Knowledge that Transforms

This paper shows that investment banks that advise acquirers of assets negotiate favourable terms when they invest their own money in the deal, but lead their clients to overpay when they do not have financial incentives. Acquirers pay the smallest premiums in divisional MBOs when advised by the investment bank that finances the deal, and the largest premiums in interfirm asset sales when advised by an investment bank remunerated contingent on deal completion. Premiums are in between the two extremes when acquirers do not use advisors. These results are attributed to investment bank incentives, which exacerbate the information asymmetry between buyers and sellers of assets.

This study investigates the profit efficiency (PROFEFF) of small banks (those under $500 million in total assets) for 1990–96. Assuming that small banks and large banks use the same production technology, we find, consistent with Berger and Mester [J. Bank. Finance 21 (1997) 875], that small banks are more profit efficient than large banks. Small banks in non-metropolitan statistical areas (non-MSA) areas are consistently more profit efficient than small banks in MSAs. Cross-sectional analysis of the correlates of the PROFEFF estimates suggests that structure–performance factors, relationship–development factors, and expense-preference behavior play an important role in explaining the PROFEFF of small US commercial banks.

This study extends the work of Akella and Greenbaum [Journal of Banking & Finance 12 (1988) 419] through the use of a much larger, nationwide sample of US saving and loan associations and supports their original finding of significant expense-preference behavior in mutual savings and loans during their original study period (1979–80). This study also provides evidence that over the time period of substantial deregulation and changes in the competitive environment in the US financial services industry, expense-preference behavior for savings and loans decreased. The results are consistent with the idea that the removal of barriers that restrict competition should improve managerial efficiency in firms that survive.

We examine Korean chaebols to determine the costs and benefits associated with the operation of a diversified business group. We find that chaebol-affiliated firms suffer a value loss relative to non-affiliated firms. We observe that this value loss holds even after controlling for the relatedness of the diversification present within the chaebol. To identify the causes of this value loss, we obtain evidence suggesting that chaebol firms: (1) pursue profit stability rather than profit maximization, (2) over-invest in low performing industries, and (3) cross-subsidize the weaker members of their group. We do find however that chaebol firms possess greater debt capacity and consequently enjoy lower tax burdens. Nevertheless, because chaebols suffer an overall loss in value, we conclude that the costs associated with chaebol membership exceed its benefits.

The announcement of a bank loan by a borrowing firm has been shown to have a positive effect on the market value of the borrower’s claims. This is consistent with a lender’s implied endorsement of the borrower––an endorsement that has value to the borrower. In this paper, we investigate whether the lender is able to extract a premium loan rate or certification premium in return. We find empirical evidence that in the absence of collateral reputable lenders are able to exact a certification premium.

In this paper we document the short-term stock price behaviour following a period of stock market stress. We focus on price behaviour using daily market indexes from 39 stock exchanges over the period 1989–1998. Our results are not consistent with the overreaction hypothesis. We find positive (negative) abnormal price performance in the short-term window (up to 10 days) following positive (negative) price shocks. Our analysis also highlights differences between developed and emerging markets. We show that the post-shock abnormal performances are significantly larger for emerging markets but that this momentum behaviour is markedly less in the late 1990s. We find the size of the after-shock tremors to be related to market liquidity, with larger post-shock price changes in less-liquid markets.

This paper investigates whether stock-price indexes of seventeen emerging markets can be characterized as random walk (unit root) or mean reversion processes. We implement a test that can account for structural breaks in the underlying series and is more powerful than standard tests. We find that for fourteen countries, stock prices exhibit structural breaks. Furthermore, for ten countries, the null hypothesis of a random walk can be rejected at the one or 5% significance level. Our results indicate that ignoring structural breaks that arise from the liberalization of emerging markets can lead to incorrect inference that these indices are characterized by random walks, and are consistent with the points made by Bekaert et al. [J. Int. Money Finan. 21 (2002) 295]. Our findings hold true regardless of whether stock indexes are denominated in US dollar terms, in local currencies terms, or in real terms.

This paper examines the performance of Swiss banks from 1996 to 1999. Using a broad definition of bank output, we find evidence of large relative cost and profit inefficiencies in Swiss banks. A more narrow definition that focuses on only traditional activities leads to efficiency estimates that are even lower. We also find evidence of economies of scale for small and mid-size banks, but little evidence that significant scale economies remain for the very largest banks. Finally, evidence on scope economies is weak for the largest banks that are involved in a wide variety of financial activities. Taken together, these results suggest few obvious benefits from the trend toward larger, universal banks in Switzerland.

This study examines the effect of foreign (Anglo-American) board membership on corporate performance measured in terms of firm value (Tobin’s Q). Using a sample of firms with headquarters in Norway or Sweden the study indicates a significantly higher value for firms that have outsider Anglo-American board member(s), after a variety of firm-specific and corporate governance related factors have been controlled for. We argue that this superior performance reflects the fact that these companies have successfully broken away from a partly segmented domestic capital market by “importing” an Anglo-American corporate governance system. Such an “import” signals a willingness on the part of the firm to expose itself to improved corporate governance and enhances its reputation in the financial market.