auditors response to political connections and cronyism in malaysia this paper extends the literature on the role of political economy in financial reporting and auditing by testing two hypotheses the first hypothesis predicts that there will be a greater increase in audit effort and audit fees for malaysian firms with political connections as a result of the asian financial crisis than for non politically connected firms because these firms have a higher risk of financial misstatements the second hypothesis predicts that the audit fees of politically connected firms will decline when capital controls are introduced by the government as a ploy to financially assist politically connected firms to rebound from the crisis and thus reduces the risk of financial misstatements the results show that there is a greater increase in audit fees for firms with political connections than for non politically connected firms as a result of the asian financial crisis however there is a decline in audit fees for politically connected firms after the capital controls are implemented

bank stability and managerial compensation abstract we investigate the relationship between insolvency risk and executive compensation for bhcs over the 1992 2008 period we employ ceo compensation sensitivity to risk vega and pay share inequality between the ceo and other executives as measures of compensation and employ a system model to account for the endogeneity problem between vega and risk five main results are obtained first ceo compensation sensitivity to risk of bhcs has risen in response to deregulation to resemble those of the industrial firms second higher vegas lead to greater bank instability third the association between bank stability and managerial compensation is bi directional higher vegas induce greater risk and vice versa fourth bhcs in the next to the largest size group increase ceo vegas the most and have the strongest potential to create instability fifth increased pay share inequality has effects opposite to those of the increase in vega greater pay share inequality is associated with greater stability

bank incentives economic specialization and financial crises in emerging economies abstract we model the vulnerability of an economy to a financial crisis as arising from the interaction of the degree of economic specialization and bank debt financing the probability of a financial crisis is shown to increase in the degree of economic specialization bank debt financing has the beneficial effect of lowering the degree of economic specialization by increasing access to financing of investment opportunities that would not have been financed due to wealth constraints of entrepreneurs financial access effect however bank debt financing induces risk shifting incentives leverage effect the net effect on the probability of a financial crisis depends on which of these two effects dominates we show that commonly employed mechanisms in managing financial crises particularly bailouts induce an additional agency cost by distorting bank incentives to concentrate loans in specific sectors bank debt concentration effect we propose a tax based ex ante solution mechanism that simultaneously induces optimal investment and eliminates the bank debt concentration effect implementation issues and empirical policy implications are also discussed

reserve requirements bank share prices and the uniqueeness of bank loans abstract this study examines the impact of changes in reserve requirements on large banks stock returns it finds statistically and economically significant abnormal returns on the day following the announcement of such changes this finding is consistent with the notion that reserve requirements are a tax on deposits it indicates however that bank s shareholders bear at least part of the tax thus it does not support the hypothesis advanced by some authors that the tax falls exclusively on banks borrowers the evidence further suggests that part of the tax falls on demand depositors these findings undercut the case for the uniqueness of bank loans insofar as it is based on the incidence of the deposit tax

impact of deposit rate ceiling changes on bank stock returns this paper reexamines the impact of four major changes in deposit rate ceilings that occurred during the 1970 80 decade on bank systematic and unsystematic risk the reexamination clarifies why it is dangerous to conduct event studies naively stephen m goldfeld and richard e quandt s switching regressions method is proposed as a procedure that forces the researcher to take a more disciplined approach to determining event dates contrary to previous studies switch dates identified by goldfeld and quandt s switching regressions method cannot be associated with ceiling change announcements because of other information flows so that inferences cannot be drawn about the specific effects of the regulatory adjustments copyright 1989 by ohio state university press

how does political connection affect firm financial distress and resolution in china we examine the impact of political connections on firm performance financial distress and its resolution in china a country where government influence over stock markets has been demonstrated to

lobbying political connections and emergency lending by the federal reserve this paper tests whether the political connections of banks were important in explaining participation in the federal reserve s emergency lending programs during the recent financial crisis our multivariate tests show that banks that were politically connected either through lobbying efforts or employment of politically connected individuals were substantially more likely to participate in the federal reserve s emergency loan programs in economic terms participation in these programs was 28 36 more likely for banks that were politically connected than for banks that were not politically connected in our final set of tests we attempt to identify a proper explanation for this peculiar relationship while a broad literature speaks of the moral hazard associated with receiving bailouts we test whether another type of moral hazard exists in the period preceding the bailout in particular we argue that to the extent that political connections act as synthetic insurance banks may have engaged in more risky behavior that lead them to the fed s emergency lending facilities tests seem to confirm this explanation

cross border bank m as and risk evidence from the bond market the impact of cross border bank m as on bank risk remains an open question though geographically diversifying bank m as have the potential to reduce the risk of bank insolvency they also have the potential to increase that risk due to the increase in risk taking incentives by bank managers and stockholders following these transactions this paper empirically investigates whether cross border bank m as increase or decrease the risk of acquiring banks as captured by changes in acquirers yield spreads this paper also investigates how differences in the institutional environments between bidder and target countries affect changes in yield spreads following m a announcements the study finds that bondholders in general perceive cross border bank m as as risk increasing activities unlike domestic bank mergers specifically on average yield spreads increase by 4 13 basis points following the announcement of cross border m as this study also finds that these yield spreads are significantly affected by the differences in investor protection and deposit insurance environments between the transacting countries however the study does not find that the regulatory and supervisory environment in the home countries of the transacting parties significantly affects the changes in yield spreads the overall evidence suggests that regulators should judge the relative environment in both the home and the host countries in evaluating the associated risks of an active multinational financial institution and in setting the sufficiency of the banks reserve positions

