A Tale of Two Runs: Depositor Responses to Bank Solvency Risk

We examine heterogeneity in depositor responses to solvency risk using depositor‐level data for a bank that faced two different runs. We find that depositors with loans and bank staff are less likely to run than others during a low‐solvency‐risk shock, but are more likely to run during a high‐solvency‐risk shock. Uninsured depositors are also sensitive to bank solvency. In contrast, depositors with older accounts run less, and those with frequent past transactions run more, irrespective of the underlying risk. Our results show that the fragility of a bank depends on the composition of its deposit base.     

Earnings Announcements and Systematic Risk

Firms scheduled to report earnings earn an annualized abnormal return of 9.9%. We propose a risk‐based explanation for this phenomenon, whereby investors use announcements to revise their expectations for nonannouncing firms, but can only do so imperfectly. Consequently, the covariance between firm‐specific and market cash flow news spikes around announcements, making announcers especially risky. Consistent with our hypothesis, announcer returns forecast aggregate earnings. The announcement premium is persistent across stocks, and early (late) announcers earn higher (lower) returns. Nonannouncers' response to announcements is consistent with our model, both over time and across firms. Finally, exposure to announcement risk is priced.     

The Effect of SOX Internal Control Deficiencies on Firm Risk and Cost of Equity

The Sarbanes-Oxley Act (SOX) mandates management evaluation and independent audits of internal control effectiveness. The mandate is costly to firms but may yield benefits through lower information risk that translates into lower cost of equity. We use unaudited pre–SOX 404 disclosures and SOX 404 audit opinions to assess how changes in internal control quality affect firm risk and cost of equity. After controlling for other risk factors, we find that firms with internal control deficiencies have significantly higher idiosyncratic risk, systematic risk, and cost of equity. Our change analyses document that auditor-confirmed changes in internal control effectiveness (including remediation of previously disclosed internal control deficiencies) are followed by significant changes in the cost of equity that range from 50 to 150 basis points. Overall, our cross-sectional and intertemporal change test results are consistent with internal control reports affecting investors' risk assessments and firms' cost of equity.     

The Capitalization of Consumer Financing into Durable Goods Prices

Using loan‐level data on millions of used‐car transactions across hundreds of lenders, we study the consumer response to exogenous variation in credit terms. Borrowers offered shorter maturity decrease expenditures enough to offset 60% to 90% of the monthly payment increase. Most of this is driven by shifting toward lower‐quality cars, but affected borrowers offset 20% to 30% of a monthly payment shock by negotiating lower prices for equivalent cars. Our results suggest that durable goods prices adjust to reflect credit terms even at the individual level, with one year of additional loan maturity increasing a car's price by 2.8%.     

SIZE MATTERS: THE ECONOMIC VALUE OF BEACH EROSION AND NOURISHMENT IN SOUTHERN CALIFORNIA

Despite the widespread use of nourishment in California, few studies estimate the welfare benefits of increased beach width. This paper relies on panel data funded by National Oceanic and Atmospheric Administration and other agencies. Beach choices of respondents were combined with beach attribute data to reveal how changes in width affect choice and the economic value of beach visits. We use a random‐utility approach to show that the value of beach width varies for different types of beach uses: water contact, sand‐, and pavement‐based activities. We also find that the marginal value of beach width depends on initial beach width. (JEL Q50)     

Do Large Banks Have Lower Costs? New Estimates of Returns to Scale for U.S. Banks

This paper presents new, fully nonparametric estimates of ray‐scale and expansion‐path scale economies for U.S. banks based on a model of bank costs. Unlike prior studies that use models with restrictive parametric assumptions or limited samples, our methodology uses local polynomial estimators and data on all U.S. banks over the period 1984–2006. Our estimates indicate that as recently as 2006, most U.S. banks faced increasing returns to scale, suggesting that scale economies are a plausible (but not necessarily only) reason for the growth in average bank size and that the tendency toward increasing scale is likely to continue unless checked by government intervention.     

HOW KNOWLEDGE AFFECTS PAYMENT TO CONSERVE AN ENDANGERED BIRD

The paper reports the findings of an experimental survey conducted to determine the public's willingness to pay (WTP) for the protection and conservation of the golden-shouldered parrot in Australia. This parrot is endemic to Australia and is one of Australia's most endangered birds. The paper examines the public's knowledge of this parrot and compares it with other endangered birds as well as common birds and the public's WTP for conservation from a hypothetical allocation of money based on their current knowledge. We then examine how this allocation changes with increased knowledge about all species.     

The Real Effects of FAS 166/167 on Banks’ Mortgage Approval and Sale Decisions

We examine the real effects of FAS 166 and FAS 167 on banks’ loan‐level mortgage approval and sale decisions. Effective in 2010, these standards tightened the accounting for securitizations and consolidation of securitization entities, respectively, causing banks to recognize an estimated $811 billion of securitized assets on balance sheet. We find that banks that recognize more securitized assets exhibit larger decreases in mortgage approval rates and larger increases in mortgage sale rates. These effects significantly exceed those of banks’ off–balance sheet securitized assets, consistent with our results being driven by the consolidation of securitization entities rather than by securitization per se. We conduct tests that help rule out the financial crisis as an alternative explanation for our results. Further analyses suggest that mechanisms underlying the results include consolidating banks’ reduced regulatory capital adequacy, increased market discipline, and consequent desire not to recognize high‐risk mortgages on balance sheet.