Final Report Summary - UNIVERSAL BANKING (Universal Banking, Corporate Control and Crises)
A first group of papers study how financial intermediaries, in particular financial conglomerates, affect non-financial firm policies and outcomes.
I study the effect of bank-firm lending and governance links (through boards or equity stakes - direct or by asset management divisions) on bank choice, loan pricing and valuation. I find that these bank-firm governance links increase the likelihood of lending interactions. Links give access to loans with lower loan spreads in bad times, but higher spreads in good times. A paper studies the transmission of bank distress to nonfinancial firms from 34 countries during the 2007-2009 financial crisis using systemic and bank-specific shocks. I find that bank distress is associated with equity valuation losses and investment cuts to borrower firms with the strongest lending relationships with banks.
I study the effect of foreign portfolio investment (institutional ownership) foreign direct investment (cross-border M&As) on firm outcomes. I find that foreign investment has positive effects on long-term investment and firm performance. I also find important governance spillover effects to rival firms in the same industry resulting from cross-border M&A activity. Finally, I show that foreign institutional ownership increases stock market comovement across countries.
I study the effects of credit ratings on bank lending supply, firm investment and financial policy. I find that variation in ratings due to sovereign downgrades and sovereign ceilings has a negative effect on bank lending supply and firm investment. I also study public finance by looking into the effects of changes in local government ratings. I find that increased access to finance by local governments through a ratings channel has positive effects on public spending and private employment and income during recessions. Local government ratings also affect election outcomes.
I also study the effects on the market for executives and non-executive directors. Specifically, I study the determinants of corporate board composition by examining the influence of creditors (banks) following loan covenant violations and the corresponding transfer of control rights in favor of creditors. I also study the effects of board composition on the market reaction to capital issues (SEOs). In the case of executives, I study the effects of the skill set and firm characteristics such as foreign institutional ownership on executive compensation and risk taking.
A second group of papers study the way financial conglomerates operate in financial product markets and potential conflicts of interest among business units of financial conglomerates.
I study the relation between indexing and active management in the mutual fund industry worldwide. I find that actively managed funds are more active and charge lower fees when they face more competitive pressure from low-cost explicitly indexed funds. Another major limitation to competition in the mutual fund industry is the strong presence of commercial bank-affiliated funds. I show that bank-affiliated funds underperform unaffiliated funds. Consistent with conflicts of interest among divisions of financial conglomerates, the underperformance of bank-affiliated funds is more pronounced among funds with larger stock holdings of the bank’s lending clients.
I also study several other aspects of mutual fund performance worldwide including economies of scale, flow-performance relationship, equity lending programs and investor-stock geographic location.
I study the effect of bank-firm lending and governance links (through boards or equity stakes - direct or by asset management divisions) on bank choice, loan pricing and valuation. I find that these bank-firm governance links increase the likelihood of lending interactions. Links give access to loans with lower loan spreads in bad times, but higher spreads in good times. A paper studies the transmission of bank distress to nonfinancial firms from 34 countries during the 2007-2009 financial crisis using systemic and bank-specific shocks. I find that bank distress is associated with equity valuation losses and investment cuts to borrower firms with the strongest lending relationships with banks.
I study the effect of foreign portfolio investment (institutional ownership) foreign direct investment (cross-border M&As) on firm outcomes. I find that foreign investment has positive effects on long-term investment and firm performance. I also find important governance spillover effects to rival firms in the same industry resulting from cross-border M&A activity. Finally, I show that foreign institutional ownership increases stock market comovement across countries.
I study the effects of credit ratings on bank lending supply, firm investment and financial policy. I find that variation in ratings due to sovereign downgrades and sovereign ceilings has a negative effect on bank lending supply and firm investment. I also study public finance by looking into the effects of changes in local government ratings. I find that increased access to finance by local governments through a ratings channel has positive effects on public spending and private employment and income during recessions. Local government ratings also affect election outcomes.
I also study the effects on the market for executives and non-executive directors. Specifically, I study the determinants of corporate board composition by examining the influence of creditors (banks) following loan covenant violations and the corresponding transfer of control rights in favor of creditors. I also study the effects of board composition on the market reaction to capital issues (SEOs). In the case of executives, I study the effects of the skill set and firm characteristics such as foreign institutional ownership on executive compensation and risk taking.
A second group of papers study the way financial conglomerates operate in financial product markets and potential conflicts of interest among business units of financial conglomerates.
I study the relation between indexing and active management in the mutual fund industry worldwide. I find that actively managed funds are more active and charge lower fees when they face more competitive pressure from low-cost explicitly indexed funds. Another major limitation to competition in the mutual fund industry is the strong presence of commercial bank-affiliated funds. I show that bank-affiliated funds underperform unaffiliated funds. Consistent with conflicts of interest among divisions of financial conglomerates, the underperformance of bank-affiliated funds is more pronounced among funds with larger stock holdings of the bank’s lending clients.
I also study several other aspects of mutual fund performance worldwide including economies of scale, flow-performance relationship, equity lending programs and investor-stock geographic location.