hedging and coordinated risk management evidence from thrift conversions we provide an explanation for hedging as a means of allocating rather than reducing risk we argue that when increases in total risk are costly firms optimally allocate risk by reducing increasing exposure to risks that provide zero positive economic rents our evidence shows that mutual thrifts that convert to stock institutions increase total risk following conversion consistent with their increased abilities and incentives for risk taking they achieve this increase by hedging interest rate risk and increasing credit risk we provide some evidence that risk management activities are related to growth capacity and management compensation structure attained at conversion

regulating banks through market discipline a survey of the issues abstract the interest in the application of market discipline to regulate the financial industry has boomed recently due to the proposed new capital accord this paper reviews the potential role market discipline can play in financial regulation we start with a discussion of the rationale for financial regulation and with a brief history of the current regulatory mechanisms next a definition of market discipline as a regulatory mechanism is advanced we evaluate the disciplining power various market participants have finally we argue that more external risk management disclosure is a condition sine qua non in order to enable market discipline as a regulatory mechanism in this respect the basle committee has taken the right approach

the decision to lobby bureaucrats despite a good deal of interest in lobbyists tactics virtually no research has been published examining the conditions under which interest groups lobby the bureaucracy rather than or in addition to the legislature using two comprehensive datasets i show that lobbying increases in both branches when conflict is higher and when the lobbyist has professional or political connections to that venue in addition certain conditions cause lobbyists to specialize in one branch or a particular branch only depending on the issue area being lobbied the interest group type being represented the lobbyist s resources and other factors

some talk money in politics a partial review of the literature the financing of political campaigns is an area of active scholarly study i review some of the recent literature and discuss important methodological issues that arise in empir ical research on campaign expenditures and campaign contributions the effects of campaign expenditures and advertising on candidate and ballot measure elections are summarized as are the impacts of contributions on contributors welfare many states have changed their campaign finance laws in the past few years and i describe work that exploits variations in these laws a discussion of the strategies used by interest groups to allocate their campaign contributions provides insights into contributors motives

testing mixed strategy equilibria when players are heterogeneous the case of penalty kicks in soccer the concept of mixed strategy is a fundamental component of game theory and its normative importance is undisputed however its empirical relevance has sometimes been viewed with skepticism the main concern over the practical usefulness of mixed strategies relates to the indifference property of a mixedstrategy equilibrium in order to be willing to play a mixed strategy an agent must be indifferent between each of the pure strategies that are played with positive probability in the mixed strategy as well as any combination of those strategies given that the agent is indifferent across these many strategies there is no bene t to selecting precisely the strategy that induces the opponent to be indifferent as required for equilibrium why an agent would in the absence of communication between players choose exactly one particular randomization is not clear of course whether agents in real life actually play nash equilibrium mixed strategies is ultimately an empirical question the evidence to date on this issue is based almost exclusively on laboratory experiments e g barry o neill 1987 amnon rapoport and richard b boebel 1992 dilip mookherjee and barry sopher 1994 jack ochs 1995 kevin a mccabe et al 2000 the results of these experiments are mixed o neill 1987 concludes that his experimental evidence is consistent with nash mixed strategies but that conclusion was contested by james n brown and robert w rosenthal 1990 with the exception of mccabe et al 2000 which looks at a three person game the other papers generally reject the nash mixedstrategy equilibrium while much has been learned in the laboratory there are inherent limitations to such studies it is sometimes argued that behavior in the simpli ed arti cial setting of games played in such experiments need not mimic real life behavior in addition even if individuals behave in ways that are inconsistent with optimizing behavior in the lab market forces may discipline such behavior in the real world finally interpretation of experiments rely on the assumption that the subjects are maximizing the monetary outcome of the game whereas there may be other preferences at work among subjects e g attempting to avoid looking foolish that distort the results tests of mixed strategies in nonexperimental data are quite scarce in real life the games played are typically quite complex with large strategy spaces that are not fully speci ed ex ante in addition preferences of the actors may not be perfectly known we are aware of only one paper in a similar spirit to our own research using data from classic tennis matches mark walker and john wooders 2001 test whether the probability the player who serves the ball wins the point is equal for serves to the right and chiappori department of economics university of chicago 1126 east 59th street chicago il 60637 levitt department of economics university of chicago groseclose graduate school of business stanford university 518 memorial way stanford ca 94305 the paper was presented at games 2000 in bilbao and at seminars in paris and chicago we thank d braun j m conterno r guesnerie d heller d mengual p reny b salanie and especially j l ettori for comments and suggestions and m mazzocco and f bos for excellent research assistance any errors are ours 1 the theoretical arguments given in defense of the concept of mixed strategy equilibria relate either to puri cation john c harsanyi 1973 or to the minimax property of the equilibrium strategy in zero sum games for recent elaborations on these ideas see authur j robson 1994 and phil reny and robson 2001 2 the ultimatum game is one instance in which experimental play of subjects diverges substantially from the predicted nash equilibrium robert slonim and alvin e roth 1998 demonstrate that raising the monetary payoffs to experiment participants induces behavior closer to that predicted by theory although some disparity persists

the use of accounting flexibility to reduce labor renegotiation costs and manage earnings abstract we investigate the determinants of discretionary sfas 106 choices of non regulated firms we find that more unionized firms are more likely to use immediate recognition consistent with incentives to reduce labor renegotiation costs immediate recognition is more prevalent among post adoption plan modifiers particularly if their transition obligation is large consistent with incentives to increase future reported earnings immediate recognition together with post adoption benefit plan reduction frees future income from the transition obligation amortization expense and adds a positive component as negative prior service costs are amortized immediate recognition is less prevalent among firms with higher potential debt contracting costs

