Michael F. Spivey

Plant-closing decisions and the market value of the firm

Abstract We investigate the underlying causes and the announcement effects of plant closings. The closing in our sample do not appear related to takeover activity. Instead, they appear motivated by declining firm profitability. Firms announcing closings have lower earnings than market or industry medians; earnings typically improve slightly after the announcement. We find a negative stock-market reaction to plant-closing announcements.

Shelf Registration and the Reduced Due Diligence Argument: Implications of the Underwriter Certification and the Implicit Insurance Hypotheses

Critics argue that shelf registration greatly reduces the ability of underwriters to perform adequate due diligence. This argument suggests underwriters will demand greater compensation for shelf issues compared to such traditional issues as an insurance premium for protection against potential litigation or loss of reputation caused by inadequate due diligence. Our findings suggest the presence of such a premium, that the premium is higher for firms with higher expected due diligence liabilities, and that underwriters perceive that shelf registration erodes due diligence and, subsequently, price the due diligence erosion accordingly. This pricing behavior is consistent with our findings that firms with higher expected due diligence liabilities are more likely to choose traditional registration.

Prompt corrective action and bank efforts to recover from undercapitalization

Abstract This study empirically examines the likelihood and timing of bank recoveries from positions of undercapitalization. Our findings indicate that: (1) There appears to be only a limited capacity for banks to ‘correct’ positions of undercapitalization by growth limitations or dividend restrictions; (2) the impact of profitability on recovery is greater the longer a bank remains undercapitalized; and (3) equity infusions are the primary mechanism by which banks can recapitalize quickly. This evidence is relevant to regulators in their implementation of the FDIC Improvement Act of 1991, which requires that undercapitalized banks take ‘prompt corrective actions’ to recapitalize quickly under threat of early closure.

Financing Loan Growth at Banks

We analyze investment and financing decisions for a broad sample of affiliated and independent banks during the 1994–1998 period. Our results indicate that growth in lending at affiliated banks is supported by net equity financing flows from parent holding companies. We also provide evidence that loan growth at affiliated banks, relative to independent banks, is less constrained by capital availability. Both findings appear relevant to understanding the diminishing role of independent banks in aggregate lending.

Nonshareholder constituency statutes and shareholder wealth: A note

Abstract We assess the effects of the introduction and passage of state nonshareholder constituency statutes on shareholder wealth. We find a small, but significantly negative effect on shareholder wealth for companies incorporated in states passing nonshareholder constituency statutes that did not already have corporate takeover defenses in place. Further, we find that firms that are poorly managed (as proxied by low market-to-book ratios) react more negatively to the statutes.

CEBA of 1987 and the security returns and market risk of savings and loan institutions: a note

Abstract This article examines the market reaction to announcements leading to the eventual passage of the Competitive Equality Banking Act (CEBA) of 1987 using portfolios of savings and loans. Negative announcement effects of the CEBA legislation are observed for well capitalized savings and loans and positive announcement effects are observed for less capitalized savings and loans. The evidence also indicates that the market risk for the less capitalized savings and loans decreased following the passage of the CEBA legislation.

Exchange rate movements and the stock returns of U.S. commercial banks

Abstract This article investigates the correlation between exchange rates and the stock returns of a portfolio of commercial banks. The results provide some evidence that bank stocks are, on average, sensitive to foreign exchange rate movements. The results also suggest significant cross-sectional variation in the sensitivity of bank stock returns to exchange rate movements. Similar to a study of U.S. nonfinancial multinationals, this study finds evidence that the relationship of stock returns and exchange rates may be correlated with the degree of the firms foreign operations.

The Timing and Persistence of CRA Compliance Ratings

We evaluate supervisory practices in enforcing the Community Reinvestment Act (CRA) by examining whether or not supervisors consider observable, bank-specific characteristics in (1) scheduling CRA compliance examinations and (2) determining whether, and for how long, a given CRA rating persists. Failure to confirm such a relationship would be consistent with criticism that the evaluation criteria are so vague that supervisors can essentially assign “any rating they want” for compliance purposes. Analysis of a sample of several thousand commercial banks, observed over a relatively stable regulatory regime, indicates that both examination scheduling and the persistence of examination ratings are associated with residential loan levels, a presumed cornerstone of the CRA, as well as other financial, regulatory and market factors. We conclude that CRA enforcement during this period reflected, at least in part, objective evaluation criteria.

Community Reinvestment Act Enforcement and Changes in Targeted Lending

The Community Reinvestment Act (CRA) encourages banks and savings and loan associations to meet the credit needs of local communities. Controversies surrounding implementation of the CRA, however, have challenged its effectiveness as a tool for increasing loan activity. To determine whether the CRA influences lending, the authors compare the low-income mortgage loans of banks that experience CRA downgrades to those of other banks that are not downgraded. The authors find no evidence consistent with the hypothesis that downgraded banks, in an attempt to reestablish an acceptable rating, increase lending.

Advance notice of plant closings and firm value

Abstract Prior to the passage of the Worker Adjustment and Retraining Notification (WARN) Act, many argued that mandating minimal advance notice given to employees would reduce managerial flexibility in closing plants, thereby reducing firm values. In addressing this issue, we use 193 closing announcements to examine the stock markets reaction to the amount of advance notice given by the firm when closing a plant. We find no relationship between the amount of advance notice provided and firm value. We also find that the majority of corporations in our sample were providing lengthy advance notice, corroborating statements in the popular press by managers who foresaw no additional burden from the passage of the WARN Act.