Contemporary Topics in Finance: A Collection of Literature Surveys PDF
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Contemporary Topics in Finance Contemporary Topics in Finance A Collection of Literature Surveys Edited by Iris Claus and Leo Krippner Thiseditionfirstpublished2019 Chapters©2019TheAuthors Bookcompilation©2019JohnWiley&SonsLtd OriginallypublishedasaspecialissueoftheJournalofEconomicSurveys(Volume32,Issue5) Allrightsreserved.Nopartofthispublicationmaybereproduced,storedinaretrievalsystem,ortransmitted,inany formorbyanymeans,electronic,mechanical,photocopying,recordingorotherwise,exceptaspermittedbylaw. Adviceonhowtoobtainpermissiontoreusematerialfromthistitleisavailableat http://www.wiley.com/go/permissions. TherightsofIrisClausandLeoKrippnertobeidentifiedastheauthorsoftheeditorialmaterialinthisworkhave beenassertedinaccordancewithlaw. 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LibraryofCongressCataloging-in-Publicationdataisavailableforthisbook. 9781119565161(paperback) CoverDesign:Wiley CoverImages:LeeYiuTung/Shutterstock,©GoldenHouseStudio/Shutterstock Setin10/12ptTimesLTStdbyAptaraInc.,NewDelhi,India 10 9 8 7 6 5 4 3 2 1 CONTENTS 1. ContemporaryTopicsinFinance:ACollectionofLiteratureSurveys 1 IrisClausandLeoKrippner 2. ASurveyoftheInternationalEvidenceandLessonsLearnedabout UnconventionalMonetaryPolicies:Isa‘NewNormal’inourFuture? 11 DomenicoLombardi,PierreSiklosandSamanthaSt.Amand 3. ImplicitBankDebtGuarantees:Costs,BenefitsandRisks 41 SebastianSchich 4. FinancialFraud:ALiteratureReview 79 ArjanReurink 5. EstimatingInflationRiskPremiaUsingInflation-LinkedBonds:AReview 117 AlexanderKupfer 6. FinanceandProductivity:ALiteratureReview 151 MarkHeil 7. BusinessAngelsResearchinEntrepreneurialFinance:ALiteratureReviewand aResearchAgenda 183 FrancescaTenca,AnnalisaCroceandElisaUghetto 8. VentureCapitalInternationalization:SynthesisandFutureResearchDirections 215 DavidDevigne,SophieManigart,TomVanackerandKlaasMulier 9. IsRelationshipLendingStillaMixedBlessing?AReviewofAdvantagesand DisadvantagesforLendersandBorrowers 249 AndiDuqi,AngeloTomaselliandGiuseppeTorluccio 10. DeterminantsofthePerformanceofMicrofinanceInstitutions:ASystematic Review 297 NielsHermesandMarekHudon vi CONTENTS 11. CrowdfundingandInnovation 331 FabriceHerve´andArminSchwienbacher 12. Crypto-Currencies–AnIntroductiontoNot-So-FunnyMoneys 351 ChristieSmithandAaronKumar Index 383 1 CONTEMPORARY TOPICS IN FINANCE: A COLLECTION OF LITERATURE SURVEYS Iris Claus University of Waikato Leo Krippner Reserve Bank of New Zealand “Fortherewasonceatimewhennosuchthingasmoneyexisted....Butitdidnotalways and so easily happen that when you had something which I wanted, I for my part, had somethingthatyouwerewillingtoaccept.Soamaterialwasselectedwhich,beinggivena stablevaluebythestate,avoidedtheproblemsofbarterbyprovidingaconstantmediumof exchange.” JuliusPaulusPrudentissimus,about230A.D.(translationbyA.Watson,1985) Financehasalwaysplayedacriticalroleineconomies,givenitisattheheartofconsump- tion,saving,andinvestmentdecisionsbyindividuals,firms,andgovernments.Asapractical and professional field, finance facilitates the efficient exchange of funds within economies betweenlenders,investors,andborrowers.Therefore,itisunderstandablethatfinanceiscon- tinuallyevolvinginpractice. However,itisimportantthatthepracticalevolutionoffinanceiscomplementedbyactive academic and policy related research. As a simple historical example, money, which lies at thecoreoffinanceandeconomics,hasexistedinpracticeforthousandsofyears,ashasthe temptation for its exploitation by authorities. The introductory quote is actually part of an academicargumentonthekeypropertiesofmoney(anefficientmediumofexchange,asecure storeofvalue,andastableunitofaccount)thatsuccessfullyconvincedGordianIIIatthetime againstdebasingthecurrencyofRome. Followingthethemeofbestpracticebeingcomplementedbybestresearch,thisbookcom- prisesacollectionofup-to-datereviewsonelevencontemporarytopicsinfinance. Wehave broadlygroupedtheseintothethreecategoriesdiscussedinthefollowingparagraph. ContemporaryTopicsinFinance:ACollectionofLiteratureSurveys,FirstEdition.EditedbyIrisClausandLeoKrippner. Chapters©2019TheAuthors.Bookcompilation©2019JohnWiley&SonsLtd.Published2019byJohnWiley&SonsLtd. 