25 research outputs found
Corporate Leverage and Product Differentiation Strategy
We explore the joint determination of product differentiation strategy and corporate leverage in a setting where (i) product differentiation is valued by customers; (ii) debt is necessary to discipline managers; and (iii) liquidation is costly for customers, in particular, when products are highly differentiated from competitors' products. We show that when managerial incentive problems call for high leverage, firms position their products closer to competitors to reduce deadweight costs customers incur in liquidation. We discuss our findings in light of case study evidence.leverage; product differentiation; liquidation costs; customer lock-in strategies; innovation
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An empirical analysis of subprime consumer credit demand
We test the interest rate sensitivity of subprime credit card borrowers using a unique panel data set from a UK credit card company. What is novel about our contribution is that we were given details of a randomized interest rate experiment conducted by the lender between October 2006 and January 2007. We find that individuals who tend to utilize their credit limits fully do not reduce their demand for credit when subject to increases in interest rates as high as 3 percentage points. This finding is naturally interpreted as evidence of binding liquidity contraints. We also demonstrate the importance of truly exogenous variation in interest rates when estimating credit demand elasticities. We show that estimating a standard credit demand equation with nonexperimental variation leads to seriously biased estimates even when conditioning on a rich set of controls and individual fixed effects. In particular, this procedure results in a large and statistically significant 3-month elasticity of credit card debt with respect to interest rates even though the experimental estimate of the same elasticity is neither economically nor statistically different from zero
Regulating financial conglomerates
We investigate the optimal regulation of financial conglomerates which combine a bank and a non-bank financial institution. The conglomerateâs risk-taking incentives depend upon the level of market discipline it faces, which in turn is determined by the conglomerateâs liability structure. We examine optimal capital requirements for stand-alone institutions, for integrated financial conglomerates, and for financial conglomerates that are structured as holding companies. For a given risk profile, integrated conglomerates have a lower probability of failure than either their stand-alone or decentralized equivalent. However, when risk profiles are endogenously selected, conglomeration may extend the reach of the deposit insurance safety net and hence provide incentives for increased risk-taking. As a result, integrated conglomerates may optimally attract higher capital requirements. In contrast, decentralised conglomerates are able to hold assets in the socially most efficient place. Their optimal capital requirements encourage this. Hence, the practice of âregulatory arbitrageâ, or of transferring assets from one balance sheet to another, is welfare-increasing. We discuss the policy implications of our finding in the context not only of the present debate on the regulation of financial conglomerates but also in the light of existing US bank holding company regulation
The SSM at 1
On February 3-4, 2016 SUERF â The European Money and Finance Forum â, Deutsche Bundesbank and Stiftung Geld und WĂ€hrung jointly organized a Colloquium/Conference in Frankfurt in order to evaluate the experience with the SSM â the Single Supervisory Mechanism â during the first year of its existence. The present issue of SUERF Conference Proceedings includes a selection of papers based on the authorsâ contributions to the Frankfurt event
On the Incentive Problems in Financial Conglomerates
This paper analyses the effects of scope expansion on the core activity of banks and provides a rationale for their interest in offering a wider product range. We show that scope economies may stem from moral hazard in the core business, and argue that a cost of scope expansion might be the inability of banks to credibly commit to penalize their clients in the event of default or poor performance. We find that inefficiencies in conglomerate banks are more prone to occur when competition in the additional activity is intense, and when willingness of firms to pay for a new financial product is higher.Asymmetric Information; Financial Innovations; Mergers
Multinational Bank Regulation with Deposit Insurance and Diversification Effects
We analyse a model in which bank deposits are insured and there is an exogenous cost of bank capital. The former effect results in bank over-investment and the latter in under-investment. Regulatory capital requirements introduce investment distortions, which are a constrained optimal response to these market imperfections. We show that capital requirements which are constrained optimal for national banks result in under-investment by multinational banks. The extent of under-investment depends upon the home bankâs riskiness, the extent of international diversification, and the liability structure (branch or subsidiary) of the multinational. Capital requirements for international banks should therefore reflect these effects. We relate our findings to observed features of multinational banks and we discuss the possible existence of a multinational bank channel for financial contagion.capital adequacy requirements; deposit insurance; multinational bank
Regulation of Multinational banks: A Theoretical Inquiry
This Paper studies prudential regulation of a multinational bank (MNB here-after). We analyse how two frequently chosen representation forms for MNBs - branch and subsidiary representation - affect the behaviour of national regulators. We find that the different liability structure and insurance arrangements for non-local depositors under the two representations have a crucial impact on regulatorsâ behaviour. We show that branch representation leads to a more lenient regulation for the home unit (the unit of incorporation) than subsidiary representation. Regulation of the foreign unit can be softer or tougher in branch MNBs depending on the prospect of the home unit. We examine how intervention of a regulator in charge of a given bank's unit changes with the information received about the foreign units. We discuss the effect of lobbying activity and international resources transfers on its regulation.branch; multinational banks; prudential regulation; representation form; subsidiary
Relative Performance, Risk and Entry in the Mutual Fund Industry
This Paper constitutes a first attempt to analyse the impact of the emergence of new funds on portfolio decisions of mutual fund managers who are evaluated on the basis of relative performance. Recent theoretical literature has pointed to the inefficiencies in portfolio selection caused by relative performance evaluation of fund managers. We find that the ongoing process of creation of new funds, by posing an entry threat to the incumbent fund managers, greatly alleviates these inefficiencies. Hence the transitory market structure that characterizes the mutual fund industry could explain why relative performance evaluation is widely in use.family of funds; fund management industry; ranking objectives; relative performance evaluation
Corporate Leverage and Product Differentiation Strategy
We explore the joint determination of product differentiation strategy and corporate leverage in a setting where (i) product differentiation is valued by customers; (ii) debt is necessary to discipline managers; and (iii) liquidation is costly for customers, in particular, when products are highly differentiated from competitors' products. We show that when managerial incentive problems call for high leverage, firms position their products closer to competitors to reduce deadweight costs customers incur in liquidation. We discuss our findings in light of case study evidence.customer lock-in strategies; innovation; leverage; liquidation costs; product differentiation