Political Relationships, Global Financing and Corporate Transparency

This study examines the financing choices of firms operating in a weak institutional environment. We argue that in relationship-based systems, global financing and strong political connections are alternative means to create firm value. Well-connected firms might be less inclined to access global capital markets because (state-owned) domestic banks provide capital at low cost. Moreover, the expanded disclosures and additional scrutiny that come with issuing foreign securities might be at odds with close political ties at home because these ties can best be exploited when little is disclosed about the firm. Using data from Indonesia, we provide strong support for the hypothesis that global financing and political connections are substitutes: Firms with close political ties to former President Soeharto are significantly less likely than nonconnected firms to have publicly traded foreign securities. To study performance effects, we examine how returns during the Asian financial crisis differ between firms with and without foreign securities. Consistent with prior work, we find that firms with foreign securities exhibit higher returns during the crisis. However, our data indicate that politically well-connected firms also received considerable support during this period. These results suggest that previous estimates of cross-listing benefits are considerably biased if domestic opportunities such as political connections are ignored.

The long term impact of microfinance on income, wages and the sectoral distribution of economic activity

This paper analyses the long-term effects of improved small-scale lending, often provided by microfinance institutions set up with the support of development aid. The analysis shows that some common assumptions about microfinance are not true at all: First, it shows that the impact on income will accrue not to the microenterprises themselves, but rather to the consumers of their products. Second, microfinance will have a significant positive effect on the wage levels of employees in the informal sector. Third, microfinance will cause high growth rates in the informal production sector, whereas the trade sector will either contract or at best grow very little

Project selection, income smoothing, and Bayesian learning

Capital rationing is an empirically well-documented phenomenon. This constraint requires managers to make investment decisions between mutually exclusive investment opportunities. In a multiperiod agency setting, this paper analyses accounting rules that provide managerial incentives for efficient project selection. In order to motivate a shortsighted manager to expend unobservable effort and to make efficient investment decisions, the principal sets up an incentive scheme based on residual income (e.g. EVATM). The paper shows that income smoothing generates a trade-off between agency costs resulting from differences in discount rates and the costs associated with the "congruity" of residual earnings

Avoiding the rating bounce : why rating agencies are slow to react to new information

Rating agencies state that they take a rating action only when it is unlikely to be reversed shortly afterwards. Based on a formal representation of the rating process, I show that such a policy provides a good explanation for the empirical evidence: Rating changes occur relatively seldom, exhibit serial dependence, and lag changes in the issuers’ default risk. In terms of informational losses, avoiding rating reversals can be more harmful than monitoring credit quality only twice per year

News : 1/12 / Center for Financial Studies

Editorial 01 Foreword Research & Policy 01 WP 12/06: Central Banks - Paradise Lost 02 Staff Member Profile Events 01 The ECB and Its Watchers XIV 02 Greece: Getting Here and Moving Forward 03 Beyond Our Means: Why America Spends While the World Saves 04 How can Macro-Prudential Regulation be Effective? 05 Globalization and Pluralization of States. Why there will be no “United States of Europe” 06 Deutsche Bank Prize in Financial Economics 2013: Preview Last but not least 01 Christian Leuz will visit Frankfurt with Humboldt Research Award 02 LOEWE center "Sustainable Architecture for Finance in Europe" 03 New Senior Fellows at CF

The ignored performance measure

This paper studies a setting in which a risk averse agent must be motivated to work on two tasks: he (1) evaluates a new project and, if adopted, (2) manages it. While a performance measure which is informative of an agent´s action is typically valuable because it can be used to improve the risk sharing of the contract, this is not necessarily the case in this two-task setting. I provide a sufficient condition under which a performance measure that is informative of the second task is worthless for contracting despite the agent being risk averse. This shows that information content is a necessary but not a sufficient condition for a performance measure to be valuable

Networks of micro and small enterprise banks : a contribution to financial sector development : [Version March 2005]

The paper is a follow-up to an article published in Technique Financière et Developpement in 2000 (see the appendix to the hardcopy version), which portrayed the first results of a new strategy in the field of development finance implemented in South-East Europe. This strategy consists in creating microfinance banks as greenfield investments, that is, of building up new banks which specialise in providing credit and other financial services to micro and small enterprises, instead of transforming existing credit-granting NGOs into formal banks, which had been the dominant approach in the 1990s. The present paper shows that this strategy has, in the course of the last five years, led to the emergence of a network of microfinance banks operating in several parts of the world. After discussing why financial sector development is a crucial determinant of general social and economic development and contrasting the new strategy to former approaches in the area of development finance, the paper provides information about the shareholder composition and the investment portfolio of what is at present the world's largest and most successful network of microfinance banks. This network is a good example of a well-functioning "private public partnership". The paper then provides performance figures and discusses why the creation of such a network seems to be a particularly promising approach to the creation of financially self-sustaining financial institutions with a clear developmental objective