Structured Debt Ratings: Evidence on Conflicts of Interest
Journal of Financial Economics, 116, 2015, 46-60, with Harald Hau.
(Award for best paper on financial markets at Paris December 2013 Finance Meeting)
We test if issuers of asset- and mortgage-backed securities receive rating favors from agencies with which they maintain strong business relationships. Controlling for issuer fixed effects and a large set of credit risk determinants, we show that agencies publish better ratings for those issuers that provide them with more bilateral securitization business. Such rating favors are larger for very complex structured debt deals and for deals issued during the credit boom period. Our analysis is based on a new deal-level rating statistic that accounts for the full distribution of tranche ratings below the AAA cut-off point of a structured debt deal.
Incentive Pay and Bank Risk-Taking: Evidence from Austrian, German, and Swiss Banks
Journal of International Economics, 96, 2015, 123-140, with Harald Hau, Patrick Kampkötter, and Johannes Steinbrecher.
We use payroll data in the Austrian, German, and Swiss banking sector to identify incentive pay in the critical banking segments of treasury/capital market management and investment banking for 67 banks. We document an economically significant correlation of incentive pay with both the level and volatility of bank trading income—particularly for the pre-crisis period 2003–2007, in which incentive pay was strongest. This result is robust if we instrument the bonus share in the capital market divisions with the strength of incentive pay in unrelated bank divisions like retail banking. Moreover, pre-crisis incentive pay appears too strong for an optimal trade-off between trading income and risk, which maximizes the net present value of trading income. Further analyses indicate that the bonus moderation during the crisis has removed excessive pre-crisis incentive pay.
Empty Creditors and Strong Shareholders: The Real Effects of Credit Risk Trading
(Previous title: My Credit But Your Problem: The Real Effects of Credit Risk Trading)
Revise & resubmit at Journal of Financial Economics, with Stefano Colonnello and Francesca Zucchi.
Credit default swaps (CDSs) can create empty creditors who may push borrowers into inefficient bankruptcy but also reduce shareholders’ incentives to default strategically. We show theoretically and empirically that the presence and the effects of empty creditors on firm outcomes depend on the distribution of bargaining power among claimholders. Firms are more likely to have empty creditors if these would face powerful shareholders in debt renegotiations. The empirical evidence confirms that more CDS insurance is written on firms with strong shareholders and that CDSs increase the bankruptcy risk of these same firms. The ensuing effects on firm value and investment are negative.
Arbitraging the Basel Securitization Framework: Evidence from German ABS Investment
Revise & resubmit at Review of Finance.
(Joint winner of the ESRB Research Prize in Memory of Ieke van den Burg 2016, Swiss Finance Institute best paper doctoral award 2015)
This paper provides evidence for regulatory arbitrage within the class of asset-backed securities (ABS) based on individual asset holding data of German banks. I find that those banks operating with tight regulatory constraints pick the securities with the highest yield and lowest collateral quality among ABS with the same regulatory risk weight. This ABS selection allows banks to increase the return on the capital required for an ABS investment by a factor of four—thus rendering the Basel II Securitization Framework ineffective.
How Do Investors and Firms React to an Unexpected Currency Appreciation Shock?
SFI Working Paper, with Rüdiger Fahlenbrach, Christoph Herpfer, and Philipp Krüger.
We examine the impact of a sudden home currency appreciation on the valuation and behavior of corporations in a developed economy. The Swiss National Bank surprisingly repealed the minimum exchange rate of 1.2 Swiss francs per Euro on January 15, 2015. On that day the franc appreciated by 15% and the main stock market index dropped by 8.7%. The impact was largest for export oriented firms with high domestic costs. These firms experienced 5% lower announcement returns, subsequently faced economically sizeable reductions in sales and profitability, and responded by reducing investment by 8.1% while only slightly reducing employment.
Bank Capital Regulation with an Opportunistic Rating Agency
SFI Working Paper.
(Distinguished CESifo Affiliate Award 2013, Swiss Finance Institute best paper doctoral award 2012)
This paper models the strategic interaction between a rating agency, a bank and a bank regulator who lacks information about bank asset risk. The regulator can either (1) make bank capital requirements contingent on credit ratings; or (2) set rating-independent capital requirements. Truthful ratings provide efficiency gains because they allow the regulator to constrain high risk bank investment without simultaneously reducing overall investment volume. However, if collusion between the rating agency and the bank corrupts rating quality, rating-independent regulation enhances welfare. The welfare benefits are largest if regulators maintain rating-contingent capital requirements and discipline rating agencies.
What does a bank’s payroll reveal about its risk-taking?
International Banker, April 10, 2017, with Harald Hau and Patrick Kampkötter
Optimale Vergütungsstrukturen in Banken
Die Bank, 2015(3), 65-69, with Harald Hau, Patrick Kampkötter and Johannes Steinbrecher
Die Dosis macht das Gift – eine Analyse zum Einfluss von Bonuszahlungen auf die Profitabilität und das Risiko von Banken
ifo Schnelldienst 68 (03), 2015, 23‐31, with Harald Hau, Patrick Kampkötter and Johannes Steinbrecher.
Bankers’ Bonuses and Performance Sensitivity
voxeu.org, November 13, 2014, with Harald Hau, Patrick Kampkötter and Johannes Steinbrecher.
Corrupted Credit Ratings: Standard & Poor’s Lawsuit and the Evidence
voxeu.org, June 18, 2013, with Harald Hau