroeconomic conditions, we estimate a Bayesian dynamic factor model using block‐exclusion restrictions to identify a China factor and a US factor from monthly macroeconomic data for China and the US. We, then, assess the implications of a negative shock to both factors on the macroeconomy of a commodity‐exporting nation using Bayesian FAVARs based on recursive identification. A negative China shock leads to output loss and a fall in stock prices in these countries. China shock affects the output of only a subset of countries in our sample compared to the US shock, which affects all countries. China shock has a larger, quicker and more persistent impact on the stock markets of commodity‐exporting countries compared to the US shock. Countries with weaker institutional or business environments experience a larger negative real effect of the China shock, whereas countries with less stable financial systems demonstrate stronger financial effects. Using historical decomposition, we establish a growing role of the China factor over time, in particular for large emerging economies such as Brazil and Russia.

The unintended consequence of financial statement comparability: evidence from managerial learning practices

Comparable financial disclosure has well-known benefits but also unintended consequences. This study identifies one unintended consequence of managerial learning. For a large sample of Chinese companies, we find that investment-to-price sensitivity declines with financial statement comparability, indicating that comparability discourages managers from learning from prices. Consistent with the learning explanation, this negative relation is stronger for growth firms and for firms operating in more concentrated industries, where managers rely more on market prices for their investment decisions. We further find a decrease in firm value for these two groups of firms. Overall, we document a negative real effect of comparability.

Government economic policy uncertainty and corporate debt contracting

AbstractWe examine the relation between government economic policy uncertainty and debt contracting of U.S. public firms. We find that policy uncertainty is associated with more stringent debt terms, such as shorter debt maturity, higher cost of debt, and more restrictive debt covenants, and these relations are concentrated in financially constrained firms. Further analysis indicates that the negative real effects of policy uncertainty documented in the literature are more pronounced for financially constrained firms. Overall, our evidence suggests that policy uncertainty dampens external financing and exacerbates firms' financial constraints, leading to their investment delays.

Mandatory Repurchase Disclosure, Opportunistic Repurchases, and Their Real Effects

In 2003, the SEC amended Rule 10b-18, significantly increasing the disclosure requirements for and transparency of share repurchases with the intention to curb false signaling by management. Bonaime (2015) finds that the 2003 SEC amendment reduced firms’ open market repurchase announcements and increased repurchase announcement completion rates, resulting in a decline in false signaling. In this paper, we examine the effect of the 2003 SEC amendment on firms’ opportunistic use of stock repurchases to meet or beat analyst earnings per share (EPS) forecasts and the resultant negative real effects. We find that the 2003 SEC amendment curtails opportunistic repurchases, enables the market to recognize and discount opportunistic repurchases, and eliminates the employment and investment reductions following opportunistic repurchases. Our evidence suggests that the increased transparency of share repurchases mandated by the 2003 SEC amendment has significantly altered both the corporate use of repurchases as an earnings management device and the negative real consequences of opportunistic repurchases.

Financing with equity-for-guarantee swaps and dynamic investment under incomplete markets

This paper develops a dynamic incomplete-markets model to analyse the impact of equity-for-guarantee swaps (EGSs), a financial innovation in China, on the interaction between an entrepreneur's initial financing and future dynamic investment policies. We compare the main implications generated by EGSs and traditional fee-for-guarantee swaps (FGSs). We demonstrate a twofold effect of EGSs on the firm: EGSs increase the firm's borrowing ability ex ante and thus allow the entrepreneur to enjoy a greater reduction in exposure to idiosyncratic business risk and undertake larger initial projects. However, EGSs aggravate the ex post underinvestment problem. Moreover, we argue that this additional underinvestment is more severe when entrepreneurs have higher risk aversion, the firm's capital is less liquid, the long- and short-term shocks to the firm's cash flow are larger, the corporate tax rate is higher, and the government provides higher subsidies to guarantors. Thus, our model yields a novel practical implication whereby EGSs' positive and negative real effects should be fully considered when decisions are made regarding their use.

Public Debt Composition, Debt Policy Rules and Growth in Selected SADC Countries

Purpose: This study examined the relative effect of debt composition and debt reduction policy rule on economic growth in selected SADC countries which are Mauritius, Tanzania and Zimbabwe. Design/Methodology/Approach The Markov-switching method was used to estimate the debt growth model for the period 1990Q1-2016Q4
 Findings:. The effects of debt proved to be regime dependent which supports the time effects of debt in all countries. High external debt relative to domestic debt had positive effect on growth in Tanzania which is a good reforming country and had negative effects in the case of Zimbabwe which is a debt distressed country. In comparison to Mauritius, a domestic debt dependent country, high domestic debt relative to external debt had negative impact on growth. The effects tend to rise with market pressure and government consumption behaviour. A negative real effect of debt reduction policy rule was confirmed for Zimbabwe and irrelevance in countries with less threat of debt distress. 
 Implications/Originality/Value Therefore the study found support to the quantity-effect rather than type-effect of debt on growth. We recommended that countries should consider both time and quantity effects of debt in debt management; adopt explicit debt reduction rules which constrain fiscal behaviour and force policy commitment towards debt stabilization.

