The 28th NBER-TCER-CEPR Conference

The 28th NBER-TCER-CEPR Conference took place in Tokyo July 27. This meeting was sponsored jointly by the Centre for Economic Policy Research in London, the NBER, the Tokyo Center for Economic Research, the Center for Advanced Research in Finance, and the Center for International Research on the Japanese Economy and co-sponsored by the Center for Advanced Research in Finance (CARF), Center for International Research on the Japanese Economy (CIRJE), and the Research Institute of Capital Formation (RICF), Development Bank of Japan. Shin-ichi Fukuda and Kenichi Ueda, both of University of Tokyo, Research Associate Takeo Hoshi of Stanford University, and Franklin Allen of Imperial College London organized the meeting. These researchers' papers were presented and discussed:

Yukihiro Yasuda and Ryosuke Fujitani, Hitotsubashi University, and Joseph French, University of Northern Colorado

Stock Market Listing, Investment, and Business Groups: How Firm Structure Impacts Investment?

Yasuda, French, and Fujitani provide the first large sample comparison of investment by Japanese listed and unlisted public firms. Empirical results show listed firms invest more than comparable unlisted companies. Their findings suggest that the role of listing in alleviating financial constraints is more important than potential underinvestment due to myopic managerial behavior. However, they find that the positive relationship between listing and investment is primarily driven by standalone firms. Further analysis confirms that as the number of subsidiaries in a business group (i.e., firms with subsidiaries) increases the positive impact of listing on investment declines. In contrast, listed standalone firms invest more and are more sensitive to investment opportunities than unlisted companies. Additional results show that listing more positively impacts investment when a firm faces financial constraints. Yasuda, French, and Fujitani also find a positive relationship between stock liquidity and investment for listed firms. Taken together, their results suggest that markets play an important role in easing financial constraints and preventing managerial shirking both of which increase investment. Finally, the researchers show for all firms that higher levels of ownership by financial institutions, board members, and foreign investors facilitates higher levels investment.

Arantxa Jarque, Federal Reserve Bank of Richmond, and Edward S. Prescott, Federal Reserve Bank of Cleveland

Banker Compensation, Relative Performance, and Bank Risk A multi-agent, moral-hazard model is used to analyze the connection between compensation of bank employees (below a CEO) and bank risk. Optimal contracts consist of heavy use of relative performance and and under some conditions under provide effort. Unlike in the single-agent model, pay for performance does not necessarily create risk. If employee returns are uncorrelated, pay is irrelevant for risk. If returns are perfectly correlated, effort is underprovided and a low wage increases risk. For intermediate levels of correlations, optimal contracts are characterized and described as relative performance schemes that depend on individual performance and bank revenue. Comovement of compensation with bank performance are derived for a simple production function and used to analyze the role of bonuses. Connections to compensation regulations are discussed.

Jennifer Corbett, Australian National University, and Ying Xu, Australian Treasury

Using Network Method to Measure Financial Interconnection

Corbett and Xu use a different approach to measuring financial openness, highlighting interconnectedness in a network of financial flows. Applying an adapted version of eigenvector centrality, often used in network analysis, the new measure captures multidimensional and high-degree financial relations among countries. It provides a nuanced picture of financial integration and interconnectedness in the global and regional financial networks. The United Kingdom and the United States remain the 'core' in the global banking network, with all other countries scattered in the 'periphery'. The application of the new measure of financial integration to the empirical analysis reveals the nonlinear relationship between financial integration and output volatility.

Renee Adams, University of Oxford; Brad Barber, University of California, Davis; and Terrance Odean, University of California, Berkeley

Values in Finance

Implicit in current distrust in the finance industry is the idea that finance professionals are unethical. Adams, Barber, and Odean test this hypothesis using a unique data set on values of CFAs in 2016 paired with the World Value Survey. Their results are inconsistent with the idea that finance professionals are systematically less ethical than members of the population. Consistent with research suggesting finance is a high skill industry, finance professionals are highly achievement oriented. Both achievement orientation and the structure of the financial system help explain attitude gaps towards income inequality, government ownership, individual responsibility, competition, the role of hard work and wealth. While many are asked what they think about financiers, Adams, Barber, and Odean's results suggest that asking financiers what they think opens new questions about the links between values and trust.

