The syndicated loan market is one of the largest sources of financing for U.S. firms. This market has experienced tremendous growth over the past 20 years. In fact, some recent estimates suggest that U.S. firms obtain over $1 trillion in new syndicated loans each year and that this represents more than 50 percent of total equity and debt issuances.,
The primary players in the syndicated loan market are large banks that have developed strong reputations over time, likely due to their performance in issuing high quality loans. These banks employ loan officers and corporate bankers who screen … Read more
There are two established explanations for bank runs: coordination problems among depositors and information asymmetries between bank managers and depositors. In a new paper, “Information Gaps and Shadow Banking,” forthcoming in the Virginia Law Review and available here, I offer a novel, complementary explanation for why short-term creditors run: information nobody possesses.
Both the banking and shadow banking systems use short-term debt to fund longer-term, less liquid assets. That short-term debt is designed to pose sufficiently minimal credit, liquidity, and duration risk that holders can treat the claims as close substitutes for money. This reduces funding costs and has … Read more
We believe the recent election will have less impact on the Department of Labor’s (DOL) fiduciary duty rule than some in the media are currently speculating. While some provisions may be modified by a new Administration, we believe the rule’s core framework will remain intact. The industry has already made significant progress toward complying with the rule, and there is general recognition of the importance of removing conflicts of interest between financial advisers and retirement investors. A Trump Administration is unlikely to want to immediately restore such conflicts that could harm the very voters who propelled him into office.… Read more
Small and medium-size enterprises (SMEs) play a significant role in the global economy, accounting for a substantial portion of employment and domestic production. According to some estimates, SMEs’ contribution to gross domestic product exceeds 51 percent in high-income countries, consistent with the general consensus that SMEs are “engines” of economic growth. With an increasing number of SMEs engaging in international transactions, their influence on the volume of international trade has increased as well. In the U.S alone, SMEs represented 97 percent of all importers and 98 percent of all exporters, and accounted for 31 percent and 33 percent of imported … Read more
It is well established that venture capitalists can improve the product market value — the quality of projects and employees — at the private firms they invest in, either by making the firms more efficient (Chemmanur, Krishnan, and Nandy (2011)) or through monitoring (see, e.g., Gompers (1995) or Lerner (1995)). However, entrepreneurs and investors also talk about venture capitalists helping to create value for the firm in the financial market at the time the firm goes public. The channels through which such value is created, however, are less well-understood. In our new paper, available here, we explore a new … Read more
This is the fourth in a series examining the increased regulatory scrutiny on new and innovative financial technologies (“FinTech”).
This update considers the initiatives of two federal regulatory agencies—the Office of the Comptroller of the Currency (the “OCC”) and the Consumer Financial Protection Bureau (the “CFPB” or “Bureau”)—and their approaches to balancing regulation with FinTech innovation. In examining these two models, we first discuss the OCC’s recent issuance of a framework regarding responsible innovation and the establishment of an office to implement the framework. Then, we discuss the CFPB’s Project Catalyst, and its recent report on its efforts … Read more
Dividend payment is a major corporate decision that occurs regularly, involves substantial amounts of money, interacts with all other important company decisions, and has a significant impact on firm value. Our recent study, available here, examines whether financial reporting quality affects dividend policy.
Financial reporting quality, defined broadly as how informative financial reports are about a firm’s underlying economics, can affect dividend policy through three channels. First, reporting quality can affect dividends by mitigating the so-called free cash flow problem: managers’ incentive to underpay dividends and spend free cash flows on value-destroying projects that maximize their benefits at the … Read more
As sovereign borrowers and their creditors know all too well, the legal framework governing their respective rights and obligations (the so-called international financial architecture) lacks an effective means to enforce payment in most circumstances or to modify payment obligations when the debtor is unable to honor the original terms of its debts. The recent case of Argentina exemplifies both of these shortcomings. Venezuela’s debt instruments and debt management techniques developed over time nonetheless hold out the promise that the country may forge a path to a successful rearrangement of its debts when a government committed to sound economic policies and … Read more
U.S. regulators, led by the Office of the Comptroller of the Currency (OCC), are starting to examine sales practices at large and mid-size banks. They will likely first focus on whether banks have opened accounts for customers without consent as recently highlighted in press reports. Examiners will consider deposit accounts, credit cards, and other unsecured lines of credit, which can generate customer fees or impact credit scores. Many banks have been actively preparing for these exams, and several are far along in conducting their own self assessments (with a couple recently announcing preliminary results).
Beyond this historical inquiry, regulators will … Read more
The more an investor can learn about a financial security’s value, the better his trades and the higher his profits can be. But research is costly, and trading on one’s own information inevitably affects prices, which then reveal some of the results of that costly research to others for free. This “information leakage” or “information free-riding” problem raises an important question: When is it worth the effort to learn about an asset’s value? That question has taken on a new dimension as firms globalize and diversify.
