Corporate governance and recent consolidation in the banking industry

Using the universe of publicly traded banks at year-end 1993, we find that target banks' outside directors, but not inside directors, tend to own more stock than their counterparts in other banks. Having an outside blockholder is also associated with banks becoming targets. In contrast to existing research on industrial firms, board structure does not help determine which sample banks sell. Neither the fraction of outsiders on a bank's board nor having an outside-dominated board differentiate the target banks in our sample. Instead, outside directors/shareholders and blockholders appear to be primarily responsible for encouraging bank managers to accept an attractive merger offer     

Share restrictions and asset pricing: Evidence from the hedge fund industry

This paper presents evidence on the relation between hedge fund returns and restrictions imposed by funds that limit the liquidity of fund investors. The excess returns of funds with lockup restrictions are approximately 4–7% per year higher than those of nonlockup funds. The average alpha of all funds is negative or insignificant after controlling for lockups and other share restrictions. Also, a negative relation is found between share restrictions and the liquidity of the fund's portfolio. This suggests that share restrictions allow funds to efficiently manage illiquid assets, and these benefits are captured by investors as a share illiquidity premium.     

Intra‐industry bankruptcy contagion: Evidence from the pricing of industry recovery rates

How does bankruptcy contagion propagate among industry peers? We study the debt recovery channel of industry contagion by examining whether the cost of a company's debt is affected by the observed recovery rates of its bankrupt industry peers. Our results show that lower industry recovery rates are associated with higher loan spreads, but only when the contracts were originated during industry bankruptcy waves. Consistent with the debt recovery channel of industry contagion, we find that the negative effects of industry recovery rates are significantly stronger under situations where the effect is expected to be more salient.     

The pricing of volatility risk in the US equity market

We analyze whether the pricing of volatility risk depends on the asset pricing framework applied in the tests, the specified volatility proxies, and the portfolio sorts used for spanning the asset universe. For this purpose, we compare the results using a macroeconomic and fundamental based asset pricing model using three proxies of volatility and uncertainty, using size/value sorted and industry sector portfolios. Our results reveal that the marginal pricing effect of the VIX volatility factor is strong and statistically significant throughout the models and specifications, while the effect of an EGARCH-based volatility factor is mixed, mostly smaller but with the correct sign. In most cases, the EGARCH factor does not impair the pricing effect of the VIX. The portfolio sorts have a substantial impact on the volatility premiums in both model frameworks. The size of the volatility risk premium is more uniform across the models if the industry sector portfolio sort is used. Finally, the size/value portfolio sort generates larger volatility risk premiums for both models.     

Entry and pricing in a differentiated products industry: evidence from the ATM market

We estimate a structural equilibrium model of the automatic teller machine market (ATM) to evaluate the implications of regulating ATM surcharges. We use data on bank characteristics, potential and actual ATM locations, and consumer locations; identify the model parameters with a regression discontinuity design; and develop methods to estimate the model without computing equilibria. A surcharge ban reduces ATM entry 12% and consumer welfare 24% but increases firm profits 27%. Total welfare under either regime is 4% lower than the surplus maximizing level. The article can help shed light on the implications of unregulated entry for differentiated products industries.     

Consolidation and efficiency in the US life insurance industry

This paper examines the relationship between mergers and acquisitions, efficiency, and scale economies in the US life insurance industry. We estimate cost and revenue efficiency over the period 1988–1995 using data envelopment analysis (DEA). The Malmquist methodology is used to measure changes in efficiency over time. We find that acquired firms achieve greater efficiency gains than firms that have not been involved in mergers or acquisitions. Firms operating with non-decreasing returns to scale (NDRS) and financially vulnerable firms are more likely to be acquisition targets. Overall, mergers and acquisitions in the life insurance industry have had a beneficial effect on efficiency.     

Crude oil pricing and statecraft: Surprising lessons from US economic sanctions

This study investigates the effects of US sanctions on crude oil prices, and estimates the associated losses or gains accrued to US output due to economic coercion. Using a sample of US sanctions imposed between 1987 and 2016, we find that oil prices exhibit a significant abnormal adjustment in magnitude. We show that the nature of the change is decided by the target country's status either as a net importer or exporter of oil. Our findings further reveal that while the abnormal rise in oil prices, associated with sanctions on net exporters, inflict losses on US output, coercive measures on net importers give rise to economic gains due to significant decline in oil valuations. Such externalities do not appear to be considered when designing and deploying measures of economic coercion. (JEL Q41, Q43, Q48).     

