Table Of ContentContemporary Topics in Finance
Contemporary Topics in Finance
A Collection of Literature Surveys
Edited by Iris Claus and Leo Krippner
Thiseditionfirstpublished2019
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CONTENTS
1. ContemporaryTopicsinFinance:ACollectionofLiteratureSurveys 1
IrisClausandLeoKrippner
2. ASurveyoftheInternationalEvidenceandLessonsLearnedabout
UnconventionalMonetaryPolicies:Isa‘NewNormal’inourFuture? 11
DomenicoLombardi,PierreSiklosandSamanthaSt.Amand
3. ImplicitBankDebtGuarantees:Costs,BenefitsandRisks 41
SebastianSchich
4. FinancialFraud:ALiteratureReview 79
ArjanReurink
5. EstimatingInflationRiskPremiaUsingInflation-LinkedBonds:AReview 117
AlexanderKupfer
6. FinanceandProductivity:ALiteratureReview 151
MarkHeil
7. BusinessAngelsResearchinEntrepreneurialFinance:ALiteratureReviewand
aResearchAgenda 183
FrancescaTenca,AnnalisaCroceandElisaUghetto
8. VentureCapitalInternationalization:SynthesisandFutureResearchDirections 215
DavidDevigne,SophieManigart,TomVanackerandKlaasMulier
9. IsRelationshipLendingStillaMixedBlessing?AReviewofAdvantagesand
DisadvantagesforLendersandBorrowers 249
AndiDuqi,AngeloTomaselliandGiuseppeTorluccio
10. DeterminantsofthePerformanceofMicrofinanceInstitutions:ASystematic
Review 297
NielsHermesandMarekHudon
vi CONTENTS
11. CrowdfundingandInnovation 331
FabriceHerve´andArminSchwienbacher
12. Crypto-Currencies–AnIntroductiontoNot-So-FunnyMoneys 351
ChristieSmithandAaronKumar
Index 383
1
CONTEMPORARY TOPICS IN FINANCE:
A COLLECTION OF LITERATURE SURVEYS
Iris Claus
University of Waikato
Leo Krippner
Reserve Bank of New Zealand
“Fortherewasonceatimewhennosuchthingasmoneyexisted....Butitdidnotalways
and so easily happen that when you had something which I wanted, I for my part, had
somethingthatyouwerewillingtoaccept.Soamaterialwasselectedwhich,beinggivena
stablevaluebythestate,avoidedtheproblemsofbarterbyprovidingaconstantmediumof
exchange.”
JuliusPaulusPrudentissimus,about230A.D.(translationbyA.Watson,1985)
Financehasalwaysplayedacriticalroleineconomies,givenitisattheheartofconsump-
tion,saving,andinvestmentdecisionsbyindividuals,firms,andgovernments.Asapractical
and professional field, finance facilitates the efficient exchange of funds within economies
betweenlenders,investors,andborrowers.Therefore,itisunderstandablethatfinanceiscon-
tinuallyevolvinginpractice.
However,itisimportantthatthepracticalevolutionoffinanceiscomplementedbyactive
academic and policy related research. As a simple historical example, money, which lies at
thecoreoffinanceandeconomics,hasexistedinpracticeforthousandsofyears,ashasthe
temptation for its exploitation by authorities. The introductory quote is actually part of an
academicargumentonthekeypropertiesofmoney(anefficientmediumofexchange,asecure
storeofvalue,andastableunitofaccount)thatsuccessfullyconvincedGordianIIIatthetime
againstdebasingthecurrencyofRome.
Followingthethemeofbestpracticebeingcomplementedbybestresearch,thisbookcom-
prisesacollectionofup-to-datereviewsonelevencontemporarytopicsinfinance. Wehave
broadlygroupedtheseintothethreecategoriesdiscussedinthefollowingparagraph.
ContemporaryTopicsinFinance:ACollectionofLiteratureSurveys,FirstEdition.EditedbyIrisClausandLeoKrippner.
Chapters©2019TheAuthors.Bookcompilation©2019JohnWiley&SonsLtd.Published2019byJohnWiley&SonsLtd.
