Tangible Equity Research Articles

Book Review: Colin Seale, Tangible Equity: A Guide for Leveraging Student Identity, Culture, and Power to Unlock Excellence In and Beyond the Classroom

Book Review: Colin Seale, Tangible Equity: A Guide for Leveraging Student Identity, Culture, and Power to Unlock Excellence In and Beyond the Classroom

Strategic Bank Liability Structure Under Capital Requirements

Banks strategically choose and dynamically restructure deposits and nondeposit debt in response to the minimum requirements on total capital and tangible equity. We derive the optimal strategic liability structure and show that it minimizes the protection for deposits conditional on capital requirements. Although, given any liability structure, regulators can set capital requirements high enough to remove the incentive for risk substitution, the strategic response to the capital requirements always preserves this incentive. Banks reduce leverage but increase the proportion of nondeposit debt if regulations raise the capital requirements.This paper was accepted by Lukas Schmid, finance.Supplemental Material: The online appendix and data are available at https://doi.org/10.1287/mnsc.2022.4570 .

Negative Tangible Equity

About 40% of the S&P 500 firms reported negative tangible equity (NTE) in 2019, a significant increase from the 10% level two decades ago. We find that debt-fueled NTE firms are associated with larger market caps with more stock buybacks and acquisitions of intangibles. NTE firms’ higher credit ratings and lower bond yields in the latest decade suggest that they are viewed as less risky by debtholders than previously. We also find that their stock prices increase (decrease) immediately after the Federal Reserve’s monetary policy action decreased (increased) interest rates. In addition, NTE firms’ stock returns outperform by 3.77% and 3.65% in the first and the second year after portfolio formation in 2011–2019, but such outperformance is not accompanied by higher earnings expectations. Our results contradict Graham and Dodd’s (1940) advice to avoid NTE firms but raise questions about their valuations, should interest rates rise in the future.

Labor unions and bank risk culture: evidence from the financial crisis

In this paper, we examine the effect of labor unions on bank performance during the recent financial crisis. Empirical evidence from the 314 largest global banks indicates that the stock returns and profitability of unionized banks are higher, and the default probabilities are lower than non-unionized banks. Moreover, unionized banks have lower tail risk in their stock returns, more tangible equity, more liquid assets, and better quality lending before the crisis than non-unionized banks. These finding show that unionized banks operate more conservatively and engage in less risk-taking. Our results imply that union preferences can shape the risk culture of banks.

Beyond Common Equity: The Influence of Secondary Capital on Bank Insolvency Risk

Banks must adhere to strict rules regarding the quantity of regulatory capital held but have some flexibility as to its composition. In this paper, we examine if bank insolvency (distance to default) is sensitive to capital other than common equity for a sample of listed North American and European banks. Decomposing tier 1 capital into tangible equity and non-core components reveals a series of heretofore unidentified non-linear links with insolvency risk. We assess the influence of binding capital requirements, finding that low regulatory capital buffers are associated with increased insolvency risk for banks holding greater quantities of non-core tier 1 and tier 2 capital. The links between insolvency and capital, evident when the latter is denominated relative to tangible assets or total regulatory capital, are found to be expunged when defined relative to risk-weighted assets.

Beyond common equity: The influence of secondary capital on bank insolvency risk

Banks must adhere to strict rules regarding the quantity of regulatory capital held but have some flexibility as to its composition. In this paper, we examine if bank insolvency (distance to default) is sensitive to capital other than common equity for a sample of listed North American and European banks. Decomposing tier 1 capital into tangible equity and non-core components reveals a series of heretofore unidentified non-linear links with insolvency risk. We assess the influence of binding capital requirements, finding that low regulatory capital buffers are associated with increased insolvency risk for banks holding greater quantities of non-core tier 1 and tier 2 capital. The links between insolvency and capital, evident when the latter is denominated relative to tangible assets or total regulatory capital, are found to be expunged when defined relative to risk-weighted assets.

Виробничий потенціал газовидобувного комплексу: поняття, структура, фактори формування та використання

