Research articles for the 2019-02-21

57 Channels (and Nothin on) - Does Tv-News on the Eurozone Affect Government Bond Yield Spreads?
Wolfinger, Julia,Feld, Lars P.,Koehler, Ekkehard A.,Thomas, Tobias
This paper empirically investigates the relationship between TV news coverage and the GIIPS countries' bond yield spreads using daily data between January 1, 2007 and December 1, 2016. We employ 1,542,233 human coded news items from evening news shows of leading TV stations in 12 countries which include 37,859 news on the EU, on the Eurozone and on country-specific economic issues. We find that an increasing share of news about the Eurozone reduces yield spreads, especially when the news has a positive tonality. This hints at the effectiveness of political communication through the media by European institutions and in particular the European Central Bank (ECB). In conjunction with the tonality of the news, we find that country-specific news have a significant impact on GIIPS yield spreads. A higher share of positive/negative news is positively associated with a decrease/increase of the GIIPS yield spreads vis-à-vis Germany. Moreover, some news is not immediately and completely priced in by market participants when it is released. In addition, this peculiar effect of country specific news is stronger when the respective news is aired on the North American media market.

A Theory of Outside Equity: Financing Multiple Projects
Bougheas, Spiros,Wang, Tianxi
In the financial economics literature debt contracts provide efficient solutions for addressing managerial moral hazard problems. We analyze a model with multiple projects where the manager obtains private information about their quality after the contract with investors is agreed. The likelihood of success of each project depends on both its quality and the level of effort exerted on it by the manager. We find that, depending on the distribution of the quality shock, the optimal financial contract can be either debt or equity.

Bank Bonus Pay as a Risk Sharing Contract
Efing, Matthias,Hau, Harald,Kampkötter, Patrick,Rochet, Jean-Charles
We argue that risk sharing motivates the bank-wide structure of bonus pay. In the presence of financial frictions that make external financing costly, the optimal contract between shareholders and employees involves some degree of risk sharing whereby bonus pay partially absorbs earnings shocks. Using payroll data for 1:26 million employee-years in all functional divisions of Austrian, German, and Swiss banks, we uncover several empirical patterns in bonus pay that are difficult to rationalize with incentive theories of bonus pay - but support an important risk sharing motive. In particular, bonuses respond to performance shocks that are outside the control of employees because they originate in other bank divisions or even outside the bank.

Bitcoin Fluctuations and the Frequency of Price Overreactions
Caporale, Guglielmo Maria,Plastun, Oleksiy,Oliinyk, Viktor
This paper investigates the role of the frequency of price overreactions in the cryptocurrency market in the case of BitCoin over the period 2013-2018. Specifically, it uses a static approach to detect overreactions and then carries out hypothesis testing by means of a variety of statistical methods (both parametric and non-parametric) including ADF tests, Granger causality tests, correlation analysis, regression analysis with dummy variables, ARIMA and ARMAX models, neural net models, and VAR models. Specifically, the hypotheses tested are whether or not the frequency of overreactions (i) is informative about Bitcoin price movements (H1) and (ii) exhibits seasonality (H2). On the whole, the results suggest that it can provide useful information to predict price dynamics in the cryptocurrency market and for designing trading strategies (H1 cannot be rejected), whilst there is no evidence of seasonality (H2 is rejected).

CLO Market and Corporate Lending
Gallo, Angela,Park, Min
We examine whether banks’ direct access to the collateralized loan obligation (CLO) market facilitates their risk management and corporate lending provisions. When banks experience an idiosyncratic shock, such as a large-size borrower’s default, they start lending conserva- tively. We analyze how banks with the ability to securitize corporate loans via the CLO market differ from other banks in managing such shocks given that securitization provides extra liquidity and capital relief. For identification, we adopt WorldCom’s demise in 2002 as a shock that induced significant losses among its lending banks, eventually leading to a drop in their banks’ lending amounts. We find that, among the WorldCom-affected banks, those banks that have direct access to the CLO market significantly increase their securitization amount as well as origination of the type of syndicated loan facilities that are easily secu- ritizable (Term B) under the shock. Our findings imply that securitization is actively used by banks as a risk management tool. The results hold in various robustness tests, including a triple-differences approach that expands the sample to include banks that are unaffected by the shock.

