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Schoenmaker: On the need for a fiscal backstop to the banking system

Four_Directions_Economy_Regulations

ABSTRACT: In the aftermath of the financial crisis, governments are rightly reducing their exposure to the banking system. Bail-in arrangements should ensure that shareholders and creditors take the first losses. The next line of defence is a resolution fund, which is filled via levies on

Rose & Sharfman: Shareholder Activism as a Corrective Mechanism in Corporate Governance (Updated Version)

corporate-governance_2736-29

My co-author and I have just posted a revised version of our article to SSRN.  Here’s the abstract: Under an Arrowian framework, centralized authority and management provides for optimal decision making in large organizations. However, Arrow also recognized that other elements within the organization, beyond

Verbič & Spruk: Aging Population and Public Pensions – Theory and Macroeconometric Evidence

public-pensions

Summary: Rapidly aging population in high-income countries has exerted additional pressure on the sustainability of public pension expenditure. We present a theoretical model of public pension expenditure under endogenous human capital, where the latter facilitates a substantial decrease in equilibrium fertility rate alongside the improvement in life expectancy.

Fichtner, Marcel & Gorni: An Investment Agenda for Europe

Flag_of_Europe

ABSTRACT: Only strong economic growth will help Europe emerge from its crisis. The reforms implemented to date at national and European level have failed to impact the economy positively; this is due to excessive national, corporate, and private debts, weakness of the banking system, the

Beretta & Iannini: China – A Case of ‘Mercantilism’ in a Backward Country?

20110212_fnd001

ABSTRACT: Despite being criticized for its inconsistencies, China’s mercantilism is considered a commonplace in the literature focused on Chinese economic development. This paper intends to criticize the foundations of China’s ‘monetary’ and ‘financial’ mercantilism arguing that both provide only a feeble explanation of its economic

Schoenmaker: On the need for a fiscal backstop to the banking system

Four_Directions_Economy_Regulations

ABSTRACT:

In the aftermath of the financial crisis, governments are rightly reducing their exposure to the banking system. Bail-in arrangements should ensure that shareholders and creditors take the first losses. The next line of defence is a resolution fund, which is filled via levies on banks. Nevertheless, we argue that a fiscal backstop remains necessary for a banking system, as private arrangements may not be sufficient in a severe crisis. Without a credible backstop, depositors will run on a troubled banking system causing a bad equilibrium with a full breakdown of the banking system. Only the government can provide such a credible backstop.

 

Available for download here.

Rose & Sharfman: Shareholder Activism as a Corrective Mechanism in Corporate Governance (Updated Version)

corporate-governance_2736-29

My co-author and I have just posted a revised version of our article to SSRN.  Here’s the abstract:

Under an Arrowian framework, centralized authority and management provides for optimal decision making in large organizations. However, Arrow also recognized that other elements within the organization, beyond the central authority, occasionally may have superior information or decision making skills. In such cases, such elements may act as a corrective mechanism within the organization. In the context of public companies, this article finds that such a corrective mechanism comes in the form of hedge fund activism, or, more accurately, offensive shareholder activism.

Offensive shareholder activism operates in the market for corporate influence, not control. Consistent with a theoretical framework in which the value of centralized authority must be protected and a legal framework in which fiduciary responsibility rests with the board, authority is not shifted to influential but unaccountable shareholders. Governance entrepreneurs in the market for corporate influence must first identify those instances in which authority-sharing may result in value-enhancing policy decisions, and then persuade the board and/or other shareholders of the wisdom of their policies so that they will be permitted to share the authority necessary for the policies to be implemented. Thus, boards often reward offensive shareholder activists that prove to have superior information and/or strategies by at least temporarily sharing authority with the activists by either providing them seats in the board or simply allowing them to directly influence corporate policy. This article thus reframes the ongoing debate on shareholder activism by showing how offensive shareholder activism can co-exist with — and indeed, is supported by — Arrow’s theory of management centralization which undergirds the traditional authority model of corporate law and governance.

This article provides a much needed bridge between the traditional authority model of corporate law and governance as utilized by Professors Steven Bainbridge and Michael Dooley and those who have done empirical studies on hedge fund activism, including Lucian Bebchuk. The bridge helps to identify when shareholder activism may be a positive versus negative influence on corporate governance.

Available for download here.

Verbič & Spruk: Aging Population and Public Pensions – Theory and Macroeconometric Evidence

public-pensions

Summary: Rapidly aging population in high-income countries has exerted additional pressure on the sustainability of public pension expenditure. We present a theoretical model of public pension expenditure under endogenous human capital, where the latter facilitates a substantial decrease in equilibrium fertility rate alongside the improvement in life expectancy. We demonstrate how higher life expectancy and human capital endowment facilitate a rise of net replacement rate. We then provide and examine an empirical model of old-age  expenditure in a panel of 33 countries for the period 1998-2008. Our results  indicate that increases in effective retirement age and total fertility rate would reduce age-related expenditure substantially. While higher net replacement rate would alleviate the risk of old-age poverty, further increases would add  considerable pressure on the fiscal sustainability of public pensions.

 

Available for download here.

