Seeking Capital Abroad: Motivations,Process, and Suggestions for Success

Until fairly recently, the ownership of companies has remained largely with investors in home countries with stocks listed only on domestic exchanges. But a growing number of firms are now raising equity capital on foreign stock exchanges in response to opportunities created by the increasing integration of global capital markets. The authors identify several reasons why seeking capital abroad is an attractive strategy for companies, including greater access to capital, a more liquid share price, easier means of offering employees equity interests in the firm, greater opportunities to make acquisitions, and at least the potential for a stronger reputation and higher valuation, stemming in part from better governance law and greater protection for minority investors in certain jurisdictions. But along with such potential benefits, companies that raise capital abroad also inevitably face liabilities of foreignness (LOF) in their dealings with foreign investors and capital markets. The authors propose a number of ways of minimizing such liabilities, that including signalling the firm's commitment to strengthening its internal governance system, adopting host country business practices, and enlisting the help of reputational intermediaries.     

UNDERWRITING SPREADS AND REPUTATIONAL CAPITAL: AN ANALYSIS OF NEW CORPORATE SECURITIES

When entering a new security market, investment banks must establish their reputation. This is done through direct experience in the security market or through reputational capital established in existing security markets. I examine the effects of underwriters' market reputation in publicly underwritten offerings in forty-three financial innovations and find more significant entry barriers for less prestigious underwriters. An analysis of underwriting spreads reveals first-issue pricing advantages due to reputational capital. Unlike the more prestigious underwriters, the less prestigious underwriters reduce spreads upon first entry into each new security market to overcome their lack of market reputation.     

When LIBOR becomes LIEBOR: Reputational penalties and bank contagion

We study whether commonality of incentives and opportunity to commit fraud trigger reputational contagion from culpable firms to nonculpable firms. Relying on a sample of 30 banks involved in fixing the London Interbank Offered Rate (LIBOR) and a control sample of 30 banks, we find that banks' reputations suffered substantial damage upon the announcement of their involvement in the scandal. We also document reputational contagion spread from banks that manipulated LIBOR to banks that shared the same incentives and opportunity to commit the fraud. The reputational contagion is more pronounced for large derivatives dealers who have had the strongest incentive to commit the fraud.     

Asymmetric Information,Bank Lending,and Implicit Contracts: A Stylized Model of Customer Relationships

Customer relationships arise between banks and firms because, in the process of lending, a bank learns more than others about its own customers. This information asymmetry allows lenders to capture some of the rents generated by their older customers; competition thus drives banks to lend to new firms at interest rates which initially generate expected losses. As a result, the allocation of capital is shifted toward lower quality and inexperienced firms. This inefficiency is eliminated if complete contingent contracts are written or, when this is costly, if banks can make nonbinding commitments that, in equilibrium, are backed by reputation.     

Safety Transformation and the Structure of the Financial System

This paper studies how a financial system that is organized to efficiently create safe assets responds to macroeconomic shocks. Financial intermediaries face a cost of bearing risk, so they choose the least risky portfolio that backs their issuance of riskless deposits: a diversified pool of nonfinancial firms' debt. Nonfinancial firms choose their capital structure to exploit the resulting segmentation between debt and equity markets. Increased safe asset demand yields larger and riskier intermediaries and more levered firms. Quantitative easing reduces the size and riskiness of intermediaries and can decrease firm leverage, despite reducing borrowing costs at the zero lower bound.     

Customer concentration,leverage adjustments,and firm value

We examine the relationship between customer concentration and capital structure adjustment speed using a sample of US listed firms from 1977 to 2020. We found that the customer-concentrated firms have a lower speed of leverage adjustment. Customer concentration affects leverage adjustment speed mainly through increased cash flow volatility and asset specificity. The negative association is more pronounced in firms with high relationship-specific investments and low switching costs for their customers. Stock market reacts to leverage deviation strongly for firms with concentrated customers. Our findings highlight the vital role of customers as key stakeholders in capital structure decisions.     