The economic essence of the category "production potential of the gas producing complex" is substantiated from the standpoint of the systemic approach and a set of factors determining the ability of a gas producing complex (GPC) to perform its functions. Methodical approaches to the interpretation of the essence and structure of production potential are determined, taking into account the peculiarities of gas production. It is noted that the study of production capacity should begin with its production functions, which are provided by the resource potential of a company. The relationship between production factors and production resources lies in the fact that only resources that can be used in production are considered factors of production. Emphasis is placed on the fact that the success of the gas producing complex today is not only determined by the size of hydrocarbon deposits and the availability of modern technologies or production equipment, but mainly by available intellectual capital, which includes leading technicians, gas producing management and programmers together with the software developed by them. It has been proven that a company’s ability to effectively use intellectual capital is a sustainable competitive advantage in ensuring future balanced development, as intellectual capital is based on the accumulation and use of knowledge, ideas and information that are specific to a particular company. The effect of their usage is the result of practical implementation of this knowledge, transfer of experience to young employees of the company, and interaction with partners and contractors. Nowadays, intellectual capital affects the investment attractiveness and competitiveness of the GPC to a greater extent than tangible assets and financial capital. Therefore, the production potential of a gas producing complex cannot be confined to its production capacity (tangible equity). It is concluded that, based on the fact that the GPC is a system of enterprises and organizations with different functions, its production potential should be considered systematically, comprehensively assessing the quantity and quality of resources that create opportunities for all its structural units to perform their functions in accordance with strategic development tasks.

Bank Capital: Lessons from the Financial Crisis

Using a multicountry panel of banks, we study whether better capitalized banks experienced higher stock returns during the financial crisis. We differentiate among various types of capital ratios: the Basel risk‐adjusted ratio, the leverage ratio, the Tier 1 and Tier 2 ratios, and the tangible equity ratio. We find several results: (i) before the crisis, differences in capital did not have much impact on stock returns; (ii) during the crisis, a stronger capital position was associated with better stock market performance, most markedly for larger banks; (iii) the relationship between stock returns and capital is stronger when capital is measured by the leverage ratio rather than the risk‐adjusted capital ratio; (iv) higher quality forms of capital, such as Tier 1 capital and tangible common equity, were more relevant.

From the credit crisis to the sovereign debt crisis: Determinants of share price performance of global banks

We compare and contrast the determinants of the share price performance of global banks in the credit crisis and the sovereign debt crisis. Higher loans and funding fragility, as measured by short-term funding, explain performance in the credit crisis, as banks could obtain short-term finance and hence take risks by lending more. In contrast, in the sovereign debt crisis banks with higher capital, tangible equity, deposit, lower agency problem, and smaller boards performed well. The banks that increased regulatory capital as per the policy prescription, relied more on deposit financing, and decreased board size performed well in the sovereign debt crisis. Interestingly, deposit insurance is negatively related to the performance in the sovereign debt crisis, as the governments were closer to default. We find some similarities in the share price performances of banks across these two crises. Beta and idiosyncratic risk explain the share price performances of banks in both the crises. We further examine the effect of regulations on risk, as returns should be compensation for taking risks. We find that banks in countries with higher restrictions and higher tier I capital are less risky, while countries with deposit insurance are more risky.

The U.S. Banking Industry in 2011: Credit Extension, Funding, Earnings, and Capital Prospects

Our research addresses the issue of the likely nature of financial system activities by the end of 2011. Our specific focus is on the banking industry, although our analysis begins by considering the likely role of banks relative to other credit providers in the financial system. We employ a simple, straightforward methodology, relying mostly on Flow of Funds data to develop a broad, “bird’s eye” view of past and likely future banking industry activity. Conceptually, our main tack is to ask what banking industry activity would look like by 2012, were the industry to return to the trends underway before the housing price bubble took hold (i.e., pre-2001/2002). Using that artifice to approximate reasonably stable banking activity, we calculate the nature of banking activity across four dimensions: 1) credit extension and other asset-side activities; 2) funding (i.e., liability-side activities), and in particular whether projected funding is likely to be adequate to support projected credit extension; 3) banks’ capital position, were they to maintain at least the historically high tangible equity capital-to-assets ratios attained by the end of 2009; and 4) banks’ earnings prospect, and whether in particular earnings are likely to support necessary capital accumulation.

Bank Capital: Lessons From the Financial Crisis

Using a multi-country panel of banks, we study whether better capitalized banks experienced higher stock returns during the financial crisis. We differentiate among various types of capital ratios: the Basel risk-adjusted ratio; the leverage ratio; the Tier I and Tier II ratios; and the tangible equity ratio. We find several results: (i) before the crisis, differences in capital did not have much impact on stock returns; (ii) during the crisis, a stronger capital position was associated with better stock market performance, most markedly for larger banks; (iii) the relationship between stock returns and capital is stronger when capital is measured by the leverage ratio rather than the risk-adjusted capital ratio; (iv) higher quality forms of capital, such as Tier 1 capital and tangible common equity, were more relevant.

The Warrant—Its Powers and Its Hazards

Since a warrant has no tangible equity in the balance sheet nor earning power (in fact no value other than that which investors assign to its right or privilege to buy) it moves just as other types of securities, in a free auction market, with its fortunes firmly linked to the general prospects and price movements of its common stock. Usually, its movement sharply accentuates both the advances and declines of its related stock because of its leverage which, under certain conditions, can be enormous.