Jörg Rocholl

Do Politically Connected Boards Affect Firm Value

This article explores whether political connections are important in the United States. The article uses an original hand-collected data set on the political connections of board members of S&P 500 companies to sort companies into those connected to the Republican Party and those connected to the Democratic Party. The analysis shows a positive abnormal stock return following the announcement of the nomination of a politically connected individual to the board. This article also analyzes the stock-price response to the Republican win of the 2000 presidential election and finds that companies connected to the Republican Party increase in value, and companies connected to the Democratic Party decrease in value. The Author 2008. Published by Oxford University Press on behalf of The Society for Financial Studies. All rights reserved. For Permissions, please e-mail: journals.permissions@oxfordjournals.org., Oxford University Press.

Adverse Incentives in Crowdfunding

This paper analyses the incentives in the new and significantly growing markets for crowdfunding. In these consumer lending markets, lenders can give their money directly to borrowers without the intermediation of a financial institution. We are able to take advantage of the elimination of origination fees (group leader rewards) in an online social lending market and use a difference-in-difference approach to see how the same lenders behave when the origination fees are eliminated. The results show that there is a marked change in the incentives of these group leaders, which affect the kind of loans being originated and the performance of these loans. When group leaders earn rewards, the default rates are substantially higher for the loans that they originate, while, after the abolition of rewards, group leaders originate loans with significantly lower borrower default rates. We also find that, in the presence of rewards, only when group leaders have a substantial share of the originated loan are the default rates lower. The results provide important implications for the incentives in crowdfunding as well as the question of how retail consumers can be protected against unscrupulous lending and thus the ongoing debate about the proper regulatory framework for consumer lending.This paper analyses the substantially growing markets for crowdfunding, in which retail investors lend to borrowers without financial intermediaries. Critics suggest these markets allow sophisticated investors to take advantage of unsophisticated investors. The growth and viability of these markets critically depends on the underlying incentives. We provide evidence of perverse incentives in crowdfunding that are not fully recognized by the market. In particular we look at group leader bids in the presence of origination fees and find that these bids are (wrongly) perceived as a signal of good loan quality, resulting in lower interest rates. Yet these loans actually have higher default rates. These adverse incentives are overcome only with sufficient skin in the game and when there are no origination fees. The results provide important implications for crowdfunding, its structure and regulation.

Government Guarantees and Bank Risk Taking Incentives

This paper analyzes the effect of the removal of government guarantees on bank risk taking. We exploit the removal of guarantees for German Landesbanken which results in lower credit ratings, higher funding costs, and a loss in franchise value. This removal was announced in 2001, but Landesbanken were allowed to issue guaranteed bonds until 2005. We find that Landesbanken lend to riskier borrowers after 2001. This effect is most pronounced for Landesbanken with the highest expected decrease in franchise value. Landesbanken also significantly increased their off-balance sheet exposure to the global ABCP market. Our results provide implications for the debate on how to remove guarantees.

The Price of Liquidity: Bank Characteristics and Market Conditions

We identify frictions in the market for liquidity as well as bank-specific and market-wide factors that affect the prices that banks pay for liquidity, captured here by borrowing rates in repos with the central bank and benchmarked by the overnight index swap. We have price data at the individual bank level and, unique to this paper, data on individual banks’ reserve requirements and actual reserve holdings, thus allowing us to gauge the extent to which a bank is short or long liquidity. We find that the price a bank pays for liquidity depends on the liquidity positions of other banks, as well as its own. There is evidence that liquidity squeezes occasionally occur and short banks pay more the larger is the potential for a squeeze. The price paid for liquidity is decreasing in bank size and small banks are more adversely affected by an increased potential for a squeeze. Healthier banks pay less, but contrary to what one might expect, banks in formal liquidity networks do not.

What Kinds of Bank-Client Relationships Matter in Reducing Loan Defaults and Why?

