Knowledge that Transforms

We investigate the impact of financial crises on the syndicated loan spreads applied to public and private firms. We found evidence of a greater increase in loan spreads for European public firms than for private ones during the global financial crisis and the euro area sovereign debt crisis. This result is consistent with our hypothesis that public firms’ borrowing costs are more sensitive to financial market swings than those of private companies. Our results hold when we control for relationship banking effects, a different sample composition between crisis and non-crisis periods, estimating a propensity score matching, and adopting a sample of syndicated loans to US public firms.

One of the most dramatic trends in banking since the 1980s has been the secular movement away from core banking and interest generating activities towards enhanced reliance on non-interest-generating activities that focus largely on fees and trading profits. In this paper, we draw on a dataset covering nearly a million quarterly observations on more than 12,000 US banks and find no evidence that this shift in the bank business model harms bank profitability. To the contrary, a higher share of non-traditional bank income is associated with a higher profitability. The increase in profitability does not seem to come at the cost of substantially larger bank-level risk taking, at least not for large banks, which are the banks mostly involved in non-traditional bank business. There is also no conclusive evidence that a larger share of non-traditional income is associated with a larger contribution to systemic risk. The net benefits of non-traditional income increased in the 2000s, when both interest rates and bank margins started to decline. Estimation techniques that mitigate endogeneity concerns resulting from unobserved heterogeneity also show larger net benefits associated with greater bank reliance on generating non-traditional income.

We study the impact of the recent government bailout, called Trouble Asset Relief Program (TARP), on bank accounting quality. By adopting a difference-in-difference (DID) method, we find a significantly positive impact of TARP on earnings management of recipient banks, compared with their non-recipient peers. Further, we observe that TARP-recipient banks engage more in earnings-decreasing manipulation rather than earnings-increasing manipulation. This behavior is more obvious for those banks that voluntarily request for TARP funds. Also, participant banks change their accounting strategy to manipulate earnings upwards after TARP funds are paid back. Our findings confirm our hypothesis that TARP-recipient banks are motivated to manipulate downwards (or hide some earnings) to obtain further favorable treatment by the program administrators.

Using a sample of banks from 36 countries, we document that accounting enforcement is negatively related to bank risk-taking. We also provide evidence that accounting enforcement enhances bank stability during the crisis. In addition, we show that banks assume less risk through more conservative lending decisions and a reduction in complexity in jurisdictions with higher accounting enforcement. Our results show that formal institutions such as accounting enforcement are associated with bank financial decisions and risk-taking behavior.

We investigate a controversial and hotly debated issue of whether low stock return synchronicity (SRS) means more or less informative stock prices using three exogenous events: an anti-corruption campaign launched by the Chinese Government, a stock market crash in China, and firms’ public exposure of fraud. Investigating the changes in SRS associated with these events helps mitigate endogenous issues since these events have distinctive relationships with companies’ stock price informativeness. Our results show that firms’ SRS declines significantly after the anti-corruption campaign aiming to improve corporate governance and after firms’ public exposure of fraud. The SRS is substantially higher during and after the stock market crises. Firms located in more developed regions have lower SRS than those in less developed regions. These results consistently indicate an inverse relationship between the SRS and stock price informativeness.