Sampling process and selection criteria

The list of European banks is drawn from two main indices: European stock market indices and premier indices of the European Union countries (EU-27) (Fasshauer, Glaum, and Street, 2008). The number of banks included in these indices is 112 banks. However, since 38 banks are cross-listed, the initial potential sample size is 72 banks. Some banks are also dropped from the sample based on the following criteria: not providing English copy of the annual reports, merger or acquisition, and missing data. Table 3.1 summarises the Sample selection process.

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Taking all of the abovementioned reasons together, additional 12 companies were dropped from the sample. The final sample consists of 60 banks that were listed on 22 European stock exchanges indices or included in one of three European indices (i.e., FTSE Eurotop 100 Index, FTSE Eurofirst 300 Index, and Euronext100 Index).27

Listed banks Reasons for including

Table 3.1: Sample selection process

31 FTSE Eurotop 100 Index

Criteria 1

Banks listed in these European stock

market indices 13

FTSEurofirst 300 Index

6 Euronext100

72 Premier segment of 27 European stock exchanges.

Criteria 2

Banks included in the premier indices of 27 European countries

Reasons for excluding Deleted

13 Listed on more than one of the indices

Cross-listed

3 An English copy is not available

Annual report not available in English

1 Merged or acquired during the sample period

Merger or acquisition

10 Banks that do not provide enough details of CEO compensation

Missing data

66 Total sample companies

This set of publicly listed banks is chosen for two important reasons. Firstly, publicly listed firms are more likely to comply with accounting standards and disclose detailed information about their executives compensation (Bai and Elyasiani, 2013; Conyon et al., 2011; Gao, 2010). Moreover, publicly traded firms are incited by international accounting standards/international financial reporting standards (IASs/IFRSs) to report their derivatives activities in their annual financial statements and this increases the availability of richer data because of the mandatory disclosure requirements (Judge, 2006). As of 2005, almost all publicly listed firms in European and many other countries are required to prepare financial statements in accordance with International Financial Reporting Standards, and firms that

27

Fasshauer, Glaum and Street (2008) adopt the same approach to analysis the defined benefit pension disclosure of European companies.

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adopt IAS appear to provide higher accounting quality (Barth, Landsman, and Lang, 2008; Fasshauer, Glaum, and Street, 2008).

Secondly, listed firms are normally large and more likely to engage in credit derivatives activities because they benefit from economies of scale (Minton et al., 2009;Supanvanij and Strauss, 2010;Hagendorff and Vallascas, 2011).28 A positive association between large firms

and derivatives disclosure level has been recognised in derivatives-reporting literature (e.g., Beretta and Bozzolan, 2004; Linsley and Shrives, 2006; Zhou and Wang, 2013).

The limited amount of previous empirical studies in this area can be explained by the lack of publicly available information on corporate hedging activity (Mian, 1996; Supanvanij and Strauss, 2010). In the absence of specific reporting requirements, firms have not voluntarily disclosed derivatives activities in their financial statements in a uniform manner.

Banks and insurance companies are major groups of active participants in CDS markets (Fung et al., 2012). However, the core aim of this thesis is to examine CDS use in the banking industry. There is a notable difference between derivatives use in insurance companies compared to the banking industry (Castries and Claveranne, 2010). Insurance companies are using derivatives mostly for hedging purposes, and have regulatory or legal restrictions on their ability to enter into derivatives contracts (Cummins et al., 2001; Castries and Claveranne, 2010). In addition, using reported data from only one industry will help to control for cross-industry differences in investment opportunity sets, reporting practices, and regulatory environment (Colquitt and Hoyt, 1997).29

Virtually all firms belong at least to one of these European indices: FTSE Eurotop 100 Index, FTS Eurofirst 300 Index, and Euronext100, and premier indices of EU-27. Table 3.2 presents a summary of the sample based on the country, stock market index, number of banks

28

The benefits from economies of scale for large firm are related to the disclosure costs, information and transaction costs on derivative.

29

Hentschel and Kothari (2001) also exclude insurance companies because of the wide range of financial activities by insurance firms that makes it difficult to classify them into financial and non-financial corporations.

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used in the sample and mentioned in the stock market index, and number of publicly listed banks in the stock market.

Table 3.2: A summary of the sample based on the country, market index, number of banks included, and number of publicly listed banks in the stock market.

Country Market index Number of banks in stock market Number of banks in the sample and the

percentage

Country Market index

Number of banks in stock

market

Number of banks in the sample and the

percentage UK FTSE100 9 5 (55.6%) Denmark OMX 20 28 2 (7.1%) Italy MIB-30 19 6 (31.6%) Belgium BEL20 4 2(50%)

Spain IBEX 35 10 5 (50%) Sweden OMXS 30 4 4(100%)

Germany DAX 30 13 (23.1%) 3 Austria ATX 8 1(12.5%)

France CAC40 20 4(20%) Bulgaria SOFIX 5 3(60%)

Portugal PSI-20 4 4(100%) Lithuania OMX Vilnius 2 2(100%)

Malta MSE 4 3(75%) Hungary BUX 2 2(100%)

Poland WIG20 16 3 (18.8%) Switzerland SMI 24 1(4.2%)

Slovenia LJSE 3 3 (100%) Ireland ISEQ-20 2 1(50%)

Romania BET 3 2 (66.7%) Norway OBX 22 1(4.5%)

Cyprus CySE 20 4 2 (50%) Czech republic PX Index 1 1(100%)

Total 105 40 102 20

Banks are classified as users or non-users of CDS based on a search of their annual reports for information about the use of CDS. Appendix C shows the complete list of the banks classified as CDS user or CDS non-user, and their market capitalisation.

Banks in the following 22 countries will be included in the sample: the UK, Italy, Spain, Germany, Austria, Belgium, Denmark, Ireland, France, Portugal, Sweden, Cyprus, Bulgaria, Lithuania, Czech Republic, Hungary, Malta, Poland, Romania, Slovenia, Switzerland, and Norway. The sample used in this thesis represents about 83% (£670,494 millions) of the market capitalisation of European publicly listed banks (£804,196.42 millions).