the forecasting approach to efficiency in the wool market this paper develops and presents estimates of a simultaneous equations model of the australian wool market the world s largest producer and exporter of fine wool the model contains functional relationships for unhedged inventories consumption of raw wool and the activities of both hedgers and speculators in wool futures expectations are represented by the adaptive hypothesis this model extends the work of leuthold and hartmann 1979 and leuthold and garcia 1988 by including expectations in the spot futures model and that of goss and giles 1986 by including composite equations for hedger speculators extending the expectations hypothesis to the consumption equation and by using the model to test the efficient markets hypothesis wald tests and likelihood ratio tests for unit roots in wool cash prices are conducted and in no case can the hypothesis of a single unit root be rejected estimation is by three stage least squares with correction for first order serial correlation the model provide

the turnover of teachers a competing risks explanation in this paper we analyze the decision by teachers to leave the profession in a dependent competing risks framework the econometric model allows for a flexible semiparametric specification of the duration dependence structure and of the unobserved heterogeneity distribution in each exit specific hazard function our results obtained for a large sample of uk teachers affirm the importance of teacher salaries and opportunity wages in the turnover decision of teachers and illustrate the insight gained from differentiating between multiple destinations or exit types

do depositors punish banks for bad behavior market discipline deposit insurance and banking crises this paper empirically investigates two issues largely unexplored by the literature on market discipline we evaluate the interaction between market discipline and deposit insurance and the impact of banking crises on market discipline we focus on the experiences of argentina chile and mexico during the 1980s and 1990s we find that depositors discipline banks by withdrawing deposits and by requiring higher interest rates deposit insurance does not appear to diminish the extent of market discipline aggregate shocks affect deposits and interest rates during crises regardless of bank fundamentals and investors responsiveness to bank risk taking increases in the aftermath of crises

privatization in eastern europe irreversibility and critical mass effects abstract this paper proposes a model to shed light on two important policy features of privatization in central and eastern europe the idea of a necessary critical mass of privatization on one hand and the great difficulties encountered in the actual privatization process on the other the model incorporates a positive externality related to the size of the private sector multiple equilibria may arise for political and economic reasons policies of free distribution are analysed with the model they may eliminate the danger of policy reversals due to excess unemployment but may at the same time increase the relative cost of restructuring leading in some cases to pareto inferior outcomes

unilateral altruism may be beneficial a game theoretic illustration abstract this paper examines when unilateral altruism may be beneficial the example of two person 2 2 noncooperative games is used to develop an intuitive criterion namely that a role reversal would result in the two persons behavior changing in a similar direction

fundamentals panics and bank distress during the depression we assemble bank level and other data for fed member banks to model determinants of bank failure fundamentals explain bank failure risk well the first two friedman schwartz crises are not associated with positive unexplained residual failure risk or increased importance of bank illiquidity for forecasting failure the third friedman schwartz crisis is more ambiguous but increased residual failure risk is small in the aggregate the final crisis early 1933 saw a large unexplained increase in bank failure risk local contagion and illiquidity may have played a role in pre 1933 bank failures even though those effects were not large in their aggregate impact

prohibition of riba and gharar a signaling and screening explanation abstract the emergence of islamic banks ibs with sharia boards that restrict the set of permissible products and enforce prohibition of riba and gharar raises basic questions about how ib clients benefit when choosing from a restricted menu of possibly higher cost cash flows norms that restrict choice sets or impose otherwise harsh requirements would seem to act as a barrier to religious identification by raising costs for ib clients contrary to this intuition our model demonstrates that premium costs associated with restrictions on the set of financing options considered to be sharia compliant provide a signaling and screening technology that benefits ib clients who are highly pious by revealing what would otherwise remain private information about the intensity of religious piety this signaling technology simultaneously provides a screening service that enables high piety types to separate themselves and concentrate both social and commercial interactions with others who are similarly pious iannaccone 1992 demonstrates a rationale for harsh norms as a mechanism for reducing free riding in the supply of club goods in contrast our model shows that piety can be signaled by the act of choosing to become an ib client and bearing the costs of its restricted choice set and premium pricing for otherwise identical cash flows signaling and screening provide a new rationalization for prohibition of riba and gharar as a stable institution signaling piety is especially valuable in environments where piety is uncertain and otherwise difficult for others to observe the model predicts that ibs sharia compliance criteria will tend to be stricter and ib premiums larger in places where the proportion of highly pious muslims is small

