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Palgrave Macmillan Studies in Banking and Financial Institutions Series Editor: Professor Philip Molyneux The Palgrave Macmillan Studies in Banking and Financial Institutions are international in orientation and include studies of banking within particular countries or regions, and studies of particular themes such as Corporate Banking, Risk Management, Mergers and Acquisitions, etc The books’ focus is on research and practice, and they include up-to-date and innovative studies on contemporary topics in banking that will have global impact and influence Titles include: Steffen E Andersen THE EVOLUTION OF NORDIC FINANCE Seth Apati THE NIGERIAN BANKING SECTOR REFORMS Power and Politics Vittorio Boscia, Alessandro Carretta and Paola Schwizer COOPERATIVE BANKING IN EUROPE Case Studies Roberto Bottiglia, Elisabetta Gualandri and Gian Nereo Mazzocco (editors) CONSOLIDATION IN THE EUROPEAN FINANCIAL INDUSTRY Dimitris N Chorafas CAPITALISM WITHOUT CAPITAL Dimitris N Chorafas SOVEREIGN DEBT CRISIS The New Normal and the Newly Poor Dimitris N Chorafas FINANCIAL BOOM AND GLOOM The Credit and Banking Crisis of 2007–2009 and Beyond Violaine Cousin BANKING IN CHINA Vincenzo D’Apice and Giovanni Ferri FINANCIAL INSTABILITY Toolkit for Interpreting Boom and Bust Cycles Peter Falush and Robert L Carter OBE THE BRITISH INSURANCE INDUSTRY SINCE 1900 The Era of Transformation Franco Fiordelisi MERGERS AND ACQUISITIONS IN EUROPEAN BANKING Franco Fiordelisi, Philip Molyneux and Daniele Previati (editors) NEW ISSUES IN FINANCIAL AND CREDIT MARKETS Franco Fiordelisi, Philip Molyneux and Daniele Previati (editors) NEW ISSUES IN FINANCIAL INSTITUTIONS MANAGEMENT Kim Hawtrey AFFORDABLE HOUSING FINANCE Jill M Hendrickson REGULATION AND INSTABILITY IN U.S COMMERCIAL BANKING A History of Crises 9780230_313354_01_prexviii.indd i 5/26/2011 7:35:01 PM Otto Hieronymi (editor) GLOBALIZATION AND THE REFORM OF THE INTERNATIONAL BANKING AND MONETARY SYSTEM Sven Janssen BRITISH AND GERMAN BANKING STRATEGIES Alexandros-Andreas Kyrtsis (editor) FINANCIAL MARKETS AND ORGANIZATIONAL TECHNOLOGIES System Architectures, Practices and Risks in the Era of Deregulation Caterina Lucarelli and Gianni Brighetti (editors) RISK TOLERANCE IN FINANCIAL DECISION MAKING Roman Matousek (editor) MONEY, BANKING AND FINANCIAL MARKETS IN CENTRAL AND EASTERN EUROPE 20 Years of Transition Philip Molyneux (editor) BANK PERFORMANCE, RISK AND FIRM FINANCING Philip Molyneux (editor) BANK STRATEGY, GOVERNANCE AND RATINGS Imad A Moosa THE MYTH OF TOO BIG TO FAIL Simon Mouatt and Carl Adams (editors) CORPORATE AND SOCIAL TRANSFORMATION OF MONEY AND BANKING Breaking the Serfdom Anders Ögren (editor) THE SWEDISH FINANCIAL REVOLUTION Özlem Olgu EUROPEAN BANKING Enlargement, Structural Changes and Recent Developments Ramkishen S Rajan EMERGING ASIA Essays on Crises, Capital Flows, FDI and Exchange Rate Yasushi Suzuki JAPAN’S FINANCIAL SLUMP Collapse of the Monitoring System under Institutional and Transition Failures Ruth Wandhöfer EU PAYMENTS INTEGRATION The Tale of SEPA, PSD and Other Milestones Along the Road The full list of titles is available on the website: www.palgrave.com/finance/sbfi.asp Palgrave Macmillan Studies in Banking and Financial Institutions Series Standing Order ISBN 978–1–4039–4872–4 You can receive future titles in this series as they are published by placing a standing order Please contact your bookseller or, in case of difficulty, write to us at the address below with your name and address, the title of the series and the ISBN quoted above Customer Servics Department, Macmillan Distribution Ltd., Houndmills, Basingstoke, Hampshire RG21 6Xs, England 9780230_313354_01_prexviii.indd ii 5/26/2011 7:35:01 PM Bank Performance, Risk and Firm Financing Edited by Philip Molyneux Professor of Banking and Finance, Bangor Business School, Bangor University, UK 9780230_313354_01_prexviii.indd iii 5/26/2011 7:35:01 PM Introduction, selection and editorial matter © Philip Molyneux 2011 Individual chapters © contributors 2011 All rights reserved No reproduction, copy or transmission of this publication may be made without written permission No portion of this publication may be reproduced, copied or transmitted save with written permission or in accordance with the provisions of the Copyright, Designs and Patents Act 1988, or under the terms of any licence permitting limited copying issued by the Copyright Licensing Agency, Saffron House, 6–10 Kirby Street, London EC1N 8TS Any person who does any unauthorized act in relation to this publication may be liable to criminal prosecution and civil claims for damages The authors have asserted their rights to be identified as the authors of this work in accordance with the Copyright, Designs and Patents Act 1988 First published 2011 by PALGRAVE MACMILLAN Palgrave Macmillan in the UK is an imprint of Macmillan Publishers Limited, registered in England, company number 785998, of Houndmills, Basingstoke, Hampshire RG21 6XS Palgrave Macmillan in the US is a division of St Martin’s Press LLC, 175 Fifth Avenue, New York, NY 10010 Palgrave Macmillan is the global academic imprint of the above companies and has companies and representatives throughout the world Palgrave® and Macmillan® are registered trademarks in the United States, the United Kingdom, Europe and other countries ISBN: 978–0–230–31335–4 hardback This book is printed on paper suitable for recycling and made from fully managed and sustained forest sources Logging, pulping and manufacturing processes are expected to conform to the environmental regulations of the country of origin A catalogue record