Working paper series / Johann-Wolfgang-Goethe-Universität Frankfurt am Main, Fachbereich Wirtschaftswissenschaften : Finance & Accounting
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118
A financial system can only perform its function of channelling funds from savers to investors if it offers sufficient assurance to the providers of the funds that they will reap the rewards which have been promised to them. To the extent that this assurance is not provided by contracts alone, potential financiers will want to monitor and influence managerial decisions. This is why corporate governance is an essential part of any financial system. It is almost obvious that providers of equity have a genuine interest in the functioning of corporate governance. However, corporate governance encompasses more than investor protection. Similar considerations also apply to other stakeholders who invest their resources in a firm and whose expectations of later receiving an appropriate return on their investment also depend on decisions at the level of the individual firm which would be extremely difficult to anticipate and prescribe in a set of complete contingent contracts. Lenders, especially long-term lenders, are one such group of stakeholders who may also want to play a role in corporate governance; employees, especially those with high skill levels and firm-specific knowledge, are another. The German corporate governance system is different from that of the Anglo-Saxon countries because it foresees the possibility, and even the necessity, to integrate lenders and employees in the governance of large corporations. The German corporate governance system is generally regarded as the standard example of an insider-controlled and stakeholder-oriented system. Moreover, only a few years ago it was a consistent system in the sense of being composed of complementary elements which fit together well. The first objective of this paper is to show why and in which respect these characterisations were once appropriate. However, the past decade has seen a wave of developments in the German corporate governance system, which make it worthwhile and indeed necessary to investigate whether German corporate governance has recently changed in a fundamental way. More specifically one can ask which elements and features of German corporate governance have in fact changed, why they have changed and whether those changes which did occur constitute a structural change which would have converted the old insider-controlled system into an outsider-controlled and shareholder-oriented system and/or would have deprived it of its former consistency. It is the second purpose of this paper to answer these questions.
117
This paper studies a setting in which a risk averse agent must be motivated to work on two tasks: he (1) evaluates a new project and, if adopted, (2) manages it. While a performance measure which is informative of an agent´s action is typically valuable because it can be used to improve the risk sharing of the contract, this is not necessarily the case in this two-task setting. I provide a sufficient condition under which a performance measure that is informative of the second task is worthless for contracting despite the agent being risk averse. This shows that information content is a necessary but not a sufficient condition for a performance measure to be valuable.
116
Capital rationing is an empirically well-documented phenomenon. This constraint requires managers to make investment decisions between mutually exclusive investment opportunities. In a multiperiod agency setting, this paper analyses accounting rules that provide managerial incentives for efficient project selection. In order to motivate a shortsighted manager to expend unobservable effort and to make efficient investment decisions, the principal sets up an incentive scheme based on residual income (e.g. EVATM). The paper shows that income smoothing generates a trade-off between agency costs resulting from differences in discount rates and the costs associated with the "congruity" of residual earnings.
115
Under a new Basel capital accord, bank regulators might use quantitative measures when evaluating the eligibility of internal credit rating systems for the internal ratings based approach. Based on data from Deutsche Bundesbank and using a simulation approach, we find that it is possible to identify strongly inferior rating systems out-of time based on statistics that measure either the quality of ranking borrowers from good to bad, or the quality of individual default probability forecasts. Banks do not significantly improve system quality if they use credit scores instead of ratings, or logistic regression default probability estimates instead of historical data. Banks that are not able to discriminate between high- and low-risk borrowers increase their average capital requirements due to the concavity of the capital requirements function.
114
Open-end real estate funds (so called “Offene Immobilienfonds”) play a major role in the German market for securitised real estate investments. Such funds are pools of money from many investors, which are invested in real estate by special investment management companies. This study seeks to identify the risk and return profile of this investment vehicle (before and after income taxes), to compare them with those of other major asset classes, and to provide implications for their appropriate role in a mixed-asset portfolio. Addition-ally, an overview of the institutional architecture and role of German open-end real estate funds is given. Empirical evidence suggests that the financial characteristics of open-end real estate funds are in many respects similar to those reported for direct real estate invest-ments. Accordingly, German open-end real estate funds qualify for medium and long-term investment horizons, rather than for shorter holding periods.
111
What constitutes a financial system in general and the German financial system in particular?
(2003)
This paper is one of the two introductory chapters of the book "The German Financial System". It first discusses two issues that have a general bearing on the entire book, and then provides a broad overview of the German financial system. The first general issue is that of clarifying what we mean by the key term "financial system" and, based on this definition, of showing why the financial system of a country is important and what it might be important for. Obviously, a definition of its subject matter and an explanation of its importance are required at the outset of any book. As we will explain in Section II, we use the term "financial system" in a broad sense which sets it clearly apart from the narrower concept of the "financial sector". The second general issue is that of how financial systems are described and analysed. Obviously, the definition of the object of analysis and the method by which the object is to be analysed are closely related to one another. The remainder of the paper provides a general overview of the German financial system. In addition, it is intended to provide a first indication of how the elements of the German financial system are related to each other, and thus to support our claim from Section II that there is indeed some merit in emphasising the systemic features of financial systems in general and of the German financial system in particular. The chapter concludes by briefly comparing the general characteristics of the German financial system with those of the financial systems of other advanced industrial countries, and taking a brief look at recent developments which might undermine the "systemic" character of the German financial system.
