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Abstract:
In this study, we examine the wealth effect of regulatory changes intended to improve corporate governance and protect minority shareholders from expropriation by controlling shareholders. Using data on publicly traded Chinese firms, we find strong evidence supporting the claim that better investor protection in the form of share-market regulation can create substantial value for minority shareholders in a country with weak judicial enforcement. Furthermore, our results suggest that, in this environment, regulation in the form of simple "bright-line rules" is more effective than in the form of "broad standards." Finally, we find that firms with poor corporate governance benefit disproportionately from the regulatory changes relative to firms with good corporate governance.

expropriation, regulation, China, independent director, investor protection, minority shareholder, tunneling

Abstract:
We examine the wealth effects of three regulatory changes designed to improve minority-shareholder protection in the Chinese stock markets. Using the value of a firm's related-party transactions as an inverse proxy for the quality of corporate governance, we find that firms with weaker governance experienced significantly larger abnormal returns around announcements of the new regulations than did firms with stronger governance. This evidence indicates that securities-market regulation can be effective in protecting minority shareholders from expropriation in a country with weak judicial enforcement. We also find that firms with strong ties to the government did not benefit from the new regulations, suggesting that minority shareholders did not expect regulators to enforce the new rules on firms where block holders have strong political connections.

China, convergence, enforcement, expropriation, political connections, investor protection, minority shareholder, regulation, tunneling

Abstract:
The informational opacity of small businesses makes them an interesting area for the study of banks' lending practices and procedures. We use a survey of small businesses conducted by the Federal Reserve to analyze the micro-level differences between large banks and small banks in the loan approval process. We provide evidence that large banks ($1 billion or more in assets) tend to employ standard criteria obtained from financial statements in the loan decision process, but that small banks (less than $1 billion in assets) deviate from these criteria by relying to a larger extent on the character of the borrower. Some of the results are inconsistent, however. These "cookie-cutter" and "character" approaches are compatible with the incentives and environments facing large and small banks.

Small business lending, Banks, Relationship banking, and Size of bank

Abstract:
We examine changes in market values and accounting returns for a sample of publicly traded Chinese firms around announcements of block-share transfers among government agencies ("State Bureaucrats"), market-oriented State-owned enterprises ("MOSOEs") and private investors ("Private Entities"). We provide evidence that transfers from State Bureaucrats to Private Entities result in larger increases in market value and accounting returns than transfers to MOSOEs. We also find that CEO turnover occurs more quickly when shares are transferred to Private Entities. Moreover, we find that the changes in firm value and accounting returns as well as the likelihood of CEO turnover are all functions of the incentives and managerial expertise of the new block holder. We conclude that corporate governance can be improved at State-controlled firms by improving the incentives and managerial expertise of controlling block holders, and that this is better accomplished by transferring ownership to private investors rather than by shuffling ownership among State-controlled entities.

block-holder identity, China, partial corporate control, partial privatization, privatization, State ownership, SOE

Abstract:
This study examines the determinants of executive compensation using data from two nationally representative samples of privately held U.S. corporations conducted ten years apart-in 1993 and 2003. We find that: (i) the level of executive pay at privately held firms is higher at larger firms and varies widely by industry, consistent with stylized facts about executive pay at public companies; (ii) inflation-adjusted executive pay has fallen at privately held companies, in contrast with the widely documented run-up in executive pay at large public companies; (iii) the pay-size elasticity is much larger for privately held firms than for the publicly traded firms on which previous research has almost exclusively focused; (iv) executive pay is higher at more complex organizations; (v) organizational form affects taxation, which, in turn, affects executive pay, with executives at C-corporations being paid significantly more than executives at S-corporations; (vi) executive pay is inversely related to CEO ownership; (vii) executive pay is inversely related to financial risk; and (viii) executive pay is related to a number of CEO characteristics, including age, education and gender: executive pay is inversely related to CEO age, positively related to educational, and is significantly lower for female executives.

CEO, Compensation, Education, Executive, Executive Pay, Gender, Organizational Form, Ownership, SSBF, Taxes

Abstract:
The capital-structure decision is one of the most fundamental issues in corporate finance. Numerous empirical studies have been conducted to test the two major competing theories of capital structure (Trade-Off Theory and Pecking-Order Theory), yet none of these studies has analyzed the capital-structure decisions of privately held U.S. firms, which constitute the vast majority of all U.S. business enterprises. In this study, we provide the first evidence on this important issue, utilizing data from four nationally representative surveys conducted by the Federal Reserve Board: the 1987, 1993, 1998 and 2003 Surveys of Small Business Finances (SSBF). We find that firm leverage as measured by the ratios of total loans to total assets and total liabilities to total assets is negatively related to firm size, age, profitability, liquidity and credit quality and is positively related to tangibility of firm assets and to limited liability. In addition, we find that firm leverage is an increasing function of both the number of banks and the number of non-bank financial institutions with which the firm has business relationships. Finally, we find no significant variations in firm leverage by race or ethnicity, but some evidence that female-owned firms use less leverage. In general, these results are broadly supportive of the Pecking-Order Theory and inconsistent with the Trade-Off Theory.

