This paper examines the relationships among capital regulation, deposit insurance, and the optimal bank interest margin. In a model where loan losses are the source of uncertainty, changes in capital regulation or deposit insurance premiums have direct effects on the bank's interest margin. An increase in bank capital requirement or in deposit insurance premiums results in a reduced interest margin under nonincreasing risk aversion. Comparative static analysis also explores the relation between asset quality and interest margin. It is shown that a mean-preserving spread of the distribution of loan losses results in a reduced margin

In this paper we analyze how depositors can employ both monitoring and capital requirements to control the risk of bank assets. We also analyze how monitors should be compensated if their actions are not directly observable and if there are binding limits on their liability. Second-best capital and monitoring levels (with unobservable actions) will be distorted away from their respective first-best levels. We derive some results about the nature of these distortions and characterize the optimal incentive scheme for monitors

Fundamentals of EC structural change underwriting new issues of securities corporate financial advisory services rules and precedures governing European mergers and acquisitions secondary market brokerage and trading investment management services securities industry regulation in the EC competitive positioning of investment banking players conclusions and implications

This research examines the information content of the bank earnings components entitled "Securities Transactions Gains and Losses" (STGL). STGL reflect the accounting gain or loss that arises when a bank sells an investment security at a price different from the book value. Institutional as well as anecdotal evidence suggests that investors may price STGL differently from the operating earnings come ponent entitled "Income before Securities Transactions" (IBST). For example, prior to 1983, bank regulators viewed the IBST and STGL components as reflecting unique aspects of bank activities and, therefore, required that total bank earnings be disaggregated into IBST and STGL components (SEC 1983). In addition, because of investment market volatility and the discretionary nature of investment securities sales, STGL may convey limited information about current changes in bank value (Linden 1990). Indeed, with banks, security analysts often focus on IBST (Barth et al. 1990), and managers have been accused of selectively selling appreciated investment securities to increase reported levels of accounting earnings (Berton 1991; Wyatt 1991). Research by Barth et al. (1990) has assessed the relative ability of the IBST and STGL income components to explain cross-sectional variation in annual common stock prices. They predicted, for many of the reasons cited above, that the STGL earnings/security price multiple should be less than the multiple assigned to the IBST component. Their results confirm this prediction: IBST played an important role in explaining bank stock prices, but the earnings/security price multiple assigned to STGL did not differ significantly from zero. There are several reasons why STGL might not have exhibited information content in this research. First, as Barth et al. suggest, the incremental information content of the STGL component may have been diminished because STGL appear to be realized to smooth income. In this situation, STGL are likely to provide little incremental information about changes in bank equity values. Second, Barth et al. measure stock returns over a 12-month interval corresponding to the bank's fiscal year. When returns are measured over such a long period, the likelihood increases that information unrelated to earnings will also be reflected in equity prices, thereby (potentially) reducing the ability of earnings to explain security returns. Third, significant tax-related, cross-sectional differences may exist in the STGL earnings component/security price relationship, and these are "averaged away" when one overall earnings/security price coefficient is estimated. For example, Scholes et al. (1990) suggest that STGL may be realized to minimize taxes. Based on this tax-planning scenario (described in section I), security transaction losses (gains) for tax-paying (non-taxpaying) banks are predicted to be negatively (positively) related to bank equity values. The objective of this study is to assess whether the STGL earnings component is priced by investors in a manner consistent with this tax-planning rationale. Empirical tests measure the market reaction to IBST and STGL earnings information over the two-day interval consisting of the day before and day of the preliminary quarterly earnings release, and the results provide evidence that STGL are priced by investors in a manner consistent with the tax-planning hypothesis. However, these results appear to hold only in the first three quarters of the fiscal year. In the fourth quarter, there is no evidence that the STGL component is priced by bank investors. These fourth-quarter results are consistent with an increase in earnings-management activity related to STGL near the fiscal year-end

