Journal of Financial Economics

REF 104 The Relationship between Finance and Industry: A Historical Perspective - Human Capital in Finance

No summary is available.

Since the outburst of the financial crisis, French banks acted so that financial stability might be restored and economic growth might resume. During this period, in which important changes in the financial regulation occurred, they proved a real adaptability’s ability. The French banking industry, in which major international banks are to be found, has thus proven its economic and social efficiency and it is most important that future regulations will not harm their business model.

Most of the comparative studies about the relationships between banking and industry on the long term have been focused on the comparison between Britain and Germany. The discussion concerning the relative efficiency of each financial system vis-à-vis the growth of industry in those countries has often been stated and is relatively well known. To propose another comparison could enlarge the problematic. I propose here a comparative study about the relationships between banking and industry in France and in Britain from the last third of the nineteenth century until World War 2. The reasons of this choice are the following. Firstly the two countries are the first that began to develop industrialization. Secondly, during that long period, their financial systems have known some important alterations. Finally, in going away from a comparison Britain/Germany, often based on a frontal opposition between market-based and bank-based financial systems, I hope to help to lead to a more comprehensive and nuanced appreciation of the realities of the financing of industry and of its problems.

This article analyses the history of the relationship between manufacturing industries and financial markets in 19th century France. It shows that most industries didn’t want to get financed by issuing new securities on stock markets, except in the few sectors where initial investments were very important. Progressively, shareholders requiring more liquidity for their portfolios obtain the listing of more firms. They face a market structure that does not satisfy them: the official Paris market – the Parquet – is not very open to manufacturing firms’ securities; provincial stock exchanges are little liquid; the Paris semi-illegal market – the Coulisse – appears too risky for prudent entrepreneurs. The reforms of the Parisian financial centre between 1893 and 1898 contribute to solving this dilemma by providing a safe and active market open to manufacturing shares.

How to implement a mass production when you are a car manufacturer at the beginning of the 20^th century? The article illustrates the case of Peugeot, a French car manufacturer, who had to raise new financings between 1919 and 1939 because of the very carefulness of banks. Even if nothing came out of the business relationships established with the Rosengart and Oustric financing houses, they provided nevertheless the basis of the strengthening of the family relationships and of the setting up of a holding company, key to a self-financing strategy.

The aim of this paper is to study to what extent the “heart” of Deutschland AG – defined as the set of cross-shareholdings and cross-mandates between the major german financial institutions – has been quickly eroded. Then, we analyze the impact on the bank/industry model. We find that large financial institutions have abandoned their traditional role of Hausbank, selling their industrial holdings, deserting supervisory boards and shareholders’ meetings. After presenting the DB strategic mutation, we empirically quantify the destabilization of the “heart” of Deutschland AG. Finally, we consider the implications on the role of banks in the governance of the industry.

This contribution investigates the role played by credit during business cycles as well as financial and economic crises. More specifically, we will focus on credit demand behavior but also on the evolving institutional rules which favour and limit this demand as far as the organization of the financial and banking system is concerned. The theory and the history of business cycles can both be very useful from this standpoint. Credit excesses and the importance of the leverage effect are not new phenomena but they exerted their influences in a majority of business cycles which took place in different parts of the xix^th century. These historical and analytical investigations do provide adequate tools for an analysis of the formation of a collective belief according to which the permanent reinforcement of the limitation of corporate liability and of the risk transfer is the condition of an efficient system of financing and funding.

From this standpoint, after having recalled the importance attributed by Clément Juglar to credit in the explanation of business cycles, the contribution focuses on the financial and economic crises of 1866, 1882, 1929 and 2007, and draws some general conclusions allowing a better understanding of the weight of credit excesses in the origin of crises.

