Thrift Asset-Class Returns and the Efficient Diversification of Thrift Institution Portfolios

We estimate quarterly return series from March 1984 through December 1989 for 10 classes of thrift assets using the statistical cost-accounting methodology of Hester and Zoellner (1966). We then use these return series to estimate mean-variance efficient frontiers for all thrifts, for thrifts that were well capitalized two years earlier and for thrifts that were insolvent two years earlier. Our results show that neither the asset restrictions existing before nor those in effect after passage of the Financial Institutions Reform, Recovery and Enforcement Act of 1989 would have prevented thrifts from reaching most of the portfolios along the efficient frontier. The actual portfolio chosen by well-capitalized thrifts is close to the estimated efficient frontier, while the actual portfolio chosen by insolvent thrifts is located far from the frontier in the high-risk end of investment space. These findings, coupled with the high proportion of nontraditional assets in the actual portfolio chosen by insolvent thrifts, support the hypothesis that moral hazard induced thrifts to take on investments that were excessively risky from the deposit insurer's point of view.     

The Effects of the Real Estate Crisis on Institutional Stock Prices

This article investigates the contagious movement of financial institutions' common stock prices in response to real estate news. The basic hypothesis is that because real estate assets are traded infrequently, the market has incomplete information about their true value. The stock price reaction by banks, thrifts and insurance companies to announcements of poorly performing real estate portfolios is studied. Consistent with the hypothesis, significantly negative reactions obtain, both within and across industries, to these announcements. Reflecting the differential regulatory environment and disclosure policies, insurance companies, in general, react more strongly to adverse real estate news. Also, the price reaction of an individual firm is significantly associated with the level of its real estate exposure.     

Demand‐side strategy,relational advantage,and partner‐driven corporate scope: The case for client‐led diversification

Research Summary: We advance research on corporate diversification by joining insights from the demand‐side and relational views in strategy to offer a novel theory of client‐led diversification. We propose that client‐led diversification results from a combination of the customer‐driven opportunities emphasized in the demand‐side view and the creation of added value through relational assets that is a central tenet of the relational view. Furthermore, we hypothesize that suppliers’ client‐specific knowledge, clients’ relational commitment to suppliers, and growth opportunities in clients’ markets (relative to the suppliers’ own markets) will magnify the client‐led diversification effect. We test our hypotheses using a longitudinal dataset on patent law firms and their diversification into new domains of patent prosecution work for their corporate clients. Managerial Summary: Explanations of why firms diversify into new lines of business have largely concerned the redeployment of underutilized resources, with little regard to opportunities or influences stemming from firms’ existing customers. In our article, we show how the changing scope of business needs from a knowledge‐based supplier firm's set of existing clients is a central driver of supplier‐firm diversification, and this is especially the case when the level of relational assets shared between a supplier and its clients is higher. In a competitive landscape where suppliers compete intensively for the business of clients, our results show how managers can increase the likelihood of capturing additional business from its existing exchange relationships rather than bearing the risks of seeking new exchange relationships.     

Geographic scope,product diversification,and the corporate performance of Japanese firms

The study extends research on the geographic scope, product diversification, and performance relationship by exploring both the antecedents and consequences of geographic scope. In so doing, it addresses a fundamental criticism of the geographic scope–performance relationship; namely, that the observed positive relationship between geographic scope and performance is spurious because it is the possession of proprietary assets that is the foundation of superior performance, not expansion into international markets per se. We tested the research model with data on the corporate performance of 399 Japanese manufacturing firms. In the partial least squares analyses used to examine the study’s six main hypotheses, we demonstrate that geographic scope was positively associated with firm profitability, even when the competing effect of proprietary assets on firm performance was considered. Further, we find that performance was not related to the extent of product diversification, although investment levels in rent‐generating, proprietary assets were related to the extent of product diversification. Copyright © 1999 John Wiley & Sons, Ltd.     

