Opaque Industry Research Articles

Business ethics and corporate governance – Nigeria’s Guaranty Trust Bank, ca. 1990–2004

Abstract Guaranty Trust Bank (GTB) PLC, a wholly Nigerian business enterprise, founded in 1990, blazed the trail in the banking sector of Nigeria in many respects. By 1995, it had become the fourth most profitable bank in Nigeria and the first indigenous bank to attain a profit-before-tax of one bn naira, and by 2002 had expanded into several West African countries. The significance of the bank is attested by several scholarly studies of its founding, growth, performance and impact. This paper examines a neglected aspect of the history of the bank: its successes and failure in complying with standards of corporate governance and business ethics in a notoriously opaque industry. Specifically, it focuses on the GTB’s relations with statutory regulatory bodies – the Central Bank of Nigeria (CBN) and the National Deposit Insurance Corporation (NDIC) – as well as its shareholders, who kept the bank on its toes on matters of its business operations. Relying on previously unexploited sources, including minutes of the bank’s board of directors, annual reports and oral evidence provided by members of the board, management and staff, and former top employees of the bank, as well as snippets from the reports of the regulatory bodies (which are not to be cited), this paper highlights issues raised by stakeholders about how the bank managed its affairs, and how it dealt with the queries and questions raised by the external regulators and internal stakeholders in the first 15 years of its existence.

Analyst coverage, executive compensation and corporate risk‐taking: Evidence from property–casualty insurance firms

AbstractUsing an exogenous drop in analyst coverage introduced by broker closures and mergers, we test for the causal impact of analyst coverage on corporate risk‐taking, in an opaque industry. We document an increase in risk using several book‐based and market‐based risk measures, including tail and default risk measures. Results are driven by firms with stronger managerial risk‐taking compensation incentives. The increase in risk is stronger in more opaque firms, and firms with weaker policyholder monitoring. Firm risk increases through at least one risk‐taking action, such as investing firm assets in higher‐risk bonds. Our study highlights the importance of stock analysts in affecting corporate risk‐taking, especially in the presence of stronger managerial, compensation risk‐taking incentives.

Implementation of government policies in small and medium industry development in Sidodadi Village Biru-Biru District Deli Serdang Regency

The research method used is field research (field research) or what is called a descriptive qualitative method, which will later describe the facts that happened, so that a conclusion can be found. The findings of this thesis are that the method for developing the opaque cracker industry in Sidodadi Village is by marketing various innovative opaque cracker products. The elements that hindered the development of the industry were insufficient capital, lack of raw materials, and previous lack of cooperation between business owners and the government, so that of the 5 (five) opaque industries that were established previously, 2 (two) of them were bankrupt. So with the incident that caused a decline in the economy in the village Sidodadi, there needs to be a government and more attention to contribute to the existing industry. And the government policy is the need for industrial owners to complete the requirements for establishing an MSME, the existence of capital assistance provided to the industry, providing marketing method training to employees in order to increasing sales, and assistance from the government and other institutions in terms of providing production equipment assistance to increase the production of opaque crackers.

Family ownership and stockholder reactions to environmental performance disclosure: A test of secondary agency relationships

AbstractUsing the first ever Newsweek “Green Rankings” of the 500 largest U. S. firms in 2009 as a significant historical event, we test for the stockholder reaction to ratings of corporate environmental performance. Both the conventional null hypothesis significance testing and Bayesian approaches show that stockholders react significantly more positively to corporations with higher ratings of corporate environmental performance and that this effect is stronger in family owned firms. Our findings suggest that majority shareholders do not necessarily appropriate minority stockholders' rents when investing in environmental activities, as would be the case in the presence of “Type II” agency conflicts between majority family owners and minority stockholders. The family ownership effect is also found to be stronger in dirty (heavy polluting) industries as well as in more competitive and more opaque industry contexts.

