M. Cary Collins

The Relationship Between Corporate Compensation Policies and Investment Opportunities: Empirical Evidence for Large Bank Holding Companies

This paper investigates whether the firms set of investment opportunities drives the amount and type of executive compensation by conducting a detailed empirical analysis of the executive compensation plans of large bank holding companies. We examine intra-industry changes in compensation policy over a period of significant change in the investment-opportunity set, 1979 to 1985. Our empirical findings reveal that total real compensation and the ratio of incentive compensation-to-total compensation increased substantially at regional bank holding companies but remained stable at money-center bank holding companies. These results are consistent with the hypothesis that during the early 1980s financial innovation and deregulation created greater growth opportunities for regional bank holding companies than for money-center bank holding companies.

Do Black-Owned Banks Discriminate Against Black Borrowers?

Black-owned and white-owned banks are studied to test for lending discrimination based on applicants race. Using single-equation models the rndings suggest that black-owned banks may utilize applicant race in the mortgage granting decision. The result holds in a naive HMDA model and in an enhanced HMDA model with bank-specirc, demographic, and neighborhood characteristics added.

An Examination of the Equity Market Response to the Gramm-Leach-Bliley Act Across Commercial Banking, Investment Banking, and Insurance Firms

This paper examines the wealth effects of the events surrounding the passage of the Gramm-Leach-Bliley Act of 1999 and changes in systematic risk from the pre-Act period to the post-Act period for commercial banks, investment banks, and insurance firms. The results suggest that investment banks and insurance firms are better positioned to exploit the benefits of product-line diversification opportunities allowed by the legislation compared to commercial banks that experience no significant market reaction. Further evidence indicates a significant risk shift and overall reduction in riskiness for the financial sectors under consideration around the event period.

Disparities in Mortgage Lending, Bank Performance, Economic Influence, and Regulatory Oversight

This study investigates factors affecting changes in the disparity of home mortgage denial rates between white and minority loan applicants in the U.S. during the period 1991–1997. We develop a two-stage least-squares regression model that incorporates applicant-level characteristics, neighborhood characteristics, regional economic data, and bank-specific data as explanatory variables. Some have argued that mortgage lenders were under increasing pressure from industry regulators to extend additional credit to minorities and low-income groups during the period under study. The model includes each institutions periodic CRA rating as a proxy for regulatory influence. An alternative explanation is that market forces, such as improvements in economic conditions and in bank financial condition and performance, affected default loss estimates and credit standards in a way that disproportionally benefited minority and low-income applicants. The empirical findings are consistent with the latter hypothesis. We conclude that policy makers should consider the impact of market factors when assessing the allocation of mortgage credit in a particular demographic market. The findings also underscore the importance of controlling for lender assessments of credit risk when evaluating compliance with CRA and fair lending statutes.

External audits and the impact of loss of reputation on agency costs: an empirical investigation

Refers to previous research on the effects of poor external audits on agency costs to shareholders and takes the 1991 disciplinary action by the US Securities and Exchange Commission against Ernst and Young (re the Republic Bank) as an example to examine the effect on its other audit clients and on financial institutions. Uses event study methods to show that there were no statistically abnormal returns for financial institutions or for Ernst and Young’s audit clients; but significant negative returns for firms audited by non‐big six auditors.

The impact of the failure of Continental Illinois and the too‐big‐to‐fail doctrine on changes in operating efficiency

Outlines the US development of the “too‐big‐to‐fail” (TBTF) doctrine following the collapse of the Continental Illinois Bank, reviews relevant research and explores the impact on the efficiency of the banking system. Uses 1983‐1985 call report data, explains the methodology and presents the results, which analyse economies and diseconomies of scope and scale between different types of loans; and levels of inefficiency for TBTF and non‐TBTF banks. Shows that TBTF banks had the greatest increase in inefficiency following Continental’s failure but reduced this in the following year, as did small banks which did not benefit from complete depository coverage. Confirms that the TBTF doctrine increased stability for all banks, but particularly those covered by the doctrine.