危机后美国金融综合统计的发展与部门协调

较为完善的货币与金融统计,是制定适当的宏观经济和金融政策的必要前提。2008年国际金融危机暴露出金融统计的严重缺陷。危机后,美联储积极改进和完善金融综合统计框架,拓宽统计覆盖范围,从更广阔的视角来审视整个金融体系的运行状况和风险。同时,通过成立专门机构便利跨部门信息共享以及采用“一对一”签署备忘录的形式,加强部门间的协调与合作,完善信息共享功能,增强宏观调控和金融风险防控的有效性、针对性和前瞻性。美联储金融综合统计的发展经验和部门间信息共享机制,对完善我国金融统计工作有借鉴意义。     

The theory of limit pricing: Some applications to the banking industry

This paper employs a probabilistic theory of limit pricing to examine a number of issues of bank behavior relevant to limit pricing. First, the circumtances under which an entry threat produces a procompetitive impact on prices are analyzed. In contrast to the single-product firm, unambiguous predictions are found to result only in rather special situations. Next, the theory is used to examine the conditions under which it is optimal for a bank to ration credit as a result of an entry threat, suggesting limit pricing as an alternative explanation for this phenomenon. Finally, the theory is employed to contrast the implications of limit pricing from that of a related concept (probable future competition) as they apply to bank merger policy.     

Mergers and acquisitions in the US property-liability insurance industry: Productivity and efficiency effects

This paper analyzes the productivity and efficiency effects of mergers and acquisitions (M&As) in the US property-liability insurance industry during the period 1994–2003 using data envelopment analysis (DEA) and Malmquist productivity indices. We seek to determine whether M&As are value-enhancing, value-neutral, or value-reducing. The analysis examines efficiency and productivity change for acquirers, acquisition targets, and non-M&A firms. We also examine the firm characteristics associated with becoming an acquirer or target through probit analysis. The results provide evidence that M&As in property-liability insurance were value-enhancing. Acquiring firms achieved more revenue efficiency gains than non-acquiring firms, and target firms experienced greater cost and allocative efficiency growth than non-targets. Factors other than efficiency enhancement are important factors in property-liability insurer M&As. Financially vulnerable insurers are significantly more likely to become acquisition targets, consistent with corporate control theory, and we also find evidence that M&As are motivated to achieve diversification. However, there is no evidence that scale economies played an important role in the insurance M&A wave.     

Competition and subsidies in the deregulated US local telephone industry

The 1996 Telecommunications Act opened the monopolistic US local telephone industry to new entrants. However, substantial entry costs have prevented some markets from becoming competitive. We study various subsidy policies designed to encourage entry. We estimate a dynamic entry game using data on potential and actual entrants, allowing for heterogeneous option values of waiting. We find that subsidies to smaller markets are more cost effective in reducing monopoly markets, but subsidies to only lower‐cost firms are less cost effective than a nondiscriminatory policy. Subsidies in only early periods reduce the option value of waiting and accelerate the arrival of competition.     

Audit pricing and auditor industry specialization in an emerging market: Evidence from China

In this paper we examine the determinants of audit fees by focusing on auditor industry specialization and second tier auditors in the Chinese market. We find evidence of Big 4 premiums for brand name as well as industry specialization in both the statutory and supplementary market. Big 4 industry specialists earn additional premiums in the statutory market as compared to non-industry specialists. We also find that market expansion did not provide the second tier auditors any price advantage. These auditors increased their market share mainly in the mid- and small-sized clienteles. Moreover, industry experience developed by the second tier firms may have helped them gain economy of scale and reduce service fees. This may be their strategy to win future clients that seek low-priced audits.     

The evolution of an industry: US thrifts in the 1990s

This paper estimates multi-product cost functions for nearly 900 thrifts from 1990 to 1995. The results show the thrift industry benefited in the 1990s from a combination of reduced scale diseconomies, technical progress, and industry consolidation. The 1990 sample is characterized by substantial diseconomies of scale, which increased with thrift size, while the 1995 sample shows thrifts of all sizes operating with constant returns to scale. Sample selection is an important issue since there are fundamental differences between the thrifts that exited the industry during the 1990s and those that survived through the 1990s. If one examines all operating thrifts each year, for example, estimates of technical progress are biased upward, since large, inefficient thrifts regularly exited the industry in the 1990s.     