110
An economy in which deposit-taking banks of a Diamond/ Dybvig style and an asset market coexist is modelled. Firstly, within this framework we characterize distinct financial systems depending on the fraction of households with direct investment opportunities that are less efficient than those available to banks. With this fraction comparatively low, the evolving financial system can be interpreted as market-oriented. In this system, banks only provide efficient investment opportunities to households with inferior investment alternatives. Banks are not active in the secondary financial market nor do they provide any liquidity insurance to their depositors. Households participate to a large extent in the primary as well as in the secondary financial markets. In the other case of a relatively high fraction of households with inefficient direct investment opportunities, a bank-dominated financial system arises, in which banks provide liquidity transformation, are active in secondary financial markets and are the only player in primary markets, while households only participate in secondary financial markets. Secondly, we analyze the effect a run on a single bank has on the entire financial system. Interestingly, we can show that a bank run on a single bank causes contagion via the financial market neither in market-oriented nor in extremely bank-dominated financial systems. But in only moderately bank-dominated (or hybrid) financial systems fire sales of long-term financial claims by a distressed bank cause a sudden drop in asset prices that precipitates other banks into crisis.
109
As past research suggest, currency exposure risk is a main source of overall risk of international diversified portfolios. Thus, controlling the currency risk is an important instrument for controlling and improving investment performance of international investments. This study examines the effectiveness of controlling the currency risk for international diversified mixed asset portfolios via different hedge tools. Several hedging strategies, using currency forwards and currency options, were evaluated and compared with each other. Therefore, the stock and bond markets of the, United Kingdom, Germany, Japan, Switzerland, and the U.S, in the time period of January 1985 till December 2002, are considered. This is done form the point of view of a German investor. Due to highly skewed return distributions of options, the application of the traditional mean-variance framework for portfolio optimization is doubtful when options are considered. To account for this problem, a mean-LPM model is employed. Currency trends are also taken into account to check for the general dependence of time trends of currency movements and the relative potential gains of risk controlling strategies.
108
Past research suggests that international real estate markets show return characteristics and interrelationships with other asset classes, which probably qualify them as an interesting component of national and international asset allocation decisions. However, the special characteristics of real estate assets are quite distinct from that of financial assets, such as stocks and bonds. This is also the case for real estate return distributions. Therefore, the proper integration of real estate markets into asset allocation decisions requires profound understanding of real estate returns' distributional characteristics .
Because of the particular characteristics of real estate, representing real estate markets through reliable a time-series is a complex task. Consequently, reliable real estate indices with a sufficiently long history in major international real estate markets are only scarcely available. Most of the research that has been done on real estate returns was done for the U.K. and U.S., where eligible indices exist. On the other hand, in other important real estate markets, such as Germany, either little or no research has been perfoimed.
In this analysis, the methodology of Maurer, Sebastian and Stephan (2000) for indirectly deriving an appraisal-based index for the German commercial real estate market will be applied. This approach is solely based on publicly available data from German open-ended real estate investment trusts. It could also provide a solution to deriving a reliable real estate time-series for other markets.
We will extend previous analyses for the U.K. and U.S. to provide additional fundamental insights into the return characteristics of the German commercial real estate market. Despite univariate considerations, the main focus is the interrelationships between various international real estate markets, as well as between those respective markets and the international stock and bond markets.
107
Intangible assets as goodwill, licenses, research and development or customer relations become in high technology and service orientated economies more and more important. But comparing the book values of listed companies and their market capitalization the financial reports seems to fail the information needs of market participants regarding the estimate of the proper firm value. Moreover, with the introduction of Anglo-American accounting systems in Europe and Asia we can observe even in the accounts of companies sited in the same jurisdiction diverging accounting practices for intangible assets caused by different accounting standards. To assess the relevance of intangible assets in Japanese and German accounts of listed companies we therefore measure certain balance sheet and profit and loss relations according to goodwill and self-developed software. We compare and analyze valuation rules for goodwill and software costs according to German GAAP, Japanese GAAP, US GAAP and IAS to determine the possible impact of diverging rules in the comparability of the accounts. Our results show that the comparability of the accounts is impaired because of different accounting practices. The recognition and valuation of goodwill and self-developed software varies significantly according to the accounting regime applied. However, for the recognition of self-developed software, the effect on the average impact on asset coefficients or profit is not that high. Moreover, an industry bias can only be found for the financial industry. In contrast, for goodwill accounting we found major differences especially between German and Japanese Blue Chips. The introduction of the new goodwill impairment only approach and the prohibition of the pooling method may have a major impact especially for Japanese companies’ accounts.