for this book is available from the British Library Library of Congress Cataloging-in-Publication Data Bank performance, risk and firm financing / edited By Philip Molyneux p cm Includes bibliographical references and index ISBN 978–0–230–31335–4 (alk paper) Banks and banking Banks and banking – Risk management Bank management Financial institutions – Management I Molyneux, Philip HG1601.B147 2011 332.1068Ј1—dc22 2011012069 10 20 19 18 17 16 15 14 13 12 11 Printed and bound in Great Britain by CPI Antony Rowe, Chippenham and Eastbourne 9780230_313354_01_prexviii.indd iv 5/26/2011 7:35:01 PM Contents List of Tables and Figures vii Notes on Contributors xii Introduction Philip Molyneux 1 Bank Size, Market Power and Financial Stability Joaquín Maudos and Juan Fernández de Guevara Bank Risk and Analysts’ Forecasts Mario Anolli and Elena Beccalli Foreign Banks in Central Eastern Europe: Impact of Foreign Governance on Bank Performance Ewa Miklaszewska and Katarzyna Mikolajczyk Financial Crisis and Bank Profitability Ted Lindblom, Magnus Olsson and Magnus Willesson Asset-Backed Securitization and Financial Stability: The Downgrading Delay Effect Mario La Torre and Fabiomassimo Mango 32 55 83 106 A Revenue-Based Frontier Measure of Banking Competition Santiago Carbó-Valverde, David Humphrey and Francisco Rodríguez Fernández 135 Regulation and Bank Performance in Europe Georgios E Chortareas, Claudia Girardone and Alexia Ventouri 154 The Italian Popular Banks and Their Behaviour after the Recent Financial Crisis Pierluigi Morelli and Elena Seghezza 10 Access to Equity for New, Innovative Companies in Italy Luciana Canovi, Elisabetta Gualandri and Valeria Venturelli Can R&D Expenditures Affect Firm Market Value? An Empirical Analysis of a Panel of European Listed Firms Andi Duqi and Giuseppe Torluccio 174 194 215 v 9780230_313354_01_prexviii.indd v 5/26/2011 7:35:01 PM vi 11 Contents Value Creation of Internationalization Strategies of Italian Medium-Sized Listed Firms Ottorino Morresi and Alberto Pezzi 242 12 Managers’ Capital Structure Decisions – the Pecking Order Puzzle Ted Lindblom, Gert Sandahl and Stefan Sjögren 273 Index 289 9780230_313354_01_prexviii.indd vi 5/26/2011 7:35:01 PM Tables and Figures Tables 1.1 1.2 1.3 Descriptive statistics of the sample used Market power and financial stability Market power determinants Dependent variable: Lerner index 1.4 Determinants of financial stability Dependent variable: Z-score 1.5 Elasticities of the variation of market power and Z-score 2.1 Number of banks in the sample (by country and year) 2.2 Number of analysts’ earnings forecasts (by year) 2.3 Descriptive statistics of mean and last announced forecast errors (by year) 2.4 Descriptive statistics of analysts’ forecast error, bank risk and control variables 2.5 Correlation analysis 2.6 Regression of forecast error on bank risk (Z-score) and control variables (entire period) 2.7 Regression of forecast error on bank risk (ROA-STDEV) and control variables (Pre- crisis and during the crisis) 3.1 Top 10 world banks by total assets and tier- one capital 2006 and 2009 $billion 3.2 CEE macroeconomic and banking key figures (2008) 3.3 CEE-17 largest players, 2008 3.4 Growth rate of GDP, percentage change on previous year 3.5 CEE-5 bank characteristics (percentage) 3.6 Top three largest banks by assets in CEE-5 (major shareholder) 3.7 Profitability ratios for analysed banks by host countries and by ownership structure (major shareholder), in per cent 3.A1 Sample characteristics 3.A2 Regression results (ROA) 3.A3 Regression results (Z-score) 3.A4 DEA results: average efficiency scores 18 19 20 21 24 39 40 41 42 44 49 50 58 61 62 63 63 64 69 75 76 77 79 vii 9780230_313354_01_prexviii.indd vii 5/26/2011 7:35:01 PM viii List of Tables and Figures 4.1 The overall profitability of the Swedish banks during 2007–9 4.2 The banks’ average cost of debt during 2007–9 4.3 The relative development of net fees and commission income 4.4 Average interest income of the banks during 2007–9 4.5 The banks’ profit margins before loss provisions 4.6 The relative development of net interest income (NII) 4.7 The development of net interest margin 4.8 Return on invested funds and on financial leverage before tax 4.9 The banks’ leverage spread and leverage multiplier 4.10 Average own funds ratio of savings and commercial banks 5.1 Micro and macro determinants in rating of ABS 5.2 The sample selected for the test 5.3 Distribution of rating for the sample 5.4 Rating conversion matrix 5.5 Correlations hypothesized by the model 5.6 Significance of relevant correlations among independent variables 5.7 Downgrading occurring 5.8 Downgrading occurring in each country 5.9 Regression results 5.10 Results of regression in a ‘downgrading shift scenario’ 6.1 Standard competition efficiency measures: Spain, 1992–2005 6.2 Competition efficiency in Spain: 1992–2005 7.1 Data frequency distribution by country and year 7.2 Details on regulatory and supervisory variables included in the empirical analysis 7.3 Descriptive statistics of banks’ inputs and outputs used to compute DEA efficiency 7.4 Descriptive statistics for the variables employed in the empirical analysis 7.5 Correlation matrices for Basel II pillars on regulation and institutional characteristics 8.1 ROE and ROA of Italian banks (2006–9) 8.2 Changes in profitability (difference between 2006–7 and 2008–9 values) 8.3 Gross income on capital (percentage value) 9780230_313354_01_prexviii.indd viii 88 91 93 94 97 98 99 100 102 103 115 124 125 127 127 128 129 129 130 130 137 143 162 164 165 166 169 187 187 188 5/26/2011 7:35:02 PM List of Tables and Figures ix 8.4 8.5 8.6 9.1 9.2 9.3 