Sovereign Credit Risk,Banks' Government Support,and Bank Stock Returns around the World

We explore the joint effect of expected government support to banks and changes in sovereign credit ratings on bank stock returns using data for banks in 37 countries between 1995 and 2011. We find that sovereign credit rating downgrades have a large negative effect on bank stock returns for those banks that are expected to receive stronger support from their governments. This result is stronger for banks in advanced economies where governments are better positioned to provide that support. Our results suggest that stock market investors perceive sovereigns and domestic banks as markedly interconnected, partly through government guarantees.     

Financially Constrained Stock Returns

We study the effect of financial constraints on risk and expected returns by extending the investment-based asset pricing framework to incorporate retained earnings, debt, costly equity, and collateral constraints on debt capacity. Quantitative results show that more financially constrained firms are riskier and earn higher expected stock returns than less financially constrained firms. Intuitively, by preventing firms from financing all desired investments, collateral constraints restrict the flexibility of firms in smoothing dividend streams in the face of aggregate shocks. The inflexibility mechanism also gives rise to a convex relation between market leverage and expected stock returns.     

Consumer Vulnerability to Fraud: Influencing Factors

Using the 1993 Survey of Older Consumer Behavior commissioned by the American Association of Retired Persons, consumer vulnerability to market fraud was investigated. Consumer vulnerability was determined based on consumers' market knowledge and awareness of unfair business practices. Using an ordered logit analysis, it was found that consumers were more susceptible to fraud if they were older, poor, less educated, and/or living without spouse. Neither gender nor race was found to be a significant predictor of consumer vulnerability. Implications for consumer educators and policy makers were drawn.