Royal Bank of Scotland, Fortis and Banco Santander are set to to win the battle for Dutch bank ABN AMRO. This is the world's biggest bank merger.
Shareholders of all four banks will wonder how their shares might develop in the short, medium and longer term. Tough question! A look at mergers in the financial industry in the past might give some evidence. A paper by M. Campo and I. Hernando looks at the performance record of financial industry deals that took place in the European Union between 1998-2002.
M&A Performance in the European Financial Industry, J.M. Cama, University of Navarra; National Bureau of Economic Research (NBER), I. Hernando, Bank of Spain, IESE Business School, Working Paper No. 588, April 2005
Key findings were:
Attached paper analyzes market reactions triggered by announcements that hedge funds and private equity investors purchase large blocks of voting rights. Researchers argue that shareholder's wealth is created by a reduction of agency costs through active holders of share blocks.
The investigation is based on a unique data set of German public listed companies and relates their short-term stock performance
to several corporate and market variables. Additionally, researchers examine ownership structure specific effects besides mid-term returns.
Key findings are:
Sometimes a historical perspective is needed to understand the events of the present.
Franklin Allen from University of Pennsylvania and Douglas Gale, New York University, provide a valuable overview on financial crises over the last decades. They refer to research which has been done on the explanation of crises. One view they mention is that "crises occur spontaneously as the result of mob psychology or panic" (Panic based models).
Another view they mention is that crises are an intrinsic part of economic cycles and result from shocks to economic fundamentals (models with real intrinsic shocks).
Both models and research which has been done so far are explained in the paper by Allen and Gale.
Researchers from Turin University analyzed the impact of public policy on venture market activity. They formalized "innovation ratios" and explore the possibility of excess supply of venture capital.
Further data on entrepreneurship:
UBS has announced a CEO change this summer without giving detailed reason. Yesterday they announced that they have to make provisions of approximately Swiss francs 4 billion mainly due to losses in subprime investments. The financial community is asking whether the CEO change has been due to this bad investments (which seems to be obvious) and whether bad news has been delayed. We do not know for sure.
S.P. Kothari, S. Shu and P. Wysocki from MIT examine whether managers delay the disclosure of bad news relative to good news. They infer the relative timeliness of bad and good news disclosures from the magnitude of stock price reactions to such disclosures.
Key findings are:
UBS stock has improved approximately 10% since yesterday's announcement of the subprime losses in the third quarter. It will be interesting to see how the share price will develop in the next 3 days. Announcing the losses together with further management changes (CFO, CIO..) was definitely not the worst thing to do. It demonstrated that the new CEO is willing to act resolutely in crisis situations.
Source: "Biofuels - at what Costs by Dough Koplow
Attached article from the online section of the New York Times clearly demonstrates how subsidies in many cases lead to market distortions. Subsidizing ethanol production obviously lead to overinvestment in ethanol distilleries.
It can also be questioned whether the subsidizing of ethanol production is meaningful from an environmental point of view: the carbon dioxide produced by burning ethanol has been in the atmosphere. Putting it back into the air has overall no adverse effect on the climate. However, ethanol is not a very effective fuel. By burning a litre of ethanol you get a third less heat than by burning a litre of petrol. Various research institutions and firms are currently working on developing a better fuel. As an example, researchers try to develop techniques which turn living organisms into chemical reactors, finally making fuel which has better qualities than ethanol.
The question arises whether taxpayer's money should rather be invested in the not so efficient ethanol production or in promising new projects.
The study "Biofuels – At What Cost? Government support for ethanol and biodiesel in the United States", by Dough Koplow addresses the consequences of biofuel subsidies in various countries. Due to a lack of information regarding consequences of such subsidies the report makes amongst others following recommendations:
href="http://www.card.iastate.edu/publications/synopsis.aspx?id=1029">Long-Run Impact of Corn-Based Ethanol on the Grain, Oilseed, and Livestock Sectors: A Preliminary Assessment, Amani Elobeid, Simla Tokgoz, Dermot J. Hayes, Bruce A. Babcock, Chad E. Hart, Iowa State University, November 2006
Firm Failures as a Determinant of New Entry: Is There Evidence of Local Creative Destruction? Aviad Pe'er, Tuck School of Business at Dartmouth, Ilan Vertinsky, University of British Columbia - Sauder School of Business, June 2005, Tuck School of Business Working Paper No. 2005-30 Sauder School of Business Working Paper
Relating to the previous post and the possible destruction of firms ..... there will always be new opportunities as attached paper explains:
Selection of key findings:
Particularly in times of volatile financial markets it is sometimes helpful to lean back and to think about the strength of sustainable and successful firms and institutions.
