Jeff Madura

Optimal Bank Interest Margin under Capital Regulation and Deposit Insurance

This paper examines the relationships among capital regulation, deposit insurance, and the optimal bank interest margin. In a model where loan losses are the source of uncertainty, changes in capital regulation or deposit insurance premiums have direct effects on the banks interest margin. An increase in bank capital requirement or in deposit insurance premiums results in a reduced interest margin under nonincreasing risk aversion. Comparative static analysis also explores the relation between asset quality and interest margin. It is shown that a mean-preserving spread of the distribution of loan losses results in a reduced margin.

REIT Characteristics and the Sensitivity of REIT Returns

Previous research on the returns to real estate investment trusts (REITs) has considered whether REITs are systematically exposed to general stock-market risk and interest-rate risk. This study examines how the sensitivity of REIT returns to these factors may be influenced by various REIT characteristics. Using a sample of publicly traded REITs, we estimate the sensitivity of REIT returns to stock market and interest-rate changes. We then propose and implement a model for testing whether differences in asset structure, financial leverage, management strategy, and degree of specialization in the REIT portfolios are related to their sensitivity to interest rate and market risk. Our results permit us to offer some inferences about how REITs can alter their risk exposure by managing these characteristics.

Sources of Bank Interest Rate Risk

We investigate bank stockssensitivity to changes in interest rates and the factors affecting this sensitivity. We focus on whether the exposure of commercial banks to interest rate risk is conditioned on certain balance sheet and income statement ratios. We find a significantly negative relation between bank stock returns and changes in interest rates over the period 1991-1996. We also find that bank characteristics measured from basic financial statement information explain bank stockssensitivity to interest rate changes. These results suggest that bank managers, analysts, and regulators can use this information to assess the relative risk exposure of banks. Copyright 2002 by the Eastern Finance Association.

Long-term valuation effects of bank acquisitions

Abstract This study measures the abnormal performance of banks subsequent to their acquisitions of other banks. We find a strong negative share price reaction following the acquisition, which tends to continue over a 36-month period. The results suggest that banks generally do not realize the potential benefits from acquisitions, or that any advantages are offset. The long-run valuation effects across the acquiring banks were found to be more favorable for banks that (1) made acquisitions within their existing markets, (2) experienced relatively poor pre-acquisition performance, and (3) had relatively low pre-acquisition growth.

Currency Option Pricing with Stochastic Domestic and Foreign Interest Rates

This study develops a currency option pricing model under stochastic interest rates when interest rate parity holds, and it is assumed that domestic and foreign bond prices have local variances that depend only on time. We demonstrate how existing currency option models are simply derived from one framework. Empirical tests employing transactions option data reveal that a particularly simple form of the stochastic rate model is uniformly more accurate than a constant rate model for all boundaries and maturities tested.

Why do contagion effects vary among bank failures

Abstract Many of the previous studies on contagion effects in the banking industry focused on the failure of a large bank to determine whether the adverse effects spread to other banks. Yet, little is known whether other publicized bank failures cause contagion effects, and why the effects may vary among bank failures. Given the changes in the banking environment over time, contagion effects could be conditioned on the characteristics of the failing bank and of the banking environment at that time. We assess 99 publicized bank failures over the 1980–1996 period, and find that contagion effects exist in general for the surviving rivals of the failed bank. The degree of contagion effects varies over time (among bank failures), and is stronger when the failed bank is a multibank holding company, when the failed bank is publicly held, when the failed bank is relatively large, when the rivals are relatively small, and when the rivals have relatively low capital levels. The contagion effects are less pronounced in the period following the passage of FIRREA. Furthermore, the total risk-shifts of surviving rival banks in response to the announcement of a failed bank are inversely related to their capital level, and total risk-shifts of rival banks are less pronounced for failures occurring just after the passage of FIRREA. The results suggest that a bank’s exposure to possible contagion effects due to a bank failure can be partially controlled by a bank’s managerial policies and by regulatory policies.

Explaining Variation in Risk Across Insurance Companies

The purpose of this study is to determine what firm-specific factors affect the risk of insurance companies. Traditional methods used to identify potential failures have been severely criticized. Thus, alternative approaches to risk assessment should be of interest to investors and managers of these companies. Models for measuring the impact of factors on risk are developed and empirically tested. The models employed explain a high proportion of variation in risk levels across companies. The sensitivity of insurance company risk to financial characteristics vary with the variable used as a proxy for risk and the type of insurance company assessed. Given the strong relationships between firm-specific characteristics and company risk, it appears that the risk of insurance companies can be effectively controlled with proper management.

Why are some corporate earnings restatements more damaging

If an earnings restatement is simply an accounting adjustment to old information that is no longer being used for valuation purposes, it will not necessarily cause a change in a firms value. However, the restatement may contain information that is used to reassess the future cash flows and credibility of the firm. It is found that the earnings restatements elicit a strong negative market response. Moreover, the market response is conditioned on the content of the earnings restatements. The market-imposed penalty is more severe when the restatement is attributed to an adjustment in revenue, when it is forced by the auditor or the SEC, and when the revised earnings level is lower than two proxies used to measure expected earnings.

Overreaction of Exchange-Traded Funds During the Bubble of 1998-2002

This study of overreaction is motivated by the unique characteristics of exchange-traded funds (ETFs), which should contribute to market efficiency. Since ETFs represent portfolios of stocks, they may not be as susceptible to short-term overreaction as individual stocks. In addition, they can be traded throughout the day and can be sold short, which might further limit potential overreaction. Yet, the tradability of ETFs may allow unusual pressure on ETF prices that is not initiated by price movements of all the component stocks. We find substantial overreaction of ETFs during normal trading hours (9:30 a.m. to 4 p.m.) and after hours, which presents opportunities for feedback traders. Extreme price movements of ETFs occur more frequently after hours. Yet, the after-hours correction of extreme price movements that occurred that day is more pronounced than the day correction of extreme stock price movements that occurred in the previous after-hours period, even after controlling for ETF type and other potential confounding effects. The degree of overreaction is also more pronounced for international ETFs.

Operating characteristics, risk, and performance of born‐global firms

Purpose – To determine what characteristics distinguish firms that conduct international business within three years of going public and six years from founding, and how these firms perform. Design/methodology/approach – A logistic regression analysis is used to identify characteristics that distinguish firms that are international at the time they go public, versus those that are not. The paper also assesses post-IPO performance and apply multivariate analysis to determine how performance varies among these firms. Findings – Compared to firms of similar age who do not pursue rapid internationalization, born-global firms are generally larger, more diversified, and have more venture capital backing. Their founders, board members and managers exhibit more international experience. The returns 12 and 18 months post-IPO are significantly higher for born-global firms than for a control sample of firms who do not engage in rapid internationalization. Furthermore, those born-global firms with joint ventures or acquisitions in several countries perform better than those that only export within the first six years since their inception. Research limitations/implications – Managerial implications include having a board of directors with sound international business experience as well as using a venture capital firm to provide monitoring and oversight of operations at home and in the foreign market. Originality/value – This paper is original in that it is the first to provide a financial markets-oriented empirical investigation of the “born-global” phenomenon using a sample of newly public American firms.