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2011, 06
We analytically show that a common across rich/poor individuals Stone-Geary utility function with subsistence consumption in the context of a simple two-asset portfolio-choice model is capable of qualitatively and quantitatively explaining: (i) the higher saving rates of the rich, (ii) the higher fraction of personal wealth held in risky assets by the rich, and (iii) the higher volatility of consumption of the wealthier. On the contrary, time-variant “keeping-up-with-the-Joneses” weighted average consumption which plays the role of moving benchmark subsistence consumption gives the same portfolio composition and saving rates across the rich and the poor, failing to reconcile the model with what micro data say. JEL Classification: G11, D91, E21, D81, D14, D11
2011, 16
This paper studies the impact of the concentration of control, the type of controlling shareholder and the dividend tax preference of the controlling shareholder on dividend policy for a panel of 220 German firms over 1984-2005. While the concentration of control does not have an effect on the dividend payout, there is strong evidence that the type of controlling shareholder matters as family controlled firms have high dividend payouts whereas bank controlled firms have low dividend payouts. However, there is no evidence that the dividend preference of the large shareholder has an impact on the dividend decision. JEL Classification: G32, G35 Keywords: Dividend Policy, Payout Policy, Lintner Dividend Model, Tax Clientele Effects, Corporate Governance
2011, 09
In the microstructure literature, information asymmetry is an important determinant of market liquidity. The classic setting is that uninformed dedicated liquidity suppliers charge price concessions when incoming market orders are likely to be informationally motivated. In limit order book markets, however, this relationship is less clear, as market participants can switch roles, and freely choose to immediately demand or patiently supply liquidity by submitting either market or limit orders. We study the importance of information asymmetry in limit order books based on a recent sample of thirty German DAX stocks. We find that Hasbrouck’s (1991) measure of trade informativeness Granger-causes book liquidity, in particular that required to fill large market orders. Picking-off risk due to public news induced volatility is more important for top-of-the book liquidity supply. In our multivariate analysis we control for volatility, trading volume, trading intensity and order imbalance to isolate the effect of trade informativeness on book liquidity. JEL Classification: G14 Keywords: Price Impact of Trades , Trading Intensity , Dynamic Duration Models, Spread Decomposition Models , Adverse Selection Risk
2011, 17
Do firms buy their stock at bargain prices? : Evidence from actual stock repurchase disclosure
(2011)
We use new data from SEC filings to investigate how S&P 500 firms execute their open market repurchase programs. We find that smaller S&P 500 firms repurchase less frequently than larger firms, and at a price which is significantly lower than the average market price. Their repurchase activity is followed by a positive and significant abnormal return which lasts up to three months after the repurchase. These findings do not hold for large S&P 500 firms. Our interpretation is that small firms repurchase strategically, whereas the repurchase activity of large firms is more focused on the disbursement of free cash. JEL Classification: G14, G30, G35 Keywords: Stock Repurchases, Stock Buybacks, Payout Policy, Timing, Bid-Ask Spread, Liquidity
2011, 04
Regulations in the pre-Sarbanes–Oxley era allowed corporate insiders considerable flexibility in strategically timing their trades and SEC filings, for example, by executing several trades and reporting them jointly after the last trade. We document that even these lax reporting requirements were frequently violated and that the strategic timing of trades and reports was common. Event study abnormal re-turns are larger after reports of strategic insider trades than after reports of otherwise similar nonstrategic trades. Our results also imply that delayed reporting is detrimental to market efficiency and lend strong support to the more stringent trade reporting requirements established by the Sarbanes–Oxley Act. JEL Classification: G14, G30, G32 Keywords: Insider Trading , Directors' Dealings , Corporate Governance , Market Efficiency
2011, 20
