Does bank competition reduce cost of credit? Cross-country evidence from Europe

Despite the extensive debate on the effects of bank competition on economic welfare and growth, only a handful of single-country studies deal with the impact of bank competition on the cost of credit. We contribute to the literature by investigating the impact of bank competition on the cost of credit in a cross-country setting. Using a panel of firms from 20 European countries covering the period 2001–2011, we consider a broad set of measures of bank competition, including two structural measures (Herfindahl–Hirschman index and CR5), and two non-structural indicators (Lerner index and H-statistic). We find that bank competition increases the cost of credit and observe that the positive influence of bank competition is stronger for smaller companies. Our findings accord with the information hypothesis, whereby a lack of competition incentivizes banks to invest in soft information and conversely increased competition raises the cost of credit. This positive impact of bank competition is however influenced by the institutional and economic framework, as well as by the crisis.     

Does reputation matter? Evidence on spatial competition in China's bond market

This study investigates the effect of market competition on the reputational concerns of credit rating agencies (CRAs) in the Chinese bond market. We find credit ratings increase when the market share distance between an incumbent CRA and its closest peer competitor decreases. This spatial competition effect only exists at the provincial level. We also find the market competition deteriorates the ability of ratings to predict future bond defaults, while the correlation between credit ratings and market-implied credit spreads is unaffected. Our findings suggest that because of the market inefficiency in emerging economies, CRAs privilege current profits over reputational concerns.     

Does conglomeration really reduce credit risk?

I quantify the effects of conglomeration on credit risk by first computing theoretical default probabilities for conglomerates and their hypothetical stand‐alone counterparts and then mapping them into physical probabilities using a comprehensive database of corporate failures. Comparing the credit risk of conglomerates with that of hypothetical stand‐alone firms, I report significant reductions in the annual probability of default for small firms. My results support the proposition that managers can have a strong incentive to engage in conglomeration, even if it reduces shareholder value and show for which firms this is the case.     

Does bank capital reduce liquidity creation?

This paper investigates the relationship between bank capital and liquidity creation against the backdrop of the 2007–2008 financial crisis. Analyzing an unbalanced panel of 11,617 U.S. commercial banks from 1996 to 2016, we find a negative association between regulatory capital and on-balance-sheet liquidity creation, but positive associations for small banks and after the financial crisis. Further, we observe lower liquidity creation among banks that participated in the Troubled Asset Relief Program (TARP). The results are largely robust to several alternate variable proxies and model specifications. Our findings suggest that “one-size-fits-all” policy may have some unintended consequences for banks.     

Does competition aggravate moral hazard? A Multi-Principal-Agent experiment

We conduct an experiment to determine whether market structure affects financial intermediary behavior. The intermediaries (Agents) are perfectly informed regarding project types and can recommend that their clients (Principals) either proceed or discontinue a project. Intermediaries earn revenues only when they recommend proceeding with the transaction. Thus, our design captures some of the incentives faced by financial advisers in commercial banks, where compensation depends on sales performance, and also by money-managers, whose income depends on the size of their portfolios. We find that a monopolist intermediary protects the interest of clients better than when intermediaries compete. Our results are robust to a significant fee increase and provide additional evidence on the impact of market structure on individual incentives and equilibrium outcomes.     

Identity Theft and Consumer Payment Choice: Does Security Really Matter?

In their paper “Spectral Risk Measures: Properties and Limitations”, Dowd et al. (J Financ Serv Res 341:61–75, 2008) introduce exponential and power spectral risk measures as subclasses of spectral risk measures (SRMs) to the literature, and claim that they are subject to three serious limitations: First, for these subclasses, the spectral risk may be counterintuitively decreasing when the user’s risk aversion is increasing. Second, these subclasses, and power SRMs in particular, become completely insensitive to market volatility when the respective parameters of risk aversion tend to their lower and upper boundaries. Third, exponential SRMs exhibit constant absolute risk aversion, while constant relative risk aversion better meets the empirical evidence. Consequently, “users of spectral risk measures must be careful to select utility functions that fit the features of the particular problems they are dealing with, and should be especially careful when using power SRMs.” (p. 61). In this comment, we show that the findings of Dowd et al. (J Financ Serv Res 341:61–75, 2008) suffer from misinterpretations and wrong conclusions.     

