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Creditor Rights, Information Sharing, and Bank Risk Taking

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Abstract

Looking at a sample of nearly 2,400 banks in 69 countries, we find that stronger creditor rights tend to promote greater bank risk taking. Consistent with this finding, we also show that stronger creditor rights increase the likelihood of financial crisis. On the plus side, we find that stronger creditor rights are associated with higher growth. In contrast, we find that the benefits of information sharing among creditors appear to be universally positive. Greater information sharing leads to higher bank profitability, lower bank risk, a reduced likelihood of financial crisis, and higher economic growth.

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... Chia sẻ thông tin tín dụng là việc trao đổi thông tin về lịch sử tài chính của khách hàng, bao gồm lịch sử tín dụng, uy tín tín dụng, và mức nợ hiện tại của người đi vay [2]. Các nghiên cứu trước đây đã cung cấp bằng chứng rằng chia sẻ thông tin tín dụng làm giảm vấn đề bất cân xứng thông tin giữa bên cho vay và bên vay, từ đó giúp hạn chế nợ xấu và giảm thiểu các lựa chọn bất lợi do sự thiếu hụt thông tin gây ra [3,4], tăng cường kỷ cương của bên vay nợ [5], giảm thiểu chi phí mua thông tin của các tổ chức tài chính [6,7]. ...
... Do đó, thúc đẩy cơ chế chia sẻ thông tin tín dụng trong lĩnh vực ngân hàng là một trong những giải pháp làm giảm thiểu thông tin bất cân xứng trong hệ thống ngân hàng [3]. Trong một môi trường như vậy, việc chia sẻ thông tin tín dụng trở thành một công cụ thiết yếu giúp các ngân hàng giảm rủi ro phá sản bằng cách giảm thiểu sự lựa chọn bất lợi (adverse selection) và rủi ro đạo đức (moral hazard) của người đi vay [4,5,7]. ...
... Được xây dựng dựa trên phương pháp của A.D. Roy (1952) [16] và sau đó được phát triển để ứng dụng trong lĩnh vực ngân hàng bởi J.H. Boyd và cs (1986) [17], chỉ số Z-score là phương pháp truyền thống được sử dụng để đo lường rủi ro phá sản của ngân hàng [4,18]. Chỉ số này được tính bằng công thức sau: ...
... We measure risk-taking using RISKi,t and Z-scorei,t. These measures, and especially Z-scorei,t, are often used to capture risk-taking (John et al., 2008;Laeven & Levine, 2009;Berger & Bouwman, 2009;Houston et al., 2010). Following John et al. (2008) and Faccio et al. (2016), we estimate RISKi,t for bank i in year t, using the standard deviation of DEi,t from t to t+4, where DEi,t is the deviation of a bank's return on assets (ROA) from our global sample average, over 5-year overlapping windows. ...
... Following Laeven & Levine (2009) and Houston et al. (2010), we estimate Z-scorei,t for bank i in a country at year t as, ...
... However, they find no support for their prediction. Like Houston et al. (2010) and Beltratti & Stulz (2012), we measure bank charter value using the total assets of the three largest commercial banks in a country, relative to the total assets of all banks in that country. We call this measure Bank Concentration. ...
... This study contends that the adoption of a more stringent regulatory and supervisory framework, coupled with the issuance of guidelines on improved risk management disclosures in European banking institutions, is anticipated to lead to a significant reduction in their inclination to undertake high-risk activities. Moreover, according to the existing literature, numerous macroeconomic and institutional factors have the capacity to affect banks' propensity towards risk-taking (Demirgüç-Kunt and Huizinga 2010;Djankov et al. 2008;Houston et al. 2010;Laeven and Levine 2009). ...
... Accounting-based risk-taking measures included in this study are (a) the Z-score (Delis, Hasan, and Tsionas 2014;Houston et al. 2010;Khan, Scheule, and Wu 2017;Laeven and Levine 2009), and (b) the standard deviation of the net interest margin (Dal Maso et al. 2020;Kanagaretnam, Lim, and Lobo 2014). Using a large sample of European banks over the period 2005-2020, we assess whether risk disclosure processes contribute to the role of strict regulatory and supervisory frameworks in limiting banks' risk-taking behavior. ...
... In the present study, two accounting-based measures of risk-taking are employed, specifically the z-score and σ (NIM). The Z-score is a metric used to assess the stability of banks by measuring their distance from default (Beltratti and Stulz 2012;Houston et al. 2010;Kanagaretnam, Lim, and Lobo 2014;Khan, Scheule, and Wu 2017;Laeven and Levine 2009;Ramayandi, Rawat, and Tang 2014). The Z-score is expressed mathematically as follows: Z-score = [CAR + ROA]/σ (ROA), where CAR represents the ratio of a bank's total capital to its assets, ROA denotes the return on assets ratio, and σ (ROA) represents the standard deviation of the bank's ROA. ...
... The factor focuses on not only the corruption level or anti-corruption campaign (Wu & Liu, 2022;Fan et al., 2012) but also other aspects such as political stability (Çam & Özer, 2022), government effectiveness (Awartani et al., 2016) and investor protection (Cho et al., 2014). Regarding legal protection, on one hand, Houston et al. (2010) examine the "supplyside" view and indicate that stronger creditor rights may encourage bank risk-taking. They suggest that strong creditor rights create several privileges for banks to seize the collaterals of borrowers, increasing the expected recovery rates if the borrowers go bankrupt. ...
... However, the "demand-side" view asserts an inverse relationship (Cho et al., 2014). Standing on the borrowers' side, the managers of financially distressed firms may be seriously interfered in business activities and even be dismissed from their positions (Houston et al., 2010). Therefore, managers and shareholders tend to avoid using high leverage. ...
... This can increase the leverage of the borrowers. Using international data, Houston et al. (2010) suggest that strong creditor rights bring more power to creditors in the expropriation of firms' assets, forcing the repayments or even taking control of the business in the event of bankruptcy. In addition, creditors can impose more restrictions on corporate reorganization as well as remove ineffective managers in the event of a financial crisis. ...
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This paper investigates the impact of creditor rights on the relationship between corruption and capital structure. We hypothesize that creditor rights can mitigate the impact of corruption on capital structure. The data consists of 17,114 firms listed in 24 emerging countries during the period from 2012 to 2020. Our setting of emerging countries can be an interesting context because firms in these countries may rely more on debt than equity. In these countries, the corruption may be more severe and thus we expect that the impact of corruption on corporate capital structure may be more prominent. Using a pooled ordinary least square (POLS) regression model, we find that firms tend to use more leverage in countries with a high level of corruption. However, this relationship can be weakened in strong creditor rights countries. This result does not change when we employ random effects and fixed effects models. The results of this study imply that policymakers should consider improving the degree of creditor rights if they want to deal with the high level of corruption in a country.
