Law, Banking and Growth
Friday, Jan. 6, 2017 7:30 PM – 9:30 PM
- Chair: Lemma Senbet, University of Maryland
How Lenders Evaluate Lawsuits? Evidence From Chinese Corporate Bond Market
AbstractWe 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
AbstractWe 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
AbstractWe 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.
- G2 - Financial Institutions and Services
- K4 - Legal Procedure, the Legal System, and Illegal Behavior