Kenneth N. Daniels

The Effect of Credit Ratings on Credit Default Swap Spreads and Credit Spreads

This article investigates empirically the relationship between credit spreads and credit default swap spreads and how these spreads react to changes in credit ratings. The authors’ findings suggest a clear relationship between the two spreads and that credit rating and macroeconomic factors add significant information to this relationship. Furthermore, both spreads react to changes in credit ratings, and in particular to downgrades. The authors discover anticipated and lagged effects of changes in credit rating and differences between investment grades. Interestingly, the CDS market seems to react faster and more significantly than the bond market to changes in credit ratings.

An empirical analysis of differences in Black and White asset and liability combinations

Abstract This study analyzes data from the 1992 Survey of Consumer Finances and finds significant differences in asset and liability combinations between Black and White households. In addition, White households are identified as having significantly greater net worth and financial assets relative to Black households. We are unable to show that the net worth of Black households is constrained by barriers in financial markets. Our study investigates how this difference in net worth could engender different financing decisions. We find that Black households are significantly more risk averse in their choice of assets. Further, we find that Black households typically pay higher rates for several types of credit instruments, even though they self identify as conducting significantly more extensive searches in the financial markets. JEL classification: D10; D31; J15

The Impact of Technological Change on the Currency Behavior of Households: An Empirical Cross-Section Study

The purpose of this article is to determine the impact of adoption of new technology (ATMs) by households on their behavior in holding currency inventories. Previous studies hypothesize that households respond to the availibility of ATMs by reducing their currency inventories. To test this hypothesis, data from two large household surveys are utilized. It is shown that the use of technology has a substantial impact on the currency inventories held by households. Copyright 1994 by Ohio State University Press.

Debt Maturity, Credit Risk and Information Asymmetry: The Case of Municipal Bonds

Using a system of equations approach, this paper empirically tests the impact of credit quality, asset maturity, and other issuer and issue characteristics on the maturity of municipal bonds. We find that under conditions of lower information asymmetry that prevails in the municipal sector, higher-rated bonds have longer maturities than low-rated bonds. This result differs from that observed in the corporate sector. Overall, our results support the asset maturity hypothesis. In addition, our analysis finds that fundamentals matter. Issue features that provide additional protection or convenience to the investor tend to increase debt maturity.

Total Factor Productivity Growth in U.S. Commercial Banking for 1935–1991: A Latent Variable Approach Using the Kalman Filter

This paper studies total factor productivity (TFP) in U.S. commercial banking for 1935–1991. TFP can contain a procyclical bias when some input factors are not freely variable, causing their shadow and market prices to differ. We correct this bias in TFP by decomposing it into its latent stochastic trend and cyclical components by employing the Kalman filter. Using the FDICs annual aggregate data on U.S. insured commercial banks, we report that the stochastic trend has been positive during 1935–1991, with an average annual growth rate of 2.27%, and that it exhibits a decaying time path. We attribute the positive TFP growth to technical change.

The impact of technological change on household transactions account balances: An empirical cross-section study

The purpose of this article is to determine the impact of adoption of new technology (ATMs) by households on their behavior in holding transactions balances. Previous studies show that households respond to the, availability of ATMs by reducing their currency inventories. Reduced currency needs may be reflected in a reallocation of funds from currency to transactions balances. To test this hypothesis, data from two large household surveys are utilized. It is shown that use of technology has a substantial impact on the transactions balances held by households.

The Competitive Impact of Commercial Bank Underwriting on the Market for Municipal Revenue Bonds

This paper examines the impact of commercial bank entry in the market for municipal revenue bonds. We show that issues underwritten by commercial banks have lower underwriter spreads but not lower yields relative to issues underwritten by nonbank investment firms. In particular, this is more significant for non-investment-grade bonds underwritten by commercial banks. Our results are consistent with the interpretation that bank entry has resulted in increased competition in the municipal revenue bond market and that the lower yields observed for bank-underwritten commercial bonds may be due to banks having private information. Overall, our results suggest that policy changes leading to the relaxation of restrictive provisions concerning bank underwriting of municipal revenue bonds have had beneficial effects.

An empirical analysis of net interest cost, the probability of default and the credit risk premium: a case study using the Commonwealth of Virginia

Explains the rating system for US municipal bonds and its effect on borrowing costs, reviews relevant research and provides a study of the factors affecting grading by rating agencies in Virginia using 1995 data. Explains the methodology and presents the results, which identify five significant determinants of favourable ratings. Shows that net interest costs are lower when other rates of interest are low, real estate taxes are high (though not excessive), total municipal debt levels are low and credit risks are low. Confirms that bond ratings capture additional information and that a drop in ratings will raise net interest costs substantially. Considers consistency with other research and the implications of the findings for participants in the municipal bond market.

The Existence of Corporate Bond Clawbacks (IPOCs): Theory and Evidence

Clawback provisions allow the issuer to partially redeem a bond issue often within three years of issuance using proceeds only from new equity issues. Empirical evidence indicates the clawback provision is rarely exercised. This poses an interesting dilemma as clawback provisions are an expensive source of funding, often commanding yields that are significantly higher than traditional corporate bonds. We develop a simple model that provides a rationale for the scarcity of call redemptions and the higher yields of clawback bonds. The model predicts a relation between issuance of clawback bonds, cash flow volatility and the probability of renegotiation of clawback debt contracts.

Efficiency Estimation of U.S. Commercial Banking: A Stochastic Frontier Approach Using Gibbs Sampling

Banking cost or X-efficiency is dependent upon the frontier analysis method used to measure the efficient frontier. Parametric methods require estimation of a composite error model where the banks efficiency parameter is a portion of the banks deviation from the cost frontier of the banking cost function. In this article Bayesian-based Markov chain Monte Carlo (MCMC) methods, specifically the Gibbs sampler supplemented by data augmentation, are used for the first time to estimate the cost efficiency of a sample of U.S. commercial banks. Sampling-based computational methods are shown to provide a straightforward and reasonable approach to determining bank cost efficiency. Additionally, such new analytical capabilities provide summary statistics for statistical testing previously beyond the scope of classical methods.