... VOL is the standard deviation of the ROA of each commercial bank in the sample. Following Houston et al. (2010), LnZ is defi ned as LnZ ln Z ln ...
... Another potential problem of the study is that it might omit some bank risk variables. We calculate the Z score following an approach similar to that of Houston et al. (2010), and add lnZ to the independent variables. We still use median regressions and calculate heteroskedasticity-robust standard errors. ...
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This study examines the too-big-to-fail expectations in the primary market issuance spreads of commercial bank tier-2 capital bonds and additional tier-1 capital bonds in China. Using a sample of 574 issuances with total amount of 4.76 trillion RMB (749 billion USD), we conduct median regressions with the issuance spreads as the dependent variable. The coefficients of DSIB and GSIB are negative and statistically significant at 1% and 5% levels respectively in the full sample, and are negative and statistically significant at 1% level in the subsample after the guidance on asset management businesses was announced. Ceteris paribus, the issuance spreads of capital bonds of systemically important banks are 15.2 bps to 19.7 bps lower than those issued by other banks. The too-big-to-fail expectations and implicit guarantee of systemically important banks in the Chinese bond market, which narrow the primary market spreads of capital bonds issued by systemically important banks, may account for the results. To address the potential endogeneity issues, we use 90% quantile and 95% quantile of sample bank consolidated assets as proxies of systemic importance, and use China Development Bank bond yields to calculate issuance spreads, and the results show that the conclusion is robust.
... Following Roy (1952), Houston et al. (2010), Camara et al. (2013), and Filomeni (2023), we re-estimate the regression model in Eq. ...
... Specifically, the Z-score equals (ROA + CAR)/σ(ROA), where ROA is the rate of return on assets, CAR is the ratio of equity to assets, and σ(ROA) is an estimate of the standard deviation of the rate of return on assets, all measured with accounting data. Intuitively, this measure represents the number of standard deviations below the mean by which ROA would have to fall so as to just deplete equity capital (Boyd et al., 2006;Hannan & Hanweck, 1988;Houston et al., 2010). Indeed, the basic principle behind the Z-score is to relate the capital ratio to the variability in the ROA so that one can know how much variability in returns can be absorbed by capital without the firm becoming insolvent (Hafeez et al., 2022). ...
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Gender bias in leadership and decision-making is a well-documented and pervasive topic that continues to garner significant attention in academic research and business literature. In this paper, by exploiting a unique proprietary dataset of 550 mid-corporate loan applications managed by a major European bank, we explore how the use of soft information influences lending decisions of female loan officers as compared to their male counterparts. We find that use of soft information reduces information asymmetry which helps female officers in making diligent lending decisions resulting in increased granted credit with a lower default probability. We also investigate gender affinity within the banking organisation and find that female loan approvers are more likely to be supportive of their subordinate female loan officers by approving more credit to the loan applications handled by female loan officers. Finally, we examine the possible mechanisms that can explain these results, and find that female loan officers are able to better collect and use soft information as they cultivate and maintain deeper firm-bank relationships with their clients due to higher threat of losing or being penalized in their jobs for any possible errors. We also rule out any other possible explanations such as differences in workload, work experience, loan officers’ optimism, managerial ability, and screening capabilities between female and male loan officers. Our findings carry important policy implications, reflected in the optimal allocation of capital in the economy and the reduction of gender-related exclusion, which is vital in creating an equitable society and fostering a more ethical and inclusive workplace.
... In regard to bank-specific factors, bank size is a key determinant since it allows banks to capture a large proportion of the market share, resulting in increased profits and capital buffers, thus making them less vulnerable to internal and external shocks [1]. Furthermore, large banks can diversify their portfolios and offer more loans [14] while taking advantage of economies of scale [38]. However, studies about the impact of bank size on banking stability show contrasting results. ...
... This result supports the "too big to fail" theory, which explains that large banks tend to carry out high-risk activities to gain market share, especially in a very competitive market. This finding is consistent with the findings of Ozili [55] but different from the conclusions of Ibrahim and Rizvi [38], and Chand et al. [14]. According to the General Statistics Office, total banking industry income has been almost flat since the third quarter of 2022 until now due to the weak economy and crises in the real estate market. ...
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This article aims to examine the moderating role of investor sentiment in the impact of house prices on banking stability over the period from 2017 to 2022 in Vietnam. The research tries to build a banking stability index by combining the principal components of an international rating system of financial institutions stability (CAMELS) through principal component analysis, while the average apartment price index in Hanoi and Ho Chi Minh City is used as a variable of house prices in Vietnam, and investor sentiment is measured using the Google search volume index. By using panel corrected standard errors, the research gives evidence of the positive impact of house prices on banking stability in Vietnam, and the moderating role of investor sentiment on this positive effect. Moreover, the research indicates the positive roles of bank efficiency, regulatory quality, and GDP growth for boosting banking stability, while the opposite impact can be seen in the case of bank concentration. In addition, there is no evidence of any influence of bank size on banking stability in Vietnam.
... We use Z-Score [37] as an inverse proxy of bank risk-taking level-dependent variable q i,t , in other words, it can be used as a proxy of bank monitoring effort level. It is a very common practice in existing literature [38][39][40]. There are also various other risk measures, but these often require market as well as accounting data and so may not be feasible in this case. ...
... Intuitively, this measure of Z-score represents the number of standard deviations below the mean by which profits would have to fall so as to just deplete equity capital [42]. It has been widely used to measure the bank risk-taking level recently [39,40]. Regarding the independent variables, we use banks' net income to measure the banks' profit (in a hundred thousand US Dollars). ...
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This paper investigates the relationship between monetary policy and bank risk-taking by introducing a model wherein banks expend a level of costly monitoring effort to select low-risk projects, thereby reducing the risk associated with the loans they grant. The impact of monetary policy on bank risk-taking is examined through both theoretical models and empirical analysis. The paper compares theoretical models with different assumptions, revealing an unambiguous negative effect without the assumption of limited liability for banks, and an ambiguous effect with the assumption of limited liability for banks, influenced by the equity ratio. The empirical model employs unique quarterly data comprising balance sheet information for top-listed banks in the U.S. banking system from 2000 to 2017. The findings indicate that low-interest rates contribute to an increase in bank risk-taking. Moreover, this effect is more pronounced after the financial crisis and weaker before the crisis. Additionally, the impact is evident for undercapitalized banks and more substantial for those financed with a higher proportion of equity.