Our concept (referring to the basic idea underlying this blog) is not to reinvent the world but to post highly valuable ideas, articles and papers which we find useful for the practitioner. Attached article definitely belongs to this category:
A selection of key messages:
Researchers from the University of Cologne analyzed the decision making process of German mutual fund managers on the basis of a telephone survey. We find interesting that there seems to be a behavior difference between managers of large mutual funds and those of small and medium sized mutual funds. Key findings are:
An interesting question would be why there seems to be a tendency that managers of smaller funds do not necessarily see the value of contact with company managements. Might there just be a lack of critical mass to act in the most professional way?
Home Ownership Rates for the US from 1965 to present
Source: United States Statistical Abstracts
The report, prepared by the IMF's Monetary and Capital Markets Department twice a year, said the turbulence could impact global economic growth. "Although the dislocations, especially to short-term funding markets, have been large, and in some cases unexpected, the event hit during a period of above-average global growth. Our assessment is that credit losses and the liquidity constriction experienced to date will [nevertheless] likely slow the global expansion," it stated. The IMF will give its next forecast for world growth on October 17. The GFSR noted that systemically important financial institutions began this episode with adequate capital to absorb the likely level of credit losses. "Corporations, have, for the most part, been able to secure the financing they need to maintain their operations. However, the adjustment period is continuing and if the intermediation process stalls and financial conditions deteriorate further, the global financial sector and real economy could experience more serious negative repercussions," the report added.
Marc Thornton, an economist with Austrian school background, philosophizes about the predictability of stock market bubbles by economic professionals. He has identified two groups which predicted the 2000 stock market decline:
We attach this paper as it contains some very valuable quotes about the phenomena of bubbles and their predictability.
Further reading about bubbles:
Source: Christopher L. Peterson, Univ. of Florida
We particularly recommend to read chapter I of attached paper which gives a very valuable insight into the evolution of mortgage securitization in a historical context.
Subprime Mortgage Market Turmoil: Examining the Role of Securitization – A hearing before the U.S. Senate Committee on Banking, Housing, and Urban Affairs Subcommittee on Securities, Insurance, and Investment Written Testimony of Christopher L. Peterson, Associate Professor of Law, University of Florida, April 17, 2007
Mervyn King, governor of the Bank of England, has defended his handling of the Northern Rock crisis in front of a panel of MPs.
Key elements were:
Questions that might arise from this case:
- Mistakes in communication policy by the Bank of England?
- Effect of the event on future pricing of risk?
- Consequences for the management of Northern Rock in order to avoid future excessive
risk behavior of banking managements?
- What other measures, if any, could be taken instead of tighter regulation?
- What can be learnt for possible interventions in the future?
- Impact of the "EU policy directive" mentioned above on central bank behavior? Is there a
need for adaption?
"The knock on effects of defaults in the US sub prime market and the impact of big investors on asset prices are factors we need to assess not just in trying to
understand the financial sector and the stresses it faces but in gauging the state of
the economy more widely."
Mervyn King, the central bank's governor, in week 37, 2007:
"The provision of such liquidity support undermines the efficient pricing of risk by providing ex post insurance for risky behavior," he said in prepared remarks to a government committee. "That encourages excessive risk-taking, and sows the seeds of a future financial crisis."
Bank of England injects £4.4bn into money markets, Independent, Sept. 19, 2007: "The Bank of England injected £4.4bn in emergency loans into the financial system yesterday, marking yet another departure from the hard line that the central bank had initially taken on the crisis. The Bank said that it released the funds – its first exceptional finetuning of the market since the global credit crunch began – to offset the spike in overnight lending rates that worsened in the wake of the run on Northern Rock. The injection brought the overnight lending rate down to 6.14250 per cent yesterday from 6.46875. The three-month Libor rate – the key rate at which banks will lend to each other – continued to move down as signs increased of easing in the commercial paper markets."
It might be interesting for certain blog visitors to read a paper of the St. Louis Fed about Milton Friedman’s views and predictions regarding U.S. monetary policy developments after 1960. The author evaluates these interpretations and predictions in light of subsequent events.
Resolution of banking crises: a review, G. Hoggarth (Financial Industry and Regulation Division, Bank of England), J. Reidhill1 (US Federal Deposit Insurance Corporation), P. Sinclair (University of Birmingham)
A 2003 article of the Bank of England describes some of the principles that banking authorities should consider when they have to resolve banking crises. Although 4 years old the article has become actual as the British banking system is facing the Northern Rock debacle. Among many other aspects the article deals with potential medium- and longterm effects of government intervention in a banking crisis. Some of the major conclusions (out of the articles summary) are listed below:
Source: Silicon Valley's secret Ingredient
There have been many attempts to copy the success of Silicon Valley elsewhere
However, it is not only a concentrated geographical region which is important for the success. There are many other key factors such as availability of skilled labor, a demanding local market and, probably most important, a risk-taking culture.
Culture has played a critical role in the competitiveness in many Silicon Valley industries.
Researchers argue that culture affects several firm factors such as firm’s strategy and structure. Furthermore, they argue that also related industries and demand conditions get affected by the innovative firm’s culture.
Some Key findings:
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