US Financial Services Research Articles

Managerial incentives for ESG in the financial services industry: direct and indirect association between ESG and executive compensation

PurposeThis study investigates the empirical association between environmental, social and corporate governance (ESG) performance and top executive compensation in the US financial services industry. Considering that financial firms can inflict systemic shocks across the economy, it has been argued that they must conduct ethical and sustainable business in accordance with ESG principles. This study examines whether ESG efforts are beneficial to managers.Design/methodology/approachThe authors use CEO compensation and ESG performance ratings data for all US financial firms (SIC 6000–6799) from 2015 to 2019. Employing fixed effects regressions, the authors test whether lagged ESG performance is related to CEO compensation, after controlling for other firm characteristics such as size, financial performance, leverage and CEO stock ownership.FindingsThe authors find that lagged ESG ratings are strongly associated with all forms of compensation. An increase of one standard deviation in the composite ESG rating is associated with a 14%–16% increase in the total pay. Among the three ESG pillars, only S (social) and G (governance) exhibit persistent and significant associations with both short- and long-term executive pay. The authors also document the significant moderating effects of ESG on the relationships among firm performance, size, leverage, ownership and executive pay, identifying how ESG is associated with compensation.Originality/valueThe authors conclude that managers receive ESG incentives implicitly and explicitly. The novel finding of direct and indirect associations between ESG and top executive compensation contributes to the growing ESG literature on the financial sector and ongoing debate about the explicit inclusion of ESG targets in compensation design.

Analyzing spillover effects from data breaches to the US (cyber) insurance industry

As the US cyber insurance market is the largest worldwide, this paper presents an analysis of the effects of data breaches in the US financial services industry in relation to the stocks of US insurance companies. We conduct an event study, focusing on publicly announced data breaches that occurred between 2005 and 2018, and observe significant negative spillover effects for US insurers. However, in the subsample of non-announcing cyber insurers between 2015 and 2018, we not only find significant negative spillover effects especially for longer event windows, but also significant positive effects in case of ‘mega data breaches' with more than 1 million breached records, which may be due to an increasing demand for cyber insurance. To understand these findings in more detail, we further analyze event as well as firm characteristics and find that spillover effects are information-based rather than pure.

Advancing the settlement model of the US securities markets

In a securities settlement cycle, one of the greatest factors affecting market risk — including counterparty risk, credit risk and default risk — continues to be time. One of the areas of exposure remaining in the settlement system today is the risk of a sudden event that could affect the transfer of cash or ownership of securities from trade execution through trade settlement. The current standard cycle for settling equity trades in the US is trade date plus two business days (T+2); however, industry consensus is growing that accelerating this settlement cycle to one day or less will better serve market participants by reducing costs and mitigating risk. While shortening a settlement cycle sounds simple enough, the execution is more complex. Equity clearance and settlement is part of a large ecosystem of global financial markets, interconnected processes and linked systems. Accelerating the US cash market settlement cycle will have both upstream and downstream impacts on other parts of the market structure, such as derivatives, securities lending, financing, foreign clients and foreign exchange and collateral management. Settlement is one of the most powerful and critical processes of The Depository Trust & Clearing Corporation (DTCC), and as the backbone of the US financial services industry, DTCC clears and settles hundreds of billions of dollars in equities transactions every day. This paper suggests that the industry’s primary goal must be to create efficiencies without introducing additional risk to markets. DTCC is actively working with its industry partners towards a path to accelerated settlement of T+1 and beyond by taking a careful, methodical approach to examine all issues and potential impacts for the entire US equities market.

Cooperation amidst competition: cybersecurity partnership in the US financial services sector

ABSTRACT The US Financial Services Sector (FSS) is commonly regarded as one of the most successful in addressing cybersecurity through public–private partnership and as a potential model for less advanced sectors. However, how well the sector has actually fared remains poorly understood. Based on publicly available material and in-depth interviews with those intimately involved in business–government collaboration on cybersecurity in the FSS, we analyze how and why collaboration evolved into its current form. We find that considerable gaps remain, which both reveal limitations in the current policy framework for the FSS and suggest lessons for other critical infrastructure sectors.