the distortive effects of too big to fail evidence from the danish market for retail deposits we study the impact of too big to fail tbtf guarantees on the market for retail deposits exploiting information about all personal deposit accounts in denmark and salient changes to the deposit insurance limit we provide evidence that systemically important banks successfully retain and attract uninsured deposits in a crisis at the expense of other banks even as they differentially lower their interest rates the funding shock suffered by nonsystemic banks causes a decrease in their lending the results point to the distortive effects of tbtf guarantees in the market for retail deposits received march 15 2018 editorial decision january 15 2019 by philip strahan

size and performance of banking firms testing the predictions of theory abstract in recent years two important literatures on the theory of banking firms have developed one examines the economic functions of banks in environments in which agents are asymmetrically informed another considers the incentive effects moral hazard resulting from deposit insurance both theories make predictions about the relation between banking firm size and performance an empirical analysis of large bank holding companies investigates measures of market valuation and risk of failure limited support is provided for either set of theoretical predictions

the pricing of deposit insurance in the presence of systematic risk based on the merton 1977 put option framework we develop a deposit insurance pricing model that incorporates asset correlations a measurement for the systematic risk of a bank to account for the risk of joint bank failures estimates from our model suggest that actuarially fair risk based deposit insurance that considers only individual bank failure risk is underpriced leaving insurance providers exposed to net losses our estimates also capture the size premium where big banks are priced with higher deposit insurance than small banks this result is particularly relevant to the current regulatory concerns on big banks that are too big to fail above all our approach provides a unifying framework for integrating risk based deposit insurance with risk based basel capital requirements

the market valuation effects of the financial institutions reform recovery and enforcement act of 1989 abstract this paper evaluates the stock market effects of events leading to the passage of the financial institutions reforms recovery and enforcement act of 1989 the evidence suggests that the signing of the act by president bush produced positive abnormal returns for both banks and s ls and that the addition of tougher capital standards produced positive returns for s ls in addition the act increased the risk of both banks and s ls

do professionals choke under pressure high rewards or the threat of severe punishment provide strong motivation but also create psychological pressure which might induce performance decrements by analyzing the performance of professional football players in penalty kick situations the paper provides empirical evidence for the existence of detrimental incentive effects two pressure variables are considered in particular 1 the importance of success and 2 the presence of spectators there are plenty of situations in which pressure arises in the workplace knowing how individuals perform under pressure conditions is crucial because it has implications for the design of the workplace and the design of incentive schemes

foreign aid and population policy some ethical considerations abstract this paper analyzes a two period foreign aid model where assistance can be given in the form of consumption or population control aid population size in period 2 is endogenous using the family of ethical principles called critical level utilitarianism clu we examine the properties of ethically optimal resource allocations our results show that the direction of the ethical response of population size to changes in the cost of population control and the size of the grant depends on the relationship between the critical level of well being an ethical parameter and the standard of living in the recipient country

professionals play minimax the implications of the minimax theorem are tested using natural data the tests use a unique data set from penalty kicks in professional soccer games in this natural setting experts play a one shot two person zero sum game the results of the tests are remarkably consistent with equilibrium play in every respect i winning probabilities are statistically identical across strategies for players ii players choices are serially independent the tests have substantial power to distinguish equilibrium play from disequilibrium alternatives these results represent the first time that both implications of von neumann s minimax theorem are supported under natural conditions during the last few decades game theory has contributed to a reshaping of important aspects of the methodology of economics and other social sciences in a large part this is because the language concepts and techniques of non cooperative game theory have become central to many areas of the discipline undoubtedly studying the interaction of ideally rational players greatly aids our understanding of the behaviour of real individuals firms and other agents moreover as kreps 1991 remarks studying the former should aim at understanding the latter the point of game theory is to help economists understand and predict what will happen in economic social and political contexts theoretical contributions should thus feed back to empirical analysis however testing the implications of the theory has proven extremely difficult in the literature the primary reason is that many predictions often hinge on properties of the utility functions and the values of the rewards used even when predictions are invariant over classes of preferences data on rewards are seldom available in natural settings moreover there is often great difficulty in determining strategy sets and in measuring individuals choices effort levels and the incentive structures they face as a result even the most fundamental predictions of game theoretical models have not yet been supported empirically in real situations in view of the substantial problems associated with testing theoretical predictions using natural data many authors have been compelled to test them in experimental settings interestingly enough despite the controlled structure of experiments the results of many experiments during the last few decades typically reject the assumption that subjects are playing according to the theoretical implications of equilibrium play for instance a number of experiments have evaluated the empirical validity of von neumann s minimax theory for two person zero sum games a theory that occupies a central position in our understanding of strategic situations the results have been mixed and are often rather negative see for instance brown and rosenthal 1990 rapoport and boebel 1992 camerer 2003 and the references therein

the tale of two great crises abstract the great depression of 1929 and the great financial crisis of 2008 have been the two big events of the last 75 years not only have they produced serious economic consequences but they also changed our view of economics and policymaking the aim of this work is to compare these two great crises and highlight similarities as well as differences monetary policy the exchange rate system and the role of banks are our fields of investigation we find interesting parallels between the two big events but also differences in their specific developments

does player specialization predict player actions evidence from penalty kicks at fifa world cup and uefa euro cup penalty kicks are analysed in the literature as real life experiments for assessing the use of rational mixed strategies by professional players however each penalty kick cannot be considered a repetition of the same event because of the varying background conditions in particular the heterogeneous ability of different players consequently aggregate statistics over data sets composed of a large number of penalty kicks mediate the behaviour of the players in different games and the properties of optimal mixed strategies cannot be tested directly because of aggregation bias in this article we model the heterogeneous ability of players we then test the hypothesis that differently talented players randomize over different actions to achieve this aim we study a data set that collects penalties kicked during shoot out series in the last editions of fifa world cup and uefa euro cup 1994 2012 where kickers are categorized as specialists and non specialists the results support our theoretical predi

birth date dependent population ethics critical level principles abstract this paper investigates birth date dependent principles for social evaluation in an intertemporal framework in which population size may vary we weaken the strong pareto principle in order to allow individuals birth dates to matter in establishing a social ordering using the axiomindependence of the utilities of the dead we characterize population principles with a recursive structure if the individual substitution principle and an individual intertemporal equivalence axiom are added birth date dependent generalizations of the critical level generalized utilitarian principles result stationarity leads to the special case of geometric discounting journal of economic literatureclassification numbers d63 d71

social criteria for evaluating population change abstract many applications of economic analysis require social evaluations of alternatives involving different numbers of people in this paper we use the tools of social choice theory to provide an axiomatic formulation of this problem it yields a class of social criteria called critical level generalized utilitarianism this class and its implications are compared with other criteria and are found to yield intuitively appealing results