capital structure, pecking-order theory, privately held firm, small business, trade-off theory, SSBF

Abstract:
Previous research has established (i) that a country's financial sector influence future economic growth and (ii) that stock market index returns affect future economic growth. We extend and tie together these two strands of the growth literature by analyzing the relationship between banking industry stock returns and future economic growth. Using dynamic panel techniques to analyze panel data from 18 developed and 18 emerging markets, we find a positive and significant relationship between bank stock returns and future GDP growth that is independent of the previously documented relationship between market index returns and economic growth. We also find that much of the informational content of bank stock returns is captured by country-specific and institutional characteristics, such as bank-accounting-disclosure standards, banking crises, enforcement of insider trading law and government ownership of banks.

Banks, Economic Growth, Emerging Markets, Financia

Abstract:
In this study, we test whether bankers take on more risk when they enjoy superior creditor protection. We test this hypothesis using bank-level data over the period 2000-2006 from 99 emerging-market countries and a random-effects model that controls for bank heterogeneity. We find that bankers allocate a significantly larger portion of their assets to loans: (i.) where they enjoy English legal origin rather than French or Socialist legal origin; (ii.) where judicial enforcement of debt contracts is more efficient; (iii.) where banks enjoy fewer restrictions on their operations; but also (iv.) where creditors' rights are weaker. These results provide strong support for the theory of legal origin but provide only mixed support for the "power" theories of credit.

banking, bank loans, bank risk-taking, creditor protection, creditors' rights, emerging markets, investor protection, judicial enforcement, law and finance, legal origin, legal rights

Abstract:
We identify and analyze a sample of publicly traded Chinese firms that issued loan guarantees to their related parties (usually the controlling block holders), thereby expropriating wealth from minority shareholders. Our results show that the issuance of related guarantees is less likely at smaller firms, at more profitable firms and at firms with higher growth prospects. We also find that the identity and ownership of block holders affect the likelihood of expropriation. In addition, we use this sample to provide new evidence on the relation between tunneling and proxies for firm value and financial performance. We find that Tobin's Q, ROA and dividend yield are significantly lower, and that leverage is significantly higher, at firms that issued related guarantees.

Block holder, China, connected party transaction, corporate governance, expropriation, related party transaction, Tobin's Q, tunneling

Abstract:
We identify and analyze a sample of publicly traded Chinese firms that issued loan guarantees to their related parties (usually the controlling block holders), thereby expropriating wealth from minority shareholders. Our results show that the issuance of related guarantees is less likely at smaller firms, at more profitable firms and at firms with higher growth prospects. We also find that the identity and ownership of block holders affect the likelihood of expropriation. Firms with State Non-Corporate controlling block holders are less likely to issue related guarantees than are firms with State Corporate, Private or Foreign controlling block holders, and firms with higher percentage ownership by Private non-controlling block holders are less likely to issue related guarantees. In addition, we use this sample to provide new evidence on the relation between tunnelling and proxies for firm value. We find that Tobin's Q, ROA and dividend yield are significantly lower, and that leverage is significantly higher, at firms that issued related guarantees.

block holder, China, expropriation, minority shareholder, Tobin's Q, tunneling

Abstract:
How quickly do the CAMEL ratings regulators assign to banks during on-site examinations become "stale"? One measure of the information content of CAMEL ratings is their ability to discriminate between banks that will fail and those that will survive. To assess the accuracy of CAMEL ratings in predicting failure, Rebel Cole and Jeffery Gunther use as a benchmark an off-site monitoring system based on publicly available accounting data. Their findings suggest that, if a bank has not been examined for more than two quarters, off-site monitoring systems usually provide a more accurate indication of survivability than its CAMEL rating. The lower predictive accuracy for CAMEL ratings "older" than two quarters causes the overall accuracy of CAMEL ratings to fall substantially below that of off-site monitoring systems. The higher predictive accuracy of off-site systems derives from both their timeliness-an updated off-site rating is available for every bank in every quarter-and the accuracy of the financial data on which they are based. Cole and Gunther conclude that off-site monitoring systems should continue to play a prominent role in the supervisory process, as a complement to on-site examinations.

