This paper contributes to the literature that analyzes the mechanisms linking financial shocks and real activity. In particular, we investigate the growth impact of banking crises on industries with ...different levels of dependence on external finance. If banks are the key institutions allowing credit constraints to be relaxed, then a sudden loss of these intermediaries in a system in which such intermediaries are important should have a disproportionately contractionary impact on the sectors that flourished due to their reliance on banks. Using data from 38 developed and developing countries that experienced financial crises during the last quarter century, we find that those sectors that are highly dependent on external finance tend to experience a substantially greater contraction of value added during a banking crisis in countries with deeper financial systems than in countries with shallower financial systems. Our results do not suggest, however, that on net the externally dependent firms fare worse in deep financial systems.
This paper investigates private-interest, public-interest, and political-institutional theories of regulatory change to analyze state-level deregulation of bank branching restrictions. Using a hazard ...model, we find that interest group factors related to the relative strength of potential winners (large banks and small, bank-dependent firms) and losers (small banks and the rival insurance firms) can explain the timing of branching deregulation across states during the last quarter century. The same factors also explain congressional voting on interstate branching deregulation. While we find some support for each theory, the private interest approach provides the most compelling overall explanation of our results.
We investigate the trade-off between the benefits from bank monitoring when a banker is represented on a firm's board and the costs from two sources: conflicts of interests between lenders and ...shareholders, and U.S. legal doctrines that generate lender liability for bankers on boards of firms in financial distress. Consistent with high costs of active involvement, bankers are on boards of large, stable firms with high proportions of collateralizable assets and low reliance on short-term financing. While permitting banks to own equity could mitigate conflicts, the protection of shareholder versus creditor rights could continue to reduce the role of U.S. banks in corporate governance.
The debate over the existence and extent of funding cost differentials between large and small banks is central to regulatory reforms related to perceptions of “too big to fail” government support. ...After providing a simple taxonomy of five basic approaches into which the wide-ranging empirical literature on this topic can be categorized, I analyze key challenges that all of the approaches face, namely, the interpretation of funding costs differences between large and small banks, the choice of the relevant time period, the choice of the sample, and the significant differences in the funding structures of large and small banks. After analyzing further more specific challenges for three of the approaches, I describe the most promising methods for measuring funding cost differentials and present a “natural experiment” concerning the elimination of complete FDIC coverage of transactions deposits at the end of 2012, which suggests that depositors did not perceived a significant difference in risk between large and small banks during this period.
We document that ownership by officers and directors of publicly traded firms is on average higher today than earlier in the century. Managerial ownership has risen from 13 percent for the universe ...of exchange-listed corporations in 1935, the earliest year for which such data exist, to 21 percent in 1995. We examine in detail the robustness of the increase and explore hypotheses to explain it. Higher managerial ownership has not substituted for alternative corporate governance mechanisms. Lower volatility and greater hedging opportunities associated with the development of financial markets appear to be important factors explaining the increase in managerial ownership.
Are politicians who follow a strategy of reputational development rewarded with high levels of corporate campaign contributions? Reputational clarity could help to reduce uncertainty about a ...candidate and lead to greater campaign contributions from favored interests. Alternatively, such clarity could alienate those who disagree and prevent the politician from obtaining contributions from groups on both sides of an issue. We outline an approach that considers conditions under which a politician would or would not prefer reputational development and policy‐stance clarity and consistency in the context of repeat dealing with special interests. Our proxy for reputational development is the percentage of repeat givers to a legislator. Using data on corporate political action committee (PAC) contributions to members of the U.S. House during the seven electoral cycles from 1983/84 to 1995/96, we explore a variety of alternative hypotheses and find that greater reputational development is rewarded with greater PAC contributions.
We develop a positive theory of how interest-group competition shapes the organization of Congress and use it to explain campaign contribution patterns in financial services. Since interest groups ...cannot enforce fee-for-service contracts with legislators, legislators have an incentive to create specialized, standing committees which foster repeated dealing between interests and committee members. The resulting reputational equilibrium supports high contributions and high legislative effort for the interests. Contribution patterns by competing interests in the congressional battle over whether banks can enter new businesses support the theory, which also has implications for term limits and campaign reform.
Today's financial system is dominated by markets with institutions connected by short-term financing, securitization, derivatives, and other means. Yet regulations have focused on depositories, ...leaving regulators unprepared for the 2008 crisis. We suggest two key principles for regulatory reform. First, some changes in the financial system came as institutions lowered the burden of regulations through "regulatory arbitrage." Reform needs to avoid driving businesses "into the shadows," where risks may accumulate and sow seeds of future crises. Second, reform ought to improve transparency to reduce uncertainty and inter-linkages between players. We evaluate some of Dodd-Frank Act in light of these principles. PUBLICATION ABSTRACT
This paper investigates how changes in both institutional incentives and economic interests are important for securing durable changes in economic policy. We study how bipartisan support developed to ...sustain the Reciprocal Trade Agreements Act (RTAA) of 1934, which fundamentally transformed U.S. trade policy. The durability of this change was achieved only when the Republicans, long‐time supporters of high tariffs who originally vowed to repeal the RTAA, began to support this Democratic initiative in the 1940s. We find little evidence of an ideological shift among Republicans, but rather an increased sensitivity to export interests for which the institutional structure of the RTAA itself may have been responsible. We conclude that the combination of greater export opportunities and the institutional change that strengthened exporters' lobbying position was required to bring about Republican support for trade liberalization.
PDF