Deep Adaptive Input Normalization for Price Forecasting using Limit Order Book Data
Nikolaos Passalis,Anastasios Tefas,Juho Kanniainen,Moncef Gabbouj,Alexandros Iosifidis

Deep Learning (DL) models can be used to tackle time series analysis tasks with great success. However, the performance of DL models can degenerate rapidly if the data are not appropriately normalized. This issue is even more apparent when DL is used for financial time series forecasting tasks, where the non-stationary and multimodal nature of the data pose significant challenges and severely affect the performance of DL models. In this work, a simple, yet effective, neural layer, that is capable of adaptively normalizing the input time series, while taking into account the distribution of the data, is proposed. The proposed layer is trained in an end-to-end fashion using back-propagation and can lead to significant performance improvements. The effectiveness of the proposed method is demonstrated using a large-scale limit order book dataset.

Do Survey Expectations of Stock Returns Reflect Risk-Adjustments?
Adam, Klaus,Matveev, Dmitry,Nagel, Stefan
Motivated by the observation that survey expectations of stock returns are inconsistent with rational return expectations under real-world probabilities, we investigate whether alternative expectations hypotheses entertained in the asset pricing literature are consistent with the survey evidence. We empirically test (1) the notion that survey forecasts constitute rational but risk-neutral forecasts of future returns, and (2) the notion that survey forecasts are ambiguity averse/robust forecasts of future returns. We find that these alternative hypotheses are also strongly rejected by the data, albeit for different reasons. Hypothesis (1) is rejected because survey return forecasts are not in line with risk-free interest rates and because survey expected excess returns are predictable. Hypothesis (2) is rejected because agents are not always pessimistic about future returns, instead often display overly optimistic return expectations. We speculate as to what kind of expectations theories might be consistent with the available survey evidence.

Exchange Competition, Entry, and Welfare
Cespa, Giovanni,Vives, Xavier
We assess the consequences for market quality and welfare of different entry regimes and exchange pricing policies in a context of limited market participation. To this end we integrate a two-period market microstructure model with an exchange competition model with entry in which exchanges supply technological services, and have market power. We find that technological services can be strategic substitutes or complements in platform competition. Free entry of platforms delivers a superior outcome in terms of liquidity and (generally) welfare compared to the case of an unregulated monopoly. Controlling entry or, even better typically, platform fees may further increase welfare. The market may deliver excessive or insufficient entry. However, if the regulator is constrained to not making transfers to platforms then there is never insufficient entry.

Financial Market Responses to a Natural Disaster: Evidence from Local Credit Networks and the Indian Ocean Tsunami
Czura, Kristina,Klonner, Stefan
Conventional wisdom in economics holds that traditional credit and insurance networks are inapt for insuring against covariate risks such as natural hazards. We challenge this claim by examining changes in financial allocations in Rotating Savings and Credit Associations (Roscas), a popular group-based financial institution world-wide, in the aftermath of the 2004 Indian Ocean tsunami. With financial data from locations along the South Indian coast that were affected by this natural disaster to different extents, we estimate the causal effect of this devastating economic shock on financial flows between occupational groups, the price of credit and other loan characteristics. We find that the supply of funds in these local credit networks remained remarkably stable, while demand by self-employed members increased significantly. In response, substantial funds were channeled from wage-employed members and commercial investors to small and medium-scale entrepreneurs. We conclude that traditional non-market financial institutions may be more important for coping with covariate risks in low-income environments than commonly assumed.

