We hypothesize that financial risk-taking originates in preindustrial interpersonal population diversity. We use data on immigrants residing in the United States and show that controlling for all known determinants of portfolio decisions and more than 100 control variables, diversity in the country of immigrants’ origin positively affects stock market participation and the level of risky asset holdings. Our results remain robust when instrumenting diversity with plant variety. We also identify the channels through which the effect of diversity operates (mostly individualism and human capital), but also conclude that diversity exerts an independent effect.

Lending to corporates in foreign currencies can expose banks to substantial currency risk. Using global syndicated loan data, we find that a one-standard-deviation increase in exchange rate volatility increases loan spreads somewhere in the range between 5.5 and 16.1 basis points for loans made in a currency different from the lenders’. This implies excess interest of approximately 1 to 3 USD million for loans of average size and duration. We also show that this finding is mostly attributed to credit constraints and deviations from perfect competition in international lending markets, and that borrowers can lower the extra cost by forming strong lending relationships with their banks.

The aim of this study is to examine the relationship between banking sector reform and bank performance – measured in terms of efficiency, total factor productivity growth and net interest margin – accounting for the effects through competition and bank risk-taking. To this end, we develop an empirical model of bank performance, which is consistently estimated using recent econometric techniques. The model is applied to bank panel data from ten newly acceded EU countries. The results indicate that both banking sector reform and competition exert a positive impact on bank efficiency, while the effect of reform on total factor productivity growth is significant only toward the end of the reform process. Finally, the effect of capital and credit risk on bank performance is in most cases negative, while it seems that higher liquid assets reduce the efficiency and productivity of banks.

In this paper we quantify the differences between market and regulatory assessments of bank portfolio risk, and thereby demonstrate that larger differences significantly reduce corporate lending rates. Specifically, to entice borrowers, banks reduce spreads by approximately 4.3% following a one standard deviation increase in our measure for bank asset-risk differences. This is equivalent to an interest income loss of USD 2.03 million on a loan of average size and duration. The separate effects of market and regulatory risk are much less potent. Our study reveals a disciplinary-competition effect in favor of corporate borrowers when there is information asymmetry between investors and bank regulators.

We study whether management practices determine merger and acquisition (M&A) success. We model management as an unobserved (latent) variable in a standard microeconomic model of the firm and derive firm-year management estimates. We validate these estimates against benchmark survey data on management practices and by using Monte Carlo simulation. We show that our measure is among the most important determinants of value creation in M&A deals, substantially increasing the predictive power of models that explain cumulative abnormal returns. Thus, we offer a measure of management practices that identifies the best-performing M&As. Our results are robust to the inclusion of acquirer fixed effects and many control variables, and to several other sensitivity tests. We identify the Q-theory as the key mechanism driving our results.