Do personal connections improve sovereign credit ratings?

In a large sample of sovereign debt issues, we show that a personal connection between senior executives in credit rating agencies and leading politicians in the sovereign results in an improved rating. A test on bond yields suggest that the personal connection reflects a favorable treatment of the issuer

The effect of CEO power on bank risk: do boards and institutional investors matter?

We test for a link between CEO power and risk-taking in US banks. Banks are more likely to take risks if they have powerful CEOs and relatively poor balance sheets. There is little evidence that executive board size and independence have a dampening effect on the channels through which powerful CEOs influence risk-taking and some evidence that institutional investors reinforce the risk-taking preferences of powerful CEOs

Credit default swaps and firms' financing policies

This paper examines the impact of credit default swaps (CDS) on firms' financing and trade credit policies. Our results indicate firms with CDS trading on their debt increase their equity issuances. Further, firms with CDS trading on their debt and high levels of long-term debt issuances decrease their debt financing. Total and idiosyncratic risks are also higher for firms with CDS trading on their debt. These firms pay their suppliers and collect from their customers quicker. Thus, the impacts of the CDS market are not limited to the borrowing firms but also affect economically connected firms

Politicians’ connections and sovereign credit ratings

Using a unique hand-collected sample of professional connections between finance ministers and the top executives of the three largest credit rating agencies (CRAs) for 38 European sovereigns between January 2000 and November 2017, we show that professional connections result in higher sovereign ratings. This finding is attributed to ‘favoritism’, which stems from the conflict-of-interest problem in the CRA business model. We also find that the subjective component of ratings, captured by professional connections, has a more pronounced role for developing than developed countries. Our study offers new empirical evidence that unsolicited sovereign ratings are significantly lower than solicited ratings. Our results survive battery of robustness checks including propensity score matching (PSM), two-way fixed-effects, system GMM and various definitions of connection. Our findings offer wide-ranging implications for regulators, governments, market participants and CRAs

CEO tenure and corporate misconduct: Evidence from US banks

We test for a link between CEO tenure and misconduct by US banks. We find that banks are more likely to commit misconduct when CEOs have a relatively long tenure and banks have relatively poor balance sheets. Large and independent corporate boards can mitigate but not prevent misconduct

The relationship between financial reporting standards and accounting irregularities: evidence from US banks

Purpose: The purpose of this paper is to explore whether the choice of International Financial Reporting Standards (IFRS) vs Generally Accepted Accounting Principles (GAAP) is associated with the frequency and likelihood of accounting irregularities and fraud in US banks. Design/methodology/approach: The authors examine the relationship between financial reporting standards and accounting irregularities in publicly listed US banks. Using a sample of 4,284 banks with accounting irregularities observed in the USA over the period of 1996–2014. They used logit model to estimate the likelihood of corporate misreporting having been committed in terms of accounting irregularities. Findings: The authors show that banks that use US GAAP exhibit better operating performance than fraudulent banks that use IFRS except for certain variables. They also find that fraudulent banks are more likely to commit accounting irregularities when they have to follow IFRS and banks have relatively better bank performance. Practical implications: Overall, the empirical findings result consistent with Kohlbeck and Warfield’s (2010) find that accounting standards are linked to fewer accounting irregularities. Originality/value:In this study, accounting irregularities have a significant effect on bank performance during the Dodd–Frank period. It finds that banks that choose to use IFRS are more likely to have accounting irregularities and to engage in fraud