... Now, we address concerns regarding how potential omitted institutional environment and cultural control variables influence the association between corruption and bank stability. Therefore, in addition to bank level and macroeconomic variables, we refer to the banking literature and control for creditor rights, economic freedom, culture, and religion (Houston et al. 2010;Anginer et al. 2014;Anginer et al. 2018;Anginer et al. 2019;Bitar and Tarazi 2019;Bitar and Tarazi 2022;Berger et al. 2021). Strong creditors' rights grant more power to creditors in case of bankruptcy, thus reducing both the adverse selection and moral hazard problems associated with bank lending (Houston et al. 2010) and corporate risk-taking (Acharya et al. 2011). ...
... Therefore, in addition to bank level and macroeconomic variables, we refer to the banking literature and control for creditor rights, economic freedom, culture, and religion (Houston et al. 2010;Anginer et al. 2014;Anginer et al. 2018;Anginer et al. 2019;Bitar and Tarazi 2019;Bitar and Tarazi 2022;Berger et al. 2021). Strong creditors' rights grant more power to creditors in case of bankruptcy, thus reducing both the adverse selection and moral hazard problems associated with bank lending (Houston et al. 2010) and corporate risk-taking (Acharya et al. 2011). Economic freedom measures such as judicial effectiveness, monetary freedom, and financial freedom are also expected to be positively associated with bank stability. ...
Article
Research Question/Issue We investigate whether the risk‐taking of Islamic banks is affected differently by corruption compared to conventional banks. We also examine whether the characteristics of the Shari'ah Supervisory Board (SSB) of Islamic banks and the characteristics of the board of directors of conventional banks play an effective role in moderating such an effect. Research Findings/Insights We find consistent evidence that banks in countries with higher corruption have higher bank risk for both conventional and Islamic banks. However, this association is attenuated by the size of the SSB, the presence of female board members, and higher academic qualifications of SSB members. For conventional banks, the moderating effect of the presence of female directors and academically qualified members on the board of directors is also prevalent but to a lesser extent. Theoretical/Academic Implications This study contributes to the corporate finance literature more generally by highlighting the role played by corporate governance, particularly the presence of female members and academically qualified members on the SSBs of Islamic banks and on the board of directors of conventional banks, in mitigating the effect of corruption on bank risk‐taking for the two bank types. Practitioner/Policy Implications Our findings are based on a matched sample of banks operating in 10 OIC (Organization of Islamic Cooperation) countries and have important implications for bank stability and bank governance reforms. On the detrimental side, urgency of the anti‐corruption campaigns in these countries is justified due to the significant effect of corruption on risk‐taking for both conventional and Islamic banks. Overall, to better fight corruption in countries with dual banking systems, there is a need to enforce stricter rules for all types of banks.
... Various methods are used to calculate this score. In this study, we use the rolling Z-score approach, as our data frequency is annual (e.g., Laeven and Levine 2009;Houston et al. 2010). We compute the mean of banks' ROA and SD of ROA over moving windows of the four previous years, including the current year of the study period. ...
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Utilizing a panel data set consisting of 144 Middle East and North African (MENA) banks covering the period 2014–2021, this study (a) explores the correlation between CEO narcissism and insolvency risk (risk‐taking) and (b) investigates whether certain CEO attributes can moderate this association. We identify a significant positive relationship between CEO narcissism and insolvency risk, shedding light on the dark side of CEO narcissism as elucidated within the upper echelons theory. Furthermore, our findings indicate that the presence of returnee CEOs or politically connected CEOs strengthens the aforementioned relationship by increasing the likelihood of narcissistic CEOs contributing to amplify insolvency risk.
... The coefficients are statistically significant at the 1%, 5%, and 10% levels, respectively, with t-statistics ranging from -1.78 to -6.24 (p < 0.001). These findings are consistent with the notion that excessive risk-taking can erode bank profitability and shareholder value [16,17]. ...
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Introduction. The management of liquidity and market risks in the banking sector is of paramount importance for maintaining a robust financial system and mitigating potential crises. Despite extensive research and implementation of risk management techniques, recent experiences have highlighted the inadequacy of purely statistics-based approaches in extreme situations. This study aims to critically examine the current state of banking risk management, focusing on the effectiveness of methods such as Value at Risk (VaR) for foreign currency risks and Gap Analysis for liquidity and interest rate risks. By identifying limitations and proposing enhancements, this research seeks to contribute to the development of more resilient risk management frameworks in the banking industry. Methods. This study employs a comprehensive literature review and empirical analysis of risk management practices in the banking sector. VaR and Gap Analysis methods are applied to real-world data from a representative sample of banks to assess their efficacy in capturing and mitigating liquidity, foreign currency, and interest rate risks. The results are critically evaluated using advanced statistical techniques and benchmarked against industry standards. Results. The findings reveal significant limitations in the current application of VaR and Gap Analysis methods, particularly in extreme market conditions. The study identifies key factors contributing to these shortcomings and proposes a set of enhanced risk management strategies that incorporate scenario analysis, stress testing, and machine learning techniques. These innovations demonstrate improved risk capture and mitigation capabilities. Discussion. The outcomes of this research have significant implications for risk management practices in the banking sector. The proposed enhancements to VaR and Gap Analysis methods offer a pathway towards more robust and adaptive risk frameworks. Future research should focus on the practical implementation and validation of these strategies across a wider range of banking institutions and market conditions.
... Larger banks have more risk diversification, economies of scale, access to finance, risk management expertise, market credibility, regulatory monitoring, and shock absorption capability. These factors collectively contribute to higher levels of financial stability for larger banks in the country (Cubillas & González, 2014;Srairi, 2013;Soedarmono et al., 2011;Houston et al., 2010). ...
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The primary objective of this research is to analyze the effect of bank-specific and risk determinants on conventional banks' z-scores in Bangladesh from 2011 to 2021. This study used panel linear regression and panel corrected standard error (PCSEs) to estimate the model. Capital adequacy, asset quality, income diversification, bank competition, managerial efficiency, and profitability (return on equity) are used as proxies for bank-specific and liquidity risk; Sensitivity to marketing risk is used as a proxy for bank risk, while the bank size is used as a control variable and Z-scores are used as a proxy for measurement of bank stability. The main results indicate that capital adequacy, bank competition, and managerial efficiency are negative, but asset quality, income diversification, and profitability (ROE) are positively related to the Z-score. The results further indicate that determinants of bank risk, such as liquidity risk and marketing risk, negatively impact the Z-score. The control variable bank size has a positive impact on the Z-score. Based on our results, authorities in Bangladesh may develop rules for managing operations and ensuring bank stability.
