FRANCESCA ARNABOLDI, University of Milan - Istituto di Scienze Economiche e Statistiche , University of Bocconi - Institute of Financial Markets and Institutions
Email: farnaboldi@unimi.it
PETER CLAEYS, European University Institute - Economics Department (ECO), University of Barcelona - Faculty of Economic Science and Business Studies
Email: Peter.Claeys@eui.eu

A key strategic issue for banks is the relative success of pure Internet banks and internet banking facilities offered by existing banks as part of an overall banking strategy (the click and mortar model). The object of the paper is to compare the performance of the two models across countries: Finland, Spain, Italy and the UK that have different banking systems and different levels of technological advance. From the fuzzy cluster analysis we found that internet banks are hard to distinguish from banks that adopt both click and mortar strategies. Country specific features seem to be important in explaining differences across banks. We therefore explain the performance of banks by a group of selected bank specific features, country specific macroeconomic indicators and information technology related ratios over the period 1995-2004. We find that the strategy of banking groups to incorporate internet banks reflects some competitive edge that these banks have in their business models.

JOSEP A. TRIBO, Universidad Carlos III de Madrid - Department of Economics
Email: JOATRIBO@EMP.UC3M.ES

In this paper we study the effect of banks' equity holdings on the probability of firms being listed on the stock market as well as on issuing negotiated debt. We argue that banks take an equity position either to expropriate the current shareholders or strategically to open the possibility of future business opportunities once firms are listed on the stock market. The first reason hinders security issues while the second stimulates them. We have shown that when banks' stakes are low, the expropriating argument applies, while the strategic one does so for large stakes. We have proved our contentions making use of a sample composed of 5160 firms from 59 different countries for the period 2000-2004.

MICHEL DUBOIS, University of Neuchatel - Institute of Financial Analysis
Email: michel.dubois@unine.ch
PASCAL DUMONTIER, University of Geneva - Graduate School of Business (HEC-Geneva)
Email: Pascal.Dumontier@hec.unige.ch

This study examines the economic consequences of the Market Abuse Directive which is notably aimed at curbing conflicts of interest in the EU. It focuses on the impact of this new regulation on stock price changes associated with recommendations issued by analysts potentially affected by conflicts of interest because they work for a financial institution having strong business ties with the firms they recommend. The empirical evidence indicates that only 2% of the recommendations under study were potentially biased by conflicts, versus 60% in the US. Furthermore, following MAD adoption, the proportion of Buy recommendations dropped only by 4.5% (versus 14% in the US following SOX501) and the proportion of Sell recommendations increased by 2% (versus 7.6% in the US). Regarding stock price effects, we find that MAD had a positive and significant impact on stock returns resulting from recommendation upgrades. This finding suggests that investors perceive these recommendations as more reliable since the adoption of the new regulation. This effect is not at the cost of less credible downgrades, the introduction MAD having no impact on market reactions to recommendation downgrades. However, the introduction of MAD had no impact on financial institutions with investment banking business, the most exposed to conflicts of interest, mainly because these conflicts did not materialize, even before the new regulation was passed. Finally, we examine whether the US regulation devoted to investment research, which is very similar to the European one, spilled over into the European Union, making MAD useless. Our results show that the Market Abuse Directive has its own legitimacy since the US regulation did not affect returns of European stock resulting from recommendations potentially biased by conflicts of interest.

SUMIT AGARWAL, Federal Reserve Bank of Chicago - Economic Research
Email: sagarwal@frbchi.org
ROBERT B.H. HAUSWALD, American University - Department of Finance and Real Estate
Email: hauswald@american.edu

Using a unique data set of loan applications by small businesses, we study the determinants of loan transactions focusing on the respective roles of private information and borrower proximity. Although credit availability and the offered loan rate decrease in the bank-borrower distance and increase in the borrower-competitor distance, the inclusion of proxies for the bank's proprietary and private information reduces these effects to the point of insignificance. Analyzing loan rates and borrowers' decision to switch lenders we find strong evidence for the informational capture of good credit risks. Our results shed new light on the importance of soft information in informationally opaque credit markets and show how borrower proximity facilitates the production of proprietary intelligence that helps banks to exploit information asymmetries and to locally carve out captive markets.

