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Abstract:
If the private benefits of control are high and management owns a small equity stake, managers and workers are natural allies. There are two forces at play. First, managers effectively transform employees into a "poison pill" by signing generous long-term labor contracts and thereby reducing the firm's attractiveness to a raider. Second, employees act as "white squires" for the incumbent managers, lobbying against hostile takeovers to protect the high wages enjoyed under incumbent management. Our model is consistent with available empirical findings, and yields new predictions as well.

private benefits, employment protection, takeovers, ESOPs

Abstract:
The paper analyzes the political decision that determines the degree of investor protection. We show that, in some circumstances, entrepreneurs and workers agree to trade low investor protection for high employment protection. The feasibility of this "corporatist" agreement depends on the distribution of wealth and on technological factors. Otherwise, a "non-corporatist" outcome will occur, featuring high investor protection and low employment protection. Therefore, our main prediction is that employment and investor protection is negatively correlated across countries. The model also predicts that the frequency of mergers and acquisitions is negatively correlated with employment protection. Both predictions are consistent with OECD evidence.

Abstract:
Recent work documents that better legal institutions are associated with broader equity markets. We investigate whether international differences in legal institutions also help explain the international cross-section of expected stock returns. We document three main regularities. First, total stock market returns are positively correlated with overall measures of the quality of institutions, such as judicial efficiency and rule of law, but have no relationship with measures of shareholder rights, controlling for risk. Second, dividend yields and earning-price ratios also correlate positively with judicial efficiency and rule of law, but negatively with shareholder rights' protection, controlling for risk and expected earnings growth. Thirdly, the excess return on new issues is negatively associated with the quality of accounting standards. We interpret the positive effect of the overall quality of institutions on equity returns as capturing the resulting curtailment of private benefits and increase of profitability, under imperfect international integration of stock markets. The negative impact of shareholders' legal protection and of accounting standards can instead be seen as resulting from the implied reduction in shareholders' auditing and monitoring costs.

Law, enforcement, shareholder protection, corporate governance, return on equity

Abstract:
This paper documents the aggregate trends in the foreign listings of companies and analyzes both their distinctive pre-listing characteristics and their post-listing performance relative to other companies. In the 1986-97 interval, many European companies listed abroad, but did so mainly on US exchanges. At the same time, the number of US companies listed in Europe decreased. The cross-listings of European companies appear to have sharply different motivations and consequences depending on whether they cross-list in the United States or within Europe. In the first case, companies pursue a strategy of rapid expansion fuelled by high leverage before the listing and large equity issues after the listing. They rely increasingly on export markets both before and after the listing, and tend to belong to high-tech industries. In the second case, companies do not grow more than the control group, and increase their leverage after the cross-listing. Also, they fail to increase their foreign sales in the wake of the cross-listing. The only common features of the two groups are their large size, high foreign sales before cross-listing and high R&D spending after cross-listing.

Abstract:
We analyze how the law and its enforcement affect equity market equilibrium. Improvements in the legal system, while invariably associated with broader equity markets, have different effects on equity returns depending on the institutional change considered and on the degree of international stock market segmentation. The model is useful to interpret the results of recent empirical work, such as La Porta et al. (1997) and Lombardo and Pagano (1999). In particular, it can rationalize the observed cross-country pattern, whereby better institutions are associated both with broader equity markets and higher risk-adjusted returns on equity.

Abstract:
This paper presents a political economy model where there is mutual feedback between investor protection and stock market development. Better investor protection induces companies to issue more equity and thereby leads to a broader stock market. In turn, equity issuance expands the shareholder base and increases support for shareholder protection. This feedback loop can generate multiple equilibria, with investor protection and stock market size being positively correlated across equilibria. The model's predictions are tested on panel data for 47 countries over 1993-2002, controlling for country and year effects and endogeneity issues. We also document international convergence in shareholder protection to best-practice standards, and show that it is correlated with cross-border M&A activity, consistent with the model.

political economy, shareholder protection, corporate governance, stock market development

Abstract:
In the last decade, the increased competition between European stock exchanges has reduced the cost of trading and increased the variety of trading mechanisms. The London Stock Exchange, which initiated the competition in 1986 by setting up the SEAQ-I market, attracted considerable trading volume in Continental equities in the late 1980s. Later, however, Continental exchanges recovered most of the trading volume from London upon restructuring their auction systems so as to offer very low trading costs, greater transparency and continuous trading via an automated order book. At the same time, the spreads quoted by SEAQ-I dealers increased considerably. Lately, potential competition by continuous auction systems threatened even the market for British equities, and prompted the London Stock Exchange to replace its former SEAQ system with an automated order book. As in Continental Bourses, this automated auction system is expected to run in parallel with a dealership market for large trades. So trading systems appear to be converging towards a dualistic structure all over Europe. The paper documents these developments, and considers how the competition between European exchanges is likely to evolve and which opportunities and dangers the future may hold for them.

