Positive Real Effects Research Articles

Credit quality determinants of banks: how important are bankruptcy reforms?

PurposeAlthough several microeconomic and macroeconomic factors driving banks' credit quality have been well-studied in the literature, one aspect which appears to have received limited attention is bankruptcy reforms. To address this issue, the author exploits data on Middle East and North Africa (MENA) country banks during the period 2010–2020 and examines the impact of bankruptcy laws on their credit quality.Design/methodology/approachIn view of the staggered nature of the implementation of legal reforms across countries, the author utilize a difference-in-differences specification to tease out the causal impact.FindingsThe findings reveal that bankruptcy reforms lead to a significant improvement in banks' credit quality. The impact is manifest mainly for conventional banks and driven by an increase in recovery intensity. The author also presents evidence which shows that such reforms exert positive real effects, although this impact differs across country characteristics.Originality/valueThe study is among the early ones for the MENA region to assess the interlinkage between bankruptcy reforms and banks' credit quality.

The Impact of foreign banks entry on financial development in Lebanon for the period 1995-2014

This study investigates the impact of foreign banks entry on financial development in Lebanon for the period between 1995 and 2014. We use the number of foreign banks to total banks as measure of foreign banks entry and liquid liabilities, private credit by deposit monetary institutions and domestic credit to private sector as measures of financial development. Liquid liabilities represent the size of the financial sector, while private credit by deposit monetary institutions and domestic credit to private sector represent the activity of the financial sector. We find positive real effect of the level of foreign banks entry on financial development. This result suggests that foreign banks entry play a crucial role in developing the financial sector in Lebanon for the period between 1995 and 2014 . By contrast, the results of the present study contradict with other studies that claim that foreign banks entry have negative effects on financial development in developing countries .

Local Effects of Global Capital Flows: A China Shock in the U.S. Housing Market

We show that foreign real estate capital inflows have positive real effects and adverse distributional consequences. Using transaction-level data, we document (i) a China shock in the U.S. housing market characterized by surging foreign Chinese housing purchases after 2008; and (ii) home bias in these purchases, as they concentrate in neighborhoods historically populated by ethnic Chinese. Exploiting their temporal and spatial variation, we find that these capital inflows raise local house prices and employment, with the employment effect transmitted through a housing net worth channel. At the same time, they crowd out low-income residents and widen economic inequality across neighborhoods.

Private Equity and Financial Stability: Evidence from Failed Bank Resolution in the Crisis

This paper investigates the role of private equity (PE) in failed bank resolutions after the 2008 financial crisis, using proprietary FDIC failed bank acquisition data. PE investors made substantial investments in underperforming and riskier failed banks, particularly in geographies where local banks were also distressed, filling the gap created by a weak, undercapitalized banking sector. Using a quasi-random empirical design based on detailed bidding information, we show PE-acquired banks performed better ex post, with positive real effects for the local economy. Overall, PE investors had a positive role in stabilizing the financial system through their involvement in failed bank resolution.

Private Equity and Financial Stability: Evidence from Failed Bank Resolution in the Crisis

We investigate the role of private equity (PE) in the resolution of failed banks after the 2008 financial crisis. Using proprietary failed bank acquisition data from the FDIC combined with data on PE investors, we find that PE investors made substantial investments in underperforming and riskier failed banks. Further, these acquisitions tended to be in geographies where the other local banks were also distressed. Our results suggest that PE investors helped channel capital to underperforming failed banks when the “natural” potential bank acquirers were themselves constrained, filling the gap created by a weak, undercapitalized banking sector. Next, we use a quasi-random empirical design based on proprietary bidding data to examine ex post performance and real effects. We find that PE-acquired banks performed better ex post, with positive real effects for the local economy. Our results suggest that private equity investors had a positive role in stabilizing the financial system in the crisis through their involvement in failed bank resolution.

Good Buffer, Bad Buffer

Bank regulators and academics have long conjectured the beneficial effects of counter-cyclical loan loss provisioning (i.e., making higher provisions during good times so as to avoid doing so during bad times) for bank lending and stability. In contrast, accounting regulators express concerns about its potential adverse impact on reporting transparency due to the ensuing income smoothing. Testing these opposing predictions of the dark versus bright sides of counter-cyclical provisioning requires a shock to capital supply that is not confounded by borrower demand for credit. Using the emerging market crisis of the late 1990s to identify an adverse supply-shock to bank capital, we show that the ensuing contractions in bank lending are weaker for banks that were provisioning counter-cyclically. These lending differences translate into positive real effects for the counter-cyclical banks’ small borrowers that have limited access to alternative funding sources. Our inferences are robust to addressing the endogeneity of counter-cyclical provisioning and to corroborating the emerging market crisis results with large-sample evidence based on Federal Reserve data on bank supply and borrower demand. Overall, our results highlight the tradeoff between bank stability and transparency inherent in counter-cyclical loan loss provisioning – while proactive recognition of unrealized loan losses reduces bank transparency, it increases bank stability during periods (if and) when these losses materialize.

