Knowledge that Transforms

We consider how size matters for banks in three size groups: small community banks with assets less than 1 billion, large community banks with assets between 1 billion and 10 billion, and midsize banks with assets between 10 billion and 50 billion. To illustrate the differences between these banks and larger banks whose business models are distinctly different, we examine large banks with assets between 50 billion and 250 billion and the largest banks with assets exceeding 250 billion. Community banks have potential advantages in relationship lending compared with large banks. However, increases in regulatory compliance and technological burdens may have disproportionately increased community banks’ costs, raising concerns about small businesses’ access to credit. Our evidence suggests several patterns: (1) while small community banks exhibit relatively more valuable investment opportunities, larger community banks, midsize banks, and larger banks exploit theirs more efficiently and achieve better financial performance; (2) average operating costs that include costs related to regulatory compliance and technology decrease with size; (3) unlike small community banks, large community banks have financial incentives to increase lending to small businesses; and (4) for business lending and commercial real estate lending, compared with small community banks, large community banks, midsize banks, and larger banks assume higher inherent credit risk and exhibit more efficient lending. Thus, concern that small business lending would be adversely affected if small community banks find it beneficial to increase their scale is not supported by our results.

This study defines the aggregate analyst recommendation for a country as the value-weighted average of all outstanding recommendations for shares of firms incorporated in that country. We show that country-level analyst recommendations predict international stock market returns. A trading strategy based on country-level recommendations yields an abnormal return of around 1% per month. Aggregate recommendations also help to predict changes in gross domestic product and aggregate earnings surprises. Overall, we find that country-level analyst recommendations provide useful information to predict future aggregate cash flows and associated market returns across different countries.

We collect compensation policy data from 60 Chinese mutual fund companies, which cover 88% of the assets managed by all active stock and stock-oriented hybrid mutual funds in China. Using the collected data, we investigate portfolio pumping from a performance-based perspective. We find that portfolio pumping is stronger for funds ranking around critical points of performance distribution (i.e., the top one-tenth, one-fourth, one third, and half cutoffs). This finding is mainly driven by funds from companies that set these critical points to grade fund managers’ bonus levels. Our findings provide evidence of portfolio pumping motivated by performance ranking instead of the flow-performance relationship documented in prior studies.

We empirically investigate the effect of the Capital Purchase Program under the Troubled Asset Relief Program (TARP) on the transparency of participating banks by examining changes in their loan loss provisions. We demonstrate that TARP banks reduced transparency to a greater extent than non-TARP banks did by recognizing smaller and less timely loan loss provisions for changes in nonperforming loans and increasing discretionary loan loss provisions more after receiving TARP funds. While the reduced timeliness was mainly observed in large TARP banks and banks with low tier 1 capital or high earnings, small TARP banks and banks with low earnings significantly increased their discretionary provisions. In addition, the decreased timeliness and increased discretionary provisions were mainly driven by TARP banks that did not repay their funds. TARP banks’ reduced transparency, which inhibits the accurate assessment of bank risk by outsiders, is consistent with moral hazard in disclosing their financial reporting information.

Collectively organized pension plans must increasingly demonstrate that the risk preferences of their members are adequately reflected in the plans’ asset allocations. However, whether funds should elicit individual members’ risk preferences to achieve this goal, or whether they can rely on other indicators, such as socio-demographics, remains unclear. To address this question, we apply a tailored augmented lottery choice method to elicit individual pension income risk preferences from 7,894 members from five different pension plans. The results show that member risk preferences are strongly heterogeneous and can only partially be predicted from individual and plan characteristics. Differences in risk preference imply different optimal asset allocations. We find large welfare losses for heterogeneous members in pension plans with their current asset allocation because these allocations are safer than implied by members’ preferences. We provide a framework for pension plans to gauge the need to elicit risk preferences among their members.

We investigate the takeover strategies of high default risk acquirers and their value impact. We find that these bidders select bigger, less profitable and unrelated targets, pursue transactions during recessions, and pay with shares by offering target shareholders high premiums. Their long-term buy-and-hold returns are extremely negative, and reflect fundamentally their substantial drop in profitability combined with high leverage. We show that the well-established long-run underperformance of acquiring firms is largely driven by this sub-set of acquirers. The results are similar when we use alternative measures of default risk and performance, and a global sample of non-US bidders.

We investigate the link between stock and options markets during the 2008 U.S. short sale ban. First, we find definitive evidence that the ban indeed caused stock overvaluation. Second, we show that the short sale ban caused a significant increase in put-call parity violations only in the direction of the short sale constraints and it significantly enhanced the stock return predictability of put-call parity violations. Third, the overvaluation is really large. A portfolio formed on the trading signal that the put-call parity violation is in the top quintile underperforms the lowest quintile portfolio by a statistically and economically significant abnormal daily return of 5.6% during the short sale ban period. We employ a novel and rigorous method of using TAQ intraday data to ensure that our high-low violation arbitrage portfolio as well as the five Fama-French factors used to estimate the abnormal returns are implementable by a hypothetical investor exempt from the shorting ban.

The decision to syndicate investments in entrepreneurial finance has been explained through financial, networking, and resource-based perspectives. We posit that a personality perspective exists next to these three perspectives and hypothesize that the personality of business angels influences syndication behavior. Using data from 3,234 syndication decisions of 1,348 business angels, we find evidence for some of our predictions. By measuring personality through a comprehensive language analysis based on digital footprints in Twitter statements of business angels, we show that extraversion makes syndication more likely, whereas conscientiousness reduces the likelihood of syndication. Several sensitivity analyses underline the robustness of our main results. Further exploratory analyses assess the relationship between personality and syndicate composition as well as that between personality and venture success. Our study contributes to the entrepreneurial finance literature by adding and validating a new perspective to explain syndication behavior. In addition, our study contributes to research on the personality of business angels.

Commercial banks in China issued a multitude of wealth management products (WMPs) from 2009 to 2016. These products are largely short-term, but a significant proportion of capital is allocated to long-term investments. In this paper, we first construct a measure of WMP maturity mismatch for each bank in each quarter using R2s from regressing expected yields of WMPs on expected yields of banks’ generally claimed investment assets. The degree of maturity mismatch is positively related to banks’ quarter-end non-performing loan ratio (NPLR), after accounting for time-varying bank characteristics, bank and time fixed effects. The result indicates that severer mismatch is associated with reduced NPLR. Cross-sectionally, the positive relation is stronger in big banks and when banks had a larger NPLR in the previous quarter. The results highlight the fact that regulated commercial banks use financial innovation and exploit maturity mismatch in their issued WMPs to evade regulator's credit risk monitoring.

This study examines the association between informed short selling and a firm's position in the board interlock network formed by shared directors. We find that better-connected firms experience higher levels of informed short selling and that this association is driven by both eigenvector centrality (a measure that accounts for both the quantity and quality of firms’ ties) and betweenness centrality (a measure of the extent to which firms serve as information intermediaries), not by degree centrality (a measure that only counts the quantity of their ties) in interlock networks. In addition, the positive association between interlock centrality and informed trading is more pronounced for firms whose directors have more opportunities to interact with directors of external firms in the network, consistent with director information leakage serving as a plausible underlying channel. Our further tests do not support an alternative interpretation based on short sellers’ superior processing of public information. Our findings have policy implications for regulators and professional director associations.