Roger D. Stover

Bank Debt and Corporate Governance

 The authors thank Yakov Amihud, Allen Berger, Andrew Metrick and Randall Morck for helpful discussions; and seminar participants at New York University and the Australasia Conference for Banking and Finance for comments. Abstract To transfer loans from one debtor to another debtor, banks might transmit borrower information which is collected in the lending process to potential acquirers. In this paper, we investigate the importance of banks in the effectiveness of the takeover mechanism and hence in corporate governance. Using unsolicited takeovers between 1992 and 2003, we find that bank lending intensity and bank client network (the number of firms that the bank deals with) have a significant and positive effect on the probability of a borrower firm becoming a target. We find that this effect is enhanced in cases where the target and acquirer have a relationship with the same bank and is robust to the inclusion of several firm characteristics including the presence of large external shareholders. Moreover, takeover completion rates are positively related to bank lending intensity. Finally, we find that the equity market views takeovers where the target and the acquirer deal with the same bank more positively relative to takeovers with no bank involvement. Overall, the evidence supports the view that banks increase the disciplining role of the market for corporate control.

Standby letters of credit and large bank capital: An empirical analysis

Abstract A recent trend in commercial banking has been the rapid growth in the issuance of off-balance, sheet guarantees. Revised capital standards presume that banks are increasing the issuance of off-balance sheet guarantees to generate fee income and conserve primary capital while shifting out of low risk assets. The relationship between standby letters of credit, an off-balance sheet guarantee, and large bank capital is tested using Granger causality, and then estimated in a structural model. To accurately estimate the relationship, a simultaneous equation model is required to capture the positive effect of bank capital on standby letter of credit issuance.

Deposit Insurance and the Risk Premium in Bank Deposit Rates

Abstract By placing a ceiling on the amount of possible depositor loss, deposit insurance should result in a lower deposit risk premium. However, this effect may be modified if either the insurance promise has low credibility or the moral hazard incentives generated by deposit insurance result in a greater probability of bank default. Using financial and institutional panel data from thirteen countries, we find that the risk premium is over 40 basis points higher on average in uninsured countries than in countries that offer insurance up to some pre-specified maximum. However, the risk premium has a non-linear relationship with the level of maximum insurance coverage, suggesting that the market recognizes the moral hazard potential. Moreover, the effect of deposit insurance on the risk premium is weaker in countries with strong creditor rights, consistent with the view that investors view the latter as a substitute for explicit deposit insurance.

Standby letters of credit and bank capital: Evidence of market discipline

Abstract Market discipline, if it exists and is important, should link bank decisions together and have an impact on the way decisions are made. The relationship between the issuance of standby letters of credit and primary capital is modeled in the context of market discipline and then estimated. The hypothesis that market discipline causes a joint relationship between bank capital and standby letter of credit decisions for banks that are active participants in the standby market or that rely heavily on purchased funds is tested and cannot be rejected.

Early resolution of troubled financial institutions: An examination of the accelerated resolution program

Abstract This paper expands the empirical research on the auctions of failed financial institutions by examining the thrift industry Accelerated Resolution Program as an alternative to the standard auction procedures. Jointly managed by the Office of Thrift Supervision and the Resolution Trust Corporation, the objective of this program was to intervene before insolvency and, thereby, to reduce the regulatory expenditures. Previous research has often found the existence of a wealth transfer to the winning bidders in both commercial bank and thrift auctions. In contrast to this previous research, no evidence is found in this study to conclude that a wealth transfer occurred in standard Resolution Trust Corporation auctions. Furthermore, while the Accelerated Resolution Program yielded positive abnormal returns, there is also no evidence of a wealth transfer.

Agricultural Lending Decision: A Multiattribute Analysis

This paper examines the agdcultural loan decision process from the perspective of the individual loan officer. An analysis of this process concerns the relative effects of various criteria on the loan application and the degree to which tradeoffs are made among them by the loan officer. The theoretical model is empirically tested using a set of factorially designed combinations of these variables. This format avoids several of the problems previously encountered when the iending process has been empirically examined. The model not only exhibits a high degree of explanatory power but also permits important insights into this process.

Deposit insurance and the stock market: evidence from Denmark

Previous studies of the relationship between deposit insurance and bank market values have usually been limited to consideration of minor changes in bank regulations, but the 1987 initiation of deposit insurance in Denmark permits examination of a potentially major policy shift. It is found that the market values of large Danish banks exhibited a modest positive reaction to the announcement of insurance, but that small risky banks responded negatively. These results partially contrast with those previously found for the USA, an outcome that seems likely to reflect the interaction of deposit insurance with the particular characteristics of the pre-existing Danish regulatory system.

How much do governance and managerial behavior matter in investment decisions? Evidence from failed thrift auctions

Abstract Corporate governance and managerial behavior, both in terms of entrenchment and financial leverage, have been individually shown to directly affect firm performance and to indirectly affect it through influence on other determinants of performance. Employing an empirical model that captures documented interactions among the explanatory variables, we examine the importance of these integrated factors in an investment decision by focusing on the determinants of bank bidding activity for failed thrift institutions. While the endogenous relationships based on previous research appear tractable, their overall addition to the explanatory power of the bidding model based on traditional auction variables is very limited. These results suggest questions that should be further examined regarding how much managerial variables as defined by previous studies actually affect firm investment decisions once their endogeneity and unique linkages are formally recognized.

Debt Capacity and the Capital Budgeting Decision: A Caveat

* In recent issues of Financial Management, Martin and Scott [5] and Hong and Rappaport [2] propose conceptual bases for assessing the debt capacity of a proposed investment project. Because both studies numerically illustrate their respective methodologies by examining the effect of one additional investment project on the value of the firm, readers may conclude that under either approach the increase in the value of the firm will equal the sum of the net present values of the accepted projects. This, however, is not the case. The values of the incremental debt capacities of the accepted projects are not additive in the same way that the values of their after-tax operating earnings and their cash outlays are. As a result, under either approach it may be possible that two projects are both acceptable when analyzed independently, while in combination they actually decrease the value of the firm.

Staying Close to Home: Foreign Bank Participation in Syndicated Loans

We examine the propensity of Australian banks to participate in syndicated loans to corporate borrowers from 12 countries in the Asia-Pacific region. We find that these banks participate more often in greater numbers and in greater quantity for loans made to Australian and New Zealand borrowers. However much of this apparent bias can be attributed to differences in familiarity characteristics - legal systems culture banking presence and distance from Australia. As these characteristics are likely to proxy for information availability our results provide further support for the view that home bias phenomena are primarily due to information problems.