2 CLAUSANDKRIPPNER
Developmentsinfinancepractice,research,policy,andregulationcanbetriggeredbymany
catalysts.Onesuchcatalystisexceptionalfinancialandeconomiceventsthatcanleadpolicy
makers,researchers, andsocietyingeneral toquestionand revisittheparameters andlimits
under which the finance industry operates. A broader avenue, for research in particular, is
thepassageoftime,whichallowspreviouslynewformsoffinancingtobebeddedin,while
newempiricalmethodsanddatabecomeavailableforquantitativeanalysis.Athirdcatalystis
technologicalinnovations,whichcanaltertheefficiencyofexistingfinancialtransactionsand
flowsoffunding,orcreatenewones.
Themostexceptionalfinancialandeconomiceventinrecenthistoryis,ofcourse,theGlobal
FinancialCrisis(GFC)andtheassociatedGreatRecession.Thefirstthreearticlesinthisbook
relatetothoseevents.Theyreviewtheliteratureontheeffectivenessofunconventionalmon-
etarypolicy,thecostsofimplicitbankdebtguarantees,anddriversoffinancialfraud.Estima-
tionofinflationriskpremia,advancesinfinanceandproductivity,andlesstraditionalforms
offinanceincludingbusinessangels,venturecapital,microfinance, andrelationshiplending
are reviewed in the next six articles. The last two reviews are on new topics in finance that
havearisenfromtechnologicaladvances;crowdfundingandinnovationandanintroductionto
crypto-currencies.
TheimmediatechallengesoftheGFCandGreatRecessionweretostabilizefinancialmar-
ketsandtheeconomy,andultimatelysettingthemonacourseforaneventualrecovery.Hence,
in“Asurveyoftheinternationalevidenceandlessonslearnedaboutunconventionalmonetary
policies:Isa‘newnormal’inourfuture?”PierreSiklos,DomenicoLombardi,andSamantha
St.Amanddiscusstheeffectivenessofunconventionalmonetarypolicy(UMP)andimplica-
tionsforthefuture.UMPisdefinedasanypolicyaction,otherthantheconventionalsetting
ofshort-terminterestratesundertakenpriortotheGFCof2007/08thatinfluenceseconomic
activityand/ormoderatesshockstothefinancialsystemtoachieveastatedmonetarypolicy
objective. UMP therefore includes the well-known quantitative easing (QE) actions, where
central banks change the size and/or composition of their balance sheet, forward guidance
policies,wherecentralbankschangemarketexpectationsofinterestratesbysendingsignals
aboutthefuturepolicypath,andinflationtargetannouncementsthatcanchangeexpectedin-
flationandhencerealinterestrates.
TheauthorsfindconsiderableevidencethatUMPcanbepowerfulinoffsettingthenegative
economiceffectsofafinancialcrisis.Inthatcontext,theevidencesuggeststhatasuccessful
monetary policy response should be forceful, that a joint response from both the fiscal and
monetaryauthoritiesisdesirable,andthatthepolicyresponseshouldbepersistentuntilcon-
fidenceandtheconditionsforfullrecoveryareinplace.Fromtheseperspectives,theauthors
providearetrospectiveonthecaseofUMPinJapan,giventhatitsofarshowsfewsignsof
producingtheaimed-foreconomicoutcomesdespitelongandvariedattempts.Theyalsoraise
relatedquestionsfortheeuroarea,giventhatthespecificstructureofitsfinancialsystemand
macroeconomicpolicymakingprocessesmaylimitthedesiredco-ordinatedresponse.
Regardingtheaftermathofafinancialcrisis,theauthorsinterprettheevidenceasshowing
thatUMPisnotnecessarilysufficientorcapableofpromotingstrongerlong-termeconomic
growthonitsown.Consistentwiththis,centralbankshavebeenreluctanttoclaimthatthey
canrestoregrowthtopre-crisisconditionswithoutsupportingfiscalandstructuralpoliciesalso
beingenacted.
