Vaulting
Monetary Stability and the Rule of Law
Mark Koyama & Blake Johnson
Journal of Financial Stability, forthcoming
Abstract:
This paper investigates the relationship between the functioning of money and the rule of law. We explore the claim that monetary stability is a necessary condition for the rule of law to operate and that periods of rapid inflation and deflation stemming from monetary instability erode and undermine the rule of law. We support our argument with panel data evidence and four detailed case studies from the Roman empire, the Weimar Republic, the Great Depression and the Great Recession. Our conclusions examine what monetary institutions are most conducive to maintaining monetary stability and the rule of law.
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Mortgage Modification and Strategic Behavior: Evidence from a Legal Settlement with Countrywide
Christopher Mayer et al.
American Economic Review, September 2014, Pages 2830-2857
Abstract:
We investigate whether homeowners respond strategically to news of mortgage modification programs. We exploit plausibly exogenous variation in modification policy induced by settlement of US state government lawsuits against Countrywide Financial Corporation, which agreed to offer modifications to seriously delinquent borrowers. Using a difference-in-difference framework, we find that Countrywide's monthly delinquency rate increased more than 0.54 percentage points - a ten percent relative increase - immediately after the settlement's announcement. The estimated increase in default rates is largest among borrowers least likely to default otherwise. These results suggest that strategic behavior should be an important consideration in designing mortgage modification programs.
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The Information Content of Insider Trades around Government Intervention during the Financial Crisis
Alan Jagolinzer et al.
Stanford Working Paper, August 2014
Abstract:
This paper examines whether insiders at leading financial institutions anticipated the effect of government intervention during the Financial Crisis on their firms' share prices. While we find no evidence that insiders anticipated the Crisis, we find considerable evidence that insiders anticipated the recovery and bank bailouts. Specifically we find: (i) that the predictive ability of insider trades for future firm performance is higher during the nine months following the announcement of the Troubled Asset Relief Program (TARP) than at any other time from 2002 to 2010, (ii) that the increase in predictive ability associated with the announcement of TARP is concentrated in firms that previously performed poorly, and (iii) that insider trades at banks five days before the announcement of TARP capital infusions predict the market reaction to the infusion. Overall, our results suggest that once the government announced it would intervene during the Crisis, insiders of financial institutions anticipated the effect of this intervention on share prices.
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Benjamin Keys, Devin Pope & Jaren Pope
NBER Working Paper, August 2014
Abstract:
Households that fail to refinance their mortgage when interest rates decline can lose out on substantial savings. Based on a large random sample of outstanding U.S. mortgages in December of 2010, we estimate that approximately 20% of households for whom refinancing would be optimal and who appeared unconstrained to do so, had not taken advantage of the lower rates. We estimate the present-discounted cost to the median household who fails to refinance to be approximately $11,500, making this a particularly large consumer financial mistake. To shed light on possible mechanisms and corroborate our main findings, we also provide results from a mail campaign targeted at a sample of homeowners that could benefit from refinancing.
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Savings and Prize-Linked Savings Accounts
Kadir Atalay et al.
Journal of Economic Behavior & Organization, November 2014, Pages 86-106
Abstract:
Many households have insufficient savings to handle moderate and routine consumption shocks. Many of these financially-fragile households also have the highest lottery expenditures as a proportion of income. This combination suggests that Prize-Linked Savings (PLS) accounts, combining security of principal with lottery-type jackpots, can increase savings among these at-risk households. Results from an online experiment show that the introduction of PLS accounts increase total savings and reduce lottery expenditures significantly, especially among individuals with the lowest levels of savings and income. The results imply that PLS accounts offer a plausible market-based solution to encourage individuals to increase savings.
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The Effect of Foreclosures on Nearby Housing Prices: Supply or Dis-amenity?
Daniel Hartley
Regional Science and Urban Economics, forthcoming
Abstract:
A number of studies have measured negative price effects of foreclosed residential properties on nearby property sales. However, only one other study addresses which mechanism is responsible for these effects. I measure separate effects for different types of foreclosed properties and use these estimates to decompose the effects of foreclosures on nearby home prices into a component that is due to additional available housing supply and a component that is due to dis-amenity stemming from deferred maintenance or vacancy. I estimate that each extra unit of supply decreases prices within 0.05 miles by about 1.2 percent while the dis-amenity stemming from a foreclosed property is near zero.
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A Century of Capital Structure: The Leveraging of Corporate America
John Graham, Mark Leary & Michael Roberts
Journal of Financial Economics, forthcoming
Abstract:
Unregulated US corporations dramatically increased their debt usage over the past century. Aggregate leverage - low and stable before 1945 - more than tripled between 1945 and 1970 from 11% to 35%, eventually reaching 47% by the early 1990s. The median firm in 1946 had no debt, but by 1970 had a leverage ratio of 31%. This increase occurred in all unregulated industries and affected firms of all sizes. Changing firm characteristics are unable to account for this increase. Rather, changes in government borrowing, macroeconomic uncertainty, and financial sector development play a more prominent role. Despite this increase among unregulated firms, a combination of stable debt usage among regulated firms and a decrease in the fraction of aggregate assets held by regulated firms over this period resulted in a relatively stable economy-wide leverage ratio during the 20th century.