Other incomes on capital (percentage values) Net interest income on total assets (percentage values) Operating expenses on total assets (percentage values) Structure of the universe and sample Firms’ growth cycle stages R&D expenditure as a percentage of total operating costs and firm’s development stage (number of firms) 9.4 Obstacles encountered at the start of operations (percentage frequency) 9.5 Barriers to growth at the time of incorporation (average values on scale 1–7) 9.6 Sources of finance used at the time of incorporation (number of replies) 9.7 Reasons for lack of involvement of equity investors (number of replies) 9.8 Desire to receive equity investment (number of firms) 9.9 Reasons for equity investors’ lack of interest: firms’ opinions (number of replies) 9.10 Availability of venture capital for innovative SMEs in Emilia Romagna (number of firms) 9.11 Frequency of contacts with venture capital investors (number of firms) 9.12 Sources of finance for fixed asset and working capital investments (average values on scale 1–7) 9.13 Firms’ willingness to accept new partners (average values on scale 1–7) 9.14 Barriers to growth in coming years 9.15 Barriers to future growth (average values on scale 1–7) 10.1 Univariate statistics, years 2001–7 / full sample 10.2 Univariate descriptive statistics by country, years 2001–7 10.3 Correlation matrix, years 2001–7 10.4 Analysis in pooled cross-section Dependent variable: (Mv−Bv)/Bv 10.5a Panel fixed effects regression Dependent variable: (Mv−Bv)/Bv 10.5b Panel fixed effects regression by country Dependent variable: (Mv−Bv)/Bv 10.6 Analysis in pooled cross-section Dependent variable: (Mv−Bv)/Bv 10.7 Analysis in pooled cross-section for full sample Dependent variable: (Mv−Bv)/Bv 9780230_313354_01_prexviii.indd ix 188 189 190 197 198 199 200 201 202 203 204 205 206 207 208 208 209 210 224 226 227 228 230 231 234 235 5/26/2011 7:35:02 PM 282 Ted Lindblom, Gert Sandahl and Stefan Sjögren an optimal financial mix is targeted Such a target makes no sense in the pecking order theory As reported by Lindblom et al (2011), most respondents (75.5 per cent) state that the firm has a certain capital structure target This is almost as high a percentage as observed by Graham and Harvey (2001) (81 per cent) Considering that almost all respondents (93.5 per cent) state that the firm’s capital structure is frequently revised lends further support to the trade- off theory It is, then, puzzling that we (and many others) also find strong empirical evidence for the pecking order theory (cf Table 12.2) Contrary to, for example, Graham and Harvey (2001), we arrive at the conclusion that managers are pecking- order- oriented, as the apparent anomaly concerning managers’ adoption of a capital structure target can be explained The questionnaire comprises a number of statements for finding out to what extent managers adhere to the notion of an optimal capital structure (Lindblom et al., 2011) In general their answers not point to the trade- off theory in either its static form or its extended version Twice as many respondents disagree than agree with the crucial statement: ‘A capital structure with high leverage contributes to increase firm value’ (µ = 2.75***) They give a similar response to the tax statement: ‘Tax consequences mean that high leverage is creating value for shareholders’ (µ = 2.70***) A more affirmative response to both these statements should be expected, unless most firms operate at or beyond their optimal capital structure The latter is actually implied by the fact that a majority of the respondents agree or strongly agree with the statement: ‘It is important to balance debt and equity to maximize shareholder value’ (µ = 3.83***) However, this interpretation seems unrealistic, as almost all firms are reported to set and follow up capital structure targets in terms of book values (84.3 per cent) rather than market values (7.4 per cent) only.5 The minor use of market-value-based targets6 strongly implies that managers in general set capital structure targets for other reasons than for optimizing firm value.7 Considering the non-affirmative response to the leverage and tax statements, the likely explanation for managers’ concern about capital structure is that they not want the firm to enter into financial distress This also explains their frequent followups of the capital structure (at least once a year in 95 per cent of the firms) These follow-ups not seem to be made either for changing the target (in a majority of the firms the target is set less frequently than once a year) or for adjusting the capital structure (most respondents agree / strongly agree with the statement that it is too costly to make an adjustment quickly if the solidity is too low or too high) Apparently, 9780230_313354_14_cha12.indd 282 5/26/2011 5:08:12 PM Managers’ Capital Structure Decisions 283 targets are a means for controlling the financial robustness and soundness of the firm rather than a means for finding the lowest funding cost This makes sense, as losses cannot be absorbed by a high market value A realized loss has to be covered by equity in the balance sheet! Certainly, the balance sheet may be fuelled through issuance of new equity, but for pecking order adopters this is a last resort that is likely to be very costly and uncertain The managerial emphasis on the financial stability of the firm implies that direct capital costs are not regarded as a major issue Clearly, this is not true Managers’ concern about the firm’s debt capacity does not exclude the search for low funding costs It just suggests that this search is likely to be driven, not by the notion of