A. Joseph Warburton

The End of Market Discipline? Investor Expectations of Implicit Government Guarantees

Using unsecured bonds traded in the U.S. between 1990 and 2012, we find that bond credit spreads are sensitive to risk for most financial institutions, but not for the largest financial institutions. This “too big to fail” relation between firm size and the risk sensitivity of bond spreads is not seen in the non-financial sectors. The results are robust to using different measures of risk, controlling for bond liquidity, conducting an event study around shocks to investor expectations of government guarantees, examining explicitly and implicitly guaranteed bonds of the same firm, and using agency ratings of government support for financial institutions.

The Chrysler Effect: The Impact of the Chrysler Bailout on Borrowing Costs

Did the U.S. governments intervention in the Chrysler reorganization overturn bankruptcy law? Critics argue that the government-sponsored reorganization impermissibly elevated claims of the auto union over those of Chryslers other creditors. If the critics are correct, businesses might suffer an increase in their cost of debt because creditors will perceive a new risk, that organized labor might leap-frog them in bankruptcy. This paper examines the financial market where this effect would be most detectible, the market for bonds of highly unionized companies. The authors find no evidence of a negative reaction to the Chrysler bailout by bondholders of unionized firms. They thus reject the notion that investors perceived a distortion of bankruptcy priorities. To the contrary, bondholders of unionized firms reacted positively to the Chrysler bailout. This evidence suggests that bondholders interpreted the Chrysler bailout as a signal that the government will stand behind unionized firms. The results are consistent with the notion that too-big-to-fail government policies generate moral hazard in the credit markets.

Do fiduciary duties matter

Purpose – The purpose of this paper is to explore whether fiduciary duties impact the behavior of firm insiders. Trust law imposes stricter fiduciary obligations on insiders than corporate law does. This paper seeks to examine whether the difference in fiduciary duties impacts agency conflict, performance, and/or risk taking.Design/methodology/approach – The paper takes an empirical approach to answering the question by comparing mutual funds organized as trusts and as corporations. The existence of these two types of organizations within the same industry offers a unique laboratory for the study of the effects of fiduciary duties.Findings – Mutual funds organized in trust form charge significantly lower fees and take on less risk than equivalent mutual funds organized in corporate form. Evidence also suggests that the trusts tend to under‐perform their corporate counterparts, even after adjusting for differences in risk.Originality/value – Much of the existing literature on firm governance and investor p...

Competition in Financial Services: Evidence from British Mutual Funds

This paper explores the effects of competition on risk-taking behavior and firm performance within the financial services industry. It does so by exploiting a regulatory change that allowed new players to enter the British mutual fund industry. Exploiting this regulatory shock, we trace non-trivial linkages among industry competition, risk taking, and performance. Greater competition followed the regulatory liberalization, leading to a significant increase in risk-taking behavior of funds. Competition generated performance efficiencies, forcing underperforming funds to exit and halting earlier value-destruction. Competition, however, did not produce tangible cost savings for consumers of investment services.

Competition in Financial Services: Evidence from British Mutual Funds: Competition in Financial Services

This article explores the effects of competition on risk�?taking behavior and firm performance within the financial services industry. It does so by exploiting a regulatory change that allowed new players to enter the British mutual fund industry. Exploiting this regulatory shock, we trace nontrivial linkages among industry competition, risk taking, and performance. Greater competition followed the regulatory liberalization, leading to a significant increase in risk�?taking behavior of funds. Competition generated performance efficiencies, forcing underperforming funds to exit and halting earlier value destruction. Competition, however, did not produce tangible cost savings for consumers of investment services.