Abstract:
In the last decade, the increased competition between European stock exchanges has reduced the cost of trading and increased the variety of trading mechanisms. The London Stock Exchange, which initiated the competition in 1986 by setting up the SEAQ-I market, attracted considerable trading volume in Continental equities in the late 1980s. Later, however, Continental exchanges recovered most of the trading volume from London upon restructuring their auction systems so as to offer very low trading costs, greater transparency and continuous trading via an automated order book. At the same time, the spreads quoted by SEAQ-I dealers increased considerably. Lately, potential competition by continuous auction systems threatened even the market for British equities, and prompted the London Stock Exchange to replace its former SEAQ system with an automated order book. As in Continental Bourses, this automated auction system is expected to run in parallel with a dealership market for large trades. So trading systems appear to be converging towards a dualistic structure all over Europe. The paper documents these developments, and considers how the competition between European exchanges is likely to evolve and which opportunities and dangers the future may hold for them.

Abstract:
We analyze corporate fraud in a model in which managers have superior information but are biased against liquidation, because of their private benefits from empire building. This may induce them to misreport information and even bribe auditors when liquidation would be value-increasing. To curb fraud, shareholders optimally choose auditing quality and the performance sensitivity of managerial pay, taking external corporate governance and auditing regulation into account. For given managerial pay, it is optimal to rely on auditing when external governance is in an intermediate range. When both auditing and incentive pay are used, worse external governance must be balanced by heavier reliance on both of those incentive mechanisms. In designing managerial pay, equity can improve managerial incentives while stock options worsen them.

accounting fraud, auditing, managerial compensation, corporate governance, regulation

Abstract:
Many economists argue that the primary economic function of banks is to provide cheap credit, and to facilitate this function, they advocate the strict protection and enforcement of creditor rights. But banks can serve another important economic function: through project screening they can reduce the number of project failures and thus mitigate their private and social costs. Strict protection of creditor rights would leave the tradeoff between these two banking functions to the market. In this paper, we show that because of market imperfections in the banking industry, strong creditor protection may lead to market equilibria in which cheap credit is inappropriately emphasized over project screening. Restrictions on collateral requirements and the protection of debtors in bankruptcy proceedings may redress this imbalance and increase credit-market efficiency.

Abstract:
Theory predicts that information sharing among lenders attenuates adverse selection and moral hazard, and can therefore increase lending and reduce default rates. To test these predictions, we construct a new international data set on private credit bureaus and public credit registers. We find that bank lending is higher and proxies for default rates are lower in countries where lenders share information, regardless of the private or public nature of the information sharing mechanism. We also find that public intervention is more likely where private arrangements have not arisen spontaneously and creditor rights are poorly protected.

Abstract:
Theory predicts that information sharing among lenders attenuates adverse selection and moral hazard, and can therefore increase lending and reduce default rates. To test these predictions, we construct a new international data set on private credit bureaus and public credit registers. We find that bank lending is higher and proxies for default rates are lower in countries where lenders share information, regardless of the private or public nature of the information sharing mechanism. We also find that public intervention is more likely where private arrangements have not arisen spontaneously and creditor rights are poorly protected.

Abstract:
In this Paper, we document how in the wake of monetary unification the markets for euro area sovereign and private-sector bonds have become increasingly integrated. Issuers and investors alike have come to regard the euro area bond market as a single one. Primary and secondary bond markets have become increasingly integrated on a pan-European scale. Issuance of corporate bonds has taken off on an unprecedented scale in continental Europe. In the process, both investors and issuers have reaped the considerable benefits afforded by greater competition in the underwriting of private bonds and auctioning of public ones, and by the greater liquidity of secondary markets. Bond yields have converged dramatically in the transition to EMU. The persistence of small and variable yield differentials for sovereign debt under EMU indicates that euro area bonds are still not perfect substitutes. However, to a large extent this does not reflect persistent market segmentation but rather small differentials in fundamental risk. Liquidity differences play at most a minor role, and this role appears to arise partly from their interaction with fundamental risk. The challenges still lying ahead are numerous. They include the unbalance between the German-dominated futures and the underlying cash market; the vulnerability of the cash markets' prices to free-riding and manipulation by large financial institutions; the possibility of joint bond issuance by euro area countries; the integration of clearing and settlement systems in the euro area bond market, and the participation of new accession countries' issuers to this market.

Euro, bond market, financial integration, bond yield differential

Abstract:
In this paper, we document how in the wake of monetary unification the markets for Euro-area sovereign and private-sector bonds have become increasingly integrated. Issuers and investors alike have come to regard the Euro-area bond market as a single one. Primary and secondary bond markets have become increasingly integrated on a pan-European scale. Issuance of corporate bonds has taken off on an unprecedented scale in continental Europe. In the process, both investors and issuers have reaped the considerable benefits afforded by greater competition in the underwriting of private bonds and auctioning of public ones, and by the greater liquidity of secondary markets.

Bond yields have converged dramatically in the transition to EMU. The persistence of small and variable yield differentials for sovereign debt under EMU indicates that Euro-area bonds are still not perfect substitutes. However, to a large extent this does not reflect persistent market segmentation but rather small differentials in fundamental risk. Liquidity differences play at most a minor role, and this role appears to arise partly from their interaction with fundamental risk.

The challenges still lying ahead are numerous. They include the unbalance between the German-dominated futures and the underlying cash market; the vulnerability of the cash markets' prices to free-riding and manipulation by large financial institutions; the possibility of joint bond issuance by Euro-area countries; the integration of clearing and settlement systems in the Euro-area bond market, and the participation of new accession countries' issuers to this market.