TheGFCwasalsoacatalystforrevisitingthetopic,andpolicyframework,aroundimplicit
governmentguaranteesforbanks,giventhatthebankingsystemandmanyindividualbanks
receivedunprecedentedgovernmentsupportatthetime,althoughthetopicalsohasplentyof
CONTEMPORARYTOPICSINFINANCE 3
pre-GFC history. “Limiting implicit bank debt guarantees” by Sebastian Schich reviews the
literature, noting that implicit government guarantees exist for banks essentially due to the
expectationbymarketparticipantsthatpublicauthoritiesmightbailoutthecreditorsofbanks
thatareconsideredtobe“toobigtofail”(TBTF).ThepolicyresponsetotheGFCmighthave
furtherentrenchedthatperception.
Whileimplicitbankdebtguaranteesmightbenefitsomestakeholdersintheshortterm,they
create economic costs as well as additional risks. In particular, they tend to weaken market
discipline, encourage bank leverage and risk-taking, and distort competition between banks
and non-banks, between small and large banks, and between banking sectors from different
countries.Theyalsocreatecontingentliabilitiesforthesovereignandthetaxpayer.
Policymeasurestolimitthevalueofimplicitguarantees,andhencetheircosts,differfrom
country to country. One overarching goal is to strengthen bank balance sheets, thus making
guaranteeslessvaluable.Anotheravenueistomakebankfailureresolutionsmootherandmore
effective,thusreducingtheperceptionthatimplicitguaranteesexist.Explicitlychargingauser
fee,asadisincentiveforbanksto“use”suchguarantees,isconsideredlessattractive,giventhe
difficultyofmakingappropriatevaluationsandalsopotentiallyreinforcingtheperceptionthat
guaranteesexist.Theapproachofidentifyingsomebanksasgloballysystemicallyimportant
and subjecting them to a special and more intrusive regulatory treatment may be seen as an
indirectchargeforthe“use”ofimplicitguarantees.However,Schichfindslittleevidencethat
thisspecificapproachhasbeensuccessfulsofar.
Schichsummarizesthemeasuresofimplicitguaranteeswhich,whileinherentlydifficultto
value,canbeusedtoassessprogressregardinglimitingTBTF.Thereisevidencethatthevalues
ofimplicitbankdebtguaranteesforbankshavedeclinedfromtheirpeaksattainedduringthe
GFC,butitisnotclearwhetherthevalueshavefallenbelowthoseprevailingbeforethecrisis.
Open questions that remain are how much further should the value of implicit bank debt
guaranteesbereduced?Andatwhatpointcantheirlevelbeconsideredlowenoughsothatthe
costsoffurthereffortstoreducethemwouldoutweighthebenefitsofdoingso?
AnothertopicthathasbeengivenanewleaseoflifeintheonsetandthewakeoftheGFC
isfinancialfraud,giventheroleofthesubprimemortgagemarketsinthatevent,althoughthe
topichashadalongandcolourfulpedigreepriortotheGFC.In“Financialfraud:Aliterature
review”,ArjanReurinksurveystheempiricalliteratureonfinancialfraudfromthreeperspec-
tives.Thefirstisfinancialstatementfraud,whichinvolvesfalsestatementsaboutinvestment
entities,thesecondisfinancialscams,whicharedeceptiveandfullyfraudulentschemes,and
thethirdisfraudulentmis-sellingpractices,wheretheproductorserviceisknowinglyunsuit-
ableforclients’needs.