Bank, Bank Failure, CAMEL, Commercial Bank, Offsite Supervision, Regulation

Abstract:
We provide measures of absolute and relative equity agency costs for corporations under different ownership and management structures. Our base case is Jensen and Meckling's (1976) zero agency-cost firm, where the manager is the firm's sole shareholder. We utilize a sample of 1,708 small corporations from the FRB/NSSBF database and find that agency costs (i) are significantly higher when an outsider rather than an insider manages the firm; (ii) are inversely related to the manager's ownership share; (iii) increase with the number of nonmanager shareholders, and (iv) to a lesser extent, are lower with greater monitoring by banks.

agency costs, bank monitoring, ownership structure,

Abstract:
In this study, we use data from the Federal Reserve's 1993, 1998 and 2003 Surveys of Small Business Finances to classify small businesses into four groups based upon their credit needs and to model the credit allocation process into a sequence of three steps. First, do firms need credit‘ We classify those that do not as Non-Borrowers; these firms have received scant attention in the literature even though they account for more than half of all small firms. Second, do firms need credit but fail to apply because they feared being turned down‘ We classify such firms as Discouraged Borrowers. Like Non-Borrowers, Discouraged Borrowers have received little attention in the literature and often are pooled with firms who applied for, but were denied, credit. Discouraged Borrowers outnumber firms that applied for, but were denied, credit by more than two to one. Third, do firms apply for credit but get turned down‘ We classify such firms as Denied Borrowers. Finally, we classify firms that applied for and were extended credit as Approved Borrowers. Our results reveal strong and significant differences among each of these four groups of firms. Non-borrowers look very much like approved borrowers, consistent with the Pecking-Order Theory of capital structure. Discouraged Borrowers resemble Denied Borrowers in many respects, but are significantly different along a number of dimensions. This finding calls into question previous studies that have pooled together these two groups of firms in analyzing credit allocation. Finally, we find strong evidence that Denied Borrowers differ from Approved Borrowers across numerous characteristics as previously documented in the literature. Of particular note, minority owned-firms, and especially Black-owned firms, were denied credit at a far higher rate than firms with owners who were white.

availability of credit, capital structure, discrimination, entrepreneurship, small business, SSBF

Abstract:
We examine stock returns for a sample of publicly traded Chinese firms around announcements of block share transfers from government agencies to corporatized firms where the State is the ultimate controlling shareholder. We provide evidence that these transfers improve corporate governance and firm value by partially reattaching cash-flow rights to control rights. We find that cumulative abnormal returns average 7.5% during the announcement period, and that more than 40% of the CEOs were replaced within 12 months. Moreover, we find that both the change in firm value and the likelihood of CEO turnover are functions of the incentives and managerial expertise of the new block holder. We conclude that corporate governance can be improved at State-controlled firms by including private block holders in the ultimate ownership structure, which more closely aligns cash-flow rights with control rights.

annual meeting, block holder, board of directors, cash-flow rights, control rights, corporate governance, incentive compensation, politics and finance, privatization, State ownership, State-owned enterprise, ultimate shareholder

Abstract:
This article examines the role of commercial real estate investments in the banking crisis of 1985-92, an unprecedented period during which more than 1,300 banks failed. Bank failures are fundamentally important because of the unique role played by financial institutions in the provision of business credit. We discover three striking features of banks failing during this period. First, commercial real estate was only a factor in the bank failures of 1988-92. Second, construction loans played a much larger role in bank failures than permanent loans, and the relationship is strongest with construction loans booked during 1983-1985. Third, other ex ante risk measures are systematically related to banking failure throughout the sample period. These results suggest that risk-seeking banks brought about their own demise and commercial real estate, especially construction lending, was one of the vehicles.

bank, bank failure, commercial bank, commercial real estate

Abstract:
In this study, we examine unsuccessful takeover attempts for new evidence on whether mergers create or destroy value for acquirers and targets. We contribute to the literature in three important areas. First, we contribute to the literature on signaling by investigating whether a takeover attempt signals investors about the quality of firm management as well as the quality of the specific firm investment under consideration. We find that bid announcement returns are partially, but not completely, reversed by termination announcement returns, evidence that the merger proposal itself contains information about the value of the bidding firm. Second, we contribute to the literature on the value of diversification by examining how merger bids and terminations affect the relative values of bidders attempting diversifying and focusing takeovers. Our evidence enables us to differentiate between the synergistic and agency views of mergers. We find significant differences in the responses of firms attempting focusing versus diversifying mergers. The reversal of bid announcement returns by termination announcement returns is significantly different for focusing and diversifying firms. There is no reversal for diversifying firms while there is a partial reversal for focusing firms. This provides evidence in support of both the synergistic and agency views of mergers. Synergies are evident in focusing mergers while agency costs are evident in diversifying mergers. Third, we contribute to the literature on the valuation effects of mergers by using data from the 1991-2000 period to re-examine the important topic of who wins and who loses when mergers are terminated.

