Safer Ratios, Riskier Portfolios: Banks’ Response to Government Aid

We study the effect of government assistance on bank risk taking. Using hand-collected data on bank applications for government assistance under the Troubled Asset Relief Program (TARP), we investigate the effect of both application approvals and denials. To distinguish banks’ risk taking behavior from changes in economic conditions, we control for the volume and quality of credit demand based on micro-level data on home mortgages and corporate loans. Our difference-in-difference analysis indicates that banks make riskier loans and shift investment portfolios toward riskier securities after being approved for government assistance. However, this shift in risk occurs mostly within the same asset class and, therefore, remains undetected by the closely-monitored capitalization levels, which indicate an improved capital position at approved banks. Consequently, these banks appear safer according to regulatory ratios, but show a significant increase in volatility and default risk.http://deepblue.lib.umich.edu/bitstream/2027.42/86216/1/1165_Sosyura.pdfhttp://deepblue.lib.umich.edu/bitstream/2027.42/86216/4/1165_Sosyura_B.pdfhttp://deepblue.lib.umich.edu/bitstream/2027.42/86216/6/1165_Duchin_jan12.pdfhttp://deepblue.lib.umich.edu/bitstream/2027.42/86216/8/1165_Dec12_Duchin.pdfhttp://deepblue.lib.umich.edu/bitstream/2027.42/86216/10/1165_Duchin_Jul2013.pdfhttp://deepblue.lib.umich.edu/bitstream/2027.42/86216/12/1165_Duchin_Feb14.pd

The Politics of Government Investment

This paper investigates whether corporate political influence affects government investment decisions. We study the efficacy of the various forms of political influence, ranging from the relatively passive connections between firms and politicians, such as those based on politicians’ voting districts to the more active forms of influence, such as lobbying, campaign contributions, and connections to regulators via directorships. Using hand-collected data on firm applications for government investment funds in the United States, we find that firms with political connections are significantly more likely to be funded, controlling for other firm characteristics. Investments in politically-connected firms underperform those in unconnected firms. Overall, we demonstrate one mechanism through which political influence affects investment and show that connections between firms and regulators appear to distort rather than improve investment efficiency.http://deepblue.lib.umich.edu/bitstream/2027.42/63451/1/1127_duchin.pdfhttp://deepblue.lib.umich.edu/bitstream/2027.42/63451/4/1127r_duchin.pdfhttp://deepblue.lib.umich.edu/bitstream/2027.42/63451/6/1127_r10_duchin.pdfhttp://deepblue.lib.umich.edu/bitstream/2027.42/63451/7/1127_rfeb10.pdfhttp://deepblue.lib.umich.edu/bitstream/2027.42/63451/8/1127_feb10_sosyura.pdfhttp://deepblue.lib.umich.edu/bitstream/2027.42/63451/9/1127_duchin_oct10.pdfhttp://deepblue.lib.umich.edu/bitstream/2027.42/63451/12/1127_4_11_duchin.pdfhttp://deepblue.lib.umich.edu/bitstream/2027.42/63451/14/1127_duchin_nov11.pd

Divisional Managers and Internal Capital Markets

Using hand-collected data on divisional managers at S&P 500 firms, we study their role in internal capital budgeting. Divisional managers with social connections to the CEO receive more capital. Connections to the CEO outweigh measures of managers’ formal influence, such as seniority and board membership, and affect both managerial appointments and capital allocations. The effect of connections on investment efficiency depends on the tradeoff between agency and information asymmetry. Under weak governance, connections reduce investment efficiency and firm value via favoritism. Under high information asymmetry, connections increase efficiency and value via information transfer.http://deepblue.lib.umich.edu/bitstream/2027.42/71383/1/1144_Sosyura.pdfhttp://deepblue.lib.umich.edu/bitstream/2027.42/71383/3/1144_Sosyura_oct2010.pdfhttp://deepblue.lib.umich.edu/bitstream/2027.42/71383/6/1144_Duchin_feb2011.pdfhttp://deepblue.lib.umich.edu/bitstream/2027.42/71383/8/1144_Duchin_Dec11.pdfhttp://deepblue.lib.umich.edu/bitstream/2027.42/71383/10/1144_DuchinFeb12_.pdfhttp://deepblue.lib.umich.edu/bitstream/2027.42/71383/12/1144_DuchinAug12.pdfhttp://deepblue.lib.umich.edu/bitstream/2027.42/71383/14/1144_DuchinSept12.pd

Cash Holdings and Corporate Diversification

This paper studies the relation between corporate liquidity and diversification. The key finding is that multidivision firms hold significantly less cash than stand-alone firms because they are diversified in their investment opportunities. Lower cross-divisional correlations in investment opportunity and higher correlations between investment opportunity and cash flow correspond to lower cash holdings, even after controlling for cash flow volatility. The effects are strongest in financially constrained firms and in well-governed firms, and correspond to efficient fund transfers from low- to high-productivity divisions. Taken together, these results bring forth an efficient link between diversification and corporate liquidity. Copyright (c) 2010 The American Finance Association.

Divisional Managers and Internal Capital Markets

Using hand-collected data on divisional managers at S&P 500 firms, we study their role in internal capital budgeting. Divisional managers with social connections to the CEO receive more capital. Connections to the CEO outweigh measures of managers ’ formal influence, such as seniority and board membership, and affect both managerial appointments and capital allocations. The effect of connections on investment efficiency depends on the tradeoff between agency and information asymmetry. Under weak governance, connections reduce investment efficiency and firm value via favoritism. Under high information asymmetry, connections increase efficiency and value via information transfer. JEL classification: G31; G3