This paper briefly reviews the contemporary literature on relationship banking. We start out with a discussion of the raison d'être of banks in the context of the financial intermediation literature. From there we discuss how relationship banking fits into the core economic services provided by banks and point at its costs and benefits. This leads to an examination of the interrelationship between the competitive environment and relationship banking as well as a discussion of the empirical evidence. Journal of Economic Literature Classification Numbers: G20, G21, L10.

We hypothesize that firms choose dividend increases to distribute relatively permanent cash-flow shocks and repurchases to distribute more transient shocks. As predicted, we find that post-shock cash flows of dividend increasing firms exhibit less reversion to pre-shock levels compared with repurchasing firms. We also examine whether the stock market uses the announcement of the payout method to update its beliefs about the permanence of cash-flow shocks. Controlling for payout size and the market's expectation about the permanence of the cash-flow shock, the stock price reaction to dividend increases is more positive than the reaction to repurchases.

This paper analyzes the optimality of conglomeration. We show that the potential benefits of conglomeration depend critically on the effectiveness of market discipline for stand-alone activities. Effective market discipline reduces the benefits of conglomeration. With ineffective market discipline of stand-alone activities, conglomeration would further undermine market discipline, but may nevertheless be beneficial. In particular, when rents are not too high, the diversification benefits of conglomeration dominate the negative incentive effects. A more competitive environment therefore induces conglomeration. We also show that introducing internal cost-of-capital allocation schemes creates internal market discipline that complements the weak external market discipline of a conglomerate. Our analysis sheds light on the Barings debacle and other recent developments in the banking sector. Journal of Economic Literature Classification Numbers: G20, G21, G34.

I document the shift of high-yield issuance from the public to the Rule 144A private placement market and exploit data on credit spreads to investigate whether investors regard disclosure in the two markets as comparable. The key implications of the inadequate-disclosure hypothesis are that investors require premiums on 144A securities and that such premiums are largest for first-time bond issuers and privately owned firms about whom less information is publicly available. I find that 144A premiums, though positive initially, have vanished over time, and I find no evidence of larger 144A premiums for first-time issuers or private firms. Investors do, however, require premiums of first-time issuers, and to a lesser extent of privately owned firms, regardless of whether securities are issued in the 144A or public market. These findings imply that sophisticated investors do not value the incremental information provided by securities registration, but do value ongoing disclosure.

Over the past decade several countries, including the US, have introduced or redesigned legislation that confers priority in bankruptcy upon all or some bank deposits. We argue that in the presence of contracting costs such rules can increase efficiency. We first show in a private information model that a borrower can reduce overall costs of finance by letting informationally heterogeneous lenders choose between junior and senior debt. In particular, we find that debt priorities reduce socially wasteful information gathering by investors. We then argue why, particularly in banking, legal standardization of debt priorities may be superior to bilateral private arrangements.

Over the past decade several countries, including the US, have introduced or redesigned legislation that confers priority in bankruptcy upon all or some bank deposits. We argue that in the presence of contracting costs such rules can increase efficiency. We first show in a private information model that a borrower can reduce overall costs of finance by letting informationally heterogeneous lenders choose between junior and senior debt. In particular, we find that debt priorities reduce socially wasteful information gathering by investors. We then argue why, particularly in banking, legal standardization of debt priorities may be superior to bilateral private arrangements.

Using Current Population Survey data for 1983-93, this article analyzes whether there is a union membership wage premium among full-time, private sector employees covered by union contracts. Ordinary least squares estimates of the membership wage premium are 12%-14%, and allowing membership to be endogenous yields larger estimates. Differences in job tenure, unobservable characteristics, and measurement error cannot fully explain the estimated premium. Significant differences in this premium, as well as in membership rates conditional upon coverage, across various demographic subgroups are also documented. In general, "free riders" do not appear to be free riding. Copyright 2000 by University of Chicago Press.

We examine the implications of portfolio theory for the cross-sectional behavior of equity trading volume. Two-fund separation theorems suggest a natural definition for trading activity: share turnover. If two-fund separation holds, share turnover must be identical for all securities. If (K + 1)-fund separation holds, we show that turnover satisfies an approximately linear K-factor structure. These implications are examined empirically using individual weekly turnover data for NYSE and AMEX securities from 1962 to 1996. We find strong evidence against two-fund separation, and a principal-components decomposition suggests that turnover is well approximated by a two-factor linear model.