Christopher M. James

Some evidence on the uniqueness of bank loans

Abstract This paper presents evidence that banks provide some special service with their lending activity that is not available from other lenders. I find evidence that bank borrowers, not CD holders, bear the cost of reserve requirements on CDs. In addition, I find a positive stock price response to the announcement of new bank credit agreements that is larger than the stock price response associated with announcements of private placements or public straight debt offerings. Finally, I find significantly negative returns for announcements of private placements and straight debt issues used to repay bank loans.

Where do merger gains come from? Bank mergers from the perspective of insiders and outsiders

Abstract Traditional studies fail to find conclusive evidence that bank mergers create value. We analyze a sample of the largest bank mergers between 1985 and 1996. For a subset of this sample, we obtain management estimates of projected cost savings and revenue enhancements. We find that recent mergers appear to result in positive revaluations of the combined value of bidder and target stocks. Although not as large as the present value of managements estimates, with the bulk of the revaluation being attributable to estimated cost savings rather than projected revenue enhancements.

Capital market frictions and the role of internal capital markets in banking

Abstract The extent to which banking firms face external financing costs when funding new loans has important implications for the role of banks in the corporate capital acquisition process, for the effectiveness of monetary policy and for the impact of capital requirements. We investigate this issue by examining the cash-flow sensitivity of loan growth at bank holding companies, and by examining the extent to which holding companies establish an internal capital market to allocate capital among their various subsidiaries. Overall, we find that loan growth at subsidiary banks is more sensitive to the holding companys cash flow and capital position than to the banks own cash flow and capital. Moreover, we find that bank loan growth is negatively correlated with loan growth among the other subsidiaries within the holding company. Overall, this evidence suggests that bank holding companies establish internal capital markets to allocate scarce capital among their various subsidiaries.

Do Banks Provide Financial Slack

We study the decision to choose bank debt rather than public securities in a firms marginal financing choice. Using a sample of 500 firms over the 1980 to 1993 time period, we find that firms are relatively more likely to choose bank loans when variables that measure asymmetric information problems are elevated. The sensitivity of the likelihood of choosing bank debt to information problems is greater for firms with no public debt outstanding. These results are consistent with the hypothesis that banks help alleviate asymmetric information problems and that firms weigh these information benefits against a wide range of contracting costs when choosing bank financing. Copyright The American Finance Association 2002.

Borrowing relationships, intermediation, and the cost of issuing public securities

Abstract This paper investigates how an established borrowing relationship affects the costs associated with initial public offerings of equity. Our model illustrates how the existence of a borrowing relationship reduces the ex ante uncertainty about the value of the issuing firms equity in the secondary market. If underpricing is related to uncertainty, a borrowing relationship can reduce underpricing. Empirically, we find that, other things equal, IPOs of firms with previously established borrowing relationships are underpriced substantially less than other IPOs.

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 banks charter. This result is inconsistent with the hypothesis that compensation policies promote risk taking in banking.

The use of loan sales and standby letters of credit by commercial banks

Abstract This paper examines the incentives banks have to engage in ‘off balance sheet’ activities such as commercial loan sales and the issuance of standby letters of credit (SLCs). I show that loan sales and loans backed by SLCs have payoff characteristics similar to secured debt. Like secured debt, off balance sheet activities permit banks to sell a portion of the cash flows associated with new investment oppurtunities. This ability permits banks to invest in loans with positive net present values that they would pass up if restricted to deposit financing. An examination of the risk premium on large certificates of deposit provides evidence consistent with the model.

Do Relationships Have Limits? Banking Relationships, Financial Constraints and Investment

Using detailed information on the debt structure of 250 publicly traded U.S. firms over the 1980-93 period, we find that the sensitivity of investment to internally generated funds increases with a firms reliance on bank financing. Bank-dependent firms also hold larger stocks of liquid assets and have lower dividend payout rates. However, the greater cash sensitivity of investment for bank-dependent firms arises only for the largest capital expenditures (relative to assets). For most levels of investment spending, bank-dependent firms appear to be slightly less cash-flow-constrained than firms with access to public debt markets. Copyright 2001 by University of Chicago Press.

Asset sales by financially distressed firms

Abstract This paper examines asset sales by financially distressed firms. Contrary to the results for healthy firms, we find significantly lower returns to shareholders when asset sales proceeds are used to repay debt than when sales proceeds are retained by the firm. We find that asset sales proceeds are more likely to be paid out to creditors, as opposed to being retained by the firm, the larger the proportion of short-term senior bank debt in the firms capital structure and the poorer the selling firms investment opportunities. Our results suggest that creditors significantly influence the liquidation decisions of financially distressed firms.

Do bank internal capital markets promote lending

Abstract We analyze the relation between organization structure and bank lending. Loan growth among banks that are affiliated with a multi-bank holding company is shown to be less sensitive to the banks cash flow, capital position and liquidity relative to unaffiliated banks. Our results, coupled with the recent findings of Houston et al. (Houston, J.F., James, C., Marcus, D., Journal of Financial Economics 46 (1997) 135–164.), suggest that bank holding companies establish internal capital markets in an attempt to allocate capital among their various subsidiaries. We also find that affiliated banks are more responsive to local market conditions than their unaffiliated counterparts. This finding suggests that despite the concerns raised regarding bank consolidation – affiliated banks are willing to lend in local markets as long as the opportunities are there.