... Z-skoru, bir bankanın iflas olasılığını yansıtan bir risk ölçüsü olarak ampirik analizlerde yaygın bir şekilde kullanılmaktadır (Laeven ve Levine, 2009;Houston, Lin, Lin ve Ma, 2010;Čihák ve Hesse, 2010;Beck, Demirgüç-Kunt ve Merrouche, 2013;Kabir, Worthington ve Gupta, 2015;Albaity, Mallek ve Noman, 2019;Hafeez, Li, Kabir ve Tripe, 2022). Finansal sağlamlığın bir göstergesi olarak Z-skorunun yaygın olarak tercih edilmesinin nedenlerinden biri, Z-skorunun bankanın temerrüde düşme olasılığıyla ters ilişkili olduğunun kolaylıkla gösterilebilmesidir (Kabir, Worthington ve Gupta, 2015: 334). ...
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2018-2022 döneminde Türkiye’de faaliyet gösteren mevduat bankalarının finansal sağlamlığınınZ-skoru kullanılarak ölçülmesi ve daha sonra yüksek ve düşük Z-skoruna sahip mevduat bankalarının finansal oranları arasında istatistiksel olarak anlamlı bir farklılık olup olmadığının tespit edilmesi, bu çalışmanın amacınıoluşturmaktadır. Kullanılan finansal oranlar, literatürde yer alan CAMELS Derecelendirme Sistemi bileşenleri temel alınarak Türkiye Bankalar Birliği’nin yıllık olarak yayımladığı “Türkiye’de Bankacılık Sistemi Seçilmiş Rasyolar 2012-2022” isimli rapordan elde edilmiştir.Yüksek ve düşük Z-skoruna sahip mevduat bankalarının finansal oranları arasında istatistiksel olarak anlamlı bir farklılık olup olmadığının belirlenmesi amacıyla Mann Whitney U-Testi kullanılmıştır.Analiz sonuçları, yüksek Z-skoruna sahipbankaların genellikle daha yüksek sermaye yeterliliğine, varlık kalitesine, yönetim kalitesine, kârlılığa ve likiditeye sahip olduğunu göstermiştir. Ayrıca, analiz sonuçları doğrultusunda, Türkiye’de mevduat bankalarının finansal sağlamlığınındeğerlendirilmesi açısından Z-skorlarının önemli bir ölçüt olarak görülebileceğini ifade etmek mümkündür.
... The literature often considers different measures of banks' risk, such as the Z-score (Altunbas et al., 2018;Ashraf et al., 2020;Dutra et al., 2023b;Gaganis et al., 2020;Houston et al., 2010;Laeven & Levine, 2009;Lapteacru, 2016;Niţoi et al., 2019), loan-loss reserves to total loans ratio (Bitar et al., 2016), and credit growth (Cerutti et al., 2017;Claessens et al., 2014;Ghosh, 2014;Teixeira, Matos, et al., 2020). Therefore, we repeat the same regressions using a different indicator for banks' risk, the Z-score. ...
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This study examines whether forcing banks to hold subordinated debt and enforcing market discipline could enhance the effectiveness of capital macroprudential policies in reducing banks' risk and contribute to bank stability. Using the system generalised method of moments and based on a sample of 322 banks across 18 countries during the period 2006–2020, we find that a higher level of subordinated debt leads banks to avoid moral-hazard behaviours and engage in risk shifting when adapting to a tighter macroprudential framework, which in turn leads to a greater effectiveness of these policies. Furthermore, as robustness tests, we show that this effect is stronger in advanced economies and in the United States of America. These results also stand using a different proxy for banks' risk.
... There is an extensive literature examining the nexus between fintech and the development of the economy (Allen & Gale, 1994;Bollaert et al., 2021;Beck et al., 2016;Houston et al., 2010). Similarly, there is a growing literature examining issues related to fintech and climate change (Ullah et al., 2023;Jahanger et al., 2023;Su et al., 2020;Zeraibi et al., 2021). ...
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Low-carbon development is important to reduce global warming, allow people to live in normal temperatures and climates, and limit the loss of labor productivity by avoiding air pollution. However, greenwashing prevents low-carbon development by making companies appear more eco-friendly than they are. Therefore, this study examines the influence of financial technology (FinTech) credit and the implementation of the Pilot Low Carbon Project on corporate greenwashing in China from 2015 to 2021. The study uses the method of moment quantile regression (MMQR) to determine that FinTech credit and low- carbon projects prevent greenwashing behavior and promote environmentally sustainable corporate practices in China. Fintech plays a crucial role in monitoring the environmental impact of urban development, especially in the context of the Low Carbon City Initiative. The influence of Fintech Credit on greenwashing experiences a notable reduction in the higher quantiles, especially between the 75th and 95th culminating in a significant decrease to approximately − 0.07. Companies outside the low carbon city areas consistently experience a negative impact of Fintech Credit on greenwashing. This investigation contributes significantly to the discourse on the interplay between greenwashing, FinTech and sustainable urban development. It also provides valuable insights for the development of strategies aimed at mitigating misleading environmental claims made by companies.
... He found that among the thirty-nine selected companies, nine are in a phase of bankruptcy. Rashid et al. (2021) employed the emerging Altman Z Score model in their study to assess the financial distress of Indian banks while also performing a comparative analysis between scheduled private sector and scheduled public sector banks at the same time.The Z value has been utilized in multiple research studies to assess financial distress, as evidenced by Boyd and Runkle (1993), Laeven and Levine (2009), Demirguc-Kunt and Huizinga (2010), Houston et al. (2010), and Beltratti and Stulz (2012). The combined findings of these studies confirm that the Z value serves as an appropriate measure for evaluating the performance of an enterprise. ...
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This study explores the Altman Z-Score model in depth, investigating its evolution and diverse range of applications. Starting from its inception, the study highlights the modifications made by Altman to the model over time. The study examines the utilization of the Altman Z-Score in various sectors, including both public and private enterprises, as well as its tailored application for emerging markets. Each version of the model is thoroughly analyzed, providing a clear understanding of its elements and explanations in the assessment of financial stability. The Altman Z-Score model separates itself by offering a comprehensive analysis of a company's financial well-being beyond traditional ratios. By categorizing enterprises into safe, gray, and distress zones, the Altman Z-Score provides valuable insights for financial decision-makers.The article highlights the enduring significance and adaptability of the model across different economic scenarios, making it a valuable tool for investors,analysts, and other stakeholderswho are interested in assessing a firm's financial health.
