Working paper series / Johann-Wolfgang-Goethe-Universität Frankfurt am Main, Fachbereich Wirtschaftswissenschaften : Finance & Accounting
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131
The question whether the adoption of International Financial Reporting Standards (IFRS) will result in measurable economic benefits is of special policy relevance in particular given the European Union’s decision to require the application of IFRS by listed companies from 2005/2007. In this paper, I investigate the common con-jecture that internationally recognized high quality reporting standards (IAS/IFRS or US-GAAP) reduce the cost of capital of adopting firms (e.g. Levitt 1998; IASB 2002). Building on Leuz/Verrecchia (2000), I use a set of German firms which pre-adopted such standards before 2005, but investigate the potential economic benefits by analyzing their expected cost of equity capital utilizing and customizing avail-able implied estimation methods (e.g. Gebhardt/Lee/Swaminathan 2001, Easton/Taylor/Shroff/Sougiannis 2002, Easton 2004). Evidence from a sample of about 13,000 HGB, 4,500 IAS/IFRS and 3,000 US-GAAP firm-month observations in the period 1993-2002 generally fails to document lower expected cost of equity capital and therefore measurable economic benefits for firms applying IAS/IFRS or US-GAAP. Accordingly, I caution to state that reporting under internationally accepted standards, per se, lowers the cost of equity capital of adopting firms.
130
EU financial integration : is there a 'Core Europe'? ; evidence from a cluster-based approach
(2005)
Numerous recent studies, e.g. EU Commission (2004a), Baele et al. (2004), Adam et al.(2002), and the research pooled in ECB-CFS (2005), Gaspar, Hartmann, and Sleijpen(2003), have documented progress in EU financial integration from a micro-level view.This paper contributes to this research by identifying groups of financially integratedcountries from a holistic, macro-level view. It calculates cross-sectional dispersions, andinnovates by applying an inter-temporal cluster analysis to eight euro area countries for the period 1995-2002. The indicators employed represent the money, government bond and credit markets. Our results show that euro countries were divided into two stable groups of financially more closely integrated countries in the pre-EMU period. Back then, geographic proximity and country size might have played a role. This situation has changed remarkably with the euro's introduction. EMU has led to a shake-up both in the number and composition of groups. The evidence puts a question mark behin d using Germany as a benchmark in the post-EMU period. The ¯ndings suggest as well that ¯nancial integration takes place in waves. Stable periods and periods of intense transition alternate. Based on the notion of 'maximum similarity', the results suggest that there exist 'maximum similarity barriers'. It takes extraordinary events, such as EMU, to push the degree of ¯nancial integration beyond these barriers. The research encourages policymakers to move forward courageously in the post-FSAP era, and provides comfort that the substantial di®erences between the current and potentially new euro states can be overcome. The analysis could be extended to the new EU member countries, to the global level, and to additional indicators.
35
Major differences between national financial systems might make a common monetary policy difficult. As within Europe, Germany and the United Kingdom differ most with respect to their financial systems, the present paper addresses its topic under the assumption that the United Kingdom is already a part of EMU. Employing a comprehensive concept of a financial system, the author shows that there are indeed profound differences between the national financial systems of Germany and the United Kingdom. But he argues that these differences are not likely to create great problems for a common monetary policy. In the context of the present paper, one important difference between the two financial systems refers to the structure of the respective financial sector and, as a consequence, to the strength with which a given monetary policy impulse set by the central bank is passed on to the financial sector. The other important difference refers to the typical relationship between the banks and the business sector in each country which determines to what extent the financial sectors and especially the banks pass on pressure exerted on them by a monetary policy authority to their clients in their national business sector. In Germany, the central bank has a stronger influence on the financial sector than in England, while, for systemic reasons, German banks tend to soften monetary policy pressures on their customers more than British banks do. As far as the transmission of a restrictive monetary policy of the ECB to the real economy is concerned, these two differences tend to offset each other. This is good news for the advocates of a monetary union as it eases the task of the ECB when it comes to determining the strength of its monetary policy measures.