an optimal capital structure, but rather by a notion that the cost of different funding sources varies Almost three out of four respondents (73 per cent) agree / strongly agree with the statement: ‘The firm is systematically searching for opportunities to lower the cost of capital’ (µ = 3.9***) Even though this suggests a search for ‘windows of opportunity’, answers to other statements related to the market timing theory fail to lend any significant support to financial decision-making in accordance with this theory – rather the opposite (see Lindblom et al., 2011) 12.3.3 Financial flexibility matters in a pecking order setting Our results from the probit regression show that managers creating flexibility with liquidity buffers are less likely to deviate from the pecking order The same holds for managers stating that they have not rejected profitable projects due to lack of funds, implying investment capability These results support an extended pecking order theory that, besides asymmetric information between outside investors and insiders, also includes a moral hazard dimension Graham and Harvey (2001) conclude that ‘managers’ desire for financial flexibility’ is the most important determinant for leverage This may lead to the interpretation that the free cash flow theory can explain managers’ striving for financial flexibility as pure self-interest and that flexibility provides opportunities for discretionary expenditures The validity of such an interpretation is not tested directly in our survey However, the survey includes a number of statements that are related to this issue, and the respondents’ combined answers offer an in- depth understanding of the rationale for creating financial flexibility We use the concept of uncertainty avoidance, with an economic content complementing the inherent social norm described by Hofstede (1980) The concept of uncertainty avoidance is 9780230_313354_14_cha12.indd 283 5/26/2011 5:08:12 PM 284 Ted Lindblom, Gert Sandahl and Stefan Sjögren frequently used as a culturally based matter influencing the economic interaction between residents in a society (Guiso et al., 2009; Fidrmuc and Jacob, 2010) Chui et al (2002) find that national culture is an important determinant for debt levels; managers in countries with high scores on uncertainty avoidance tend to use less debt, as they put more emphasis on control, financial planning and cash flows Moreover, they find that ‘mastery’, interpreted as having an internal locus of control, greater avoidance of debt covenants and bankruptcy avoidance, also results in lower leverage Lindblom et al (2011) found that the propensity to prepare for potential investment opportunities is high and that it is important for managers to avoid external monitoring and preserve manoeuvrability The majority of them (83 per cent) not acknowledge that the firm has had to reject profitable investment projects due to lack of funding Moreover, few respondents consider the possibility of reducing dividends in order to avoid rejection of profitable projects This suggests that managers are confident that they have sufficient financial buffers or debt capacity to pursue any attractive investment opportunity without having to consider whether funds can be raised on the financial market Hence, for the manager financial stability does not only mean uncertainty avoidance in terms of mitigating exposure to downside risks; it also gives financial flexibility to realize new investment opportunities The use of short-term lending also supports the ideas of uncertainty avoidance and managers mastering their situation with sufficient flexibility There is significant agreement with the statement: ‘Short-term credit availability is an important financial buffer’ (µ = 3.44***) These observations confirm the study by Child et al (2005) showing that financial flexibility encourages managers to use short-term debt, and that this may decrease the agency costs associated with underinvestment This may explain why respondents generally believe that they not need to create financial flexibility They already have financial means for investing in all profitable projects Very seldom is their aim of keeping dividends unchanged thwarted by dividend cuts for the purpose of preserving funds (c.f Lindblom et al., 2011) It is also evident that most managers not consider it important to create equity buffers for offsetting macroeconomic fluctuations in interest, currency, stock, product and supplier markets These variations in the business environment are obviously supposed to be managed by the operating unit concerned or at the central office Macro fluctuations should not lead to operational losses absorbed by overcapitalization 9780230_313354_14_cha12.indd 284 5/26/2011 5:08:12 PM Managers’ Capital Structure Decisions 285 Finally, we observe that many managers believe that a high credit rating offers flexibility in terms of debt capacity The statement ‘A good credit rating is vital for keeping financial flexibility’ (µ = 3.68***) confirms that credit rating seems to be such a factor (Lindblom et al., 2011) Kisgen (2006) finds that ‘Firms near a credit rating upgrade or downgrade issue less debt relative to equity than firms not near a change in rating.’ We find that firms with a credit rating make significantly more use of several banks We also find that firm size influences the probability of deviating from a ranking scheme in accordance with the pecking order theory A plausible explanation (see Faulkender and Petersen, 2006) is that the source of capital, via active or passive lenders, influences the capital structure of the firm Opaque firms rely on active lenders, while rated firms also have access to the financial markets (passive lenders) Borrowing from active lenders is assumed to be at a higher cost Accordingly, rated firms have more leverage These results confirm a pecking order of debt, as the asymmetry of information between the issuing firm and the passive lender is presumed to be higher than that between the firm and the active lender 12.4 Conclusions Most empirical studies of financial structure decisions find evidence supporting both the static trade-off theory and the pecking order theory Our survey also demonstrates decision-making in accordance with both theories in the same firm An explanation that has been put forward is that under certain conditions a trade-off is prevalent when a manager makes a capital structure decision, and under others a pecking order Even if this sounds reasonable, the explanation is not fully convincing, as the notion of an optimal capital structure is not relevant in a pecking order setting We are able to discern a stronger preference for a pecking order in our survey, and that is our motive for running a probit regression wherein the likelihood of deviating from a pecking order ranking of funds is tested against variables used as proxies for alternative capital structure theories On the one hand, we not find any relationship between the likelihood of deviating from a pecking order scheme and managers timing the market or avoiding signalling On the other hand, we find that managers creating buffers are less likely to deviate from such a scheme, indicating that the extended pecking order theory is valid The seemingly most puzzling result is that managers who set targets are unlikely to deviate from a pecking order scheme However, this anomaly is explained by the fact that, in a clear majority of the firms, targets are based on book value rather than market value This implies 9780230_313354_14_cha12.indd 285 5/26/2011 5:08:13 PM 286 Ted Lindblom, Gert Sandahl and Stefan Sjögren that earlier studies using targets as a proxy for the trade-off theory may have arrived at the wrong conclusion A target that is not based on market value cannot be used for obtaining an optimal capital structure Our conclusion is that targets play another role We argue that managers’ main concern is uncertainty avoidance and manoeuvrability Their use of targets, adhering to a pecking order scheme, and their strong striving for financial flexibility fit well with uncertainty avoidance Most managers have not faced financial constraints preventing profitable projects, indicating that managers actually succeed in creating flexibility Managers seek control over the financial situation of the firm and are strongly governed by accounting values Notes We have used the VA500 list for 2006 Firm-specific data that are either missing or not included in VA500 have been complemented from various data bases, mainly Affärsdata, Datastream and VPC The actual number of responses was 149, but 10 questionnaires were not completed due to ‘lack of time’, because the survey was considered irrelevant to the business of the firm, or due to a general rule not to answer questionnaires Despite this, the response rate is high for this type of survey The major survey by Graham and Harvey (2001) received less than per cent and the one by Beattie et al (2006) slightly over 23 per cent Pinegar and Wilbricht (1989) received a response rate of 35.2 per cent to their more focused survey The size interval of each sample group is derived from the corresponding population tertian Tests conducted for significant differences in the answers of early and late responders not indicate that there should be any time bias The percentage numbers are based on those 108 respondents who did answer this question The remaining 8.3 per cent are using a mix of book and market values A majority of these firms were either real-estate companies or investment firms Clearly, the book value may be regarded as a reasonable approximation of the market value if the firm has adopted International Financial Reporting Standards (IFRS) However, there is no significant difference between adopters and nonadopters in their choice of target measure The book value based equity-to-asset ratio (solidity) has a long tradition as a capital structure measure in Sweden References Allen, D.E (1991) ‘The Determinants of Capital Structure of Listed Australian Companies: the Financial Manager’s Perspective’, Australian Journal of Management, 16(2), 103–28 Bancel, F and Mittoo, U.R (2004) ‘Cross- Country Determinants of Capital Structure: A Survey of European Firms’, Financial Management, 33(4), 103–32 9780230_313354_14_cha12.indd 286 5/26/2011 5:08:13 PM Managers’ Capital Structure Decisions 287 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33, 99–127 Donaldson, G (1961) Corporate Debt Capacity: A Study of Corporate Debt Policy and the Determination of Corporate Debt Capacity (Boston: Harvard Graduate School of Business Administration) Faulkender, M., and Petersen, M.A (2006) ‘Does the Source of Capital Affect Capital Structure’, The Review of Financial Studies, 19(1), 45–79 Fidrmuc, J.P and Jacob, M (2010) ‘Culture, agency, and dividends’, Journal of Comparative Economics, 38, 321–39 Graham, J.R and Harvey, C.R (2001) ‘The Theory and Practice of Corporate Finance: Evidence from the Field’, Journal of Financial Economics, 60(2/3), 187–243 Guiso, L., Sapienza, P and Zingales, L (2009) ‘Cultural biases in economic exchange?’, Quarterly Journal of Economics, 124, 1095–131 Harris, M and Raviv, A (1991) ‘The Theory of Capital Structure’, Journal of Finance, 46(1), 297–355 Hofstede, G (1980) Culture’s