an inferred valuation method although estimates of people s values for public goods are often needed to conduct cost benefit analysis existing value elicitation methods are prone to a number of well documented biases we argue that some of these biases result because people derive utility from the act of saying they are willing to pay for a good to counteract this phenomenon we consider an approach that asks people to predict or infer others values for a good instead of asking people to state their own value both a conceptual model and results from a laboratory experiment lend support for the new approach

the market for equity options in the 1870s the introduction of exchange traded options in 1973 led to explosive growth in the stock options market but put and call options on equity securities have existed for more than a century prior to the listing of option contracts trading was conducted in an order driven over the counter market from 1873 to 1875 quotes for options contracts were published weekly in the commercial and financial chronicle during a period that saw extensive marketing efforts by a number of brokerage firms in this article we examine these quotes to determine why this seemingly sophisticated market existed for only a brief period in financial history in 1973 exchange traded options were introduced and for the first time a central marketplace was available for the trading of standardized option contracts in addition the creation of the options clearing corporation provided an intermediary to all contracts the volume of options traded has exploded during the past twenty three years as has our understanding of the pricing of options and other derivative securities put and call options on equity securities however have been available to american investors for more than a century following the civil war an active market in privileges the term then used for options1 developed in new york city with numerous brokerage firms offering put call and double privilege contracts this market reached the height of its activity in the period from 1873 through 1875 during that time indicative price quotes from a particular broker for options on about a dozen equity securities were generally published every saturday in the commercial and financial chronicle these quotes were placed along with the other financial data for the week including daily high and low stock prices bond prices gold prices money

the s l debacle public policy lessons for bank and thrift regulation this book describes the period of failures of savings and loan associations and sets out a program of policies to prevent future debacles it explains the regulatory actions and inactions that created the incentives for large numbers of thrifts to make excessively risky and ill conceived and in some cases fraudulent and criminal investments it describes the failure of the accounting system to provide adequate information to regulators and in many cases even to the managers of the thrifts themselves concerning the health and riskiness of individual thrifts it also discusses how the regulatory system that had been conceived in an earlier and highly regulated era was overwhelmed in the deregulated environment of the early 1980s it shows how the reforms that were made in response to the growing crisis were too little and too late and finally it offers a set of policy reforms that could prevent future crises in the savings and loan industry this work should be of interest to political and financial economists

mortgage terminations heterogeneity and the exercise of mortgage options as applied to the behavior of homeowners with mortgages option theoiy predicts that mortgage prepayment or default will be exercised if the call or put option is in the money by some specific amount our analysis tests the extent to which the option approach can explain default and prepayment behavior evaluates the practical importance of modeling both options simultaneouisly and models the unobserved heterogeneity of borrowers in the home mortgage market the paper presents a uinified model of the competing risks of mortgage termination by prepayment and default considering the two hazards as dependent competing risks that are estimated jointly it also accounts for the unobserved heterogeneity among borrowers and estimates the unobserved heterogeneity simultaneously with the parameters and baseline hazards associated with prepayment and default functions our results show that the option model in its most straightfolward version does a good job of explaininig default and prepayment but it is not enouigh by itself the simultaneity of the options is very important empirically in explaining behavior the results also show that there exists significant heterogeneity among mortgage borrowers ignoring this heterogeneity results in serious errors in estimating the prepayment behavior of homeowners

does deposit insurance increase banking system stability an empirical investigation based on evidence of 61 countries in 1980 97 the authors find that explicit deposit insurance tends to be detrimental to bank stability the more so where bank interest rates are deregulated and the institutional environment is weak the adverse impact of deposit insurance on bank stability tends to be stronger the more extensive is the coverage offered to depositors and where the scheme is funded and run by the government rather than the private sector

how does the stock market view bank regulatory capital forbearance policies during the subprime crisis the fdic has shown once again laxity in resolving and closing insolvent institutions ronn and verma 1986 call the tolerance level below which a bank closure is triggered the regulatory policy parameter we derive a model in which we make this parameter stochastic and bank specific to infer the stock market view of the regulatory capital forbearance value for 565 u s listed banks during 1990 to 2012 the countercyclical forbearance fraction in capital most substantial in recessions could represent 17 on average of the market valuation of bank equity and could go as high as 100

