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We investigate the nature of mid-loan relationships between bank-lenders and borrowers, to test whether firms borrow from banks to signal quality. Using the LPC DealScan, CRSP, and Wall Street Journal databases, we test whether borrower abnormal returns are related to bank, borrower, deal, and/or event characteristics during the duration of the loan. We demonstrate that borrower abnormal returns are related to mid-loan bank events, defined as an event resulting in bank abnormal returns beyond a specified threshold. The results suggest that borrowers are affected by bank events mid-loan, even when the event is not directly related to bank default.

Recent studies on the use of private, non-bank, debt have given conflicting results. Instead of a fixed order of preference between various choices of debt as suggested by previous studies, this study postulates that there is a life cycle of debt choice, and as firms move through the cycle, their preferences change. For stable, mature firms, when given a choice, non-bank private debt would fall in between the two extremes of bank debt and public debt. We provide empirical as well as anecdotal evidence from the trade press to support this view. We jointly model the decision to choose a debt source as well as the amount of debt on data from a current database to focus on the “intentional” change in debt levels, rather than those due to unintentional changes. We find that there are significant interdependencies between the decision to borrow from a particular source, as well as the amount of loan, and that taxes, as well as lender reputation, degree of renegotiability and financial flexibility required by the borrower, are key factors that influence the choice of private debt source.

We study institutional investors’ influence on the use of related party transactions (RPTs) in China. We test the significance of potential factors in the cross-sectional regression analysis of the amount of RPTs reported by Chinese listed companies. We also analyze intraday trading activities and stock prices in days around public announcements of RPTs. Our findings suggest that institutional investors do not have a significant influence on Chinese firms’ usage of RPTs but they react to RPT announcements through buying or selling shares.

This study analyses the influence of the recent economic downturn on earnings management (EM), as well as the manipulation of real activities through cash flow from operations (CFO), with a sample of Spanish listed firms from 2004 to 2009.

We find evidence that the recent economic downturn has changed the patterns of firms’ EM. On the one hand, the crisis influence higher earnings generation as indebtedness increase. On the other hand, results support the hypothesis of an opportunistic behaviour of managers with higher firm market valuation. They have incentives to reduce earnings during the recession and push earnings for the recovery phase of the business cycle.

The study finds also a significant relationship between EM and abnormal CFO generation. The downturn influences positive abnormal CFO generation with indebtedness, as well as negative abnormal CFO generation with firm size and market valuation. It has no significant influence through abnormal accruals on abnormal CFO generation.

Directors help determine the strategic direction of a corporation and are responsible for ensuring the institution has a good system of internal control. Banking institutions without a strategic direction emphasizing sound lending practices that promote the long-run financial health and viability of the institution will be sued more frequently than peer institutions. Institutions that do not have a good system of internal control will also be sued more frequently. Hence, legal expense is a bank corporate governance measure. We compare the performance of bank legal expense and a widely cited corporate governance index in a regression framework to determine which better predicts bank performance. The regressions indicate legal expense is a much better predictor, hence a better measure of bank corporate governance. Regulators should require legal expense reporting and rank institutions by the ratio of legal expense to assets to help identify institutions with weak governance. Seven case studies illustrate the role of legal expense in corporate governance.

This chapter examines the effect of creditors’ monitoring role on the profitability of firm acquisitions. We use the shares retained by the lead arranger of a syndicated loan as a proxy for monitoring level. We find that acquirer announcement returns are positively related to the shares retained by the lead arranger. The effect of the lead arranger’s shares on the acquirer’s return becomes pronounced in cash acquisition deals, and when there exist financial covenants. Our results suggest that lead arrangers are important not only for monitoring loans but also for successful acquisitions by borrowers. An important policy implication of the main findings of this chapter on bank monitoring is that policy makers should design financial covenants to improve the efficiency of monitoring activities by lead arranging banks in syndicated bank loan deals.

We examine the maturity structure in private placements of debt and relate it to contracting, signaling, tax, and liquidity risk considerations for firms. We find that firms with higher tax rates issue private placements of debt with longer maturities, consistent with the tax hypothesis. However, our results do not support the contracting, signaling, and liquidity risk hypotheses. In addition, the results are confined to the smaller firms in the sample, firms without a public debt rating, and debt issues not pursuant to Rule 144A. The evidence is consistent with smaller firms issuing private placements of debt to avoid monopoly rent extraction from banks.

Several studies and research related to event study and terrorist bombing acts have different conclusions. Moreover, research on terrorist bombings worldwide has never been conducted. Hence, this research aims at examining the impact of terrorist bombing using the abnormal return variables by looking at all bombings around the world in the past 10 years. This research uses a paired t-test by looking at the abnormal return before, during, and after a bombing act. Results show no significant difference between the abnormal return before, during, and after bombing acts.

We examine bidder returns in Japanese mergers and find that shareholders of bidders experience a significant positive announcement return. Bidder returns are higher when firms acquire targets in the same industry, when their managers performed well before the merger, and when their managers acquire relatively large targets. Unlike non-keiretsu firms, returns to keiretsu firms are higher when they acquire firms operating in different industries. We also find that bidder returns increase with the bidder’s leverage and the bidder’s ties to financial institutions through borrowings. Our evidence is consistent with the view that managerial incentives affect firm value.