This paper examines risk-taking incentives in banks under different accounting regimes in presence of capital regulation. In the model the bank jointly determines the capital issuance and investment policy. Given an exogenous minimum capital requirement, lower-of-cost-or-market accounting is the most effective regime that induces the bank to issue more excess equity capital above the minimum required level and implement less risky investment policy. However, the disciplining role of lower-of-cost-or-market accounting may discourage the bank from exerting project discovery effort ex-ante. From the regulator’s perspective, the accounting regime that maximizes the social welfare is determined by a tradeoff between the social cost of capital regulation and the efficiency of the bank’s project discovery efforts. When the former effect dominates, the regulator prefers lower-of-cost-or-market accounting; when the latter effect dominates, the regulator may prefer other regimes

Using the 2002 Sarbanes–Oxley reform as an exogenous disclosure shock, we find that high, relative to low, volatility firms opt for lower levels of information availability pre reform and experience increases in information availability, CEO turnover-to-performance sensitivity, myopic behavior, CEO compensation with a structure tilted towards more cash pay, and a reduction in firm value post the reform. Our findings suggest that mandating high levels of information availability across the board increases managerial evaluation risk and produces additional agency costs for firms with volatile performance.

We examine the effect of the full set of bank capital regulations (capital stringency) on loan growth, using bank-level data for a maximum of 125 countries over the period 1998–2011. Contrary to standard theoretical considerations, we find that overall capital stringency only has a weak negative effect on loan growth. In fact, this effect is completely offset if banks hold moderately high levels of capital. Interestingly, the components of capital stringency that have the strongest negative effect on loan growth are those related to the prevention of banks to use as capital borrowed funds and assets other than cash or government securities. In contrast, compliance with Basel guidelines in using Basel- and credit-risk weights has a much less potent effect on loan growth

This paper analyzes how corporate taxation and regulatory requirements affect the location of financial sector FDI. We use novel information on new financial services entities established by multinational firms in 83 host countries. We find a negative effect of host country taxes on the probability of choosing a particular host location. We can also confirm a significant influence of the regulatory environment. For example, stricter (equity) capital requirements negatively affect location probabilities. Our empirical approach allows us to provide new insight in how a policy measure of a given country affects other countries by estimating cross-country tax and regulation elasticities

This paper examines empirically the determinants of bank interest margins in Central America and the Caribbean over the period 1998–2014. A particular focus is set on the impact of differences in the regulatory environment and market structure across countries in explaining the interest margins of individual banks. Our results suggest that bank market power, operating costs, credit risk, and liquid asset holdings increase the margin between loan and deposit rates, while increased income diversification and GDP growth are associated with lower loan-deposit spreads. When considering information on banking regulation, we find strong evidence to support our main hypothesis that improvements in market quality and liberalization have a significant effect on interest margins. More specifically, reductions in entry requirements to banking, higher involvement of foreign banks, and increased financial statement transparency are associated with significant reductions in interest margins

Bank capital is the cornerstone of bank regulation and is considered a key determinant of a bank's ability to withstand economic shocks. In the area of bank capital regulation, the general view is that more bank capital is better, irrespective of who provides it. In this paper, we investigate whether the investment horizon of bank capital providers matters for bank performance during the recent financial crisis. We observe that banks with more short-term investor ownership have worse stock returns during the crisis. Further exploration suggests that this is partially because banks with higher short-term investor ownership took more risk prior to the crisis but mainly because they experienced higher selling pressure during the crisis. Our results confirm the economic benefit of bank capital in helping banks to perform better during crises. However, when we decompose bank capital by the nature of its providers, we show that more capital is associated with worse performance when it is provided by short-term institutional investors

We study the effect of bank governance on risk-taking in commercial lending. Banks with more effective boards are less likely to lend to riskier borrowers. This effect is restricted to periods of distress in the banking industry and is stronger at banks with board-level credit committees. Banks with more effective boards are less likely to lend to riskier borrowers right after the Russian default, which exogenously imposed distress conditions on U.S. banks. Thus, value-maximizing banks appear to ration credit to riskier borrowers precisely when such firms might be credit-constrained, suggesting that bank governance regulations may have potential unintended consequences

This paper estimates a reduced-form model to assess the insolvency risk of General Insurance (GI) firms in the UK. In comparison to earlier studies, it uses a much larger sample including 30 years of data for 515 firms, and also considers a much wider set of possible determinants of insolvency risk. The empirical results suggest that macroeconomic and firm-specific factors both play important roles. Other key findings are the following: insolvency risk varies across firms depending on their business lines; there is default clustering in the GI industry; different reinsurance levels also affect the insolvency risk of insurance firms. The implications of these findings for regulators of GI firms under the newly launched Solvency II are discussed

We study how investors respond to ‘superficial’ mutual-fund name changes that occur for no fundamental reasons. We find that such name changes remain widespread even after regulation to curb potentially misleading name changes (SEC Rule 35d-1). Superficial changes are more widespread than previously studied ‘misleading’ changes that are not accompanied by corresponding portfolio adjustments reflecting the investment style suggested by the new name. Superficial changes appear to be driven by managerial incentives. Investors react to superficial changes with increased fund flows but appear to gain no benefit through improved performance or lower fees. On the contrary, name-change funds underperform as a group. Our findings highlight inefficiencies in the mutual-fund market and hold important implications for the stakeholders involved

In this paper, we empirically estimate the costs of delay in the FDIC's closures of 433 commercial banks between 2007 and 2014 based upon a counterfactual closure regime. We find that the costs of delay could have been as high as 18.5 billion, or 37% of the FDIC's estimated costs of closure of 49.8 billion. We think that these findings call for a more aggressive stance by bank regulators with respect to the provisions for loan losses and write-downs of banks’ non-performing assets. More aggressive (and earlier) provisions and write-downs, or adoption of a capital ratio that penalizes nonperforming loans, would allow the concept of “prompt corrective action” (PCA) to play the role that it was meant to play in reducing FDIC losses from insolvent banks