Euro, EMU, bond market, financial integration, bond yield differential

Abstract:
The cost of enforcing contracts is a key determinant of market performance. We document this point with reference to the credit market in a model of opportunistic debtors and inefficient courts. According to the model, improvements in judicial efficiency should reduce credit rationing and increase lending, with an ambiguous effect on interest rates that depends on banking competition and on the type of judicial reform. These predictions are supported by panel data on Italian provinces and by cross-country evidence. In Italian provinces with longer trials or large backlogs of pending trials, credit is less widely available. International evidence also shows that the depth of mortgage markets is inversely related to the costs of mortgage foreclosure and other proxies for judicial inefficiency.

enforcement, judicial efficiency, credit market, interest rates

Abstract:
We investigate the distribution of trading volume across different venues after a company lists abroad. In most cases, after an initial blip, foreign trading declines rapidly to extremely low levels. However, there is considerable cross-sectional variation in the persistence and magnitude of foreign trading. The ratio between foreign and domestic trading volume is higher for smaller, more export and high-tech oriented companies. It is also higher for companies that cross-list on markets with lower trading costs and better insider trading protection. Foreign trading is high close to the cross-listing date but decreases dramatically in the subsequent six months. This accords with the 'flow-back hypothesis' that declining foreign trading is associated with the gravitational pull of the home market.

Trading volume, cross-listing, flow-back

Abstract:
We investigate the distribution of trading volume across different venues after a company lists abroad. In most cases, after an initial blip, foreign trading declines rapidly to extremely low levels. However, there is considerable cross-sectional variation in the persistence and magnitude of foreign trading. The ratio between foreign and domestic trading volume is higher for smaller, more export and high-tech oriented companies. It is also higher for companies that cross-list on markets with lower trading costs and better insider trading protection. Domestic trading increases around the cross-listing, and afterwards is negatively correlated with past foreign trading activity. This accords with the flow-back hypothesis that declining foreign trading is associated with the gravitational pull of the home market.

trading volume, cross-listing, flow-back

Abstract:
We study regulation of the auditing profession in a model where audit quality is unobservable and enforcing regulation is costly. The optimal audit standard falls short of the first-best audit quality, and it is increasing in the riskiness of firms and in the amount of funding they seek. The model can encompass collusion between clients and auditors, arising from the joint provision of auditing and consulting services: deflecting collusion requires less ambitious standards. Finally, banning the provision of consulting services by auditors eliminates collusion but may not be optimal in the presence of economies of scope. (JEL Classification: G28, K22, M42).

auditing, regulation, enforcement, collusion.

Abstract:
We study regulation of the auditing profession in a model where audit quality is unobservable and enforcing regulation is costly. The optimal audit standard falls short of the first-best audit quality, and is increasing in the riskiness of firms and in the amount of funding they seek. The model can encompass collusion between clients and auditors, arising from the joint provision of auditing and consulting services: deflecting collusion requires less ambitious standards. Finally, banning the provision of consulting services by auditors eliminates collusion but may not be optimal in the presence of economies of scope.

auditing, regulation, enforcement, collusion

Abstract:
We search for the circumstances in which the response of national saving to fiscal policy contradicts conventional Keynesian predictions, using data from 18 OECD countries. The data suggest that non-Keynesian effects are associated with large and persistent fiscal impulses. Such responses can be traced to changes in taxes and transfers, more than to changes in government consumption, and are stronger for fiscal contractions than expansions. During large contractions an increase in taxes has no effect on national saving. High or rapidly growing public debt is not a good predictor of non-Keynesian effects. Finally, the composition of the fiscal impulse matters: the non-Keynesian effects of a large fiscal contraction are enhanced when this is carried out primarily by raising taxes.

Abstract:
Entrepreneurs may be constrained by the law to bequeath a minimal stake to non-controlling heirs. The size of this stake can reduce investment in family firms, by reducing the future income they can pledge to external financiers. Using a purpose-built indicator of the permissiveness of inheritance law and data for 10,245 firms from 32 countries over the 1990-2006 interval, we find that stricter inheritance law is associated with lower investment in family firms, while it leaves investment unaffected in non-family firms. Moreover, as predicted by the model, inheritance laws affects investment only in family firms that experience a succession.

Family firms, Inheritance law, Investor protection

Abstract:
We investigate whether inheritance law constrains investment in family firms. Using a model of succession in family firms where the law may constrain the entrepreneur to give a minimal stake to non-controlling heirs, we show that the size of this stake reduces investment in family firms, by reducing the firm's ability to pledge future income streams to external financiers. We take this prediction to the data, by collecting information about inheritance law in 62 countries. Wherever present, these laws effectively constrain the stake that can be given to the controlling and non-controlling heirs. Using a purpose-built indicator of the permissiveness of inheritance law together with measures of investor protection and data for 10,245 firms from 32 countries over the 1990-2006 interval, we find that stricter inheritance law is associated with lower investment in family firms, while it leaves investment unaffected in non-family firms, and that this result survives several robustness checks. Moreover, as predicted by the model, inheritance laws affects investment only in family firms that experience a succession.