Rage Against American Healthcare

Rage Against American Healthcare Laura Marsh (bio) Our Malady: Lessons in Liberty from a Hospital Diary by Timothy Snyder Crown, 2020, 192 pp. Medicare for All: A Citizen's Guide by Abdul El-Sayed and Micah Johnson Oxford University Press, 2021, 368 pp. To fall sick in the United States is to undergo a unique rite of passage. Each sick person discovers the ordeal of trying to get a diagnosis, of attempting to access treatment, and of being extorted every step of the way—of realizing that we do not, in fact, have a healthcare system. Beliefs that the healthy can hold lightly no longer make sense—the belief, for instance, that health insurance will provide. The sick soon learn that insurance, even "good" employerprovided insurance, does not protect them from outrageous bills, and that paying through the nose is no guarantee of timely, humane, or even competent care. In order to get medical treatment, Americans have to deal with one of the most opaque industries in the world. The 28 million people who do not have health insurance are locked out of affordable care almost entirely. The 50 percent of Americans who get insurance through their employers have little say in the coverage they end up with: the employer chooses the plan, or sometimes a couple of different plans; most employees will never see how any of this is decided, despite the fact it will determine which doctors they can see, the monthly premiums they'll pay, and the deductible and out of pocket costs that will hit them if they get really ill. Beyond insurers, the providers themselves—hospitals, doctors' offices, pharmacies—are exceptionally secretive. Most doctors' offices cannot tell a patient before they get a treatment how much it will cost; even the doctor can only know that once they send out the bill. That's because there are no set prices for procedures. Every insurer negotiates their own rates with every provider and passes on a portion of that rate to the patient. That means not only that the cost of care is impossible to predict or plan for; it also means that patients can't "shop around" as they might in a functional market. You can't shop around when there are no prices to compare. The bills themselves are notoriously difficult to understand, with lists of often unrecognizable charges. A single visit to the ER may occasion one bill from the hospital itself, plus separate bills from individual doctors and labs. And if you arrived by ambulance, a service that is often not covered by insurance at all, that will be billed separately too. The patient has a full-time job—on top of being sick, they also have to spend hours coordinating, haggling, and sometimes pleading with each of these entities. It's the patient's job to find the right doctor, to research and locate a facility that offers [End Page 187] Click for larger view View full resolution Billing envelopes litter the floor of a shuttered hospital in rural Missouri. (Michael S. Williamson/Washington Post via Getty Images) the care they need, to check who is in network or out of network, to chase down test results and schedule follow-up care. Although we talk about a "healthcare system," the many facilities that provide care are separate companies that have limited communications with one another. Americans spent $812 billion in 2017 on the administrative costs of healthcare—more than the entire U.S. military budget that year—but there is, remarkably, no one at the doctor's office whose job is to guide the patient smoothly through their treatment. When the historian Timothy Snyder fell ill at the end of 2019, the dysfunction of American healthcare nearly killed him. In his recent book Our Malady: Lessons in Liberty from a Hospital Diary, he recounts a pattern of neglect in his visits to hospitals over a single month, as his symptoms are dismissed, his medical history goes ignored, and his condition worsens. The disaster of his illness and mistreatment is the starting point for a short, livid set of reflections on healthcare in the United States and how its failures make us...

Risk Mitigating versus Risk Shifting: Evidence from Banks Security Trading in Crises

We show that risk mitigating incentives dominate risk shifting incentives in fragile banks. Risk shifting could be particularly severe in banking since it is the most opaque industry and banks are one of the most leveraged corporations with very low skin in the game. To analyze this question, we exploit security trading by banks during financial crises, as banks can easily and quickly change their risk exposure within their security portfolio. However, in contrast with the risk shifting hypothesis, we find that less capitalized banks take relatively less risk after financial market stress shocks. We show this using the supervisory ISIN-bank-month level dataset from Italy with all securities for each bank. Our results are over and above capital regulation as we show lower reach-for-yield effects by less capitalized banks within government bonds (with zero risk weights) or within securities with the same rating and maturity in the same month (which determines regulatory capital). Effects are robust to controlling for the covariance with the existence portfolio, and less capitalized banks, if anything, reduce concentration risk. Further, effects are stronger when uncertainty is higher, despite that risk shifting motives may be then higher. Moreover, three separate tests – based on different accounting portfolios (trading book versus held to maturity), the distribution of capital and franchise value – suggest that bank own incentives, instead of supervision, are the main drivers. Results are confirmed if we consider other sources of balance sheet fragility and different measures of risk-taking. Finally, evidence from the recent COVID-19 shock corroborates findings from the Global Financial Crisis and the Euro Area Sovereign Crisis.