2 CLAUSANDKRIPPNER Developmentsinfinancepractice,research,policy,andregulationcanbetriggeredbymany catalysts.Onesuchcatalystisexceptionalfinancialandeconomiceventsthatcanleadpolicy makers,researchers, andsocietyingeneral toquestionand revisittheparameters andlimits under which the finance industry operates. A broader avenue, for research in particular, is thepassageoftime,whichallowspreviouslynewformsoffinancingtobebeddedin,while newempiricalmethodsanddatabecomeavailableforquantitativeanalysis.Athirdcatalystis technologicalinnovations,whichcanaltertheefficiencyofexistingfinancialtransactionsand flowsoffunding,orcreatenewones. Themostexceptionalfinancialandeconomiceventinrecenthistoryis,ofcourse,theGlobal FinancialCrisis(GFC)andtheassociatedGreatRecession.Thefirstthreearticlesinthisbook relatetothoseevents.Theyreviewtheliteratureontheeffectivenessofunconventionalmon- etarypolicy,thecostsofimplicitbankdebtguarantees,anddriversoffinancialfraud.Estima- tionofinflationriskpremia,advancesinfinanceandproductivity,andlesstraditionalforms offinanceincludingbusinessangels,venturecapital,microfinance, andrelationshiplending are reviewed in the next six articles. The last two reviews are on new topics in finance that havearisenfromtechnologicaladvances;crowdfundingandinnovationandanintroductionto crypto-currencies. TheimmediatechallengesoftheGFCandGreatRecessionweretostabilizefinancialmar- ketsandtheeconomy,andultimatelysettingthemonacourseforaneventualrecovery.Hence, in“Asurveyoftheinternationalevidenceandlessonslearnedaboutunconventionalmonetary policies:Isa‘newnormal’inourfuture?”PierreSiklos,DomenicoLombardi,andSamantha St.Amanddiscusstheeffectivenessofunconventionalmonetarypolicy(UMP)andimplica- tionsforthefuture.UMPisdefinedasanypolicyaction,otherthantheconventionalsetting ofshort-terminterestratesundertakenpriortotheGFCof2007/08thatinfluenceseconomic activityand/ormoderatesshockstothefinancialsystemtoachieveastatedmonetarypolicy objective. UMP therefore includes the well-known quantitative easing (QE) actions, where central banks change the size and/or composition of their balance sheet, forward guidance policies,wherecentralbankschangemarketexpectationsofinterestratesbysendingsignals aboutthefuturepolicypath,andinflationtargetannouncementsthatcanchangeexpectedin- flationandhencerealinterestrates. TheauthorsfindconsiderableevidencethatUMPcanbepowerfulinoffsettingthenegative economiceffectsofafinancialcrisis.Inthatcontext,theevidencesuggeststhatasuccessful monetary policy response should be forceful, that a joint response from both the fiscal and monetaryauthoritiesisdesirable,andthatthepolicyresponseshouldbepersistentuntilcon- fidenceandtheconditionsforfullrecoveryareinplace.Fromtheseperspectives,theauthors providearetrospectiveonthecaseofUMPinJapan,giventhatitsofarshowsfewsignsof producingtheaimed-foreconomicoutcomesdespitelongandvariedattempts.Theyalsoraise relatedquestionsfortheeuroarea,giventhatthespecificstructureofitsfinancialsystemand macroeconomicpolicymakingprocessesmaylimitthedesiredco-ordinatedresponse. Regardingtheaftermathofafinancialcrisis,theauthorsinterprettheevidenceasshowing thatUMPisnotnecessarilysufficientorcapableofpromotingstrongerlong-termeconomic growthonitsown.Consistentwiththis,centralbankshavebeenreluctanttoclaimthatthey canrestoregrowthtopre-crisisconditionswithoutsupportingfiscalandstructuralpoliciesalso