The event study is an important research tool in economics and finance. The goal of an event study is to measure the effects of an economic event on the value of firms. Event study methods exploit the fact that, given rationality in the marketplace, the effects of an event will be reflected immediately in security prices. Thus the impact can be measured by examining security prices surrounding the event. In this paper event study methods are described including some of the potential complications. An example is included to illustrate the approach.

http://www.business.unr.edu/faculty/liuc/files/BADM742/MacKinlay_1997.pdf

Event Studies in Economics and Finance

Legal and accounting reform that strengthens creditor rights, contract enforcement, and accounting practices boosts financial development and accelerates economic growth. Levine, Loayza, and Beck evaluate: Whether the level of development of financial intermediaries exerts a casual influence on economic growth. Whether cross-country differences in legal and accounting systems (such as creditor rights, contract enforcement, and accounting standards) explain differences in the level of financial development. Using both traditional cross-section, instrumental-variable procedures and recent dynamic panel techniques, they find that development of financial intermediaries exerts a large causal impact on growth. The data also show that cross-country differences in legal and accounting systems help determine differences in financial development. Together, these findings suggest that legal and accounting reform that strengthens creditor rights, contract enforcement, and accounting practices boosts financial development and accelerates economic growth. This paper - a product of Macroeconomics and Growth, Development Research Group - is part of a larger effort in the group to understand the links between the financial system and economic growth. Thorsten Beck may be contacted at tbeck@worldbank.org.

Financial Intermediation and Growth: Causality and Causes

http://faculty.haas.berkeley.edu/ross_levine/Papers/2000_JME_Fin%20Int%20Growth%20Causality.pdf

Financial intermediation and growth: Causality and causes ☆

https://personal.lse.ac.uk/FERREIRD/gender.pdf

Women in the boardroom and their impact on governance and performance

Customer relationships arise between banks and firms because, in the process of lending, a bank learns more than others about its own customers. This information asymmetry allows lenders to capture some of the rents generated by their older customers; competition thus drives banks to lend to new firms at interest rates which initially generate expected losses. As a result, the allocation of capital is shifted toward lower quality and inexperienced firms. This inefficiency is eliminated if complete contingent contracts are written or, when this is costly, if banks can make nonbinding commitments that, in equilibrium, are backed by reputation. THIS PAPER DERIVES A dynamic theory of "customer relationships" in bank loan markets. The theory builds on a traditional view of bank lending behavior, first spelled out by Hodgman (1961) and Kane and Malkiel (1965) and later elaborated upon by Wood (1975). According to this view, an essential factor underlying a bank's loan pricing policy is its impact on the bank's stock of loyal customers, as well as on those customers' deposits. Rather than take relationships as a given, we examine the implications of the view expressed, for example, by Fama (1985), that they arise because of "inside information" generated by the history of bankfirm interactions. In our theory, customer relationships arise endogenously as a consequence of the asymmetric evolution of information sets. In contrast with most theories of pricing under asymmetric information, though, the key informational asymmetry postulated here is that which arises between agents on the same side of the market. We exploit the presumption, made by Kane and Malkiel (1965) and Fama (1985), that a bank which actually lends to a firm learns more about that borrower's characteristics than do other banks. A fundamental consequence of this asymmetric evolution of information is the potential creation of ex post, or temporary, monopoly power. If it is relatively costly for banks and firms to write multiperiod contingent contracts, this ex post monopoly power has undesirable effects on the allocation of capital. Even though banks earn zero expected profit over the lifespan of the average customer relationship, they are not disciplined by the market to offer

Asymmetric Information, Bank Lending, and Implicit Contracts: A Stylized Model of Customer Relationships

