Victor Mendes

Productive efficiency, technological change and productivity in Portuguese banking

In this paper we aim at studying efficiency, productivity and technological change in Portuguese banking during 1990-95, using information on the vast majority of banks operating in Portugal during that period. We use a translog variable cost function and a stochastic frontier model to estimate inefficiency and technological change. Our results suggest that the increased competition that Portuguese banks witnessed over the last few years did not lead to a better overall performance from the standpoint of costs: on the one hand, the annual efficiency average did not clearly increase over time; on the other hand, many more banks are now less efficient (in relative terms) than they were in the early 1990s. They also suggest that there is not a clear relationship between size and cost efficiency. Efficiency and scale economies also seem not to be related with size: some of the less efficient institutions (net assets below 50 million contos) are the ones facing global, although small, economies of scale and the largest institutions are the more efficient but face diseconomies of scale, therefore suggesting that they remain competitive via a better cost control. As for technological progress, our results suggest the existence of technological recess, along the six years of the sample.

Financial literacy and portfolio diversification

We use a survey of individual investors disclosed by the Portuguese Securities Commission (CMVM) in May 2005 to study the impact of investors’ levels of financial literacy on portfolio diversification. We consider distinct aspects of financial literacy, and control for socioeconomic and behavioral differences among individual groups of investors. Our results suggest that investors’ educational levels and their financial knowledge have a positive impact on investor diversification. The information sources used by retail investors to gather information on markets and financial products also have a significant impact on the number of different assets included in a portfolio.

Malmquist indices of productivity change in Portuguese banking: The deregulation period

This paper will evaluate productivity change in Portuguese banking using the Malmquist productivity index. The results show that between 1990 and 1997, banks in Portugal witnessed increased productivity and strong technological progress. Both small and large banks experienced higher productivity and technological change scores, while mid-sized institutions are putting more effort into catching-up policies. Rural banks have experienced strong productivity growth and are catching up with the best practices but lower levels of technological change. Urban banks show higher productivity growth and technological change levels. Government-owned banks have experienced lower levels of productivity change. Finally, the asset per employee ratio shows a positive correlation with the productivity scores, suggesting that this simple index is a good proxy for productivity.

Are mutual fund investors in jail

The absence of investor reaction to the poor performance of mutual funds is a widely reported phenomenon. This article investigates the role of load costs as an explanation for the phenomenon and concludes that back-end load fees are an obstacle to reaction. We found evidence consistent with the hypothesis that medium and long-term investors do not react to poor performances due to the fact that they are ‘imprisoned’ by back-end load fees.

Mutual funds biased preference for the parent's stock: evidence and explanation

The potential manager-investor conflict of interests in mutual funds is a classic agency problem. Using a database from Portugal, we show that mutual funds tend to overweight the stocks issued by their parent and underweigh the stocks of competitors. This cannot be explained by performance, risk, securities’ characteristics or information advantage; funds invest in the stock of their parent company especially when there is widespread selling, and avoid selling them when the stock is experiencing low performance. This agency relationship is costly for fund investors: compared with the competitors stock, the parents stock underperforms after being acquired by the fund.

Do stress tests matter? A study on the impact of the disclosure of stress test results on European financial stocks and CDS markets

During the recent sovereign debt crisis, the European Banking Authority conducted two stress tests on European banks in order to gauge their capital needs, core Tier-1 ratios and ratios of resilience to adverse shocks. We assess the informational content of the disclosure of the stress test outcomes. We conclude that the stress tests conveyed new information and that the outcomes were not anticipated by the stock market but were partially anticipated by the credit default swap (CDS) market. However, while the stock market reacted to the disclosure of the stress test outcomes, in the CDS market there is some evidence of a ‘reverse’ reaction. Moreover, the publication of the outcomes of the stress tests had a stronger impact on the stock prices of riskier financial institutions. A similar pattern is evident in the CDS market, albeit narrowed to one of the stress tests and amid the financial institutions with higher perceived credit risk.

DO FINANCIAL CONGLOMERATES HAVE AN INCENTIVE TO PREVENT MANAGERS OF OTHER FIRMS FROM PURSUING THEIR OWN INTEREST

Purpose – We develop a theoretical model to analyze the role that financial conglomerates may play in reducing agency costs in target firms. Methodology/Approach – We develop a model to analyze the activism of a financial conglomerate (that includes investment banking besides mutual fund management activities) in monitoring the managers of a listed firm. The specific problem we study is this: should the managers of a listed company undertake a new project within the firm or should they develop it outside of the firm with the help of a bank? Should or not the financial conglomerate help the managers undertake the project outside of the existing firm at the expenses of the investors of the mutual fund that it manages, but collecting fees from the investment banking activities? Findings – It will be attractive to both the financial conglomerate and the managers to develop the project outside of the firm if the fees charged by the financial conglomerate for the provision of investment banking services are within a certain range. However, a more intense reaction to performance from the fund investors will translate to a greater space of converging interests between the conglomerate shareholders and mutual fund investors. Additionally, if fees earned by the mutual fund company are a large source of income for the conglomerate, then the lower will be its tendency to assist the managers. Social implications – From a regulatory standpoint, the implementation of measures aimed at transferring capital between funds without cost would allow mutual fund investors to intensify their reaction to fund performance, therefore increasing the likelihood of lower agency costs. We also conclude that supervisory authorities should pay special attention to the banking relationships of firms and banks to whom the asset management component is secondary and with smaller direct stakes in the said firm. Originality/Value of paper – We develop a theoretical framework to explain the absence of activism of institutional investors integrated in financial conglomerates in the governance of listed firms.

Are Banks Sensitive to Monetary and Exchange Rate Policy

This paper studies banks sensitiveness to monetary and exchange rate policy. Although some of the past studies of bank performance use macroeconomic explanatory variables, this is the first study to examine the impact of the exchange rate and monetary policy on bank interest margins and profitability, combining a broad cross section of bank balance sheet and income statement information in 12 European countries with a time series dimension (for the period 1988-98).The main conclusions of the study are threefold. First, monetary and exchange rate policy do matter. Second, the impact on commercial banks is different from the impact on other types of banks. Third, bank size is relevant.