Foreign Ownership and Skillbiased Technological Change
Koch, Michael,Smolka, Marcel
We conduct an empirical investigation into the effects of foreign ownership on worker skills using firm-level data from Spain. To control for endogeneity bias due to selection into foreign ownership, we combine a difference-in-differences approach with a propensity score weighting estimator. Our results provide novel evidence that foreign-acquired firms actively raise the skills of their workforce in response to the acquisition by hiring high-skilled workers and providing worker training. To pin down the mechanism, we exploit unique information on whether firms use their foreign parent in exporting to foreign markets. Our results suggest a fundamental role for market access through the foreign parent in explaining skill upgrading in foreign-acquired firms. We reveal substantial productivity gains within foreign-acquired firms and we show that these gains derive from a concurrent effort to raise worker skills and adopt more advanced technology, suggesting a skill bias in technological innovations. We develop a simple theoretical model of foreign ownership featuring technology-skill complementarities in production that can rationalize our findings.

Freeze! Financial Sanctions and Bank Responses
Efing, Matthias,Goldbach, Stefan,Nitsch, Volker
We study the effects of financial sanctions on cross-border credit supply. Using a differences-in-differences approach to analyze eleven sanctions episodes between 2002 and 2015, we find that banks located in Germany reduce their positions in countries with sanctioned entities by 38%. The average German branch or subsidiary located outside Germany does not adjust its positions after the imposition of sanctions. For affiliated banks located in countries with low financial standards, we even observe a relative increase in credit supply. These effects are stronger if sanctions are only imposed by EU member states and not by the entire UN.

Getting Life Expectancy Estimates Right for Pension Policy: Period Versus Cohort Approach
Ayuso, Mercedes,Bravo, Jorge Miguel,Smarzynska Javorcik, Beata
In many policy areas it is essential to use the best estimates of life expectancy, but it is vital to most areas of pension policy. This paper presents the conceptual differences between static period and dynamic cohort mortality tables, estimates the differences in life expectancy for Portugal and Spain, and compares official estimates of both life expectancy estimates for Australia, the United Kingdom, and the United States for 1981, 2010, and 2060. These comparisons reveal major differences between period and cohort life expectancy in and between countries and across years. The implications of using wrong estimates for pension policy, including financial sustainability, are explored.

Global Investors, the Dollar, and U.S. Credit Conditions
Niepmann, Friederike,Schmidt-Eisenlohr, Tim
This paper documents that an appreciation of the U.S. dollar is associated with a reduction in the supply of commercial and industrial loans by U.S. banks. An increase in the broad dollar index by 2.5 points (one standard deviation) reduces U.S. banks' corporate loan originations by 10 percent. This decline is driven by a reduction in the demand for loans on the secondary market where prices fall and liquidity worsens when the dollar appreciates, with stronger effects for riskier loans. Today, the main buyers of U.S. corporate loans—and, hence, suppliers of funding for these loans—are institutional investors, in particular mutual funds, which experience outflows when the dollar appreciates. A shift of traditional financial intermediation to these relatively unregulated entities, which are more sensitive to global developments, has led to the emergence of this new channel through which the dollar affects the U.S. economy, which we term the secondary market channel.

I'll Have What S/he's Having: A Case Study of a Social Trading Network
Pelster, Matthias
Opinion leaders of an investment network can have a significant impact on capital markets because their investment decisions are adopted by their peers and trigger large trading cascades, increasing herding behavior and comovement among stock returns. This paper analyzes the interaction-based relations of traders from a large social trading platform and identifies the driving forces and the opinion leaders within a large online trading network as the nodes with the highest centrality and the highest force of infection, respectively. Relying on recent insights from epidemiological research, I maintain that centrality identifies the most central traders in the network, while the expected force quantifies the most influential traders and their spreading power. I study the behavior and characteristics that set central and influential traders apart from other traders. The ability to identify focal points and their trading behavior within a trading network is important for investors, investment advisers, and policy makers.