Consequences: International Differences in Workrelated Values (Beverly Hills, CA: Sage Publications) Jensen, M.C (1986) ‘Agency 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PM 288 Ted Lindblom, Gert Sandahl and Stefan Sjögren Norton, E (1990) ‘Similarities and Differences in Small and Large Corporation Beliefs about Capital Structure Policy’, Small Business Economics, 2, 229–45 Pinegar, J.M and Wilbricht, L (1989) ‘What Managers Think of Capital Structure Theory: A Survey’, Financial Management, 18(4), 82–91 Rajan, R.G and Zingales, L (1995) ‘What Do We Know About Capital Structure Choice? Some Evidence from International Data’, Journal of Finance, 50(5), 1421–60 Ritter, J.R (1991) ‘The Long-Run Performance of Initial Public Offerings’, Journal of Finance, 46(1), 3–27 Ross, S (1977) ‘The Determination of Financial Structure: The Incentive Signalling Approach’, Bell Journal of Economics, 8, 23–40 Shyam- Sunder, L and Myers, S.C (1999) ‘Testing Static Tradeoff against Pecking Order Models of Capital Structure’, Journal of Financial Economics, 51, 219–44 Stonehill, A., Beekhuisen, T., Wright, R., Remmers, L., Toy, N., Pares, A., Shapiro, A., Egan, D and Bates, T (1975) ‘Financial Goals and Debt Ratio Determinants: A Survey of Practice in Five Countries’, Financial Management, 4(3), 27–41 9780230_313354_14_cha12.indd 288 5/26/2011 5:08:13 PM Index abnormal returns, 5, 215, 217, 247–8, 253, 257–8 cross-sectional determinants of, 264–6 internationalization strategies and, 260–4 ABS, see asset-backed securitization (ABS) activity restrictions (ACTRS), 164 agency costs, 59, 178, 274, 279, 284 agency problems, 59, 178–9 analysts’ forecasts accuracy of, 35–8 bank risk and, 32–53 empirical analysis of, 40–51 factors affecting, 38 literature review, 34–5 positive bias in, 34 robustness tests, 51 sample of, 39–40 study methodology, 35–8 asset-backed securitization (ABS), 3, 106–32 downgrading delays, 121–2 financial crisis and, 110–12 financial stability and, 116–32 flow of funds of, 112–14 investors’ protection, 112–14 ratings, 114–16 systemic crisis and, 116–22, 126 asset growth, 38 asymmetric information, 176–7, 285 balance sheet structure, 84, 85, 86 Baltic countries, 60, 62, 83 bank card sales, 153n30 bank failure, 12, 155–7, 167 Bank for International Settlements (BIS), 7–8 banking competition see also competition changes in, 146–8 in Italian popular banks, model of, revenue-based frontier measure of, 135–53 in Spain, 142–6 standard measures of, 135–8, 145–6 banking crises, 155 see also financial crisis banking specialization, 14, 22, 23, 66 bank performance in CEE countries, 70–4, 81 foreign governance and, 55–81 regulation and, 4, 154–71 bank profitability, see profitability bank regulation adaptation to, 32 compliance costs, 154–5, 157–8 efficiency and, 155, 157, 159, 163–70 performance and, 4, 154–71 bank risk, 140 accuracy in analysts’ forecasts, 37–8 estimation of, 36–7 banks and banking business model of, 56–60, 65, 66, 71, 74 deregulation and, 11, 27–8, 155 disclosure requirements of, 2, 33, 52, 157, 251, 263–4 efficiency of see efficiency governance of, 56–60, 66, 174–92 recapitalization of, relationship, 64 risk-taking in, 1–2, 32–3, 84–7, 103–4 special role of, in economy, 154 bank size, 66, 86 see also firm size financial stability and, 1, 8, 26, 28–9 market power and, 1, 7–30 systemic risk and, 7–8, 29 barriers to entry, 23 Basel Core Principles (BCPs), 158 289 9780230_313354_15_ind.indd 289 5/26/2011 5:07:30 PM 290 Index Basel II, 4, 33, 101, 104, 155–6, 157, 169 Basel III, 156 BCE growth rate, 127, 128, 130, 131 book-to-price ratio, 38, 53n5 branch network density, 16 business model, of banks, 55–60, 65, 66, 71, 74 capital infusion programme, 87 capitalization, 84, 85, 86, 103 Capital Regulatory Index (CAPRQ), 164 capital requirements, 8, 155, 156, 159, 207–9 capital risk, 86, 101, 103–4 capital structure, 5–6, 273–86 cash delivery services, 138 Central and Eastern Europe (CEE) bank performance in, 70–4, 81 foreign banks in, 2, 55–81 growth rate of GDP, 63, 64 macroeconomic characteristics of, 60–4 post-accession period, 62 profitability ratios for banks, 68–70 central banks, monetary policies of, 56 Citigroup, 57, 59, 62, 63 commercial banks (CBs), 86, 87, 89, 96, 150n10 commission income, 93 Commonwealth of Independent States (CIS), 60 competition changes in, 146–8 in financial sector, 27–8 financial stability and, 8, 11–12, 26, 28 imperfect, 28 market concentration and, 23 market power and, 10 price, 139, 140, 145, 148–9 revenue-based frontier measure of, 135–53 in Spanish banks, 142–6 standard measures of, 135–8, 145–6 competition-fragility hypothesis, competition frontier, 141–2 9780230_313354_15_ind.indd 290 competition-instability hypothesis, 1, 26 compliance costs, 154–5, 157–8 Consolidated Italian Law on Financial Intermediation (TUF), 251, 252, 255, 261, 263–4, 265, 267 Constant Returns to Scale (CRS) models, 67 cooperative banks, 175, 176 see also Italian popular (cooperative) banks corporate governance bank business model and, 56–60 of Italian popular banks, 174–92 corporate taxes, 274, 275 country of destination, 246–8, 251–4, 255, 261, 262, 263, 264, 266, 267 country risk, 243, 250, 251, 254, 261–2, 266 credit, tightening of, credit ratings, 285 credit risk, 56, 83, 106, 117 credit spread, on lending, 92, 95–6, 104, 147 customer relationships, popular banks and, 175–8 Czech Republic, 61, 68 Data Envelopment Analysis (DEA), 67, 70–4, 79–80, 150n8, 159, 160, 165 debt financing, 195, 273, 274–5, 277 default ratio, 114 degree of innovation, 197 deposit insurance, 87 deregulation, 11, 27–8, 155 disclosure requirements, 2, 33, 52, 157, 251, 263–4 disequilibrium