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

intertemporal population ethics critical level utilitarian principles this paper considers the problem of social evaluation in a model where population size individual lifetime utilities lengths of life and birth dates vary across states in an intertemporal framework we investigate principles for social evaluation that allow history to matter to some extent using an axiom called independence of the utilities of the dead we provide a characterization of critical level generalized utilitarian rules as a by product of our analysis we show that social discounting is ruled out in an intertemporal welfarist environment a simple population planning example is also discussed

capital markets assessment of the economic impact of the dodd frank act on systemically important financial firms abstract we examine stock and bond market reactions to the key events leading to the passage of the dodd frank act to assess the markets expectations about the effectiveness of the act on systemically important financial firms using small medium sized domestic financial institutions as a control group we find that large financial institutions overall had negative abnormal stock returns and positive abnormal bond returns suggesting that the markets expect the act to be effective in reducing these banks risk taking we further investigate the market reactions for 1 larger and more interconnected financial institutions and 2 the big 6 banks to evaluate the markets assessment about the effectiveness of the act in ending the too big to fail policy we document that larger and more interconnected financial institutions experienced more negative abnormal stock returns and more positive abnormal bond returns as compared to other banks in our sample but these relations are not present during the final phase of the passage likewise we find that both shareholders and bondholders of the big 6 banks initially experienced significant negative returns followed by insignificant returns during the final phase of the passage these results appear to suggest the markets are doubtful about the effectiveness of the final version of the bill to end the too big to fail status in particular for the big 6 banks

taming systemically important financial institutions we model a systemically important financial institution sifi that is too big or too interconnected to fail without credible regulation and strong supervision the shareholders of this institution might deliberately let its managers take excessive risk we propose a solution to this problem showing how insurance against systemic shocks can be provided without generating moral hazard the solution involves levying a systemic tax needed to cover the costs of future crises and more importantly establishing a systemic risk authority endowed with special resolution powers including the control of bankers compensation packages during crisis periods

additional evidence on the information based contagion effects of bank failures abstract recent theoretical models addressed the question of the nature of bank runs and what triggers them two competing hypotheses emerged pure panic and information based contagion this study provides additional evidence consistent with the latter hypothesis three observable bank characteristics are examined as proxy measures for the interim private information used by rational depositors in assessing the riskiness of a bank s long lived assets that may trigger bank runs the three factors are 1 the distance of the solvent banks headquarters from the headquarters of each failed bank 2 the size of the solvent banks and 3 the capital ratio as a proxy for their solvency the analysis is conducted in the context of the five large bank failures that occurred in the southwest region of the us during the mid 1980s weekly abnormal returns of 33 southwestern bhcs in ten critical failure related event dates are regressed on the three observable bank characteristics our findings suggest that distance and capital adequacy are negatively related to the magnitude of the contagion effect whereas size is positively related

the industrial organization of congress or why legislatures like firms are not organized as markets this paper provides a theory of legislative institutions that parallels the theory of the firm and the theory of contractual institutions like market institutions legislative institutions reflect two key components the goals or preferences of individuals here representatives seeking reelection and the relevant transactions costs we present three conclusions first we show how the legislative institutions enforce bargains among legislators second we explain why given the peculiar form of bargaining problems found in legislatures specific forms of nonmarket exchange prove superior to market exchange third our approach shows how the committee system limits the types of coalitions that may form on a particular issue

campaign contributions and congressional voting does the timing of contributions matter theoretical and empirical studies do not address whether campaign contributions from more than one election cycle are important for congressional voting behavior further they do not address whether campaign contributions from different periods have different effects on legislative voting behavior this paper analyzes the cumulative effect of campaign contributions over two time periods moreover this paper studies the importance of the timing of contributions for legislative voting behavior ten roll call votes on price supports and quotas for various farm commodities in 1981 and 1985 are analyzed most of the estimated contribution coefficients are statistically significant the results show that without campaign contributions farm interest would have lost in five of the seven votes that were won moreover contributions that were given at approximately the same time as the vote have a larger impact on voting behavior than contributions that the legislator received one or two years prior to the vote copyright 1995 by mit press

political connection and leverage some malaysian evidence abstract this paper extends prior work on the linkage between politically connected pcon firms and capital structure in developing countries specifically this paper focuses on the association between malaysian pcon firms and leverage and is motivated by the results of fraser et al 2006 who report a positive association between leverage and political patronage controlling for a potential misspecification in that paper this study documents that a significant proportion almost 12 of the malaysian pcon firms have negative equity and builds on the previous paper by providing fresh evidence that market to book ratio is positively associated with leverage and that borrowing pcon firms have significantly lower roa compared to non pcon firms