Listing Gaps, Merger Waves, and the New American Model of Equity Finance
Lattanzio, Gabriele,Megginson, William L.,Sanati, Ali
We document that the U.S. economy has experienced over the last 25 years sharply declining numbers of listed firms, extraordinary volumes of mergers and of private equity investments, and abnormally high aggregate valuations for U.S. listed corporations. We synthesize and empirically analyze these trends and their interconnections and document the recent emergence of a new model of equity finance in the United States. We show that the listing gap identified by Doidge, Karolyi, and Stulz (2017) was caused by an unprecedented merger wave occurring between 1997-2001, which directly reduced the number of listed firms, and by the rise of the private equity industry, which curtailed new listings through IPOs. Our model of equity financing well explains changes in the number of listed U.S. firms before and after the 1997-2001 transition to a new equilibrium. We conclude that this new model of equity finance has yielded net financial and developmental benefits for the U.S. economy, although the merger waves have increased industrial concentration and the privatization of equity finance has almost certainly increased income inequality. We conclude by presenting preliminary evidence that this new model of equity financing is emerging in other developed countries.

Low Inflation: High Default Risk and High Equity Valuations
Smarzynska Javorcik, Beata,Dorion, Christian,Jeanneret, Alexandre,Weber, Michael
We develop an asset-pricing model with endogenous corporate policies that explains how inflation jointly impacts real asset prices and corporate default risk. Our model includes two empirically grounded nominal frictions: fixed nominal coupons and sticky profitability. Taken together, these two frictions result in higher real equity prices and credit spreads when inflation falls. An increase in inflation has opposite effects, but with smaller magnitudes. In the cross section, the model predicts the negative impact of inflation on real equity values is stronger for low leverage firms. We find empirical support for the model predictions.

Macro Fundamentals or Geopolitical Events? A Textual Analysis of News Events for Crude Oil
Brandt, Michael W.,Gao, Lin
News about macroeconomic fundamentals and geopolitical events affect crude oil markets differently. Using sentiment scores for a broad set of global news of different types, we find that news related to macro fundamentals have an impact on the oil price in the short run and significantly predict oil returns in the long run. Geopolitical news have a much stronger immediate impact but exhibit no predictability. Moreover, geopolitical news generate more uncertainty and greater trading volume, consistent with a disagreement explanation, while macroeconomic news are associated with subsequent lower trading volume. Finally, we find that news sentiment tracks the statistical releases quite well and can partially predict the future realizations of the economic data.

Microcredit and Household Welfare: Evidence from Vietnam Bank for Social Policies
Kim, Booyuel,Pham, Trinh
This paper evaluates how governmental microcredit affects rural households in Vietnam using panel data obtained from Vietnam Household Living Standards Surveys 2010, 2012, 2014. Employing household fixed-effects with instrumental variable, the results show that the Vietnam Bank for Social Policies (VBSP) microcredit program has no significant impact on total income of household. Decomposing the total income into smaller components, we find significant and positive impacts of microcredit on profits from farming activities, whereas insignificant impacts are found on such other components as income from wage and income profits from non-farming activities. The findings also show positive, significant impacts on total household expenditure, food consumption and spending on health care.

Non-exchangeability of copulas arising from shock models
Damjana Kokol Bukovšek,Tomaž Košir,Blaž Mojškerc,Matjaž Omladič

When choosing the right copula for our data a key point is to distinguish the family that describes it at the best. In this respect, a better choice of the copulas could be obtained through the information about the (non)symmetry of the data. Exchangeability as a probability concept (first next to independence) has been studied since 1930's, copulas have been studied since 1950's, and even the most important class of copulas from the point of view of applications, i.e. the ones arising from shock models s.a. Marshall's copulas, have been studied since 1960's. However, the point of non-exchangeability of copulas was brought up only in 2006 and has been intensively studied ever since. One of the main contributions of this paper is the maximal asymmetry function for a family of copulas. We compute this function for the major families of shock-based copulas, i.e. Marshall, maxmin and reflected maxmin (RMM for short) copulas and also for some other important families. We compute the sharp bound of asymmetry measure $\mu_\infty$, the most important of the asymmetry measures, for the family of Marshall copulas and the family of maxmin copulas, which both equal to $\frac{4}{27}\ (\approx 0.148)$. One should compare this bound to the one for the class of PQD copulas to which they belong, which is $3-2\sqrt{2}\ \approx 0.172)$, and to the general bound for all copulas that is $\frac13$. Furthermore, we give the sharp bound of the same asymmetry measure for RMM copulas which is $3-2\sqrt{2}$, compared to the same bound for NQD copulas, where they belong, which is $\sqrt{5}-2\ (\approx 0.236)$. One of our main results is also the statistical interpretation of shocks in a given model at which the maximal asymmetry measure bound is attained. These interpretations for the three families studied are illustrated by examples that should be helpful to practitioners when choosing the model for their data.

