Privatized Returns and Socialized Risks: CEO Incentives, Securitization Accounting and the Financial Crisis

The paper investigates the role of CEO’s equity and risk incentives in boosting securitization in the financial industry and in motivating executives to reduce the perceived risk while betting on it. Using a sample of US financial institutions over the period 2003-2009 we document that CEOs with high equity incentives have systematically engaged in securitization transactions to a larger extent than CEOs with low incentives. We also show that CEOs with high equity and risk-related incentives have engaged in the securitization of risky loans and have used securitization for transferring risks to outside investors. Finally, we show that executives incentivized on risk have provided outside investors with low quality disclosure about losses recorded on securitized loans thus contributing to increase the opacity of securitization transactions undertaken. Overall, we interpret our results as evidence that CEOs have foreseen in securitizations under US GAAP an opportunity for hiding risks while bearing them and generating profits and cash flows because of the risks. Our results are robust to several model specifications as well as to endogeneity concerns

Investors’ expectations around quantitative easing: does liquidity injection affect European banks equally?

The role of liquidity in the banking industry is increasingly under the spotlight since the Global Financial Crisis (GFC) in 2007. Prior evidence offers contrasting findings on the role played by liquidity in banks: whilst it ensures systemic financial stability, at the same time it raises agency costs. Notwithstanding this, European banks benefited from a generous liquidity injection following the launch of the Quantitative Easing (QE) programme by the European Central Bank (ECB) in 2015–2016. We leverage on the release of the QE and investigate whether investors’ reactions to the announcements of new liquidity injections vary according to bank-level characteristics of the European banks: namely, their financial soundness, asset portfolio quality and the level of transparency. Our findings document an overall negative market reaction to the QE announcements; at a more fine-grained level of analysis we highlight that banks falling short of the regulatory requirements are not expected to benefit from additional liquidity. This study contributes to the literature on the role of liquidity in banks by showing important boundary conditions to the beneficial role of liquidity in banks, that is—because of the regulatory capital requirements—liquidity is only valuable to investors if it can be reinvested once constraints are overcome

Covid-19, corporate survival and public policy: The role of accounting information and regulation in the wake of a systemic crisis

The economic crisis triggered by the Covid-19 pandemic prompted governments to issue several relief mechanisms to hold up companies and workers. This study analyzes how accounting information and regulation can support policymakers in the wake of a systemic crisis. Based on an accounting-based framework and readily available data from financial statements, it forecasts the impact of the crisis in terms of losses, equity depletion, and corporate defaults, absent government intervention. Next, it quantifies the costs and effects of five relief mechanisms in alleviating the risk of generalized corporate bankruptcies. The effects of the health pandemic and relief mechanisms on profitability and equity shortfalls are estimated for a sample of 586,076 privately held Italian firms. The findings indicate that the number of companies facing bankruptcy risk would increase from 65,463 (11% of the population) in 2019 to 153,681 (26%) in 2020, absent any government intervention. Altogether, these firms employ 1.4 million employees and have a total exposure to the financial industry equal to €68 billion in loans. Next, we assess the effects of relief mechanisms introduced by the Italian government to support corporations, whose aggregate costs reach €49.33 billion in 2020, and find that the interventions ‘rescue’ about 43,000 firms otherwise in default. Finally, the study adds to the debate on the role of accounting regulation in the wake of a systemic crisis by (a) discussing the effects of temporary changes to accounting rules on the informativeness and transparency of financial statements, and (b) suggesting alternative ways to modify accounting rules to safeguard corporate survival without compromising the informativeness of financial statements once the crisis reaches a halt

Soggetto economico e corporate governance

none2noneS. Bozzolan; A. ParbonettiBozzolan, Saverio; Parbonetti, Antoni