beingenacted. TheGFCwasalsoacatalystforrevisitingthetopic,andpolicyframework,aroundimplicit governmentguaranteesforbanks,giventhatthebankingsystemandmanyindividualbanks receivedunprecedentedgovernmentsupportatthetime,althoughthetopicalsohasplentyof CONTEMPORARYTOPICSINFINANCE 3 pre-GFC history. “Limiting implicit bank debt guarantees” by Sebastian Schich reviews the literature, noting that implicit government guarantees exist for banks essentially due to the expectationbymarketparticipantsthatpublicauthoritiesmightbailoutthecreditorsofbanks thatareconsideredtobe“toobigtofail”(TBTF).ThepolicyresponsetotheGFCmighthave furtherentrenchedthatperception. Whileimplicitbankdebtguaranteesmightbenefitsomestakeholdersintheshortterm,they create economic costs as well as additional risks. In particular, they tend to weaken market discipline, encourage bank leverage and risk-taking, and distort competition between banks and non-banks, between small and large banks, and between banking sectors from different countries.Theyalsocreatecontingentliabilitiesforthesovereignandthetaxpayer. Policymeasurestolimitthevalueofimplicitguarantees,andhencetheircosts,differfrom country to country. One overarching goal is to strengthen bank balance sheets, thus making guaranteeslessvaluable.Anotheravenueistomakebankfailureresolutionsmootherandmore effective,thusreducingtheperceptionthatimplicitguaranteesexist.Explicitlychargingauser fee,asadisincentiveforbanksto“use”suchguarantees,isconsideredlessattractive,giventhe difficultyofmakingappropriatevaluationsandalsopotentiallyreinforcingtheperceptionthat guaranteesexist.Theapproachofidentifyingsomebanksasgloballysystemicallyimportant and subjecting them to a special and more intrusive regulatory treatment may be seen as an indirectchargeforthe“use”ofimplicitguarantees.However,Schichfindslittleevidencethat thisspecificapproachhasbeensuccessfulsofar. Schichsummarizesthemeasuresofimplicitguaranteeswhich,whileinherentlydifficultto value,canbeusedtoassessprogressregardinglimitingTBTF.Thereisevidencethatthevalues ofimplicitbankdebtguaranteesforbankshavedeclinedfromtheirpeaksattainedduringthe GFC,butitisnotclearwhetherthevalueshavefallenbelowthoseprevailingbeforethecrisis. Open questions that remain are how much further should the value of implicit bank debt guaranteesbereduced?Andatwhatpointcantheirlevelbeconsideredlowenoughsothatthe costsoffurthereffortstoreducethemwouldoutweighthebenefitsofdoingso? AnothertopicthathasbeengivenanewleaseoflifeintheonsetandthewakeoftheGFC isfinancialfraud,giventheroleofthesubprimemortgagemarketsinthatevent,althoughthe topichashadalongandcolourfulpedigreepriortotheGFC.In“Financialfraud:Aliterature review”,ArjanReurinksurveystheempiricalliteratureonfinancialfraudfromthreeperspec- tives.Thefirstisfinancialstatementfraud,whichinvolvesfalsestatementsaboutinvestment entities,thesecondisfinancialscams,whicharedeceptiveandfullyfraudulentschemes,and thethirdisfraudulentmis-sellingpractices,wheretheproductorserviceisknowinglyunsuit- ableforclients’needs. Reurinkfindsthatfinancialfraudiswidespreadthroughoutthefinancialindustry,including thefrequentinvolvementofestablishedfinancialinstitutions,andisnotsimplyattributabletoa few“badapples”.Indeed,theliteraturereviewhighlightsfourrecentdevelopmentsthatschol- ars think have facilitated the occurrence of financial fraud. First, financial deregulation has resultedinnewconflictsofinterestandperverseincentivestructures,facilitatedbyincentive- basedcompensationstructuresinfinancialfirmsatalllevels(andnewlayersofintermediaries, suchasfundmanagersandfinancialadvisers).Perverseincentivestructurescanorientatefirms towardsshort-termprofit-makingandstock-pricemaximization,irrespectiveofthelegalim- plications,andlegalpenaltiescansimplybeseenasacostofdoingbusiness.Second,finan- cial markets have seen an influx of relatively unsophisticated