[This research examines the information content of the bank earnings components entitled "Securities Transactions Gains and Losses" (STGL). STGL reflect the accounting gain or loss that arises when a bank sells an investment security at a price different from the book value. Institutional as well as anecdotal evidence suggests that investors may price STGL differently from the operating earnings component entitled "Income before Securities Transactions" (IBST). For example, prior to 1983, bank regulators viewed the IBST and STGL components as reflecting unique aspects of bank activities and, therefore, required that total bank earnings be disaggregated into IBST and STGL components (SEC 1983). In addition, because of investment market volatility and the discretionary nature of investment securities sales, STGL may convey limited information about current changes in bank value (Linden 1990). Indeed, with banks, security analysts often focus on IBST (Barth et al. 1990), and managers have been accused of selectively selling appreciated investment securities to increase reported levels of accounting earnings (Berton 1991; Wyatt 1991). Research by Barth et al. (1990) has assessed the relative ability of the IBST and STGL income components to explain cross-sectional variation in annual common stock prices. They predicted, for many of the reasons cited above, that the STGL earnings/security price multiple should be less than the multiple assigned to the IBST component. Their results confirm this prediction: IBST played an important role in explaining bank stock prices, but the earnings/security price multiple assigned to STGL did not differ significantly from zero. There are several reasons why STGL might not have exhibited information content in this research. First, as Barth et al. suggest, the incremental information content of the STGL component may have been diminished because STGL appear to be realized to smooth income. In this situation, STGL are likely to provide little incremental information about changes in bank equity values. Second, Barth et al. measure stock returns over a 12-month interval corresponding to the bank's fiscal year. When returns are measured over such a long period, the likelihood increases that information unrelated to earnings will also be reflected in equity prices, thereby (potentially) reducing the ability of earnings to explain security returns. Third, significant tax-related, cross-sectional differences may exist in the STGL earnings component/security price relationship, and these are "averaged away" when one overall earnings/security price coefficient is estimated. For example, Scholes et al. (1990) suggest that STGL may be realized to minimize taxes. Based on this tax-planning scenario (described in section I), security transaction losses (gains) for tax-paying (non-tax-paying) banks are predicted to be negatively (positively) related to bank equity values. The objective of this study is to assess whether the STGL earnings component is priced by investors in a manner consistent with this tax-planning rationale. Empirical tests measure the market reaction to IBST and STGL earnings information over the two-day interval consisting of the day before and day of the preliminary quarterly earnings release, and the results provide evidence that STGL are priced by investors in a manner consistent with the tax-planning hypothesis. However, these results appear to hold only in the first three quarters of the fiscal year. In the fourth quarter, there is no evidence that the STGL component is priced by bank investors. These fourth-quarter results are consistent with an increase in earnings-management activity related to STGL near the fiscal year-end

[This study describes the behavior of audit fees during a period of apparent increasing competition in the market for independent audit services. Academic researchers (e.g., Danos and Eichenseher 1986; Kinney 1988) and the business press (e.g., Journal of Accountancy 1984; The Wall Street Journal 1985, 1987; Work 1985) have noted increasing competition in the market for audit services among public accounting firms, but there has been no documentation that audit fees have decreased. The purpose of this study is to determine whether real audit fees decreased between 1977 and 1981. This interval started with federal investigations of anticompetitive behavior in the accounting profession, included several changes in the accounting profession that, coupled with the economic downturn of the late 1970s and early 1980s, could have increased competition in the market for audit services. It ended after the Federal Trade Commission announced it was closing its investigation of the profession's anticompetitive rules because many of the restrictions against competition had been dropped (The Wall Street Journal 1980). The study sample was developed from a set of publicly traded companies reporting external audit fees in a University of Michigan database. Of the 98 companies reporting these data for 1977 and 1981, the two years of interest, 20 were excluded to minimize the potential confounding effects of major changes in internal auditing, the impact of auditor turnover, and changes in regulation of the banking industry on external audit fees. The study finds a significant decrease in real audit fees between 1977 and 1981. These findings were not sensitive to alternative specifications of the audit fee model and were not driven by any particular industry or audit firm. The results of this study are consistent with claims of increasing fee competition in the market for independent audit services. In view of the number of changes occurring in the audit profession and the market during that period, it is difficult to make causal inferences about the effects of particular changes in the profession on audit fees. Thus, this article should be viewed as a descriptive study of the behavior of audit fees in a time when the market for audit services was allegedly becoming more competitive