Ying LIANG will defend her thesis on "Essay on Monetary Policies and Firms’ Behaviors " on Monday 21th January 2019, Room MS 217 (Manufacture des Tabacs) at 6 pm.
Supervisor: Augustin Landier, HEC Paris and TSE researcher
- Romain RANCIERE, Professor, University of South California
- Guillaume VUILLEMEY, Professor, HEC, Paris
- Sébastien POUGET, Professor and TSE-TSM researchercher
Augustin LANDIER, Professor, HEC, Paris &TSE
“My thesis studies the monetary policies and firm’s behaviour induced by policies.
Starting from my very initial research paper, non-financial firms’ investment and interest rate variations, I study the effect of risk-free rate variations on firms that are exposed to interest rate risk. To examine their influence on the firms' investment behaviours, I define an interest rate exposure, which is measured by the total floating debt, so that the impact of interest rate shocks on firms can be measured by the product of the interest rate exposure and the change in the interest rate. Using the Compustat data from 1974-2012 and the US annual fundamental financial data, I firstly find that the firms, which are exposed more to interest, have more sensitive cash flows of interest payments and retained earnings. Secondly, I find that exposed firms' investment behaviours are sensitive to the interest rate shocks as well: the higher the exposure to interest rate risk, the more the firms would react to interest rate shocks. Furthermore, I show that financially constrained or high-leverage firms are more sensitive to interest rate shocks than financially non-constrained or low-leverage ones. Interestingly, I find that the fact that firms have different reactions to the interest rate shocks of different signs, which also works for R&D policies. Finally, I show that the model structure changes a lot after the 2008 financial crisis.
Estimating the reactions of equity prices to the monetary policies is complicated by the fact that the market is unlikely to respond to the policy that was already anticipated. Distinguishing between expected and unexpected policies is therefore essential for discerning their effects. In the second paper, I study the reactions of insurance companies to the unexpected interest shocks, which are defined by using the level and the slope of future contract interest rates. I find that on average, insurance companies have significantly positive abnormal returns following a positive unexpected shock in the level or the slope of interest rates: a 1% increase in the level or the slope of interest rates will increase the abnormal returns on average by 2.59% and 1.63%, respectively. I also find that insurance firms engage in maturity transformation in the opposite direction of banks: insurance companies, whose long-term debts will maturate after a very long term, will benefit from the increase in interest rate slope shocks rather than banks' riding on the yield curve through a large mismatch between assets and liabilities. The empirical results provide important policy implications: interest rate shocks boost the value of insurance equities, with a decreasing effect on life, property & causality, and multi-line, but not for the reinsurance or insurance brokers.
In the third paper, I turn to study the behaviour of European banks and investigates how the 2011 and 2014 EU stress tests affect the risk-taking of European banks. After the financial crisis in 2008, both US and European authorities conducted a series of stress tests to limit the risk-taking of banks and to strengthen their capital structures. However, the regulator's objective of limiting risk-taking may not be aligned with the bank's private interests, which may then lead to regulatory arbitrage: if banks face tighter constraints on their investments, they may wish to strategically take more risks which deviates from the regulator's aim. Therefore, understanding the impact of potential new constraints on banks' risk-taking is critical for both regulators and policymakers. In this paper, I document a non-monotonic relationship between banks' risk-shifting resulting from regulatory arbitrage and the tightness of their capital constraint (i.e., the distance between their ex-ante capital ratio and the regulatory level): banks with capital ratios marginally above the regulatory level do more regulatory arbitrage than banks with a level of capital ratio significantly below or above the regulatory level. I also study the indirect effect of the tests on the financing costs of banks which are excluded from the tests: their financing costs on the corporate bond market increase with the level of negative information released in the country in which they are located.
To summarize, at the beginning of my research, my thesis pay attention on old research questions which is about investment behaviour and interest rates, and then turn to new appeared economic questions in the later research papers. Getting align with my research interests, all the papers focus the monetary policy and firms’ reactions to them.”