succession, family firms, inheritance law, growth, investment

Abstract:
We investigate whether information sharing among banks has affected credit market performance in the transition countries of Eastern Europe and the former Soviet Union, using a large sample of firm-level data. Our estimates show that information sharing is associated with improved availability and lower cost of credit to firms, and that this correlation is stronger for opaque firms than transparent firms. In cross-sectional estimates, we control for variation in country-level aggregate variables that may affect credit, by examining the differential impact of information sharing across firm types. In panel estimates, we also control for the presence of unobserved heterogeneity at the firm level and for changes in selected macroeconomic variables.

credit access, information sharing, transition countries

Abstract:
We investigate whether information sharing among banks has affected credit market performance in the transition countries of Eastern Europe and the former Soviet Union, using a large sample of firm-level data. Our estimates show that information sharing is associated with improved availability and lower cost of credit to firms. This correlation is stronger for opaque firms than transparent ones and stronger in countries with weak legal environments than in those with strong legal environments. In cross-sectional estimates, we control for variation in country-level aggregate variables that may affect credit, by examining the differential impact of information sharing across firm types. In panel estimates, we also control for the presence of unobserved heterogeneity at the firm level, as well as for changes in macroeconomic variables and the legal environment.

information sharing, credit access, transition countries

Abstract:
We present a model in which issuers of structured bonds choose coarse and opaque ratings to enhance the liquidity of their primary market, at the cost of reducing secondary market liquidity or even causing it to freeze. The degree of transparency is inefficiently low if the social value of secondary market liquidity exceeds its private value. We analyze various types of public intervention - requiring transparency for rating agencies, providing liquidity to distressed banks or supporting secondary market prices - and find that their welfare implications are quite different. Finally, transparency is greater if issuers restrain the issue size, or tranche it so as to sell the more information-sensitive tranche to sophisticated investors only.

default, liquidity, rating, securitization, subprime lending crisis, transparency

Abstract:
We present a model in which issuers of structured bonds choose coarse and opaque ratings to enhance the liquidity of their primary market, at the cost of reducing secondary market liquidity or even causing it to freeze. The degree of transparency is inefficiently low if the social value of secondary market liquidity exceeds its private value. We analyze various types of public intervention: requiring transparency for rating agencies, providing liquidity to distressed banks or supporting secondary market prices and find that their welfare implications are quite different. Finally, transparency is greater if issuers restrain the issue size, or tranche it so as to sell the more information-sensitive tranche to sophisticated investors only.

securitization, rating, liquidity, subprime lending crisis, default

Abstract:
Creditors often share information about their customers' credit record. Besides helping them to spot bad risks, this informational exchange acts as a disciplinary device. If creditors are known to exchange data about defaults, borrowers must consider that default on a current lender would disrupt their credit rating with all the other lenders. This raises their incentive to perform. But sharing more detailed information can reduce this disciplinary effect: when lenders only disclose past defaults, borrowers' incentives to perform may be greater than when lenders share all their information. In some instances, by "fine-tuning" the type and accuracy of the information shared, lenders can raise borrowers' incentives to their first-best level.

Abstract:
We explore the determinants of yield differentials between sovereign bonds in the Euro area. There is a common trend in yield differentials, which is correlated with a measure of the international risk factor. In contrast, liquidity differentials display sizeable heterogeneity and no common factor. We present a model that predicts that yield differentials should increase in both liquidity and risk, with an interaction term hose magnitude and sign depends on the size of the liquidity differential with respect to the reference country. Testing these predictions on daily data, we find that the international risk factor is consistently priced, while liquidity differentials are priced only for a subset of countries and their interaction with the risk factor is crucial to detect their effect.

Abstract:
The paper explores the determinants of yield differentials between sovereign bonds, using Euro area data. There is a common trend in yield differentials, which is correlated with a measure of aggregate risk. In contrast, liquidity differentials display sizeable heterogeneity and no common factor. We propose a simple model with endogenous liquidity demand, where a bond's liquidity premium depends both on its transaction cost and on investment opportunities. The model predicts that yield differentials should increase in both liquidity and risk, with an interaction term of the opposite sign. Testing these predictions on daily data, we find that the aggregate risk factor is consistently priced, liquidity differentials are priced for a subset of countries, and their interaction with the risk factor is in line with the model's prediction and crucial to detect their effect.

bond markets, liquidity, risk

Abstract:
The paper explores the determinants of yield differentials between sovereign bonds, using Euro area data. There is a common trend in yield differentials, which is correlated with a measure of aggregate risk. In contrast, liquidity differentials display sizeable heterogeneity and no common factor. We propose a simple model with endogenous liquidity demand, where a bond's liquidity premium depends both on its transaction cost and on investment opportunities. The model predicts that yield differentials should increase in both liquidity and risk, with an interaction term of the opposite sign. Testing these predictions on daily data, we find that the aggregate risk factor is consistently priced, liquidity differentials are priced for a subset of countries, and their interaction with the risk factor is in line with the model's prediction and crucial to detect their effect.

