DEPOSIT INSURANCE AND EXTERNAL FINANCE

In this article we examine one potential explanation for the cross-country differences in the importance of banks and capital market financing of investment. We provide both an equilibrium model predicting and empirical evidence showing that countries with explicit deposit insurance and a high degree of state-owned bank assets have smaller equity markets, a lower number of publicly traded firms, and a smaller amount of bank credit to the private sector. Finally, our results suggest that the effects of deposit guarantees are more important than the origins of national legal systems. (JEL G21 , G22 , G32 )     

INTERNATIONAL DEAL EXPERIENCE AND CROSS‐BORDER ACQUISITIONS

I show that corporate directors' human capital facilitates international investments. Directors' experience with cross‐border transactions positively influences firms' decisions to conduct their first cross‐border acquisitions. Cross‐border acquirers are more likely to buy firms headquartered in countries with which the directors have prior deal experience. This effect is strongest for target firms headquartered in culturally and institutionally dissimilar countries. Announced cross‐border acquisitions are received more favorably by financial markets and are more likely to be completed successfully when the announcing firm has a director with cross‐border acquisition experience. These effects are not driven by investment bank involvement in the deal process or by other forms of directors' human capital, and they are robust to endogeneity of director hires. (JEL F23, F21, J24, L23)     

FISCAL RULES AND GOVERNMENT BORROWING COSTS: INTERNATIONAL EVIDENCE

We find that the adoption of numerical fiscal rules reduces government borrowing costs in a sample of 101 advanced and developing countries for 1985–2010. We apply a variety of propensity score matching methods to address the self‐selection problem of policy adoption and find strong evidence that fiscal rules have large and significant treatment effects on lowering government borrowing costs in both international and domestic financial markets. The results are robust to changes in country sample and alternative estimation methodology, and are consistent with fiscal rules helping to build policy credibility by reducing the probability of default and the “risk premium” on government debt that compensates lenders for this possibility. (JEL E43, G12, H60)     

MONETARY POLICY AND ANTI‐CYCLICAL BANK CAPITAL REGULATION

The financial crisis of 2008–2009 revived attention given to booms and busts in bank credit, and their effects on real activity. This interest sparked two different strands of research in macro. The first one focuses on monetary policy in the context of financial frictions. The second studies capital regulation in banking. To the best of our knowledge, so far these two topics have mostly been studied in isolation from each other. Thus, we still lack an understanding of how monetary policy and bank capital regulation interact in the presence of financial fragility. This paper aims to contribute to furthering this understanding. Specifically, we ask how the monetary policy rule should look like in the presence of cyclical capital requirements. We extend the dynamic stochastic general equilibrium model with bank capital in Aliaga‐Díaz and Olivero by introducing price rigidities in the spirit of the New‐Keynesian literature. We find that: First, anti‐cyclical requirements have important stabilization properties relative to the case of constant requirements. This is true for all types of fluctuations that we study, which include those caused by productivity, preference, fiscal, monetary, and financial shocks. Second, output and consumption volatilities present in the no regulation economy can be recovered with anti‐cyclical requirements as long as the policy rate responds only slightly to credit spreads. Third, monetary policy rules that respond to credit conditions also perform better in terms of welfare. (JEL E32, E44)     

THE ROLE OF REGULATORY ARBITRAGE IN U.S. BANKS' INTERNATIONAL FLOWS: BANK‐LEVEL EVIDENCE

I study the prevalence and profitability of regulatory arbitrage in U.S. banks' foreign activities. I analyze a publicly available bank‐level data set on bilateral lending flows to 75 countries over 2003–2013. U.S. banks' affiliates lend less to borrowers in host countries with stricter bank capital regulations, and are less likely to maintain affiliates in such countries. Banks substitute from (host‐regulated) affiliate toward (U.S.‐regulated) cross‐border lending in hosts with strict bank capital rules. This is particularly so for low‐capitalized banks with lower foreign ownership shares. Banks that reduce their exposure to stricter host capital rules are more profitable in foreign activities. (JEL F3, F4, G2)     

THE VALUE OF RISK: MEASURING THE SERVICE OUTPUT OF U.S. COMMERCIAL BANKS

Banks often charge implicitly for their services via interest spreads, instead of explicit fees. Much of bank output thus has to be estimated indirectly. In contrast to current statistical practice, dynamic optimizing models of banks argue that compensation for bearing systematic risk is not part of bank output. We apply these models and find that in the U.S. National Accounts between 1997 and 2007, bank output was overestimated by 21% and gross domestic product (GDP) by 0.3%. Compared with current methods, our new estimates imply more plausible estimates of the income share of capital and the return on fixed capital of the banking industry. (JEL E01, E44, O47)     

Finance capital markets and corporate decision-making processes: The case of W. T. Grant Company's bankruptcy

The effect of capital markets on corporate decision making has been a focus of scholarly attention for more than a century. The existing literature has remained sparse, however, in detailed analyses of the processes and effects of organized finance capital markets on managerial discretion. The case of W. T. Grant Company's bankruptcy illustrates the mechanisms by which the banking community's organized control of the finance capital markets posed a constraining influence on the firm's decision-making processes. This influence extended to the decision to throw the company into involuntary bankruptcy. The case also illustrates finance capital to be both a unique resource (having no alternatives) and a special relationship that, unlike material capital supplier relationships, has long-term consequences for the borrowing firm.     

