Guest editors: Kostas Andriosopoulos1, Fotios Pasiouras2,3, Constantin Zopounidis3,4
1ESCP Europe Business School
Research Centre for Energy Management (RCEM)
527 Finchley Road, Hampstead, London NW3 7BG, UK
2University of Surrey
Guildford, Surrey GU2 7XH
3Technical University of Crete
School of Production Engineering and Management
University Campus, 73100 Chania, Greece
4Audencia School of Management, Nantes, France
About the SI
The papers included in this special issue are drawn from a series of papers presented at the 2nd International Conference of the Financial Engineering and Banking Society (FEBS) that took place on 7th and 8th June, 2012 at the ESCP Europe London campus. Established in 2010 in Greece, FEBS is a non-profit research society, with a global orientation aiming towards the promotion of decision making approaches in the fields of financial engineering and banking.
The 2012 FEBS meeting provided a forum for researchers and practitioners to exchange ideas and present new research results on the theory and modern practice of financial engineering and bank management in a financial crisis era. Hence, this special issue is an eclectic collection of research into a number of different facets of financial markets, including high-quality papers on all aspects of banking, corporate finance and financial modelling, presenting high level theoretical and/or empirical research results related to the theme of the special issue.
The first set of papers includes three studies that are related to the financial markets. There are many papers that examine the stock market reaction to the announcement of bank mergers and acquisitions (M&As). In general, these studies report that the acquirer suffers a loss that offsets the gains of the target. The first study by Beltratti and Paladino re-examines the stock market reaction during the crisis, using a sample of bank acquirers headquartered in the EU, Switzerland, and Norway. They find that abnormal returns for acquirers are zero on average at the announcements; however, they are positive after completion. Thus, they conclude that consistent with their initial belief, the M&A activity in the banking sector during the financial crisis was different. They also study the determinants of abnormal returns, and they reveal that these are mainly explained by bank characteristics. The second paper by Petrella and Resti examines the role of supervisors as information producers. This study brings together two issues that have received a lot of attention in banking. The first is the 2011 European Union stress test exercise which was conducted by the European Banking Authority (EBA) and received attention from the media, policy makers, academics, etc. The second is bank opaqueness, a topic that has been central in the agenda of academic research in banking. Petrella and Resti use a sample that includes 51 European banks that were included in the stress test exercise and 45 non-participating banks from the same countries to calculate abnormal returns around important announcements of the EBA. The authors reach a number of interesting conclusions, concluding that the market is not able to anticipate the test result which is consistent with the idea of greater bank opaqueness prior to the disclosure of the stress test results. Valenzuela and Zer focus on the Istanbul Stock Exchange to examine how the information content of a limit order book affects the order choice of an investor. Their three main conclusions are as follows: (i) the competition effect is stronger than the signalling effect, (ii) none of the price information affects the order choice of an impatient trader, and (iii) institutional investors trading strategies are affected by fewer pieces of the limit order book information compared to individual investors.
The second group of papers includes three studies that deal with various issues in banking. Market discipline has received a lot of attention from policy makers (e.g. see Basel II) and academics; however, its effectiveness came into question during the crisis. Hasan, Jackowicz, Kowalewski and Kozłowski provide an interesting investigation that extends our knowledge in various directions. In addition to examining a large sample of banks operating in 11 Central European countries over a long time period (1994-2011), one of the most interesting aspects of their study is that they consider not only financial statements for each bank, but also information about parent companies, mass-media rumours, capital injections, bad-loan removals, and emergency loans. They conclude that: (i) the crisis did not alter the sensitivity of deposit growth rates to accounting risk measures, (ii) depositors' actions were more strongly influenced by negative press rumours concerning parent companies than by fundamentals, (iii) public aid announcements were primarily interpreted by depositors as confirmation of a parent company's financial distress. Zhao, Matthews and Murinde focus on the British banking sector to examine its competitiveness in the context of cross-selling and switching costs during 1993-2008. More detailed, they estimate a structural model of strategic bank pricing behaviour that uses switching costs and contemporaneous cross-selling of loans against off-balance sheet business to maximise an intertemporal profit objective. Their results show that the second half of the sample period saw an increase in switching costs between providers of loan products as a result of weakening competition in the loan market. Furthermore, the consumers faced higher costs of purchasing from an alternative provider of off-balance sheet services. They conclude that these findings challenge the conventional view that banks engage in a loss-leader strategy of under-pricing loan products to attract bank customers and achieve the cross-selling of fee-based financial services in periods of increasing competition in the loan market. The last paper by Gaganis and Pasiouras uses a large international sample and stochastic frontier analysis to examine the impact of the financial supervision regime on bank profit efficiency. In particular, they examine the role of the involvement of the central bank in banking supervision, the financial authorities' unification, and the central bank independence. This differentiates their work from earlier studies that examine the impact of regulations like supervisory power, market discipline, and restrictions on bank activities. They conclude that bank profit efficiency decreases as the number of the financial sectors that are supervised by the central bank increases as well as in countries with greater unification of supervisory agencies. Furthermore, central bank independence also appears to decrease profit efficiency.