Assessing Systemic Risk Exposure from Banks and GSEs Under Alternative Approaches to Capital Regulation

A key function of capital regulation is to mitigate the potential for systemic financial risk by maintaining public confidence in the ability of regulated market participants to honor their financial obligations in times of market stress. While it is well known that the portfolios of banks and non-banks, especially those intermediaries specializing in mortgage securitization or in specialized mortgage lending, differ in important respects, debate over alternative capital regulations has yet to recognize the implications of these differences, despite the increasing importance of non-bank intermediaries in risk-sharing markets. This paper uses a simple two-date discrete state space exchange economy with opportunities for moral hazard on the part of financial intermediaries to investigate the design of capital regulations to control systemic risk. Holding constant asset risks, we show that intermediaries that issue contingent liabilities may exhibit low or no risk of insolvency while holding significantly less capital than deposit-taking institutions because banks primarily issue claims that promise fixed payments in all states of nature. We also show that, rather than raising capital requirements, the control of systemic risk may involve lowering capital requirements and extending guarantees to liability-holders, without a necessary increase in expected subsidy payments, if such requirements account for shareholder incentives. Specifically, we analyze an example of regulatory policy in which lower capital requirements and an ex post penalty schedule reduce systemic risk by increasing the volume of tradable securities exchanged and by offering a credible mechanism by which intermediaries can signal the true riskiness of their portfolios to liability-holders.     

声誉模型视角的商业银行关系营销策略研究

根据菲利普·科特勒关于关系营销的建议,商业银行对客户实施关系营销有效的深度是不同的。商业银行与客户的关系是一种既竞争又合作的关系,声誉模型可以为商业银行有效实施关系营销策略提供支持。研究发现：商业银行应该选择“合作策略”彰显良好声誉,选择具有良好声誉的客户合作,并着力发展优质的忠诚客户。     

Two Modes of Investment Banking: Technocrats,Relationship Managers,and Conflict

Efficient capital allocation in a market economy depends on the exchange of reliable information between providers of capital and companies that seek to put capital to work. One challenge, however, is that information exchange is at most only partly subject to verification and contractual arrangements. Take the case of securities issuance, including IPOs; whereas issuers of the new securities have incentives to overstate their prospects to attract higher bids, prospective investors have incentives to understate their interest. In principle, the counterparties could enter into an agreement that would prevent or discourage misrepresentations by both sides, but failure to perform would be very costly, if not impossible, for a court to verify. Investment banks have traditionally addressed this problem by creating extralegal markets for information whose functioning depends on the reputations of the banks for upholding the interests of both their corporate clients and the providers of capital. But committing to strike the right balance among all of the parties’ interests means that relational investment bankers inevitably face conflicts of interest. The authors of this article argue that such bankers exist to absorb and to manage conflicts of interest in financial markets—and that they do so by exercising judgment in ways that support their reputation for fair dealing. Modern full‐service investment banks, when addressing such conflicts, combine, or braid, such relational functions with technocratic banking activities involving the use of technical skills with advanced information technology. In so doing, however, technocratic bankers substitute formal contracts for the informal judgment exercised by relational bankers; and as a result, they are less dependent on their banks’ reputations for fair dealing. Moreover, technocratic bankers often have powerful incentives to pursue a personal reputation by executing complex transactions that demonstrate their skill, even at the expense of their clients and the bank's reputation for fair dealing. Well‐governed braided banks can benefit from complementarities between relational and technocratic skills. Nevertheless, full‐service banks continue to struggle with governance problems. The authors discuss several market responses to these struggles, such as the growing use of boutique banks offering “unconflicted” sell‐side advice in mergers and acquisitions and securities offerings. But the authors view such responses as at most a first step toward achieving a new understanding of the extent of the challenge facing today's investment banks in carrying out their economic function of bringing together and balancing the interests of companies and their investors.     

Customers and investors: A framework for understanding the evolution of financial institutions

Financial institutions are financed by both investors and customers. Investors expect an appropriate risk-adjusted return for providing financing and risk bearing. Customers, in contrast, provide financing in exchange for specific services, and want the service fulfillment to be free of the intermediary's credit risk. We develop a framework that defines the roles of customers and investors in intermediaries, and use it to build an economic theory that has the following main findings. First, with positive net social surplus in the intermediary-customer relationship, the efficient (first best) contract completely insulates the customer from the intermediary's credit risk, thereby exposing the customer only to the risk inherent in the contract terms. Second, when intermediaries face financing frictions, the second-best contract may expose the customer to some intermediary credit risk, generating “customer contract fulfillment” costs. Third, the efficiency loss associated with these costs in the second best rationalizes government guarantees like deposit insurance even when there is no threat of bank runs. We further discuss the implications of this customer-investor nexus for numerous issues related to the design of contracts between financial intermediaries and their customers, the sharing of risks between them, ex ante efficient institutional design, regulatory practices, and the evolving boundaries between banks and financial markets.     

