Are market-based or bank-based financial systems better at financing the expansion of industries that depend heavily on external finance, facilitating the formation of new establishments, and improving the efficiency of capital allocation across industries? We find evidence for neither the market-based nor the bank-based hypothesis. While legal system efficiency and overall financial development boost industry growth, new establishment formation, and efficient capital allocation, having a bank-based or market-based system per se does not seem to matter much.

This paper evaluates the empirical relation between the level of financial intermediary development and (i) economic growth, (ii) total factor productivity growth, (iii) physical capital accumulation, and (iv) private savings rates. We use (a) a pure cross-country instrumental variable estimator to extract the exogenous component of financial intermediary development, and (b) a new panel technique that controls for biases associated with simultaneity and unobserved country-specific effects. After controlling for these potential biases, we find that (1) financial intermediaries exert a large, positive impact on total factor productivity growth, which feeds through to overall GDP growth and (2) the long-run links between financial intermediary development and both physical capital growth and private savings rates are tenuous.

Using a sample of 70 former colonies, this paper assesses two theories regarding the historical determinants of financial development. The law and finance theory holds that legal traditions, brought by colonizers, differ in terms of protecting the rights of private investors vis-à-vis the state, with important implications for financial markets. The endowment theory argues that the disease environment encountered by colonizers influences the formation of long-lasting institutions that shape financial development. The empirical results provide evidence for both theories. However, initial endowments explain more of the cross-country variation in financial intermediary and stock market development.

This paper conducts the first empirical assessment of theories concerning risk taking by banks, their ownership structures, and national bank regulations. We focus on conflicts between bank managers and owners over risk, and we show that bank risk taking varies positively with the comparative power of shareholders within the corporate governance structure of each bank. Moreover, we show that the relation between bank risk and capital regulations, deposit insurance policies, and restrictions on bank activities depends critically on each bank's ownership structure, such that the actual sign of the marginal effect of regulation on risk varies with ownership concentration. These findings show that the same regulation has different effects on bank risk taking depending on the bank's corporate governance structure.

This paper investigates whether the diversity of activities conducted by financial institutions influences their market valuations. We find that there is a diversification discount: The market values of financial conglomerates that engage in multiple activities, e.g., lending and non-lending financial services, are lower than if those financial conglomerates were broken into financial intermediaries that specialize in the individual activities. While difficult to identify a single causal factor, the results are consistent with theories that stress intensified agency problems in financial conglomerates engaged in multiple activities and indicate that economies of scope are not sufficiently large to produce a diversification premium.

We develop a new identification strategy to evaluate the impact of the geographic expansion of a bank holding company (BHC) across US metropolitan statistical areas (MSAs) on BHC risk. For the average BHC, the instrumental variable results suggest that geographic expansion materially reduces risk. Geographic diversification does not affect loan quality. The results are consistent with arguments that geographic expansion lowers risk by reducing exposure to idiosyncratic local risks and inconsistent with arguments that expansion, on net, increases risk by reducing the ability of BHCs to monitor loans and manage risks.

Do stock markets act as a spare tire during banking crises, providing an alternative corporate financing channel and mitigating the economic severity of these crises? Using firm-level data in 36 countries from 1990 through 2011, we find that the adverse consequences of banking crises on equity issuances, firm profitability, employment, and investment efficiency are smaller in countries with stronger shareholder protection laws. These findings are not explained by the development of stock markets or financial institutions prior to the crises, the severity of the banking crisis, or overall economic, legal, and institutional development.

By documenting the evolution of Tobin's q before, during, and after firms internationalize, this paper provides evidence on the bonding, segmentation, and market-timing theories of internationalization. We find that Tobin's q does not rise after internationalization, even relative to domestic firms. Instead, q rises significantly before and during the internationalization year, but then falls sharply in the following year, quickly relinquishing the increases of the previous years. In decomposing these dynamics, we find that market capitalization rises before internationalization and remains high, while corporate assets increase during internationalization. The evidence supports the theory that financial internationalization facilitates corporate expansion, but challenges the theory that internationalization produces an enduring effect on q by bonding firms to a better corporate governance system.

We evaluate the connection between corporate characteristics and the reaction of stock returns to COVID-19 cases using data on more than 6,700 firms across 61 economies. The pandemic-induced drop in stock returns was milder among firms with stronger pre-2020 finances (more cash and undrawn credit, less total and short-term debt, and larger profits), less exposure to COVID-19 through global supply chains and customer locations, more corporate social responsibility activities, and less entrenched executives. Furthermore, the stock returns of firms controlled by families (especially through direct holdings and with non-family managers), large corporations, and governments performed better, and those with greater ownership by hedge funds and other asset management companies performed worse. Stock markets positively price small amounts of managerial ownership but negatively price high levels of managerial ownership during the pandemic.