Personal Communication in a Fintech World: Evidence from Loan Payments
Laudenbach, Christine,Pirschel, Jenny,Siegel, Stephan
We examine the effect of personal, two-way communication on the behavior of borrowers, who have fallen behind on their consumer loan payments. While the lender has informed all borrowers about the delinquency through an automatically generated letter, some borrowers also receive a phone call from a randomly assigned bank agent. We find that borrowers, who speak with a bank agent typically for only a few minutes, are significantly more likely to make timely payments and significantly less likely to default. This finding holds in a subset of hard-to-reach borrowers as well as when we instrument for the call with exogenous variation in borrowers' reachability. The effect of the call is also persistent. Borrowers, who receive a call, are significantly less likely to become delinquent again. Personal aspects of the call, such as the likeability of the agent's voice, significantly affect payment behavior, while the surprise element of the call does not. Our results suggest that the form of communication significantly affects borrowers' payment behavior.

Political Tension and Stock Markets in the Arabian Peninsula
Al-Maadid, Alanoud,Caporale, Guglielmo Maria,Spagnolo, Fabio,Spagnolo, Nicola
This note investigates the effects of the recent political tensions in the Arabian peninsula on the linkages between the stock markets of the leading GCC countries by estimating a VAR-GARCH (1,1) model at a weekly frequency. The results indicate that the June 2017 crisis lowered stock market returns and generally led to greater volatility spillovers within the region. This evidence supports the need for further financial integration and suggests fewer portfolio diversification opportunities for investors in the GCC region.

Punish One, Teach a Hundred: The Sobering Effect of Punishment on the Unpunished
D'Acunto, Francesco,Weber, Michael,Xie, Jin
Direct experience of a peer's punishment might make non-punished peers reassess the probability and consequences of facing punishment and hence induce a change in their behavior. We test this mechanism in a setting, China, in which we observe the reactions to the same peer's punishment by listed firms with different incentives to react - state-owned enterprises (SOEs) and non-SOEs. After observing peers punished for wrongdoing in loan guarantees to related parties, SOEs - which are less disciplined by traditional governance mechanisms than non-SOEs - cut their loan guarantees. SOEs whose CEOs have stronger career concerns react more than other SOEs to the same punishment events, a result that systematic differences between SOEs and non-SOEs cannot drive. SOEs react more to events with higher press coverage even if information about all events is publicly available. After peers' punishments, SOEs also increase their board independence, reduce inefficient investment, increase total factor productivity, and experience positive cumulative abnormal returns. The bank debt and investment of related parties that benefited from tunneling drop after listed peers' punishments. Strategic punishments could be a cost-effective governance mechanism when other forms of governance are ineffective.

Quantitative or Qualitative Forward Guidance: Does it Matter?
Detmers, Gunda-Alexandra,Karagedikli, Özer,Moessner, Richhild
Every monetary policy decision by the Reserve Bank of New Zealand (RBNZ) is accompanied by a written statement about the state of the economy and the policy outlook, but only every second decision by a published interest rate forecast. We exploit this difference to study the relative influences of qualitative and quantitative forward guidance. We find that announcements that include an interest rate forecast lead to very similar market reactions across the yield curve as announcements that only include written statements. We interpret our results as implying that central bank communication is important, but that the exact form of that communication is less critical. Our results are also consistent with market participants understanding the conditional nature of the RBNZ interest rate forecasts. 