Do Star Analysts Shine in Opaque Industries? Evidence from European Banking

We assess whether skills allow sell-side analysts to mitigate the opaqueness of a whole industry. We rely on a sample of 5,150 recommendation changes relating to 80 European banks during a period that encompasses the financial and euro-zone crises. In contrast with other industries, recommendation changes made by talented analysts are not likelier to influence bank stock prices, as if opaqueness impedes analyst influence. However, these changes induce sharp negative revaluations of bank stock prices. Our results suggest that stars remain influential by focusing on selected large, complex institutions and being apt at identifying mis-pricings and uncovering bad news.

Private Equity Valuation Before and After ASC 820

With $3.4 trillion invested in North America, private equity comprises a large segment of the capital markets. We examine the effect of ASC 820 (formerly known as SFAS 157) on the valuations reported by US private equity funds to their investors. In 2008, the FASB implemented ASC 820 to achieve more consistent measurement and increased transparency in fair value reporting. This new standard clarified the most critical accounting policy for private equity funds, which typically include highly illiquid investments. Exploiting a setting where we can observe all cash flows over a fund’s lifetime, we show that the reported net asset valuations (NAVs) of liquidated private equity funds more accurately predict future net distributions to investors following ASC 820 adoption, particularly for smaller funds, less experienced fund managers, and high-performing funds. Our findings shed light on financial reporting in an opaque industry and suggest that ASC 820’s enhanced fair value guidance improved the information environment in an economically significant cross-section of the financial markets.

Is It the Investment Bank or the Investment Banker? A Study of the Role of Investment Banker Human Capital in Acquisitions

Using a novel data set that links individual investment bankers to the acquisition deals they advise on, we find that individual investment bankers with greater deal experience are associated with higher acquisition returns and post-acquisition operating performance, particularly for acquirers in complex and more opaque industries. The advisory fee on acquisitions is also positively associated with the investment banking team’s experience. Finally, when more experienced investment bankers switch to a new bank, acquirers are more likely to move with them. Overall, our results suggest that the human capital of individual investment bankers is valuable to acquirers.

The Labyrinthine Workings of the Nursing Home Business.

A look inside an opaque industry that often puts profits over patient care.

Bank Concentration and Misallocation of Credit: Evidence from Firm Entry and Exit

This paper empirically investigates the effect of interbank competition and misallocation of credit on the creation and destruction of establishments. Using industry and prefecture level establishment data from Japan, we find that concentration in the banking sector negatively affects start-up and exit rates in industries with a greater dependence on external financing and a greater value of intangible fixed assets. Next, we examined the effect of banks’ misallocation of credit. We find the effect of bank concentration on start-up and exit rates in informational opaque industries is weakened by the presence of zombie, financially unhealthy, and otherwise insolvent firms. We also find firm entry in informational opaque industries is encouraged in a market where government capital injected banks operate, offsetting the negative effects of bank concentration. Banks’ non-performing loans have no significant effect on firm entry and exit. These results suggest bank loan market structure, the presence of zombie firms, and an increase of credit supply following capital injection into banks play a significant role regarding firm entry and exit.