Liquidity, yield differentials, bond markets

Abstract:
We explore two main questions. First, can two markets for a company's shares coexist and, if so, what determines the distribution of trading volume across them? For firms cross-listed in the U.S. we find that in most cases the U.S. market attracts a significant fraction of total trading volume, and tends to be more active when the company is based in a country that is geographically close, has low financial development and relatively poor anti-insider trading protection. Moreover, the relative size of the U.S. market is larger if the company is small, volatile and high-tech. Second, we ask whether developing an active foreign market entails lower domestic trading activity. We find that for firms based in developed markets, the domestic turnover rate increases in the wake of cross-listing and remains permanently higher. In contrast, emerging market firms tend to experience a decrease in domestic trading activity.

cross-listing, trading volume, trade creation

Abstract:
Using a large database of private firms in Italy, we analyze the determinants of initial public offerings (IPOs) by comparing the ex ante and ex post characteristics of IPOs with those of private firms. The likelihood of an IPO is increasing in the company's size and the industry's market-to-book ratio. Companies appear to go public not to finance future investments and growth, but to rebalance their accounts after high investment and growth. IPOs are also followed by lower cost of credit and increased turnover in control.

Abstract:
This paper empirically analyzes the determinants of an initial public offering (IPO) and the consequences of this decision on a company's investment and financial policy. We compare both the ex ante and the ex post characteristics of IPOs with those of a large sample of privately held companies of similar size. We find that (i) the likelihood of an IPO is positively related to the market-to-book ratio prevailing in the relevant industrial sector and to a company's size, (ii) IPOs are followed by an abnormal reduction in profitability, (iii) the new equity capital raised upon listing is not used to finance subsequent investment and growth, but to reduce leverage, (iv) going public reduces the cost of bank credit; (v) it is often associated by equity sales by controlling shareholders, and is followed by a higher turnover of control than for other companies.

Abstract:
We analyze the welfare implications of liquidity constraints for households in an overlapping generations model with growth. In a closed economy with exogenous technical progress, liquidity constraints reduce welfare if the economy is dynamically inefficient. But if it is dynamically efficient, some degree of financial repression is required to maximize steady-state utility, even though some generations are hurt in the transition. With endogenous technical progress, financial repression may increase welfare even along the transition path, thus leading to a Pareto improvement. In this case the optimal degree of financial repression increases as the economy grows.

Abstract:
We analyze the welfare implications of liquidity constraints for households in an overlapping generations model with growth. In a closed economy with exogenous technical progress, liquidity constraints reduce welfare if the economy is dynamically inefficient. But if it is dynamically efficient, some degree of financial repression is required to maximize steady-state utility, even though some generations are hurt in the transition. With endogenous technical progress, financial repression may increase welfare even along the transition path, thus leading to a Pareto improvement. In this case the optimal degree of financial repression increases as the economy grows.

Abstract:
The regulations that shape the design and operations of corporations and credit and securities markets differ vastly from country to country. In addition, similar regulations are often unequally enforced in different countries. Economists still have an imperfect understanding of why these international differences exist and of whether they tend to persist over time. However, a recent strand of research has shown that some progress on these issues can be made using the approach of the new political economy, which models regulation and its enforcement as the result of the balance of power between social and economic constituencies. In this paper we offer a first assessment of the results and potential of this approach in three fields: corporate finance, banking, and securities markets.

Abstract:
The regulations that shape the design and the operations of corporations, credit and securities markets differ vastly from country to country. In addition, similar regulations are often unequally enforced in different countries. Economists still have an imperfect understanding of why these international differences exist and of whether they tend to persist over time. A recent strand of research has shown that some progress on these issues can be made using the approach of the new political economy, which models regulation and its enforcement as the result of the balance of power between social and economic constituencies. In this Paper we offer a first assessment of the results and potential of this approach in three fields: corporate finance, banking and securities markets.
development, privatization

Political economy, shareholder protection, corporate governance, bankruptcy law, credit market regulation, financial

Abstract:
Entrepreneurs may be constrained by the law to bequeath a minimal stake to non-controlling heirs. The size of this stake can reduce investment in family firms, by reducing the future income they can pledge to external financiers. Using a purpose-built indicator of the permissiveness of inheritance law and data for 10,245 firms from 32 countries over the 1990-2006 interval, we find that stricter inheritance law is associated with lower investment in family firms, while it leaves investment unaffected in non-family firms. Moreover, as predicted by the model, inheritance law affects investment only in family firms that experience a succession.

Succession, Family Firms, Inheritance Law, Growth, Investment

Abstract:
When a customer can borrow from several competing banks, multiple lending raises default risk. If creditor rights are poorly protected, this contractual externality can generate novel equilibria with strategic default and rationing, in addition to equilibria with excessive lending or non-competitive rates. Information sharing among banks about clients' past indebtedness lowers interest and default rates, improves access to credit (unless the value of collateral is very uncertain) and may act as a substitute for creditor rights protection. If information sharing also allows banks to monitor their clients' subsequent indebtedness, the credit market may achieve full efficiency.

information sharing, multiple-bank lending, creditor rights, seniority, non-exclusivity

Abstract:
The current diversity in the degree of financial development across the EU can be a great opportunity at a time where this area is poised to become increasingly financially integrated. Integration should accelerate the development of the most backward financial markets, and allow companies from these countries to access more sophisticated credit and security markets. In line with a large recent literature, it is reasonable to expect that financial integration will have a 'growth dividend' in Europe. This paper attempts to quantify this growth dividend, using both industry and firm-level data to estimate the empirical relationship between financial market development and growth, and to gauge how it will distribute itself across countries and sectors.

