- 03 Oct 2013
- Views on News
Is the US financial system in better shape today than it was five years ago? Finance professors Victoria Ivashina, David Scharfstein, and Arthur Segel see real progress—but also missed opportunities and more challenges. Closed for comment; 2 Comment(s) posted.
- 09 Sep 2013
- Working Paper Summaries
As numerous news stories document, interest on the part of institutional investors in undertaking direct investments—and thus bypassing intermediaries—appears to have increased substantially. More generally, the impact of financial intermediation has also been a subject of considerable examination in the corporate finance literature. On the one hand, these middlemen should be able to overcome transaction cost and information problems; on the other, they may be prone to agency conflicts that affect their performance. In this paper, the authors focus on private equity, a setting in which disintermediation has become increasingly common. Private equity might appear to be a textbook case where the benefits from financial intermediation—in this case, specialized funds—would be substantial: not only are the transaction costs associated with structuring these investments large, but substantial information asymmetries surround the selection, monitoring, and nurturing of the investments, giving rise to potential information advantages for specialized investors. Using proprietary data covering 392 deals by a set of institutions, both co-investments and direct investments, between 1991 and 2011, the authors find a sharp contrast between the performance of solo deals and that of coinvestment deals. Outperformance of solo direct investments is due in part to their ability to exploit information advantages by investing locally and in settings where information problems are not too great, as well as to their relative outperformance during market peaks. The underperformance of coinvestments appears to be associated with the higher risk of deals available for coinvestments. Key concepts include: The authors complied the first large sample evidence of the relative performance of direct investments by large institutional investors. Findings show a sharp contrast between the performance of solo deals and that of coinvestment deals. This indicates that there can be an agency problem when general partners selectively offer deals to limited partners for coinvesting. As striking as the findings are, they must be interpreted cautiously. For example, it is not clear whether this result is a reflection of the fact that the sample consists of large and sophisticated investors: small investors replicating a direct investment strategy may have different experiences. As institutional investors expand their direct investment programs, it is unclear whether returns on direct investment deals will continue to be as successful. Closed for comment; 0 Comment(s) posted.
- 01 Feb 2013
- Working Paper Summaries
A striking fact about international financial markets is the large share of dollar-denominated intermediation done by non-US banks. The large footprint of global banks in dollar funding and lending markets raises several important questions. This paper takes the presence of global banks in dollar loan markets as a given, and explores the consequences of this arrangement for cyclical variation in credit supply across countries. In particular, the authors show how shocks to the ability of a foreign bank to raise dollar funding translate into changes in its lending behavior, both in the US and in its home market. Overall, the authors identify a channel through which shocks outside the US can affect the ability of American firms to borrow. Although dollar lending by foreign banks increases the supply of credit to US firms during normal times, it may also prove to be a more fragile source of funding that transmits overseas shocks to the US economy. Key concepts include: Findings show Eurozone banks adjust to strains in wholesale dollar funding markets by borrowing more in euros, but also by cutting back their dollar lending relative to euro lending. Eurozone banks rely on less stable wholesale dollar funding sources to finance their dollar lending whereas a good deal of their euro lending is financed with stickier euro deposits. Frictions in the foreign exchange swap market limit the extent to which Eurozone banks can use euro deposits to fund their dollar lending. As swap demand from Eurozone banks rises, there is only limited arbitrage capital available to take the other side of the trade, which increases the cost of engaging in this synthetic dollar borrowing. Closed for comment; 0 Comment(s) posted.
- 01 Jul 2010
- Working Paper Summaries
Bank lending falls in economic recessions. In particular, it shrank considerably during the recent economic downturn. Does such cyclicality of bank lending reflect a decline in banks' willingness to lend (the "loan supply" effect) or reduced demand for loans from firms (the "loan demand" effect)? The considerable attention that is given to banks' financial health by the Federal Reserve, Congress, and other branches of government is only warranted if the answer is supply. Focusing on U.S. firms that raised new debt financing between 1990 and 2009, HBS professors Bo Becker and Victoria Ivashina demonstrate that many large U.S. firms turn to the bond market when banks are in poor financial health. When times are better, the same firms get bank loans. Becker and Ivashina argue that the substitution between bonds and loans at the firm-level is a good economic proxy for the bank credit supply. Key concepts include: The incidence of bank loans, as compared to bonds, is very cyclical. Firms getting a bank loan are likely to stay with that form of debt in the near future. The pattern is similar in most years. But when banks are doing poorly, this pattern is reversed, and many large firms who would typically turn to banks for debt financing, instead issue bonds. The loan-and-bond mix for large firms is a strong predictor of a likelihood of firms without access to bond markets to raise bank debt. Closed for comment; 0 Comment(s) posted.
- 24 Jun 2010
- Working Paper Summaries
Does the combination of banking and private equity investing endow banks with superior information that allows them to identify good prospects and garner superior returns? Or does the combination bestow banks with an unfair ability to expand their balance sheets, capturing benefits within the bank at the expense of the overall market and ultimately the taxpayers? INSEAD's Lily Fang and Harvard Business School professors Victoria Ivashina and Josh Lerner examined nearly 8,000 unique private equity transactions between 1978 and 2009, looking in depth at the nature of the private equity investors, the structure of the investments, and the performance of the firms. Collectively, findings suggest that there are risks in combining banking and private equity investing. The results are consistent with many of the worries about these transactions articulated by policymakers. Key concepts include: The cyclicality of bank-affiliated transactions, the time-varying pattern of the financing benefit enjoyed by affiliated deals, and the generally worse outcomes of these deals done at market peaks raise questions about the desirability of combining banking with private equity investing. These investments seem to exacerbate the amplitude of waves in the private equity market, leading to more transactions at precisely the times when the private and social returns are likely to be the lowest. Investments involving both affiliated and nonaffiliated firms appear particularly vulnerable to downturns. Some information-related synergies, however, are captured internally by the banks. But banks' involvement poses significant issues as well. The share of banks in the private equity market is substantial. Between 1983 and 2009, over one-quarter of all private equity investments involved bank-affiliated private equity groups. Closed for comment; 0 Comment(s) posted.