Shareholder Bargaining Power and the Emergence of Empty Creditors (Internet Appendix)
(Previous title: Empty Creditors and Strong Shareholders: The Real Effects of Credit Risk Trading)
Journal of Financial Economics (forthcoming), with Stefano Colonnello and Francesca Zucchi.
Credit default swaps (CDSs) can create empty creditors who potentially force 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 effect on firm value is negative.
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.
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 banks operating with tight regulatory constraints exploit a non-monotonic relation between yield spreads and rating-contingent capital requirements for ABS. Unlike unconstrained banks, they systematically pick the securities with the highest yield spreads and the lowest ex post performance while keeping constant or even decreasing capital requirements. This regulatory arbitrage allows constrained banks to increase the ratio of yield spread to required capital by a factor of four. Differences in sophistication, market power, or incentives to retain securitizations are unlikely to explain the riskier ABS investments of constrained banks.
Freeze! Financial Sanctions and Bank Responses
Deutsche Bundesbank Discussion Paper, with Stefan Goldbach and Volker Nitsch
We study the effects of financial sanctions on cross-border credit supply. Using a differences-in-differences approach to analyze eleven sanctions episodes between 2002 and 2015, we find that banks located in Germany reduce their positions in countries with sanctioned entities by 38%. The average German branch or subsidiary outside Germany does not adjust its positions after the imposition of sanctions. For affiliated banks located in countries with low financial standards, we even observe a relative increase in credit supply. These effects are stronger if sanctions are only imposed by EU member states and not by the entire UN.
Bank Bonus Pay as a Risk Sharing Contract
HEC Working Paper, with Harald Hau, Patrick Kampkötter, and Jean-Charles Rochet.
We argue that risk sharing motivates the bank-wide structure of bonus pay. In the presence of financial frictions that make external financing costly, the optimal contract between shareholders and employees involves some degree of risk sharing whereby bonus pay partially absorbs earnings shocks. Using payroll data for 1.26 million employee-years in all functional divisions of Austrian, German, and Swiss banks, we uncover several empirical patterns in bonus pay that are difficult to rationalize with incentive theories of bonus pay—but support an important risk sharing motive. In particular, bonuses respond to performance shocks that are outside the control of employees because they originate in other bank divisions or even outside the bank.
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