The allocation of talent: Finance versus entrepreneurship

The rapid growth of US financial services coupled with rapid increases in wealth inequality have been focusing policy debate as to the function of the financial sector and on its social desirability as a whole. I propose a heterogeneous agent model with asymmetric information and matching frictions that produces a tradeoff between finance and entrepreneurship. By becoming bankers, talented agents efficiently match investors with entrepreneurs, but extract excessive informational rents due to contract incompleteness. Thus the financial sector is inefficiently large in equilibrium, and this inefficiency increases with wealth inequality. The estimated model with time variation in the banker capacity accounts for the simultaneous growth of wealth inequality and the financial sector in the US. The endogenous feedback between inequality and the size of the financial sector is quantitatively important.

Buried Treasure: Contradictions in the Perception and Reality of Women's Leadership.

The impact of gender on assessments of leadership performance and leadership potential was examined through two clusters of leadership behaviors, one set related to traditional constructions of leadership labeled directing others and another associated with contemporary constructions of leadership labeled engaging others. Based on data collected from a sample of 91 senior leaders in one US financial services organization over a 3-year period prior to Covid-19, the results showed a negative relationship between directing others behaviors and leadership potential ratings for females and a positive relationship between these variables for males. A negative relationship between engaging others behaviors and performance assessments was also found for females. This study highlights the continuing bias in leadership assessments of women and explores the contradictions between the perception and the reality of women's leadership.

The politics of bailouts: Estimating the causal effects of political connections on corporate bailouts during the 2008\u20132009 US financial crisis

In 2008, as the financial crisis unfolded in the United States, the banking industry elevated its lobbying and campaign spending activities. By the end of 2008, and during 2009, the biggest political spenders, on average, received the largest bailout packages. Is that relationship causal? In this paper, I examine the effect of political connections on the allocation of funds from the Troubled Asset Relief Program (TARP) to the US financial services industry during the 2008–2009 financial crisis. I find that TARP recipients that lobbied the government, donated to political campaigns, or whose top executives had direct connections to politics received better bailout deals. I estimate regression discontinuity design and instrumental variable models to uncover how election outcomes for politicians in close races affected the distribution of bailout funds for connected firms. The results do not imply that some banks were deliberately favored over others, just that favored banks benefited because of their proximity to the right people in power. If being politically connected matters in general, in times of crisis it matters even more.

The global deregulation hypothesis

Abstract The growth of the American financial services remains a bit of a puzzle. The standard approach, the deregulation hypothesis, posits that the industry expanded in response to national deregulation. Yet, when viewed in a comparative context, US finance was deregulated significantly less than other national financial systems and yet grew significantly more than most. We propose the global deregulation hypothesis as a solution to this puzzle. The hypothesis posits that American finance grew in response to deregulation in Europe and the emerging market economies. The article develops two theoretical mechanisms that link global deregulation to US financialization. It reports statistical tests that support two central implications of the global deregulation hypothesis. First, global deregulation is positively associated with the growth of US financial services, while US deregulation is not. Second, global deregulation is not systematically related to the growth of financial services in other industrial democracies.

Understanding the risks and challenges of shell companies in managing AML compliance

This paper begins by discussing how anonymous corporate entities serve as vehicles for the entry of illicit funds into the legitimate financial system, allowing criminals to carry out untraceable transactions and engage in illegal activity while remaining hidden from law enforcement, regulators and the public. It continues by discussing some of the stronger regulations focusing on corporate transparency many countries have adopted now that this issue is more widely recognised. The paper then discusses the various attempts to increase corporate transparency and combat the misuse of US shell companies, and analyses two recently introduced AML bills which demonstrate that there is strong bipartisan support for ending anonymous companies within the USA. Regardless of whether the proposed bills pass as currently drafted, the probability of AML reform impacting the US financial services industry is inevitable amid mounting domestic and international pressure, and the paper proposes that, in order to effectively manage AML compliance and meet increasingly stringent regulatory demands, it is critical that compliance leaders have a thorough understanding of the ways in which anonymous companies may be abused and the risks associated with such entities. The paper discusses the expectations places on regulators, financial institutions, and that financial institution’s AML compliance programme, including the processes and procedures around beneficial ownership. The paper contains advice on reassessing existing AML compliance programmes, with a focus on enhanced due diligence processes and procedures around the identification and verification of beneficial ownership.