diversification, focus, merger, signaling, terminated merger

Abstract:
On-site examinations are regulators' primary tool for monitoring the financial condition of federally insured depository institutions. In this paper, we assess the speed with which the information content of the supervisory rating assigned during bank exams - the CAMEL rating - decays. This is an important issue because cost and regulatory burden considerations often cause CAMEL ratings to be assigned relatively infrequently. As a benchmark for information content, we use econometric forecasts of bank failures generated by applying a probit model to publicly available accounting data. When compared with all CAMEL ratings available at a given point in time, the econometric forecasts provide a more accurate indication of failure. Further analysis reveals that this overall finding reflects the tendency for a CAMEL rating's information content to deteriorate noticeably beginning in the second or third quarter after the rating initially was assigned.

bank examination, bank failure, CAMEL rating, early warning system

Abstract:
As many as six million U.S. homeowners are facing foreclosure during 2009 and beyond. Delinquent residential mortgages are at the heart of the ongoing financial crisis, as they have been packaged into mortgage-related securities originally worth trillions of dollars, but now valued at substantial discounts. I propose to address this crisis by striking at the heart of the problem - by refinancing delinquent mortgages. Approximately $300 billion in TARP or stimulus funds would be used to write down the principal on these mortgages so that new mortgages would meet underwriting guidelines for debt-to-income ratios. Delinquent mortgages would be repaid in the refinancing, eliminating approximately $1.5 trillion in toxic assets from the balance sheets of lenders and the asset pools underlying mortgage-related securities. This proposal is designed to achieve three goals: (1) to enable as many as six million families to avoid eviction and stay in their homes; (2) to recapitalize the banking system; and (3) to detoxify mortgage-related securities by eliminating delinquent mortgages from the underlying pool of assets, thereby avoiding the need for complex “price discovery” plans for pricing these toxic securities. This program deals with a number of practical problems that have dogged other proposals, including how to provide for significant principal reduction, how prevent ruthless defaults by healthy but underwater borrowers, how to deal with second-lien holders, how to deal with mortgages in pools of securitized assets, and how to properly price toxic mortgage-related securities.

ABS, banks, CDO, delinquent mortgage, foreclosure, financial crisis, housing, housing crisis, mortgage crisis, MBS, refinancing, subprime, subprime crisis, TARP

Abstract:
This article analyzes factors influencing the decisions of prospective lenders to extend credit to small and minority-owned businesses. Using data from a government survey of small businesses, the analysis reveals that prospective lenders (primarily commercial banks) are four times more likely to deny credit to firms owned by African-Americans than to firms owned by Non-Hispanic whites, and are twice as likely to deny credit to firms owned by Asian-Americans than to firms owned by Non-Hispanic whites. These differences in denial rates remain both statistically and economically significant, even after controlling for differences in the type and size of the prospective loan; in the age, experience, education, and creditworthiness of the firm's primary owner; in the age, size, capital structure, profitability, organizational form, creditworthiness, and industry of the firm; and in the types and length of pre-existing relationships between the firm and its prospective lender. Interestingly, these differences in denial rates are significant only when the prospective lender is a commercial bank.

credit availability, discrimination, race, small business, SSBF

Abstract:
In this study, we use firm-level data from the 1993 National Survey of Small Business Finances to test the hypothesis that banking consolidation has reduced the availability of credit to small businesses. We find that banks in markets where mergers have occurred are more likely than other banks to deny credit to small business loan applicants. However, this relationship disappears after we control for characteristics of the small business firm and its principal owner, the economic environment of the market where the firm is located, and the financial condition of the prospective lender. Moreover, we find that one set of banks, those in the process of acquiring other banks, are less likely to deny credit to small businesses. These results suggest that consolidation in the banking industry may have enhanced rather than restricted the availability of credit to small businesses. However, the data reflect credit availability during 1991-94, and may not be representative of subsequent credit conditions. Nor does the analysis rule out possible changes in the terms of credit available to small businesses.

acquisition, bank, credit, merger, relationship, small business, takeover

Abstract:
In this article, I examine the effect of pre-existing relationships between a firm and its potential lender on the potential lender's decision whether or not to extend credit to the firm. I find that a potential lender is more likely to extend credit to a firm with which it has a pre-existing relationship as a source of financial services, but that the length of this relationship is unimportant. These findings provide empirical support for theories of financial intermediation positing that banking relationships generate valuable private information about the financial prospects of the financial institution's customer. The results also provide evidence that potential lenders are less likely to extend credit to firms with multiple sources of financial services, in support of the theory that the private information a financial institution generates about a firm is less valuable when the firm deals with multiple sources of financial services.

asymmetric information, credit availability, relationship lending, small business

Abstract:
This article tests several hypotheses concerning the failure of thrift institutions and the costs these failures imposed upon the thrift deposit insurance fund. The central hypothesis posits that thrift failures during the 1986-1989 period were largely a function of portfolio decisions made by thrift managers during the mid-1980s, which, in turn, were strongly influenced by the structural characteristics of these thrifts in the early 1980s. A sample of 1,654 healthy thrifts and 621 failed or soon-to-fail thrifts for which consistent official estimates of the cost of liquidation were available from the FSLIC is analyzed using a variation of the technique suggested by Heckman (1979) to correct for sample-selectivity bias. The results provide strong support for the central hypothesis, demonstrating that these portfolio choices and structural characteristics are strong determinants of the likelihood and cost of failure, and that the structural characteristics strongly influence the subsequent portfolio choices.

deregulation, failure, moral hazard, S&L, thrift

Abstract:
In this study, we present new panel-data evidence on REIT liquidity and its determinants over the 1988 - 2007 period. We focus upon liquidity measures that do not require micro-structure data (1) to facilitate use of our results as benchmarks for comparisons with results from international markets for which micro-structure data may be unavailable; (2) to provide benchmarks that do not require access to costly (and voluminous) micro-structure data.

