Paola Brighi

How do income diversification, firm size and capital ratio affect performance? Evidence for bank holding companies

We use panel data from 52 Italian Bank Holding Companies (BHCs) over the period of 2006 to 2011 to test how revenue diversification affects bank performance. Unlike studies of diversification that focus on its effect on equity and debt values and risk return portfolio strategies, we investigate how various nontraditional revenues mix impact performance. Diversification increases bank profitability on a risk-adjusted basis; however, no statistical effect in terms of risk is observed. We also argue that the results of previous research on the impact of diversification may differ because of its interaction with asset size and degree of capitalization. Our models are robust to different measures of performance, endogeneity tests and the effect of the financial crisis. The results have strategic implications for the consequences of bank performance and stability that are relevant to bank managers, regulators and supervisors.

Self-Financing of Traditional and R&D Investments: Evidence from Italian SMEs

Self-financing has often been seen as an important source for research-and-development (R&D) funding. However, an in-depth comparison between the determinants of self-financing in the case of traditional investments versus those in R&D has not been provided yet. We use a comprehensive data set of Italian manufacturing firms to investigate this issue. We analyse the role of a wide number of financial variables in driving the rate of self-financing of firms, in both traditional and R&D investments, and we focus on public subsidies and firm size as critical factors explaining heterogeneity. First, we perform logit and logistic regressions separately for traditional and R&D self-financing, finding that they are positively correlated, and that the availability of public subsidies reduces self-financing. Subsequent poolability tests show that public subsidies and firm size are crucial discriminating factors for self-financing behaviour. Our main finding is that, in the absence of public subsidies, no internal or external market variable is able to explain the firms’ financing decisions. Furthermore, our analyses generally show that credit constraints and banking relationship variables are relevant in determining traditional investment self-financing, while no clear statistical evidence is found in the R&D case. Credit rationing is not significant for R&D selffinancing, which may be explained by rationed firms being left out of our sample.

Distance and Efficiency in the Italian Banking System

During recent decades, banks have progressively moved towards larger, centralized and hierarchical organizational structures. An increased investment in non-interest-generating activities has also implied performance vulnerability, whose effects have been particularly destabilizing during the recent financial crisis. In this economic and financial contest, several banks have become increasingly concerned with controlling and analysing their costs and revenues, as well as measuring the risks taken to produce acceptable returns.

Traditional and R&D Investments: are They really Different?

The aim of this chapter is to identify the different role of financial funds in traditional and R&D investments in Italian manufacturing firms using information from Capitalia’s latest Survey of Italian Firms. R&D, defined as a creative activity implemented to improve know-how and its utilization in new applications, is quite distinct because of its high rate of information opacity. Coherently with the asymmetric information theory, R&D thus implies that firms will have greater difficulty in finding external financial funding. The higher risk related to R&D projects could entail some form of financial constraint. However, signalling mechanisms such as self-financing could correct such a market imperfection.

Managing Corporate Investment and R&D Financing: Are They Really Different?

The aim of this paper is to identify the different role of financial funds in traditional and R&D investments in Italian firms. Given its intrinsic characteristics, R&D is usually characterized by high information opacity and thus implies, coherently with the asymmetric information theory, greater difficulties in finding external financial funding. The higher risk related to R&D projects could entail some form of financial constraints. However, signaling mechanisms such as self-financing could correct such a market imperfection. The aim of this research is to investigate the determinants of R&D investment internal financial funding (self-financing). Traditional and R&D investments are considered to indicate a possible interaction between different self-financing patterns. Using different econometric models (Logit, OLS and SUR), our results show how information and agency costs, reflected in firm characteristics, affect financing decisions in both traditional and R&D investments. Our findings are consistent with the hypothesis that, in information opaque firms, internal equity plays an important role in R&D financing decisions. To the contrary, traditional investments are less related to self-financing. Public subsidies play a crucial role as a stimulus of R&D and investment self-financing. The overall evidence indicates that banking variables are also more relevant in traditional investments.

Bank branches expansion, efficiency and local economic growth

ABSTRACT This study investigates the effects of branch network expansion and geographical strategies on the cost efficiency of Italian cooperative banks between 2006 and 2013. Results indicate that, except for banks with a more diversified product offering, expansion has a negative impact on efficiency, which is exacerbated by increased distance between the headquarters and branches. Any positive effect due to a larger bank size is neutralized by the branch expansion. Efficient local banks and a larger credit availability boost the local economy, while a bank structural change by a branch expansion generates a negative effect in terms of local economic development.

Too Small or Too Low? New Evidence on the 4-Factor Model

In 1992, Fama and French published a landmark paper in which they provided, by means of a cross-sectional analysis, strong evidence of explanatory power by size and book-to-market factors, compared with little or no ability by the market factor to explain differences in equity returns. After this, a large body of literature came out evidencing the beta model’s weakness in explaining asset returns. Empirical works have mostly used US data, and most of them reject the beta Capital Asset Pricing model (CAPM — see, for example, Grinold, 1993). In another paper, Fama and French (1993), using a time-series approach, found basically the same evidence. However, further evidence for their model (Lakonishok et al., 1994; Haugen, 1995), highlighted the role of investor overreaction (De Bondt and Thaler, 1985) in explaining the value anomaly. Based on the overreaction/under-reaction argument to information, Jegadeesh andTitman (1993) and Rouwenhorst (1998) document the existence of a momentum anomaly: over a medium time horizon, firms with high returns over the previous three months to one year continue to outperform firms with low past returns over the same period.

Predictive Strength of Lending Technologies in Funding SMEs: JOURNAL OF SMALL BUSINESS MANAGEMENT

Using a proprietary database of lending decisions (N = 9,898) for small and medium‐sized enterprises (SMEs), the paper investigates how banks cope with the adverse selection dilemma. Based on an intertemporal framework, we qualify incorrect and correct lending decisions of banks and investigate the power of lending technologies to predict errors and correct choices. Findings suggest that adverse selection can be better controlled by a durable bank–firm relationship, as well as by an atomistic loan decision process, at the local level. By contrast, a loan decision‐making process based exclusively on hard financial information about SMEs may lead to adverse selection errors.

Demand and Supply Determinants of Credit Availability: Evidence from the Current Credit Crisis for European SMEs

The aim of this chapter is to examine the importance of demand and supply factors in determining credit availability during the recent financial crisis for a different sample of small- and medium-sized enterprises (SMEs) in some principal European countries. A first investigation suggests that during crisis time, the credit demand is mainly driven by liquidity problems. As for the determinants of credit demand, it emerges a different pattern among countries more bank than market oriented. Then, controlling for the supply of credit two types of credit rationing have been investigated. Weak rationing defines that condition for which firms asking for credit at the same interest rate did not receive it. To be strongly bank dependent implies a greater probability to be weakly credit rationed in crisis times. Differently solid accounting data, collateral and greater size may loosen such a condition. Finally, we control for strong rationing, i.e., the condition for which a firm even if ready to accept worse interest rates is subject to rationing. Evidence suggests that relationship-lending attitude as well as larger size could weaken the rationing condition; differently collateral as well as R&D propensity may exacerbate it because of moral hazard risk and higher information asymmetries.

Diversification Strategies and Performance in the Italian Banking System

This chapter addresses the subject of diversification in the Italian banking sector. The Italian banking system represents an ideal experimental setting since it is characterized by a heterogeneous range of banks. The processes of deregulation, innovation and consolidation during the 1990s prompted a new competitive contest within the banking system, which forced new managerial strategies to emerge from attempts to find new opportunities in terms of increased profits.