Do Firms Strategically Internalize Disclosure Spillovers? Evidence from Cash-Financed M&As

We investigate whether managers internalize the spillover effects of their disclosure on the stock price of related firms and strategically alter their disclosure decisions when doing so is beneficial. Using data on firm-initiated disclosures during all-cash acquisitions, we find evidence consistent with acquirers strategically generating news that they expect will depress the target's stock price. Our results suggest the disclosure strategy leads to lower target returns during the negotiation period when the takeover price is being determined and results in a lower target premium. These findings are robust to a battery of specifications and falsification tests. Our results are consistent with expected spillovers influencing the timing and content of firms’ disclosures in M&A transactions.     

Do banks really monitor? Evidence from CEO succession decisions

We demonstrate that banks play an important monitoring role in CEO succession that is not observed for other types of lenders, particularly public bondholders. There is a stronger relation between cash flow performance and forced CEO turnover for firms issuing bank debt during the year of CEO turnover than for firms not issuing bank debt, and bank debt issuance increases the likelihood of external CEO succession. The stock price reaction to CEO succession is higher when bank monitoring is prevalent. Our results are consistent with theories of relationship banking that propose a valuable monitoring role for well informed, incentivized bank lenders.     

Do firms have leverage targets? Evidence from acquisitions

In the context of large acquisitions, we provide evidence on whether firms have target capital structures. We examine how deviations from these targets affect how bidders choose to finance acquisitions and how they adjust their capital structure following the acquisitions. We show that when a bidder's leverage is over its target level, it is less likely to finance the acquisition with debt and more likely to finance the acquisition with equity. Also, we find a positive association between the merger-induced changes in target and actual leverage, and we show that bidders incorporate more than two-thirds of the change to the merged firm's new target leverage. Following debt-financed acquisitions, managers actively move the firm back to its target leverage, reversing more than 75% of the acquisition's leverage effect within five years. Overall, our results are consistent with a model of capital structure that includes a target level and adjustment costs.     

Do foreign banks take more risk? Evidence from emerging economies

This paper addresses the impact of foreign ownership on the risk-taking behavior of banks. Using bank-level panel data of more than 1300 commercial banks in 32 emerging economies during 2000–2013, we find that foreign owned banks take on more risk than their domestic counterparts. We further examine several factors that may potentially contribute to foreign banks’ differentiated riskiness from four perspectives, namely, foreign banks’ informational disadvantages, agency problems, the contagious effect of parent banks’ financial conditions and the disparity between home and host markets. We find supportive evidence that these factors play a significant role in affecting foreign banks’ risk-taking.     

Do investment banks listen to their own analysts?

To what extent conflicts of interest affect the investment value of sell-side analyst research is an ongoing debate. We approach this issue from a new direction by investigating how asset-management divisions of investment banks use stock recommendations issued by their own analysts. Based on holdings changes around initiations, upgrades, and downgrades from 1993 to 2003, we find that these bank-affiliated investors follow recommendations from sell-side analysts in general, increasing (decreasing) their relative holdings following positive (negative) recommendations. More importantly, these investors respond more strongly to recommendations issued by their own analysts than to those issued by analysts affiliated with other banks, especially for recommendations on small and low-analyst-coverage firms. Thus, we find that investment banks “eat their own cooking,” showing that these presumably sophisticated institutional investors view sell-side recommendations as having investment value, particularly when the recommendations come from their own analysts.     

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.     

Do banks’ overnight borrowing rates lead their CDS price? Evidence from the Eurosystem

We construct a measure of a bank's relative creditworthiness from the Eurosystem's proprietary inter-bank loan data: average overnight borrowing rate relative to an overnight rate index (AOR). We then investigate the dynamic relationship between AOR and the credit default swap price relative to the corresponding market index of 60 banks during 2008–2013. Price discovery mainly takes place in the CDS market, but AOR also contributes to it. The lagged daily changes of AOR help predict CDS. This indicates that AOR includes private information, which the CDS market does not immediately incorporate. We further show that the private information advantage is concentrated on days of market stress and on banks, which mainly borrow from relationship lender banks. Such borrower banks are typically smaller, have weaker ratings, and are likely to reside in crisis countries. Competent authorities can use AOR as a complementary indicator of banks’ concurrent health.     