Does banking system transparency enhance bank competition? Cross-country evidence

There seems to be a consensus among regulators and scholars that in order to improve the functioning of a banking system it is necessary to raise the level of bank information disclosure. However, its influence on bank competition – which is an important factor affecting the efficiency and stability of the banking system – is left out of consideration. To test whether greater bank information disclosure is associated with both lower market power and lower concentration in the banking markets, we use country-level data covering the years 1998, 2001, 2005 and 2010. Our findings show that countries with higher levels of bank transparency have lower levels of bank concentration, while the link between transparency and market power is less pronounced. We also show that the reduction of competition due to stricter disclosure requirements depends on bank credit risks and the relationship is U-shaped.     

Are for-profit hospital conversions harmful to patients and to Medicare?

We examine how changes in hospital ownership to and from for-profit status affect quality and Medicare payments per hospital stay. We hypothesize that hospitals converting to for-profit ownership boost post acquisition profitability by reducing dimensions of quality not readily observed by patients and by raising prices. We find that 1-2 years after conversion to for-profit status, mortality of patients, which is difficult for outsiders to monitor, increases while hospital profitability rises markedly and staffing decreases. Thereafter, the decline in quality is much lower. A similar decline in quality is not observed after hospitals switch from for-profit to government or private nonprofit status.     

Does corporate diversification reduce value in high technology firms?

We find that firm value is reduced via industrial diversification and this reduction in value depends upon a firm’s technology intensity. We consider that asymmetric information problems are more severe in technology intensive industries and find that high tech industry firms present distinctly larger value reduction when compared to low tech industry firms. The negative valuation effect is greater for firms that have a relatively larger amount of intangible assets and greater R&D capital. We determine that our findings are robust to different estimation methods and alternative excess value measures.     

Does exposure to product market competition influence insider trading profitability?

We examine whether and how product market competition affects insider trading profitability. We empirically show that the insiders of firms in highly competitive industries make higher abnormal profits. Our identification strategy includes both a quasi-natural experiment setting and an instrumental variable approach to address endogeneity concerns. We also run an extensive array of robustness checks and find that our baseline results remain substantially unchanged. Our cross-sectional analyses show that insider trading profitability is more pronounced for firms with: a higher level of trade secrecy, a higher level of R&D, a lower level of management voluntary disclosures, less readable 10-K reports and highly tone-ambiguous financial disclosures. We also find that our results are robust to the inclusion of corporate governance mechanisms. Overall, this study is consistent with the theoretical predictions that support the information asymmetry and proprietary cost channels of competition and that increases in competition lead insiders to undertake more rent-seeking activity.     

Does sustainable investing reduce portfolio risk? A multilevel analysis

This study complements and extends prior research on the risk mitigation role of sustainable investing. We use a continuous measure of funds' sustainability traits, rather than a categorical approach, and assess impact on risk directly rather than by looking at fund performance in up versus down markets. We find that sustainable investing plays a significant role in mitigating total, systematic, and idiosyncratic risk of equity funds, even after controlling for other fund characteristics. Further evidence indicates that the explanation for the risk reduction role of sustainable funds largely runs through traits of the firms held in the funds.     

Do bankers on the board reduce crash risk?

Commercial banker‐directors (CBDs) bring both financial expertise in risk management and conflicts of interest between shareholders and debtholders. The burgeoning literature on stock price crash risk generates important questions of whether CBDs reduce crash risk. Using BoardEx data from 1999 to 2009, we find supporting evidence that the firms with CBDs experience lower stock price crash risk. Moreover, the reduction of crash risk is more pronounced for high‐risk firms under the monitoring of affiliated banker‐directors. The results of this study are robust to the Heckman selection model, propensity score matching, and alternative measures of crash risk.     

Does competition for capital discipline governments? The role of fiscal equalization

This paper examines how a fiscal equalization system affects the disciplining effect of competition for capital among heterogeneous regions in a decentralized economy. I build a model in which regions that are heterogeneous in initial endowments try to attract capital by competing public input that enhances the productivity of capital; meanwhile, a fiscal equalization system is imposed by the central government to reduce regional disparities in fiscal capacity. The key prediction, borne out in data from the German equalization system, is that while competition for capital strengthens discipline in the well-endowed regions, it weakens discipline in the poorly endowed regions. However, a conventional equalization transfer scheme, common to many countries, can be effective in correcting the distortion driven by the heterogeneity of initial endowments across competing regions.     