The pricing of systematic liquidity risk: Empirical evidence from the US stock market

In this study, we examine whether aggregate market liquidity risk is priced in the US stock market. We define a bivariate Garch (1,1)-in-mean specification for the market portfolio excess returns and the changes in the standardized number of shares in the S&P 500 Index, the aggregate market liquidity proxy. The findings, based on monthly data, suggest that systematic liquidity risk is priced in the US over the period January 1973–December 1997. The liquidity premium represents a non-negligible, negative and time-varying component of the total market risk premium whose magnitude is not influenced by the October’87 Crash.     

The effects of regulation on industry structure and trade generation in the US securities industry

This study investigates the effects of Regulation FD and the Global Research Analyst Settlement on market share within the US securities industry as well as the determinants of market share during 1996–2004. We find that these regulations did not cause top brokers to lose market share in spite of their reduction of information asymmetries existing within the brokerage industry. They did, however, significantly reduce the quarterly variability in market share changes. We find that Regulation FD and the Global Research Analyst Settlement reduce the importance of an all-star analyst, issuer affiliation, and analyst optimism for gaining brokerage market share. We further discover that the Global Research Analyst Settlement increases the importance of coverage as a market share determinant while reducing the value of analyst experience for non-top brokers. We find that our results remain robust even when we limit our analysis to a set of pure brokerage firms.     

What matters in audit pricing: industry specialization or overall market leadership?

Ferguson et al. (2003) report that audit industry fee premia primarily reside with joint national and city‐specific industry leadership as opposed to merely firm‐wide (national) industry expertise, suggesting auditor choice among the Big 5 is best conceptualized on joint industry specialization in city‐specific markets and nationally. The present study examines whether the prior results could be confounded by the presence of city‐specific overall market leadership effects. Our findings reaffirm that joint local and national auditor industry expertise is valued by audit clients. Furthermore, overall city‐specific leadership, by itself, also matters in fee determination and results in higher fees, although at a slightly weaker level of statistical significance.     

Understanding merger incentives and outcomes in the US mutual fund industry

This paper examines the incentives of acquirers and targets in the merger market. Using data on acquisitions among mutual fund management companies from 1991 to 2004, I estimate a two-sided matching model of the merger market jointly with equations representing merger outcomes. According to the empirical investigation, although the desire to achieve a sufficient scale to attract investors is a key driver for mergers, some mergers seem to be driven by objectives other than shareholder value maximization. I find that companies that are potentially prone to misaligned incentives between owners and managers are more acquisitive than others, yet have significantly worse post-merger operating performance. I also find that these acquirers, despite their higher willingness to pay for targets, are not any more likely to match with high-quality targets, potentially due to targets’ incentive to avoid bad organizations.     

Quantifying search and switching costs in the US auto insurance industry

I estimate demand for auto insurance in the presence of two types of market frictions: search and switching costs. I develop an integrated utility‐maximizing model in which consumers decide over which and how many companies to search and from which company to purchase. My modelling approach rationalizes observed consideration sets as being the outcomes of consumers' search processes. I find search costs to range from $35 to $170 and average switching costs of $40. Search costs are the most important driver of customer retention and their elimination is the main lever to increase consumer welfare in the auto insurance industry.     

The consolidation of the financial services industry: Causes,consequences, and implications for the future

This article designs a framework for evaluating the causes, consequences, and future implications of financial services industry consolidation, reviews the extant research literature within the context of this framework (over 250 references), and suggests fruitful avenues for future research. The evidence is consistent with increases in market power from some types of consolidation; improvements in profit efficiency and diversification of risks, but little or no cost efficiency improvement on average; relatively little effect on the availability of services to small customers; potential improvements in payments system efficiency; and potential costs on the financial system from increases in systemic risk or expansion of the financial safety net.     

Frontiers of commercial biotechnology: US and Japanese potential in a new industry

With their godlike ability to alter life and cure disease, the new biotechnologies have moved swiftly out of the laboratory and into various scientific and commercial applications. The small, innovative biotechnology firm has been the principal vehicle for the transition and it has been resoundingly supported by US venture capital and equity markets. Wall Street's support, however, could quickly evaporate, especially if major advances against cancer and AIDS are not soon forthcoming. With increasing Japanese interest in this field, there could be major industrial changes at the frontiers of commercial biotechnology.