Retail Islamic banking and financial services

PurposeThe purpose of this study is to identify the determinants of the intended use of Islamic banking and financial services by US Muslims. It builds on the plethora of studies primarily conducted in Muslim-majority countries.Design/methodology/approachAn extended theory of planned behavior model was tested using structural equation modeling. The hypothesized paths were positive attitude, positive subject norms, perceived behavioral control, greater Islamic religiosity and lower perceived cost of being Muslim. A sample size of n = 251 was analyzed.FindingsThe analysis showed that positive attitudes toward Islamic financial services were found to be statistically significant (p < 0.001), and its path was the strongest. The higher Muslim identification path was trending toward being statistically significant (p < 0.086). The analysis also showed that lower perceived cost of being Muslim path was statistically significant (p < 0.035), but in the opposite hypothesized direction. No support was found for the effect of positive subjective norms or perceived behavior control hypotheses.Research limitations/implicationsThe study was exploratory in nature and has limitations, including some discriminant validity problems.Practical implicationsThe paper includes recommendations for US Islamic banking and financial services providers to develop more effective market segmentation and targeting, as well as integrated marketing communication strategies.Originality/valueThis paper fulfills a void in research on Islamic marketing in the West, particularly the USA, a country with a nominal Muslim population.

The Allocation of Talent: Finance Versus Entrepreneurship

The rapid growth of US financial services coupled with rapid increases in wealth inequality have been focusing policy debate on the function of the financial sector and on its social desirability as a whole. I propose a heterogeneous agent model with asymmetric information and matching frictions that produces a tradeoff between finance and entrepreneurship. By becoming bankers, talented agents efficiently match investors with entrepreneurs but extract excessive informational rents due to contract incompleteness. Thus, the financial sector is inefficiently large in equilibrium, and this inefficiency increases with wealth inequality. The model explains the simultaneous growth of wealth inequality and finance in the US, and why more unequal countries have larger financial sectors.

Clear, conspicuous, and improving

PurposeThe economic downturn and financial meltdown in the changing retirement savings and pension landscape in the US placed individual investors and financial companies at risk. Recognizing the need for more financial literacy among investors, the US financial services companies for retirement plans and investment options (i.e. the retirement financial services providers (RFSPs)) have stepped up consumer marketing, particularly through creation of corporate websites. Seeing their potential for increasing literacy and aiding consumer financial decisions, a majority of RFSPs are promoting websites and a large number of consumers use them. With this backdrop, the purpose of this paper is to examine the use of these websites and their conformity to existing regulations regarding design and structure.Design/methodology/approachThe present study used a quantitative content analysis to examine the types of disclosure information presented on the corporate websites of RFSPs during 2013-2015. It also examined the adherence to the Federal Trade Commission’s (FTC) clear and conspicuous standards (CCS) disclosure guidelines over the three-year period. Finally, this study examined the levels of financial literacy activities employed on 164 RFSPs’ websites over the three-year period.FindingsThis study shows that RFSPs are increasingly providing disclosure information for target consumers via their websites. Although problems still exist with the presentation of that material in terms of the FTC’s suggestions for prominence, there have been some improvements in compliance with proximity of disclosures. In addition, just under one-fourth of the RFSPs were providing tactics and features on their websites to potentially aid in the creation and maintenance of critical financial literacy and acumen.Practical implicationsThe key point emerging from this analysis is that financial services providers, regulators, advocacy groups, and policymakers should continue to address varying levels of financial literacy activities to promote the deliberation and discussion of the retirement issues and topics across media while facilitating the provision and dissemination of financial information and data in a clear and conspicuous manner.Originality/valueThis is the first study to explore the content of RFSPs’ websites with regard to disclosure information, adherence to FTC CCS disclosure guidelines, and the use of techniques related to various levels of financial literacy from 2013-2015.

