Federal Reserve Regulation A imposes formal guidelines on borrowing from the discount window and ensures that the facility is used for appropriate purposes. In a way, this regulation imposes a nonprice mechanism that compels depository institutions to be more prudent in exercising their borrowing privileges. In the 1980s, however, banks became increasingly more reluctant to borrow adjustment credit from the discount window. This behavior is puzzling because discount window guidelines have not changed. This paper investigates the reasons behind the weakened demand for borrowed reserves. Our empirical findings suggest that the growing reluctance to borrow stems from the deteriorating financial position of banks during this period. In particular, banks avoided the discount window because they feared that market participants might have interpreted their visits as a signal of serious funding difficulties.

[A large fraction of the companies that went private between 1990 and 2007 were fairly young public firms, often with the same management team making the crucial restructuring decisions at both the time of the initial public offering (IPO) and the buyout. This article investigates the determinants of the decision to go private over a firm's entire public life cycle. Our evidence reveals that firms with declining growth in analyst coverage, falling institutional ownership, and low stock turnover were more likely to go private and opted to do so sooner. We argue that a primary reason behind the decision of IPO firms to abandon their public listing was a failure to attract a critical mass of financial visibility and investor interest.]

A large fraction of the companies that went private between 1990 and 2007 were fairly young public firms, often with the same management team making the crucial restructuring decisions at both the time of the initial public offering (IPO) and the buyout. This article investigates the determinants of the decision to go private over a firm's entire public life cycle. Our evidence reveals that firms with declining growth in analyst coverage, falling institutional ownership, and low stock turnover were more likely to go private and opted to do so sooner. We argue that a primary reason behind the decision of IPO firms to abandon their public listing was a failure to attract a critical mass of financial visibility and investor interest.

This paper investigates the primary and secondary syndicated bank loan market to analyze the effect on pricing when the financial institution commingles syndicated lending with merger advisory services. In particular, we investigate the connection between the acquirer’s choice of financial advisor in a merger and future financing commitments. We find evidence of underpricing of syndicated bank loans in both the primary and secondary market. In the primary market, we show that non-acquisition loans granted by merger advisors to acquiring firms after the merger announcement date are charged a lower all-in-spread relative to acquisition loans if there has been a prior lending relationship. Consistent with this finding, we find that syndicated bank loans for non-acquisition purposes arranged by the acquirer’s advisor after the merger announcement date trade in the secondary market at a significant discount. Since the terms on these non-acquisition loans are not set upon merger announcement, they are most subject to risk shifting and underpricing agency problems. These findings offer evidence consistent with the existence of loss leader and potentially conflicted loans (priced at below-market terms) that are offered by the acquirer’s relationship bank advisor in order to win merger advisory business.

This study re-examines the 1990 credit slowdown by investigating the loan pricing behavior of commercial banks. We find strong evidence that large, undercapitalized banks contributed to the credit slowdown by charging consumers a higher-than-average loan rate relative to better-capitalized institutions. This disparity in lending exists even after accounting for bank funding costs. Thus, we argue that there was a lending slowdown that occurred among large, undercapitalized banks. The reluctance to lend among undercapitalized banks is at least suggestive of behavior that is consistent with a credit crunch.

This paper investigates whether the institutional affiliation of a collateralized loan obligation (CLO) manager influences the manager's access to information and risk appetite. We find that CLO managers affiliated with banks start to sell off their positions in loans arranged by their bank well before the onset of default. In contrast, CLO managers affiliated with nonbanks do not lower their exposures to distressed loans. These findings are consistent with bank-affiliated CLO managers being more risk averse, but they could also derive from them having access to valuable information. On close inspection, we find that although bank-affiliated CLO managers are averse to holding any distressed loans, they are also more aggressive at divesting distressed loans arranged by their parent bank, suggesting that they benefit from an information wedge. Besides helping us understand CLO managers’ trading activities, our findings highlight a potential limit to banks’ ability to originate loans and distribute them via their affiliated CLOs.

In this paper, we use methods from social network analysis to assess the relative importance of financial centers around the world. Using data from virtually the entire universe of global equity activity, we present complete rankings for 45 separate locations for the period 1990–2006. Our analysis constructs a network measure of prestige based on their ability to attract global IPOs. U.S. exchanges are effectively the unique hosts for cross-border equity activity from many other locations. Moreover, they are the destination of choice for most companies coming from locations with highly prestigious exchanges. We also document the emergence of several competing stock exchanges from developed and emerging market economies. The ascent of these stock markets, however, might reflect improved conditions in a growing global market rather than a decline in the competitiveness of U.S. exchanges.

In moral hazard models, bank shareholders have incentives to transfer wealth from the deposit insurer – that is, maximize put option value – by pursuing riskier strategies. For safe banks with large charter value, however, the risk-taking incentive is outweighed by the possibility of losing charter value. Focusing on the relationship between Tobin’s q and an ex ante measure of the failure probability, this paper develops a semi-parametric model for estimating the critical level of bank risk at which put option value starts outweighing charter value. From these estimates, we infer the prevalence of moral hazard. Examining publicly held bank holding companies (BHC) during the tumultuous 1986–1992 period, we find that shareholders’ risk-taking incentives were confined to a small fraction of highly risky institutions. Furthermore, our analysis shows that the inflection point at which banks begin to tilt in favor of moral hazard increased substantially in 1993–2005. These findings are encouraging to bank regulators and legislators because they indicate that tighter capital rules and more rigorous supervision introduced by several legislative initiatives in the 1990s have helped squeeze a lot of the moral hazard incentives out of the banking system.