investors during the last few decades, which has provided fraudulently predisposed market players with a larger pool of moreeasilyexploitableinvestors.Third,theincreasingcomplexityinvolvedinfinancialmarket 4 CLAUSANDKRIPPNER transactionsprovidesopportunitiesforfraudsterstodeceiveothermarketparticipants.Fourth, the veil of secrecy and mystique surrounding some collective investment funds which have been on the rise over recent decades can facilitate fraud. The secrecy is justified in the con- text of proprietary trading models used by fund managers, but financial scams and finan- cial statement frauds associated with the funds can thrive in the environment of incomplete disclosure. Future research in the area, building on some existing work, could investigate the impact offraudonthefunctioningofmarketsandthestabilityoffinancialsystems,thepoliticaland economicstructuresthatfacilitatefinancialfraud,andtherelationshipbetweenderegulation andfinancialfraud.Particularlyrelevantinthepresentenvironmentofunusuallylowinterest ratesishowthatmightencourageexcessiverisktakingandfacilitatePonzilikeschemes. Withinthesecondmaincategoryofexistingtopicsinfinancethathavebenefitedfromnew research,weincludesixpapers. AlexanderKupferin“Estimatinginflationriskpremiausinginflation-linkedbonds:Are- view” surveys studies investigating the premia in inflation-linked bonds (ILBs), which have growninnumberwiththeavailabilityofnewdata,notablyintheUnitedStatesoverthepast 20 years. Inflation expectations are an unobserved variable that are an important economic quantity for policy makers and investors. In principle, nominal bonds and ILBs should al- low high frequency readings of implied inflation expectations for different horizons (unlike surveyed inflation expectations). However, nominal-ILB spreads are biased by inflation risk premia,liquiditypremia,lagsonindexingILBstoinflationoutturns,andembeddeddeflation options(someILBsruleoutindexationbelowfacevalue).Allowingforthosebiasesimproves implied inflation expectations nominal-ILB spreads, and is also important for decisions on nominalversusILBsovereigndebtissuance.Thesignoftheinflationriskpremiumalsooffers someintuitionaboutthestateoftheeconomy. Kupferfindsthatstrategiestoestimatetheinflationriskpremiumvaryconsiderablythrough- out the literature, including regression-based approaches, term structure models (with and withoutinflationdata),andmacro-financetermstructuremodels.Thesestudiesgenerallyfind thatthemagnitudeandvariationintheinflationriskpremiumismaterial.Regardingtheliq- uidity premium, it was highest in the first years of ILB issuance and around the time of the GFC.Theindexationlaganddeflationoptionarefoundtobenegligible,apartfromduringthe GFCinthelattercase. Thesurveyalsopresentspotentialdirectionsforfutureresearch.Oneisbuildingonlimited worksofarusingtermstructuremodelsthatallowfortheeffectivelowerboundinnominal yields,whileILByieldsarefreetoevolvetonegativevalues.Similarly,furtherandin-depth analysis is needed on ILB liquidity premia and their determinants because eliminating that premium would present a large fiscal saving when issuing ILBs. Finally, a further area for futureresearchistoextendrecenttermstructureapproachesthatgaugetheequilibriumreal rateusingILBs,andtoinvestigatetwo-(ormulti-)countrytermstructuremodelsthatinclude ILBdata. Anothertopicthathasevolvedrapidlyinthepastdecade,dueinparttogreateravailabil- ityoffirm-levelandplant-leveldataandpolicyagendapriorities,istherelationshipbetween financeandproductivity.In“Financeandproductivity”MarkHeilsurveystheempiricalliter- ature,afterprovidinganintroductiontothelong-termtrendsinproductivityandfinance,and astylizedviewofkeypolicymechanismsthatinfluenceproductivity. Regardingempiricalresults,mountingevidenceshowsthatfinancialdevelopmenthasbeen an important contributor to productivity