DO CAPITAL ADEQUACY REQUIREMENTS MATTER FOR MONETARY POLICY?

Central bankers and financial supervisors can have conflicting goals. While monetary policymakers work to ensure sufficient lending activities as a foundation for high and stable economic growth, supervisors may limit banks’ lending capacities in order to prevent excessive risk taking. We show that, in theory, central bankers can avoid this potential conflict by adopting an interest rate strategy that takes accounts of capital adequacy requirements. Empirical evidence suggests that while policymakers at the Federal Reserve have adjusted their interest rate to neutralizing the procyclical impact of bank capital requirements, those in Germany and Japan have not. (JEL E52, E58, G21)     

OVERSEAS MARKET INFORMATION AND FIRMS' EXPORT DECISIONS

This paper examines how firms' decision to start exporting is affected by the availability of information on export markets. Unlike existing studies that focus on information sharing among firms, we are interested in the information provided by firms' main bank. Specifically, using a unique data set containing information on both Japanese firms' export activities and the experience of their main bank (i.e., their top lender bank) in transacting with other exporting firms, we examine whether main banks act as a conduit of information on export markets. We find that information spillovers through main banks positively affect client firms' decision to start exporting (extensive margin), implying that information on foreign markets provided by banks substantially reduces the fixed entry cost of exporting. On the other hand, we do not find any evidence that information provided by banks has an effect on the export volume or on the growth rate of exports (intensive margin). Our results highlight that channels of information spillovers other than those examined in the literature so far may be of considerable importance. (JEL F10, F14, G21)     

Corporate Transformation to the Multilayered Subsidiary Form: Changing Economic Conditions and State Business Policy

Despite the prevalence of corporate change in the last decade, researchers have not examined whether a change occurred in the corporate form. The analysis here presents a historical case study of a large U.S. corporation and quantitative data on the largest 100 U.S. industrial corporations. The case study examines the effects of changing economic conditions and state business policy on the corporate form. This study demonstrates that the corporation changed to a multilayered subsidiary form (MLSF): a corporation with a hierarchy of two or more levels of subsidiary corporations with a parent company at the top of the hierarchy operating as a management company. Whereas rising debt and increasing competition in the 1970s and 1980s undermined corporations' capacity to accumulate capital, changes in state business policy in the mid-1980s provided the political-legal structure for corporations to restructure their assets as subsidiary corporations tax free. Changes in state business policy also provided a means for corporations to merge, acquire, and spin-off subsidiary corporations tax free. Quantitative data on the 100 largest U.S. industrial corporations show that while the multidivisional form decreased, the MLSF increased between 1981 and 1993. Findings support a capital dependence framework. The MLSF constructs liability firewalls among corporate entities and creates internal capital markets, reducing dependence on external capital markets.     

BANK RESERVE REQUIREMENTS AS AN IMPEDIMENT TO SIGNALING

Effective legal reserve requirements may hamper the private capital market's ability to price bank deposits. In the model developed here, the market has less information about bank assets than the banks have, and a bank can therefore signal its superior information through its choice of excess reserves. Mandatory reserves can inhibit such signaling and therefore result in inefficient deposit pricing.     

Financial Resources and Product Market Development: Strategic Choice and Institutional Processes During China's Transition

During an economic transition from socialism, market exchange replaces redistribution. We study firm decisions to enter product markets to understand the factors that influence this process. Managers in Chinese State Owned Enterprises operated within institutional constraints to make strategic decisions, and state intervention shaped which factors were salient. Firms financed through central government and bond issues relied less on markets. Firms funded through local government moved into markets faster; firms funded by banks were initially faster to markets but slower to markets after bank reform shifted lending policies. Thus, the accessibility, flexibility, and stability of financing shaped decisions about market entrance.     

The Cost of Not Knowing the Score: Self-Estimated Credit Scores and Financial Outcomes

This study analyzes consumers’ knowledge of their own credit situation and tests whether a lack of knowledge affects financial outcomes. The unique dataset from survey and credit report data includes self-estimates of credit scores and actual scores from a low-to-moderate income sample. We argue and show empirically that many respondents don’t know their credit score and generally underestimate their creditworthiness. Furthermore, our evidence suggests that this biased self-assessment may explain differences in perceived credit constraints and credit contracts, specifically credit card interest rates. Our research suggests that an important aspect of financial literacy is self-assessment, and that it is important to encourage consumers to regularly check their credit reports and scores so as to better understand their actual creditworthiness.     

