George C. Philippatos

Efficiency of Banks: Recent Evidence from the Transition Economies of Europe, 1993–2000

This study examines the cost and profit efficiency of banking sectors in twelve transition economies of Central and Eastern Europe (CEE) over the period 1993–2000, using the stochastic frontier approach (SFA) and the distribution-free approach (DFA). The managerial inefficiencies in CEE banking markets were found to be significant, with average cost efficiency level for 12 countries of 72% and 77% by the DFA and the SFA, respectively. The alternative profit efficiency levels are found to be significantly lower relative to cost efficiency. According to the SFA, approximately one-third of banks’ profits are lost to inefficiency, and almost one-half according to the DFA. The results of the second-stage regression analyses suggest that higher efficiency levels are associated with large and well-capitalized banks. The degree of competition has a positive influence on cost efficiency and a negative one on profit efficiency, while market concentration is negatively linked to efficiency. Finally, foreign banks are found to be more cost efficient but less profit efficient relative to domestically owned private banks and state-owned banks.

Competition and contestability in Central and Eastern European banking markets

Purpose - This study sets out to examine the evolution of competitive conditions in the banking industries of 14 Central and Eastern European (CEE) transition economies for the period 1993-2000. Design/methodology/approach - The basis for the evaluation of competitive conditions is the extant oligopoly theory in the new industrial organization literature, specifically, the competition model developed by Panzar and Rosse. Findings - The results of the competition analysis suggest that the banking markets of CEE countries cannot be characterized by the bipolar cases of either perfect competition or monopoly over 1993-2000 except for FYR of Macedonia and Slovakia. That is, banks earned their revenues as if operating under conditions of monopolistic competition in that period. An analysis of changes in competitive structure shows a higher degree of competition in the later years of the sample period. Large banks in transition countries are found to be operating in a relatively more competitive environment compared with small banks or, in other words, competition is lower in local markets compared with national and international markets. Research limitations/implications - The period under investigation corresponds to early years of the ongoing transition from central planning when these countries were lacking many market-supportive institutions essential for efficient financial markets. Therefore, the results of this study should be interpreted with the necessary scholarly scrutiny. Practical implications - The paper measures the level of market contestability that may have been facilitated by the recent liberalization and deregulation progress. Originality/value - The paper is highly original. Although research on the bank competition in the USA and other developed countries is voluminous, research that focuses on transition economies is relatively scant.

Evaluating Investment in Inventory Policy: A Net Present Value Framework

ABSTRACT This paper provides a method for evaluating investment in inventory that is consistent with a wealth maximizing objective. Theoretical superiority and conceptual straightforwardness of the proposed approach arc demonstrated via development of the net present value maximizing models for various inventory systems. Some important financial implications of the study are also discussed.

Voluntary divestitures and corporate life-cycle: some empirical evidence

The life-cycle concept is utilized to examine the voluntary divestiture phenomenon and is sucessful in seperating a sample of 145 divesting firms into four life-cycle groups through the use of cluster analysis preceded by factor analysis. The resulting groups, late expansion/early maturity, regenerating maturity, late maturity/early decline, and decline, differ from one another in terms of basic financial characteristics just before the divestiture event. They also differ in terms of the changes in financial characteristics experienced around the divestiture event by these divesting firms relative to their matched control firms. Support is found for most of the divestiture hypotheses suggested by life-cycle theory using paired-sample nonparametric tests and t-tests.

The impact of market contestability on the systematic risk of US bank stocks

The implications of contestable-markets theory (CMT) are employed to examine the systematic risk of US bank stocks during 1973–1988, a period spanning deregulatory changes. The implications of CMT lead to an expectation of higher risk after the product innovations and deregulation of the late 1970s and early 1980s. Systematic risk does increase in the later portion of the study. Also in keeping with CMT expectations, banking firms that are in potentially more competitive environments, MBHCs and those with state-wide branching abilities, are found to have higher systematic risk. However, switching regression shows the increase in systematic risk after regulatory and competitive change to be related more to Federal Reserve monetary policy changes than other regulatory moves. Support for CMT is therefore not robust.

