Banks, Risk, and Investment
Big Bad Banks? The Winners and Losers from Bank Deregulation in the United States
Thorsten Beck, Ross Levine & Alexey Levkov
Journal of Finance, forthcoming
Abstract:
We assess the impact of bank deregulation on the distribution of income in the United States. From the 1970s through the 1990s, most states removed restrictions on intrastate branching, which intensified bank competition and improved bank performance. Exploiting the cross-state, cross-time variation in the timing of branch deregulation, we find that deregulation materially tightened the distribution of income by boosting incomes in the lower part of the income distribution while having little impact on incomes above the median. Bank deregulation tightened the distribution of income by increasing the relative wage rates and working hours of unskilled workers.
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Gary Richardson & William Troost
Journal of Political Economy, December 2009, Pages 1031-1073
Abstract:
The Federal Reserve Act divided Mississippi between the 6th (Atlanta) and 8th (St. Louis) Districts. During the Great Depression, these districts' policies differed. Atlanta championed monetary activism and the extension of aid to ailing banks. St. Louis eschewed expansionary initiatives. During a banking crisis in 1930, Atlanta expedited lending to banks in need. St. Louis did not. Outcomes differed across districts. In Atlanta, banks survived at higher rates, lending continued at higher levels, commerce contracted less, and recovery began earlier. These patterns indicate that central bank intervention influenced bank health, credit availability, and business activity.
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Measuring Systemic Risk in the Finance and Insurance Sectors
Monica Billio, Mila Getmansky, Andrew Lo & Loriana Pelizzon
MIT Working Paper, March 2010
Abstract:
A significant contributing factor to the Financial Crisis of 2007-2009 was the apparent interconnectedness among hedge funds, banks, brokers, and insurance companies, which amplified shocks into systemic events. In this paper, we propose five measures of systemic risk based on statistical relations among the market returns of these four types of financial institutions. Using correlations, cross-autocorrelations, principal components analysis, regime-switching models, and Granger causality tests, we find that all four sectors have become highly interrelated and less liquid over the past decade, increasing the level of systemic risk in the finance and insurance industries. These measures can also identify and quantify financial crisis periods. Our results suggest that while hedge funds can provide early indications of market dislocation, their contributions to systemic risk may not be as significant as those of banks, insurance companies, and brokers who take on risks more appropriate for hedge funds.
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Short Sellers and Financial Misconduct
Jonathan Karpoff & Xiaoxia Lou
Journal of Finance, forthcoming
Abstract:
We examine whether short sellers detect firms that misrepresent their financial statements, and whether their trading conveys external costs or benefits to other investors. Abnormal short interest increases steadily in the 19 months before the misrepresentation is publicly revealed, particularly when the misconduct is severe. Short selling is associated with a faster time-to-discovery, and it dampens the share price inflation that occurs when firms misstate their earnings. These results indicate that short sellers anticipate the eventual discovery and severity of financial misconduct. They also convey external benefits, helping to uncover misconduct and keeping prices closer to fundamental values when firms provide incorrect financial information.
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Place-based corporate hegemony: General Electric in Tell City, Indiana, 1943-1947
Robert Lewis
Journal of Historical Geography, forthcoming
Abstract:
This paper examines the dynamics behind the selling of a federally owned World War II factory in Tell City, Indiana in 1946 and 1947. The federal agency charged with disposing of wartime plant, the War Assets Administration, reversed its decision to sell the factory to a small innovative company, Electra-Voice, selling it instead to the giant electrical equipment manufacturer, General Electric. What would make federal administrators who were part of a powerful liberal state apparatus committed to economic competition and anti-monopoly change their mind? The answer lies in what I call place-based corporate hegemony. Probing the material consequences of everyday action, place-based corporate hegemony revolves around the formation of alliances based on axiomatic values, the continued appeal of these values, the redistribution of symbolic and material resources, and the incorporation of threatening elements. Deploying a range of archival materials I show how the concerted efforts of the community, business organizations, politicians and unions as well as General Electric to question the initial decision forced the state to rethink and change its decision.