Does product market competition affect corporate governance? Evidence from corporate takeovers

We examine the extent to which shareholders strategically allow a weak governance structure in response to increasing competition pressures in the product market. We treat acquisitions by rival firms as shocks that increase threats in a competitive product market. We find that firms adopt greater entrenchment provisions when there are greater competition threats. Moreover, firms with high institutional ownership – especially by dedicated investors – and​ board independence within the compensation committee are particularly aggressive, which is consistent with our theory that aggressive behavior represents a strategic decision by shareholders. Finally, we find positive relationship between the adoption of entrenchment provisions and firm’s future performance, but only for the adoption under relatively severe competitive pressures.     

Does local competition and firm market power affect investment adviser misconduct?

This paper examines the impact of local competition and local firm market power on misconduct by analyzing the investment adviser market. The study is based on an extensive sample of more than 3.8 million employee-year observations of investment advisers resulting in 709,416 firm-county-year observations over 12 years. The findings show that a firm's county-level market power and county market competition have a negative influence on investment adviser misconduct. The result is robust to a battery of empirical tests. We show that a firm exhibits lower levels of misconduct in counties in which it has greater local market power. We also identify the effect of local competition and market power on misconduct using two exogenous shocks, mergers and acquisitions (M&As) and the end of a local monopoly. We establish adviser employment stability as a novel channel for explaining the impact of local competition and firm market power on misconduct.     

Does competition influence the bank lending channel in the euro area?

This paper examines how competition influences the bank lending channel in the euro area countries. Using a large panel of banks from 12 euro area countries for the period 2002–2010 we analyze the reaction of loan supply to monetary policy actions depending on the degree of bank competition. We find that the effect of monetary policy on bank lending is dependent on bank competition: the transmission of monetary policy via the bank lending channel is less pronounced for banks with extensive market power. Further investigation shows that banks with less market power were more sensitive to monetary policy only before the financial crisis. These results suggest that bank market power has a significant impact on the effectiveness of monetary policy. Therefore, wide variations in the level of bank market power may lead to asymmetric effects of the single monetary policy.     

Does liberalization reduce agency costs? Evidence from the Indian banking sector

On February 16, 2002, the Reserve Bank of India issued a circular that signaled a policy liberalization facilitating acquisition of private sector banks in India by foreign entities. Portfolios of private sector and nationalized banks posted significant value gains in the days surrounding the announcement. The gains by private sector banks were almost double those of nationalized banks. We further analyze the firm specific abnormal returns using cross-sectional regressions and find a significant relation between firm-specific abnormal returns and factors typically associated with a bank’s potential for takeover. These results provide the first empirical support for Stulz’s hypothesis that one cause of the valuation gains associated with liberalization is the expected gain from a reduction of agency costs.     

Does takeover competition affect acquisition choices and bidding firm performance? Australian evidence

We examine the influence of takeover competition on three acquisition choices: (i) public versus private target acquisitions; (ii) stock versus cash financed acquisitions; and (iii) related versus unrelated acquisitions. We find strong evidence of acquirers’ preference for public targets, stock swaps and business focus, in the face of takeover competition. Further, we find that the takeover competition has a positive influence on the bid premium paid to acquirer public targets and those financed with stock issues; competitive bids offered to acquire related targets are associated with significantly low bid premiums. In the short-term announcement window, competition-induced bids to acquire public targets and those financed with stock are penalised by the capital market. However, only stock-financed takeovers undertaken in a competitive takeover market show a long-run decline in performance of acquirers.     

Does the cessation of quarterly earnings guidance reduce investors’ short-termism?

The practice of providing quarterly earnings guidance has been criticized for encouraging investors to fixate on short-term earnings and encouraging managerial myopia. Using data from the post–Regulation Fair Disclosure period, we examine whether the cessation of quarterly earnings guidance reduces short-termism among investors. We show that, after guidance cessation, investors in firms that stop quarterly guidance are composed of a larger (smaller) proportion of long-term (short-term) institutions, put more (less) weight on long-term (short-term) earnings in firm valuation, become more (less) sensitive to analysts’ long-term (short-term) earning forecast revisions, and are less likely to dismiss chief executive officers for missing quarterly earnings targets by small amounts, relative to investors in firms that continue to issue quarterly earnings guidance. Our study provides new evidence of the benefit of stopping quarterly earnings guidance, that is, the reduction of short-termism among investors.