USE OF CORRELATION AND REGRESSION ANALYSIS FOR THE CRYPTOASSETS’ PRICE MODELING IN ACCOUNTING AND CONTROL

The article investigates the use of correlation-regression analysis in cryptoassets’ price modeling in accounting and control in a rapidly developing digital economy, its decentralization, the use of distributed registry technology (DTL) and blockchain technology. The author analyzed the dynamics of changes in the average capitalization of cryptocurrencies with the example of the most common cryptocurrency Bitcoin and other cryptocurrencies (Altcoins) during 2016 – 2020. In the absence of a unified definition of the term «cryptoassets», the author proposed a possible definition. A cryptoasset is a digital asset that uses cryptography, distributed ledger technology, and direct interaction between the two parties without the involvement of intermediaries. The author analyzed the necessity of determining the factors influencing the value of cryptoassets in order to predict their future price. In 2020, there were more than 5,784 different types of cryptoassets, including cryptocurrencies and tokens with a total market capitalization of over USD 300,089 million. It is determined that factor analysis and cryptoassets’ price forecasting should be carried out on the cryptoasset with the largest market capitalization – cryptocurrency Bitcoin, which represents more than 61% of the total capitalization of cryptoassets. The study confirmed the hypothesis that the value of the cryptocurrency Bitcoin is influenced by the indices of the world economy, the value of paired currencies, the value of precious metals, energy resources, shares of the largest US companies. The study of correlation-regression analysis involved 1,266 observations of each variable. The studied period was five years: from 07.08.2015 to 09.10.2020. The analysis provides an opportunity to rank the factors according to the strength of their influence on the cryptoasset’s price. Therefore, the following factors had the greatest impact: the dynamics of the US financial services market, the Dow Jones industrial index, the NASDAQ general index, the value of Adobe Company’s shares, the closing price of the cryptocurrency Ethereum (ETH). After the model optimization, the following three factors were left: the Dow Jones index; Ethereum cryptocurrency (ETH); Adobe stock price. The author prepared a multiple linear regression model. The resulting model can be used to predict the Bitcoin price in the short term. The average relative approximation error is 9%, which means that the model of a multiple regression as a whole adequately describes the relationship between the Bitcoin price and the selected factors in the short term.

Earnout financing in the financial services industry

This paper explores the effects of earnout contracts used in US financial services M&A. We use propensity score matching (PSM) to address selection bias issues with regard to the endogeneity of the decision of financial institutions to use such contracts. We find that the use of earnout contracts leads to significantly higher acquirer abnormal returns (short- and long-run) compared to counterpart acquisitions (control deals) which do not use such contracts. The larger the size of the deferred (earnout) payment, as a fraction of the total transaction value, the higher the acquirers' gains in the short- and long-run. Both acquirer short- and long-run gains increase when the management team of the target institution is retained in the post-acquisition period.

The risk implication of Sarbanes-Oxley Act of 2002: an empirical examination of the US financial services industry

This article examines the risk effect of the Sarbanes-Oxley Act of 2002 (SOX) for the US financial services (FS) industry. The major provisions of SOX relate to increased transparency of the financial reporting system and improved internal governance of firms. The overall results support that SOX reduced the total risk and idiosyncratic risk of FS firms, particularly of banks, savings and insurance companies. Yet, this article finds an increase in systematic risk of banks, savings and insurance companies. This outcome may be due to increased financial integration, innovation, globalization and deregulation.

Firm Structure in Banking and Finance: Is Broader Better?

Economies of scope in financial intermediation continue as a focal point in strategic and regulatory debates. In this paper, we summarize the theoretical research on the value of diversification in financial services firms, and survey the empirical research so far on the conglomerate discount in US and international financial services businesses. We also review research on the internal capital market efficiency in universal banks and financial conglomerates. The paper provides new empirical evidence on the conglomerate discount in US financial intermediaries and how that changes between non-crisis and crisis periods, showing a decline in the discount under turbulent conditions.