selection on observed and unobserved variables assessing the effectiveness of catholic schools in this paper we measure the effect of catholic high school attendance on educational attainment and test scores because we do not have a good instrumental variable for catholic school attendance we develop new estimation methods based on the idea that the amount of selection on the observed explanatory variables in a model provides a guide to the amount of selection on the unobservables we also propose an informal way to assess selectivity bias based on measuring the ratio of selection on unobservables to selection on observables that would be required if one is to attribute the entire effect of catholic school attendance to selection bias we use our methods to estimate the effect of attending a catholic high school on a variety of outcomes our main conclusion is that catholic high schools substantially increase the probability of graduating from high school and more tentatively attending college we find little evidence of an effect on test scores

systemic risks and the too big to fail problem the financial crisis of 2007 9 resulted in state intervention in financial markets around the world and the state became a major shareholder in many banks while state bailouts were politically sensitive policy makers had little alternative but to supply funds to financial institutions that were viewed as too big to fail or tbtf in this paper i review the history of and the rationale for the tbtf policy i argue that from a policy perspective the most important costs of the tbtf problem are incurred ex ante in the form of distorted incentives that arise as a consequence of distortions to the capital markets and to the choice of banks scale and scope i argue that it is impossible credibly to withdraw the tbtf policy and hence that it should be managed so as to minimize the costs of these distortions in this context i discuss the role of policy in institutional design in the restriction of bank scope and in designing appropriate capital regulations

federal deposit insurance regulatory policy and optimal bank capital this paper seeks to explain the combination of explicit and implicit pricing for deposit insurance employed by the fdic essentially the fdic sells two products insurance and regulation to span the product space it must and does set two prices we argue that the need to establish regulatory disincentives to bank risk taking is the heart of the controversy over the adequacy of bank capital and that the ability to close risky banks before exhausting their charter value i e the value of their right to continue in business stands at the center of these disincentives and in front of the fdic s insurance reserves just as a book shouldn t be judged by its cover a government agency shouldn t be judged by the words behind its initials with the fdic federal deposit insurance corporation the agency s name describes only part of its formal operations the fdic is quasi governmental has a regional structure and sells deposit insurance however the initials fail to convey the fdic s critical place in the governmental regulatory structure as the sole federal overseer of the approximately 8900 state chartered commercial banks that have chosen not to belong the federal reserve system reflecting the federal reserve s membership problem the number of these banks is growing year by year besides selling deposit insurance at bargain explicit rates the fdic performs four regulatory functions 1 entry regulation it passes on new banks applications for deposit insurance and on branch and merger proposals as well thereby protecting the value of existing bank charters 2 examination two thirds of fdic employees are concerned with inspecting bank records and supervising managerial activity 3 regulation of deposit rates and conditions for withdrawal by tradition fdic policies on these matters conform entirely with regulations applicable to federal reserve member banks and 4 disposition of failed banks when an insured bank fails the fdic usually chooses not to liquidate it 2

implicit bank debt guarantees costs benefits and risks the expectation by market participants that public authorities might bailout the creditors of banks that are considered too important for financial system stability or another reason to be allowed to fail is commonly referred to as an implicit guarantee public authorities do not have any explicit commitment to intervene they may even honestly state that they not want to do so ex ante but may feel compelled to do so ex post a declared policy aim is to limit the value of implicit guarantees by making banks stronger more easily resolvable in case of distress as well as by imposing extra charges that rise as banks become more systemically important as part of the latter approach globally systemically important banks are identified and subjected to more costly and intrusive regulation there is little evidence that specific approach has been successful so far there is some evidence that the introduction of new resolution frameworks has been helpful while the use of newly available resolution tools and the involvement of bank creditors in the burden sharing associated with bank failure resolution has significantly reduced the value of implicit bank debt guarantees where it occurred in that sense actions speak louder than words

banking reforms performance and risk in china we investigate the impact of the banking reform started from 2005 on ownership structures in china on commercial banks profitability efficiency and risk over the period 2000 2012 providing comprehensive evidence on the impact of banking reform in china we find that banks on average tend to have higher profitability lower risk and lower efficiency after the reforms and the results are robust with our difference in difference approach our results also show that the big 5 state owned banks socb underperform banks with other types of ownership when risk is measured by non performing loans npls over the entire study period but tend to have fewer npls than other banks during the post reform period our results provide some supporting evidence on the ongoing banking reforms in china suggesting that attracting strategic foreign investors and listing socbs on stock exchanges appear to be effective ways to help socbs deal with the problem of npls and manage their risk

what do campaign contributions buy deciphering causal effects of money and votes in the 1987 1988 election cycle political action committees pacs spent 176 6 million on candidates who competed for a seat in the house of representatives what do pacs buy when contributing this money if campaign contributions are rational allocations of a contributor s income campaign expenditures could increase both the probability that the contributor s preferred candidate is elected and the likelihood that if elected the candidate will vote in the interest of the contributor most studies do not find that incumbents expenditures have a significant positive effect on the number of votes incumbents receive 11 14 15 17 29 the evidence that contributions influence congressional votes is mixed most studies find weak or no support for this hypothesis for example kau rubin and keenan 17 find that contributions from businesses mattered in only two of the eight votes they analyzed others argue that campaign expenditures play no important role in the voting decision of congressmen 5 9 12 31 the lack of finding of significant effects of money on votes has been explained with the need for better models to explain campaign contributions 5 however the theoretical developments of for example ben zion and eyton 4 bental and ben zion 3 and baron 2 have not been incorporated in the empirical analysis of the effect of campaign contributions on the voting behavior of legislators empirical models that test this relationship must allow for the endogeneity of campaign contributions for the dichotomous nature of the dependent vote variable and the nonnegativity constraint of campaign contributions most empirical work in this area utilize models that do not incorporate these restrictions in this study i plan to incorporate these aspects of the data generating process into a more detailed model of the effects of campaign contributions on congressional votes of all the reported empirical studies on this issue only chappell 5 uses a model which can properly assess the impact of money on votes chappell finds that campaign contributions do not affect votes in congress when his more detailed econometric technique is used the best test of the theory results if votes have a clear economic payoff to contributors benefits of the votes are concentrated and costs are

