Lending to troubled thrifts: the case of FHLBanks
AUTHORS: Brewer, Elijah; Ashley, Lisa K.
Deregulation and the relationship between bank CEO compensation and risk taking
The deregulation of the banking industry during the 1990s provides a natural (public policy) experiment for investigating how firms adjust their executive compensation contracts as the environment in which they operate becomes relatively more competitive. Using the Riegle-Neal Act of 1994 as a focal point, we investigate how banks changed the equity-based component of bank CEO compensation contracts. We also examine the relationships between equity- based compensation and risk, capital structure, and investment opportunity set. Consistent with theoretical predictions, we find that after deregulation, the equity- based component of bank CEO compensation increases significantly on average for the industry. Additionally, we find that more risky banks have significantly higher levels of equity-based compensation, as do banks with more investment opportunities. But, more levered banks do not have higher levels of equity-based CEO compensation. Finally, we observe that most of these relationships become more powerful in our post- deregulation period.
AUTHORS: Brewer, Elijah; Hunter, William C.; Jackson, William E.
Pricing IPOs of mutual thrift conversions: the joint effect of regulation and market discipline
A large number of mutual savings and loan associations (MSLs) converted their charters into stock ownership between the mid-1980s to mid-1990s. Because these conversions tended to generate windfall profits for insiders and investors, new conversion guidelines and regulations were proposed by the FDIC to make sure that prices of the conversion IPO were right and fair. As pointed out by Mr. Henry B. Gonzales, former Chairman of the House Banking Committee, "conversion regulations of the Office of Thrift Supervision have ensured that insiders and acquirers don't benefit at the expenses of the institutions and its account holders. ; This study examines the price behavior of the mutual-to-stock conversions from 1985 to 1996. We show that if the thrift members exercised their rights to subscribe the new shares allotted to them or were allowed to sell their rights, whether the conversion IPOs were under-or-over-priced would not create any wealth transfer. Given the absence of wealth transfers, in order to guarantee full subscription, price discounts might be necessary. Empirically, we find that under- pricing was common for the thrift conversions, but not as significant as found in non-banking industries. We also examine the relationship between insider the subscriptions and after market price movements and find that insider-subscriptions have a positive correlation with after-market performance. We believe that insider- subscriptions can therefore be used as a "signal" to encourage unsophisticated mutual depositors to exercise their in-the-money rights. Finally, using options-pricing theory, we find that underwriters' spreads can be explained by volatility but not by the relationship between the offering price and the estimated market price. Therefore, the use of uninsured rights, instead of rights with standby underwriting, appears to be a more cost-effective method of equity flotation for thrift conversions. This occurs because the "insurance premium" associated with the latter does not reflect the discount that would increase the probability of the offer's success.
AUTHORS: Evanoff, Douglas D.; Brewer, Elijah; So, Jacky C.
Does the Japanese stock market price bank risk? evidence from financial firm failures
The efficiency of Japanese stock market to appropriately price the riskiness of Japanese firms has been frequently questioned, particularly with respect to Japanese banks which have experienced severe financial distress in recent years. This paper examines the response in the stock market returns of Japanese commercial banks to the failure of four commercial banks and two securities firms between 1995 and 1998. The analysis finds that the stock market responded to new information of the failures and did so rationally. Financially weaker banks were affected more adversely by the failure of other banks and financial institutions than were healthier banks. This suggests that the Japanese stock market is more efficient, even for banks, than often perceived.
AUTHORS: Brewer, Elijah; Genay, Hesna; Hunter, William C.; Kaufman, George G.
How much would banks be willing to pay to become \\"too-big-to-fail\\" and to capture other benefits?
This paper examines an important aspect of the ?too-big-to-fail? (TBTF) policy employed by regulatory agencies in the United States. How much is it worth to become TBTF? How much has the TBTF status added to bank shareholders? wealth? Using market and accounting data during the merger boom (1991-2004) when larger banks greatly expanded their size through mergers and acquisitions, we find that banking organizations are willing to pay an added premium for mergers that will put them over the asset sizes that are commonly viewed as the thresholds for being TBTF. We estimate at least $14 billion in added premiums for the nine merger deals that brought the organizations over $100 billion in total assets. These added premiums may reflect that perceived benefits of being TBTF and/or other potential benefits associated with size.
AUTHORS: Brewer, Elijah; Jagtiani, Julapa
Impact of independent directors and the regulatory environment on merger prices and motivation: evidence from large bank mergers in the 1990s
AUTHORS: Brewer, Elijah; Jagtiani, Julapa; Jackson, William E.
Performance and access to government guarantees: the case of small business investment companies
This article analyzes the performance of small business investment companies (SBICs) that are chartered and regulated by the Small Business Administration (SBA). Our principal finding is that poor performance over the 1986-91 period is associated with high usage of funds from the SBA.
AUTHORS: Brewer, Elijah; Worthington, Paula R.; Jackson, William E.; Genay, Hesna
Why the life insurance industry did not face an \\"S&L-type\\" crisis
AUTHORS: Strahan, Philip E.; Mondschean, Thomas H.; Brewer, Elijah
The price of bank mergers in the 1990s
This article examines the primary motivations for the massive wave of bank mergers in the U.S. during the 1990s by analyzing the prices paid for target banks. The authors find that these prices reflect both general market and firm-specific characteristics. For example, the lifting of regulatory restrictions on geographic markets for bank mergers has a significant impact on the average price paid. Additionally, more profitable target banks tend to command a significantly higher market price.
AUTHORS: Brewer, Elijah; Jackson, William E.; Jagtiani, Julapa; Nguyen, Thong
The value of using interest rate derivatives to manage risk of U.S. banking organizations
This article examines the major differences in the accounting and stock market characteristics of banking organizations that use derivatives relative to those that do not.
AUTHORS: Brewer, Elijah; Jackson, William E.; Moser, James T.