evidence of bank market discipline in subordinated debenture yields 1983 1991 we examine debenture yields over the period 1983 1991 to evaluate the market s sensitivity to bank specific risks and conclude that investors have rationally reflected changes in the government s policy toward absorbing private losses in the event of a bank failure although this evidence does not establish that market discipline can effectively control banking firms it soundly rejects the hypothesis that investors cannot rationally differentiate among the risks undertaken by the major u s banking firms an increasingly important issue in the regulation of financial institutions concerns the extent to which market investors can will recognize and control the risks of banking firms although the banking act of 1933 replaced some private risk bearing with federal deposit insurance legislators were reluctant to displace market discipline very extensively flood 1992 by the early 1980s however u s regulators had come to protect virtually all bank liability holders from credit losses most visibly at large banks which were deemed too big to fail sprague 1986 o hara and shaw 1990 this extension of the government safety net largely reflects a skepticism on the part of regulators that normal market forces could adequately identify and control bank risks while u s regulators have recently shown an increased willingness to let some bank investors bear default losses an official suspicion of the efficacy of market discipline remains widespread by contrast some prominent academic economists argue that market investors in bank debentures could provide timely and effective control over banking firms risk exposures and that the social cost of supervising banks would be lower if regulators ceded greater

inertial credit and opportunistic arrears in transition in a transition economy enterprise restructuring may exhibit a laffer curve response to tighter credit as a result of rational collective inertia in the presence of a rigid production structure unenforceable contracts and high adjustment costs a contraction in credit finance subtracts more liquidity than enterprises can generate internally because unrestructured firms are forced to extend trade credit to illiquid buyers an increase in their number increases the availability of forced supplier credit in turn increasing the attractiveness of inertial behavior as trade credit cannot be enforced a critical mass of trade and wage arrears causes pressure for a collective bailout thus validating inertial behavior even by reformable firms

bank valuation and accounting discretion during a financial crisis this paper shows that banks overstate the value of distressed assets and their regulatory capital during the us mortgage crisis real estate related assets are overvalued in banks balance sheets especially those of bigger banks compared to the market value of these assets banks with large exposure to mortgage backed securities also provision less for bad loans furthermore distressed banks use discretion over the classification of mortgage backed securities to inflate their books our results indicate that banks balance sheets offer a distorted view of the financial health of the banks and provide suggestive evidence of regulatory forbearance and noncompliance with accounting rules

flexible parametric estimation of duration and competing risk models in this paper we specify and estimate a flexible parametric proportional hazards model the model specification is flexibly parametric in the sense that the baseline hazard is non parametric while the effect of the covariates takes a particular functional form we also add parametric heterogeneity to the underlying hazard model specification we specify a flexible parametric proportional competing risks model which permits unrestricted correlation among the risks unemployment duration data are then analysed using the flexible parametric duration and competing risks specifications we find an important effect arising from the exhaustion of unemployment insurance and significantly different hazards for the two types of risks new jobs and recalls

do lenders favor politically connected firms rent provision in an emerging financial market corruption by the politically connected is often blamed for economic ills particularly in less developed economies using a loan level data set of more than 90 000 rms that represents the universe of corporate lending in pakistan between 1996 and 2002 we investigate rents to politically connected rms in banking classifying a rm as political if its director participates in an election we examine the extent nature and economic costs of political rent provision we nd that political rms borrow 45 percent more and have 50 percent higher default rates such preferential treatment occurs exclusively in government banks private banks provide no

forecasting bankruptcy more accurately a simple hazard model i argue that hazard models are more appropriate than single period models for forecasting bankruptcy single period models are inconsistent while hazard models produce consistent estimates i describe a simple technique for estimating a discrete time hazard model i find that about half of the accounting ratios that have been used in previous models are not statistically significant moreover market size past stock returns and idiosyncratic returns variability are all strongly related to bankruptcy i propose a model that uses both accounting ratios and market driven variables to produce out of sample forecasts that are more accurate than those of alternative models copyright 2001 by university of chicago press

