Keeping up with the Joneses? Evidence from Peer Performance in the Banking Industry

This paper traces the reaction of US banks to ROE underperformance on liquidity creation, equity capital, and loan loss provisions. We find that banks change their structures in the subsequent quarter after underperformance by increasing their on-balance and off-balance sheet liquidity creation to increase profitability. Banks tend to increase their equity capital and improve their loan quality by lowering non-discretionary loan loss provisions to become safer. Banks signal their ability to overcome underperformance by increasing their discretionary loan loss provisions. Our results reveal that large banks rely mainly on off-balance sheet liquidity creation as their primary tool to recover from underperformance while medium-size and small banks adjust their equity capital to increase their safety.     

Corporate Governance Reform,Board Structure,and Its Determinants in the Banking Industry—Evidence from Taiwan

This study employs the data of twenty-seven banks listed on the Taiwan Stock Exchange from 2000–11 to examine the determinants of board structure, e.g., board size and the independent directors ratio. The evidence shows that bank size, the degree of revenue diversification, and the CEO’s shareholding are positively associated with the independent directors ratio. A higher outside block shareholding is correlated with a larger board size and a higher independent directors ratio. As the creditors’ stake decreases, a larger board and greater board independence are required to maintain internal corporate governance. Finally, banks with M&A activity tend to downsize their board sizes and reduce board independence in the subsequent period.     

Are Risk Management Disclosures Informative or Tautological? Evidence from the U.S. Banking Sector

Banks experienced increasing risk levels during the latest financial crisis. Investors’ confidence was shaken by the effectiveness of bank risk management practices, which has opened new challenges for bank management in approaching its risk. Understanding and communicating adopted risk management mechanisms is likely to provide insights and enable diagnosis on firm risk exposure. Conveying data that reduces information asymmetry might be reflected on stock performance. Investigating the impact of risk management disclosures content on stock price change and return volatility, using a sample of U.S. national commercial banks during 2009–2010, shows that informative risk management disclosures seems to be valued by investors. This is reflected on current‐year stock prices and reduces the subsequent‐year return variances.     

How Are Derivatives Used? Evidence from the Mutual Fund Industry

We investigate investment managers' use of derivatives by comparing return distributions for equity mutual funds that use and do not use derivatives. In contrast to public perception, derivative users have risk exposure and return performance that are similar to nonusers. We also analyze changes in fund risk in response to prior fund performance. Changes in risk are substantially less severe for funds using derivatives, consistent with the explanation that managers use derivatives to reduce the impact of performance on risk. We provide new evidence regarding the implications of cash flows and managerial gaming for the relation between performance and risk.     

Informal or formal financing? Evidence on the co-funding of Chinese firms

Different modes of external finance provide heterogeneous benefits for the borrowing firms. Informal finance offers informational advantages whereas formal finance is scalable. Using unique survey data from China, we find that informal finance is associated with higher sales growth for small firms but lower sales growth for large firms. We identify a complementary effect between informal and formal finance for the sales growth of small firms, but not for large firms. Co-funding, thereby simultaneously using the informational advantage of informal finance and the scalability of formal finance, is therefore the optimal choice for small firms.     

Should Investors Bet on the Jockey or the Horse? Evidence from the Evolution of Firms from Early Business Plans to Public Companies

We study how firm characteristics evolve from early business plan to initial public offering (IPO) to public company for 50 venture capital (VC)-financed companies. Firm business lines remain remarkably stable while management turnover is substantial. Management turnover is positively related to alienable asset formation. We obtain similar results using all 2004 IPOs, suggesting that our main results are not specific to VC-backed firms or the time period. The results suggest that, at the margin, investors in start-ups should place more weight on the business ("the horse") than on the management team ("the jockey"). The results also inform theories of the firm.     

Does the Momentum Strategy Work at the Industry Level? Evidence from the Chinese Stock Market

This article examines the effectiveness of momentum strategy at the industry level in the Chinese stock market. We find that the intermediate-horizon momentum effect is stronger in industries with higher competition. This effect is consistent with the hypothesis that information contained in firms from highly competitive industries is vague and hence leaves more space for behavioral biases, which leads to the momentum effect. Alternatively, the measure of the Herfindahl–Hirschman index potentially captures the size effect in explaining this phenomenon. Moreover, concentrated industries experience a pronounced lead-lag effect of big firms on small firms, which is a potential explanation for the contrarian strategy. We do find that the short-horizon contrarian effect is pronounced in highly concentrated industries.     