Reurinkfindsthatfinancialfraudiswidespreadthroughoutthefinancialindustry,including
thefrequentinvolvementofestablishedfinancialinstitutions,andisnotsimplyattributabletoa
few“badapples”.Indeed,theliteraturereviewhighlightsfourrecentdevelopmentsthatschol-
ars think have facilitated the occurrence of financial fraud. First, financial deregulation has
resultedinnewconflictsofinterestandperverseincentivestructures,facilitatedbyincentive-
basedcompensationstructuresinfinancialfirmsatalllevels(andnewlayersofintermediaries,
suchasfundmanagersandfinancialadvisers).Perverseincentivestructurescanorientatefirms
towardsshort-termprofit-makingandstock-pricemaximization,irrespectiveofthelegalim-
plications,andlegalpenaltiescansimplybeseenasacostofdoingbusiness.Second,finan-
cial markets have seen an influx of relatively unsophisticated investors during the last few
decades, which has provided fraudulently predisposed market players with a larger pool of
moreeasilyexploitableinvestors.Third,theincreasingcomplexityinvolvedinfinancialmarket
4 CLAUSANDKRIPPNER
transactionsprovidesopportunitiesforfraudsterstodeceiveothermarketparticipants.Fourth,
the veil of secrecy and mystique surrounding some collective investment funds which have
been on the rise over recent decades can facilitate fraud. The secrecy is justified in the con-
text of proprietary trading models used by fund managers, but financial scams and finan-
cial statement frauds associated with the funds can thrive in the environment of incomplete
disclosure.
Future research in the area, building on some existing work, could investigate the impact
offraudonthefunctioningofmarketsandthestabilityoffinancialsystems,thepoliticaland
economicstructuresthatfacilitatefinancialfraud,andtherelationshipbetweenderegulation
andfinancialfraud.Particularlyrelevantinthepresentenvironmentofunusuallylowinterest
ratesishowthatmightencourageexcessiverisktakingandfacilitatePonzilikeschemes.
Withinthesecondmaincategoryofexistingtopicsinfinancethathavebenefitedfromnew
research,weincludesixpapers.
AlexanderKupferin“Estimatinginflationriskpremiausinginflation-linkedbonds:Are-
view” surveys studies investigating the premia in inflation-linked bonds (ILBs), which have
growninnumberwiththeavailabilityofnewdata,notablyintheUnitedStatesoverthepast
20 years. Inflation expectations are an unobserved variable that are an important economic
quantity for policy makers and investors. In principle, nominal bonds and ILBs should al-
low high frequency readings of implied inflation expectations for different horizons (unlike
surveyed inflation expectations). However, nominal-ILB spreads are biased by inflation risk
premia,liquiditypremia,lagsonindexingILBstoinflationoutturns,andembeddeddeflation
options(someILBsruleoutindexationbelowfacevalue).Allowingforthosebiasesimproves
implied inflation expectations nominal-ILB spreads, and is also important for decisions on
nominalversusILBsovereigndebtissuance.Thesignoftheinflationriskpremiumalsooffers
someintuitionaboutthestateoftheeconomy.
Kupferfindsthatstrategiestoestimatetheinflationriskpremiumvaryconsiderablythrough-
out the literature, including regression-based approaches, term structure models (with and
withoutinflationdata),andmacro-financetermstructuremodels.Thesestudiesgenerallyfind
thatthemagnitudeandvariationintheinflationriskpremiumismaterial.Regardingtheliq-
uidity premium, it was highest in the first years of ILB issuance and around the time of the
GFC.Theindexationlaganddeflationoptionarefoundtobenegligible,apartfromduringthe
GFCinthelattercase.
Thesurveyalsopresentspotentialdirectionsforfutureresearch.Oneisbuildingonlimited
worksofarusingtermstructuremodelsthatallowfortheeffectivelowerboundinnominal
yields,whileILByieldsarefreetoevolvetonegativevalues.Similarly,furtherandin-depth
analysis is needed on ILB liquidity premia and their determinants because eliminating that
premium would present a large fiscal saving when issuing ILBs. Finally, a further area for
futureresearchistoextendrecenttermstructureapproachesthatgaugetheequilibriumreal
rateusingILBs,andtoinvestigatetwo-(ormulti-)countrytermstructuremodelsthatinclude
ILBdata.
Anothertopicthathasevolvedrapidlyinthepastdecade,dueinparttogreateravailabil-
ityoffirm-levelandplant-leveldataandpolicyagendapriorities,istherelationshipbetween
financeandproductivity.In“Financeandproductivity”MarkHeilsurveystheempiricalliter-
ature,afterprovidinganintroductiontothelong-termtrendsinproductivityandfinance,and
astylizedviewofkeypolicymechanismsthatinfluenceproductivity.