The Bright Side of Stock Repurchases

Motivated by concerns that stock buybacks slow down the economic recovery in the United States, I analyze the bright side of open market repurchases. I examine the effect of price-support motivated repurchases on Capital Expenditures, Research & Development, and Corporate Acquisitions. I exploit the fact that distressed mutual funds tend to decrease existing positions to meet redemptions, and that these sales are uncorrelated with the firms' prospects. I show that price-support motivated repurchases increase corporate investment, specially in Capital Expenditures. Firms that trade their own stock to support price reduce the cost of capital, easing financial constraints, what ultimately leads to an increase in investment. Contrary to the widespread belief that repurchases trade off investment, these results suggest that some repurchases have positive real effects.

Real Effects of Money Growth and Optimal Rate of Inflation in a Cash‐in‐Advance Economy with Labor‐Market Frictions

This paper studies the consequences of labor‐market frictions for the real effects of steady inflation when cash is required for households' consumption purchases and firms' wage payments. Money growth may generate a positive real effect by encouraging vacancy creation and raising job matches. This may result in a positive optimal rate of inflation, particularly in an economy with moderate money injections to firms and with nonnegligible labor‐market frictions in which wage bargains are not efficient. This main finding holds for a wide range of money injection schemes, with alternative cash constraints, and in a second‐best world with preexisting distortionary taxes.

The value relevance of top executive departures: Evidence from the Netherlands

On theoretical grounds, monitoring of top executives by the (supervisory) board is expected to be value relevant. The empirical evidence is ambiguous and we analyze three non-competing explanations for this ambiguity: (i) The positive effect on firm value of board monitoring is hidden in stock price effects due to the simultaneous occurrence of the positive real effect of monitoring and the opposing information effect. (ii) The combination of board monitoring and monitoring by other parties prevents assessing the value relevance of board monitoring in isolation. (iii) The confounding effect of a simultaneous successor appointment typically generates an upward biased estimate. Based on an analysis of price effects and trading volumes at announcement, we conclude that monitoring by the supervisory board is valued by investors: Forced departures of executive directors, also without a successor appointment, are value relevant in the Netherlands where external control mechanisms and shareholder control were virtually absent in the period studied (1991–2000).

The Value-Relevance of Forced Top Management Departures

On theoretical grounds, internal monitoring of top executives by the supervisory board is expected to result in positive abnormal returns subsequent to the announcement of their unanticipated forced departures. The empirical evidence is ambiguous and we analyze three non-competing explanations for this ambiguity: (i) The positive effect on firm value of internal monitoring is hidden in stock price effects due to the simultaneous occurrence of the positive real effect of monitoring and the opposing information effect. (ii) The interrelation between external and internal control prevents assessing the value relevance of internal monitoring in isolation. Moreover, the active role of shareholders prevents assessing the relevance of the board's role in the internal monitoring process. (iii) The confounding effect of a simultaneous successor appointment typically generates an upward biased estimate. Based on an analysis of price effects and trading volumes at announcement, we conclude that monitoring by the supervisory board is valued by investors: forced departures of executive directors, also without a successor appointment, are value relevant in the Netherlands where external control mechanisms and shareholder control are virtually absent. A general implication of our analysis is that the value relevance of a certain event can often not properly be refuted without analyzing trading volumes.

MONEY, INFLATION AND CAPITAL ACCUMULATION

This paper shows that increasing the rate of monetary growth increases the capital-labor ratio in the long run when the initial inflation rate is low but decreases the capital-labor ratio when the inflation rate is high. This paper provides a theoretical justification for the empirical result by Bullard and Keating (1996) that inflation has positive real effects for low-inflation countries in the long run but negative effects for higher-inflation countries.

Loss function‐based evaluation of DSGE models

AbstractIn this paper we propose a Bayesian econometric procedure for the evaluation and comparison of DSGE models. Unlike in many previous econometric approaches we explicitly take into account the possibility that the DSGE models are misspecified and introduce a reference model to complete the model space. Three loss functions are proposed to assess the discrepancy between DSGE model predictions and an overall posterior distribution of population characteristics that the researcher is trying to match. The evaluation procedure is applied to the comparison of a standard cash‐in‐advance (CIA) and a portfolio adjustment cost (PAC) model. We find that the CIA model has higher posterior probability than the PAC model and achieves a better in‐sample time series fit. Both models overpredict the magnitude of the negative correlation between output growth and inflation. However, unlike the PAC model, the CIA model is not able to generate a positive real effect of money growth shocks on aggregate output. Overall, the impulse response dynamics of the PAC model resemble the posterior mean impulse response functions more closely than the responses of the CIA model. Copyright © 2000 John Wiley & Sons, Ltd.