Working paper series / Johann-Wolfgang-Goethe-Universität Frankfurt am Main, Fachbereich Wirtschaftswissenschaften : Finance & Accounting
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182
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.
183
Private Equity ist außerhalb des Fachpublikums von vielen Mythen und Missverständnissen umgeben. Dies fängt bereits bei der Funktionsweise und Größe des Sektors an, aber auch über die Profitabilität und die Gebührenstruktur von Private Equity Gesellschaften gibt es falsche Vorstellungen. Zudem werden immer wieder Vorwürfe laut, dass Private Equity zu massivem Arbeitsplatzabbau, einer hohen Anzahl von Konkursen und dem Unterlassen von langfristigen Investitionen führt. Dennoch wird Private Equity als wichtiges Instrument zur Finanzierung des deutschen Mittelstandes angeführt. Dieser Essay stellt den gängigen Vorurteilen zu Private Equity die neuesten Forschungsergebnisse gegenüber und versucht so, ein ausgewogenes Bild sowohl der Chancen und Risiken als auch des Einsatzgebiets von Private Equity zu zeichnen.
184
Generally, information provision and certifcation have been identified as the major economic functions of rating agencies. This paper analyzes whether the “watchlist” (rating review) instrument has extended the agencies' role towards a monitoring position, as proposed by Boot, Milbourn, and Schmeits (2006). Using a data set of Moody's rating history between 1982 and 2004, we find that the overall information content of rating action has indeed increased since the introduction of the watchlist procedure. Our findings suggest that rating reviews help to establish implicit monitoring contracts between agencies and borrowers and as such enable a finer partition of rating information, thereby contributing to a higher information quality.
185
The introduction of a common currency as well as the harmonization of rules and regulations in Europe has significantly reduced distance in all its guises. With reduced costs of overcoming space, this emphasizes centripetal forces and it should foster consolidation of financial activity. In a national context, as a rule, this led to the emergence of one financial center. Hence, Europeanization of financial and monetary affairs could foretell the relegation of some European financial hubs such as Frankfurt and Paris to third-rank status. Frankfurt’s financial history is interesting insofar as it has lost (in the 1870s) and regained (mainly in the 1980s) its preeminent place in the German context. Because Europe is still characterized by local pockets of information-sensitive assets as well as a demand for variety the national analogy probably does not hold. There is room in Europe for a number of financial hubs of an international dimension, including Frankfurt.
186
Sowohl die Diversifikation als auch die Fokussierung von Unternehmensaktivitäten werden häufig mit der Maximierung des Unternehmenswertes begründet. Wir untersuchen die Auswirkungen auf den Aktienkurs für 184 Akquisitionen sowie 139 Desinvestitionen deutscher Konzerne im Zeitraum von 1996-2005. Unternehmensdiversifikationen üben, entgegen der oft geäußerten Kritik, keinen signifikant negativen Einfluss auf den Marktwert aus. Fokussierende Unternehmensakquisitionen hingegen sind mit einem signifikanten Wertaufschlag verbunden. Der Verkauf von Unternehmensteilen führt generell zu einer Marktwertsteigerung. Dabei führen Abspaltungen außerhalb des Kerngeschäfts zu einer – allerdings insignifikant – höheren Wertsteigerung als Desinvestitionen von Kerngeschäftsaktivitäten. Statt eines systematischen Diversifikationsabschlags finden wir somit einen „Fokussierungsaufschlag“ für den deutschen Markt.
187
Risk transfer with CDOs
(2008)
Modern bank management comprises both classical lending business and transfer of asset risk to capital markets through securitization. Sound knowledge of the risks involved in securitization transactions is a prerequisite for solid risk management. This paper aims to resolve a part of the opaqueness surrounding credit-risk allocation to tranches that represent claims of different seniority on a reference portfolio. In particular, this paper analyzes the allocation of credit risk to different tranches of a CDO transaction when the underlying asset returns are driven by a common macro factor and an idiosyncratic component. Junior and senior tranches are found to be nearly orthogonal, motivating a search for the where about of systematic risk in CDO transactions. We propose a metric for capturing the allocation of systematic risk to tranches. First, in contrast to a widely-held claim, we show that (extreme) tail risk in standard CDO transactions is held by all tranches. While junior tranches take on all types of systematic risk, senior tranches take on almost no non-tail risk. This is in stark contrast to an untranched bond portfolio of the same rating quality, which on average suffers substantial losses for all realizations of the macro factor. Second, given tranching, a shock to the risk of the underlying asset portfolio (e.g. a rise in asset correlation or in mean portfolio loss) has the strongest impact, in relative terms, on the exposure of senior tranche CDO-investors. Our findings can be used to explain major stylized facts observed in credit markets.