Regardingempiricalresults,mountingevidenceshowsthatfinancialdevelopmenthasbeen
an important contributor to productivity growth. Conversely, financial frictions that impede
CONTEMPORARYTOPICSINFINANCE 5
theefficientflowoffinancecanmitigatethepositiveeffectsthroughavarietyofchannels.For
example,inefficientinsolvencyregimesthatimpedetheexitoflow-productivityfirmsinhibits
productivity growth. The magnitudes of frictional costs in general appear to be modest in
financiallydevelopedeconomies,butareconsiderablylargerindevelopingeconomies.
A primary driver of productivity growth is knowledge production, yet evidence that the
availability of financing facilitates higher educational attainment is tenuous. On the whole,
mergerandacquisitionactivityisassociatedwithgainsinproductivity,butthedirectcontri-
butionsofthefinancialsectortoproductivityaremixed;improvementsduringthelate1990s
weresubstantial,butmightbeassociatedwiththetechbubbleatthetime.Cross-countryand
single-country studies agree that financial liberalization, such as stock market opening and
liftingofforeigncapitalcontrols,isassociatedwitheconomicallymeaningfulaggregatepro-
ductivitygains.
Theresearchsuggeststhattheavailabilityofequityfinancingisparticularlyvaluableforthe
growthofyoungandsmallenterprisesanditremainstheprimaryexternalsourceforfunding
research and development. Recent studies of both periods of economic decline and booms
suggestthatbusinesscycleinfluencesonproductivityareinconclusive.
Astheauthornotes,therecentempiricalliteratureprovidesfreshinsightsthatmayinform
policydevelopmenttohelpenactfinancerelatedmeasuresthatmoreeffectivelypromotepro-
ductivitygrowth.However,itwillbeimportantinfutureresearchtoidentifyempiricalregu-
larities,aswellasdifferencesacrosscountries.
Angelfinanceisanon-traditionalsourceoffundsthathasbecomemorecommonplacein
recentdecades,inpracticeandintheliterature.In“Businessangelsresearchinentrepreneurial
finance: A literature review and a research agenda”, Francesca Tenca, Annalisa Croce, and
Elisa Ughetto provide a summary of findings of prior literature and a bibliometric analysis.
Businessangelsarehighwealthindividualswhoprovideseedorgrowthcapital,advice,and
hands-on assistance to business start-ups in exchange for ownership equity. They invest at
theearlieststagesofventures’lifecycletypicallylongbeforeinstitutionalinvestors.Business
angels play a complementary role to venture capitalists. They are typically more involved
intheselectionphaseandfirstcontactwithentrepreneurs,whileventurecapitalistsheadthe
deal-structuring phase. In the post-investment phase, business angels are more involved in
mentoring while venture capitalists are more engaged in monitoring through contracts and
supervisoryboardinvolvement.
Theauthorscategorizetheliteratureonbusinessangelsintothreethematicareas.Thefirst
is business angel characteristics, which was the first research stream to emerge. The second
is business angel market, and the third is business angel investment process, which has be-
comethemostextensiveresearchstreamfollowingincreasedgrowthinthenumberofpapers
published since 2011. However, a significant research gap has emerged between developed
andemergingeconomies.Emergingmarketsareoftencharacterizedbypoliticaluncertainty,
corruption,lackofsupportinginstitutionsforearlystageinvestment,andlegalprotectionfor
minorityshareholders.Businessangelsmanagesuchdifficultiesbyadoptinginvestmentstrate-
gies of informal networking and co-investment. In emerging countries business angels co-
investtoreducehighlevelsoffinancial,legal,currency,political,economic,andmarketrisks
whileindevelopedeconomiestheytypicallyco-investtoreducefinancialrisks.
Quantitative analysis is the most frequent methodology used in business angel research.
However,akeychallengeisthatbusinessangelsareoftenanonymousandinvisibleandhence
difficulttoidentifywhichmakessamplingproblematicandmoststudiesrelyonconvenience
samples.