Asset redeployability and the choice between bank debt and public debt

A firm with less redeployable assets, which are assets that have fewer alternative uses outside the firm, is more likely to borrow from banks than issue public debt. These findings are consistent with firms with less redeployable assets valuing the ability to renegotiate bank debt contracts instead of selling assets in the event of default. Consistent with this mechanism, firms with lower asset redeployability sell fewer assets following covenant violations. Our results contribute to work on the determinants of which debt markets a firm chooses to borrow from and the role that banks play as intermediaries.     

The reputational effects of analysts' stock recommendations and credit ratings: Evidence from operational risk announcements in the financial industry

This paper investigates whether more favorable stock recommendations and higher credit ratings serve as a reputational asset or reputational liability around reputation-damaging events. Analyzing the reputational effects of operational risk announcements incurred by financial institutions, we find that firms with a “Buy” stock recommendation or “Speculative Grade” credit rating are more likely to incur an equity-based reputational damage. In addition, firms with lower credit ratings incur a much more severe debt-based reputational damage. Moreover, credit ratings are more instrumental in mitigating the debt-based reputational damage caused by fraud incidents or incurred in non-banking activities. Furthermore, the misconduct of senior management could demolish the reputation of firms with less heterogeneous stock recommendations. Finally, credit ratings serve as an equity-based reputational asset in the short term but turn into an equity-based reputational liability in the long term. Overall, our analysis reveals that stock recommendations represent a reputational burden and credit ratings act as a reputational shield; however, the persistence and magnitude of such reputational effects are moderated by time and event characteristics.     

Boundaries of the firm: evidence from the banking industry

Agency theory implies that asset ownership and decision authority are complements. Using 1998 data from Texas commercial banks, we test whether the likelihood of local ownership of bank offices increases with the importance of granting local managers greater decision authority (for example, due to location or customer base). Our empirical evidence is consistent with this hypothesis. It suggests that complementarities between strategy and organizational structure can foster differentiation among firms in terms of location, customers, and products. It also supports the growing view that small locally-owned banks have a comparative advantage over large banks within specific environments.     

风险投资声誉和股价“传染”效应——来自中国上市公司立案公告的证据

本文以我国2007-2015年证监会立案调查事件为样本,研究当风险投资支持的上市公司涉嫌违规,同一风险投资所支持的其他上市公司(即关联公司)的股价是否会被“传染”。实证结果表明,有风投背景的上市公司在立案公告日有显著的负面市场反应(约-8%),并且这种负面反应会通过共同的风险投资链条“传染”给关联公司(约-1.2%)。我们还发现,风险投资机构的声誉越高,风险投资对涉嫌违规企业参与度越高,则立案调查事件对风险投资的声誉损害越严重,市场对关联上市公司的惩罚也越严重。     

Japanese stock market reaction to announcements of news affecting auditors’ reputation: The case of the Olympus fraud

The revelation of accounting fraud by the Olympus Corporation gave rise to shareholder allegations of audit failure against Olympus’ auditors—Ernst & Young ShinNihon LLC and KPMG AZSA LLC—in 2011. In this study, we investigate whether the auditors’ affiliation with Olympus contributes to divergent perceptions of audit quality in the event of news announcements affecting the reputation of Olympus’ auditors. First, we use a nonparametric generalized rank event study methodology on 918 sample firms from the First Section of the Tokyo Stock Exchange (TSE) to observe Japanese investors’ perceptions of auditor reputation as proxied by abnormal returns. Second, we perform a multivariate linear regression on firms’ abnormal returns after controlling for firm-specific variables. We find that Japanese investors do not respond to negative or neutral reputational information arising from news announcements concerning Olympus’ auditors for firms affiliated and not affiliated with those auditors. In the absence of legal penalties imposed on Olympus’ auditors, we argue that Japanese investors consider the Olympus fraud case as an expected occurrence of audit failure due to a lack of evidence suggesting systematic audit failure on the part of Olympus’ auditors and an expectation of lower audit quality in the Japanese capital market. As a result, Japanese investors do not consider news announcements affecting the Olympus auditors’ reputation as sufficient evidence to change their prior expectation regarding the reputations of the audit firms affiliated with the Olympus fraud case.     

