Essays on corporate governance and banking

This dissertation consists of three empirical essays related to corporate governance and banking. The first essay, entitled Independent or co-opted? Corporate directors with ties to the nonprofit sector, studies the relation of independence and firm outcome, and focuses on independent directors that also belong to a nonprofit organization. Independent directors who also sit at boards of non-profit organizations (NPOs) may contribute valuable knowledge to their firms or possess personality traits that enhance their value as monitors. However, they may also be prone to be co-opted by the CEO with promises of donations to the NPO of their interest. This paper studies whether independent director’s links with NPOs affect their performance by analyzing how the presence of NPO-linked directors affects firm value, CEO pay and earnings management. To identify the causal effect of NPO-linked directors I use the retirement of independent directors as a source of exogenous variation in the composition of the board and its committees. I find that the participation of NPO-linked directors at the compensation committee is significant in terms of firm value, level of pay and compensation structure. The sign of the effect will depend on managerial power, measured as CEO entrenchment. The results suggest that less entrenched CEOs use the appointment of NPO-linked directors to increase their influence over the board. The second essay, co-authored with Pablo Ruiz-Verdú and is entitled CEO Risk Taking Incentives and Bank Failure during the 2007-2010 Financial Crisis. In this paper we show that stronger CEO risk taking incentives prior to the 2007–2010 financial crisis are associated with a higher probability of bank failure during the crisis. We define failure to include acquisitions facilitated by supervisors and employ measures of incentives that account for the risk taking incentives generated by CEOs’ stock and stock option holdings. Risk taking incentives and bank risk were not the result of the use of particular compensation vehicles (such as stock options) or the governance failures usually considered in the corporate governance literature. On the contrary, CEOs’ incentives were tightly aligned with those of shareholders. Related to the risk-taking incentives of large financial institutions, the third essay (Too big too discipline?, also co-authored with Pablo Ruiz-Verdú) documents a possible bias in bank supervisors behavior that benefits systematically large firms in the industry. Through formal enforcement actions, bank supervisors can coerce banks into adopting policies or practices to limit their risk. Moreover, formal enforcement actions are public, so they can communicate important information to investors and depositors and, thus, constitute a source of market discipline. In this paper, we document that supervisors appear to have a bias when issuing formal enforcement actions: very large financial institutions are less likely to receive formal enforcement actions than one would expect on the basis of their fundamentals. At the same time, they do not seem to be less risky than smaller, yet large, financial firms. Very large financial institutions seem to be too big to publicly discipline.This research has been funded with "Ayudas a la Investigación Santander Financial Institute (2013 Edition)" granted by Fundación de la Universidad de Cantabria para el Estudio y la Investigación del Sector Financiero (UCEIF) and the research grants ECO2009-08278 from the Ministerio de Ciencia e Innovación and ECO2012-33308 from Ministerio de Economía y Competitividad.Independent or co-opted? : corporate directors with ties to the nonprofit sector. CEO risk : taking incentives and bank failure duing the 2007-2010 financial crisis. Too big to discipline?Presidente: Manuel Fernández; Vocal: Gaizka Ormazabal Sánchez; Secretaria: María Gutiérrez Urtiag

Do depositors care about enforcement actions?

Since 1990, federal bank supervisors have publicly announced formal enforcement actions. This change in regime provides a natural laboratory to test two propositions: (1) claims by economists that putting confidential supervisory information in the public domain will enhance market discipline and (2) claims by bank supervisors that releasing such data will spark runs. To evaluate these propositions, we measure depositor reaction to 87 Federal Reserve announcements of enforcement actions. We compare deposit growth rates and yield spreads before and after the announcements at the sample banks and a control group of peer banks. The data show no evidence of unusual deposit withdrawals or spread increases at the sample banks following the announcements of formal actions. These results suggest that public announcements of enforcement actions did not spark bank runs or enhance depositor discipline. Apparently, depositors did not care a great deal about our sample actions.Bank supervision ; Deposit insurance

Is there a regulatory trade-off between stability and performance? Evidence from italian banks.

Disentangling the direct causal effect that sanctions exert on bank performance from the indirect through default risk, we show that a trade-off exists for regulators between banks’ performance and stability in Italy. Two key findings provide evidence for the nontriviality of the return-risk nexus: (i) banks’ liquidations are concentrated at the lower-end of the profitability distribution, resulting in (attrition) biased estimates; (ii) the drop-out is informative since it depends on the unobserved measurements of profitability. Despite this evidence, while returns are affected by sanctions and regulatory requirements, default risk is not. However, looking at growth of gross loans, enforcement actions reduce default risk though at a cost of a significant fall in lending, creating a regulatory tradeoff. In fact, through loans’ growth, we account for the key dynamics of intermediaries’ soundness, namely higher profits and less non-performing loans

Adaptive Financial Regulation and RegTech: A Concept Article on Realistic Protection for Victims of Bank Failures