We find that REIT liquidity deteriorated during the late 1990s but improved dramatically during 2000- 006, with the notable exception of 2007. Liquidity improved the most for REITs traded on the NYSE, and was an order of magnitude better than liquidity of REITs traded on the AMEX or NASDAQ. We link the deterioration in liquidity observed in 2007 to the investment portfolio of a REIT. We find that the percentage bid-ask spread is highly correlated with the measure of price impact proposed by Amihud (2002).

We provide panel-data evidence on the key determinants of the percentage bid-ask spread that largely confirms the results reported by Bhasin, Cole and Kiely (1997) for 1990 and 1994: the percentage spread is a positive function of the volatility of stock returns, and a negative function of dollar volume turnover, share price and market capitalization.

Finally, we provide evidence that these results obtained using daily closing bid- and ask-prices are not qualitatively different from those obtained using market micro-structure data. This suggests that we can use liquidity measures based upon readily available daily return data rather than being forced to rely upon market micro-structure data.

Bid-Ask Spread, Depth, Liquidity, Price Impact, REIT

Abstract:
One of the primary responsibilities of banking regulatory agencies is to minimize the financial loss to the bank to Bank Insurance Fund that results from the failure of insured depository institutions. To discharge this responsibility, bank regulators evaluate the financial performance and condition of depository institutions and initiate prompt corrective actions when they find signs of distress. In evaluation, regulators use a combination of on-site examinations and off-site monitoring systems. In 1993, the Federal Reserve instituted the Financial Institutions Monitoring System ("FIMS," also known as "SEER," or System for Estimating Examination Ratings), which is significantly more accurate that previous off-site systems in identifying financially trouble banking institutions. This article gives the background of FIMS, describes the new system, and explained how it improves on previous systems.

bank, bank failure, bank supervision, CAEL, CAMEL, early warning system, EWS, Federal Reserve, SEER, UBSS

Abstract:
This study examines how the introduction of deposit insurance affects a banking system, using the deposit-insurance scheme introduced into the Russian banking system as a natural experiment. The fundamental research question is whether the introduction of deposit insurance leads to a more effective banking system as evidenced by increased deposit-taking and decreased reliance upon State-owned banks as custodians of retail deposits. We find that banks entering the new deposit-insurance system increased both their level of retail deposits and their ratios of retail deposits to total assets relative to banks that did not enter the new deposit insurance system. We also find that these results hold up in a multivariate panel-data analysis that controls for bank and time random effects. The longer a bank was entered into the deposit insurance system, the greater was its level of deposits and its ratio of deposits to assets. Moreover, this effect was stronger for regional banks and for smaller banks. Finally, we find that implementation of the new deposit-insurance system had the effect of "leveling the playing field" between State-owned banks and privately owned banks.

bank, deposit insurance, moral hazard, Russia, State-owned bank

Abstract:
This study uses data from thrift institutions to provide new evidence on the relation between executive pay and firm performance. We find a positive and statistically significant relation between CEO pay and firm performance as measured by both return on assets and return on equity. Moreover, the relation is robust across alternative specifications of the model. This evidence is consistent with the view that a firm's executive compensation policy is designed to reduce the agency costs between managers and shareholders.

agency costs, CEO pay, compensation, deposit insurance, executive compensation, thrift

Abstract:
Previous research has established (i) that a country's financial sector influence future economic growth and (ii) that stock market index returns affect future economic growth. We extend and tie together these two strands of the growth literature by analyzing the relationship between banking industry stock returns and future economic growth. Using dynamic panel techniques to analyze panel data from 18 developed and 18 emerging markets, we find a positive and significant relationship between bank stock returns and future GDP growth that is independent of the previously documented relationship between market index returns and economic growth. We also find that much of the informational content of bank stock returns is captured by country-specific and institutional characteristics, such as bank-accounting-disclosure standards, banking crises, enforcement of insider trading law and government ownership of banks.

