Gary B. Gorton

Banks and loan sales Marketing nonmarketable assets

A defining characteristic of bank loans is that they are not resold once created. Yet, in 1989 about

Clearinghouses and the Origin of Central Banking in the United States

240 billion of commercial and industrial loans were sold, compared to trivial amounts five years earlier. Selling loans without explicit guarantee or recourse is inconsistent with theories of the existence of financial intermediation. What has changed to make bank loans marketable? In this paper we test for the presence of implicit contractual features of bank loan sales contracts that could explain this inconsistency. In addition, the effect of technological progress on the reduction of information asymmetries between loan buyers and loan sellers is considered. The paper tests for the presence of these features and effects using a sample of over 800 recent loan sales.

Bank suspension of convertibility

The pre-1914 U.S. banking industry is not easily characterized as a market operating through a price system. The endogenous development of the clearinghouse as the industrys organizing institution can be explained by inherent characteristics of demand deposits. During banking panics the clearinghouse united banks into an organization resembling a single firm which produced deposit insurance.

Eat or Be Eaten: A Theory of Mergers and Firm Size

Abstract A banking panic occurs when depositors at all banks seek a large reduction in their.deposit holdings. Suspension of convertibility of demand deposits into currency was the banking systems response to a banking panic. When depositors are incompletely informed about the state of bank investments, a panic can occur when depositors expect capital losses, conditional on having observed noisy indicators of the state of bank investments. Banks, with superior information about the investments, can signal to depositors, by suspending convertibility, that continuation of the long-term investments is mutually beneficial.

Stock price manipulation, market microstructure and asymmetric information

We propose a theory of mergers that combines managerial merger motives and a regime shift that may lead to some value-increasing merger opportunities. Anticipation of the regime shift can lead to mergers, either for defensive or positioning reasons. Defensive mergers occur when managers acquire other firms to avoid being acquired themselves. Mergers may also allow a firm to position itself as a more attractive takeover target and earn a takeover premium. The identity of acquirers and targets and the profitability of acquisitions depend, among other factors, on the distribution of firm sizes within an industry. ∗ The views in this paper are those of the authors and may not represent the views of the Federal Reserve Bank of Chicago or the Federal Reserve System. We thank Amit Goyal, Cabray Haines, Shah Hussain, Feifei Li, and Yihui Wang for excellent research assistance. We are grateful for helpful comments and suggestions by Andres Almazan, Antonio Bernardo, Sanjai Bhagat, Bhagwan Chowdhry, Michael Fishman, Gunter Strobl, S. Viswanathan, Ivo Welch, seminar participants at the University of Houston, Purdue University, and the University of Wisconsin-Madison, and conference participants at the AFA 2000 meetings and the Texas Finance Festival 2000. This is a substantially revised version of an early draft that was presented at these conferences. Of course, all remaining errors and shortcomings are solely our responsibility. Introduction The 1990s produced the greatest wave of mergers in U.S. history. Between 1995 and 2000, U.S. merger volume set a new record every year, expanding from

Corporate governance, ownership dispersion and efficiency: Empirical evidence from Austrian cooperative banking

800 billion in 1995 to

Banking in transition economies: does efficiency require instability?

