The Bankers’ New Clothes – What’s Wrong with Banking and What to Do about It

Sometimes inaccurate arguments are repeated so often and with impressive (apparent) authority that most people take them for granted. Anat Admati and Martin Hellwig illustrate one of these situations in their book The Bankers’ New Clothes: What’s Wrong with Banking and What to Do about It. By using a pun inspired by the classic tale The Emperor’s New Clothes by Hans Andersen, Admati and Hellwig guide us around the world of the “bankers’ new clothes”, that is, “flawed and misleading claims that are made in discussions about banking regulation” (p. 9). In the tale, everybody initially pretends to see the emperor’s invisible clothes in order not to appear stupid given that the invisible clothes were made by two (allegedly) highly skilled weavers.

Financial Innovation: A Permanent Agenda in Finance

The Journal of Financial Innovation (JoFI), which is totally independent and completely free to anyone who is interested in reading it, has been establishing itself as one of the first periodicals dedicated to financial innovation, a subject that has been growing in importance in various spheres of interest, from academia to industry, including policy makers. Economic stability and growth are closely linked to financial innovation in its various formats, i.e. products, processes and financial institutions.At the end of the 1980s the financial market in the United States and its institutions were facing changes that were seen as revolutionary at the time. In other words, at that particular moment in time we witnessed the rise of financial instruments and institutions that did not even exist at the end of the 1970s. As Mishkin (1990) points out, there is still an interest in understanding better the dynamic of the changes in financial systems and the proliferation of financial products. In this regard, the forces behind financial innovation are increasing in relevance. These include the conditions required for changes in the market, advances in technology, market (de)regulation, different types of crisis that are relevant to the market, new challenges facing banks, and other such matters.

Property Mix Heterogeneity and Market Cycles: How Much Can We Rely on Median-Price Indices?

Objective. Understand in which types of location median-price indices could provide reasonable estimates of rent growth. As far as our research allows, the market-based measures developed througout this study are the first to emphasize office properties in Brazil using an hedonic framework.Methodology. Create appraisal-based indices of rent growth using median-price and hedonic-based techniques for two regions with different degrees of property mix heterogeneity and compare their behavior overtime.Findings. Volatility in median-price measures is larger than hedonic-based measures in market peaks and throughs due to different weighting of high and low-tier properties overtime. This result is stronger in the location with higher property mix heterogeneity and, consequently, exacerbates market cycles in this region. Limitations. We do not find statistically significant differences between the measures considered. Nevertheless, we do not consider whether this similarity would hold when using transactional-based data. Value. Our results suggest that researchers, policy makers and investors need to take into account the “undesired fluctuation” of median-price measures when interpreting such indices.

Price Reaction of Airline Stocks after Accidents: International Evidence

Objective. In this paper we evaluate the reaction of airline stock prices after the occurrence of an extreme event, the air crash, based on international evidence.Methodology. We selected 49 cases that occurred between January of 1990 and April of 2011, we used the method of event studies. Cumulative Abnormal Return (CAR) was obtained through the simple addition of all abnormal returns contained in an event window. We also tested the existence of price reaction differences in high and low disclosure markets.Findings. The results obtained in this article, from a sample of 49 events, suggest that stock prices of air transport companies are instantaneously and negatively impacted by the occurrence of aerial accidents, average CAR of 4,3% until the tenth trading day after the event. And, this decrease in prices seems to be more pronounced when there are fatalities, but at the same time no differences were found due to the level of disclosure of the market in which the company is based. In addition, there appears to be a statistically significant negative reaction to the air crash, resulting in loss of shareholder wealth. The analyzes indicate that, as expected, the events in which victims were found, the loss of value of the company was considerably higher.Originality/Value. This article, in a pioneering way, considers the level of disclosure typical of the markets in the evaluation of the reaction of the prices to the occurrence of aerial accidents.

Shared Value Creation and Crowdfunding in Brazil

Objective. Approaching the theory of creating shared value (Porter & Kramer, 2011) with the basic social elements of crowdfunding in Brazil. The idea was to explore the complementarity of the concepts governing the CF in line with the theory of Porter and Kramer. Through literature review and empirical discussion is intended to answer two central questions regarding the theme developed in this essay: i) which elements of the theory of creating shared value are found in crowdfunding? ii) how occurs the creation of shared value in business developed in crowdfunding platforms?Methodology. Theoretical Essay.Findings. It is possible to make a theoretical approach of the themes studied in this trial, as we take the social and financial perspective of crowdfunding and their relationships with the creation of value for the company and investors.Originality. So far, was not found another study that addressed the themes of this essay in Brazil.

Manager’s Flexibility & Cancellation Option: Insights of a Case Study in the Latin American Oil Industry

Purpose: This article focused on the main business insights of the use of Real Options valuation analysis in the eyes of a finance professional. It used a case study of an investment opportunity in the oil and gas field services industry in Latin America to discuss the methodology implementation and its insights. As a secondary objective, it discussed the insights and options embedded in this investment opportunity.Methodology: The investment opportunity was examined using the Real Options Analysis (ROA) framework and the results compared to the traditional methodology of Net Present Value. The valuation technique was performed as if it had been applied at the time the project was approved.Findings: The most important of Real Option valuation is not the results, but how one arrives at them. After the project value is calculated and the project approved or not, the Real Option valuation requires and supports the monitoring of the project. By understanding how the options are created, managers can make better decisions about the project after it was approved.Practical implications: A relevant contribution from the study was the discussion, as a practitioner, of the methodology implementation in a real world corporation. Originality & value: The case study evaluated two types of real options: first, the effect of an option to cancel a contract that was assessed from the perspective of the client contracting the project; and second, the option to abandon and defer, from the perspective of the company that will perform the investment to provide the services. By incorporating the cost of the put option that the company puts forth for the client (cancellation option) it reduces the project value by giving flexibility to its clients.