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Jonathan Karpoff, Scott Lee & Gerald Martin
University of Washington Working Paper, March 2010
Abstract:
Firms prosecuted for foreign bribery experience significant costs. Their share values decline by 4.99%, on average, on the first day that news of the bribery action is reported, and by 13% over all announcements related to the regulatory enforcement action. These firms' average cost of equity capital increases from 10.5% to 13%, and compared to matched control firms, they experience a higher number of mergers and bankruptcies. Closer inspection, however, indicates that most of these costs are due to other violations, not the bribery charges per se. When charges of financial misrepresentation are included, the mean initial share price reaction is -5.66%, compared to -1.15% when they are not. The cumulative share price reaction is -14.33% when financial misconduct occurs, compared to -6.05% when it does not. And the mean increase in the cost of equity capital is 3.52 percentage points for firms whose actions include financial misconduct charges, compared to a negligible change when such charges are absent. These results indicate that the cost to firms of being charged with foreign bribery are substantially smaller than for other types of misconduct, especially financial misrepresentation. These results are inconsistent with arguments that foreign bribery actions impose large costs on target firms and represent a significant deterrent to bribery. Investors and regulators appear to care about, and discipline, financial reporting violations, but not bribery as a stand-alone offense.
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Information Content of Public Firm Disclosures and the Sarbanes-Oxley Act
Shimon Kogan, Bryan Routledge, Jacob Sagi & Noah Smith
University of Texas Working Paper, April 2010
Abstract:
We find evidence that public firm disclosure, in the form of Management Discussion and Analysis (Sections 7 and 7a of annual reports), is more informative about the firm's future risk following the passage of the Sarbanes-Oxley Act of 2002. Employing a novel text regression, we are able to predict, out of sample, firm return volatility using the Management Discussion and Analysis section from annual 10-K reports (which contains forward-looking views of the management). Using the relative performance of the text model as a proxy for the informativeness of reports, we show that the MD&A sections are significantly more informative after the passage of SOX. We further show that this additional information is associated with a reduction in share illiquidity, suggesting that the information divulged was new to investors. Finally, we find that the increase in informativeness of MD&A reports is most pronounced for firms with higher costs of adverse selection.
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Market demand for conservative analysts
Artur Hugon & Volkan Muslu
Journal of Accounting and Economics, May 2010, Pages 42-57
Abstract:
Sell-side analysts, on balance, have incentives to emphasize good company news and downplay the bad, resulting in inefficient forecasts. We conjecture that this behavior generates a demand for forecasts from conservative analysts who unwind this pattern, at least in part, resulting in more efficient forecasts. To investigate, we introduce a measure of analyst conservatism and assess the market reaction to analysts' forecast revisions conditioned on their past levels of conservatism. We find a stronger market reaction to forecast revisions by more conservative analysts, and that this result is heightened for companies with greater institutional investor following.
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The Sarbanes-Oxley Act and CEO Tenure, Turnover, and Risk Aversion
Hongxia Wang, Wallace Davidson & Xiaoxin Wang
Quarterly Review of Economics and Finance, forthcoming
Abstract:
Using a sample of CEO turnover from 1999 to 2005, we find that CEOs become significantly more risk averse following the passage of the Sarbanes-Oxley Act, SOX. Their increased risk aversion may serve as an explanation for why CEO tenure is not significantly shortened and forced CEO turnover is not more likely post SOX, as we document in this paper. In addition, we provide evidence that financial restatements have some effects on CEO tenure and the probability of forced CEO turnover. This may be due to intensified monitoring activities by the board and the financial press in the post-SOX era, but we cannot contribute all of it to SOX. In some occasions, SOX seems to weaken the effect of board monitoring on CEO tenure and the effect of firm performance on CEO risk aversion. Though the increased monitoring level post-SOX contributes to the increased CEO risk aversion, little impact is found from the SOX-mandated accuracy and transparency of financial reporting.
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Does Silence Speak? An Empirical Analysis of Disclosure Choices During Conference Calls
Stephan Hollander, Maarten Pronk & Erik Roelofsen
Journal of Accounting Research, June 2010, Pages 531-563
Abstract:
In this paper, we exploit the open nature of conference calls to explore whether managers withhold information from the investing public. Our evidence suggests that managers regularly leave participants on the conference call in the dark by not answering their questions. We find that the best predictors of such an event are firm size, a CEO's stock price-based incentives, company age, firm performance, litigation risk, and whether analysts are actively involved during the call's Q&A section. Finally, we document strong support for the assumption maintained in the literature that investors interpret silence negatively. That is, investors seem to interpret no news as bad news.