Kelley School of Business -- Indianapolis

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Capital market reactions to the passage of the Financial Services Modernization Act of 1999
(The Quarterly Review of Economics and Finance, 2002) Carow, Kenneth A.; Heron, Randall A.
The Financial Services Modernization Act of 1999, also known as the Gramm-Leach-Bliley Act (GLBA), removed most of the remaining barriers between financial companies. Stock market reactions to the passage of GLBA vary across financial sectors and company size. Specifically, we find negative returns for foreign banks, thrifts and finance companies; insignificant returns for banks; and positive returns for investment banks and insurance companies. Additionally, larger non-depository firms have higher returns. The return variation reflects resolution of uncertainty surrounding the final provisions of GLBA, competitive pressures, and expectations of future business combinations. Potential gains from business combinations may arise from economies of scope, market power, and/or from an implicit extension of government guarantees to banking affiliates.
Earnings Management and Initial Public Offerings: The Case of the Depository Industry
(2009-04) Adams, Brian John; Carow, Kenneth A.; Perry, Tod
In a typical IPO, insiders are “net sellers” of IPO shares; however, in a demutualizing thrift, insiders are “net buyers” of IPO shares. Using a sample of mutual depository IPOs, we find evidence consistent with earnings management prior to the conversion of mutual thrifts. We find on average that mutuals report lower ROA and increased loan loss provisions and loan loss reserves in the period prior to the demutualization. Using a two-stage approach, we also find that the level of discretionary loan loss provisions and discretionary reserves are positively related to both the level of insider participation in the IPO and the first-day returns to investors. Our results are consistent with management of mutual thrifts benefiting at the conversion from reduced pre-IPO earnings and book equity resulting from earnings management.
Event-study evidence of the value of relaxing long-standing regulatory restraints on banks, 1970–2000
(2002) Carow, Kenneth A.; Kane, Edward J.
In a partial-equilibrium model, removing a binding constraint creates value. However, in general equilibrium, the stakes of other parties in maintaining the constraint must be examined. In financial deregulation, the fear is that expanding the scope and geographic reach of very large institutions might unblock opportunities to build market power from informational advantages and size-related safety-net subsidies. This paper reviews and extends event-study evidence about the distribution of the benefits and costs of relaxing long-standing geographic and product-line restrictions on U.S. financial institutions. The evidence indicates that the new financial freedoms may have redistributed rather than created value. Event returns are positive for some sectors of the financial industry and negative for others. Perhaps surprisingly, where customer event returns have been investigated, they prove negative.
How Have Borrowers Fared in Banking Mega-Mergers?
(2003-07) Carow, Kenneth A.; Kane, Edward J.; Narayanan, Rajesh
Previous studies of event returns surrounding bank mergers show that banks gain value in megamergers and additional value when they absorb in-market competitors. A portion of these gains has been traced to the increased bargaining power of banks vis-à-vis regulators and other competitors. We demonstrate that increased bargaining power of megabanks adversely affects loan customers of the acquired institution. Wealth losses are greater when loan customers are credit-constrained, the loan customer is smaller, or the acquisition is an in-market deal. These findings reinforce complaints that the ongoing consolidation in banking has unfavorably affected the availability of credit for smaller firms and especially capital-constrained firms.
Winners and Losers from Enacting the Financial Modernization Statute
(2005-04) Carow, Kenneth A.; Kane, Edward J.; Narayanan, Rajesh
Previous studies of the announcement effects of relaxing administrative and legislative restraints show that signal events leading up to the enactment of the Financial Services Modernization Act (FSMA) increased the prices of several classes of financial-institution stocks. An unsettled question is whether the gains observed for these stocks arise mainly from projected increases in efficiency or from reductions in customer or competitor bargaining power. This paper documents that the value increase came at the expense of customers and competitors. The stock prices of credit-constrained customers declined during FSMA event windows and experienced significant increases in beta in the wake of its enactment. These findings reinforce evidence in the literature on bank mergers that large-bank consolidation is adversely affecting access to credit for capital-constrained firms.
