Iftekhar Hasan

The performance of de novo commercial banks: A profit efficiency approach

Abstract We examine the profit efficiency of US banks chartered between 1980 and 1994. Our results suggest that profit efficiency improves rapidly at the typical de novo bank during its first three years of operation, but on average takes about nine years to reach established bank levels. Excess branch capacity, reliance on large deposits, and affiliation with a multibank holding company are associated with low profit efficiency at de novo banks. De novo national banks are initially less profit efficient than are state-chartered de novos, perhaps reflecting differences in the chartering philosophy of federal and state bank regulators.

The Effects of Deregulation on the Performance of Financial Institutions: The Case of Spanish Savings Banks

This paper examines the impact of regulatory reform on the performance of Spanish savings banks. To this end it uses panel data for the period 1986-1995 and a flexible variable profit function that incorporates time-varying technical efficiency. The focus is whether increased competition brought on by deregulation affected performance of banks over time. Bank performance, measured by the percentage change in profitability, ceteris paribus, is decomposed into technical change and change in technical efficiency both of which are defined in terms of the profit function. We also examine output technical efficiency, which is defined in terms of the production possibility frontier. Several alternative models with different specifications of technical efficiency are used to check robustness of the results. Empirical results show declining levels of output technical efficiency along with a significantly high rate of technical progress. In spite of declining technical efficiency during this period, we find evidence of an increasing trend in productivity growth.

European Bank Performance Beyond Country Borders: What Really Matters?

The paper analyzes bank performance in the context of the integrated European Union market and its member countries. First, the paper investigates the technical efficiency of banks in each country sample using a Data Envelopment Analysis (DEA) model incorporating only banking variables. Then, a second DEA model is defined incorporating environmental factors together with banking variables in order to standardize the country-specific environmental conditions. Based on these models, the paper systematically analyzes the efficiency position for each of the European banking industry if average banks decide to operate in any other country. The results indicate that adverse (advantageous) environmental conditions are a positive (negative) factor for the home banking industry and being technically efficient appears to be a significant deterrence to foreign competition.

The Underpricing of Venture and Nonventure Capital IPOs: An Empirical Investigation

In this paper, we examine the premarket underpricing phenomenon within a group of venture-backed and a group of non-venture-backed initial public offerings (IPOs), using a stochastic frontier approach. Consistent with previous research, we find that venture-backed IPOs are managed by more reputable underwriters and generally are associated with less underwriter compensation. However, unlike other papers in the literature, we find that the initial-day returns of venture-backed IPOs on average, are, higher than the non-venture-backed group. We observe a significantly higher degree of premarket pricing inefficiency in the initial offer price of venture-backed IPOs. Further, our results show that a significant portion of the initial day returns is due to deliberate underpricing in the premarket.

The Impact of Out-of-State Entry on the Cost Efficiency of Local Commercial Banks

Abstract We examined the relationship between out-of-state entry and local bank cost efficiency in states which passed interstate banking laws prior to the Riegle-Neal Act. The cost efficiency of local banks worsened with increased entry in the years immediately following the implementation of local laws, but improved in response to increased entry in states which had been allowing out-of-state entry for at least six years. These results suggest that the Riegle-Neal Act will enhance competition and improve bank performance, particularly in local markets for which Riegle-Neal marks the first introduction of interstate competition.

A Rational Explanation for Home Country Bias

While modern portfolio theory predicts that investors should diversify across international markets, corporate equity is essentially held by domestic investors. French and Poterba (1991) suggest that in order for this bias to be justified, investors must hold optimistic expectations about their domestic markets and pessimistic expectations about their foreign markets. Tesar and Werner (1995) find existing explanations to the home equity bias unsatisfactory and conclude that the issue poses a challenge for portfolio theory. We develop a model that incorporates both the foregone gains from diversification and the informational constraints of international investing, and shows that home equity bias is consistent with rational mean-variance portfolio choice. Specifically, we prove that the nature of estimation risk in international markets can be responsible for this phenomenon. We show that when the cross-market variability in the estimation errors of international markets means far exceeds the cross-market variability in the means themselves, domestic dedication dominates international diversification. An examination of eleven international markets returns over the last twenty-five years, from the perspective of German, Japanese and U.S investors provides evidence consistent with this explanation.

An empirical analysis of fraud detection likelihood

Investigates the relative importance of potential factors associated with the likelihood of detecting fraud during the audit of financial statements. Based on a survey of 357 auditors, reveals auditing experience of the auditor and prior success of auditing organization in detecting fraud are constantly significant variables in detecting fraud for each audit cycle and combined cycle estimates. Certified public accountant certification, peer review, and organizational size have impact only on certain specific audit cycles. This study surveyed two types of auditor: first, certified public accountants specialized in auditing publicly held corporations (external); and second, government entities, and internal auditors specialized in auditing publicly held corporations (internal). The respondent auditors evaluated the degree of effectiveness of 218 auditing techniques in detecting fraud. These techniques were associated with four different audit cycles: acquisition and payment, inventory and warehousing, payroll and personnel and sales and collection.

Are consumers Ricardian? Evidence for Canada

Abstract This research derives three empirical implications of a well-specified model of consumer behavior, a model that nests both the possibility that consumers are Ricardian and an alternative theory. The hypothesis that consumers are Ricardian is then tested against this alternative hypothesis. The tests reveal that the hypothesis that consumers are Ricardian cannot be rejected. Moreover, even if Canadians are not Ricardian consumers, their behavior is unlikely to differ much from that of Ricardian consumers.

Promotional Expenditures, Market Competition, and Thrift Behavior

Abstract This article investigates the impact of promotional expenditures or advertising on the performance and asset and liability characteristics of firms in the U.S. savings and loan industry over the period 1985 to 1989. The results of a simultaneous equation analysis on a sample of 2,534 thrifts in the Southeast region indicate that promotional expenditures had a strong positive impact on the profitability of their non-interest business activities. The promotional expenditures of thrifts were found to be positively related to their investment in nontraditional assets and their reliance on purchased funds. The findings indicate that promotional expenditures have increased due to the increased competition in the local markets as a result of the introduction of interstate banking during the period.

The consumption-based capital asset pricing model: International evidence

Abstract This paper modifies the consumption-based capital asset pricing model (CCAPM) to allow for the possibility that households have finite horizons. Introducing finite horizons into CCAPM does not enhance its ability to account for real-world data. Risk is priced identically whether horizons are finite or infinite. Furthermore, the finite-horizon CCAPM accounts less well than the infinite-horizon CCAPM for the coexistence of low real money-market interest rates and high consumption growth rates and for the coexistence of a wide cross-country variation in the means and variances of consumption growth with a relatively narrow cross-country variation in real money-market interest rates.