The impact of creditor protection on stock prices in the presence of credit crunches
A Tobin q model of investment is used to show that stronger creditor protection increases the expected level and lowers the variance of stock prices in the presence of credit crunches. There are two main channels through which creditor protection enhances the performance of the stock market: (1) The credit-constrained stock price increases with better protection of creditors; (2) The probability of a credit crunch leading to a binding credit constraint falls with strong protection of creditors. ; The paper tests the predictions of the model by using cross?country panel regressions of stock market returns in 40 countries over the period from 1984 to 2004 at an annual frequency. We find broad empirical support for the prediction of the model that creditor protection increases the expected level of the stock market price level and reduces its volatility, both directly and indirectly, by lowering the probability of credit crunches.
AUTHORS: Tong, Hui; Hale, Galina; Razin, Assaf
Corporate Yields and Sovereign Yields
We document that positive association between corporate and sovereign cost of funds borrowed on global capital markets weakens during periods of unusually high sovereign yields, when corporate borrowers are able to issue debt that is priced at lower rates than sovereign debt. This state-dependent sensitivity of corporate yields to sovereign yields has not been previously documented in the literature. We demonstrate that this stylized fact is observed across countries and industries as well as for a given borrower over time and is not explained by a different composition of borrowers issuing debt during periods of high sovereign yields or by the relationship between corporate and sovereign credit ratings. We show that even if we exclude high-yield episodes that accompany financial crises and IMF programs, the sensitivity of corporate yields to sovereign yields is lower when sovereign yields are high. We propose a simple information model that rationalizes our empirical observations: when sovereign yields are high and more volatile, corporate yields are less sensitive to sovereign yields.
AUTHORS: Bevilaqua, Julia; Hale, Galina; Tallman, Eric
Do banks price their informational monopoly?
Modern corporate finance theory argues that although bank monitoring is beneficial to borrowers, it also allows banks to use the private information they gain through monitoring to "hold-up" borrowers for higher interest rates. In this paper, we seek empirical evidence for this information hold-up cost. Since new information about a firm's credit-worthiness is revealed at the time of its first issue in the public bond market, it follows that after firms undertake their bond IPO, banks with an exploitable information advantage will be forced to adjust their loan interest rates downwards, particularly for firms that are revealed to be safe. Our findings show that firms are able to borrow from banks at lower interest rates after they issue for the first time in the public bond market and that the magnitude of these savings is larger for safer firms. We further find that among safe firms, those that get their first credit rating at the time of their bond IPO benefit from larger interest rate savings than those that already had a credit rating when they entered the bond market. Since more information is revealed at the time of the bond IPO on the former firms and since this information will increase competition from uninformed banks, these findings provide support for the hypothesis that banks price their informational monopoly. Finally, we find that while entering the public bond market may reduce these informational rents, it is costly to firms because they have to pay higher underwriting costs on their IPO bonds. Moreover, IPO bonds are subject to more underpricing than subsequent bonds when they first trade in the secondary bond market.
AUTHORS: Santos, Joao A. C.; Hale, Galina
Shock Transmission through Cross-Border Bank Lending: Credit and Real Effect
We study the transmission of financial sector shocks across borders through international bank connections. For this purpose, we use data on long-term interbank loans among more than 6,000 banks during 1997-2012 to construct a yearly global network of interbank exposures. We estimate the effect of direct (first-degree) and indirect (second-degree) exposures to countries experiencing systemic banking crises on bank profitability and loan supply. We find that direct exposures to crisis countries squeeze banks? profit margins, thereby reducing their returns. Indirect exposures to crisis countries enhance this effect, while indirect exposures to non-crisis countries mitigate it. Furthermore, crisis exposures have real effects in that they reduce banks? supply of domestic and cross-border loans. Our results, based on a large global sample, support the notion that interconnected financial systems facilitate shock transmission.
AUTHORS: Hale, Galina; Kapan, Tumer; Minoiu, Camelia
The Euro and the Geography of International Debt Flows
Greater financial integration between core and peripheral EMU members had an effect on both sets of countries. Lower interest rates allowed peripheral countries to run bigger deficits, which inflated their economies by allowing credit booms. Core EMU countries took on extra foreign leverage to expose themselves to the peripherals. The result has been asset-price bubbles and collapses in some of the peripheral countries, area-wide banking crisis, and sovereign debt problems. We analyze the geography of international debt flows using multiple data sources and provide evidence that after the euro?s introduction, Core EMU countries increased their borrowing from outside of EMU and their lending to the EMU periphery.
