Tax lien conference held in Louisville, Kentucky educating individuals of the tax lien industry and the investment of tax liens.
Can a government credibly promise not to bailout firms whose failure would have major negative systemic consequences? Our analysis of Korea’s 1997–98 crisis suggests an answer: No. Despite a general “no bailout” policy during the crisis, the largest Korean corporate groups—facing severe financial and governance problems—could still borrow heavily from households by issuing bonds at prices implying very low expected default risk. The evidence suggests “too big to fail” beliefs were not eliminated by government promises because investors believed that this policy was not time consistent. Subsequent bailouts confirmed the market view that creditors would be protected.
Multiple bank lending induces borrowers to take too much debt when creditor rights are poorly protected; moreover, banks wish to engage in opportunistic lending at their competitors’ expenses if borrowers’ collateral is sufficiently risky. These incentives lead to credit rationing and positive-profit interest rates, possibly exceeding the monopoly level. If banks share information about past debts and seniority via credit reporting systems, the incentive to overborrow is mitigated: interest and default rates decrease; credit access improves if the value of collateral is not very volatile, but worsens otherwise. Recent empirical studies report evidence consistent with these predictions. The article also shows that private and social incentives to share information are not necessarily aligned.
This article examines enterprises funded by government-sponsored venture capitalists (GVCs). We find that enterprises funded by both GVCs and private venture capitalists (PVCs) obtain more investment than enterprises funded purely by PVCs, and much more than those funded purely by GVCs. Also, markets with more GVC funding have more VC funding per enterprise and more VC-funded enterprises, suggesting that GVC finance largely augments rather than displaces PVC finance. There is also a positive association between mixed GVC/PVC funding and successful exits, as measured by initial public offerings (IPOs) and acquisitions, attributable largely to the additional investment.
In December 2006, the Securities and Exchange Commission issued new rules that require enhanced disclosure on how firms tie CEO compensation to performance. We use this new available data to study the terms of performance-based awards in CEO compensation contracts in S&P 500 firms. We observe large variations in the choice of performance measures. Our evidence is consistent with predictions from optimal contracting theories: firms rely on performance measures that are more informative of CEO actions.
This article discusses the effects of small banks on economic growth. We first theoretically show that small banks operating at a regional level can spur local economic growth. As compared with big interregional banks, small regional banks are more effective in promoting local economic growth, especially in regions with lower initial endowments and severe credit rationing. We then test the model predictions using a sample of German banks and corresponding regional statistics. We find that small regional banks are more important funding providers in regions with low access to finance. The empirical results support the theoretical hypotheses.
We propose the realized systemic risk beta as a measure of financial companies’ contribution to systemic risk, given network interdependence between firms’ tail risk exposures. Conditional on statistically pre-identified network spillover effects and market and balance sheet information, we define the realized systemic risk beta as the total time-varying marginal effect of a firm’s Value-at-risk (VaR) on the system’s VaR. Statistical inference reveals a multitude of relevant risk spillover channels and determines companies’ systemic importance in the US financial system. Our approach can be used to monitor companies’ systemic importance, enabling transparent macroprudential supervision.
We exploit the US Survey of Consumer Finances from 1998 to 2010 to study households’ portfolio risk. We compare alternative measures of ex-ante risk, based on a financial portfolio including deposits, bonds, and stocks, or a broader portfolio also including real estate, business wealth, and related debt. The measures provide different rankings of portfolio risk, but they all show a skewed distribution with many households bearing limited risk. Large wealth holdings lead to more aggressive risk positions. Moreover, risk falls at the beginning of the sample period and rises at the end, together with the business cycle.
Casting Doubt on the Predictability of Stock Returns in Real Time: Bayesian Model Averaging using Realistic Priors
Previous studies have identified several variables that would have predicted future stock returns, though other studies suggest these results may be due to data snooping. To guard against data snooping, researchers have suggested use of Bayesian model averaging (BMA) to account for the uncertainty about prediction models. In common with other researchers, I find evidence of predictability during time periods when a hypothetical investor uses BMA with no restrictions on what variables may be included in the model. However, when the hypothetical investor is limited to using only variables whose predictive ability would have been known at the time of the forecast, predictability disappears. Moreover, predictability also disappears when data are updated through 2010, even without constraints on variable use. The results cast doubt on whether stock returns were ever predictable in real time and also suggest that returns may no longer be predictable even if real-time constraints are removed.
This article studies the impact of a redistributive tax system on consumption, portfolio decisions, and asset prices in a dynamic general equilibrium model. Poorer agents, which receive more in transfers than they pay in taxes, optimally reduce their exposure to equity, because the transfer income they receive is subject to stock market risk. This article thus provides a novel explanation for the low stock market participation rates of poorer investors.