Essays on corporate governance of financial intermediaries

This thesis comprises four papers that examine the effect of information advantage of bank executives and CEOs on bank risk taking and performance and also investigate to reveal which CEO power variables, which denote information advantage to the CEO, influence the likelihood of bank fraud and the likelihood of detecting fraud. Paper 1 provides a theoretical, regulatory, structural, and historical analysis of US banks. The regulatory environment of banks has been changed dramatically as well as the structure of banks in the last three decades. Banks’ financial intermediation role and opaqueness that comes from greater risk-taking make them special in corporate governance applications. It is known that regulations have the direct effect on bank corporate governance with the hands of regulators. Paper 2 examines whether information advantage of the CEO can influence bank risk to add empirical evidence to hypothesised relationship from the perspective of the CEO power. CEO tenure and CEO network size that denote the sources of information advantage are used as the CEO power variables. The effect of CEO power on three measures of bank risk is assessed: Z-score, systematic risk, and systemic risk. Results from fixed effects and generalised method-of-moments (GMM) dynamic panel data estimations reveal that banks are more likely to take on more risks when CEO’s have a relatively long tenure and large network. The results of the robustness tests provide the same connection between CEO power and bank risk. Paper 3 explores whether institutional investors in publicly listed US banks can influence bank ownership structure and performance through a prior connection to newly appointed senior executives of the bank by employing a unique dataset. The impact of the connection on three measures of bank performance is assessed: non-interest income to total assets ratio, market beta, and Tobin’s Q. Institutional investors increase their shareholding in banks after the appointment of a connected executive. Results of regressions reveal that the presence of connected executives is positively and significantly associated with developments in market beta and non-interest income, and negatively and significantly related to developments in Tobin’s Q. The results as consistent with institutional investors with prior connections to bank executives having a significant information advantage relative to other shareholders in the bank on its likely future performance. Finally, paper 4 contributes the corporate governance literature that has little to say about the likelihood of banks engaging in financial fraud. The commission of financial fraud by banks as partly reflecting that bank’s culture, which is driven in large part by the bank’s senior executives, especially the CEO. A unique dataset on financial fraud in publiclylisted US banks is employed to test for a link between fraud and CEO power that creates information advantage. The results from probit and partially-observed bivariate probit estimations suggest that banks are more likely to commit fraud and more likely to be detected by regulators if they have powerful CEOs measured by length of CEO tenure, Chair/CEO duality, size of CEO’s network, and if the CEO is also a part-owner of the bank. Fraud also appears more likely to be committed by large banks with relatively poor balance sheets, raising the prospect that fraud (and powerful CEOs) can have adverse systemic consequences

Essays on corporate governance of financial intermediaries

This thesis comprises four papers that examine the effect of information advantage of bank executives and CEOs on bank risk taking and performance and also investigate to reveal which CEO power variables, which denote information advantage to the CEO, influence the likelihood of bank fraud and the likelihood of detecting fraud. Paper 1 provides a theoretical, regulatory, structural, and historical analysis of US banks. The regulatory environment of banks has been changed dramatically as well as the structure of banks in the last three decades. Banks’ financial intermediation role and opaqueness that comes from greater risk-taking make them special in corporate governance applications. It is known that regulations have the direct effect on bank corporate governance with the hands of regulators. Paper 2 examines whether information advantage of the CEO can influence bank risk to add empirical evidence to hypothesised relationship from the perspective of the CEO power. CEO tenure and CEO network size that denote the sources of information advantage are used as the CEO power variables. The effect of CEO power on three measures of bank risk is assessed: Z-score, systematic risk, and systemic risk. Results from fixed effects and generalised method-of-moments (GMM) dynamic panel data estimations reveal that banks are more likely to take on more risks when CEO’s have a relatively long tenure and large network. The results of the robustness tests provide the same connection between CEO power and bank risk. Paper 3 explores whether institutional investors in publicly listed US banks can influence bank ownership structure and performance through a prior connection to newly appointed senior executives of the bank by employing a unique dataset. The impact of the connection on three measures of bank performance is assessed: non-interest income to total assets ratio, market beta, and Tobin’s Q. Institutional investors increase their shareholding in banks after the appointment of a connected executive. Results of regressions reveal that the presence of connected executives is positively and significantly associated with developments in market beta and non-interest income, and negatively and significantly related to developments in Tobin’s Q. The results as consistent with institutional investors with prior connections to bank executives having a significant information advantage relative to other shareholders in the bank on its likely future performance. Finally, paper 4 contributes the corporate governance literature that has little to say about the likelihood of banks engaging in financial fraud. The commission of financial fraud by banks as partly reflecting that bank’s culture, which is driven in large part by the bank’s senior executives, especially the CEO. A unique dataset on financial fraud in publiclylisted US banks is employed to test for a link between fraud and CEO power that creates information advantage. The results from probit and partially-observed bivariate probit estimations suggest that banks are more likely to commit fraud and more likely to be detected by regulators if they have powerful CEOs measured by length of CEO tenure, Chair/CEO duality, size of CEO’s network, and if the CEO is also a part-owner of the bank. Fraud also appears more likely to be committed by large banks with relatively poor balance sheets, raising the prospect that fraud (and powerful CEOs) can have adverse systemic consequences

Money laundering and bank risk: Evidence from US banks

We test for a link between bank risk and enforcements issued by US regulators against banks for money laundering (ML) in a sample of 960 publicly listed US banks over 2004-2015. ML-related enforcements are associated with increased bank risk on several measures of risk with the result robust to a variety of estimation methodologies. Moreover, the impact of money laundering on bank risk is accentuated by the presence of powerful CEOs and only partly mitigated by large and independent executive boards