Corporate leverage and the collateral channel

We investigate whether and how corporate leverage depends on the structure of corporate assets. Based on a large panel dataset of US firms from 1990 to 2010, we show that property, plant and equipment are important drivers of the collateral channel, while inventories and receivables are less important. The collateral channel is more pronounced for firms that have to rely on banks and trade creditors to raise debt finance, but it has become weaker for these firms after the start of the financial crisis. Our study provides new evidence on the cross-sectional and time-varying importance of the collateral channel for corporate leverage.     

Neglected risks,financial innovation,and financial fragility

We present a standard model of financial innovation, in which intermediaries engineer securities with cash flows that investors seek, but modify two assumptions. First, investors (and possibly intermediaries) neglect certain unlikely risks. Second, investors demand securities with safe cash flows. Financial intermediaries cater to these preferences and beliefs by engineering securities perceived to be safe but exposed to neglected risks. Because the risks are neglected, security issuance is excessive. As investors eventually recognize these risks, they fly back to the safety of traditional securities and markets become fragile, even without leverage, precisely because the volume of new claims is excessive.     

Relationship lending,hierarchical distance and credit tightening: Evidence from the financial crisis

This paper examines the firms’ credit availability during the 2007–2009 financial crisis using a dataset of 5331 bank–firm relationships provided by borrowers’ credit folders of three Italian banks. It aims to test whether a strong lender–borrower relationship can produce less credit rationing for borrowing firms even during a credit crunch period. The results show that exclusivity of the relationship can mitigate the firm credit rationing. We also verify the influence of lending organizational structure during crisis. A new measure of distance in lending technologies has been introduced: the hierarchical distance calculated as the distance between the branch that originates the loan and the location of the hierarchical level responsible for financing decision. Our findings document a negative impact of distance on credit availability, consistent with the idea that proximity facilitates the transmission of soft information.     

Determinants of collateral

We estimate a comprehensive model of the determinants of collateral in loans extended to business firms. We use a panel data on a sample of bank loans to Spanish firms from 1984 to 2002. Consistent with theories that view collateral as a solution to adverse selection problems, our results provide direct evidence of a negative association between collateral and a borrower's risk. We also present evidence on previously unexplored determinants of collateral such as credit market competition, lender type, and the business cycle.     

Renegotiation of financial contracts: Evidence from private credit agreements

Using a large sample of private credit agreements between U.S. publicly traded firms and financial institutions, we show that over 90% of long-term debt contracts are renegotiated prior to their stated maturity. Renegotiations result in large changes to the amount, maturity, and pricing of the contract, occur relatively early in the life of the contract, and are rarely a consequence of distress or default. The accrual of new information concerning the credit quality, investment opportunities, and collateral of the borrower, as well as macroeconomic fluctuations in credit and equity market conditions, are the primary determinants of renegotiation and its outcomes. The terms of the initial contract (e.g., contingencies) also play an important role in renegotiations; by altering the structure of the contract in a state contingent manner, renegotiation is partially controlled by the contractual assignment of bargaining power.     

Market concentration and the likelihood of financial crises

According to theory, market concentration affects the likelihood of a financial crisis in different ways. The “concentration-stability” and the “concentration-fragility” hypotheses suggest opposing effects operating through specific channels. Using data of 160 countries for the period 1970–2009, this paper empirically tests these indirect effects of financial market structure. We set up a simultaneous system in order to jointly estimate financial stability and the relevant channel variables as endogenous variables. Our findings provide support for the assumption of channel effects in general and both the concentration-stability and the concentration-fragility hypothesis in particular. The effects are found to vary between high and low income countries.     

Securitization and systematic risk in European banking: Empirical evidence

Using a unique dataset of 592 cash and synthetic securitizations issued by 54 banks from the EU-15 plus Switzerland over the period from 1997 to 2007 this paper provides empirical evidence that credit risk securitization has a positive impact on the increase of European banks’ systematic risk. Baseline results hold when comparing estimated beta coefficients with a control group of similar non-securitizing banks. Building several sub-samples we additionally find that (a) the increase in systematic risk is more relevant for larger banks that repeatedly engage in securitization, (b) securitization is more important for small and medium financial institutions, (c) banks have a higher incentive to retain the larger part of credit risk as a quality signal at the beginning of the securitization business in Europe, and (d) the overall risk-shifting effect due to securitization is more distinct when the pre-event systematic risk is low.     

