Silvia Albrizio, Iván Kataryniuk, Luis Molina, Jan Lukas Schaefer
The use of central bank liquidity lines has gained momentum since the global financial crisis in order to provide liquidity in foreign exchange markets, while at the same time preventing threats to financial stability and negative spillbacks. US dollar swap lines are well studied, but much less is known about the effects of liquidity lines in euros. We use a difference-in-differences strategy to show that the announcement of ECB euro liquidity lines has a direct positive signalling effect since the premium paid by foreign agents to borrow euros in FX markets decreases up to 76 basis points relative to currencies not covered by these facilities. Additionally, the paper provides suggestive evidence that these facilities generate positive spillbacks to the euro area since domestic bank equity prices increase by 6.7% in euro area countries highly exposed via banking linkages to countries whose currencies are targeted by liquidity lines.
{"title":"ECB Euro Liquidity Lines","authors":"Silvia Albrizio, Iván Kataryniuk, Luis Molina, Jan Lukas Schaefer","doi":"10.2139/ssrn.3909723","DOIUrl":"https://doi.org/10.2139/ssrn.3909723","url":null,"abstract":"The use of central bank liquidity lines has gained momentum since the global financial crisis in order to provide liquidity in foreign exchange markets, while at the same time preventing threats to financial stability and negative spillbacks. US dollar swap lines are well studied, but much less is known about the effects of liquidity lines in euros. We use a difference-in-differences strategy to show that the announcement of ECB euro liquidity lines has a direct positive signalling effect since the premium paid by foreign agents to borrow euros in FX markets decreases up to 76 basis points relative to currencies not covered by these facilities. Additionally, the paper provides suggestive evidence that these facilities generate positive spillbacks to the euro area since domestic bank equity prices increase by 6.7% in euro area countries highly exposed via banking linkages to countries whose currencies are targeted by liquidity lines.","PeriodicalId":233958,"journal":{"name":"European Finance eJournal","volume":"BME-28 9","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2021-08-23","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"132728190","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
This study examines the impact of negative interest rate (NIR) regimes on corporate tax behavior. We argue that NIRs act as a de-facto tax levied by central banks and investigate how this ‘tax’ affects banks’ corporate tax planning. Using a sample of domestic banks in OECD countries and a difference-in-difference research design, we find that banks affected by negative interest rate policies exhibit an increase in tax planning following the adoption of NIR, compared to unaffected banks. We document that the introduction of NIRs is associated with a 2.3 to 2.6 percentage point decrease in GAAP ETR and that the effects of NIRs are more pronounced in banks with a lower distance to default or lower reserves, and in countries with lower levels of tax enforcement or lower levels of trust in the government. Collectively, our results suggest that NIRs lead banks to increase tax planning as a funding source.
{"title":"Negative Interest Rates and Corporate Tax Behavior in Banks","authors":"A. Edwards, Michael Marin, Yuchen Wu","doi":"10.2139/ssrn.3921343","DOIUrl":"https://doi.org/10.2139/ssrn.3921343","url":null,"abstract":"This study examines the impact of negative interest rate (NIR) regimes on corporate tax behavior. We argue that NIRs act as a de-facto tax levied by central banks and investigate how this ‘tax’ affects banks’ corporate tax planning. Using a sample of domestic banks in OECD countries and a difference-in-difference research design, we find that banks affected by negative interest rate policies exhibit an increase in tax planning following the adoption of NIR, compared to unaffected banks. We document that the introduction of NIRs is associated with a 2.3 to 2.6 percentage point decrease in GAAP ETR and that the effects of NIRs are more pronounced in banks with a lower distance to default or lower reserves, and in countries with lower levels of tax enforcement or lower levels of trust in the government. Collectively, our results suggest that NIRs lead banks to increase tax planning as a funding source.","PeriodicalId":233958,"journal":{"name":"European Finance eJournal","volume":"1 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2021-08-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"130648721","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
We analyze the phenomenon of zombification in Europe and show that monetary policy alone is not its only driver. Concurring phenomena explain zombie and distressed firms’ prevalence. Using Compustat data on public firms, we find that a rise in short-term interest rates is associated with a decrease in zombie status, suggesting that low rates constitute a favorable environment for zombie firms; there is no evidence of credit misallocation within the ECB’s Corporate Sector Purchase Program; and that a decrease in inflation and a lower state of the business cycle is associated with a rise in zombie prevalence.
