This article provides the first comprehensive econometric analysis of the causes of bank distress during the Depression. We assemble bank-level data for virtually all Fed member banks, and combine those data with county-level, state-level, and national-level economic characteristics to capture cross-sectional and inter-temporal variation in the determinants of bank failure.
Students in my Advanced Corporate Finance course address the diversification discount during the segment on mergers and corporate control. My goal is to develop their understanding of both the theoretical and the practical issues surrounding diversifying mergers. First, we discuss the irrelevance of a diversifying merger to firm value under the Modigliani-Miller assumptions. We recall that if shareholders seek diversification of unsystematic risk, they can diversify within their own portfolio directly by buying other stocks, rather than diversifying at the firm level.
Interest rate swap pricing theory traditionally views swaps as portfolios of forward contracts with net swap payments discounted using the LIBOR curve. Current market practices of marking-to-market and collateralization question this view. Collateralization and marking-to-market affects discounting of swap payments (through altered default characteristics) and introduces intermediate cash-flows. This paper provides a theory of swap valuation under collateralization and we find evidence supporting the presence of costly collateral.
We show that network advantages constitute an important intangible asset that goes unrecognized in the financial statements. For a sample of e-commerce firms, we find that network advantages created by Web site traffic have substantial explanatory power for stock prices over and above traditional summary accounting measures such as earnings and book value of equity. Also, network advantages are positively associated with one-year-ahead and two-year-ahead earnings forecasts provided by equity analysis.
This paper analyzes the effects of tax policy on the strategic choices of multinationals and on national welfare. Contrary to existing theory, in the absence of foreign taxation, deferral of home-country taxation until earnings on outbound FDI are repatriated is generally superior to including those earnings in current income. This holds even if the home country taxes domestic investment less generously. This is also generally superior to exempting foreign income.
During the recent stock market bubble, the traditional financial reporting model was assailed as a backward-looking system, out of date in the Information Age. With the bursting of the bubble, the quality of financial reporting is again under scrutiny, but now for not adhering to traditional principles of sound earnings measurement and asset and liability recognition. This paper is a retrospective on the quality of financial reporting during the 1990s. Did reporting under U.S. GAAP perform well during the bubble, or was its quality suspect?
We consider a setting where a firm delegates an investment decision and, subsequently, a sales decision to a privately informed manager. For both decisions corporate income taxes have real effects. We show that compensating the manager based on pre-tax residual income can ensure after-tax NPV-maximization ("goal congruence") for each decision problem in isolation. However, this metric fails if both decisions are nontrivial, since it requires asset-specific hurdle rates and hence precludes asset aggregation.
This paper studies the capital budgeting process in a setting where a manager is privately informed about the profitability of an investment project and enjoys nonpecuniary benefits of control ("empire benefits"). I characterize the optimal required rate of return and show that a delegation scheme with residual income-based compensation can replicate the benchmark performance achieved under centralization. The main result of the paper is that the optimal capital charge rate for computing residual income always exceeds the required rate of return as a result of empire benefits.
The article examines the price implications of corporate disclosures as well as other information releases. Corporate disclosures are an important source of information for investors. For dividend announcements, the price implications appear straightforward: price is the present value of expected future dividends. Hence, to the extent that future dividends are related to current dividends, dividend changes should trigger price responses. Other corporate disclosures, such as earnings, may also be viewed as proxies for future dividends.