Donald J. Mullineaux

Monitoring, loan renegotiability, and firm value: The role of lending syndicates

Abstract The positive response in capital markets to announcements of private financings is well documented and typically rationalized as a reflection of valuable monitoring and screening services provided by banks and other private lenders. This paper investigates the hypothesis that the capacity to renegotiate private debt contracts relatively inexpensively complements monitoring as a source of value to borrowers. The context for our study is lending by syndicates of private lenders. As the number of lenders increases, contracting costs increase and the value associated with the capacity to renegotiate should decline. Our evidence supports this hypothesis. We conduct additional tests to determine whether our results are robust to alternative interpretations, such as information leakage or the prospect that syndicate size proxies for information-related variables. Syndicate size remains related to the scale of the markets reaction, after taking various borrower and loan characteristics into account.

Are REITs inflation hedges

This study investigates the relationship between returns on Real Estate Investment Trusts (REITs) and anticipated inflation. It was motivated by the contradictory findings in the literature concerning the inflation-hedging characteristics of financial and real assets. We employ the methodology developed by Fama and Schwert, which represents a generalization of the Fisher equation. Two different measures of anticipated inflation were used to estimate the regression equations. The results show that REITs generally tend to behave like equities with respect to their hedging characteristics, regardless of how inflation expectations are measured. When we used a survey measure of anticipated inflation, however, we found some evidence that REITs are partial hedges against anticipated inflation.

Monitoring by financial intermediaries: Banks vs. Nonbanks

Recent empirical evidence indicates that captical markers respond positively to debt-financing announcements in the form of loan agreements. Nonbank firms, prompted largely by technological and telecommunications advances, have also entered the commercial lending market in recent years. This article finds evidence that borrowing firms experience positive abnormal returns upon announcing conclusions of loan agreements with nonbank firms. Our evidence suggests that nonbanks have replicated some of the unique attributes formerly enjoyed only by banks.

Economic effect of a smoke-free law in a tobacco-growing community

Objective: To determine whether Lexington, Kentucky’s smoke-free law affected employment and business closures in restaurants and bars. On 27 April 2004, Lexington-Fayette County implemented a comprehensive ordinance prohibiting smoking in all public buildings, including bars and restaurants. Lexington is located in a major tobacco-growing state that has the highest smoking rate in the US and was the first Kentucky community to become smoke-free. Design: A fixed-effects time series design to estimate the effect of the smoke-free law on employment and ordinary least squares to estimate the effect on business openings and closings. Subjects and settings: All restaurants and bars in Lexington-Fayette County, Kentucky and the six contiguous counties. Main outcome measures: ES-202 employment data from the Kentucky Workforce Cabinet; Business opening/closings data from the Lexington-Fayette County Health Department, Environmental Division. Results: A positive and significant relationship was observed between the smoke-free legislation and restaurant employment, but no significant relationship was observed with bar employment. No relationship was observed between the law’s implementation and employment in contiguous counties nor between the smoke-free law and business openings or closures in alcohol-serving and or non-alcohol-serving businesses. Conclusions: No important economic harm stemmed from the smoke-free legislation over the period studied, despite the fact that Lexington is located in a tobacco-producing state with higher-than-average smoking rates.

Agency costs and dividend payments: The case of bank holding companies

Abstract This paper examines the hypothesis that agency costs are a primary factor motivating dividend payments. Norohna et al. (1996) present evidence that the agency cost rationale is context specific and that dividends will not be driven by agency costs when other mechanisms exist for controlling agency problems. We argue that regulation of bank holding companies involves a context specific case where agency costs may be less relevant. Using an empirical methodology similar to Born and Rimbey’s (1993) , we find that the abnormal returns associated with dividend announcements by bank holding companies are not related to their external financing activities. The monitoring activities of the capital markets are not a rationale for dividend payments in the presence of bank regulation. Our results are robust to an alternative explanation involving the signaling role of new equity financings.

Bank marketing investments and bank performance

Purpose - The purpose of this paper is to examine empirically the effects of investments by US banks in advertising and promotion on their performance in the areas of profits and market share. Design/methodology/approach - The model presented in the paper is motivated by the theory of the profit function. We estimate a base model with a fixed-effects panel including an AR(1) disturbance over the period 2002-2006. To test for selection bias, we also estimate a Heckman model. Findings - It is found that bank profits and market share increase significantly with increased spending on advertising and promotion. Also, significant evidence is found of increasing returns to scale in this type of marketing expenditure. It is also found that increased expenditures on branching result in higher profits and increased market share, but without scale effects. The results are robust, the inclusion of variables is not suggested by profit function theory and corrected for prospective selection bias. Originality/value - The extant literature does not include research on the effectiveness of bank marketing from the viewpoint of its impact on profit performance. The findings should be of interest to academics in finance and marketing and to banking practitioners.

The Impact of the Federal Reserve's Source of Strength Policy on Bank Holding Companies

This study examines the impact of the establishment of the Federal Reserves source of strength policy on bank holding companies (BHCs). No significant change in share price or systematic risk was detected for BHCs with all healthy bank subsidiaries. In contrast, those BHCs with financially troubled bank subsidiaries experienced declines in share price and increases in systematic risk coinciding with the establishment of the policy. In addition, it was found that the negative wealth effect was detected in connection with the Feds charge against Hawkeye Bancorp of failing to serve as a source of strength and not in response to its subsequent source of strength policy statement.

The impact of bank venture capital on initial public offerings

Abstract Studies of the role of venture capital in the IPO process generally assume that all venture capitalists are alike. We relax this assumption and focus on the role of venture capitalists affiliated with either commercial or investment banks. We find that firms backed by these bank venture capitalists experience a lower opportunity cost of going public. This result holds mainly for small issuers, suggesting that banks are superior to traditional venture capitalists in providing certification services to this segment of the market. We also find that bank venture capital-backed firms experience a less negative abnormal return at lockup expiration, which is consistent with the hypothesis that banks are motivated, at least in part, by ‘relationship building’ when providing venture capital funding.