{"title":"When Companies Don't Die: Analyzing Zombie and Distressed Firms in a Low Interest Rate Environment","authors":"Angela De Martiis, F. Peter","doi":"10.2139/ssrn.3890788","DOIUrl":"https://doi.org/10.2139/ssrn.3890788","url":null,"abstract":"We analyze the phenomenon of zombification in Europe and show that monetary policy alone is not its only driver. Concurring phenomena explain zombie and distressed firms’ prevalence. Using Compustat data on public firms, we find that a rise in short-term interest rates is associated with a decrease in zombie status, suggesting that low rates constitute a favorable environment for zombie firms; there is no evidence of credit misallocation within the ECB’s Corporate Sector Purchase Program; and that a decrease in inflation and a lower state of the business cycle is associated with a rise in zombie prevalence.","PeriodicalId":233958,"journal":{"name":"European Finance eJournal","volume":"3 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2021-07-22","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"124723105","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
We identify a novel channel through which financial constraints propagate in the production chain. Exploiting recent developments on production network data of US-listed firms, we show that firms experience greater valuation losses during industry downturns when their suppliers are financially constrained. Our baseline downstream amplification effect corresponds to roughly 60% of the horizontal amplification documented in the literature. We find stronger impacts of downturns when: (i) suppliers are more constrained; (ii) firms depend more on specific inputs; and (iii) suppliers are more concentrated. The effects are attenuated or muted at high levels of downstream firms' accounts payable and upstream firms' accounts receivable, suggesting trade credit as a mechanism through which the downstream channel operates. Our findings uncover two network implications of financing constraints: a more severe contagion of negative shocks through supplier-customer links and an amplification of downstream industries' aggregate valuation losses.
{"title":"The Downstream Channel of Financial Constraints and the Amplification of Aggregate Downturns","authors":"Gustavo S. Cortés, Sergio H. Rocha","doi":"10.2139/ssrn.3880704","DOIUrl":"https://doi.org/10.2139/ssrn.3880704","url":null,"abstract":"We identify a novel channel through which financial constraints propagate in the production chain. Exploiting recent developments on production network data of US-listed firms, we show that firms experience greater valuation losses during industry downturns when their suppliers are financially constrained. Our baseline downstream amplification effect corresponds to roughly 60% of the horizontal amplification documented in the literature. We find stronger impacts of downturns when: (i) suppliers are more constrained; (ii) firms depend more on specific inputs; and (iii) suppliers are more concentrated. The effects are attenuated or muted at high levels of downstream firms' accounts payable and upstream firms' accounts receivable, suggesting trade credit as a mechanism through which the downstream channel operates. Our findings uncover two network implications of financing constraints: a more severe contagion of negative shocks through supplier-customer links and an amplification of downstream industries' aggregate valuation losses.","PeriodicalId":233958,"journal":{"name":"European Finance eJournal","volume":"43 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2021-07-05","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"127102926","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
I provide a comprehensive evaluation of the Double Volume Cap mechanism, a regulation that regularly triggers dark trading suspension based on a stock's historical dark trading activity. By analysing the impact of each suspension wave occurring between 2018 and 2020, I show that, during the pre-COVID-19 pandemic period, the dark trading suspension improves market liquidity, worsens informational efficiency, and reduces return volatility, whereas, during the post-COVID-19 pandemic period, the suspension imposes exactly opposite effects on market quality. I also find that lifting the dark trading suspension induces exactly opposite impacts, with a larger effect size, compared to triggering suspension, providing more statistically powerful evidence of how dark trading affects market quality. These results imply that the Double Volume Cap mechanism may have brought about many unintended consequences to the market when the market needs liquidity and stability the most and when the suspension is relaxed. Nevertheless, I do identify evidence that the market gradually learns and adapts to the new trading environment as market participants reduce their reliance on dark pools over time, a result consistent with the policymaker's original objective.
{"title":"MiFID II: The Impact of Double Volume Cap Mechanism on Market Quality","authors":"Zhenkai Ran","doi":"10.2139/ssrn.3891160","DOIUrl":"https://doi.org/10.2139/ssrn.3891160","url":null,"abstract":"I provide a comprehensive evaluation of the Double Volume Cap mechanism, a regulation that regularly triggers dark trading suspension based on a stock's historical dark trading activity. By analysing the impact of each suspension wave occurring between 2018 and 2020, I show that, during the pre-COVID-19 pandemic period, the dark trading suspension improves market liquidity, worsens informational efficiency, and reduces return volatility, whereas, during the post-COVID-19 pandemic period, the suspension imposes exactly opposite effects on market quality. I also find that lifting the dark trading suspension induces exactly opposite impacts, with a larger effect size, compared to triggering suspension, providing more statistically powerful evidence of how dark trading affects market quality. These results imply that the Double Volume Cap mechanism may have brought about many unintended consequences to the market when the market needs liquidity and stability the most and when the suspension is relaxed. Nevertheless, I do identify evidence that the market gradually learns and adapts to the new trading environment as market participants reduce their reliance on dark pools over time, a result consistent with the policymaker's original objective.","PeriodicalId":233958,"journal":{"name":"European Finance eJournal","volume":"125 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2021-07-02","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"124515506","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
PurposeThis paper aims to investigate bank earnings management using loan loss provision. The paper examines income smoothing, which is a type of earnings management. It compares the income smoothing behaviour of banks in the UK, France, South Africa and Egypt.Design/methodology/approachThe study uses the panel fixed effect regression methodology to analyse bank income smoothing.FindingsThe findings show that bank income smoothing is present in the UK and Egypt and absent in France and South Africa. Banks in Egypt used LLPs to smooth income before the global financial crisis. Meanwhile, bank income smoothing is pronounced in France during and after the financial crisis but was absent in the pre-crisis period. Also, bank income smoothing is reduced in countries that (1) have strict banking supervision, (2) adopt common law particularly the United Kingdom, and by countries that adopt civil law, particularly France and Egypt. Bank earnings management is greater in countries that (3) adopt a mixed legal system, particularly South Africa, and in countries that adopt International Financial Reporting Standards accounting standards.Research limitations/implicationsThe implication of the findings is that country differences may affect banks' incentive to smooth income using loan loss provision.Originality/valueThe novelty of this paper is that it explicitly analyses specific countries that have different supervisory regimes, different structure and accounting rules.