Safety-Net Losses from Abandoning Glass–Steagall Restrictions
(2011-02) Carow, Kenneth A.; Kane, Edward J.; Narayanan, Rajesh
This paper evaluates the redistribution of gains surrounding regulatory relaxations in 1996 and 1997 and ultimate passage of the Financial Services Modernization Act (FSMA) of 1999. Gains in financial institution stocks may come from projected increases in efficiency, increases in the bargaining power of financial institutions, or greater access to the federal safety net. For customers seeking greater access to capital markets, gains in efficiency should result in increased benefits, but increases in bank bargaining power could increase funding costs and/or decrease capital market access. Customers may also lose as taxpayers who support the federal safety net. This paper finds evidence of potential taxpayer losses and increased bank bargaining power, especially vis-a-vis credit-constrained customers for whom safety-net subsidies are unlikely to be shifted forward. The stock prices of credit-constrained customers declined during FSMA event windows and in event windows associated with regulatory relaxations.
Option grant backdating investigations and capital market discipline
(2009-12) Carow, Kenneth A.; Heron, Randall A,; Lie, Erik; Neal, Robert
Using a large sample of option granting firms, some of which were investigated for option grant backdating, we develop a predictive model for such investigations and examine how the capital market responded as the backdating scandal unfolded. Firms that were investigated experienced significant stock price declines from the beginning of the Wall Street Journal's Perfect Payday series through the end of 2006. Firms predicted to have backdating problems, but not the subject of publicly revealed investigations, experienced stock price performance during the same period that was remarkably similar to that of firms with publicly revealed investigations. In contrast, firms not predicted to have backdating problems experienced normal stock price performance. Our results suggest that capital markets disciplined companies with suspicious option grant histories, often prior to, and irrespective of, any public revelation of an investigation into the matter.
Research Report: Modifying Paradigms—Individual Differences, Creativity Techniques, and Exposure to Ideas in Group Idea Generation
(2001-09) Garfield, Monica J.; Taylor, Nolan J.; Dennis, Alan R.; Satzinger, John W.
In today's networked economy, ideas that challenge existing business models and paradigms are becoming more important. This study investigated how individual differences, groupware-based creativity techniques, and ideas from others influenced the type of ideas that individuals generated. While individual differences were important (in that some individuals were inherently more likely to generate ideas that followed the existing problem paradigm while others were more likely to generate paradigm-modifying ideas that attempted to change the problem paradigm), the exposure to paradigm-modifying ideas from others and the use of intuitive groupware-based creativity techniques rather than analytical groupware-based creativity techniques were found to increase the number of paradigm-modifying ideas produced
Information foraging on the web: The effects of “acceptable” Internet delays on multi-page information search behavior
(2006-11) Taylor, Nolan J.; Dennis, Alan R.
Web delays are a persistent and highly publicized problem. Long delays have been shown to reduce information search, but less is known about the impact of more modest “acceptable” delays — delays that do not substantially reduce user satisfaction. Prior research suggests that as the time and effort required to complete a task increases, decision-makers tend to reduce information search at the expense of decision quality. In this study, the effects of an acceptable time delay (seven seconds) on information search behavior were examined. Results showed that increased time and effort caused by acceptable delays provoked increased information search.
Public grid computing participation: An exploratory study of determinants
(2007-01) Taylor, Nolan J.
Using the Internet, “public” computing grids can be assembled using “volunteered” PCs. To achieve this, volunteers download and install a software application capable of sensing periods of low local processor activity. During such times, this program on the local PC downloads and processes a subset of the project's data. At the completion of processing, the results are uploaded to the project and the cycle repeats. Public grids are being used for a wide range of endeavors, from searching for signals suggesting extraterrestrial life to finding a cure for cancer. Despite the potential benefits, however, participation has been relatively low. The work reported here, drawing from technology acceptance and volunteer literature, suggests that the grid operator's reputation, the project's perceived need, and the level of volunteering activity of the PC owner are significant determinants of participation in grid projects. Attitude, in addition to personal innovativeness and level of volunteering activity, predicted intentions to join the project. Thus, methods traditionally used for motivating volunteer behavior may be effective in promoting the use of grid computing.

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