SEC Comment Letters and M&A Outcomes
Johnson, Bret A.,Lisic, Ling Lei,Moon, Joon Seok,Wang, Mengmeng
Prior research on SEC comment letters has almost exclusively focused on reviews of periodic filings, such as 10-Ks, which are selectively reviewed by the SEC. Transactional filing reviews, such as those related to mergers and acquisitions (M&A), are all scrutinized by the SEC and are a top priority to the SEC and to the executives of the filing companies, yet have received little attention from the literature. We examine the impact of SEC comment letters on one type of transactional filing, Form S-4, on short- and long-term M&A outcomes. We find that S-4s that receive an SEC comment letter have a significantly higher completion rate although a longer duration. S-4s that receive an SEC comment letter are less likely to have a goodwill impairment or a restatement after the M&A deal is completed. These findings provide evidence on the costs and benefits of the SEC’s disclosure regulation over M&A deals.

Sovereign Bonds Since Waterloo
Meyer, Josefin,Reinhart, Carmen,Trebesch, Christoph
This paper studies external sovereign bonds as an asset class. We compile a new database of 220,000 monthly prices of foreign-currency government bonds traded in London and New York between 1815 (the Battle of Waterloo) and 2016, covering 91 countries. Our main insight is that, as in equity markets, the returns on external sovereign bonds have been sufficiently high to compensate for risk. Real ex-post returns averaged 7% annually across two centuries, including default episodes, major wars, and global crises. This represents an excess return of around 4% above US or UK government bonds, which is comparable to stocks and outperforms corporate bonds. The observed returns are hard to reconcile with canonical theoretical models and with the degree of credit risk in this market, as measured by historical default and recovery rates. Based on our archive of more than 300 sovereign debt restructurings since 1815, we show that full repudiation is rare; the median haircut is below 50%.

Stacking with Neural network for Cryptocurrency investment
Avinash Barnwal,Haripad Bharti,Aasim Ali,Vishal Singh

Predicting the direction of assets have been an active area of study and a difficult task. Machine learning models have been used to build robust models to model the above task. Ensemble methods is one of them showing results better than a single supervised method. In this paper, we have used generative and discriminative classifiers to create the stack, particularly 3 generative and 9 discriminative classifiers and optimized over one-layer Neural Network to model the direction of price cryptocurrencies. Features used are technical indicators used are not limited to trend, momentum, volume, volatility indicators, and sentiment analysis has also been used to gain useful insight combined with the above features. For Cross-validation, Purged Walk forward cross-validation has been used. In terms of accuracy, we have done a comparative analysis of the performance of Ensemble method with Stacking and Ensemble method with blending. We have also developed a methodology for combined features importance for the stacked model. Important indicators are also identified based on feature importance.

Ten Years after: Iceland's Unfinished Business
Gylfason, Thorvaldur
This study discusses the economic, political, and judicial aftermath of Iceland´s financial collapse in 2008. It considers lessons learned, or not learned, with emphasis on unsettled issues concerning the distribution of incomes and wealth, banking, and politics. The study makes three main points. First, the measurement of income flows and living standards needs to be adjusted in two respects. Second, since the crisis, Ireland has made a significantly stronger recovery than Iceland in terms of per capita income. Third, Iceland´s economic recovery from the crisis is marred by a visible deterioration of various components of the country´s social capital.

The Dynamics of Finance-Growth-Inequality Nexus: Theory and Evidence for India
Das, Pranab Kumar,Ganguli, Bhaswati,Marjit, Sugata,Roy, Sugata Sen
The purpose of this research study has been to expand our understanding of the finance-growth 'nexus' to finance-growth-inequality 'nexus' in the presence of both the formal and the informal sources of borrowing. Using empirical evidence of IHDS Survey data for two rounds the study attempts to assess the co-evolution of finance-growth-inequality in an intertemporal framework. The most important finding of the paper pertains to the econometric result that the household asset grows at the same rate independent of the source of loans - banks or moneylenders though the level effect (intercept) is higher if the loan is obtained from banks or lower if the household lives below poverty line. The same also holds for the rate of growth of per capita income. There is virtually no significant difference for the households living below poverty line (BPL) on the rate of growth of capital asset or income whether source of borrowing is bank or money lender. This is then formalized in a theoretical model of intertemporal choice of entrepreneur-investor to show that if there are both formal and informal sources of borrowing with a constraint on the formal sector borrowing and no constraint on the latter, then growth rates of asset and income are determined by the informal sector interest rate. The result can be generalised for any number of sources of borrowing. This questions the conventional wisdom regarding the policy aimed at financial inclusion. Inequality of income increases independent of the source of borrowing, though the BPL households are worse off in general.