Abstract:
The diversity in the current degree of financial development across the EU can be a great opportunity at a time where this area is poised to become increasingly financially integrated. Integration should accelerate the development of the most backward financial markets, and allow companies from these countries to access more sophisticated credit and security markets. In line with a large recent literature, it is reasonable to expect that financial integration will have a 'growth dividend' in Europe. This Paper attempts to quantify this growth dividend, using both industry and firm-level data to estimate the empirical relationship between financial market development and growth, and to gauge how it will distribute itself across countries and sectors.

Financial integration, financial development, growth

Abstract:
According to conventional wisdom, a fiscal consolidation is likely to contract real aggregate demand. It has often been argued, however, that this conclusion is misleading as it neglects the role of expectations of future policy: if the fiscal consolidation is read by the private sector as a signal that the share of government spending in GDP is being permanently reduced, households will revise upwards their estimate of their permanent income, and will raise current and planned consumption.
Only the empirical evidence can sort out which of these two contending views about fiscal policy is more appropriate -- i.e. how often the contractionary effect of a fiscal consolidation prevails on its expansionary expectational effect. This paper brings new evidence to bear on this issue drawing on the European exercise in fiscal rectitude of the 1980s, and focusing, in particular, on its two most extreme cases -- Denmark and Ireland.
We find that at least in the experience of these two countries the expectations' view has a serious claim to empirical relevance.

Abstract:
In earlier work we documented two episodes in which a sharp fiscal consolidation was associated with a very large expansions in private domestic demand. In this paper we draw on further evidence to investigate if and when fiscal policy changes can have such non-Keynesian effects. In the first part of the paper, we analyze cross-country data for 19 OECD countries. In the second, we concentrate on the Swedish fiscal expansion of the early 1990s. The cross-country evidence on private consumption confirms that fiscal policy changes - both contractions and expansions - can have non-Keynesian effects if they are sufficiently large and persistent, and suggests that these effects can result not only from changes in public consumption but to some extent also from changes in taxes and transfers. The latter result is consistent with the Swedish experience where a decrease in net taxes (with almost no change in public consumption) was associated with a dramatic fall in private domestic demand. Our evidence and that from other studies agree that during the Swedish fiscal expansion of the early 1990s a large negative error appears in the consumption function. There is less consensus about how this error should be interpreted, but it is clear that the most obvious candidates (wealth effects and after-tax real interest rate effects) are not sufficient to explain it. This error may reflect a large downward revision of permanent disposable income, which affected the consumption of Swedish households over and beyond the negative effects of the drop in real asset prices. We suggest that this revision in permanent income may have been triggered, at least partly, by the fiscal expansion of the early 1990s.

Abstract:
Data revisions and the availability of a longer sample offer the opportunity to reconsider the empirical findings that suggest that in the OECD countries national saving responds non-monotonically to fiscal policy. The paper confirms that the circumstance most likely to give rise to a non-monotonic response of national saving to a fiscal impulse is a "large and persistent impulse," defined as one in which the full employment surplus, as a percent of potential output, changes by at least 1.5 percentage points per year over a two-year period. This particular circumstance remains the only statistically significant one even when we allow for non-monotonic responses to arise when public debt is growing rapidly or interest rate spreads are widening. We find that non-monotonic responses are similar for fiscal contractions and expansions. In particular, an increase in net taxes has no effect on national saving during large fiscal contractions or expansions. For government consumption there is a large, albeit in some specifications less then complete, offset during expansions or contractions.

Fiscal policy, national saving

Abstract:
Data revisions and the availability of a longer sample offer the opportunity to reconsider the empirical findings that suggest that in the OECD countries national saving responds non-monotonically to fiscal policy. The paper confirms that the circumstance most likely to give rise to a non-monotonic response of national saving to a fiscal impulse is a "large and persistent impulse", defined as one in which the full employment surplus, as a percent of potential output, changes by at least 1.5 percentage points per year over a two-year period. This particular circumstance remains the only statistically significant one even when we allow for non-monotonic responses to arise when public debt is growing rapidly or interest rate spreads are widening. We find that non-monotonic responses are similar for fiscal contractions and expansions. In particular, an increase in net taxes has no effect on national saving during large fiscal contractions or expansions. For government consumption there is a large, albeit in some specifications less then complete, offset during expansions or contractions.

Abstract:
The underpricing of initial public offerings (IPOs) is generally explained with asymmetric information and risk. We complement these traditional explanations with a new theory where investors worry also about the after-market illiquidity that may result from asymmetric information after the IPO. The less liquid the aftermarket is expected to be, and the less predictable its liquidity, the larger will be the IPO underpricing. Our model blends such liquidity concerns with adverse selection and risk as motives for underpricing. The model's predictions are supported by evidence for 337 British IPOs effected between 1998 and 2000. Using various measures of liquidity, we find that expected after-market liquidity and liquidity risk are important determinants of IPO underpricing.

