SEQUELS ARE RARELY AS good as the originals, so I approach this review of the market efficiency literature with trepidation. The task is thornier than it was 20 years ago, when work on efficiency was rather new. The literature is now so large that a full review is impossible, and is not attempted here. Instead, I discuss the work that I find most interesting, and I offer my views on what we have learned from the research on market efficiency.

https://onlinelibrary.wiley.com/doi/pdf/10.1111/j.1540-6261.1991.tb04636.x

Efficient Capital Markets: II

This paper presents some empirical results of a study predicting corporate failure as evidenced by the event of bankruptcy. There have been a fair number of previous studies in this field of research; the more notable published contributions are Beaver [1966; 1968a; 1968b], Altman [1968; 1973], Altman and Lorris [1976], Altman and McGough [1974], Altman, Haldeman, and Narayanan [1977], Deakin [1972], Libby [1975], Blum [1974], Edmister [1972], Wilcox [1973], Moyer [1977], and Lev [1971]. Two unpublished papers by White and Turnbull [1975a; 1975b] and a paper by Santomero and Vinso [1977] are of particular interest as they appear to be the first studies which logically and systematically develop probabilistic estimates of failure. The present study is similar to the latter studies, in that the methodology is one of maximum likelihood estimation of the so-called conditional logit model. The data set used in this study is from the seventies (1970-76). I know of only three corporate failure research studies which have examined data from this period. One is a limited study by Altman and McGough [1974] in which only failed firms were drawn from the period 1970-73 and only one type of classification error (misclassification of failed firms) was analyzed. Moyer [1977] considered the period 1965-75, but the sample of bankrupt firms was unusually small (twenty-seven firms). The

Financial ratios and the probabilistic prediction of bankruptcy

This paper empirically examines how ties between a firm and its creditors affect the availability and cost of funds to the firm. We analyze data collected in a survey of small firms by the Small Business Administration. The primary benefit of building close ties with an institutional creditor is that the availability of financing increases. We find smaller effects on the price of credit. Attempts to widen the circle of relationships by borrowing from multiple lenders increases the price and reduces the availability of credit. In sum, relationships are valuable and appear to operate more through quantities rather than prices.

https://onlinelibrary.wiley.com/doi/pdf/10.1111/j.1540-6261.1994.tb04418.x

The Benefits of Lending Relationships: Evidence from Small Business Data

Researchers typically estimate financial distress prediction models on nonrandom samples. Estimating models on such samples can result in biased parameter and probability estimates if appropriate estimation techniques are not used. This paper examines conceptually and empirically two estimation biases which can result when financial distress models are estimated on nonrandom samples. The first bias results from "oversampling" distressed firms and falls within the topic of choice-based sample biases. The second results from using a "complete data" sample selection criterion and falls within the topic of sample selection biases. The two issues examined in this paper arise because of sample selection/data collection constraints typically faced by financial distress researchers. The first constraint is the extremely low frequency rate of firms exhibiting financial distress characteristics (e.g., petitioning for

https://www.jstor.org/stable/pdfplus/2490859.pdf

Methodological issues related to the estimation of financial distress prediction models

Combining forecasts: A review and annotated bibliography

regulating bank capital, however, is a detailed consideration of the impact of such regulation on individual bank behavior and whether the regulation actually achieves its desired result.' Typically regulation is assumed to function in an essentially ceteris paribus environment, whereby the mere addition of capital to the bank's balance sheet reduces risk. The purpose of this paper is to examine explicitly the issue of portfolio reaction to capital requirements by investigating the effect of capital ratio regulation on the portfolio behavior of commercial banks.2 Implicit in the analysis is the view that bank regulators presently do not constrain portfolio risk so as to prevent such asset reshuffling. Given the lack of objective standards or guidelines on asset portfolio risk, this approach seems more appropriate than to assume no asset portfolio response. This paper examines the portfolio allocation that flows from the portfolio decision of the firm. Next it examines the effects on bank portfolio risk of a regulatory increase in the minimum capital asset ratio that is acceptable to the supervisory agency. For the system as a whole, the results of a higher required capital-asset ratio in terms of the average probability of failure are ambiguous,3 while the intra-industry dispersion of the probability of failure unambiguously increases. This result leads us to question the viability of regulating commercial banks in terms of a capital requirement. Thus, serious consideration should be given to the discontinuance of regulation of bank capital via ratio constraints. Alternatively, regulation should be imposed on both asset composition and capital in a way that has heretofore not been considered.