The dynamics of livelihood diversification in post-famine Ethiopia

Based on data for almost 300 households this paper explores associations among income diversification, household perceptions of livelihood risks, and changes in consumption outcomes across two points in time in post-famine Ethiopia. Four key questions are addressed: i) To what extent did households emerging from the famine period with relatively higher income and calorie consumption levels also have a more diversified income base?; ii) Was higher income diversification in 1989 associated with higher income and consumption levels by 1994?; iii) Which households increased their share of income from non-cropping activities most during the inter-survey years?; and iv) Did household heads perceive a lack of non-farm income activities to be an important risk factor in famine vulnerability? We find that wealthier households tended to have more diversified income streams; those initially more diversified subsequently experienced a relatively greater increase in both income and calorie intake; households with a greater concentration of assets were more likely to fall in their relative outcome ranking (as were female-headed households); and, initially less diversified households subsequently realized greater gains in income diversification. We also find suggestive evidence that personal perceptions of risk factors guided subsequent diversification decisions.     

Technological diversity,related diversification,and firm performance

Previous findings that related diversification creates value have been called into question over concerns about methodology and measures. Reviewing existing theory to consider how a firm's knowledge base interacts with its product market activity, I address several of these concerns by creating a measure of technological diversity based on citation‐weighted patents. The measure indicates a firm's opportunity for corporate diversification based on economies of scope in valuable knowledge assets, is defined for both single‐ and multibusiness firms, and is not correlated with more fundamental aspects of diversification, such as the number of businesses in the corporate portfolio. Evidence from a large sample of firms shows the positive relationship between diversification based on technological diversity and market‐based measures of performance, controlling for R&D intensity and capital intensity as further indicators of the type of assets underlying diversification. Results hold when controlling for the endogeneity of diversification and performance in a cross‐sectional sample or when controlling for unobserved factors using panel data. Copyright © 2006 John Wiley & Sons, Ltd.     

Asset diversification,firm risk,and risk-based capital requirements in banking

The implications of diversification by firms for risk has been raised particularly in connection with conglomerate mergers. This issue is of special interest in banking now because of a recently implemented policy — risk-based capital guidelines. This study presents results of an empirical investigation into the relationship between diversification of a bank's financial assets and indicators of the risk of insolvency. Results indicate that financial asset diversification, as well as geographic diversification, are related to lower risk.     

Restructuring through spin-off or sell-off: transforming information asymmetries into financial gain

The authors examine how managers select between corporate restructuring implementation alternatives and how those decisions influence the profitability of the restructuring event. They argue that managers and owners have information asymmetries with respect to the assets in the restructuring and the restructured firms' diversification strategy, and that managers select between two popular implementation alternatives, spin-offs and sell-offs, to convert knowledge differences into financial gain. When the restructured assets reside in primary and related business lines or the firm has low and related diversification among its business lines, the restructuring is difficult for observers to assess and understand. Spin-offs most effectively and profitably reduce information asymmetries by transferring assets to the capital market and increasing the efficiency and transparency of the restructuring firm. Conversely, when the restructured assets reside in secondary and unrelated business lines or the firm has high diversification, sell-offs best mitigate asymmetries by using market forces to reallocate assets to their most productive uses while improving the strategy and performance of the restructuring firm. Tests of a sample of 204 restructuring events support the hypotheses. Overall, the findings suggest that the influence of corporate restructuring on financial performance is determined in part through how the restructuring is implemented. Copyright © 2007 John Wiley & Sons, Ltd.     

Location and competition in retail banking

We investigate the impact of banking deregulation during the 1990s on consumer welfare. We estimate a spatial model of consumer demand for retail bank deposits that explicitly accounts for consumer disutility from distance traveled. This is important given the substantial changes in banks' branch networks observed in the data. Our model indicates that cross-price elasticities between banks whose branches are close to consumers (‘close’ banks) are larger than those between ‘far’ banks and more than double the cross-price elasticity of ‘close’ banks with respect to ‘far’ banks. We distinguish between thrifts and other banks and find that within-thrift competitive effects are stronger than within-bank effects or those between thrifts and banks. We use our estimates to predict the effect of changes in market structure on consumer welfare following the branching deregulation of the Riegle–Neal Act of 1994. Our results indicate that the median household gained around $60 per year from the changes. Approximately two thirds of the gains come from within-market changes in market structure. The gains were greater in markets with high initial numbers of banks than elsewhere.     