growth. Conversely, financial frictions that impede CONTEMPORARYTOPICSINFINANCE 5 theefficientflowoffinancecanmitigatethepositiveeffectsthroughavarietyofchannels.For example,inefficientinsolvencyregimesthatimpedetheexitoflow-productivityfirmsinhibits productivity growth. The magnitudes of frictional costs in general appear to be modest in financiallydevelopedeconomies,butareconsiderablylargerindevelopingeconomies. A primary driver of productivity growth is knowledge production, yet evidence that the availability of financing facilitates higher educational attainment is tenuous. On the whole, mergerandacquisitionactivityisassociatedwithgainsinproductivity,butthedirectcontri- butionsofthefinancialsectortoproductivityaremixed;improvementsduringthelate1990s weresubstantial,butmightbeassociatedwiththetechbubbleatthetime.Cross-countryand single-country studies agree that financial liberalization, such as stock market opening and liftingofforeigncapitalcontrols,isassociatedwitheconomicallymeaningfulaggregatepro- ductivitygains. Theresearchsuggeststhattheavailabilityofequityfinancingisparticularlyvaluableforthe growthofyoungandsmallenterprisesanditremainstheprimaryexternalsourceforfunding research and development. Recent studies of both periods of economic decline and booms suggestthatbusinesscycleinfluencesonproductivityareinconclusive. Astheauthornotes,therecentempiricalliteratureprovidesfreshinsightsthatmayinform policydevelopmenttohelpenactfinancerelatedmeasuresthatmoreeffectivelypromotepro- ductivitygrowth.However,itwillbeimportantinfutureresearchtoidentifyempiricalregu- larities,aswellasdifferencesacrosscountries. Angelfinanceisanon-traditionalsourceoffundsthathasbecomemorecommonplacein recentdecades,inpracticeandintheliterature.In“Businessangelsresearchinentrepreneurial finance: A literature review and a research agenda”, Francesca Tenca, Annalisa Croce, and Elisa Ughetto provide a summary of findings of prior literature and a bibliometric analysis. Businessangelsarehighwealthindividualswhoprovideseedorgrowthcapital,advice,and hands-on assistance to business start-ups in exchange for ownership equity. They invest at theearlieststagesofventures’lifecycletypicallylongbeforeinstitutionalinvestors.Business angels play a complementary role to venture capitalists. They are typically more involved intheselectionphaseandfirstcontactwithentrepreneurs,whileventurecapitalistsheadthe deal-structuring phase. In the post-investment phase, business angels are more involved in mentoring while venture capitalists are more engaged in monitoring through contracts and supervisoryboardinvolvement. Theauthorscategorizetheliteratureonbusinessangelsintothreethematicareas.Thefirst is business angel characteristics, which was the first research stream to emerge. The second is business angel market, and the third is business angel investment process, which has be- comethemostextensiveresearchstreamfollowingincreasedgrowthinthenumberofpapers published since 2011. However, a significant research gap has emerged between developed andemergingeconomies.Emergingmarketsareoftencharacterizedbypoliticaluncertainty, corruption,lackofsupportinginstitutionsforearlystageinvestment,andlegalprotectionfor minorityshareholders.Businessangelsmanagesuchdifficultiesbyadoptinginvestmentstrate- gies of informal networking and co-investment. In emerging countries business angels co- investtoreducehighlevelsoffinancial,legal,currency,political,economic,andmarketrisks whileindevelopedeconomiestheytypicallyco-investtoreducefinancialrisks. Quantitative analysis is the most frequent methodology used in business angel research. However,akeychallengeisthatbusinessangelsareoftenanonymousandinvisibleandhence difficulttoidentifywhichmakessamplingproblematicandmoststudiesrelyonconvenience samples.
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