empirical research on accounting choice abstract we review research from the 1990s that examines the determinants and consequences of accounting choice structuring our analysis around the three types of market imperfections that influence managers choices agency costs information asymmetries and externalities affecting non contracting parties we conclude that research in the 1990s made limited progress in expanding our understanding of accounting choice because of limitations in research design and a focus on replication rather than extension of current knowledge we discuss opportunities for future research recommending the exploration of the economic implications of accounting choice by addressing the three different reasons why accounting matters

an analysis of the impact of deposit rate ceilings on the market values of thrift institutions this paper examines the impact of changes in deposit interest rate regulations on the common stock values of savings and loan institutions the analysis indicates that stockholder owned savings and loans s l s have experienced statistically significant declines in equity market values at the announcement of the removal of ceilings on certain consumer small saver certificate accounts and the introduction of short term variable rate money market certificates we find the evidence to be consistent with the hypothesis that s l s have earned economic rents from restrictions on interest rates paid to small saver accounts and that relaxation of interest rate ceilings has reduced these rents a central issue in the economics of regulation is whether regulators behave in a way that primarily benefits the economic agents whose actions they are supposed to regulate the proposition that regulation is demanded and acquired by the regulated and that regulations are designed and administered primarily for their benefit was originally put forth by stigler 19 and has come to be known as the capture theory of regulation an alternative view is that regulators adopt policies which serve some other perhaps public or possibly the regulators own interest and that administration of these policies does not benefit the regulated entities this paper examines the regulation of savings and loan associations deposit interest rates and reports evidence pertaining to the impact of the administration of regulation regulation of interest rates paid to depositors in federally insured savings and loan associations began in 1966 since that time several changes in the maximum allowed interest rates deposit rate ceilings have been made these changes present an opportunity to observe the impact of one form of regulatory action on savings and loan institutions deposit rate regulation has been the subject of extensive previous research the empirical investigations have focused primarily on two issues 1 the allocational efficiency and wealth redistribution effects of rate ceilings and 2 the impact of deposit rate ceilings on the flow of funds into the residential

the leverage effect and the basket index put spread abstract benchmark models that exogenously specify equity dynamics cannot explain the large spread in prices between put options written on individual banks and options written on the bank index during the financial crisis however theory requires that asset dynamics be specified exogenously and that endogenously determined equity dynamics exhibit a leverage effect that increases put prices by fattening the left tail of the distribution the leverage effect is larger for puts on individual stocks than for puts on the index thus increasing the basket index spread time series and cross sectional variation in the leverage effect explains option prices well

the market for congressional votes is timing of contributions everything this study utilizes the timing of campaign contributions to identify whether the objective of political action committees pacs is to influence congressional votes or solely to elect a preferred candidate the results show that pac behavior is consistent with an attempt to purchase congressional votes and to influence elections contributions increase in the weeks surrounding legislative events of importance to pacs and elections the magnitude of increased contributions is examined the article also addresses the lack of legal enforcement mechanisms in vote for contribution agreements it develops hypotheses regarding the timing of contributions as an inexpensive mechanism to assure contractual performance hypotheses are tested regarding pacs incentives to mitigate potential cheating by legislators on such agreements results show that pacs use the timing of contributions as a mechanism to prevent legislators from reneging on vote for contribution trades

political connection and cost of debt some malaysian evidence abstract this paper investigates the association between malaysian politically connected pcon firms and the cost of debt we extend previous research that finds malaysian pcon firms are perceived as being of higher risk by the market and by audit firms by providing evidence that lenders also perceive these firms as being of higher risk we also find that pcon firms have a significantly 1 higher extent of leverage 2 higher likelihood of reporting a loss 3 higher likelihood of having negative equity and 4 higher likelihood of being audited by a big audit firm we suggest that pcon firms are charged higher interest rates by lenders as a result of efficient contracting given their higher inherent risks additionally we find that ceo duality present in pcon firms is perceived by lenders as being more risky and that a higher proportion of independent directors on the audit committee mitigate this perceived risk

the costs and benefits of moral suasion evidence from the rescue of long term capital management this study examines the level of unsecured borrowing done by the firms that ultimately rescued long term capital management in the days leading up to the hedge fund s rescue although these banks borrowed less at the height of the crisis evidence suggests that this reduction in borrowing was demand driven and did not result from rationing by the market further it is shown that large banks that were not involved with the ltcm rescue saw the rates they pay for unsecured funds decline following the hedge fund s resolution this finding is consistent with an increase in the strength of a too big to fail policy

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

wealth and risk effects of adopting deposit insurance in canada evidence of risk shifting by banks and trust companies this paper confirms that adopting explicit deposit insurance expanded risk shifting incentives for canadian banks and trust companies by transferring responsibility for monitoring non systematic risk to the canadian deposit insurance corporation cdic deposit insurance eliminated the compensation previously paid to large block stockholder monitors this transfer fueled a redistribution of insured institution stock from poorly diversified large block shareholders to diversified investors also subsequent changes in market volatility support the hypothesis that cdic insurance and the absorption of catastrophic risk it provided reduced systematic risk in the stock market as a whole even as it increased non systematic risk in the banking and trust company sector

efficiency and bargaining power in the interbank loan market using detailed transactions level data on interbank loans we examine the efficiency of an overnight interbank lending market and the bargaining power of its participants our analysis relies on the equilibrium concept of the core which imposes a set of no arbitrage conditions on trades in the market for canada s large value transfer system we show that although the market is fairly efficient systemic inefficiency persists throughout our sample the level of inefficiency matches distinct phases of both the bank of canada s operations as well as phases of the 2007 8 financial crisis we find that bargaining power tilted sharply toward borrowers as the financial crisis progressed and surprisingly toward riskier borrowers

