About Finance, Impact of Lehman Brothers’ Bankruptcy

Article 1: The Lehman Brothers Effect and Bankruptcy Cascades.

The article talks about the effects of the bankruptcy of the Lehman Brothers and the consequences that it had on the global financial system. Then, it will take effect to develop a simple model that initiates the Lehman failure event is quantified that will have an immediate effect on the worsening of the creditworthiness of all financial institutions in the economic network. This article has proven that the process to bail out of a company that defaults is not always a solution but it will help in mitigating the effects of global impact, and this will be determined by measuring the part of the company that has not defaulted as a result (Sieczka, Sornette & Holyst, 2011). Also, the article describes the existence of phase transitions, which are between the paramagnetic and the ferromagnetic stages to describe the sensitivity of the system to any form of negative impact. The beneficial effect as described in the article is a counterpart of the large vulnerability of the system of coupled firms. I find this article to be very informative of the consequences of the Lehman Brothers bankruptcy, and it also provides crucial information on the possible alleviation of future crises that are related to the one described.

Article 2: Hedge Funds as Liquidity Providers

The article uses the case of Lehman bankruptcy to pass across the information. Hedge funds that were using the Lehman brothers as their prime broker prior to the bankruptcy faced a decline in funding liquidity after the bankruptcy in the year 2008. This is one of the main consequences that can be associated with the bankruptcy. The stocks that were held by the funds connected to Lehman experienced greater declines in the market liquidity in comparison to other stocks after the bankruptcy was declared. The effect of decline was even greater for the ex-ante illiquid stocks, and this seemed to persist into the start of the year 2009. However, no similar effects were noted with the Bear Stearns Failure according to the article, and this is suggestive that the disruption that is associated with bankruptcy can be used in the explanation of liquidity effects. From the article, the conclusion that can be made is that the shocks that funding liquidity of traders usually experience helps in the reduction of the market liquidity of the assets that they trade in. The article is well formulated and it explains the consequence of the Lehman bankruptcy to the hedge funds. The authors have properly explained the situation associated with the hedge funds, making this article to be very helpful.

Article 3: International Shock Transmission after the Lehman Brothers Collapse: Evidence from Syndicated Lending

This article explains the international shock transmission that was experienced by businesses after the declaration of bankruptcy by Lehman Brothers in the year 2008. The immediate effect was the contraction of lending in a sharp manner by the cross-border banks which affected many businesses (De Haas & Van Horen, 2012). The article uses an analysis of detailed data on cross-border syndicated banking in the explanation of the severity and variation in the contraction of this type of lending. The syndicated data has been derived from 75 banks in more than 55 countries in the different continents of the world. The article finds out that many banks had to write down sub-prime assets, and refinancing a large amount of long-term debts, and those which experienced sharp declines in their market-to-book ratio. Additionally, it explains that there was the transmission of the shocks across borders which curtailed the lending abroad. The situation led to a situation in which banks were constrained to only giving money to the small borrowers but the effects had minor differences between the countries. This article clearly explains one of the results that can be associated with the bankruptcy of the Lehman brothers to be the reduction in lending to huge borrowers from the cross-border banks.

Article 4: The Value of Investment Banking Relationships: Evidence from the Collapse of Lehman Brothers

The main point of discussion of the article is the examination of the value of investment banking relationships. It examines the question of whether or not firms derive their value from investment bank relationships by considering the effect that the collapse of the Lehman brothers had on industrial firms (Fernando, May & Megginson, 2012). The firms that were considered were those that were receiving advisory, underwriting, market making, and analyst services from Lehman Brothers. The result was that there was the discovery that the equity underwriting clients experienced an abnormal return which was found to be around 5% on average in the days leading to the declaration of bankruptcy of Lehman Brothers and the few following days. The amount was found to total to over 23 billion dollars in form of aggregate risk-adjusted losses. These were mainly severe for the companies that had broader and stronger security underwriting relationships with the Lehman Brothers. Also, the companies that were younger or smaller were also severely affected and they became more financially constrained. The other groups of companies were not found to be severely affected.

Article 5: Does Corporate Social performance yield any tangible financial benefit during a crisis? An event study of Lehman Brothers’ Bankruptcy

The final article examines whether or not corporate social performance can yield any financial benefit in the event of a crisis, and it uses the bankruptcy of the Lehman Brothers as a basis for explanation (Mio & Fasan, 2012). The article mainly uses an empirical test in the determination of whether corporate social performance had an impact on the corporate financial management in the bankruptcy under consideration. The empirical test is also based on past studies in the formulation of three mechanisms that can link corporate social performance to corporate financial management. The findings of the tests are that the corporate social performance was related to the corporate financial performance, although on a short-term basis and this provided a buffer effect. The article is very informative on the issues of the Lehman Brother bankruptcy. However, the recommendation is that the author should prove the direct co-relation of the corporate social performance to the corporate financial management. The empirical test results seem to be speculative and not objective in nature.

References

Sieczka, P., Sornette, D., & Holyst, J. A. (2011). The Lehman Brothers effect and bankruptcy cascades. The European Physical Journal B, 82(3-4), 257.

Aragon, G. O., & Strahan, P. E. (2012). Hedge funds as liquidity providers: Evidence from the Lehman bankruptcy. Journal of Financial Economics, 103(3), 570-587.

De Haas, R., & Van Horen, N. (2012). International shock transmission after the Lehman Brothers collapse: Evidence from syndicated lending. American Economic Review, 102(3), 231-37.

Fernando, C. S., May, A. D., & Megginson, W. L. (2012). The value of investment banking relationships: evidence from the collapse of Lehman Brothers. The Journal of Finance, 67(1), 235-270.

Mio, C., & Fasan, M. (2012). Does corporate social performance yield any tangible financial benefit during a crisis? An event study of Lehman Brothers’ Bankruptcy. Corporate reputation review, 15(4), 263-284.