The Entropic Measure Transform
Renjie Wang,Cody Hyndman,Anastasis Kratsios

We introduce the entropic measure transform (EMT) problem for a general process and prove the existence of a unique optimal measure characterizing the solution. The density process of the optimal measure is characterized using a semimartingale BSDE under general conditions. The EMT is used to reinterpret the conditional entropic risk-measure and to obtain a convenient formula for the conditional expectation of a process which admits an affine representation under a related measure. The entropic measure transform is then used provide a new characterization of defaultable bond prices, forward prices, and futures prices when the asset is driven by a jump diffusion. The characterization of these pricing problems in terms of the EMT provides economic interpretations as a maximization of returns subject to a penalty for removing financial risk as expressed through the aggregate relative entropy. The EMT is shown to extend the optimal stochastic control characterization of default-free bond prices of Gombani and Runggaldier (Math. Financ. 23(4):659-686, 2013). These methods are illustrated numerically with an example in the defaultable bond setting.

The Good, the Bad, and the Ugly: Impact of Negative Interest Rates and QE on the Profitability and Risk-Taking of 1600 German Banks
Florian, Urbschat
The recent negative interest rate policy (NIRP) and quantitative easing (QE) programme by the ECB have raised concerns about the pass-through of monetary policy. On the one hand, negative rates could lead to declining bank profitability making an expansionary monetary policy contractionary. Also, if interest rates are too low for too long banks could be induced to take too much risky credit. On the other hand, several economists argue that there is nothing special about negative interest rates per se. This paper uses a large micro level data set of the German bank universe to examine how banks behave in this uncharted territory. The evidence found suggests that bank's business model, i.e. the share of overnight deposits, plays a crucial role. While some banks may benefit in the short run via for instance reduced refinancing costs or lower loan loss provisions, many banks with high deposit ratios face lower net interest income and lower credit growth rates. If continued for too long QE and NIRP erode bank profits for most banks eventually.

The Impact of Business and Political News on the GCC Stock Markets
Al-Maadid, Alanoud,Caporale, Guglielmo Maria,Spagnolo, Fabio,Spagnolo, Nicola
This paper investigates the impact of business and political news on stock market returns in the Gulf Cooperation Council (GCC) countries. For this purpose, it employs a Markov switching model including a separate index for each of the two categories of news considered. The results indicate the importance of news as drivers of GCC stock returns, with business news playing a more substantial role; further, news released in the largest financial markets in the regions are found to have significant cross-border effects.

The Information Content of Funds From Operation and Net Income in Real Estate Investment Trusts
Cho, Hoon,Ryu, Doojin,Seok, Sangik
This study compares the information content of funds from operation (FFO) and net income (NI) in the real estate investment trust (REIT) industry. We find that models using FFO explain more of the variance in cumulative abnormal returns around earnings announcement dates than models using NI do. We also find that the information content of FFO differ across REITs of different sizes. FFO does not provide useful information to investors in the case of large REITs. Finally, we show that gain or loss from sales of property is relevant for valuing large REITs.

The Value of Say on Pay
Kind, Axel Herbert,Poltera, Marco,Zaia, Johannes
This paper measures the impact of “say on pay” (SoP) on the market value of corporate voting rights. By exploiting the staggered introduction of SoP regulations across ten major European economies, we show that the value of voting rights has increased for firms with excessive CEO pay, while it has decreased for other companies. Thus, the option to signal dissent with current compensation is not per se valuable and can actually translate into net costs for shareholders. Advisory votes trigger stronger effects on voting values than binding votes. Finally, the effect of mandatory SoP on voting values is not persistent but rather concentrated on the year of introduction.

