Journal Article The Review of Corporate Finance Studies Volume 6 Number 2 September 2017 – Table of Content Get access The Review of Corporate Finance Studies, Volume 6, Issue 2, September 2017, Page i4, https://doi.org/10.1093/rcfs/cfx008 Published: 18 August 2017

Journal Article The Review of Corporate Finance Studies Volume 6 • Number 2 • September 2017 – Front Cover Get access The Review of Corporate Finance Studies, Volume 6, Issue 2, September 2017, Page i1, https://doi.org/10.1093/rcfs/cfx005 Published: 18 August 2017

In this paper, we build a simple formal model of cash holdings that can explain this and other empirical regularities. Our model is based on the well-known “lemons” problem associated with equity issuance. We show that firms with poor growth opportunities and those with excellent opportunities will not hold excess cash, whereas firms with opportunities in the middle range will hold excess cash. We derive empirical implications relating excess cash to the extent of asymmetric information, growth opportunities, value of assets in place, and cash holding costs. Received March 29, 2017; editorial decision June 12, 2017 by Editor Uday Rajan

A survey of 255 papers that rely on the instrumental variable (IV) approach for identifying causal effects published in the “Big Three” finance journals reveals that IV estimates are larger than their corresponding uninstrumented estimates in about 80% of the studies, regardless of whether the potential endogeneity is expected to create a positive or negative bias based on economic reasoning. The magnitude of the IV estimates is, on average, nine times of that of the uninstrumented estimates even when economic insights do not suggest a downward bias of the latter. This study provides several explanations to the “implausibly large” IV estimates in finance research, and proposes best practices for identification-conscientious researchers. Received January 20, 2017; editorial decision April 7, 2017 by Editor Gregor Matvos

Our study of the corporate loan pricing policies of U.S. banks over the past two decades shows that loan spreads for riskier firms become relatively lower during periods of monetary policy easing compared to tightening. This effect is driven by banks with greater risk appetite, measured from individual banks’ answers to the Senior Loan Officers Opinion Survey. Our results hold with different fixed effects that account for time-varying observed and unobserved heterogeneity of credit demand and bank lending conditions that are not directly related to monetary policy. Together with our survey-based measure of bank risk appetite, we provide compelling evidence of the presence of a bank risk-taking channel of monetary policy in the U.S.

This paper examines the association between the default risk of foreign bank subsidiaries in developing countries and their parents during the global financial crisis, with the purpose of determining the size and sign of this correlation and, more importantly, understanding what factors can help insulate affiliates from their parents. We find evidence of a significant and robust positive correlation between parent banks’ and foreign subsidiaries’ default risk. This correlation is lower for subsidiaries that have a higher share of retail deposit funding and that are more independently managed from their parents. Host country bank regulations are also associated with the extent to which shocks to the parents affect the subsidiaries’ default risk. In particular, the correlation between the default risk of subsidiaries and their parents is lower for subsidiaries operating in countries that impose higher capital, reserve, provisioning, and disclosure requirements, and tougher restrictions on bank activities

We present evidence that the Federal Reserve stress tests produce information about both the stress-tested bank holding companies and the overall state of the banking industry. Our evidence goes beyond a standard event study, which cannot differentiate between small abnormal returns and large, but opposite-signed, abnormal stock returns. We find that stress test disclosures are associated with significantly higher absolute abnormal returns, as well as higher abnormal trading volume. More levered and riskier holding companies seem to be more affected by the stress test information. We find no evidence that stress test disclosures have reduced the production of private information. After disclosure begins, stress tested firms attract equity analysts without changing analysts’ forecast dispersions or their mean forecast error.

This paper empirically highlights the role and significance of taxes for the capital structure decisions of banks. Using a difference-in-differences methodology, I show that an increase in the local U.S. state corporate tax rate affects the banks’ financing as well as their operating choices. Better-capitalized banks raise their long-term non-depository debt and thus benefit from an enlarged tax shield. Worse-capitalized banks instead reduce their lending because a higher tax rate increases the tax-adjusted cost of funding, which renders the marginal loan unprofitable

Using a comprehensive survey, we show that investors with a larger capital allocation to private equity are more specialized−measured by the degree to which the investor focuses on private equity rather than other classes of investments−and have a wider scope of due diligence and investment activities. Other investor characteristics (experience, type, location, compensation structure, number of funds under management) play no role. In particular, endowments are not special according to the survey measures. These results are consistent with the changing LP–GP relationship in private equity as capital is increasingly concentrated in the hands of large investors.

We find that certain bank characteristics—aggressive credit growth, less reliance on deposit funding, and size—prior to the 2007−2009 crisis are consistently related to the systemic dimensions of bank risk during the crisis. Exposures to real estate play a major role explaining this relationship: Banks with larger real estate betas exhibited higher levels of systemic risk during the crisis. The impact of real estate betas on systemic risk increases for larger banks, following aggressive credit growth policies in the presence of housing bubbles. We show that the relationship between bank characteristics and risk could also be detected using measures of systemic risk calculated prior to the financial crisis.