Yishay Yafeh

Emerging Market Spreads: Then versus Now

This paper analyzes yield spreads on sovereign debt issued by emerging markets using modern data from the 1990s and newly-collected historical data on debt traded in London during 1870–1913, a previous “golden era†for international capital market integration. Applying several empirical approaches, we show that the co-movement of spreads across emerging markets is higher today than it was in the historical sample. We also show that sharp changes in spreads today tend to be mostly related to global events, whereas country-specific events played a bigger role in 1870–1913. Although we find some evidence that economic fundamentals, too, co-move more strongly today than at that time, our interpretation of the results is that today’s investors pay less attention to country-specific events than their predecessors did in 1870–1913.

Do Cultural Differences Between Contracting Parties Matter? Evidence from Syndicated Bank Loans

We investigate whether cultural differences between professional decision makers affect financial contracts in a large data set of international syndicated bank loans. We find that more culturally distant lead banks offer borrowers smaller loans at a higher interest rate and are more likely to require third-party guarantees. These effects do not disappear following repeated interaction between borrower and lender and are economically sizable: A one-standard-deviation increase in cultural distance, approximately the distance between Canada and the United States or between Japan and South Korea, is associated with a 6.5 basis point higher loan spread; the loan spread increases by about 23 basis points if the bank-firm match involves culturally more distant parties, for example, from Japan and the United States. We also find that cultural differences not only affect the relation between borrower and lender, but also hamper risk sharing between participant banks and culturally distant lead banks. This paper was accepted by Brad Barber, Teck Ho, and Terrance Odean, special issue editors.

Large Shareholders and Banks: Who Monitors and How?

Using a sample of Japanese firms in the chemical industry, we show that concentrated shareholding is associated with lower expenditure on activities with scope for managerial private benefits. We interpret this as evidence of a hitherto undocumented form of monitoring by large shareholders. We examine whether such monitoring is also performed by banks and other creditors. The results in the metal product industry are roughly similar, but we find no evidence of this type of monitoring in the Japanese electronics industry, and suggest a number of explanations.

Japan's Corporate Groups: Collusive or Competitive? An Empirical Investigation of Keiretsu Behavior

This paper uses data on manufacturing firms listed on the Tokyo Stock Exchange to evaluate whether firms that are part of Japanese financial groups (keiretsu) behave differently from other Japanese firms. The results from this analysis reject the hypothesis that these firms collude in order to raise profits. The data do suggest that keiretsu firms are heavily influenced by their banks to produce at levels beyond those warranted by pure profit maximization. These higher levels of output may also explain why entry into markets with strong keiretsu presence is often described as difficult. Copyright 1995 by Blackwell Publishing Ltd.

Institutional Reforms, Financial Development and Sovereign Debt: Britain 1690 1790

ernment debt, and financial development in Britain (1690-1790) and find that interest rates remained high and volatile for four decades after the Glorious Revolution, partly due to wars and instability; British interest rates co-moved with those in Holland; Debt per capita remained lower in Britain than in Holland until around 1780; and Britain did not borrow at lower rates than European countries with more limited protection of property rights. We conclude that, in the short run, institutional reforms are not rewarded by financial markets.

Institutions, Reforms, and Country Risk: Lessons from Japanese Government Debt in the Meiji Era

We evaluate the effect of the establishment of modern state institutions (e.g. a central bank or a constitution) on the risk premium associated with government debt traded abroad. Drawing on evidence from one of the most dramatic reform periods in modern history, and using data on sovereign debt traded in London between 1870 and 1914, we investigate the impact of major reforms on the yields of Japanese government debt following the Meiji Restoration. We show that, although the risk premium on Japanese debt declined during the period, the establishment of modern, western institutions did not elicit an immediate market response. The one institutional reform that significantly reduced the perceived risk associated with Japanese bonds was the adoption of the Gold Standard in 1897. In addition, political events such as the Anglo-Japanese treaty (1902) and the military victory over Russia (1905) improved Japans debt capacity, and led to a substantial increase in the volume of Japanese debt. We conclude that, at least in the short run, well understood monetary rules as well as military achievements matter more for the perception of a country by foreign investors than modern state institutions, although we do not rule out the possibility that in the long run institutions do affect a countrys credit rating.

Conflict of Interest in Universal Banking: Bank Lending, Stock Underwriting, and Fund Management

Using a newly-constructed data set on Israeli Initial Public Offering (IPO) firms in the 1990s, we study costs and benefits of universal banking. We find that a firm whose equity was underwritten by a bank-affiliated underwriter, when the same bank was also a large creditor of the firm in the IPO year, exhibits significantly better than average post-issue accounting performance, but that its stock performance during the first year following the IPO is considerably lower than average. When an investment fund managed by the same bank is heavily involved in the IPO as buyer of the newly-issued equity, the stock performance during the first year following the IPO is even lower. This, together with negative first day returns, is indicative of IPO overpricing. We interpret these findings as evidence that universal banks use their superior information regarding client firms to float the stock of the cherries, not the lemons (as measured by post-issue accounting performance), but that bank managed funds pay too much for bank underwritten IPOs, at the expense of the investors in the funds. These results suggest that there is conflict of interest in the combination of bank lending, underwriting, {\em and\/} fund management.

The Corporation of Foreign Bondholders

This paper analyzes the Corporation of Foreign Bondholders (CFB), an association of British investors holding bonds issued by foreign governments. The CFB played a key role during the heyday of international bond finance, 1870-1913, and in the aftermath of the defaults of the 1930s. It fostered coordination among creditors, especially in cases of default, arranging successfully for many important debt restructurings, though failing persistently in a few cases. While a revamped creditor association might once again help facilitate creditor coordination, the relative appeal of defection over coordination is greater today than it was in the past. The CFB may have had an easier time than any comparable body would have today.

A microeconometric analysis of technology transfer: The case of licensing agreements of Japanese firms

This paper examines investment in foreign technology by Japanese tirms, using previously unexplored data on technology transfer to Japan. The relationship between the acquisition of foreign technology and firm size, liquidity and affiliation with a corporate group, or keiretsu, is analyzed. Our results indicate that the number of licensing agreements a firm signs is positively and strongly related to its size, although the relationship is concave. We also find that liquidity is an important consideration in the firm’s decision to invest in foreign technology. Keiretsuaffiliated firms acquire relatively more foreign technology than independent firms, suggesting that corporate groups have played an important role in Japan’s technological progress.

Institutional Investors as Minority Shareholders

We examine the role of institutional investors in corporate governance in an environment where ownership is concentrated. The presence of dominant shareholders alters the role of institutional investors by limiting their voting influence; by shifting the focus from shareholder-manager conflicts (when ownership is dispersed) to conflicts between controlling and minority shareholders (when ownership is concentrated); and by creating new potential conflicts of interest when business groups are present. Using hand-collected data on voting by institutional investors in Israel, which adopted far-reaching measures to empower minority shareholders, we find that: (1) Institutional investors rarely vote against insider-sponsored proposals even when the law grants them special voting power; (2) Institutional investors are more likely to vote against compensation-related proposals than against other related party transactions even when minority shareholders lack the power to influence outcomes; and (3) Institutional investors with potential ownership and businessrelated conflicts of interest are less likely to vote against insider-sponsored proposals than standalone institutional investors, both when minority shareholders have power and when they do not. One interpretation of these findings is that the power granted to the minority plays a role only in the selection of proposals brought to a vote but not in voting on existing proposals; another is that, in order for institutions to play a valuable role in corporate governance, granting voting power to minority shareholders is unlikely to be effective unless conflicts of interest are addressed.