banks, economic growth, emerging markets, financial development

Abstract:
In October of 2002, the Simon Property Group made a hostile takeover bid for Taubman Centers, a bid that the financial press widely reported as the first significant hostile takeover attempt in the U.S. REIT industry. As such, this event provides a natural experiment for estimating the value of the market for corporate control, one of the primary corporate governance mechanisms by which the market ensures that firm managers maximize shareholder value. Contrary to our expectations, we find no significant industry price reaction in response to this announcement, strong evidence that this event did not mark the introduction of a market for corporate control into the REIT industry. We argue that REIT anti-takeover provisions had doomed Simon's bid from the start and continue to preclude operation of a market for corporate control. However, we do find that Taubman's shares responded favorably to the announcement, rising by 12 percent on the announcement day. We attribute this to operation of the market for partial corporate control as described by Bethel, Leibeskind and Opler (1998).

anti-takeover provision, corporate control, hostile takeover, partial corporate control, REIT

Abstract:
In this study, we analyze differences by gender in privately held U.S. firms, and examine the role of gender in the availability of credit to such firms. Using data from the nationally representative Surveys of Small Business Finances, which span a period of 16 years, we document a series of empirical regularities in differences between male-owned and female-owned firms. Female-owned firms are significantly smaller as measured by sales, assets and employment; younger as measured by firm age; more likely to be organized as proprietorship and less likely to be organized as corporations; more likely to be in the retail trade and business services and less likely to be in the construction, secondary manufacturing and wholesale-trade industries; and have fewer and shorter banking relationships. Female owners are significantly younger, less experienced and less educated. We also find strong univariate evidence of differences in the availability of credit to male- and female-owned firms. More specifically, female-owned firms are significantly more likely to be credit-constrained because they are more likely to be discouraged from applying for credit but not more likely to be denied credit when they apply. However, these differences are rendered insignificant in a multivariate setting where we control for other firm and owner characteristics.

credit, discrimination, entrepreneurship, gender, SSBF

Abstract:
Bhasin, Cole, and Kiely (1997) document significant increases in REIT liquidity from 1990 to 1994 as measured by a narrowing of the percentage bid-ask spread. However, they measure the average spread in each year across all firms in the industry. In this article, I demonstrate that when the comparison is restricted to the panel of REITs operating in both time periods (1990 and 1994) rather than to all firms, percentage spreads widened rather than narrowed. I reconcile these seemingly contradictory results by showing that the narrowing of industry-wide spreads previously reported was driven by the spreads of REITs that went public during 1991-94. Hence, I contribute to the growing number of papers that differentiate the more recently established REITs from their predecessors.

bid-ask spread, liquidity, market microstructure, ownership structure, REIT

Abstract:
We investigate contagion effects in the stock returns of life insurance companies at the time of announcements by First Executive and Travelers of significant problems in their investment portfolios. We first demonstrate that investments in junk bonds or commercial mortgages are important for shareholder wealth effects of other insurance companies. We then directly link the shareholder wealth effects to characteristics of the firms' customers. Our evidence shows that effects on shareholder wealth are larger for companies with significant junk bond/commercial mortgage assets and readily mobile customers as represented by guaranteed investment contracts (GICs).

contagion, disintermediation, life insurance, writedowns

Abstract:
Restrictions on the ownership structure of a public company may harm the company's performance by preventing owners from choosing the best structure. We examine the stock-price performance and ownership structure, before and after the expiration of anti-takeover regulations, of a sample of thrift institutions that converted from mutual to stock ownership. We find that after the anti-takeover provisions expire, firm performance improves significantly, and the portions of the firm owned by managers, noninstitutional outside block holders, and the firm's employee stock ownership plan increase. Changes in performance are positively associated with changes in ownership by managers and by noninstitutional outside block holders but negatively associated with changes in ownership by employee stock ownership plans.

anti-takeover provisions, corporate control, ownership structure, regulation, savings & loan, S&L, thrift

Abstract:
This study uses a two-factor market-model to estimate excess returns around 43 announcements of FSLIC-assisted thrift mergers and 66 announcements of unassisted thrift mergers. These estimated excess returns are then used to test hypotheses about asymmetric-information and principal-agent problem in the thrift resolution process as sources of value in these mergers. The results show that acquirers in assisted transactions earned positive and statistically significant excess returns of approximately 2 percent, whereas acquirers in unassisted transactions earned excess returns that are not significantly different from zero; however, the excess returns in the assisted mergers are quantitatively small. For the 43 assisted mergers, estimated excess returns imply aggregate wealth transfers of only $13 million as compared with $2.3 billion in FSLIC assistance that were granted in these transactions. These findings suggest that the FSLIC-assisted transactions were reasonably well-structured and that the assistance granted did not result in large wealth transfers from the FSLIC and taxpayers to acquirers of insolvent institutions. Finally, the study provides evidence that informational asymmetries and principal-agent problems in the thrift resolution process were significant sources of excess returns for the acquirers receiving FSLIC assistance.

asymmetric information, deposit insurance, failure, FHLBB, FIRREA, FSLIC, insolvency, merger, OTS, principal-agent, RTC, S&L, thrift