Bank ownership and executive perquisites: New evidence from an emerging market

Direct bank ownership is a common practice in emerging markets. The current paper studies how bank ownership affects firm performance through corporate executive perquisites (perks) in China, a leading emerging economy. In addition to common factors known to influence the level of executive perks, we find a significantly positive link between bank ownership of company shares and executive perquisites. Further analyses suggest that higher level of executive perquisites hurt firm operating efficiency. Specifically, perks are positively associated with interest rate paid by the firms. We find some evidence consistent with the notion that the conflict of interests that banks face as both lenders and shareholders in the emerging markets induces banks to play less effective monitoring if they are concerned with the security of their loans or aim to obtain better arrangement for their loans. Our results reveal a particular mechanism through which bank ownership influences firm decisions and performance.     

Convergence and risk-return linkages across financial service firms

We examine the risk and return linkages across US commercial banks, securities firms, and life insurance companies during the 1991–2001 period. After controlling for changes in the broader stock market, interest rates, and foreign currency values, we find that return and risk interdependencies across these financial firms are significant and size-varying; larger institutions display stronger volatility transmission linkages, while smaller ones exhibit more prominent return-related linkages. The tighter link in risk among large financial institutions (FIs) suggests stronger convergence, employment of common models of risk measurement and risk management, and more intense inter-industry competition, particularly between large banks and large securities firms, compared to smaller institutions. Lack of risk spillover among smaller FIs confirms the intuition that they typically assume more localized and idiosyncratic risk. The co-movement of stock returns among smaller FIs has been helped by the effects of locally based factors, such as economic conditions and state regulations, on all such institutions, and a less diversified product set. Differences in spillover patterns between large and smaller institutions have implications on investment choices and mergers and acquisitions in the industry. Introduction of the Gramm-Leach-Bliley Act (1999) has had dissimilar effects on the riskiness of large versus smaller life insurance and securities firms, and an insignificant effect on commercial banks.     

Consolidation in banking and financial stability in Europe: Empirical evidence

Using aggregate balance sheet data from banks across the EU-25 over the period from 1997 to 2005 we provide empirical evidence that national banking market concentration has a negative impact on European banks’ financial soundness as measured by the Z-score technique while controlling for macroeconomic, bank-specific, regulatory, and institutional factors. Furthermore, our analysis reveals that Eastern European banking markets exhibiting a lower level of competitive pressure, fewer diversification opportunities and a higher fraction of government-owned banks are more prone to financial fragility whereas capital regulations have supported financial stability across the entire European Union.     

Risk management,corporate governance,and bank performance in the financial crisis

The recent financial crisis has raised several questions with respect to the corporate governance of financial institutions. This paper investigates whether risk management-related corporate governance mechanisms, such as for example the presence of a chief risk officer (CRO) in a bank’s executive board and whether the CRO reports to the CEO or directly to the board of directors, are associated with a better bank performance during the financial crisis of 2007/2008. We measure bank performance by buy-and-hold returns and ROE and we control for standard corporate governance variables such as CEO ownership, board size, and board independence. Most importantly, our results indicate that banks, in which the CRO directly reports to the board of directors and not to the CEO (or other corporate entities), exhibit significantly higher (i.e., less negative) stock returns and ROE during the crisis. In contrast, standard corporate governance variables are mostly insignificantly or even negatively related to the banks’ performance during the crisis.     

Corporate choice of banks: Decision factors, decision maker, and decision process — First evidence

In this paper, we investigate how firms choose their banks. We focus on the role played by the decision factors, the decision maker and the decision process in determining firm-bank relationships. We have access to a unique survey that was run by a major bank in the Czech Republic. We find that firms that consider bank reputation to be an important decision factor, have fewer bank relationships and are less likely to reduce the number or quantity of services taken from their banks. Firms that emphasize the price of bank services are more likely to end relationships or to reduce services. Interestingly, the identity of the corporate decision maker determines the number of bank relationships. A Chief Financial Officer deciding on her own will opt for a lower number of banks than a committee of board members.     

Credit lines as monitored liquidity insurance: Theory and evidence

We propose a theory of credit lines provided by banks to firms as a form of monitored liquidity insurance. Bank monitoring and resulting revocations help control illiquidity-seeking behavior of firms insured by credit lines. The cost of credit lines is thus greater for firms with high liquidity risk, which in turn are likely to use cash instead of credit lines. We test this implication for corporate liquidity management by identifying exogenous shocks to liquidity risk of firms in corporate bond and equity markets. Firms experiencing increases in liquidity risk move out of credit lines and into cash holdings.     

