The role of investment banking for the German economy: Final report for Deutsche Bank AG, Frankfurt/Main

The aim of this study is to assess the contributions of investment banking to the economy with a particular focus on the German economy. To this end we analyse both the economic benefits and the costs stemming from investment banking. The study focuses on investment banks as this part of banking is particularly relevant for financing companies as well as the development and use of specific products to support the needs of private and professional clients. The assessment of benefits and costs of investment banking has been conducted from a European perspective. Nevertheless there is a focus on the German economy to allow a more detailed analysis of certain aspects as for example the use of derivatives by German companies, the success of M&As in Germany or the effect of securitization on loan supply and GDP in Germany. For comparison purposes other European countries and also the U.S. have been taken into account. The last financial crisis has shown the negative impacts of banks on the financial system and the whole economy. In a study on the contribution of investment banks to systemic risk we quantify the negative side of the investment banking business. In the last part of the study we assess how the effects of regulatory changes on investment banking. All important changes in banking and capital market regulation are taken into account such as Basel III, additional capital requirements for systemically important financial institutions, regulation of OTC derivatives and specific taxes. --

The role of investment banking for the German economy

The aim of this study is to assess the contributions of investment banking to the economy with a particular focus on the German economy. To this end we analyse both the economic benefits and the costs stemming from investment banking

Think Twice or Be Wise in Consumer Credit Choices

We analyze whether the frequent use of credit lines is influenced by households' thinking dispositions, i.e. their tendency to reflect upon decisions or to opt for intuitive and impulsive solutions. We consider the special case of Germany where credit lines on current accounts are available to 80% of the population. We document that the frequent usage of costly credit lines is more likely for people who give intuitive but incorrect answers in the Cognitive Reflection Test. Our analysis of a rich sample of household data also adds to the discussion on the role of financial literacy in credit decisions. Our results provide evidence that consumers with higher levels of financial literacy buy less on credit lines independently from their tendency to reflect

Knowing What Not to Do: Financial Literacy and Consumer Credit Choices

Based on a rich panel of household data, we investigate the determinants of the use of consumer credit in Germany. We find that the usage frequency of an easily accessible, but relatively expensive source of consumer credit decreases with financial literacy but is unrelated to household income. This result is robust to household structure, age, formal education, and occupational status. Based on childhood-related information on spending behavior, we control for the influence of self- control on credit decisions. We document that neither self-control, nor low numeracy drive out financial literacy when explaining the frequency of (expensive) credit usage. Hence, financial education plays an important role to improve consumer choices

Is corporate fraud risk correctly priced by the market?

The answer is: No. Stocks with predictably higher fraud risk earn significantly lower stock market returns going forward. Based on an out-of-sample estimation of individual firms' fraud risk, we find a significantly negative return premium for firms with the highest fraud propensity. A portfolio investing in firms with the lowest fraud probability and shorting firms with the highest fraud probability yields abnormal returns of more than 10 percent per year. This result is robust to various asset pricing models that control for differences in firms' quality, liquidity, downside risk, or investor preferences. Our results suggest that the market does not efficiently price corporate fraud risk. This finding is puzzling, because limits of arbitrage do not seem to explain our results. Furthermore, abnormal returns are higher after periods of high sentiment, suggesting that the return patterns documented here constitute an anomaly