Abstract This article examines the contribution of hedging to firm value and the cost of hedging in a unified framework. Optimal hedging and firm value are explicitly linked to firm risk, the type of debt covenants and the relative priority of the hedging contract. It is shown that in some cases hedging is possible only if the counterparty to the forward contract also holds a significant portion of the debt. Also, the spread in the hedging contract reduces the optimal amount of hedging to less than the minimum-variance hedge ratio. Among other results this article elucidates why some firms hedge using forward contracts while other firms hedge in the futures markets, as well as why higher priority forward contracts are more efficient hedging vehicles. JEL Classification numbers: G13, G22 and G33.

This paper argues that although financial consolidation creates some dangers because it is leading to larger institutions who might expose the US financial system to increased systemic risk, these dangers can be handled by vigilant supervision and a government safety net with an appropriate amount of constructive ambiguity. Financial consolidation also opens up opportunities to dramatically reduce the scope of deposit insurance and limit it to narrow bank accounts, thus substantially reducing the moral hazard created by the government safety net. Reducing the scope of deposit insurance, however, does not eliminate the need for a government safety net, and thus there is still a strong need for adequate prudential supervision of the financial system. Moving to a world in which we have larger, nationwide, diversified financial institutions and in which deposit insurance plays a very limited role, should improve the efficiency of the financial system. However, it is no panacea: the job of financial regulators and supervisors will continue to be highly challenging in the future.

This paper exploits the 1990 change in capital adequacy regulations to construct more powerful tests of capital and earnings management effects on bank loan loss provisions. We find strong support for the hypothesis that loan loss provisions are used for capital management. We do not find evidence of earnings management via loan loss provisions. We also document the reasons for the conflicting results on these effects observed in prior studies. Additionally, we find that loan loss provisions are negatively related to both future earnings changes and contemporaneous stock returns contrary to the signaling results documented in prior work.

Private information, Moral Hazard, Contracting, Risk

Scott W. Barnhart, Robert McNown, Myles S. Wallace, Non-Informative Tests of the Unbiased Forward Exchange Rate, The Journal of Financial and Quantitative Analysis, Vol. 34, No. 2 (Jun., 1999), pp. 265-291

Do professional forecasters provide their true unbiased estimates, or do they behave strategically? In our model, forecasters have common information, confer actively, and thus know the true pdf of future outcomes. Intensive users of economic forecasts monitor forecasters' performance closely; occasional users are drawn to the forecaster who fared best in the previous period. In the resulting Nash equilibrium, even though economists have identical expectations, they make a range of projections that mimics the true probability distribution of the forecast variable. Those whose wages depend most on publicity produce forecasts that differ most from the consensus. Empirical evidence supports the model.

Auditing, Auditor-Auditee interactions, Misstatements, Strategic behavior

Disclosures, 8-K filing, Form 8-K, Timeliness

We examine foreign acquisitions of United States banks around the time of the ownership change to determine whether the observed poor performance of foreign subsidiaries is the result of changes in business strategy or the preexisting characteristics of the target bank. We find that many of the problems were already present at the time of acquisition. However, changes in business strategy by the foreign owners were generally not successful in raising the bank’s performance level to that of its domestic peers.