Research BWL VI
Research at the chair of Banking and Finance is based on empirical as well as theoretical and experimental working methods. As regards content, they can be allocated to the following main topics:
- Corporate Finance and Banking
- Corporate / Project Valuation
- Social Finance
- Financial Literacy and Household Finance
- Management Compensation and Incentive Systems
- Gender Issues in Management
Corporate Finance and Banking:
Current projects of the chair of Banking and Finance analyze the cash flow sensitivity of debt financing and investment activities in publicly-listed companies. We examine a major data set of US companies including data from 1984 to 2017. We show that not only external financing restrictions but also internal operating hedging needs have an impact on the interaction between investment, debt financing, and cash balance.
Other projects focus on the actual design of bank loans whose interest rate depends on the performance of the company taking the loan. Performance can be measured by external credit ratings or it can be determined by internal balance sheet or P&L ratios. We show how the choice of the corresponding performance measurement depends on the company characteristics.
Company / Project Valuation:
In comparison with the classic valuation methods like the discounted cash flow analysis or the multiples approach, an appraisal based on real options allows for a consideration of management flexibility in the project. This is particularly reasonable when an investment is to be taken in a particularly unstable environment, e.g. due to regulatory intervention or political instabilities, or when an entirely new market is to be developed. The research project shows ways to introduce and solidly apply the valuation method of real options in different situations and for companies in different industries and development stages.
Decisions under uncertainties are often impaired by false perceptions which may lead to inefficient actions. Our research projects complement this conclusion of the behavioral finance paradigm with the social paradigm: even social behavioral phenomena have an impact on individual decision-making. These include cultural moral concepts and conventions as well as language, religion or ideologies, which are partly initiated and spread via social networks. In different projects, the chair’s research has a particular focus on the question to which extent company communication is being influenced by cultural factors and whether the capital market is able to process offered information efficiently. The objective is to filter cultural and social factors from different communication forms in order to make the information provision of companies in different language areas comparable and usable at a global level.
Financial Literacy and Household Finance:
Against the background of an increasing complexity of investment products while at the same time facing an increasing importance of privately financed retirement provisions, the financial literacy of private households is of utmost importance. Even if it is well known that financial literacy of German households is relatively low, the reasons for the poor financial literacy are more or less unknown. Within different projects, we therefore focus on the question why, for instance, actual and subjectively perceived financial literacy strongly differ from each other and what the consequences are. We also analyze the extent to which professional investment consulting can take this issue into account in order to promote more efficient investment decisions, in particular by women who are particularly in danger of poverty among the elderly. The projects are based on survey data of German as well as international households.
Management Compensation and Incentive Systems:
Do competitive constraints for skilled employees in more and more globalized labor markets lead to higher incentives that tempt managers to take ever higher risks? This and similar questions are subject-matter of this research project. Our argumentation is based on the method of theoretical principal-agent-models. We find evidence that increasing competition for employees is not necessarily something negative but that rather a medium competition rate leads to highly efficient compensation structures. If the competitive pressure is too high, however, the highly skilled employees are in fact offered a too high performance-related compensation. If the competitive pressure is too low, though, the less skilled employees have too little performance incentives.
Gender Issues in Management:
While there are many discussions about the “glass ceiling” for women in management positions, there is hardly any attention being paid to the “glass cliff”: It seems that the frequency of women being appointed to leading management positions is above average when the company is undergoing negative development. Even if anecdotic evidence (Marissa Mayer as CEO of Yahoo, Theresa May as Prime Minister in the UK) seems to prove this hypothesis, it is still not uncontroversial. Within the framework of a research project, we test the hypothesis of the class cliff based on data of German companies that are listed in one of the indices of the German Stock Market.