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Acquiring foreign firms far away might be hazardous to your share price: evidence from Germany
(2007)
This paper examines shareholder wealth effects of cross-border acquisitions. In a sample of 155 large acquisitions by German corporations from 1985–2006 international transactions in total do not lead to significant announcement returns. Geography, however, makes a difference: Shareholders of acquiring firms gain 6.5% in cross-border transactions into countries that have a common border with Germany but lose 4.4% in other international transactions. We find proximity to be one of the most important success factors in cross-border mergers and acquisitions, even when we control for firm, deal and country characteristics.
We analyze the effect of committee formation on how corporate boards perform two main functions: setting CEO pay and overseeing the financial reporting process. The use of performance-based pay schemes induces the CEO to manipulate earnings, which leads to an increased need for board oversight. If the whole board is responsible for both functions, it is inclined to provide the CEO with a compensation scheme that is relatively insensitive to performance in order to reduce the burden of subsequent monitoring. When the functions are separated through the formation of committees, the compensation committee is willing to choose a higher pay-performance sensitivity as the increased cost of oversight is borne by the audit committee. Our model generates predictions relating the board committee structure to the pay-performance sensitivity of CEO compensation, the quality of board oversight, and the level of earnings management.
This paper analyses cross-border contagion in a sample of European banks from January 1994 to January 2003. We use a multinomial logit model to estimate the number of banks in a given country that experience a large shock on the same day (“coexceedances”) as a function of variables measuring common shocks and coexceedances in other countries. Large shocks are measured by the bottom 95th percentile of the distribution of the first difference in the daily distance to default of the bank. We find evidence in favour of significant cross-border contagion. We also find some evidence that since the introduction of the euro cross-border contagion may have increased. The results seem to be very robust to changes in the specification.
This paper traces the location of foreign banks in Germany from 1949 to 2006. As suggested by new economic geography models we find a ‘u’-shaped concentration of foreign banks in Germany. Only after a competition between several cities, Frankfurt has emerged as the pre-eminent financial centre, triggered by the ‘historical event’ of setting up the German central bank in Frankfurt. After a strong increase, Frankfurt’s share in the location of foreign banks in Germany decreases slowly but significantly since the mid 1980’s. We conclude that there will be a lesser role in Europe for secondtier financial centres in the future.
Many tax-codes around the world allow for special taxable treatment of savings in retirement accounts. In particular, profits in retirement accounts are usually tax exempt which allow investors to increase an asset’s return by holding it in such a retirement account. While the existing literature on asset location shows that risk-free bonds are usually the preferred asset to hold in a retirement account, we explain how the tax exemption of profits in retirement accounts affects private investors’ asset allocation. We show that total final wealth can be decomposed into what the investor would have earned in a taxable account and what is due to the tax exemption of profits in the retirement account. The tax exemption of profits can thus be considered a tax-gift which is similar to an implicit bond holding. As this tax-gift’s impact on total final wealth decreases over time, so does the investor’s equity exposure.
In this paper we revisit medium- to long-run exchange rate determination, focusing on the role of international investment positions. To do so, we develop a new econometric framework accounting for conditional long-run homogeneity in heterogeneous dynamic panel data models. In particular, in our model the long-run relationship between effective exchange rates and domestic as well as weighted foreign prices is a homogeneous function of a country’s international investment position. We find rather strong support for purchasing power parity in environments of limited negative net foreign asset to GDP positions, but not outside such environments. We thus argue that the purchasing power parity hypothesis holds conditionally, but not unconditionally, and that international investment positions are an essential component to characterizing this conditionality. Finally, we adduce evidence that whether deterioration of a country’s net foreign asset to GDP position leads to a depreciation of that country’s effective exchange rate depends on its rate of inflation relative to the rate of inflation abroad as well as its exposure to global shocks. JEL Classification: F31, F37, C23
Die Auswertungen der EVS 2003 zur Höhe und Struktur der Konsumausgaben der Paarhaushalte mit einem Kind im unteren Einkommensbereich erfolgten vorrangig mit dem Ziel, Anhaltspunkte zur Beurteilung des gegenwärtigen Niveaus der mit Arbeitslosengeld II und Sozialgeld gegebenen Grundsicherung von Familien zu erarbeiten. Die Ergebnisse vermitteln einen ersten Eindruck über die insgesamt stark eingeschränkten Teilhabemöglichkeiten von Familien mit Bezug von Grundsicherungsleistungen. ...
Mutual insurance companies and stock insurance companies are different forms of organized risk sharing: policyholders and owners are two distinct groups in a stock insurer, while they are one and the same in a mutual. This distinction is relevant to raising capital, selling policies, and sharing risk in the presence of financial distress. Up-front capital is necessary for a stock insurer to offer insurance at a fair premium, but not for a mutual. In the presence of an owner-manager conflict, holding capital is costly. Free-rider and commitment problems limit the degree of capitalization that a stock insurer can obtain. The mutual form, by tying sales of policies to the provision of capital, can overcome these problems at the potential cost of less diversified owners.
Open-end real estate funds are of particular importance in the German bank-dominated financial system. However, recently the German open-end fund industry came under severe distress which triggered a broad discussion of required regulatory interventions. This paper gives a detailed description of the institutional structure of these funds and of the events that led to the crisis. Furthermore, it applies recent banking theory to openend real estate funds in order to understand why the open-end fund structure was so prevalent in Germany. Based on these theoretical insights we evaluate the various policy recommendations that have been raised.
We compute the optimal dynamic asset allocation policy for a retiree with Epstein-Zin utility. The retiree can decide how much he consumes and how much he invests in stocks, bonds, and annuities. Pricing the annuities we account for asymmetric mortality beliefs and administration expenses. We show that the retiree does not purchase annuities only once but rather several times during retirement (gradual annuitization). We analyze the case in which the retiree is restricted to buy annuities only once and has to perform a (complete or partial) switching strategy. This restriction reduces both the utility and the demand for annuities.