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| Working Papers – 2016 |
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Information Acquisition in Antebellum U.S. Credit Markets: Evidence from Nineteenth-Century Credit Reports FDIC Center for Financial Research Working Paper No. 2016-04 This Version: September 2016 Abstract If a lender can easily obtain more information about a borrower, under what conditions will he choose to do so? In this paper, I use a hand-collected set of records from the nineteenth century credit reporting agency, R.G. Dun & Company, that allows me to directly observe when lenders acquired information about their borrowers. I find evidence that lenders did not always seek information even though it was inexpensive and easily available. Instead, lenders were more likely to start accessing the reports for a borrower after they heard bad news, be it aggregate or borrower-specific. These results show that lenders require relatively more information about borrowers during an economic downturn, suggesting that information constraints likely play a more important role in credit market outcomes during these times. Furthermore, lenders responded to bad news about a borrower in their loan portfolio by acquiring information about other borrowers. This result sheds light on how one default can affect the larger credit network through contagious information acquisition. JEL Codes: N2, N21, G24, E32 |
The Entry, Performance, and Risk Profile of De Novo Banks FDIC Center for Financial Research Working Paper No. 2016-03 This Version: April 7, 2016 Abstract From 2000 to 2008, 1,042 new community banks were chartered. Despite the largest financial crisis in decades, the vast majority of these new banks either survived or were financially healthy when merged with another bank. In this paper we investigate whether the patterns of community bank de novo formation and failure for this cohort that formed just prior to the recent financial crisis were the same as for new institutions from earlier periods. Similar to previous periods, we find that many of the new banks chartered were in markets that experienced bank mergers or acquisitions, and were large and growing. Consistent with a "life-cycle theory" of de novos, compared with small established banks, recent de novos were financially fragile and failed at higher rates during the crisis. Discrete-time hazards models confirm that failed de novos from the recent period invested heavily in construction and development lending prior to the crisis, similar to the concentrated loan portfolios exhibited by earlier cohorts. |
Regulatory Bank Oversight Impact Economic Activity? A Local Projections Approach FDIC Center for Financial Research Working Paper No. 2016-02 This Version: January 19, 2016 Forthcoming in: Journal of Financial Stability. Abstract Existing research generally finds that the magnitude of the effect of supervisory rating shocks on real economic activity is small and short-lived. This is puzzling because corrective actions addressing weaknesses in underwriting and other practices frequently include lending restrictions and thus would be expected to have a stronger effect on real activity. As supervisory actions curb poorly underwritten or uneconomic loans, transmission of macroprudential policy throughout the macroeconomy should be evident in the dynamic responses of the real GDP and other measures of real activity. We use the local projections approach to estimate impulse responses from a vector autoregression (VAR) model. We show that the effect of supervisory stringency shocks is larger than the one estimated with the standard Cholesky structural VAR approach. We find that the effects are asymmetric: bank downgrades lead to a pronounced decline in real activity, while upgrades do not result in its increase. This would follow if the decrease is driven by poor lending practices that would not be expected to resume when the bank is upgraded. The linear framework averages out these effects, overstating the impact of upgrades, and understating that of downgrades. Furthermore, we document the presence of nonlinear effects for the downgrade shocks, as their impact increases disproportionately with its size. Such effects are not observed for upgrade shocks. Finally, we demonstrate that our results are robust to the inclusion of a variety of controls and additional endogenous variables. JEL Codes: G21; E32; E37 |
Short-Termism of Executive Compensation FDIC Center for Financial Research Working Paper No. 2016-01 This Version: December 2015 Published as: Pogach, Jon. "Short Termism of Executive Compensation." Journal of Economic Behavior & Organization 148, (2018): 150-170. Abstract This paper presents an optimal contracting theory of short-term firm behavior. Contracts inducing short-sighted managerial behavior arise as shareholders' response to conflicting intergenerational managerial incentives. High-return projects may last longer than the tenure of managers who implement them. Consequently, inducing managers to act in the long-term interests of the firms requires the alignment of incentives across multiple managers. Such action comes at greater costs than providing incentives for a single manager and, as a result, leads to contracts that favor short-term behavior. Long-term firm value maximization is further impeded when only the quality of accepted projects–but not those of declined projects–is public. In that case, shareholders find it costly to induce long-term project selection among managers who can earn all information rents from short-term projects but must sacrifice information rents from long-term projects to future managers. Keywords: Executive Compensation, Short-Termism |
The Center for Financial Research (CFR) Working Paper Series allows CFR staff and their coauthors to circulate preliminary research findings to stimulate discussion and critical comment. Views and opinions expressed in CFR Working Papers reflect those of the authors and do not necessarily reflect those of the FDIC or the United States. Comments and suggestions are welcome and should be directed to the authors. References should cite this research as a “FDIC CFR Working Paper” and should note that findings and conclusions in working papers may be preliminary and subject to revision.