L. Paige Fields

Do Bank Loan Relationships Still Matter

James (1987) and Lummer and McConnell (1989) find that during the 1970s and 1980s the market responded positively to announcements of bank lending agreements. However, many of the advantages associated with bank lending relationships have largely disappeared since the 1980s due to financial system changes and greater availability of and less costly financial information. We find that bank loan announcements produced positive abnormal returns in the 1980s, but by the latter part of our sample period those announcement returns disappear entirely. We do find that bank loan relationships may still be valuable to smaller, poorer performing firms or during periods of high credit risk spreads.

On the compensation implications of commercial bank entry into investment banking

Abstract We provide evidence regarding the extent to which commercial banking organizations that have entered investment banking have adopted pay-performance compensation systems that are like those used by investment banks. We find that pay-performance sensitivities for these banks once they begin securities underwriting are very similar to the sensitivities for commercial banks that have chosen not to enter investment banking. We also find that pay-performance sensitivities for both types of commercial banks are less than for investment banks.

Is Bancassurance a Viable Model for Financial Firms

The bancassurance (i.e., bank and insurance company combinations) model for financial firm architecture has been widely used in Europe and recently has been adopted by U.S. financial firms. We provide evidence regarding the viability of bancassurance combinations for U.S. and non-U.S. mergers between 1997 and 2002. We find positive gains and no significant risk shifts for shareholders of bidding firms, and that higher CEO stock ownership results in less positive gains for shareholders. These and other results suggest that bancassurance firms are viable entities that may play an important role in the future evolution of the U.S. financial system.

Managerial Voting Rights and Seasoned Public Equity Issues

This paper examines the relation between changes in firm value associated with public equityissue announcements and management ownership, nonmanagement large block ownership, institutional ownership, information variables, and leverage. A significant negative relationis found between the ratio of announcement period abnormal returns to changes in management ownership and the level of management ownership. This result is consistent with Stulz (1988) who predicts that firm value increases at a decreasing rate as management control of voting rights increases. This finding is also consistent with improvements in alignment of interests, where such improvements diminish as management becomes entrenched. The announcement period abnormal returns appear to be unrelated to outside blockholdings (large block ownership or institutional holdings), information variables, or leverage.

Risk-Taking and Performance of Public Insurers: An International Comparison

We investigate how investor protection, government quality, and contract enforcement affect risk taking and performance of insurance companies from around the world. We find that better investor protection results in less risk taking, as do higher quality government and greater contract enforceability. However, we find only limited evidence that these factors influence firm performance. We conclude that better overall operating environments result in less risk taking by insurers without the concomitant decline in performance. These results imply that better investor protection environments benefit policyholders and outside stockholders by preventing corporate insiders from expropriating wealth from policyholders and outside stockholders.

A Comparison of Underwriting Costs of Initial Public Offerings by Investment and Commercial Banks

We examine differences in underwriting costs between commercial bank Section 20 underwritten initial public offerings (IPOs) and investment-bank-underwritten IPOs. Our results suggest that total underwriting costs (gross margin plus underpricing) are significantly lower for commercial bank IPOs. The lower cost for commercial-bank-underwritten IPOs is attributable to less severe underpricing for these issues. Gross margin costs generally do not differ between commercial-bank- and investment-bank-underwritten issues. Furthermore, we find that the long-run stock price performance for bank-underwritten issues is superior to that of investment-bank-underwritten issues. That is, lower underpricing for Section 20 underwritten issues may not be a short-run phenomenon. Rather, there appears to be a favorable outcome for investors in the long run for holding IPOs underwritten by Section 20 commercial banks. These results are inconsistent with the conflict of interest hypothesis often associated with merging commercial investment bank functions in one organization.

The Importance of Call Delays and Cash Flow Positions in Evaluating the Information Content of Convertible Preferred Stock Calls

We examine a sample of in-the-money convertible preferred stock calls and find that they are delayed. We find that the length of the call delay does not depend on the relation between the preferred stock dividends and the pro rata common dividends to be paid on conversion. Thus, our evidence suggests that preferred stock calls may be used for signaling purposes. In support of this, we find that only delayed calls (i.e., those with potential signaling elements) are viewed negatively by equity investors. We also show that, in responding to delayed call announcements, investors appear to react to two distinct information elements. First, price responses to delayed calls are increasingly negative the larger the cash flow disadvantage to calling. In other words, common investors respond more negatively to calls when the forced conversion results in convertible holders receiving larger dividends than were previously required. Second, both cash flow advantage and cash flow disadvantage firms experience significant downward shifts in earnings growth during post-call periods, suggesting that delayed calls are timely signals of decreasing profitability.

Conversion-forcing security calls: Wealth transfers revisited

Abstract We reexamine evidence of wealth effects on various classes of security holders due to calls of convertible bonds and preferred stocks. Significant average devaluations of common equity documented in previous research are found in our sample and, unlike earlier studies, evidence is reported of a significant wealth transfer from common stockholders to senior security holders upon announcement of calls of convertible bonds. Thus, for convertible bond calls, some of the adverse price reaction for common stocks is gained by senior claimants.