Regulation of Bank Capital and Portfolio Risk

Traditional theories of intermediation are based on transaction costs and asymmetric information They are designed to account for institutions which take deposits or issue insurance policies and channel funds to firms However, in recent decades there have been significant changes Although transaction costs and asymmetric information have declined, intermediation has increased New markets for financial futures and options are mainly markets for intermediaries rather than individuals or firms These changes are difficult to reconcile with the traditional theories We discuss the role of intermediation in this new context stressing risk trading and participation costs

/pdf/the-theory-of-financial-intermediation-r5avofll0b.pdf

The theory of financial intermediation

This paper presents evidence that the traditional banking business of accepting deposits and making loans has declined significantly in the US in recent years. There has been a switch from directly held assets to pension funds and mutual funds. However, banks have maintained their position relative to GDP by innovating and switching from their traditional business to fee-producing activities. A comparison of investor portfolios across countries shows that households in the US and UK bear considerably more risk from their investments than counterparts in Japan, France and Germany. It is argued that in these latter countries intermediaries can manage risk by holding liquid reserves and intertemporally smoothing. However, in the US and UK competition from financial markets prevents this and risk management must be accomplished using derivatives and other similar techniques. The decline in the traditional banking business and the financial innovation undertaken by banks in the US is interpreted as a response to the competition from markets and the decline of intertemporal smoothing.

/pdf/what-do-financial-intermediaries-do-26lmwz551g.pdf

What do financial intermediaries do

THIS PAPER REPORTS on the status of the literature on micro bank modeling and assesses our understanding of the banking firm's optimal behavior. This is no mean task, for much has been written on banking, broadly defined, over the past couple of decades. The review is developed in pieces. Each major subproblem is outlined and the analysis used to deal with the issue explicated. This is not the best way to summarize the development of a field, it should be immediately recognized. One would prefer to have a smooth continuum of development, moving the frontier of knowledge evenly through time and across subareas. Yet, this is rarely the way a field develops. More likely, individual questions attract attention and are the subjects of a substantial number of contributions. After a time, the field moves on to the new area of interest. The banking field is no exception. Before embarking upon the review, however, a couple of lines should be devoted to previous attempts. There have been essentially three. First, Pyle (1972) analyzes the uncertainty portfolio models at a time when little existed in the literature, and hence one finds the review a bit vague and sketchy. Baltensperger's contributions (1978, 1980) are the next serious and rather extensive reviews. The quality of these

/pdf/modeling-the-banking-firm-a-survey-4uzjw0z4n3.pdf

Modeling the Banking Firm: A Survey

Throughout the past year, on-site visits to financial service firms were conducted to review and evaluate their financial risk management systems. The commercial banking analysis covered a number of North American super-regionals and quasi–money-center institutions as well as several firms outside the U.S. The information obtained covered both the philosophy and practice of financial risk management. This article outlines the results of this investigation. It reports the state of risk management techniques in the industry. It reports the standard of practice and evaluates how and why it is conducted in the particular way chosen. In addition, critiques are offered where appropriate. We discuss the problems which the industry finds most difficult to address, shortcomings of the current methodology used to analyze risk, and the elements that are missing in the current procedures of risk management.

/pdf/commercial-bank-risk-management-an-analysis-of-the-process-1n264wnk1w.pdf

Anthony M. Santomero

Papers

Regulation of Bank Capital and Portfolio Risk

The theory of financial intermediation

What do financial intermediaries do

Modeling the Banking Firm: A Survey

Commercial Bank Risk Management: An Analysis of the Process