The third set of papers by Bartoli, Ferri, Murro and Rotondi, Andriosopoulos D., Andriosopoulos K. and Hoque, and Abudy and Benninga, focus more on corporate finance issues. Bartoli et al. investigate a very current and hot topic in corporate finance, that of the financing of Small and Medium-sized Enterprises (SMEs), concentrating in the case of Italy. They investigate the possibility for banks of combining lending technologies (LTs) for financing SMEs, such as transactional and relationship LTs, independently of their size. In particular, the authors argue that the paradigm that suggests that large financial intermediaries are disadvantaged in relationship-based lending to opaque SMEs is misleading. Results show that the use of soft information decreases the probability of firms being credit rationed. Finally, they find that more soft information is produced when the bank uses relationship LT as primary technology individually or coupled with transactional LT. Hence the authors suggest that complementarity among lending technologies, pursued by organizational measures that aim at increasing the degree of delegation and lowering the turnover of branch manager, might be more effective for the loan decision process rather than new soft information communication techniques. The focus of the paper by Andriosopoulos et al. is to assess whether the choice of disclosing explicit information or not on the intended share buyback program and CEO overconfidence among other characteristics explain share buyback completion rates. The results of their study show that disclosing explicit information about the intended buyback program can serve as a strong signal of a firm's intentions to complete the intended buyback program. In addition, they find that large and widely held firms that conduct subsequent buyback programs and have a past buyback completion reputation exhibit higher completion rates. Moreover, they show that CEO characteristics have a strong impact on buyback completion rates and find that firms with overconfident CEOs, i.e. senior CEOs who hold external directorships and have a longer tenure in that position are more likely to complete the buyback programs. In sum, their results suggest there is a clear relationship between information disclosure, CEO overconfidence, and buyback completion rates. The study by Abudy and Benninga introduces a valuation model for employee stock options (ESOs) that takes into account market imperfections and empirically estimates the value of these market imperfections. Their model quantifies the non-diversification effects and provides an endogenous explanation of ESO early exercise, combining the flexibility of the binomial model along with a theoretical framework which models the behavioural approach that characterises utility maximising models. Next the authors utilise a unique database that allows them to measure the non-marketability premium associated with ESOs and present further evidence on employees' behaviour.
The final set of papers includes two studies by Coro, Dufour and Varotto, and Brandtner that deal with various issues in financial modelling. Coro et al. investigate the role of credit and liquidity factors, including firm specific and aggregate liquidity proxies as well as an asymmetric information measure, in explaining corporate CDS price changes during normal and crisis periods. In general, the authors observe that liquidity effects dominate CDS price variations. Although firm-specific credit risk effects are very significant during the crisis, they have a lower explanatory power than liquidity effects, a confirmation of the commonly held view that the severity of the crisis was primarily due to liquidity factors. Their findings suggest that CDS price changes may not be accurate indicators of changes in default risk, even in periods of high uncertainty, contrary to accepted wisdom in the industry. Banks, insurance companies, regulators and rating agencies closely monitor CDS price changes to assess firm specific and market-wide variations in default risk. In light of their findings, these industry players may need to rethink how they interpret the signals they receive from the CDS market. Finally, Brandtner's paper studies portfolio selection under Conditional Value-at-Risk and, as its natural extension, spectral risk measures, and compares it with traditional mean-variance analysis. The author shows that the tendency towards corner solutions also prevails under spectral risk measures. If a risk free asset exists, diversification is never optimal. Similarly, without a risk free asset, only limited diversification is obtained. The reason is that spectral risk measures are based on a regulatory concept of diversification that differs fundamentally from the reward-risk tradeoff underlying the mean-variance framework. More specifically, results exhibit non-diversification if the risk free asset exists, and only limited diversification without a risk free asset. As diversification is a key issue in portfolio selection, its lack is a major drawback one should be aware of when replacing the traditional variance by spectral risk measures.
Although quite diverse, the range of papers included in this special issue offers a glimpse into the multi-faceted research currently carried out on financial markets, banking, corporate finance and financial modelling. The authors offer their insights into a number of issues, but also provide leads to further interesting research, so we are sure it will be a very satisfying read.