Knowledge that Transforms

The paper investigates the effects of bank–firm relationships on the cost and the availability of credit for a sample of small Italian firms, focusing on possible differential effects related to the local and/or cooperative nature of lending banks. We find that with banks other than cooperative banks, lending rates tend to increase with the length of the relationship for all customers, whereas with local cooperative banks (CCBs) this is the case for non-member customers only; by contrast, long-standing relationships have no significant effect on lending rates for CCBs' own members. This evidence is in line with bank capture theories, which may not apply to CCB members. We also find that CCB members enjoy easier access to credit, unlike non-member customers. Our results indicate that the main distinctive features of CCBs relative to commercial banks stem from their cooperative ownership rather than their local nature.

We analyze the relation between organization structure and bank lending. Loan growth among banks that are affiliated with a multi-bank holding company is shown to be less sensitive to the bank's cash flow, capital position and liquidity relative to unaffiliated banks. Our results, coupled with the recent findings of Houston et al. (Houston, J.F., James, C., Marcus, D., Journal of Financial Economics 46 (1997) 135–164.), suggest that bank holding companies establish internal capital markets in an attempt to allocate capital among their various subsidiaries. We also find that affiliated banks are more responsive to local market conditions than their unaffiliated counterparts. This finding suggests that despite the concerns raised regarding bank consolidation – affiliated banks are willing to lend in local markets as long as the opportunities are there.

This paper presents a model of incentive compatible bank regulation under moral hazard and adverse selection. We derive a wide range of simple and conceptually implementable mechanisms that can solve each type of incentive problem separately and also achieve the first-best outcome – but only when regulatory instruments involve ex post pricing that is contingent on the bank's performance relative to the market. An important feature of these mechanisms is that they do not involve a subsidy to the bank. When the regulator faces both moral hazard and adverse selection simultaneously, we identify the conditions under which the same mechanism can achieve the first-best solution.

The objective of this paper is to employ the generalized autoregressive conditionally heteroskedastic in the mean (GARCH-M) methodology to investigate the effect of interest rate and its volatility on the bank stock return generation process. This framework discards the restrictive assumptions of linearity, independence, and constant conditional variance in modeling bank stock returns. The model presented here allows for shifts in the volatility equation in response to the changes in monetary policy regime in 1979 and 1982 to be estimated. ARCH, GARCH, and volatility feed back effects are found to be significant. Interest rate and interest rate volatility are found to directly impact the first and the second moments of the bank stock returns distribution, respectively. The latter also affects the risk premia indirectly. The degree of persistence in shocks is substantial for all the three bank portfolios and sensitive to the nature of the bank portfolio and the prevailing monetary policy regime.

Initial public offerings that receive secondary market price support from their underwriters are characterized by severely attenuated selling by small-quantity, presumably retail, traders and more aggressive selling by large-quantity, presumably institutional, traders. The increase in institutional trading is concentrated in the first day of trading while the attenuation of retail trading persists. This pattern exists in spite of the likelihood that retail investors receive relatively large initial allocations of (fully-priced) stabilized offers. Thus the evidence is consistent with institutional investors being the primary beneficiaries of price stabilization efforts and with the use of penalty bids to constrain retail selling activity.

A unique data set from the Tel-Aviv Stock Exchange (TASE) is used to study the effect of trading mechanisms on stock return volatility. The TASE represents a natural experiment which allows separation of the overnight information effect from the trading mechanism effect. The data span a time period in which the order of the trading mechanisms (a sequential continuous mechanism and a call auction) was switched. Since overnight information should impact opening prices equally across periods, this affords an unparalleled opportunity to examine the trading mechanism effect without the confounding effect of the non-trading period. This paper finds that the null, that opening variances equal closing variances, cannot be rejected for either period. Further, the tests cannot reject null that the ratio of opening to closing return variances is equal across periods. This suggests that the trading mechanisms on the TASE do not differ in their effect upon return volatility.

This study extends the existing literature of international banking by constructing a model of foreign intermediaries in Australia. An unresolved question is establishing those factors that result in banking across borders. While a variety of theories attempt to explain international banking, empirical tests are sparse (Mahajan, A., Rangan, N., Zardkoohi, A., 1996. Journal of Banking and Finance 20, 283–306). This study considers if the results to date apply in non US settings. Foreign bank size was found to be a positive function of bank licence, parent size and time in Australia, and a negative function of Australian net interest margins and fees. The negative sign on net interest margins and fees is consistent with De Young, R., Nolle, D., 1996. Journal of Money, Credit and Banking 28, 622–636. Foreign bank profits were a positive function of Australian net interest margins and fees. There was limited evidence of defensive expansion. This paper concludes that foreign bank size is explained well by the existing theories of international banking, but a wider model is appropriate for foreign bank profits.

A considerable volume of research shows that asset prices respond to changes in the Federal Reserve's discount rate. While several competing hypotheses have been advanced to explain the market's response to discount rate announcements, comparatively little effort has been made to differentiate among alternative hypotheses. The result is an abundance of evidence establishing that asset prices respond to discount rate announcements, but little if any agreement about why markets respond. This article attempts to fill a void in the literature by pointing out how competing hypotheses differ and by constructing tests explicitly designed to differentiate among competing explanations. The evidence suggests that the market's reaction to discount rate changes is purely an announcement effect, i.e., a reaction to new information contained in the announcement, that the direct effect of discount rate changes on market rates is nil, that the announcement effect is invariant to the Federal Reserve's operating procedure and that, generally speaking, changes in the discount rate do not signal a change in monetary policy. The announcement effect appears to vary with both the nature and extent of the information that the announcement of a discount rate change is believed to contain.