CEO Bonus Compensation and Bank Default Risk: Evidence from the U.S. and Europe

We investigate the link between the incentive mechanisms embedded in CEO cash bonuses and the riskiness of banks. For a sample of U.S. and European banks, we employ the Merton distance to default model to show that increases in CEO cash bonuses lower the default risk of a bank. However, we find no evidence of cash bonuses exerting a risk‐reducing effect when banks are financially distressed or when banks operate under weak bank regulatory regimes. Our results link bonus compensation in banking to financial stability and caution that attempts to regulate bonus pay need to tailor CEO incentives to the riskiness of banks and to regulatory regimes.     

Unintended consequences of the increased asset threshold for FDICIA internal controls: Evidence from U.S. private banks

We examine the unintended consequences of the 2005 increase from $500 million to $1 billion in the asset threshold for the Federal Deposit Insurance Corporation Improvement Act (FDICIA) internal control reporting requirements. We focus on a test sample of banks that increased their total assets from between $100 million and $500 million prior to the change in regulation to between $500 million and $1 billion within two years following the change. These “affected” banks are no longer subject to the internal control requirements but would have been had the regulation not been changed. We hypothesize that these affected banks are likely to make riskier loans, which will increase the likelihood of failure during the crisis period. We find evidence consistent with this hypothesis. Affected banks have higher likelihood of failure during the crisis period than banks from two different control samples. We also find that auditor reputation (i.e., whether the bank is audited by a Big 4 auditor or an industry specialist auditor) has a moderating effect on the likelihood of failure for these affected banks.     

The Announcement Effects of U.S. versus non‐U.S. Bank Mergers: Do They Differ?

Non‐U.S. bank mergers are becoming an increasingly important part of the worldwide economic landscape. Are the market reactions to non‐U.S. bank mergers similar to the reaction in the United States? I address this question by examining abnormal returns of publicly traded partners on the announcement of forty‐one non‐U.S. bank mergers and comparing the returns with a U.S. control group. I find acquirers in non‐U.S. domestic bank mergers earn more and non‐U.S. targets earn less than their U.S. counterparts. However, for the subset of mergers in countries with relatively well‐developed stock markets, I find that partners earn similar returns.     

Firms’ performance under different bankruptcy systems: a Europe–USA empirical analysis

This study empirically analyses the effect that the bankruptcy law has on firms’ performance based on its financial situation. To do this, we considered the different types of efficiency and their influence on firms’ value. The study was carried out for Germany, Spain, the United States, France and the United Kingdom. We applied System‐GMM estimation to dynamic panel data. The main results show that under creditor‐oriented systems, there is a decrease in the value of both financially distressed firms and those filing for bankruptcy.     

The Risk‐Taking Channel of Monetary Policy in the U.S.: Evidence from Corporate Loan Data

To study the presence of a risk‐taking channel in the U.S., we build a comprehensive data set from the syndicated corporate loan market and measure monetary policy using different measures, most notably Taylor (1993) and Romer and Romer (2004) residuals. We identify a negative relation between monetary policy rates and bank risk‐taking, especially in the run up to the 2007 financial crisis. However, this effect is purely supply‐side driven only when using Taylor residuals and an ex ante measure of bank risk‐taking. Our results highlight the sensitivity of the potency of the risk‐taking channel to the measures of monetary policy innovations.     

On the independence of assets and liabilities: Evidence from U.S. commercial banks, 1990–2005

Traditional asset–liability management techniques limit banks’ abilities to structure their balance sheets—but more recently, financial innovations have allowed banks the chance to manage interest rate risk without constraining their asset–liability choices. Using canonical correlation analysis, we examine how the relationships between asset and liability accounts at U.S. commercial banks changed between 1990 and 2005. Importantly, we show that asset–liability linkages are weaker for banks that are intensive users of risk-mitigation strategies such as interest rate swaps and adjustable loans. Perhaps surprisingly, we find that asset–liability linkages are stronger at large banks than at small banks, although these size-based differences have diminished over time, both because of increased asset–liability linkages at small banks and decreased linkages at large banks.     

An empirical analysis of the factors impacting discount rates: Evidence from the U.S. Marine Corps

This analysis examines the impact of age, race, marital status, number of dependents, education, rank, years of service, and occupational code on personal discount rates. The study focuses on 3241 Marine Corps officers/enlisted personnel between 1992 and 1997 who separated from the Marine Corps through the VSI program (an annuity payment) or the SSB program (lump-sum payment). The analysis finds that, although the degree of statistical significance varied between the officer model and the enlisted model, holding other factors constant, females and individuals with more years of service or education were less likely to take the lump-sum payment, and that blacks and individuals with more dependents were more likely to take the lump-sum payment. Across all demographic factors, enlisted personnel had statistically significantly higher average discount rates than officers, as is consistent with prior studies. The estimated personal discount rates averaged 14.9% for officers and 24% for enlisted Marines. This study contributes to the literature in that it is the only study to examine the Marines during this time period. Many of the results can be generalized to the civilian sector to assist in formulation of savings/retirement policies.