Search duplication in research and design spaces — Exploring the role of local competition

A lack of sufficient diversification in research strategies has been identified as an important problem for delegated research. We show that this problem can be solved by local competition (such as bribery, lobbying, rent seeking, competition at the patent office) among players who apply the same search strategies or develop the same design. Such competition can restore full efficiency in the non-cooperative equilibrium. Local competition interacts with the choice of whether to cluster or diversify, and rather than adding a further inefficiency to the existing ones, it eliminates inefficiency. The results are robust and hold under simultaneous search strategy choices as well as for sequential choices.     

Diversification strategies,business cycles and economic performance

Two major diversification strategies of firms are examined: diversification into related businesses and diversification into unrelated businesses. The first strategy attempts to exploit operating synergies. In the second, the firm attempts to gain financial benefits from its ability to increase leverage due to a greater stability of cash flows. The study utilizes a large sample affirms to assess empirically the benefits and costs of these two diversification strategies by developing a new measure of diversification across business cycles and economic sectors. This new measure is compared with Berry—Herfindahl type measures of total diversification and recent measures of diversification into related businesses. The results indicate that pure financial diversification is associated with (a) more stable cash flows, i.e. lower operating risk; (b) increased levels of leverage; and (c) lower profitability. These observations are in accord with the theory. We also reaffirm that firms which diversify into related businesses have, on the average, higher profitability than non-diversified firms, although these results are not always statistically significant.     

Why Agency Costs Explain Diversification Discounts

We study diversificsation within the real estate industry because of its relative transparency: portfolio management of assets with well-defined market prices. Diversification is over property types and geographical regions. The major cause of the diversification discount is not diversification per se but anticipated costs due to rent dissipation in future diversifying acquisitions. Firms expected to pursue nonfocusing strategies do indeed diversify more, are valued ex ante at a 20% discount over firms anticipated to follow a focusing strategy, are predominantly privately controlled and use dual-class shares extensively. The ex ante diversification discount is, therefore, a measure of agency costs.     

WHO COMPETES WITH WHOM? THE CASE OF DEPOSITORY INSTITUTIONS*

The willingness of consumers to substitute between banks and thrifts and between multimarket and single‐market institutions is of strong interest to policymakers, yet little empirical work exists in this area. We estimate a structural model of consumer choice of depository institutions using a broadly representative panel data set covering the U.S. from 1990–2001. Using a flexible framework, we uncover utility parameters that affect a consumer's institution choice and measure the degree of market segmentation for two institutional subgroups. Our estimated parameters, elasticities and policy experiments suggest limited substitutability between banks and thrifts and between multimarket and single‐market institutions, especially in urban markets.     

Asset Characteristics and Boom and Bust Periods: An Experimental Study

We examine the impact of transaction costs, short selling restrictions and divisibility of assets on market efficiency in experimental asset markets. We find that transaction costs do not exacerbate the inefficiency of the market. They reduce the magnitude of bubbles and push prices closer to fundamentals. More divisible assets exhibit smaller deviations of prices from fundamentals. Short selling restrictions contribute to prolonged bubbles, while relaxing them increases the occurrence of “bust cycles.” We also find that experimental real estate markets display larger deviations of prices from fundamental values, longer boom and bust cycles and smaller turnover than experimental financial markets.     

Search behavior of the diversified firm: The impact of fit on innovation

This paper provides a new approach to account for the relationship between diversification and innovation by integrating insights concerning strategic fit. We argue that the type of diversification strategy leads to greater innovation output when the appropriate technological search strategy is employed. Using a longitudinal study of the patenting activity of 258 manufacturing firms, we find that strategic fit is important for innovation output. More specifically, a related diversification strategy leads to greater innovation when firms use a narrow technological search strategy. In contrast, an unrelated diversification strategy leads to greater innovation when a broader technological search strategy is used. Implications for future research are discussed. Copyright © 2013 John Wiley & Sons, Ltd.     

The Insolvent Thrifts of 1982: Where Are They Now?