Frustrated by the seeming inability of regulators and prosecutors to hold bank executives to account for losses inflicted by their companies before, during, and since the financial crisis of 2008, some scholars have suggested that private-attorney-general suits such as class action and shareholder derivative suits might achieve better results. While a few isolated suits might be successful in cases where there is provable fraud, such remedies are no general panacea for preventing large-scale bank-inflicted losses. Large losses are nearly always the result of unforeseeable or suddenly changing economic conditions, poor business judgment, or inadequate regulatory supervision—usually a combination of all three. Yet regulators face an increasingly complex task in supervising modern financial institutions. This Article explains how the challenge has become so difficult. It argues for preserving regulatory discretion rather than reducing it through formal congressional direction. The Article also asserts that regulators have to develop their own sophisticated methods of automated supervision. Although also not a panacea, the development of “RegTech” solutions will help clear away volumes of work that understaffed and underfunded regulators cannot keep up with. RegTech will not eliminate policy considerations, nor will it render regulatory decisions noncontroversial. Nevertheless, a sophisticated deployment of RegTech should help focus regulatory discretion and public-policy debate on the elements of regulation where choices really matter

How (Not) to Measure Institutions

The statement “institutions matter” has become commonplace. A precondition for it to be supported by empirical evidence, is, however, that institutions are measurable. Glaeser et al. (2004) attacks many studies claiming to prove the relevance of institutions for economic development as being based on flawed measures of institutions, or not even on institutions at all. This paper shows that their criticism deserves to be taken seriously, but that it is somewhat overblown. Some of the difficulties in measuring institutions are described and some ways of measuring them are proposed.Institutions, Institutions vs. Policies, Measurement, Formal vs. Informal Institutions

The Domestic and International Enforcement of the OECD Anti-Bribery Convention

International corruption law is a growing, if understudied, area of international economic law. This Article examines two aspects of governments\u27 enforcement of the OECD\u27s Anti-Bribery Convention. The first aspect is the member state\u27s efforts to enforce its own national legislation prohibiting foreign corruption within its territory and with regards to its nationals doing business abroad. The OECD Treaty\u27s obligation concerning member states\u27 enforcement of their own national legislation is somewhat ambiguous. While the obligation to pass particular national legislation is quite clear and specific, the treaty does not specify what resources that a state must dedicate to internally enforcing these laws. As a result, states may have robust anti-corruption laws on the books but fail to enforce them in a meaningful way. This is more than an abstract concern. As of 2013, less than half of the states party to the OECD Treaty had successfully prosecuted a private actor for foreign corruption. This Article also discusses a second aspect of enforcement: how these internal enforcement ambiguities hamper state-to-state efforts to enforce the agreement. States cannot easily identify whether other states are breaching the treaty\u27s obligations when the internal enforcement obligations are opaque. This complicates international efforts to pressure other states to increase their compliance through retaliation or reciprocity. This Article concludes by discussing enforcement alternatives, namely the continued rigorous American enforcement of anti-corruption policies against private actors, even for activities having minimal territorial ties

Enforcing the FCPA: International Resonance and Domestic Strategy

The Foreign Corrupt Practices Act (“FCPA”), which bans corporations from offering bribes to foreign government officials, was enacted during the Watergate era’s crackdown on political corruption but remained only weakly enforced for its first two decades. American industry argued that the law created an uneven playing field in global commerce, which made robust enforcement politically unpopular. This Article documents how the executive branch strategically under- enforced the FCPA, while Congress and the President pushed for an international agreement that would bind other countries to rules similar to those of the United States. The Article establishes that U.S. officials ramped up enforcement only after the United States successfully concluded the Organization for Economic Co-operation and Development (“OECD”) Anti-Bribery Convention in 1997, twenty years after the enactment of the FCPA. Afterward, U.S. officials, desiring to maintain industry support for the FCPA, prosecuted both foreign and domestic corporations, thereby minimizing the statute’s competitive costs for American companies. This Article argues that the OECD Convention was critical to the dramatic expansion of FCPA enforcement because it allowed American prosecutors to adopt an “international-competition neutral” enforcement strategy, investigating domestic corporations and their foreign rivals alike. The existence of the treaty was decisive because it established anti-bribery as a binding legal principle and legitimized U.S. prosecutions of foreign corporations. Today, seven of the ten highest FCPA penalties have been against foreign corporations. This Article advocates, on a theoretical level, for a reevaluation of the multidirectional relationship between international and domestic law in transnational issue areas, such as foreign bribery. National laws are most often viewed as self-contained legal rules that develop or decline based on domestic officials’ policy decisions. The evolution of the FCPA, however, demonstrates that some statutes may require “international resonance” to be meaningfully enforced: a domestic statute can create pressure for national leaders to conclude an international agreement, and then that agreement provides the means for the national law to develop into a robust national policy. As this Article establishes, the OECD Convention owed its existence to the FCPA and, in turn, the FCPA owes much of its development and strength to the OECD Convention. A greater appreciation for international resonance’s feedback mechanisms is essential to understanding national enforcement of a wide range of transnational commercial, financial, and environmental statutes