Financial Market Imperfection, Overinvestment,and Speculative Precaution

The author uses panel data to assess the sensitivity of investment to cash flow in non-financial firms, taking into account the role their financial health plays in investment decisions. Firms are categorized using a method called the Z-score, a contemporaneous indicator of financial stress that is inversely related to firms’ probability of financial failure. Based on this method, empirical evidence suggests that firms that have the greatest sensitivity of investment to cash flow display the lowest average Z-score. The author also shows that, in this class of firms, investment seems to be partly driven by excessive conservatism, or precaution.Business fluctuations and cycles

Witt groups of Grassmann varieties

We compute the total Witt groups of (split) Grassmann varieties, over any regular base X. The answer is a free module over the total Witt ring of X. We provide an explicit basis for this free module, which is indexed by a special class of Young diagrams, that we call even Young diagrams.Comment: 31 pages, 16 figures. Final version. Complies with the new formalism on total Witt groups recently developed by the authors (arXiv:1104.5051

Geometric description of the connecting homomorphism for Witt groups

We give a geometric setup in which the connecting homomorphism in the localization long exact sequence for Witt groups decomposes as the pull-back to the exceptional fiber of a suitable blow-up followed by a push-forward.Comment: 19 pages, minor details added, reference to published paper adde

The Impact of Banking Deregulation on Canadian Banks Returns

This paper revisits the impact of OBS activities on Canadian banks risk-return trade-off. Recent studies (Stiroh and Rumble 2006, Calmès and Liu 2007) suggest that increasing OBS activities do not necessarily yield straightforward diversification benefits. However, adding a risk premium to earlier accounting returns models by resorting to an ARCH-M procedure, an updated sample reveals that the Canadian banks risk-return trade-off displays a structural break, around 1997. In the second subperiod (1997-2007) of our sample, we find that the share of noninterest income no longer negatively impacts banks returns. Relatedly, we find that a risk premium emerges while, in the first period (1988-1996), the volatility variable is not significant in any returns equations. Our results are thus consistent with a maturation process story.Regulatory changes; Noninterest income; Diversification; Structural break; Risk premium.

Off-Balance-Sheet Activities and the Shadow Banking System: An Application of the Hausman Test with Higher Moments Instruments

The noninterest income banks generate from their off-balance-sheet activities contributes greatly to the volatility of their operating revenues. Using Canadian data, we apply a modified Hausman procedure based on higher moments instruments and revisit this phenomenon to establish that the share of noninterest income (snonin) is actually endogenous to banks returns. In 1997, after the adoption of the Value at Risk (VaR) as a measure of banks risk, the snonin sign turns positive in the returns equations, indicating the emergence of diversification gains from banks non-traditional activities. ARCH-M estimations corroborate the idea that banks have gradually adapted to their new business lines, with an adjustment process begun even before 1997. However, the banks risk premium associated to OBS activities has continuously increased since that date.Bank Risk Measures; Diversification; Noninterest income; Hausman test; Endogeneity; ARCH-M.

Banking Deregulation and Financial Stability : is it Time to re-regulate in Canada ?

We provide new evidence of a worsening of the risk-return trade-off in Canadian banking. Surging OBS activities have led to increasingly volatile net operating revenues, and might have reduced well-known measures of bank profitability, like return on assets and return on equity. In this context, a natural question arises: should we re-regulate? On this matter, we confirm Calmès(2003) prediction: a maturation process took place after 1997. Using a new approach based on ARCH-M estimation, we find that an additional risk premium has emerged. In this sense, there is no need to re-regulate.ARCH-M Models, risk premium, financial stability

Self-Enforcing Labour Contracts and the Dynamics Puzzle

To properly account for the dynamics of key macroeconomic variables, researchers incorporate various internal-propagation mechanisms in their models. In general, these mechanisms implicitly rely on the assumption of a perfect equality between the real wage and the marginal product of labour. The author proposes a theoretical validation of a micro-founded internal-propagation mechanism: he builds a model that features a limited-commitment economy, and derives endogenous self-enforcing labour contracts that produce a different linkage between the real wage and the marginal product of labour. The risk-sharing between the entrepreneur and the worker, both faced with enforcement problems, provides an admissible explanation of the prolonged comovements observed between consumption and labour. Since these co-movements are at the core of the persistence of the impulse response of output to exogenous technology shocks, this persistence can, in turn, be rationalized with the endogenous real rigidity emerging from the economy. The author shows that, in this framework, the persistence ultimately depends on the initial bargaining power and the magnitude of the risk-sharing.Business fluctuations and cycles; Economic models; Labour markets

Trivial Witt groups of flag varieties

Let G be a split semi-simple linear algebraic group over a field, let P be a parabolic subgroup and let L be a line bundle on the projective homogeneous variety G/P. We give a simple condition on the class of L in Pic(G/P)/2 in terms of Dynkin diagrams implying that the Witt groups W^i(G/P,L) are zero for all integers i. In particular, if B is a Borel subgroup, then W^i(G/B,L) is zero unless L is trivial in Pic(G/B)/2.Comment: 3 pages, 1 figur