Kenichi Ueda, University of Tokyo, and Somnath Sharma, University of Tokyo and Reserve Bank of India

Listing Advantages Around the World

Using the firm-level data of 29 countries of 10 years (from 2008-2017) for both listed and unlisted firms, Ueda and Sharma find that the listed firms, on an average, tend to have lower marginal products of capital (measured by return on assets) in comparison with the unlisted firms. This implies that the listed firms face less financial constraints. Moreover, they investigate the institutional factors that exacerbate or mitigate the listing advantages across the countries. The listing advantages are enlarged with product market competition and macroeconomic instability, which are factors raising profit volatilities. General institutional quality seems to belong to these factors. On the other hand, the listing advantages are lowered with financial developments and creditor's rights, which are factors easing financial constraints. Ueda and Sharma, however, do not find robust effects from corporate governance, perhaps because there is a trade-off between easing financial constraints and lowering owners' benefits to go public.

Rodney Ramcharan, University of Southern California; Stefan Gissler, Federal Reserve Board; and Edison Yu, Federal Reserve Bank of Philadelphia

The Effects of Competition in Consumer Credit Markets

Ramcharan, Gissler, and Yu find that banks and non-banks respond differently to increased competition in consumer credit markets. Increased competition and the greater threat of failure induces banks to specialize more in higher margin business lending, and surviving banks are more profitable. However, non-banks change their credit policy when faced with more competition and aggressively expand credit to riskier borrowers at the extensive margin, resulting in higher default rates. These results show how the effects of competition can depend on the form of intermediation. They also suggest that increased competition can lead to large changes in credit policy at institutions outside the traditional supervisory umbrella, possibly creating a less stable financial system.

Andreas Lehnert, Federal Reserve Board; Michael Barr and Phillip Swagel, University of Maryland; and Neel Kashkari, Federal Reserve Bank of Minneapolis

Inside the U.S. Strategy for Fighting the 2007-2009 Global Financial Crisis

Eugenio M. Cerutti, International Monetary Fund

U.S. vs. Euro Area: Who Drives Cross-Border Bank Lending to EMs?

Cerutti analyzes the drivers of cross-border bank lending to 49 Emerging Markets (EMs) during the period 1990Q1-2014Q4, by assessing the impact of monetary, financial and real sector shocks in both the U.S. and the euro area. The literature has traditionally highlighted the influence of US monetary policy on driving cross-border bank flows, and more recently the importance of both US and Euro Area (EA) financial/banking sectors’ related variables. Cerutti's contribution is the simultaneous analysis of the role of these U.S. and EA drivers, as well as their interactions with real sector shocks. He corroborate the negative impact of U.S. monetary policy tightening on cross-border lending to EMs, but finds that EA monetary policy seems to have an impact mostly on Emerging Europe, reflecting the fact that cross-border lending to most other EM regions is dollar denominated. He also find that real sector shocks in both the U.S. and EA trigger an increase in cross-border lending, but less in EA when modeling the financial sector. Finally, for financial sector shocks, such as those associated with a decrease in bank leverage, Cerutti's results indicate a broad-based overall contraction of cross-border lending if the shock originates in the U.S., and heterogenous effects across borrowing regions if the shock originates in the EA.

Yoshiaki Ogura, Waseda University

Search for Yield under Prolonged Monetary Easing and Aging

Ogura finds several facts supportive of the search for yield, i.e., the phenomenon that a low loan spread encourages banks to extend less monitored and more risky loans, in Japanese regional loan market, where banks experience the prolonged monetary easing and the rapid population aging. He estimate the demand elasticity and the conjectural variation in local loan markets simultaneously with a structural model. The estimates show that the competition gets more intensified in the markets where the loan demand is less elastic against lowering interest rates due to the rapidly aging population. The banks in such competitive markets are driven to extend riskier loans.

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