... In other words, a high Z-score implies lower insolvency risk and hence, better banking stability (Lepetit and Strobel, 2013). The Z-score is highly skewed; consequently, we follow Houston et al. (2010), Beck et al. (2013), Fern andez et al. (2016 and adopt the natural log of Z-score (LNZ), which is shown to be normally distributed. ...
Article
Purpose Serious concerns about the stability of the international financial systems have arisen recently, resulting from the mounting inflation rates and the accompanying procedures to control them. Consequently, this study aims at examining empirically the impact of inflationary pressures/shocks on the stability of banking sectors. Design/methodology/approach The study adopts a dynamic GMM models and exploits a sample of 188 banks operating in 14 MENA economies, over the period 1999–2021. Findings This research finds that high inflation does indeed harm bank financial stability and deteriorates banks credit risk. Furthermore, the examination of the impact of interaction terms between inflation and bank-specific and institutional quality variables shows that better capitalisation levels, higher liquidity buffers, larger asset size, greater market power, foreign ownership and overall political stability, all can counterbalance the impact of inflationary pressures on MENA banks financial stability. Originality/value In addition to empirically revealing how inflationary shocks can deteriorate financial stability, the main novelty of this research is examining how the interactions between inflation on one hand, and bank-specific and institutional quality on the other, affect bank stability.
... This examination is relevant as the current regulatory regime in the United States requires a series of regulations, such as stress tests and liquidity requirements, which are enforced to reduce or at least curb bank risk-taking. Following prior literature (Houston et al. 2010;Bai and Elyasiani 2013;Fang et al. 2014;Berger et al. 2017;Tripathy et al. 2021), we use bank z-score as a measure of bank risk in our following regression analyses. Table 12 presents the regression results regarding the effects of these two types of fund growth on bank riskiness over the sample period. ...
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This paper identifies a contemporaneous substitutional relationship between retail deposits and wholesale funds, while the lagged relationship between the two is rather weak-a finding consistent with our “stable capitalization hypothesis.” We find that this substitution effect is much more pronounced for banks facing retail deposit inflows compared to those facing outflows, suggesting that influxes of deposits allow banks to cut wholesale funding more aggressively to maintain their capital structures. This substitution effect is also negatively associated with wholesale funding maturity and riskiness. Furthermore, we show that the substitutional relationship is weaker during funding shocks such as the 2007-2009 financial crisis and that the substitution itself does not help banks maintain their lending, which supports the argument for a lender of last resort. Finally, we demonstrate that liquidity regulation curbs this substitution, which overall helps banks improve financial stability.
... It is asserted that a company's intangible (HC and SC) and tangible (CE) resources are the main drivers of its market value (Pulic, 2004 is high, the bank is safer and less risky. Numerous studies (e.g., Houston et al., 2010;Laeven & Levine, 2009) used the risk index proposed by Hannan and Hanweck (1988). ...
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This study intends to investigate the potential effects of various bank-specific characteristics on the efficiency of intellectual capital (IC) in Cambodia’s commercial banks from 2013 to 2021. Using multiple regression analysis, the study examines the link between IC efficiency as a dependent variable and some independent variables. The study uses value-added intellectual capital (VAIC) established by Pulic (2004) to assess how IC is effectively utilized in Cambodian commercial banks. The findings show that the bank size, bank profitability, and entry barriers significantly influence IC efficiency. The study’s findings cannot be extrapolated to commercial banks in other countries or other study periods because the empirical testing has been confined to Cambodian commercial banks from 2013 to 2021. The study will aid banking regulators in identifying the variables influencing IC efficiency so they can take steps to improve the efficient utilization of IC resources and maximize value creation. This analysis is beneficial to bank management. Since it informs them of the variables, they should concentrate on increasing the IC efficiency of the banks. This study is the first to examine the variables that affect IC efficiency in commercial banks in Cambodia. It adds to the previous studies about the factors that affect IC efficiency in banks. Keywords: Intellectual capital; Commercial banks; Cambodia
... A higher z-score indicates a more stable banking system and lower risk-taking (i.e., the bank is less risky). Following Houston et al. (2010) and Fang et al. (2014), we measure risk-taking behavior of banks using the inverse z-score, which is expressed from Eq. 2.3 as: ...
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This study examines how regulatory policy impacts the complex relationship between bank risk-taking and the predicted probability of a systemic banking crisis in 54 African countries for the period, 2004–2020. The empirical evidence is based on the instrumental variable probit panel regressions. The study found a non-linear U-shaped relationship between bank risk-taking and the probability of a systemic banking crisis. The study shows that a systemic banking crisis is likely to occur when the monotonically increasing levels of risk-taking of banks exceed thresholds of 0.015 and 0.79. The study also found that the thresholds of risk-taking in countries with stringent regulatory policies are relatively greater in countries operating in low regulatory policy regimes. In light of the conditional marginal effects, the study provides evidence to support that regulatory policy amplifies and augments the negative linear impact of risk-taking on the predicted probability of a systemic banking crisis. This is relevant to policymakers because the established conditional effects imply that regulatory policy is a sufficient complementary condition for shaping the negative effect of bank risk-taking and systemic banking crises.
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Purpose Creditor rights reduce or increase agency problems in corporations, affecting financial decisions. This study examines the impact of India’s Insolvency and Bankruptcy Code of 2016 (hereinafter referred to as the Code) on firms’ investment and investment sensitivity based on their health, considering this Code as more creditor-friendly than pre-existing bankruptcy laws. Design/methodology/approach This study uses a quasi-natural experiment that employs the difference-in-differences (DID) and propensity score matching difference-in-differences (PSM DiD) approach by considering the Code as treatment and categorizing the firms into distressed (treated group) and healthy (control group) firms. For the purpose of analysis, a fixed-effect regression model is used. Findings This study finds that distressed firms reduce their investment after the Code, but healthy firms do not observe any change. It shows that the reduction in investment of the distressed group is significantly greater than that of the healthy group due to agency conflict and the liquidation bias hypothesis. However, the reduction in investment is not followed by the change in investment sensitivity. Originality/value This study adds to the existing studies on the impact of the Insolvency and Bankruptcy Code, 2016 on investment. No study explores the relationship between this Code and investment based on the financial health of the firms. Also, none of the studies explores the impact of the Code on investment sensitivity. The results show that this Code has provided stronger protection to the creditors, which hurts the internal stakeholders’ interests. The study has implications for policymakers and academicians.