Abstract:
Most stock exchange regulators around the world reacted to the financial crisis of 2007-2009 by imposing bans or regulatory constraints on short-selling by market participants. We use the large amount of evidence generated by these regime changes to investigate their effects on liquidity, price discovery and stock returns. Since bans were enacted and lifted at different dates in different countries, and in some countries applied to financial stocks only, we identify their effects with panel data techniques, and find that bans (i) were detrimental for liquidity, especially for stocks with small market capitalization and high volatility; (ii) slowed down price discovery, especially in bear market phases, and (iii) failed to support stock prices.

Abstract:
No abstract is available for this paper.

Abstract:
If the private benefits of control are high and management owns a small equity stake, managers and workers are natural allies. Two forces are at play. First, managers can transform employees into a 'poison pill' through generous long-term labour contracts and thereby reduce the firm's attractiveness to a raider. Second, employees act as 'white squires' for the incumbent managers: to protect their high wages, they resist hostile takeovers, by refusing to sell their shares to the raider or by lobbying against the takeover. The model is consistent with available empirical findings, and also yields new predictions.

Corporate control, private benefits, takeovers, ESOPs, employment protection

Abstract:
The cost of enforcing contracts is a key determinant of market performance. We document this point with reference to the credit market in a model of opportunistic debtors and inefficient courts. According to the model, improvements in judicial efficiency should reduce credit rationing and increase lending, with an ambiguous effect on interest rates that depends on banking competition and on the type of judicial reform. These predictions are supported by panel data on Italian provinces and by cross-country evidence. In Italian provinces with longer trials or large backlogs of pending trials, credit is less widely available. International evidence also shows that the depth of mortgage markets is inversely related to the costs of mortgage foreclosure and other proxies for judicial inefficiency.

Credit market, enforcement, interest rates, judicial efficiency

Abstract:
This paper presents a political economy model where there is mutual feedback between investor protection and stock market development. Better investor protection induces companies to issue more equity and thereby leads to a broader stock market. In turn, equity issuance expands the shareholder base and increases support for shareholder protection. This feedback loop can generate multiple equilibria, with investor protection and stock market size being positively correlated across equilibria. The model's predictions are tested on panel data for 47 countries over 1993-2002, controlling for country and year effects and endogeneity issues. We also document international convergence in shareholder protection to best-practice standards, and show that it is correlated with cross-border M&A activity, consistent with the model.

Political economy, shareholder protection, corporate governance, stock market development

Abstract:
Several recent studies suggest that the response of national saving to fiscal policy may be non-linear. In this paper we use two data sets to search for the circumstances in which such non-linear responses may arise: a sample of OECD countries used in previous studies, and sample of developing countries, using more recent World Bank data. We find that in both samples non-linear effects tend to be associated with large and persistent fiscal impulses. In the OECD sample the non-linearity of the response is stronger for fiscal contractions than for expansions. An increase in net taxes has no effect on national saving during large fiscal contractions, while it has a positive effect in less pronounced contractions. High or rapidly growing public debt does not appear to be a good predictor of non-linear effects. In the World Bank sample of developing countries, non-linearities in the response national saving to fiscal policy are not limited to large fiscal contractions, and also tend to occur in periods in which debt is accumulating rapidly, regardless of its initial level.

Abstract:
The paper explores the determinants of yield differentials between sovereign bonds in the Euro area. There is a common trend in yield differentials, which is correlated with a measure of aggregate risk. In contrast, liquidity differentials display sizeable heterogeneity and no common factor. We propose a simple model with endogenous liquidity demand, where a bond's liquidity premium depends both on its transaction cost and on investment opportunities. The model predicts that yield differentials should increase in both liquidity and risk, with an interaction term of the opposite sign. Testing these predictions on daily data, we find that the aggregate risk factor is consistently priced, liquidity differentials are priced for a subset of countries, and their interaction with the risk factor is in line with the model's prediction and crucial to detect their effect.

Bond yields, euro area, liquidity, risk

Abstract:
When a customer can borrow from several competing banks, multiple lending raises default risk. If creditor rights are poorly protected, this contractual externality can generate novel equilibria with strategic default and rationing, in addition to equilibria with excessive lending or non-competitive rates. Information sharing among banks about clients' past indebtedness lowers interest and default rates, improves access to credit (unless the value of collateral is very uncertain) and may act as a substitute for creditor rights protection. If information sharing also allows banks to monitor their clients' subsequent indebtedness, the credit market may achieve full efficiency.

creditor rights, information sharing, multiple-bank lending, non-exclusivity, seniority

Abstract:
We analyze corporate fraud in a model in which managers have superior information but are biased against liquidation, because of their private benefits from empire building. This may induce them to misreport information and even bribe auditors when liquidation would be value-increasing. To curb fraud, shareholders optimally choose auditing quality and the performance sensitivity of managerial pay, taking external corporate governance and auditing regulation into account. For given managerial pay, it is optimal to rely on auditing when external governance is in an intermediate range. When both auditing and incentive pay are used, worse external governance must be balanced by heavier reliance on both of those incentive mechanisms. In designing managerial pay, equity can improve managerial incentives while stock options worsen them.

accounting fraud, auditing, corporate governance, managerial compensation, regulation

Abstract:
The single most important policy-induced innovation in the international financial system since the collapse of the Bretton-Woods regime is the institution of the European Monetary Union. This paper provides an account of how the process of financial integration has promoted financial development in the euro area. It starts by defining financial integration and how to measure it, analyzes the barriers that can prevent it and the effects of their removal on financial markets, and assesses whether the euro area has actually become more integrated. It then explores to which extent these changes in financial markets have influenced the performance of the euro-area economy, that is, its growth and investment, as well as its ability to adjust to shocks and to allow risk-sharing. The paper concludes analyzing further steps that are required to consolidate financial integration and enhance the future stability of financial markets.

