Search

Existing studies suggest levying a systemic risk tax on systemically important banks to cover the costs of governmental interventions in (bailing out) these banks in the case of their bankruptcies. We develop a static model to investigate how this tax would affect the banks' equilibrium capital holdings and its impacts on banks’ optimal capital regulations in terms of social welfare. We find that this tax would not only result in a safer banking system but would also help to mitigate the pro-cyclical effects of banking capital requirements. However, these merits would come at the cost of an increase in loan rate. Moreover, the improvements of the tax are less pronounced when the capital requirements are relatively strict as, for example, in Basel III. Regarding welfare, Basel II is closer to the optimal level. Although Basel III results in a safer banking system, this improvement compromises social welfare. Our findings also suggest that regulators should set higher capital requirements for systemically important banks, which is similar to the rules in Basel III.

Using a continuous-time model of litigation, we show that the increasingly popular practice of third-party litigation financing has ambiguous welfare implications. A defendant and a plaintiff bargain over a settlement payment. The defendant takes costly actions to avoid deadweight losses associated with large transfers to the plaintiff. Litigation financing bolsters the plaintiff, leading to larger deadweight losses. However, by endogenously deterring the defendant from taking costly actions, litigation financing can nonetheless improve the joint surplus of the plaintiff and the defendant. In contrast to popular opinion, litigation financing does not necessarily encourage high-risk frivolous lawsuits.

Implicit guarantees provided by financial intermediaries are a key component of China's shadow banking sector. We show theoretically that project screening by intermediaries, accompanied by their implicit guarantees to investors, can be the second-best arrangement and mitigate capital misallocation that favors state-owned enterprises (SOEs). Using a dataset of trusts’ investment products, we find, consistent with our model, that ex ante expected yields reflect borrower risks and implicit guarantee strength, and risk sensitivity is reduced by strong guarantees. Regulations in 2018 restricting implicit guarantees lead to a weaker relationship between yield spread and guarantee strength, and more credit rationing of non-SOEs.

We study a model of electoral accountability and selection whereby heterogeneous voters aggregate incumbent politician's performance data into personalized signals through paying limited attention. Extreme voters' signals exhibit an own-party bias, which hampers their ability to discern the good and bad performances of the incumbent. While this effect alone would undermine electoral accountability and selection, there is a countervailing effect stemming from partisan disagreement, which makes the centrist voter more likely to be pivotal. In case the latter's unbiased signal is very informative about the incumbent's performance, the combined effect on electoral accountability and selection can actually be a positive one. For this reason, factors that carry a negative connotation in every political discourse -- such as increasing mass polarization and shrinking attention span -- have ambiguous accountability and selection effects in general. Correlating voters' signals, if done appropriately, unambiguously improves electoral accountability and selection and, hence, voter welfare.

Given the alleged uniqueness of Islamic stocks, it is expected that they should provide insurance when faced with adverse market conditions. This expectation is tested by assessing contagion, using 25 Islamic indexes during the period 2007–2017, by employing contemporary econometric techniques. The results reveal robust contagion effects of the financial crisis on Islamic stock indexes. Furthermore, we find Baker and Wurgler’s investor sentiment can predict Islamic stock returns during the crisis period. Our findings indicate that Islamic stocks cannot be used as a haven asset during financial turmoil.

Shariah screening discards the firms that belong to impermissible business sectors (or sin industries) and follow capital structure with high debt and current assets. This study tests whether the firms passing Shariah screening have better (or worse) governance quality as compared to firms not subjected to Islamic screening. The screened firms may have lesser governance quality as they cannot use debt to discipline managers or achieve optimal capital structure. On the contrary, they may be better governed as these firms get higher presence of institutional investors and better analyst coverage. This paper provides comparison of governance quality of Shariah compliant (SC) firms in United States by using proprietary dataset of Dow Jones US Indices. The screened firms offer ground for a natural experiment as they pass negative ethical screening and meet financial criteria for the inclusion in the index. The findings suggest that the SC firms have lesser governance quality than Shariah Non-Compliant firms. The lower level of governance can be attributed to lower Size, lower Profitability, higher Dividend Payout, higher Total Risk and lower Free Cash Flow. Various robustness tests are performed to validate the findings and the results remained robust. These findings provide useful insights about the governance mechanism of SC firms that are emerging as an important alternative investment class in the last two decades.

Cultural dimensions have a significant impact on capital structure decisions, particularly in Islamic economies where unique personal, social and ethical values are closely integrated with culture. This study considers the relationship between four Hofstede cultural dimensions to explain their connection with the capital structure decisions of Shariah-compliant firms. Using a panel of 342 Shariah complaint companies from Malaysia, Saudi Arabia and Pakistan for the period 2013 to 2017, this study investigates the influence of cultural dimensions on short-term, long-term and total leverage in the presence of several firm- and country-specific variables. On average, Saudi Arabian firms witnessed comparatively higher percentages of all three debt classifications considered. Typically, determinants of debt do not otherwise differ significantly across the three countries. Firms also carefully consider asset structure and growth opportunities when raising debt capital. On the other hand, when tested alongside cultural dimensions, Islamic firms from countries with (a) higher power distance scores, (b) higher levels of individualism, (c) higher masculinity scores and (d) lower degrees of uncertainty avoidance exhibit a preference for long-term debt. This finding diverges from the existing literature on non-Islamic firms. Agency theory and pecking order theory predominate in explaining our findings.