Law, Banking and Growth

Paper Session

Friday, Jan. 6, 2017 2:30 PM – 4:30 PM

Sheraton Grand Chicago, Colorado
Hosted By: Association of Financial Economists & American Economic Association
  • Chair: Lemma Senbet, University of Maryland

Interstate Banking, Bank Information, and Corporate Acquisitions

Kose John
,
New York University and Temple University
Qianru Qi
,
Fudan University
Jing Wang
,
University of Nebraska-Lincoln

Abstract

Using staggered interstate bank deregulation in the US during the 1980s and 1990s as an exogenous expansion to banks’ information boundaries, we show that the information acquired by banks in the lending process helps non-financial firms identify out-of state targets to acquire. We find that the likelihood that a firm becomes the target in an out-of-state acquisition increases after the state is deregulated, and more so when the firm has more out-of-state loans, and if the firm’s bank is acquired by an out-of-state bank. This effect is stronger for firms that are subject to more asymmetric information, such as younger, smaller, unrated or not-publicly-traded firms. We also find corresponding results at the state level, aggregating both public and private firms. Acquirers of out-of-state targets (particularly private targets) receive significantly higher announcement returns after the deregulation. Overall, our findings suggest that banking sector deregulation has the potential to improve investment efficiency by alleviating information asymmetry in the real economy.

How Lenders Evaluate Lawsuits? Evidence From Chinese Corporate Bond Market

Xian Gu
,
Central University of Finance and Economics
Iftekhar Hasan
,
Fordham University
Haitian Lu
,
Hong Kong Polytechnic University

Abstract

We provide the first evidence that litigation matters in China’s corporate bond market. Using unique data sets on all lawsuits of Chinese listed firms and all stock exchange listed corporate bonds, we find investment grade bonds issued by litigated firms have higher yield spread, shorter maturity and less issuance volume than propensity score matched bonds issued by non-litigated firms. This effect is more pronounced where the litigated firm is the defendant, sued by a bank, and where the firm lost the case; and less pronounced where the litigated firm is an SOE. Better corporate governance appears to mitigate bond’s sensitivity to litigations. Our result is robust to a test of the same firm that issued bonds both before and after the litigation. Finally, we find abnormal negative bond return and excess trading volume around the public announcement of corporate lawsuits. Our evidence is consistent with litigations enhance the default risk of the issuer and that bondholders react by reducing the “free cash flow” of managers.

Investment Banker Directors and Seasoned Equity Offerings

Qianqian Huang
,
City University of Hong Kong
Kai Li
,
University of British Columbia
Ting Xu
,
University of British Columbia

Abstract

We examine how directors with investment banking experience affect firms’ capital raising activities. We find that firms with investment bankers on their boards have a higher probability of making seasoned equity offerings (SEOs), and that these offerings are associated with higher announcement returns, lower underpricing, and lower underwriter spreads. These results are consistent with the idea that investment banker directors reduce information asymmetry between issuers and the equity market. We find a limited role of investment banker directors in firms issuing bonds or obtaining loans, which are less information-sensitive than equity. Overall, our results highlight the advisory role of specialist directors in shaping corporate policies.

The Real Impact of Basel Ratings-Based Capital Rules on the Finance-Growth Nexus

Iftekhar Hasan
,
Fordham University
Suk-Joong Kim
,
University of Sydney
Gazi Hassan
,
University of Waikato
Eliza Wu
,
University of Sydney

Abstract

We investigate whether ratings-based capital regulation has affected the finance-growth nexus via the foreign credit channel. Using data on real GDP growth per capita and cross-border bank lending to 67 countries over time we find that since the implementation of Basel 2 capital rules, risk weight reductions mapped to sovereign credit rating upgrades have hampered economic growth in both recipient and lender countries. The adverse effects of capital regulation on bank credit supply and economic growth is compounded in less developed non-investment grade countries with more corruption and less competitive banking sectors but ameliorated with greater political stability.
Discussant(s)
Anthony Saunders
,
New York University
April Klein
,
New York University
Iftekhar Hasan
,
Fordham University
Kose John
,
New York University and Temple University
JEL Classifications
  • G2 - Financial Institutions and Services
  • K4 - Legal Procedure, the Legal System, and Illegal Behavior