The findings of a two-year research programme were presented in Brussels today, calling for further reform of the financial and regulatory system in Europe. The research, which provides one of the most comprehensive and thorough analyses of any financial system undertaken to date, highlights the the need to modify prudential regulation of banks’ sovereign exposures so as to eliminate the current regulatory preference for public over private debt, and instead encourage banks to hold a well-diversified sovereign debt portfolio.
The study considered the causes of the persistently low level of investment in Europe pointing out that Europe has experienced a “lost decade” following the Financial Crisis similar to that of Japan. This collapse in European Investment contrasts with the United States which recovered more rapidly as a result of more developed capital markets and the importance of equity as well as debt in the funding of the corporate sector.
The research also emphasises the ‘double-edged sword’ nature of debt and the risks inherent in excessive reliance on debt as a source of funding, observing that this reliance is substantially intensified by the corporate tax system. One feature of corporation tax around the world is ‘interest tax-deductibility’ – the provision by which companies can deduct their payments of interest against their earnings in computing their liabilities for corporate taxation. It makes the cost of debt finance substantially less than that of equity.
The study, produced by the Centre for Economic Policy Research (CEPR) by Professors Colin Mayer (Said Business School, Oxford University, ECGI and CEPR), Stefano Micossi (Assonime), Marco Onado (Università Bocconi), Marco Pagano (Università di Napoli Federico II, ECGI and CEPR) and Andrea Polo (Universitat Pompeu Fabra, Barcelona GSE and CEPR), concludes that ‘we should correct the distortions imposed by taxation and regulation as a matter of urgency and recognise the importance that equity plays as the lifeblood of corporate sectors in loosening the noose of excessive corporate debt’.
Speaking at the launch of the book, “Finance and Investment: The European Case”, Professor Colin Mayer, said “the programme has shed new light on the operation of economic and financial systems around the world and the causes of Europe’s ‘lost decade’. The insights come from the remarkable natural experiments that the financial and sovereign crises have provided. They point consistently to the importance of debt overhang as a contributory factor and the role of both tax and regulatory policy in exacerbating the problems.”
The book, published by oxford University Press is currently available for purchase with online retailers.
The event was held in collaboration with the European Corporate Governance Institute (ECGI).
Click here to read more about the findings of this study.
About the European Corporate Governance Institute (ECGI)
The ECGI is an international scientific non-profit association which provides a forum for debate and dialogue focusing on major corporate governance issues and thereby promoting best practice. It is the home for all those with an interest in corporate governance offering membership categories for academics, practitioners, patrons and institutions.
Its primary role is to undertake, commission and disseminate research on corporate governance. Based upon impartial and objective research and the collective knowledge and wisdom of its members, it can advise on the formulation of corporate governance policy and development of best practice. In seeking to achieve the aim of improving corporate governance, ECGI acts as a focal point for academics working on corporate governance in Europe and elsewhere, encouraging the interaction between the different disciplines, such as economics, law, finance and management.
About the Centre for Economic Policy Research
The Centre for Economic Policy Research (CEPR) was founded in 1983 to advance the quality of economic policy-making within Europe and beyond, by fostering top quality, policy-relevant economic research, and disseminating it widely to decision-makers in the public and private sectors. Drawing together the expertise of its over 900 Research Fellows and Affiliates, CEPR initiates and coordinates research activities, and communicates the results quickly and effectively to decision makers around the world. CEPR organises approximately 80 meetings a year, and produces over 600 Discussion Papers, reports and books. The Centre is an independent, non-profit organization and takes no institutional policy positions.
RELTIF is a research project on corporate financing in Europe jointly developed by Assonime and the Centre for Economic Policy Research (CEPR) in London. It is designed to serve two purposes:
1. Advance the understanding of issues relating to the financing of corporations, especially European ones,
2. Provide evidence on the policy issues currently debated in Europe about the financing of corporations.
The project aim is to distil robust policy recommendations that can guide and influence the future path of reform, and the resulting changes in the structure of financial markets in the years to come.
The time horizon of the project is three years. Funding is provided by Emittenti Titoli.
Assonime is the Association of Italian joint stock companies, constituting around 500 companies from a range of sectors including finance, public utilities and industry. Assonime was established in 1910 as a research centre by a distinguished group of industrialists and financiers. Its history is intertwined with that of the Italian economic system and, more recently, European integration. Both a company association and a think tank, Assonime’s goal is the creation of a healthy macroeconomic and regulatory environment for business as a whole, without sectoral interests, and with a strong commitment to opening markets and promoting European integration.
Assonime is an Institutional Member of the European Corporate Governance Institute (ECGI).