on private charity and altruism if well off persons were to voluntarily engage in significant transfers of income to the poor the rationale and need for recourse to state measures to redistribute income and impose taxes would weaken it is thus not surprising that a good many social scientists have been fascinated by private charity which they usually explain is motivated by altruism this note looks further into the role of altruism in private charity demonstrating first that altruism can be consistent with no transfers from the altruists to the poor and second that a special form of altruism a dose of mutual altruism amongst the altruists suffices to ensure charitable transfers reference to means designed to bring about mutual altruism and their role in a number of empirical contexts concludes this note prior to proceeding along these lines a brief remark seems appropriate a recurrent and appropriate reference is made to the act of transferring as such for example roberts 1984 points out that if altruists receive utility from the act of transferring then private charity would be positive in equilibrium emphasis added this may but need not be the case two well off altruists can exchange some given income rather than transfer income to the poor unless we admit that the act of receipt of income creates suffering which is highly unrealistic such reciprocal transfers imply that the altruists end up with exactly the same income plus the satisfaction derived from having engaged in an enjoyable act this pareto dominates transfers to the poor that people indeed derive joy from such exchanges can be readily observed my inviting you to lunch this week your inviting me to lunch next week is more enjoyable than both of us sharing the bill at each of the two lunches or my sending you a bouquet for your birthday your sending me one for mine is more gratifying than each of us buying flowers for his own birthday 2

why suicide terrorists get educated and what to do about it this paper tries to reconcile the observed fact that suicide terrorists have a relatively high education level with rationality it brings out the conditions under which potential students choose to acquire some education in a rational choice model where this yields a non zero probability of blowing up the resulting human capital in a terrorist attack the comparative statics of the rational expectations equilibrium of this model demonstrate how economic development on the one hand and repression on the other hand might reduce terrorism under some parameter restrictions

assessing public priorities for experiment station research contingent value and public preferences for agricultural research laws concerning government accountability mandate that agencies weigh constituent interests in setting priorities this study extends literature on the value of research by considering the public s stated preferences for scientist effort allocated across an agricultural experiment station s research portfolio over 75 of respondents expressed a willingness to pay exceeding 20 per household for allocations of at least 139 scientist months the mean household is willing to pay about 25 for a 25 increase in effort marginal analysis identifies topic areas where an additional scientist month provides above or below average benefits the distribution of effort across research topics significantly affects respondents values

theoretical foundations for sticky wages abstract the paper compares three different types of theoretical explanation of sticky wages they are implicit contracts efficiency wage models and insider outsider models it then reconsiders keynes rationale for sticky wages which focuses on relative wage issues finally the paper considers possible directions for future research

interest rates and efficiency in medieval wool forward contracts while it is commonly believed that derivative instruments are a recent invention we document the existence of forward contracts for the sale of wool in medieval england around 700 years ago the contracts were generally entered into by english monasteries who frequently sold their wool for up to 20 years in advance to mostly foreign and particularly italian merchants employing a unique source of data collected by hand from the historical records we determine the interest rates implied in these transactions and we also examine the efficiency of the forward and spot markets the calculated interest rates average around 20 in accordance with available information concerning the interest rates used in other types of transactions at that time perhaps surprisingly we also find little evidence of informational inefficiencies in these markets

unemployment insurance rules joblessness and part time work developed and under general conditions an increase in the disregard is shown to increase both the part time and overall re employment hazards data from the current population survey s displaced worker supplements are used to test these predictions estimates from a competing risks model with correlated risks and time varying coefficients shows that increasing the disregard significantly increases the conditional probability of part time re employment during the first three months of joblessness

opportunism and ngos entrepreneurship and green north south transfers abstract through the lens of entrepreneurship this paper applies the new institutional economics to examine two case studies of environmental nongovernmental organizations ngos in latin america to clarify their political economic roles southern ngos that rely on northern donors are viewed as entrepreneurial economic entities producing international public goods these nonprofit ngos take their place alongside for profit firms as contributors to economic production employment institutional innovation and technology transfer the theoretical framework proposed assumes that self interested behavior coexists with loyalty commitment and altruism as well as opportunism

how good is the market at assessing bank fragility a horse race between different indicators abstract we explore for individual banks active in the east asian countries during the years 1996 1998 the performance of three sets of indicators of bank fragility that can be computed from publicly available information accounting data stock market prices and credit ratings we find significantly different patterns among the three groups of indicators in their ability of forecasting financial distress at a specific point in time and over time more specifically in the east asia crisis episode the information based on stock prices or on judgmental assessments of credit rating agencies did not outpace backward looking information contained in balance sheet data stock market based information though has responded more quickly to changing financial conditions than ratings of credit risk agencies overall the evidence supports the policy conclusion that where the information processing is quite costly as in most developing countries it is important to use simultaneously a plurality of indicators to assess bank fragility

