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We investigate into the role of the trade channel as important determinant of a country's current account position and the degree of business cycle synchronization with the rest of the world by comparing the predictions of two types of DGE models. It is shown that the behavior of a country's external balance and the international transmission of shocks depends amongst other things on two factors: i) the magnitude of trade interdependence, ii) the degree of substitutability between importable and domestically-produced goods. Using time series data on bilateral trade flows, we estimate the magnitude of trade interdependence and the elasticity of substitution between importable and domestic goods for the G7 countries. Given these estimates, idiosyncratic supply shocks potentially induce changes in the current account and foreign output that vary in direction and magnitude across G7 countries. The relationship between the magnitude of foreign trade and the import substitutability with various correlation measures is examined empirically in a cross-sectional dimension. First Draft, July 2001. Final Draft, November 2001. Klassifikation: E32, F41
Industrial production in G7 countries is assumed to be driven by two exogenous disturbances. Those disturbances are identified in a VAR model so they can be interpreted as country-specific and global supply shocks. The dynamic properties of the model are analyzed and the relative importance of each shock is measured. It is shown that the VAR model matches most of the theoretical predictions of standard intertemporal open-economy models. The identified structural disturbances are analyzed with regard to their impact on the current account and investment. First Draft, October 2000. Final Draft, January 2001. This paper is based on the second chapter of my doctoral dissertation at the University of Frankfurt. Klassifikation: E32, F41
Our study examines the existence and the nature of private benefits of control in Germany. We do this by analyzing initial public offerings of founding-family owned firms and tracking their fate up to ten years following the IPO. Our sample includes a uniquely rich data set of 105 IPOs of family-owned firms floated from 1970 to 1991 on German stock exchanges. We find that, first, even ten years after the IPO, family owners, in the cross section, continue to exercise considerable control. Second, we show that there exist substantial private benefits of control in these firms and - to our understanding for the first time - we empirically measure what the nature of these private benefits really is. We also show that the separation of cash flow rights and voting rights via the issuance of dual-class shares is used to create controlling shareholder structures in order to preserve these private benefits. Third, we find a puzzling and significant underperformance of dual-class share IPOs, which can be explained by ex ante unanticipated expropriation of minority shareholders due to poor investor protection in Germany. This Version: 4th draft, November 2001 This paper has been presented at the European Financial Management Association 2001 Meeting in Lugano, the CEPR Conference "The Firm and its Stakeholders" in Courmayeur, the Fall 2000 WAFA Conference in Washington, D.C., the European Economic Association 2000 Conference in Bozen, the ABN AMRO International Conference on IPOs in Amsterdam, the SIRIF Conference on Corporate Governance in Edinburgh, the Financial Center Seminar at the Tinbergen Institute Rotterdam, and the G-Forum on Entrepreneurship Research in Vienna. Klassifikation: G14, G32, G15
Against the difficult background of analysing aggregated data in this paper core inflation in the euro area is estimated by means of the structural vector autoregressive approach. We demonstrate that the HICP sometimes seems to be a misleading indicator for monetary policy in the euro area. We furthermore compare our core inflation measure to the wide-spread "ex food and energy" measure, often referred to by the ECB. In addition we provide evidence that our measure is a coincident indicator of HICP inflation. Assessing the robustness of our core inflation measure we carefully conclude that it seems to be quite reliable. This Version: April, 2002 Revised edition published in: Allgemeinenes Statistisches Archiv, Vol 87, 2003. Klassifikation: C32, E31
Recent empirical research found that the strong short-term relationship between monetary aggregates and US real output and inflation, as outlined in the classical study by M. Friedman and Schwartz, mostly disappeared since the early 1980s. In the light of the B. Friedman and Kuttner (1992) information value approach, we reevaluate the vanishing relationship between US monetary aggregates and these macroeconomic fundamentals by taking into account the international currency feature of the US dollar. In practice, by using official US data for foreign flows constructed by Porter and Judson (1996) we find that domestic money (currency component of M1 corrected for the foreign holdings of dollars) contains valuable information about future movements of US real output and inflation. Statistical evidence here provided thus suggests that the Friedman and Schwartz's stylized facts can be reestablished once the focus of analysis is back on the domestic monetary aggregates. This Version: August, 2001. Klassifikation: E3, E4, E5
We use consumer price data for 81 European cities (in Germany, Austria, Finland, Italy, Spain, Portugal and Switzerland) to study the impact of the introduction of the euro on goods market integration. Employing both aggregated and disaggregated consumer price index (CPI) data we confirm previous results which showed that the distance between European cities explains a significant amount of the variation in the prices of similar goods in different locations. We also find that the variation of relative prices is much higher for two cities located in different countries than for two equidistant cities in the same country. Under the EMU, the elimination of nominal exchange rate volatility has largely reduced these border effects, but distance and border still matter for intra-European relative price volatility.
