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Working Paper
Supervisory Stringency, Payout Restrictions, and Bank Equity Prices
I study investor responses to the 2020 bank stress tests that included restrictions on shareholder payouts. I find that banks subject to the stress tests and payout restrictions experienced both immediate and persistently lower excess stock price returns. In the cross-section, I find that excess stock returns declined with bank size but cannot otherwise be explained by pre-pandemic bank or payout characteristics, suggesting that investors penalized banks likely to experience greater regulatory scrutiny. However, the excess stock return penalties are smaller than those previously estimated in ...
Report
Bank holding company dividends and repurchases during the financial crisis
Many large U.S. bank holding companies (BHCs) continued to pay dividends during the 2007-09 financial crisis, even as financial market conditions deteriorated, large losses accumulated, and emergency capital and liquidity were being provided by the official sector. In contrast, share repurchases by these BHCs dropped sharply in the early part of the crisis. Documenting this divergent behavior is one of the key contributions of this paper. The paper also examines the role that repurchases played in large BHCs? decisions to reduce or eliminate dividends. The key findings are that smaller BHCs ...
Working Paper
Workplace Automation and Corporate Liquidity Policy
Using an occupational probability of computerization, we measure a firm’s ability to replace labor with automated capital. Our evidence suggests that the potential to automate a workforce enhances operating flexibility, allowing firms to hold less precautionary cash. To provide evidence for this mechanism, we exploit the 2011–2012 Thailand hard drive crisis as an exogenous shock to the cost of automation. In addition, the negative relation between prospective automation and cash holdings is greater for firms with a lower expected cost of worker displacement and greater ...
Working Paper
Insider bank runs: community bank fragility and the financial crisis of 2007
From 2007 to 2010, more than 200 community banks in the United States failed. Many of these failed community banking organizations (CBOs) held less than $1 billion in total assets. As economic conditions worsen, banking organizations are expected to preserve capital to withstand unexpected losses. This study examines CBOs prior to failure or becoming problem institutions to understand if, on average, a run on capital by insiders via dividend payouts led to greater financial fragility at the onset of the crisis. We use a control group of similar-sized banks that did not fail or become problem ...
Report
How do stock repurchases affect bank holding company performance?
Using data from bank holding company regulatory reports, we examine the relationship between stock repurchases and financial performance for a large sample of bank holding companies over the years 1987 to 1998. The primary result is that higher levels of repurchases in one year are associated with higher profitability and a lower share of problem loans in the subsequent year. This finding is robust to several different ways of measuring share repurchase activity. Our results appear to be driven primarily by bank holding companies with publicly traded stock, especially those companies whose ...
Working Paper
Equity Financing Risk
A risk factor linked to aggregate equity issuance conditions explains the empirical performance of investment factors based on the asset growth anomaly of Cooper, Gulen, and Schill (2008). This new risk factor, dubbed equity financing risk (EFR) factor, subsumes investment factors in leading linear factor models. Most importantly, when substituted for investment factors, the EFR factor improves the overall pricing performance of linear factor models, delivering a significant reduction in absolute pricing errors and their associated t-statistics for several anomalies, including the ones ...
Working Paper
Reputation and Investor Activism: A Structural Approach
We measure the impact of reputation for proxy fighting on investor activism by estimating a dynamic model in which activists engage a sequence of target firms. Our estimation produces an evolving reputation measure for each activist and quantifies its impact on campaign frequency and outcomes. We find that high reputation activists initiate 3.5 times as many campaigns and extract 85% more settlements from targets, and that reputation-building incentives explain 20% of campaign initiations and 19% of proxy fights. Our estimates indicate these reputation effects combine to nearly double the ...
Working Paper
Reputation and Investor Activism
We show that an activist's reputation is a critical determinant of the success of their campaigns. We model reputation as target managers' belief about the activist's willingness to initiate a proxy fight. Our model indicates reputation, rather than stake size, induces managers to settle without a proxy fight. We present empirical evidence supporting our model's predictions: target companies more-frequently increase payouts, change management or board composition, engage in a merger or acquisition, or otherwise reorganize in response to high reputation activist campaigns, while target actions ...
Report
Caught between Scylla and Charybdis? Regulating bank leverage when there is rent seeking and risk shifting
We consider a model in which banking is characterized by asset substitution moral hazard and managerial underprovision of effort in loan monitoring. The privately optimal bank leverage efficiently balances the benefit of debt in providing the discipline to ensure that the bank monitors its loans against the benefit of equity in attenuating asset-substitution moral hazard. However, when correlated bank failures impose significant social costs, regulators bail out bank creditors. Anticipation of this action generates multiple equilibria, including an equilibrium featuring systemic risk, in ...
Working Paper
The Global Rise of Corporate Saving
The sectoral composition of global saving changed dramatically during the last three decades. Whereas in the early 1980s most of global investment was funded by household saving, nowadays nearly two-thirds of global investment is funded by corporate saving. This shift in the sectoral composition of saving was not accompanied by changes in the sectoral composition of investment, implying an improvement in the corporate net lending position. We characterize the behavior of corporate saving using both national income accounts and firm-level data and clarify its relationship with the global ...