Dr. Darius Palia: Relevant Banking Research

Impact of the Dodd-Frank Act on Credit Ratings, with Valentin Dimitrov and Leo Tang, Journal of Financial Economics (forthcoming)

This paper analyzes the impact of the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank) on corporate bond ratings issued by credit rating agencies (CRAs). We find no evidence that Dodd-Frank disciplines CRAs to provide more accurate and informative credit ratings. Instead, following Dodd-Frank, CRAs issue lower ratings, give more false warnings, and issue downgrades that are less informative. These results suggest that CRAs become more protective of their reputation following the passage of Dodd-Frank.  We also find that our results are stronger for industries with low Fitch market share, where Moody’s and Standard & Poor’s have stronger incentives to protect their reputation. Our results are not driven by business cycle effects or firm characteristics, and strengthen as the uncertainty regarding the passage of Dodd-Frank gets resolved.  We conclude that increasing the legal and regulatory costs to CRAs might have an adverse effect on the quality of credit ratings.

 

Private Equity Alliances in Mergers, with Tae-Nyun Kim, Journal of Empirical Finance, June 2014

This paper studies the impact of alliances formed between two private equity bidders. Testing a comprehensive set of alliance formation hypotheses, we find strong evidence that bidders are less likely to form an alliance with a target firm with whom they share a two-digit SIC code.  We also find that private equity alliances involve more profitable target firms than their sole- sponsored private equity deals. Finally, we find that the negative abnormal returns earned by private equity deals is eliminated once we control for differences in the types of target firms acquired by private equity and public bidders.  The last result suggests that private equity alliances do not generate significant negative returns because of collusion.

 

Are Initial Returns and Underwriting Spreads in Equity Issues Complements or Substitutes?, with Dongcheol Kim and Anthony Saunders, Financial Management, Winter 2010

This paper finds that the fees charged by underwriters to issuers in initial public offerings and seasoned equity issues (direct costs) are related to the first day underpricing that occurs when they trade in the stock market (indirect costs). Both costs are higher for lower quality issuers than for high-quality issuers.

 

The Impact of Commercial Banks on Underwriting Spreads: Evidence from Three Decades, with Dongcheol Kim and Anthony Saunders, Journal of Financial and Quantitative Analysis, December 2008

This paper examines the effect of commercial bank entry on underwriting fees or spreads for equity and debt issues using a long time series that spans 30 years. We find that, on average, commercial banks charge lower spreads of approximately 72 basis points for IPOs, 43 basis points for SEOs, and 14 basis points for debt. The economic impact of commercial banks on lowering underwriting spreads is most significant when commercial banks were allowed to enter via Section 20 subsidiaries but persists beyond. Therefore commercial bank entry into underwriting has a procompetitive effect on issuer costs.

 

Evidence of Jointness in the Terms of Relationship Lending, with Ivan Brick, Journal of Financial Intermediation, January 2007

This paper examines the impact of the borrower–lender relationship on loan interest rates and collateral. We find that collateral has a statistically significant positive impact of 200 to 400 basis points on loan interest rates. We find this positive association to be stronger for personal (or outside) collateral than collateral provided by the firm’s assets (or inside collateral). Finally, we find the economic impact of the borrower–lender relationship to be 21 basis points for one standard deviation increase in relationship length.

 

The Impact of Capital Requirements and Managerial Compensation on Bank Charter Value, with Robert Porter, Review of Quantitative Finance and Accounting, November 2004

This paper examines the joint impact of capital requirements and managerial incentive compensation on bank charter value and bank risk. We jointly estimate their impact of capital requirements on bank charter value and risk. We find that capital levels are consistently a significant positive factor in determining bank charter value and a significant negative factor in determining risk. We find no evidence of managerial compensation being related to risk, but some evidence relating it risk.

 

Contemporary Issues in Regulatory Risk Management of Commercial Banks, with Robert Porter, Financial Markets, Institutions and Instruments, November 2003

This paper describes the various relationships that have been found between managerial compensation, capital requirements (Basle II), charter values, and bank risk.

 

The Impact of the Manager-Shareholder Conflict on Acquiring Bank Returns, with Marcia Cornett, Gayane Hovakimian, and Hassan Tehranian, Journal of Banking and Finance, January 2003

We find that diversifying bank acquisitions earn significantly negative announcement period abnormal returns (AR) for bidder banks whereas focusing acquisitions earn zero AR. We then find that corporate governance variables (such as CEO share and option ownership and a small board size) in the bidding bank are less effective in diversifying acquisitions than in focusing acquisitions.

 

Are There Bank Effects in Borrower Cost of Funds? Evidence From a Matched Sample of Borrowers and Banks, with Glenn Hubbard and Ken Kuttner, Journal of Business, October 2002

This paper finds that low-capital banks tend to charge higher loan rates than well-capitalized banks. This effect is primarily associated with firms for which information costs are likely to be important; and when borrowing from weak banks, these firms tend to hold more cash. The results indicate that many firms face significant costs in switching lenders and provides support for the bank lending channel of monetary transmission.

 

The Political Economy of Branching Restrictions and Deposit Insurance, with Nicholas Economides and Glenn Hubbard, Journal of Law and Economics, October 1996

This article suggests that the introduction of bank branching restrictions and federal deposit insurance in the United States likely was motivated by political considerations. Specifically, we argue that these restrictions were instituted for the benefit of the small unit banks that were unable to compete effectively with large, multiunit banks. We use a model of monopolistic competition between small and large banks to examine gains to the former group from the introduction of branching restrictions and government-sponsored deposit insurance. We then find strong evidence for the political hypothesis by examining the voting record of Congress.

 

Executive Pay and Performance, with Glenn Hubbard, Journal of Financial Economics, September 1995

This paper examines CEO pay in the banking industry and the effect of deregulating the market for corporate control. Using data over the 1980s we find higher levels of pay in competitive corporate control markets, i.e., those in which interstate banking is permitted. We also find a stronger pay-performance relation in deregulated interstate banking markets. Finally, CEO turnover increases substantially after deregulation. These results provide evidence of a managerial talent market – one which matches the level and structure of pay with the competitiveness of the banking environment.

 

Recent Evidence on Bank Mergers, Financial Markets, Institutions and Instruments, December 1994

This paper examine the two different approaches used to analyze bank mergers, namely, the accounting approach used by merger practitioners, and the other that primarily uses stock price data. The evidence from these two approaches is compared and contrasted using a large sample of bank mergers. The paper finds a negative relationship between the bid premium and the excess stock return, when the acquiring bank has high levels of managerial ownership.

 

The Managerial, Regulatory and Financial Determinants of Bank Merger Premiums, Journal of Industrial Economics, March 1993

This paper examines the various characteristics of both acquirer and target bank and their regulatory environments that significantly impact the price paid for a target bank using a a large sample of bank m&a transactions in the 1980s.

 

Professor of Finance and Economics Darius Palia was recently asked to join the Editorial Board as an Associate Editor of the top-rated finance journal Journal of Financial and Quantitative Analysis (JFQA). The JFQA publishes theoretical and empirical research in financial economics. Topics include corporate finance, investments, capital and security markets, and quantitative methods of particular relevance to financial researchers. It is published bimonthly in February, April, June, August, October, and December by the Michael G. Foster School of Business at the University of Washington.