Voluntary Disclosure and Informed Trading

I study the impact of informed trading on voluntary corporate disclosure in the presence of two frictions: cost of disclosure and value of managerial information. In the absence of both frictions, informed trading has no impact on disclosure even when traders are not certain whether the manager has information. If disclosure is costly, then informed trading reduces disclosure. Since traders can discover favorable information about the firm, additional disclosure of the information is not necessary. If managerial information is valuable for the firm, then informed trading increases disclosure. Since traders can discover unfavorable information about the firm, the manager with such information has less incentives to pool with uninformed managers and discloses to show that he is informed. I also show that informed trading can have both a positive and a negative real effect on the firm value by crowding in or crowding out information production in the firm. These results hold for general information structures and are robust if traders can choose how much information to acquire.

Output Effects of Monetary Policy in Emerging and Developing Countries: Evidence from a Meta-Analysis

ABSTRACTUsing 45 studies conducted between 2001 and 2014, this paper employs a meta-regression analysis (MRA) to synthesize vector-autoregressive findings of output effects of a tightening in monetary policy in 32 emerging and developing countries. The outcomes indicate a publication bias. However, tightening of monetary policy has a negative real effect on output. Primary studies including commodity price variable(s) tend to report stronger negative effects. Output effects are likely to be more negative in an economy with a developed financial system and less effective in an economy with high inflation volatility.

Bank Lending and the European Sovereign Debt Crisis

I investigate whether bank exposures to sovereign debt during the European debt crisis affected the real economy. I show that a shock to the marked-to-market (MTM) value of bank exposures to sovereign debt led to credit tightening in 2010–2011 that had negative real effects on small and young firms. Because banks do not usually mark their holdings of sovereign bonds to market, I explore the transmission channels of the unrealized losses on credit supply. I show that a shock to MTM exposures reduced short-term bank funding from U.S. money market funds rather than affecting equity or working through alternative channels.

Real Effects of the Sovereign Debt Crisis in Europe: Evidence from Syndicated Loans

We explore the causes of the credit crunch during the European sovereign debt crisis and its impact on the corporate policies of European firms. Our results show that value impairment in banks’ exposures to sovereign debt and the risk-shifting behavior of weakly capitalized banks reduced the probability of firms being granted new syndicated loans by up to 53%. This lending contraction depressed investment, employment, and sales growth of firms affiliated with affected banks. Our estimates based on firm-level data suggest that the credit crunch explains between 44% and 66% of the overall negative real effects suffered by European firms. Received April 5, 2016; editorial decision February 3, 2018 by Editor Andrew Karolyi. Authors have furnished an Internet Appendix, which is available on the Oxford University Press Web site next to the link to the final published paper online.

Basel III LCR: A Regulatory Shock on a Bank and Beyond

This study investigates a regulatory spillover effect of the Basel III liquidity standard on the real economy through a series of difference-in-difference estimations. Since the Basel Committee’s official endorsement for the new liquidity regulation in December 2010, a bank exposed to high liquidity risk reduced its loan proportion significantly, making a negative real effect on its surrounding economy via a bank-lending-channel. The new regulation also induced a bank with a weak liquid balance sheet to raise its deposit rate aggressively, generating a liquidity problem in a nearby local bank through a deposit-competition-channel and ultimately curbing an expansion of the local bank’s credit supply to the economy.

Bank Lending and the European Sovereign Debt Crisis

I investigate the relationship between the sovereign debt crisis and the credit crunch in Europe. Using data on banks’ exposure to government debt, I show that banks more exposed to the sovereign shock tightened credit supply by more than banks that were less exposed. This happens both though credit quantities and prices, even controlling for a firm fixed effect. I further show that there are negative real effects for small firms borrowing from the affected banks, even in countries not under sovereign stress. The results are also robust to instrumenting the level of sovereign exposure with banks’ government ownership. The data suggest that banks’ sovereign exposures mattered for the credit crunch because they increased banks’ cost of funding rather than affecting banks’ equity.

