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- Bank Market Power, Firm Performance, Financing Costs and Capital StructurePublication . Gonçalves, Marisa Pessoa; Reis, Pedro; Pinto, PedroIn this study, we provide a thorough analysis, conducted on a company-by-company basis, of the impact of bank concentration and the bank-relative power of banks on firm profitability, financing costs, and capital structure in a small economy like Portugal. Using a sample of 434,990 Portuguese companies, the study spans a time frame of 13 years (from 2006 to 2018). Principal component analysis (PCA) was used to determine bank concentration, and a new variable, “bank-related power”,was introduced. This work employed linear regression with static panel data for fixed and pooled effects, using Driscoll–Kraay standard errors and robust standard error estimation. A direct associ ation was found between business performance and the use of bank credit in highly concentrated banking markets (SMEs), and there is evidence of an inverse relationship when the relative power of banks increases (small business). Evidence also shows that financing costs increase with greater bank concentration, while firms’ capital structure improves under similar conditions. When a bank holds greater relative market power, it tends to exert a negative impact on the capital structure of large companies. However, an inverse relationship is observed in the case of SMEs. Unlike previous studies, the article assesses the effects of bank market power on each of the different companies involved by using both bank concentration (as a composite variable) and a new variable that measures the relative power of banks. Due to its extensive database and expanded time frame, this research is innovative in the context of small-sized companies.
- Unlocking portfolio resilient and persistent risk: A holistic approach to unveiling potential groundsPublication . Reis, Pedro; Pinto, PedroPurpose: This study identifies residual, persistent, or resilient risks that remain even after controls for systematic and sentiment risk and extensive portfolio diversification are applied. Method: This methodology employs the Newey-West regression analysis in conjunction with the Lagrange multiplier method to construct a global minimum variance portfolio. This analysis focuses explicitly on the diversifiable risk component. It uses two benchmarks, the Wilshire 5000 and S&P500, in collaboration with investor sentiment metrics. Its primary objective is to mitigate systematic and idiosyncratic risk by examining three different portfolios (Tourism, Utilities/Energy, and Industrials) comprising 132 individual stocks observed over a span of 17 years. Findings: This study identifies a persistent and resilient residual risk that may be connected to undisclosed uncertainties and emerging risks that are known to exist but are not yet fully materialized. These include potential ramifications from emerging widespread climate disasters, the duration of the recession periods, the effect of uncertainty on merger and acquisition outcomes, and even unknown threats such as the proliferation of new computer viruses and system vulnerabilities, the repercussions of unregulated artificial intelligence, and shifts in individual preferences, beliefs, and behaviours that may influence both investors and society’s economic dynamics. All these risks and uncertainties will greatly contribute to a fear of the unknown and subsequently affect financial markets. Novelty: In this study, we extract the systematic and investor sentiment risks for individual socks and construct annual minimum variance portfolios. Our next step was to justify the presence of unknown, persistent, resilient, or residual risk factors. Practical implications: This particular approach provides multiple advantages to investors and regulators. It enables them to construct portfolios with lower levels of risk and proactively mitigate potential sources of risk that are presently little more than possibilities but may evolve into real threats.