Fichtner, Marcel & Gorni: An Investment Agenda for Europe

Flag_of_Europe

ABSTRACT:

Only strong economic growth will help Europe emerge from its crisis. The reforms implemented to date at national and European level have failed to impact the economy positively; this is due to excessive national, corporate, and private debts, weakness of the banking system, the lack of structural reforms, an insufficient institutional framework at European level, as well as a persisting climate of distrust in the stability of economic development. The probability of economic stagnation, characterized by high unemployment, declining incomes, decelerating potential growth, and deflation, is high and has increased significantly. The risk of economic development in Europe following Japan’s example of the 1990s is very real indeed.

This Economic Bulletin shows that one of Europe’s biggest economic weaknesses is a lack of private investment and that a European investment agenda is vital in order to generate the impetus required to push the European economy towards a sustainable recovery. European economic policy should focus not on higher public spending, but on increasing private investment as well as creating markets that function properly.

 

Available for download here.

 

Beretta & Iannini: China – A Case of ‘Mercantilism’ in a Backward Country?

20110212_fnd001

ABSTRACT:

Despite being criticized for its inconsistencies, China’s mercantilism is considered a
commonplace in the literature focused on Chinese economic development. This paper intends to criticize the foundations of China’s ‘monetary’ and ‘financial’ mercantilism arguing that both provide only a feeble explanation of its economic success. In particular, rather than echoing the practices of classical mercantilism, such supposed ‘mercantilist’ approach, on the contrary. Reflects the Gerschenkronian model of development, according to which the growth of the ‘backward’ countries is based massively on banks and State support.

 

Available for download here.

 

(image: The Economist)

Megginson, Ullah & Wei: Holdings – Evidence from China’s Privatized Firms

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ABSTRACT:

We study the relation between state ownership and cash holdings in China’s share-issue privatized firms from 2000 to 2012. We find that the level of cash holdings increases as state ownership declines. For the average firm in our sample, a 10 percentage-point decline in state ownership leads to an increase of aboutRMB 55 million in cash holdings. This negative relation can be attributable to the soft-budget constraint (SBC) inherent in state ownership. The Chinese financial system is dominated by the state-owned banks, an environment very conducive for the SBC effect. We further examine and quantify the effect of state ownership on the value of cash and find that the marginal value of cash increases as state ownership declines. The next RMB added to cash reserves of the average firm is valued at RMB 0.96 by the market. The marginal value of cash in firms with zero state ownership is RMB 0.36 higher than in firms with majority state ownership. The SBC effect exacerbates agency problems inherent in state-controlled enterprises, contributing to their lower value of cash.

 

Available for download here.

Munnell, Aubry & Cafarelli: An Update on Pension Obligation Bonds

public-pensions

From the Introduction:

This update shows how Pension Obligation Bonds (POBs) have fared since the financial crisis. This instrument, which is a general obligation of the government, alleviates pressure on the government’s cash position; and it may offer cost savings if the bond proceeds are invested, through the pension fund, in assets that realize a return higher than the cost of the bond. At the time of our last study, 2009 data showed that most issuers had lost money by issuing a POB. One question is the extent to which five additional years have changed that picture. The earlier study also looked at the factors leading a state or locality to issue a POB and concluded that those least able to absorb the risk were the most likely to do so. The second question is whether that continues to be the story.

 

Available for download here.

Wilson: New Investment Approaches for Addressing Social and Economic Challenges

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Summary:

This paper aims to provide an introduction and overview about the social investment market for OECD member countries. Social investment is becoming increasingly important as a way to address both social and economic challenges. Several OECD member countries have been active in creating policies and support mechanisms for social investment. This paper seeks to provide background information on social investment, demonstrate how the market is evolving and highlight the role that policy makers can play in facilitating the development of the market.

 

Available for download here.

Kuper & Veurink: Central Bank Independence and Political Pressure in the Greenspan Era

Marriner_S._Eccles_Federal_Reserve_Board_Building

ABSTRACT:

This paper investigates whether political pressure from incumbent presidents influences the Fed’s monetary policy during the period that Alan Greenspan was the chairman of the United States Federal Reserve Board. A modified Taylor rule with time-varying coefficients will be used to test well-known political-economic theories of Nordhaus (1975) and Hibbs (1987). The findings suggest that the Fed under Greenspan did not create election driven monetary cycles, but was less inflation averse with a Democratic president.

 

Available for download here.

Santos: Credit Booms – Implications for the public and the private sector

Currency-Revaluation

ABSTRACT:

The period preceding the global financial crisis that started in 2008 was one characterized by ample liquidity, a credit boom, and low yields in a wide range of asset classes. It was also defined by the accumulation of risks on and off the balance sheets of many financial intermediaries, particularly banks, as well as a substantial increase in public and private sector debt in some countries. Under standing the relation between liquidity and the excessive accumulation of risks remains a central policy question. How do credit booms affect incentives? In the case of the government sector, credit booms may affect the incentives of different interest groups to agree on policies for reform or fiscal stabilization. In the case of the private sector, it may change the incentives that originators have to produce good assets. Credit booms complicate inference and make it difficult to evaluate the benefits and costs of alternative policies and strategic choices as well as monitor agents. Finally, credit booms facilitate the entrenchment of interest groups and may lead to a deterioration of governance institutions.

 

Available for download here.

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