Abstract:
Agency theory suggests that many of the costs incurred by the taxpayer during the 1980s thrift crisis were the result of conflicts between principals and their agents. This study models the costs associated with three distinct types of agency conflicts involved in closing an insolvent thrift conflicts between creditors and owners, between owners and managers, and between taxpayers and government officials. Using a model that controls for sample-selection bias, the study presents strong evidence that thrift owners effected wealth transfers from creditors by undertaking high-risk investments, and that government officials pursued policies that increased losses to the thrift deposit insurance fund which ultimately were funded by the taxpayer. The results do not show that managers effected wealth transfers from owners through expense-preference behavior, but rather that inefficient management increased the losses of the deposit insurance fund.

agency, agency cost, failure, moral hazard, principal-agent, saving & loan, S&L, thrift

Abstract:
Agency theory suggests that many of the costs incurred by the taxpayer during the 1980s thrift crisis were the result of conflicts between principals and their agents. This study models thrift failure costs as a function of three distinct types of agency conflicts: conflicts between creditors and owners, between owners and managers, and between taxpayers and government officials. Using a model that controls for sample-selection bias, the study presents strong evidence that thrift owners effected wealth transfers from creditors by undertaking high-risk investments, and that government officials pursued policies that increased losses to the thrift deposit insurance fund that were ultimately funded by the taxpayer. The results do not show that managers effected wealth transfers from owners through expense-preference behavior, but rather that inefficient management increased losses to the deposit insurance fund.

agency, agency cost, failure, moral hazard, principal-agent, saving & loan, S&L, thrift

Abstract:
This article examines the determinants of both book-value insolvency and regulatory closure in the thrift industry. Agency theory suggests that the determinants of insolvency and closure are a function of conflicts between shareholders and creditors, shareholders and managers, and regulators and taxpayers. Certain thrift attributes may have differing effects upon insolvency and closure because regulators' best interests may not be served by promptly closing insolvent institutions. In this study, both thrift insolvency and thrift closure are modeled as functions of two broad risk factors: operating risk and agency risk. Using a bivariate probit model to jointly examine determinants of insolvency and closure, the analysis reveals that measures of both operating risk and agency risk generally are statistically significant with the expected signs, providing evidence consistent with the existence both of moral hazard by thrift oweners and of expense-preferent behavior by thrift managers. The results also show that agency conflicts between regulators and taxpayers are important in explaining why some thrifts were closed while others were not.

closure, deposit insurance, FHLBB, FSLIC, insolvency, OTS, principal-agent, savings & loan, S&L, thrift

Abstract:
We estimate quarterly return series from March 1984 through December 1989 for ten classes of thrift assets using the statistical cost accounting methodology of Hester and Zoellner (1966). We then use these return series to estimate mean-variance efficient frontiers for all thrifts, for thrifts that were well-capitalized two years earlier, and for thrifts that were insolvent two years earlier. Our results show that neither the asset restrictions existing before nor those in effect after passage of the Financial Institutions Reform, Recovery and Enforcement Act of 1989 would have prevented thrifts from reaching most of the portfolios along the efficient frontier. The actual portfolio chosen by well capitalized thrifts is close to the estimated efficient frontier, while the actual portfolio chosen by insolvent thrifts is located far from the frontier in the high-risk end of investment space. These findings, coupled with the high proportion of nontraditional assets in the actual portfolio chosen by insolvent thrifts, support the hypothesis that moral hazard induced thrifts to take on investments that were excessively risky from the deposit insurer's point of view.

Abstract:
The recent consolidation in the banking system has focused attention on the difference in lending between large and small banks, since large banks lend proportionally less to small business. We use a newly available survey of small business finances conducted by the Federal Reserve System to analyze the micro-level differences between large banks and small banks in the loan approval process. We find that large banks (over $1 billion in assets) appear to employ standard criteria obtained from financial statements in the loan decision process, while small banks (less than $1 billion in assets) deviate from these criteria more and appear to rely on their impression of the character of the borrower to a larger extent. These "cookie-cutter" and "character" approaches are consistent with the incentives and environments facing large and small banks.

Abstract:
This study analyzes the performance of Texas commercial banks specializing in mortgage lending during the late 1980s and early 1990s to investigate how representative was their experience as compared with that of banks across the country concentrating in real estate lending. The results show that Texas real estate banks (REBs) performed very poorly during the 1980s and early 1990s, but this was because the Texas REBs were clearly different from the majority of the banks classified as REBs in the rest of the country. Texas REBs invested more heavily in commercial mortgages than did other banks. In a poor real estate market, these loans performed very poorly. The analysis indicates that the Texas experience is not a basis for rejecting the view that the commercial banking industry can safely replace the declining thrift industry as a major source of residential mortgage financing.