This paper seeks to explain the combination of explicit and implicit pricing for deposit insurance employed by the FDIC. Essentially, the FDIC sells two products-insurance and regulation. To span the product space, it must and does set two prices. We argue that the need to establish regulatory disincentives to bank risk-taking is the heart of the controversy over the adequacy of bank capital and that the ability to close risky banks before exhausting their charter value (i.e., the value of their right to continue in business) stands at the center of these disincentives and in front of the FDIC's insurance reserves. JUST AS A BOOK shouldn't be judged by its cover, a government agency shouldn't be judged by the words behind its initials. With the FDIC (Federal Deposit Insurance Corporation), the agency's name describes only part of its formal operations: the FDIC is quasi-governmental, has a regional structure and sells deposit insurance. However, the initials fail to convey the FDIC's critical place in the governmental regulatory structure as the sole federal overseer of the approximately 8900 state-chartered commercial banks that have chosen not to belong the Federal Reserve System.' Reflecting the Federal Reserve's membership problem, the number of these banks is growing year by year. Besides selling deposit insurance at bargain explicit rates, the FDIC performs four regulatory functions: (1) Entry regulation. It passes on new banks' applications for deposit insurance and on branch and merger proposals as well, thereby protecting the value of existing bank charters; (2) Examination. Two-thirds of FDIC employees are concerned with inspecting bank records and supervising managerial activity; (3) Regulation of deposit rates and conditions for withdrawal. By tradition, FDIC policies on these matters conform entirely with regulations applicable to Federal Reserve member banks; and (4) Disposition of failed banks. When an insured bank fails, the FDIC usually chooses not to liquidate it.2

Federal Deposit Insurance, Regulatory Policy, and Optimal Bank Capital*

The S & L insurance mess : how did it happen?

Explicit deposit insurance has been spreading rapidly in recent years, even to countries not advanced in financial and institutional development. Economic theory indicates that deposit insurance design features interact--for good or ill--with country-specific elements of the financial and governmental contracting environment. The authors document the extent of cross-country differences in deposit insurance design and review empirical evidence on how design features affect private market discipline, banking stability, financial development, and the effectiveness of crisis resolution. This evidence challenges the wisdom of encouraging countries to adopt explicit deposit insurance without first addresing weaknesses in their informational and supervisory environments.

/pdf/deposit-insurance-around-the-globe-where-does-it-work-2fpqaq0rwu.pdf

Deposit Insurance Around the Globe: Where Does It Work?

The system of federal deposit insurance adopted during the 1930s has become increasingly costly and unreliable. This timely study warns bankers, regulators, politicians, and taxpayers that no matter how well the deposit-insurance system may have run in the past it is headed for an expensive bureaucratic breakdown. It forcefully argues that unless market discipline can be reintroduced, this breakdown threatens to take depository institutions into de facto nationalization. Reversing these trends, it points out, requires redesigning the deposit insurance system to curtail the subsidizing of risk taking by deposit institutions, a practice that has resulted in widespread insolvency among financial institutions. The Gathering Crisis in Federal Deposit Insurance provides more than a warning. It shows that the current system is unfair and has transformed the federal government into the chief supplier of equity funds to depository institutions. And it observes that whenever the financial environment is changing rapidly, the existing system of deposit insurance subsidizes risk-taking in ways that impose a huge, but largely unrecognized burden on the general taxpayer and conservatively managed financial institutions. In one way or another, the taxpayer is going to be called upon to make good the financially staggering amount of the system's guarantees. The book provides a comprehensive discussion of FDIC and FSLIC policies and procedures, describes the variety of risks facing deposit institutions and their implications for the insurance system, explains the perverse risk-bearing incentives inherent in the current deposit insurance system, documents the extent of actual insolvency at insured institutions, and proposes a framework for reform.

The Gathering Crisis in Federal Deposit Insurance

I. Portfolio theory and the availability doctrine, 113. — II. Portfolio optimization under deposit variability, 120. — III. Some extensions of the argument, 125. — IV. Conclusions, 128. — Appendix, 130.

Edward J. Kane

Papers

Federal Deposit Insurance, Regulatory Policy, and Optimal Bank Capital*

The S & L insurance mess : how did it happen?

Deposit Insurance Around the Globe: Where Does It Work?

The Gathering Crisis in Federal Deposit Insurance

Bank Portfolio Allocation, Deposit Variability, and the Availability Doctrine