Technology Development through Knowledge Assimilation and Innovation

The current paper studies an endogenous growth model driven by the technological development level of a country, which conditions both its factor productivity and the financial investment decisions of agents. Heterogeneity in the level of technological development among countries may not only lead to temporal divergences in income and productivity levels but also to divergent growth paths and poverty traps for identical available technologies. The authors illustrate the structural instability resulting from differences in the technological development level of countries and the subsequent financial constraints arising from such differences. Consequently, a strong national system of innovation should prove vital to ameliorate the negative real effects that follow from a severe financial shock. The obvious and imminent implications regarding the expected evolution of the European Monetary Union are derived both formally and numerically.

Real Effects of the Sovereign Debt Crisis in Europe: Evidence from Syndicated Loans

We explore the impact of the credit crunch that followed the European debt crisis on the corporate policies of European firms. We show that banks' exposures to impaired sovereign debt and the risk-shifting behavior of undercapitalized banks contributed significantly to the severity of the crisis. In particular, we present firm-level evidence showing that the lending contraction of banks affected by the crisis depressed the investment, job creation, and sales growth of firms affiliated with these banks. Our estimates suggest that the credit crunch explains between one-fifth and one-half of the overall negative real effects suffered by European borrowing firms.

Do Asset Price Bubbles have Negative Real Effects?

In the recent recession and current economic recovery, policymakers have supported asset prices in the U.S. treasury and mortgage markets, expecting that improvement in the balance sheet of banks will lead to more commercial lending. In general, we document that increases in housing prices in a bank’s deposit base lead banks to decrease commercial lending. Further, we find that a one-standard deviation increase in housing prices is associated with a 10.3 percentage point decrease in investment of borrowing firms and a 4.2 percentage point decrease in leverage. These results suggest that when asset prices increase in one sector (such as the housing market), banks may respond by reallocating capital away from other sectors (such as commercial lending) towards the supported sectors.

How do bank competition, regulation, and institutions shape the real effect of banking crises? International evidence

This paper studies the influence of bank competition on the real effect of 36 systemic banking crises in 30 countries over the 1980–2000 period and how this influence varies across countries depending on bank regulation and institutions. We find that bank market power is not on average useful for mitigating the negative real effect of a systemic banking crisis. Market power promotes higher growth during normal times in industries that are more dependent on external finance but induces a bigger reduction in growth during systemic banking crises. We also find a country-specific effect depending on bank regulation and institutions. Stringent capital requirements and poor protection of creditor rights increase the benefits of bank market power for mitigating the negative real effect of a systemic banking crisis because bank market power has a positive effect on economic growth during both crisis and non-crisis periods in these environments.

Wall Street and Main Street: the macroeconomic consequences of New York bank suspensions, 1866–1914

Before the formation of the Federal Reserve, banking panics were routine events in the United States. During the most severe episodes, banks in cities across the country would often suspend or restrict the par convertibility of their demand deposit liabilities. In diagnosing the causes of the Great Depression, Friedman and Schwartz famously regard these local initiatives as a second best solution, which in the absence of an effective lender of last resort would have prevented the rash of bank failures during the early 1930s and their dire monetary and real impacts. Recent research in macroeconomics though has raised the possibility that banks’ suspension of payments might also have negative real effects albeit through changes in aggregate supply such as the financing of working capital. We would expect to observe these negative shocks during the pre-Fed era, because the decentralized, private interbank payments network was especially vulnerable to systemic disruptions such as suspensions by New York and other money center banks. Reports in national trade periodicals and local newspapers during suspension periods offer many accounts of factories closing because of the inability to obtain currency for weekly payrolls and “domestic exchange” to finance internal trade. We corroborate these observations with more systematic econometric evidence at the national and regional levels. Our results show that controlling for the overall contraction and bank failures, suspension periods were associated with a statistically significant and quantitatively large decline in real activity, on the order of 10–20 %.

A note on inflation targeting and economic growth in Brazil

This paper analyzes the relation between monetary policy and economic performance in Brazil during the period 1999-2006. In particular, it discusses the growth effects of the inflation targeting regime through its effects on aggregate demand. It is argued that monetary policy under IT reacts in a procyclical and asymmetric way to fluctuations in economic activity (too tight during recessions, not so loose during expansions). Such pattern may generate a downward bias in aggregate demand, with negative real effects on output growth and employment. Our results suggest that monetary policy has been procyclical and asymmetrical in Brazil under inflation targeting. The main economic policy implication of this study is that central banks should consider more seriously the real effects of monetary policy on output and employment.

The real effect of banking crises

Banking crises are usually followed by low credit and GDP growth. Is this because crises tend to take place during economic downturns, or do banking sector problems have independent negative real effects? If banking crises exogenously hinder real activity, then sectors more dependent on external finance should perform relatively worse during banking crises. The evidence in this paper supports this view. The differential effects across sectors are stronger in developing countries, in countries with less access to foreign finance, and where banking crises were more severe. Robustness checks include controlling for recessions, currency crises, and alternative proxies for bank dependence.