This paper investigates how US and European equity markets affected the US dollar-euro rate from the introduction of the euro through April 2001. More detailed the following questions are raised: First, do movements in the stock market help to explain movements in the exchange rate? Second, how large is the impact of stock market returns on the exchange rate? And third, does the exchange rate respond differently to different equity markets? The investigation was carried out using daily data within a vector-autoregression model (VAR). Surprisingly, positive returns on US equities as well as on European stock markets had a negative impact on the US dollar-euro rate. Quantitatively, the US dollar-euro rate seems to be more influenced by European stock markets compared to US stock markets. Further, there is evidence for a somewhat weaker impact of technology stock indices on the US dollar-euro rate compared with broader market indices. Finally, the long-term interest rate differential seems to contain more information about exchange rate movements than the short-term interest rate differential. This Version: August, 2001. Klassifikation: C32, F31
This paper uses a unique data set from credit files of six leading German banks to provide some empirical insights into their rating systems used to classify corporate borrowers. On the basis of the New Basle Capital Accord, which allows banks to use their internal rating systems to compute their minimum capital requirements, the relations between potential risk factors, rating decisions and the default probabilities are analysed to answer the question whether German banks are ready for the internal ratings-based approach. The results suggests that the answer is not affirmative at this stage. We find internal rating systems not comparable over banks and furthermore we reveal differences between credit rating determining and default probability determining factors respectively. Klassifikation: G21, G33, G38
In the recent theoretical literature on lending risk, the coordination problem in multi-creditor relationships have been analyzed extensively. We address this topic empirically, relying on a unique panel data set that includes detailed credit-file information on distressed lending relationships in Germany. In particular, it includes information on creditor pools, a legal institution aiming at coordinating lender interests in borrower distress. We report three major findings. First, the existence of creditor pools increases the probability of workout success. Second, the results are consistent with coordination costs being positively related to pool size. Third, major determinants of pool formation are found to be the number of banks, the distribution of lending shares, and the severity of the distress shock.
In recent years new methods and models have been developed to quantify credit risk on a portfolio basis. CreditMetrics (tm), CreditRisk+, CreditPortfolio (tm) are among the best known and many others are similar to them. At first glance they are quite different in their approaches and methodologies. A comparison of these models especially with regard to their applicability on typical middle market loan portfolios is in the focus of this study. The analysis shows that differences in the results of an application of the models on a certain loan portfolio is mainly due to different approaches in approximating default correlations. That is especially true for typically non-rated medium-sized counterparties. On the other hand distributional assumptions or different solution techniques in the models are more or less compatible.
This paper shows that emerging market eurobond spreads after the Asian crisis can be almost completely explained by market expectations about macroeconomic fundamentals and international interest rates. Contrary to the claim that emerging market bond spreads are driven by market variables such as stock market volatility in the developed countries, it is found that this did not play a significant role after the Asian crisis. Using panel data techniques, it is shown that the determinants of bond spreads can be divided into long-term structural variables and medium-term variables which explain month-to-month changes in bond spreads. As relevant medium-term variables, ''consensus forecasts'' of real GDP growth and inflation, and international interest rates are identified. The long-term structural factors do not explicitly enter the model and show up as fixed or random country-specific effects. These intercepts are highly correlated with the countries' credit rating.
This paper analyzes a comprehensive data set of 160 non venture-backed, 79 venture-backed and 61 bridge financed companies going public at Germany´s Neuer Markt between March 1997 and March 2002. I examine whether these three types of issues differ with regard to issuer characteristics, balance sheet data or offering characteristics. Moreover, this empirical study contributes to the underpricing literature by focusing on the complementary or rather competing role of venture capitalists and underwriters in certifying the quality of a company when going public. Companies backed by a prestigious venture capitalist and/or underwritten by a top bank are expected to show less underpricing at the initial public offering (IPO) due to a reduced ex-ante uncertainty. This analysis provides evidence to the contrary: VC-backed IPOs appear to be more underpriced than non VC-backed IPOs.
This paper examines thoroughly the Chilean Pension Reform, giving first an overview of the mandatory saving plan, the relevant institutions, and the rules for transition from the old to the new system. The main part of the paper contains a critical evaluation of the reform, in particular the macroeconomic performance with respect to capital formation and growth, and the effects on the savings rate as well as on the rates of return and labor market are discussed. Furthermore, the development of capital markets is reviewed. A short critique is presented with respect to intergenerational distribution and risk sharing as well as with respect to the social consequences. This paper is the result of a CFS sponsored research project. A preliminary version was presented at the meeting of the committee of Social Policy of the Verein fuer Socialpolitik, May 1999 and at the 55th Congress of IIPF, 23-26 August 1999, in Moskow.
This paper provides empirical evidence on initial public offerings (IPOs) by investigating the pricing and long-run performance of IPOs using a unique data set collected on the German capital market before World War I. Our findings indicate that underpricing of IPOs has existed, but has significantly decreased over time in our sample. Employing a mixture of distributions approach we also find evidence of price stabilization of IPOs. Concerning long-run performance, investors who bought their shares in the early after-market and held them for more than three years experienced significantly lower returns than the respective industry as a whole. Earlier versions of this paper were presented at the ABN-AMRO Conference on IPOs in Amsterdam, the Annual Meetings of the European Finance Association, the Annual Meetings of the Verein für Socialpolitik, the IX Tor Vergata International Conference on Banking and Finance in Rome, and at Johann Wolfgang Goethe-University in Frankfurt.
