Accounting Restatements and Bank Liquidity Creation

Banks play a central role in creating liquidity for the economy by financing illiquid assets with liquid liabilities. This paper examines the effect of accounting restatements on bank liquidity creation. Using a difference-in-differences research design, I show that restatements trigger a significant reduction in liquidity creation. This effect derives mainly from banks shifting away from illiquid assets and toward liquid assets. Further analysis reveals that restatements affect liquidity creation through supervisory enforcement actions and unravelling of risk exposures accumulated in the misreporting period. Government deposit insurance blunts the effect of an information asymmetry channel.

Illiquid Assets and the Opacity Discount in Banks’ Valuation

The paper investigates the impact of fair value accounting for illiquid assets (so-called ‘Level 2’ and ‘Level 3’ assets by accounting rules) on banks’ valuation and focuses on the change in relative weight of Level 3 (the most opaque and illiquid assets) with respect to Level 2 assets. The boundary between Level 3 and Level 2 assets is blurred and less clear than the one between Level 1 and Level 2 assets. Such unclear borderline entails corporate governance issues and provides room for opportunistic behavior by managers to opt for less transparent instruments. The paper proposes the change in Level 3-to-Level 2 assets ratio as a new measure to capture deviations in the opacity of bank assets and suggests a negative relationship between this ratio and bank’s price-to-book value. The rationale behind this relationship is that market participants interpret growth in Level 3-to-Level 2 assets ratio as an increase in bank’s opacity, since Level 3 assets might be as illiquid as Level 2 assets with the benefit of a less transparent model-based valuation technique. Based on a sample of 33 European banks from 2009 to 2018, I find that an increase of 100[Formula: see text]bps in Level 3-to-Level 2 assets ratio is linked to a decrease of about 74[Formula: see text]bps in the price-to-book value. Results are robust for different measures of firm relative valuation and using a different measure of illiquidity in fair value assets holdings (Level 2-to-Level 1 assets ratio).

Plans and situated actions in urban renewal projects: The role of governance devices in realizing projects

Municipalities and city administrations have the jurisdiction to determine the use of land and real estate, but must collaborate with various actors, including real estate developers, construction companies, and financial institutions, to realize stated goals. When implementing initiatives such as urban renewal projects, plans and situated actions may be loosely coupled during the early stages, when visions of the future are being articulated; over time, however, the information needed to calculate whether illiquid assets are attractive investment objects must be introduced. As such information is generated, the gap between plans and situated actions closes, having material effects under favourable conditions. This article presents an empirical study of an urban renewal project in a metropolitan area that initially gained external recognition via a prize awarded for visionary planning work. The project eventually encountered considerable difficulties, as a shortage of accurate information hampered production activities. The study underlines the importance of robust governance practices and accompanying governance devices in effectively transforming illiquid assets into, for example, housing.

Pension fund's illiquid assets allocation under liquidity and capital requirements

Defined benefit pension funds invest in illiquid asset classes for return, diversification or liability hedging reasons. So far, little is known about factors influencing how much they invest in illiquid assets. We conjecture that liquidity and capital requirements are pivotal in this decision. Short-term pension payments and margining on derivative contracts generate liquidity requirements, while regulations impose capital requirements. Consistent with our model we empirically find that these requirements create a hump-shaped impact of liability duration on the fraction of risky assets invested in illiquid assets. Further, we report that pension fund size, type, and funding ratio impact illiquid assets allocations.