Abstract The U.S. banking sector had nearly 70% fewer banks in 2022 relative to 1989, primarily because of mergers. We develop a methodology to estimate cross-market spillover effects of bank mergers and test whether the operations of incumbents facing consolidating competitors in one market are affected in other markets. We find that nonmerging banks within a market that are one standard deviation more exposed to mergers in other markets increase deposits by 2.1% relative to their less exposed competitors. Our methodology may be applied elsewhere to assess the aggregate impacts of industry consolidation and illustrates challenges with product-based or geographic market definitions.

Abstract Given the complex and controversial nature of short-selling regulation, we review the academic literature and provide insights for policy makers and academics. We organize the complex history of short-selling regulation into three areas: trading restrictions, securities lending regulations, and disclosure requirements. We identify, analyze, and discuss 45 distinct regulations promulgated from 1896 to 2021, primarily by reviewing the academic literature and the data sources employed. We provide several insights regarding the effectiveness of regulatory approaches and the wider impact of short-selling regulation on markets. (JEL G2, G12, G14, G15, G34)

Eric A. Posner of University of Chicago reviews “The Problem of Twelve: When a Few Financial Institutions Control Everything” by John Coates. The Econlit abstract of this book begins: “Explores issues that arise when a small number of actors acquire the means to exert outsized influence over the politics and economy of a nation, focusing in particular on the two late-twentieth-century institutions of index funds and private equity funds.”

We examine the determinants of investor flows into, and the potential market fragility imposed by, U.S. municipal bond mutual funds. We find that funds have a linear flow-performance relationship that is consistent with effective liquidity management strategies. Funds use liquid holdings to partially offset net redemptions, but trade municipal bonds in proportion to flows. Funds increase their liquid holdings after flow volatility increases. The fact that funds use a vertical slice approach as a primary strategy is not surprising because they maintain small amounts of liquid securities. Our evidence is consistent with investors not being concerned with municipal bond mutual funds promoting run-risk.

Financial intermediation has distinct value from transforming financial claims to create liquidity and mitigate risks. However, research and policy competition analyses often neglect this value or minimally account for it. We review findings to better incorporate this value. We suggest shifting the mix of individual services analyzed to better represent the distinct value, focusing more on topics closely aligned with the distinct value concept beyond individual services, and accounting for the multimarket nature of financial intermediation. We recommend attention on future competition with digital FinTech, BigTech, and DeFi firms and policies to best preserve the distinct value of financial intermediation.

We make use of rich U.S. data to show that debt overhang significantly reduces firm asset-, capex-, and employee-growth. We show these contractions are likely driven by firm decisions as opposed to the result of credit constraints or changes in investment opportunities. Our measure of overhang – liabilities to cash flow — aligns with traditional theory and focuses on the importance of a firm’s debt servicing capacity. It further allows us to capitalize on the COVID-19 shock as a quasi-natural experiment to confirm the impact of overhang on firm investment and growth.

Abstract Prior research shows that contingent liabilities do not accurately predict future cash payments due to the managerial discretion afforded by accounting standards. We examine the extent to which current accounting guidance for a material contingent liability—the reserve for unrecognized tax benefits (UTBs) under Financial Interpretation No. 48 (FIN 48)—generates accruals that are predictive of future income tax cash outflows. We document that UTBs fully unwind as cash tax payments over the subsequent 5 years, suggesting that managers, on average, accurately incorporate their expectations of future tax liabilities. This result persists for firms that are (1) most affected by the implementation of FIN 48, (2) unable to impound detection risk into their reserves, (3) engaged in relatively more ex ante tax avoidance, (4) suspected to have engaged in earnings management through the tax accounts, and (5) subject to plausibly exogenous shocks to tax reporting. Overall, our results suggest that current accounting guidance under FIN 48 for contingent tax liabilities enables managers to accurately report, and financial statement users to reliably predict, future cash obligations.