Free Bank Failures: Risky Bonds versus Undiversified Portfolios

Almost 30% of the 872 banks established under the Free Banking System (1837–62) are considered failures, unable to reimburse noteholders for the full value of their bank notes upon closure. Lacking sufficient data, economists have focused on one of two general failure explanations: poor regulation design or undiversified bank portfolios. I test both explanations within hazard functions using Warren Weber's annual balance sheet data for almost every antebellum bank. My results suggest that free banking's bond‐secured note issue was the underlying problem, but individual banks could have avoided failure by diversifying their assets with loans and controlling their circulation.     

The Effect of Lender Identity on a Borrowing Firm's Equity Return

Previous research demonstrates that a firm's common stock price tends to fall when it issues new public securities. By contrast, commercial bank loans elicit significantly positive borrower returns. This article investigates whether the lender's identity influences the market's reaction to a loan announcement. Although we find no significant difference between the market's response to bank and nonbank loans, we do find that lenders with a higher credit rating are associated with larger abnormal borrower returns. This evidence complements earlier findings that an auditor's or investment banker's perceived “quality” signals valuable information about firm value to uninformed market investors.     

Concentrating on Governance

This paper develops a novel trade‐off view of corporate governance. Using a model that integrates agency costs and bargaining benefits of management‐friendly provisions, we identify the economic determinants of the resulting trade‐offs for shareholder value. Consistent with the theory, our empirical analysis shows that provisions that allow managers to delay takeovers have significant bargaining effects and a positive relation with shareholder value in concentrated industries. By contrast, non‐delay provisions have an unambiguously negative relation with value, particularly in concentrated industries. Our analysis suggests that there are governance trade‐offs for shareholders and that industry concentration is an important determinant of their severity.     

A Multiple Lender Approach to Understanding Supply and Search in the Equity Lending Market

Using unique data from 12 lenders, we examine how equity lending fees respond to demand shocks. We find that, when demand is moderate, fees are largely insensitive to demand shocks. However, at high demand levels, further increases in demand lead to significantly higher fees and the extent to which demand shocks impact fees is also related to search frictions in the loan market. Moreover, consistent with search models, we find significant dispersion in loan fees, with this dispersion increasing in loan scarcity and search frictions. Our findings imply that search frictions significantly impact short selling costs.     

On the Asymmetric U‐Shaped Relationship between Inflation,Inflation Uncertainty,and Relative Price Skewness in the UK

We investigate the asymmetric relationships between aggregate inflation and the second and third moments of the cross‐sectional distribution of relative prices using a modified Calvo pricing model with regime‐dependent price rigidities. Calibration experiments reveal that the inflation‐standard deviation and inflation‐skewness relationships exhibit U‐shaped asymmetries around the historical mean inflation rate. UK sectoral data support our results. We conclude that monetary policy should target an inflation rate proximate to the (common) minima of these nonlinear relationships and that core inflation measures should not be used for policy purposes as they exclude much of the information contained in the higher moments.     

Leveraging FDA Health Claims

Although past research has investigated different aspects of various health claims, relatively little effort has been directed toward synthesizing the reasons why some Food and Drug Administration (FDA) health claims are more successful than others. After outlining two necessary conditions for a health claim's success, currently approved FDA health claims are examined to explain both the diet–health relationship and its effect on the widespread awareness and adoption of the claim. Understanding what makes health claims successful provides useful nutrition education and product‐labeling lessons for policy makers in all countries.     

The Effects of Reallocating General Revenue Assistance among the Australian States*

The Australian government distributes about 4 per cent of GDP to the State governments in the form of general revenue assistance. The distribution formula, which favours the less populous States, is a source of resentment in Victoria and NSW. We use two general equilibrium models to analyze the regional employment, output and efficiency effects of proposed changes in the formula     

Banking on the Boom,Tripped by the Bust: Banks and the World War I Agricultural Price Shock

How do banks respond to asset booms? This paper examines (i) how U.S. banks responded to the World War I farmland boom; (ii) the impact of regulation; and (iii) how bank closures exacerbated the postwar bust. The boom encouraged new bank formation and balance sheet expansion (especially by new banks). Deposit insurance amplified the impact of rising crop prices on bank portfolios, while higher minimum capital requirements dampened the effects. Banks that responded most aggressively to the asset boom had a higher probability of closing in the bust, and counties with more bank closures experienced larger declines in land prices.     

Withering Government Spending Multipliers

The empirical literature has documented a weakening of the consumption and output responses to an increase in government spending during the last 30 years. We show that a New Keynesian model in which real government spending is observed with measurement errors can account for the reduction in the size of government spending multipliers. The model implies—consistent with empirical evidence presented by Ilzetzki, Mendoza, and Vegh (2010)—that the evolution of monetary policy and greater globalization (increasing international trade and decreasing capital controls) are key factors in this development.