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This paper examines the impact of economic freedom on the financial fragility of 1,496 non-financial SMEs in Vietnam over the period 2012–2020. We also evaluate the effect of ownership structure on the relationship between economic freedom and financial fragility. Our findings provide evidence that an increase in the degree of aggregated economic freedom and its categories – rule of law, regulatory efficiency, and market openness – help firms reduce the level of financial fragility. However, an increased government size tends to worsen their financial risk. Regarding the impact of ownership, our results reveal that greater rule of law, regulatory efficiency, and market openness have a positive influence on foreign-owned firms, enabling them to maintain lower levels of financial fragility compared to non-foreign-owned firms. However, foreign-owned firms experience a higher level of financial fragility relative to domestically private-owned firms due to increased government size. Furthermore, our analysis indicates that there is no difference in the effect of economic freedom on financial fragility between state-owned and non-state-owned firms in Vietnam. This finding has implications for recognizing the importance of foreign ownership and economic freedom in emerging markets. It also encourages foreign shareholders to design appropriate policies to mitigate financial risk.
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We formulate a simple theoretical model of a banking industry that we use to identify and construct theory-based measures of systemic bank shocks (SBS). These measures differ from “banking crisis” (BC) indicators employed in many empirical studies, which are constructed using primarily information on government actions undertaken in response to bank distress. Using both country-level and firm-level samples, we show that SBS indicators consistently predict BC indicators, indicating that BC indicators actually measure lagged policy responses to systemic bank shocks. We then re-examine the impact of macroeconomic factors, bank market structure, deposit insurance, and external shocks on the probability of systemic bank shocks (SBS) and on “banking crisis” (BC) indicators. We find that the impact of these variables on the likelihood of a policy response to banking distress (as represented by BC indicators) is frequently quite different from that on the likelihood of a systemic bank shock (SBS). We argue that disentangling the effects of systemic bank shocks and policy responses is crucial in understanding the roots of banking crises. We believe that many findings of a large empirical literature need to be re-assessed.
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If banks have an informational monopoly about their clients, borrowers may curtail their effort level for fear of being exploited via high interest rates in the future. Banks can correct this incentive problem by committing to share private information with other lenders. The fiercer competition triggered by information sharing lowers future interest rates and future profits of banks. But, provided banks retain an initial informational advantage, their current profits are raised by the borrowers’ higher effort. This trade-off determines the banks’ willingness to share information. Their decision affects credit market competition, interest rates, volume of lending, and social welfare.
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The law and finance literature highlights the role of investor rights in financial development, firm corporate governance, and financing patterns. For a panel of 35 countries, we investigate how bankruptcy use relates to countries' creditor rights and judicial efficiency. Bankruptcies are higher in countries with more creditor rights, except for a "no automatic stay on assets" provision. Higher judicial efficiency is associated with more bankruptcies and appears as a substitute with more creditor rights. Although only a first step, our findings suggest creditor rights are complex, balancing prioritization of claims, ex ante risk-taking incentives, and an efficient resolution of distressed firms. Copyright 2005, Oxford University Press.
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Better investor protection could lead corporations to undertake riskier but value-enhancing investments. For example, better investor protection mitigates the taking of private benefits leading to excess risk-avoidance. Further, in better investor protection environments, stakeholders like creditors, labor groups, and the government are less effective in reducing corporate risk-taking for their self-interest. However, arguments can also be made for a negative relationship between investor protection and risk-taking. Using a cross-country panel and a U.S.-only sample, we find that corporate risk-taking and firm growth rates are positively related to the quality of investor protection.
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Financial systems are crucial to the allocation of resources in a modern economy. They channel household savings to the corporate sector and allocate investment funds among firms; they allow intertemporal smoothing of consumption by households and expenditures by firms; and they enable households and firms to share risks. These functions are common to the financial systems of most developed economies. Yet the form of these financial systems varies widely. Why do different countries have such different financial systems? Is one system better than all the others? Do different systems merely represent alternative ways of satisfying similar needs? Is the current trend toward market-based systems desirable? Franklin Allen and Douglas Gale argue that the view that market-based systems are best is simplistic. A more nuanced approach is necessary. Financial institutions are not simply veils, disguising the allocation mechanism without affecting it, but are crucial to overcoming market imperfections. An optimal financial system relies on both financial markets and financial intermediaries.
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We propose that stronger creditor rights in bankruptcy affect corporate investment choice by reducing corporate risk-taking. In cross-country analysis, we find that stronger creditor rights induce greater propensity of firms to engage in diversifying acquisitions that are value-reducing, to acquire targets whose assets have high recovery value in default, and to lower cash-flow risk. Also, corporate leverage declines when creditor rights are stronger. These relations are usually strongest in countries where management is dismissed in reorganization and are also observed over time following changes in creditor rights. Our results thus identify a potentially adverse consequence of strong creditor rights.
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This article develops a framework for efficient IV estimators of random effects models with information in levels which can accommodate predetermined variables. Our formulation clarifies the relationship between the existing estimators and the role of transformations in panel data models. We characterize the valid transformations for relevant models and show that optimal estimators are invariant to the transformation used to remove individual effects. We present an alternative transformation for models with predetermined instruments which preserves the orthogonality among the errors. Finally, we consider models with predetermined variables that have constant correlation with the effects and illustrate their importance with simulations.
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This paper examines whether executive compensation in banking is structured to promote risk taking. We find that, on average, bank CEOs receive less cash compensation, are less likely to participate in a stock option plan, hold fewer stock options, and receive a smaller percentage of their total compensation in the form of options and stock than do CEOs in other industries. Cross-sectional differences in the structure of compensation contracts within banking are also examined. We find a positive and significant relation between the importance of equity-based incentives and the value of the bank's charter. This result is inconsistent with the hypothesis that compensation policies promote risk taking in banking.
Article
Building on the important study by Beck, Demirguc-Kunt, and Levine [2006. Bank supervision and corruption in lending. Journal of Monetary Economics 53, 2131-2163], we examine the effects of both borrower and lender competition as well as information sharing via credit bureaus/registries on corruption in bank lending. Using the unique World Bank data set (WBES) covering more than 4,000 firms across 56 countries with information on credit bureaus/registries, assembled by Djankov, McLiesh, and Shleifer [2007. Private credit in 129 countries. Journal of Financial Economics 84, 299–329], and bank regulation data collected by Barth, Caprio, and Levine [2006. Rethinking Bank Regulation: Till Angels Govern. Cambridge University Press, New York] to measure bank competition and information sharing, we find strong evidence that both banking competition and information sharing reduce lending corruption, and that information sharing also helps enhance the positive effect of competition in curtailing lending corruption. We also find that the ownership structure of firms and banks, legal environment, and firm competition all exert significant impacts on lending corruption.
