Working Papers by Caroline M. Fohlin
Showing 1 to 15 of 15 records.
# | Title | Authors | Date | Length | Paper | Abstract | |
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1089 | Economic, Political, and Legal Factors in Financial System Development: International Patterns in Historical Perspective | Fohlin, Caroline M. | 05/01/2000 | wp1089.pdf | Financial systems are often described either as bank-based, universal, and relational or as market-based, specialized, and arms-length; and for many years academics and policymakers have debated the relative merits of these different types of systems. This paper inquires into the underlying causes of financial system structure and development. Older theories dictated that financial institutions developed in relationship to the economy's level of development. Newer work has brought political and legal factors to the fore: hypothesizing specific relationships between banking structure and state centralization and between financial development and legal tradition. This study classifies countries by type of financial system, and in doing, indicates that few banking systems fit the extreme paradigms of universal-relationship or specialized-arms length banking. On the other hand, despite several cases of temporary upheaval, and recent widespread movement toward conglomeration, banking system structure as remained remarkable stable over the last 100 to 150 years. Economic factors in the late nineteenth century provide relatively strong explanatory power for financial system development, market orientation, and banking structure at the eve of World War I and in the present day. Banking specialization and market orientation appear strongly associated with legal tradition, though it seems more likely that the three characteristics are jointly determined or that the legal system variable simply proxies for a close or historical tie to the exporter of many political-economic institutions, England. Legal orientation exerted little impact on financial institution growth at the turn of the century and provides no consistent prediction of real economic growth rates over the past 150 years. Finally, political structure relates significantly to market orientation but not to banking system design or legal tradition. Nonetheless, many individual country histories make it clear that political forces played important roles in shaping regulations that in turn altered the course of financial institutions and markets. The results here simply suggest that these political forces appeared inconsistently and had no traceable, uniform relationship to the overall political system in place in the nineteenth century. The results underscore two principal themes: the weight of history in determining the growth and design of financial institutions and markets, and the importance of idiosyncratic forces that buffet institutions over time. Despite obvious connections among political, legal, economic, and financial institutions, robust, long-term, causal relationships often prove to be elusive. | ||
1088 | IPO Underpricing in Two Universes: Berlin, 1882-1892, and New York, 1998-2000 | Fohlin, Caroline M. | 05/01/2000 | wp1088.pdf | Underpricing of new issues relates negatively to underwriter reputation in studies covering the US during the early 1970s until 1997 but positively in one study of IPOs from 1992-4. This paper investigates whether IPO underpricing depends on the organization of the financial system, whether underwriter reputation is a consistent indicator of firm quality and therefore (negatively) of underpricing, and whether this reputation effect also appears in completely different contexts. The study also looks for truncation in the observed returns distributions that may hint at price support activities on the part of underwriters. To answer these questions, the study presents evidence on new issues of stocks and their one-day returns in the Berlin market of 1882-1892 along with parallel data from the New York markets of 1998-2000. Despite what appear to be major institutional differences between the US and Germany, underpricing and its correlates are remarkably similar in the two cases: median underpricing is nearly the same in the two samples. Strikingly, the link between underwriter reputation and underpricing is positive both in the U.S. of recent years and in Berlin of the 1880s. This finding is in stark contrast with those for the US in the 1970s and 80s. The trade off between prices and rationing faced by underwriters might result in this instability in the reputation-underpricing link. Finally, the observed distributions of first-day returns for both markets display marked skewness toward positive values - a pattern that is consistent with left censoring and quite possibly with underwriter price supports. These results support a number of conclusions: first, either underwriter reputation is a poor signal of firm quality or firm quality is positively related to underpricing in certain circumstances; second, the largest and most prestigious underwriters may exert market power or at least provide more or better service in return for their higher indirect costs; third, the relationship between underwriter reputation or market share and underpricing clearly varies dramatically over time and across countries; and finally, financial system design-in particular, universal and relationship banking-may have little impact on the performance of new issues markets. Given the German results, one should conclude either that significant information asymmetries exist despite universality and formal relationships in the banking system or that information problems are unnecessary for the emergence of underpricing. | ||