EMU, financial market integration

Abstract:
We analyze optimal policy design when firms' research activity may lead to socially harmful innovations. Public intervention, affecting the expected profitability of innovation, may both thwart the incentives to undertake research (average deterrence) and guide the use to which innovation is put (marginal deterrence). We show that public intervention should become increasingly stringent as the probability of social harm increases, switching first from laissez-faire to a penalty regime, then to a lenient authorization regime, and finally to a strict one. In contrast, absent innovative activity, regulation should rely only on authorizations, and laissez-faire is never optimal. Therefore, in innovative industries regulation should be softer.

authorization, deterrence, innovation, liability for harm, safety regulation

Abstract:
Stricter laws require more incisive and costlier enforcement. Since enforcement activity depends both on available tax revenue and the honesty of officials, the optimal legal standard of a benevolent government is increasing in per-capita income and decreasing in officials' corruption. In contrast to the "tollbooth view" of regulation, the standard chosen by a self-interested government is a non-monotonic function of officials' corruption, and can be either lower or higher than that chosen by a benevolent regulator. International evidence on environmental regulation show that standards correlate positively with per-capita income, and negatively with corruption, consistently with the model's predictions for benevolent governments

corruption, enforcement, legal standards, tollbooth view

Abstract:
We analyze the location of stock trading for firms with a US cross-listing. The fraction of trading that occurs in the United States tends to be larger for companies from countries that are geographically close to the United States and feature low financial development and poor insider trading protection. For companies based in developed countries, trading volume in the United States is larger if the company is small, volatile, and technology-oriented, while this does not apply to emerging country firms. The domestic turnover rate increases in the cross-listing year and remains higher for firms based in developed markets, but not for emerging market firms. Domestic trading volume actually declines for companies from countries with poor enforcement of insider trading regulation.

G15, G30

Abstract:
We analyze the political determinants of investor and employment protection. Our model predicts that proportional electoral systems are conducive to weaker investor protection and stronger employment protection than majoritarian systems. This prediction is consistent with international panel data evidence. The proportionality of the voting system is significantly and negatively correlated with shareholder protection in a panel of 45 countries, and positively correlated with employment protection in a panel of 21 OECD countries. Other political variables also affect regulatory outcomes, especially for the labor market. The origin of the legal system has some additional explanatory power only for employment protection.

Abstract:
This paper documents aggregate trends in the foreign listings of companies, and analyzes their distinctive prelisting characteristics and postlisting performance. In 1986-1997, many European companies listed abroad, mainly on U.S. exchanges, while the number of U.S. companies listed in Europe decreased. European companies that cross-list tend to be large and recently privatized firms, and expand their foreign sales after listing abroad. They differ sharply depending on where they cross-list: The U.S. exchanges attract high-tech and export-oriented companies that expand rapidly without significant leveraging. Companies cross-listing within Europe do not grow unusually fast, and increase their leverage after cross-listing.

Abstract:
This paper complements the analysis of the decision to go public contained in Pagano et al. (1995). We compare a larger set of Italian initial public offerings, including holding companies, with size-matched private companies. Even in this larger sample we find evidence that: (i) the new equity capital raised upon listing is not used to finance subsequent investment and growth; (ii) going public reduces the cost of credit; (iii) it is often associated with equity sales by controlling shareholders, and is followed by a higher turnover of control than for other companies. A novel finding is that the funds raised are used to purchase stakes in other companies and other financial assets.

Initial public offering, Going public, Stock market

Abstract:
Many economists argue that the primary economic function of banks is to provide cheap credit, and to facilitate this function, they advocate the strict protection of creditor rights. But banks can serve another important economic function: by screening projects they can reduce the number of project failures and thus mitigate their private and social costs. In this article we show that because of market imperfections in the banking industry, strong creditor protection may lead to market equilibria in which cheap credit is inappropriately emphasized over project screening. Restrictions on collateral requirements and the protection of debtors in bankruptcy may redress this imbalance and increase credit-market efficiency.

Abstract:
If banks have an informational monopoly about their clients, borrowers may curtail their effort level for fear of being exploited via high interest rates in the future. Banks can correct this incentive problem by committing to share private information with other lenders. The fiercer competition triggered by information sharing lowers future interest rates and future profits of banks. But, provided banks retain an initial informational advantage, their current profits are raised by the borrowers' higher effort. This trade-off determines the banks' willingness to share information. Their decision affects credit market competition, interest rates, volume of lending, and social welfare.