incentives for banking megamergers what motives might regulators infer from event study evidence methodologically this paper frames the opportunity cost of any merger as the value of the alternative deals it precludes or defers this challenges the standard event study hypothesis that stock markets benchmark the value of a merger deal by the profits the partners would have earned in stand alone activity substantively the paper finds that megamergers in banking show two size related exceptions to the prototypical result that acquirer stock value tends to be unaffected or to fall when a merger is announced giant u s banking organizations gain value from becoming more gigantic and gain additional value when they absorb an in state competitor

implicit bank debt guarantees costs benefits and risks implicit bank debt guarantees the expectation by market participants that public authorities might bailout the creditors of banks that are considered too important for financial system stability or another reason to be allowed to fail is commonly referred to as an implicit guarantee public authorities do not have any explicit commitment to intervene they may even honestly state that they not want to do so ex ante but may feel compelled to do so ex post a declared policy aim is to limit the value of implicit guarantees by making banks stronger more easily resolvable in case of distress as well as by imposing extra charges that rise as banks become more systemically important as part of the latter approach globally systemically important banks are identified and subjected to more costly and intrusive regulation there is little evidence that specific approach has been successful so far there is some evidence that the introduction of new resolution frameworks has been helpful while the use of newly available resolution tools and the involvement of bank creditors in the burden sharing associated with bank failure resolution has significantly reduced the value of implicit bank debt guarantees where it occurred in that sense actions speak louder than words

managerial risk taking behavior a too big to fail story we examine the implications of the us government s too big to fail tbtf policy as it has been applied to banks using alternative measures of risk we compare the risk taking behavior of 11 tbtf banks identified by the comptroller of the currency in 1984 to a number of non tbtf banks we provide both theory and new empirical evidence to support our argument that the tbtf policy leads management to significantly increase risk taking with no corresponding increase in performance while prior studies have considered the effects of the tbtf policy on limited but risk related aspects of bank behavior such as the cost of funds our study provides direct evidence about the risk taking behavior associated with the tbtf policy our study has important implications for the current political debate regarding the too big to fail policy

nash equilibrium in strictly competitive games live play in soccer abstract i model a scoring situation that arises frequently during soccer matches the nash equilibrium solution is shown to be broadly consistent with the conventional wisdom of experts data on goals scored over an entire season in italy s soccer league provide statistical support for a prediction of the model s nash equilibrium

financial flexibility and the cost of external finance for u s bank holding companies this paper models a bank with access to two segmented capital markets the market for insured deposits and the market for uninsured claims we illustrate how higher costs of accessing either market leads to lower firm values and a greater incentive to carry liquid assets we test our model on a sample of large banking firms and label banks with relatively lower costs of accessing the two markets as more financially flexible our two key findings are 1 banks with greater financial flexibility have greater value and 2 banks with greater financial flexibility devote a smaller percentage of assets to cash and marketable securities consistent with the notion that financial flexibility reduces the sensitivity of firm profits to internal wealth shocks thus reducing the firm s need to carry financial slack

does the debt market assess large banks risk time series evidence from money center cds abstract uninsured bank liabilities should offer a promised yield that compensates depositors for their expected default losses however the conjectural guarantees available to large u s banking firms makes it questionable whether large depositors should or do feel themselves exposed to credit risk prior papers have evaluated the determinants of bank risk premia using cross sectional data with relatively inconclusive results this paper investigates the same issue in a methodologically independent fashion using time series data on specific banks daily offering rates during the period may 1982 through july 1988 we find that cd rates paid by large money center banks include significant default risk premia

psychological pressure in competitive environments evidence from a randomized natural experiment much like cognitive abilities emotional skills can have major eects on performance and economic outcomes this paper studies the behavior of professional subjects involved in a dynamic competition in their own natural environment the setting is a penalty shoot out in soccer where two teams compete in a tournament framework taking turns in a sequence of ve penalty kicks each as the kicking order is determined by the random outcome of a coin ip the treatment and control

an empirical analysis of the economic implications of fair value accounting for investment securities abstract this paper analyzes security returns of bank holding companies and insurance companies during periods surrounding the adoption of sfas 115 we find bank share prices were negatively affected by the examined events but find little share price reaction for insurance companies our evidence suggests banks were adversely affected by the standard because of problems with the standard s market value accounting approach cross sectional analysis of event period returns shows that banks that more frequently traded their investments with longer maturing investments and that are more fully hedged against interest rate changes were the most negatively impacted by the standard

the importance of being systemically important financial institutions abstract we investigate whether financial markets reacted to the regulatory changes implied by the publication of the list of systemically important financial institutions sifi and the new rules designed to address the too big to fail problem of systemic banks by applying event study methodology to a sample of 70 of the world s largest banks we assess whether the stock prices of sifis reacted significantly and differently from those of other large banks not deemed to be systemically important following the release of information regarding the methodology used to identify sifis and their new capital requirements the disclosure of the first list of 29 sifis and the publication of the updated list of 28 sifis overall we determine that financial markets did not univocally react to the new regulation regarding sifis however markets discriminated between high and low capitalized banks and they correctly estimated the probable effects of the additional capital requirements

corporate lobbying political connections and the bailout of banks abstract political involvement has long been shown to be a profitable investment for firms that seek favorable regulatory conditions or support in times of economic distress but how important are different types of political involvement for the timing and magnitude of political support to answer this question we take a comprehensive look at the lobbying expenditures and political connections of banks that were recipients of government support under the 2008 troubled asset relief program tarp we find that politically engaged firms were not only more likely to receive tarp funds but they also received a greater amount of tarp support and received the support earlier than firms that were not politically involved

