Kenneth A. Carow

THE WEALTH EFFECTS OF ALLOWING BANK ENTRY INTO THE INSURANCE INDUSTRY

The term bancassurance labels the delivery of insurance products through banks. With the recent Supreme Court decisions, in 1993, 1995, and 1996, upholding the rights of U.S. banks to sell annuities and insurance, the U.S. banking industry took the first steps toward the effective implementation of bancassurance. I analyze the returns surrounding the OCC and Supreme Court rulings that provide banks with the opportunity to sell annuities and other insurance products. Overall, insurance company stock returns are negative. Consistent with contestable market theory, the overall negative returns for the insurance industry show that the rulings, removing entry barriers to the insurance industry, significantly reduced the value of the insurance industry. Barriers to bank entry provided greater protection to some segments of the insurance industry than others. Stock price returns differ by industry segment. Insurance companies with insurance agencies and life/health insurance companies have the most negative stock returns, but insurance companies that market their products through a brokerage system have a more positive price reaction. The findings imply that banks may benefit brokerage firms that underwrite bank insurance sales; however, the sale of insurance by banks will increase competition for sales made by insurance agencies and life insurance companies. If the insurers have lost value, do banks gain this value? No, the average stock price of banks did not change surrounding the rulings that have allowed banks to enter the insurance sales market. The findings imply that investors anticipate that the value of banks entering the insurance market will not exceed the value of existing bank investment opportunities (zero long-term economic profits).

Debit, Credit, or Cash: Survey Evidence on Gasoline Purchases

Abstract We analyzed the consumer’s payment option to use debit, general purpose credit cards, gasoline credit cards, or cash. Based on the results from a nested multinomial logit model, we found consumers are more likely to use cash when they have less education, lower incomes, are middle-aged, and own fewer credit cards. Debit and credit card users are younger, more educated, and hold more credit cards. Respondents who use their debit card are less likely to use their gasoline credit card. The results suggest that greater debit card usage will place the greatest competitive pressure on the gasoline credit card program.

Citicorp–Travelers Group merger: Challenging barriers between banking and insurance

The Citicorp - Travelers Group merger increased the prospects for new legislation to remove the barriers between banking and insurance, resulting in a positive wealth effect for institutions most likely to gain from deregulation. Analysis of abnormal returns surrounding the merger show that life insurance companies and large banks (excluding Citicorp and Travelers Group) have significant stock price increases, while the returns of small banks, health insurers, and property/casualty insurers are insignificantly different from zero. This analysis provides evidence that investors expect large banks and insurance companies to receive significant benefits from recent congressional legislation removing barriers to bancassurance.

The interstate banking and branching efficiency act of 1994: A wealth event for acquisition targets

Abstract The Interstate Banking and Branching Efficiency Act (IBBEA) represented a significant step in the deregulation of interstate banking and branching. The IBBEAs passage had a positive wealth effect on a sample of large Bank Holding Companies (BHCs). Cross-sectional tests of abnormal returns reveal that BHCs having characteristics associated with acquisition targets and BHCs headquartered in states that prohibited interstate branching experienced significantly higher returns. Collectively, the evidence suggests that investors anticipated that the IBBEA would provide for increased corporate control activities among banks and that a large portion of the BHC gains stems from the relaxation of interstate branching restrictions.

Event-study evidence of the value of relaxing long-standing regulatory restraints on banks, 1970–2000

Abstract In a partial-equilibrium model, removing a binding constraint creates value. However, in general equilibrium, the stakes of other parties in maintaining the constraint must be examined. In financial deregulation, the fear is that expanding the scope and geographic reach of very large institutions might unblock opportunities to build market power from informational advantages and size-related safety-net subsidies. This paper reviews and extends event-study evidence about the distribution of the benefits and costs of relaxing long-standing geographic and product-line restrictions on U.S. financial institutions. The evidence indicates that the new financial freedoms may have redistributed rather than created value. Event returns are positive for some sectors of the financial industry and negative for others. Perhaps surprisingly, where customer event returns have been investigated, they prove negative.

Evidence of Early-Mover Advantages in Underwriting Spreads

I use a sample of 2370 public security offerings, comprising 64 financial security innovations and 4 traditional securities, to examine how investment banks are compensated for bearing underwriting risks related to new product development. I find strong evidence that underwriting fees decline as the innovation is widely adopted and competition enters the market, suggesting that underwriters be compensated for the additional risk associated with innovative securities. The data also reveal that underwriters seek greater compensation for security features that increase price volatility, which is consistent with the notion that underwriters value their position as a put option on the security. Finally, the inverse relationship between underwriting spreads and underwriter prestige suggests that larger, more reputable underwriters experience economies of scale.

State passage of interstate banking legislation: An analysis of firm, legislative, and economic characteristics

Abstract Forty-nine states and the District of Columbia enacted legislation reducing interstate banking restrictions between July 1982 and April 1993. For these 50 banking bills, deregulation increased the average price of bank stocks. Returns vary cross-sectionally by firm characteristics, regulatory features, and economic conditions. Returns are positively related to the characteristics of acquisition targets. Furthermore, returns are positively related to legislative features that increase the bargaining power of potential targets and economic conditions that are likely to encourage bank acquisition. These findings are consistent with the relaxation of geographic restrictions increasing activity in the corporate control market.

Plastic choices: Consumer usage of bank cards versus proprietary credit cards

Using survey data from retail and gasoline cardholders, we examine the substitution of general purpose (bank) cards for proprietary cards and how issuers can predict which consumers are most likely to substitute. Convenience and rebates are the primary reasons for using a bank card. However, consumers use their proprietary gasoline cards to keep purchase records and proprietary retail cards to obtain better service. These results help explain the growth in popularity of “co-branded” cards.

Determinants of the stock price reaction to leveraged buyouts

This paper investigates the determinants of leveraged buyout activity through the use of an abnormal return premium from the time of the first announcement through the final trading day. Consistent with the free. cash flow theory, firms with either high free cash flow or low Tobin’s q have higher abnormal returns. However, the returns to firms with both high free cash flow and low Tobin’s q are lower than firms with just one of these characteristics. Firms which substantially increase leverage and management buyouts with high insider ownership prior to the buyout have lower abnormal returns. Firms with lower risk, and therefore greater debt capacity, have higher abnormal returns.