58
Although the world of banking and finance is becoming more integrated every day, in most aspects the world of financial regulation continues to be narrowly defined by national boundaries. The main players here are still national governments and governmental agencies. And until recently, they tended to follow a policy of shielding their activities from scrutiny by their peers and members of the academic community rather than inviting critical assessments and an exchange of ideas. The turbulence in international financial markets in the 1980s, and its impact on U.S. banks, gave rise to the notion that academics working in the field of banking and financial regulation might be in a position to make a contribution to the improvement of regulation in the United States, and thus ultimately to the stability of the entire financial sector. This provided the impetus for the creation of the “U.S. Shadow Financial Regulatory Committee”. In the meantime, similar shadow committees have been founded in Europe and Japan. The specific problems associated with financial regulation in Europe, as well as the specific features which distinguish the European Shadow Financial Regulatory Committee from its counterparts in the U.S. and Japan, derive from the fact that while Europe has already made substantial progress towards economic and political integration, it is still primarily a collection of distinct nation-states with differing institutional set-ups and political and economic traditions. Therefore, any attempt to work towards a European approach to financial regulation must include an effort to promote the development of a European culture of co-operation in this area, and this is precisely what the European Shadow Financial Regulatory Committee (ESFRC) seeks to do. In this paper, Harald Benink, chairman of the ESFRC, and Reinhard H. Schmidt, one of the two German members, discuss the origin, the objectives and the functioning of the committee and the thrust of its recommendations.
075
Since the beginning of the 1990s, it has been widely expected that the implementation of the European Single Market would lead to a rapid convergence of Europe’s financial systems. In the present paper we will show that at least in the period prior to the introduction of the common currency this expected convergence did not materialise. Our empirical studies on the significance of various institutions within the financial sectors, on the financing patterns of firms in various countries and on the predominant mechanisms of corporate governance, which are summarised and placed in a broader context in this paper, point to few, if any, signs of a convergence at a fundamental or structural level between the German, British and French financial systems. The German financial system continues to appear to be bank-dominated, while the British system still appears to be capital market-dominated. During the period covered by the research, i.e. 1980 – 1998, the French system underwent the most far-reaching changes, and today it is difficult to classify. In our opinion, these findings can be attributed to the effects of strong path dependencies, which are in turn an outgrowth of relationships of complementarity between the individual system components. Projecting what we have observed into the future, the results of our research indicate that one of two alternative paths of development is most likely to materialise: either the differences between the national financial systems will persist, or – possibly as a result of systemic crises – one financial system type will become the dominant model internationally. And if this second path emerges, the Anglo-American, capital market-dominated system could turn out to be the “winner”, because it is better able to withstand and weather crises, but not necessarily because it is more efficient.
151
Despite a lot of re-structuring and many innovations in recent years, the securities transaction industry in the European Union is still a highly inefficient and inconsistently configured system for cross-border transactions. This paper analyzes the functions performed, the institutions involved and the parameters concerned that shape market and ownership structure in the industry. Of particular interest are microeconomic incentives of the main players that can be in contradiction to social welfare. We develop a framework and analyze three consistent systems for the securities transaction industry in the EU that offer superior efficiency than the current, inefficient arrangement. Some policy advice is given to select the 'best' system for the Single European Financial Market.
120
Efficient systems for the securities transaction industry : a framework for the European Union
(2003)
This paper provides a framework for the securities transaction industry in the EU to understand the functions performed, the institutions involved and the parameters concerned that shape market and ownership structure. Of particular interest are microeconomic incentives of the industry players that can be in contradiction to social welfare. We evaluate the three functions and the strategic parameters - the boundary decision, the communication standard employed and the governance implemented - along the lines of three efficiency concepts. By structuring the main factors that influence these concepts and by describing the underlying trade-offs among them, we provide insight into a highly complex industry. Applying our framework, the paper describes and analyzes three consistent systems for the securities transaction industry. We point out that one of the systems, denoted as 'contestable monopolies', demonstrates a superior overall efficiency while it might be the most sensitive in terms of configuration accuracy and thus difficult to achieve and sustain.
57
We present an empirical study focusing on the estimation of a fundamental multi-factor model for a universe of European stocks. Following the approach of the BARRA model, we have adopted a cross-sectional methodology. The proportion of explained variance ranges from 7.3% to 66.3% in the weekly regressions with a mean of 32.9%. For the individual factors we give the percentage of the weeks when they yielded statistically significant influence on stock returns. The best explanatory power – apart from the dominant country factors – was found among the statistical constructs „success“ and „variability in markets“.