This paper examines CEO pay in the banking industry and the effect of deregulating the market for corporate control. Using panel data on 147 banks over the 1980s, we find higher levels of pay in competitive corporate control markets, i.e., those in which interstate banking is permitted. We also find a stronger pay-performance relation in deregulated interstate banking markets. Finally, CEO turnover increases substantially after deregulation. These results provide evidence of a managerial talent market — one which matches the level and structure of pay with the competitiveness of the banking environment.

One possible explanation for bidding firms earning positive abnormal returns in diversifying acquisitions in the 1960s is that internal capital markets were expected to overcome the information deficiencies of the less‐developed capital markets. Examining 392 bidder firms during the 1960s, we find the highest bidder returns when financially “unconstrained” buyers acquire “constrained” targets. This result holds while controlling for merger terms and for different proxies used to classify firms facing costly external financing. We also find that bidders generally retain target management, suggesting that management may have provided company‐specific operational information, while the bidder provided capital‐budgeting expertise.

We find that short sellers manage risks by strategically borrowing shares in stocks with significant ownership by passive investors. This practice increases securities lending demand for stocks with substantial passive ownership, resulting in improved price efficiency, higher lending fees, and increased short interest in these stocks. Consistent with the risk mitigation motive, these stocks show reduced risks of unexpected fee hikes and loan recall, longer loan durations, and attract more informed short sellers. These effects are particularly pronounced in hard-to-borrow stocks where short-sale constraints are binding. Our study suggests that passive investing helps alleviate short-sale constraints by reducing the risks associated with stock borrowing.

This paper finds noninterest income is positively correlated with the total systemic risk for U.S. banks. Decomposing total systemic risk into three components, we find that noninterest income is positively related to a bank’s tail risk, positively related to a bank’s interconnectedness risk, and an insignificantly related to a bank’s exposure to macroeconomic and finance factors. We also find that noninterest income is more volatile and negatively related to interest income. Finally, we find trading and other noninterest income to be positively correlated with systemic risk. Other noninterest income, compared with trading income, has a slightly larger economic impact. (JEL G01, G18, G20, G21, G32, G38) Received October 31, 2019; editorial decision February 3, 2020 by Editor Andrew Ellul.

Is credit expansion a sign of desirable financial deepening or the prelude to an inevitable bust? We study this question in modern US data using a structural VAR model of 10 monthly frequency variables, identified by heteroskedasticity. Negative reduced-form responses of output to credit growth are caused by endogenous monetary policy response to credit expansion shocks. On average, credit and output growth remain positively associated. “Financial stress” shocks to credit spreads cause declines in output and credit levels. Neither credit aggregates nor spreads provide much advance warning of the 2008–2009 crisis, but spreads improve within-crisis forecasts.