Do banks appraise internal capital markets during credit shocks? Evidence from the Greek crisis

Using data of bank loans to Greek firms during the Greek crisis we provide evidence that affiliated firms, having access to the internal capital markets of their associated group, are less likely to default on their loans. Furthermore, banks require lower loan collateral coverage from affiliated firms and are less likely to downgrade the affiliates’ credit profile. Finally, banks are more likely to show forbearance to affiliated firms with non-performing loans. The results are consistent with the view that banks manage their relationships with firms in a business group jointly, as opposed to viewing each firm as an independent entity. Our findings also suggest that the value of risk sharing through internal capital markets increases when external financing is scarce.     

Do public banks have a competitive advantage?

Public banks are often blamed to possess an unfair competitive advantage in the form of lower funding costs due to a state guarantee on their deposits. However, public and private banks tend to differ not only in their funding costs, but also in the way they deal with borrowers in financial distress. The model presented in this paper shows that if banks differ in these two characteristics, a separation of borrowers may result, with public banks lending to risky firms and private banks lending to safe firms. This separation can explain differences in the lending behavior and performance of public and private banks as observed in the market. Interestingly, the separation may persist even when funding costs are equal, implying that an abolition of state guarantees will not necessarily lead to identical performance of the two types of banks.     

Do employee-friendly firms invest more efficiently? Evidence from labor investment efficiency

We investigate the impact of employee treatment on labor investment efficiency. We provide evidence that employee-friendly treatment is significantly associated with lower deviations of labor investment from the level justified by economic fundamentals, i.e., higher labor investment efficiency. The effect of employee treatment on labor investment efficiency is stronger for firms that are human-capital-intensive, with more skilled labor and knowledge capital, and those that face higher product market competition. Using the 2008–2009 financial crisis as an external shock and applying the difference-in-difference method, we also show that employee-friendly firms have higher labor investment efficiency in the post-financial crisis period, but experience more inefficient labor investments during the crisis. Our results are robust to placebo tests, selection bias, propensity score matching, alternative explanations, alternative proxies for both employee treatment and labor investment efficiency as well as the adjustment for using residuals as dependent variables, additional control variables, and various approaches in addressing endogeneity issues.     

Why do investment banks buy put options from companies?

Companies have collected billions in premiums from privately sold put options written on their own stock. It is puzzling that counterparties, investment banks, would agree to make such transactions with better-informed companies which have extraordinary ability to time the market as documented by Jenter et al. (2011). To resolve this puzzle, we develop a model that shows that investment banks, by offering to buy put options from better-informed parties, receive private information about issuing companies. Our model also incorporates the practice of firms (such as Microsoft) of sometimes repurchasing their own put options and thus providing additional private information to investment banks. Empirically, we find support for our theory from an abnormal 9% increase in the stock prices and a 40% increase in the trading volumes around the put sales. Examination of 13D filings reveals that trading by upper management insiders cannot completely account for the change in volume.     

Do banks price environmental transition risks? Evidence from a quasi-natural experiment in China

This paper assesses the risk arising from transition toward a low-emission economy and examines its transmission channels within the financial system. The environmental dynamic stochastic general equilibrium (E-DSGE) model shows that tightening environmental regulation impairs firms' balance sheets in the short term, as it enforces firms to internalize the pollution costs, which consequentially escalates the risks facing the financial system. For the empirical analysis, we employ the Clean Air Action that the Chinese government launched in 2013 as a quasi-natural experiment. The analysis on a unique dataset containing more than one million loans indicates that the default rates of high-polluting firms rose by around 80% along their environmental policy exposure. Further analysis shows those joint equity commercial banks with lower degree of government intervention and better corporate governance structure were able to appropriately manage their exposure to transition risks, while the state-owned banks failed to factor in such risks when extending credit to the borrowers targeted by the environmental regulation.     

