Nanda Rangan

Technical, Scale, and Allocative Efficiencies in U.S. Banking: An Empirical Investigation

A nonparametric frontier approach is used to calculate the overall, technical, pure technical, allocative, and scale efficiencies for a sample of 322 independent banks. The sample was drawn from the Federal Deposit Insurance Corporation tapes on the Reports of Condition and Reports of Income (Call Reports) for the year 1986. The results indicated a low level of overall efficiency. The main source of inefficiency was technical in nature, rather than allocative. Separate efficiency frontiers were constructed to test the effect of branching. However, the distributions of efficiency measures for branching and non-branching banks were not found to be different.

Board Composition and Shareholder Wealth: The Case of Management Buyouts

There is an inherent conflict of interest between managers and shareholders when all or part of a public corporation is taken private and managers become major shareholders in the newly privatized firm. The role of outside directors who are independent of management is investigated to determine whether they ensure that shareholder interests are well-served. Our empirical investigation indicates that when the entire firm is taken private, abnormal returns for sellers are substantially higher for firms with boards that are dominated by independent outside directors than for firms that are not. In these transactions, the level of inside director ownership of shares is also significant in promoting shareholder wealth. For unit management buyouts, where the unit managers are seldom board members, board composition and inside director ownership appear to have no systematic effect on abnormal returns.

The technical efficiency of US banks

Abstract The paper uses a non-parametric frontier approach to measure the technical efficiency of a sample of U.S. banks. The results indicate that these banks could have produced the same level of output with only 70% of the inputs actually used. In addition, most of this inefficiency is due to pure technical inefficiency (wasting inputs) rather than scale inefficiency (operating at non-constant returns to scale). Finally, regression analysis indicates that the technical efficiency of the banks is positively related to size, negatively related to product diversity, and not at all related to the extent to which branch banking is allowed.

The role of outside directors in bank acquisitions

Banking law appears to limit the available pool of qualified directors. This study finds - in contrast to nonfinancial firms - a negative relation between abnormal returns and the proportion of independent outside directors on the board of directors of bidding banks.

Organizational forms in banking: An empirical investigation of cost efficiency

Abstract This paper compares the relative performance of bank holding company and branch banking organizational forms. Performance is measured by constructing nonparametric frontiers from which measures of overall, allocative, technical, pure technical and scale efficiency can be derived. The results indicate that branch banking is a more efficient organizational form than the bank holding company.

The market valuation effects of the Financial Institutions Reform, Recovery and Enforcement Act of 1989

Abstract This paper evaluates the stock market effects of events leading to the passage of the Financial Institutions Reforms, Recovery, and Enforcement Act of 1989. The evidence suggests that the signing of the Act by President Bush produced positive abnormal returns for both banks and S&Ls and that the addition of tougher capital standards produced positive returns for S&Ls. In addition, the Act increased the risk of both banks and S&Ls.

Production costs for consolidated multibank holding companies compared to one-bank organizational forms

Abstract Economies of scale and scope for consolidated multibank holding companies (MBHCs) are examined with a translog cost function and are compared with one-bank holding companies (OBHCs) and independent banks. Empirical results indicate that costs curves are generally U-shaped for independent banks and OBHCs but are relatively flat for MBHCs. This evidence implies that banking organizations should prefer the MBHC to one-bank forms at higher output levels. Implications for bank regulatory policy and interstate banking are discussed.

Risk reduction in S&L mortgage loan portfolios through geographic diversification

The reduction in foreclosure-risk exposure to S&L mortgage portfolios that results from elimination of geographic restrictions due to DIDMCA of 1980 is evaluated in this study. By employing a quadratic programming approach, it is empirically demonstrated that geographic diversification can reduce a mortgage portfolios foreclosure-risk exposure by 50 percent to 90 percent when compared to geographically undiversified mortgage portfolios. The benefits of reduced-foreclosure risk could accrue to either the FSLIC or to member S&Ls if the FSLIC adopts a risk-based insurance premium.

Debt-equity swaps, regulation K, and bank stock returns

Abstract Since the early 1980s, the financial health of several highly levered LDCs has become increasingly precarious. Their financial problems, in turn, imply potentially serious financial problems for their creditors, foremost among whom are some of the largest banks in the American financial system. In order to relieve some of the pressure on the lending firms, the Board of Governors has recently amended Regulation K, which provides guidelines for international banking operations, to allow for unrestricted investment in foreign nationalized firms through the mechanism of the debt-equity swap. This paper examines the capital market reaction to the regulatory change and we find that (1) investors, on average, viewed the change as a wealth-increasing event, (2) the magnitude of the market reaction was significant and positively related to the level of foreign lending exposure, and (3) among LDC lenders, the capital market reaction differed significantly between money-center and non-money-center banks.

The market effects of acquisition-related foreign direct investments in the U.S

Abstract Theories of foreign direct investment (PDI) indicate that both location and firm specific advantages must be present for FDI to be feasible. These advantages can be readily exploited by expansion through the utilization of external markets. Therefore, international acquisitions can best be explained by the perceived benefits associated with intemalization. Acquisitions allow bidders to capture partially the gains associated with internalization of markets for their products and services, and to partially distribute them to target firm shareholders. The results of this study support the hypothesis that target shareholders receive abnormal positive returns. However, returns to bidder stockholders are zero, indicating that either investors do not price positively the benefits of FDI, or that costs associated with managerial perquisites, the winners curse, and ineffective utilization of free cash flow outweigh positive FDI benefits.