Abstract:
We use a simple dynamic hazard model with time-varying covariates to develop a bank-failure early warning model, and then test the out-of-sample forecasting accuracy of this model relative to a simple one-period probit model, such as is used by U.S. banking regulators. By incorporating time-varying covariates, our model enables us to utilize macro-economic variables, which cannot be incorporated into in a one-period model. We find that our model significantly outperforms the simple probit model with and without the macro-economic variables. The improvement in accuracy comes from the time-varying bank-specific variables.

bank, bank failure, early warning system, failure prediction, forecasting, hazard model, time-varying covariates

Abstract:
In this study, we use data on intra-day transactions to analyze whether REIT liquidity as measured by the bid-ask spread changed from 1990 to 1994, a period during which the industry's market capitalization increased from $9 billion to $45 billion. We find that REIT spreads narrowed significantly. We then use a variation of the empirical model proposed by Stoll (1978) to analyze the determinants of percentage spreads including whether spreads are determined by return variability, share price, exchange listing, and asset type. We find strong support for Stoll's model, in that return variance and share price are the primary determinants of percentage spreads in both periods analyzed. This suggests that the liquidity of REIT securities is similar to that of non-REIT securities with similar prices and return variance. In addition, we find that spreads are wider for REITs trading on NASDAQ. In contrast with an earlier study, we find that market capitalization is not a significant determinant of REIT spreads.

Abstract:
The appraisal of a major commercial property is a complex and challenging task. Typically, a client requests an opinion of market value, often with his or her own unique definition of value. Although definitions vary and "a current definition of market value" cited in the Appraisal Institute's principal text is quite distinguishable from a "most probable selling price, most practitioners are comforted when arms-length transactions between astute buyers and sellers take place at prices close to appraised market value.

This article examines a series of sales of commercial properties that had been recently appraised in an effort to assess the reliability of commercial appraisals. While there can be no perfect test of an opinion, we believe that the data are informative. On average, the absolute difference in sales price and most recent independent appraisal was almost 9%.

appraisal, commercial real estate, pension funds

Abstract:
This study examines average recoveries from distressed commercial real estate assets held by FSLIC receiverships, and explores differences in the relative efficiency of public versus quasi-private and private entities in the management of these assets. It finds that properties located in markets with rising per capita income and properties that were judged to be less difficult to manage and sell provided higher recoveries, while properties with smaller write downs prior to government takeover provided lower recoveries. The analysis also provides evidence that quasi-government management by the Federal Asset Disposition Agency provided higher mean recoveries, while private management by contractors provided lower mean recoveries than did public management by FSLIC receivership staff.

Asset Disposition, Commercial Real Estate, Distressed Real Estate, Deposit Insurance, FADA, FSLIC, S&L

Abstract:
Commercial real estate makes up a relatively small percentage of most institutional portfolios, even though the existing literature has consistently reported attractive risk-return characteristics that would suggest much larger allocations. The discrepancy has been explained by a perceived lack of comparability between return series calculated for real estate and those calculated for other asset classes. Just as investors actively involved in the futures markets do not consider individual common stocks to be traded continuously, those active in the stock market do not consider real estate to be traded continuously. In both cases, adjustments to reported returns are necessary to achieve a degree of comparability. This study makes such adjustments, using sales data from the properties that help comprise the National Council of Real Estate Fiduciaries/Frank Russell Company (NCREIF/FRC) Index to generate a transaction-driven commercial real estate return series. Examination of the risk-return characteristics of this series shows that it is quite different from traditionally reported real estate return series and is far more consistent with risk-return characteristics that have been reported for other asset classes.

commercial real estate, efficiency, hedonic, transaction index

Abstract:
This article summarized preliminary findings from the 1993 Survey of Small Business Finances, which was sponsored by the Federal Reserve Board and the Small Business Administration.

banking, entrepreneurship, small business, ,SSBF

Abstract:
Restrictions on stock ownership may harm a company's performance because restrictions prevent owners from choosing an optimal structure. We examine the stock-price performance and ownership structure of a sample of thrift institutions that converted from mutual to stock ownership. We find that, after conversion and the expiration of ownership-structure restrictions, firm performance improves significantly, and the portions of the firm owned by managers and the firm's employee stock ownership plan
increase. Changes in performance are positively associated with changes in ownership by managers, but negatively associated with changes in ownership by employee stock ownership plans.

corporate control, regulation, ownership structure, anti-takeover provisions

Abstract:
The informational opacity of small businesses makes them an interesting area for the study of banks' lending practices and procedures. We use data from a survey of small businesses to analyze the micro-level differences in the loan-approval processes of large and small banks. We provide evidence that large banks ($1 billion or more in assets) employ standard criteria obtained from financial statements in the loan decision process, whereas smaller banks rely to a larger extent on information about the character of the borrower. These cookie-cutter and character approaches are compatible with the incentives and environments facing large and small banks.

Bank, bank size, credit availability, relationship lending, small business