Article
Theory predicts that information sharing among lenders attenuates adverse selection and moral hazard, and can therefore increase lending and reduce default rates. Using a new, purpose-built data set on private credit bureaus and public credit registers, we find that bank lending is higher and credit risk is lower in countries where lenders share information, regardless of the private or public nature of the information sharing mechanism. We also find that public intervention is more likely where private arrangements have not arisen spontaneously and creditor rights are poorly protected.
Article
This paper conducts the first empirical assessment of theories concerning risk taking by banks, their ownership structures, and national bank regulations. We focus on conflicts between bank managers and owners over risk, and we show that bank risk taking varies positively with the comparative power of shareholders within the corporate governance structure of each bank. Moreover, we show that the relation between bank risk and capital regulations, deposit insurance policies, and restrictions on bank activities depends critically on each bank's ownership structure, such that the actual sign of the marginal effect of regulation on risk varies with ownership concentration. These findings show that the same regulation has different effects on bank risk taking depending on the bank's corporate governance structure.
Article
Creditors often share information about their customers’ credit records. Besides helping them to spot bad risks, this acts as a disciplinary device. If creditors are known to inform one another of defaults, borrowers must consider that default on one lender would disrupt their credit rating with all the other lenders. This increases their incentive to perform. However, sharing more detailed information can reduce this disciplinary effect: borrowers’ incentives to perform may be greater when lenders only disclose past defaults than when they share all their information. In some instances, by ‘fine-tuning’ the type and accuracy of the information shared, lenders can raise borrowers’ incentives to their first-best level.
Article
Motivated by public policy debates about bank consolidation and conflicting theoretical predictions about the relationship between bank concentration, bank competition and banking system fragility, this paper studies the impact of national bank concentration, bank regulations, and national institutions on the likelihood of a country suffering a systemic banking crisis. Using data on 69 countries from 1980 to 1997, we find that crises are less likely in economies with more concentrated banking systems even after controlling for differences in commercial bank regulatory policies, national institutions affecting competition, macroeconomic conditions, and shocks to the economy. Furthermore, the data indicate that regulatory policies and institutions that thwart competition are associated with greater banking system fragility.
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This paper reviews, appraises, and critiques theoretical and empirical research on the connections between the operation of the financial system and economic growth. While subject to ample qualifications and countervailing views, the preponderance of evidence suggests that both financial intermediaries and markets matter for growth and that reverse causality alone is not driving this relationship. Furthermore, theory and evidence imply that better developed financial systems ease external financing constraints facing firms, which illuminates one mechanism through which financial development influences economic growth. The paper highlights many areas needing additional research.
Article
Using a sample of 1,560 new debt financings, we examine the choice among bank debt, non-bank private debt, and public debt. The primary determinant of the debt source is the credit quality of the issuer. Firms with the highest credit quality borrow from public sources, firms with medium credit quality borrow from banks, and firms with the lowest credit quality borrow from non-bank private lenders. Non-bank private debt thus plays a unique role in accommodating the financing needs of firms with low credit quality. In addition, the choice of debt source is (weakly) influenced by managerial discretion.
Article
We investigate whether information sharing among banks has affected credit market performance in the transition countries of Eastern Europe and the former Soviet Union, using a large sample of firm-level data. Our estimates show that information sharing is associated with improved availability and lower cost of credit to firms. This correlation is stronger for opaque firms than transparent ones and stronger in countries with weak legal environments than in those with strong legal environments. In cross-sectional estimates, we control for variation in country-level aggregate variables that may affect credit, by examining the differential impact of information sharing across firm types. In panel estimates, we also control for the presence of unobserved heterogeneity at the firm level, as well as for changes in macroeconomic variables and the legal environment.
Article
Swedish bankruptcy filing automatically terminates the employment of the chief executive officer (CEO) and triggers an auction of the firm. Critics of this system warn of excessive shareholder risk-shifting incentives prior to filing. We argue that private benefits of control induce managerial conservatism that may override shareholder risk-shifting incentives. By investing conservatively, the CEO increases the joint probability that the auction results in a going-concern sale and that the CEO is rehired. This uniquely implies that the rehiring probability is increasing in private control benefits, which our empirical results support. We also find that buyers in the auction screen on CEO quality. Overall, labor market discipline is dramatic, as filing CEOs suffer large income losses relative to CEOs of matched, non-bankrupt firms. Firms emerging from auction bankruptcy appear healthy as they typically go on to perform at par with industry rivals.JEL classification: G33; G34
Article
This paper integrates elements from the theory of agency, the theory of property rights and the theory of finance to develop a theory of the ownership structure of the firm. We define the concept of agency costs, show its relationship to the ‘separation and control’ issue, investigate the nature of the agency costs generated by the existence of debt and outside equity, demonstrate who bears these costs and why, and investigate the Pareto optimality of their existence. We also provide a new definition of the firm, and show how our analysis of the factors influencing the creation and issuance of debt and equity claims is a special case of the supply side of the completeness of markets problem.The directors of such [joint-stock] companies, however, being the managers rather of other people's money than of their own, it cannot well be expected, that they should watch over it with the same anxious vigilance with which the partners in a private copartnery frequently watch over their own. Like the stewards of a rich man, they are apt to consider attention to small matters as not for their master's honour, and very easily give themselves a dispensation from having it. Negligence and profusion, therefore, must always prevail, more or less, in the management of the affairs of such a company.Adam Smith, The Wealth of Nations, 1776, Cannan Edition(Modern Library, New York, 1937) p. 700.
Article
Differences in culture, proxied by differences in religion and language, cannot be ignored when examining why investor protection differs across countries. We show that a country's principal religion predicts the cross-sectional variation in creditor rights better than a country's natural openness to international trade, its language, its income per capita, or the origin of its legal system. Catholic countries protect the rights of creditors less well than Protestant countries. A country's natural openness to international trade mitigates the influence of religion on creditor rights. Culture proxies are also helpful in understanding how investor rights are enforced across countries.
Article
This paper is a first attempt at measuring financial sector outreach and investigating its determinants. First, we present new indicators of banking sector outreach across 99 countries, constructed from aggregate data provided by bank regulators. Second, we show that our indicators closely predict harder-to-collect micro-level statistics of household and firm use of banking services, and are associated with measures of firm financing obstacles in the expected way. Finally, we explore the association between our outreach indicators and standard determinants of financial sector depth. We find many similarities but also some differences in the determinants of outreach and depth.
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This paper investigates the impact of stock markets and banks on economic growth using a panel data set for the period 1976–1998 and applying recent generalized-method-of moments techniques developed for dynamic panels. On balance, we find that stock markets and banks positively influence economic growth and these findings are not due to potential biases induced by simultaneity, omitted variables or unobserved country-specific effects.
