Craig Brown

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.

Marketable Securities: Storage or Investment?

Corporate liquidity demand models view investments in marketable securities as a relatively simple store of excess liquidity (the storage view). However, compared to excess cash, marketable securities have more in common with investment and payout. For firms with repatriation tax exposure, constrained to a limited payout and permanent foreign real-investment plans, the average coefficient difference between excess cash and market investment regressions is zero. For all firms, the difference is 12%. The findings suggest that market investment is no longer a passive store of excess liquidity. Rather, market investment is associated with general investment and liability-driven investment.

The Lure of the Slant and the Banality of the Conservative

Forecast bias is associated with lower short-term returns. However, bias is not equivalent to optimism when information-biased analysts exhibit processing errors. Late-tenure and early-forecasting analysts are incentivized to be strategically optimistic. Using the timing variables for identification, this paper finds that for upward revisions, a 1% increase in analyst optimism results in a 12 basis-point greater two-day return. Under normal conditions, the overpriced (underpriced) stocks covered by late-tenure (early-tenure) analysts do (do not) experience a price correction; the under-reaction engenders an analyst-optimism portfolio alpha of 62 basis points per month. The findings suggest that asset prices increase with strategic optimism.

Corporate Market Investments: Risk, Returns, and Governance

This paper studies the risk associated with corporate market investments. For the years 1970 to 2011, market investment returns are shown to be risky and inefficient. The value-weighted average firm-level portfolio risk is 60%; the Sharpe ratio is merely 4.7%. Using a novel fiscal-year factor pricing approach, I show that the market beta for all firms is 27%. Portfolio cash-flow risk relative to assets is comparable to operating cash-flow risk, and market investment returns substitute for accounting manipulation. Moreover, market investment risk decreases with institutional ownership. The findings suggest that market investment risk is substantial and associated with agency costs.

Coordinated Enticement: Analyst Optimism and CEO Optimism

This paper studies the relation between analyst optimism and CEO optimism. The CEO optimism indicator is derived from unexercised option moneyness. Bias, a common measure of analyst optimism, is partly driven by information bias. To identify the correlation between CEO optimism and analyst optimism, I use a control function to control for information bias. When acting on information, analysts expect lower earnings from optimistic CEOs; the average partial effect of information bias (or expected earnings) is -33%. However there is a positive correlation between analyst optimism and CEO optimism; the average partial effect of optimism is 29%. These results remain robust when controlling for year effects and firm fixed effects. The evidence suggests that correlated optimism is driven by behavioral CEO optimism and strategic analyst optimism; strategically optimistic analysts cover behaviorally biased CEOs in an effort to influence investors.

Keeping It in the Family: The Role of a Bank in Business Group Tunneling

We examine the role of a bank within a business group consisting of favored firms with greater owner rights, and disadvantaged firms with fewer owner rights. Our results suggest that a bank allows a family owner to tunnel wealth by offering high-yield subordinated debt to favored firms, increasing favored-firm financial revenue; while granting high-interest-rate loans to disadvantaged firms, increasing disadvantaged-firm financial expenses. Correspondingly, a sales-growth shock to the most disadvantaged group firm is met with more financial revenue for favored firms. For disadvantaged firms within family groups, there is also less investment efficiency in the presence of a bank.

Economic Leadership and Growth

Economies governed by former economics students grow faster than economies governed by leaders with other education backgrounds; a result which is most evident for presidents. Faster growth (average growth) occurs during an economic leader’s first year (entire tenure), primarily through investment. When focusing on close elections which “quasi-randomize�? economic leadership, I find a large effect that is robust controlling for a leader’s advanced education. Investors seem to hasten their activity in anticipation of their economic leader’s eventual reduction of the top personal income-tax rate. Overall, the findings suggest that economic leaders improve short-term growth through the anticipation of policy changes.

The Politics of Government Financial Management: Evidence from State Bonds

In the

The Cash-Flow Risk of Corporate Market Investments

3.7 trillion U.S. state-and-local-government-bond market, greater issuance costs (lower issue-prices and greater underwriting fees) benefit financial institutions, while costing taxpayers. Campaign contributions by politically supportive underwriters can be associated with lower issuance costs. Alternatively, contributions can influence a politician to accept greater costs. This papers evidence suggests that contributions influence politicians: In the absence of an underwriter auction, underpricing increases with the chosen underwriters contributions relative to others. Moreover, the difference in the fees charged by contributing underwriters and those charged by non-contributing underwriters is 2.9%. In the presence of an underwriter auction, these results are statistically insignificant.

Too Many to Fail? Evidence of Regulatory Forbearance When the Banking Sector Is Weak

Over a long span of time, US aggregate risk has decreased while the risk for US nonfinancial corporations (or firms) has increased substantially.1 This general finding has been observed using sales (Comin and Mulani, 2006), stock returns (Campbell et al., 2001) and cash flows (Irvine and Pontiff, 2009) in addition to earnings,2 employment and capital investment (Comin and Philippon, 2005).