Empirical Insights on the Trading Behavior of the UK Leveraged ETFs

Objective. This paper focuses on UK leveraged Exchange Traded Funds (ETFs) and examines their ability to meet their daily targets, the impact of volatility on targets’ achievement, and their pricing efficiency.Methodology. Standard regression analysis is used to evaluate performance, tracking efficiency and persistence in tracking failures, and the relationship between tracking efficiency and market volatility. Moreover, the pricing efficiency is examined along with the persistence in premium and the influence of market factors on premium.Findings. Results reveal that ETFs achieve their targets but occasionally tracking error can be significant. Furthermore, increases in market volatility relate to higher and lower tracking errors for bull and bear ETFs respectively. Moreover, average premiums testify a sufficient fit between trading prices and net asset values whereas the premiums are eliminated sharply. Moreover, the pricing efficiency of bear ETFs is positively associated with benchmark returns. The opposite is the case for bull ETFs. Finally, the pricing deviations are positively related to benchmarks’ volatility.Limitations. A possible limitation is that our sample includes just nine bear and sixteen bull ETFs even though more than 90 leveraged ETFs are traded on the UK market and our results may not be indicative of the entire UK leveraged ETF market. However, we had to use a small sample of ETFs because the trading activity of the rest ETFs has been very poor and, consequently, our analysis could have been biased by a thin trading effect. Originality/Value. This is the first study to examine the UK market of leveraged ETFs.

Governança Corporativa Induz Melhor Desempenho e Inibe Alavancagem: Evidência da Indústria Brasileira de Petróleo & Gás

Purpose. This study analyzes the oil industry, gas and biofuels in order to identify associations between corporate governance practices with capital structure, risk and performance.Methodology. These data were verified through 3SLS models (Three-Stage Least Squares). For this, we used a data set composed of 19 companies, for a panel data analysis in the period 2005-2009.Findings. The results suggest a negative association between leverage and corporate governance company level, supporting the substitution hypothesis, according to which the leverage works as a governance substitute. Also they did not reject the hypothesis that the greater the governance practices, greater market performances and accounting of these companies, as well as reduces the market risk.Limitations. The main limitation of this research is the sample size, 19 companies, with particular focus on an industry, reducing the generalizability of the results.Originality/Value. This study sought to contribute to the understanding of the relationship between corporate governance, capital structure, performance and risk; specifically for the oil, gas and biofuels in Brazil, an important and understudied emerging market.

Cooperativas de Crédito Brasileiras Adotam Monitoramento Internacional de Desempenho?

Purpose: The study examined if the Brazilian credit unions use the 'PEARLS' performance monitoring methodology proposed by the World Council of Credit Unions, and the perception of the analysts of the cooperative system on the relevance of the indicators of this system.Methods: We used qualitative research with a sample selected through accessibility. Data were obtained from structured interviews conducted with five analysts of Brazil's Central Bank and two managers of central credit cooperatives, in addition to response, via questionnaire, of seventeen managers of credit unions located in the northern, northeast, south and southeast regions of Brazil.Results: Most of the individual cooperatives and the two central credit unions analyzed were unaware of the PEARLS methodology. This monitoring system is known only by the analysts of the Central Bank of Brazil, indicating that only the supervisory agent of cooperatives in Brazil knows the internationally proposed system and the adapted version proposed to Brazilian reality.Limitations: The survey via questionnaires obtained only 1,4% of population response rate, and the results can not be generalized.Practical implications: It can be said that there is room for improving performance monitoring techniques, as the PEARLS is used in 97 countries and unknown both by individual cooperatives and credit central cooperatives surveyed in this study.Originality: It is noteworthy that studies of this problem applied to the Brazilian reality were not found to date.

Strategic Financial Performance Evaluation of the Iranian automotive industry Using Imperialist competitive Algorithm

Purpose. This paper evaluates strategic financial performance of 10 Iranian stock exchange listed automotive companies over the period 2005-2009 at the hand of value-creating performance indicators and the Free Cash Flow derived value indicators.Design. To this effect, profiting from the Imperialist Competitive Algorithm (ICA), the understudy companies were assigned to three clusters in terms of debt structure, firm size, and growth opportunitiesFindings. The results, in general, indicate a significant correlation between value-based indicators Economic Value Added (EVA) and True Value Added (TVA) and the FCF-derived indicators Created Value from Free Cash Flow to Firm (CVFCFF) and Created Value from Free Cash Flow to Equity (CVFCFE), and between Market Value Added (MVA) and CVFCFF (one of the two FCF-derived indicators), while, according to the results, there is no significant correlation between the value-driven performance indicators Refined Economic Value Added (REVA) and Equity Economic Value Added (EEVA) and either of the FCF-derived indicators CVFCFF and CVFCFE.Originality. Present Paper, by company clustering in ICA environment, the companies are clustered based on their close similarity in all three criteria and subsequently for examination of each strategic performance indicator were subjected to correlation and Fisher (F) tests.