This paper examines the relationships among capital regulation, deposit insurance, and the optimal bank interest margin. In a model where loan losses are the source of uncertainty, changes in capital regulation or deposit insurance premiums have direct effects on the bank's interest margin. An increase in bank capital requirement or in deposit insurance premiums results in a reduced interest margin under nonincreasing risk aversion. Comparative static analysis also explores the relation between asset quality and interest margin. It is shown that a mean-preserving spread of the distribution of loan losses results in a reduced margin.

Many of the previous studies on contagion effects in the banking industry focused on the failure of a large bank to determine whether the adverse effects spread to other banks. Yet, little is known whether other publicized bank failures cause contagion effects, and why the effects may vary among bank failures. Given the changes in the banking environment over time, contagion effects could be conditioned on the characteristics of the failing bank and of the banking environment at that time. We assess 99 publicized bank failures over the 1980–1996 period, and find that contagion effects exist in general for the surviving rivals of the failed bank. The degree of contagion effects varies over time (among bank failures), and is stronger when the failed bank is a multibank holding company, when the failed bank is publicly held, when the failed bank is relatively large, when the rivals are relatively small, and when the rivals have relatively low capital levels. The contagion effects are less pronounced in the period following the passage of FIRREA. Furthermore, the total risk-shifts of surviving rival banks in response to the announcement of a failed bank are inversely related to their capital level, and total risk-shifts of rival banks are less pronounced for failures occurring just after the passage of FIRREA. The results suggest that a bank’s exposure to possible contagion effects due to a bank failure can be partially controlled by a bank’s managerial policies and by regulatory policies.

Bank acquisitions have increased in recent years, as more banks attempt to exploit potential synergies, economies of scale, and other benefits. Numerous studies have determined that bank acquisitions generate strong positive valuation effects for targets on average, while the evidence of the impact on acquirers is mixed. Our objectives are: (1) determine whether the announcement of a bank acquisition transmits intra-industry signals; (2) explain why the intra-industry effects vary across acquisition announcements; and (3) explain why the valuation effects of individual rival banks vary. We find that bank acquisition announcements generate significant positive intra-industry effects, on average. The intra-industry effects of rival bank portfolios are not uniform across announcements, as they are conditioned by variables that could signal information about the probability that rival banks will become takeover targets. The valuation effects of rival bank portfolios are positively related to the valuation effects of the target banks, and inversely related to the size and prior performance of rival bank portfolios. Furthermore, the valuation effects are more favorable for individual rival banks that are ultimately acquired. To the extent that these variables reflect the probability of being acquired in the future, the intra-industry effects appear to be more favorable for acquisitions in which there is a higher probability that the corresponding rivals will become targets. Overall, investors discriminate based on event-specific and rival bank-specific characteristics when interpreting the signal transmitted as a result of bank acquisitions.

Numerous studies have shown that the valuation effects of corporate policies are conditioned on corporate control. A partial acquisition serves as a unique form of corporate control that has not been thoroughly researched as a control mechanism. When firms are partially acquired, the impact of their subsequent corporate policies may be affected by the degree of control imposed by the partial acquirer. Our primary objective is to test this hypothesis by (1) measuring valuation effects of the partial target and partial acquirer in response to policies enacted by the partially acquired firm (after becoming a partial target), and (2) conducting a comprehensive cross-sectional analysis for each policy which incorporate proxies for the degree of control by the partial acquirer. We find that partial targets and partial acquirers experience significant valuation effects in response to some policies enacted by the target. We also find that the valuation effects on a partial target in response to its subsequent policies are commonly conditioned by the degree of the partial acquirer's control.

Jimmy E. Hilliard, Jeff Madura, Alan L. Tucker, Currency Option Pricing with Stochastic Domestic and Foreign Interest Rates, The Journal of Financial and Quantitative Analysis, Vol. 26, No. 2 (Jun., 1991), pp. 139-151

Can a stock exchange improve corporate governance and transparency by designating companies that exhibit superior corporate governance? In 2000, the Borsa Italiana created a mid-cap segment with strong listing standards, which is composed of firms (called STARS) that follow stricter standards of transparency, disclosure, monitoring and liquidity. We find that STAR firms exhibit governance characteristics not observed in non-STAR firms, such as a higher incidence of audit and executive committees and higher debt ratios. They experienced a modestly favorable share price response upon the implementation of the STAR initiative. Moreover, they experienced significantly higher buy and hold returns and transparency after the initiative. Several governance characteristics are cross-sectionally associated with performance following the STAR initiative. Overall, the results suggest that firms may be willing to improve governance when they are endorsed by a credible agency for doing so, and such improvements may lead to better performance. The STAR initiative may serve as a model that can be adapted by other stock exchanges to promote transparency and governance.