ceo compensation and bank risk is compensation in banking structured to promote risk taking abstract this paper examines whether executive compensation in banking is structured to promote risk taking we find that on average bank ceos receive less cash compensation are less likely to participate in a stock option plan hold fewer stock options and receive a smaller percentage of their total compensation in the form of options and stock than do ceos in other industries cross sectional differences in the structure of compensation contracts within banking are also examined we find a positive and significant relation between the importance of equity based incentives and the value of the bank s charter this result is inconsistent with the hypothesis that compensation policies promote risk taking in banking

repeated insurance contracts and moral hazard abstract an attempt is made to account for the frequently observed phenomenon of insurance companies offering discounts to clients who possess a favorable record of past claims we argue that such discounts provide a mechanism which enables both insurer and insured to counteract the inefficiency which arises from moral hazard

moving toward risk based deposit insurance premiums in the european union the case of spain this article provides a scenario based analysis of how the european union proposal for a new funding model for deposit insurance systems diss would affect the spanish banking sector we examine the risk profiles of commercial banks savings banks and credit cooperatives over the period 2007 to 2011 and compare the contributions to the deposit insurance fund dif under the current flat rate regime with those that would have occurred under the new risk sensitive system we find that a risk based scheme could provide an incentive for sound management by reducing the premiums for credit institutions with better risk profiles we also conclude that the proposed reform may help to mitigate the moral hazard associated with larger credit institutions

an analysis of intra industry differences in the effect of regulation the case of deposit rate ceilings abstract this study examines the impact of deposit rate ceiling changes on the market value of commercial banks and stock savings and loan associations statistically significant increases in market value are found on announcement of the removal of ceilings on large denomination certificates of deposit in contrast retail commercial banks and savings and loans experienced declines in value on announcement of the elimination or relaxation of deposit rate ceilings on small denomination consumer accounts in addition for all events analyzed significant differences were found in the effect of ceiling changes on the market value of wholesale and retail commercial banks

bank size and household financial sentiment surprising evidence from university of michigan surveys of consumers we analyze comparative advantages disadvantages of small and large banks in improving household sentiment regarding financial conditions we match sentiment data from the university of michigan surveys of consumers with local banking market data from 2000 to 2014 surprisingly the evidence suggests that large rather than small banks have significant comparative advantages in boosting household sentiment findings are robust to instrumental variables and other econometric methods additional analyses are consistent with both scale economies and the superior safety of large banks as channels behind the main findings these channels appear to more than offset stronger relationships with and greater trust in small banks

ambiguity and nonparticipation the role of regulation we investigate the implications of ambiguity aversion for performance and regulation of markets in our model agents decision making may incorporate both risk and ambiguity and we demonstrate that nonparticipation arises from the rational decision by some traders to avoid ambiguity in equilibrium these participation decisions affect the equilibrium risk premium and distort market performance when viewed from the perspective of traditional asset pricing models we demonstrate how regulation particularly regulation of unlikely events can moderate the effects of ambiguity thereby increasing participation and generating welfare gains our analysis demonstrates how legal systems affect participation in financial markets through their influence on ambiguity the author 2009 published by oxford university press on behalf of the society for financial studies all rights reserved for permissions please e mail journals permissions oxfordjournals org oxford university press

interest group competition and the organization of congress theory and evidence from financial services political action committees we develop a positive theory of how interest group competition shapes the organization of congress and use it to explain campaign contribution patterns in financial services since interest groups cannot enforce fee for service contracts with legislators legislators have an incentive to create specialized standing committees which foster repeated dealing between interests and committee members the resulting reputational equilibrium supports high contributions and high legislative effort for the interests contribution patterns by competing interests in the congressional battle over whether banks can enter new businesses support the theory which also has implications for term limits and campaign reform

pigs and guinea pigs a note on the ethics of animal exploitation discussions of the morality of animal exploitation must deal with the fact that these activities result in animal populations that would not otherwise exist in this paper simple economic models of animal using food production and research are combined with explicit ethical criteria that are sensitive to animal well being and numbers the authors show that when animal exploitation is morally acceptable lack of regulation results in too many food animals and research that is too animal intensive in addition nonmarket control through bills of rights for farm animals and research practice standards is necessary for ethical optimality copyright 1992 by royal economic society

deposit insurance and wealth effects the value of being too big to fail this paper investigates the effect on bank equity values of the comptroller of the currency s announcement that some banks were too big to fail and that for those banks total deposit insurance would be provided using an event study methodology we find positive wealth effects accruing to tbtf banks with corresponding negative effects accruing to non included banks we demonstrate that the magnitude of these effects differed with bank solvency and size we also show that the policy to which the market reacted was that suggested by the wall street journal and not that actually intended by the comptroller the role of deposit insurance has become a topic of increasing debate advocates argue that by removing the incentive to run deposit insurance protects individual financial institutions from instability in the intermediation process thereby providing stability to the financial system as a whole 1 the recent rise in bank failures and the concomitant crises in the s l industry however demonstrate that this stability is not guaranteed moreover critics note that deposit insurance may introduce incentive problems and wealth effects into the financial system both of which can impede the effective functioning of any deposit insurance system these problems have prompted concern about the structure of the current deposit insurance system and have led to numerous proposals regarding its restructuring 2 this paper investigates one aspect of this debate by analyzing the effect on bank equity values of the policy decision to insure completely some banks but not others specifically in september 1984 the comptroller of the currency testified before congress that some banks were simply too big to fail tbtf and that for those banks total deposit insurance would be provided while not explicitly naming the banks the comptroller admitted that this policy would apply to the eleven largest banks using an event study methodology we analyze