This paper outlines a new method for using qualitative information to analyze the monetary policy strategy of central banks. Quantitative assessment indicators that are extracted from a central bank's public statements via the balance statistic approach are employed to estimate a Taylor-type rule. This procedure allows to directly capture a policymaker's assessments of macroeconomic variables that are relevant for its decision making process. As an application of the proposed method the monetary policy of the Bundesbank is re-investigated with a new dataset. One distinctive feature of the Bundesbank's strategy consisted of targeting growth in monetary aggregates. The analysis using the proposed method provides evidence that the Bundesbank indeed took into consideration monetary aggregates but also real economic activity and inflation developments in its monetary policy strategy since 1975. JEL Classification: E52, E58, N14 Keywords: Monetary Policy Rule, Statement Indicators, Bundesbank, Monetary Targeting
2011, 19
This paper analyzes the emergence of systemic risk in a network model of interconnected bank balance sheets. Given a shock to asset values of one or several banks, systemic risk in the form of multiple bank defaults depends on the strength of balance sheets and asset market liquidity. The price of bank assets on the secondary market is endogenous in the model, thereby relating funding liquidity to expected solvency - an important stylized fact of banking crises. Based on the concept of a system value at risk, Shapley values are used to define the systemic risk charge levied upon individual banks. Using a parallelized simulated annealing algorithm the properties of an optimal charge are derived. Among other things we find that there is not necessarily a correspondence between a bank's contribution to systemic risk - which determines its risk charge - and the capital that is optimally injected into it to make the financial system more resilient to systemic risk. The analysis has policy implications for the design of optimal bank levies. JEL Classification: G01, G18, G33 Keywords: Systemic Risk, Systemic Risk Charge, Systemic Risk Fund, Macroprudential Supervision, Shapley Value, Financial Network
2011, 15
"Buffer-stock" models of saving are now standard in the consumption literature. This paper builds theoretical foundations for rigorous understanding of the main features of such models, including the existence of a target wealth ratio and the proposition that aggregate consumption growth equals aggregate income growth in a small open economy populated by buffer stock savers. JEL Classification: D81, D91, E21 Keywords: Precautionary Saving, Buffer Stock Saving, Marginal Propensity to Consume, Permanent Income Hypothesis
2011, 23
The direct financial impact of the financial crisis has been to deal a heavy blow to investment-based pensions; many workers lost a substantial portion of their retirement saving. The financial sector implosion produced an economic crisis for the rest of the economy via high unemployment and reduced labor earnings, which reduced household contributions to Social Security and some private pensions. Our research asks which types of individuals were most affected by these dual financial and economic shocks, and it also explores how people may react by changing their consumption, saving and investment, work and retirement, and annuitization decisions. We do so with a realistically calibrated lifecycle framework allowing for time-varying investment opportunities and countercyclical risky labor income dynamics. We show that households near retirement will reduce both short- and long-term consumption, boost work effort, and defer retirement. Younger cohorts will initially reduce their work hours, consumption, saving, and equity exposure; later in life, they will work more, retire later, consume less, invest more in stocks, save more, and reduce their demand for private annuities. Keywords: Financial Crisis , Household Finance , Cycle Portfolio Choice , Labor Supply Classification: D1, G11, G23, G35, J14, J26, J32
2011, 28
Using life-history survey data from eleven European countries, we investigate whether childhood conditions, such as socioeconomic status, cognitive abilities and health problems influence portfolio choice and risk attitudes later in life. After controlling for the corresponding conditions in adulthood, we find that superior cognitive skills in childhood (especially mathematical abilities) are positively associated with stock and mutual fund ownership. Childhood socioeconomic status, as indicated by the number of rooms and by having at least some books in the house during childhood, is also positively associated with the ownership of stocks, mutual funds and individual retirement accounts, as well as with the willingness to take financial risks. On the other hand, less risky assets like bonds are not affected by early childhood conditions. We find only weak effects of childhood health problems on portfolio choice in adulthood. Finally, favorable childhood conditions affect the transition in and out of risky asset ownership, both by making divesting less likely and by facilitating investing (i.e., transitioning from non-ownership to ownership).