188
Do we measure what we get?
(2008)
Performance measures shall enhance the performance of companies by directing the attention of decision makers towards the achievement of organizational goals. Therefore, goal congruence is regarded in literature as a major factor in the quality of such measures. As reality is affected by many variables, in practice one has tried to achieve a high degree of goal congruence by incorporating an increasing number of these variables into performance measures. However, a goal congruent measure does not lead automatically to superior decisions, because decision makers’ restricted cognitive abilities can counteract the intended effects. This paper addresses the interplay between goal congruence and complexity of performance measures considering cognitively-restricted decision makers. Two types of decision quality are derived which allow a differentiated view on the influence of this interplay on decision quality and learning. The simulation experiments based on this differentiation provide results which allow a critical reflection on costs and benefits of goal congruence and the assumptions regarding the goal congruence of incentive systems.
189
Motivated by the recent discussion of the declining importance of deposits as banks´ major source of funding we investigate which factors determine funding costs at local banks. Using a panel data set of more than 800 German local savings and cooperative banks for the period from 1998 to 2004 we show that funding costs are not only driven by the relative share of comparatively cheap deposits of bank´s liabilities but among other factors especially by the size of the bank. In our empirical analysis we find strong and robust evidence that, ceteris paribus, smaller banks exhibit lower funding costs than larger banks suggesting that small banks are able to attract deposits more cheaply than their larger counterparts. We argue that this is the case because smaller banks interact more personally with customers, operate in customers´ geographic proximity and have longer and stronger relationships than larger banks and, hence, are able to charge higher prices for their services. Our finding of a strong influence of bank size on funding costs is also in an in- ternational context of great interest as mergers among small local banks - the key driver of bank growth - are a recent phenomenon not only in European banking that is expected to continue in the future. At the same time, net interest income remains by far the most important source of revenue for most local banks, accounting for approximately 70% of total operating revenues in the case of German local banks. The influence of size on funding costs is of strong economic relevance: our results suggest that an increase in size by 50%, for example, from EUR 500 million in total assets to EUR 750 million (exemplary for M&A transactions among local banks) increases funding costs, ceteris paribus, by approximately 18 basis points which relates to approx. 7% of banks´ average net interest margin.
190
The "quiet life hypothesis (QLH)" posits that banks enjoy the advantages of market power in terms of foregone revenues or cost savings. We suggest a unified approach to measure competition and efficiency simultaneously to test this hypothesis. We estimate bank-specific Lerner indices as measures of competition and test if cost and profit efficiency are negatively related to market power in the case of German savings banks.We find that both market power and average revenues declined among these banks between 1996 and 2006. While we find clear evidence supporting the QLH, estimated effects of the QLH are small from an economical perspective.
191
This paper is one of the first to analyse political influence on state-owned savings banks in a developed country with an established financial market: Germany. Combining a large dataset with financial and operating figures of all 457 German savings banks from 1994 to 2006 and information on over 1,250 local elections during this period we investigate the change in business behavior around elections. We find strong indications for political inflence: the probability that savings banks close branches, lay-off employees or engage in merger activities is significantly reduced around elections. At the same time they tend to increase their extraordinary spendings, which include support for social and cultural events in the area, on average by over 15%. Finally, we find that savings banks extend significantly more loans to their corporate and private customers in the run-up to an election. In further analyses, we show that the magnitude of political influence depends on bank specific, economical and political circumstances in the city or county: political influence seems to be facilitated by weak political majorities and profitable banks. Banks in economically weak areas seem to be less prone to political influence.