1.8 trillion in 2000. Due to the growth and importance of mergers, a substantial academic literature has developed to examine them. However, existing merger theories remain unable to reconcile certain key facts about merger activity. Two of the most important stylized facts about mergers are the following: First, the stock price of the acquirer in a merger decreases on average when the merger is announced. Recent work shows that this result is driven by negative announcement returns for very large acquirers, while small acquirers tend to gain in acquisitions (Moeller et al. (2004) and Kahl and Rosen (2002)). Second, mergers concentrate in industries that have experienced regime shifts in technology or regulation. Mergers may provide an efficient strategy for managers coping with such a shift and seeking to maximize the value of their firms (see, for example, Mitchell and Mulherin (1996), Andrade, Mitchell, and Stafford (2001), and Andrade and Stafford (2004)). The view that mergers are an efficient response to regime shifts by value-maximizing managers – the so-called neoclassical merger theory (see, for example, Mitchell and Mulherin (1996), Weston, Chung, and Siu (1998), and Jovanovic and Rousseau (2002)) can explain the second stylized fact. However, it has difficulties explaining negative abnormal returns to acquirers. Theories based on managerial self-interest or a desire for larger firm size and diversification (for example, Morck, Shleifer, and Vishny (1990)) can explain negative acquirer returns. However, they cannot explain why mergers are concentrated in industries undergoing a regime shift. This paper provides a theory of mergers that combines elements from both of these schools 1 See “The Year of the Mega Merger...”, Fortune Magazine, January 11, 1999, “Tales of the Tape: ’99 M&A Vol Hits Record...”, Dow Jones News Service, December 29, 1999, and “Year-End Review of Markets & Finance 2000..”, The Wall Street Journal, January 2, 2001. 2 Studies that find negative average returns to bidders include Asquith, Bruner, and Mullins (1987), Banerjee and Owers (1992), Bradley, Desai, and Kim (1988), Byrd and Hickman (1992), Jennings and Mazzeo (1991), Servaes (1991), Varaiya and Ferris (1987), and You, Caves, Smith, and Henry (1986). See Table 86 in Gilson and Black (1995). See also the recent survey by Andrade, Mitchell, and Stafford (2001). Bradley and Sundaram (2004) find, using a much larger sample of mergers in the 1990s, that most acquirers experience positive announcement returns. The negative announcement returns are concentrated among stock financed acquisitions of public targets that are large relative to the acquirer. 3 Other papers in which managerial motivations for mergers are prominent include Amihud and Lev (1981), Shleifer and Vishny (1989), and May (1995). Theoretical papers representing the neoclassical tradition include Gort (1969) and Rubin (1973). Negative acquirer announcement returns can be explained without appealing to agency conflicts between managers and owners if the takeover announcement reveals negative information about the acquirer’s profitability relative to expectations (see McCardle and Viswanathan (1994) and Jovanovic and Braguinsky (2004)).

Chapter 8 Financial intermediation

In recent years, there has been a large literature on how stock exchange specialists set prices when there are investors who know more about the stock than they do. An important assumption in this literature is that there are *liquidity traders* who are equally likely to buy or sell for exogenous reasons. It is plausible that some buyers have cash needs and are forced to sell their stock. However, buyers will usually be able to choose the time at which they trade. It will be optimal for them to minimize the probability of trading with informed investors by choosing an appropriate time to trade and clustering at that time. This asymmetry means that when liquidity buyers are not clustering, purchases are more likely to be by an informed trader than sales so the price movement resulting from a purchase is larger than for a sale. As a result, profitable manipulation by uninformed investors may occur. A model where the specialist takes account of the possibility of manipulation in equilibrium is presented.

Equilibrium Investment and Asset Prices under Imperfect Corporate Control

Abstract The ownership structures of firms are endogenous. This makes it difficult to produce direct evidence on the Berle and Means [Berle, A.A., Means, G.C., 1932. The Modern Corporation and Private Property, New York.] hypothesis that corporate governance becomes less efficient as the degree of separation of ownership and control increases. We address this issue by studying Austrian cooperative banking, an organizational form in which the ownership structure is exogenous. We show that firm performance declines as the number of cooperative members increases, corresponding to a greater separation of ownership and control. We also provide direct evidence on another theory that is difficult to test, namely, the efficiency wage hypothesis. We show that the decline in firm performance as the number of shareholders increases is due to an increase in efficiency wages.

Banking Panics and the Origin of Central Banking

Efficient banks are essential for capitalist economies, yet bank failures result in costly externalities, leading to a potential conflict between the risk choices of private agents that own banks and socially optimal choices. This conflict is particularly severe in transition economies. Evidence suggests that these economies have banking systems which are both prone to failure and inefficiently small; established banks suffer from an overhang of bad loans, and implicit subsidies often favor continued lending to inefficient state-owned enterprises (SOEs). If a regulator seeks to impose higher capital standards to reduce the odds of bank failure, privately-held banks may instead exit the industry, shrinking a system that is already inefficiently small. If loans to SOEs are subsidized so as to mitigate repercussions from their failure to workers and to banks, established banks may prefer such loans over riskier unsubsidized loans to entrepreneurial firms. Encouraging entry into banking may mitigate this problem, but the new banks will be quite risky and prone to failure. The upshot is that, in transition economies, achieving an efficient banking system is likely to require significant instability.