Time-dependent or state-dependent wage-setting? Evidence from periods of macroeconomic instability

Administrative data on monthly wages in Iceland during 1998–2010 provide new insight into nominal wage rigidity. Unlike the data used in previous work, ours have a higher frequency, minimal measurement error, and a long sample including a period of substantial macroeconomic instability. We find that the monthly frequency of nominal wage changes is 13 percent. Although nominal wage cuts are rare, their frequency rises following a large macroeconomic shock. Timing of wage changes is both time-dependent and state-dependent: we find evidence of synchronization of adjustment and contracts of fixed duration, but also that inflation and unemployment over the wage spell affect the timing of adjustment.     

Are Dividends Disappearing or Shrinking? Evidence from the Istanbul Stock Exchange

This paper examines the dividend payment decision of publicly owned firms listed on the Istanbul Stock Exchange (ISE) from 1991 through 2006. There is a decline in the percentage of net dividend payers, accompanied by a decline in the aggregate level of net real dividends paid. Contrary to the situation in developed markets, earnings and dividends concentration have declined over the sample period. The first mandatory dividend payment regulation pushed some firms to collect the distributed dividends back through rights issues and this resulted in low net dividend payments. One of the striking findings of this paper reveals that a majority of ISE firms prefer dividend omissions rather than dividend reductions. Once a firm keeps paying dividends, it puts much effort into increasing dividend payments rather than reducing them. Further, dividend payment and reduction decisions are affected by the current earnings of the firm and financial crisis significantly explains both the dividend payment and dividend reduction decisions.     

Can Unemployment Insurance Spur Entrepreneurial Activity? Evidence from France

We evaluate the effect of downside insurance on self-employment. We exploit a large-scale reform of French unemployment benefits that insured unemployed workers starting businesses. The reform significantly increased firm creation without decreasing the quality of new entrants. Firms started postreform were initially smaller, but their employment growth, productivity, and survival rates are similar to those prereform. New entrepreneurs' characteristics and expectations are also similar. Finally, jobs created by new entrants crowd out employment in incumbent firms almost one-for-one, but have a higher productivity than incumbents. These results highlight the benefits of encouraging experimentation by lowering barriers to entry.     

What determines the profitability of banks? Evidence from Spain

This paper empirically analyses the factors that determine the profitability of Spanish banks for the period of 1999–2009. We conclude that the high bank profitability during these years is associated with a large percentage of loans in total assets, a high proportion of customer deposits, good efficiency and a low doubtful assets ratio. In addition, higher capital ratios also increase the bank’s return, but only when return on assets (ROA) is used as the profitability measure. We find no evidence of either economies or diseconomies of scale or scope in the Spanish banking sector. Finally, our study reveals differences in the performance of commercial and savings banks.     

Does Reputation Limit Opportunistic Behavior in the VC Industry? Evidence from Litigation against VCs

We examine the role of reputation in limiting opportunistic behavior by venture capitalists towards four types of counterparties: entrepreneurs, investors, other VCs, and buyers of VC‐backed startups. Using a hand‐collected database of lawsuits, we document that more reputable VCs (i.e., VCs that are older, have more deals and funds under management, and syndicate with larger networks of VCs) are less likely to be litigated. We also find that litigated VCs suffer declines in future business relative to matched peers. These declines are larger for more reputable VCs, and for VCs that are defendants to multiple lawsuits or sued by entrepreneurs.     

Survival of the Fittest or the Fattest? Exit and Financing in the Trucking Industry

This paper studies the impact that capital market imperfections have on the natural selection of the most efficient firms by estimating the effect of the prederegulation level of leverage on the survival of trucking firms after the Carter deregulation. Highly leveraged carriers are less likely to survive the deregulation shock, even after controlling for various measures of efficiency. This effect is stronger in the imperfectly competitive segment of the motor carrier industry. High debt seems to affect survival by curtailing investments and reducing the price per ton-mile that a carrier can afford to charge after deregulation.     

Can Taxes Shape an Industry? Evidence from the Implementation of the “Amazon Tax”

For years, online retailers have maintained a price advantage over brick‐and‐mortar retailers by not collecting sales tax at the time of sale. Recently, several states have required that online retailer Amazon collect sales tax during checkout. Using transaction‐level data, we document that households living in these states reduced their Amazon purchases by 9.4% following the implementation of the sales tax laws, implying elasticities of –1.2 to –1.4. The effect is stronger for large purchases, where purchases declined by 29.1%, corresponding to an elasticity of –3.9. Studying competitors in the electronics field, we find some evidence of substitution toward competing retailers.     

Does the Management's Forecast of Merger Synergies Explain the Premium Paid,the Method of Payment,and Merger Motives?