loyalty based portfolio choice i evaluate the effect of loyalty on individuals portfolio choice using a unique dataset of retirement contributions i exploit the statutory difference that in 401 k plans stand alone employees can invest directly in their division while conglomerate employees must invest in the entire firm including all unrelated divisions consistent with loyalty employees of stand alone firms invest 10 percentage points 75 more in company stock than conglomerate employees support is also found using variation in loyalty between different groups of employees across and within firms the cost to employees of loyalty is large amounting to nearly a 20 loss in retirement income

the politics of bank failures evidence from emerging markets this paper studies large private banks in 21 major emerging markets in the 1990s it first demonstrates that bank failures are very common in these countries about 25 percent of these banks failed during the seven year sample period the paper also shows that political concerns play a significant role in delaying government interventions to failing banks failing banks are much less likely to be taken over by the government or to lose their licenses before elections than after this result is robust to controlling for macroeconomic and bank specific factors a new party in power early elections outstanding loans from the imf as well as country specific time independent factors this finding implies that much of the within country clustering in emerging market bank failures is directly due to political concerns

liquidity shortages and banking crises we show in this article that bank failures can be contagious unlike earlier work where contagion stems from depositor panics or contractual links between banks we argue that bank failures can shrink the common pool of liquidity creating or exacerbating aggregate liquidity shortages this could lead to a contagion of failures and a total meltdown of the system given the costs of a meltdown there is a possible role for government intervention unfortunately liquidity and solvency problems interact and can cause each other making it hard to determine the cause of a crisis we propose a robust sequence of intervention banks are often found at the center of systemic financial crises the causes of these crises have long been debated do they stem from depositor panics or do they arise because bank balance sheets are exposed to common factors if it is the latter then is there any sense in which bank failures can be contagious can anything be done to prevent these crises or stop them from propagating once they begin our purpose in this paper is to reexamine whether bank failures can start and propagate systemic crises even if we assume that depositors do not panic that is even if depositors actions are coordinated and they do not run simply because they fear others will run our focus is not because we think that panics are empirically unimportant the jury is still out on that instead we show that contagion can stem from an underlying real general equilibrium problem rather than just from lack of coordination among depositors from a policy perspective attempts to reassure investors through confidence building measures will not work if panic and lack of coordination are not the reasons for a crisis we begin in this paper with a model of a bank that we developed in diamond and rajan 2001 assets in this model are illiquid they cannot be borrowed against or sold for the full value of resources they will generate in their best use because the human capital necessary to generate that full value cannot

contagion and bank failures during the great depression the june 1932 chicago banking panic the authors examine the social costs of asymmetric information induced bank panics in an environment without government deposit insurance their case study is the chicago bank panic of june 1932 the authors compare the ex ante characteristics of panic failures and panic survivors despite temporary confusion about bank asset quality on the part of depositors during the panic which was associated with widespread depositor runs and bank stock price declines the panic did not produce significant social costs in terms of failures among solvent banks copyright 1997 by american economic association

bank sovereign risk spillovers in the european debt crisis this paper investigates contagion between bank risk and sovereign risk in europe over the period 2006 2011 since this period covers various stages of the banking and sovereign crisis it oers a fertile ground to analyze bank sovereign risk spillovers we de ne contagion as excess correlation i e correlation between banks and sovereigns over and above what is explained by common factors using cds spreads at the bank and at the sovereign level moreover we investigate the determinants of contagion by analyzing bank speci c as well as country speci c variables and their interaction we provide empirical evidence that various contagion channels are at work including a strong home bias in bank bond portfolios using the eba s disclosure of sovereign exposures of banks we nd that banks with a weak capital and or funding position are particularly vulnerable to risk spillovers at the country level the debt ratio is the most important driver of contagion

competition policy in banking this paper summarizes some of the arguments relating competition and banking instability draws connections between regulation and competition policy and surveys and analyses the role of competition policy in the banking sector in a financial crisis it is argued that a trade off between competition and stability is bound to persist despite improvements in regulation that the banking sector specificity should be recognized by competition policy and that competition policy and regulation need close coordination copyright 2011 oxford university press

bank recapitalization regulatory intervention and repayment we use prudential supervisory data for all german banks during 1994 2010 to test if regulatory interventions affect the likelihood that bailed out banks repay capital support accounting for the selection bias inherent in nonrandom bank bailouts by insurance schemes and the endogenous administration of regulatory interventions we show that regulators can increase the likelihood of repayment substantially an increase in intervention frequencies by one standard deviation increases the annual probability of capital support repayment by 7 sturdy interventions like restructuring orders are effective whereas weak measures reduce repayment probabilities intervention effects last up to 5 years

