We examine the multi-faceted effect of creditor rights on the way banks monitor, operate and finance themselves. We present a simple analytical model that shows that a strengthening of creditor rights reduces the need for banks to monitor their borrowers; and that banks, as a result, tilt their capital structures away from financing that provides the strongest monitoring incentives.
To empirically examine whether this financing is deposits or equity, we use the staggered passage of legal reforms across countries as identifying variation in creditor rights, and find that banks tilt their capital structures away from equity and towards deposits when creditor rights become stronger. These results suggest that bank equity, rather than deposits, is the predominant form of monitoring-inducing financing. Next, we examine how creditor rights and the ensuing increase in bank leverage affect bank risk-taking. We find that increases in creditor rights increase bank risk-taking, but
only in countries with government safety nets that encourage risk-shifting, not in countries without such incentives. We also find an increase in banks? cost of debt, but here too only in countries with government safety nets. These results indicate that lenders punish banks? higher risk-shifting propensities with higher costs of debt. Overall, our study sheds light on the complex role of country-level creditor rights on the way banks within the country function, and in doing so, contrasts the effect of creditor rights on banks from that on industrial firms.
Potential conficts of interest arise when IPO underwriters allocate IPO shares to their affiliated funds. We hypothesize that such nepotism incentives affect IPO pricing. Using a novel hand-collected dataset, we find support for this hypothesis...Read more
As FinTech promises to increase competition for both banks and investment firms, we consider the market failures that emerge from its existence, particularly as they relate to issues of financial stability and investor protection. This chapter...Read more
This paper reports the findings of a recent survey of 1019 individuals to learn about their commitment to and perceived value from personal and organizational higher purpose, and examines the implications of the findings for corporate governance...Read more
The Covid crisis raises important questions about the role of stress testing during periods of systemic distress. Should stress testing of banks be abandoned? Modified? Proceed as scheduled? Different jurisdictions have taken different tacks,...Read more