Grace W.Y. Wang

The relative efficiency and financial risk assessment of shipping companies

Since shipping companies are highly competitive, we ask whether financial risk assessment tools impact company performance and, therefore competitiveness and efficiency. Stochastic Frontier Analysis (SFA) is used in the evaluation. Based on distinct features of the risk-return relationship, three cargo segments in the shipping industry are studied—dry bulk, liquid bulk, and containerized cargo. The influence of the risk assessment indicators on market and operational efficiency is subsequently determined using a panel regression to determine whether different asset allocation and risk management techniques improve the performance of shipping companies. In this analysis, 79 international shipping companies listed in Bloomberg Shipping Indices are included in the data collected from Thomson One for the period of 2001–2010. Efficiency estimation from the SFA shows that containerized cargo firms have better performance in both market and operating efficiencies. Operating efficiency performance is achieved by lowering liquidity. Market efficiency is improved by well-managed leverage level.

A study of relative efficiency between privatised and publicly operated US ports

This study identifies and compares the financial performance of privatised ports with non-privatised ports using the stochastic frontier profit function and panel data regression analysis. The goal of privatisation is to improve capital utilisation, sharpen managerial incentives and reduce bureaucratic waste. Given the arguments in favour of private ownership, the question is whether privatised ports satisfy the expectation of higher profitability. US ports are unique compared to foreign counterparts, with organisational forms ranging from purely public to landlord to private. To assess relative efficiency, we obtain data from the Public Ports Finance Survey for the period 1997 to 2006. Our findings support the argument that private sector involvement has a positive impact on port efficiency in terms of its financial performance. When price of output, capital intensity, cost of labour and size are controlled for, we see greater profit margins in landlord ports.

Partial Deposit Insurance and Moral Hazard in Banking

Abstract: Countries with deposit insurances differ significantly on how much protection their insurance provides. We study the optimal coverage limit in a model of deposit insurance with capital requirements and risk sensitive premia to prevent moral hazard. Depositors have incentives to monitor the bank’s risk taking behavior, thus threatening banks with withdrawals of deposits if necessary. We find that either banking regulations or market discipline is insufficient to reduce bank’s risk. In addition, our numerical example explains the differences in coverage cross countries which agrees with empirical evidence. We show that low income countries provide more generous insurance protection than higher income countries.

Risk taking by US banks led to their failures

This research studies why commercial banks in the USA failed in the recent financial crisis from the aspect of risk taking by the financial institutions. First, lending risks come from the choice of illiquid assets that affect the quality of loans. Second, risk of securitisation is rooted in the implicit recourse, backstop of liquidity, balance sheet overexpansion, and the moral hazard problem. Third, the systemic risk from the overall economic conditions was ubiquitous when market liquidity intertwined with the funding liquidity. Indicators are provided that distinguish surviving banks from their failed peers which serve as the early warning signals that predict banking failures. Given that, this study provides policy options which will contribute to greater stability in the banking sector in a future financial market and economic crisis.

A game theory application of a cruise value chain – the case of China

Purpose Regardless of the facts showing a booming Chinese cruise market, cruise operations in China are very different from the current practices of the two major cruise markets – the US and the Mediterranean Sea. This study aims to quantify pricing strategies and possible incentive mechanisms of cruise operations in China. Design/methodology/approach Using optimization in economic-based game theory, the complexity of the pricing strategies and interaction and/or possible coordination within the cruise value-added chain can be captured. Findings The results show that a coordinative pricing strategy with Shapley profit redistribution within the value-added chain offers benefits to both cruise passengers and service suppliers. With two subsidy scenarios, one to the passenger and the other to the travel agent, a cooperative pricing strategy outperforms other strategies and successfully increases market shares and total revenue. Originality/value The advantages of coordination between participants in cruise value chain are quantified. Effective strategies for attracting players participating in cruise value chain are designed. This paper will provide market participants with strategies to enhance their decision-making processes.

Drivers of US Bank Failures during the Financial Crisis

Hundreds of banks failed during the financial crisis of 2008 to 2010 causing significant social cost and enfeebling economic growth for years following. In the aftermath of the crisis, regulators responded, as always, with new regulations, the efficacy of which is debatable. For policy makers to enact effective regulation, they must understand the true cause of bank failures during crisis periods. We study the effects of 31 variables using univariate t-tests and probit regression to determine their influence on the probability of bank failure. We find that banks failed during the 2008 to 2010 financial crisis because of choices management made to accept more risk, specifically by having higher financial leverage, investing in higher risk loans in real estate and construction and by holding less liquid assets and fewer low risk loans like single family real estate loans. That is, the cause of US bank failures during the finance crisis was poor management.

Bank asset allocation: the effectiveness of market monitoring

Purpose - – The purpose of this paper is to study the effectiveness of market discipline on banks’ risk-taking behavior based on how swiftly banks respond to market information. Design/methodology/approach - – A simplified incentive model provides the necessary justification for two types of market disciplines: first, monitoring by uninsured market participants, and second, risk premium in terms of interest spread required by risk-averse depositors. Panel data regression is carried out for both surviving and failed US banks for the period 1999:Q4-2007:Q3 to examine the role of market discipline, bank capital, and macroeconomic shocks. Findings - – The paper finds that banks which failed during 2007:Q4-2010:Q4 suffered from fundamental weaknesses in their asset quality relative to the surviving banks prior to the crisis. Originality/value - – The paper focusses on two questions: In what circumstance does market monitoring exist? And how can market incentives affect banking firms’ actions? The first question is studied in a simplified incentive model that provides justification for two types of market discipline. Given that, the effectiveness of market discipline is empirically tested, using the US banking data in the period leading up to a surge in the number of bank failures in 2007-2010. The papers results show that failed institutions with large size were relatively less responsive to early warning signals of declining uninsured deposits and rising deposit spread.