Trade and Credit Reallocation: How Banks Help Shape Comparative Advantage
Keuschnigg, Christian ,Kogler, Michael
Trade and innovation cause structural change. Productive factors must flow from declining to growing industries. Banks play a major role in cutting credit to non-viable firms in downsizing sectors and in providing new credit to finance investment in expanding, innovative sectors. Structural parameters of a country's banking system thus influence comparative advantage and trade, and can magnify the gains from trade liberalization. The analysis shows how insolvency laws, minimum capital standards, and cost of bank equity determine credit reallocation, sectoral expansion and trade patterns.

Uncertainty and the Cost of Bank vs. Bond Finance
Grimme, Christian
How does uncertainty affect the costs of raising finance in the bond market and via bank loans? Empirically, this paper finds that heightened uncertainty is accompanied by an increase in corporate bond yields and a decrease in bank lending rates. This finding can be explained with a model that includes costly state verification and a special informational role for banks. To reduce uncertainty, banks acquire additional costly information about borrowers. More information increases the value of the lending relationship and lowers the lending rate. Bond investors demand compensation for the increased risk of firm default.

Understanding the (Ir)Relevance of Shareholder Votes on M&A Deals
Cox, James D.,Mondino, Tomas,Thomas, Randall S.
Has corporate law and its bundles of fiduciary obligations become irrelevant? Over the last thirty years, the American public corporation has undergone a profound metamorphosis, transforming itself from a business with dispersed ownership to one whose ownership is highly concentrated in the hands of sophisticated financial institutions. Corporate law has not been immutable to these changes so that current doctrine now accords to a shareholder vote two effects: first, the vote satisfies a statutory mandate that shareholders approve a deal, and second and significantly, the vote insulates the transaction and its actors from any claim of misconduct incident the approved transaction. This article takes issue with the courts and commentators who have so elevated the impact of shareholder approval to insulate misconduct. We develop why it is not reasonable to believe that the shareholders’ competencies extend to adjudging managerial misconduct, why that conclusion is inconsistent with other modern corporate law developments, and why such shareholder ratification is likely both coerced and poorly considered. We also point out that the position of courts and commentators who pronounce the death of corporate fiduciary law is deeply qualified by the deep conflicts of interest institutional investors face when voting as well as the very real threat that today’s ecology that supports shareholder activism is likely to change so that the voice of the discontented shareholder will be at least more muted in the future. Finally, we provide strong empirical support based on a sample of 852 merger deals from 2000 to 2015 that there is a very large thumb on the scale that pushes all deals toward approval, regardless of any allegations of wrongdoing. We observe substantial ownership changes at target corporations, sometimes as high as 40 to 50% of their stock, from long-term investors to hedge funds upon the announcement of a deal and before the consummation of the transaction with a shareholder vote. This change reflects the merger arbitrageurs’ actions. We further show that this change in ownership has a positive and statistically significant impact on the likelihood of merger deals garnering the required shareholder approval. We conclude that the Delaware courts need to rethink their obsession with the shareholder vote, renounce the current doctrinal trends that are taking them in the wrong direction, and return to their historic role of evaluating whether directors have satisfied their fiduciary duties in M&A transactions.

What is the central bank of Wikipedia?
Denis Demidov,Klaus M. Frahm,Dima L. Shepelyansky

We analyze the influence and interactions of 60 largest world banks for 195 world countries using the reduced Google matrix algorithm for the English Wikipedia network with 5 416 537 articles. While the top asset rank positions are taken by the banks of China, with China Industrial and Commercial Bank of China at the first place, we show that the network influence is dominated by USA banks with Goldman Sachs being the central bank. We determine the network structure of interactions of banks and countries and PageRank sensitivity of countries to selected banks. We also present GPU oriented code which significantly accelerates the numerical computations of reduced Google matrix.