CEM DEMIROGLU, University of Florida - Department of Finance, Insurance and Real Estate
Email: cem.demiroglu@cba.ufl.edu
CHRISTOPHER M. JAMES, University of Florida - Department of Finance, Insurance and Real Estate
Email: christopher.james@cba.ufl.edu

In this paper, we examine whether the reputation of the acquiring private equity group (PEG) is related to the financing structure, loan contract terms, and valuation of LBOs. Using a sample of 181 public-to-private leveraged buyouts (LBOs) completed during the January 1, 1997 to August 15, 2007 period, we find that buyouts sponsored by high reputation funds pay narrower loan spreads, have fewer and less restrictive financial loan covenants, use less traditional bank debt, and borrow more and at a lower cost from institutional loan markets. In addition, PEG reputation is positively related to the amount of leverage used to finance the buyout. While we find that reputation is related to the amount of leverage used, and leverage is significantly related to buyout pricing, we do not find any direct effect of reputation on buyout valuations. We also find that deals sponsored by high reputation PEGs are less likely to experience financial distress or bankruptcy ex-post. The evidence is consistent with the hypothesis that deals involving reputable PEGs are perceived as less risky by creditors because reputable PEGs are more skillful in selecting and monitoring investments or because reputation serves to mitigate the agency costs of debt and thus lowers the need for bank monitoring and control. We also find that macroeconomic conditions (e.g. credit risk spreads), growth prospects, ex-ante risk, and deal size also impact buyout financing terms and valuations. Overall, our results suggest that the increase in leverage and the decline in both the proportion of bank debt financing and the restrictiveness of covenants in recent deals reflect in part the involvement of experienced PEGs in recent buyouts.

MIGUEL A. FERREIRA, ISCTE Business School, Lisbon
Email: miguel.ferreira@iscte.pt
PEDRO P. MATOS, USC Marshall School of Business
Email: pmatos@marshall.usc.edu

This paper studies the impact of connections between banks and firms on the lead arranger bank choice and loan pricing in the global syndicated loan market. We examine cases where the bank is an insider on the borrower firm by representation on the board of directors or by holding equity stakes directly and indirectly (through affiliated institutional money managers). These connections have a positive and significant effect on a firm's lead arranger bank choice. Additionally, we find that banks charge higher interest rate spreads and face less credit risk after origination when lending to firms where the bank is an insider. Our findings suggest that the influence of banks over firms seems to accrue mostly to the banks' benefit, and therefore conclude for the existence of a conflict of interest between the role of lender and that of insider in the firm.

ALFRED LEHAR, Haskayne School of Business, University of Vienna - Institute of Business Administration
Email: alehar@ucalgary.ca
DUANE J. SEPPI, Carnegie Mellon University - David A. Tepper School of Business
Email: ds64@andrew.cmu.edu
GÜNTER STROBL, University of North Carolina at Chapel Hill - Kenan-Flagler Business School
Email: strobl@unc.edu

An important trend in bank regulation is greater reliance on market discipline. In particular, information impounded in securities prices is increasingly used to complement supervisory activities of regulators with limited resources. The goal of this paper is to analyze the theoretical foundations of market-based bank regulation. We find that price information only improves the efficiency of the regulator's monitoring function if the banks' risk-shifting incentives are not too large. Further, if the regulator cannot commit to an ex ante suboptimal auditing policy, market-based bank regulation can lead to more risk taking in equilibrium, increasing the expected payments by the deposit insurance agency. Finally, we show that the regulatory use of market information can decrease the investors' incentives to acquire costly information, thereby reducing the informativeness of stock prices.

DENISE M. FINNEY, Independent
Email: dmf4mtgloan@sprintpcs.com

Prior to its collapse Bear Stearns and other investment banks had taken the lead in the mortgage funding market through securitization. The Federal Reserve's decision to provide backing to Bear Stearns, and to other Wall Street investment banks signaled a greater liquidity crisis sent the dollar plummeting against international currencies on March 17th. The Bear collapse will affect the functioning of all financial markets both nationally and internationally.