The value of a financial security may comprise several distinct elements that depend on … Read more
The Commodity Futures Trading Commission (CFTC) recently proposed new regulations that will significantly affect international swap transactions. At present, international swap market participants look to the CFTC’s 2013 Interpretive Guidance and Policy Statement Regarding Compliance With Certain Swap Regulations (Cross-Border Guidance or Guidance) in order to determine whether they must register with the CFTC as Swap Dealers or Major Swap Participants (MSPs), and whether and how the CFTC’s business conduct standards apply to their businesses. The proposed new regulations would formally codify certain provisions of the Guidance while refining and superseding some others.
The CFTC has … Read more
On October 25, 2016, the Argentine province of Santa Fe issued $250 million in international bonds. One aspect of this offering is highly unusual for international sovereign debt: the bonds are not listed on any of the major global stock exchanges.
Such offerings are almost always listed, and usually on the Luxembourg Stock Exchange. Why did Santa Fe decide to stray from the herd? Perhaps it realized that there was little value to be gained from listing on an exchange.
In our recent paper, “The Sovereign-Debt Listing Puzzle,” we investigate what purpose is served by listing sovereign bonds … Read more
The efficiency of dual class share structures is controversial, and whether to allow them is a difficult choice. Though much has been written about this topic, no comprehensive picture of dual class structures’ governance effects has emerged.
Although dual class structures may take many forms, their key characteristic is that some shares, per unit of their cash flow rights, effectively give their holders more voting rights than other shares do. For purposes of illustration, consider the following example. A company issues two classes of shares: “A” shares, with one vote each, issued mainly to outsiders, and “B” shares, with … Read more
Prior to the 2008 financial crisis and the Great Recession, global banks were big, broad and borderless. They operated as integrated groups. Separate legal entities within a group were an afterthought: The results that mattered were those for lines of business and for the group as a whole. Global banks were also considered good for growth, facilitating the allocation of capital to its most efficient uses.
The financial crisis changed that judgment. Governments bailed out global banks, and global banks came to be seen as a source of instability. Consequently, in 2009, G-20 leaders mandated officials to devise a new … Read more
Two major challenges have arisen for financial services companies since the global financial crisis (GFC) of 2008. On the expense side, post-crisis fines have exceeded $200 billion, and the ongoing cost of regulation and compliance has become massive. On the revenue side, competition from new start-up companies may well put up to $4.7 trillion of revenues at risk.
The GFC accelerated the evolution of financial technology start-ups – or FinTechs – which in the last five years have attracted over $80 billion of investment capital. FinTechs run the gamut of new platforms for peer-to-peer lending, robo-advice, payments, credit scoring, and … Read more
The Consumer Financial Protection Bureau (the “CFPB” or “Bureau”) made headlines in FinTech on October 24, 2016. First, the Bureau released its first-ever Project Catalyst report on promoting consumer-friendly innovation (the “Report”). The Report summarizes the work conducted by Project Catalyst to date and sets forth in broad strokes some of the financial innovations that the CFPB is encouraging. While the Report does not represent new policy, it provides a helpful glimpse into the key developments in financial services that the Bureau is encouraging or monitoring.
On the same day, Director Richard Cordray addressed Money 20/20 in Las Vegas, Nevada, … Read more
There is an increasing worldwide focus on trying to end the problem of “too big to fail” (“TBTF”). Regulators are concerned that systemically important financial firms might engage in excessive risk-taking because they would profit from a success and be bailed out by the government in case of a failure. This is primarily a problem of moral hazard, that persons protected from the negative consequences of their risky actions will be more tempted to take more risks.
My new article, available here, argues that, contrary to accepted regulatory wisdom, the problem is exaggerated. The central evil of TBTF is … Read more
High-frequency quoting and trading (HFQ) has become a global phenomenon. It’s based on reducing the lag time – known as latency – between order submission and execution or cancellation so that order outcome is reported almost instantaneously. A number of market mishaps, though, have drawn HFQ to the attention of regulators. Whether they have anything to worry about is a question we seek to answer in our recent paper, available here.
The paper focuses on the introduction of the Arrowhead high-speed-trading platform by the Tokyo Stock Exchange (TSE) in January of 2010. The platform reduced latency from six … Read more
In the controversial practice of appraisal arbitrage, activist investors buy shares of a corporation to be acquired by merger so as to assert appraisal rights challenging the merger price – which may already have been approved by the target’s stockholders. The practice is controversial because the appraisal remedy is widely seen as intended to protect existing stockholders who are forced to sell their shares in the merger and not to afford hedge funds a way to extract extra returns from the deal. But the puzzle is why appraisal arbitrage is profitable, since the remedy seeks to determine fair prices using … Read more
In a September 22, 2016, post on this blog, available here, Professor Wulf Kaal asked in the title to his piece, “What Happens When Technology Is Faster Than the Law?” He noted that while “innovation driven by science and technology is accelerating, …Federal and state agencies’ regulatory processes have slowed down.”
My report for The Pew Charitable Trusts asks that question in regard to mobile payments. The answer: When technological developments occur more quickly than changes in the law, the result is gaps, ambiguities, and overlap in laws related to mobile payments.
As the popularity of mobile payments grows, … Read more