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Do Parents Matter? Effects of Lender Affiliation Through the Mortgage Boom and Bust
Claudine Gartenberg
Management Science, forthcoming
Abstract:
It is widely acknowledged that the 2007 mortgage crisis was preceded by a broad deterioration in underwriting diligence. This paper shows that this deterioration varied by the industry affiliation of mortgage lenders. Loans issued by homebuilders and stand-alone lenders were significantly less likely to default than loans issued by depository banks and affiliates of major financial institutions. I argue that homebuilders and stand-alone lenders had the least financial capacity to hold mortgages, and their resulting need to sell loans quickly on the secondary market forced them to issue safer loans. Tests of other explanations, including differences in information and incentives to avoid foreclosure externalities, receive little support. This study highlights a novel means by which firm boundaries influence firm adaptation to changing market conditions by defining the boundaries of the internal capital markets and hence the relative constraints of constituent units.
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Anil Kumar
Federal Reserve Working Paper, June 2014
Abstract:
Given that excessive borrowing helped precipitate the housing crisis, a key component of a policy agenda to prevent future meltdowns is effective regulation to curb unaffordable mortgage debt. Texas is the only US state that limits home equity borrowing to 80 percent of home value. Anecdotal reports have long suggested that home equity restrictions shielded Texas homeowners from the worst of the subprime mortgage crisis. But there is, as yet, no formal empirical investigation of these restrictions' role in curbing mortgage default. This paper is the first to empirically estimate the impact of Texas home equity restrictions on mortgage default using individual and loan level data from three different sources. The paper exploits the policy discontinuity around Texas' interstate borders induced by the home equity restrictions to identify the causal effect of home equity extraction on mortgage default in a border discontinuity design framework. The paper finds that limits on home equity borrowing in Texas lowered the likelihood of mortgage default by about 2 percentage points with a significantly larger impact on mortgage borrowers in the bottom quartile of the credit score distribution. Estimated default hazards for mortgages within 50 to 100 miles of the Texas' border decline sharply as one crosses into Texas. Overall, the paper finds evidence that Texas' home equity restrictions exert a robust negative impact on mortgage default.
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Norbert Michel et al.
Journal of Banking & Finance, October 2014, Pages 147-154
Abstract:
Some economists argue the recent recovery has been so meager because many consumers have lost their main source of income and maxed-out their home-equity borrowings. Further, banks that were able to make consumer loans did so with less security because home prices fell so dramatically. This paper argues that at least part of that recovery story is purely anecdotal and, in fact, incorrect. In spite of the precipitous decline in home prices, the original price increases were so large that many homeowners still have/had adequate equity in their homes to borrow. The paper presents evidence that the average quarterly increase in aggregate home equity line of credit (HELOC) lending after housing prices began their decline is, statistically, no different than the average quarterly increase in HELOC lending before housing prices began their downward trend. The evidence also suggests that increased HELOC lending during the recession is not correlated with higher unemployment.
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Does Banking Competition Affect Innovation?
Jess Cornaggia et al.
Journal of Financial Economics, forthcoming
Abstract:
We exploit the deregulation of interstate bank branching laws to test whether banking competition affects innovation. We find robust evidence that banking competition reduces state-level innovation by public corporations headquartered within deregulating states. Innovation increases among private firms that are dependent on external finance and that have limited access to credit from local banks. We argue that banking competition enables small, innovative firms to secure financing instead of being acquired by public corporations. Therefore, banking competition reduces the supply of innovative targets, which reduces the portion of state-level innovation attributable to public corporations. Overall, these results shed light on the real effects of banking competition and the determinants of innovation.
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The Politics of Financialization in the United States, 1949-2005
Christopher Witko
British Journal of Political Science, forthcoming
Abstract:
Financial activity has become increasingly important in affluent economies in recent decades. Because this 'financialization' distributes costs and benefits unevenly across groups, politics and policy likely affect the process. Therefore, this article discusses how changes in the power of organizations representing the 'winners' and 'losers' of financialization affect its pace. An analysis of the United States from 1949-2005, shows that when unions are stronger, and when the Democratic Party is in power and is more reliant on the support of working-class voters, financialization is slower. In contrast, when the financial industry is more highly mobilized into politics, financialization is faster. The study also finds that financial deregulation was one policy translating the political power of these actors into economic outcomes.
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Do Relationships Matter? Evidence from Loan Officer Turnover
Alejandro Drexler & Antoinette Schoar
Management Science, forthcoming
Abstract:
We show that the cost of employee turnover in firms that rely on decentralized knowledge and personal relationships depends on the firms' planning horizons and the departing employees' incentives to transfer information. Using exogenous shocks to the relationship between borrowers and loan officers, we document that borrowers whose loan officers are on leave are less likely to receive new loans from the bank, are more likely to apply for credit from other banks, and are more likely to miss payments or go into default. These costs are smaller when turnover is expected, as in the case of maternity leave, or when loan officers have incentives to transfer information, as in the case of voluntary resignations.