Do Mergers Improve Information? Evidence from the Loan Market

We examine the informational effects of M&As by investigating whether bank mergers improve banks' ability to screen borrowers. By exploiting a data set in which we observe a measure of a borrower's default risk that the lenders observe only imperfectly, we find evidence of these informational improvements. Mergers lead to a closer correspondence between interest rates and individual default risk: after a merger, risky borrowers experience an increase in the interest rate, while nonrisky borrowers enjoy lower interest rates. These informational benefits appear to derive from improvements in information processing resulting from the merger, rather than from explicit information sharing on individual customers among the merging parties. Our evidence suggests that part of these informational improvements stem from the consolidated banks using "hard" information more intensively.     

Do foreign banks increase competition? Evidence from emerging Asian and Latin American banking markets

In this paper we examine the impact of foreign bank penetration on the competitive structure of domestic banking sectors in host emerging economies. We focus our analysis on Asia and Latin America during the period 1997-2008. Using bank-level panel data to identify foreign banks and to estimate measures of banking competition, we are able to provide robust empirical evidence that an increase in foreign bank penetration enhances competition in these host countries’ banking sectors. We find that this positive foreign bank penetration and banking competition link is associated with a spillover effect from foreign banks to their domestic counterparts. This spillover effect becomes stronger when more efficient and less risky foreign banks enter into less concentrated host country markets. We also find that the spillover effect is greater when foreign banks enter in the form of ‘de novo penetration’ than through mergers or acquisitions of domestic banks (‘M&A penetration’).     

Do banks price discriminate spatially? Evidence from small business lending in local credit markets

In this paper we explore the effects of bank–borrower physical proximity on price and non-price aspects of small business lending in local credit markets. Along the price dimension, our analysis reveals that interest rates increase with bank–borrower distance and decrease with the distance between borrower and other competing banks. Along the quantity dimension, we observe that more distant borrowers are more likely to experience binding credit limits. We also show that the quantity effects of bank–borrower distance are concentrated among less transparent firms. Our findings are consistent with pricing based on marginal costs that reflect information-based factors, and are in contrast to the established paradigm, where banks adopt spatial discriminatory pricing rules when lending to small-sized enterprises.     

Do some lenders have information advantages? Evidence from Japanese credit market data

Using detailed Japanese credit data, we test for the existence of a credit market hierarchy. Empirical tests indicate that firms with information problems are more likely to carry higher proportions of relationship loans from main banks than non-main banks, holding constant risk and control factors. We further examine credit specialization on the part of lenders by testing the relationship between client firms' information and risk characteristics and the concentration of loans obtained from depository institutions versus other financial institutions. However, no significant differences in information superiority between these two types of financial institutions are found. We conclude that our evidence supports the credit market hierarchy hypothesis for Japanese main banks in particular but not depository institutions in general.     

Do more competitive banks have less market power? The evidence from Central and Eastern Europe

Studies that have explored the competitive behaviour of banks frequently arrive at divergent conclusions because they use different measures of competition. This study first discusses these various measures of competition and their divergence from a theoretical perspective and then employs them to measure the competitiveness of Central and Eastern European banks and to investigate whether more competitive banks really have less market power. We find that these banks increase their market power when there is low banking concentration and do not necessarily become less competitive. Moreover, a more concentrated banking market does not enhance the market power of banks and does not make them less competitive, and more competitive banks do not necessarily have less market power. This latter outcome ensues because revenue and production reactions to cost evolution are either positively related – or completely unrelated – to the competitive behaviour of banks.     

Do CFOs matter? Evidence from the M&A process

This study examines the effect of Chief Financial Officers (CFOs) on mergers and acquisitions using a newly constructed CFO Influence Index. Because the perceived influence of CFOs is high in U.K. firms, we use that market for our analysis. We find that influential CFOs as measured by experience, stature, and pay are associated with more deal completions and the pursuit of smaller, domestic targets. High influence CFOs require less time to complete a deal and are able to identify higher quality targets for which they pay less. We also discover that firms with high influence CFOs enjoy greater long-term operating and financial performance post-merger. We conclude that influential CFOs are effective in creating shareholder value during M&A.