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Euro crash risk
(2015)
A premise of the capabilities perspective in strategy is that firm-specific capabilities allow some firms to be unusually adept at exploiting growth opportunities. Since few firms have the capacity to internally generate the quantity or variety of strategic resources needed to exploit growth opportunities, the ability to externally acquire complementary resources is critical to the acquisition of competitive advantage. However, the external sourcing of resources exposes the firm’s strategic resources to risks of expropriation. We argue this threat gives capable firms incentive to use internally generated strategic resources to pursue growth opportunities before turning to external sources. A pecking order theory of strategic resource deployment is implied. Data from a 22-year sample of cross-border investment partnership decisions made by U.S.-based venture capital firms lend support to our theory.
We investigate the effect of the tone of news on investor stock price expectations and beliefs. In an experimental study we ask subjects to estimate a future stock price for twelve real listed companies. As additional information we provide them with historical stock prices and extracts from real newspaper articles. We propose a way to manipulate the tone of news extracts without distorting its content. Subjects in different treatment groups read news items that are written either in positive or negative tone for each stock. We find that subjects tend to predict a significantly higher (lower) return for stocks after reading positive (negative) tone news. The effect is especially pronounced for stocks with poor past performance. Subjects are more likely to be optimistic (pessimistic) about the economy and to buy (sell) stocks after reading positive (negative) than negative (positive) tone news. Our results show that the news media might affect not only how investors perceive information, but also what they do in response to it.
We present an accessible narrative of the Turkish economy since its great 2001 crisis. We broadly survey economic developments and pay particular attention to monetary policy. The data suggests that the Central Bank of Turkey was a strong inflation targeter early in this period but began to pay less attention to inflation after 2009. Loss of the strong nominal anchor is visible in the break we estimate in Taylor-type rules as well as in asset prices. We also argue that recent discrete jumps in Turkish asset prices, especially the exchange value of the lira, are due more to domestic factors. In the post-2009 period the Central Bank was able to stabilize expectations and asset prices when it chose to do so, but this was the exception rather than the rule.
We show that the size of collateralized household debt determines an economy’s vulnerability to crises of confidence. The house price feeds back on itself by contributing to a liquidity effect, which operates through the value of housing in a collateral constraint. Over a specific range of debt levels this liquidity feedback effect is strong enough to give rise to multiplicity of house prices. In a dynamic setup, we conceptualize confidence as a realization of rationally entertainable belief-weightings of multiple future prices. This delivers debt-level-dependent bounds on the extent to which confidence may drive house prices and aggregate consumption.
Signaling cooperation
(2015)
We examine what an applicant’s vita signals to potential employers about her willingness to cooperate in teams. Intensive social engagement may credibly reveal that an applicant cares about the well-being of others and therefore is less likely to free-ride in teamwork situations. We find that contributions in a public goods game strongly increase in a subject’s degree of social engagement as indicated on her résumé (and rated by an independent third party). Engagement in other domains, such as student or sports associations, is not positively correlated with contributions. In a prediction experiment with human resource managers from various industries, we find that managers use résumé content effectively to predict relative differences in subjects’ willingness to cooperate. Thus, young professionals signal important behavioral characteristics to potential employers through the choice of their extracurricular activities.
We offer evidence of a new stylized feature of corporate financing decisions: the tendency of managers to rely more on debt financing when earnings prospects are poor. We term this 'leaning against the wind' and consider three possible explanations: market timing, precautionary financing, and 'making the numbers'. We find no evidence in favor of the first two hypotheses, and provisionally accept the 'making the numbers' hypothesis that managers who are under pressure because of unrealistically optimistic earnings expectations by analysts and deteriorating real opportunities, will rely more heavily on debt financing to boost earnings per share and return on equity.
We build a novel leading indicator (LI) for the EU industrial production (IP). Differently from previous studies, the technique developed in this paper is able to produce an ex-ante LI that is immune to “overlapping information drawbacks”. In addition, the set of variables composing the LI relies on a dynamic and systematic criterion. This ensures that the choice of the variables is not driven by subjective views. Our LI anticipates swings (including the 2007-2008 crisis) in the EU industrial production – on average – by 2 to 3 months. The predictive power improves if the indicator is revised every five or ten years. In a forward-looking framework, via a general-to-specific procedure, we also show that our LI represents the most informative variable in approaching expectations on the EU IP growth.
The interbank market is important for the efficient functioning of the financial system, transmission of monetary policy and therefore ultimately the real economy. In particular, it facilitates banks' liquidity management. This paper aims at extending the literature which views interbank markets as mutual liquidity insurance mechanism by taking into account persistence of liquidity shocks. Following a theory of long-term interbank funding a financial system which is modeled as a micro-founded agent based complex network interacting with a real economic sector is developed. The model features interbank funding as an over-the-counter phenomenon and realistically replicates financial system phenomena of network formation, monetary policy transmission and endogenous money creation. The framework is used to carry out an optimal policy analysis in which the policymaker maximizes real activity via choosing the optimal interest rate in a trade-off between loan supply and financial fragility. It is shown that the interbank market renders the financial system more efficient relative to a setting without mutual insurance against persistent liquidity shocks and therefore plays a crucial role for welfare.