1084 | The Pricing of Securities Risk in a Universal Banking System: Historical Evidence from Germany | Fohlin, Caroline M. Bossaerts, Peter | 07/01/2000 | 29 pages | wp1084.pdf | The cross-section of average annual returns on German common stock in the period of 1881-1913 exhibits several of the patterns that have been observed in more recent U.S. data. Market beta is hardly important, and its explanatory power is swamped by size and the ratio of book value to market value. A book-to-market risk measure (covariance with a portfolio long in high book-to-market firms and short in low book-to-market firms) has no effect on the explanatory power of the book-to-market characteristic. But the size effect appears to be caused by selection bias in the sample. And the book-to-market effect is opposite that of the recent U.S. experience (and, hence, can certainly not be attributed to selection bias). Finally, a momentum portfolio constructed on the basis of the error of the basic 3-characteristic model (market beta, size and book-to-market) does not generate significant returns. These findings highlight the variability in the power of certain characteristics in explaining the cross section of average returns. | |
1078 | Banking Industry Structure, Competition, and Performance: Does Universality Matter? | Fohlin, Caroline M. | 02/01/2000 | 47 pages | wp1078.pdf | By studying the German universal banking system in the pre-World War I period, in comparison with its American and British counterparts, this paper investigates whether universality (the combination of commercial and investment banking services) influences banking industry concentration, levels of market power, or financial performance of banks. The short answer is "no". First, given that the UK's specialized commercial banking sector was structured very similarly to the German universal industrial banking sector, and that neither system was extremely concentrated in the pre-war era, the paper argues that universality does not necessarily or uniquely propagate concentration. Second, on average, German universal banks behaved no less competitively than their American counterparts in the provision of loan services. Structural price markup models, as well as reduced-form Rosse-Panzar tests, demonstrate little deviation from competitive pricing in either country. The findings therefore indicate that universality does not lead to appreciable market power, in either an absolute or a relative sense. These same results also imply that banking industry concentration, at least up to the moderately high levels found in Germany, does not in itself produce anti-competitive behavior. The empirical results, though contradictory to common wisdom about German universal banking, are easily motivated by the theoretical literature in industrial organization. Finally, estimates of returns on equity and on assets suggest only slight international differences in average returns over extended periods, but large deviations in individual years. Adjusting for prevailing rates on government bonds, commercial loans, or commercial deposits narrows the gaps further. Universality is not linked with superior profitability, whether the hypothesized source is efficiency (economies of scope) or monopoly power. These three sets of findings may assuage fears that deregulation in American banking could lead to excessive concentration and therefore collusive behavior. At the same time, the results may lower hopes of significant efficiency gains from broadening the scope of services. | |
1065 | Company Law, Stock Market Regulation, and the Development of the German Financial System, 1880 - 1913. | Fohlin, Caroline M. | 07/01/1999 | wp1065r.pdf | |||
1030 | Financing Decisions and Corporate Capital Structure in the Later Stages of the German Industrialization. | Fohlin, Caroline M. | 05/01/1998 | 43 pages | wp1030r.pdf | Information asymmetries and conflicts of interest are theorized to inflate the cost of external finance, but formal bank relationships are thought to ameliorate such problems and may even lead to excessive leverage. Bank oversight is associated with slightly higher leverage but not with greater use of bank debt. Older and cash-rich firms have lower leverage and less bank debt, suggesting that information problems affected firms' financing decisions; but bank attachment appears not to alter these patterns. The findings suggest that bank oversight had little to do with leverage decisions, particularly short-term borrowing, in the later stages of the German industrialization. | |
1028 | Historical and Theoretical Debates Over Financial Systems and Industrialization | Fohlin, Caroline M. | 05/01/1998 | 52 pages | wp1028.pdf | Lack of both theoretical cogency and empirical evidence casts doubt on the Gerschenkronian paradigm of banking and industrial development. Social, political, and regulatory environments may shape financial systems, and institutions may persist beyond their usefulness. Central features of universal banking arose late in the German industrialization, if at all; those that did may not have stemmed from the banks' universal structure. In focusing on international differences among financial systems, traditional views on the relative benefits of universal banking may underestimate both the impact of non-institutional factors on development experiences and the similarities in the ultimate effects of disparate systems. | |
1016 | Bank Structure and Growth: Insights from British and German Balance Sheets Before World War I | Fohlin, Caroline M. | 08/01/1997 | ||||
1008 | The Universal Banks and the Mobilization of Capital in Imperial Germany | Fohlin, Caroline M. | 06/01/1997 | ||||
1007 | Bank Securities Holdings and Industrial Finance Before World War I: Britain and Germany Compared | Fohlin, Caroline M. | 05/01/1997 | ||||
999 | Revolutionary Finance? Capital Mobilization and Utilization in Pre-War Germany and Italy | Fohlin, Caroline M. | 02/01/1997 | ||||
984 | Universal Banking Networks and Industrialization: Firm-Level Evidence from Pre-War Germany | Fohlin, Caroline M. | 11/01/1996 | ||||
948 | Fiduciari and Firm Liquidity Constraints: The Italian Experience with German-Style Universal Banking | Fohlin, Caroline M. | 05/01/1996 | ||||
931 | The Rise of Interlocking Directorates in Imperial Germany (also titled "Relationship Banking and corporate governance in the Kaiserreich") | Fohlin, Caroline M. | 07/01/1995 | sswp931.pdf | |||
913 | Relationship Banking, Liquidity, and Investment in the German Industrialization | Fohlin, Caroline M. | 07/01/1996 | sswp913.pdf |