Using a unique dataset of more than 1 million loans made by 296 German banks, we evaluate the impact of many aspects of customer–bank relationships on loan default rates. Our research suggests a practical solution to reducing loan defaults for new customers: Have the customer open a simple transactions account – savings or checking account. Observe for some time and then decide whether to make a loan. Loans made under this model have lower default, as banks can use historical data about their borrowers to establish a baseline against which new client-related information can be evaluated. Banks assemble this historical information through relationships of different forms. We define relationships in many different ways to capture non-credit relationships, transaction accounts, as well as the depth and intensity of relationships, and find each of these can provide information that helps reduce default – even establishing a simple savings or checking account and observing the activity prior to loan granting can help reduce loan defaults. Our results show that banks with relationship-specific information act differently compared with banks that do not have this information both in screening and subsequent monitoring borrowers which helps reduce loan defaults.

What Do a Million Observations Have to Say About Loan Defaults? Opening the Black Box of Relationships

Using a unique dataset of more than 1 million loans made by 296 German banks, we evaluate the impact of many aspects of customer–bank relationships on loan default rates. Our research suggests a practical solution to reducing loan defaults for new customers: Have the customer open a simple transactions account – savings or checking account. Observe for some time and then decide whether to make a loan. Loans made under this model have lower default, as banks can use historical data about their borrowers to establish a baseline against which new client-related information can be evaluated. Banks assemble this historical information through relationships of different forms. We define relationships in many different ways to capture non-credit relationships, transaction accounts, as well as the depth and intensity of relationships, and find each of these can provide information that helps reduce default – even establishing a simple savings or checking account and observing the activity prior to loan granting can help reduce loan defaults. Our results show that banks with relationship-specific information act differently compared with banks that do not have this information both in screening and subsequent monitoring borrowers which helps reduce loan defaults.

Loan Officer Incentives, Internal Rating Models and Default Rates

There is increasing reliance on quantitative complex models, such as internal ratings based (IRB) models for bank regulation, with much resources being spent on model validation exercises. We argue that a significant cost of IRB models that is not well understood or monitored is the change in loan officer incentives down the line. Using proprietary data on almost a quarter million loan applications, we show loan officer incentives significantly skew ratings even if the quantitative model is correct and there is no subjectivity in the system. These incentive effects have a first order effect on bank profitability. Incentives influence the hard information reported by loan officers and thus change the link between hard information and default probabilities in a way not captured by regular model validation exercises. Banks and regulators need to take these effects into account when using internal ratings for risk assessment and regulation.

WILL GERMAN BANKS EARN THEIR COST OF CAPITAL?: GERMAN BANKS

In recent years, the German banking sector has overcome major challenges such as the global financial crisis and the European debt crisis. This paper analyses a recent development as a particular determinant of the future outlook for the German banking sector. Interest rates are at historically low levels and may remain at these levels for a considerable period of time. Such levels pose a specific challenge to banks which are heavily dependent on interest income, as is the case for most German banks. We consider different interest rate scenarios and analyse the extent to which they cause a further narrowing of the interest rate margin. Our results indicate that a projected decline in this margin will result in no more than 20% of German banks earning a cost of capital of 8% by the end of this decade. This decline is somewhat alleviated by the fact that German banks can apply a special feature of German accounting standards by using hidden and open reserves.

Institutional Investors and Corporate Political Activism

The landmark decision by the U.S. Supreme Court on Citizens United v. Federal Election Commission asserts for the first time that corporations benefit from First Amendment protection regarding freedom of speech in the form of independent political expenditures, thus creating a new avenue for political activism. This paper studies how corporations adjusted their political activism in response to this ruling. The paper presents evidence consistent with the hypothesis that institutional investors, in particular public pension funds, have a preference for not using the new avenue for political activism, a preference not shared by other investors.

Unternehmensfinanzierung im Licht des finanzwirtschaftlichen Strukturwandels

Die offensichtliche Krise im Euroraum befindet sich nun in ihrem funften Jahr. Wenn man die weltweite Finanzkrise betrachtet, gehen wir sogar bereits ins achte Jahr. Diese uber einen solch langen Zeitraum anhaltende und in Form und Intensitat variierende Finanzkrise hat nicht nur zu massiven Erschutterungen innerhalb des Systems gefuhrt, sondern auch grundlegende Kritik an unserem marktwirtschaftlichen Wirtschaftssystem hervorgerufen. Dabei geht es vor allem um den haufig vorgebrachten Vorwurf, dass die Gewinne von Unternehmen und Banken privatisiert, die Verluste – bei Banken insbesondere im Fall vermeintlicher systemischer Relevanz – jedoch sozialisiert wurden.