Contagion Effects in the Aftermath of Lehman's Collapse: Evidence from the US Financial Services Industry

The spectacular failure of the 150-year old investment bank Lehman Brothers on September 15th, 2008 was a major turning point in the global financial crisis that broke out in the summer 2007. Through the use of stock market data and Credit Default Swap (CDS) spreads, this paper examines the investors’ reaction to Lehman’s collapse in an attempt to identify a spillover effect on the surviving financial institutions. The empirical analysis indicates that (i) the collateral damages were limited to the largest financial firms; (ii) the most affected institutions were the surviving “non-bank” financial services firms; (iii) the negative effect was correlated with financial conditions of the surviving institutions. We also detect significant abnormal jumps in the CDS spreads that we interpret as evidence of sudden upward revisions in the market assessment of future default probabilities assigned to the surviving financial firms.

The Growth of Finance

The US financial services industry grew from 4.9 percent of GDP in 1980 to 7.9 percent of GDP in 2007. A sizeable portion of the growth can be explained by rising asset management fees, which in turn were driven by increases in the valuation of tradable assets, particularly equity. Another important factor was growth in fees associated with an expansion in household credit, particularly fees associated with residential mortgages. This expansion was fueled by the development of nonbank credit intermediation (or “shadow banking”). We offer a preliminary assessment of whether the growth of active asset management, household credit, and shadow banking—the main areas of growth in the financial sector—has been socially beneficial.

A strategic response to the financial crisis: an empirical analysis of financial services advertising before and during the financial crisis

PurposeThis paper aims to investigate how the US financial services organizations (FSOs) provided marketing information and the way they strategically used various appeals through their advertising before and during the current financial crisis.Design/methodology/approachThis takes the form of a content analysis examining a total of 2,480 financial services ads (FSA) in print magazines within two periods – the two years before the crisis (2005 to 2006) and the two years during the crisis (2007 to 2008).FindingsThis study showed three significant findings: because of the economic struggle, there was a significant decline across the two periods in the total number of yearly FSA; the economic crisis led to a significant increase in the use of informational message strategies across all FSOs; and financial value and atmospherics appeals were predominant after the crisis. However, each FSO used appeals in a different way.Research limitations/implicationsThis study focused on only print media. A future research project aimed at other traditional media such as television and new media such as the internet or weblogs could provide additional analysis of financial advertising strategies.Practical implicationsThe findings of this study suggest that FSOs may rely much more heavily on informational than on transformational approaches during an economic crisis. The findings may provide further valuable implications for non‐profit institutions and international marketers.Originality/valueThis study contributes in several ways to understanding of the strategic communicative reactions of FSOs during the crisis.

Pension Buyouts: What Can We Learn from the UK Experience?

Managing (or at least slowing) the decline of private defined benefit (DB) pensions has been a top priority for US policymakers. Any market-related developments or regulatory changes that alter the provision or sustainability of private DB pensions in other countries are thus relevant to policy and worth understanding. One such development taking place in the United Kingdom, pension fund buyouts, has enjoyed measured success. A DB pension bulk buyout refers to a transaction in which a pension plan sponsor pays another company a fee to take over the assets and liabilities of the pension plan. Clearly such transactions are relevant to the provision and long-term sustainability of this institution. So, while the increasing popularity of these transactions is restricted to the UK, the market has garnered the attention of US financial services firms, plan sponsors and policymakers. This paper thus analyzes the growing market for DB pension buyouts in the UK and considers its implications for the US. It contributes to our understanding of the future prospects for employer-sponsored defined benefit pensions, and how they will contribute to retirement income over time. Using various qualitative methodologies, this paper traces the evolution of the buyout from a transaction for insolvent plan sponsors to a transaction for solvent plan sponsors with funded pensions. While certain types of solvent buyouts have fallen out of favor, such as non-insured buyouts, the paper concludes that buyouts of the insured variety have a bright future. The increasingly burdensome nature of the DB pension plan will sustain this market over the long-term.