Following the excess of financial capitalism, the SRC (social responsibility of the company) would represent a potential mode of regulation for a “responsible capitalism”. Our article aims at discussing this thesis from the analyses of J.R. Commons, who proposed a model of regulation of the “banker capitalism” at the end of the xix^th century and the beginning of the xx^th century in the United States. This model called “reasonable capitalism” articulates the industrial and financial dimensions through the joint consideration of Law and ethics. The “reasonable capitalism” can be thought as a model of elaboration of economic institutions based on a process of collective bargaining between actors where public authorities play a role of arbitration. We will show to which extend the notion of “reasonable capitalism” is preferable to the SRC’s approach.

Thanks to an original wage dataset (1997-2000) from a major bank in Paris, we show the importance of human capital in the financial sector, both in terms of quantity and price. However, a careful examination of the data shows significant anomalies compared to the human capital model: at given levels of human capital, wages vary widely by profession. Are these differences due to reasons of incentives and compensation for risk aversion? We show also that the principal-agent theory does not adequately account for unequal pay. Occupations where bonus expectancy is the highest are also jobs where fixed wages are the highest. There is no trade-off between these two components of pay. While human capital and incentives can contribute to wage levels, they fail to account fully for the latter and reveal rents relating to the occupation of key positions.

Offshoring goes on growing, in spite of some ebbing away. It has been especially the case for the financial services industry over the last couple of years. As a result of this trend, it is the double stake of globalization and industries specialization that is being addressed. The comprehensive analysis of current decision making models is therefore of paramount importance since different rationality models are being referred to. In that regard, the human capital approach is required to enlighten the offshoring debate. Indeed, this approach can help clarifying in a fresh manner the costs/benefits analysis of an offshoring strategy, especially through human capital risks scrutiny.

Vocational training in French banks remains a tradition. From many years, rates participation and expenditures are high. Regulatory and technical requirements, commercial duties could explain this volume of training. Joint training projects have been realized when they made sense (apprenticeship, professional qualifications…). But investments are not optimized in the French vocational training system. Theory indicates that it might be reconsidered.

Nowadays it is common knowledge to consider that the value of a company’s staff is a key factor of its performance. Even if there is no straightforward indicator of this value, banks are more and more aware of it, even if it is hard to define.

Banks address this issue in several ways: firstly, by trying to hire the best talents available on the labour market; secondly, by trying to keep and make these talents more productive (incentives, training…) and thirdly, by complying with extra financial rating agencies’ criteria. This last point is a rather new stake but is becoming more and more pressing.

In an efficient market, optimal allocation of capital to listed companies relies on precise public information on their future profitability. Market regulation enforces a wide disclosure of information in order to avoid insider trading so that this information becomes also available to competitors. As a result, managers are induced to limit public information and market participants have to make valuation decisions on the basis of a quite poor material. This may lead to financial bubbles or to financial restrictions to firms facing strategic competition. In order to avoid such shortcomings, a solution could be to rely on independent actors in charge of collecting confidential information and of making it available to all market participants in a synthetic way.

MIFID has led to the proliferation of orders execution systems in Europe. Three years after launching, results are subject to discussion and pave the way towards a substantial revision project. In order to throw light on regulatory debate, this paper studies institutional investors’ preferences for order execution methods. Based on Euronext Paris data, the study shows that trading services diversification and a certain degree of order flows fragmentation are justified when accompanied by adapted transparency rules.

This paper examines the financial structure of central banks in the context of unconventional monetary policy. It highlights the responses made during the financial crisis of 2007 to 2010. It examines the impact of these exceptional policies in the balance sheets of central banks. These have used various unconventional measures of monetary policy leading to changes and increases of the size of their balance sheets. Pursuing the increase of monetary assets and the control of long-term interest rates, central banks acquired relatively illiquid assets such as long-term government bonds subject to a risk of rate. Quantitative easing policy is able to be effective only if investors believe that monetary authorities will maintain it. But when long rates begin to rise, continuing monetary easing could expose a central bank to a risk of loss in capital on its potential detention of national debts.