Do more reputable financial institutions reduce earnings management by IPO issuers?

This study investigates whether financial intermediaries (FIs) participating in the IPO process play a significant role in restraining earnings management (EM). Specifically, we examine whether EM around IPOs is negatively related to investment banks (IBs) and venture capital (VC) investor reputations. In general, we do not find evidence that VCs as a group significantly restrain EM by IPO issuers. However, we uncover strong evidence that more reputable VCs and IBs are associated with significantly less EM, which is consistent with them implicitly certifying the quality of issuer financial reports. Moreover, a stronger reduction in EM is found when more reputable IBs are matched with more reputable VCs, which indicates that VC and IB reputation are complements rather than substitutes. These conclusions are invariant to adjustments for potential endogeneity of underwriter reputation and VC-backing or reputation.     

The influence of sponsor,servicer, and underwriter characteristics on RMBS performance

This paper assesses how the default frequencies of RMBS loan portfolios vary depending on sponsor, servicer, and underwriter characteristics. We find that the larger and healthier the sponsor of the transaction, the lower the default frequency of the securitized loans. This finding is consistent with the hypothesis that banks with a longer market perspective are less willing to risk their good reputation for a gain in short-term profits. More surprisingly, we find that there is a negative relationship between the market share of the lead underwriter and default frequency. In contrast to reputational capital theory, it appears that investment banks with high market shares in the securitization business exploit their reputational capital.     

Earnings performance of major customers and bank loan contracting with suppliers

Using a sample of 3725 loan facility–years for supplier firms that have financial data on their major customers during the period 1995–2011, this study investigates whether the earnings performance of major customers has effect on the price and nonprice terms of loans to the supplier firms. We find that various contracting terms are more favorable for loans to supplier firms whose major customers have higher return on assets (ROA). More importantly, we find that the effect of major customers’ earning performance on loan contracting terms is weaker for the borrowers with prior loan relationships with banks, while it is stronger for the borrowers that are highly dependent on their major customers. Our results suggest that banks take into account major customers’ earnings performance when contracting with their supplier firms, and the informativeness of customer earnings varies with the nature and strength of the customer–supplier relationships.     

Incentives and financial crises: Microfounded macroprudential regulation

We provide a micro-based rationale for macroprudential capital regulation of financial intermediaries (banks) by developing a model in which bankers can privately undertake a costly effort and reduce the probability of adverse shocks to their asset holdings that force liquidation (deterioration risk). A decline in the fundamental risk of assets ameliorates funding conditions, boosting the banks’ ability to expand their balance sheets. In principle, a higher continuation value would improve incentives to put effort. However, the rise in asset demand and prices also increases the payoff in liquidation, eventually reducing the equilibrium optimal effort. Poor incentives impose socially inefficient liquidation and can be corrected through a regulatory capital requirement. We show that the requirement should be high when fundamental risk is low. Therefore, the model suggests a theoretical foundation for macroprudential regulation and the countercyclical capital buffer of Basel III.     

Dwarf banks

This study examines the business model and the viability of very small commercial banks in emerging market context. Using a unique sample of 141 Russian banks with less than a $10 million in assets, I trace performance, survival, recapitalization and growth patterns of these dwarf banks in response to the sharp increase in the minimum capital requirements. I find that dwarf banks are, on average, low-risk financial intermediaries that perform simple operations and have significantly higher survival rates in local markets with poor economic and banking services outreach characteristics. I also find that the average dwarf banks withstand the regulatory capital shock surprisingly well by securing fresh capital injection followed by a twofold asset size increase. The results of this study contribute to the literature on the relationship between the small bank business model, local banking markets characteristics and long-term viability. They also provide new evidence on the expected and unexpected outcomes of the “too small to survive” regulatory intervention into the banking market size structures.