The performance of analyst recommendations in the banking sector: A case of Poland

Purpose – The paper aims at empirical evaluation of the performance of the professional stock market analysts’ recommendations in the Polish banking sector. Design/methodology/approach – The employed research methods involve the analyses of structure and accuracy of the examined recommendations in terms of target prices. The examined sample covers 2,806 stock recommendations issued for 14 banks listed on the Warsaw Stock Exchange over the period 1999–2016. The performance of each recommendation was assessed over a time horizon of 180 days from its issuance through comparison with actual market prices of a given stock. Findings – Consistent with the evidence in the relevant literature the results of the study indicate that even in such complex and opaque industry as banking, the analyst recommendations should serve only as a supplementary source of information supporting the decision-making processes of the equity investors. In the specific context of the Polish banking sector the analyst recommendations performed moderately, with slightly more than 56% of them being able to correctly predict the prices of bank stocks within the 180 days time window since the issuance date. However, even if the exact target prices were often not reached, the recommendations seem useful as the indicators of the short-run price movements. Originality/value – The majority of empirical studies in the relevant literature examines the performance of analyst recommendations without taking into account the potential impact of industry-specific contextual factors. Additionally, these studies are focused mostly on developed capital markets, while the evidence for the emerging ones remains quite modest. Moreover, to date apparently no study has addressed this issue in the context of the Polish capital market. The present study attempts, therefore, to fill this gap.

Banking Market Competition and Corporate Innovation

By using the U.S. data, this study shows that state-level banking market competition, measured by Panzar-Rosse (1984) H-statistic, increases the number of patents and citations generated by firms and improves corporate innovation efficiency, supporting market power hypothesis. Greater banking competition is also found to enable innovative firms to adopt more ambitious innovation policies and have more flexibility to experiment with new technologies. The investigation of the heterogeneity of banking competition effects at the state-level shows that regional innovation in the states with lower R&D intensity benefits more from improved competition in local banking markets where additional innovation makes a greater marginal economic contribution. At the firm-level, such favourable effects vary across firm characteristics and innovative firms, with greater dependence on external finance and being financially constrained, enjoy a greater benefit from increased banking competition. The research also examines the role of information specialisation and finds that the banking competition effects are stronger for firms operating in informationally opaque industries and having more specialised information. It implies that banks benefit from the economies of scale in more specialised information acquisition when allocating credit supply. Finally, the research reveals novel evidence on the substitution effects of competition in a wider region and neighbour-state to local banking market in financing corporate innovations. The finding shows ‘how local is local banking market’ depends on the operating scope and information transparency of borrowing firms and local banks have an information advantage over distant banks in financing local businesses and informationally opaque corporate innovation activities.

The effect of foreign bank presence on firm entry and exit in transition economies

This study investigates the impact of foreign bank penetration on firm entry in Central and Eastern Europe. Acquisition of domestic banks by foreign investors has lowered rates of firm creation, decreased the average size of entrants, and increased firm exit in industries with greater informational opacity, while entry of greenfield foreign banks appears to have spurred firm creation and exit. We modify the view in earlier studies that informational opacity equates with firm size, defining opacity in terms of technological characteristics for a given industry. We find the economic significance of foreign bank entry is larger for opaque industries than industries with large shares of small firms. The study provides evidence of increased credit constraints for start-ups in Central and Eastern Europe which is consistent with the theoretical proposition that the presence of foreign banks exacerbates informational asymmetries.

The Effect of Foreign Bank Presence on Firm Entry and Exit in Transition Economies

This study investigates the impact of foreign bank penetration on firm entry in Central and Eastern Europe. Acquisition of domestic banks by foreign investors has lowered rates of firm creation, decreased the average size of entrants, and increased firm exit in industries with greater informational opacity, while entry of greenfield foreign banks appears to have spurred firm creation and exit. We modify the view in earlier studies that informational opacity equates with firm size, defining opacity in terms of technological characteristics for a given industry. We find the economic significance of foreign bank entry is larger for opaque industries than industries with large shares of small firms. The study provides evidence of increased credit constraints for start-ups in Central and Eastern Europe, which is consistent with the theoretical proposition that the presence of foreign banks exacerbates informational asymmetries.

