Mariassunta Giannetti, Economics, Stockholm

2008-2013

As described in the application, the project started by exploring what determines exchanges' fortunes and their reversals in attracting foreign listings. This has led to a first paper, coauthored with Nuno Fernandes, entitled "On the Fortunes of Stock Exchanges and Their Reversals: Evidence from Foreign Listings ".

In this paper, using a sample that provides unprecedented detail on foreign listings for 29 exchanges in 24 countries starting from the early 1980s, we show that although firms list in countries with better investor protection, they are less likely to list in countries with too much better investor protection. We provide evidence based on ex ante firm and market characteristics and ex post listing outcomes that our findings are due to lack of investor interest for firms from environments with much weaker investor protection. We also argue that our findings, together with a general trend of improvement in investor protection in many firms' countries of origin, can explain why US and UK exchanges have attracted an increasing number of foreign listings during our sample period. Thus it appears that an exchange's fortunes depend on investor protection in other countries.

This paper is now forthcoming in the Journal of Financial Intermediation and has been presented in a number of seminars and conferences, including ESSEC Private Equity Conference, Wharton/SIFR/Tsinghua Conference on Emerging Market Finance, the Conference on Corporate Governance in Emerging Markets (São Paulo), the Workshop on Corporate Governance at Copenhagen Business School, the Madrid Finance Workshop on Corporate Finance, Stockholm School of Economics, BI Norwegian School of Management, Bocconi University, University of Zurich, the Shanghai Advanced Institute of Finance, and Foro de Finanzas (Barcelona).

The financial crisis has made the theme of the project even more relevant and has opened new areas of related research.

First, the fortunes of stock exchanges and their reversals may depend on the nature of market participants. In the paper, "Investors' Horizons and the Amplification of Market Shocks" (coauthored with Andrew Ellul and Cristina Cella), I explore precisely this question. This paper shows that during episodes of market turmoil 13F institutional investors with short trading horizons sell their stockholdings to a larger extent than 13F institutional investors with longer trading horizons. This creates price pressure for the stocks mostly held by short horizon investors, which, as a consequence, experience larger price drops, and subsequent reversals, than stocks mostly held by long horizon investors. These findings are not driven by the withdrawals experienced by the institutional investors or by other institutional investors' and firms' characteristics. Overall, the evidence indicates that investors with short horizons amplify the effects of market-wide negative shocks by demanding liquidity at times when other potential buyers' capital is scarce.

Second, I ask whether government interventions can mitigate the effects of financial crises and how should government intervention be designed. In the paper (coauthored with Andrei Simonov), "On the real effects of bank bailouts: Micro-Evidence from Japan", exploiting the Japanese banking crisis of the 1990s as a laboratory, we investigate the effects of bank bailouts on the supply of credit and the performance of banks' clients. Consistent with recent theories, our findings indicate that the size of capital injections relative to banks' initial financial conditions is crucial for the success of bank bailouts. Capital injections that are large enough to reestablish bank capital requirements increase the supply of credit and spur investment. In contrast, not only do capital injections that are too small fail to increase the supply of credit, but they also encourage the evergreening of non-performing loans and favor investment by unviable "zombie" firms.

Third, in two papers published in the American Economic Review and in the Journal of Financial Economics, I explore the collapse of the global market for syndicated loans during financial crises and show that it can in part be explained by a flight home effect whereby lenders rebalance their loan portfolios in favor of domestic borrowers. The home bias of lenders' loan origination increases by approximately 20% if the bank's home country experiences a banking crisis. This flight home effect is distinct from flight to quality because borrowers of different quality are equally affected. The results indicate that the home bias in capital allocation tends to increase when adverse economic shocks reduce the wealth of international investors. We also show that international banks exhibit a flight abroad during good times.

Fourth, in ongoing work, I show that in mortgage markets with low concentration, lenders have an excessive propensity to foreclose defaulting mortgages. Though rational, foreclosure decisions by individual lenders may increase aggregate losses because they generate a pecuniary externality that causes house price drops and contagious strategic defaults. In concentrated markets, instead, lenders internalize the adverse effects of mortgage foreclosures on local house prices, and are more inclined to renegotiate defaulting mortgages. Thus, negative income shocks do not trigger strategic defaults, foreclosure rates are lower, and house prices are less volatile. We provide empirical evidence consistent with the theory using U.S. counties during the 2007-2009 housing market collapse.

Finally, another recent working paper shows that after the revelation of corporate fraud, the equity holdings of households in that state decrease significantly both in the extensive and the intensive margins. Using an exogenous shock to fraud detection and within-state variation in households' lifetime experiences of corporate fraud, we establish that the impact of fraud revelation in local companies on household stock market participation is causal. Even households that did not hold stocks in the fraudulent firms decrease their equity holdings, and all households decrease their holdings in fraudulent firms as well as non-fraudulent firms. As a consequence of the decrease in local households' demand for equity, firms headquartered in the same state as the fraudulent firms experience a decrease in valuation and in the number of shareholders.