I study a sample of 336 mergers and acquisitions (M&A) deals to investigate the effect of managements’ estimate of synergy on the reservation price and the payment method. I find that synergy does not explain the premium paid implying that it may have been announced to induce shareholders to endorse the deal. Acquiring firms are more likely to overpay if they have low growth potential, while the target firm is large, has higher premerger operating performance, and high growth potential. Acquirers may be serving their own self‐interests as they are more likely to exceed their reservation price if they receive low compensation and if entrenchment provisions are in place. I also find that these acquisitions lead to postmerger shareholders’ wealth destruction, which is more pronounced when acquirers overpay. I document that the greater the synergy and the acquirer firm‐specific overvaluation, the higher the likelihood of settling the deal with more shares.     

Concentration of Banking Relationships in Switzerland: The Result of Firm Structure or Banking Market Structure?

Switzerland is one of the countries with the highest concentration of bank–customer relationships. The present paper seeks to find out whether this can be explained by the structure of Swiss firms or by the organization of the Swiss banking market. Using survey data from small and medium-sized enterprises in 1996 and 2002, we examine the influence of firm-, loan-, and bank-specific variables on the number of banking relationships. We find that firm and industry structure have the largest explanatory power, while banking market structure and conduct play a minor role. Relationship lending by state-owned cantonal banks and small regional banks tends to enhance the concentration of banking relationships.

What Drives CEOs to Take on More Risk? Some Evidence from the Laboratory of REITs

Many have pointed to excessive risk‐taking by the CEOs of financial firms as a contributor to the recent worldwide economic crisis. The same observers often blame questionable corporate governance structures and compensation practices for that risk‐taking. But is this perception correct? And what is the relationship between CEO incentives and risk‐taking outside of the financial industry, where the government guarantees provided by deposit insurance could have distorted incentives? In an attempt to answer these questions, the authors analyze the relationship between CEO incentives and corporate risk‐taking by 101 U.S. REITs during the period 2003 to 2007. Their main finding is that corporate risk‐taking, as measured by the growth rate in corporate debt (the only measure of risk that is completely under the control of the CEO), is inversely related to CEO stock ownership—that is, the larger the CEO's equity ownership stake, the slower the growth in debt financing and financial risk‐taking. At the same time, the authors find that financial risk‐taking is positively related to large cash bonuses for the CEOs and to situations in which the CEO is also chairman of the board of directors. Finally, the authors also report that CEOs who are relatively new to the job grow more slowly and borrow less, suggesting that boards of directors can temporarily contain risky expansion plans by the CEO. These results provide support for those corporate governance reformers who wish to cut cash bonus payments for CEOs in favor of long‐term stock ownership.     

Does the signature of a CPA matter? Evidence from Taiwan

This paper employed aquestionnaire survey to investigate the opinions of audit report stakeholders in Taiwan regarding the regulation of signatures in audit reports. The Public Company Accounting Oversight Board (PCAOB) proposed these regulations in 2009, and again in 2011 with a slight alteration. Most respondents agree that having the engagement partner sign the audit report could increase the accountability of CPAs. In addition, the participants believed that knowledge of the name of the engagement partner is important for the users of audit reports. Both of these views are consistent with the views voiced by the PCAOB. Most of the respondents also believe that the regulation of signatures would increase the legal responsibility of the engagement partner and minimize the role of firms in the auditing process. Finally, the respondents felt that the engagement partner has a much greater responsibility when their signature is in the audit report than when it is disclosed elsewhere, indirectly supportingthe second proposal of the PCAOB, which, rather than having the engagement partner sign their name on the audit report, simply lists the names of engagement partners elsewhere.     

Who are the vectors of contagion? Evidence from emerging markets

We test whether foreign investors are the vectors of contagion to emerging markets, as various theoretical models imply. We also explore the role of local institutions and individuals during and after contagion days. To do this, we propose a novel measure of contagion and estimate its dynamic relationship with the net purchases of each of the three groups of investors, from 2007 to 2016, in seven emerging markets. We find that foreign investors bring contagion by actively selling and impacting local prices on days of large declines in the US stock market and the days following. Local institutions are also net sellers on the day of contagion, while individuals act as the main liquidity providers, but institutions become net buyers soon after.     

Does prestigious board membership matter? Evidence from New Zealand

This study investigates whether ‘prestigious’ multiple board membership is positively associated with firm performance. We employ Resource Dependency theory to explain why performance outcomes may be improved by the presence of ‘prestigious’ multiple directorships. Our analysis relies on extensive hand‐collected data on New Zealand company directorships. The results support the contention that ‘prestigious’ multiple directorships are related to better accounting and market performance. Conclusions reflect upon how Resource Dependency theory informs this phenomenon and how ‘prestigious’ board members may be a valuable resource for firms. We also reveal how these findings expose a new avenue for board governance research.