Corporate Finance

April 11, 2014
Steven Kaplan and Kelly Shue, University of Chicago Booth School, Organizers

Johannes Stroebel, New York University; Sumit Agarwal, National University of Singapore; Souphala Chomsisengphet, Department of the Treasury; and Neale Mahoney, University of Chicago and NBER

Regulating Consumer Financial Products: Evidence from Credit Cards (NBER Working Paper 19484)

Agarwal, Chomsisengphet, Mahoney, and Stroebel analyze the effectiveness of consumer financial regulation by considering the 2009 Credit Card Accountability Responsibility and Disclosure (CARD) Act in the United States. Using a difference-in-difference research design and a unique panel dataset covering more than 150 million credit card accounts, they find that regulatory limits on credit card fees reduced overall borrowing costs to consumers by an annualized 1.7 percent of average daily balances, with a decline of more than 5.5 percent for consumers with the lowest FICO scores. Consistent with a model of low fee salience and limited market competition, the authors find no evidence of an offsetting increase in interest charges or a reduction in volume of credit. Taken together, they estimate that the CARD Act fee reductions have saved U.S. consumers $12.6 billion per year. The authors also analyze the CARD Act requirement to disclose the interest savings from paying off balances in 36 months rather than only making minimum payments. They find that this "nudge" increased the number of account holders making the 36-month payment by 0.5 percentage points.

Andrew Ang, Columbia University and NBER; William Goetzmann, Yale University and NBER; and Ludovic Phalippou, University of Oxford

Estimating Private Equity Returns from Limited Partner Cash Flows

Ang, Chen, Goetzmann, and Phalippou introduce a methodology to estimate the historical time series of returns to investment in private equity. The approach is quite general, requires only an unbalanced panel of cash contributions and distributions accruing to limited partners, and is robust to sparse data. The authors decompose private equity returns into a component attributable to traded factors and a time-varying private equity premium. They find strong cyclicality in the premium component that differs according to fund type. The time-series estimates allow the authors to directly test theories about private equity cyclicality and they find evidence in favor of the Kaplan and Strömberg (2009) hypothesis that capital market segmentation helps to determine the private equity premium.

Itzhak Ben-David, Ohio State University and NBER; Ajay Palvia, Office of the Comptroller of the Currency; and Chester Spatt, Carnegie Mellon University and NBER

Banks' Internal Capital Markets and Deposit Rates

A common view is that deposit rates are determined primarily by supply: depositors require higher deposit rates from risky banks and hence create market discipline. An alternative mechanism is that market discipline is weak (potentially because of deposit insurance, for example) and that internal demand for funding by banks determines rates. Using branch-level deposit rate data, Ben-David, Palvia, and Spatt find little evidence for market discipline as rates are similar across bank capitalization levels. In contrast, banks' loan growth has a causal effect on deposit rates; for example, branches' rates are correlated with loan growth in other states in which their bank has a presence.

Shai Bernstein, Stanford University, and Albert Sheen, Harvard University

The Operational Consequences of Private Equity Buyouts: Evidence from the Restaurant Industry

How do private equity firms affect their portfolio companies? Bernstein and Sheen document operational changes in restaurant chain buyouts between 2002 and 2012 using comprehensive health inspection records in Florida. Store-level operational practices improve after private equity buyouts as restaurants become cleaner, safer, and better maintained. Supporting a causal interpretation, this effect is stronger in chain-owned stores than in franchised locations-"twin" restaurants over which private equity owners have limited control. Private equity targets also slightly reduce employee head counts and lower menu prices. These changes to store-level operations require monitoring, training, and alignment of worker incentives, suggesting that private equity firms improve management practices throughout the organization.

Jongha Lim, University of Missouri, and Berk Sensoy and Michael Weisbach, Ohio State University

Indirect Incentives of Hedge Fund Managers (NBER Working Paper 18903)

Indirect incentives exist in the money management industry when good current performance increases future inflows of new capital, leading to higher future fees. Lim, Sensoy, and Weisbach quantify the magnitude of indirect performance incentives for hedge fund managers. Flows respond quickly and strongly to performance; lagged performance has a monotonically decreasing impact on flows as lags increase up to two years. Conservative estimates indicate that indirect incentives for the average fund are four times as large as direct incentives from incentive fees and returns to managers' own investment in the fund. For new funds, indirect incentives are seven times as large as direct incentives. Combining direct and indirect incentives, for each dollar generated for their investors in a given year, managers receive close to 74 cents in direct performance fees plus the present value of future fees over the expected life of the fund. Older and capacity-constrained funds have considerably weaker relations between future flows and performance, leading to weaker indirect incentives. There is no evidence that direct contractual incentives are stronger when market-based indirect incentives are weaker.

Samuel Hanson and Andrei Shleifer, Harvard University and NBER; Jeremy Stein, Federal Reserve Board of Governors; and Robert Vishny, University of Chicago and NBER

Banks as Patient Fixed Income Investors

Hanson, Shleifer, Stein, and Vishny examine the business model of traditional commercial banks in the context of their coexistence with shadow banks. While both types of intermediaries create safe "money-like" claims, they go about this in very different ways. Traditional banks create safe claims with a combination of costly equity capital and fixed income assets that allows their depositors to remain "sleepy": they do not have to pay attention to transient fluctuations in the mark-to-market value of bank assets. In contrast, shadow banks create safe claims by giving their investors an early exit option that allows them to seize collateral and liquidate it at the first sign of trouble. Thus traditional banks have a stable source of cheap funding, while shadow banks are subject to runs and fire-sale losses. These different funding models in turn influence the kinds of assets that traditional banks and shadow banks hold in equilibrium: traditional banks have a comparative advantage at holding fixed-income assets that have only modest fundamental risk, but are relatively illiquid and have substantial transitory price volatility.

Francisco Perez-Gonzalez, Stanford University and NBER

The Death Sentence, Organizations and Firm Performance

Perez-Gonzalez examines the importance of organizational form for firm performance. He exploits plausibly exogenous variation in organizational form that resulted from the implementation of the Public Utility Holding Company Act (PUHCA) of 1935. PUHCA, through the so-called "death sentence" clause (DSC), stipulated that holding companies (HCs) could only retain businesses as long as their assets were geographically integrated and their organizational structures were simplified. Using hand-collected data, the author discovers five main findings. First, PUHCA led to a drastic simplification of corporate ownership: more than 40 percent of the operating firms ceased to be part of a holding company. Second, firms that in 1935 were part of regionally fragmented HCs were three times more likely to be independent in 1955 than those that were part of regionally integrated HCs. Third, using measures of regional fragmentation as instrumental variables for standalone status, the author shows that standalone firms are more productive and profitable, grow faster, and pay more dividends than HC firms. Fourth, he finds that HCs were likely to extract rents from consumers and minority investors. Fifth, consistent with superior HC tax arbitrage capabilities, standalone firms are less aggressive at capturing the tax benefits of debt. In sum, the evidence casts doubt on the idea that HCs are superior organizational structures, and also challenges the notion that PUHCA's divestment requirements led to the "death" of the industry as anticipated by its critics.

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