event, 114 Distribution Free Approach (DFA), 139 dividends, 57 domestic banks, 56, 65, 68 efficiency of, 57–8, 74 downgrading delay effect, 106–32 earnings management, 53n2 Eastern Europe, see Central and Eastern Europe (CEE) 5/26/2011 5:07:31 PM Index economic cycle, 15 economic theory, 8, 23, 156 economies of scale, 84, 140 economies of scope, 84 efficiency, 14–15, 22–3, 25, 28, 57–8 competition, 143–5, 146–7 foreign capital and bank, 57–8 of Italian popular banks, 189–90 measures of, 159 regulation and, 155, 157, 159, 163–70 technical, 67, 73–4, 79–80, 159, 161, 167 emerging countries, 60, 262 financial crises and, 155 foreign banks in, 63–4 EONIA (European OverNight Index Average), 115, 123, 124, 127, 128, 130, 131, 132n3 equity entry modes, 245–6, 255, 260, 263 equity financing availability of, 4–5, 194–213 importance of, 202–7 equity gap, 195–6 EURIBOR (Europe interbank offered rate), 127, 128, 132n1 European Association of University Teachers of Banking and Finance Conference, European banks, regulation and performance of, 154–71 European Central Bank, 13 European listed firms, market value and R&D expenditures of, 215–39 European Union (EU), 60 expectations management, 2, 52, 53n2 extended trade-off theory, 275 factor productivity, 138 fee-based stability fund, 87 financial analysts excessive optimism by, 34 forecasting by, 32–53 positive bias of, 34 financial crisis, 7, 56–7 asset-backed securitization and, 106–32 9780230_313354_15_ind.indd 291 291 bank profitability and, 83–104 downgrading delay effect and, 106–32 financial stability and, 28–9 impact of, on Swedish banks, 2–3 Italian banks’ performance during, 186–9 regulation and, 154 risk-taking and, 1–2, 32, 83 financial decisions, pecking order theory and, 273–86 financial liberalization, 155 financial sectors competition in, 27–8 liberalization of, 11 financial stability asset-backed securitization and, 106–32 bank size and, 1, 8, 26, 28–9 competition and, 8, 11–12, 26, 28 determinants of, 21 financial crisis and, 28–9 market power and, 11–16, 19 measurement of, 16–17 Financial Stability Board, 7–8 financing, 4–6 debt, 195, 273, 274–5, 277 of innovative new companies, 194–213 sources of, 202, 207–9 value creation and, 274 financing gap, 195–6 firm age, 248–9, 255, 263 firm size, 216, 276–8, 285 see also bank size internationalization strategies and, 262, 267 market value and, 232, 237 R&D expenditures and, 220, 229 firm takeovers, 179, 185, 189 forecast errors, 1–2 bank risk and, 32–53 empirical analysis of, 40–51 policy implications of, 51–2 foreign banks in CEE countries, 2, 55–81 efficiency of, 57–8 governance of, 66 majority-owned, 65 5/26/2011 5:07:31 PM 292 Index foreign banks – continued performance of, 67 Z-scores for, 70–4 foreign capital, bank efficiency and, 57–8, 65–74 free banking school, 155 free cash flow theory, 275 frontier analysis, 139–53, 159 frontier costs function, 15 funding costs, 89–90, 92, 96, 104n6, 150n4 GDP growth rate, 16, 25 globalization, 57, 245 governance bank business model and, 56–60 of Italian popular banks, 4, 174–92 Hausman test, 29n4 Herfindahl-Hirschmann index (HHI), 13, 23, 26, 135–8, 145, 148, 149n2 HSBC, 62, 63 H-statistic, 10, 11, 135–8, 139, 145–6, 148, 149, 149n1, 149n2, 150n5, 152n25 Hungary, 61, 62, 68 see also Central and Eastern Europe (CEE) imperfect competition, 28 income per capita, 15 independent savings banks (ISBs), 86, 87, 89, 90, 96, 101, 103–4 inflation rate, 15, 23, 26, 30n8 information asymmetries, 176–7, 285 information disclosure regulation, 2, 33, 52, 157, 251, 263–4 innovative companies financing of, 194–213 investment in R&D and market value of, 215–39 input costs, 138 ‘inside effect’, 106, 117–18, 119, 122 intangibles, investment in, and market value, 215–39 interest income, 93–4, 96, 98 interest rate risk, 84, 86, 104 interest rates, 12, 83–4, 90, 92, 121 9780230_313354_15_ind.indd 292 internationalization strategies abnormal returns and, 260–4 firm performance and, 244–5 literature review of, 244–51 of medium-sized Italian firms, 5, 242–67 International Monetary Fund (IMF), 155, 156 irrelevance theorem, 273 Italian firms availability of equity financing for, 4–5, 194–213 information disclosure regulation, 251 internationalization strategies of medium-sized, 5, 242–67 prospects for and barriers to growth, 209–11 Italian popular (cooperative) banks customer relationships, 175–8 efficiency of, 189–90 during financial crisis, 186–9 governance of, 4, 174–92 operating costs, 189–90 peer monitoring, 175–8 profitability off, 186–9 short-termism in, 178–86 job security, 57 knowledge gap, 196 Latin America, 64, 155 Lehman Brothers, 28 lending rates, 92, 95–6, 104 Lerner index, 8, 13–16, 18–27, 29n7, 135–8, 145, 147–9, 149n1, 149n2, 150n5 leverage spread, 86, 101–2 LIBOR (London interbank offered rate), 127, 128, 132n2 limited liability, 175, 176 liquidity, 123 liquidity agreement event, 114 liquidity risk, 83 liquidity-supporting activities, 87 living wills, loan-deposit rate, 140 loan loss ratio, 151n13 5/26/2011 5:07:31 PM Index 293 Macmillan Report, 195 majority-owned foreign banks, 65 management styles, 85 market concentration, 9–10, 13, 23, 26, 84 market discipline, 32–3 market power bank size and, 1, 7–30 determinants of, 12–27 elasticities of variation of, 24–5 empirical analysis of determinants of, 12–17 financial stability and, 11–16, 19 market-seeking hypothesis, market sentiment, 279 market share, 14, 24, 26 market timing theory, 275 market value firm size and, 232, 237 R&D expenditures and, 5, 215–39 monetary policies, 56 Monti-Klein model, moral hazard, 8, 33, 117, 176, 275 mortgage backed securities (MBS), 110 national GDP, 127 net fees, 92, 