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Abstract: A firm’s ‘reputation’ reflects the expectations of its partners of the benefits of trading with it in the future. An announcement by a regulator that a firm has engaged in misconduct may be expected to impact negatively on trading parties’ (i.e. consumers or investors) expectations for a firm’s future performance, and hence on its market value. How can we identify reputational losses from share price reactions? How large are these losses for different types of misconduct? The chapter seeks to answer the above questions in the light of recent empirical evidence and draws implications for regulatory enforcement policy.
We study the impact of the enforcement of financial regulation by the United Kingdom’s regulatory authorities on the market price of penalized firms. Existing studies rely on analyses of multiple events that may distort the measurement of reputational losses. In the United Kingdom, the entire enforcement process involves only one public announcement and is accompanied by complete information on legal penalties. We find that reputational losses are nearly nine times the size of fines and are associated with misconduct harming customers or investors but not third parties.
There have been debates about the role of financial systems in corporate activity for the best part of a century. A consensus view is yet to emerge as to whether cross-country differences in the structure of financial, corporate, and legal systems have any causal influence on cross-country economic performance. But interest in this question has stimulated attempts to assemble data banks on financial and corporate systems that allow international comparisons to be performed. The objective of this essay is to review these debates, to present additional empirical evidence, and to put forward some new interpretations of this evidence.
We begin in Section 2 with the debates about the comparative merits of different financial, corporate, and legal systems for economic performance. These debates have a long history. Until recently, they primarily took the form of bilateral country comparisons on, for example, the role of banks in comparative British and German industrial performance since the late nineteenth century. The positive role of the German banking system in promoting German industrialization through the provision of external finance frequently acquired the status of a “stylized fact” in the discussion of comparative performance. The influence of “bank” versus “market”-based financial systems was revisited in the examination of the postwar “Golden Age” growth of the West European and Japanese economies. But more detailed empirical work, using individual firm and institution data, has frequently failed to identify the source of advantage of the German and Japanese systems.
Under the influence of the Anglo-American systems, corporate finance over the past three decades has been dominated by consideration of the operation of securities markets. Recently attention has begun to switch to the role of financial intermediaries. This has occurred at the same time as financial innovation has led some observers to suggest that there is little future for financial intermediation in financing large corporate activities.
The integration of financial markets in Europe and the possible emergence of a single European currency have raised questions about the regulation of financial markets. Does increased competition endanger the stability of banking systems and should the regulation of banks change in the future? The requirement on banks to perform a central function in restructuring enterprises in Eastern Europe has made reform of banking systems of crucial importance.
A study of financial intermediation is therefore timely from the perspective of both academic analysis and policy relevance. The Fundacion Banco Bilbao Vizcaya and the Centre for Economic Policy Research organized an international conference on financial intermediation in San Sebastián in Spain on 27 and 28 March 1992. This brought together academics and policy makers from Europe and North America to discuss the latest advances in the study of financial intermediation.
This introduction begins by discussing four issues in the theory of banks: the rationale for the existence of financial intermediaries, competition in banking, bank regulation and the real effects of banks. It then turns to three policy issues: securitization and the future of banks, increased competition in Europe and the US, and banking in Eastern Europe.
Financial intermediation is currently a subject of active research on both sides of the Atlantic. The integration of European financial markets, in particular, highlights several important issues. In this volume, derived from a joint CEPR conference with the Fundacion Banco Bilbao Vizcaya (BBV), leading academics from Europe and North America review 'state-of-the-art' theories of banking and financial intermediation and discuss their policy implications. The principal focus is on the risks of increased competition, the appropriate regulation of banks, and the differences between Anglo-American and Continental European forms of financial markets. Relationship banking, stock markets and banks, banking and corporate control, financial intermediation in Eastern Europe, monetary policy and the banking system, and financial intermediation and growth are also discussed.
On 27–28 March 1992, the Fundación Banco Bilbao Vizcaya (BBV) and the Centre for Economic Policy Research organized an international conference on financial intermediation in San Sebastián in Spain. The conference brought together leading academics and policy-makers from Europe and the United States working in the field of financial intermediation. This book contains all the papers presented at the conference together with discussants' comments.
The conference was generously supported by the Fundación BBV. We are particularly grateful to José Angel Sánchez Asiaín, President of the Fundación BBV, Emilio Ybarra, President of the BBV, Luis Angel Lerena, Director of the Centro de Estudios Bancarios of the Fundacion BBV, and María Luisa Oyarzábal, General Secretary of the Fundación BBV, for their support. We are also grateful to Stephen Yeo at CEPR and to Antonio Roldán at Fundación BBV for having devoted considerable effort to ensuring the success of the conference, to Miguel Angel García Cestona as a Rapporteur, to Jennifer Jones and Núria Guinjoan for assistance in organizing the conference, to David Guthrie and Kate Millward for overseeing the preparation of this volume, and to Liz Paton for her patient work in copyediting the volume.
Philippe Aghion, European Bank for Reconstruction and Development and CEPR,
Robin Burgess, European Bank for Reconstruction and Development,
Colin Mayer, City University Business School, London, and CEPR
As the citizens of Eastern Europe and the former Soviet Union (EESU) are rapidly discovering, transition involves a good deal more than adherence to the dogma of privatization and market forces: increases in personal freedom have not been accompanied by spectacular increases in the standard of living. Instead there is a recession in the region: demand has fallen, intra-EESU trade has collapsed, unemployment is rising, and fiscal deficits, debt and inflation have become problems. The challenge is to build on the new freedoms of economic agents to generate welfare improvements and growth in EESU countries.
The recent experience of Poland, Czechoslovakia (CSFR) and Hungary has shown that macro stabilization, price liberalization and a minimum degree of convertibility can be achieved rapidly. The more complex and fundamental issues of restructuring and privatization have yet to be properly addressed. These two processes in many ways define transition. The scope of the challenge is unprecedented in history and the costs of making these deep adjustments will be very large. Success in maintaining stability in the macro sphere and in pushing the overall reform process forward, however, depends on advances in these areas. Microeconomic reform now represents the central challenge of transition in EESU.
Our focus in this paper is on privatization, restructuring and foreign direct investment in EESU countries.