{"title":"Bank Earnings Management Using Loan Loss Provisions: Comparing the UK, France, South Africa and Egypt","authors":"Peterson K. Ozili","doi":"10.2139/ssrn.3875404","DOIUrl":"https://doi.org/10.2139/ssrn.3875404","url":null,"abstract":"PurposeThis paper aims to investigate bank earnings management using loan loss provision. The paper examines income smoothing, which is a type of earnings management. It compares the income smoothing behaviour of banks in the UK, France, South Africa and Egypt.Design/methodology/approachThe study uses the panel fixed effect regression methodology to analyse bank income smoothing.FindingsThe findings show that bank income smoothing is present in the UK and Egypt and absent in France and South Africa. Banks in Egypt used LLPs to smooth income before the global financial crisis. Meanwhile, bank income smoothing is pronounced in France during and after the financial crisis but was absent in the pre-crisis period. Also, bank income smoothing is reduced in countries that (1) have strict banking supervision, (2) adopt common law particularly the United Kingdom, and by countries that adopt civil law, particularly France and Egypt. Bank earnings management is greater in countries that (3) adopt a mixed legal system, particularly South Africa, and in countries that adopt International Financial Reporting Standards accounting standards.Research limitations/implicationsThe implication of the findings is that country differences may affect banks' incentive to smooth income using loan loss provision.Originality/valueThe novelty of this paper is that it explicitly analyses specific countries that have different supervisory regimes, different structure and accounting rules.","PeriodicalId":233958,"journal":{"name":"European Finance eJournal","volume":" 14","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2021-06-28","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"132158320","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
This paper proposes a new measure of epidemic uncertainty combining three dimensions related to the SARS-CoV-2 disease ‒ (i) the total COVID-19 confirmed cases, (ii) the total COVID-19 confirmed deaths and (iii) the total COVID-19 recovered cases ‒ to show how financial and macroeconomic variables respond to epidemic risk. Using the cross-wavelet coherence, we investigate the relationship between the American and European stock markets and three measures of uncertainty (financial, economic, and epidemic) in the time-frequency domain. Our empirical analysis confirms the close out-of-phase link between financial uncertainty and markets, and suggests that the impact of the epidemic uncertainty, on both the U.S. and European stock markets, exhibit different patterns over time and across frequencies.
{"title":"Do Economic Surprises Explain Returns of Stocks: The Case of COVID-19 Pandemic","authors":"Amine Ben Amar, Héla Mzoughi, K. Guesmi","doi":"10.2139/ssrn.3859434","DOIUrl":"https://doi.org/10.2139/ssrn.3859434","url":null,"abstract":"This paper proposes a new measure of epidemic uncertainty combining three dimensions related to the SARS-CoV-2 disease ‒ (i) the total COVID-19 confirmed cases, (ii) the total COVID-19 confirmed deaths and (iii) the total COVID-19 recovered cases ‒ to show how financial and macroeconomic variables respond to epidemic risk. Using the cross-wavelet coherence, we investigate the relationship between the American and European stock markets and three measures of uncertainty (financial, economic, and epidemic) in the time-frequency domain. Our empirical analysis confirms the close out-of-phase link between financial uncertainty and markets, and suggests that the impact of the epidemic uncertainty, on both the U.S. and European stock markets, exhibit different patterns over time and across frequencies.","PeriodicalId":233958,"journal":{"name":"European Finance eJournal","volume":"12 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2021-06-03","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"115193572","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Active fee is the ratio between the excess cost of active management over the index alternative and the fund's activity level. We suggest a simple model that explains active capital allocations in the presence of time-varying active fee. We show that investors respond in accordance with the model's prediction of a negative relationship between active fee and subsequent flows. Our findings can be interpreted as negative price elasticity of demand for active management, where one standard deviation change in active fee translates into a shift in net flow of 83.4 bps. This effect implies a 42% change in the unconditional expected yearly flow. The time-series relation is driven by both the activity level and the excess cost of active management. The result also holds after controlling for Morningstar Ratings.