In 1982, 237 thrifts were GAAP (Generally Accepted Accounting Principle) insolvent. By 1987, 92 of these were either merged or closed and 77 remained insolvent. The remaining 68 were GAAP solvent with an average GAAP-to-total-assets ratio of 5.6%. The purpose of this paper is to identify the factors that affected the probability of solvency for the 1982-insolvent thrifts over the period 1983–1987.
To identify these factors, the probability of insolvency is modeled in each year between 1983 and 1987 using logistic regression. Because a thrift can earn its way out of insolvency or raise outside capital, the probability of solvency is a function of the infusion of outside capital along with balance sheet and income statement ratios reflecting the thrifts earning ability. The only variable consistently significant in each year is the variable reflecting the raising of outside capital.     

Commercial Real Estate Returns

In the commercial real estate market, which is perceived to be relatively inefficient, investors have comparative advantages; hence there are significant costs to diversification. This paper presents for the first time a series of market (or quasi-market) returns for a large data base. This data base is believed to be the most complete commercial real estate data base yet constructed. The paper empirically evaluates the benefits of diversification along various dimensions within the commercial real estate opportunity set. The analysis confirms certain aspects of prior work concerning inflation protection and diversification opportunities while concluding that even investment grade real estate investments are heterogeneous assets.     

中国银企不良资产清算分析

从企业管理者、股东和债权人之间的利益分配关系看，目前我国还没有建立起一个以债权人为主导的企业筛选机制。建立和完善企业筛选制度，不仅是我国市场化进程中的一个重要环节．是实现资源市场化配置的必然渠道，而且是不良资产清算的制度保证：不良资产的多样化出售的目的主要是最大限度地以最高价格出售不良资产，为此需要在信用增级、公开操作原则、间接出售方式和完善的市场环境支持出售等各个环节上进行创新：“债转股”是常规不良资产清算手段难以奏效而破产清盘损失又太大时债务重组的最后一招．中国是典型的“政策型”债转股，并因此而生成了不少实施风险。中国的债转股要取得成功．一要建立健全资产管理公司的激励和约束机制，二要全力提高资产管理公司的能力．使其有动力也有能力高效率地完成任务。     

Bank Efficiency, Risk-Based Capital, and Real Estate Exposure: The Credit Crunch Revisited

The turbulent real estate market during the early 1990s coincided with the implementation of risk-based capital standards for commercial banks. In this study we use non-parametric linear programming techniques to identify the lost real estate lending due to bank inefficiency. Inefficiency may arise from one of three sources: risk-based capital standards which constrain bank real estate lending, inefficiency stemming from managerial oversight of real estate lending, and scale inefficiency which arises from banks not operating at constant returns to scale. The results indicate that the lost real estate lending associated with risk-based capital standards averaged 2.7% of total bank assets. However, banks could compensate by exercising better managerial oversight of real estate lending and by operating at constant returns to scale.     

Firm‐specific knowledge assets and employment arrangements: Evidence from CEO compensation design and CEO dismissal

Research summary : We argue that firms with greater specificity in knowledge structure need to both encourage their CEOs to stay so that they make investments with a long‐term perspective, and provide job securities to the CEOs so that they are less concerned about the risk of being dismissed. Accordingly, we found empirical evidence that specificity in firm knowledge assets is positively associated with the use of restricted stocks in CEO compensation design (indicating the effort of CEO retention) and negatively associated with CEO dismissal (indicating the job securities the firm committed to CEOs). Furthermore, firm diversification was found to mitigate the effect of firm‐specific knowledge on both CEO compensation design and CEO dismissal, as CEOs are more removed from the deployment of knowledge resources in diversified firms. Managerial summary : A firm's knowledge structure, that is, the extent to which its knowledge assets are firm‐specific versus general, has implications for both CEO compensation design and CEO dismissal. In particular, we find that a firm with a high level of firm‐specific knowledge has the incentive to retain its CEO through the use of restricted stocks in CEO compensation. Such a firm is also likely to provide job security for its CEO, leading to a lower likelihood of CEO dismissal. These arguments, however, are less likely to hold in diversified corporations as CEOs in such corporations are more removed from the deployment of knowledge assets. A key managerial implication is that CEO compensation and job security design should be made according to the nature of firm knowledge assets. Copyright © 2016 John Wiley & Sons, Ltd.