A stochastic frontier approach to modelling financial constraints in firms: An application to India

We propose the use of stochastic frontier approach to modelling financial constraints of firms. The main advantage of the stochastic frontier approach over the stylised approaches that use pooled OLS or fixed effects panel regression models is that we can not only decide whether or not the average firm is financially constrained, but also estimate a measure of the degree of the constraint for each firm and for each time period, and also the marginal impact of firm characteristics on this measure. We then apply the stochastic frontier approach to a panel of Indian manufacturing firms, for the 1997–2006 period. In our application, we highlight and discuss the aforementioned advantages, while also demonstrating that the stochastic frontier approach generates regression estimates that are consistent with the stylised intuition found in the literature on financial constraint and the wider literature on the Indian credit/capital market.     

Board characteristics and Chinese bank performance

Using a sample of 50 largest Chinese banks during the period of 2003–2010, we explore a comprehensive set of board characteristics (size, composition and functioning of the board) and analyze their impacts on bank performance and bank asset quality in China. We find that the number of board meetings and the proportion of independent directors have significantly positive impacts on both bank performance and asset quality while board size has a significantly negative impact on bank performance. We find new evidence that the degree of bank boards’ political connection is negatively correlated with bank performance and asset quality. The findings suggest that the board of directors plays a significant role in bank governance in China.     

Economic value,competition and financial distress in the European banking system

In this paper we examine the impact of a large number of factors at the bank level (liquidity and credit risks, asset size, income diversification and market power), at the industry level (banking concentration) and macro-level (real GDP growth) on bank financial distress using an unbalanced panel of 308 European commercial banks between 1996 and 2009. The observations falling below a given threshold of the empirical distribution of the Shareholder Value Ratio proxy bank financial distress. We employ a panel probit regression and, given the presence of overlapping data giving rise to residual autocorrelation, we use the Bertschek and Lechner (1998) robust estimator of the covariance matrix of parameters. We show that credit risk, liquidity risk and bank market power are the most influential determinants of distressed Shareholder Value Ratio. Finally we evaluate the model out-sample forecasting performance over the 2008–2009 crisis period.     

Industrial Loan Companies: Where Banking and Commerce Meet

Should commercial firms be prohibited from owning banking institutions? Should the United States remain the only G20 country opposed to the “mixing of banking and commerce”? These questions have assumed new urgency as the Dodd Frank Act of July 2010 imposed a moratorium on the commercial ownership of industrial loan companies (ILCs), which was the last remaining entry point for commercial firms into banking. This paper specifically examines the role of ILCs in America's financial system from its beginnings in 1910 to the present. Special attention is paid to the performance of commercially owned ILCs prior to, during and after the most recent financial crisis. The examination is based upon both survey data and Federal Deposit Insurance Corporation (FDIC) data, which represents a database of the ILC industry that is the most comprehensive one available to date. The paper also reviews the laws and regulations regarding the mixing of banking and commerce, and discusses the advantages and disadvantages of allowing commercial ownership of banks.     

Syndicated Loan Announcements and Borrower Value

Announcements of syndication loans increase borrowers' shareholder wealth if they are revolving credit agreements but not if they are term loans. Share price responses to revolving credit announcements are positive and significant, whereas the wealth effect for term loans is negative and significant. The results show that announcements from both the financial press and commercial information providers can affect borrower share price reaction. Overall, single syndication announcements appear to be more newsworthy than multiple announcements reported in the financial press, and we find evidence of information leakage, post‐announcement drift, or both.     

Foreign bank entry and firms’ access to bank credit: Evidence from China

This paper studies the impact of foreign bank entry on domestic firms’ access to bank credit using a within-country staggered geographic variation in the policy of foreign bank lending in China. The paper finds that after foreign bank entry profitable firms use more long-term bank loans; whereas firms with higher value of potential collateral do not. It also finds that non-state-owned firms become able to substitute some trade credit with long-term bank loans. The findings suggest that less opaque firms and non-state-owned firms benefit more from foreign bank entry and that collateral may only play a limited role in mitigating the problem of information asymmetry when creditors’ rights are not well protected in a host country.     

Bank Funding,Securitization, and Loan Terms: Evidence from Foreign Currency Lending

We examine how bank funding structure and securitization activities affect the currency denomination of business loans. We analyze a unique data set that includes information on the requested and granted loan currency for 99,490 loans granted to 57,464 firms by a Bulgarian bank. Our findings document that foreign currency lending is at least partially driven by bank eagerness to match the currency structure of assets with that of liabilities. Our results also show that loan currency, as well as loan amount and maturity, are adjusted to make loans eligible for securitization.