The informational relevance of corporate social responsibility: evidence from DS400 index reconstitutions

AbstractThis study examines the relationship between corporate social responsibility and financial performance by analyzing the intra‐industry wealth impact of additions and deletions to the Domini Social 400 index. Results from the event study analysis indicate that additions to the index generate a positive share price response for the announcement firm and a negative response by rival firms. The opposite reaction is observed for index deletions. Additionally, the share price response is more pronounced for informationally opaque industries. Our study highlights the importance of external monitoring agencies in providing meaningful information that helps resolve investor uncertainty regarding the quality of a firm's relationships with its primary stakeholders. Copyright © 2011 John Wiley & Sons, Ltd.

Bank concentration and financial constraints on firm-level investment in Europe

This study examines the effect of bank concentration on financing constraints of non-financial firms in 14 European countries between 1992 and 2005. Using firm-level data we analyze financial constraints with the Euler equation derived from the dynamic investment model. We find that with a highly concentrated banking sector firms are less financially constrained. This result is robust to consideration of firm opacity, firm size, and business cycle. Relaxation of financial constraint while greater for firms in less opaque industries also accrues for firms in more opaque industries. Greater bank concentration is associated with less tight financial constraint during both expansions and recessions. Results overall are consistent with an information-based hypothesis that more market power increases banks’ incentives to produce information on potential borrowers. Findings are robust to consideration of country specific institutional factors.

Tolerance for uncertainty and the growth of informationally opaque industries

Hofstede's [Hofstede, Geert H. 1980. Culture's consequences: international differences in work-related values. Thousand Oaks, CA: Sage.] cross-country psychological survey of IBM employees finds that some countries (societies) are systematically less tolerant of uncertainty, while uncertainty-tolerance is shown by some theoretic models to be essential to the growth of emerging sectors about which less is known. This paper first uses Durnev, Morck, and Yeung's [Durnev, Art, Morck, Randall, and Yeung, Bernard. 2004. Value-enhancing capital budgeting and firm-specific stock return variation. The Journal of Finance. 59(1): 65–105.] methodology to identify these informationally opaque industries. The hypothesis is then made that countries characterized by high uncertainty aversion (measured by Hofstede's indicator, and two other alternative indicators) will grow disproportionately slower in industrial sectors where information is less available. Using the Rajan and Zingales [Rajan, Raghuram G. and Zingales, Luigi. 1998. Financial Dependence and Growth. American Economic Review. Vol. 88(3): 559–586.] “difference-in-differences” methodology, which is relatively free from the endogeneity problem, the study provides robust evidence of such an industrial growth pattern in 34 countries and 36 manufacturing industries. It also shows that national uncertainty aversion is not driven by underdevelopment of financial sector, inadaptability of civil law systems, lower level of economic or human capital development, labor market inflexibility, or any of many other institutional factors. The results remain robust when religious (Catholic vs. Protestant) composition is used as an instrumental variable for national uncertainty aversion. The international evidence presented helps explain why some countries are slower in embracing “new” (vs. traditional) industries.

Rating Banks: Risk and Uncertainty in an Opaque Industry

The pattern of disagreement between bond raters suggests that bank and insurance firms are inherently more opaque than other firms. Moody's and Standard and Poor's split more frequently over these financial intermediaries, and the splits are more lopsided, as theory here predicts. Uncertainty over the banks stems from their assets, loans and trading assets in particular, the risks of which are hard to observe or easy to change. Banks' high leverage, which invites agency problems, compounds the uncertainty over their assets. Our findings bear on both the existence and reform of bank regulation.

Is there market discipline for New Zealand non-bank financial institutions?

This paper studies effects of market discipline on the pricing of term deposit type investment products issued by New Zealand Non-Bank Financial Institutions (NBFIs) and how risk disclosure by NBFIs affects this relationship. While we find that more risky NBFIs indeed have to offer higher interest premiums, it is remarkable that investors do not appear to reward NBFIs for disclosure by accepting lower interest rates for better transparency. We attribute this unexpected result to possible limitations of a purely prospectus based disclosure quality index developed for this study or the inherent opaqueness of financial firms which cannot be overcome by even the best of disclosure [as argued by Morgan D.P., 2002. Rating banks: risk and uncertainty in an opaque industry. The American Economic Review 92 (4), 874–888].