Campaigning to save market women's livelihoods in Hanoi: experience from HealthBridge

Traditional markets are at the heart of economic and social life in many cities, but in many, supermarkets and commercial centres are replacing the markets as governments pursue modernisation strategies. HealthBridge in Vietnam engaged in a multi-faceted advocacy campaign to show the importance of the markets in the country's capital, Hanoi, for women's livelihoods, the local economy, health, and the environment. The aim was to change attitudes among decision-makers and ensure the survival of markets as a relevant and positive aspect of life in the city.     

LIFETIME UNCERTAINTY, HUMAN CAPITAL AND PHYSICAL CAPITAL

This paper demonstrates that the non-inheritability of human capital makes investment in it fundamentally different from investment in physical capital when lifetime is uncertain. A simple two-period model is used to highlight the effect of lifetime uncertainty on the optimal investment in human capital with and without markets for life insurance.     

Disabling governance: Privatisation of city markets and implications for vendors’ associations in Kampala, Uganda

Contemporary international models of governance prescribe the devolution of service provision to a range of non-state actors and the adoption of market-oriented policies. This paper explores the politics that have arisen from changes in the governance framework in Kampala, the capital of Uganda. The focus is on the privatisation of the management of city markets and on the relations between the multiple actors involved—private contractors, vendors’ associations, cooperatives and state actors. In particular, the paper looks into the implications of the privatisation process for vendors and their associations. It argues that, while the latter have sometimes adjusted to the changes by turning into cooperative societies or creating their own management firms, increasingly, however, private interests external to the markets are taking over the management functions, sidelining or even repressing, vendors’ associations. The general picture is one of weakening associations and endangered possibilities for broad-based organising and interest representation.     

CO-MOVEMENTS IN RELATIVE COMMODITY PRICES AND INTERNATIONAL CAPITAL FLOWS: A SIMPLE MODEL

Suppose a number of countries produce a commodity which employs local labor and a type of capital that is internationally mobile. Within the framework of a specific-factors model the paper argues that there is a presumption about the international movement of capital when the relative price of the industry using that capital rises on world markets. Capital flows towards countries less heavily involved in producing the commodity; internal labor flows contribute toward worldwide industry dispersion; and the volume of international trade in that commodity tends to fall.     

The rise (and fall?) of a state land bank

Land markets in most poor cities do not work very effectively and contribute to making social housing unaffordable. One once popular response was to set up a public land bank. In truth, few such banks were terribly successful and, with the onset of neo-liberalism, the approach fell out of fashion. However, one government recently established a state land bank in an attempt to slow the growth of illegal settlement and to improve housing conditions for the poor. Bogotá's efforts have had some measure of success although the agency could never achieve the ambitious goals set for it. The paper describes the different approaches of the agency over the last decade, the problems that it has faced and what it has managed to achieve. Today, the agency no longer buys land and prefers to work in association with private landowners; in effect, Bogotá no longer has a state land bank. However, what it does have is an interesting set of tools with which to confront land speculation and to discourage owners from holding on to serviced land. Whether this set of tools will be able to confront the perennial problem of providing land for affordable social housing remains to be seen. Nevertheless, Bogotá provides many lessons for governments in poorer cities about how and why they should take measures to improve the working of the land market.     

FOREIGN DIRECT INVESTMENT AND ECONOMIC GROWTH: THE GROWTH ACCOUNTING PERSPECTIVE

A positive relationship between FDI and economic growth under two economic conditions has been estimated: a sufficient level of human capital and well-developed financial markets, respectively. However, these two conditions can be fundamentally different catalysts for FDI to promote economic growth in the perspective of growth accounting. Using data from 69 countries over 1970–1989, we find that FDI promotes productivity growth only when the host country reaches a threshold level of human capital; and FDI promotes capital growth only when a certain level of financial development is achieved. ( JEL F21)     

MANAGERIAL MOTIVES, MARKET STRUCTURES AND THE PERFORMANCE OF HOLDING COMPANY BANKS

Since the late 1960's bank holding companies have become a dominant force in U. S. banking; they now account for over 2/3 of the nation's total deposits. This paper tests the hypothesis that the holding company form of organization leads to relatively risk-taking behavior by affiliated banks. A major finding is that holding company banks react to monopolistic market situations by choosing risker portfolios and by leveraging to a greater extent than their independent counterparts. Such a behavioral characteristic has important implications for the allocation of resources in the country's 2600 local banking markets and for the regulation of financial institutions in general.