Article
This study investigates senior management turnover in financially distressed firms. In any given year, 52% of sampled firms experience turnover if they are either in default on their debt, bankrupt, or privately restructuring their debt to avoid bankruptcy. A significant number of changes are initiated by firms' bank lenders. Following their resignation from these firms, managers are not subsequently employed by another exchange-listed firm for at least three years. Results are consistent with managers experiencing large personal costs when their firms default.
Article
We show that country-level creditor rights influence dividend policies around the world by establishing the balance of power between debt and equity claimants. Creditors demand and managers consent to a more restrictive payout policy as a substitute for weak creditor rights in an effort to minimize the firm's agency costs of debt. Using a sample of 120,507 firm-years from 52 countries, we find that both the probability and amount of dividend payouts are significantly lower in countries with poor creditor rights. A reduction in the creditor rights index from its highest value to its lowest value implies a 41% reduction in the probability of paying a dividend, and a 60% reduction in dividend payout ratios. These results are robust to numerous control variables, sample variations, model specifications, and alternative hypotheses. We also show that the agency costs of debt play a more decisive role in determining dividend policies than the previously documented agency costs of equity. Overall, our findings contribute to the growing literature arguing that creditors exert significant influence over corporate decision-making outside of bankruptcy.
Article
We analyze the link between creditor rights and firms’ investment policies, proposing that stronger creditor rights in bankruptcy reduce corporate risk-taking. In cross-country analysis, we find that stronger creditor rights induce greater propensity of firms to engage in diversifying acquisitions, which result in poorer operating and stock-market abnormal performance. In countries with strong creditor rights, firms also have lower cash flow risk and lower leverage, and there is greater propensity of firms with low-recovery assets to acquire targets with high-recovery assets. These relationships are strongest in countries where management is dismissed in reorganization, and are observed in time-series analysis around changes in creditor rights. Our results question the value of strong creditor rights as they have an adverse effect on firms by inhibiting management from undertaking risky investments.
Article
This paper provides a survey on studies that analyze the macroeconomic effects of intellectual property rights (IPR). The first part of this paper introduces different patent policy instruments and reviews their effects on R&D and economic growth. This part also discusses the distortionary effects and distributional consequences of IPR protection as well as empirical evidence on the effects of patent rights. Then, the second part considers the international aspects of IPR protection. In summary, this paper draws the following conclusions from the literature. Firstly, different patent policy instruments have different effects on R&D and growth. Secondly, there is empirical evidence supporting a positive relationship between IPR protection and innovation, but the evidence is stronger for developed countries than for developing countries. Thirdly, the optimal level of IPR protection should tradeoff the social benefits of enhanced innovation against the social costs of multiple distortions and income inequality. Finally, in an open economy, achieving the globally optimal level of protection requires an international coordination (rather than the harmonization) of IPR protection.
Article
This paper evaluates the importance of property rights institutions', which protect citizens against expropriation by the government and powerful elites, and contracting institutions', which enable private contracts between citizens. We exploit exogenous variation in both types of institutions driven by colonial history, and document strong first-stage relationships between property rights institutions and the determinants of European colonization (settler mortality and population density before colonization), and between contracting institutions and the identity of the colonizing power. Using this instrumental variables strategy, we find that property rights institutions have a first-order effect on long-run economic growth, investment, and financial development. Contracting institutions appear to matter only for the form of financial intermediation. A possible interpretation for this pattern is that individuals often find ways of altering the terms of their formal and informal contracts to avoid the adverse effects of contracting institutions but are unable to do so against the risk of expropriation.
Article
Countries that have experienced occasional financial crises have, on average, grown faster than countries with stable financial conditions. Because financial crises are realizations of downside risk, we measure their incidence by the skewness of credit growth. Unlike variance, negative skewness isolates the impact of the large, infrequent, and abrupt credit busts associated with crises. We find a robust negative link between skewness and GDP growth in a large sample of countries over 1960–2000. This suggests a positive effect of systemic risk on growth. To explain this finding, we present a model in which contract enforceability problems generate borrowing constraints and impede growth. In financially liberalized economies with moderate contract enforceability, systemic risk taking is encouraged and increases investment. This leads to higher mean growth but also to greater incidence of crises. In the data, the link between skewness and growth is indeed strongest in such economies.
Article
The authors study an incentive model of financial intermediation in which firms as well as intermediaries are capital constrained. They analyze how the distribution of wealth across firms, intermediaries, and uninformed investors affects investment, interest rates, and the intensity of monitoring. The authors show that all forms of capital tightening (a credit crunch, a collateral squeeze, or a savings squeeze) hit poorly capitalized firms the hardest, but that interest rate effects and the intensity of monitoring will depend on relative changes in the various components of capital. The predictions of the model are broadly consistent with the lending patterns observed during the recent financial crises. Copyright 1997, the President and Fellows of Harvard College and the Massachusetts Institute of Technology.
Article
It is commonly believed that equity finance for banks is more costly than deposits. This suggests that banks should economize on the use of equity and regulatory constraints on capital should be binding. Empirical evidence suggests that in fact this is not the case. Banks in many countries hold capital well in excess of regulatory minimums and do not change their holdings in response to regulatory changes. We present a simple model of bank moral hazard that is consistent with this observation. In perfectly competitive markets, banks can find it optimal to use costly capital rather than the interest rate on the loan to guarantee monitoring because it allows higher borrower surplus.
Article
This paper identifies factors that influence decisions about a country's financial safety net, using a comprehensive data set covering 180 countries during the 1960-2003 period. Our analysis focuses on how private interest-group pressures, outside influences, and political-institutional factors affect deposit-insurance adoption and design. Controlling for macroeconomic shocks, quality of bank regulations, and institutional development, we find that both private and public interests, as well as outside pressure to emulate developed-country regulatory schemes, can explain the timing of adoption decisions and the rigor of loss-control arrangements. Controlling for other factors, political systems that facilitate intersectoral power sharing dispose a country toward design features that accommodate risk-shifting by banks.
Article
Arguing that a relatively high cost of deposit insurance indicates that a bank takes excessive risks, this article estimates the cost of deposit insurance for a large sample of banks in 14 economies to assess the relationship between the risk-taking behavior of banks and their corporate governance structure. The results suggest that banks with concentrated ownership tend to take the greatest risks, and those with dispersed ownership engage in a relatively low level of risk taking. Moreover, as a proxy for bank risk, the cost of deposit insurance has some power in predicting bank distress. Copyright 2002, Oxford University Press.