93 net interest income (NII), 92, 96, 98, 188–9 net interest margin (NIM), 84–5, 96, 99, 157–8, 163, 167 New Member States (NMSs), 4, 156 official supervisory power (SPOWER), 164 operating costs, 138, 140, 150n9, 189–90 operating income, 59, 92, 93, 98 optimism, in forecasting, 34, 48 ‘outside effect’, 106, 117–18, 119, 121, 122 overcapitalization, 284 overhead costs, 157–8 ownership, 85, 86 own funds ratio, 103 Pavitt taxonomy, 256 payment services, 138 pecking order theory, 5–6, 273–86 9780230_313354_15_ind.indd 293 peer monitoring, 175–8 performance see also bank performance bank regulation and supervision and, 4, 154–71 firm age and, 248–9, 263 internationalization and, 244–5 pessimism, in forecasting, 34, 48 Poland, 61, 62, 68 see also Central and Eastern Europe (CEE) popular banks, see Italian popular (cooperative) banks population density, 16 positive bias, 34 potential profits, 179–80 price competition, 139, 140, 145, 148–9 ‘primary effect’, 109, 126, 131 principle-agent approach, 189 private monitoring, 157–8, 163, 165, 167 profitability, 30n8, 33, 57 competition and, 11 financial crisis and, 83–104 of foreign banks in CEE, 68–70 of Italian popular banks, during financial crisis, 186–89 market power and, 10 measurement of, in Swedish banks, 84–7 risk-taking and, 84–7, 103–4 of Swedish banks, 2–3, 87–104 property rights, 175 pure technical efficiency (PTE), 67, 79–80 rating agencies, 115–16 ratings of asset-backed securities, 106–32 of securitized assets, real estate bubbles, 123 recapitalization, recourse hypothesis, 119 regional aspects, profitability and, 85, 86 regulations adaptation to, 32 bank performance and, 4, 154–71 5/26/2011 5:07:32 PM 294 Index regulations – continued Basel, 101, 104, 155–7, 169, 333 information disclosure, 251, 263–4 regulatory authorities, 32 relationship banking, 64 repo rates, 83–4, 89, 90, 104n2 research and development (R&D) expenditures, firm market value and, 215–39 internationalization and, 249–50, 262–3, 266 residential mortgage backed securities (RMBS), 110 retail-based model, of foreign banks, return on assets (ROA), 16–17, 37, 51, 63, 66, 68, 70, 76, 85, 187 return on equity (ROE), 63, 84, 85, 87, 187 return on financial leverage (ROFL), 85–6, 96, 100, 101 return on invested funds (ROIF), 85–6, 96, 100 revenue frontier estimations, 3, 135–53 risk asset-backed securitization and, 110–12 bank, 36–8, 140 bank size and, 7–8, 29 capital, 86, 101, 103–4 country, 243, 250, 251, 254, 261–2, 266 credit, 56, 83, 106, 117 forecast errors and, 2, 32–53 interest rate, 84, 86, 104 liquidity, 83 measures of, 34–5 systemic, 7–8, 29, 35 underestimation of, 32 risk aversion, risk premiums, 2–3, 23 risk-taking, 1–2 financial crisis and, 83 market discipline and, 32–3 moral hazard and, 8, 33 profitability and, 84–7, 103–4 regulation, supervision and, 158 9780230_313354_15_ind.indd 294 Royal Bank of Scotland (RBS), 57 Russia, 155 savings banks (SBs), 86, 150n10 scale economies, 84, 140 scale efficiency (SE), 67, 74, 79–80 secondary derivative effect, 3, 109, 126, 128–31 securitized assets, rating of, 3, 106–32 shareholders’ limited liability, 175, 176 shareholder system of governance, 57, 58 shareholder value, 279 short-termism, 178–86 signalling theory, 275 Slovakia, 61, 62, 68 see also Central and Eastern Europe (CEE) Slovenia, 61, 62, 68 see also Central and Eastern Europe (CEE) small and medium enterprises (SMEs) financing of, 4–5, 194–213 internationalization strategies of, 5, 242–67 prospects for and barriers to growth, 209–11 southeast Asia, 155 South Eastern Europe (SEE), 60 Spanish banks competition among, 142–6 market power and risk in, 12 special purpose vehicle (SPV), 112–13 stakeholder system of governance, 57, 58 state-controlled banks, 56, 62, 65, 74, 84, 85 static trade-off theory, 6, 275, 276 STIBOR (Stockholm Interbank Offered Rate), 89, 90, 92, 95, 96 Stochastic Frontier Approach, 150n8 stock market capitalization, 13–14, 22, 23 stock prices, 217–18, 253–4, 260 abnormal returns, 260–6 internationalization strategies and, 260–4 5/26/2011 5:07:32 PM Index Stoxx600 Bank index, 38–9 structure-conduct-performance (SCP) paradigm, 135 supervisory authorities, 32, 164 Swedbank, 86, 87, 89, 96, 101 Swedish banks average cost of debt, 91 impact of financial crisis on, 2–3, 83–104 lending rates, 92, 95–6 measurement of profitability, 84–7 profitability of, 87–104 risk-taking by, 83, 103–4 utilization of guarantee programme, 89 systemic crisis, asset securitization and, 116–22, 126 systemic risk, 35 asset securitization and, 116–22 bank size and, 7–8, 29 takeovers, 179, 185, 189 taxes, 274, 275 technical efficiency (TE), 67, 73–4, 79–80, 159, 161, 167 third pillar, 33 “too big too fail,” 8, 10 transition countries, 60 transparency, 33, 157 TUF, see Consolidated Italian Law on Financial Intermediation (TUF) 9780230_313354_15_ind.indd 295 295 uncertainty avoidance, 284 UniCredit (UCG), 63–4 US-owned banks, value creation, 4–6 capital structure decisions and, 273–86 country of destination and, 246–8 country risk and, 250, 254 equity entry modes and, 245–6 financing and, 274 firm age and, 248–9 information disclosure regulation and, 251 internationalization strategies and, 242–67 irrelevance theorem and, 273 R&D intensity and, 249–50 selected variables on, 245–8 size of target and, 248 variable returns to scale (VRS), 67 venture capital, 206–7, 212 wealth transfer, 157 Wells Fargo, 57 wholly foreign-controlled banks, Wolpertinger Conference, World Bank (WB), 155 Z-score, 8, 16–19, 21, 24–8, 43, 45–9, 51, 66, 68, 70–4, 77–8, 170 5/26/2011 5:07:32 PM 9780230_313354_15_ind.indd 296 5/26/2011 5:07:33 PM
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