We examine the effects of structural change in the U.S. banking industry, as well as key regulatory changes, including recently enacted deposit insurance reform legislation, on the resiliency of the FDIC-administered bank insurance fund (BIF) by estimating and comparing the probability of BIF insolvency over time. We do this using a Markov-switching model that relies on historical patterns of BIF disbursements to define the probability of switching among three “states” of the banking industry's financial health. Monte Carlo simulations are then performed to project the financial condition of the BIF over a 50-year period. Our results indicate that the insolvency risk to the bank insurance fund has increased significantly due to industry consolidation, and is mainly due to the concentration of deposits in the 10 largest U.S. banking companies. We also find that recent deposit insurance reforms will cause only a marginal reduction in the risk of BIF insolvency. The increased risk associated with a more concentrated industry structure simply dominates the reform effect.

This paper helps close the gap between theory and empirical evidence in the literature on asymmetric employer learning. If an employer's private learning is reflected in a worker's wage and one employer's private information is transmitted to the next when the worker makes a job-to-job transition, then asymmetric employer learning will appear in wage regressions as learning over an employment spell. Extending previous work that assumes all learning takes place publicly, this paper develops wage regressions that test for both asymmetric employer learning and public learning. The empirical results, including tests of alternative explanations, are consistent with asymmetric employer learning's having at least as much of an effect on wages during an employment spell as does public learning. The model developed in this paper illustrates how the story suggested by the empirical work might unfold. It shows that outside firms can profitably compete with a better-informed employer through bidding wars, even when the worker is equally productive in all firms. Furthermore, this competition results in different wages for workers with the same publicly observable characteristics, a result that previous models of asymmetric learning have not produced.

Cheng and Neamtiu examine whether credit rating agencies exploit market power to sell a substandard product. Their evidence is suggestive, but plausible alternative hypotheses could explain their results. Johnston, Markov and Ramnath provide first evidence on the bond and firm characteristics that determine the quantity of sell-side debt analyst coverage that a corporate bond receives. They also find that debt analysts anticipate credit rating changes and add information to markets incremental to credit ratings, suggesting debt analysts will be important to future research on bond markets. These results also suggest a method for refining tests of rating agency market power.

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ABSTRACT We examine management discretion to decide when and how much to write down an asset, in a unique case where a tracking stock provides an observable market value for the asset. We find that, despite market evidence that Inco Ltd.'s financial statements substantially overvalued the Voisey's Bay nickel mine throughout 1997 to 2000, management chose not to write down the mine until 2002. Inco management used an independent fairness opinion to justify its December 2000 redemption of the tracking stock at 25% of its initial value, indicating almost surely that Inco management was aware of the generally accepted accounting principles (GAAP) impairment. This case illustrates that GAAP's reliance on undiscounted cash flows for impairment decisions allows huge unrecorded disparities between book and market value. The management discretion exercised in this case provides a concrete example of the subjectivity inherent in fair valuation.

This paper investigates whether leveraged buyouts (LBOs) increase the bargaining power of firms with their suppliers. We find that suppliers to LBO firms experience significantly negative abnormal returns at the announcements of downstream LBOs. We also find that suppliers who have likely made substantial relationship-specific investments are more negatively affected, both in terms of abnormal stock returns and reduced profit margins, than suppliers of commodity products or transitory suppliers. Interestingly, leveraged recapitalization announcements are not associated with negative returns to suppliers, suggesting that increased leverage without an accompanying change in organizational form does not, on average, lead to price concessions from suppliers.

We use a unique dataset to show that relationships are an important determinant of banks' ability to access interbank market liquidity. More precisely, we find that: (i) banks with a larger reserve imbalance are more likely to borrow funds from banks with whom they have a relationship, and to pay a lower interest rate than otherwise; (ii) smaller banks and banks with more non-performing loans tend to have limited access to international markets, and rely more on relationships; (iii) relationships are established between banks with less correlated liquidity shocks. These results suggest that relationships allow banks to insure liquidity risk in the presence of market frictions such as transaction and information costs. Our analysis explicitly controls for the endogeneity of bank relationships.

I study external debt issued by operating subsidiaries of diversified firms. Consistent with Kahn and Winton's [2004. Moral hazard and optimal subsidiary structure for financial institutions. Journal of Finance 59, 2537–2575] model, where subsidiary debt mitigates asset substitution, I find firms are more likely to use subsidiary debt when their divisions vary more in risk. Consistent with subsidiary debt mitigating the free cash flow problem, I find that subsidiaries are more likely to have their own external debt when they have fewer growth options and higher cash flow than the rest of the firm. Finally, I find that subsidiary debt mitigates the “corporate socialism” and “poaching” problems modeled in theories of internal capital markets.