Carolin D. Schellhorn

Lender Certification Premiums

The announcement of a bank loan by a borrowing firm has been shown to have a positive effect on the market value of the borrowers claims. This is consistent with a lenders implied endorsement of the borrower - an endorsement that has value to the borrower. In this paper, we investigate whether the lender is able to extract a premium loan rate or certification premium in return. We find empirical evidence that in the absence of collateral reputable lenders are able to exact a certification premium.

Subordinated debt prices and forward-looking estimates of bank asset volatility

Abstract We have estimated the forward-looking bank asset volatility using market prices of bank equity and subordinated debt. This is in contrast to estimation procedures which rely on historical stock price volatilities. Important for bank regulatory policy, we find that, during 1987–1988, a time of financial stress in the banking industry, most bank asset volatility estimates based on contemporaneous market information were on average 40% higher than historically-based readings. Our results suggest that elevated asset volatilities would require higher risk-based capital standards to protect the deposit guarantor.

Bank forbearance: A market-based explanation

Abstract Why does forbearance for insolvent banks occur? We offer an explanation based on stockholders’ ability to appeal to the courts for reversal and monetary damages after the regulator has initiated a receivership action. Although this has always been theoretically possible, precedents and common law standards now exist. We calculate the market’s perceived postponement of receiverships for banks thought to be insolvent. We explain the receivership delays with the regulator’s reluctance to proceed when investors’ pricing of the bank’s stock and accountants’ assessment of the bank’s solvency do not support a receivership action. Our clinical evidence is consistent with this notion. Jel Classification: G180; G200; G210; G280

The Low-Carbon Transition and Financial System Stability

The agreement of the climate-negotiating parties in Paris in December 2015 (COP21) signaled the world’s intent to decarbonize over the coming decades in order to keep the earth’s average temperature increase below 2 degrees Celsius by mid-century. A timely and smooth transition to a low-carbon economy may be accomplished if businesses routinely disclose and manage carbon dioxide emissions subject to science-based targets along with climate-related financial risks and financial performance. Existing capital budgeting techniques can help create value sustainably by focusing on the opportunity costs of both financial capital and carbon dioxide thus improving the allocations of both financial and atmospheric capital. Business efforts in this area will be most effective if guided by supportive government policy. If the voluntary responses from businesses, consumers, investors and local policy-makers fail to meet the science-based deadline for carbon dioxide emission reduction, aggressive and globally enforced carbon pricing mechanisms and emissions restrictions may become necessary. To the extent the business community is unprepared for broad-based climate policy intervention individual firm balance sheets may become impaired. In this case the greater likelihood of financial insolvencies in carbon-intensive and related industries will challenge the stability of the global financial system. It is therefore imperative that the problem of financial institutions that are “too big to fail” be addressed expeditiously by reducing financial firms’ holdings of high-carbon assets.

A Rasch Perspective on Firm Financial Performance in the Pharmaceutical Industry

The metrics that are relevant for ranking firms by their financial performance may vary with conditions across different industries. For the pharmaceutical industry, we explore an approach that lets the Rasch model determine the performance metrics that are most important. Using an initial set of ratios spanning multiple dimensions of firm financial performance, we select the ratios that are compatible with the requirements of the Rasch model for this industry during 2002–2011. We identify the metrics, for which positive results were most difficult to achieve, and the firms that most frequently ranked among the top five performers. Our approach offers a new perspective or research method on the valuation of managers and their firms. Interestingly, our results suggest that the variables most relevant for a Rasch financial performance ranking of firms in this industry are not necessarily the variables that directly measure increases in investor wealth or returns.

The Predictive Power of Treasury Securities: Estimating Changes in Market Expectations of Future Inflation

Many courses in financial economics cover the estimation of forward rates implied in Treasury spot rates. A less well-known extension of this discussion shows how yields on TIPS and similar-maturity conventional Treasury securities may be used to extract the markets inflation expectation. We illustrate the use of this methodology with data for the beginning of 2007 and 2008. One interesting opportunity to apply this method arose in January 2008 around the time of two substantial federal funds target rate cuts by the Federal Reserve. Near-term and longer-term inflation expectations appear to have responded differently to the first and second interest rate cuts, which were only ten days apart. After reporting our results, we discuss caveats that should be taken into account when applying this method.