Using variation in payday lending restrictions over time and across states, we study competition in the market for small, short-term consumer loans. We find that banks and credit unions reduce overdraft credit limits and prices when payday credit, a possible substitute, is prohibited. These findings suggest that depositories respond to payday loan bans by taking less risk, bouncing checks that they would have otherwise covered. The decline in overdraft prices is surprising when viewed in isolation, but sensible given that depositories incur lower credit losses as they limit overdraft coverage. We find some evidence that credit unions’ overdraft activities are more profitable when payday loans are prohibited, consistent with decreased competition. In addition to characterizing the impact of prohibiting payday lending, a common state policy change in recent years, our findings illuminate competition in the small-dollar loan market by highlighting the importance of non-price adjustments to credit offers.

This paper examines the costs, wealth effects, and determinants of international capital raising for a sample of 260 public debt issues made by non-U.S. firms in the Yankee bond market. We find that investors demand economically significant premiums on bonds issued by firms that are located in countries that do not protect investors' rights and do not have a prior history of ongoing disclosure. The results provide support for the literature that suggests better legal protections and more detailed information disclosure increases the price investors will pay for financial assets. Journal of Economic Literature Classification Numbers: F3, G1.

This paper examines whether monetary policy responsibilities alter the central bank's role as a bank supervisor. The analysis focuses on the United States, where the Federal Reserve System shares supervisory duties with the Office of the Comptroller of the Currency and the Federal Deposit Insurance Corporation. Among the three institutions, the Fed is the only one responsible for monetary policy. Hence, the Fed's supervisory behavior—as captured by formal actions—is compared with the behavior of the other two agencies. The results suggest that the Fed's monetary policy responsibilities do alter its bank supervisory behavior: indicators of monetary policy affect the supervisory actions of the Fed, but do not affect the actions of the other two agencies.

This paper argues that the presence of both profit-based and stock price-based components in compensation contracts provides senior managers the incentive to optimally allocate effort to both implementing previously devised strategies that provide current profits and to formulating new strategies that create shareholder value. If managers are concerned about their reputation and if outcomes of strategy implementation are more informative about their ability than outcomes of strategy formulation, compensation based only on profit will incent managers to boost their reputation by over-allocating effort to strategy implementation. To restore the balance the contract needs to contain some stock-based compensation.

We construct a degree-of-total-leverage framework to test whether and how shifts in product mix affect earnings volatility at 472 U.S. commercial banks between 1988 and 1995. Our framework, which accounts for cost and revenue synergies not captured in most previous studies, conceptually links earnings volatility to revenue volatility, expense fixity, and product mix. We find that replacing traditional lending activities with fee-based activities—an ongoing trend that may be strengthened by recent financial modernization—is associated with both higher revenue volatility and higher total leverage, which in this framework implies higher earnings volatility. Journal of Economic Literature Classification Numbers: G21, G32, D24.

This paper presents a rationale for divestiture consistent with one of the reasons frequently cited by divesting firms, namely, that the firm is undervalued and splitting the firm into its component businesses will make it easier for the market to value the components accurately. When firms are undervalued due to unobservability of divisional cash flows, they may resort to divestiture to raise capital while overvalued firms will use external equity. Diversification thus might result in costly future divestiture. Firms trade off this expected cost of diversification against the benefit of higher levels of cheaper internal capital in deciding the scope of the firm. Journal of Economic Literature Classification Numbers: D82, G34, L22.

The Great Recession focused attention on large financial institutions and systemic risk. We investigate whether large size provides any cost advantages to the economy and, if so, whether these cost advantages are due to technological scale economies or too-big-to-fail subsidies. Estimating scale economies is made more complex by risk-taking. Better diversification resulting from larger scale generates scale economies but also incentives to take more risk. When this additional risk-taking adds to cost, it can obscure the underlying scale economies and engender misleading econometric estimates of them. Using data pre- and post-crisis, we estimate scale economies using two production models. The standard model ignores endogenous risk-taking and finds little evidence of scale economies. The model accounting for managerial risk preferences and endogenous risk-taking finds large scale economies, which are not driven by too-big-to-fail considerations. We evaluate the costs and competitive implications of breaking up the largest banks into smaller banks.

We analyze the effect of deposit insurance on the risk-taking behavior of banks in the context of a quasi-natural experiment using detailed credit registry data. Using the case of an emerging economy, Bolivia, which introduced a deposit insurance system during the sample period, we compare the risk-taking behavior of banks before and after the introduction of this system. We find that in the post-deposit insurance period, banks are more likely to initiate riskier loans (i.e., loans with worse internal ratings at origination). These loans carry higher interest rates and are associated with worse ex-post performance (i.e., they have higher default and delinquency rates). Banks do not seem to compensate for the extra risk by increasing collateral requirements or decreasing loan maturities. We also find evidence that the increase in risk-taking is due to the decrease in market discipline from large depositors. Finally, differences between large (too-big-to-fail) and small banks diminished in the post-deposit insurance period.

This study examines online multi-unit, discriminatory, ascending auctions of certificates of deposit. We find evidence suggesting that the most aggressive bids are likely to occur at the beginning and the end of the auctions. The opening of the auction serves an important role in price discovery. In addition, in multi-unit auctions last-minute bidding is a conditional strategy, and is used only when bidding is intense. Furthermore, we provide evidence suggesting that revenues are increasing in the depth of the market, in the concentration of early bids, and in bank participation relative to the size of the principal.

Investment spending by US public firms is highly concentrated. The 100 largest spenders account for 60% of total capital expenditures and drive most of the variation in aggregate investment. This high concentration creates a disconnect between the average public firm and macroeconomic aggregates. For large firms, cash flow remains the primary driver of investment spending and has not declined in importance as it has for smaller public firms. The cash flowing to big spenders provides a better forecast of future investment opportunities than noisy proxies for Tobin's q even though these firms are not financially constrained. These results suggest that, at least for the largest spenders, it is unlikely that measurement error drives the significance of cash flow. Our results are also inconsistent with recent models that predict higher investment-cash flow sensitivity for small young growth firms and suggest that cash flow is still the most important determinant of macroeconomic fluctuations in investment spending.