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Hilton Atlanta, 212-213-214
American Finance Association
Disclosure, Regulation, and Banking
Sunday, Jan. 6, 2019 8:00 AM - 10:00 AM
- Chair: Marcus Opp, Stockholm School of Economics
(Why) Do Central Banks Care About Their Profits?
AbstractWe provide prima facie evidence that central banks care about their profits by documenting that they are significantly more likely to report slightly positive profits than slightly negative profits. The discontinuity in the profit distribution is more pronounced amid greater political or public pressure, the public’s receptiveness to more extreme political views, and agency frictions arising from governor career concerns, but absent when no such factors are present. Moreover, the propensity to report small profits over small losses is correlated with more lenient monetary policy inputs and greater inflation. These findings indicate that profitability concerns, while absent from standard theoretical models of central banking, are both present and effective in practice, which informs a theoretical debate about monetary stability and the effectiveness of non-traditional central banking.
The Interdependence of Bank Capital and Liquidity
AbstractBank runs may be associated with inefficient liquidation of good investment projects and costly fire sales. We analyze the interdependent effects of bank capital and liquidity on financial stability in a global game model, where banks' failure probabilities are endogenously determined and depend on their balance sheet choices. The main insight of our analysis is that regulation should be designed in a way to consider both sides of the balance sheet. Capital and liquidity regulation are perfect substitutes in dealing with individual bank stability (micro-prudential perspective), while both are needed to deal with system-wide crises (macro-prudential perspective).
The Effect of Mandatory Information Disclosure on Financial Constraints
AbstractThis paper studies the effect of mandatory disclosure on firms’ financial constraints and investment policies. Using a difference-in-difference estimation, I analyze a quasi-natural experiment that exogenously changed voluntarily reported information into mandatory disclosure. I find that firms became more equity-constrained but less debt-constrained. Firms also invested more in physical capital but kept expenditure in R&D unchanged. The effect on equity constraints was stronger when investors had little information about the firm and when the firm had difficulties to differentiate from other firms. Alternatively, the effect on debt constraints was stronger when the ability to guarantee a permanent disclosure policy was more relevant. The findings suggest that mandatory disclosure benefits debt by reducing the agency cost (Jensen and Meckling (1976)) but harms equity by shutting down the signaling mechanism inherent to voluntary disclosure (Myers and Majluf (1984)).
University of California-San Diego
Federal Reserve Bank of New York
IESE Business School
University of Michigan
- G2 - Financial Institutions and Services