{"title":"Does Active Fee Predict Mutual Fund Flow? - Price Sensitivity of Demand for Active Management","authors":"Trond Døskeland, A. Sjuve, Andreas Ørpetveit","doi":"10.2139/ssrn.3857628","DOIUrl":"https://doi.org/10.2139/ssrn.3857628","url":null,"abstract":"Active fee is the ratio between the excess cost of active management over the index alternative and the fund's activity level. We suggest a simple model that explains active capital allocations in the presence of time-varying active fee. We show that investors respond in accordance with the model's prediction of a negative relationship between active fee and subsequent flows. Our findings can be interpreted as negative price elasticity of demand for active management, where one standard deviation change in active fee translates into a shift in net flow of 83.4 bps. This effect implies a 42% change in the unconditional expected yearly flow. The time-series relation is driven by both the activity level and the excess cost of active management. The result also holds after controlling for Morningstar Ratings.","PeriodicalId":233958,"journal":{"name":"European Finance eJournal","volume":"24 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2021-06-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"131545677","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
We study the effect of board reforms on firms' research and development investments utilizing a sample of 40 countries. Using a difference-in-differences analysis, we find that firms' invest more in research and development following corporate governance reforms. Of these, two reforms - having an independent audit committee and board independence - have a greater impact on innovation. Additionally, we show that reforms have the largest impact on research and development investment in hi-tech industries and the health sector.
{"title":"Board Reforms and Innovation","authors":"Muhammad Farooq Ahmad, Oskar Kowalewski","doi":"10.2139/ssrn.3850121","DOIUrl":"https://doi.org/10.2139/ssrn.3850121","url":null,"abstract":"We study the effect of board reforms on firms' research and development investments utilizing a sample of 40 countries. Using a difference-in-differences analysis, we find that firms' invest more in research and development following corporate governance reforms. Of these, two reforms - having an independent audit committee and board independence - have a greater impact on innovation. Additionally, we show that reforms have the largest impact on research and development investment in hi-tech industries and the health sector.","PeriodicalId":233958,"journal":{"name":"European Finance eJournal","volume":"6 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2021-05-20","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"115389853","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
This study examines the GME short squeeze in early 2021. Using intraday data from the period 4/1/2021 - 5/2/2021, we show that the GME stock price exhibited abnormal behavior. The Runs-test confirms that the GME returns were not randomly distributed, which is an indication of a violation of the Efficient Market Hypothesis (EMH). Moreover, we employ the asymmetry EGARCH(1,1,1) model and we provide evidence that an exceptional time series feature emerged during the examined period: the anti-leverage effect. In contrast to what the time series normally show, volatility increased when the GME prices increase. The combination of the short squeeze and the investors’ coordination may be the appropriate conditions for the anti-leverage effect to emerge, which may be a new way to econometrically show violation of the EMH. The outcome of this analysis is useful for scholars and regulators because coordination among investors is easier than ever in the internet era and such events may happen again in the future; even under normal conditions (not during a short squeeze) this could lead to market instability.
{"title":"Does the Short Squeeze Lead to Market Abnormality and Anti-leverage Effect? Evidence From the GameStop Case","authors":"Evangelos Vasileiou","doi":"10.2139/ssrn.3831619","DOIUrl":"https://doi.org/10.2139/ssrn.3831619","url":null,"abstract":"This study examines the GME short squeeze in early 2021. Using intraday data from the period 4/1/2021 - 5/2/2021, we show that the GME stock price exhibited abnormal behavior. The Runs-test confirms that the GME returns were not randomly distributed, which is an indication of a violation of the Efficient Market Hypothesis (EMH). Moreover, we employ the asymmetry EGARCH(1,1,1) model and we provide evidence that an exceptional time series feature emerged during the examined period: the anti-leverage effect. In contrast to what the time series normally show, volatility increased when the GME prices increase. The combination of the short squeeze and the investors’ coordination may be the appropriate conditions for the anti-leverage effect to emerge, which may be a new way to econometrically show violation of the EMH. The outcome of this analysis is useful for scholars and regulators because coordination among investors is easier than ever in the internet era and such events may happen again in the future; even under normal conditions (not during a short squeeze) this could lead to market instability.","PeriodicalId":233958,"journal":{"name":"European Finance eJournal","volume":"44 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2021-04-22","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"128421220","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
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