EFFECT OF FED POLICY ACTIONS ON THE DEFAULT LIKELIHOOD OF COMMERCIAL BANKS

Using a measure of default likelihood based on an option pricing method, we provide evidence that Fed policy actions affect the financial distress of commercial banks. When the Fed increases (decreases) interest rates, the measure of default likelihood increases (decreases). We show that when the Fed uses a tight money policy, the increase in default likelihood is more pronounced for banks that have less capital, have greater financial leverage, are smaller, have fewer growth opportunities, and have lower asset quality. Additionally, the effects on bank default likelihood are more pronounced when the Fed's policy signals less concern about economic growth, as indicated by its bias toward further tightening, and when there is a market expectation of higher short‐term market rates in the future.     

INTRA-INDUSTRY EFFECTS OF BOND RATING ADJUSTMENTS

Several studies find that bond rating downgrades cause negative valuation effects. Other studies find that signals conveyed by earnings releases, earnings forecasts, bankruptcies, and stock offerings of individual firms can be transmitted to their corresponding industries. By combining the two sets of studies, we hypothesize that bond rating changes may contain relevant information not only about the firm, but also about the corresponding industry. We find significantly negative valuation effects for rating downgrades, which are transmitted throughout the industry. Furthermore, we find that intra-industry effects depend on particular characteristics of the bond downgrade, the downgraded firm, and industry rivals. Specifically, the negative intra-industry effects are more pronounced when (1) the downgraded firm experiences a more severe share price response to the bond rating downgrade, (2) the downgraded firm is dominant in the industry, (3) the downgraded firm is more closely related to its rivals in the industry, and (4) the downgrade is due to a deterioration in the firm's financial prospects.     

Sources of Bank Interest Rate Risk

We investigate bank stocks'sensitivity to changes in interest rates and the factors affecting this sensitivity. We focus on whether the exposure of commercial banks to interest rate risk is conditioned on certain balance sheet and income statement ratios. We find a significantly negative relation between bank stock returns and changes in interest rates over the period 1991–1996. We also find that bank characteristics measured from basic financial statement information explain bank stocks'sensitivity to interest rate changes. These results suggest that bank managers, analysts, and regulators can use this information to assess the relative risk exposure of banks.     

What are the real prospects for total EC integration?

Nothing can stop the momentum behind the movement for total European integration, or so it would seem. But what about the impact of Gemn reunijication, strong nationalistic feelings, and the socialist tradition in Europe? The authors look at what impact these might have on the move toward creation of a Single Market.     

FINANCING DECISIONS AND SIGNALING BY PARTIALLY ACQUIRED FIRMS

It is well documented that financing decisions by firms can signal valuable information about that firm. Our goal is to determine whether financing decisions by firms can signal valuable information about large stakeholders who have a substantial investment in those firms. In particular, we focus on financing decisions by firms after they had been partially acquired to determine whether these decisions signaled information that affected the values of their corresponding partial acquirers. We find that some financing policies by partially acquired firms may not only signal valuable information about themselves, but may also signal valuable information about their corresponding partial acquirers. We also find that the magnitude of the signal for the partially acquired firm that enacts a financing policy is dependent on the degree of monitoring imposed by the respective partial acquirer. JEL classification: G14, G34     

Do managers make takeover financing decisions that circumvent more effective outside blockholders?

Consistent with agency theory, we find that bidder managers make takeover financing decisions in ways that circumvent more effective monitors. Bidder managers are more likely to use cash rather than stock when targets have aggressive outside blockholders. We also find that the likelihood of a cash offer decreases when aggressive outside bidder block ownership is relatively low. However, the likelihood of a cash offer increases when aggressive outside bidder blockholding is in the intermediate range, a range of ownership where their continued influence over managerial decisions is threatened by a stock offer. Furthermore, we find that bidder management tends to use cash when its outside bidder blockholders are less aggressive. Overall, our findings indicate that managerial decisions on financing takeovers are motivated to prevent aggressive outside blockholders from gaining more control.     

THE VALUATION EFFECTS OF FREQUENT COMMON STOCK ISSUANCES

Previous empirical studies show that announcements of seasoned common stock registrations and issuances lead to significant reductions in common stock prices and shareholder wealth. Nevertheless, some firms issue common stock frequently. Our empirical study of nonutility firms that issued common stock four or more times within ten years shows that market reactions to announcements of offerings and to registrations are less unfavorable than typical reactions for infrequent issuers. A cross-sectional analysis reveals no unique characteristics that distinguish frequent issuers from one-time common equity issuers. In fact, the only detectable characteristic unique to the firms is that they issue common stock frequently.     

Why do merger premiums vary across industries and over time?

We identify time-varying industry and macroeconomic factors that explain the observed variation in takeover premiums over time. Results support our hypotheses that some industry and economic factors can increase the growth prospects in an industry, which boosts expected synergies and/or demand for the target firm, and therefore increases the merger premiums. Merger premiums are higher when the target's corresponding industry experiences higher growth, has more research and development (a proxy for expected growth), and has less dispersion in performance among firms within the industry. Merger premiums are also positively related to capital liquidity, which can enhance economic growth and competition for target firms, and positively related to volatility in economic growth, which affect merger waves and the demand for target firms over time.