AUTHORS: Hale, Galina; Obstfeld, Maurice
Are there productivity spillovers from foreign direct investment in China?
We review previous literature on productivity spillovers of foreign direct investment (FDI) in China and conduct our own analysis using a firm-level data set from a World Bank survey. We find that the evidence of FDI spillovers on the productivity of Chinese domestic firms is mixed, with many positive results largely due to aggregation bias or failure to control for endogeneity of FDI. Attempting over 2500 specifications which take into account forward and backward linkages, we fail to find evidence of systematic positive productivity spillovers from FDI.spillovers from FDI. We do, however, find robust evidence that Chinese private firms tend to invest less in innovation in the presence of FDI. Combined with our previous findings that domestic private firms tend to be more involved in providing inputs and intermediary goods for foreign firms (Hale and Long, 2006), these results suggest a more passive role played by domestic firms in the global division of labor than envisioned by the Chinese government. ; Formerly titled: What determines technological spillovers of foreign direct investment: evidence from China
AUTHORS: Hale, Galina; Long, Cheryl
U.S. Monetary Policy and Fluctuations of International Bank Lending
There is no consensus in the empirical literature on the direction in which U.S. monetary policy affects cross-border bank lending. We find robust evidence that the impact of the U.S. federal funds rate on cross-border bank lending in a given period depends on the prevailing international capital flows regime and on the level of the two main components of the federal funds rate: macro fundamentals and monetary policy stance. During episodes in which bank lending from advanced to emerging economies is booming, the relationship between the federal funds rate and cross-border bank lending is positive and mostly driven by the macro fundamentals component, which is consistent with a search-for-yield behavior by internationally-active banks. In contrast, during episodes of stagnant growth in bank lending from advanced to emerging economies, the relationship between the federal funds rate and bank lending is negative, mainly due to the monetary policy stance component of the federal funds rate. The latter set of results is driven by the lending to emerging markets, which is consistent with the international bank-lending channel and flight-to- quality behavior by internationally-active banks.
AUTHORS: Hale, Galina; Avdjiev, Stefan
Monitoring Banking System Fragility with Big Data
The need to monitor aggregate financial stability was made clear during the global financial crisis of 2008-2009, and, of course, the need to monitor individual financial firms from a microprudential standpoint remains. In this paper, we propose a procedure based on mixed-frequency models and network analysis to help address both of these policy concerns. We decompose firm-specific stock returns into two components: one that is explained by observed covariates (or fitted values), the other unexplained (or residuals). We construct networks based on the co-movement of these components. Analysis of these networks allows us to identify time periods of increased risk concentration in the banking sector and determine which firms pose high systemic risk. Our results illustrate the efficacy of such modeling techniques for monitoring and potentially enhancing national financial stability.
AUTHORS: Hale, Galina; Lopez, Jose A.
Gender ratios at top PhD programs in economics
Analyzing university faculty and graduate student data for the top-ten U.S. economics departments between 1987 and 2007, we find that there are persistent differences in gender composition for both faculty and graduate students across institutions and that the share of female faculty and the share of women in the entering PhD class are positively correlated. We find, using instrumental variables analysis, robust evidence that this correlation is driven by the causal effect of the female faculty share on the gender composition of the entering PhD class. This result provides an explanation for persistent underrepresentation of women in economics, as well as for persistent segregation of women across academic fields.
AUTHORS: Hale, Galina; Regev, Tali
Bank relationships, business cycles, and financial crisis
Recent literature argues that the structure of a banking network is important for its stability. We use network analysis to formally describe bank relationships in the global banking network between 1980 and 2009 and analyze the effects of recessions and banking crises on these relationships. We construct a novel data set that builds a bank-level global network from loan-level data on syndicated loans to financial institutions. Our network consists of 7938 banking institutions from 141 countries. We find that the network became more interconnected and more asymmetric, and therefore potentially more fragile, prior to 2008, and that its expansion slowed in recent years, dramatically so during the 2008-09 crisis. We use a stylized model to describe potential effects of banking crises and recessions on bank relationships. Empirically, we find that the structure of a global banking network is not invariant to banking crises nor to recessions, especially those in the United States. While recessions appear to encourage banks to make new connections, especially on the periphery of the network, the global financial crisis of 2008-09 made banks very cautious in their lending, meaning that almost no new connections were made during the crisis, particularly in 2009. We also find that during country-specific recessions or banking crises past relationships become more important as few new relationships are formed.
AUTHORS: Hale, Galina