Asymmetric Volume-Return Relation and Concentrated Trading in LIFFE Futures

This study demonstrates that intraday volume and return on LIFFE interest rate and currency futures exhibit an asymmetric volume-return relationship characterised by significantly larger volume associated with negative returns than with non-negative returns. This finding is unlike the stylised asymmetric relation often observed in equity markets, where the volume on price rise is larger than the volume on price decline. The asymmetric relationship in LIFFE futures is also found to be dynamic as the direction of asymmetry can reverse during the day. It has been argued in the past that a costly short sale restriction that requires a higher transaction cost on a short position than on a long position is responsible for the asymmetric effect in equity markets. Since such a restriction is absent in futures markets, they should not exhibit any asymmetric volume behaviour. Based on the results of this research, the costly short sale hypothesis is rejected. An alternative explanation of the asymmetric relation observed in futures is presented based on recent information models that take into consideration asymmetrically-informed traders, their dispersion of beliefs, quality and quantity of the information signal, and how the traders process it. The paper also confirms a strong U-shape trading pattern in 15-minute volume, but no such pattern is identified in intraday returns.

Determinants of stock price reaction to announcements of equity financing by US firms

Standard event-study and cross-sectional regresion methodologies are applied to data from 211 American industrial firms that issued new shares of common stock during 1971-84. The hypothesis that significant percentage of insider ownership and financial slack moderate the stock price drops typically observed on the announcement of new equity issues by seasoned, publicly-traded firms is tested. The results indicate that insider ownership of 30% or less mitigates somewhat the negative stock price reaction in the market during the two-day announcement period, thus providing empirical support for the agency hypothesis proposed by Jensen and Meckling (1976), and the informational asymmetry hypothesis by Leland and Pyle (1977). No empirical support was found for the beneficial effects of financial slack abundance, hypothesized by Myers and Majluf (1984), despite the utilization of several proxies for the measurement of slack.

Financial theory and the growth of scientific knowledge: From Modigliani and Miller to “an organizational theory of capital structure”

Abstract In this paper the evolution of the theory of capital structure, cost-of-capital and firm valuation is examined within the philosophical edicts of progress in science. It is argued that beyond the work of Modigliani and Miller, all theories of this subset of financial economics are lacking the elements that are required for growth in scientific knowledge. The authors see as a possible solution to this impasse reformative thinking within the boundaries of dual rationality.

Economies of scale in the US savings and loan industry: 1973–83

The question addressed in this research is whether or not there exist economies of scale in the US savings and loan (SL(b) that from 1979 to 1983 the minimum efficient scale for associations declined;(c) that a substantial change has occurred in operating costs and the estimated augmented elasticity.

Asymmetric Mean Reversion in European Interest Rates: A Two-factor Model

Abstract This paper tests for asymmetric mean reversion in European short-term interest rates using a combination of the interest rate models introduced by Longstaff and Schwartz (Longstaff, F.A., Schwarts, E.S. (1992) Interest rate volatility and the ferm structure: A two factor general equilibrium model, Journal of Finance, 48, pp. 1259–1282.) and Bali (Bali, T. (2000) Testing the empirical performance of stochastic volatility models of the short-term interest rates, Journal of Financial and Quantitative Analysis, 35, pp. 191–215.). Using weekly rates for France, Germany and the United Kingdom, it is found that short-term rates follow in all instances asymmetric mean reverting processes. Specifically, interest rates exhibit non-stationary behavior following rate increases, but they are strongly mean reverting following rate decreases. The mean reverting component is statistically and economically stronger thus offsetting non-stationarity. Volatility depends on past innovations past volatility and the level of interest rates. With respect to past innovations volatility is asymmetric rising more in response to positive innovations. This is exactly opposite to the asymmetry found in stock returns.