Does lending behaviour of banks in emerging economies vary by ownership? Evidence from the Indian banking sector

While much has been discussed about the relationship between ownership and financial performance of banks in emerging markets, literature about cross-ownership differences in credit market behaviour of banks in emerging economies is sparse. Using a portfolio choice model and bank-level data from India for 9 years (1995–96 to 2003–04), we examine banks’ behaviour in the context of credit markets of an emerging market economy. Our results indicate that, in India, the data for the domestic banks fit well the aforementioned portfolio-choice model, especially for private banks, but the model cannot explain the behaviour of foreign banks. In general, allocation of assets between risk-free government securities and risky credit is affected by past allocation patterns, stock exchange listing (for private banks), risk averseness of banks, regulations regarding treatment of NPA, and ability of banks to recover doubtful credit. It is also evident that banks deal with changing levels of systematic risk by altering the ratio of securitized to non-securitized credit.     

EARNINGS DIFFERENCES BETWEEN CHINESE AND INDIAN WAGE EARNERS, 1987–2004

This paper is one of the first comprehensive attempts to compare earnings in urban China and India over the recent period. While both economies have grown considerably, we illustrate significant cross-country differences in wage growth since the late 1980s. For this purpose, we make use of comparable datasets, estimate Mincer equations and perform Oaxaca–Blinder decompositions at the mean and at different points of the wage distribution. The initial wage differential in favor of Indian workers, observed in the middle and upper part of the distribution, partly disappears over time. While the 1980s Indian premium is mainly due to higher returns to education and experience, a combination of price and endowment effects explains why Chinese wages have caught up, especially since the mid-1990s. The price effect is only partly explained by the observed convergence in returns to education; the endowment effect is driven by faster increase in education levels in China and significantly accentuates the reversal of the wage gap in favor of this country for the first half of the wage distribution.     

The Costs of Issuing Preferred Stock

U.S. firms commonly use preferred stocks to raise external capital. Yet this hybrid security's issuance costs and offer yields have not been previously examined in a systematic manner. We analyze a sample of 3,042 U.S. preferred stocks issued between 1980 and 1999. We find that convertible issues, which are riskier than straight issues, entail higher gross spreads and other direct expenses. Scale, credit rating, and industry effects influence gross spreads and issuance costs. We also compare preferred stocks yields with various bellwether bond yields. Our results support the tax‐based argument that suggests that yields on preferred stocks should be lower than comparable risky bonds.     

Impact of regulatory interactions on bank capital structure

This article examines a bank's optimal capital structure and risk-taking decisions in a regulated environment. We focus on the interactive nature of the Fed's collateralized discount window lending and the FDIC's deposit insurance. Such regulatory interactions are shown to have nonlinear and nonuniform impacts on the bank's leverage and risk-taking decisions. Thus, bank moral hazard problems may persist, even when banks are charged risk-adjusted deposit insurance premia and are also subject to market discipline through subordinate debt. Our analysis yields several new policy implications about the design and pricing of bank regulations.     

Ethnic conflict and economic disparity: Serbians and Albanians in Kosovo

Using the Living Standards Measurement Study (LSMS) household survey from post-conflict Kosovo, we investigate the comparative economic well-being of Serbs and Albanians. An Oaxaca decomposition shows Serb households are both better endowed with income generating characteristics, such as education, and receive higher returns to these characteristics than Albanian households. Despite these advantages, Serb households have lower living standards, on average, than Albanian households. Most of the difference in living standards between Serb and Albanian households is due to unobserved non-economic factors. This result has serious implications for the political economy of policymaking in post-conflict Kosovo. Journal of Comparative Economics 34 (4) (2006) 754–773.     

How successful are banking sector reforms in emerging market economies? Evidence from impact of monetary policy on levels and structures of firm debt in India

Many emerging markets have undertaken significant financial sector reforms, especially in their banking sectors, that are critical for both financial development and real economic activity. In this paper, we investigate the success of banking reforms in India where significant banking reforms were implemented during the 1990s. Using the argument that well-functioning credit markets would reflect a credit channel for monetary policy at work, we test whether a change in monetary policy has a predictable impact on borrowing behaviour of several types of firms, including business group affiliated, unaffiliated private firms, state-owned firms and foreign firms. The empirical results suggest that unaffiliated private firms have the most vulnerable to monetary policy stance during tight policy regimes. We also find that during tight monetary policy regimes, bank credit of smaller firms is more sensitive to changes in the interest rate than that of large firms. In an easy money regime, monetary policy and the associated change in interest rate does not affect change in bank credit, change in total debt and the proportion of bank credit in total debt for any of the firms. We discuss the policy implications of the findings.     

Regulatory Monitoring,Closure Costs and Bank Moral Hazard Behavior

We theoretically analyze the efficacy of close regulatory monitoring and early bank closure policies, introduced by the 1991 Federal Deposit Insurance Corporation Improvement Act (FDICIA), in reducing the FDICs losses and curbing bank moral hazard behavior induced by mis-priced deposit insurance. Contrary to conventional wisdom, we demonstrate that continuous bank monitoring and early closure may in fact exacerbate the moral hazard problem if bank shareholders face a penalty upon closure. Moreover, if reputational disincentives and monitoring costs prevent the regulator from implementing timely closure then the banks moral hazard incentives are significantly altered. These results suggest several new policy implications.     

BANK REGULATIONS,CAPITAL STRUCTURE,AND RISK

The joint influence of the Federal Reserve's (Fed) discount window credit and reserve requirements and FDIC's deposit insurance on a bank's optimal capital structure and asset risk choices is analyzed. The specific seniority of such regulatory claims, and potentially strong negative correlation between bank asset classes, significantly alters our traditional view of such regulatory influences on bank behavior. I find that the discount window's presence does not always prompt bank risk taking and leverage, but it does partially offset such incentives under certain conditions. In addition to its cost, a reserve requirement provides the bank with an indirect subsidy that may encourage deposit funding. Thus, regulatory reforms, such as the FDIC Improvement Act of 1991, which curtail banks' access to the discount window, may not always be appropriate to resolve a bank's incentive for moral hazard behavior. The Fed's presence needs to be more comprehensively examined to design effective regulatory policy.     

‘FAMILY’ OWNERSHIP,TUNNELLING AND EARNINGS MANAGEMENT: A REVIEW OF THE LITERATURE

Abstract In this review paper, we bring together a number of aspects of family firms that are ubiquitous in a number of institutional contexts, often as part of larger business groups. We pay particular attention to the mechanisms by which families retain control over firms, and the incentives of the families in control to expropriate other stakeholders by way of tunnelling. We examine the role of earnings management in facilitating tunnelling, and evidence about the incidence of earnings management in family firms. Our review suggests that while the literature on these aspects of family control is rich, the contexts in which the empirical exercises are undertaken are relatively few, and hence there is considerable opportunity to expand it to other contexts, in particular in the form of cross‐country comparisons of the relative impact of agency conflicts and institutions on these issues.