This paper examines empirically the question whether the presence of foreign banks and a liberal trade regime with regard to financial services can contribute to a stabilization of capital flows to emerging markets. Since foreign banks, so the argument goes, provide better information to foreign investors and increase transparency, the danger of herding is reduced. Previous findings by Kono and Schuknecht (1998) confirmed empirically that such an effect does exist. This study expands their data set with respect to the length of the time period and the number of countries. Contrary to Kono and Schuknecht, it is found that foreign bank penetration tends to rather increase the volatility of capital flows. The trade regime variables are not significant in explaining cross-country variations in the volatility of capital flows. This result does not change significantly when alternative measures of volatility are considered. This paper was presented at the conference ''Financial crisis in transition countries: recent lessons and problems yet to solve'' on 13-14 July 2000 at the Institute for Economic Research (IWH) in Halle, Germany.
This paper discusses the role of internal corporate ratings as a means by which commercial banks condense their informational advantage and preserve it vis-à-vis a competitive lending market. In drawing on a unique data set collected from leading universal banks in Germany, we are able to evaluate the extent to which non-public information determines corporate ratings. As a point of departure, the paper describes a sample of rating systems currently in use, and points at methodological differences between them. Relying on a probit analysis, we are able to show that the set of qualitative, or soft, factors is not simply redundant with respect to publicly available accounting data. Rather, qualitative information tends to be decisive in at least one third of cases. It tends to improve the firms' overall corporate rating. In the case of conflicting rating changes, i.e. when qualitative and quantitative rating changes have opposing signs, quantitative criteria dominate the overall rating change. Furthermore, the more restrictive the weighting scheme as part of the rating methodology is, the stronger is the impact of qualitative information on the firms' overall rating. The implications of our results underline the need to define stringent rating standards, from both a risk management and a regulatory point of view. Revised edition published in: ZEW Wirtschaftsanalysen 2001, Bd 54, Baden-Baden, Nomos
This paper provides a broad empirical examination of the major currencies' roles in international capital markets, with a special emphasis on the first year of the euro. A contribution is made as to how to measure these roles, both for international financing as well as for international investment. The times series collected for these measures allow for the identification of changes in the role of the euro during 1999 compared to the aggregate of euro predecessor currencies, net of intra -euro area assets/liabilities, before stage 3 of EMU. A number of key factors determining the currency distribution of international portfolio investments, such as relative market liquidity and relative risk characteristics of assets, are also examined empirically. It turns out that for almost all important market segments for which data are available, the euro immediately became the second most widely used currency for international financing and investment. For the flow of international bond and note issuance it experienced significant growth in 1999 even slightly overtaking the US dollar in the second half of the year. The euro's international investment role appears more static though, since most of the early external asset supply in euro is actually absorbed by euro area residents.
This paper examines the interaction of G7 real exchange rates with real output and interest rate differentials. Using cointegration methods, we generally find a link between the real exchange rate and the real interest differential. This finding contrasts with the majority of the extant research on the real exchange rate - real interest rate link. We identify a new measure of the equilibrium exchange rate in terms of the permanent component of the real exchange rate that is consistent with the dynamic equilibrium given by the cointegration relation. Furthermore, the presence of cointegration also allows us to identify real, nominal and transitory disturbances with only minimal identifying restrictions. Our findings suggest that persistent deviations of real exchange rates from their equilibrium value can have feedback effects on the underlying fundamentals, hence altering the equilibrium exchange rate itself. This has important implications for the persistence measures of real exchange rates that are reported elsewhere in the literature.
In this study the firms' choice of the number of bank relationships is analyzed with respect to influential factors like borrower quality, size and the existence of a close housebank relationship. Then, the number of bank relationships is used as a proxy to examine if bank competition is reflected in loan terms. It is shown that the number of bank relationships is foremost determined by borrower size and the existence of a housebank relationship. Loan rate spreads are not effected by the number of bank relationships. However, borrowers with a small number of bank relationships provide more collateral and get more credit. These effects are amplified by a housebank relationship. Housebanks get more collateral and are ready to take a larger stake in the financing of their customers.
The globalization of markets and companies has increased the demand for internationally comparable high quality accounting information resulting from a common set of accounting rules. Despite remarkable efforts of international harmonization for more than 25 years, accounting regulation is still the domain of national legislators or delegated standard setters. The paper starts by outlining the reasons for this state of affairs and by characterizing the different institutional backgrounds of accounting standard setting in four selected countries as well as on the international level. This is followed by a summary of important international differences in accounting rules and a summary of the empirical evidence of the impact of different rules on the resulting numbers and their relevance to users. It is argued that neither a priori theoretical reasoning nor the evidence from empirical studies provides a convincing basis for choices between accounting regimes and even less so between specific accounting rules. As there is a broad consensus that there is a need for one set of global accounting standards the final sections of the paper discuss currently existing and proposed structures of international accounting standard setting. The evolving new IASC structure is critically evaluated.