Corporate Finance

November 14, 2014
Nittai Bergman and Antoinette Schoar, MIT, Organizers

Puriya Abbassi, Deutsche Bundesban; Rajkamal Iyer, MIT; and Jose-Luis Peydro, Universitat Pompeu Fabra

Securities' Trading by Banks: Micro-Evidence

Abbassi, Iyer, Peydro and Tous analyze security-trading activities of banks in the crisis, and the associated spillovers to the supply of bank credit. Empirical analysis has been elusive due to the lack of comprehensive securities register for banks. The researchers use a unique proprietary dataset of investments of banks at the security-level for the period between 2005-2012 in conjunction with the credit register from Germany. They find that banks with higher levels of capital increase their overall investments in securities during the crisis. Effects are quantitatively stronger in securities whose prices have previously fallen, especially in investments with lower ratings and longer maturity. However, there is no differential effect for securities without market prices (non-traded securities). Finally, these banks reduce their overall supply of credit in crisis times, with stronger effects when overall securities prices fall more.

Anil Kashyap, University of Chicago and NBER; Dimitrios Tsomocos, University of Oxford; and Alexandros Vardoulakis, Board of Governors of the Federal Reserve System

How Does Macroprudential Regulation Change Bank Credit Supply? (NBER Working Paper 20165)

Kashyap, Tsomocos, and Vardoulakis analyze a variant of the Diamond-Dybvig (1983) model of banking in which savers can use a bank to invest in a risky project operated by an entrepreneur. The savers can buy equity in the bank and save via deposits. The bank chooses to invest in a safe asset or to fund the entrepreneur. The bank and the entrepreneur face limited liability and there is a probability of a run which is governed by the bank's leverage and its mix of safe and risky assets. The possibility of the run reduces the incentive to lend and take risk, while limited liability pushes for excessive lending and risk-taking. The researchers explore how capital regulation, liquidity regulation, deposit insurance, loan to value limits, and dividend taxes interact to offset these frictions. The authors compare agents welfare in the decentralized equilibrium absent regulation with welfare in equilibria that prevail with various regulations that are optimally chosen. In general, regulation can lead to Pareto improvements but fully correcting both distortions requires more than one regulation.

Daniel Paravisini and Veronica Rappoport, London School of Economics, and Philipp Schnabl, New York University and NBER

Comparative Advantage and Specialization in Bank Lending

Paravisini, Rappoport, and Schnabl develop an empirical approach for identifying comparative advantages in bank lending. Using matched credit-export data from Peru, the researchers first uncover patterns of bank specialization by export market: every country has a subset of banks with an abnormally large loan portfolio exposure to its exports. Using outliers to measure specialization, the authors use a revealed preference approach to show that bank specialization reflects a comparative advantage in lending. They show, in specifications that saturate all firm-time and bank-time variation, that firms that expand exports to a destination market tend to expand borrowing disproportionately more from banks specialized in that destination market. Bank comparative advantages increase with bank size in the cross section, and in the time series after mergers. Their results challenge the perceived view that, outside relationship lending, banks are perfectly substitutable sources of funding.

Efraim Benmelech, Northwestern University and NBER, and Ralf Meisenzahl and Rodney Ramcharan, Federal Reserve Board

The Real Effects of Liquidity during the Financial Crisis

Roni Michaely, Cornell University; Martin Jacob, WHU - Otto Beisheim School of Management; and Annette Alstadsæter, University of Oslo

Taxation and Dividend Policy: The Muting Effect of Diverse Ownership Structure

Policymakers frequently try to use dividend tax changes to affect payout policy. However, empirical evidence finds the effect to be much smaller than theory implies. Using identification strategy that exploits a large exogenous shock to dividend taxation and comprehensive proprietary data on ownership structure and owners' tax preference, Jacob, Michaely, and Alstadsæter show that absent of conflicting objectives between managers and owners, dividend taxation has a large effect on payouts. The impact becomes insignificant as the number of owners increases. Differential tax preferences across owners is one factor. However, even when owners have the same tax preferences, disperse ownership significantly reduces the impact of dividend taxation; plausibly due to coordination problems across owners and conflicting objectives of owners and managers. The researchers' results explain why previous evidence on the impact of dividend taxation has been so elusive. Taxation has a first order impact on payout policy, but disperse ownership mutes its impact substantially.

Jonathan Berk, Stanford University and NBER; Jules van Binsbergen, University of Pennsylvania and NBER; and Binying Liu, Northwestern University

Matching Capital and Labor (NBER Working Paper 20138)

Berk, van Binsbergen, and Liu establish an important role for the firm by studying capital reallocation decisions of mutual fund firms. At least 30% of the value mutual fund managers add can be attributed to the firm's role in efficiently allocating capital amongst its mutual fund managers. The researchers find no evidence of a similar effect when a firm hires managers from another firm. They conclude that an important reason why firms exist is the private information that derives from the firm's ability to better assess the skill of its own employees.

Alexander Dyck, University of Toronto; Adair Morse, University of California, Berkeley and NBER; and Luigi Zingales, University of Chicago and NBER

How Pervasive is Corporate Fraud

Dyck, Morse, and Zingales estimate the pervasiveness and the cost of corporate fraud. To identify the potential 'iceberg' of undetected fraud the researchers take advantage of Arthur Andersen's demise, which forces companies to change auditors and exposes preexisting frauds. This experiment suggests that only one quarter of frauds are detected in normal times, and leads the authors to infer that in the 1996-2004 period on average one out of seven large publicly-traded U.S. firms was engaged in fraud. The researchers obtain similar estimates by using an alternative approach. Firms that engage in fraud destroy on average one fifth of their value. These estimates set the average cost of fraud in large corporations to be $380 billion a year.

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