This study proposes a political interference hypothesis to explain how political considerations depress the performance of government banks. We define political interference as a situation in which government bank executives are replaced within 12months after the country’s major elections (presidential or parliamentary elections). We classify political and non-political government banks as those that experience or do not experience political interference, respectively. The hypothesis firstly suggests that once government banks undertake political interference, their financial performance deteriorates. That is, political banks display the worst performance, followed by non-political banks and private banks have the best performance. Next, we posit that the impact of political interference is greater in developing countries than in developed countries. Finally, we hypothesize that the underperformance of government banks will be reduced if we remove political interference. By employing bank data from 65 countries from the period of 2003–2007, our hypothesis effectively explains why government banks in developed countries escape relatively unscathed, while those in developing countries suffer significantly.

By examining cross-country data for the period from 2000 to 2010, this study investigates whether monitoring by the media affects the performance of government-owned banks (GOBs). The results indicate that GOBs under strong monitoring do not underperform privately owned banks (POBs), whereas those under weak monitoring do underperform POBs. Further, we find that the strength of the media's monitoring has an important effect on corruption behavior and banks’ performance. This result provides an important policy implication that the government should minimize its ownership, and therefore its influence, in the media sector if it intends to improve the performance of its GOBs.

In this paper, we examine the effect of labor unions on bank performance during the recent financial crisis. Empirical evidence from the 314 largest global banks indicates that the stock returns and profitability of unionized banks are higher, and the default probabilities are lower than non-unionized banks. Moreover, unionized banks have lower tail risk in their stock returns, more tangible equity, more liquid assets, and better quality lending before the crisis than non-unionized banks. These finding show that unionized banks operate more conservatively and engage in less risk-taking. Our results imply that union preferences can shape the risk culture of banks.

Our paper examines whether investor opinions expressed in social media predicted stock returns of financial firms during the 2007–2009 global financial crisis. We conduct a textual analysis of the articles published on the stock market insight website Seeking Alpha before the crisis and find that banks that were described in articles with a higher fraction of negative words experienced (1) sharper drops in stock prices, (2) larger increases in expected default probability, and (3) greater surges in nonperforming loans during the crisis. Our evidence suggests that wisdom of crowds provides valuable information on how banks weather a forthcoming crisis.

We find that changes in short interest predict banks’ stock returns during two recent banking crises. Furthermore, before the 2007–2008 crisis, short interest increased more for banks with worse performance during the Long-Term Capital Management crisis of 1998. We also find that changes in short interest predicted banks’ loan quality and default risk during the 2007–2008 crisis. The results are stronger for banks with higher levels of risk-taking. Overall, our findings indicate that short sellers were informed about the persistent risky business models of banks and shorted those banks before the 2007–2008 crisis.

We hypothesize that when managers do not exercise their options, they signal valuable private information. Accordingly, we construct a proxy to capture managers’ private information from their in-the-money vested options unexercised (VOU) and find that high VOU firms’ stocks are underpriced. A long-short portfolio based on VOU generates a 5% alpha annually. Additionally, we find a positive relation with subsequent operating performance. Firms with higher VOU also receive more favorable analyst recommendations and upgraded credit ratings. Firms with higher VOU are more likely to issue news releases, share repurchases, and stock splits to convey that private information to the public. (JEL G11, G14, G32, G35, G40)

Over a period that includes the 1998 Russian crisis and 2007–2009 financial crisis,banks with overconfident chief executive officers (CEOs) were more likely to weaken lending standards and increase leverage than other banksin advance of a crisis,making them more vulnerable to the shock of the crisis.During crisis years, they generally experienced more increases in loan defaults, greater drops in operating and stock return performance, greater increases in expected default probability, and higher likelihood of CEO turnover or failure than other banks.CEO overconfidence thus canexplain the cross-sectional heterogeneity in risk-taking behavior among banks.

While there is no apparent reason for loan spreads to cluster at certain numbers, we find that approximately 70 % of bank loans have round-yard spreads (i.e., multiples of 25 basis points). We hypothesize that dominant banks implicitly collude using round yards as focal pricing points when negotiating with borrowers. Tacit collusion leads to higher spreads and total costs of round yard priced loans than of non-round yard priced loans. Consistent with our tacit collusion hypothesis, dominant banks round up loans to multiple yards rather than rounding them down. Moreover, round-yard pricing is more prevalent among lower-quality and nonrepeat borrowers.

In this paper, we examine the effect of managerial overconfidence on bank loan spreads. Our theoretical model and empirical results support that firms with highly overconfident CEOs have lower loan spreads and that the reducing effect of these CEOs on the spread is more pronounced when the loan contracts have collateral or covenants. Unlike firms with highly overconfident CEOs, firms with moderately overconfident CEOs do not receive lower loan spreads. We perform various tests to alleviate the concerns about endogeneity, and the results are robust. The results are consistent with the idea that highly overconfident CEOs are more willing to pledge collateral and accept covenants in exchange for a reduction in their loan rate.

Using a sample of banks from 56 countries, this paper investigates the lending behavior of government banks during the crisis of 2008, and its association with bank performance and the economy. Contrary to the traditional wisdom, we find that government banks can play a beneficial role under certain circumstances. Government banks have higher loan growth rates than private banks during the crisis. In countries with low corruption, the increased lending by government banks is associated with better bank performance and more favorable GDP and employment growth in the crisis period. In contrast, the results for countries with high corruption are more consistent with the political view: the increased lending by government banks is associated with underperformance relative to private banks, and creates no beneficial effects on either GDP growth or employment.