politicians and banks political influences on government owned banks in emerging markets abstract government ownership of banks is very common in countries other than the united states this paper provides cross country bank level empirical evidence about political influences on these banks it shows that government owned banks increase their lending in election years relative to private banks this effect is robust to controlling for country specific macroeconomic and institutional factors as well as bank specific factors the increase in lending is about 11 of a government owned bank s total loan portfolio or about 0 5 of the median country s gdp per election per government owned bank

the great divide and beyond financial architecture in transition a growing and deepening divide has opened up between transition countries where economic development has taken off and those caught in a vicious cycle of institutional backwardness and macroeconomic instability this great divide is visible in almost every measure of economic performance gdp growth investment government finances growth in inequality general institutional infrastructure and increasingly in measures of financial development strategies for financial development have differed dramatically across countries and over time offering interesting opportunities to study the links between real and financial sector development

elections political competition and bank failure abstract we exploit exogenous variation in the scheduling of gubernatorial elections to study the timing of bank failure in the us using hazard analysis we show that bank failure is about 45 less likely in the year leading up to an election political control i e lack of competition can explain all of this average election year fall in the hazard rate in particular we show that the reduction in hazard rate doubles in magnitude for banks operating in states where the governor has simultaneous control of the upper and lower houses of the state legislature i e complete control heading into an election

the recall and new job search of laid off workers a bivariate proportional hazard model with unobserved heterogeneity workers who lose their jobs can become re employed either by being recalled to their previous employers or by finding new jobs workers chances for recall should influence their job search strategies so the rates of exit from unemployment by these two routes should be directly related we solve a job search model to establish in theory a negative relationship between the recall and new job hazard rates we look for evidence in the psid by estimating a semi parametric competing risks model with explicitly related hazards we find only a small negative behavioral relationship between recall and new job hazard rates

bank bailouts and moral hazard evidence from germany we use a structural econometric model to provide empirical evidence that safety nets in the banking industry lead to additional risk taking to identify the moral hazard effect of bailout expectations on bank risk we exploit the fact that regional political factors explain bank bailouts but not bank risk the sample includes all observed capital preservation measures and distressed exits in the german banking industry during 1995 2006 a change of bailout expectations by two standard deviations increases the probability of official distress from 6 6 to 9 4 which is economically significant

how control system design influences performance misreporting this paper investigates reporting honesty when managers have monetary incentives to overstate their performance we argue that managers who report about their performance will take into account how their report affects their peers i e other managers at the same hierarchical level this effect depends on the design of the organization s control system in particular on the reward structure and the information policy regarding individual performance reports the reward structure determines if peers monetary payoff is increased or decreased when managers claim a higher level of performance the information policy determines if managers will be able to link individual peers to their reports and affects the nonmonetary costs of breaking social norms we present the results of a laboratory experiment as predicted we find that participants are more likely to overstate their performance if this increases the monetary payoff of others than if their reported performance decreases others monetary gains in addition overstatements are lower under an open information policy where each individual s reported performance is made public compared to a closed information policy where participants only learn the average performance of the other participants our findings have several important implications for management accounting research and practice

too many to fail evidence of regulatory forbearance when the banking sector is weak this paper studies bank failures in 21 emerging market countries in the 1990s by using a competing risk hazard model for bank survival we show that a government is less likely to take over or close a failing bank if the banking system is weak this too many to fail effect is robust to controlling for macroeconomic factors financial crises the too big to fail effect domestic financial development and concerns due to systemic risk and information spillovers the paper also shows that the too many to fail effect is stronger for larger banks and when there is a large government budget deficit

regulatory incentives and the thrift crisis dividends mutual to stock conversions and financial distress during the 1980s insolvency of individual thrifts and the thrift deposit insurer created severe incentive problems lacking cash to close insolvent thrifts regulators induced nearly 10 billion of private capital to flow into the industry through mutual to stock conversions we test a theory of how regulators encouraged capitalimpaired mutual thrifts to convert by permitting them to pay dividends rather than rebuild capital we estimate the costs of this policy and interpret the 1991 federal deposit insurance corporation improvement act as requiring regulators to impose restraints on depository institutions parallel to debt covenants that prevent capital distributions by nonfinancial firms experiencing distress